<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 11, 1999
REGISTRATION NO. 333-
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
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 PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE (1) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.01 par value per share(2) $6,447,477 $1,793(1)
====================================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act of 1933.
(2) 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.
---------------
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.
===============================================================================
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.
<PAGE> 2
SUBJECT TO COMPLETION, DATED JUNE 11, 1999
PROSPECTUS
PERFUMANIA, INC.
1,663,865 SHARES
COMMON STOCK
-------------------------
The selling shareholders are offering up to 1,663,865 shares of our
common stock under this prospectus. The selling shareholders either (a)
obtained their shares of common stock pursuant to the terms of Subscription
Agreements dated March 22, 1999 or (b) obtained convertible notes which are
convertible into common stock pursuant to the terms of a Securities Purchase
Agreement dated April 28, 1999.
Our common stock trades on the Nasdaq National Market under the symbol
"PRFM." On June 8, 1999 the closing price of one share of common stock on the
Nasdaq National Market was $3.875.
The selling shareholders may offer the shares through public or
private transactions, on or off the Nasdaq National Market, at prevailing
market prices or at privately negotiated prices. They may make sales directly
to purchasers or to or through agents, dealers or underwriters.
----------------------
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>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
Prospectus Summary................................................................................................1
Risk Factors......................................................................................................3
Forward Looking Statements........................................................................................4
Use of Proceeds...................................................................................................5
Price Range of Common Stock.......................................................................................5
Dividend Policy...................................................................................................5
Capitalization....................................................................................................6
Selected Consolidated Financial Data..............................................................................7
Management's Discussion and Analysis of Financial Condition and Results of Operations.............................9
Business.........................................................................................................16
Management.......................................................................................................23
Certain Relationships and Related Transactions...................................................................28
Principal Shareholders...........................................................................................29
Selling Shareholders.............................................................................................30
Plan of Distribution.............................................................................................31
Description of Capital Stock.....................................................................................32
Legal Matters....................................................................................................32
Experts..........................................................................................................32
Where You Can Find More Information..............................................................................32
Index to Financial Statements...................................................................................F-1
</TABLE>
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
Perfumania, Inc. ("Perfumania" or the "Company") is a leading
specialty retailer and wholesale distributor of a wide range of brand name and
designer fragrances. As of May 31, 1999, we operated a chain of 284 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. 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 Form S-1, they are referred
to as segments.
RECENT DEVELOPMENTS
In February 1999, Perfumania, through its wholly owned subsidiary,
perfumania.com, inc., began operation of an Internet commerce site,
perfumania.com. Perfumania intends to capitalize on its name recognition and
cross marketing opportunities with its 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 $15 - $20 million in the offering. 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 Perfumania and for working capital and other
general corporate purposes.
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.
<PAGE> 5
<TABLE>
THE OFFERING
<S> <C>
Common stock offered by the
selling shareholders.............................. 1,663,865 shares
Common stock to be outstanding
after the offering................................ 8,122,771 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 June 10, 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 were converted into common stock on June 8, 1999.
SUMMARY FINANCIAL INFORMATION
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------------------------------------
JANUARY 28, FEBRUARY 3, FEBRUARY 1, JANUARY 31, JANUARY 30,
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ................................ $ 115,578 $ 129,157 $ 138,920 $ 163,594 $ 175,256
Gross profit ............................. 43,649 52,168 60,150 67,784 68,382
Total operating expenses ................. 40,634 48,214 52,796 74,972 81,782
Income (loss) from operations before other
income (expenses) ..................... 3,015 3,954 7,354 (7,188) (13,400)
Income (loss) before income taxes* ....... 957 1,206 3,722 (11,122) (17,637)
Income (loss) before cumulative effect of
change in accounting principle* ....... 1,325 2,002 2,075 (10,801) (18,974)
Net income (loss)* ....................... 1,325 2,002 2,075 (11,433) (18,974)
Weighted average shares outstanding:
Basic ................................. 6,155,733 6,973,670 7,183,462 7,025,236 6,659,237
Diluted ............................... 6,210,542 7,067,291 7,633,588 7,025,236 6,659,237
</TABLE>
<TABLE>
<CAPTION>
JANUARY 30,
1999
-----------
<S> <C>
BALANCE SHEET DATA:
Working capital deficit.................................................................................... $(3,750)
Total assets............................................................................................... 95,672
Long-term debt, less current portion(1).................................................................... 2,933
Total shareholders' equity................................................................................. 18,178
</TABLE>
- ---------------
(1) Amount does not include long-term severance payables in the amount of
$1,038 for fiscal year 1998.
* 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
You should carefully consider the risks described below before making
an investment decision. The risks and uncertainties described below are not the
only ones facing Perfumania. 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. We have historically
experienced 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. A variety of factors
affect the sales levels of new and existing stores, 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 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 a material change in our ability to obtain necessary merchandise
occurs, our results of operations could be materially adversely affected.
OUR OPERATIONS ARE DEPENDENT ON THE AVAILABILITY OF FUNDS UNDER OUR
LINE OF CREDIT. As discussed above, we experience significant seasonal
fluctuations in our sales and operating results, like many specialty retailers.
We utilize our line of credit to fund inventory purchases and to support new
retail store openings. Any future limitation on our borrowing ability and
access to financing could limit our ability to open new stores and to obtain
merchandise on satisfactory terms. We have violated some of the debt covenants
contained in our bank line of credit agreement. As of June 11, 1999, the bank
had not waived these debt covenant violations, and we cannot assure that a
waiver will be obtained.
WE ARE DEPENDENT ON OUR PRESIDENT AND ON OTHER KEY PERSONNEL. Jerome
Falic, our President, is primarily responsible for our merchandise purchases.
He has developed strong, reliable relationships with suppliers, as well as
customers of our wholesale division in the United States, Europe, Asia and
South America. The loss of his service or any of our other current executive
officers could have a material adverse effect on Perfumania.
WE RECEIVED A QUALIFIED ACCOUNTANTS' REPORT. 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. Such 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. As of June 11, 1999, we are still in violation of these
debt covenants.
WE NEED TO SUCCESSFULLY MANAGE OUR GROWTH. Even though we have grown
significantly in the past several years, we cannot assure you that we will
sustain the growth in the number of retail stores and revenues that we have
achieved historically. Our growth is dependent, in large part, upon our ability
to open and operate new retail stores on a profitable basis, which in turn is
subject to, among other things, our ability to secure suitable store sites on
satisfactory terms, our ability to hire, train and retain qualified management
and other personnel, the availability of adequate capital resources and our
successful integration of new stores into existing operations. We
3
<PAGE> 7
cannot assure that our new stores will achieve sales and profitability
comparable to existing stores, or that the opening of new locations will not
cannibalize sales at existing locations.
THE MERCHANDISING ASPECT OF THE FRAGRANCE BUSINESS HAS LITIGATION
EXPOSURE. 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 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, which could have an
adverse effect on 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 certain
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 cannot guarantee that the estimates will be achieved 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 have a material adverse effect on our
business, financial condition and results of operations. In addition, a
significant portion of purchases from our stores are made with credit cards,
and our operations may be materially adversely affected to the extent our
customers are unable to use their credit cards due to Year 2000 problems that
are not remedied by their credit card vendors.
A COMPLAINT HAS BEEN FILED AGAINST US IN CONNECTION WITH THE
BANKRUPTCY OF A FORMER CUSTOMER. We have been characterized as an insider 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.
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 us. 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. We cannot presently predict the outcome of these matters.
An adverse outcome on these matters could have a materially adverse effect on
our financial position or result of operations.
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.
4
<PAGE> 8
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.
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on the Nasdaq National Market under
the symbol "PRFM" since November 13, 1997. 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 (through June 10, 1999) ........ $4 7/32 $3
</TABLE>
As of June 10, 1999, there were 82 holders of record of the 9,156,184
issued shares of common stock, of which 1,512,406 shares were held in treasury.
The closing sales price for the common stock on June 10, 1999 was $3 17/32.
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.
5
<PAGE> 9
CAPITALIZATION
The following table sets forth the capitalization of Perfumania as of
January 30, 1999, and as adjusted for the issuance and assumed conversion into
common stock on June 8, 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 JANUARY 30, 1999
-------------------------------
ACTUAL PRO FORMA
------------ ------------
<S> <C> <C>
Long-term obligations, net of current maturities(1) ............... $ 3,403,824 $ 3,403,824
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, 8,614,491 shares issued, actual; and
9,564,070 shares issued, as adjusted ......................... 86,145 95,641
Capital in excess of par value ................................. 54,440,009 56,817,482
Treasury stock, at cost, 1,512,406 shares ...................... (5,413,002) (5,413,002)
Accumulated deficit ............................................ (30,935,097) (31,322,066)
------------ ------------
Total shareholders' equity ................................. 18,178,055 20,178,055
------------ ------------
Total capitalization .................................. $ 21,581,879 $ 23,581,879
============ ============
</TABLE>
- ---------------
(1) Item includes long-term portion of notes payable, capital leases and
redeemable common equity.
6
<PAGE> 10
SELECTED CONSOLIDATED FINANCIAL DATA
This section presents selected financial data of Perfumania. 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.
Perfumania's 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 the audited consolidated
financial statements of Perfumania.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------------------------------------
JANUARY 28, FEBRUARY 3, FEBRUARY 1, JANUARY 31, JANUARY 30,
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales, wholesale division .......... $ 38,484 $ 36,200 $ 30,317 $ 34,032 $ 40,466
Net sales, retail division ............. 77,094 92,957 108,603 129,562 134,790
----------- ----------- ----------- ----------- -----------
Total net sales ..................... 115,578 129,157 138,920 163,594 175,256
----------- ----------- ----------- ----------- -----------
Gross profit, wholesale division ....... 7,573 8,784 7,614 8,249 8,186
Gross profit, retail division .......... 36,076 43,384 52,536 59,535 60,196
----------- ----------- ----------- ----------- -----------
Total gross profit .................. 43,649 52,168 60,150 67,784 68,382
----------- ----------- ----------- ----------- -----------
Selling, general and administrative
expenses ............................ 37,081 43,372 48,165 64,219 72,502
Provision for doubtful accounts ........ 27 310 500 1,730 --
Provision for potential inventory
losses .............................. -- -- 190 1,810 3,765
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
----------- ----------- ----------- ----------- -----------
Total operating expenses ............ 40,634 48,214 52,796 74,972 81,782
----------- ----------- ----------- ----------- -----------
Income (loss) from operations
before other income (expense) ....... 3,015 3,954 7,354 (7,188) (13,400)
Other income (expense)
Interest expense, net* .............. (2,415) (3,144) (4,110) (4,696) (4,882)
Other, net .......................... 357 396 478 762 645
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes* ..... 957 1,206 3,722 (11,122) (17,637)
(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)
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)
=========== =========== =========== =========== ===========
Weighted average shares outstanding:
Basic ............................... 6,155,733 6,973,670 7,183,462 7,025,236 6,659,237
Diluted ............................. 6,210,542 7,067,291 7,633,588 7,025,236 6,659,237
Basic income (loss) per share net of
cumulative effect of change in
accounting principle* ............... $ 0.22 $ 0.29 $ 0.29 $ (1.63) $ (2.85)
Diluted income (loss) per share net of
cumulative effect of change in
accounting principle* ............... $ 0.21 $ 0.28 $ 0.27 $ (1.63) $ (2.85)
</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.
7
<PAGE> 11
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------------------------
JANUARY 28, FEBRUARY 3, FEBRUARY 1, JANUARY 31, JANUARY 30,
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Number of stores open at end of
period ....................... 175 194 262 285 289
Comparable store sales increases 5.9% 4.1% 3.6% 0.0% 0.0%
BALANCE SHEET DATA (AT YEAR END):
Working capital (deficit) ....... $26,865 $30,227 $ 33,157 $ 19,287 $ (3,750)
Total assets .................... 79,329 93,565 129,908 114,722 95,672
Long-term debt, less current
portion(1) ................... 1,367 1,815 5,708 5,643 2,933
Total stockholders' equity ...... 43,359 45,300 49,325 35,983 18,178
</TABLE>
The fiscal 1998 financial statements have been prepared assuming
Perfumania will continue as a going concern. We have violated certain debt
covenants contained in our bank line of credit agreement. As of June 11, 1999,
the debt covenant violations had not been waived by the bank and we cannot
assure that waivers shall be obtained.
- -----------------
(1) Amount does not include long-term severance payables in the amount of
$1,038 for fiscal year 1998.
8
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read together with Perfumania's
consolidated financial statements and related notes contained later in this
prospectus.
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
-------------------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Net sales, wholesale division 21.8% 20.8% 23.1%
Net sales, retail division 78.2 79.2 76.9
----- ----- -----
Total net sales 100.0 100.0 100.0
Gross profit, wholesale division 25.1 24.2 20.2
Gross profit, retail division 48.4 46.0 44.7
----- ----- -----
Total gross profit 43.3 41.4 39.0
Selling, general and administrative expenses 34.6 39.2 41.4
Provision for doubtful accounts 0.4 1.1 --
Provision for potential inventory losses 0.1 1.1 2.1
Provision for impairment of assets and store closings 0.2 1.5 0.6
Depreciation and amortization 2.7 2.9 2.6
----- ----- -----
Total operating expenses 38.0 45.8 46.7
----- ----- -----
Income (loss) from operations before
other income (expenses) 5.3 (4.4) (7.7)
----- ----- -----
Other income (expense):
Interest, net (2.9) (2.9) (2.8)
Other, net 0.3 0.5 0.4
----- ----- -----
Income (loss) before income taxes* 2.7 (6.8) (10.1)
----- ----- -----
(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)
----- ----- -----
Cumulative effect of change in accounting principle,
net of income tax benefit -- (0.4) --
----- ----- -----
Net income (loss)* 1.5% (7.0%) (10.9%)
</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 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
9
<PAGE> 13
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 common stock of
Perfumania 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 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 increased 0.8% from $67.8 million in fiscal year 1997
(41.4% of total net sales) to $68.4 million in fiscal year 1998 (39.0% of total
net sales) as a result of higher sales and gross profit in the retail division
offset by lower gross profit in the wholesale division.
Gross profit for the wholesale division remained flat at $8.2 million
in fiscal years 1997 and 1998. The wholesale division's gross margin in fiscal
1998 was 20.2% compared to 24.2% 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 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 increased 1.1% from $59.5 million
in fiscal year 1997 to $60.2 million in fiscal year 1998, principally as a
result of higher retail sales volume. As a percentage of net retail sales,
gross profit for the retail division decreased from 46.0% in fiscal year 1997
to 44.7% in fiscal year 1998. The decrease was due to store promotions
discussed above as well as increases in freight expense and inventory
shrinkage.
OPERATING EXPENSES
Operating expenses increased $6.8 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 non-recurring charge of
$1.9 million related to severance agreements with two executive officers, (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 and (c) a $3.8 million provision for potential
inventory losses. 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 increased from 45.8% in fiscal year 1997 to 46.6% 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."
10
<PAGE> 14
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 compared to fiscal
year 1996, 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. We operated 285
and 262 stores at the end of fiscal years 1997 and 1996, respectively.
GROSS PROFIT
Gross profit increased 12.7% from $60.2 million in fiscal year 1996
(43.3% of total net sales) to $67.8 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 $8.3 million in fiscal year 1997. The wholesale division's
gross margin in fiscal 1997 was 24.2% compared to 25.1% in fiscal year 1996.
Gross profit for the retail division increased 13.3% from $52.5
million in fiscal year 1996 to $59.5 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 46.0% in fiscal year 1997. The decrease was due to promotions discussed
above.
OPERATING EXPENSES
Operating expenses increased $22.2 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, (c) a $1.2 million write off of
accounts receivable from L. Luria & Son, Inc. and (d) a $1.8 million provision
for potential inventory losses. 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. During fiscal year 1998, we intend to reduce our inventories
of certain non-designer products; consequently, we recorded a $1.8 million
provision to reduce the carrying cost of such
11
<PAGE> 15
inventories to their estimated market value. 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, 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, the bank can demand payment of the amounts
outstanding under the line of credit agreement. As of June 11, 1999, the bank
had not waived these covenant violations and there is no assurance that these
violations will be waived by the bank. Although management believes that a
waiver will be obtained for all covenant violations and that the covenants will
be revised to be less restrictive, there can be no assurance of this. Should we
be unable to obtain the required waiver from the bank, we may be required to
repay outstanding amounts (totaling approximately $32 million as of June 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 addition, as a result of these violations, we incurred
the default rate of interest, prime plus 4% (11.75%) from December 1998 through
June 1999.
In April 1999, Perfumania entered into a Securities Purchase Agreement
whereby it issued an aggregate of $2 million worth of Perfumania's 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.
12
<PAGE> 16
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.
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 $12.7 million, which was primarily due to our reduction in
inventories and receivables.
Trade receivables primarily relate to our wholesale business. At
fiscal year end 1998, approximately $1.3 million of the trade receivables, net,
were more than 90 days past due. Trade receivables due from customers at
January 30, 1999 were $4.1 million. 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 Perfumania intends to liquidate in fiscal 1999.
Net cash used in investing activities in 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 1999 versus 36 stores in fiscal 1998.
In addition, we do not plan any significant renovations of existing stores in
fiscal 1999, whereas 18 Nature's stores were completely remodeled in fiscal
1998. Thus, store-related capital expenditures for fiscal 1999 are projected to
be significantly lower than fiscal 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 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 1998.
13
<PAGE> 17
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.
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.
14
<PAGE> 18
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 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,
1999. 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.
CHANGES IN INTEREST RATES CREATE MARKET RISK.
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, 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>
15
<PAGE> 19
BUSINESS
We are a leading specialty retailer and wholesale distributor of a
wide range of brand name and designer fragrances.
As of May 31, 1999, we operated a chain of 284 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:
- 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).
- 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.
- 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.
- 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 Perfumania's 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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<PAGE> 20
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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<PAGE> 21
STORE LOCATION AND EXPANSION
Perfumania's 284 stores are located in 36 states, the District of
Columbia and Puerto Rico, including the following states:
- 49 in Florida,
- 34 in New York,
- 24 in California and
- 21 in Texas.
Perfumania's strategy for opening new stores is to seek locations
throughout the United States in the following locations
- regional malls,
- manufacturers' outlet malls and
- 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:
- locating satisfactory sites,
- obtaining leases on favorable terms and
- 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 May 31, 1999, we had opened 2 stores and closed 7 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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<PAGE> 22
The wholesale division's strategy for purchasing merchandise is as
follows:
- capitalize on market opportunities,
- purchase products that are in demand and
- 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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<PAGE> 23
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. Such 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:
- department stores,
- regional retail chains
- national retail chains,
- independent drug stores,
- duty free shops and
- 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.
We believe that the following factors give us a competitive advantage:
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<PAGE> 24
- European-style perfumeries concept,
- full-service sales staff,
- discount prices,
- large and varied selection of brand name and designer
fragrances and
- 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 May 31, 1999, we had 1,593 employees in the following areas:
- 1,403 in retail stores,
- 80 in warehouse and distribution operations and
- 110 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 $15 - $20 million, reflecting the sale of approximately 33%
of the common stock to be outstanding following the offering. 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 to repay outstanding
indebtedness to Perfumania and for working capital and other general corporate
purposes.
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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<PAGE> 25
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. 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 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. 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. We cannot presently predict the outcome of these matters, although we
believe, upon the advice of counsel, that we would have meritorious defenses
and that the ultimate resolution of these matters should not have a materially
adverse effect on our financial position or result of operations.
From time to time, Perfumania is involved in various legal proceedings
in the ordinary course of business.
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<PAGE> 26
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
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<PAGE> 27
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.
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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 $100,000 at the end of the last
fiscal year (collectively, the "Named Executive Officers"), for services
rendered to Perfumania during fiscal year 1998, 1997 and 1996, and (c) those
individuals for whom disclosures would have been provided but for the fact that
the individual was not serving as an executive officer of Perfumania at the end
of the last fiscal year.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------- -------------------------------------
OTHER ANNUAL NO. OF SECURITIES
NAME AND FISCAL COMPENSATION UNDERLYING OTHER ANNUAL
PRINCIPAL POSITION YEAR SALARY ($) 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, 1999 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).
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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.
<TABLE>
<CAPTION>
INDIVIDUAL OPTION GRANTS IN FISCAL YEAR 1998
--------------------------------------------------------------------------------------------------
% 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 $0.50.
(4) Total stock option grants during fiscal 1998 were 1,926,750 of which
1,130,600 represents options cancelled and subsequently re-granted as part
of the repricing.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information concerning option
exercises in fiscal year 1998 and the number of unexercised stock options held
by the Named Executive Officers and the two individuals for whom disclosure
would have been provided but for the fact that the individuals were not serving
as executive officers of Perfumania at the end of the last fiscal year.
26
<PAGE> 30
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
SHARES ACQUIRED VALUE FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)
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
The Company does not have any long-term incentive or pension plans.
EMPLOYMENT AGREEMENTS
Effective February 1, 1999, Perfumania 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 Perfumania 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 Perfumania meets certain net income levels. The
employment agreements also prohibit the employees 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 Perfumania 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
Perfumania 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
Perfumania meets 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 Perfumania without cause.
SEPARATION AGREEMENTS
Upon his resignation, Mr. Simon Falic entered into a separation
agreement with Perfumania, 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 Perfumania 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.
27
<PAGE> 31
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.
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 in the liquidating plan of reorganization filed on April 6, 1998 by
Luria's in the United States Bankruptcy Court, Southern District of Florida. 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. Management cannot presently predict the
outcome of these matters, although management believes, upon the advice of
legal counsel, that we would have meritorious defenses and that the ultimate
resolution of these matters should not have a materially adverse effect on our
financial position or result of operations.
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
FISCAL DURING FISCAL FISCAL YEAR MATURITY ANNUAL
YEAR 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,
$417,763 and $415,527, respectively, issued in connection with his purchase of
a 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.
28
<PAGE> 32
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of May 24, 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(6)
- ---------------------------------------- ------------------- ----------
<S> <C> <C>
Ilia Lekach........................................................ 1,459,995 (2)(3)(4) 17.3%
Simon Falic........................................................ 683,050 (2)(4) 8.8%
Rachmil Lekach..................................................... 675,125 (2)(4) 8.7%
Jerome Falic....................................................... 923,230 (3)(4) 11.6%
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) *
All directors and executive officers as a group (8 persons)........ 2,447,525 (5) 27.8%
</TABLE>
- -------------
* Less than 1%.
(1) The address of each of the beneficial owners identified is 11701 NW 101st
Road, Miami, Florida 33178 except for Simon Falic.
(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 May 24, 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) Includes 1,172,800 shares of common stock issuable upon the exercise of
stock options within 60 days of May 24, 1999.
(6) Based on 7,408,485 shares outstanding on May 24, 1999 and the 235,293 shares
issued pursuant to the Subscription Agreements.
29
<PAGE> 33
SELLING SHAREHOLDERS
The following table provides information regarding the 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 or (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. 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 Agreement, 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>
OWNERSHIP PRIOR OWNERSHIP AFTER
NO. OF SHARES TO THE OFFERING(10) NUMBER OF THE OFFERING
TO BE ------------------------- SHARES ----------------------
NAME AND ADDRESS REGISTERED SHARES PERCENTAGE(11) OFFERED SHARES PERCENTAGE
- ---------------- ------------- -------- -------------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
S. Robert Productions, LLC(1) 273,109(5) 165,966 2.14% 273,109(5) 0 0%
Cranshire Capital, L.P.(1) 546,219(6) 331,933 4.22 546,219(6) 0 0
Namax Corp.(2) 273,109(5) 165,966 2.14 273,109(5) 0 0
EP Opportunity Fund, L.L.C.(3) 335,714(7) 167,857 2.15 335,714(7) 0 0
EP Opportunity Fund
International, Ltd. (3) 21,428(8) 10,714 * 21,428(8) 0
JJP Partnership (4) 214,286(9) 107,143 1.38 214,286(9) 0 0
--------- ---------
Total 1,663,865 1,663,865
</TABLE>
- -------------------------
* Represents ownership of less than 1%.
(1) The address is 666 Dundee Road, Suite 1801, Northbrook, Illinois 60092,
attention: Mitchell Kopin.
(2) The address is 666 Dundee Road, Northbrook, Illinois 60092, attention:
Mark Rice.
(3) The address is 77 West Wacker Drive, Chicago, Illinois 60601, attention:
Jeffrey Eisenberg.
(4) The address is 2 North LaSalle Street, Chicago, Illinois 60602, attention:
Tracy Davis.
(5) Of the shares being registered, 58,823 were issued pursuant to the
Subscription Agreement, dated March 22, 1999,and 214,286 represents 200% of
the number of shares of common stock that would have been received if the
$300,000 of convertible notes received under the Securities Purchase
Agreement, dated April 28, 1999, were converted on June 8, 1999.
(6) Of the shares being registered, 117,647 were issued pursuant to the
Subscription Agreement, dated March 22, 1999,and 428,572 represents 200% of
the number of shares of common stock that would have been received if the
$600,000 of convertible notes received under the Securities Purchase
Agreement, dated April 28, 1999, were converted on June 8, 1999.
(7) The 335,714 shares represent 200% of the number of shares of common stock
that would have been received if the $470,000 of convertible notes received
under the Securities Purchase Agreement, dated April 28, 1999, were
converted on June 8, 1999.
(8) The 21,428 shares represent 200% of the number of shares of common stock
that would have been received if the $30,000 of convertible notes received
under the Securities Purchase Agreement, dated April 28, 1999, were
converted on June 8, 1999.
(9) The 214,286 shares represent 200% of the number of shares of common stock
that would have been received if the $300,000 of convertible notes received
under the Securities Purchase Agreement, dated April 28, 1999, were
converted on June 8, 1999.
(10) Derived from actual amount held, if any, plus the number of shares which
would be held if the convertible notes were converted on June 8, 1999.
(11) Based on 7,643,778 shares outstanding on June 10, 1999.
30
<PAGE> 34
PLAN OF DISTRIBUTION
GENERAL
Transactions. The selling shareholders may offer and sell the common
stock in one or more of the following transactions:
- in the over-the-counter market,
- in negotiated transactions or
- 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:
- fixed prices which may be changed,
- market prices prevailing at the time of sale,
- prices related to prevailing market prices or
- 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:
- directly to purchasers or
- 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.
31
<PAGE> 35
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 June 10, 1999, there were 9,156,184 shares of common stock
issued, of which 1,512,406 shares were held in treasury, and held of record by
approximately 82 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 May 31, 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.
32
<PAGE> 36
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.
33
<PAGE> 37
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..................................... F-3
Consolidated Statements of Operations for the Fiscal Years Ended February 1, 1997,
January 31, 1998 and January 30, 1999.................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the Fiscal Years Ended February 1, 1997,
January 31, 1998 and January 30, 1999.................................................................... F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended February 1, 1997,
January 31, 1998 and January 30, 1999.................................................................... F-6
Notes to Consolidated Financial Statements.................................................................. F-7
</TABLE>
F-1
<PAGE> 38
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 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 not been waived by the bank as
of April 29, 1999. There is no assurance that the Company will be able to
generate future net income nor obtain the required waivers of default from the
bank, 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 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
F-2
<PAGE> 39
PERFUMANIA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 30,
1998 1999
------------- ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents ............................................... $ 1,554,117 $ 1,745,603
Trade receivables, less allowance for doubtful accounts of
$704,954 in 1998 and 1999 ............................................. 5,186,473 4,108,847
Advances to suppliers ................................................... 7,611,036 8,065,301
Inventories, net of reserve of $2,750,000 and $4,163,251 in 1998
and 1999, respectively .................................................. 73,137,842 53,880,132
Prepaid expenses and other current assets ............................... 2,086,118 1,502,087
Tax refund receivable ................................................... 814,766 --
Deferred tax asset, net ................................................. 1,219,856 --
Due from related parties ................................................ 772,855 --
------------- ------------
Total current assets .................................................. 92,383,063 69,301,970
Property and equipment, net ................................................ 18,307,240 23,180,462
Leased equipment under capital leases, net ................................. 2,266,674 1,373,878
Other assets, net .......................................................... 1,764,906 1,357,966
Due from related parties ................................................... -- 457,243
------------- ------------
Total assets .......................................................... $ 114,721,883 $ 95,671,519
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Bank line of credit and current portion of notes payable ................ $ 34,139,766 $ 32,800,627
Accounts payable - non-affiliates ....................................... 13,308,914 14,329,013
Accounts payable - affiliates ........................................... 16,958,163 15,812,240
Accrued expenses and other liabilities .................................. 6,848,923 9,205,316
Income taxes payable .................................................... 505,098 485,098
Current portion of obligations under capital leases ..................... 1,030,340 419,487
Due to related parties .................................................. 304,483 --
------------- ------------
Total current liabilities ............................................. 73,095,687 73,051,781
Long-term portion of notes payable ......................................... 4,709,434 2,370,684
Long-term portion of obligations under capital leases ...................... 933,615 562,552
Long-term severance payables ............................................... -- 1,037,859
------------- ------------
Total liabilities ..................................................... 78,738,736 77,022,876
Commitments and contingencies .............................................. -- --
Redeemable common equity (Note 11) ......................................... -- 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 in 1998 and 1999, respectively .. 78,453 86,145
Capital in excess of par value .......................................... 52,386,361 54,440,009
Treasury stock, at cost, 1,218,360 and 1,512,406 shares in 1998
and 1999, respectively ................................................ (4,521,068) (5,413,002)
Accumulated deficit ..................................................... (11,960,599) (30,935,097)
------------- ------------
Total stockholders' equity .......................................... 35,983,147 18,178,055
------------- ------------
Total liabilities and stockholders' equity .......................... $ 114,721,883 $ 95,671,519
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 40
PERFUMANIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 1999
------------- ------------- -------------
(AS RESTATED,
NOTE 11)
<S> <C> <C> <C>
Net sales:
Non-affiliated customers ................................................ $ 136,446,104 $ 161,593,736 $ 175,255,633
Affiliates .............................................................. 2,473,623 1,999,823 --
------------- ------------- -------------
138,919,727 163,593,559 175,255,633
------------- ------------- -------------
Cost of goods sold:
Non-affiliated customers ................................................ 76,516,903 94,243,329 106,873,767
Affiliates .............................................................. 2,252,850 1,566,489 --
------------- ------------- -------------
78,769,753 95,809,818 106,873,767
------------- ------------- -------------
Gross profit ...................................................... 60,149,974 67,783,741 68,381,866
------------- ------------- -------------
Operating expenses:
Selling, general and administrative expenses ............................ 48,165,392 64,219,379 72,501,987
Provision for doubtful accounts ......................................... 500,000 1,730,000 --
Provision for potential inventory losses ................................ 190,000 1,810,000 3,764,665
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
------------- ------------- -------------
Total operating expenses .......................................... 52,796,059 74,972,013 81,782,050
------------- ------------- -------------
Income (loss) from operations before other income (expense) ............. 7,353,915 (7,188,272) (13,400,184)
------------- ------------- -------------
Other income (expense):
Interest expense:
Affiliates ............................................................ (148,647) (124,250) (22,486)
Other ................................................................. (4,004,754) (4,617,070) (4,938,365)
------------- ------------- -------------
(4,153,401) (4,741,320) (4,960,851)
------------- ------------- -------------
Interest income:
Affiliates ............................................................ 39,480 42,450 43,440
Other ................................................................. 3,499 2,660 35,057
------------- ------------- -------------
42,979 45,110 78,497
------------- ------------- -------------
Other income ............................................................ 478,179 762,138 645,446
------------- ------------- -------------
Total other income (expense) ............................................ (3,632,243) (3,934,072) (4,236,908)
------------- ------------- -------------
Income (loss) before income taxes .......................................... 3,721,672 (11,122,344) (17,637,092)
(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)
Cumulative effect of change in accounting principle, net of income tax
benefit of $380,958 ..................................................... -- (631,418) --
============= ============= =============
Net income (loss) .......................................................... $ 2,074,941 $ (11,432,570) $ (18,974,498)
============= ============= =============
Basic earnings (loss) per common share:
Income (loss) before cumulative effect of change in accounting principle ... $ 0.29 $ (1.54) $ (2.85)
Cumulative effect of change in accounting principle ........................ -- (0.09) --
============= ============= =============
Net income (loss) .......................................................... $ 0.29 $ (1.63) $ (2.85)
============= ============= =============
Diluted earnings (loss) per common share:
Income (loss) before cumulative effect of change in accounting principle ... $ 0.27 $ (1.54) $ (2.85)
Cumulative effect of change in accounting principle ........................ -- (0.09) --
============= ============= =============
Net income (loss) .......................................................... $ 0.27 $ (1.63) $ (2.85)
============= ============= =============
Weighted average number of shares outstanding:
Basic ................................................................... 7,183,462 7,025,236 6,659,237
============= ============= =============
Diluted ................................................................. 7,633,588 7,025,236 6,659,237
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 41
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 AND FISCAL YEAR ENDED JANUARY 30, 1999
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN TREASURY STOCK
---------------- EXCESS ---------------------- ACCUMULATED
SHARES AMOUNT OF PAR VALUE SHARES AMOUNT DEFICIT TOTAL
--------- ------- ------------ --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at February 3, 1996 .................... 6,707,700 $67,077 $ 47,959,464 23,000 $ (123,323) $(2,602,970) $ 45,300,248
Exercise of stock options ...................... 2,000 20 8,230 -- -- -- 8,250
Conversion of debentures ....................... 918,091 9,181 2,978,085 -- -- -- 2,987,266
Beneficial conversion feature of
debentures .................................. -- -- 529,412 -- -- -- 529,412
Issuance of common stock ....................... 180,000 1,800 954,450 -- -- -- 956,250
Purchases of treasury stock .................... -- -- -- 644,900 (2,531,787) -- (2,531,787)
Net income for the fiscal year ended
February 1, 1997 ............................ -- -- -- -- -- 2,074,941 2,074,941
--------- ------- ------------ --------- ------------ ------------ ------------
Balance at February 1, 1997 .................... 7,807,791 78,078 52,429,641 667,900 (2,655,110) (528,029) 49,324,580
Exercise of stock options ...................... 37,500 375 116,812 -- -- -- 117,187
Purchases of treasury stock .................... -- -- -- 550,460 (1,865,958) -- (1,865,958)
Other .......................................... -- -- (160,092) -- -- -- (160,092)
Net loss for the fiscal year ended January
31, 1998 .................................... -- -- -- -- -- (11,432,570) (11,432,570)
--------- ------- ------------ --------- ------------ ------------ ------------
Balance at January 31, 1998 .................... 7,845,291 78,453 52,386,361 1,218,360 (4,521,068) (11,960,599) 35,983,147
Exercise of stock options ...................... 684,200 6,842 310,865 -- -- -- 317,707
Purchases of treasury stock .................... -- -- -- 294,046 (891,934) -- (891,934)
Issuance of common stock ....................... 85,000 850 213,371 -- -- -- 214,221
Proceeds on common stock to be issued .......... -- -- 1,529,412 -- -- -- 1,529,412
Net loss for the fiscal year ended January
30, 1999 .................................... -- -- -- -- -- (18,974,498) (18,974,498)
--------- ------- ------------ --------- ------------ ------------ ------------
Balance at January 30, 1999 .................... 8,614,491 $86,145 $ 54,440,009 1,512,406 $ (5,413,002) $(30,935,097) $ 18,178,055
========= ======= ============ ========= ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE> 42
PERFUMANIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 1999
------------ ------------ ------------
(AS RESTATED,
NOTE 11)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................. $ 2,074,941 $(11,432,570) $(18,974,498)
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 --
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
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 .................... 529,412 -- --
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
Affiliates ..................................................... (653,657) 653,657 --
Advances to suppliers .......................................... (712,058) (2,587,318) (454,265)
Inventories .................................................... (24,288,235) 10,162,581 15,493,045
Prepaid expenses ............................................... (747,225) (186,798) 584,031
Due from related parties ....................................... 34,689 (269,479) --
Tax refund receivable .......................................... -- (814,766) 814,766
Other assets ................................................... (123,998) (539,266) 406,940
Increase (decrease) in:
Accounts payable ............................................... 17,314,213 (5,861,438) (125,824)
Accrued expenses and other liabilities ......................... 1,088,386 2,908,483 2,356,398
Income taxes payable ........................................... 1,321,203 (816,105) (20,006)
Long term severance payable .................................... -- -- 1,037,859
Negative goodwill .............................................. -- (470,000) --
------------ ------------ ------------
Net cash provided by operating activities ...................... 625,275 7,489,719 12,910,212
------------ ------------ ------------
Cash flows from investing activities:
Additions to property and equipment ............................ (7,341,901) (7,207,114) (9,495,824)
------------ ------------ ------------
Net cash used in investing activities .......................... (7,341,901) (7,207,114) (9,495,824)
------------ ------------ ------------
Cash flows from financing activities:
Net borrowings under bank line of credit and loans
payable ...................................................... 7,208,943 2,957,170 (3,677,888)
Net increase (decrease) in due to related parties .............. 90,000 (465,517) 11,129
Principal payments under capital lease obligations ............. (639,892) (952,805) (981,916)
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
Stock issuance costs ........................................... -- (160,092) --
Purchases of treasury stock .................................... (2,531,787) (1,865,958) (891,934)
------------ ------------ ------------
Net cash provided by (used in) financing activities ............ 8,027,125 (370,015) (3,222,902)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents .................. 1,310,499 (87,410) 191,486
Cash and cash equivalents at beginning of period .................. 331,028 1,641,527 1,554,117
------------ ------------ ------------
Cash and cash equivalents at end of period ........................ $ 1,641,527 $ 1,554,117 $ 1,745,603
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE> 43
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 and January 30, 1999 were 262, 285 and 289,
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 and $18.9 million during the fiscal years ended
January 31, 1998 and January 30, 1999, respectively, and has a working capital
deficit of $3.8 million at January 30, 1999. In addition, the Company was in
violation of certain debt covenants contained in its bank line of credit
agreement (Note 8). These debt covenant violations have not been waived by the
bank as of April 29, 1999 and there is no assurance that the Company will be
able to obtain the required waivers of default from the bank.
Management's plan initially consists of obtaining a waiver for the
debt covenant violations and amending the line of credit agreement. In
addition, 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> 44
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 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.
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 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 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> 45
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 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
--------------------------------------------------
1996 1997 1998
------------- ------------- -------------
(as restated,
Note 11)
<S> <C> <C> <C>
Numerator:
Income (loss) before cumulative effect of
change in accounting principle ........ $ 2,074,941 $ (10,801,152) $ (18,974,498)
------------- ------------- -------------
Denominator:
Denominator for basic income (loss) per
share ................................. 7,183,462 7,025,236 6,659,237
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
============= ============= =============
Income (loss) per share before cumulative
effect of change in accounting principle:
Basic ................................... $ 0.29 $ (1.54) $ (2.85)
============= ============= =============
Diluted ................................. $ 0.27 $ (1.54) $ (2.85)
============= ============= =============
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
Exercise price .......................... $2.75 - $8.50 $2.75 - $5.63 $0.41 - $2.75
</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
The carrying amount of cash and cash equivalents, trade receivables,
advances to suppliers, accounts payable, bank line of credit, obligations under
capital leases and loans payable approximate fair value as of January 31, 1998
and January 30, 1999.
F-9
<PAGE> 46
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.
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 1996 and 1997 amounts have been reclassified to conform
with the fiscal 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 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 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,
1999. Management has not determined the effect, if any, of adopting SFAS No.
133.
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
F-10
<PAGE> 47
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
--------------------------------------------------------------------
FEBRUARY 1, 1997 JANUARY 31, 1998 JANUARY 30, 1999
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash paid during the period for:
Interest......................... $ 3,459,563 $ 4,671,039 $ 4,830,230
Income taxes..................... $ 71,138 $ 1,012,000 $ 20,000
</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 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. 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 LIVES
JANUARY 31, 1998 JANUARY 30, 1999 (IN YEARS)
---------------- ---------------- ----------------------
<S> <C> <C> <C>
Furniture, fixtures and equipment... $ 15,213,721 $ 15,959,500 5-7
Leasehold improvements.............. 14,995,361 21,235,443 10
------------- -------------
30,209,082 37,194,943
Less: Accumulated depreciation and
amortization..................... (11,901,842) (14,014,481)
------------- -------------
$ 18,307,240 $ 23,180,462
============= =============
</TABLE>
NOTE 7 -- RELATED PARTY TRANSACTIONS:
Due from related parties consists of the following:
<TABLE>
<CAPTION>
JANUARY 31, 1998 JANUARY 30, 1999
---------------- ----------------
<S> <C> <C>
Amounts due from officers............... $ 315,612 $ --
Note receivable from shareholder........ 457,243 457,243
--------- ---------
$ 772,855 $ 457,243
========= =========
</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
F-11
<PAGE> 48
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 1996, 1997 and 1998 was
approximately $40,000, $43,000 and $43,000, respectively. Accrued interest
receivable at January 31, 1998 and January 30, 1999 amounted to approximately
$42,000 and $85,000, respectively.
Purchases of products from a company affiliated through common
ownership amounted to $30,735,244, $21,436,855 and $24,333,032, and in fiscal
year 1996, 1997 and 1998, respectively. The amount due to this company at
January 31, 1998 and January 30, 1999, was $16,958,163, and $15,812,240 and
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.
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
---------------- ----------------
<S> <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
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
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
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
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
------------ ------------
38,849,200 35,171,311
Less: current portion ...................................................... (34,139,766) (32,800,627)
------------ ------------
Long-term portion ........................................................... $ 4,709,434 $ 2,370,684
============ ============
</TABLE>
F-12
<PAGE> 49
The aggregate maturities of the bank line of credit and notes payable
at January 30, 1999 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1999 $ 32,800,627
2000 1,698,120
2001 528,540
2002 123,966
2003 20,058
------------
$ 35,171,311
============
</TABLE>
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 and as a result of these violations, the Company is in
default under the line of credit agreement. As a result, the bank can demand
payment of the amounts outstanding under the line of credit agreement. As of
April 29, 1999, the bank has not waived these covenant violations and there is
no assurance that these violations will be waived by the bank. In addition, as
a result of these violations, the Company incurred the default rate of
interest, prime plus 4% (11.75%) from December 1998 through April 1999.
Advances made under the line of credit are based on a formula of
eligible inventories and receivables. At January 30, 1999, the Company had
available under the line of credit approximately $1,390,000. 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 reviews of the Company's retail store locations with
significant negative cash flows, the Company recognized in fiscal year 1996,
1997 and 1998, non-cash charges of $0.2 million, $2.5 million and $1.0 million,
respectively, representing a reduction of the carrying amounts of the impaired
assets (fixtures and leasehold improvements) to their estimated recoverable
amount. These impairment losses are included in "Provision for impairment of
assets and store closings," in the Consolidated Statements 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-13
<PAGE> 50
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 1,166,750
Property and equipment .................. 1,283,375 1,807,118
Allowance for doubtful accounts and other 319,011 319,011
Reserves ................................ 714,970 883,760
Other ................................... 118,208 136,157
----------- ------------
Total deferred tax assets ................. 4,624,856 11,786,525
----------- ------------
Valuation allowance ....................... (3,405,000) (11,786,525)
----------- ------------
Net deferred tax assets ................... $ 1,219,856 $ --
=========== ============
</TABLE>
During fiscal 1998, the Company provided a valuation allowance of
$11,786,525 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 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.
F-14
<PAGE> 51
The Company has net operating loss carryforwards of approximately $21 million
which begin to expire in the year 2017.
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 a 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 Agreements or 2) 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
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 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 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-15
<PAGE> 52
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> <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-16
<PAGE> 53
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- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE 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 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 payment of claims. Adjustments, if any, to estimates recorded
resulting from ultimate claim payments will be
F-17
<PAGE> 54
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. 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>
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:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
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
===========
</TABLE>
The depreciation expense relating to capital leases is included in
depreciation and amortization expense.
F-18
<PAGE> 55
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. 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.
The Company is also involved in various other legal proceedings in the
ordinary course of business.
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 and , 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 in the liquidating
plan of reorganization filed on April 6, 1998 by Luria's in the United States
Bankruptcy Court, Southern District of Florida. 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.
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.
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
------------------------------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Net sales:
Wholesale ....................... $ 30,316,598 $ 34,031,744 $ 40,465,689
Retail .......................... 108,603,129 129,561,815 134,789,944
------------ ------------ ------------
Total net sales ................. $138,919,727 $163,593,559 $175,255,633
============ ============ ============
Cost of goods sold:
Wholesale ....................... $ 22,702,968 $ 25,782,695 $ 32,280,324
Retail .......................... 56,066,785 70,027,123 74,593,443
------------ ------------ ------------
Total cost of goods sold ...... $ 78,769,753 $ 95,809,818 $106,873,767
============ ============ ============
Gross profit:
Wholesale ....................... $ 7,613,630 $ 8,249,049 $ 8,185,365
Retail .......................... 52,536,344 59,534,692 60,196,501
------------ ------------ ------------
Total gross profit ............ $ 60,149,974 $ 67,783,741 $ 68,381,866
============ ============ ============
Inventories:
Wholesale ....................... $ 32,051,346 $ 20,368,792 $ 8,227,522
</TABLE>
F-19
<PAGE> 56
<TABLE>
<S> <C> <C> <C>
Retail .......................... 53,059,077 52,769,050 45,652,610
------------ ------------ ------------
Total inventories ............. $ 85,110,423 $ 73,137,842 $ 53,880,132
============ ============ ============
Depreciation and amortization:
Wholesale ....................... $ -- $ -- $ --
Retail .......................... 3,771,508 $ 4,697,816 4,480,681
------------ ------------ ------------
$ 3,771,508 $ 4,697,816 $ 4,480,681
============ ============ ============
Capital expenditures:
Wholesale ....................... $ -- $ -- $ --
Retail .......................... 6,798,159 6,831,944 8,849,837
------------ ------------ ------------
$ 6,798,159 $ 6,831,944 $ 8,849,837
============ ============ ============
</TABLE>
An unaffiliated customer of the wholesale segment accounted for
approximately 11%, 8% and 6% of the consolidated net sales in fiscal year 1996,
1997 and 1998, respectively, and 18% and 0% of the consolidated net trade
accounts receivable balance at January 31, 1998 and January 30, 1999,
respectively.
In fiscal year 1996, 1997 and 1998, the wholesale segment included
foreign sales of approximately $3.8 million, $1.7 million and $2.9 million,
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
thousands). Certain of the quarterly information has been restated, as described
below.
<TABLE>
<CAPTION>
FISCAL YEAR 1997 FISCAL YEAR 1998
------------------------------------------------- --------------------------------------------
1ST QTR 2ND QTR 3RD QTR 4TH QTR 1ST QTR 2ND QTR 3RD QTR 4TH QTR
---------- -------- ---------- ---------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Wholesale division ........... $ 6,541 $ 8,333 $ 8,590 $ 10,568 $ 13,468 $ 10,235 $ 6,993 $ 9,770
Retail division .............. 23,447 28,952 30,185 46,978 25,000 29,450 30,091 50,249
Total net sales .............. 29,988 37,285 38,775 57,546 38,468 39,685 37,084 60,019
Gross profit ................. 12,906 15,628 15,913 23,337 14,806 16,511 15,020 22,045
Loss before cumulative
effect of change in
accounting principle ...... (1,998) (457) (1,226) (7,122) (2,772) (1,273) (3,859) (11,070)
Cumulative effect of
change in accounting ...... (632) -- -- -- -- -- -- --
principle
Net loss ..................... (2,630) (457) (1,226) (7,122) (2,772) (1,273) (3,859) (11,070)
Basic loss per common share:
Loss before cumulative
effect of change in
accounting principle ...... $ (0.28) $ (0.06) $ (0.17) $ (1.05) $ (0.42) $ (0.20) $ (0.59) $ (1.64)
Cumulative effect of
change in accounting
principle.................. (0.09) -- -- -- -- -- -- --
Net loss ..................... $ (0.37) $ (0.06) $ (0.17) $ (1.05) $ (0.42) $ (0.20) $ (0.59) $ (1.64)
Diluted loss per common share:
Loss before cumulative
effect of change in
accounting principle ...... $ (0.28) $ (0.06) $ (0.17) $ (1.05) $ (0.42) $ (0.20) $ (0.59) $ (1.64)
Cumulative effect of
change in accounting ...... $ (0.09) -- -- -- -- -- -- --
principle
Net loss ..................... $ (0.37) $ (0.06) $ (0.17) $ (1.05) $ (0.42) $ (0.20) $ (0.59) $ (1.64)
% of total net sales for
fiscal year ............... 18.3% 22.8% 23.7% 35.2% 21.9% 22.6% 21.2% 34.3%
# of retail stores at end
of each period ............ 270 271 283 285 284 287 294 289
</TABLE>
F-20
<PAGE> 57
<TABLE>
<CAPTION>
----------------------------------------------- -------------------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
----------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net loss as previously
reported .................. $(2,039) $ (498) $ (878) $(7,555) $(2,772) $(1,273) $(3,859) $(11,070)
Cumulative effect of
change in accounting ...... (564) 68 121 21 -- -- -- --
principle
Provision for doubtful
accounts .................. -- -- (700) 700 -- -- -- --
Income tax (provision) ....... (27) (27) 231 (288) -- -- -- --
benefit
Net loss as adjusted ......... $(2,630) $ (457) $(1,226) $(7,122) $(2,772) $(1,273) $(3,859) $(11,070)
Per Share Amounts:
Basic:
Net loss as previously
reported .................. $ (0.29) $(0.07) $ (0.12) $ (1.11) $ (0.42) $ (0.20) $ (0.59) $ (1.64)
Cumulative effect of
change in accounting
principle ................. (0.08) 0.01 0.02 -- -- -- -- --
Provision for doubtful
accounts .................. -- -- (0.10) 0.10 -- -- -- --
Income tax (provision) ....... -- -- 0.03 (0.04) -- -- -- --
benefit
Net loss as adjusted ......... $ (0.37) $(0.06) $ (0.17) $ (1.05) $ (0.42) $ (0.20) $ (0.59) $ (1.64)
Per Share Amounts:
Diluted:
Net loss as previously
reported .................. $ (0.29) $ (0.07) $ (0.12) $ (1.11) $ (0.42) $ (0.20) $ (0.59) $ (1.64)
Cumulative effect of
change in accounting ...... (0.08) 0.01 0.02 -- -- -- -- --
principle
Provision for doubtful
accounts .................. -- -- (0.10) 0.10 -- -- -- --
Income tax (provision) ....... -- -- 0.03 (0.04) -- -- -- --
benefit
Net loss as adjusted....... $ (0.37) $ (0.06) $ (0.17) $ (1.05) $ (0.42) $ (0.20) $ (0.59) $ (1.64)
</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 $2.8 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, Perfumania entered into a Securities Purchase Agreement
whereby it issued an aggregate of $2 million worth of Perfumania'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 $15 - $20
million representing approximately 33% of the common stock to be outstanding
following the offering. 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.
F-21
<PAGE> 58
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................................................ $ 1,793
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.......................................................................................... 150,000
=======
</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 April 1999, Perfumania entered into a Securities Purchase Agreement
whereby it issued an aggregate of $2 million worth of Perfumania's 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.
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 a 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.
II-1
<PAGE> 59
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
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <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. (8)
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)
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)
21.1 Subsidiaries of the Registrant (5)
23.1 Consent of PricewaterhouseCoopers LLP (8)
23.2 Consent of Greenberg Traurig, P.A. (included in its opinion in Exhibit 5.1) (8)
24.0 Reference is made to the Signatures section of this Registration Statement for the
Power of Attorney contained therein. (8)
</TABLE>
II-2
<PAGE> 60
<TABLE>
<CAPTION>
Page Number or
Exhibit Incorporated by
Number Description Reference From
- ------- ----------------------- ---------------
<S> <C> <C>
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) Filed herewith.
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
II-3
<PAGE> 61
(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> 62
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Miami,
State of Florida on this 11th day of June, 1999.
PERFUMANIA, INC.
By: /s/ Ilia Lekach
---------------------------------------------
Ilia Lekach, Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Ilia Lekach his true and lawful
attorney-in-fact, who acting alone, with full powers of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments, including any post-effective
amendments, to this Registration Statement, and to file the same, with exhibits
thereto, and other documents to be filed in connection therewith, including any
registration statement pursuant to Rule 462 under the Securities Act, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact or his substitute, acting alone, may lawfully do or cause
to be done by virtue hereof.
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 June 11, 1999
- --------------------------------- (Principal Executive Officer)
Ilia Lekach
/s/ Jerome Falic President and Vice Chairman of the Board June 11, 1999
- ---------------------------------
Jerome Falic
/s/ Donovan Chin Chief Financial Officer and Director (Principal June 11, 1999
- --------------------------------- Financial and Accounting Officer
Donovan Chin
/s/ Marc Finer President of the Retail Division and Director June 11, 1999
- ---------------------------------
Marc Finer
/s/ Robert Pliskin Director June 11, 1999
- ---------------------------------
Robert Pliskin
/s/ Carole Ann Taylor Director June 11, 1999
- ---------------------------------
Carole Ann Taylor
Director
- ---------------------------------
Horatio Groisman, M.D.
</TABLE>
II-5
<PAGE> 1
5.1
GREENBERG TRAURIG, P.A.
1221 BRICKELL AVENUE
MIAMI, FLORIDA 33131
TELEPHONE: (305) 579-0500
TELECOPIER: (305) 579-0717
June 11, 1999
Perfumania, Inc.
11701 N.W. 101st Road
Miami, FL 33178
RE: REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
In connection with the Registration Statement on Form S-1 (the
"Registration Statement"), filed by Perfumania, Inc., a Florida corporation (the
"Company"), with the Securities and Exchange Commission on June 11, 1999
pursuant to the Securities Act of 1933, as amended (the "Act"), and the rules
and regulations promulgated thereunder (the "Rules"), you have requested us to
furnish you our opinion as to the legality of the 1,663,865 shares of Common
Stock, par value $.01 per share, of the Company (the "Shares") being registered
thereunder.
For the purpose of rendering our opinion, we have reviewed (a) the
Registration Statement and the exhibits thereto; (b) the Articles of
Incorporation, as amended to date, and the Bylaws of the Company, as amended to
date; and (c) certain records of the Company's corporate proceedings as
reflected in its minute books. In our examination, we have assumed the
genuineness of signatures, the authenticity of all documents submitted to us as
originals and the conformity with the originals of all documents submitted to us
as copies thereof. In addition, we have made such other examinations of law and
fact as we considered necessary in order to form a basis for the opinion
hereinafter expressed.
Based on the foregoing, we are of the opinion that the Shares have been
duly and validly authorized and are, or, with respect to the Shares to be issued
upon conversion of convertible notes, upon such issuance will be, validly
issued, fully paid and non-assessable.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement, and further consent to the use of our name wherever
appearing in the Registration Statement, including any Prospectus constituting a
part thereof, and any amendments thereto. In giving this consent we do not
thereby admit that we come within the category of persons whose consent is
required by the Act or the Rules.
Very truly yours,
/s/ Greenberg Traurig, P.A.
GREENBERG TRAURIG, P.A.
<PAGE> 1
Exhibit 10.11
FORM OF
SUBSCRIPTION AGREEMENT
March 22, 1999
Perfumania Inc.
11701 N.W. 101st Road
Miami, Florida 33178
Attn: Ilia Lekach
Chairman and Chief Executive Officer
Gentlemen:
The undersigned ("Subscriber") hereby tenders this Subscription
Agreement ("Agreement") for the purchase of _________ shares of common stock,
$.01 par value ("Common Stock") of Perfumania, Inc., a Florida corporation
("Perfumania").
1. SUBSCRIPTION. Subscriber hereby irrevocably subscribes for and
agrees to purchase ____________ shares (the "Shares") of Common Stock for a
purchase price of $8.50 per Share, or $____________ in the aggregate.
Subscriber has heretofore made payment of the full amount of the purchase price
of the Shares by wire transfer of funds in accordance with instructions from
Perfumania.
2. OFFERING MATERIAL. Subscriber represents and warrants that it is in
receipt of and that it has carefully read the following items, which items
constitute the only information provided by Perfumania to Subscriber in
connection with Subscriber's investment in the Shares (the "Offering
Materials"): (a) Perfumania's Annual Report on Form 10-K for its fiscal year
ended January 31, 1998 (the "Form 10-K"); (b) Perfumania's Quarterly Reports on
Form 10-Q for the quarters ended May 2, 1998, August 1, 1998 and October 31,
1998; and (c) Perfumania's Proxy Statement for its Annual Meeting of
Shareholders held on December 16, 1998.
3. REPRESENTATIONS AND WARRANTIES OF PERFUMANIA. Perfumania represents
and warrants that: (a) it is a corporation duly organized and validly existing
and in good standing under the laws of the State of Florida, with full power
and authority to carry on its business as currently conducted; (b) it, by
appropriate corporate action, has, or will have prior to the issuance of the
Shares, duly authorized the execution, delivery and performance of this
Agreement and all of the transactions contemplated hereby, including the
issuance and delivery of the Shares and the registration of such shares; (c)
the Shares are not subject to preemptive or other rights of any stockholders
and when issued in accordance with the terms of this Agreement, the Shares will
be validly issued, fully paid and nonassessable; and (d) performance of this
Agreement and compliance with the provisions hereof will not violate any
provision of any applicable law or of its Articles of Incorporation or By-Laws,
and will not conflict with or result in any breach of any of the terms,
conditions or provisions of, or constitute a default under, or result in the
creation or imposition of any lien, charge or encumbrance upon, any of its
material properties or assets, pursuant to the terms of any material indenture,
mortgage or other agreement or instrument binding upon it or any of its
subsidiaries, other than such breaches, defaults or liens which would not have
a material adverse effect on Perfumania and its subsidiaries taken as a whole.
Perfumania further represents and warrants that as of the date hereof the
Offering Materials are true and correct, in all material respects, except for
any written communications made by Perfumania to the Subscriber describing any
material change in Perfumania's business or operations.
4. REPRESENTATIONS AND WARRANTIES OF SUBSCRIBER. Subscriber hereby
represents and warrants that: (a) it has the full legal right and power and all
authority and approval required to execute, deliver and perform its obligations
under this Agreement; (b) it is acquiring the Shares for the purpose of
investment for its own account and not for the account or beneficial interest
of any other person, and not with a view to any distribution or resale thereof
Page 1
<PAGE> 2
within the meaning of the Securities Act of 1933, as amended (the "Act"), and
has not offered or sold any portion of the Shares being acquired, nor does it
have any present intention of selling, distributing or otherwise disposing of
the Shares either currently or after the passage of a fixed or determinable
period of time or upon the occurrence or nonoccurrence of any predetermined
event or circumstance in violation of the Act; provided, however, that by
making the representations herein, Subscriber does not agree to hold any of the
Shares for any minimum or other specific term and Subscriber reserves the right
to dispose of the Shares at any time in accordance with or pursuant to a
registration statement or an exemption under the Act (c) it is an "accredited
investor," within the meaning of Rule 501(a) of Regulation D under the Act, and
has not been formed for the specific purpose of acquiring the Shares; and (d)
it has such knowledge and experience in business, financial and investment
matters that it is capable of evaluating the merits and risks of an investment
in the Shares, and in acquiring the Shares, it has not acted on the basis of
any representations and warranties concerning Perfumania's business or
financial condition, other than those contained in the Offering Materials, and
has been afforded the opportunity to ask questions of, and receive answers
from, Perfumania and to obtain any additional information necessary to verify
the accuracy of any information provided by Perfumania, and in general had
access to all information it deemed material to an investment decision with
respect to the acquisition of the Shares.
5. RESTRICTIONS ON TRANSFER; REGISTRATION OF SHARES; PAYMENT IN
CERTAIN CIRCUMSTANCES.
5.1. Subscriber acknowledges that (a) the offer and sale of the Shares
have not been registered under the Securities Act of 1933, as amended (the
"Act"), or applicable state securities laws, and may not be sold, transferred,
pledged, or otherwise disposed of unless subsequently so registered or unless
Subscriber delivers to Perfumania an opinion of counsel satisfactory to
Perfumania that such sale, transfer, pledge or disposition is exempt from
registration under the Act; (b) except as provided in this Agreement,
Perfumania is under no obligation to register or facilitate any resale of the
Shares; and (c) any certificate evidencing the Shares will bear a restrictive
legend prohibiting the transfer thereof except in compliance with clause (a) of
this Section 5.1.
5.2. Perfumania shall prepare and file with the Securities and
Exchange Commission (the "SEC"), and shall use its best efforts to cause to
become effective within six (6) months after the date hereof (the "Registration
Deadline Date"), a registration statement (the "Shelf Registration Statement")
and such other documents as may be necessary in the opinion of counsel for
Perfumania, in order to comply with the provisions of the Act so as to permit
the registered resale of the Shares by Subscriber in open market transactions.
Perfumania shall give Subscriber notice, at its address set forth on the
signature page hereof, of the filing and effectiveness of the Shelf
Registration Statement. The registration rights provided under this Section 5.2
are not assignable by Subscriber.
5.3. In connection with the registration of the Shares, Perfumania
will: (a) prepare and file with the SEC a registration statement with respect
to the Shares and use its best efforts to cause such registration statement to
become effective by the Registration Deadline Date; (b) prepare and file with
the SEC such amendments and supplements to such registration statement and the
prospectus used in connection therewith as may be necessary to keep such
registration statement effective for the period (the "Effective Period")
commencing on the effective date of such registration statement (the "Effective
Date") and ending on the later of (i) six months after the Effective Date, or
(ii) one year after the date hereof, and to comply with the requirements of the
Act and the rules and regulations promulgated by the SEC thereunder relating to
the sale or other disposition of the securities covered by such registration
statement; (c) furnish to Subscriber such numbers of copies of a prospectus,
including a preliminary prospectus, complying with the requirements of the Act,
as Subscriber may reasonably request in order to facilitate the public sale or
other disposition of the Shares owned by Subscriber; and (d) use its best
efforts to register or qualify the securities covered by such registration
statement under the securities laws of any state within the United States as
Subscriber shall reasonably request, and do any and all such other acts and
things as may be necessary or advisable to enable Subscriber to consummate the
public sale or other disposition of the Shares owned by Subscriber in such
states; PROVIDED, that Perfumania shall not be obligated to register or qualify
such securities in any jurisdiction in which such registration or qualification
would require Perfumania to qualify as a foreign corporation or file any
general consent to service of process where it is not then so qualified or has
not theretofore so consented.
Page 2
<PAGE> 3
5.4. The expenses incurred by Perfumania in connection with action
taken by it to comply with Sections 5.2 and 5.3, including all registration and
filing fees, printing and delivery expenses, fees and disbursements of its
counsel and accountants, shall be paid by Perfumania. All fees and
disbursements of any counsel, experts or consultants employed by Subscriber
shall be borne by Subscriber. Perfumania shall not be obligated in connection
with any registration pursuant to this Agreement for any selling commissions or
discounts payable by Subscriber to any underwriter or broker of securities to
be sold by Subscriber.
5.5. It shall be a condition precedent to the obligation of Perfumania
to register the Shares under the Act pursuant to this Agreement that Perfumania
shall have received from Subscriber for use in the preparation of the
registration statement and prospectus such written information concerning the
Common Stock beneficially owned by Subscriber, Subscriber's intended method of
disposition of the Shares, information concerning any underwriter of such
Shares and any additional information as Perfumania shall reasonably request or
as may be required in connection with the action to be taken by Perfumania
hereunder.
5.6. In the event of any registration of the Shares under the Act
pursuant to this Agreement, Perfumania will indemnify and hold harmless
Subscriber, its officers, directors and each underwriter of such securities,
and any person who controls Subscriber or underwriter within the meaning of
Section 15 of the Act, against all claims, actions, losses, damages,
liabilities and expenses, joint or several, to which any of such persons may
become subject under the Act or otherwise, insofar as such losses, claims,
damages, liabilities or actions arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in any
registration statement under which such securities were registered under the
Act, any preliminary prospectus or final prospectus contained therein, or any
amendment or supplement thereof, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and will
reimburse Subscriber, its officers, directors and each underwriter of such
securities, and each such controlling person or entity for any legal and any
other expenses reasonably incurred by Subscriber, such underwriter, or such
controlling person or entity in connection with investigating or defending any
such loss, action, claim, damage, liability, or action; PROVIDED, that
Perfumania will not be liable in any such case to the extent that any such
loss, claim, damage, liability or action arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in said registration statement, said preliminary prospectus or said
prospectus, or said amendment of supplement in reliance upon and in conformity
with written information furnished to Perfumania by Subscriber or such
underwriter specifically for use in the preparation thereof, and PROVIDED
FURTHER, that Perfumania will not be liable in any such case to the extent that
any such loss, claim, damage or liability or action arises out of or is based
upon an untrue or alleged untrue statement or omission or an alleged omission
made in any preliminary prospectus or final prospectus if (i) Subscriber failed
to send or deliver a copy of the final prospectus or prospectus supplement with
or prior to the delivery of written confirmation of the sale of the Conversion
Shares, and (ii) the final prospectus or prospectus supplement would have
corrected such untrue statement or omission.
5.7. In the event of any registration of the Shares under the Act
pursuant to this Agreement, Subscriber will indemnify and hold harmless
Perfumania, its officers, directors and any person who controls Perfumania
within the meaning of Section 15 of the Act, against any losses, claims,
damages, liabilities, or actions, joint or several, to which Perfumania, its
officers, directors, or such controlling person or entity may become subject
under the Act or otherwise, insofar as such losses, claims, damages,
liabilities, or actions (i) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in any statement
made by Subscriber to Perfumania pursuant to Section 5.5 of this Agreement and
such untrue statement of any material fact is contained in any registration
statement under which the Shares are registered under the Act, any preliminary
prospectus or final prospectus contained therein, or any amendment or
supplement thereto, or (ii) arise out of or are based upon the omission or
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alleged omission to state in a statement made by Subscriber to Perfumania
pursuant to Section 5.5 of this Agreement a material fact required to be stated
therein or necessary to make such statements not misleading, in each case to
the extent and only to the extent that any such loss, claim, damage, liability,
or action arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in said the statement required
to be made by Subscriber pursuant to Section 5.5 and the registration
statement, said preliminary prospectus or said prospectus or said amendment or
supplement in reliance upon and in conformity with written information
furnished to Perfumania by Subscriber or any underwriter of Subscriber's
securities specifically for use in the preparation thereof.
5.8. Provided that Subscriber holds and has not sold any of the Shares
prior to the effective date of the registration statement referred to in
Section 5.2 hereof (the "Effective Date"), if on the Effective Date the Market
Price (as hereinafter defined) is less than $8.50, Perfumania will pay to
Subscriber, within ten (10) business days following the Effective Date, an
amount equal to the lesser of (a) the product of (i) the difference between
$8.50 minus the Market Price on the Effective Date, times (ii) the number of
Shares set forth in Section 1 above, or (b) the product of (x) $2.00, times (y)
the number of Shares set forth in Section 1 above. For purposes of this
Agreement, the term "Market Price" means the closing bid price per share of the
Common Stock on the Nasdaq National Market, as reported by Nasdaq. The
provisions of this Section 5.8 shall terminate and be of no further force and
effect if at any time prior to the Effective Date the Market Price equals or
exceeds $20.00.
5.9. If Perfumania fails to fully satisfy its obligations under
Sections 5.2 and 5.3 of this Agreement (a "Registration Default"), then
Perfumania shall be obligated to pay liquidated damages ("Liquidated Damages")
to Subscriber following the occurrence of such Registration Default in an
amount determined by multiplying (i) $.17 per Share not covered by an effective
registration statement by (ii) the percentage derived by dividing (A) the
actual number of days elapsed from the last day of the date of the Registration
Default or the prior 30-day period, as applicable, to the day such Registration
Default has been completely cured by (B) 30, in cash. The Liquidated Damages
payable pursuant hereto shall be payable within five (5) business days from the
end of the calendar month commencing on the first calendar month in which the
Registration Default occurs.
5.10. Perfumania covenants that it shall use its best efforts to cause
its transfer agent to comply with the terms and provisions of this Section 5.
6. MISCELLANEOUS.
6.1. Any notice or demand to be given or served in connection herewith
shall be deemed to be sufficiently given or served for all purposes by being
sent as registered or certified mail, return receipt requested, postage prepaid
or overnight courier or facsimile, in the case of Perfumania, addressed to it
at Perfumania Inc., 11701 N.W. 101st Road, Miami, Florida 33178, Attention:
President, Facsimile: (305) 888-7825, Telephone: (305) 889-1600; and in the
case of Subscriber to the address for correspondence set forth on the signature
page hereof.
6.2. Subscriber hereby acknowledges and agrees that the subscription
hereunder is irrevocable and that, except as required by law, the undersigned
is not entitled to cancel, terminate or revoke this Agreement or any agreements
of the undersigned hereunder.
6.3. This Agreement shall be governed and construed in all respects in
accordance with the laws of the State of Florida, as such laws are applied by
Florida courts to agreements entered into and to be performed in Florida by and
between residents of Florida.
6.4. This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns. If any
provision of this Agreement is invalid or unenforceable under any applicable
statute or rule of law, then such provision shall be deemed inoperative to the
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extent that it may conflict therewith and shall be deemed to be modified to
conform with such statute or rule of law. Any provision hereof that may prove
invalid or unenforceable under any law shall not affect the validity or
enforceability of any other provision hereof.
6.5. In any action, proceeding or counterclaim brought to enforce any
of the provisions of this Agreement or to recover damages, costs and expenses
in connection with any breach of the Agreement, the prevailing party shall be
entitled to be reimbursed by the opposing party for all of the prevailing
party's attorneys' fees, costs and other out-of-pocket expenses incurred in
connection with such action, proceeding or counterclaim.
6.6. This Agreement constitutes the entire agreement between the
parties hereto with respect to the subject matter hereof and supersedes any
prior oral or written communications between the parties regarding the subject
matter hereof and may be amended only by a writing executed by both parties
hereto.
IN WITNESS WHEREOF, Subscriber has executed this Subscription
Agreement as of the date first set forth above.
SUBSCRIBER:
---------------------------------------------
Name of Subscriber [Please Print]
By:
-----------------------------------------
Authorized Signatory
---------------------------------------------
Name and Title of Authorized Signatory
[Please Print]
Address; phone and fax:
---------------------------------------------
---------------------------------------------
---------------------------------------------
Tax Identification Number:
-------------------
Perfumania hereby acknowledges, agrees to and accepts the terms of the
foregoing Subscription Agreement as of the date first set forth above:
PERFUMANIA, INC.
By:
-----------------------------------
Title:
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Exhibit 10.12
SECURITIES PURCHASE AGREEMENT
This SECURITIES PURCHASE AGREEMENT (the "AGREEMENT"), dated as of
April 28, 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 A 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 A 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 one (1) business day
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
Company. Neither such inquiries nor any other due diligence investigations
conducted by such Buyer or its advisors, if any, or its representatives shall
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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 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.
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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, properties, assets, operations,
results or operations, or financial condition of the Company and its
Subsidiaries, if any, taken as a whole.
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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. 667,000 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
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
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<PAGE> 6
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, 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
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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 December 16, 1998, 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, 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.
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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.
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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 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 non-possession 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]
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<PAGE> 10
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 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.
u. CURRENT PUBLIC INFORMATION. The Company is currently
eligible to register the resale of its Common Stock on a registration statement
on Form S-3 under the 1933 Act.
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.
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<PAGE> 11
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 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. [RESERVED]
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 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
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<PAGE> 12
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.
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.
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<PAGE> 13
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 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
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<PAGE> 14
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 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.
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<PAGE> 15
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.
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 (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 $30,000.
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
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<PAGE> 16
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 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.
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<PAGE> 17
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; 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
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<PAGE> 18
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:
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.
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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.
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.
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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.
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.
20
<PAGE> 21
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: /s/ Ilia Lekach By: /s/ Mitchell P. Kopin
--------------------------- -----------------------------------------
Name: Ilia Lekach Name: Mitchell P. Kopin
------------------------- -----------------------------------
Title: Chairman and Chief Title: President - Downsview Capital
------------------------ ----------------------------------
Executive Officer The General Partner
S. ROBERT PRODUCTIONS, LLC
By: /s/ Mitchell P. Kopin
-----------------------------------------
Name: Mitchell P. Kopin
---------------------------------------
Title: President
--------------------------------------
NAMAX CORP.
By: /s/ Mark Rice
-----------------------------------------
Name: Mark Rice
---------------------------------------
Title: President
--------------------------------------
EP OPPORTUNITY FUND, L.L.C.
By: /s Jeffrey Eisenberg
-----------------------------------------
Name: Jeffrey Eisenberg
---------------------------------------
Title: Manger of Eisenberg Partners, L.L.C.,
--------------------------------------
Manager of EP Opportunity Fund, L.L.C.
21
<PAGE> 22
JJP PARTNERSHIP
By: /s/ Jerome Kahn, Jr.
----------------------------------
Name: Jerome Kahn
--------------------------------
Title: Managing General Partner
-------------------------------
EP OPPORTUNITY FUND
INTERNATIONAL, LTD.
By: /s/ Jeffrey Eisenberg
----------------------------------
Name: Jeffrey Eisenberg
--------------------------------
Title: Manager of Eisenberg Partners,
-------------------------------
L.L.C., Investment Manager of
-------------------------------
EP Opportunity Fund
-------------------------------
International, Ltd.
-------------------------------
22
<PAGE> 23
SCHEDULE 1: LIST OF INVESTORS
<TABLE>
<CAPTION>
INVESTOR ADDRESS AMOUNT OF INVESTOR'S LEGAL REPRESENTATIVES'
INVESTOR'S NAME AND FACSIMILE NUMBER NOTES ADDRESS AND FACSIMILE NUMBER
- ---------------- --------------------------- --------- ---------------------------------
<S> <C> <C> <C>
CRANSHIRE CAPITAL, L.P. 770 FRONTAGE ROAD, STE. 134 $600,000 KATTEN MUCHIN & ZAVIS
NORTHFIELD, ILLINOIS 60093 525 W. MONROE STREET
ATTENTION: MITCHELL KOPIN CHICAGO, ILLINOIS 60661-3693
TELEPHONE: (847) 784-1544 ATTENTION: ANTHONY J. RIBAUDO, ESQ.
FACSIMILE: (847) 784-1546 FACSIMILE: (312) 577-8763
TELEPHONE: (312) 902-5521
S. ROBERT PRODUCTIONS, LLC 770 FRONTAGE ROAD, STE. 134 $300,000
NORTHFIELD, ILLINOIS 60093
ATTENTION: MITCHELL KOPIN
TELEPHONE: (847) 784-1544
FACSIMILE: (847) 784-1546
NAMAX CORP. 666 DUNDEE ROAD $300,000
NORTHBROOK, ILLINOIS 60092
ATTENTION: MARK RICE
TELEPHONE: (847) 509-2290
FACSIMILE: (847) 509-2295
EP OPPORTUNITY FUND, L.L.C. 77 W. WACKER DRIVE $470,000
CHICAGO, ILLINOIS 60601
ATTENTION: JEFFREY EISENBERG
TELEPHONE: (312) 456-9500
FACSIMILE: (312) 456-9501
EP OPPORTUNITY FUND RESIDENCY: CAYMAN ISLANDS $30,000
INTERNATIONAL, LTD. FOR NOTICE PURPOSES ONLY:
77 W. WACKER DRIVE
CHICAGO, ILLINOIS 60601
ATTENTION: JEFFREY EISENBERG
TELEPHONE: (312) 456-9500
FACSIMILE: (312) 456-9501
JJP PARTNERSHIP 2 NORTH LASALLE ST. $300,000
CHICAGO, ILLINOIS 60602
ATTENTION: TRACY DAVIS
TELEPHONE: (312) 621-0647
FACSIMILE: (312) 621-3807
</TABLE>
<PAGE> 1
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 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
June 11, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PERFUMANIA, INC. FOR THE YEAR ENDED JANUARY 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-02-1997
<PERIOD-END> JAN-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,554,117
<SECURITIES> 0
<RECEIVABLES> 5,891,427
<ALLOWANCES> 704,954
<INVENTORY> 73,137,842
<CURRENT-ASSETS> 92,383,063
<PP&E> 30,209,082
<DEPRECIATION> 11,901,842
<TOTAL-ASSETS> 114,721,883
<CURRENT-LIABILITIES> 73,095,687
<BONDS> 0
0
0
<COMMON> 78,453
<OTHER-SE> 35,904,694
<TOTAL-LIABILITY-AND-EQUITY> 114,721,883
<SALES> 163,593,559
<TOTAL-REVENUES> 163,593,559
<CGS> 95,809,818
<TOTAL-COSTS> 95,809,818
<OTHER-EXPENSES> 74,972,013
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,741,320
<INCOME-PRETAX> (11,122,344)
<INCOME-TAX> (321,192)
<INCOME-CONTINUING> (10,801,152)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (631,418)
<NET-INCOME> (11,432,570)
<EPS-BASIC> (1.63)
<EPS-DILUTED> (1.63)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-30-1999
<EXCHANGE-RATE> 1
<CASH> 1,745,603
<SECURITIES> 0
<RECEIVABLES> 4,813,801
<ALLOWANCES> 704,954
<INVENTORY> 53,880,132
<CURRENT-ASSETS> 69,301,970
<PP&E> 37,194,943
<DEPRECIATION> 14,014,481
<TOTAL-ASSETS> 95,671,519
<CURRENT-LIABILITIES> 73,051,781
<BONDS> 0
0
0
<COMMON> 86,145
<OTHER-SE> 18,091,910
<TOTAL-LIABILITY-AND-EQUITY> 95,671,519
<SALES> 175,255,633
<TOTAL-REVENUES> 175,255,633
<CGS> 106,873,767
<TOTAL-COSTS> 106,873,767
<OTHER-EXPENSES> 81,782,050
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,960,851
<INCOME-PRETAX> (17,637,092)
<INCOME-TAX> 1,337,406
<INCOME-CONTINUING> (18,974,498)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,974,498)
<EPS-BASIC> (2.85)
<EPS-DILUTED> (2.85)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE COMPANY HAS RESTATED ITS FISCAL 1996 NET INCOME AND NET INCOME PER SHARE
CALCULATION TO COMPLY WITH THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE
COMMISSION STAFF POSITION ON ACCOUNTING FOR CONVERTIBLE SECURITIES HAVING
BENEFICIAL CONVERSION FEATURES.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> FEB-04-1996
<PERIOD-END> FEB-01-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 138,919,727
<TOTAL-REVENUES> 138,919,727
<CGS> 78,769,753
<TOTAL-COSTS> 78,769,753
<OTHER-EXPENSES> 52,796,059
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,153,401
<INCOME-PRETAX> 3,721,672
<INCOME-TAX> 1,646,731
<INCOME-CONTINUING> 2,074,941
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,074,941
<EPS-BASIC> .29
<EPS-DILUTED> .27
</TABLE>
