<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 31, 1999
REGISTRATION NO. 333-80525
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
PERFUMANIA, INC.
(Exact Name of Registrant as Specified in Its Charter)
--------------
<TABLE>
<S> <C> <C>
FLORIDA 5912 65-0026340
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
--------------
11701 N.W. 101ST ROAD
MIAMI, FLORIDA 33178
(305) 889-1600
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Office)
--------------
ILIA LEKACH
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
PERFUMANIA, INC.
11701 N.W. 101ST ROAD
MIAMI, FLORIDA 33178
(305) 889-1600
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
-------------------
COPIES OF COMMUNICATIONS TO:
Kenneth C. Hoffman, Esq.
Greenberg Traurig, P.a.
1221 Brickell Avenue
Miami, Florida 33131
Phone: (305) 579-0500
Fax: (305) 579-0717
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]_____
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]_______
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(d) under the Securities Act, check the following box and
list the Securities Act registration statement of the earlier effective
registration statement for the same offering. [ ]_______
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box.
-----------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================================================
TITLE OF EACH
CLASS OF SECURITIES AMOUNT TO PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TO BE REGISTERED BE REGISTERED OFFERING PRICE PER UNIT AGGREGATE OFFERING PRICE (2) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value
per share(1) 3,339,795 Shares $ 2.94 $9,818,997.30 2,729.68(3)
================================================================================================================================
</TABLE>
(1) A portion of the common stock to be registered are issuable upon
conversion of certain convertible notes issued by the registrant.
Pursuant to Rule 416 under the Securities Act, such number of shares of
common stock registered hereby shall include an indeterminate number of
shares of common stock that may be issued in connection with a stock
split, stock dividend, recapitalization or similar event. As the
calculation of the conversion price for the convertible notes is based
upon the market price for the underlying common stock, the registrant
has agreed to register 200% of the number of shares of common stock
that would have been received by the holders if all outstanding
convertible notes registered hereunder were converted on the day before
the date of this filing.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act of 1933.
(3) $1,793 was previously paid.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED AUGUST __, 1999
PROSPECTUS
PERFUMANIA, INC.
1,787,544 SHARES
COMMON STOCK
-------------------------
The selling shareholders are offering up to 1,787,544 shares of our
common stock under this prospectus.
Our common stock trades on the Nasdaq National Market under the symbol
"PRFM." On August 23, 1999 the closing price of one share of common stock on the
Nasdaq National Market was $3 7/32.
----------------------
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 3 OF
THIS PROSPECTUS.
----------------------
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS
HAVE NOT APPROVED OR DISAPPROVED OF THESE SHARES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------------
The date of this prospectus is ___________, 1999
<PAGE> 3
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM
THAT CONTAINED IN THIS PROSPECTUS. THE SELLING SHAREHOLDERS ARE OFFERING TO
SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS
WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE
TIME OF DELIVERY OF THE PROSPECTUS OR OF ANY SALE OF THE COMMON STOCK. IN THIS
PROSPECTUS, REFERENCES TO "PERFUMANIA," "WE," "OUR" AND "US" REFER TO
PERFUMANIA, INC.
-------------------------
TABLE OF CONTENTS
-------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................................................................................................1
Risk Factors......................................................................................................3
Forward Looking Statements........................................................................................5
Use of Proceeds...................................................................................................5
Price Range of Common Stock.......................................................................................6
Dividend Policy...................................................................................................6
Capitalization....................................................................................................7
Selected Consolidated Financial Data..............................................................................8
Management's Discussion and Analysis of Financial Condition and Results of Operations.............................9
Business.........................................................................................................18
Management.......................................................................................................25
Certain Relationships and Related Transactions...................................................................30
Principal Shareholders...........................................................................................32
Selling Shareholders.............................................................................................33
Plan of Distribution.............................................................................................35
Description of Capital Stock.....................................................................................36
Legal Matters....................................................................................................36
Experts..........................................................................................................36
Where You Can Find More Information..............................................................................36
Index to Financial Statements...................................................................................F-1
</TABLE>
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ii
<PAGE> 4
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION REGARDING PERFUMANIA AND THE COMMON STOCK BEING SOLD IN THIS
OFFERING, AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS.
WHO WE ARE
We are a leading specialty retailer and wholesale distributor of a wide
range of brand name and designer fragrances. As of August 23, 1999, we operated
a chain of 279 retail stores specializing in the sale of fragrances at
discounted prices up to 60% below the manufacturer's suggested retail prices.
Our wholesale division distributes approximately 1,100 stock keeping units of
fragrances and related products to approximately 41 customers, including
national and regional chains and other wholesale distributors throughout North
America and overseas. We manage and own our wholesale business and our retail
business is managed and owned by Magnifique Parfumes and Cosmetics, Inc., our
wholly owned subsidiary. Although our wholesale and retail businesses are
managed and owned by separate and distinct legal entities, for ease of reference
in this Form S-1, the wholesale and retail businesses are referred to as
segments.
RECENT DEVELOPMENTS
In February 1999, through our wholly owned subsidiary, perfumania.com,
inc., we began operation of an Internet commerce site, perfumania.com. We intend
to capitalize on our name recognition and cross marketing opportunities with our
stores to become a top discount retailer of fragrance and related products on
the Internet. All orders placed with the Internet site are shipped from our
existing distribution center in Miami, Florida.
In April 1999, perfumania.com, inc. announced that it intends to make
an initial public offering of its common stock. perfumania.com, inc. plans to
raise approximately $25 - $32 million representing approximately 53% of the
common stock to be outstanding following the offering. Perfumania.com, inc. is
offering 3,500,000 shares of its common stock, which includes 1,000,000 shares
held by us. A registration statement for the offering was filed on June 4, 1999,
and the offering should be completed as soon as practicable after the
registration statement becomes effective. The net proceeds of the offering will
be used by perfumania.com for repayment of outstanding indebtedness to us and
for working capital and other general corporate purposes as well as reduction of
the outstanding balance in our bank line of credit.
In July 1999, our board approved the transfer of 1,512,406 shares of
our treasury stock to a company affiliated through common ownership in
consideration for a partial reduction of our outstanding trade indebtedness of
approximately $4.5 million. The transfer price was based on a per share price of
$2.98. In connection with the transfer of the shares, we are negotiating a
registration rights agreement which would obligate us to register their shares
for resale to the public.
We were incorporated in Florida in January, 1988. Our executive offices
are located at 11701 N.W. 101st Road, Miami, Florida 33178, and our telephone
number is (305) 889-1600.
1
<PAGE> 5
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by the
selling shareholders.............................. 1,787,544 shares
Common stock to be outstanding
after the offering................................ 10,708,685 shares (1)
Use of proceeds...................................... We will not receive any proceeds from the sale of the
shares by the selling shareholders. See "Use of
Proceeds."
Nasdaq National Market symbol........................ "PRFM"
</TABLE>
- ----------------
(1) Includes all shares outstanding on August 24, 1999. Excludes shares of
common stock issuable upon the exercise of outstanding stock options and
additional shares of common stock reserved for future issuance under our
existing stock option plans. Assumes that the convertible notes issued in
April 1999 and July 1999 were converted into common stock on August 24,
1999.
SUMMARY FINANCIAL INFORMATION
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED THIRTEEN WEEKS ENDED
-------------------------------------------------------------- ----------------------
JANUARY 28, FEBRUARY 3, FEBRUARY 1, JANUARY 31, JANUARY 30, MAY 2, MAY 1,
1995 1996 1997 1998 1999 1998 1999
----------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................ $115,578 $129,157 $138,920 $163,594 $175,256 $38,468 $39,401
Gross profit..................... 43,649 52,168 59,960 65,974 64,617 14,806 15,253
Total operating expenses......... 40,634 48,214 52,606 73,162 78,017 16,420 17,796
Income (loss) from operations
before other income (expenses) 3,015 3,954 7,354 (7,188) (13,400) (1,614) (2,543)
Income (loss) before income
taxes*........................ 957 1,206 3,722 (11,122) (17,637) (2,772) (4,092)
Income (loss) before cumulative
effect of change in
accounting principle*......... 1,325 2,002 2,075 (10,801) (18,974) (2,772) (4,092)
Net income (loss)*............... 1,325 2,002 2,075 (11,433) (18,974) (2,772) (4,092)
Weighted average shares
outstanding:
Basic......................... 6,155,733 6,973,670 7,183,462 7,025,236 6,659,237 6,560,354 7,364,485
Diluted....................... 6,210,542 7,067,291 7,633,588 7,025,236 6,659,237 6,560,354 7,364,485
</TABLE>
<TABLE>
<CAPTION>
MAY 1, 1999
-----------
<S> <C>
BALANCE SHEET DATA: (UNAUDITED)
Working capital deficit.................................................................................... $ (5,731)
Total assets............................................................................................... 105,142
Long-term debt, less current portion(1).................................................................... 4,912
Total shareholders' equity................................................................................. 14,060
</TABLE>
- ---------------
(1) Amount includes redeemable common equity of $471 but does not include
long-term severance payables in the amount of $975.
* As disclosed in Note 11 to the consolidated financial statements, the
net income and net income per common share for fiscal 1996 was restated
to account for the value attributable to the beneficial conversion
feature on certain debt issued in fiscal 1996.
2
<PAGE> 6
RISK FACTORS
BEFORE YOU INVEST IN OUR COMMON STOCK, YOU SHOULD BE AWARE OF VARIOUS
RISKS, INCLUDING THOSE DESCRIBED BELOW. YOU SHOULD CAREFULLY CONSIDER THE RISKS
DESCRIBED BELOW, TOGETHER WITH ALL OF THE INFORMATION INCLUDED IN THIS
PROSPECTUS, BEFORE YOU DECIDE WHETHER TO PURCHASE SHARES OF OUR COMMON STOCK.
THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES WE FACE.
ADDITIONAL RISKS AND UNCERTAINTIES THAT WE ARE UNAWARE OF OR THAT WE CURRENTLY
DEEM IMMATERIAL ALSO MAY BECOME IMPORTANT FACTORS THAT AFFECT US.
IF ANY OF THE FOLLOWING RISKS OCCURS, OUR BUSINESS, FINANCIAL CONDITION
OR RESULTS OF OPERATIONS COULD BE MATERIALLY HARMED. IN THAT CASE, THE TRADING
PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR
INVESTMENT.
THIS PROSPECTUS ALSO CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THE RISKS FACED BY US DESCRIBED BELOW AND ELSEWHERE IN THIS
PROSPECTUS.
OUR BUSINESS IS SUBJECT TO SEASONAL FLUCTUATIONS, WHICH COULD LEAD TO
FLUCTUATIONS IN OUR STOCK PRICE.
We have historically experienced higher sales in the third and fourth
fiscal quarters than in the first and second fiscal quarters. People increase
their purchases of fragrances as gift items during the Christmas holiday season
which results in significantly higher fourth fiscal quarter retail sales. If our
quarterly operating results are below the expectations of stock market analysts,
our stock price would likely decline. Our quarterly results may also vary as a
result of the timing of new store openings, net sales contributed by new stores
and fluctuations in comparable sales of existing stores. Sales levels of new and
existing stores are affected by a variety of factors, including the retail sales
environment, the level of competition, the effect of marketing and promotional
programs, acceptance of new product introductions, adverse weather conditions
and general economic conditions.
WE MAY EXPERIENCE SHORTAGES OF THE SUPPLIES WE NEED TO MAKE OUR PRODUCTS BECAUSE
WE DO NOT HAVE LONG-TERM AGREEMENTS WITH SUPPLIERS.
Our success depends to a large degree on our ability to provide an
extensive assortment of brand name and designer fragrances. We have no long-term
purchase contracts or other contractual assurance of continued supply, pricing
or access to new products. While we believe that we have good relationships with
our vendors, if we are unable to obtain merchandise from one or more key vendors
on a timely basis, or if there is a material change in our ability to obtain
necessary merchandise, our results of operations could be seriously harmed.
WE MAY NOT BE ABLE TO OBTAIN THE FUNDS NEEDED UNDER OUR LINE OF CREDIT TO
OPERATE OUR BUSINESS.
As discussed above, our sales and operating results fluctuate by
season, like many specialty retailers. Our line of credit funds inventory
purchases and supports new retail store openings. Any future limitation on our
borrowing ability and access to financing could limit the opening of new stores
and obtaining merchandise on satisfactory terms. We were in violation of some
debt covenants contained in our bank line of credit agreement. These violations
included our failure to maintain the minimum tangible net worth and net income
levels established by the financial covenants, purchasing treasury stock and
exceeding the limit on new store openings. On July 14, 1999, the bank gave us a
waiver through September 30, 1999. Future outstanding borrowings will bear
interest at the prime rate plus four percent. The bank agreed to less
restrictive covenants if a number of specified events happen before September
30, 1999, including the requirement that perfumania.com, inc., our wholly-owned
subsidiary, receives at least $10 million from a contemplated initial public
offering of its shares, of which at least $2 million is to be repaid to us.
OUR PRESIDENT AND KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS, AND THESE KEY
PERSONNEL MAY NOT REMAIN WITH US IN THE FUTURE.
Jerome Falic, our President, is primarily responsible for our
merchandise purchases. He has developed strong, reliable relationships with
suppliers and customers of our wholesale division in the United States, Europe,
3
<PAGE> 7
Asia and South America. The loss of his service or any of our other current
executive officers could seriously harm us.
WE RECEIVED A QUALIFIED ACCOUNTANTS' REPORT WHICH INDICATES THERE ARE DOUBTS
ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
The report of our independent accountants in connection with our
audited consolidated financial statements as of January 31, 1998 and January 30,
1999 and for each of the three years in the period ended January 30, 1999,
contains an explanatory paragraph indicating factors which create substantial
doubt about our ability to continue as a going concern. These factors include
our recurring net losses in fiscal 1998 and 1997 and our default on our bank
line of credit agreement as a result of our violation of some debt covenants,
that, as of April 29, 1999, had not been waived by the bank.
WE NEED TO SUCCESSFULLY MANAGE OUR GROWTH IN ORDER FOR THE ADDITION OF OUR NEW
STORES TO BE PROFITABLE.
Even though we have grown significantly in the past several years, we
may not be able to sustain the growth in the number of retail stores and
revenues that we have achieved historically. Our growth is dependent, in large
part, upon opening and operating new retail stores on a profitable basis, which
in turn is subject to, among other things, securing suitable store sites on
satisfactory terms, hiring, training and retaining qualified management and
other personnel, having adequate capital resources and successfully integrating
new stores into existing operations. It is possible that our new stores will not
achieve sales and profitability comparable to existing stores, and it is
possible that the opening of new locations will adversely effect sales at
existing locations.
WE COULD BE SUBJECT TO LITIGATION BECAUSE OF THE MERCHANDISING ASPECT OF OUR
BUSINESS.
Some of the merchandise we purchase from suppliers is manufactured by
entities who are not the owners of the trademarks or copyrights for the
merchandise. This practice is common in the fragrance and cosmetics business.
The owner of a particular trademark or copyright may challenge us to demonstrate
that the specific merchandise was produced and sold with the proper authority
and if we were unable to demonstrate this, we could, among other things, be
restricted from reselling the particular merchandise. This type of restriction
could seriously harm our business and results of operations.
OUR ELECTRONIC DATA-SENSITIVE EQUIPMENT MAY NOT BE READY FOR YEAR 2000 PROBLEMS.
The Year 2000 issue is the result of computer and other business
systems being written using two digits rather than four to represent the year.
Many of our time sensitive applications and business systems and the
applications and business systems of our business partners may recognize a date
using "00" as the year 1900 rather than the year 2000, which could result in
system failure or disruption of operations. Although the Year 2000 problem will
impact us and our business partners, we have made a preliminary assessment of
our Year 2000 exposure and, primarily because our major management information
systems are in the process of being upgraded, we believe we will be able to
achieve Year 2000 readiness for our internal systems by the fourth quarter of
1999. We are also developing a plan of communication with our significant
business partners to obtain appropriate assurances that the Year 2000 issues are
resolved in a timely manner. We believe that we will satisfactorily resolve all
significant Year 2000 problems and that the related costs will not be material.
However, our estimates of Year 2000 related costs are based on numerous
assumptions, including the continued availability of some resources, the ability
to acquire accurate information regarding third party suppliers and the ability
to correct all relevant applications and third party modification plans. We may
not achieve our estimated costs and actual costs could differ materially from
those anticipated. Moreover, the failure of a major vendor's systems to operate
properly with respect to the Year 2000 problem on a timely basis or a Year 2000
conversion that is incompatible with our systems could seriously harm our
business, financial condition and results of operations. In addition, a
significant portion of our stores' purchases are made with credit cards, and our
operations may be seriously harmed if our customers are unable to use their
credit cards due to Year 2000 problems that are not remedied by their credit
card vendors.
4
<PAGE> 8
We are preparing contingency plans which will include the
identification of our most reasonably likely worst case scenarios. Currently,
the most reasonably likely sources of risk to us include (a) the disruption of
our internal inventory management system, (b) the inability of principal
suppliers or logistics providers to be Year 2000-ready, which could result in
delays in product deliveries from the suppliers or logistics providers, and (c)
failure of systems and necessary infrastructure including electricity supply. We
are preparing plans to flow inventory around an assumed period of disruption to
our stores, which could include accelerating distribution of high volume
merchandise and critical products to reduce the impact of significant failure.
A COMPLAINT HAS BEEN FILED AGAINST US IN CONNECTION WITH THE BANKRUPTCY OF A
FORMER CUSTOMER WHICH COULD RESULT IN SUBSTANTIAL DAMAGES.
We have been characterized as an insider as defined by the United
States Bankruptcy Code, in the liquidating plan of reorganization filed on April
6, 1998 by L. Luria & Son, Inc. in the United States Bankruptcy Court, Southern
District of Florida because our Chairman of the Board and Chief Executive
Officer was the principal of the entity that controlled Luria's. In October
1998, the committee of unsecured creditors in Luria's bankruptcy proceedings
filed a complaint with the United States Bankruptcy Court, Southern District of
Florida. The complaint alleges that Luria's made preference payments, as defined
by the Bankruptcy Court, to us. The complaint seeks recovery of the preference
payments, and disallows any and all of our claims against Luria's until we have
made full payment of the preference payments. In July 1999, we agreed with the
committee of unsecured creditors to settle all claims held by Luria's against us
for the sum of $1.2 million, payable over the next nine months according to a
repayment schedule. This settlement is subject to the approval of the Bankruptcy
Court. The full amount of the settlement was accrued for in our financial
statements for the years ending January 31, 1998 and January 30, 1999.
WE ARE INVOLVED IN A LAWSUIT THAT ALLEGES THAT WE HAVE INFRINGED ON PATENT
RIGHTS.
In December 1993, the patent holder and exclusive licensee in the U.S.
of Boucheron filed a complaint against us in the United States District Court
for the Southern District of New York alleging that we infringed upon their
exclusive right to sell the Boucheron bottle and is seeking $1.5 million in
damages. Their theory is that they have a valid patent for the bottles and that
our sales of such bottles infringes upon their patent rights. We believe that a
patentee cannot control by resort to an infringement suit the resale of a
patented article which it has sold. We filed a motion to dismiss during February
1994. On March 20, 1995, the court denied our motion to dismiss, and on April
14, 1995, we filed an answer to the complaint. Discovery is in progress.
FORWARD LOOKING STATEMENTS
Some of the statements in this prospectus, including those that contain
the words "anticipate," "believe," "plan," "estimate," "expect," "should,"
"intend" and other similar expressions, are "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Those
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
Perfumania or its industry to be materially different from any future results,
performance or achievements expressed or implied by those forward-looking
statements. Those factors include, among other things, those risks identified in
"Risk Factors." You should carefully consider the risks described in this
prospectus.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the common
stock by the selling shareholders hereunder. We estimate that our expenses in
connection with this offering will be approximately $150,000.
5
<PAGE> 9
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on the Nasdaq National Market under
the symbol "PRFM" since December 19, 1991. The following table sets forth for
the periods indicated the range of high and low closing sales prices per share
of our common stock as reported by the Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL 1997
First Quarter................................................ $ 3 11/16 $ 2 19/64
Second Quarter .............................................. $ 4 5/16 $ 2 7/8
Third Quarter................................................ $ 3 7/8 $ 2 5/8
Fourth Quarter............................................... $ 3 3/4 $ 2 1/4
FISCAL 1998
First Quarter................................................ $ 3 1/4 $ 2 1/4
Second Quarter............................................... $ 2 13/16 $ 1 9/16
Third Quarter................................................ $ 1 11/16 $ 13/32
Fourth Quarter............................................... $12 $ 17/32
FISCAL 1999
First Quarter................................................ $ 8 11/16 $ 2 3/4
Second Quarter............................................... $ 4 7/32 $ 3
</TABLE>
As of August 23, 1999, there were 81 holders of record of the 9,156,434
issued shares of common stock, of which 1,512,406 shares were held in treasury.
The closing sales price for the common stock on August 23, 1999 was $3 7/32.
DIVIDEND POLICY
We have not declared or paid any dividends on our common stock, and we
do not currently intend to declare or pay cash dividends in the foreseeable
future. Our board of directors, in their discretion, determines the payment of
dividends, if any, after taking into account various factors, including our
financial condition, results of operations, current and anticipated cash needs
and plans for expansion. We are prohibited from paying cash dividends under our
line of credit with LaSalle National Bank.
6
<PAGE> 10
CAPITALIZATION
The following table sets forth our capitalization as of May 1, 1999,
and as adjusted for the issuance and assumed conversion into common stock on
August 24, 1999, of the convertible notes and the issuance of the shares
associated with the January 1999 proceeds from the sale of common stock.
This table should be read together with our consolidated financial
statements and accompanying notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF MAY 1, 1999
------------------------------
ACTUAL AS ADJUSTED
------------ ------------
<S> <C> <C>
Long-term obligations, net of current maturities(1) ...... $ 4,911,735 $ 2,911,735
Shareholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized, none issued and outstanding ............. -- --
Common stock, $0.01 par value; 25,000,000 shares
authorized, 8,896,891 shares issued, actual; and
10,708,685 shares issued, as adjusted ............... 88,969 107,087
Capital in excess of par value ........................ 54,963,570 59,595,075
Treasury stock, at cost, 1,512,406 shares ............. (5,413,002) (5,413,002)
Accumulated deficit ................................... (35,026,963) (35,664,461)
------------ ------------
Total shareholders' equity ........................ 14,612,574 18,624,699
------------ ------------
Total capitalization ......................... $ 19,524,309 $ 21,536,434
============ ============
</TABLE>
(1) Item includes long-term portion of notes payable, convertible notes
payable, capital leases and redeemable common equity.
7
<PAGE> 11
SELECTED CONSOLIDATED FINANCIAL DATA
This section presents our selected financial data. You should read
this selected data with the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section later in this prospectus
as well as our financial statements and related notes contained later in this
prospectus.
Our fiscal year end is the Saturday closest to January 31. All
references in this prospectus to fiscal years are to the calendar year in which
the fiscal year begins; for example, fiscal year 1998 refers to the fiscal year
that began on February 1, 1998 and ended on January 30, 1999. The following
selected consolidated financial statements as of and for the fiscal years ended
as indicated have been derived from our audited consolidated financial
statements, and for the thirteen weeks ended as indicated have been derived from
our unaudited consolidated financial statements.
<TABLE>
<CAPTION>
THIRTEEN WEEKS
FISCAL YEAR ENDED ENDED
-------------------------------------------------------------------- -----------------------
JANUARY 28, FEBRUARY 3, FEBRUARY 1, JANUARY 31, JANUARY 30, MAY 2, MAY 1,
1995 1996 1997 1998 1999 1998 1999
--------- --------- --------- --------- ----------- --------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales, wholesale division ... $ 38,484 $ 36,200 $ 30,317 $ 34,032 $ 40,466 $ 13,468 $ 11,267
Net sales, retail division ...... 77,094 92,957 108,603 129,562 134,790 25,000 28,134
--------- --------- --------- --------- --------- --------- ---------
Total net sales .............. 115,578 129,157 138,920 163,594 175,256 38,468 39,401
--------- --------- --------- --------- --------- --------- ---------
Gross profit, wholesale division 7,573 8,784 7,614 7,942 7,545 3,188 2,194
Gross profit, retail division ... 36,076 43,384 52,346 58,032 57,072 11,618 13,059
--------- --------- --------- --------- --------- --------- ---------
Total gross profit ........... 43,649 52,168 59,960 65,974 64,617 14,806 15,253
--------- --------- --------- --------- --------- --------- ---------
Selling, general and
administrative expenses ...... 37,081 43,372 48,165 64,219 72,502 15,308 16,616
Provision for doubtful accounts.. 27 310 500 1,730 -- 30 15
Provision for impairment of
assets and store closings .... 623 1,232 169 2,515 1,035 -- --
Depreciation and amortization ... 2,903 3,300 3,772 4,698 4,480 1,082 1,165
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses ..... 40,634 48,214 52,606 73,162 78,017 16,420 17,796
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations
before other income (expense). 3,015 3,954 7,354 (7,188) (13,400) (1,614) (2,543)
Other income (expense)
Interest expense, net* ....... (2,415) (3,144) (4,110) (4,696) (4,882) (1,279) (1,582)
Other, net ................... 357 396 478 762 645 121 33
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income
taxes*........................ 957 1,206 3,722 (11,122) (17,637) (2,772) (4,092)
(Provision) benefit for income
taxes......................... 368 796 (1,647) 321 (1,337) -- --
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before cumulative
effect of change in
accounting principle* ........ 1,325 2,002 2,075 (10,801) (18,974) (2,772) (4,092)
Cumulative effect of change in
accounting principle, net of
income tax benefit of $380,958 -- -- -- (632) -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)* .............. $ 1,325 $ 2,002 $ 2,075 $ (11,433) $ (18,974) $ (2,772) $ (4,092)
========= ========= ========= ========= ========= ========= =========
Weighted average shares outstanding:
Basic ........................ 6,155,733 6,973,670 7,183,462 7,025,236 6,659,237 6,560,354 7,364,485
Diluted ...................... 6,210,542 7,067,291 7,633,588 7,025,236 6,659,237 6,560,354 7,364,485
Basic income (loss) per share
net of cumulative effect of
change in accounting
principle*.................... $ 0.22 $ 0.29 $ 0.29 $ (1.63) $ (2.85) $ (0.42) $ (0.56)
Diluted income (loss) per share
net of cumulative effect of
change in accounting
principle*.................... $ 0.21 $ 0.28 $ 0.27 $ (1.63) $ (2.85) $ (0.42) $ (0.56)
SELECTED OPERATING DATA:
Number of stores open at end
of period..................... 175 194 262 285 289 284 288
Comparable store sales increases. 5.9% 4.1% 3.6% 0.0% 0.0% 3.0% 0.0%
BALANCE SHEET DATA (AT PERIOD END):
Working capital (deficit) ....... $ 26,452 $ 29,688 $ 32,614 $ 18,473 $ (3,835) $ 12,623 $ (5,731)
Total assets .................... 78,916 93,026 129,365 113,908 95,129 112,719 105,142
Long-term debt, less current
portion(1) ................... 1,367 1,815 5,708 5,643 3,404 5,220 4,912
Total stockholders' equity ...... 42,946 44,761 48,782 35,169 17,636 31,716 14,060
</TABLE>
- -----------------
* As disclosed in Note 11 to the consolidated financial statements, the net
income and the net income per share for fiscal year 1996 was restated to
account for the value attributable to the beneficial conversion feature on
certain debt issued in fiscal year 1996.
(1) Amount includes redeemable common equity of $471 as of both January 30,
1999 and May 1, 1999 but does not include long-term severance payables of
$1,038 and $975 as of January 30, 1999 and May 1, 1999, respectively.
The fiscal 1998 financial statements have been prepared assuming we
will continue as a going concern. We have violated certain debt covenants
contained in our bank line of credit agreement; however, we obtained a waiver
from the bank on July 14, 1999.
8
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ TOGETHER WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED LATER IN THIS PROSPECTUS. THIS
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO BUSINESS
RISKS AND UNCERTAINTIES, AND OUR ACTUAL RESULTS OF OPERATIONS MAY DIFFER
MATERIALLY FROM THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS. FOR A MORE
DETAILED DISCUSSION OF THESE BUSINESS RISKS AND UNCERTAINTIES, PLEASE SEE "RISK
FACTORS."
During the last three fiscal years, our retail division has accounted
for the majority of our net sales and gross profit. Our overall profitability
depends principally on our ability to purchase a wide selection of merchandise
at favorable prices. Other factors affecting our profitability include general
economic conditions, the availability to us of volume discounts and, in the
retail division, the number of stores in operation, the timing of store openings
and closings and the effect of special promotions offered by us.
The following table sets forth items from our consolidated statements
of operations expressed as a percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
------------------------------------------------------
FISCAL YEAR ENDED THIRTEEN WEEKS ENDED
----------------------------------- --------------------
JANUARY 1, JANUARY 31, JANUARY 30, MAY 2, MAY 1,
1997 1998 1999 1998 1999
---------- ----------- ---------- ------ -----
<S> <C> <C> <C> <C> <C>
Net sales, wholesale division .................. 21.8% 20.8% 23.1% 35.0% 28.6%
Net sales, retail division ..................... 78.2 79.2 76.9 65.0 71.4
----- ----- ----- ----- -----
Total net sales ....................... 100.0 100.0 100.0 100.0 100.0
Gross profit, wholesale division ............... 25.1 23.3 18.6 23.7 19.5
Gross profit, retail division .................. 48.2 44.8 42.3 46.5 46.4
----- ----- ----- ----- -----
Total gross profit .................... 43.2 40.3 36.9 38.5 38.7
Selling, general and administrative expenses ... 34.6 39.2 41.4 39.8 42.2
Provision for doubtful accounts ................ 0.4 1.1 -- 0.1 --
Provision for impairment of assets and store
closings...................................... 0.2 1.5 0.6 -- --
Depreciation and amortization .................. 2.7 2.9 2.6 2.8 3.0
----- ----- ----- ----- -----
Total operating expenses .............. 37.9 44.7 44.6 42.7 45.2
----- ----- ----- ----- -----
Income (loss) from operations before
other income (expenses) ................. 5.3 (4.4) (7.7) (4.2) (6.5)
----- ----- ----- ----- -----
Other income (expense):
Interest, net ............................. (2.9) (2.9) (2.8) (3.3) (4.0)
Other, net ................................ 0.3 0.5 0.4 0.3 0.1
----- ----- ----- ----- -----
Income (loss) before income taxes* ............. 2.7 (6.8) (10.1) (7.2) (10.4)
----- ----- ----- ----- -----
(Provision) benefit for income taxes ........... (1.2) 0.2 (0.8) -- --
----- ----- ----- ----- -----
Income (loss) before cumulative effect of change
in accounting principle ................... 1.5 (6.6) (10.9) (7.2) (10.4)
----- ----- ----- ----- -----
Cumulative effect of change in accounting
principle, net of income tax benefit ...... -- (0.4) -- -- --
----- ----- ----- ----- -----
Net income (loss)* ............................. 1.5% (7.0%) (10.9%) (7.2%) (10.4%)
===== ===== ===== ===== =====
</TABLE>
* As disclosed in Note 11 to the consolidated financial statements, the net
income and net income per share for 1996 was restated to account for the
value of the beneficial conversion feature of certain debt issued in
fiscal year 1996.
RESULTS OF OPERATIONS
WE RESTATED FISCAL YEAR 1996 NET INCOME PER COMMON SHARE TO REFLECT
RECENT SEC ANNOUNCEMENTS REGARDING THE TREATMENT OF CONVERTIBLE DEBT
TRANSACTIONS. In a 1997 announcement, the staff of the Securities
9
<PAGE> 13
and Exchange Commission indicated that when debt is convertible at a discount
from the then current common stock market price, the discounted amount reflects
at that time an incremental yield, i.e., a "beneficial conversion feature,"
which should be recognized as a return to the debt holders. In March 1996, we
issued $3,000,000 of 5% convertible debentures in a Regulation S offering to
non-U.S. persons. The debentures were convertible into shares of our common
stock at any time after May 21, 1996. Based on the market price of our common
stock, the debentures had a beneficial conversion feature of $529,412 at that
point in time. Because of the SEC announcement, we restated our 1996 net
income and net income per common share information to reflect the new accounting
treatment. The net effect of the restatement represents a non-cash interest
charge in the determination of net income.
COMPARISON OF THE THIRTEEN WEEKS ENDED MAY 1, 1999 WITH THE THIRTEEN WEEKS ENDED
MAY 2, 1998.
NET SALES
Net sales increased 2.4% from $38.5 million in the first thirteen weeks
of 1998 to $39.4 million in the first thirteen weeks of 1999. The increase in
net sales was the result of a 12.5% increase in retail sales (from $25.0 million
to $28.1 million) offset by a 16.3% decrease in wholesale sales (from $13.5
million to $11.3 million). The decrease in wholesale sales was primarily due to
unusually large sales to a wholesale customer during the first thirteen weeks of
1998. The increase in retail sales was due to the increase in the number of
stores operated during the first thirteen weeks of 1999 compared to the first
thirteen weeks of 1998, as well as an increase in comparable store sales of 3%.
We operated 288 and 284 stores at May 1, 1999 and May 2, 1998, respectively.
Although we plan to open only 8 retail stores in fiscal year 1999 and to close
approximately 10 unprofitable stores, retail sales are expected to increase in
fiscal 1999 compared to fiscal year 1998. This is due to an expected increase in
comparable store sales due to improved merchandising variety and clarity and
reduced promotional sales of lower price points resulting in a higher average
sale per transaction.
GROSS PROFIT
Gross profit increased 3.0% from $14.8 million in the first thirteen
weeks of 1998 (38.5% of total net sales) to $15.3 million in the first thirteen
weeks of 1999 (38.7% of total net sales) primarily due to an increase in gross
profit for the retail division.
Gross profit for the wholesale division decreased 31.2% from $3.2
million in the first thirteen weeks of 1998 to $2.2 million in the first
thirteen weeks of 1999. As a percentage of net sales, gross profit for the
wholesale division decreased from 23.7% in the first thirteen weeks of 1998 to
19.5% in the first thirteen weeks of 1999. The decrease in gross profit and
gross profit as a percentage of net wholesale sales was attributable to
decreased sales volume and liquidation of certain slow moving inventory items.
Wholesale sales historically yield a lower gross margin when compared to retail
sales.
Gross profit for the retail division increased 12.4% to $13.1 million
in the first thirteen weeks of 1999 from $11.6 million in the first thirteen
weeks of 1998. This is a result of higher retail sales associated with the
operation of more stores during the thirteen week period ended May 1, 1999 as
compared to the thirteen week period ended May 2, 1998, as well as an increase
in comparable store sales of 3%. As a percentage of net retail sales, gross
profit for the retail division decreased slightly from 46.5% in the first
thirteen weeks of 1998 to 46.4% in the first thirteen weeks of 1999. Gross
margins are expected to increase slightly during the remainder of fiscal year
1999 due to improved merchandise buying costs, a reduction of non-designer
fragrance merchandise and reduced freight costs.
OPERATING EXPENSES
Operating expenses, which include selling, general and administrative
expenses, as well as depreciation, increased 8.4% from $16.4 million in the
first thirteen weeks of 1998 to $17.8 million in the first thirteen weeks of
1999. As a percentage of net sales, operating expenses increased from 42.7% in
the first thirteen weeks of fiscal year 1998 to 45.2% in the first thirteen
weeks of fiscal year 1999. The increase was primarily attributable to costs
associated with the operation of an average of 5 additional stores during the
1999 period as well as expenses of $0.7 million attributable to perfumania.com,
our wholly-owned internet commerce site which began operations in
February 1999. We expect operating expenses to decrease in fiscal year 1999
compared to fiscal year
10
<PAGE> 14
1998 as we expect to have a net decrease in the number of stores in operation,
due to fewer openings of new stores and the closing of unprofitable locations.
In addition, we will not incur any severance expense in fiscal year 1999 and we
do not expect to incur any significant expense for disposition for fixed assets
due to store closings, as these expenses were recorded in fiscal year 1998 in
anticipation of 1999 store closings.
Other expenses, which include interest expense, increased by 33.9% from
$1.2 million for the thirteen weeks ended May 2, 1998 to $1.5 million for the
thirteen weeks ended May 1, 1999. The increase is principally due to the
beneficial conversion cost of approximately $385,000 associated with the
issuance of the convertible notes.
As a result of the foregoing, we had a net loss of $4,091,866
in the first thirteen weeks of 1999 compared to a net loss of $2,771,612 in the
first thirteen weeks of 1998. Net loss per share for the thirteen week periods
ended May 1, 1999 and May 2, 1998, was $0.56 and $0.42 per share, respectively.
COMPARISON OF FISCAL YEARS 1998 AND 1997
NET SALES
Net sales increased 7.1% from $163.6 million in fiscal year 1997 to
$175.3 million in fiscal year 1998. The increase in net sales during fiscal year
1998 was due to a 4.0% increase in retail sales (from $129.6 million to $134.8
million), and a 18.9% increase in wholesale sales (from $34.0 million to $40.5
million). The increase in retail sales was principally due to an increase in the
number of stores operated during fiscal year 1998 compared to fiscal year 1997,
as comparable store sales were flat compared to the prior year. We believe that
various sales promotions held during the year to stimulate sales and reduce
inventory levels resulted in lower average sales per customer, which contributed
to the flat comparable store sales. We operated 289 and 285 stores at the end of
fiscal years 1998 and 1997, respectively. The increase in wholesale sales was
due to our efforts to reduce inventory levels of certain non-designer
fragrances.
GROSS PROFIT
Gross profit decreased 2.1% from $66.0 million in fiscal year 1997
(40.3% of total net sales) to $64.6 million in fiscal year 1998 (36.9% of total
net sales) as a result of higher inventory loss provisions (see below), higher
sales and gross profit in the retail division offset by lower gross profit in
the wholesale division.
Gross profit for the wholesale division decreased from $7.9 million in
fiscal year 1997 to $7.5 million in fiscal year 1998 due mainly to a $330,000
increase in inventory provisions. The wholesale division's gross margin in
fiscal 1998 was 18.6% compared to 23.3% in fiscal year 1997. The decrease in
gross margin was due to the increase in sales of non-designer fragrances in the
wholesale division and the increase in the overall ratio of wholesale sales to
retail sales in fiscal year 1998. Wholesale sales historically yield a lower
gross margin when compared to retail sales.
Gross profit for the retail division decreased 1.7% from $58.0 million
in fiscal year 1997 to $57.1 million in fiscal year 1998, principally as a
result of a $1.6 million increase in the inventory provision, offset by higher
retail sales volume. As a percentage of net retail sales, gross profit for the
retail division decreased from 44.8% in fiscal year 1997 to 42.3% in fiscal year
1998. The decrease was due to store promotions discussed above as well as
increases in inventory provisions, freight expense and inventory shrinkage.
Inventory provisions were increased to bring the carrying cost of certain
non-designer fragrance merchandise to their estimated carrying values. We
will reduce inventory levels of this non-designer fragrance merchandise
in fiscal year 1999. Freight expenses increased primarily due to the necessity
of shipping merchandise from our distribution center to its retail
stores using express freight service during the 1998 holiday season. This
resulted from a temporary failure in our inventory management system to properly
replenish the merchandise at our retail stores. Inventory shrinkage increased
due to the replenishment situation discussed above and increased movement of
inventory due to the closing of 32 retail stores. We expect these expenses to
decrease in fiscal year 1999 because non-designer fragrance merchandise will be
reduced to a minimum, the management information system will be upgraded in
fiscal year 1999 and we do not expect to close a significant number
of retail stores. Furthermore, we have hired additional loss prevention and
distribution center management personnel to ensure that shrinkage expense is
reduced to an acceptable level.
11
<PAGE> 15
OPERATING EXPENSES
Operating expenses increased $4.9 million in fiscal year 1998 compared
to fiscal year 1997, due principally to (a) a $8.3 million increase in selling,
general and administrative expenses, which includes a charge of $1.9 million
related to severance agreements with two executive officers and (b) a $1.0
million provision for disposition of fixed assets relating to retail stores
which were either closed during fiscal year 1998, or are scheduled to close
during fiscal year 1999. We do not expect to incur a significant provision for
the disposition of fixed assets in fiscal year 1999 as the fixed assets for all
stores expected to be closed in fiscal year 1999 were expensed in fiscal year
1998. The increase in selling, general and administrative expense was primarily
the result of increases in rent, payroll and other costs associated with the
operation of an average of 10 additional stores during fiscal year 1998.
Depreciation and amortization decreased $0.2 million in fiscal year 1998
compared to fiscal year 1997. As a percentage of net sales, operating expenses
decreased from 44.7% in fiscal year 1997 to 44.6% in fiscal year 1998.
INTEREST EXPENSE
Interest expense (net) increased 4.6% from $4.7 million in fiscal year
1997 to $4.9 million in fiscal 1998. The increase was principally due to
increased use of lease financing for new store furniture and fixtures. See
"Liquidity and Capital Resources."
INCOME TAXES
The provision for income taxes in fiscal 1998 was $1.3 million, which
includes an increase in the valuation allowance of $1.2 million to provide fully
for the net deferred tax assets since management believes that it is more likely
than not that these amounts will not be realized due to our recurring losses.
As a result of the foregoing, we had a net loss of $18.9 million in
fiscal 1998 compared to a net loss of $11.4 million in fiscal 1997.
COMPARISON OF FISCAL YEARS 1997 AND 1996
NET SALES
Net sales increased 17.8% from $138.9 million in fiscal year 1996 to
$163.6 million in fiscal year 1997. The increase in net sales during fiscal year
1997 was due to a 16.8% increase in retail sales (from $108.6 million to $129.6
million), and a 16.3% increase in wholesale sales (from $30.3 million to $34.0
million). The increase in retail sales was principally due to an increase in the
number of stores operated during fiscal year 1997 (285) compared to fiscal year
1996 (262), as comparable store sales were flat compared to the prior year. We
believe that various promotions held during the year to stimulate sales and
reduce and rebalance inventory levels resulted in lower average sales per
customer, which contributed to the flat comparable store sales.
GROSS PROFIT
Gross profit increased 10.0% from $60.0 million in fiscal year 1996
(43.2% of total net sales) to $66.0 million in fiscal year 1997 (41.4% of total
net sales) as a result of higher sales and gross profit in both the wholesale
and retail divisions.
Gross profit for the wholesale division increased from $7.6 million in
fiscal year 1996 to $7.9 million in fiscal year 1997. The wholesale division's
gross margin in fiscal 1997 was 23.3% compared to 25.1% in fiscal year 1996.
Gross profit for the retail division increased 10.9% from $52.3 million
in fiscal year 1996 to $58.0 million in fiscal year 1997, principally as a
result of higher retail sales volume. As a percentage of net retail sales, gross
profit for the retail division decreased from 48.4% in fiscal year 1996 to 44.8%
in fiscal year 1997. The decrease was due to promotions discussed above as well
as a $1.3 million increase in inventory provisions. Inventory provisions were
increased to bring the carrying cost of certain non-designer fragrance
merchandise to their estimated carrying values.
12
<PAGE> 16
OPERATING EXPENSES
Operating expenses increased $20.6 million in fiscal year 1997 compared
to fiscal year 1996, due principally to (a) a $16.1 million increase in selling,
general and administrative expenses, which includes $1.7 million of losses
suffered from operating Perfumania's Nature's Elements stores before their
conversion and/or closure, (b) a $2.4 million increase in provision for
impairment of assets and store closing and (c) a $1.2 million write off of
accounts receivable from L. Luria & Son, Inc. The increase in selling, general
and administrative expense was primarily the result of increases in rent,
payroll and other costs associated with the operation of an average of 64
additional stores during fiscal year 1997. The average number of stores during
fiscal 1997 includes 20 temporary holiday-only stores. We intend to continue to
use temporary stores in an effort to reduce our inventories. The increase in
provision for doubtful account occurred primarily because of increased
write-offs of wholesale accounts receivable. See "Liquidity and Capital
Resources." After performing a review of certain retail store locations with
significant negative cash flows, we recognized a non-cash impairment charge of
$2.2 million, representing a reduction of the carrying amounts of fixed assets
at those store locations to their estimated recoverable amounts. We also
recorded a loss of $0.3 million on disposition of fixed assets relating to
retail stores which were closed during fiscal year 1997. Due to the heavy
concentration of sales in the fourth quarter of each fiscal year, we do not
believe it is meaningful to make impairment determinations on an interim basis
during the year. Depreciation and amortization increased $0.9 million in fiscal
year 1997 compared to fiscal year 1996, due to increased fixed assets associated
with retail stores. As a percentage of net sales, operating expenses increased
from 38.0% in fiscal year 1996 to 45.8% in fiscal year 1997 due to the above
reasons.
INTEREST EXPENSE
Interest expense (net) increased 14.3% from $4.2 million in fiscal year
1996 to $4.7 million in fiscal 1997. The increase was principally due to the
increase in our line of credit from $30 to $35 million during fiscal 1997, as
well as increased use of lease financing for new store furniture and fixtures,
offset by a one-time non-cash interest charge of $529,412 for a beneficial
conversion feature of convertible debt in fiscal 1996 (see Note 11 to the
consolidated financial statements). See "Liquidity and Capital Resources".
INCOME TAXES
The benefit for income taxes in fiscal 1997 was $0.3 million, which
includes an increase in the valuation allowance of $3.4 million for deferred tax
assets due to their uncertain realization.
As a result of the foregoing, we had a loss before cumulative effect of
a change in accounting principle of $10.8 million in fiscal 1997 compared to a
net income of $2.1 million in fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements are to fund inventory purchases and
for new store openings. We financed these capital requirements primarily through
borrowings under our working capital lines of credit, cash flows from
operations, lease financing of store furniture and fixtures and short-term
borrowings from related parties and other individuals.
On May 15, 1998, we extended our $35 million revolving line of credit
facility with LaSalle National Bank, from April 1999 to April 2001. Advances
made under the line of credit are based on a formula of eligible inventories and
receivables, bear interest at 2% above the bank's prime rate (9.75% at January
30, 1999, however,
13
<PAGE> 17
see discussion below regarding events of default and default rate interest), and
are payable on demand. Advances are secured by a first lien on all of our assets
and assignment of a life insurance policy on one of our officers.
Our $35 million line of credit contains covenants requiring the
maintenance of minimum tangible net worth and book value and the achievement of
specified levels of quarterly results of operations. The line of credit also
contains limitations on additional borrowings, capital expenditures, number of
new store openings and purchases of treasury stock and prohibits distribution of
dividends. As of January 30, 1999, we were in violation of some of the above
covenants and, as a result of these violations, were in default under the line
of credit agreement. As a result, we incurred the default rate of
interest, prime plus 4% (11.75%) beginning December 1998 and the bank can demand
payment of the amounts outstanding under the line of credit agreement. The
violations consist primarily of our failure to maintain the minimum
tangible net worth and net income levels established by the financial covenants,
purchasing treasury stock and exceeding the limit on new store openings. On July
14, 1999, we obtained a waiver of default from the bank through
September 30, 1999 as of and for the year ended January 30, 1999. Future
outstanding borrowings will bear interest at the prime rate plus four percent.
The bank agreed to less restrictive covenants provided that certain events
commence prior to September 30, 1999. One such event includes that
perfumania.com, inc., a wholly-owned subsidiary, is to receive at least $10
million from a contemplated initial public offering of its shares, of which at
least $2 million is to be repaid to us. Management believes that the
conditions included in the waiver will be met by September 30, 1999, however,
there can be no assurance of this. Should we be unable to meet these conditions,
we may be required to repay outstanding amounts (totaling approximately $33.1
million as of August 11, 1999) and obtain alternative sources of financing. We
could also be required to take other actions to reduce our reliance on working
capital financing and generate additional working capital, which could include
delaying the opening of new stores, reducing inventory purchases and/or reducing
our wholesale and retail selling prices to generate more cash. Any such actions,
or our failure to obtain additional financing in an amount sufficient to support
our current and planned levels of operation, could adversely affect our business
and operating results.
In July 1999, we entered into a Securities Purchase Agreement
and issued an aggregate of $2 million worth of our Series B Convertible Notes,
which are convertible into common stock. The Notes contain a beneficial
conversion feature of approximately $637,500 which will be taken by us
as a non-cash interest charge to income in the second quarter of fiscal year
1999. The agreement requires us to file a registration statement with
the Securities and Exchange Commission within forty-five days after the date of
issuance of the convertible notes. The conversion price is the lower of (A)
$3.40625 per share, subject to adjustment and (B) the floating conversion price
determined by multiplying (1) the average closing bid price of the common stock
for the three trading days immediately preceding the date of determination, by
(2) 80%, subject to adjustment. The conversion price may be adjusted pursuant to
antidilution provisions in the convertible note. If the conversion price
decreases, we are obligated to issue additional shares of common stock.
In April 1999, we entered into a Securities Purchase Agreement and
issued an aggregate of $2 million worth of our Series A Convertible Notes, which
are convertible into common stock. The agreement requires us to file a
registration statement with the Securities and Exchange Commission within
forty-five days after the date of issuance of the convertible notes. The
conversion price is the lower of (A) $4.35 per share, subject to adjustment and
(B) the floating conversion price determined by multiplying (1) the average
closing bid price of the common stock for the three trading days immediately
preceding the date of determination, by (2) 80%, subject to adjustment. The
conversion price may be adjusted pursuant to antidilution provisions in the
convertible note. If the conversion price decreases, we are obligated to issue
additional shares of common stock.
In March 1999, we entered into Subscription Agreements for the sale of
235,293 shares of our common stock to a group of private investors at a price of
$8.50 per share. The proceeds of $2 million were received in January 1999. The
Subscription Agreements require that we file this registration statement with
the Securities and Exchange Commission within six months from the date of the
agreement to permit the registered resale of the shares by the investors in open
market transactions. If, on the effective date of the registration statement,
the market price is less than $8.50 per share, we are obligated to reimburse the
investor group the lesser of (a) the product of the difference between $8.50 and
the closing bid price of the common stock on the effective date of this
registration statement multiplied by the number of shares issued under the
Subscription Agreements or (b) the product of $2.00 multiplied by the number of
shares issued under the Subscription Agreements. As of January 30, 1999, the
potential redeemable amount of $470,588 was recorded as redeemable common equity
and the remaining $1,529,412 was recorded as capital in excess of par value in
the accompanying balance sheets.
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<PAGE> 18
On March 21, 1996, we sold 180,000 shares of common stock for
approximately $956,000 in a private placement.
On March 25, 1996, we issued $3,000,000 of 5% Convertible Debentures in
a Regulation S offering to non-U.S. persons. The debentures were convertible at
any time after May 21, 1996 into shares of common stock, at a conversion price
for each share of common stock equal to eighty-five percent of the market price
of the common stock on the date of conversion, not to exceed $8.50 per share of
common stock. The debentures were converted to approximately 918,000 shares of
the common stock in the second quarter of fiscal 1996. See Note 11 of the
consolidated financial statements.
In fiscal year 1998, net cash provided by operating activities was
approximately $13.0 million, which was primarily due to our reduction in
inventories and receivables.
Trade receivables primarily relate to our wholesale business. Trade
receivables due from customers at January 30, 1999 were $4.1 million. Of this,
approximately $1.3 million was more than 90 days past due. The allowance for
doubtful accounts was approximately $0.7 million at January 30, 1999 and was
considered adequate by management based on its write-off experience during the
last three years and an analysis of the aging of its trade receivables at
January 30, 1999.
During fiscal year 1998, inventories decreased by approximately $15.5
million due to (a) our efforts to reduce inventory levels and (b) an inventory
provision during the fourth quarter of $3.8 million related primarily to
non-designer fragrances we intend to liquidate in fiscal year 1999.
Net cash used in investing activities during fiscal year 1998 was
approximately $9.5 million, principally due to capital expenditures related to
opening new stores and renovation of existing stores. We intend to slow our
growth and open only 7 stores in fiscal year 1999 versus 36 stores in fiscal
year 1998. In addition, we do not plan any significant renovations of existing
stores in fiscal year 1999, whereas 18 Nature's stores were completely remodeled
in fiscal year 1998. Thus, store-related capital expenditures for fiscal year
1999 are projected to be significantly lower than fiscal year 1998. Although we
intend to upgrade various components of our management information systems and
will also make various hardware and software enhancements, total capital
expenditures for fiscal year 1999 are projected to be $4.0 million of which
approximately $1.8 million pertains to new store openings and $2.2 million
pertains to hardware, software and other corporate improvements. Currently, our
average capital expenditure for opening a store is approximately $175,000,
including furniture and fixtures, equipment and other items, which average
approximately $50,000 per store, build-out costs, which average approximately
$120,000 per store, and pre-opening expenses, such as the hiring and training of
new employees and travel, which average approximately $5,000 per store. In
addition, initial inventory (not including inventory replenishment) in a new
store ranges from approximately $100,000 during the first fiscal quarter to
approximately $140,000 during the Christmas holiday season. Wholesale inventory
levels vary significantly during the fiscal year depending upon availability,
price and selection of merchandise available for purchase, and seasonality. We
generally carry at least four months' supply of inventory for our retail and
wholesale divisions.
We also repurchased approximately 294,000 shares of our common stock
for $0.9 million in fiscal year 1998.
SEASONALITY AND QUARTERLY RESULTS
Our operations have historically been seasonal, with generally higher
sales in the third and fourth fiscal quarters than in the first and second
fiscal quarters. Significantly higher fourth fiscal quarter retail sales result
from increased purchases of fragrances as gift items during the Christmas
holiday season. Our quarterly results may also vary due to the timing of new
store openings, net sales contributed by new stores and fluctuations in
comparable sales of existing stores. Wholesale sales vary by fiscal quarter as a
result of the selection of merchandise available for sale and the need for us to
stock our retail stores for the Christmas holiday season. Therefore, the results
of any interim period are not necessarily indicative of the results that may be
expected during a full fiscal year. See Note 15 of the Notes to Consolidated
Financial Statements for additional information regarding quarterly financial
data.
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<PAGE> 19
YEAR 2000 COMPLIANCE
The following critical application systems areas are the focus of our
Y2K compliance efforts: (a) merchandising, (b) inventory management and
distribution, (c) point-of-sales systems, (d) human resources and (e) finance
and accounting. The merchandising and finance and accounting systems are
currently being upgraded utilizing vendor software certified as Y2K compliant.
The inventory management and distribution systems as well as the point-of-sales
and human resources systems will be upgraded in the third quarter of 1999. Our
hardware and communications network is currently being inventoried, assessed,
and where instances of non-compliance are noted, upgraded and tested.
We have not incurred material costs to date in the process, and do not
believe that the cost of additional actions will have a material effect on our
operating results or financial condition. However, we have established a budget
totaling approximately $1.5 million for the acquisition of computer hardware and
software that will assist in the Year 2000 assessment and remediation activities
to be completed no later than the third quarter of 1999. Our current systems may
contain undetected errors or defects with Year 2000 date functions that may
result in material costs. In addition, we use third-party equipment and
software, including non-information technology systems, such as facilities and
distribution equipment, that may not be Year 2000 compliant. Failure of
third-party equipment, software or content to operate properly with regard to
the Year 2000 issue could require us to incur unanticipated expenses to remedy
problems, which could have a material adverse effect on our business, operating
results and financial condition.
We are currently assessing whether third parties in our supply and
distribution chain are adequately addressing their Year 2000 compliance issues.
We have initiated formal communications with our significant suppliers and
service providers to determine the extent to which our systems may be vulnerable
if suppliers and providers fail to address and correct their own Year 2000
issues. We cannot guarantee that the systems of suppliers or other companies on
which we rely will be Year 2000 compliant.
We will track the Year 2000 compliance status of our material vendors
and suppliers via our own internal vendor compliance effort. Year 2000
correspondence will be sent to critical vendors and suppliers by the second
quarter of 1999, with continued follow up for those who fail to respond. All
vendor responses will be evaluated to assess any possible risk to or effect on
our operations. Prior to mid 1999, we expect to implement additional procedures
for assessing the Year 2000 compliance status of our most critical vendors and
will modify our contingency plans accordingly.
We are preparing contingency plans which will include the
identification of our most reasonably likely worst case scenarios. Currently,
the most reasonably likely sources of risk to us include (a) the disruption of
our internal inventory management system, (b) the inability of principal
suppliers or logistics providers to be Year 2000-ready, which could result in
delays in product deliveries from such suppliers or logistics providers and (c)
failure of hardware and software utilized by transportation vendors as a result
of a general failure of systems and necessary infrastructure such as electricity
supply. We are preparing plans to flow inventory around an assumed period of
disruption to our stores, which could include accelerating distribution of high
volume merchandise and critical products to reduce the impact of significant
failure.
Based on our current assessment efforts, we do not believe that Year
2000 issues will have a material adverse effect on our financial condition or
results of operations. However, our Year 2000 issues and any potential business
interruptions, costs, damages or losses related thereto, are dependent, to a
significant degree, upon the Year 2000 compliance of third parties, such as
government agencies, vendors and suppliers. Consequently, we are unable to
determine at this time whether Year 2000 failures will materially affect our
business. We believe that our compliance efforts have and will reduce the impact
of any failures.
RECENT ACCOUNTING STANDARDS.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income," which establishes standards for reporting and display of
comprehensive income and its components. In June 1997, the FASB also issued
Statement of
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<PAGE> 20
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information." This Statement establishes standards
for reporting information about a company's operating segments and related
disclosures about its products, services, geographic areas of operations and
major customers. Both Statements were adopted by us in 1998.
In March 1998, the AICPA issued Statement of Financial Position 98-1,
("SOP 98-1") "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 provides guidance for capitalization of
certain costs incurred in the development of internal-use software and is
effective for financial statements for years beginning after December 15, 1998.
SOP 98-1 was adopted in fiscal 1998 and had no significant impact on the results
of operations, cash flows or financial position.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of
Start-Up Activities," which requires us to expense preopening expenses as
incurred. We early adopted SOP 98-5 in fiscal year 1997. See Note 2 of Notes to
Consolidated Financial Statements.
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 the 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.
CHANGES IN FOREIGN EXCHANGE RATES CREATE RISK.
Although large fluctuations in foreign exchange rates could have a
material effect on the prices we pay for products we purchase from outside the
United States, the prices obtainable for sales denominated in foreign currencies
and wholesale sales to foreign customers, such fluctuations have not been
material to our results of operations to date. Transactions with foreign
suppliers generally are in United States dollars. We believe that inflation has
not had a material impact on our results of operations and that we are generally
able to pass through any cost increases in the form of increased sales prices.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Our exposure to market risk for changes in interest rates relates
primarily to our bank line of credit. The bank line of credit bears interest at
a variable rate, as discussed above under "Liquidity and Capital Resources." We
mitigate interest rate risk by continuously monitoring the interest rates.
The table below presents the outstanding principal amount and the
related fair value at January 30, 1999, together with the weighted average
interest rate and maturity date of our bank line of credit.
<TABLE>
<CAPTION>
OUTSTANDING FAIR WEIGHTED AVERAGE MATURITY
PRINCIPAL AMOUNT VALUE INTEREST RATE DATE
---------------- ----- ------------- --------
<S> <C> <C> <C> <C>
Bank Line of Credit $30,035,019 $30,035,019 10.83% April 2001
</TABLE>
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<PAGE> 21
BUSINESS
We are a leading specialty retailer and wholesale distributor of a wide
range of brand name and designer fragrances.
As of August 23, 1999, we operated a chain of 279 retail stores
specializing in the sale of fragrances at discounted prices up to 60% below the
manufacturer's suggested retail prices. Our wholesale division distributes
approximately 1,100 stock keeping units of fragrances and related products to
approximately 44 customers, including national and regional chains and other
wholesale distributors throughout North America and overseas. Our wholesale
business is managed and owned by Perfumania and our retail business is managed
and owned by Magnifique Parfumes and Cosmetics, Inc., a wholly owned subsidiary
of Perfumania. The parent and subsidiary are separate and distinct legal
entities, but for ease of reference in this prospectus they are referred to as
segments.
RETAIL SEGMENT
MARKETING AND MERCHANDISING
PRODUCTS:
o Fragrances:
Each of our retail stores offers approximately 175 different
brands of fragrances for women and men at prices up to 60% below the
manufacturer's suggested retail prices. Our stores stock brand name and
designer brands including the following:
Estee Lauder(R), Fendi(R), Yves Saint Laurent(R), Fred
Hayman(R), Karl Lagerfeld(R), Gucci(R), Ralph Lauren/Polo(R),
Perry Ellis(R), Liz Claiborne(R), Giorgio(R), Hugo Boss(R),
Halston(R), Christian Dior(R), Chanel(R) and Cartier(R).
o Bath and body treatment:
Historically, we have carried a narrow private line of bath
and body and treatment under the name Jerome Privee. During 1998 we
expanded, repackaged and redesigned our bath and body line. Our new
line was reintroduced during April 1998 and includes approximately 250
stock keeping units.
o Cosmetics:
Also during 1998, we continued to develop our own private
label Nature's Elements line of cosmetics, treatment and aromatherapy.
The cosmetics line stresses quality for value and was introduced in May
1998. We launched the treatment line in the fourth quarter of 1998, and
we expect to introduce the aromatherapy line during the fourth quarter
of 1999. We believe that the continued expansion of sales in the bath,
body, cosmetic and treatment categories is very important to our future
business. We hope that sales will increase as a result of people more
frequently visiting our stores to purchase our private label lines.
o Gift accessories:
We plan to continue to expand our gift accessories category by
offering a wider assortment of vanity trays, perfume bottles and oil
burners.
MARKETING PHILOSOPHY. The cornerstone of our marketing philosophy is
customer awareness that our stores offer an extensive assortment of brand name
and designer fragrances at discount prices. We post highly visible price tags
for each item in a store, listing both the manufacturers' suggested retail price
and our discounted prices in order to enable customers to make price
comparisons. In addition, we have sales promotions such as "gift with purchase"
and "purchase with purchase" offers. From time to time Perfumania test markets
in its stores additional specialty gift items.
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PERSONNEL. Our stores are "full-service" stores. Accordingly, store
personnel are trained to establish a personal rapport with each customer, to
identify customer preferences with respect to both product and price range, and
to successfully conclude a sale. Management believes that attentive personal
service and knowledgeable sales personnel are key factors to the success of our
retail stores. Our store personnel are compensated on a salary plus bonus basis.
We have several bonus programs that provide incentives for store personnel to
sell merchandise on which we have higher profit margins. In addition, to provide
an incentive to reduce expenses, district and area managers are eligible to
receive a bonus if store profit goals are met. Management believes that a key
component of our ability to increase profitability will be our ability to
locate, train and retain store personnel and regional and district managers. We
conduct comprehensive training programs designed to increase customer
satisfaction.
ADVERTISING. We rely on our distinctive store design and window
displays to attract the attention of prospective customers. We also distribute
flyers and brochures in our stores and in the malls in which our stores are
located. Perfumania has refocused a substantial portion of its advertising from
national and local newspapers, television and radio to less expensive billboards
and in-store promotions. The amount of advertising varies with the seasonality
of the business.
RETAIL STORES
Our standard store design includes signs and merchandise displays which
are designed to enhance customer recognition of Perfumania's stores. Our stores
average approximately 1,500 square feet, although stores located in
manufacturer's outlet malls tend to be larger than our other stores. Each store
is managed by one manager and one assistant manager. The average number of
employees in a Perfumania store is five, including part-time help. District or
area managers visit stores on a regular basis in an effort to ensure
knowledgeable and attentive customer service.
INFORMATION SYSTEMS
We have a point-of-sale and management information system which
integrates data from every significant phase of our operations and provides us
with information for planning, purchasing, pricing, distribution, financial and
human resources decisions. The system also provides, on a real-time basis,
information to manage store and warehouse inventories efficiently and to closely
monitor individual store and each salesperson's performance. In addition, the
system prepares price labels and pick orders and provides for automatic
reordering, minimum and maximum stocking levels and optimum order quantities
based on actual sales. Further, the system permits analysis of our retail sales
data based on product groups, items and manufacturers, enabling us to respond to
changes in sales patterns. The management information system has bar scanners to
record sales, track inventories and conduct physical inventories. The
information system also has automated time and attendance modules to capture
payroll information through the stores' point-of-sale systems, e-mail systems
allowing daily communication among the stores, district managers and the
corporate office, and automated scheduling for store personnel. During the third
quarter of 1999, we will upgrade the merchandising, inventory management and
distribution and finance components of our management information system. During
the third quarter of 1999, we also intend to upgrade our register software so
that it will be able to perform promotional discounts automatically, calculate
bonuses for employees at store level, perform inventories at store level and
expand our e-mail and printing capabilities. We expect the costs for
improvements and upgrades to our management information systems and related
point-of-sale software to be approximately $1.5 million in fiscal 1999.
ACQUISITION
During November 1996, we acquired substantially all of the assets of
Nature's Elements Holding Corporation which included the service mark and trade
name "Nature's Elements" and the stock of its subsidiary. Prior to the
acquisition, all of Nature's Elements' liabilities, both at the parent and
subsidiary level, were transferred to a liquidating trust. Subsequent to the
purchase, the stock of the subsidiary was liquidated and we received inventory
and store fixtures, and assumed the obligation for 34 leases, including 1
seasonal store. We have since closed 11 locations and renovated 18 locations and
during 1998; the remaining locations will either be renovated or subleased
during 1999. We continue to use the trade name Nature's Elements for our
in-house developed cosmetic, treatment, aromatherapy and bath line.
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STORE LOCATION AND EXPANSION
Perfumania's 279 stores are located in 36 states, the District of
Columbia and Puerto Rico, including the following states:
o 49 in Florida,
o 33 in New York,
o 22 in California and
o 20 in Texas.
Perfumania's strategy for opening new stores is to seek locations
throughout the United States in the following locations
o regional malls,
o manufacturers' outlet malls and
o suburban shopping centers in metropolitan areas.
To achieve economies of scale with respect to advertising and
management costs, we emphasize opening additional stores in markets where we
already have a presence. We also plan to expand into additional markets that we
believe have a population density to support a cluster of stores. Prior to
selecting new store locations, we analyze, among other things, the potential
adverse effect of competition from new stores on the sales of existing stores.
The opening of new stores depends on several factors including:
o locating satisfactory sites,
o obtaining leases on favorable terms and
o general economic and business conditions in the localities of
the new stores.
Currently, the average cost to us for opening a store is approximately
$175,000, including equipment, furniture and fixtures, and other items (which
average approximately $50,000 per store), build-out costs (which average
approximately $120,000 per store), and preopening expenses, such as the hiring
and training of new employees and travel (which average approximately $5,000 per
store). In addition, initial inventory in a new store ranges from approximately
$100,000 during the first fiscal quarter to approximately $140,000 during the
Christmas holiday season. To supplement the inventory in our stores, we carry at
least four months supply of inventory at our warehouse.
Through August 23, 1999, we had opened 4 stores and closed 12 stores in
fiscal year 1999. We opened 36 stores in fiscal year 1998, 40 stores in fiscal
year 1997 (excluding 18 seasonal locations) and 74 stores in fiscal year 1996
(including 33 stores acquired from Nature's Elements). We continuously monitor
store performance and from time to time we have closed underperforming stores,
which typically have been older stores in undesirable locations. We attempt to
schedule store closings after the Christmas holiday season. During fiscal year
1998, 1997 and 1996, we closed 32 stores, 17 stores and 6 stores, respectively.
For fiscal 1999, we plan to slow our growth and focus on improving our existing
stores' profitability by opening a maximum of 7 stores and closing 5 to 15
stores during 1999.
WHOLESALE SEGMENT
We are one of the largest wholesale distributors of fragrances in the
United States. We distribute fragrances on a wholesale basis to national and
regional retail chains and other wholesale distributors throughout North America
and overseas. During fiscal years 1998, 1997 and 1996, the wholesale division
sold to approximately 41, 44 and 57 customers, respectively. One of our
customers accounted for 24.8%, 37.0% and 51.3% of net wholesale sales during
fiscal year 1998, 1997 and 1996, respectively. Foreign wholesale sales during
fiscal year 1998 were $2.9 million, compared to $1.7 million during fiscal year
1997.
The wholesale division offers its customers approximately 1,100 stock
keeping units.
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The wholesale division's strategy for purchasing merchandise is as
follows:
o capitalize on market opportunities,
o purchase products that are in demand and
o purchase merchandise available due to overstock situations or
close-out sales.
In addition, it takes us approximately 70 days after purchase to
receive inventory for our wholesale division and an additional 20 days for the
inventory to arrive at our stores. As a result, the wholesale division generally
carries at least four months' supply of inventory. Perfumania's warehouse
inventory is generally higher than other retailers and wholesalers since we
purchase a large amount of our inventories from the manufacturers and the
secondary market and must assure ourselves of having consistent supplies of
desirable inventories at favorable prices. Some of our suppliers require
monetary advances to purchase the inventory.
Jerome Falic, our President, is primarily responsible for activities of
the wholesale division. We believe that Mr. Falic has developed strong, reliable
relationships with suppliers and customers in the United States, Europe, Asia
and South America. We continuously seek to develop new supplier and customer
relationships. The wholesale division works closely with the retail division
when determining which merchandise to purchase on behalf of Perfumania and the
retail division frequently directs the wholesale division to locate and purchase
particular products. We purchase merchandise on behalf of both the wholesale
division and the retail division which, we believe, allows both divisions to
benefit from our supplier relationships and volume discounts and thereby obtain
a more reliable source of inventory at lower prices than many other wholesalers
or retailers of fragrances.
Perfumania believes that our ability to extend credit has been an
important factor of wholesale sales. Most sales are made on open account terms,
generally net 30 to 60 days following the receipt of goods. Other sales, with
the exception of sales to our largest customer, are made on a basis of cash on
or in advance of delivery or upon receipt of a letter of credit. The receivable
from our largest customer was $0.1 million as of January 30, 1999, compared to
$0.9 million as of January 31, 1998. Historically, the credit terms for this
customer have been up to six months. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources."
SOURCES OF SUPPLY
During fiscal years 1998, 1997 and 1996, we purchased fragrances from
155, 126 and 114 different suppliers, respectively. We purchase fragrances from
national and international manufacturers, distributors, wholesalers, importers
and retailers. As we purchase based on the most favorable available combination
of prices, quantities and merchandise selection, the extent and nature of our
purchases from our various suppliers changes constantly. Like others in the
perfume industry, we have no long-term or exclusive contract with any supplier.
We purchase merchandise both directly from manufacturers and secondary
sources, including distributors, wholesalers, importers and retailers.
MOST OF OUR MERCHANDISE IS COVERED BY TRADEMARKS OR COPYRIGHTS OWNED BY OTHERS
Merchandise from secondary sources includes trademarked and copyrighted
products manufactured in foreign countries and trademarked and copyrighted
products manufactured in the United States that may have been sold to foreign
distributors.
Occasionally, litigation or administrative agency proceedings seeking
to (a) halt the importation of foreign manufactured or previously exported
trademarked products into the United States or (b) restrict the sale of such
goods in the United States has been initiated by trademark and copyright owners
and their licensees and trade associations. Federal legislation addressing this
issue has been proposed but not yet adopted.
There have been a number of court cases dealing with trademark,
copyright and other laws and regulations that restrict the importation or sale
of trademarked or copyrighted merchandise without the consent of the trademark
or copyright owner. The courts remain divided on the issue even in the
circumstances in which the entities owning
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and applying the trademark or copyright are under common ownership or control.
Although a recent case appears favorable to those involved in purchasing through
secondary sources, it is still too early to tell how the decision will be
applied to future situations.
THE MERCHANDISING ASPECT OF THE FRAGRANCE BUSINESS HAS LITIGATION EXPOSURE
Some of the merchandise we purchase from suppliers is manufactured by
other entities who are not the owners of the trademarks or copyrights for the
merchandise. This is common in the fragrance and cosmetics business. If we were
called upon or challenged by the owner of a particular trademark or copyright to
demonstrate that the specific merchandise was produced and sold with the proper
authority and we were unable to do so, we could, among other things, be
restricted from reselling the particular merchandise or be subjected to other
liabilities, which could have an adverse effect on our business and results of
operations.
During fiscal 1998, less than 30 percent of our merchandise was
purchased from sources who do not disclose the identity of their suppliers,
because the sources consider supplier information to be proprietary trade
information. As a result, we cannot specifically determine what portion of our
merchandise purchased from these sources could expose us to the type of actions
discussed above or actions on other grounds. We cannot assure you that our
secondary sources of supply or other business activities will not be limited or
eliminated by future judicial, legislative or administrative agency action,
including possible import, export, tariff or other trade restrictions. In
addition, we cannot assure you that our business activities will not become the
subject of legal or administrative actions brought by manufacturers,
distributors or others.
DISTRIBUTION
Our warehouse in Miami, Florida services our retail and wholesale
operations. The facility's lease expires in July 2003. The warehouse has
approximately 139,000 square feet, of which 20,000 square feet are used as
office space. Our wholesale division also uses space in a bonded warehouse owned
by a third party.
Perfumania delivers merchandise utilizing our own trucks to our South
Florida stores and utilize independent national trucking companies to deliver
merchandise to stores outside of the South Florida area. Deliveries generally
are made weekly, with more frequent deliveries during the Christmas holiday
season. These deliveries permit the stores to minimize inventory storage space,
and increase the space available for display and sale of merchandise. Perfumania
ships merchandise to wholesale customers by truck, ship or plane. In addition,
in order to expedite delivery of merchandise to our customers, we sometimes
instruct our suppliers to ship merchandise directly to wholesale division
customers.
COMPETITION
The retail and wholesale fragrance businesses are highly competitive.
Retail competitors include:
o department stores, including Macy's, Dillards, JC Penney and
Sears,
o regional retail chains, including Sephora and The Cosmetic
Company Store,
o national retail chains, including Bath and Body Works, Garden
Botanika and Victoria's Secret,
o independent drug stores,
o duty free shops and
o other specialty retail stores.
We are the largest specialty retailer of discounted fragrances in the
United States in terms of number of stores. Some of our competitors sell
fragrances at discount prices, and some are part of large national or regional
chains that have substantially greater resources and name recognition than
Perfumania. Our stores compete on the basis of selling price, customer service,
merchandise variety, store location and ambiance.
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We believe that the following factors give us a competitive advantage:
o European-style perfumeries concept,
o full-service sales staff,
o discount prices,
o large and varied selection of brand name and designer
fragrances and
o attractive shopping environment.
Perfumania is one of the largest wholesale distributors of fragrances
in the United States. The wholesale division competes directly with other
perfume wholesalers and perfume manufacturers, some of which have substantially
greater resources or merchandise variety than Perfumania. The wholesale division
competes principally on the basis of merchandise selection and availability,
selling price and rapid delivery.
EMPLOYEES
At August 23, 1999, we had 1,624 employees in the following areas:
o 1,449 in retail stores,
o 70 in warehouse and distribution operations and
o 105 in executive, administrative and other positions.
We usually hire temporary and part-time employees during peak sales
periods, especially between Thanksgiving and Christmas. None of our employees is
covered by a collective bargaining agreement, and we consider our relationship
with employees to be good.
TRADE NAME AND SERVICE MARK
Our stores use the trade name and service mark Perfumania(R). We also
operate under the following trade names:
Nature's Element -- 17 stores
Class Perfumes -- 3 stores
Perfumania Plus -- 10 stores
We have common law rights to our trade names and service mark in those
general areas in which our existing stores are located, and we registered the
service mark Perfumania(R) with the U.S. Patent and Trademark Office. The
registration expires in 2009 and may be renewed for 10-year terms thereafter.
RECENT DEVELOPMENTS
In February 1999, Perfumania, through its wholly owned subsidiary,
perfumania.com, inc., began operation of an Internet commerce site,
perfumania.com. We intend to capitalize on our name recognition and cross
marketing opportunities to become a top discount retailer of fragrance and
related products on the Internet. All orders placed with the Internet site are
shipped from our existing distribution center in Miami, Florida.
In April 1999, perfumania.com, inc. announced that it intends to make
an initial public offering of its common stock. perfumania.com, inc. plans to
raise approximately $25 - $32 million representing approximately 53% of the
common stock to be outstanding following the offering. perfumania.com, inc. is
offering 3,500,000 shares of its common stock, which includes 1,000,000 shares
held by us. A registration statement for the offering was filed on June 4, 1999,
and the offering should be completed as soon as practicable after the
registration statement becomes effective. The net proceeds of the offering will
be used for repayment of outstanding indebtedness to us and for working capital
and other general corporate purposes as well as reduction of the outstanding
balance in our bank line of credit.
PROPERTIES
The lease for our executive offices is for a ten (10) year term
(expiring July 2003) with monthly rental payments of approximately $70,000 and
specified annual increases thereafter.
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All of our retail stores are located in leased premises. Most of the
store leases have a fixed amount of base rent plus a percentage of sales,
ranging from 3% to 10%, over certain minimum sales levels. Store leases
typically require us to pay all utility charges, insurance premiums, increases
in property taxes and some other costs. Some of our leases permit the lessor to
terminate the lease if specified minimum sales levels are not met.
LEGAL PROCEEDINGS
BOUCHERON. In December 1993, the patent holder and exclusive licensee
in the U.S. of Boucheron filed a complaint against us in the United States
District Court for the Southern District of New York alleging that we infringed
upon their exclusive right to sell the Boucheron bottle and is seeking $1.5
million in damages. Their theory is that they have a valid patent for the
bottles and that Perfumania's sales of such bottles infringes upon their patent
rights. We believe that a patentee cannot control by resort to an infringement
suit the resale of a patented article which it has sold. We filed a motion to
dismiss during February 1994. On March 20, 1995, the court denied our motion to
dismiss, and on April 14, 1995, we filed an answer to the complaint. Discovery
is in progress.
OTHER. Perfumania is characterized as an insider as defined by the
United States Bankruptcy Code, in the liquidating plan of reorganization filed
on April 6, 1998 by L. Luria & Son, Inc. in the United States Bankruptcy Court,
Southern District of Florida because our Chairman of the Board and Chief
Executive officer was the principal of the entity that controlled Luria's. In
October 1998, the committee of unsecured creditors in Luria's bankruptcy
proceedings filed a complaint with the United States Bankruptcy Court, Southern
District of Florida to recover substantial funds from Perfumania. The complaint
alleges that Luria's made preference payments, as defined by the Bankruptcy
Court, to us and seeks to recover preference payments, and seeks to disallow any
and all claims of Perfumania against Luria's until Perfumania pays for the
preference payments. In July 1999, we agreed with the committee of unsecured
creditors to settle all claims held by Luria's against us for the sum of $1.2
million, payable over the next nine months according to a repayment schedule.
This settlement is subject to the approval of the Bankruptcy Court. The full
amount of the settlement was accrued for in our financial statements for the
year ending January 31, 1998 and January 30, 1999.
From time to time, we are involved in various legal proceedings in the
ordinary course of business.
24
<PAGE> 28
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Ilia Lekach......................... 50 Chairman of the Board and Chief Executive Officer
Jerome Falic........................ 35 President and Vice Chairman of the Board
Marc Finer.......................... 37 President of the Retail Division and Director
Donovan Chin........................ 32 Chief Financial Officer, Secretary and Director
Claire Fair......................... 39 Vice President of Human Resources
Robert Pliskin(1)(2)(3)............. 75 Director
Carole Ann Taylor(1)(2)(3).......... 53 Director
Horatio Groisman, M.D.(2)(3)........ 46 Director
</TABLE>
- -----------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Member of Stock Option Committee.
ILIA LEKACH is a co-founder of Perfumania and was Perfumania's Chief
Executive Officer and Chairman of the Board since its incorporation in 1988
until his resignation in April 1994. Mr. Lekach was re-appointed the
Perfumania's Chief Executive Officer and Chairman of the Board on October 28,
1998. He is also Chairman of the Board and Chief Executive Officer of Parlux
Fragrances, Inc., a publicly traded manufacturer of fragrance and related
products. In August 1996, Mr. Lekach became an officer and director with L.
Luria & Son, Inc., a publicly traded specialty discount retailer. On August 13,
1997, L. Luria & Son, Inc., filed for relief under Chapter 11 of the Bankruptcy
Code and has since been liquidated. See "Certain Relationships and Related
Transactions."
JEROME FALIC was appointed President on October 28, 1998. Mr. Falic has
been a Vice President of Perfumania since Perfumania's inception and a director
of Perfumania since August 1994. Mr. Falic was appointed Perfumania's Vice
Chairman of the Board in September 1994.
MARC FINER has been the President of Perfumania's Retail Division since
March 1994 and a director since August 1994. Mr. Finer was the President of
Parfums Expresso, Inc. and Parfums D'Arte, wholesale distributors of fragrances
in Puerto Rico, from their inception in August 1986 until March 1994.
DONOVAN CHIN was appointed Chief Financial Officer and Secretary of
Perfumania in February of 1999. Prior to this appointment, Mr. Chin served as
Corporate Controller of Perfumania from May 1995 to February 1999 and Assistant
Corporate Controller from May 1993 to May 1995. Previously, Mr. Chin was
employed by Price Waterhouse LLP in its Miami audit practice.
CLAIRE FAIR was appointed Vice President of Human Resources in August
1996. From November 1993 to August 1996, she served as Perfumania's Director of
Human Resources. Previously, she was the Director of Employee Relations with
Sterling, Inc.
ROBERT PLISKIN was appointed a director of Perfumania in October 1991.
Mr. Pliskin served as President of Longines Wittnauer Watch Company from 1971 to
1980 when he became President of the Seiko Time Corporation, a position he held
until 1987. In 1987 he became the President of Hattori Corporation of America, a
distributor of watches and clocks, until his retirement in 1993. Mr. Pliskin is
a member of our Audit, Compensation and Stock Option Committees.
CAROLE ANN TAYLOR was appointed a director of Perfumania in June 1993.
From 1987 to 1998, Ms. Taylor was the owner and president of the Bayside Company
Store, a retail souvenir and logo store at Bayside Marketplace
25
<PAGE> 29
in Miami, Florida. During this time she has also been a partner of the Jardin
Bresilien Restaurant also located at the Bayside Marketplace. Currently, Ms.
Taylor is the owner of Miami To Go, Inc., a retail and wholesale logo and
souvenir merchandising and silkscreening company. She is also a partner at Miami
Airport Duty Free Joint Venture with Greyhound Leisure Services which owns and
operates the 19 duty free stores at Miami International Airport. She serves as
director of the Miami-Dade Chamber of Commerce, the Greater Miami Convention &
Visitors Bureau and the Miami Film Festival. Ms. Taylor is a member of our
Audit, Compensation and Stock Option Committees.
DR. HORATIO GROISMAN was appointed a Director of Perfumania in March
1999. Dr. Groisman has been a practicing physician since 1981, specializing in
head and neck surgery, and currently has offices in Miami, Aventura and
Hollywood, Florida. Dr. Groisman is a member of our Compensation and Stock
Option Committees.
Perfumania's officers are elected annually by the Board of Directors
and serve at the discretion of the Board. Perfumania's directors hold office
until the next annual meeting of shareholders and until their successors have
been duly elected and qualified.
COMMITTEES OF THE BOARD OF DIRECTORS
During fiscal year 1998 the Board took some actions by unanimous
written consent and held two meetings. During fiscal year 1998, no director
attended fewer than 75 percent of the aggregate of (i) the number of meetings
held by the Board during the period he served on the Board and (ii) the number
of meetings of committees of the Board held during the period he served on such
committee.
The Board currently has three committees: an Audit Committee, a
Compensation Committee and a Stock Option Committee. The Board does not have a
Nominating Committee.
Ms. Taylor and Mr. Pliskin are members of the Audit Committee, which
held one meeting during fiscal year 1998. The Audit Committee (a) recommends to
the full Board the appointment of our auditors and any termination of
engagement, (b) reviews the plan and scope of audits, (c) reviews Perfumania's
significant accounting policies and internal controls, (d) has general
responsibility for all related auditing matters and (e) reports its
recommendations and findings to the full Board.
Mrs. Taylor, Mr. Pliskin and Dr. Groisman are members of the Stock
Option Committee, which held two meetings during fiscal year 1998. The Stock
Option Committee administers Perfumania's 1991 Stock Option Plan and Directors
Stock Option Plans, and grants stock options to employees and directors. Mr.
Simon Falic served on the Stock Option Committee until he resigned from the
committee and the Board on January 29, 1999.
Ms. Taylor, Dr. Groisman and Mr. Pliskin are members of the
Compensation Committee, which held one meeting during fiscal year 1998. The
Compensation Committee administers our executive compensation program.
DIRECTOR COMPENSATION
Perfumania pays each nonemployee director a $6,500 annual retainer and
reimburses directors for expenses relating to their activities as directors of
Perfumania. In addition, nonemployee directors are eligible to receive stock
options under the Directors Stock Option Plan.
When a person is elected as a director of Perfumania, pursuant to the
terms of the Director Stock Option Plan, the director is automatically granted
an option to purchase 2,000 shares of common stock and upon the directors
re-election he is granted an option to purchase 4,000 shares of common stock,
with the exercise price in both instances equal to the fair market value of the
common stock on the date of grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Simon Falic, our pervious Chairman of the Board and Chief Executive
Officer, was a member of our Stock Option Committee. Mr. Falic did not
participate in deliberations, if any, concerning stock option grants for his
benefit.
26
<PAGE> 30
EXECUTIVE COMPENSATION
The following table sets forth compensation awarded to, earned by or
paid to (a) our Chief Executive Officer, (b) each of the three other highly
compensated executive officers of Perfumania who were serving as executive
officers at the end of the last completed fiscal year, other than the Chief
Executive Officer, whose compensation exceeded $100,000 at the end of the last
fiscal year (collectively, the "Named Executive Officers"), for services
rendered to Perfumania during fiscal year 1998, 1997 and 1996, and (c) those
individuals for whom disclosures would have been provided but for the fact that
the individual was not serving as an executive officer of Perfumania at the end
of the last fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------- ------------------------------
NO. OF
OTHER ANNUAL SECURITIES
NAME AND FISCAL COMPENSATION UNDERLYING OTHER ANNUAL
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) (1) OPTIONS COMPENSATION ($)
------------------ ----- ---------- --------- ------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Ilia Lekach (2) 1998 0 0 500,000(3) 775,000(8) 0
Chairman of the Board
and Chief Executive
Officer
Jerome Falic (4) 1998 259,034 0 0 334,500(8) 0
President and Vice 1997 246,700 0 0 0 0
Chairman of the Board 1996 236,250 61,000 0 0 0
Marc Finer 1998 200,401 0 0 60,000(8) 0
President, Retail 1997 183,912 0 0 50,000 0
Division 1996 169,962 22,500 0 0 0
Claire Fair 1998 116,855 0 0 26,500(8) 0
Vice President of 1997 114,980 0 0 15,000 0
Human Resources 1996 85,809 0 0 3,000 0
Simon Falic (5) 1998 316,598 0 0 154,500(8) 1,303,588(6)
1997 304,813 0 0 0 0
1996 287,163 75,000 0 0 0
Ron A. Friedman (7) 1998 228,981 0 0 429,000(8) 826,232(6)
1997 246,700 0 0 0 0
1996 236,250 61,000 0 0 0
</TABLE>
- ----------
(1) The column for "Other Annual Compensation" does not include any amounts
for executive perquisites and any other personal benefits, such as the
cost of automobiles, life insurance and disability insurance because
the aggregate dollar amount per executive is less than 10% of his
annual salary and bonus.
(2) Ilia Lekach was re-appointed Chief Executive Officer and Chairman of
the Board on October 28, 1998.
(3) Amount reported represents consulting fees paid to Ilia Lekach during
fiscal 1998 prior to his employment by Perfumania. Signing bonus for
services rendered in fiscal 1998.
(4) Jerome Falic was appointed as President following the resignation of
Simon Falic on January 29, 1999.
(5) Simon Falic resigned on January 29, 1999, at which time he served as
President, Chief Financial Officer, Chief Operating Officer, Treasurer
and Secretary.
(6) Represents severance payments in accordance with individual separation
agreements with each receiving the amount indicated over a 36-month
term.
(7) Mr. Friedman resigned on October 28, 1998 as Chief Financial Officer,
Chief Operating Officer, Treasurer and Secretary.
(8) Includes options repriced effective October 28, 1998 in the following
amounts: Ilia Lekach (375,000); Jerome Falic (100,000); Mark Finer
(60,000); Claire Fair (21,500), Simon Falic (100,000); and Ron Friedman
(429,000).
27
<PAGE> 31
OPTION GRANTS DURING FISCAL YEAR 1998
The following table sets forth certain information concerning grants of
stock options made during fiscal year 1998 to the Named Executive Officers and
the two individuals for whom disclosures would have been provided but for the
fact that the individuals were not serving as an executive officer of Perfumania
at the end of the last fiscal year.
INDIVIDUAL OPTION GRANTS IN FISCAL YEAR 1998
<TABLE>
<CAPTION>
% OF TOTAL
OPTIONS POTENTIAL REALIZABLE VALUE AT
NUMBER GRANTED TO ASSUMED ANNUAL RATES OF STOCK
OF OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION PRICE APPRECIATION FOR OPTION TERM
NAME GRANTED (1) FISCAL 1998(4) PER SHARE DATE 5% (1) 10% (1)
------- -------------- -------------- ---------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Ilia Lekach 400,000 21% $0.41 2008 $ 103,156 $ 260,760
375,000(2) 20% $0.50 2008 $ 117,938 $ 298,125
Jerome Falic 34,500(3) 4% $0.50 2008 $ 10,850 $ 27,428
200,000 25% $0.41 2008 $ 51,578 $ 130,380
100,000(2) 5% $0.50 2008 $ 31,450 $ 79,500
Marc Finer 60,000(2) 3% $0.50 2008 $ 18,870 $ 47,700
Claire Fair 5,000(3) * $0.50 2008 $ 1,573 $ 3,975
21,500(2) 1% $0.50 2008 $ 6,762 $ 17,093
Simon Falic 54,500(3) 3% $0.50 2008 $ 71,140 $ 43,328
100,000(2) 13% $0.50 2008 $ 31,450 $ 79,500
Ron Friedman 54,000 3% $0.50 2008 $ 16,983 $ 42,930
375,000 19% $0.50 2008 $ 117,938 $ 298,125
</TABLE>
- ----------
* Indicates that amount is less than 1%.
(1) In accordance with the rules of the Securities and Exchange Commission, the
potential realizable values for such options shown in the table presented
above are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the options were granted to their
expiration date. These assumed rates of appreciation do not represent the
Company's estimate or projection of the appreciation of shares of common
stock of the Company.
(2) The indicated options were initially granted prior to fiscal 1998 and were
subject to the Company's repricing effective October 28, 1998. Pursuant to
repricing, these options were cancelled and reissued with an exercise price
of $0.50.
(3) The indicated options were granted during fiscal 1998 prior to the
repricing and were subject to the Company's repricing. Pursuant to
repricing, these options were cancelled and reissued with an exercise price
of $0.50.
(4) Total stock option grants during fiscal 1998 were 1,926,750 of which
1,130,600 represents options cancelled and subsequently re-granted as part
of the repricing.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information concerning option
exercises in fiscal year 1998 and the number of unexercised stock options held
by the Named Executive Officers and the two individuals for whom disclosure
would have been provided but for the fact that the individuals were not serving
as executive officers of Perfumania at the end of the last fiscal year.
28
<PAGE> 32
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
SHARES ACQUIRED VALUE FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- --------------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Ilia Lekach................. -- -- 775,000/0 $8,061,938/0
Jerome Falic................ -- -- 334,500/0 $2,439,386/0
Marc Finer.................. 33,000 $120,375 27,000/0 $280,868/0
Claire Fair................. 9,500 $97,532 9,500/7,500 $98,824/78,019
Simon Falic................. -- -- 154,500/0 $1,607,186/0
Ron A. Friedman............. 429,000 $175,890 -- --
</TABLE>
LONG-TERM INCENTIVE AND PENSION PLANS
We do not have any long-term incentive or pension plans.
EMPLOYMENT AGREEMENTS
Effective February 1, 1999, we entered into 3-year employment
agreements with Ilia Lekach and Jerome Falic. The employment agreements provide
for annual salaries of $400,000 and $318,347, respectively, subject to
cost-of-living increases, or 5% if higher. The employment agreements provide
that Mr. Lekach and Mr. Falic will continue to receive their annual salary until
the expiration of the term of their employment agreements if their employment is
terminated by us for any reason other than death, disability or cause (as
defined in the employment agreements). The agreements contain a performance
bonus plan which provides for additional compensation and grant of stock
options, if we meet certain net income levels. The employment agreements also
prohibit the employees from directly or indirectly competing with us during the
term of their employment and for one year after termination of employment except
in the case of termination of employment by us without cause.
Effective August 1996, Perfumania entered into a 3-year employment
agreement with Marc Finer and Claire Fair. The employment agreements provide for
an annual salary of $175,000 and $100,000, respectively, subject to
cost-of-living increases, or 5% if higher. The agreements provide that Mr. Finer
and Ms. Fair will continue to receive their salary until the expiration of the
term of the employment agreement if his employment is terminated by us
for any reason other than death, disability or cause (as defined in the
employment agreements). There is a performance bonus plan in the agreement,
which provides for additional compensation and a grant of stock options, if
we meet certain net income levels. The employment agreements also
prohibit them from directly or indirectly competing with Perfumania during the
term of their employment and for one year after termination of employment except
in the case of termination of employment by us without cause.
SEPARATION AGREEMENTS
Upon his resignation, Mr. Simon Falic entered into a separation
agreement with us, pursuant to which we will make $1,303,588 in severance
payments to him, subject to applicable withholding taxes, which is payable as
follows: $300,000 in January 1999 and the balance payable in monthly
installments of $26,529 during fiscal 1999, $27,855 during fiscal 2000 and
$29,248 during fiscal 2001. Mr. Falic continues to receive health, dental and
life insurance coverage, on the same basis as prior to his resignation for an
additional 36 months.
Upon his resignation, Mr. Friedman entered into a separation agreement
with us pursuant to which we will make severance payments of $826,232, subject
to applicable withholding taxes, payable as follows: $119,046 in January 1999
and the balance in monthly installments of $20,136 from February through October
1999 and $18,948 from November 1999 through November 2001. Mr. Friedman will
continue to receive health, dental and life insurance coverage, on the same
basis as prior to his resignation for an additional 36 months. Additionally, we
shall convert the previously granted options into shares of common stock.
29
<PAGE> 33
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP WITH PARLUX. Parlux Fragrances, Inc. is a public company
engaged in the manufacture of fragrances. Ilia Lekach, our Chairman of the
Board and Chief Executive Officer, and one of our principal shareholders, is
the Chairman of the Board of Parlux. During fiscal year 1998, 1997 and 1996 we
purchased approximately $24.3, $21.4 and $30.7 million, respectively, of
merchandise from Parlux, representing approximately 27%, 26% and 29%,
respectively, of our total purchases. We believe that our purchases of
merchandise from Parlux, were, except for credit terms, on terms no less
favorable to us than could reasonably be obtained in arm's length transactions
with independent third parties. In July 1999, our board approved the transfer
of 1,512,406 shares of our treasury stock to Parulx in consideration for a
partial reduction of our outstanding trade indebtedness of approximately $4.5
million. The transfer price was based on a per share price of $2.98. In
connection with the transfer of the shares, we are negotiating a registration
rights agreement which would obligate us to register their shares for resale to
the public.
RELATIONSHIP WITH L. LURIA & SON, INC. L. Luria & Son, Inc. is a
public company that was a specialty discount retailer selling a broad line of
products. Ilia Lekach, our Chairman of the Board and Chief Executive Officer,
and one of our principal shareholders, was the Chairman of the Board of
Luria's. During fiscal year 1998, 1997 and 1996, we sold approximately $0, $2.0
and $2.5 million, respectively, of merchandise to Luria's, representing
approximately 0%, 1% and 2%, respectively, of our total sales. We believe that
our sales of merchandise to Luria's, were, except for credit terms, on terms no
less favorable to us than could reasonably be obtained in arm's length
transactions with independent third parties. During August 1997, Luria's filed
for relief under Chapter 11 of the United States Bankruptcy Code. We are an
unsecured creditor of Luria's and in fiscal year 1997 we wrote off receivables
from Luria's in the amount of $1.2 million. We have been characterized as an
insider as defined by the United States Bankruptcy Code, in the liquidating
plan of reorganization filed on April 6, 1998 by Luria's in the United States
Bankruptcy Court, Southern District of Florida because our Chairman of the
Board and Chief Executive Officer was the principal of the entity that
controlled Luria's. In August 1998, the committee of unsecured creditors in
Luria's bankruptcy proceedings filed a complaint with the United States
Bankruptcy Court, Southern District of Florida, to recover substantial funds
from us. The complaint alleges that Luria's made preference payments, as
defined by the Bankruptcy Court, to us and seeks recovery of said preference
payments, as well as the disallowment of any and all claims of us against
Luria's until full payment of the preference payments have been made. In July
1999, we agreed with the committee of unsecured creditors to settle all claims
held by Luria's against us for the sum of $1.2 million, payable over the next
nine months according to a repayment schedule. This settlement is subject to
the approval of the Bankruptcy Court. The full amount of the settlement was
accrued for in our financial statements for the year ending January 31, 1998.
RELATED PARTY INDEBTEDNESS. From time to time we have borrowed money
for working capital purposes from our principal shareholders and executive
officers and members of their immediate families. The highest aggregate amounts
of our indebtedness to such persons during fiscal year 1998, 1997 and 1996,
respectively, amount outstanding at the end of fiscal year 1998, 1997 and 1996,
respectively, the maturity date of such indebtedness and the interest rate
payable by us at the end of fiscal year 1998, 1997 and 1996, respectively, were
as set forth in the following table:
<TABLE>
<CAPTION>
HIGHEST AMOUNT AMOUNT
OUTSTANDING OUTSTANDING AT MATURITY ANNUAL
FISCAL YEAR DURING FISCAL YEAR FISCAL YEAR END DATE INTEREST RATE
----------- ------------------ --------------- -------- --------------
<S> <C> <C> <C> <C> <C>
Israel Friedman(1) 1998 $356,352 $0 November 1998 Prime plus 2%
1997 786,483 304,483 Payable on Demand Prime plus 2%
1996 770,000 770,000 Payable on Demand 15%
</TABLE>
- -----------------
(1) Father of Ron A. Friedman, our previous Chief Financial Officer, Chief
Operating Officer and Secretary.
As of the end of fiscal year 1998, 1997 and 1996, Ilia Lekach was
indebted to us pursuant to an unsecured note, in the amount of $457,243,
$457,243 and $417,763, respectively, issued in connection with his purchase of a
30
<PAGE> 34
condominium from us in October 1991. The note accrues interest at the rate of
9.5% and matures on December 31, 2000.
Prior to becoming employed as our Chief Executive Officer effective
February 1, 1999, Ilia Lekach provided consulting services to us. The total
consulting fees paid to him during fiscal year 1998 was $500,000. No consulting
fees were paid to Mr. Lekach in fiscal 1997 or fiscal 1996.
31
<PAGE> 35
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of August 23, 1999, information with
respect to the beneficial ownership of Perfumania's common stock by (i) each
person known by Perfumania to beneficially own more than 5% of the outstanding
shares of common stock, (ii) each director of Perfumania, (iii) each Named
Executive Officer, and (iv) all directors and executive officers of Perfumania
as a group.
<TABLE>
<CAPTION>
COMMON STOCK BENEFICIALLY OWNED
--------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER (1) SHARES PERCENT(8)
- ---------------------------------------- ------ ----------
<S> <C> <C>
Ilia Lekach........................................................ 1,459,995 (2)(3)(4) 14.7%
Simon Falic(5)..................................................... 683,050 (2)(4) 7.2%
Rachmil Lekach..................................................... 675,125 (2)(4) 7.3%
Jerome Falic....................................................... 923,230 (3)(4) 9.7%
Marc Finer......................................................... 27,000 (4) *
Claire Fair........................................................ 18,000 (4) *
Robert Pliskin..................................................... 4,000 (4) *
Carole A. Taylor................................................... 3,800 (4) *
Donovan Chin....................................................... 9,500 (4) *
Horatio Groisman, M.D.............................................. 2,000 (4) *
Parlux Fragrances, Inc.(6)......................................... 1,512,406 16.5
All directors and executive officers as a group (8 persons)........ 2,447,525 (7) 23.7%
</TABLE>
- -------------
* Less than 1%.
(1) The address of each of the beneficial owners identified is 11701 NW
101st Road, Miami, Florida 33178 except as otherwise noted.
(2) Ilia Lekach, Simon Falic and Rachmil Lekach jointly own with their
spouses the shares set forth opposite their respective names.
(3) Includes 12,300 shares of common stock owned by Pacific Investment
Group, a corporation wholly owned by Mr. Lekach.
(4) Includes shares of common stock issuable upon the exercise of stock
options within 60 days of August 23, 1999 in the following amounts: Ilia
Lekach (775,000); Rachmil Lekach (150,000); Simon Falic (334,500);
Jerome Falic (334,500); Robert Pliskin (4,000); Marc Finer (27,000);
Donovan Chin (9,500); Horatio Groisman, M.D. (2,000); Claire Fair
(17,000); and Carole A. Taylor (3,800).
(5) The address of Mr. Simon Falic is 150 Harbor Way, Bal Harbour, Florida
33154.
(6) The address of Parlux is 3725 S.W. 30th Avenue, Ft. Lauderdale, Florida
33312.
(7) Includes 1,172,800 shares of common stock issuable upon the exercise of
stock options within 60 days of August 23, 1999.
(8) Based on 9,156,434 shares outstanding on August 23, 1999.
32
<PAGE> 36
SELLING SHAREHOLDERS
The following table provides information regarding the beneficial
ownership of the common stock by the selling shareholders as of the date of
this prospectus and as adjusted to reflect the sale of all of their shares. The
selling shareholders either (a) obtained their shares of common stock pursuant
to the Subscription Agreements, dated March 22, 1999, (b) obtained Series A
Convertible Notes which are convertible into common stock pursuant to the terms
of the Securities Purchase Agreement, dated April 28, 1999, or (c) Series B
Convertible Notes which are convertible into Common Stock pursuant to the terms
of the Securities Purchase Agreement, dated as of July 8, 1999. No selling
shareholder has had any position, office or other material relationship with
Perfumania within the past three years. The selling shareholders are
participating in this offering pursuant to contractual registration rights
granted to the selling shareholders in connection with the Subscription
Agreements and Securities Purchase Agreements. In connection with the
Subscription Agreements and the Securities Purchase Agreements, we have agreed
to file and maintain the effectiveness of the registration statement of which
this prospectus forms a part and to pay all fees and expenses incident to the
registration of this offering, including all registration and filing fees, all
fees and expenses of complying with state blue sky or securities laws, all
costs of preparation of the registration statement and fees and disbursements
of our counsel and independent public accountants.
<TABLE>
<CAPTION>
$ of Series A $ of Series B
Convertible Convertible
Notes Number of Notes Number of
purchased shares purchased shares
Shares under assuming under assuming
acquired in Securities conversion of Securities conversion
Subscription Purchase the Series A Purchase of Series B
Agreement Agreement Convertible Agreement Convertible
dated dated Notes on dated Notes on Ownership of Shares
NAME AND ADDRESS OF March 22, April 28, August 24, July 8, August 24, ------------------------
BENEFICIAL OWNER 1999 1999 1999(1) 1999 1999(1)(2) Shares(3) Percentage(4)
------------ ----------- ------------- ---------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
S. Robert Productions,
LLC ................. 58,823 $ 300,000 137,928 $ 200,000 91,952 288,703 3.1
666 Dundee Road
Suite 1801
Northbrook, IL 60062
Cranshire Capital, L.P.. 117,647 600,000 275,856 700,000 72,217 465,720 4.9
666 Dundee Road
Suite 1801
Northbrook, IL 60062
Namax Corp.............. 58,823 300,000 137,928 -- -- 196,751 2.1
666 Dundee Road
Northbrook, IL 60062
EP Opportunity Fund,
L.L.C............... -- 470,000 216,087 637,000 255,695 471,782 4.9
77 West Wacker Drive
Chicago, IL 60601
EP Opportunity Fund
International, Ltd... -- 30,000 13,792 35,000 16,091 29,883 *
77 West Wacker Drive
Chicago, IL 60601
JJP Partnership ........ -- 300,000 137,928 100,000 45,976 183,904 2.0
2 North LaSalle
Street
Chicago, IL 60602
The dotCom Fund, LLC ... -- -- -- 300,000 137,928 137,928 1.5
666 Dundee Road
Northbrook, IL 60062
EP.com Fund, LLC ....... -- -- -- 28,000 12,873 12,873 *
77 West Wacker Drive
Chicago, IL 60601
----------- ---------- --------- ---------- -------- ----------
Total ........... 235,293 $2,000,000 919,519 $2,000,000 632,732 1,787,544
=========== ========== ========= ========== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
Ownership After Ownership After
Number of the Offering(5) Number of the Offering(5)
NAME AND ADDRESS OF Shares ------------------ NAME AND ADDRESS OF Shares ------------------------
BENEFICIAL OWNER Offered Shares Percentage BENEFICIAL OWNER Offered Shares Percentage
--------- -------------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
S. Robert Productions, EP Opportunity Fund
LLC ................. 288,703 0 0% International, Ltd... 29,883 0 0
666 Dundee Road 77 West Wacker Drive
Suite 1801 Chicago, IL 60601
Northbrook, IL 60062
JJP Partnership ........ 183,904 0 0
Cranshire Capital, L.P. 465,720 0 0 2 North LaSalle
666 Dundee Road Street
Suite 1801 Chicago, IL 60602
Northbrook, IL 60062
The dotCom Fund, LLC ... 137,928 0 0
Namax Corp. ............ 196,751 0 0 666 Dundee Road
666 Dundee Road Northbrook, IL 60062
Northbrook, IL 60062
EP.com Fund, LLC ....... 12,873
EP Opportunity Fund, 77 West Wacker Drive
L.L.C................ 471,782 0 0 Chicago, IL 60601
77 West Wacker Drive
Chicago, IL 60601 Total ........... 1,787,544
=========
</TABLE>
- ----------------
* Less than 1%.
(1) Assumes a conversion price of $2.17504, determined as if conversion
occurred on August 24, 1999 pursuant to the terms of the convertible
note.
(2) Under the Series B Convertible Notes, no selling shareholder can
convert the Series B Convertible Notes to the extent such conversion
would cause such selling shareholder's beneficial ownership of our
common stock to exceed 4.9% of the outstanding shares of common stock.
(3) Total shares including shares acquired pursuant to the Subscription
Agreement and Securities Purchase Agreements.
33
<PAGE> 37
(4) Based on 9,156,434 shares issued and outstanding on August 24, 1999, and
for each selling shareholder, if applicable, assuming conversion of all
such shareholder's Series A Convertible Note and assuming conversion to
the extent contractually permitted of such shareholder's Series B
Convertible Note.
(5) Assumes sale of all of the shares offered by each selling shareholder.
34
<PAGE> 38
PLAN OF DISTRIBUTION
GENERAL
TRANSACTIONS. The selling shareholders may offer and sell the common
stock in one or more of the following transactions:
o in the over-the-counter market,
o in negotiated transactions or
o in a combination of any of these transactions.
PRICES. The selling shareholders may sell their shares of common stock
at any of the following prices:
o fixed prices which may be changed,
o market prices prevailing at the time of sale,
o prices related to prevailing market prices or
o negotiated prices.
DIRECT SALES; AGENTS, DEALERS AND UNDERWRITERS. The selling
shareholders may effect transactions by selling the shares of common stock in
any of the following ways:
o directly to purchasers or
o to or through agents, dealers or underwriters designated from
time to time.
Agents, dealers or underwriters may receive compensation in the form of
underwriting discounts, concessions or commissions from the selling shareholders
and/or the purchasers of shares for whom they act as agent or to whom they sell
as principals, or both. The selling shareholders and any agents, dealers or
underwriters that act in connection with the sale of shares might be deemed to
be "underwriters" within the meaning of Section 2(11) of the Securities Act, and
any discount or commission received by them and any profit on the resale of
shares as principal might be deemed to be underwriting discounts or commissions
under the Securities Act.
STATE SECURITIES LAW. Under the securities laws of some states, the
selling shareholders may only sell the shares in those states through registered
or licensed brokers or dealers. In addition, in some states the selling
shareholders may not sell the shares unless they have been registered or
qualified for sale in that state or an exemption from registration or
qualification is available and is satisfied.
EXPENSES; INDEMNIFICATION. We will not receive any of the proceeds from
the sale of the common stock sold by the selling shareholders hereunder and will
bear all expenses related to the registration of this offering but will not pay
for any underwriting commissions, fees or discounts, if any. We will indemnify
the selling shareholders against some civil liabilities, including some
liabilities which may arise under the Securities Act.
35
<PAGE> 39
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of Perfumania consists of 25,000,000
shares of common stock, $0.01 par value per share, and 1,000,000 shares of
preferred stock, $0.01 par value per share.
COMMON STOCK
As of August 23, 1999, there were 9,156,434 shares of common stock
issued, of which 1,512,406 shares were held in treasury, and held of record by
approximately 81 shareholders. The common stock is traded on the Nasdaq National
Market under the symbol "PRFM."
The issued and outstanding shares of common stock are fully paid and
nonassessable. The holders of outstanding shares of common stock are entitled to
receive dividends out of assets legally available therefor at a time and in
amounts as the Board may from time to time determine. The shares of common stock
are not convertible and the holders thereof have no preemptive or subscription
rights to purchase any securities of Perfumania. Upon liquidation, dissolution
or winding up of Perfumania, the holders of common stock are entitled to receive
pro rata the assets of Perfumania that are legally available for distribution,
after payment of all debts and other liabilities. Each outstanding share of
common stock is entitled to one vote on all matters submitted to a vote of the
stockholders, including election of directors. There is no cumulative voting in
the election of directors.
PREFERRED STOCK
As of August 23, 1999, no shares of preferred stock were outstanding.
The Board is authorized, without further shareholder approval, to issue from
time to time up to an aggregate of 1,000,000 shares of preferred stock in one or
more series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each such series
thereof, including 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. Perfumania has no
present plans to issue any shares of preferred stock.
LEGAL MATTERS
Greenberg Traurig, P.A., Miami, Florida will provide us with an opinion
as to legal matters with respect to the common stock offered under this
prospectus.
EXPERTS
The consolidated financial statements as of January 31, 1998 and
January 30, 1999 and for each of the three years in the period ending January
30, 1999 included in this Prospectus have been so included in reliance on the
report (which contains an explanatory paragraph relating to the Company'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.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any document we file at
the SEC's public reference rooms located at 450 5th Street, N.W., Washington,
D.C. 20549, at Seven World Trade Center, 13th Floor, New York, New York 10048
and at Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also available to
the public from the SEC's web site at: http://www.sec.gov. The common stock
trades on the Nasdaq National Market. You can also inspect reports, proxy
statements and other information concerning our company at the offices of the
Nasdaq National Market.
36
<PAGE> 40
This prospectus is part of a registration statement we filed with the
SEC. You should only rely on the information incorporated by reference or
provided in this prospectus or any supplement. We have not authorized anyone
else to provide you with different information. The selling shareholders are not
offering the common stock in any state where the offer is not permitted. You
should not assume that the information in this prospectus or any supplement is
accurate as of any date other than the date on the front of those documents.
---------------
As used in this prospectus, unless the context requires otherwise, (i)
"Securities Act" means the Securities Act of 1933, as amended, and (ii)
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
37
<PAGE> 41
PERFUMANIA, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ANNUAL FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants ................................................................ F-2
Consolidated Balance Sheets as of January 31, 1998 and January 30, 1999 and May 1, 1999 (unaudited) ............... F-3
Consolidated Statements of Operations for the Fiscal Years Ended February 1, 1997, January 31, 1998 and
January 30, 1999 and the thirteen weeks ended May 2, 1998 (unaudited) and May 1, 1999 (unaudited) .............. F-4
Consolidated Statements of Changes in Stockholders' Equity for the Fiscal Years Ended February 1, 1997,
January 31, 1998 and January 30, 1999 and the thirteen weeks ended May 1, 1999 (unaudited) ..................... F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended February 1, 1997
January 31, 1998 and January 30, 1999 and the thirteen weeks ended May 2, 1998
(unaudited) and May 1, 1999 (unaudited) ........................................................................ F-6
Notes to Consolidated Financial Statements ........................................................................ F-7
</TABLE>
F-1
<PAGE> 42
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Perfumania, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Perfumania, Inc. and its subsidiaries (collectively, the "Company")
at January 31, 1998 and January 30, 1999, and the results of their operations
and their cash flows for each of the three years in the period ended January 30,
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 consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company has incurred recurring
net losses in fiscal years 1997 and 1998 and has a working capital deficit of
$3.8 million at January 30, 1999. In addition, the Company was in default of its
bank line of credit agreement as a result of its violation of certain debt
covenants. These debt covenant violations have been subsequently waived by the
bank. There is no assurance that the Company will be able to generate future net
income or secure a long-term credit facility, which creates substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
As discussed in Note 11, in 1997 the Company restated its fiscal year
1996 net income and net income per common share calculation to comply with new
requirements of the Securities and Exchange Commission Staff position on
accounting for convertible securities having beneficial conversion features.
As explained in Note 2, in 1997 the Company changed its method of
accounting for preopening expenses to conform with new requirements of the
American Institute of Certified Public Accountants.
PricewaterhouseCoopers LLP
Miami, Florida
April 29, 1999
except for the fourth
paragraph of Note 2 and the
second paragraph of Note 8
as to which the date is
July 14, 1999.
F-2
<PAGE> 43
PERFUMANIA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 30, MAY 1,
1998 1999 1999
------------- ------------ -------------
(unaudited)
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents ................................... $ 1,554,117 $ 1,745,603 $ 1,420,259
Trade receivables, less allowance for doubtful accounts of
$704,954 in 1998 and 1999 ................................. 5,186,473 4,108,847 5,222,998
Advances to suppliers ....................................... 7,611,036 8,065,301 7,428,843
Inventories, net of reserve of $2,750,000 and $4,163,251
in 1998 and 1999, respectively ............................ 73,137,842 53,880,132 63,769,253
Prepaid expenses and other current assets ................... 2,044,658 1,417,187 1,623,824
Tax refund receivable ....................................... 814,766 -- --
Deferred tax asset, net ..................................... 1,219,856 -- --
------------- ------------ -------------
Total current assets ...................................... 91,568,748 69,217,070 79,465,177
Property and equipment, net .................................... 18,307,240 23,180,462 23,109,608
Leased equipment under capital leases, net ..................... 2,266,674 1,373,878 1,210,314
Other assets, net .............................................. 1,764,906 1,357,966 1,357,379
------------- ------------ -------------
Total assets .............................................. $ 113,907,568 $ 95,129,376 $ 105,142,478
============= ============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Bank line of credit and current portion of notes payable .... $ 34,139,766 $ 32,800,627 $ 34,644,318
Accounts payable - non-affiliates ........................... 13,308,914 14,329,013 12,762,162
Accounts payable - affiliates ............................... 16,958,163 15,812,240 25,827,932
Accrued expenses and other liabilities ...................... 6,848,923 9,205,316 8,775,309
Advances from customers ..................................... -- -- 2,500,000
Income taxes payable ........................................ 505,098 485,098 368,263
Current portion of obligations under capital leases ......... 1,030,340 419,487 317,765
Due to related parties ...................................... 304,483 -- --
------------- ------------ -------------
Total current liabilities ................................. 73,095,687 73,051,781 85,195,749
Long-term portion of notes payable ............................. 4,709,434 2,370,684 1,935,402
Long-term portion of obligations under capital leases .......... 933,615 562,552 509,745
Convertible notes payable ...................................... -- -- 1,996,000
Long-term severance payables ................................... -- 1,037,859 975,423
------------- ------------ -------------
Total liabilities ......................................... 78,738,736 77,022,876 90,612,319
Commitments and contingencies .................................. -- -- --
Redeemable common equity (Note 11) ............................. -- 470,588 470,588
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued ................................... -- -- --
Common stock, $.01 par value, 25,000,000 shares
authorized, 7,845,291 and 8,614,491 shares issued at
1998 and 1999, respectively ............................... 78,453 86,145 88,969
Capital in excess of par value .............................. 52,386,361 54,440,009 54,963,570
Treasury stock, at cost, 1,218,360 and 1,512,406 shares at
1998 and 1999, respectively ............................... (4,521,068) (5,413,002) (5,413,002)
Accumulated deficit ......................................... (11,960,599) (30,935,097) (35,026,963)
Notes and interest receivable from shareholder and officers . (814,315) (542,143) (553,003)
------------- ------------ -------------
Total stockholders' equity .............................. 35,168,832 17,635,912 14,059,571
------------- ------------ -------------
Total liabilities and stockholders' equity .............. $ 113,907,568 $ 95,129,376 $ 105,142,478
============= ============ =============
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 44
PERFUMANIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THIRTEEN WEEKS ENDED
----------------------------------------------- ----------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30, MAY 2, MAY 1,
1997 1998 1999 1998 1999
------------- ------------- ------------- ------------ ------------
(as restated, (unaudited)
note 11)
<S> <C> <C> <C> <C> <C>
Net sales:
Non-affiliated customers ................... $ 136,446,104 $ 161,593,736 $ 175,255,633 $ 38,467,975 $ 39,400,964
Affiliates ................................. 2,473,623 1,999,823 --
------------- ------------- ------------- ------------ ------------
138,919,727 163,593,559 175,255,633 38,467,975 39,400,964
------------- ------------- ------------- ------------ ------------
Cost of goods sold:
Non-affiliated customers ................... 76,706,903 96,053,329 110,638,432 23,662,458 24,147,795
Affiliates ................................. 2,252,850 1,566,489 -- -- --
------------- ------------- ------------- ------------ ------------
78,959,753 97,619,818 110,638,432 23,662,458 24,147,795
------------- ------------- ------------- ------------ ------------
Gross profit ............................. 59,959,974 65,973,741 64,617,201 14,805,517 15,253,169
------------- ------------- ------------- ------------ ------------
Operating expenses:
Selling, general and administrative expenses 48,165,392 64,219,379 72,501,987 15,307,548 16,615,905
Provision for doubtful accounts ............ 500,000 1,730,000 -- 30,000 15,000
Provision for impairment of assets and
store closings ........................... 169,159 2,514,818 1,034,717 -- --
Depreciation and amortization .............. 3,771,508 4,697,816 4,480,681 1,082,258 1,165,152
------------- ------------- ------------- ------------ ------------
Total operating expenses ................. 52,606,059 73,162,013 78,017,385 16,419,806 17,796,057
------------- ------------- ------------- ------------ ------------
Income (loss) from operations before other
income (expense).......................... 7,353,915 (7,188,272) (13,400,184) (1,614,289) (2,542,888)
------------- ------------- ------------- ------------ ------------
Other income (expense):
Interest expense:
Affiliates ............................... (148,647) (124,250) (22,486) (1,103) --
Other .................................... (4,004,754) (4,617,070) (4,938,365) (1,299,151) (1,593,010)
------------- ------------- ------------- ------------ ------------
(4,153,401) (4,741,320) (4,960,851) (1,300,254) (1,593,010)
------------- ------------- ------------- ------------ ------------
Interest income:
Affiliates ............................... 39,480 42,450 43,440 21,255 10,860
Other .................................... 3,499 2,660 35,057 316 589
------------- ------------- ------------- ------------ ------------
42,979 45,110 78,497 21,571 11,449
------------- ------------- ------------- ------------ ------------
Other income ............................... 478,179 762,138 645,446 121,360 32,583
------------- ------------- ------------- ------------ ------------
Total other income (expense) ............... (3,632,243) (3,934,072) (4,236,908) (1,157,323) (1,548,978)
------------- ------------- ------------- ------------ ------------
Income (loss) before income taxes ............. 3,721,672 (11,122,344) (17,637,092) (2,771,612) (4,091,866)
(Provision) benefit for income taxes .......... (1,646,731) 321,192 (1,337,406) -- --
------------- ------------- ------------- ------------ ------------
Income (loss) before cumulative effect of
change in accounting principle ............. 2,074,941 (10,801,152) (18,974,498) (2,771,612) (4,091,866)
Cumulative effect of change in accounting
principle, net of income tax benefit of .... -- (631,418) -- -- --
============= ============= ============= ============ ============
Net income (loss) ............................. $ 2,074,941 $ (11,432,570) $ (18,974,498) $ (2,771,612) $ (4,091,866)
============= ============= ============= ============ ============
Basic earnings (loss) per common share:
Income (loss) before cumulative effect of
change in accounting principle ............. $ 0.29 $ (1.54) $ (2.85) $ (0.42) $ (0.56)
Cumulative effect of change in accounting
principle................................... -- (0.09) -- -- --
============= ============= ============= ============ ============
Net income (loss) ............................. $ 0.29 $ (1.63) $ (2.85) $ (0.42) $ (0.56)
============= ============= ============= ============ ============
Diluted earnings (loss) per common share:
Income (loss) before cumulative effect of
change in accounting principle ............. $ 0.27 $ (1.54) $ (2.85) $ (0.42) $ (0.56)
Cumulative effect of change in accounting
principle................................... -- (0.09) -- -- --
============= ============= ============= ============ ============
Net income (loss) ............................. $ 0.27 $ (1.63) $ (2.85) $ (0.42) $ (0.56)
============= ============= ============= ============ ============
Weighted average number of shares outstanding:
Basic ...................................... 7,183,462 7,025,236 6,659,237 6,560,354 7,364,485
============= ============= ============= ============ ============
Diluted .................................... 7,633,588 7,025,236 6,659,237 6,560,354 7,364,485
============= ============= ============= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 45
PERFUMANIA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1997 (AS RESTATED, NOTE 11) FISCAL YEAR
ENDED JANUARY 31, 1998, FISCAL YEAR ENDED JANUARY 30, 1999
AND THIRTEEN WEEKS ENDED MAY 1, 1999
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL TREASURY STOCK
-------------------- IN EXCESS ---------------------
SHARES AMOUNT OF PAR VALUE SHARES AMOUNT
--------- ------- ------------ ------ -----------
<S> <C> <C> <C> <C> <C>
Balance at February 3, 1996.. 6,707,700 $67,077 $ 47,959,464 23,000 $ (123,323)
Exercise of stock options.... 2,000 20 8,230 -- --
Conversion of debentures..... 918,091 9,181 2,978,085 -- --
Beneficial conversion
feature of debentures..... -- -- 529,412 -- --
Issuance of common stock..... 180,000 1,800 954,450 -- --
Purchases of treasury stock.. -- -- -- 644,900 (2,531,787)
Net change in notes and
interest receivable from
shareholder and officers.. -- -- -- -- --
Net income for the fiscal
year ended February 1, -- -- -- -- --
1997 .....................
--------- ------- ------------ --------- -----------
Balance at February 1, 1997.. 7,807,791 78,078 52,429,641 667,900 (2,655,110)
Exercise of stock options.... 37,500 375 116,812 -- --
Purchases of treasury stock.. -- -- -- 550,460 (1,865,958)
Net change in notes and
interest receivable from
shareholder and officers.. -- -- -- -- --
Other ....................... -- -- (160,092) -- --
Net loss for the fiscal year
ended January 31, 1998.... -- -- -- -- --
--------- ------- ------------ --------- -----------
Balance at January 31, 1998.. 7,845,291 78,453 52,386,361 1,218,360 (4,521,068)
Exercise of stock options.... 684,200 6,842 310,865 -- --
Purchases of treasury stock.. -- -- -- 294,046 (891,934)
Issuance of common stock .... 85,000 850 213,371 -- --
Proceeds on common stock to -- -- 1,529,412 -- --
be issued ................
Net change in notes and
interest receivable from
shareholder and officers.. -- -- -- -- --
Net loss for the fiscal year
ended January 30, 1999.... -- -- -- -- --
--------- ------- ------------ --------- -----------
Balance at January 30, 1999.. 8,614,491 86,145 54,440,009 1,512,406 (5,413,002)
Exercise of stock options 282,400 2,824 138,946 -- --
(unaudited)...............
Beneficial conversion
feature of notes payable
(unaudited)............... -- -- 384,615 -- --
Net change in notes and
interest receivable from
shareholder and officers
(unaudited)............... -- -- -- -- --
Net loss for the thirteen
weeks ended May 1, 1999
(unaudited)............... -- -- -- -- --
--------- ------- ------------ --------- -----------
Balance at May 1, 1999
(unaudited)............... 8,896,891 $88,969 $ 54,963,570 1,512,406 $(5,413,002)
========= ======= ============ ========= ===========
</TABLE>
<TABLE>
<CAPTION>
NOTES AND
INTEREST
RECEIVABLE
FROM
SHAREHOLDER
ACCUMULATED AND
DEFICIT OFFICERS TOTAL
------------ --------- ------------
<S> <C> <C> <C>
Balance at February 3, 1996.. $ (2,602,970) $(538,065) $ 44,762,183
Exercise of stock options.... -- -- 8,250
Conversion of debentures..... -- -- 2,987,266
Beneficial conversion
feature of debentures..... -- -- 529,412
Issuance of common stock..... -- -- 956,250
Purchases of treasury stock.. -- -- (2,531,787)
Net change in notes and
interest receivable from
Shareholder and officers.. -- (4,791) (4,791)
Net income for the fiscal
year ended February 1, 2,074,941 -- 2,074,941
1997......................
------------ --------- ------------
Balance at February 1, 1997.. (528,029) (542,856) 48,781,724
Exercise of stock options.... -- -- 117,187
Purchases of treasury stock.. -- -- (1,865,958)
Net change in notes and
interest receivable from
Shareholder and officers.. -- (271,459) (271,459)
Other........................ -- -- (160,092)
Net loss for the fiscal year
ended January 31, 1998.... (11,432,570) -- (11,432,570)
------------ --------- ------------
Balance at January 31, 1998.. (11,960,599) (814,315) 35,168,832
Exercise of stock options.... -- -- 317,707
Purchases of treasury stock.. -- -- (891,934)
Issuance of common stock..... -- -- 214,221
Proceeds on common stock to -- -- 1,529,412
be issued.................
Net change in notes and
interest receivable from
Shareholder and officers.. -- 272,172 272,172
Net loss for the fiscal year
ended January 30, 1999.... (18,974,498) -- (18,974,498)
------------ --------- ------------
Balance at January 30, 1999.. (30,935,097) (542,143) 17,635,912
Exercise of stock options -- -- 141,770
(unaudited)...............
Beneficial conversion
feature of notes payable
(unaudited)............... -- -- 384,615
Net change in notes and
interest receivable from
Shareholder and officers
(unaudited)............... -- (10,860) (10,860)
Net loss for the thirteen
weeks ended May 1, 1999
(unaudited)............... (4,091,866) -- (4,091,866)
------------ --------- ------------
Balance at May 1, 1999
(unaudited)............... $(35,026,963) $(553,003) $ 14,059,571
============ ========= ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE> 46
PERFUMANIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THIRTEEN WEEKS ENDED
---------------------------------------------- ---------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30, MAY 2, MAY 1,
1997 1998 1999 1998 1999
------------ ------------ ------------ ----------- -----------
(as restated, (unaudited)
note 11)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................... $ 2,074,941 $(11,432,570) $(18,974,498) $(2,771,612) $(4,091,866)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Provision for deferred taxes ............. 380,528 -- 1,219,856 -- --
Capitalized preopening costs ............. (940,550) -- -- -- --
Provision for doubtful accounts .......... 500,000 1,730,000 -- 30,000 15,000
Provision/writedown for inventory losses . 190,000 1,810,000 3,764,665 -- --
Depreciation and amortization ............ 3,771,508 4,697,816 4,480,681 1,082,258 1,165,151
Provisions for impairment of assets ...... -- 2,200,000 -- -- --
Loss on disposition of property and
equipment .............................. 169,159 314,818 1,034,717 -- --
Beneficial conversion feature of
debentures and convertible notes payable 529,412 -- -- -- 384,615
Cumulative effect of change in accounting
principle, net of tax benefit .......... -- 631,418 -- -- --
Stock compensation ....................... -- -- 214,221 -- --
Change in operating assets and
liabilities, (increase) decrease in:
Trade receivables:
Customers .............................. 716,959 5,358,686 1,077,626 1,034,806 (1,129,151)
Affiliates ............................. (653,657) 653,657 -- -- --
Advances to suppliers .................... (712,058) (2,587,318) (454,265) (1,359,268) 636,458
Inventories .............................. (24,288,235) 10,162,581 15,493,045 2,964,817 (9,889,121)
Prepaid expenses and other current assets (707,745) (184,818) 627,471 220,195 (206,637)
Tax refund receivable .................... -- (814,766) 814,766 -- --
Other assets ............................. (123,998) (539,266) 406,940 (77,189) 417
Increase (decrease) in:
Accounts payable ......................... 17,314,213 (5,861,438) (125,824) 1,122,047 8,448,841
Advances from customers .................. -- -- -- -- 2,500,000
Accrued expenses and other liabilities ... 1,088,386 2,908,483 2,356,398 (459,768) (430,007)
Income taxes payable ..................... 1,321,203 (816,105) (20,006) (117,556) (116,835)
Long term severance payable .............. -- -- 1,037,859 -- (62,436)
Negative goodwill ........................ -- (470,000) -- -- --
------------ ------------ ------------ ----------- -----------
Net cash provided by (used in) operating
activities ............................. 630,066 7,761,178 12,953,652 1,668,730 (2,775,571)
------------ ------------ ------------ ----------- -----------
Cash flows from investing activities:
Additions to property and equipment ...... (7,341,901) (7,207,114) (9,495,824) (2,978,471) (930,563)
------------ ------------ ------------ ----------- -----------
Net cash used in investing activities .... (7,341,901) (7,207,114) (9,495,824) (2,978,471) (930,563)
------------ ------------ ------------ ----------- -----------
Cash flows from financing activities:
Net borrowings under bank line of credit
and loans payable ...................... 7,208,943 2,957,170 (3,677,888) 2,020,558 1,408,409
Net increase (decrease) in due to related
parties ................................ 90,000 (465,517) (304,483) 30,486 --
Principal payments under capital lease
obligations ............................ (639,892) (952,805) (981,916) (331,578) (154,529)
Net advances to shareholder and officers . (4,791) (271,459) 272,172 (115,860) (10,860)
Issuance of convertible notes payable .... -- -- -- -- 1,996,000
Issuance of debentures ................... 2,935,361 -- -- -- --
Proceeds from issuance of common stock ... 956,250 -- 2,000,000 -- --
Proceeds from exercise of stock options .. 8,250 117,187 317,707 -- 141,770
Stock issuance costs ..................... -- (160,092) -- -- --
Purchases of treasury stock .............. (2,531,787) (1,865,958) (891,934) (564,367) --
------------ ------------ ------------ ----------- -----------
Net cash provided by (used in) financing
activities ............................ 8,022,334 (641,474) (3,266,342) 1,039,239 3,380,790
------------ ------------ ------------ ----------- -----------
Increase (decrease) in cash and cash
equivalents .............................. 1,310,499 (87,410) 191,486 (270,502) (325,344)
Cash and cash equivalents at beginning of
period ................................... 331,028 1,641,527 1,554,117 1,554,117 1,745,603
------------ ------------ ------------ ----------- -----------
Cash and cash equivalents at end of period .. $ 1,641,527 $ 1,554,117 $ 1,745,603 $ 1,283,615 $ 1,420,259
============ ============ ============ =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE> 47
PERFUMANIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF BUSINESS:
Perfumania, Inc. ("Perfumania") and its subsidiaries (collectively, the
"Company") is a specialty retailer and wholesaler of fragrances and related
products. The Company's retail stores consist of stores located in regional
malls, manufacturer's outlet malls, airports and on a stand-alone basis in
suburban strip shopping centers. The number of retail stores in operation at
February 1, 1997, January 31, 1998, January 30, 1999 and May 1, 1999 were 262,
285, 289 and 288 respectively.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES:
Significant accounting principles and practices used by the Company in
the preparation of the accompanying consolidated 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. In the accompanying notes, fiscal year 1996, 1997 and 1998
refers to the year ended February 1, 1997, January 31, 1998 and January 30,
1999, respectively.
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 allowance for doubtful accounts,
inventory reserves, self insurance health care reserves, long-lived asset
impairments and estimated useful lives of property and equipment. Actual results
could differ from those estimates.
BASIS OF PRESENTATION
The accompanying consolidated 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
consolidated financial statements, the Company incurred net losses of
approximately $11.4 million, $18.9 and $4.1 million (unaudited) during the
fiscal years ended January 31, 1998, January 30, 1999 and the thirteen week
period ended May 1, 1999, respectively, and has a working capital deficit of
$3.8 million and $5.6 million (unaudited) at January 30, 1999 and May 1, 1999,
respectively. In addition, the Company was in violation of certain debt
covenants contained in its bank line of credit agreement as of and for the year
ended January 30, 1999. These debt covenant violations have been subsequently
waived by the bank as of July 14, 1999 (See Note 8). In April 1999 and July
1999, the Company issued a total of $4 million of convertible notes to a group
of private investors (See Note 16).
Management's plan to improve the results of operations include
decreasing the number of store openings in 1999, closing a number of its
non-profitable stores, improving the effectiveness of its sales promotions
practices, continuing to improve the existing merchandise mix and to promote the
private label bath, body and cosmetic line, continuing to liquidate slow moving
inventories and reducing selling, general and administrative expenses. There is
no assurance, however, that the Company will be able to improve its results of
operations based on management's plan.
F-7
<PAGE> 48
These factors among others may indicate that the Company will be unable
to continue as a going concern for a reasonable period of time. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Perfumania and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Revenue from wholesale transactions is recorded upon shipment of
inventory. Revenue from retail sales is recorded, net of discounts and estimated
returns, upon customer purchase.
ADVANCES TO SUPPLIERS
Advances to suppliers represent prepayments to wholesale vendors on
pending inventory purchase orders.
INVENTORIES
Inventories, consisting predominantly of finished goods, are 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.
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 and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the term of the lease or the estimated
useful lives of the improvements, whichever is shorter. 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.
PREOPENING EXPENSES
Prior to fiscal year 1997, the Company capitalized expenses associated
with the opening of new retail locations and training of personnel. These costs
typically included occupancy costs incurred prior to store opening, travel
expenses, store managers' salaries and grand opening costs paid to the mall. The
Company amortized these amounts over 18 months.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of
Start-Up Activities", which requires the Company to expense preopening expenses
as incurred. SOP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998, does not require restatement of prior periods
and is applied as of the beginning of the fiscal year in which the SOP is first
adopted. The Company early adopted SOP 98-5 in fiscal year 1997 and has reported
the initial application as a cumulative effect of a change in accounting
principle in the Consolidated Statement of Operations for the year ended January
31, 1998. The effect of the change in accounting principle was to increase the
net loss reported for fiscal year 1997 by $631,418 or $0.09 per share.
INCOME TAXES
Income tax expense is based principally on pre-tax financial income.
Deferred tax assets and liabilities are recognized for the difference between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
F-8
<PAGE> 49
BASIC AND DILUTED INCOME (LOSS) PER SHARE
Basic income (loss) per common share is computed by dividing income
(loss) available to common stockholders, after giving effect in fiscal year 1996
to the restatement related to the beneficial conversion feature in connection
with convertible debt (Note 11), by the weighted average number of common shares
outstanding during the period. Diluted income (loss) per common share includes
the dilutive effect of those stock options where the option exercise prices were
greater than the average market price of the common shares during the respective
fiscal years.
Basic and diluted earnings per share for income (loss) before
cumulative effect of change in accounting principle is computed as follows:
<TABLE>
<CAPTION>
FISCAL YEAR THIRTEEN WEEKS ENDED
----------------------------------------- --------------------------
1996 1997 1998 MAY 2, 1998 MAY 1, 1999
---------- ------------ ------------ ----------- -----------
(as restated, (Unaudited)
Note 11)
<S> <C> <C> <C> <C> <C>
Numerator:
Income (loss) before cumulative
effect of change in
accounting principle......... $2,074,941 $(10,801,152) $(18,974,498) $(2,771,612) $(4,091,866)
---------- ------------ ------------ ----------- -----------
Denominator:
Denominator for basic income
(loss) per share............. 7,183,462 7,025,236 6,659,237 6,560,354 7,364,485
Effect of dilutive securities:
Options to purchase common stock 450,126 -- -- -- --
---------- ------------ ------------ ----------- -----------
Denominator for dilutive income
(loss) per share............. 7,633,588 7,025,236 6,659,237 6,560,354 7,364,485
---------- ------------ ------------ ----------- -----------
Income (loss) per share before
cumulative effect of change
in accounting principle:
Basic........................... $0.29 $(1.54) $(2.85) $(0.42) $(0.56)
========== ============ ============ =========== ===========
Diluted......................... $0.27 $(1.54) $(2.85) $(0.42) $(0.56)
========== ============ ============ =========== ===========
Antidilutive securities not
included in the diluted
earnings (loss) per share
computation:
Options to purchase common stock 1,472,861 1,724,150 391,222 1,818,150 1,477,075
Exercise price.................. $2.75 - $8.50 $2.75 - $5.63 $0.41 - $2.75 $2.75 - $5.63 $0.41-$3.75
</TABLE>
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
Statement of Financial Accounting Standards No. 107 ("SFAS 107"),
"Disclosures about Fair Value of Financial Instruments" requires disclosure on
the fair value of financial instruments held by the Company. SFAS 107 defines
the fair value of a financial instrument as the amount at which the instrument
F-9
<PAGE> 50
could be exchanged in a current transaction between willing parties. The
following methods and assumptions were used to estimate fair value:
o The carrying amounts of cash and cash equivalents, accounts
receivable and accounts payable approximate fair value due to
their short-term nature;
o The Company's bank line of credit, obligations under capital
leases and loans payable approximate fair value because they
are based on current interest rates and repayment terms of the
individual notes, and;
o Long-term severance payable approximates fair value because
discounted cash flows using current interest rates for debt
with similar characteristics and maturity were used to
estimate its carrying value.
ASSET IMPAIRMENT
The Company reviews long-lived assets and makes a provision for
impairment whenever events or changes in circumstances indicate that the
projected cash flows of related activities may not provide for cost recovery. An
impairment loss is recorded when the net book value of assets exceeds projected
undiscounted future cash flows on a store by store basis.
STOCK BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for stock Issued to Employees ("APB 25"), and provides pro forma
disclosure of net income and earnings per share as if the fair value based
method prescribed by SFAS 123 had been applied in measuring compensation expense
for options granted in 1997 and 1998. In accordance with APB 25 compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock.
RECLASSIFICATION
Certain fiscal year 1996 and 1997 amounts have been reclassified to
conform with the fiscal year 1998 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the AICPA issued Statement of Financial Position 98-1,
("SOP 98-1") "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". SOP 98-1 provides guidance for capitalization of
certain costs incurred in the development of internal-use software and is
effective for financial statements for years beginning after December 15, 1998.
The Company adopted SOP 98-1 in fiscal year 1998 which did not have a
significant impact on the Company's results of operations, cash flows or
financial position.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income," which establishes standards for reporting and displaying
comprehensive income and its components. In June 1997, the FASB issued Statement
of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about
Segments of an Enterprise and Related Information," which requires the Company
to present certain information about operating segments and related information.
The Company adopted both statements in fiscal year 1998.
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 the 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.
F-10
<PAGE> 51
NOTE 3 -- ACQUISITION:
In November 1996, the Company acquired substantially all of the assets
of Nature's Elements Holding Corporation ("Nature's") which included the service
mark and trade name "Nature's Elements" and the stock of its subsidiary. Prior
to the acquisition, all of Nature's liabilities, both at the parent and
subsidiary level were transferred to a liquidating trust. Subsequent to the
acquisition, the stock of the subsidiary was liquidated and the Company received
inventory and store fixtures and assumed the obligation for 34 leases (including
1 seasonal store) for approximately $2.2 million, of which $1.7 million was
represented by a note payable. The Company has since closed 11 locations,
renovated 18 locations and the remaining locations will either be renovated or
subleased by mid 1999. The acquisition was accounted for as a purchase and
accordingly, Nature's results are included in the consolidated financial
statements since the date of acquisition. The estimated fair value of the
acquired assets exceeded the purchase price. The excess of estimated fair value
of the assets acquired over cost was $3.5 million of which $3 million reduced
the fair value of non-current assets acquired to a zero value and $0.5 million
was allocated to negative goodwill, which was reduced to zero in 1997 due to
writedown of inventory purchased. The assets and business acquired were not
material in relation to consolidated financial statements.
NOTE 4 -- STATEMENTS OF CASH FLOWS:
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THIRTEEN WEEKS ENDED
-------------------------------------- ------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30, MAY 2, MAY 1,
1997 1998 1999 1998 1999
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash paid during the period for:
Interest .......................... $3,459,563 $4,671,039 $4,830,230 $1,307,562 $1,068,412
Income taxes ...................... $ 71,138 $1,012,000 $ 20,000 $ 117,556 $ --
</TABLE>
Supplemental disclosures of noncash activities:
The Company issued in 1996 a $1.7 million note payable due to the
acquisition discussed in Note 3.
In December 1996, the Company entered into an agreement with a vendor
whereby approximately $3.6 million of accounts payable was converted to a note
payable (see Note 8).
NOTE 5 -- INVENTORIES:
During fiscal years 1996, 1997 and 1998, the Company recorded a
provision of $0.2 million, $1.8 million and $3.8 million, respectively, to
reduce the carrying value of certain fragrances the Company intends to
liquidate. No amounts were provided for during the thirteen week periods ended
May 2, 1998 and May 1, 1999, respectively. These amounts represent management's
best estimate of the inventories' net realizable value.
NOTE 6 -- PROPERTY AND EQUIPMENT:
Property and equipment includes the following:
<TABLE>
<CAPTION>
ESTIMATED USEFUL
JANUARY 31, JANUARY 30, MAY 1, LIVES
1998 1999 1999 (IN YEARS)
------------ ------------ ----------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Furniture, fixtures and equipment . $ 15,213,721 $ 15,959,500 $17,069,134 5-7
Leasehold improvements ............ 14,995,361 21,235,443 21,054,761 10
------------ ------------ -----------
30,209,082 37,194,943 38,123,895
Less: Accumulated depreciation and
amortization ................... (11,901,842) (14,014,481) (15,014,287)
------------ ------------ -----------
$ 18,307,240 $ 23,180,462 $23,109,608
============ ============ ===========
</TABLE>
F-11
<PAGE> 52
NOTE 7 -- NOTES AND INTEREST RECEIVABLE FROM SHAREHOLDER AND OFFICERS:
Notes and interest receivable from shareholder and officers consists of
the following:
<TABLE>
<CAPTION>
JANUARY 31, 1998 JANUARY 30, 1999 MAY 1, 1999
---------------- ---------------- -----------
(unaudited)
<S> <C> <C> <C>
Notes and interest receivable
from officers................ $315,612 $ -- $ --
Note and interest receivable from
shareholder ................. 498,703 542,143 553,003
-------- -------- --------
$814,315 $542,143 $553,003
======== ======== ========
</TABLE>
The note receivable from shareholder results from the sale of a
condominium to the shareholder at its book value in 1991. The shareholder
assumed the balance of the related mortgage and issued an unsecured note payable
to the Company for $282,519, bearing interest at 9.5%. The note initially
matured in December 1993 and has been subsequently renewed through December
2000. Total interest income recognized during fiscal years 1996, 1997 and 1998
was approximately $40,000, $43,000 and $43,000, respectively, and during the
thirteen week period ended May 1, 1999 interest income recognized was
approximately $11,000 (unaudited). Accrued interest receivable at January 31,
1998, January 30, 1999 and May 1, 1999 amounted to approximately $42,000,
$85,000 and $96,000 (unaudited), respectively.
Purchases of products from a company affiliated through common
ownership amounted to $30,735,244, $21,436,855 and $24,333,032, in fiscal year
1996, 1997 and 1998, respectively, and $7,527,721 (unaudited) and $13,027,238
(unaudited) for the thirteen week periods ended May 2, 1998 and May 1, 1999,
respectively. The amount due to this company at January 31, 1998, January 30,
1999 and May 1, 1999, was $16,958,163, $15,812,240 and $25,827,932 (unaudited),
respectively. Amounts due to this affiliate are non-interest bearing.
Other income in fiscal year 1996 includes $110,000 of warehousing fees
received from an affiliated company.
Prior to signing an employment agreement effective February 1, 1999,
the Company's Chief Executive Officer provided consulting services to the
Company. Total consulting expense to this officer was $500,000 during 1998, of
which $325,000 was accrued as of January 30, 1999.
F-12
<PAGE> 53
NOTE 8 -- BANK LINE OF CREDIT AND NOTES PAYABLE:
The bank line of credit and notes payable consist of the following:
<TABLE>
<CAPTION>
JANUARY 31, 1998 JANUARY 30, 1999 MAY 1, 1999
---------------- ---------------- ------------
(unaudited)
<S> <C> <C> <C>
Bank line of credit, bearing interest at the bank's prime
rate plus 4% (11.75% at January 30, 1999), interest payable
monthly, expiring in April 2001, secured by a pledge of
substantially all of the Company's assets ....................... $ 31,657,946 $ 30,035,019 $ 32,158,669
Notes payable bearing interest ranging from
approximately 10.0% - 14.7%, payable in monthly
installments ranging from $481 to $7,500 including
interest, through July 1999 secured by equipment ................ 61,374 14,928 11,922
Notes payable bearing interest ranging from approximately
8.5%-10.8%, payable in monthly installments of $109,315,
including interest, through December 2001, secured by fixtures .. 3,394,396 2,841,267 2,546,436
Note payable bearing interest at approximately
10.25%, payable in monthly installments of $50,000,
including interest, with final payment of
$200,000 in November 1999 (See Note 3) .......................... 1,119,744 727,609 492,252
Note payable bearing interest at approximately
10.25%, payable in monthly installments of $75,000,
including interest, with final payment of
$65,736 in November 2000 (See Note 4) ........................... 2,615,740 1,552,488 1,370,441
------------ ------------ ------------
38,849,200 35,171,311 36,579,720
Less: current portion ............................................ (34,139,766) (32,800,627) (34,644,318)
------------ ------------ ------------
Long-term portion ................................................. $ 4,709,434 $ 2,370,684 $ 1,935,402
============ ============ ============
</TABLE>
The aggregate maturities of the bank line of credit and notes payable
at January 30, 1999 are as follows:
FISCAL YEAR
-----------
1999 $32,800,627
2000 1,698,120
2001 528,540
2002 123,966
2003 20,058
-----------
$35,171,311
===========
The Company's $35 million line of credit contains covenants requiring
the maintenance of minimum tangible net worth, book value and achieving
specified levels of quarterly results of operations. The line of credit also
contains limitations on additional borrowings, capital expenditures, number of
new store openings, purchases of treasury stock and prohibits distribution of
dividends. As of January 30, 1999, the Company was in violation of certain of
the above covenants. As a result, the bank can demand payment of the amounts
outstanding under the line of credit agreement. In addition, as a result of
these violations, the Company incurred the default rate of interest,
F-13
<PAGE> 54
prime plus 4% (11.75%) beginning December 1998. On July 14, 1999, the Company
obtained a waiver of default from the bank through September 30, 1999 as of and
for the year ended January 30, 1999. (See Note 16).
Advances made under the line of credit are based on a formula of
eligible inventories and receivables. At January 30, 1999 and May 1, 1999, the
Company had available under the line of credit approximately $4,248,000 and
$1,476,000 (unaudited), respectively. Advances are secured by a first lien on
substantially all of the Company's assets and assignment of a life insurance
policy on one of the Company's officers.
The Company's line of credit is guaranteed to the extent of $3,000,000
each by two stockholders of the Company.
NOTE 9 -- IMPAIRMENT OF ASSETS:
Based on a review of the Company's retail store locations with negative
cash flows, the Company recognized non-cash impairment charges relating to its
retail segment of $0.2 million, $2.5 million and $1.0 million during fiscal
years ended 1996, 1997 and 1998, respectively. No impairment charges were
recognized during the thirteen week periods ended May 2, 1998 and May 1, 1999,
respectively. These charges were determined based on the difference between the
carrying amount of the assets, representing primarily fixtures and leasehold
improvements, at a particular store location in excess of the fair value of the
assets on a store by store basis. The estimated fair value was based on
anticipated future cash flows discounted at a rate commensurate with the risk
involved. These impairment losses are included in "Provision for impairment of
assets and store closings," in the accompanying Consolidated Statement of
Operations.
NOTE 10 -- INCOME TAXES:
The (provision) benefit for income taxes is comprised of the following
amounts:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------
FEBRUARY 1, 1997 JANUARY 31, 1998 JANUARY 30, 1999
---------------- ---------------- ----------------
<S> <C> <C> <C>
Current:
Federal ............... $(1,084,088) $ 814,766 $ --
State ................. (182,244) (459,000) (117,550)
----------- ----------- -----------
(1,266,332) 355,766 (117,550)
----------- ----------- -----------
Deferred:
Federal ............... (380,399) 346,384 (1,219,856)
State ................. -- -- --
----------- ----------- -----------
(380,399) 346,384 (1,219,856)
----------- ----------- -----------
Total tax (provision)
benefit ............... $(1,646,731) $ 702,150 $(1,337,406)
=========== =========== ===========
</TABLE>
F-14
<PAGE> 55
The income tax provision differs from the amount obtained by applying
the statutory Federal income tax rate to pretax income as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
FEBRUARY 1, 1997 JANUARY 31, 1998 JANUARY 30, 1999
---------------- ---------------- ----------------
<S> <C> <C> <C>
Benefit (provision) at
federal statutory rates .......................... $(1,531,251) $ 4,066,060 $ 7,161,669
Valuation allowance against current year benefit .... -- -- (7,161,669)
State taxes ......................................... -- -- (117,550)
Recognized net operating
loss carryforward ................................ 115,810 -- --
(Increase) reduction in the valuation allowance ..... -- (3,405,000) (1,219,856)
Beneficial conversion
feature of debentures ............................ (205,000) -- --
Other ............................................... (26,290) 41,090 --
----------- ----------- -----------
(Provision) benefit for
income taxes ..................................... $(1,646,731) $ 702,150 $(1,337,406)
=========== =========== ===========
</TABLE>
Net deferred tax assets reflect the tax effect of the following
differences between financial statement carrying amounts and tax bases of assets
and liabilities:
<TABLE>
<CAPTION>
JANUARY 31, 1998 JANUARY 30, 1999
---------------- ----------------
<S> <C> <C>
Assets:
Net operating losses carryforward .......... $ 244,771 $ 7,473,729
Inventory .................................. 1,944,521 1,923,888
Property and equipment ..................... 1,283,375 1,904,756
Allowance for doubtful accounts and other .. 319,011 319,011
Reserves ................................... 714,970 982,601
Other ...................................... 118,208 136,157
----------- ------------
Total deferred tax assets .................... 4,624,856 12,740,142
----------- ------------
Valuation allowance .......................... (3,405,000) (12,740,142)
----------- ------------
Net deferred tax assets ...................... $ 1,219,856 $ --
=========== ============
</TABLE>
During fiscal year 1998, the Company provided a valuation allowance of
$12,740,142 for deferred tax assets as management believes that it is more
likely than not that the benefit of the deferred tax asset will not be realized.
Realization of future tax benefits related to the deferred tax assets is
dependent on many factors, including
F-15
<PAGE> 56
the Company's ability to generate taxable income within the net operating loss
carryforward period. Management has considered these factors in reaching its
conclusion as to the valuation allowance for financial reporting purposes.
NOTE 11 -- STOCKHOLDERS' EQUITY:
STOCK SUBSCRIPTION
In March 1999, the Company entered into Subscription Agreements for the
sale of 235,293 shares of the Company's common stock to a group of private
investors at the agreed upon price of $8.50 per share. The proceeds of $2
million were received in January 1999. The Subscription Agreements require that
the Company file the appropriate registration statements with the Securities and
Exchange Commission within six months from the date of the Subscription
Agreements to permit the registered resale of the shares by the investors in
open market transactions. If on the effective date of the registration
statement, the market price is less than $8.50 per share, the Company is
obligated to reimburse the investor group the lesser of 1) the product of the
difference between $8.50 and the closing bid price of the Company's common stock
on the effective date of the registration statement multiplied by the number of
shares issued under the Subscription Agreement or 2) the product of $2.00
multiplied by the number of shares issued under the Subscription Agreements. As
of January 30, 1999 and May 1, 1999, the potential redeemable amount of $470,588
was recorded as redeemable common equity and the remaining $1,529,412 was
recorded as capital in excess of par value in the accompanying balance sheets.
In March 1996, the Company sold 180,000 shares of common stock for
approximately $956,000 in a private placement.
DEBENTURES
In March 1996, the Company issued $3,000,000 of 5% Convertible
Debentures (the "Debentures") in a Regulation S offering to non-U.S. persons.
The debentures were convertible into shares of common stock of the Company, at
any time after May 21, 1996, at a conversion price for each share of common
stock equal to eighty-five percent of the market price of the common stock on
the date of conversion, not to exceed $8.50 per share of common stock. The
debentures were converted into approximately 918,000 shares of common stock in
the second quarter of 1996.
In a 1997 announcement, the staff of the Securities and Exchange
Commission ("SEC") indicated that when debt is convertible at a discount from
the then current common stock market price, the discounted amount represents an
incremental yield, e.g. a "beneficial conversion feature", which should be
recognized as a return to the debt holders. Based on the market price of the
Company's debentures at the date of issuance, the debentures issued by the
Company had a beneficial conversion feature of $529,412 at such point in time.
Because of the SEC announcement, the Company has restated its fiscal year 1996
net income and net income per common share information to reflect such
accounting treatment. The net effect of the restatement represents a non-cash
interest charge to net income.
STOCK WARRANTS
In connection with its initial public offering, the Company issued
warrants to purchase 150,000 shares of common stock. The warrants were
exercisable until December 19, 1996 at an exercise price equal to $12.75. The
holders of such warrants attempted to exercise the warrants in fiscal year 1996.
The Company disputed the method of determining the exercise price for such
warrants which resulted in litigation. During fiscal year 1997, the Company
settled the litigation and agreed to issue an aggregate of 85,000 shares of
common stock. These shares were issued during the first quarter of fiscal year
1998 and accordingly, the Company recorded an expense of approximately $214,000
which represented the fair value of the common stock on the date of issuance.
PREFERRED STOCK
The Company's Articles of Incorporation authorize the issuance of up to
1,000,000 shares of preferred stock. The preferred stock may be issued from time
to time at the discretion of the Board of Directors without
F-16
<PAGE> 57
stockholders' approval. The Board of Directors is authorized to issue these
shares in different series and, with respect to each series, to determine the
dividend rate, and provisions regarding redemption, conversion, liquidation
preference and other rights and privileges. As of January 30, 1999, no preferred
stock had been issued.
STOCK OPTION PLANS
Under the Company's Stock Option Plan (the "Stock Option Plan") and
Directors Stock Option Plan (the "Directors Plan") (collectively, the "Plans"),
2,500,000 shares of common stock and 60,000 shares of common stock,
respectively, are reserved for issuance upon exercise of options. The Company's
Board of Directors, or a committee thereof, administers and interprets the Stock
Option Plan. The Stock Option Plan provides for the granting of both "incentive
stock options" (as defined in Section 422A of the Internal Revenue Code) and
non-statutory stock options. Options can be granted under the Stock Option Plan
on such terms and at such prices as determined by the Board, except that the per
share exercise price of options will not be less than the fair market value of
the common stock on the date of grant. Only non-employee directors are eligible
to receive options under the Directors Plan. The Directors Plan provides for an
automatic grant of an option to purchase 2,000 shares of common stock upon
election as a director of the Company and an automatic grant of 4,000 shares of
common stock upon such person's re-election as a director of the Company, in
both instances at an exercise price equal to the fair value of the common stock
on the date of grant.
During October 1998, the Company offered each employee, who had
previously been granted options to purchase the Company's stock, the opportunity
to change the option price effective October 27, 1998 (the "Repricing"). Under
the terms of the Repricing, all previously granted stock options would be
cancelled, and the employee would be granted the same number of options at the
fair market value of the Company's common stock on October 27, 1998, which was
$0.50 per share. No other terms to the stock options were amended. At the time
of the offer, the Company had approximately 80 employees who had been granted
options to purchase the Company's common stock with option prices ranging from
$2.75 to $6.84. The Repricing plan was accepted by all employees with respect to
outstanding stock options.
The Company uses the measurement prescribed by Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). Had
compensation costs for the Company's Plans been determined based on the fair
market value at the grant dates of options granted consistent with the method of
SFAS 123, the Company's net (loss) income and diluted net (loss) income per
share would have been reduced (increased) to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
FISCAL YEARS
--------------------------------------------------------------
1996 1997 1998
---------------------- ------------ ------------
(as restated, Note 11)
<S> <C> <C> <C>
Net (loss) income As reported $2,074,941 $(11,432,570) $(18,974,498)
Proforma $1,946,867 $(11,939,613) $(19,735,008)
Diluted net (loss) As reported $0.27 $(1.63) ($2.85)
income per share Proforma $0.26 $(1.68) ($2.96)
</TABLE>
In calculating the pro forma net (loss) income and net (loss) income
per share for fiscal years 1996, 1997 and 1998, the fair value of each option
grant is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions used for grants in fiscal
years 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Expected life (years)............ 4 - 7 years 3 - 7 years 3 - 7 years
Interest rate.................... 6.39% 6.52% 6.02%
Volatility....................... 41% 39% 102%
Dividend yield................... 0% 0% 0%
</TABLE>
F-17
<PAGE> 58
Options granted under the Stock Option Plan are exercisable after the
period or periods specified in the option agreement, and options granted under
the Directors Plan are exercisable immediately. Options granted under the Plans
are not exercisable after the expiration of 10 years from the date of grant. The
Plans also authorize the Company to make loans to optionees to enable them to
exercise their options.
A summary of the Company's option activity, and related information for
each of the three fiscal years ended January 30, 1999 follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------------------------- ------------------------- --------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------------- -------- ---------------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year... 1,348,800 $3.16 1,494,600 $3.19 1,724,150 $3.18
Granted............................ 149,000 3.50 332,750 3.28 1,926,750 (1) $0.46
Exercised.......................... (2,000) 4.13 (37,500) 3.13 (684,200) 0.45
Cancelled.......................... (1,200) 2.96 (65,700) 3.84 (1,208,100)(1) 2.99
--------- ----- --------- ----- ---------- -----
Outstanding at end of year......... 1,494,600 $3.19 1,724,150 $3.18 1,758,600 $0.46
--------- ----- --------- ----- ---------- -----
Options exercisable at end of year. 1,475,500 $3.17 1,541,400 $3.14 1,600,275 $0.46
Weighted-average fair value of
options granted during the year. 149,000 $1.49 332,750 $1.48 1,926,750 $0.46
</TABLE>
- --------------
(1) Includes 1,130,600 options cancelled and then subsequently re-granted
as part of the repricing.
The following table summarizes information about stock options
outstanding at January 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------- ---------------------------------------------------------- ------------------------------
RANGE OF WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICE NUMBER OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE OUTSTANDING EXERCISE PRICES
-------------- ------------------ -------------- ---------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
$0.41 - $0.50 1,750,600 $0.46 7 1,592,275 $0.46
$2.75 8,000 2.75 7 8,000 2.75
--------- ----- --- --------- -----
1,758,600 $0.46 7 1,600,275 $0.46
--------- ----- --- --------- -----
</TABLE>
NOTE 12 -- EMPLOYEE BENEFIT PLANS:
The Company has a 401(k) Savings and Investment Plan ("the Plan").
Pursuant to such plan, participants may make contributions to the Plan up to a
maximum of 15% of total compensation or $9,500 (or such higher amount as is
prescribed by the Secretary of the Treasury for cost of living adjustments),
whichever is less, and the Company, in its discretion, may match such
contributions to the extent of 25% of the first 4% of a participant's
contribution. The Company's matching contributions vest over a 5-year period. In
addition to matching contributions, the Company may make additional
contributions on a discretionary basis in order to comply with certain Internal
Revenue Code regulations prohibiting discrimination in favor of highly
compensated employees. The Company's matching contributions during fiscal years
1996, 1997 and 1998 and the thirteen week periods ended May 2, 1998 and May 1,
1999 were not significant.
NOTE 13 -- COMMITMENTS AND CONTINGENCIES:
The Company is self-insured for employee medical benefits under the
Company's group health plan. The Company maintains stop loss coverage for
individual medical claims in excess of $50,000 and for annual Company medical
claims which exceed approximately $2,000,000 in the aggregate. While the
ultimate amount of claims incurred are dependent on future developments, in
management's opinion, recorded reserves are adequate to cover the future payment
of claims. However, it is possible that recorded reserves may not be adequate to
cover the future
F-18
<PAGE> 59
payment of claims. Adjustments, if any, to estimates recorded resulting from
ultimate claim payments will be reflected in operations in the periods in which
such adjustments are known. The self-insurance reserve at January 31, 1998 and
January 30, 1999 was approximately $338,000 and $520,000, respectively.
In the fourth quarter of 1998, the Company entered into severance
agreements with two executive officers resulting in a non-recurring charge of
approximately $1,900,000. Under the terms of the agreements, both officers will
receive severance payments over a three-year term beginning December 1998. The
resulting expense is reflected in selling, general and administrative expenses
in the accompanying consolidated statements of operation. In addition, as part
of the severance agreement with one of the executive officers, the officer
received 429,000 shares of common stock at no cost and, accordingly, the Company
recorded additional compensation expense of approximately $176,000.
In February 1999, the Company entered into three-year employment
agreements with two of its executive officers. The agreements provide for
aggregate annual salaries of approximately $718,000 to these officers subject to
the higher of the increase in adjustments for cost-of-living or 5%. The
agreements also contain a performance bonus plan and grant of stock options if
the Company meets certain net income levels.
The Company leases space for its office, warehouse and retail stores.
The lease terms vary from one to ten years, in some cases with options to renew
for longer periods. Various leases contain clauses which adjust the base rental
rate by the prevailing Consumer Price Index, as well as additional rent based on
a percentage of gross sales in excess of a specified amount.
Rent expense for fiscal year 1996, 1997, and 1998 approximated
$11,223,000, $14,398,000, and $15,972,000, respectively. For the thirteen week
periods ended May 2, 1998 and May 1, 1999, rent expense approximated $3,991,000
(unaudited) and $4,068,000 (unaudited), respectively. Future minimum lease
commitments under these operating leases at January 30, 1999 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1999 $15,750,000
2000 14,196,000
2001 11,575,000
2002 8,556,000
2003 5,855,000
Thereafter 12,908,000
-----------
Total future minimum lease payments $68,840,000
===========
</TABLE>
F-19
<PAGE> 60
The following is a schedule of future minimum lease payments under
capital leases together with the present value of the net minimum lease
payments, at January 30, 1999:
FISCAL YEAR
-----------
1999 $ 526,050
2000 265,314
2001 190,485
2002 194,724
2003 8,774
----------
Total future minimum lease payments........ 1,185,347
Less: amount representing interest........ (203,308)
----------
Present value of minimum lease payments.... 982,039
Less: current portion..................... (419,487)
----------
$ 562,552
==========
The depreciation expense relating to capital leases is included in
depreciation and amortization expense.
As of January 30, 1999, the Company had entered into 7 additional store
leases at locations under construction.
In December of 1993, the patent holder and exclusive licensee in the
U.S. of Boucheron filed a complaint against the Company in the Southern District
of New York for infringing upon their exclusive right to sell the Boucheron
bottle and is seeking $1.5 million in damages. The plaintiffs' theory is based
on the fact that they have a valid patent for the bottles and that Perfumania's
sales of such bottles infringes upon their patent rights. The Company believes
that a patent holder cannot in any way control by resort to an infringement suit
the resale of a patented article which he has sold. The Company filed a motion
to dismiss during February 1994. On March 20, 1995 the Court denied the
Company's motion to dismiss and on April 14, 1995, the Company filed its answer
to the complaint. Discovery is in progress.
In the opinion of management and counsel, the ultimate outcome of the
aforementioned litigation will not have a material effect on the accompanying
financial statements.
During 1996 and 1997, the Company made sales to L. Luria & Son, Inc.
("Luria's") in the amounts of $2,473,623 and $1,999,823, respectively. The
Company wrote off in 1997 receivables from Luria's in the approximate amount of
$1,200,000. The Company has been characterized as an insider as defined by the
United States Bankruptcy Code, in the liquidating plan of reorganization filed
on April 6, 1998 by Luria's in the United States Bankruptcy Court, Southern
District of Florida because our Chairman of the Board and Chief Executive
Officer was the principal of the entity that controlled Luria's. In October
1998, the committee of unsecured creditors in Luria's bankruptcy proceedings
filed a complaint with the United States Bankruptcy Court, Southern District of
Florida to recover substantial funds from the Company. The complaint alleges
that Luria's made preference payments, as defined by the Bankruptcy Court, to
the Company and seeks recovery of said preference payments, as well as
disallowing any and all claims of the Company against Luria's until full payment
of the preference payments have been made. (See Note 16).
The Company is also involved in various other legal proceedings in the
ordinary course of business.
Management cannot presently predict the outcome of these matters,
although management believes, upon the advice of legal counsel, that the Company
would have meritorious defenses and that the ultimate resolution of these
matters should not have a materially adverse effect on the Company's financial
position or result of operations.
F-20
<PAGE> 61
NOTE 14 -- SEGMENT INFORMATION:
The Company operates in two industry segments, specialty retail sale
and wholesale distribution of fragrances and related products. Financial
information for these segments is summarized in the following table.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THIRTEEN WEEKS ENDED
------------------------------------------------ ----------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30, MAY 2, MAY 1,
1997 1998 1999 1998 1999
------------ ------------ ------------ ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net sales to external customers:
Wholesale ....................... $ 30,316,598 $ 34,031,744 $ 40,465,689 $13,467,930 $11,266,754
Retail .......................... 108,603,129 129,561,815 134,789,944 25,000,045 28,134,210
------------ ------------ ------------ ----------- -----------
Total net sales to external
customers..................... $138,919,727 $163,593,559 $175,255,633 $38,467,975 $39,400,964
============ ============ ============ =========== ===========
Intersegment sales:
Wholesale ....................... $ 77,956,573 $ 80,022,607 $ 18,477,729 $ 2,760,767 $14,484,486
Retail .......................... -- -- -- -- --
------------ ------------ ------------ ----------- -----------
Total intersegment sales ...... $ 77,956,573 $ 80,022,607 $ 18,477,729 $ 2,760,767 $14,484,486
============ ============ ============ =========== ===========
Cost of goods sold:
Wholesale ....................... $ 22,702,968 $ 26,090,395 $ 32,920,317 $10,280,190 $ 9,072,744
Retail .......................... 56,256,785 71,529,423 77,718,115 13,382,268 15,075,051
------------ ------------ ------------ ----------- -----------
Total cost of goods sold ...... $ 78,959,753 $ 97,619,818 $110,638,432 $23,662,458 $24,147,795
============ ============ ============ =========== ===========
Gross profit:
Wholesale ....................... $ 7,613,630 $ 7,941,349 $ 7,545,372 $ 3,187,740 $ 2,194,010
Retail .......................... 52,346,344 58,032,392 57,071,829 11,617,777 13,059,159
------------ ------------ ------------ ----------- -----------
Total gross profit ............ $ 59,959,974 $ 65,973,741 $ 64,617,201 $14,805,517 $15,253,169
============ ============ ============ =========== ===========
Inventories:
Wholesale ....................... $ 32,051,346 $ 20,368,792 $ 8,227,522 $16,500,647 $11,049,365
Retail .......................... 53,059,077 52,769,050 45,652,610 53,672,378 52,719,888
------------ ------------ ------------ ----------- -----------
Total inventories ............. $ 85,110,423 $ 73,137,842 $ 53,880,132 $70,173,025 $63,769,253
============ ============ ============ =========== ===========
Depreciation and amortization:
Retail .......................... $ 3,771,508 $ 4,697,816 $ 4,480,681 $ 1,082,258 $ 1,165,151
------------ ------------ ------------ ----------- -----------
$ 3,771,508 $ 4,697,816 $ 4,480,681 $ 1,082,258 $ 1,165,151
============ ============ ============ =========== ===========
Capital expenditures:
Retail .......................... $ 6,798,159 $ 6,831,944 $ 8,849,837 $ 2,978,471 $ 930,563
------------ ------------ ------------ ----------- -----------
$ 6,798,159 $ 6,831,944 $ 8,849,837 $ 2,978,471 $ 930,563
============ ============ ============ =========== ===========
</TABLE>
An unaffiliated customer of the wholesale segment accounted for
approximately 11%, 8%, 6%, 23% (unaudited) and 13% (unaudited) of the
consolidated net sales in fiscal year 1996, 1997, 1998 and the thirteen week
periods ending May 2, 1998 and May 1, 1999, respectively, and 18%, 0% and 0%
(unaudited) of the consolidated net trade accounts receivable balance at January
31, 1998, January 30, 1999 and May 1, 1999, respectively.
In fiscal year 1996, 1997, 1998 and the thirteen week periods ending
May 2, 1998 and May 1, 1999, the wholesale segment included foreign sales of
approximately $3.8 million, $1.7 million, $2.9 million, $0.5 million (unaudited)
and $0.1 million (unaudited), respectively.
NOTE 15 -- QUARTERLY FINANCIAL DATA (UNAUDITED):
The following table sets forth the Company's unaudited quarterly
summarized financial data for the periods indicated (dollar amounts are in
F-21
<PAGE> 62
thousands). Certain of the quarterly information has been restated, as described
below.
<TABLE>
<CAPTION>
FISCAL YEAR 1997
--------------------------------------------------------
1ST QTR 2ND QTR 3RD QTR 4TH QTR
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Wholesale division ........... $ 6,541 $ 8,333 $ 8,590 $ 10,568
Retail division .............. 23,447 28,952 30,185 46,978
Total net sales .............. 29,988 37,285 38,775 57,546
Gross profit ................. 12,906 15,628 15,913 21,527
Loss before cumulative
effect of change in
accounting principle ...... (1,998) (457) (1,226) (7,122)
Cumulative effect of
change in accounting ...... (632) -- -- --
principle
Net loss ..................... (2,630) (457) (1,226) (7,122)
Basic loss per common share:
Loss before cumulative
effect of change in
accounting principle ...... $ (0.28) $ (0.06) $ (0.17) $ (1.05)
Cumulative effect of
change in accounting
principle ................. (0.09) -- -- --
Net loss ..................... $ (0.37) $ (0.06) $ (0.17) $ (1.05)
Diluted loss per common share:
Loss before cumulative
effect of change in
accounting principle ...... $ (0.28) $ (0.06) $ (0.17) $ (1.05)
Cumulative effect of
change in accounting ...... $ (0.09) -- -- --
principle
Net loss ..................... $ (0.37) $ (0.06) $ (0.17) $ (1.05)
% of total net sales for
fiscal year ............... 18.3% 22.8% 23.7% 35.2%
# of retail stores at end
of each period ............ 270 271 283 285
Net loss as previously
reported .................. $ (2,039) $ (498) $ (878) $ (7,555)
Cumulative effect of
change in accounting
principle ................. (564) 68 121 21
Provision for doubtful
accounts .................. -- -- (700) 700
Income tax (provision)
benefit.................... (27) (27) 231 (288)
Net loss as adjusted ......... $ (2,630) $ (457) $ (1,226) $ (7,122)
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 1998
--------------------------------------------------------
1ST QTR 2ND QTR 3RD QTR 4TH QTR
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Wholesale division ........... $ 13,468 $ 10,235 $ 6,993 $ 9,770
Retail division .............. 25,000 29,450 30,091 50,249
Total net sales .............. 38,468 39,685 37,084 60,019
Gross profit ................. 14,806 16,511 15,020 18,280
Loss before cumulative
effect of change in
accounting principle ...... (2,772) (1,273) (3,859) (11,070)
Cumulative effect of
change in accounting ...... -- -- -- --
principle
Net loss ..................... (2,772) (1,273) (3,859) (11,070)
Basic loss per common share:
Loss before cumulative
effect of change in
accounting principle ...... $ (0.42) $ (0.20) $ (0.59) $ (1.64)
Cumulative effect of
change in accounting
principle ................. -- -- -- --
Net loss ..................... $ (0.42) $ (0.20) $ (0.59) $ (1.64)
Diluted loss per common share:
Loss before cumulative
effect of change in
accounting principle ...... $ (0.42) $ (0.20) $ (0.59) $ (1.64)
Cumulative effect of
change in accounting ...... -- -- -- --
principle
Net loss ..................... $ (0.42) $ (0.20) $ (0.59) $ (1.64)
% of total net sales for
fiscal year ............... 21.9% 22.6% 21.2% 34.3%
# of retail stores at end
of each period ............ 284 287 294 289
Net loss as previously
reported .................. $ (2,772) $ (1,273) $ (3,859) $(11,070)
Cumulative effect of
change in accounting
principle ................. -- -- -- --
Provision for doubtful
accounts .................. -- -- -- --
Income tax (provision)
benefit.................... -- -- -- --
Net loss as adjusted ......... $ (2,772) $ (1,273) $ (3,859) $(11,070)
</TABLE>
As disclosed in Note 2, the Company changed its method of accounting
for preopening expenses in 1997 and has reported the initial applications as a
cumulative effect of a change in accounting principle. Accordingly, the
Company's net loss and net loss per common share for all quarters in 1997 in the
above table has been restated to reflect this change.
During the fourth quarter of fiscal year 1997 and 1998, the Company
recorded a reserve for inventory losses of approximately $1.8 million and $3.8
million, respectively (see Note 5).
NOTE 16 -- EVENTS SUBSEQUENT TO THE REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS (UNAUDITED):
In April 1999, the Company entered into a Securities Purchase Agreement
whereby it issued an aggregate of $2 million worth of the Company's Series A
Convertible Notes (the "Notes"), which are convertible into common stock. The
Notes contain a beneficial conversion feature of approximately $385,000 which
will be taken by the Company as a non-cash interest charge to income in the
first quarter of fiscal year 1999. The agreement requires the Company to file a
registration statement with the Securities and Exchange Commission within
forty-five days after the date of issuance of the convertible notes.
In April 1999, perfumania.com, inc., a wholly-owned subsidiary of the
Company, announced that it intends to make an initial public offering of its
common stock. perfumania.com, inc. plans to raise approximately $25 - $32
million representing approximately 53% of the common stock to be outstanding
following the offering.
F-22
<PAGE> 63
perfumania.com, inc. is offering 3,500,000 shares of its common stock, which
includes 1,000,000 shares held by the Company. A registration statement for the
offering was filed on June 4, 1999, and the offering should be completed as
soon as practicable after the registration statement becomes effective. The net
proceeds of the offering will be used for working capital and other general
corporate purposes and also repayment of any outstanding indebtedness to the
Company as well as reduction of the outstanding balance in the Company's bank
line of credit.
On July 14, 1999, the Company obtained a waiver of default from the
bank though September 30, 1999 as of and for the year ended January 30, 1999.
Future outstanding borrowings will bear interest at the prime rate plus four
percent. The bank agreed to less restrictive covenants provided that certain
events commence prior to September 30, 1999. One such event includes that
perfumania.com, inc. (a wholly-owned subsidiary) is to receive at least $10
million from a contemplated initial public offering of its shares, of which at
least $2 million is to be repaid to the Company.
In July 1999, the Company agreed with the committee of unsecured
creditors to settle all claims held by Luria's against us for the sum of $1.2
million, payable over the next nine months according to a repayment schedule.
This settlement is subject to the approval of the Bankruptcy Court. The full
amount of the settlement was accrued for in the Company's financial statements
as of January 31, 1998, January 30, 1999 and May 1, 1999.
In July 1999, the Company entered into a Securities Purchase Agreement
and issued an aggregate of $2 million worth of our Series B Convertible Notes,
which are convertible into common stock. The Notes contain a beneficial
conversion feature of approximately $637,500 which will be taken by the Company
as a non-cash interest charge to income in the second quarter of fiscal year
1999. The agreement requires the Company to file a registration statement with
the Securities and Exchange Commission within forty-five days after the date of
issuance of the convertible notes. The Conversion Price is the lower of (A)
$3.40625 per share, subject to adjustment and (B) the floating conversion price
determined by multiplying (1) the average closing bid price of the common stock
for the three trading days immediately preceding the date of determination, by
(2) 80%, subject to adjustment. The conversion price may be adjusted pursuant to
antidilution provisions in the convertible note.
In July 1999, the Company's Board of Directors approved the transfer of
1,512,406 shares of the Company's treasury stock to a company affiliated through
common ownership in consideration for a partial reduction of the Company's
outstanding trade receivable balance of approximately $4.5 million. The transfer
price was based on a per share price of $2.98, which approximates 90% of the
closing price on the Company's common stock for the previous 20 business days.
In connection with the transfer of the shares, the parties are currently
negotiating a registration rights agreement whereby the affiliate would be able
to demand registration of the shares with the Securities and Exchange Commission
at any time after February 29, 2000.
F-23
<PAGE> 64
SCHEDULE S-1
PERFUMANIA, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
ADDITIONS
---------
BALANCE AT
BEGINNING OF CHARGED TO COSTS CHARGED TO BALANCE AT
DESCRIPTION PERIOD AND EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF PERIOD
----------- ------ ------------ -------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
For the year ended
February 1, 1997:
Accounts receivable $ 472,804 $ 500,000 $ -- $ (724,418)(1) $ 248,386
Inventory 750,000 190,000 -- -- 940,000
For the year ended
January 31, 1998:
Accounts receivable 248,386 1,730,000 -- (1,273,432)(1) 704,954
Inventory 940,000 1,810,000 -- -- 2,750,000
Self-insurance -- 297,710 187,449(2) (146,937)(3) 338,222
Deferred tax asset
valuation allowance -- 3,405,000 -- -- 3,405,000
For the year ended
January 30, 1999:
Accounts receivable 704,954 -- -- -- 704,954
Inventory 2,750,000 3,764,665 -- (2,351,414)(4) 4,163,251
Self-insurance 338,222 1,295,410 541,484(2) (1,654,491)(3) 520,625
Deferred tax asset
valuation allowance 3,405,000 9,335,142 -- -- 12,740,142
For the thirteen weeks
ended May 1, 1999:
Accounts Receivable 704,954 15,000 -- -- 719,954
Inventory 4,163,251 -- -- (440,327)(4) 3,722,924
Self-insurance 520,625 172,402 178,528(2) (358,890)(3) 512,665
Deferred tax asset
valuation allowance 12,740,142 -- -- -- 12,740,142
</TABLE>
(1) Represents amounts written off against accounts receivable.
(2) Represents employee contributions.
(3) Represents benefit/premium payments.
(4) Represents amounts written off against inventory.
<PAGE> 65
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the offering are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee................................................ $2,730
Legal Fees and Expenses............................................................................ 45,000
Accounting Fees and Expenses....................................................................... 40,000
Printing and Engraving Expenses.................................................................... 10,000
Fees and Expenses (including Legal Fees) for qualifications under State Securities Laws............ 0
Registrar and Transfer Agents Fees and Expenses.................................................... 3,500
Miscellaneous...................................................................................... 49,707
-------
Total.......................................................................................... 150,937
=======
</TABLE>
All amounts except the Securities and Exchange Commission registration
fee are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant has authority under Section 607.0850 of the Florida
Business Corporation Act to indemnify its directors and officers to the extent
provided in such statute. The Registrant's Articles of Incorporation provide
that the Registrant may indemnify its executive officers and directors to the
fullest extent permitted by law whether now or hereafter. The Registrant has
entered or will enter into an agreement with each of its directors and certain
of its officers wherein it has agreed to indemnify each of them to the fullest
extent permitted by law.
The provisions of the Florida Business Corporation Act that authorize
indemnification do not eliminate the duty of care of a director, and in
appropriate circumstances equitable remedies such as injunctive or other forms
of nonmonetary relief will remain available under Florida law. In addition, each
director will continue to be subject to liability for (a) violations of the
criminal law, unless the director had reasonable cause to believe his conduct
was lawful or had no reasonable cause to believe his conduct was unlawful; (b)
deriving an improper personal benefit from a transaction; (c) voting for or
assenting to an unlawful distribution; and (d) willful misconduct or a conscious
disregard for the best interests of the Registrant in a proceeding by or in the
right of the Registrant to procure a judgment in its favor or in a proceeding by
or in the right of a shareholder. The statute does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In July 1999, we entered into a Securities Purchase Agreement and
issued an aggregate of $2 million worth of our Series B Convertible Notes, which
are convertible into common stock. The Notes contain a beneficial conversion
feature of approximately $637,500 which will be taken by us as a non-cash
interest charge to income in the second quarter of fiscal year 1999. The
agreement requires us to file a registration statement with the Securities and
Exchange Commission within forty-five days after the date of issuance of the
convertible notes. The Conversion Price is the lower of (A) $3.40625 per share,
subject to adjustment and (B) the floating conversion price determined by
multiplying (1) the average closing bid price of the common stock for the three
trading days immediately preceding the date of determination, by (2) 80%,
subject to adjustment. The conversion price may be adjusted pursuant to
antidilution provisions in the convertible note. If the conversion price
decreases, we are obligated to issue additional shares of common stock.
In April 1999, we entered into a Securities Purchase Agreement and
issued an aggregate of $2 million worth of our Series A Convertible Notes, which
are convertible into common stock. The agreement requires us to file a
registration statement with the Securities and Exchange Commission within
forty-five days after the date of issuance of the convertible notes. The
conversion price is the lower of (A) $4.35 per share, subject to adjustment and
(B) the floating conversion price determined by multiplying (1) the average
closing bid price of the common stock for the three trading days immediately
preceding the date of determination, by (2) 80%, subject to adjustment. The
conversion price may be adjusted pursuant to antidilution provisions in the
convertible note.
II-1
<PAGE> 66
In March 1999, Perfumania entered into subscription agreements for the
sale of 235,293 shares of Perfumania's common stock to a group of private
investors at an agreed upon price of $8.50 per share. The proceeds of $2 million
were received in January 1999. The subscription agreements require that we file
the appropriate registration statements with the Securities and Exchange
Commission within six months from the date of the subscription agreements to
permit the registered resale of the shares by the investors in open market
transactions. If on the effective date of the registration statement, the market
price is less than $8.50 per share, we are obligated to reimburse the investor
group the lesser of 1) the product of the difference between $8.50 and the
closing bid price of our common stock on the effective date of the registration
statement multiplied by the number of shares issued under the subscription
agreements or 2) the product of $2.00 multiplied by the number of shares issued
under the subscription agreements. As of January 31, 1999, the potential
redeemable amount of $470,588 was recorded as redeemable common equity and the
remaining $1,529,412 was recorded as capital in excess of par value in the
accompanying balance sheets.
On March 21, 1996, we sold 180,000 shares of common stock for
approximately $956,000 in a private placement.
On March 25, 1996, we issued $3,000,000 of 5% Convertible Debentures
(the "Debentures") in a Regulation S offering to non-U.S. persons. The
debentures were convertible at any time after May 21, 1996 into shares of our
common stock, at a conversion price for each share of common stock equal to
eighty-five percent of the market price of the common stock on the date of
conversion, not to exceed $8.50 per share of common stock. The debentures were
converted to approximately 918,000 shares of our common stock in the second
quarter of fiscal 1996. See Note 11 of the consolidated financial statements.
The foregoing securities were all issued without registration under the
Securities Act of 1933, as amended, by reason of the exemption from registration
afforded by the provisions of Section 4(2) thereof, as transactions by an issuer
not involving public offering, each recipient of such securities having
consented to the imposition of restrictive legends upon the certificates
evidencing such securities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Bylaws (2)
4.1 Warrant Agreement between the Company and Josephthal, Lyon & Ross Incorporated (3)
5.1 Opinion of Greenberg Traurig, P.A. (9)
10.3 Amendments to the Loan and Security Agreements between the Company and LaSalle (4)
National Bank dated July 29, 1994, and September 30, 1994
10.4 Amendments to the Loan and Security Agreements between the Company and LaSalle (5)
National Bank dated March 29, 1996
10.5 1991 Stock Option Plan, as amended (5)
10.6 1992 Directors Stock Option Plan, as amended (5)
10.7 Regulation S 5% Convertible Debentures Agreement (5)
10.8 Regulation S Stock Subscription Agreement (5)
10.9 Amendments to the Loan and Security Agreements between LaSalle National Bank dated
April 16, 1997 (6)
</TABLE>
II-2
<PAGE> 67
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.10 Executive Employment Agreements and Separation Agreements (7)
(a) Employment Agreement, dated as of June 21, 1996, between the Company and
Claire Fair
(b) Employment Agreement, dated as of August 11, 1997, between the Company and
Marc Finer
(c) Employment Agreement, dated as of February 1, 1999, between the Company and
Jerome Falic
(d) Employment Agreement, dated as of February 1, 1999, between the Company and
Ilia Lekach
(e) Separation Agreement, dated December 1, 1998, between the Company and Ron
Friedman
(f) Separation Agreement, dated January 29, 1999, between the Company and Simon
Falic
10.11 Form of Subscription Agreement, dated March 22, 1999, between the Company and the
investors set forth therein (8)
10.12 Securities Purchase Agreement, dated April 28, 1999, between the Company and the
investors set forth therein (8)
10.13 Securities Purchase Agreement, dated July 8, 1999, between the Company and the
investors set forth therein (9)
21.1 Subsidiaries of the Registrant (5)
23.1 Consent of PricewaterhouseCoopers LLP (9)
24.0 Reference is made to the Signatures section of this Registration Statement for the
Power of Attorney contained therein. (8)
27.1 Financial Data Schedule for the fiscal year ended January 30, 1999 (8)
27.2 Financial Data Schedule for the fiscal year ended January 31, 1998 (8)
27.3 Financial Data Schedule for the fiscal year ended February 1, 1997 (8)
- ----------
</TABLE>
(1) Incorporated by reference to the exhibit of the same description filed
with the Company's 1993 Form 10-K (filed April 28, 1994).
(2) Incorporated by reference to the exhibit of the same description filed
with the Company's Registration Statement on Form S-1 (No. 33-46833).
(3) Incorporated by reference to the exhibit of the same description filed
with the Company's Registration Statement on Form S-1 (No. 33-43556).
(4) Incorporated by reference to the exhibit of the same description filed
with the Company's 1994 Form 10-K (filed April 20, 1995).
(5) Incorporated by reference to the exhibit of the same description filed
with the Company's 1995 Form 10-K (filed April 26, 1996).
(6) Incorporated by reference to the exhibit of the same description filed
with the Company's 1996 Form 10-K (filed May 2, 1997).
(7) Incorporated by reference to the exhibit of the same description filed
with the Company's 1998 Form 10-K/A (filed on May 28, 1999).
(8) Incorporated by reference to the exhibit of the same description filed
with the Company's Registration Statement on Form S-1 (No. 333-80525).
(9) Filed herewith.
II-3
<PAGE> 68
(b) Financial Statement Schedules:
Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement; and
(iii) to include any material information with
respect to the plan of distribution not previously disclosed
in the registration statement or any material change to such
information in the registration statement;
(2) that, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall
be deemed to be the initial bona fide offering thereof, and
(3) to remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the Registration Statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been, settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-4
<PAGE> 69
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Miami, State of Florida on this 31st day of August, 1999.
PERFUMANIA, INC.
By: /s/ Ilia Lekach
--------------------------------------
Ilia Lekach, Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Ilia Lekach
- ------------------------------------ Chairman of the Board and Chief Executive Officer August 31, 1999
Ilia Lekach (Principal Executive Officer)
/s/ Jerome Falic*
- ------------------------------------ President and Vice Chairman of the Board August 31, 1999
Jerome Falic
/s/ Donovan Chin*
- ------------------------------------ Chief Financial Officer and Director (Principal August 31, 1999
Donovan Chin Financial and Accounting Officer)
/s/ Marc Finer*
- ------------------------------------ President of the Retail Division and Director August 31, 1999
Marc Finer
/s/ Robert Pliskin*
- ------------------------------------ Director August 31, 1999
Robert Pliskin
/s/ Carole Ann Taylor*
- ------------------------------------ Director August 31, 1999
Carole Ann Taylor
/s/ Horatio Groisman*
- ------------------------------------ Director August 31, 1999
Horatio Groisman, M.D.
*By: /s/ Ilia Lekach
-------------------------------
Ilia Lekach,
Attorney in fact
</TABLE>
II-5
<PAGE> 1
EXHIBIT 5.1
GREENBERG TRAURIG, P.A.
1221 BRICKELL AVENUE
MIAMI, FL 33131
August 31, 1999
Perfumania, Inc.
11701 N.W. 101st Road
Miami, FL 33178
Re: OFFERING OF SHARES PURSUANT TO REGISTRATION STATEMENT ON FORM S-1
-----------------------------------------------------------------
Gentlemen:
We have acted as counsel to Perfumania, Inc., a Florida corporation
(the "Company"), in connection with the preparation and filing by the Company
with the Securities and Exchange Commission of a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"). The Registration Statement relates to an aggregate of
1,787,544 shares of the Company's common stock, par value $.01 per share, some
of which are issued and outstanding (the "Issued Shares") and some of which will
be issued upon conversion of convertible promissory notes (the "Reserved
Shares").
In so acting, we have examined originals, or copies certified or
otherwise identified to our satisfaction, of (a) the Articles of Incorporation,
as amended, and Bylaws of the Company as currently in effect, (b) the
Registration Statement and exhibits thereto, (c) certain resolutions adopted by
the Board of Directors of the Company, and (d) such other documents, records,
certificates and other instruments of the Company as in our judgment are
necessary or appropriate for purposes of this opinion.
Based on and subject to the foregoing, we are of the opinion that the
Issued Shares have been duly and validly authorized and are validly issued,
fully paid and nonassessable. Further, we are of the opinion that the Reserved
Shares have been duly and validly authorized and when issued upon conversion of
the convertible promissory notes, will be validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement, and further consent to the use of our name wherever
appearing in the Registration Statement. In giving such consent, we do not
hereby admit that we come within the category of persons whose consent is
required under the Securities Act, or the rules or regulations of the Securities
and Exchange Commission promulgated thereunder.
Very truly yours,
/s/ GREENBERG TRAURIG, P.A.
GREENBERG TRAURIG, P.A.
<PAGE> 1
Exhibit 10.13
SECURITIES PURCHASE AGREEMENT
This SECURITIES PURCHASE AGREEMENT (the "AGREEMENT"), dated as of July
8, 1999, is entered into by and among Perfumania Inc., a Florida corporation,
with headquarters located at 11701 N.W. 101st Road, Miami, Florida 33178 (the
"COMPANY"), and the investors listed on Schedule 1 attached hereto
(individually, a "BUYER" and collectively, the "BUYERS").
WHEREAS:
A. The Company and the Buyers are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by Rule 506 of Regulation D ("REGULATION D") as promulgated by the United
States Securities and Exchange Commission (the "SEC") under the Securities Act
of 1933, as amended (the "1933 ACT");
B. The Company has authorized the following new series of convertible
notes: the Company's Series B Convertible Notes (the "CONVERTIBLE NOTES"),
which shall be convertible into shares of the Company's Common Stock, par value
$.01 per share (the "COMMON STOCK") (as converted, the "CONVERSION SHARES"), in
accordance with the terms of the Company's Series B Convertible Notes,
substantially in the form attached hereto as Exhibit A;
C. The Buyers wish to purchase, upon the terms and conditions stated
in this Agreement, an aggregate of $2,000,000 worth of Convertible Notes in the
respective amounts set forth opposite each Buyer's name on Schedule 1; and
D. Contemporaneously with the execution and delivery of this
Agreement, the parties hereto are executing and delivering a Registration
Rights Agreement substantially in the form attached hereto as Exhibit B (the
"REGISTRATION RIGHTS AGREEMENT") pursuant to which the Company has agreed to
provide certain registration rights under the 1933 Act and the rules and
regulations promulgated thereunder, and applicable state securities laws.
NOW THEREFORE, the Company and the Buyers hereby agree as follows:
1. PURCHASE AND SALE OF CONVERTIBLE NOTES.
a. Purchase of Convertible Notes. Subject to the satisfaction
(or waiver) of the conditions set forth in Sections 6 and 7 below, the Company
shall issue and sell (the "OFFERING") to each Buyer and each Buyer severally
agrees to purchase from the Company the amount of Convertible Notes set forth
opposite such Buyer's name on Schedule 1 (the "CLOSING"). The aggregate
purchase price (the "PURCHASE PRICE") of all the Convertible Notes offered and
sold pursuant to the Offering at the Closing shall be $2,000,000.
<PAGE> 2
b. Closing Date. The date and time of the Closing (the
"CLOSING DATE") shall be 10:00 a.m. Central Time, within two (2) business days
following the date hereof, subject to notification of satisfaction (or waiver)
of the conditions to the Closing set forth in Sections 6 and 7 below (or such
later date as is mutually agreed to by the Company and the Buyers). The Closing
shall occur on the Closing Date at the offices of Katten Muchin & Zavis, 525
West Monroe Street, Suite 1600, Chicago, Illinois 60661-3693.
c. Form of Payment. On the Closing Date, (i) each Buyer shall
pay the Purchase Price to the Company for the Convertible Notes to be issued
and sold to such Buyer at the Closing, by wire transfer of immediately
available funds in accordance with the Company's written wire instructions, and
(ii) the Company shall deliver to each Buyer, the Convertible Notes (in the
denominations as such Buyer shall request) which such Buyer is then purchasing
(as indicated opposite such Buyer's name on Schedule 1) hereunder, duly
executed on behalf of the Company and registered in the name of such Buyer or
its designee.
2. BUYER'S REPRESENTATIONS AND WARRANTIES.
Each Buyer represents and warrants with respect to only
itself that:
a. Investment Purpose. Such Buyer is acquiring the
Convertible Notes (the Convertible Notes may also be referred to herein as the
"SECURITIES"), for its own account for investment only and not with a view
towards, or for resale in connection with, the public sale or distribution
thereof, except pursuant to sales registered or exempt from registration under
the 1933 Act; provided, however, that by making the representations herein,
such Buyer does not agree to hold any of the Securities for any minimum or
other specific term and reserves the right to dispose of the Securities at any
time in accordance with or pursuant to a registration statement or an exemption
from registration under the 1933 Act.
b. Accredited Investor Status. Such Buyer is an "accredited
investor" as that term is defined in Rule 501(a)(3) of Regulation D.
c. Reliance on Exemptions. Such Buyer understands that the
Securities are being offered and sold to it in reliance on specific exemptions
from the registration requirements of United States federal and state
securities laws and that the Company is relying in part upon the truth and
accuracy of, and such Buyer's compliance with, the representations, warranties,
agreements, acknowledgments and understandings of such Buyer set forth herein
in order to determine the availability of such exemptions and the eligibility
of such Buyer to acquire such Securities.
d. Information. Such Buyer and its advisors, if any, have
been furnished with all materials relating to the business, finances and
operations of the Company and materials relating to the offer and sale of the
Securities which have been requested by such Buyer. Such Buyer and its
advisors, if any, have been afforded the opportunity to ask questions of the
2
<PAGE> 3
Company. Neither such inquiries nor any other due diligence investigations
conducted by such Buyer or its advisors, if any, or its representatives shall
modify, amend or affect such Buyer's right to rely on the Company's
representations and warranties contained in Section 3 below. Such Buyer
understands that its investment in the Securities involves a high degree of
risk. Such Buyer has sought such accounting, legal and tax advice as it has
considered necessary to make an informed investment decision with respect to
its acquisition of the Securities.
e. No Governmental Review. Such Buyer understands that no
United States federal or state agency or any other government or governmental
agency has passed on or made any recommendation or endorsement of the
Securities or the fairness or suitability of the investment in the Securities
nor have such authorities passed upon or endorsed the merits of the offering of
the Securities.
f. Transfer or Resale. Such Buyer understands that except as
provided in the Registration Rights Agreement: (i) the Securities have not been
and are not being registered under the 1933 Act or any state securities laws,
and may not be offered for sale, sold, assigned or transferred unless (A)
subsequently registered thereunder, (B) such Buyer shall have delivered to the
Company an opinion of counsel, in a generally acceptable form, to the effect
that such Securities to be sold, assigned or transferred may be sold, assigned
or transferred pursuant to an exemption from such registration, or (C) such
Buyer provides the Company with reasonable assurance that such Securities can
be sold, assigned or transferred pursuant to Rule 144 promulgated under the
1933 Act, as amended, (or a successor rule thereto) ("RULE 144"); (ii) any sale
of the Securities made in reliance on Rule 144 may be made only in accordance
with the terms of Rule 144 and further, if such Buyer intends to utilize Rule
144 but Rule 144 is not applicable to such resale, any resale of the Securities
under circumstances in which such Buyer (or the person through whom the sale is
made) may be deemed to be an underwriter (as that term is defined in the 1933
Act) may require compliance with some other exemption under the 1933 Act or the
rules and regulations of the SEC thereunder; and (iii) neither the Company nor
any other person is under any obligation to register such Securities under the
1933 Act or any state securities laws or to comply with the terms and
conditions of any exemption thereunder.
g. Legends. Such Buyer understands that the certificates or
other instruments representing the Convertible Notes and, until such time as
the sale of the Conversion Shares has been registered under the 1933 Act as
contemplated by the Registration Rights Agreement, the stock certificates
representing the Conversion Shares, except as set forth below, shall bear a
restrictive legend in substantially the following form (and a stop-transfer
order may be placed against transfer of such stock certificates):
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR APPLICABLE
STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR
ASSIGNED (1) IN
3
<PAGE> 4
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
UNDER THE 1933 ACT, AND APPLICABLE STATE SECURITIES LAWS, OR (2) IN
THE ABSENCE OF AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM,
THAT REGISTRATION IS NOT REQUIRED UNDER THE 1933 ACT OR (3) UNLESS
SOLD, TRANSFERRED OR ASSIGNED PURSUANT TO RULE 144 UNDER THE 1933 ACT.
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it
is stamped, if, unless otherwise required by state securities laws, (i) such
Securities are registered for sale under the 1933 Act, (ii) in connection with
a sale transaction, such holder provides the Company with an opinion of
counsel, in a generally acceptable form, to the effect that a public sale,
assignment or transfer of the Securities may be made without registration under
the 1933 Act, or (iii) such holder provides the Company with reasonable
assurances that the Securities can be sold pursuant to Rule 144 without any
restriction as to the number of securities acquired as of a particular date
that can then be immediately sold.
h. Validity; Enforcement. This Agreement has been duly and
validly authorized, executed and delivered on behalf of such Buyer and is a
valid and binding agreement of such Buyer enforceable against such Buyer in
accordance with its terms, subject as to enforceability to general principles
of equity and to applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation and other similar laws relating to, or affecting generally, the
enforcement of applicable creditors' rights and remedies.
i. Residency. Such Buyer is a resident of that state and
country specified in its address on Schedule 1.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each of the Buyers
that:
a. Organization and Qualification. The Company and its
"SUBSIDIARIES" (which for purposes of this Agreement means any entity in which
the Company, directly or indirectly, owns a majority of the capital stock or
holds a majority equity or similar interest) are corporations duly organized
and validly existing in good standing under the laws of the jurisdiction in
which they are incorporated, and have the requisite corporate power and
authorization to own their properties and to carry on their business as now
being conducted. Each of the Company and its Subsidiaries is duly qualified as
a foreign corporation to do business and is in good standing in every
jurisdiction in which its ownership of property or the nature of the business
conducted by it makes such qualification necessary, except to the extent that
the failure to be so qualified or be in good standing would not have a Material
Adverse Effect. As used in this Agreement, "MATERIAL ADVERSE EFFECT" means any
material adverse effect on the business,
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properties, assets, operations, results or operations, or financial condition
of the Company and its Subsidiaries, if any, taken as a whole.
b. Authorization; Enforcement; Validity. (i) The Company has
the requisite corporate power and authority to enter into and perform this
Agreement, the Registration Rights Agreement, the Irrevocable Transfer Agent
Instructions (as defined in Section 5) and each of the other agreements entered
into by the parties hereto in connection with the transactions contemplated by
this Agreement (collectively, the "TRANSACTION DOCUMENTS"), the Convertible
Notes, and to issue the Securities in accordance with the terms hereof and
thereof, (ii) the execution and delivery of the Transaction Documents and the
Convertible Notes by the Company and the consummation by it of the transactions
contemplated hereby and thereby, including without limitation the issuance of
the Convertible Notes and the reservation for issuance and the issuance of the
Conversion Shares issuable upon conversion thereof, have been duly authorized
by the Company's Board of Directors and no further consent or authorization is
required by the Company, its Board of Directors or its stockholders, (iii) the
Transaction Documents have been duly executed and delivered by the Company, and
(iv) the Transaction Documents constitute the valid and binding obligations of
the Company enforceable against the Company in accordance with their terms,
except as such enforceability may be limited by general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally, the enforcement of creditors'
rights and remedies.
c. Issuance of Securities. The Convertible Notes are duly
authorized and, upon issuance in accordance with the terms hereof, shall be (i)
validly issued, fully paid and non-assessable, (ii) free from all taxes, liens
and charges with respect to the issue thereof and (iii) entitled to the rights
and preferences as set forth in the Convertible Notes. 835,000 shares of Common
Stock (subject to adjustment pursuant to the Company's covenant set forth in
Section 4(d) below) have been duly authorized and reserved for issuance upon
conversion of the Convertible Notes. Upon conversion in accordance with the
Convertible Notes, the Conversion Shares will be validly issued, fully paid and
nonassessable and free from all taxes, liens and charges with respect to the
issue thereof, with the holders being entitled to all rights accorded to a
holder of Common Stock. Assuming the accuracy of the representations and
warranties of the Buyers set forth herein, and in reliance thereon, the
issuance by the Company of the Securities is exempt from registration under the
1933 Act.
d. No Conflicts. The execution, delivery and performance of
the Transaction Documents by the Company, the performance by the Company of its
obligations under the Convertible Notes and the consummation by the Company of
the transactions contemplated hereby and thereby (including, without
limitation, the reservation for issuance and issuance of the Conversion Shares)
will not (i) result in a violation of the Company's Articles of Incorporation,
any outstanding series of notes or preferred stock of the Company or the
Company's By-laws or (ii) conflict with, or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or
give to others any rights of termination, amendment, acceleration or
cancellation of, any material agreement, indenture or instrument to which the
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<PAGE> 6
Company or any of its Subsidiaries is a party, or result in a violation of any
law, rule, regulation, order, judgment or decree (including federal and state
securities laws and regulations and the rules and regulations of the Principal
Market (as defined below)) applicable to the Company or any of its Subsidiaries
or by which any property or asset of the Company or any of its Subsidiaries is
bound or affected, except in the case of (ii) above, where such conflict or
default would not have a Material Adverse Effect. Neither the Company nor its
Subsidiaries is in violation of any term of or in default under its Articles of
Incorporation, any outstanding series of notes or preferred stock of the
Company or By-laws or their organizational charter or by-laws, respectively.
Neither the Company nor any of its Subsidiaries is in violation of any term of
or in default under any contract, agreement, mortgage, indebtedness, indenture,
instrument, judgment, decree or order or any statute, rule or regulation
applicable to the Company or its Subsidiaries, except for possible violations
or defaults which would not have a Material Adverse Effect. The business of the
Company and its Subsidiaries is not being conducted, and shall not be
conducted, in violation of any law, ordinance, regulation of any governmental
entity, except for possible violations the sanctions for which either
individually or in the aggregate would not have a Material Adverse Effect.
Except as specifically contemplated by this Agreement and as required under the
1933 Act, the Company is not required to obtain any consent, authorization or
order of, or make any filing or registration with, any court or governmental
agency or any regulatory or self-regulatory agency in order for it to execute,
deliver or perform any of its obligations under or contemplated by the
Transaction Documents or to perform its obligations under the Convertible
Notes, in each case in accordance with the terms hereof or thereof. All
consents, authorizations, orders, filings and registrations which the Company
is required to obtain pursuant to the preceding sentence have been obtained or
effected on or prior to the date hereof. The Company and its Subsidiaries are
unaware of any facts or circumstances which might give rise to any of the
foregoing. The Company is not in violation of the listing requirements of the
Principal Market (as defined below).
e. SEC Documents; Financial Statements. Since [DECEMBER 16,
1998], the Company has filed all reports, schedules, forms, statements and
other documents required to be filed by it with the SEC pursuant to the
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"1934 ACT") (all of the foregoing filed prior to the date hereof and all
exhibits included therein and financial statements and schedules thereto and
documents incorporated by reference therein being hereinafter referred to as
the "SEC DOCUMENTS"). The Company has delivered to the Buyers or their
respective representatives true and complete copies of the SEC Documents. As of
their respective dates, the SEC Documents complied in all material respects
with the requirements of the 1934 Act and the rules and regulations of the SEC
promulgated thereunder applicable to the SEC Documents, and none of the SEC
Documents, at the time they were filed with the SEC, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading. As of their
respective dates, the financial statements of the Company included in the SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto. Such financial statements have been prepared in accordance
with generally accepted accounting principles, consistently applied,
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<PAGE> 7
during the periods involved (except (i) as may be otherwise indicated in such
financial statements or the notes thereto, or (ii) in the case of unaudited
interim statements, to the extent they may exclude footnotes or may be
condensed or summary statements) and fairly present in all material respects
the financial position of the Company as of the dates thereof and the results
of its operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments). No other
information provided by or on behalf of the Company to the Buyers which is not
included in the SEC Documents, including, without limitation, information
referred to in Section 2(d) of this Agreement, contains any untrue statement of
a material fact or omits to state any material fact necessary in order to make
the statements therein, in the light of the circumstance under which they are
or were made, not misleading. Neither the Company nor any of its Subsidiaries
or any of their officers, directors, employees or agents have provided the
Buyers with any material, nonpublic information.
f. Absence of Certain Changes. Since the filing of the most
recent SEC Document, there has been no material adverse change and no material
adverse development in the business, properties, operations, financial
condition, or results of operations of the Company or its Subsidiaries. The
Company has not taken any steps, and does not currently expect to take any
steps, to seek protection pursuant to any bankruptcy law nor does the Company
or any of its Subsidiaries have any knowledge that its creditors intend to
initiate involuntary bankruptcy proceedings.
g. Absence of Litigation. Except as set forth in the SEC
Documents, there is no action, suit, proceeding, inquiry or investigation
before or by any court, public board, government agency, self-regulatory
organization or body pending or, to the knowledge of the Company or any of its
Subsidiaries, threatened against or affecting the Company, the Common Stock or
any of the Company's Subsidiaries or any of the Company's or the Company's
Subsidiaries' officers or directors in their capacities as such, except as to
which an adverse outcome would not have a Material Adverse Effect.
h. Acknowledgment Regarding Buyers' Purchase of Convertible
Notes. The Company acknowledges and agrees that each of the Buyers is acting
solely in the capacity of arm's length purchaser with respect to the
Transaction Documents and the transactions contemplated hereby and thereby. The
Company further acknowledges that each Buyer is not acting as a financial
advisor or fiduciary of the Company (or in any similar capacity) with respect
to the Transaction Documents and the transactions contemplated hereby and
thereby and any advice given by any of the Buyers or any of their respective
representatives or agents in connection with the Transaction Documents and the
transactions contemplated hereby and thereby is merely incidental to such
Buyer's purchase of the Securities. The Company further represents to each
Buyer that the Company's decision to enter into the Transaction Documents has
been based solely on the independent evaluation by the Company and its
representatives.
i. No Undisclosed Events, Liabilities, Developments or
Circumstances. No event, liability, development or circumstance has occurred or
exists, or is contemplated to occur,
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with respect to the Company or its Subsidiaries or their respective business,
properties, prospects, operations or financial condition, that would be
required to be disclosed by the Company under applicable securities laws on a
registration statement filed with the SEC relating to an issuance and sale by
the Company of its Common Stock and which has not been publicly announced.
j. No General Solicitation. Neither the Company, nor any of
its affiliates, nor any person acting on its or their behalf, has engaged in
any form of general solicitation or general advertising (within the meaning of
Regulation D under the 1933 Act) in connection with the offer or sale of the
Securities.
k. No Integrated Offering. Neither the Company, nor any of
its affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of any of
the Securities under the 1933 Act or cause this offering of the Securities to
be integrated with prior offerings by the Company to third parties other than
the Buyers for purposes of the 1933 Act so as to render invalid the exemption
from registration provided under Rule 506 or any applicable stockholder
approval provisions, including, without limitation, under the rules and
regulations of any exchange or automated quotation system on which any of the
securities of the Company are listed or designated, nor will the Company or any
of its Subsidiaries take any action or steps that would require registration of
any of the Securities under the 1933 Act or cause the offering of the
Securities to be integrated with other offerings so as to render invalid the
exemption from registration provided under Rule 506.
l. Dilutive Effect. The Company understands and acknowledges
that the number of Conversion Shares issuable upon conversion of the
Convertible Notes will increase in certain circumstances. The Company further
acknowledges that its obligation to issue Conversion Shares upon conversion of
the Convertible Notes in accordance with this Agreement and the Convertible
Notes is absolute and unconditional regardless of the dilutive effect that such
issuance may have on the ownership interests of other stockholders of the
Company.
m. Employee Relations. Neither the Company nor any of its
Subsidiaries is involved in any union labor dispute nor, to the knowledge of
the Company or any of its Subsidiaries, is any such dispute threatened. None of
the Company's or its Subsidiaries' employees is a member of a union, neither
the Company nor any of its Subsidiaries is a party to a collective bargaining
agreement, and the Company and its Subsidiaries believe that their relations
with their employees are good.
n. Intellectual Property Rights. The Company and its
Subsidiaries own or possess adequate rights or licenses to use all trademarks,
trade names, service marks, service mark registrations, service names, patents,
patent rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and rights necessary to conduct their respective
businesses as now conducted. The Company and its Subsidiaries do not have any
knowledge of any infringement by the Company or its Subsidiaries of trademark,
trade name
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rights, patents, patent rights, copyrights, inventions, licenses, service
names, service marks, service mark registrations, trade secret or other similar
rights of others, and there is no claim, action or proceeding which has been
brought against, or to the Company's knowledge, being threatened against, the
Company or its Subsidiaries regarding trademark, trade name, patents, patent
rights, invention, copyright, license, service names, service marks, service
mark registrations, trade secret or other infringement. To the extent deemed
necessary by the Company, the Company and its Subsidiaries have taken
reasonable security measures to protect the secrecy, confidentiality and value
of all of their intellectual properties.
o. Environmental Laws. The Company and its Subsidiaries (i)
are in compliance with any and all applicable foreign, federal, state and local
laws and regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses
or other approvals required of them under applicable Environmental Laws to
conduct their respective businesses and (iii) are in compliance with all terms
and conditions of any such permit, license or approval, except, in the case of
any of the foregoing where non-compliance or non-receipt would not have a
Material Adverse Effect.
p. Title. The Company and its Subsidiaries have good and
marketable title in fee simple to all real property and good and marketable
title to all personal property owned by them which is material to the business
of the Company and its Subsidiaries, in each case free and clear of all liens,
encumbrances and defects, except for such liens, encumbrances and defects which
do not materially affect the value of such property and do not interfere with
the use made of such property by the Company and any of its Subsidiaries. Any
real property and facilities held under lease by the Company and any of its
Subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made
of such property and buildings by the Company and its Subsidiaries.
q. Regulatory Permits. The Company and its Subsidiaries
possess all certificates, authorizations and permits issued by the appropriate
federal, state or foreign regulatory authorities necessary to conduct their
respective businesses, except where such nonpossession would not have a
Material Adverse Effect, and neither the Company nor any such Subsidiary has
received any notice of proceedings relating to the revocation or modification
of any such certificate, authorization or permit.
r. [RESERVED]
s. Tax Status. The Company and each of its Subsidiaries has
made or filed all federal and state income and all other tax returns, reports
and declarations required by any jurisdiction to which it is subject (unless
and only to the extent that the Company and each of its Subsidiaries has set
aside on its books provisions reasonably adequate for the payment of all unpaid
and unreported taxes) and has paid all taxes and other governmental assessments
and charges that are material in amount, shown or determined to be due on such
returns, reports and declarations, except those being contested in good faith
and has set aside on its books provision
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reasonably adequate for the payment of all taxes for periods subsequent to the
periods to which such returns, reports or declarations apply. There are no
unpaid taxes in any material amount claimed to be due by the taxing authority
of any jurisdiction.
t. Transactions With Affiliates. Except as set forth in the
SEC Documents, none of the officers, directors, or employees of the Company is
presently a party to any material transaction with the Company or any of its
Subsidiaries (other than for services as employees, officers and directors),
including any material contract, agreement or other arrangement providing for
the furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer,
director or such employee or, to the knowledge of the Company, any corporation,
partnership, trust or other entity in which any officer, director, or any such
employee has a substantial interest or is an officer, director, trustee or
partner.
4. COVENANTS.
a. Best Efforts. Each party shall use its best efforts timely
to satisfy each of the conditions to be satisfied by it as provided in Sections
6 and 7 of this Agreement.
b. Form D and Blue Sky. The Company agrees to file a Form D
with respect to the Securities as required under Regulation D and to provide a
copy thereof to each Buyer promptly after such filing. The Company shall, on or
before the Closing Date, take such action as the Company shall reasonably
determine is necessary in order to obtain an exemption for or to qualify the
Securities for sale to the Buyers at the Closing pursuant to this Agreement
under applicable securities or "Blue Sky" laws of the states of the United
States, and shall provide evidence of any such action so taken to the Buyers on
or prior to the Closing Date. The Company shall make all filings and reports
relating the offer and sale of the Securities required under applicable
securities or "Blue Sky" laws of the states of the United States following the
Closing Date.
c. Reporting Status. Until the earlier of (i) the date which
is one year after the date as of which the Investors (as that term is defined
in the Registration Rights Agreement) may sell all of the Conversion Shares
without restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or
successor thereto), or (ii) the date on which (A) the Investors shall have sold
all the Conversion Shares and (B) none of the Convertible Notes is outstanding
(the "REGISTRATION PERIOD"), the Company shall file all reports required to be
filed with the SEC pursuant to the 1934 Act, and the Company shall not
terminate its status as an issuer required to file reports under the 1934 Act
even if the 1934 Act or the rules and regulations thereunder would otherwise
permit such termination.
d. Reservation of Shares. The Company shall take all action
necessary to at all times have authorized, and reserved for the purpose of
issuance, no less than 200% of the
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number of shares of Common Stock needed to provide for the issuance of the
shares of Common Stock upon conversion of all outstanding Convertible Notes;
provided that after the Registration Statement (as defined in the Registration
Rights Agreement) which covers the Conversion Shares for resale, has been
declared effective, this Section 4(d) shall not be violated if the Company
reserves greater than 185% of the number of shares of the Common Stock required
to be issued upon conversion of the outstanding Convertible Notes, provided,
further, however, that the Company utilizes its best efforts to reserve no less
than 200% as soon as possible of the number of shares of Common Stock required
to be issued upon conversion of the outstanding Convertible Notes.
e. Limitation on Beneficial Ownership. The Company shall not
effect any conversion of Convertible Notes and no Buyer of Convertible Notes
shall have the right to convert any Convertible Notes pursuant to Section 2(b)
of such Convertible Note to the extent that after giving effect to such
conversion such Buyer (together with such Buyer's affiliates) (A) would
beneficially own in excess of 4.9% of the outstanding shares of the Company's
Common Stock following such conversion and (B) would have acquired, through
conversion of Convertible Notes or otherwise, in excess of 4.9% of the
outstanding shares of the Company's Common Stock following such conversion
during the 60-day period ending on and including such date of conversion. For
purposes of the foregoing sentence, the number of shares of Common Stock
beneficially owned by a Buyer and its affiliates or acquired by a Buyer and its
affiliates, as the case may be, shall include the number of shares of Common
Stock issuable upon conversion of the Convertible Notes with respect to which
the determination of such sentence is being made, but shall exclude the number
of shares of Common Stock which would be issuable upon (i) conversion of the
remaining, nonconverted Convertible Notes beneficially owned by such Buyer and
its affiliates and (ii) exercise or conversion of the unexercised or
unconverted portion of any other securities of the Company (including, without
limitation, any warrants) subject to a limitation on conversion or exercise
analogous to the limitation contained herein beneficially owned by such Person
and its affiliates. Except as set forth in the preceding sentence, for purposes
of this Section 4(e), beneficial ownership shall be calculated in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as amended.
Notwithstanding anything to the contrary contained herein, each conversion
notice shall constitute a representation by the Buyer submitting such
conversion notice that, after giving effect to such conversion notice, (A) the
holder will not beneficially own (as determined in accordance with this Section
4(e)) and (B) during the 60-day period ending on and including such conversion
date, the holder will not have acquired, through conversion of Convertible
Notes or otherwise, a number of shares of Common Stock in excess of 4.9% of the
outstanding shares of Common Stock as reflected in the Company's most recent
Form 10-Q or Form 10-K, as the case may be, or more recent public press release
or other public notice by the Company setting forth the number of shares of
Common Stock outstanding, but after giving effect to conversions of Convertible
Notes by such holder since the date as of which such number of outstanding
shares of Common Stock was reported.
f. Listing. The Company shall promptly secure the listing of
all of the Registrable Securities (as that term is defined in the Registration
Rights Agreement) upon each
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national securities exchange and automated quotation system, if any, upon which
shares of Common Stock are then listed (subject to official notice of issuance)
and shall maintain, so long as any other shares of Common Stock shall be so
listed, such listing of all Registrable Securities from time to time issuable
under the terms of the Transaction Documents and the Convertible Notes. The
Company shall maintain the Common Stock's authorization for quotation on the
Nasdaq National Market, The New York Stock Exchange, Inc. or The American Stock
Exchange, Inc. (collectively, the "PRINCIPAL MARKET"). Neither the Company nor
any of its Subsidiaries shall take any action which would be reasonably
expected to result in the delisting or suspension of the Common Stock on the
Principal Market. The Company shall promptly, and in no event later than the
following business day, provide to each Buyer copies of any notices it receives
from the Principal Market regarding the continued eligibility of the Common
Stock for listing on such automated quotation system or securities exchange.
The Company shall pay all fees and expenses in connection with satisfying its
obligations under this Section 4(f).
g. Transactions With Affiliates. So long as (i) any
Convertible Notes are outstanding or (ii) any Buyer owns Conversion Shares with
a market value equal to or greater than $500,000, the Company shall not, and
shall cause each of its Subsidiaries not to, enter into, amend, modify or
supplement, or permit any Subsidiary to enter into, amend, modify or
supplement, any agreement, transaction, commitment or arrangement with any of
its or any Subsidiary's officers, directors, person who were officers or
directors at any time during the previous two years, stockholders who
beneficially own 5% or more of the Common Stock, or affiliates or with any
individual related by blood, marriage or adoption to any such individual or
with any entity in which any such entity or individual owns a 5% or more
beneficial interest (each a "RELATED PARTY"), except for (a) customary
employment arrangements and benefit programs on reasonable terms, (b) any
agreement, transaction, commitment or arrangement on an arms-length basis on
terms no less favorable than terms which would have been obtainable from a
person other than such Related Party, or (c) any agreement, transaction,
commitment or arrangement which is approved by a majority of the disinterested
directors of the Company. For purposes hereof, any director who is also an
officer of the Company or any Subsidiary of the Company shall not be a
disinterested director with respect to any such agreement, transaction,
commitment or arrangement. "AFFILIATE" for purposes hereof means, with respect
to any person or entity, another person or entity that, directly or indirectly,
(i) has a 5% or more equity interest in that person or entity, (ii) has 5% or
more common ownership with that person or entity, (iii) controls that person or
entity, or (iv) shares common control with that person or entity. "CONTROL" or
"CONTROLS" for purposes hereof means that a person or entity has the power,
direct or indirect, to conduct or govern the policies of another person or
entity.
h. Limitation on Filing Registration Statements. The Company
shall not file a registration statement (other than the Registration Statement
(as defined in the Registration Rights Agreement) or a registration statement
on Form S-8) covering the sale or resale of shares of Common Stock with the SEC
during the period beginning on the date hereof and ending on the date which is
180 days after the Registration Statement has been declared effective by the
SEC.
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i. Independent Auditors. The Company shall, until at least
three (3) years after the Closing Date, maintain as its independent auditors an
accounting firm authorized to practice before the SEC.
j. Corporate Existence and Taxes. The Company shall, until at
least the later of (i) the date that is three (3) years after the Closing Date
or (ii) the conversion or redemption of all of the Convertible Notes purchased
pursuant to this Agreement, maintain its corporate existence in good standing
(provided, however, that the foregoing covenant shall not prevent the Company
from entering into any merger or corporate reorganization as long as the
surviving entity in such transaction, if not the Company, assumes the Company's
obligations with respect to the Convertible Notes and has Common Stock listed
for trading on the Principal Market) and shall pay all its taxes when due
except for taxes which the Company disputes.
5. TRANSFER AGENT INSTRUCTIONS.
The Company shall issue irrevocable instructions to its
transfer agent, and any subsequent transfer agent, to issue certificates,
registered in the name of each Buyer or its respective nominee(s), for the
Conversion Shares in such amounts as specified from time to time by each Buyer
to the Company upon conversion of the Convertible Notes (the "IRREVOCABLE
TRANSFER AGENT INSTRUCTIONS"). Prior to registration of the Conversion Shares
under the 1933 Act, all such certificates shall bear the restrictive legend
specified in Section 2(g) of this Agreement. The Company warrants that no
instruction other than the Irrevocable Transfer Agent Instructions referred to
in this Section 5, and stop transfer instructions to give effect to Section
2(f) hereof (in the case of the Conversion Shares, prior to registration of the
Conversion Shares under the 1933 Act) will be given by the Company to its
transfer agent and that the Securities shall otherwise be freely transferable
on the books and records of the Company as and to the extent provided in this
Agreement and the Registration Rights Agreement. Nothing in this Section 5
shall affect in any way each Buyer's obligations and agreements set forth in
Section 2(g) to comply with all applicable prospectus delivery requirements, if
any, upon resale of the Securities. If a Buyer provides the Company with an
opinion of counsel, in a generally acceptable form, to the effect that a public
sale, assignment or transfer of the Securities may be made without registration
under the 1933 Act or the Buyer provides the Company with reasonable assurances
that the Securities can be sold pursuant to Rule 144 without any restriction as
to the number of securities acquired as of a particular date that can then be
immediately sold, the Company shall permit the transfer, and, in the case of
the Conversion Shares, promptly instruct its transfer agent to issue one or
more certificates in such name and in such denominations as specified by such
Buyer and without any restrictive legend. In the event that the Company
appoints a different transfer agent (other than the Company's transfer agent in
service as of the Closing) to serve as the Company's transfer agent, the
Company shall immediately, but in no event later than five (5) days from such
appointment issue irrevocable instructions to such transfer agent in
substantially the same form as the Irrevocable Transfer Agent Instructions
issued to the Company's transfer agent in service as of the Closing. The
Company acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to the Buyers by vitiating the intent and purpose
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of the transaction contemplated hereby. Accordingly, the Company acknowledges
that the remedy at law for a breach of its obligations under this Section 5
will be inadequate and agrees, in the event of a breach or threatened breach by
the Company of the provisions of this Section 5, that the Buyers shall be
entitled, in addition to all other available remedies, to seek an order and/or
injunction restraining any breach and requiring immediate issuance and
transfer, without the necessity of showing economic loss and without any bond
or other security being required.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The obligation of the Company hereunder to issue and sell the
Convertible Notes to each Buyer at the Closing is subject to the satisfaction,
at or before the Closing Date, of each of the following conditions, provided
that these conditions are for the Company's sole benefit and may be waived by
the Company at any time in its sole discretion by providing each Buyer with
prior written notice thereof:
a. Such Buyer shall have executed each of the Transaction
Documents to which it is a party and delivered the same to Katten Muchin &
Zavis, care of Anthony J. Ribaudo, Esq., as escrow agent (the "ESCROW AGENT")
for the transactions contemplated by this Agreement.
b. The representations and warranties of such Buyer shall be
true and correct in all material respects as of the date when made and as of
the Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date), and such Buyer shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by such Buyer at or prior to the Closing Date.
7. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE.
The obligation of each Buyer hereunder to purchase the
Convertible Notes at the Closing is subject to the satisfaction, at or before
the Closing Date, of each of the following conditions, provided that these
conditions are for each Buyer's sole benefit and may be waived by such Buyer at
any time in its sole discretion by providing the Company with prior written
notice thereof:
a. The Company shall have executed each of the Transaction
Documents and delivered the same to the Escrow Agent.
b. The Company's common stock shall be authorized for
quotation on the Principal Market and trading in Company common stock shall not
have been suspended by the SEC or the Principal Market.
c. The representations and warranties of the Company shall be
true and correct as of the date when made and as of the Closing Date as though
made at that time (except for
14
<PAGE> 15
representations and warranties that speak as of a specific date) and the
Company shall have performed, satisfied and complied with the covenants,
agreements and conditions required by the Transaction Documents to be
performed, satisfied or complied with by the Company at or prior to the Closing
Date. The Company shall have delivered to the Escrow Agent a certificate,
executed by the Chief Executive Officer of the Company, dated as of the Closing
Date, to the foregoing effect.
d. The Company shall have delivered to the Escrow Agent the
opinion of the Company's counsel dated as of the Closing Date, in form, scope
and substance reasonably satisfactory to such Buyer and in substantially the
form of Exhibit C attached hereto.
e. The Company shall have executed and delivered to the
Escrow Agent the Convertible Notes (in such denominations as such Buyer shall
request) being purchased by such Buyer at the Closing.
f. The Board of Directors of the Company shall have adopted
resolutions consistent with Section 3(b)(ii) above and in a form reasonably
acceptable to such Buyer.
g. As of the Closing Date, the Company shall have reserved
out of its authorized and unissued Common Stock, solely for the purpose of
effecting the conversion of the Convertible Notes, no less than 200% of the
number of shares of Common Stock needed to provide for the issuance of the
shares of Common Stock upon conversion of all outstanding Convertible Notes.
h. The Irrevocable Transfer Agent Instructions, substantially
in the form of Exhibit D attached hereto, shall have been delivered to and
acknowledged in writing by the Company's transfer agent and a copy of the
executed Irrevocable Transfer Agent Instructions shall have been delivered to
the Escrow Agent.
i. The Company shall have delivered to the Escrow Agent a
certified copy of the Articles of Incorporation as certified by the Secretary
of State of the State of Florida within ten (10) days of the Closing Date.
j. The Company shall have delivered to the Escrow Agent a
secretary's certificate, dated as the Closing Date, as to (i) the resolutions
described in Section 7(f), (ii) the Certificate of Incorporation and (iii) the
Bylaws, each as in effect at the Closing.
k. The Company shall have made all filings under all
applicable federal and state securities laws necessary to consummate the
issuance of the Securities pursuant to this Agreement in compliance with such
laws.
15
<PAGE> 16
l. The Company shall have delivered to the Escrow Agent such
other documents relating to the transactions contemplated by this Agreement as
the Escrow Agent or its counsel may reasonably request.
m. Expenses. Subject to Section 9(k) below, at the Closing,
the Company shall reimburse the Buyers for one-half (1/2) of the Buyers'
expenses (including attorneys' fees and expenses) in due diligence and
negotiating and preparing the Transaction Documents and consummating the
transactions contemplated thereby up to an aggregate of $8,000.
8. INDEMNIFICATION.
a. Indemnification by Company. In consideration of each
Buyer's execution and delivery of the Transaction Documents and acquiring the
Securities thereunder and in addition to all of the Company's other obligations
under the Transaction Documents and the Convertible Notes, the Company shall
defend, protect, indemnify and hold harmless each Buyer and each other holder
of the Securities and all of their stockholders, partners, officers, directors,
employees and direct or indirect investors and any of the foregoing person's
agents or other representatives (including, without limitation, those retained
in connection with the transactions contemplated by this Agreement)
(collectively, the "INDEMNITEES") from and against any and all actions, causes
of action, suits, claims, losses, costs, penalties, fees, liabilities and
damages, and expenses in connection therewith (irrespective of whether any such
Indemnitee is a party to the action for which indemnification hereunder is
sought), and including reasonable attorneys' fees and disbursements (the
"INDEMNIFIED LIABILITIES"), incurred by any Indemnitee as a result of, or
arising out of, or relating to (a) any material misrepresentation or breach of
any representation or warranty made by the Company in the Transaction Documents
or any other certificate, instrument or document contemplated hereby or
thereby, or (b) any material breach of any covenant, agreement or obligation of
the Company contained in the Transaction Documents or the Convertible Notes or
any other certificate, instrument or document contemplated hereby or thereby.
To the extent that the foregoing undertaking by the Company may be
unenforceable for any reason, the Company shall make the maximum contribution
to the payment and satisfaction of each of the Indemnified Liabilities which is
permissible under applicable law.
b. Indemnification by Buyer. In consideration of the
Company's execution and delivery of the Transaction Documents and the Company's
performance of the transactions contemplated thereunder, each Buyer shall
severally but not jointly defend, protect, indemnify and hold harmless the
Company, its officers and directors (collectively, the "COMPANY INDEMNITEES")
from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, liabilities and damages, and expenses in connection
therewith and including reasonable attorneys' fees and disbursements (the
"COMPANY INDEMNIFIED LIABILITIES"), incurred by any Company Indemnitee as a
result of, or arising out of, or relating to (a) any material representation or
breach of any representation or warranty made by such Buyer in the Transaction
Documents or any other certificate, instrument or document contemplated hereby
or thereby, or (b) any material breach
16
<PAGE> 17
of any covenant, agreement or obligation of such Buyer contained in the
Transaction Documents or any other certificate, instrument or document
contemplated hereby or thereby; provided, however, that any Buyer shall not be
jointly liable for the indemnification obligations of any other Buyer or
investor and the Buyer subject to an indemnification obligation shall be liable
under this Section 8(b) for only that amount of Company Indemnified Liabilities
as does not exceed the net proceeds to such Buyer as a result of the sale of
Securities and Conversion Shares held by such Buyer. To the extent that the
foregoing undertaking by a Buyer may be unenforceable for any reason, such
Buyer shall make the maximum contribution to the payment and satisfaction of
each of the Company Indemnified Liabilities which is permissible under
applicable law; provided, however, that any Buyer shall not be jointly liable
for the indemnification obligations of any other Buyer or investor and the
Buyer subject to an indemnification obligation shall be liable under this
Section 8(b) for only that amount of Company Indemnified Liabilities as does
not exceed the net proceeds to such Buyer as a result of the sale of Securities
and Conversion Shares held by such Buyer.
9. GOVERNING LAW; MISCELLANEOUS.
a. Governing Law; Jurisdiction; Jury Trial. The corporate
laws of the State of Florida shall govern all issues concerning the relative
rights of the Company and its stockholders. All other questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall
be governed by the internal laws of the State of Florida, without giving effect
to any choice of law or conflict of law provision or rule (whether of the State
of Florida or any other jurisdictions) that would cause the application of the
laws of any jurisdictions other than the State of Florida. Each party hereby
irrevocably submits to the non-exclusive jurisdiction of the state and federal
courts sitting in the City of Miami, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein, and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, that such suit, action or proceeding is
brought in an inconvenient forum or that the venue of such suit, action or
proceeding is improper. Each party hereby irrevocably waives personal service
of process and consents to process being served in any such suit, action or
proceeding by mailing a copy thereof to such party at the address for such
notices to it under this Agreement and agrees that such service shall
constitute good and sufficient service of process and notice thereof. Nothing
contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT
IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF
ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS
AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.
b. Counterparts. This Agreement may be executed in two or
more identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party;
17
<PAGE> 18
provided that a facsimile signature shall be considered due execution and shall
be binding upon the signatory thereto with the same force and effect as if the
signature were an original, not a facsimile signature.
c. Headings. The headings of this Agreement are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.
d. Severability. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
e. Entire Agreement; Amendments. This Agreement supersedes
all other prior oral or written agreements between the Buyers, the Company,
their affiliates and persons acting on their behalf with respect to the matters
discussed herein, and this Agreement and the instruments referenced herein
contain the entire understanding of the parties with respect to the matters
covered herein and therein and, except as specifically set forth herein or
therein, neither the Company nor any Buyer makes any representation, warranty,
covenant or undertaking with respect to such matters. No provision of this
Agreement may be amended other than by an instrument in writing signed by the
Company and the holders of at least two-thirds (2/3) of the Convertible Notes
(determined by reference to principal amount) then outstanding, and no
provision hereof may be waived other than by an instrument in writing signed by
the party against whom enforcement is sought. No such amendment shall be
effective to the extent that it applies to less than all of the holders of the
Convertible Notes then outstanding. No consideration shall be offered or paid
to any person to amend or consent to a waiver or modification of any provision
of any of the Transaction Documents or the Convertible Notes unless the same
consideration also is offered to all of the parties to the Transaction
Documents or holders of Convertible Notes, as the case may be.
f. Notices. Any notices, consents, waivers or other
communications required or permitted to be given under the terms of this
Agreement must be in writing and will be deemed to have been delivered: (i)
upon receipt, when delivered personally; (ii) upon receipt, when sent by
facsimile (provided confirmation of transmission is mechanically or
electronically generated and kept on file by the sending party); or (iii) one
business day after deposit with a nationally recognized overnight delivery
service, in each case properly addressed to the party to receive the same. The
addresses and facsimile numbers for such communications shall be:
18
<PAGE> 19
If to the Company:
Perfumania, Inc.
11701 N.W. 101st Road
Miami, Florida 33178
Telephone: (305) 889-1600
Facsimile: (305) 888-7825
Attention: Ilia Lekach
With a copy to:
Greenberg Traurig, P.A.
1221 Brickell Avenue
Miami, Florida 33131
Telephone: (305) 579-0809
Facsimile: (305) 579-0717
Attention: Ken Hoffman, Esq.
If to the Transfer Agent:
Continental Stock Transfer and Trust
2 Broadway, 19th Floor
New York, New York 10004
Telephone: (212) 509-4000
Facsimile: (212) 509-5150
Attention: Steve Nelson
If to a Buyer, to it at the address and facsimile number set forth on Schedule
1 with copies to such Buyer's representatives as set forth on Schedule 1, or at
such other address and/or facsimile number and/or to the attention of such
other person as the recipient party has specified by written notice given to
each other party five days prior to the effectiveness of such change. Written
confirmation of receipt (A) given by the recipient of such notice, consent,
waiver or other communication, (B) mechanically or electronically generated by
the sender's facsimile machine containing the time, date, recipient facsimile
number and an image of the first page of such transmission or (C) provided by a
nationally recognized overnight delivery service shall be rebuttable evidence
of personal service, receipt by facsimile or receipt from a nationally
recognized overnight delivery service in accordance with clause (i), (ii) or
(iii) above, respectively.
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<PAGE> 20
g. Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties and their respective successors
and assigns, including any purchasers of the Convertible Notes. The Company
shall not assign this Agreement or any rights or obligations hereunder without
the prior written consent of the holders of at least two-thirds (2/3) of the
Convertible Notes (determined by reference to principal amount) then
outstanding. A Buyer may assign some or all of its rights hereunder without the
consent of the Company, provided, however, that any such assignment shall not
release such Buyer from its obligations hereunder unless such obligations are
assumed by such assignee and the Company has consented to such assignment and
assumption. Notwithstanding anything to the contrary contained in the
Transaction Documents, the Buyers shall be entitled to pledge the Securities in
connection with a bona fide margin account.
h. No Third Party Beneficiaries. This Agreement is intended
for the benefit of the parties hereto and their respective permitted successors
and assigns, and is not for the benefit of, nor may any provision hereof be
enforced by, any other person.
i. Survival. Unless this Agreement is terminated under
Section 9(k), the agreements and covenants set forth in Sections 4, 5 and 9,
and the indemnification provisions set forth in Section 8, shall survive the
Closing. Each Buyer shall be responsible only for its own agreements and
covenants hereunder.
j. Further Assurances. Each party shall do and perform, or
cause to be done and performed, all such further acts and things, and shall
execute and deliver all such other agreements, certificates, instruments and
documents, as the other party may reasonably request in order to carry out the
intent and accomplish the purposes of this Agreement and the consummation of
the transactions contemplated hereby.
k. Termination. In the event that the Closing shall not have
occurred with respect to a Buyer on or before three (3) business days from the
date hereof due to the Company's or such Buyer's failure to satisfy the
conditions set forth in Sections 6 and 7 above (and the nonbreaching party's
failure to waive such unsatisfied condition(s)), the nonbreaching party shall
have the option to terminate this Agreement with respect to such breaching
party at the close of business on such date without liability of any party to
any other party; provided, however, that if this Agreement is terminated
pursuant to this Section 9(k), the Company shall remain obligated to reimburse
the nonbreaching Buyers for the expenses described in Section 7(m) above.
l. Placement Agent. The Company acknowledges that it has not
engaged a placement agent in connection with the sale of the Convertible Notes.
m. No Strict Construction. The language used in this
Agreement will be deemed to be the language chosen by the parties to express
their mutual intent, and no rules of strict construction will be applied
against any party.
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<PAGE> 21
n. Remedies. Each Buyer and each holder of the Securities
shall have all rights and remedies set forth in the Transaction Documents and
the Convertible Notes and all rights and remedies which such holders have been
granted at any time under any other agreement or contract and all of the rights
which such holders have under any law. Any person having any rights under any
provision of this Agreement shall be entitled to enforce such rights
specifically (without posting a bond or other security), to recover damages by
reason of any breach of any provision of this Agreement and to exercise all
other rights granted by law.
o. Payment Set Aside. To the extent that the Company makes a
payment or payments to the Buyers hereunder or pursuant to the Convertible
Notes or the Buyers enforce or exercise their rights hereunder or thereunder,
and such payment or payments or the proceeds of such enforcement or exercise or
any part thereof are subsequently invalidated, declared to be fraudulent or
preferential, set aside, recovered from, disgorged by or are required to be
refunded, repaid or otherwise restored to the Company, a trustee, receiver or
any other person under any law (including, without limitation, any bankruptcy
law, state or federal law, common law or equitable cause of action), then to
the extent of any such restoration the obligation or part thereof originally
intended to be satisfied shall be revived and continued in full force and
effect as if such payment had not been made or such enforcement or setoff had
not occurred.
[Signature Page Follows]
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<PAGE> 22
IN WITNESS WHEREOF, the Buyers and the Company have caused this
Securities Purchase Agreement to be duly executed as of the date first written
above.
COMPANY: BUYERS:
PERFUMANIA, INC. CRANSHIRE CAPITAL, L.P.
By: By:
--------------------------- ------------------------------
Name: Name:
------------------------- ------------------------------
Title: Title
------------------------ ----------------------------
S. ROBERT PRODUCTIONS, LLC
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
THE DOTCOM FUND, LLC
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
JJP PARTNERSHIP
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
EP OPPORTUNITY FUND, L.L.C.
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
[Signature Page Continues]
<PAGE> 23
EP OPPORTUNITY FUND
INTERNATIONAL, LTD.
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
EP .COM FUND, L.L.C
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
<PAGE> 24
SCHEDULE 1: LIST OF INVESTORS
<TABLE>
<CAPTION>
AMOUNT OF
INVESTOR ADDRESS CONVERTIBLE INVESTOR'S LEGAL REPRESENTATIVES'
INVESTOR'S NAME AND FACSIMILE NUMBER NOTES ADDRESS AND FACSIMILE NUMBER
- -------------------------------- ----------------------------------- ------------ ----------------------------------
<S> <C> <C> <C>
Cranshire Capital, L.P. 666 Dundee Rd., Ste. 1801 $700,000 Katten Muchin & Zavis
Northbrook, IL 60092 525 W. Monroe Street
Attention: Mitchell Kopin Chicago, Illinois 60661-3693
Telephone: (847) 562-9030 Attention: Anthony J. Ribaudo, Esq.
Facsimile: (847) 562-903 Facsimile: (312) 577-8763
Telephone: (312) 902-5521
S. Robert Productions, LLC 666 Dundee Rd., Ste. 1801 $200,000
Northbrook, IL 60092
Attention: Mitchell Kopin
Telephone: (847) 562-9030
Facsimile: (847) 562-9031
The dotCom Fund, LLC 666 Dundee Road $300,000
Northbrook, Illinois 60092
Attention: Mark Rice
Telephone: (847) 509-2290
Facsimile: (847) 509-2295
JJP Partnership 2 North LaSalle Street $100,000
Chicago, Illinois 60602
Attention: Tracy Davis
Telephone: (312) 621-0647
Facsimile: (312) 621-3807
EP Opportunity Fund, L.L.C. 77 W. Wacker Drive $637,000
Chicago, Illinois 60601
Attention: Jeffrey Eisenberg
Telephone: (312) 456-9500
Facsimile: (312) 456-9501
EP Opportunity Fund International, Residency: Cayman Islands $35,000
Ltd. For Notice Purposes Only:
77 W. Wacker Drive
Chicago, Illinois 60601
Attention: Jeffrey Eisenberg
Telephone: (312) 456-9500
Facsimile: (312) 456-9501
EP .com Fund, L.L.C 77 W. Wacker Drive $28,000
Chicago, Illinois 60601
Attention: Jeffrey Eisenberg
Telephone: (312) 456-9500
Facsimile: (312) 456-9501
</TABLE>
<PAGE> 25
EXHIBITS
Exhibit A Form of Convertible Notes
Exhibit B Form of Registration Rights Agreement
Exhibit C Form of Company Counsel Opinion
Exhibit D Form of Irrevocable Transfer Agent Instructions
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
reports dated April 29, 1999, expect for the fourth paragraph of Note 2 and
second paragraph of Note 8 as to which the date is July 14, 1999, relating to
the consolidated financial statements of Perfumania, Inc., which appear in such
Registration Statement. We also consent to the reference to us under the heading
"Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
Miami, Florida
August 31, 1999
