PERFUMANIA INC, S-1/A, 1999-09-22

PERFUMANIA INC
S-1/A, 1999-09-22
DRUG STORES AND PROPRIETARY STORES

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 22, 1999

REGISTRATION NO. 333-80525
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------

AMENDMENT NO. 2 TO

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------

PERFUMANIA, INC.
(Exact Name of Registrant as Specified in its Charter)
-------------------------

<TABLE>
<S> <C> <C>
FLORIDA 5912 65-0026340
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>

-------------------------
11701 N.W. 101ST ROAD
MIAMI, FLORIDA 33178
(305) 889-1600
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive office)

ILIA LEKACH
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
PERFUMANIA, INC.
11701 N.W. 101ST ROAD
MIAMI, FLORIDA 33178
(305) 889-1600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-------------------------
COPIES OF COMMUNICATIONS TO:

KENNETH C. HOFFMAN, ESQ.
GREENBERG TRAURIG, P.A.
1221 BRICKELL AVENUE
MIAMI, FLORIDA 33131
PHONE: (305) 579-0500
FAX: (305) 579-0717

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(d) under the Securities Act, check the following box and
list the Securities Act registration statement of the earlier effective
registration statement for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

SUBJECT TO COMPLETION, DATED SEPTEMBER , 1999

PROSPECTUS

1,533,515 Shares

PERFUMANIA, INC.

Common Stock

-------------------------

The selling shareholders are offering up to 1,533,515 shares of our common
stock under this prospectus.

Our common stock trades on the Nasdaq National Market under the symbol
"PRFM." On September 17, 1999 the closing price of one share of common stock on
the Nasdaq National Market was $3 15/16.

-------------------------

YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 4 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

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> 3

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 4
Forward Looking Statements.......... 7
Use of Proceeds..................... 7
Price Range of Common Stock......... 8
Dividend Policy..................... 8
Capitalization...................... 9
Selected Consolidated Financial
Data.............................. 10
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 12
Business............................ 24
Management.......................... 33
Certain Relationships and Related
Transactions...................... 40
Principal Shareholders.............. 42
Selling Shareholders................ 43
Plan of Distribution................ 46
Description of Capital Stock........ 47
Legal Matters....................... 47
Experts............................. 47
Where You Can Find More
Information....................... 48
Index to Financial Statements....... F-1
</TABLE>

-------------------------

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.

i
<PAGE> 4

PROSPECTUS SUMMARY

You should read the following summary together with the more detailed
information regarding Perfumania and the common stock being sold in this
offering, and our consolidated financial statements and notes thereto appearing
elsewhere in this prospectus.

WHO WE ARE

We are a leading specialty retailer and wholesale distributor of a wide
range of brand name and designer fragrances. As of September 17, 1999, we
operated a chain of 280 retail stores specializing in the sale of fragrances at
discounted prices up to 60% below the manufacturer's suggested retail prices.
Our wholesale division distributes approximately 1,100 stock keeping units of
fragrances and related products to approximately 41 customers, including
national and regional chains and other wholesale distributors throughout North
America and overseas. We manage and own our wholesale business and our retail
business is managed and owned by Magnifique Parfumes and Cosmetics, Inc., our
wholly owned subsidiary. Although our wholesale and retail businesses are
managed and owned by separate and distinct legal entities, for ease of reference
in this Form S-1, the wholesale and retail businesses are referred to as
segments.

RECENT DEVELOPMENTS

In February 1999, through our wholly owned subsidiary, perfumania.com,
inc., we began operation of an Internet commerce site, perfumania.com. We intend
to capitalize on our name recognition and cross marketing opportunities with our
stores to become a top discount retailer of fragrance and related products on
the Internet. All orders placed with the Internet site are shipped from our
existing distribution center in Miami, Florida.

In April 1999, perfumania.com, inc. announced that it intends to make an
initial public offering of its common stock. perfumania.com, inc. plans to raise
approximately $25 -- $32 million representing approximately 53% of the common
stock to be outstanding following the offering. Perfumania.com, inc. is offering
3,500,000 shares of its common stock, which includes 1,000,000 shares held by
us. A registration statement for the offering was filed on June 4, 1999, and the
offering should be completed as soon as practicable after the registration
statement becomes effective. The net proceeds of the offering will be used by
perfumania.com for repayment of outstanding indebtedness to us and for working
capital and other general corporate purposes as well as reduction of the
outstanding balance in our bank line of credit.

On August 31, 1999 we entered into a stock purchase agreement with an
affiliated Company through common ownership. The agreement calls for the
transfer of 1,512,406 shares of our treasury stock to this affiliated company in
consideration for a partial reduction of our outstanding trade indebtedness
balance of approximately $4.5 million. The transfer price was based on a per
share price of $2.98, which approximates 90% of the closing price on our common
stock for the previous 20 business days. Pursuant to this agreement the parties
entered into a registration rights agreement dated August 31, 1999, which grants
the affiliated company demand registration rights.

1
<PAGE> 5

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.

THE OFFERING

Common stock offered by the
selling shareholders............ 1,533,515 shares

Common stock to be outstanding
after the offering............ 10,454,656 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"
- -------------------------

(1) Includes all shares outstanding on September 17, 1999. Excludes shares of
common stock issuable upon the exercise of outstanding stock options and
additional shares of common stock reserved for future issuance under our
existing stock option plans. Assumes that the convertible notes issued in
April 1999 and July 1999 were converted into common stock on September 17,
1999.

2
<PAGE> 6

SUMMARY FINANCIAL INFORMATION

<TABLE>
<CAPTION>
YEAR ENDED TWENTY-SIX WEEKS ENDED
------------------------------------------------------------------- -----------------------
JANUARY 28, FEBRUARY 3, FEBRUARY 1, JANUARY 31, JANUARY 30, AUGUST 1, JULY 31,
1995 1996 1997 1998 1999 1998 1999
----------- ----------- ----------- ----------- ----------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................ $ 115,578 $ 129,157 $ 138,920 $ 163,594 $ 175,256 $ 78,152 $ 85,353
Gross profit............. 43,649 52,168 59,960 65,974 64,617 31,316 34,407
Total operating
expenses............... 40,634 48,214 52,606 73,162 78,017 33,037 35,242
Income (loss) from
operations before other
income (expenses)...... 3,015 3,954 7,354 (7,188) (13,400) (1,721) (835)
Income (loss) before
income taxes*.......... 957 1,206 3,722 (11,122) (17,637) (4,044) (4,403)
Income (loss) before
cumulative effect of
change in accounting
principle*............. 1,325 2,002 2,075 (10,801) (18,974) (4,044) (4,403)
Net income (loss)*....... 1,325 2,002 2,075 (11,433) (18,974) (4,044) (4,403)
Weighted average shares
outstanding:
Basic.................. 6,155,733 6,973,670 7,183,462 7,025,236 6,659,882 6,519,440 7,614,410
Diluted................ 6,210,542 7,067,291 7,633,588 7,025,236 6,659,882 6,519,440 7,614,410
</TABLE>

<TABLE>
<CAPTION>
JULY 31, 1999
-------------
<S> <C>
BALANCE SHEET DATA:
Working capital deficit..................................... $ (4,098)
Total assets................................................ 106,464
Long-term debt, less current portion(1)..................... 6,377
Total shareholders' equity.................................. 14,729
</TABLE>

- -------------------------

(1) Amount includes redeemable common equity of $471 but does not include
long-term severance payables in the amount of $561.

* 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.
3
<PAGE> 7

RISK FACTORS

Before you invest in our common stock, you should be aware of various
risks, including those described below. You should carefully consider the risks
described below, together with all of the information included in this
Prospectus, before you decide whether to purchase shares of our common stock.
The risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties that we are unaware of or that we currently
deem immaterial also may become important factors that affect us.

If any of the following risks occurs, our business, financial condition or
results of operations could be materially harmed. In that case, the trading
price of our common stock could decline, and you may lose all or part of your
investment.

This prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us described below and elsewhere in this
prospectus.

OUR BUSINESS IS SUBJECT TO SEASONAL FLUCTUATIONS, WHICH COULD LEAD TO
FLUCTUATIONS IN OUR STOCK PRICE.

We have historically experienced higher sales in the third and fourth
fiscal quarters than in the first and second fiscal quarters. People increase
their purchases of fragrances as gift items during the Christmas holiday season
which results in significantly higher fourth fiscal quarter retail sales. If our
quarterly operating results are below the expectations of stock market analysts,
our stock price would likely decline. Our quarterly results may also vary as a
result of the timing of new store openings, net sales contributed by new stores
and fluctuations in comparable sales of existing stores. Sales levels of new and
existing stores are affected by a variety of factors, including the retail sales
environment, the level of competition, the effect of marketing and promotional
programs, acceptance of new product introductions, adverse weather conditions
and general economic conditions.

WE MAY EXPERIENCE SHORTAGES OF THE SUPPLIES WE NEED TO MAKE OUT PRODUCTS BECAUSE
WE DO NOT HAVE LONG-TERM AGREEMENTS WITH SUPPLIERS.

Our success depends to a large degree on our ability to provide an
extensive assortment of brand name and designer fragrances. We have no long-term
purchase contracts or other contractual assurance of continued supply, pricing
or access to new products. While we believe that we have good relationships with
our vendors, if we are unable to obtain merchandise from one or more key vendors
on a timely basis, or if there is a material change in our ability to obtain
necessary merchandise, our results of operations could be seriously harmed.

WE MAY NOT BE ABLE TO OBTAIN THE FUNDS NEEDED UNDER OUR LINE OF CREDIT TO
OPERATE OUR BUSINESS.

As discussed above, our sales and operating results fluctuate by season,
like many specialty retailers. Our line of credit funds inventory purchases and
supports new retail store openings. Any future limitation on our borrowing
ability and access to financing could limit the opening of new stores and
obtaining merchandise on satisfactory terms. We were in violation of some debt
covenants contained in our bank line of credit agreement. These violations
included our failure to maintain the minimum tangible net worth and net income

4
<PAGE> 8

levels established by the financial covenants, purchasing treasury stock and
exceeding the limit on new store openings. On July 14, 1999, the bank gave us a
waiver through September 30, 1999. Future outstanding borrowings will bear
interest at the prime rate plus four percent. The bank agreed to less
restrictive covenants if a number of specified events happen before September
30, 1999, including the requirement that perfumania.com, inc., our wholly-owned
subsidiary, receives at least $10 million from a contemplated initial public
offering of its shares, of which at least $2 million is to be repaid to us. We
believe that the conditions included in the waiver will be met by September 30,
1999, however, there can be no assurance of this. Should we be unable to meet
these conditions, we may be required to repay outstanding amounts (totaling
approximately $34.8 million as of September 17, 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
operations, could adversely affect our business and operating results.

OUR PRESIDENT AND KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS, AND THESE KEY
PERSONNEL MAY NOT REMAIN WITH US IN THE FUTURE.

Jerome Falic, our President, is primarily responsible for our merchandise
purchases. He has developed strong, reliable relationships with suppliers and
customers of our wholesale division in the United States, Europe, Asia and South
America. The loss of his service or any of our other current executive officers
could seriously harm us.

WE RECEIVED A QUALIFIED ACCOUNTANTS' REPORT WHICH INDICATES THERE ARE DOUBTS
ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.

The report of our independent accountants in connection with our audited
consolidated financial statements as of January 31, 1998 and January 30, 1999
and for each of the three years in the period ended January 30, 1999, contains
an explanatory paragraph indicating factors which create substantial doubt about
our ability to continue as a going concern. These factors include our recurring
net losses in fiscal 1998 and 1997 and our default on our bank line of credit
agreement as a result of our violation of certain debt covenants, that, as of
April 29, 1999, had not been waived by the bank.

WE NEED TO SUCCESSFULLY MANAGE OUR GROWTH IN ORDER FOR THE ADDITION OF OUR NEW
STORES TO BE PROFITABLE.

Even though we have grown significantly in the past several years, we may
not be able to sustain the growth in the number of retail stores and revenues
that we have achieved historically. Our growth is dependent, in large part, upon
opening and operating new retail stores on a profitable basis, which in turn is
subject to, among other things, securing suitable store sites on satisfactory
terms, hiring, training and retaining qualified management and other personnel,
having adequate capital resources and successfully integrating new stores into
existing operations. It is possible that our new stores will not achieve sales
and profitability comparable to existing stores, and it is possible that the
opening of new locations will adversely effect sales at existing locations.

5
<PAGE> 9

WE COULD BE SUBJECT TO LITIGATION BECAUSE OF THE MERCHANDISING ASPECT OF OUR
BUSINESS.

Some of the merchandise we purchase from suppliers is manufactured by
entities who are not the owners of the trademarks or copyrights for the
merchandise. This practice is common in the fragrance and cosmetics business.
The owner of a particular trademark or copyright may challenge us to demonstrate
that the specific merchandise was produced and sold with the proper authority
and if we were unable to demonstrate this, we could, among other things, be
restricted from reselling the particular merchandise. This type of restriction
could seriously harm our business and results of operations.

OUR ELECTRONIC DATA-SENSITIVE EQUIPMENT MAY NOT BE READY FOR YEAR 2000 PROBLEMS.

The Year 2000 issue is the result of computer and other business systems
being written using two digits rather than four to represent the year. Many of
our time sensitive applications and business systems and the applications and
business systems of our business partners may recognize a date using "00" as the
year 1900 rather than the year 2000, which could result in system failure or
disruption of operations. Although the Year 2000 problem will impact us and our
business partners, we have made a preliminary assessment of our Year 2000
exposure and, primarily because our major management information systems are in
the process of being upgraded, we believe we will be able to achieve Year 2000
readiness for our internal systems by the fourth quarter of 1999. We are also
developing a plan of communication with our significant business partners to
obtain appropriate assurances that the Year 2000 issues are resolved in a timely
manner. We believe that we will satisfactorily resolve all significant Year 2000
problems and that the related costs will not be material. However, our estimates
of Year 2000 related costs are based on numerous assumptions, including the
continued availability of some resources, the ability to acquire accurate
information regarding third party suppliers and the ability to correct all
relevant applications and third party modification plans. We may not achieve our
estimated costs and actual costs could differ materially from those anticipated.
Moreover, the failure of a major vendor's systems to operate properly with
respect to the Year 2000 problem on a timely basis or a Year 2000 conversion
that is incompatible with our systems could seriously harm our business,
financial condition and results of operations. In addition, a significant
portion of our stores' purchases are made with credit cards, and our operations
may be seriously harmed if our customers are unable to use their credit cards
due to Year 2000 problems that are not remedied by their credit card vendors.

We are preparing contingency plans which will include the identification of
our most reasonably likely worst case scenarios. Currently, the most reasonably
likely sources of risk to us include (a) the disruption of our internal
inventory management system, (b) the inability of principal suppliers or
logistics providers to be Year 2000-ready, which could result in delays in
product deliveries from the suppliers or logistics providers, and (c) failure of
systems and necessary infrastructure including electricity supply. We are
preparing plans to flow inventory around an assumed period of disruption to our
stores, which could include accelerating distribution of high volume merchandise
and critical products to reduce the impact of significant failure.

6
<PAGE> 10

A COMPLAINT HAS BEEN FILED AGAINST US IN CONNECTION WITH THE BANKRUPTCY OF A
FORMER CUSTOMER WHICH COULD RESULT IN SUBSTANTIAL DAMAGES.

We are 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 because our Chairman of the Board and Chief Executive
Officer was the principal of the entity that controlled Luria's. In October
1998, the committee of unsecured creditors in Luria's bankruptcy proceedings
filed a complaint with the United States Bankruptcy Court, Southern District of
Florida. The complaint alleges that Luria's made payments to us in preference to
other creditors. The complaint seeks recovery of the preference payments, and
seeks to disallow any and all of our claims against Luria's until we have made
full payment of the preference payments. In July 1999, we agreed with the
committee of unsecured creditors to settle all claims held by Luria's against us
for the sum of $1.2 million, payable over the next nine months according to a
repayment schedule. This settlement is subject to the approval of the Bankruptcy
Court. The full amount of the settlement was accrued for in our financial
statements for the years ending January 31, 1998 and January 30, 1999.

A COMPLAINT WAS FILED AGAINST US FOR INFRINGEMENT OF A THIRD PARTY'S PATENT
RIGHTS; AN ADVERSE DETERMINATION COULD REQUIRE US TO PAY SUBSTANTIAL DAMAGES.

In December 1993, the patent holder and exclusive licensee in the U.S. of
Boucheron filed a complaint against us in the United States District Court for
the Southern District of New York alleging that we infringed upon their
exclusive right to sell the Boucheron bottle and is seeking $1.5 million in
damages. Their theory is that they have a valid patent for the bottles and that
our sales of such bottles infringes upon their patent rights. We believe that a
patentee cannot control by resort to an infringement suit the resale of a
patented article which it has sold. We filed a motion to dismiss during February
1994. On March 20, 1995, the court denied our motion to dismiss, and on April
14, 1995, we filed an answer to the complaint. Discovery is in progress.

FORWARD LOOKING STATEMENTS

Some of the statements in this prospectus, including those that contain the
words "anticipate," "believe," "plan," "estimate," "expect," "should," "intend"
and other similar expressions, are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Those
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
Perfumania or its industry to be materially different from any future results,
performance or achievements expressed or implied by those forward-looking
statements. Those factors include, among other things, those risks identified in
"Risk Factors." You should carefully consider the risks described in this
prospectus.

USE OF PROCEEDS

We will not receive any of the proceeds from the sale of the common stock
by the selling shareholders hereunder. We estimate that our expenses in
connection with this offering will be approximately $150,000.

7
<PAGE> 11

PRICE RANGE OF COMMON STOCK

Our common stock has been traded on the Nasdaq National Market under the
symbol "PRFM" since December 19, 1991. The following table sets forth for the
periods indicated the range of high and low closing sales prices per share of
our common stock as reported by the Nasdaq National Market:

<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C> <C> <C>
FISCAL 1997
First Quarter............................................... $ 3 11/16 $ 2 19/64
Second Quarter.............................................. 4 5/16 2 7/8
Third Quarter............................................... 3 7/8 2 5/8
Fourth Quarter.............................................. 3 3/4 2 1/4

FISCAL 1998
First Quarter............................................... 3 1/4 2 1/4
Second Quarter.............................................. 2 13/16 1 9/16
Third Quarter............................................... 1 11/16 13/32
Fourth Quarter.............................................. 12 17/32

FISCAL 1999
First Quarter............................................... 8 11/16 2 3/4
Second Quarter.............................................. 4 7/32 3
Third Quarter (through September 17)........................ 3 15/16 2 5/16
</TABLE>

As of September 17, 1999, there were 81 holders of record of the 9,156,434
issued shares of common stock. The closing sales price for the common stock on
September 17, 1999 was $3 15/16.

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.

8
<PAGE> 12

CAPITALIZATION

The following table sets forth the capitalization of Perfumania as of July
31, 1999 and as adjusted for the issuance and assumed conversion into common
stock on September 17, 1999 of the convertible notes and the reissuance of
treasury stock on August 31, 1999. This table should be read together with our
consolidated financial statements and accompanying notes appearing elsewhere in
this prospectus.

<TABLE>
<CAPTION>
AS OF JULY 31,1999
---------------------------
ACTUAL AS ADJUSTED
------------ ------------
<S> <C> <C>
Long-term obligations, net of current
maturities(1)..................................... $ 6,376,569 $ 2,376,569

SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized, none issued and outstanding........... 0 0
Common stock, $0.01 par value; 25,000,000 shares
authorized, 9,151,384 shares issued, actual; and
10,559,010 shares issued, as adjusted............. 91,514 105,590
Capital in excess of par value...................... 55,952,849 59,346,565
Treasury stock, at cost, 1,512,406 shares, actual;
and 0 shares, as adjusted......................... (5,413,002) --
Accumulated deficit................................. (35,338,103) (35,651,927)
Notes and interest receivable from shareholder and
officers.......................................... (563,863) (563,863)
------------ ------------
Total shareholders' equity........................ 14,729,395 23,236,365
------------ ------------
Total capitalization.............................. $ 21,105,964 $ 25,615,459
============ ============
</TABLE>

- -------------------------

(1) Item includes long-term portion of notes payable, convertible notes payable,
capital leases and redeemable common equity.

9
<PAGE> 13

SELECTED CONSOLIDATED FINANCIAL DATA

This section presents our selected financial data. You should read this
selected data with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section later in this prospectus as well as
our financial statements and related notes contained later in this prospectus.

Our fiscal year end is the Saturday closest to January 31. All references
in this prospectus to fiscal years are to the calendar year in which the fiscal
year begins; for example, fiscal year 1998 refers to the fiscal year that began
on February 1, 1998 and ended on January 30, 1999. The following selected
consolidated financial statements as of and for the fiscal years ended as
indicated have been derived from our audited consolidated financial statements,
and for the twenty-six weeks ended as indicated have been derived from our
unaudited consolidated financial statements.

<TABLE>
<CAPTION>
TWENTY-SIX WEEKS
FISCAL YEAR ENDED ENDED
------------------------------------------------------------------- -----------------------
JANUARY 28, FEBRUARY 3, FEBRUARY 1, JANUARY 31, JANUARY 30, AUGUST 1, JULY 31,
1995 1996 1997 1998 1999 1998 1999
----------- ----------- ----------- ----------- ----------- ---------- ----------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales, wholesale
division................... $ 38,484 $ 36,200 $ 30,317 $ 34,032 $ 40,466 $ 23,703 $ 22,215
Net sales, retail division... 77,094 92,957 108,603 129,562 134,790 54,449 63,138
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total net sales.......... 115,578 129,157 138,920 163,594 175,256 78,152 85,353
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit, wholesale
division................... 7,573 8,784 7,614 7,942 7,545 5,100 4,667
Gross profit, retail
division................... 36,076 43,384 52,346 58,032 57,072 26,216 29,740
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total gross profit....... 43,649 52,168 59,960 65,974 64,617 31,316 34,407
---------- ---------- ---------- ---------- ---------- ---------- ----------
Selling, general and
administrative expenses.... 37,081 43,372 48,165 64,219 72,502 30,800 32,898
Provision for doubtful
accounts................... 27 310 500 1,730 -- 60 30
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 2,177 2,314
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses............... 40,634 48,214 52,606 73,162 78,017 33,037 35,242
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations
before other income
(expense).................. 3,015 3,954 7,354 (7,188) (13,400) (1,721) (835)
Other income (expense):
Interest expense, net*..... (2,415) (3,144) (4,110) (4,696) (4,882) (2,482) (3,804)
Other, net................. 357 396 478 762 645 159 236
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income
taxes*..................... 957 1,206 3,722 (11,122) (17,637) (4,044) (4,403)
(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) (4,044) (4,403)
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) $ (4,044) $ (4,403)
========== ========== ========== ========== ========== ========== ==========
Weighted average shares
outstanding:
Basic...................... 6,155,733 6,973,670 7,183,462 7,025,236 6,659,882 6,519,440 7,614,410
Diluted.................... 6,210,542 7,067,291 7,633,588 7,025,236 6,659,882 6,519,440 7,614,410
</TABLE>

10
<PAGE> 14

- -------------------------

* As disclosed in Note 11 to the consolidated financial statements, the net
income and the net income per share for fiscal year 1996 was restated to
account for the value attributable to the beneficial conversion feature on
certain debt issued in fiscal year 1996.

(1) Amount includes redeemable common equity of $471 as of both January 30, 1999
and July 31, 1999 but does not include long-term severance payables of
$1,038 and $561 as of January 30, 1999 and July 31, 1999, respectively.

(2) Amount includes notes and interest receivable from shareholder and officers
as of January 28, 1995, February 3, 1996, February 1, 1997, January 31,
1998, January 30, 1999, August 1, 1998 and July 31, 1999 in the amount of
$413, $538, $543, $814, $542, $971 and $564, respectively.

The fiscal 1998 financial statements have been prepared assuming we will
continue as a going concern. We have violated certain debt covenants contained
in our bank line of credit agreement; however, we obtained a waiver from the
bank on July 14, 1999.

11
<PAGE> 15

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read together with our consolidated
financial statements and related notes contained later in this prospectus. This
discussion contains forward-looking statements that are subject to business
risks and uncertainties, and our actual results of operations may differ
materially from those contained in the forward-looking statements. For a more
detailed discussion of these business risks and uncertainties, please see "Risk
Factors."

During the last three fiscal years, our retail division has accounted for
the majority of our net sales and gross profit. Our overall profitability
depends principally on our ability to purchase a wide selection of merchandise
at favorable prices. Other factors affecting our profitability include general
economic conditions, the availability to us of volume discounts and, in the
retail division, the number of stores in operation, the timing of store openings
and closings and the effect of special promotions offered by us.

The following table sets forth items from our consolidated statements of
operations expressed as a percentage of net sales for the periods indicated.

<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
---------------------------------------------------------------------
TWENTY-SIX WEEKS
FISCAL YEAR ENDED ENDED
------------------------------------------ ----------------------
JANUARY 1, JANUARY 31, JANUARY 30, AUGUST 1, JULY 31,
1997 1998 1999 1998 1999
---------- ----------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
Net sales, wholesale
division................. 21.8% 20.8% 23.1% 30.3% 26.0%
Net sales, retail
division................. 78.2 79.2 76.9 69.7 74.0
Total net sales........ 100.0 100.0 100.0 100.0 100.0
Gross profit, wholesale
division................. 25.1 23.3 18.6 21.5 21.0
Gross profit, retail
division................. 48.2 44.8 42.3 48.1 47.1
Total gross profit..... 43.2 40.3 36.9 40.1 40.3
Selling, general and
administrative
expenses................. 34.6 39.2 41.4 39.4 38.5
Provision for doubtful
accounts................. 0.4 1.1 -- -- --
Provision for impairment of
assets and store
closings................. 0.2 1.5 0.6 -- --
Depreciation and
amortization............. 2.7 2.9 2.6 2.8 2.7
Total operating
expenses............. 37.9 44.7 44.6 42.3 41.3
Income (loss) from
operations before other
income (expenses)........ 5.3 (4.4) (7.7) (2.2) (1.0)
Other income (expense):
Interest, net............ (2.9) (2.9) (2.8) (3.2) (4.5)
Other, net............... 0.3 0.5 0.4 0.2 0.3
Income (loss) before income
taxes*................... 2.7 (6.8) (10.1) (5.2) (5.2)
(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) (5.2) (5.2)
Cumulative effect of change
in accounting principle,
net of income tax
benefit.................. -- (0.4) -- -- --
Net income (loss)*......... 1.5 (7.0) (10.9) (5.2) (5.2)
</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.

12
<PAGE> 16

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 be recognized as a return
to the debt holders. In March 1996, we issued $3,000,000 of 5% convertible
debentures in a Regulation S offering to non-U.S. persons. The debentures were
convertible into shares of our common stock at any time after May 21, 1996.
Based on the market price of our common stock, the debentures had a beneficial
conversion feature of $529,412 at that point in time. Because of the SEC
announcement, we restated our 1996 net income and net income per common share
information to reflect the new accounting treatment. The net effect of the
restatement represents a non-cash interest charge in the determination of net
income.

COMPARISON OF THE TWENTY-SIX WEEKS ENDED JULY 31, 1999 WITH THE TWENTY-SIX WEEKS
ENDED AUGUST 1, 1998

NET SALES

Net sales increased 9.2% from $78.2 million in the twenty-six weeks ended
August 1, 1998 to $85.4 million in the twenty-six weeks ended July 31, 1999. The
increase in net sales was the result of a 16.0% increase in retail sales (from
$54.4 million to $63.1 million) offset by a 6.3% decrease in wholesale sales
(from $23.7 million to $22.2 million). The decrease in wholesale sales was
primarily due to unusually large sales to a wholesale customer during the first
thirteen weeks of 1998. The increase in retail sales was due to the increase in
comparable store sales of 8%. We operated 281 and 287 stores at July 1, 1999 and
August 1, 1998, respectively. Although we plan to open only 8 retail stores in
fiscal year 1999 and to close approximately 15 unprofitable stores, retail sales
are expected to increase in fiscal 1999 compared to fiscal year 1998. This is
due to an expected increase in comparable store sales due to improved
merchandising variety and clarity and reduced promotional sales of lower price
points resulting in a higher average sale per transaction.

GROSS PROFIT

Gross profit increased 9.9% from $31.3 million in the twenty-six weeks
ended August 1, 1998 (40.1% of total net sales) to $34.4 million in the
twenty-six weeks ended July 31, 1999 (40.3% of total net sales) primarily due to
increases in gross profit for both the wholesale and retail divisions.

Gross profit for the wholesale division decreased 7.8% from $5.1 million in
the first twenty-six weeks of 1998 to $4.7 million in the first twenty-six weeks
of 1999. As a percentage of net sales, gross profit for the wholesale division
decreased from 21.5% in the first twenty-six weeks of 1998 to 21.0% in the first
twenty-six weeks of 1999. The decrease in gross profit and gross profit as a
percentage of net wholesale sales was attributable to decreased sales volume and
liquidation of certain slow moving inventory items. Wholesale sales historically
yield a lower gross margin when compared to retail sales.

Gross profit for the retail division increased 13.4% to $29.7 million in
the first twenty-six weeks of 1999 from $26.2 million in the first twenty-six
weeks of 1998. This is a result of higher retail sales associated with the
operation of more stores on average during the

13
<PAGE> 17

twenty-six week period ended July 31, 1999 as compared to the twenty-six week
period ended August 1, 1998, as well as an increase in comparable store sales of
8%. As a percentage of net retail sales, gross profit for the retail division
decreased slightly from 48.1% in the first twenty-six weeks of 1998 to 47.1% in
the first twenty-six weeks of 1999. Gross margins are expected to increase
slightly during the remainder of fiscal year 1999 due to improved merchandise
buying costs, a reduction of non-designer fragrance merchandise and reduced
freight costs.

OPERATING EXPENSES

Operating expenses, which include selling, general and administrative
expenses, as well as depreciation, increased $2.2 million in the first
twenty-six weeks of 1999 compared to the first twenty-six of 1998. As a
percentage of net sales, operating expenses decreased from 42.3% in the first
twenty-six weeks of fiscal year 1998 to 41.3% in the first twenty-six weeks of
fiscal year 1999. Operating expenses as a percentage of net sales decreased due
to the impact of higher comparable retail store sales, the closure of
underperforming locations in 1998 and 1999 and the reversal of $700,000 of
accrued expenses for the Luria's litigation which was settled in July 1999. We
expect operating expenses to decrease in fiscal year 1999 compared to fiscal
year 1998 as we expect to have a net decrease in the number of stores in
operation, due to fewer openings of new stores and the closing of unprofitable
locations. In addition, we will not incur any severance expense in fiscal year
1999 and we do not expect to incur any significant expense for disposition for
fixed assets due to store closings, as these expenses were recorded in fiscal
year 1998 in anticipation of 1999 store closings.

Other expenses, which include interest expense, increased by 56.5% from
$2.3 million for the twenty-six weeks ended August 1, 1998 to $3.6 million for
the twenty-six weeks ended July 31, 1999. The increase is principally due to the
beneficial conversion cost of approximately $1.4 million associated with the
issuance of the convertible notes in April 1999 and July 1999.

As a result of the foregoing, we had a net loss of $4,403,006 in the first
twenty-six weeks of 1999 compared to a net loss of $4,044,270 in the first
twenty-six weeks of 1998. Net loss per share for the twenty-six week periods
ended July 31, 1999 and August 1, 1998, was $0.58 and $0.62 per share,
respectively.

COMPARISON OF FISCAL YEARS 1998 AND 1997

NET SALES

Net sales increased 7.1% from $163.6 million in fiscal year 1997 to $175.3
million in fiscal year 1998. The increase in net sales during fiscal year 1998
was due to a 4.0% increase in retail sales (from $129.6 million to $134.8
million), and a 18.9% increase in wholesale sales (from $34.0 million to $40.5
million). The increase in retail sales was principally due to an increase in the
number of stores operated during fiscal year 1998 compared to fiscal year 1997,
as comparable store sales were flat compared to the prior year. We believe that
various sales promotions held during the year to stimulate sales and reduce
inventory levels resulted in lower average sales per customer, which contributed
to the flat comparable store sales. We operated 289 and 285 stores at the end of
fiscal years 1998 and 1997, respectively. The increase in wholesale sales was
due to our efforts to reduce inventory levels of certain non-designer
fragrances.

14
<PAGE> 18

GROSS PROFIT

Gross profit decreased 2.1% from $66.0 million in fiscal year 1997 (40.3%
of total net sales) to $64.6 million in fiscal year 1998 (36.9% of total net
sales) as a result of higher inventory loss provisions (see below), higher sales
and gross profit in the retail division offset by lower gross profit in the
wholesale division.

Gross profit for the wholesale division decreased from $7.9 million in
fiscal year 1997 to $7.5 million in fiscal year 1998 due mainly to a $330,000
increase in inventory provisions. The wholesale division's gross margin in
fiscal 1998 was 18.6% compared to 23.3% in fiscal year 1997. The decrease in
gross margin was due to the increase in sales of non-designer fragrances in the
wholesale division and the increase in the overall ratio of wholesale sales to
retail sales in fiscal year 1998. Wholesale sales historically yield a lower
gross margin when compared to retail sales.

Gross profit for the retail division decreased 1.7% from $58.0 million in
fiscal year 1997 to $57.1 million in fiscal year 1998, principally as a result
of a $1.6 million increase in the inventory provision, offset by higher retail
sales volume. As a percentage of net retail sales, gross profit for the retail
division decreased from 44.8% in fiscal year 1997 to 42.3% in fiscal year 1998.
The decrease was due to store promotions discussed above as well as increases in
inventory provisions, freight expense and inventory shrinkage. Inventory
provisions were increased to bring the carrying cost of certain non-designer
fragrance merchandise to their estimated carrying values. We will reduce
inventory levels of this non-designer fragrance merchandise in fiscal year 1999.
Freight expenses increased primarily due to the necessity of shipping
merchandise from our distribution center to its retail stores using express
freight service during the 1998 holiday season. This resulted from a temporary
failure in our inventory management system to properly replenish the merchandise
at our retail stores. Inventory shrinkage increased due to the replenishment
situation discussed above and increased movement of inventory due to the closing
of 32 retail stores. We expect these expenses to decrease in fiscal year 1999
because non-designer fragrance merchandise will be reduced to a minimum, the
management information system will be upgraded in fiscal year 1999 and we do not
expect to close a significant number of retail stores. Furthermore, we have
hired additional loss prevention and distribution center management personnel to
ensure that shrinkage expense is reduced to an acceptable level.

OPERATING EXPENSES

Operating expenses increased $4.9 million in fiscal year 1998 compared to
fiscal year 1997, due principally to (a) a $8.3 million increase in selling,
general and administrative expenses, which includes a charge of $1.9 million
related to severance agreements with two executive officers and (b) a $1.0
million provision for disposition of fixed assets relating to retail stores
which were either closed during fiscal year 1998, or are scheduled to close
during fiscal year 1999. We do not expect to incur a significant provision for
the disposition of fixed assets in fiscal year 1999 as the fixed assets for all
stores expected to be closed in fiscal year 1999 were expensed in fiscal year
1998. The increase in selling, general and administrative expense was primarily
the result of increases in rent, payroll and other costs associated with the
operation of an average of 10 additional stores during fiscal year 1998.
Depreciation and amortization decreased $0.2 million in fiscal year 1998
compared to fiscal year 1997. As a percentage of net sales, operating expenses
decreased from 44.7% in fiscal year 1997 to 44.6% in fiscal year 1998.

15
<PAGE> 19

INTEREST EXPENSE

Interest expense (net) increased 4.0% from $4.7 million in fiscal year 1997
to $4.9 million in fiscal 1998. The increase was principally due to increased
use of lease financing for new store furniture and fixtures. See "Liquidity and
Capital Resources."

INCOME TAXES

The provision for income taxes in fiscal 1998 was $1.3 million, which
includes an increase in the valuation allowance of $1.2 million to provide fully
for the net deferred tax assets since management believes that it is more likely
than not that these amounts will not be realized due to our recurring losses.

As a result of the foregoing, we had a net loss of $18.9 million in fiscal
1998 compared to a net loss of $11.4 million in fiscal 1997.

COMPARISON OF FISCAL YEARS 1997 AND 1996

NET SALES

Net sales increased 17.8% from $138.9 million in fiscal year 1996 to $163.6
million in fiscal year 1997. The increase in net sales during fiscal year 1997
was due to a 16.8% increase in retail sales (from $108.6 million to $129.6
million), and a 16.3% increase in wholesale sales (from $30.3 million to $34.0
million). The increase in retail sales was principally due to an increase in the
number of stores operated during fiscal year 1997 (285) compared to fiscal year
1996 (262), as comparable store sales were flat compared to the prior year. We
believe that various promotions held during the year to stimulate sales and
reduce and rebalance inventory levels resulted in lower average sales per
customer, which contributed to the flat comparable store sales.

GROSS PROFIT

Gross profit increased 10.0% from $60.0 million in fiscal year 1996 (43.2%
of total net sales) to $66.0 million in fiscal year 1997 (41.4% of total net
sales) as a result of higher sales and gross profit in both the wholesale and
retail divisions.

Gross profit for the wholesale division increased from $7.6 million in
fiscal year 1996 to $7.9 million in fiscal year 1997. The wholesale division's
gross margin in fiscal 1997 was 23.3% compared to 25.1% in fiscal year 1996.

Gross profit for the retail division increased 10.9% from $52.3 million in
fiscal year 1996 to $58.0 million in fiscal year 1997, principally as a result
of higher retail sales volume. As a percentage of net retail sales, gross profit
for the retail division decreased from 48.4% in fiscal year 1996 to 44.8% in
fiscal year 1997. The decrease was due to promotions discussed above as well as
a $1.3 million increase in inventory provisions. Inventory provisions were
increased to bring the carrying cost of certain non-designer fragrance
merchandise to their estimated carrying values.

OPERATING EXPENSES

Operating expenses increased $20.6 million in fiscal year 1997 compared to
fiscal year 1996, due principally to (a) a $16.1 million increase in selling,
general and administrative expenses, which includes $1.7 million of losses
suffered from operating Perfumania's

16
<PAGE> 20

Nature's Elements stores before their conversion and/or closure, (b) a $2.4
million increase in provision for impairment of assets and store closing and (c)
a $1.2 million write off of accounts receivable from L. Luria & Son, Inc. The
increase in selling, general and administrative expense was primarily the result
of increases in rent, payroll and other costs associated with the operation of
an average of 64 additional stores during fiscal year 1997. The average number
of stores during fiscal 1997 includes 20 temporary holiday-only stores. We
intend to continue to use temporary stores in an effort to reduce our
inventories. The increase in provision for doubtful account occurred primarily
because of increased write-offs of wholesale accounts receivable. See "Liquidity
and Capital Resources." After performing a review of certain retail store
locations with significant negative cash flows, we recognized a non-cash
impairment charge of $2.2 million, representing a reduction of the carrying
amounts of fixed assets at those store locations to their estimated recoverable
amounts. We also recorded a loss of $0.3 million on disposition of fixed assets
relating to retail stores which were closed during fiscal year 1997. Due to the
heavy concentration of sales in the fourth quarter of each fiscal year, we do
not believe it is meaningful to make impairment determinations on an interim
basis during the year. Depreciation and amortization increased $0.9 million in
fiscal year 1997 compared to fiscal year 1996, due to increased fixed assets
associated with retail stores. As a percentage of net sales, operating expenses
increased from 38.0% in fiscal year 1996 to 45.8% in fiscal year 1997 due to the
above reasons.

INTEREST EXPENSE

Interest expense (net) increased 14.3% from $4.1 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

17
<PAGE> 21

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.

In April 1999 we obtained a $2.5 million advance from one of our wholesale
customers. This advance represented a prepayment for a future sale of
merchandise to the customer. During the second quarter of 1999 we provided such
merchandise and recorded the related sales to the customer upon shipment of the
merchandise.

Our $35 million line of credit contains covenants requiring the maintenance
of minimum tangible net worth and book value and the achievement of specified
levels of quarterly results of operations. The line of credit also contains
limitations on additional borrowings, capital expenditures, number of new store
openings and purchases of treasury stock and prohibits distribution of
dividends. As of January 30, 1999, we were in violation of some of the above
covenants and, as a result of these violations, were in default under the line
of credit agreement. As a result, we incurred the default rate of interest,
prime plus 4% (11.75% at January 30, 1999) beginning December 1998 and the bank
can demand payment of the amounts outstanding under the line of credit
agreement. The violations consist primarily of our failure to maintain the
minimum tangible net worth and net income levels established by the financial
covenants, purchasing treasury stock and exceeding the limit on new store
openings. On July 14, 1999, we obtained a waiver of default from the bank
through September 30, 1999 as of and for the year ended January 30, 1999. Future
outstanding borrowings will bear interest at the prime rate plus four percent.
The bank agreed to less restrictive covenants provided that certain events
commence prior to September 30, 1999. One such event includes that
perfumania.com, inc., a wholly-owned subsidiary, is to receive at least $10
million from a contemplated initial public offering of its shares, of which at
least $2 million is to be repaid to us. Management believes that the conditions
included in the waiver will be met by September 30, 1999, however, there can be
no assurance of this. Should we be unable to meet these conditions, we may be
required to repay outstanding amounts (totaling approximately $34.8 million as
of September 17, 1999) and obtain alternative sources of financing. Although we
believe that we would be able to obtain a comparable line of credit with another
lender, in the interim period, 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.

On August 31, 1999, the Company entered into a stock purchase agreement
with an affiliated Company through common ownership. The agreement calls for the
transfer of 1,512,406 shares of the Company's treasury stock to this affiliated
company in consideration for a partial reduction of the Company's outstanding
trade indebtedness balance of approximately $4.5 million. The transfer price was
based on a per share price of $2.98, which approximates 90% of the closing price
on the Company's common stock for the previous 20 business days. Pursuant to
this agreement the parties entered into a registration rights agreement dated
August 31, 1999, which grants the affiliated company demand registration rights.
The Company recorded an extraordinary loss of approximately $314,000 which will
be taken to income in the third quarter of fiscal year 1999.

Management believes that its borrowing capacity under the current bank line
of credit facility, or from an alternative line of credit facility, projected
cash flows from operations,

18
<PAGE> 22

anticipated proceeds from the initial public offering of perfumania.com, inc.
and other short term borrowings will be sufficient to support working capital
needs, capital expenditures and debt service for the next twelve months.

In July 1999, we entered into a Securities Purchase Agreement and issued an
aggregate of $2 million worth of our Series B Convertible Notes, which are
convertible into common stock. The Notes contain a beneficial conversion feature
of approximately $981,000 which will be taken by us as a non-cash interest
charge to income in the second quarter of fiscal year 1999. The agreement
requires us to file a registration statement with the Securities and Exchange
Commission within forty-five days after the date of issuance of the convertible
notes. The conversion price is the lower of (A) $3.40625 per share, subject to
adjustment and (B) the floating conversion price determined by multiplying (1)
the average closing bid price of the common stock for the three trading days
immediately preceding the date of determination, by (2) 80%, subject to
adjustment. The conversion price may be adjusted pursuant to antidilution
provisions in the convertible note. If the conversion price decreases, we are
obligated to issue additional shares of common stock.

In July 1999, we obtained a $2.5 million unsecured loan from a wholesale
customer bearing an interest rate of 24%. The loan is payable in full December
1999.

In April 1999, we entered into a Securities Purchase Agreement and issued
an aggregate of $2 million worth of our Series A Convertible Notes, which are
convertible into common stock. The 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 us to file a registration statement with the Securities and
Exchange Commission within forty-five days after the date of issuance of the
convertible notes. The conversion price is the lower of (A) $4.35 per share,
subject to adjustment and (B) the floating conversion price determined by
multiplying (1) the average closing bid price of the common stock for the three
trading days immediately preceding the date of determination, by (2) 80%,
subject to adjustment. The conversion price may be adjusted pursuant to
antidilution provisions in the convertible note. If the conversion price
decreases, we are obligated to issue additional shares of common stock.

In March 1999, we entered into Subscription Agreements for the sale of
235,293 shares of our common stock to a group of private investors at a price of
$8.50 per share. The proceeds of $2 million were received in January 1999. The
Subscription Agreements require that we file this registration statement with
the Securities and Exchange Commission within six months from the date of the
agreement to permit the registered resale of the shares by the investors in open
market transactions. If, on the effective date of the registration statement,
the market price is less than $8.50 per share, we are obligated to reimburse the
investor group the lesser of (a) the product of the difference between $8.50 and
the closing bid price of the common stock on the effective date of this
registration statement multiplied by the number of shares issued under the
Subscription Agreements or (b) the product of $2.00 multiplied by the number of
shares issued under the Subscription Agreements. As of January 30, 1999, the
potential redeemable amount of $470,588 was recorded as redeemable common equity
and the remaining $1,529,412 was recorded as capital in excess of par value in
the accompanying balance sheets.

On March 21, 1996, we sold 180,000 shares of common stock for approximately
$956,000 in a private placement.

19
<PAGE> 23

On March 25, 1996, we issued $3,000,000 of 5% Convertible Debentures in a
Regulation S offering to non-U.S. persons. The debentures were convertible at
any time after May 21, 1996 into shares of common stock, at a conversion price
for each share of common stock equal to eighty-five percent of the market price
of the common stock on the date of conversion, not to exceed $8.50 per share of
common stock. The debentures were converted to approximately 918,000 shares of
the common stock in the second quarter of fiscal 1996. See Note 11 of the
consolidated financial statements.

In fiscal year 1998, net cash provided by operating activities was
approximately $13.0 million, which was primarily due to our reduction in
inventories and receivables.

Trade receivables primarily relate to our wholesale business. Trade
receivables due from customers at January 30, 1999 were $4.1 million. Of this,
approximately $1.3 million was more than 90 days past due. Of the $6.1 million
of trade receivables due from customers at July 31, 1999, approximately $1.4
million was more than 90 days past due. The allowance for doubtful accounts was
approximately $0.7 million at January 30, 1999 and July 31, 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 and July 31, 1999.

During fiscal year 1998, inventories decreased by approximately $15.5
million due to (a) our efforts to reduce inventory levels and (b) an inventory
provision during the fourth quarter of $3.8 million related primarily to
non-designer fragrances we intend to liquidate in fiscal year 1999.

Inventory levels increased by $9.1 million to $63.0 million at July 31,
1999 compared with $53.9 million as of January 30, 1999. Inventory levels as of
January 30, 1999 were unusually low as management focused on reducing the levels
of non-designer and slow moving merchandise by liquidating such merchandise
through our wholesale division. Furthermore, due to significant capital
expenditures in fiscal year 1998 for new store openings and store remodels, we
were unable to maintain optimal levels of inventory during the fourth quarter of
1998. During the first two quarters ended July 31, 1999, we have been able to
increase our inventory levels and improve the variety and freshness of our
merchandise assortment which has helped increase our retail sales performance.
From January 30, 1999 to July 31, 1999, accounts payable -- affiliates and
accounts payable -- no affiliates increased by $6.5 million and $1.5 million,
respectively, due to the corresponding increase in merchandise inventory.

Net cash used in investing activities during fiscal year 1998 was
approximately $9.5 million, principally due to capital expenditures related to
opening new stores and renovation of existing stores. We intend to slow our
growth and open only 8 stores in fiscal year 1999 versus 36 stores in fiscal
year 1998. In addition, we do not plan any significant renovations of existing
stores in fiscal year 1999, whereas 18 Nature's stores were completely remodeled
in fiscal year 1998. Thus, store-related capital expenditures for fiscal year
1999 are projected to be significantly lower than fiscal year 1998. Although we
intend to upgrade various components of our management information systems and
will also make various hardware and software enhancements, total capital
expenditures for fiscal year 1999 are projected to be $4.0 million of which
approximately $1.8 million pertains to new store openings and $2.2 million
pertains to hardware, software and other corporate improvements. Currently, our
average capital expenditure for opening a store is approximately $175,000,
including furniture and fixtures, equipment and other items, which average
approximately $50,000 per store, build-out costs, which average approximately
$120,000

20
<PAGE> 24

per store, and pre-opening expenses, such as the hiring and training of new
employees and travel, which average approximately $5,000 per store. In addition,
initial inventory (not including inventory replenishment) in a new store ranges
from approximately $100,000 during the first fiscal quarter to approximately
$140,000 during the Christmas holiday season. Wholesale inventory levels vary
significantly during the fiscal year depending upon availability, price and
selection of merchandise available for purchase, and seasonality. We generally
carry at least four months' supply of inventory for our retail and wholesale
divisions.

We also repurchased approximately 294,000 shares of our common stock for
$0.9 million in fiscal year 1998.

SEASONALITY AND QUARTERLY RESULTS

Our operations have historically been seasonal, with generally higher sales
in the third and fourth fiscal quarters than in the first and second fiscal
quarters. Significantly higher fourth fiscal quarter retail sales result from
increased purchases of fragrances as gift items during the Christmas holiday
season. Our quarterly results may also vary due to the timing of new store
openings, net sales contributed by new stores and fluctuations in comparable
sales of existing stores. Wholesale sales vary by fiscal quarter as a result of
the selection of merchandise available for sale and the need for us to stock our
retail stores for the Christmas holiday season. Therefore, the results of any
interim period are not necessarily indicative of the results that may be
expected during a full fiscal year. See Note 15 of the Notes to Consolidated
Financial Statements for additional information regarding quarterly financial
data.

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

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<PAGE> 25

communications with our significant suppliers and service providers to determine
the extent to which our systems may be vulnerable if suppliers and providers
fail to address and correct their own Year 2000 issues. We cannot guarantee that
the systems of suppliers or other companies on which we rely will be Year 2000
compliant.

We will track the Year 2000 compliance status of our material vendors and
suppliers via our own internal vendor compliance effort. Year 2000
correspondence will be sent to critical vendors and suppliers by the second
quarter of 1999, with continued follow up for those who fail to respond. All
vendor responses will be evaluated to assess any possible risk to or effect on
our operations. Prior to mid 1999, we expect to implement additional procedures
for assessing the Year 2000 compliance status of our most critical vendors and
will modify our contingency plans accordingly.

We are preparing contingency plans which will include the identification of
our most reasonably likely worst case scenarios. Currently, the most reasonably
likely sources of risk to us include (a) the disruption of our internal
inventory management system, (b) the inability of principal suppliers or
logistics providers to be Year 2000-ready, which could result in delays in
product deliveries from such suppliers or logistics providers and (c) failure of
hardware and software utilized by transportation vendors as a result of a
general failure of systems and necessary infrastructure such as electricity
supply. We are preparing plans to flow inventory around an assumed period of
disruption to our stores, which could include accelerating distribution of high
volume merchandise and critical products to reduce the impact of significant
failure.

Based on our current assessment efforts, we do not believe that Year 2000
issues will have a material adverse effect on our financial condition or results
of operations. However, our Year 2000 issues and any potential business
interruptions, costs, damages or losses related thereto, are dependent, to a
significant degree, upon the Year 2000 compliance of third parties, such as
government agencies, vendors and suppliers. Consequently, we are unable to
determine at this time whether Year 2000 failures will materially affect our
business. We believe that our compliance efforts have and will reduce the impact
of any failures.

RECENT ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income," which establishes standards for reporting and display of
comprehensive income and its components. In June 1997, the FASB also issued
Statement of 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.

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<PAGE> 26

In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of
Start-Up Activities," which requires us to expense preopening expenses as
incurred. We early adopted SOP 98-5 in fiscal year 1997. See Note 2 of Notes to
Consolidated Financial Statements.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). Among other provisions, SFAS No. 133
establishes accounting the reporting standards for derivative instruments and
for hedging activities. It also requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 is effective
for financial statements for fiscal years beginning after June 15, 2000.
Management has not determined the effect, if any, of adopting SFAS No. 133.

CHANGES IN FOREIGN EXCHANGE RATES CREATE RISK

Although large fluctuations in foreign exchange rates could have a material
effect on the prices we pay for products we purchase from outside the United
States, the prices obtainable for sales denominated in foreign currencies and
wholesale sales to foreign customers, such fluctuations have not been material
to our results of operations to date. Transactions with foreign suppliers
generally are in United States dollars. We believe that inflation has not had a
material impact on our results of operations and that we are generally able to
pass through any cost increases in the form of increased sales prices.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

Our exposure to market risk for changes in interest rates relates primarily
to our bank line of credit. The bank line of credit bears interest at a variable
rate, as discussed above under "Liquidity and Capital Resources." We mitigate
interest rate risk by continuously monitoring the interest rates.

The table below presents the outstanding principal amount and the related
fair value at January 30, 1999, together with the weighted average interest rate
and maturity date of our bank line of credit.

<TABLE>
<CAPTION>
OUTSTANDING FAIR WEIGHTED AVERAGE MATURITY
PRINCIPAL AMOUNT VALUE INTEREST RATE DATE
---------------- ----------- ---------------- ----------
<S> <C> <C> <C> <C>
Bank Line of Credit...... $30,035,019 $30,035,019 10.83% April 2001
</TABLE>

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<PAGE> 27

BUSINESS

We are a leading specialty retailer and wholesale distributor of a wide
range of brand name and designer fragrances.

As of September 17, 1999, we operated a chain of 280 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 our stores offer an extensive assortment of brand name
and designer fragrances at discount prices. We post highly visible price tags
for each item in a store, listing both the manufacturers' suggested retail price
and our discounted prices in order to enable customers to make price
comparisons. In addition, we have sales promotions such as "gift with purchase"
and "purchase with purchase" offers. From time to time Perfumania test markets
in its stores additional specialty gift items.

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<PAGE> 28

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

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<PAGE> 29

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.

STORE LOCATION AND EXPANSION

Perfumania's 280 stores are located in 36 states, the District of Columbia
and Puerto Rico, including the following states:

- 49 in Florida,

- 33 in New York,

- 22 in California and

- 20 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

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<PAGE> 30

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 September 17, 1999, we had opened 5 stores and closed 14 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 8 stores and closing up 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.

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

27
<PAGE> 31

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 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.

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<PAGE> 32

THE MERCHANDISING ASPECT OF THE FRAGRANCE BUSINESS HAS LITIGATION EXPOSURE

Some of the merchandise we purchase from suppliers is manufactured by other
entities who are not the owners of the trademarks or copyrights for the
merchandise. This is common in the fragrance and cosmetics business. If we were
called upon or challenged by the owner of a particular trademark or copyright to
demonstrate that the specific merchandise was produced and sold with the proper
authority and we were unable to do so, we could, among other things, be
restricted from reselling the particular merchandise or be subjected to other
liabilities, which could have an adverse effect on our business and results of
operations.

During fiscal 1998, less than 30 percent of our merchandise was purchased
from sources who do not disclose the identity of their suppliers, because the
sources consider supplier information to be proprietary trade information. As a
result, we cannot specifically determine what portion of our merchandise
purchased from these sources could expose us to the type of actions discussed
above or actions on other grounds. We cannot assure you that our secondary
sources of supply or other business activities will not be limited or eliminated
by future judicial, legislative or administrative agency action, including
possible import, export, tariff or other trade restrictions. In addition, we
cannot assure you that our business activities will not become the subject of
legal or administrative actions brought by manufacturers, distributors or
others.

DISTRIBUTION

Our warehouse in Miami, Florida services our retail and wholesale
operations. The facility's lease expires in July 2003. The warehouse has
approximately 139,000 square feet, of which 20,000 square feet are used as
office space. Our wholesale division also uses space in a bonded warehouse owned
by a third party.

Perfumania delivers merchandise utilizing our own trucks to our South
Florida stores and utilize independent national trucking companies to deliver
merchandise to stores outside of the South Florida area. Deliveries generally
are made weekly, with more frequent deliveries during the Christmas holiday
season. These deliveries permit the stores to minimize inventory storage space,
and increase the space available for display and sale of merchandise. Perfumania
ships merchandise to wholesale customers by truck, ship or plane. In addition,
in order to expedite delivery of merchandise to our customers, we sometimes
instruct our suppliers to ship merchandise directly to wholesale division
customers.

COMPETITION

The retail and wholesale fragrance businesses are highly competitive.

Retail competitors include:

- department stores, including Macy's, Dillards, JC Penney and Sears,

- regional retail chains, including Sephora and The Cosmetic Company Store,

- national retail chains, including Bath and Body Works, Garden Botanika
and Victoria's Secret,

- independent drug stores,

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<PAGE> 33

- 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:

- 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 September 17, 1999, we had 1,624 employees in the following areas:

- 1,449 in retail stores,

- 70 in warehouse and distribution operations and

- 105 in executive, administrative and other positions.

We usually hire temporary and part-time employees during peak sales
periods, especially between Thanksgiving and Christmas. None of our employees is
covered by a collective bargaining agreement, and we consider our relationship
with employees to be good.

TRADE NAME AND SERVICE MARK

Our stores use the trade name and service mark Perfumania(R). We also
operate under the following trade names:

<TABLE>
<S> <C> <C>
Nature's Element -- 17 stores
Class Perfumes -- 3 stores
Perfumania Plus -- 10 stores
</TABLE>

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.

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<PAGE> 34

RECENT DEVELOPMENTS

In February 1999, Perfumania, through its wholly owned subsidiary,
perfumania.com, inc., began operation of an Internet commerce site,
perfumania.com. We intend to capitalize on our name recognition and cross
marketing opportunities to become a top discount retailer of fragrance and
related products on the Internet. All orders placed with the Internet site are
shipped from our existing distribution center in Miami, Florida.

In April 1999, perfumania.com, inc. announced that it intends to make an
initial public offering of its common stock. perfumania.com, inc. plans to raise
approximately $25 - $32 million representing approximately 53% of the common
stock to be outstanding following the offering. perfumania.com, inc. is offering
3,500,000 shares of its common stock, which includes 1,000,000 shares held by
us. A registration statement for the offering was filed on June 4, 1999, and the
offering should be completed as soon as practicable after the registration
statement becomes effective. The net proceeds of the offering will be used for
repayment of outstanding indebtedness to us and for working capital and other
general corporate purposes as well as reduction of the outstanding balance in
our bank line of credit.

PROPERTIES

The lease for our executive offices is for a ten (10) year term (expiring
July 2003) with monthly rental payments of approximately $70,000 and specified
annual increases thereafter.

All of our retail stores are located in leased premises. Most of the store
leases have a fixed amount of base rent plus a percentage of sales, ranging from
3% to 10%, over certain minimum sales levels. Store leases typically require us
to pay all utility charges, insurance premiums, increases in property taxes and
some other costs. Some of our leases permit the lessor to terminate the lease if
specified minimum sales levels are not met.

LEGAL PROCEEDINGS

BOUCHERON. In December 1993, the patent holder and exclusive licensee in
the U.S. of Boucheron filed a complaint against us in the United States District
Court for the Southern District of New York alleging that we infringed upon
their exclusive right to sell the Boucheron bottle and is seeking $1.5 million
in damages. Their theory is that they have a valid patent for the bottles and
that Perfumania's sales of such bottles infringes upon their patent rights. We
believe that a patentee cannot control by resort to an infringement suit the
resale of a patented article which it has sold. We filed a motion to dismiss
during February 1994. On March 20, 1995, the court denied our motion to dismiss,
and on April 14, 1995, we filed an answer to the complaint. Discovery is in
progress.

OTHER. We are 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 because our Chairman of the Board and Chief
Executive Officer was the principal of the entity that controlled Luria's. In
October 1998, the committee of unsecured creditors in Luria's bankruptcy
proceedings filed a complaint with the United States Bankruptcy Court, Southern
District of Florida. The complaint alleges that Luria's made payments to us in
preference to other creditors. The complaint seeks to recover the preference
payments, and seeks to disallow any and all claims against Luria's until we have
made full payment of the preference payments. In July 1999, we agreed with the

31
<PAGE> 35

committee of unsecured creditors to settle all claims held by Luria's against us
for the sum of $1.2 million, payable over the next nine months according to a
repayment schedule. This settlement is subject to the approval of the Bankruptcy
Court. The full amount of the settlement was accrued for in our financial
statements for the year ending January 31, 1998 and January 30, 1999.

From time to time, we are involved in various legal proceedings in the
ordinary course of business.

32
<PAGE> 36

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.

33
<PAGE> 37

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 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.

34
<PAGE> 38

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.

35
<PAGE> 39

EXECUTIVE COMPENSATION

The following table sets forth compensation awarded to, earned by or paid
to (a) our Chief Executive Officer, (b) each of the three other highly
compensated executive officers of Perfumania who were serving as executive
officers at the end of the last completed fiscal year, other than the Chief
Executive Officer, whose compensation exceeded $100,000 at the end of the last
fiscal year (collectively, the "Named Executive Officers"), for services
rendered to Perfumania during fiscal year 1998, 1997 and 1996, and (c) those
individuals for whom disclosures would have been provided but for the fact that
the individual was not serving as an executive officer of Perfumania at the end
of the last fiscal year.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------------
ANNUAL 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 1996 236,250 61,000 0 0 0
Board

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.

36
<PAGE> 40

(5) Simon Falic resigned on January 29, 1999, at which time he served as
President, Chief Financial Officer, Chief Operating Officer, Treasurer and
Secretary.

(6) Represents severance payments in accordance with individual separation
agreements with each receiving the amount indicated over a 36-month term.

(7) Mr. Friedman resigned on October 28, 1998 as Chief Financial Officer, Chief
Operating Officer, Treasurer and Secretary.

(8) Includes options repriced effective October 28, 1998 in the following
amounts: Ilia Lekach (375,000); Jerome Falic (100,000); Mark Finer (60,000);
Claire Fair (21,500), Simon Falic (100,000); and Ron Friedman (429,000).

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
--------------------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
% OF TOTAL AT ASSUMED ANNUAL RATES
OPTIONS OF STOCK PRICE
NUMBER GRANTED TO APPRECIATION FOR OPTION
OF OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION 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 $117,938 $260,760
375,000(2) 20 0.50 2008 103,156 298,125
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.

37
<PAGE> 41

(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.

<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
SHARES ACQUIRED VALUE FISCAL YEAR-END(#) AT FISCAL YEAR-END($)
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- --------------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Ilia Lekach.......... -- -- 775,000/0 $ 8,061,938/0
Jerome Falic......... -- -- 334,500/0 2,439,386/0
Marc Finer........... 33,000 $120,375 27,000/0 280,868/0
Claire Fair.......... 9,500 97,532 9,500/7,500 98,824/78,019
Simon Falic.......... -- -- 154,500/0 1,607,186/0
Ron A. Friedman...... 429,000 175,890 -- --
</TABLE>

LONG-TERM INCENTIVE AND PENSION PLANS

We do not have any long-term incentive or pension plans.

EMPLOYMENT AGREEMENTS

Effective February 1, 1999, we entered into 3-year employment agreements
with Ilia Lekach and Jerome Falic. The employment agreements provide for annual
salaries of $400,000 and $318,347, respectively, subject to cost-of-living
increases, or 5% if higher. The employment agreements provide that Mr. Lekach
and Mr. Falic will continue to receive their annual salary until the expiration
of the term of their employment agreements if their employment is terminated by
us for any reason other than death, disability or cause (as defined in the
employment agreements). The agreements contain a performance bonus plan which
provides for additional compensation and grant of stock options, if we meet
certain net income levels. The employment agreements also prohibit the employees
from directly or indirectly competing with us during the term of their
employment and for one year after termination of employment except in the case
of termination of employment by us without cause.

38
<PAGE> 42

Effective August 1996, we entered into a 3-year employment agreement with
Marc Finer and Claire Fair. The employment agreements provide for an annual
salary of $175,000 and $100,000, respectively, subject to cost-of-living
increases, or 5% if higher. The agreements provide that Mr. Finer and Ms. Fair
will continue to receive their salary until the expiration of the term of the
employment agreement if his employment is terminated by us for any reason other
than death, disability or cause (as defined in the employment agreements). There
is a performance bonus plan in the agreement, which provides for additional
compensation and a grant of stock options, if we meet certain net income levels.
The employment agreements also prohibit them from directly or indirectly
competing with Perfumania during the term of their employment and for one year
after termination of employment except in the case of termination of employment
by us without cause.

SEPARATION AGREEMENTS

Upon his resignation, Mr. Simon Falic entered into a separation agreement
with us, pursuant to which we will make $1,303,588 in severance payments to him,
subject to applicable withholding taxes, which is payable as follows: $300,000
in January 1999 and the balance payable in monthly installments of $26,529
during fiscal 1999, $27,855 during fiscal 2000 and $29,248 during fiscal 2001.
Mr. Falic continues to receive health, dental and life insurance coverage, on
the same basis as prior to his resignation for an additional 36 months.

Upon his resignation, Mr. Friedman entered into a separation agreement with
us pursuant to which we will make severance payments of $826,232, subject to
applicable withholding taxes, payable as follows: $119,046 in January 1999 and
the balance in monthly installments of $20,136 from February through October
1999 and $18,948 from November 1999 through November 2001. Mr. Friedman will
continue to receive health, dental and life insurance coverage, on the same
basis as prior to his resignation for an additional 36 months. Additionally, we
shall convert the previously granted options into shares of common stock.

39
<PAGE> 43

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. On August 31, 1999 we entered into a stock
purchase agreement with Parlux. The agreement calls for the transfer of
1,512,406 shares of our treasury stock to Parlux in consideration for a partial
reduction of our outstanding trade indebtedness balance of approximately $4.5
million. The transfer price was based on a per share price of $2.98, which
approximates 90% of the closing price on our common stock for the previous 20
business days. Pursuant to this agreement the parties entered into a
registration rights agreement dated August 31, 1999, which grants Parlux demand
registration rights.

RELATIONSHIP WITH L. LURIA & SON, INC. L. Luria & Son, Inc. is a public
company that was a specialty discount retailer selling a broad line of products.
Ilia Lekach, our Chairman of the Board and Chief Executive Officer, and one of
our principal shareholders, was the Chairman of the Board of Luria's. During
fiscal year 1998, 1997 and 1996, we sold approximately $0, $2.0 and $2.5
million, respectively, of merchandise to Luria's, representing approximately 0%,
1% and 2%, respectively, of our total sales. We believe that our sales of
merchandise to Luria's, were, except for credit terms, on terms no less
favorable to us than could reasonably be obtained in arm's length transactions
with independent third parties. During August 1997, Luria's filed for relief
under Chapter 11 of the United States Bankruptcy Code. We are an unsecured
creditor of Luria's and in fiscal year 1997 we wrote off receivables from
Luria's in the amount of $1.2 million. We have been characterized as an insider
as defined by the United States Bankruptcy Code, in the liquidating plan of
reorganization filed on April 6, 1998 by Luria's in the United States Bankruptcy
Court, Southern District of Florida because our Chairman of the Board and Chief
Executive Officer was the principal of the entity that controlled Luria's. In
August 1998, the committee of unsecured creditors in Luria's bankruptcy
proceedings filed a complaint with the United States Bankruptcy Court, Southern
District of Florida, to recover substantial funds from us. The complaint alleges
that Luria's made preference payments, as defined by the Bankruptcy Court, to us
and seeks recovery of said preference payments, as well as the disallowment of
any and all claims of us against Luria's until full payment of the preference
payments have been made. In July 1999, we agreed with the committee of unsecured
creditors to settle all claims held by Luria's against us for the sum of $1.2
million, payable over the next nine months according to a repayment schedule.
This settlement is subject to the approval of the Bankruptcy Court. The full
amount of the settlement was accrued for in our financial statements for the
years ending January 31, 1998 and January 30, 1999.

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

40
<PAGE> 44

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, $457,243 and
$417,763, 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.

41
<PAGE> 45

PRINCIPAL SHAREHOLDERS

The following table sets forth, as of September 17, 1999, information with
respect to the beneficial ownership of Perfumania's common stock by (i) each
person known by Perfumania to beneficially own more than 5% of the outstanding
shares of common stock, (ii) each director of Perfumania, (iii) each Named
Executive Officer, and (iv) all directors and executive officers of Perfumania
as a group.

<TABLE>
<CAPTION>
COMMON STOCK BENEFICIALLY OWNED
--------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) SHARES PERCENT(8)
- --------------------------------------- ---------- -----------
<S> <C> <C>
Ilia Lekach...................................... 1,459,995(2)(3)(4) 14.7%
Simon Falic(5)................................... 683,050(2)(4) 7.2
Rachmil Lekach................................... 675,125(2)(4) 7.3
Jerome Falic..................................... 923,230(3)(4) 9.7
Marc Finer....................................... 27,000(4) *
Claire Fair...................................... 18,000(4) *
Robert Pliskin................................... 4,000(4) *
Carole A. Taylor................................. 3,800(4) *
Donovan Chin..................................... 9,500(4) *
Horatio Groisman, M.D. .......................... 2,000(4) *
Parlux Fragrances, Inc.(6)....................... 1,512,406 16.5
All directors and executive officers as a group
(8 persons).................................... 2,447,525(7) 23.7
</TABLE>

- -------------------------

* Less than 1%.

(1) The address of each of the beneficial owners identified is 11701 NW 101st
Road, Miami, Florida 33178 except as otherwise noted.

(2) Ilia Lekach, Simon Falic and Rachmil Lekach jointly own with their spouses
the shares set forth opposite their respective names.

(3) Includes 12,300 shares of common stock owned by Pacific Investment Group, a
corporation wholly owned by Mr. Lekach.

(4) Includes shares of common stock issuable upon the exercise of stock options
within 60 days of September 17, 1999 in the following amounts: Ilia Lekach
(775,000); Rachmil Lekach (150,000); Simon Falic (334,500); Jerome Falic
(334,500); Robert Pliskin (4,000); Marc Finer (27,000); Donovan Chin
(9,500); Horatio Groisman, M.D. (2,000); Claire Fair (17,000); and Carole A.
Taylor (3,800).

(5) The address of Mr. Simon Falic is 150 Harbor Way, Bal Harbour Florida 33154.

(6) The address of Parlux is 3725 S.W. 30th Avenue, Ft. Lauderdale, Florida
33312.

(7) Includes 1,172,800 shares of common stock issuable upon the exercise of
stock options within 60 days of September 17, 1999.

(8) Based on 9,156,434 shares outstanding on September 17, 1999.

42
<PAGE> 46

SELLING SHAREHOLDERS

The following table provides information regarding the beneficial ownership
of the common stock by the selling shareholders as of the date of this
prospectus and as adjusted to reflect the sale of all of their shares. The
selling shareholders either (a) obtained their shares of common stock pursuant
to the Subscription Agreements, dated March 22, 1999, (b) obtained Series A
Convertible Notes which are convertible into common stock pursuant to the terms
of the Securities Purchase Agreement, dated April 28, 1999, or (c) Series B
Convertible Notes which are convertible into Common Stock pursuant to the terms
of the Securities Purchase Agreement, dated as of July 8, 1999. No selling
shareholder has had any position, office or other material relationship with
Perfumania within the past three years. The selling shareholders are
participating in this offering pursuant to contractual registration rights
granted to the selling shareholders in connection with the Subscription
Agreements and Securities Purchase Agreements. In connection with the
Subscription Agreements and the Securities Purchase Agreements, we have agreed
to file and maintain the effectiveness of the registration statement of which
this prospectus forms a part and to pay all fees and expenses incident to the
registration of this offering, including all registration and filing fees, all
fees and expenses of complying with state blue sky or securities laws, all costs
of preparation of the registration statement and fees and disbursements of our
counsel and independent public accountants.

43
<PAGE> 47

<TABLE>
<CAPTION>
$ OF $ OF
SERIES A SERIES B
CONVERTIBLE NUMBER OF CONVERTIBLE NUMBER OF
NOTES SHARES NOTES SHARES
SHARES PURCHASED ASSUMING PURCHASED ASSUMING
ACQUIRED IN UNDER CONVERSION OF UNDER CONVERSION OF
SUBSCRIPTION SECURITIES THE SERIES A SECURITIES SERIES B
AGREEMENT, PURCHASE CONVERTIBLE PURCHASE CONVERTIBLE
DATED AGREEMENT, NOTES ON AGREEMENT, NOTES ON
NAME AND ADDRESS MARCH 22, DATED APRIL SEPTEMBER 17, DATED JULY 8, SEPTEMBER 17,
OF BENEFICIAL OWNER 1999 28, 1999 1999(1) 1999 1999(1)(2)
------------------- ------------ ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
S. Robert Productions, LLC(6).... 58,823 $ 300,000 105,572 $ 200,000 70,381
666 Dundee Road
Suite 1801
Northbrook, IL 60062
Cranshire Capital, L.P.(7)....... 117,647 600,000 211,143 700,000 136,930
666 Dundee Road
Suite 1801
Northbrook, IL 60062
Namax Corp(8).................... 58,823 300,000 105,572 -- --
666 Dundee Road
Northbrook, IL 60062
EP Opportunity Fund, L.L.C.(9)... -- 470,000 165,396 637,000 224,164
77 West Wacker Drive
Chicago, IL 60601
EP Opportunity Fund
International, Ltd.(10)......... -- 30,000 10,558 35,000 12,317
77 West Wacker Drive
Chicago, IL 60601
JJP Partnership(11).............. -- 300,000 105,572 100,000 35,191
2 North LaSalle Street
Chicago, IL 60602
The dotCom Fund, LLC(12)......... -- -- -- 300,000 105,572
666 Dundee Road
Northbrook, IL 60062
EP.com Fund, LLC(13)............. -- -- -- 28,000 9,854
77 West Wacker Drive
Chicago, IL 60601
------- ---------- ------- ---------- -------
Total......................... 235,293 $2,000,000 703,813 $2,000,000 594,409
======= ========== ======= ========== =======

OWNERSHIP AFTER
OWNERSHIP OF SHARES NUMBER OF THE OFFERING(5)
NAME AND ADDRESS ------------------------- SHARES --------------------
OF BENEFICIAL OWNER SHARES(3) PERCENTAGE(4) OFFERED SHARES PERCENTAGE
------------------- --------- ------------- --------- ------- ----------
<S> <C> <C> <C> <C> <C>
S. Robert Productions, LLC(6).... 234,776 2.5% 234,776 0 0%
666 Dundee Road
Suite 1801
Northbrook, IL 60062
Cranshire Capital, L.P.(7)....... 465,720 4.9 465,720 109,404 1.2
666 Dundee Road
Suite 1801
Northbrook, IL 60062
Namax Corp(8).................... 164,395 1.8 164,395 0 0
666 Dundee Road
Northbrook, IL 60062
EP Opportunity Fund, L.L.C.(9)... 389,560 4.1 389,560 0 0
77 West Wacker Drive
Chicago, IL 60601
EP Opportunity Fund
International, Ltd.(10)......... 22,875 * 22,875 0 0
77 West Wacker Drive
Chicago, IL 60601
JJP Partnership(11).............. 140,763 1.5 140,763 0 0
2 North LaSalle Street
Chicago, IL 60602
The dotCom Fund, LLC(12)......... 105,572 1.1 105,572 0 0
666 Dundee Road
Northbrook, IL 60062
EP.com Fund, LLC(13)............. 9,854 * 9,854 0 0
77 West Wacker Drive
Chicago, IL 60601
--------- --------- ------- ---
Total......................... 1,533,515 1,533,515 109,404 1.2%
========= ========= ======= ===
</TABLE>

- -------------------------

* Less than 1%.

(1) Assumes a conversion price of $2.84168, determined as if conversion
occurred on September 17, 1999 pursuant to the terms of the convertible
note.

(2) Under the Series B Convertible Notes, no selling shareholder can convert
the Series B Convertible Notes to the extent such conversion would cause
such selling shareholder's beneficial ownership of our common stock to
exceed 4.9% of the outstanding shares of common stock.

(3) Total shares including shares acquired pursuant to the Subscription
Agreement and Securities Purchase Agreements.

(4) Based on 9,156,434 shares issued and outstanding on September 17, 1999, and
for each selling shareholder, if applicable, assuming conversion of all
such shareholder's Series A Convertible Note and assuming conversion to the
extent contractually permitted of such shareholder's Series B Convertible
Note.

(5) Assumes sale of all of the shares offered by each selling shareholder.

(6) S. Robert Productions, LLC is a limited liability company whose manager is
Scott Casty.

44
<PAGE> 48

(7) Cranshire Capital, L.P. is a limited partnership whose general partner is
Downsview Capital, Inc., a corporation whose president is Mitchell P.
Kopin.

(8) Namax Corp. is a corporation whose president is Mark Rice.

(9) EP Opportunity Fund, L.L.C. is a limited liability company whose manager is
Eisenberg Partners, L.L.C., a limited liability company whose manager is
Jeffrey Eisenberg.

(10) EP Opportunity Fund International, Ltd., is a foreign company whose
investment manager is Eisenberg Partners, L.L.C. a limited liability
company whose manager is Jeffrey Eisenberg.

(11) JJP Partnership is a partnership whose managing general partner is Jerome
Kahn, Jr.

(12) The dotCom Fund, LLC is a limited liability company whose manager is
Minamax, LLC, a limited liability company whose manager is Mark Rice.

(13) EP.com Fund, L.L.C. is a limited liability company whose manager is
Eisenberg Partners, L.L.C., a limited liability company whose manager is
Jeffrey Eisenberg.

45
<PAGE> 49

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.

46
<PAGE> 50

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 September 17, 1999, there were 9,156,434 shares of common stock
issued held of record by approximately 81 shareholders. The common stock is
traded on the Nasdaq National Market under the symbol "PRFM."

The issued and outstanding shares of common stock are fully paid and
nonassessable. The holders of outstanding shares of common stock are entitled to
receive dividends out of assets legally available therefor at a time and in
amounts as the Board may from time to time determine. The shares of common stock
are not convertible and the holders thereof have no preemptive or subscription
rights to purchase any securities of Perfumania. Upon liquidation, dissolution
or winding up of Perfumania, the holders of common stock are entitled to receive
pro rata the assets of Perfumania that are legally available for distribution,
after payment of all debts and other liabilities. Each outstanding share of
common stock is entitled to one vote on all matters submitted to a vote of the
stockholders, including election of directors. There is no cumulative voting in
the election of directors.

PREFERRED STOCK

As of September 17, 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.

47
<PAGE> 51

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.

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.

48
<PAGE> 52

PERFUMANIA, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
ANNUAL FINANCIAL STATEMENTS PAGE
- --------------------------- ----
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Consolidated Balance Sheets as of January 31, 1998 and
January 30, 1999 and July 31, 1999 (unaudited)............ F-3
Consolidated Statements of Operations for the Fiscal Years
Ended February 1, 1997, January 31, 1998 and January 30,
1999 and the twenty-six weeks ended August 1, 1998
(unaudited) and July 31, 1999 (unaudited)................. F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Fiscal Years Ended February 1, 1997, January 31,
1998 and January 30, 1999 and the twenty-six weeks ended
July 31, 1999 (unaudited)................................. F-5
Consolidated Statements of Cash Flows for the Fiscal Years
Ended February 1, 1997, January 31, 1998 and January 30,
1999 and the twenty-six weeks ended August 1, 1998
(unaudited) and July 31, 1999 (unaudited)................. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>

F-1
<PAGE> 53

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and
Stockholders of Perfumania, Inc.

In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Perfumania, Inc. and its subsidiaries (collectively, the "Company")
at January 31, 1998 and January 30, 1999, and the results of their operations
and their cash flows for each of the three years in the period ended January 30,
1999 in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company has incurred recurring
net losses in fiscal years 1997 and 1998 and has a working capital deficit of
$3.8 million at January 30, 1999. In addition, the Company was in default of its
bank line of credit agreement as a result of its violation of certain debt
covenants. These debt covenant violations have been subsequently waived by the
bank. There is no assurance that the Company will be able to generate future net
income or secure a long-term credit facility, which creates substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

As discussed in Note 11, in 1997 the Company restated its fiscal year 1996
net income and net income per common share calculation to comply with new
requirements of the Securities and Exchange Commission Staff position on
accounting for convertible securities having beneficial conversion features.

As explained in Note 2, in 1997 the Company changed its method of
accounting for preopening expenses to conform with new requirements of the
American Institute of Certified Public Accountants.

PricewaterhouseCoopers LLP
Miami, Florida

April 29, 1999

except for the fifth

paragraph of Note 2 and the
second paragraph of Note 8

as to which the date is July 14, 1999

F-2
<PAGE> 54

PERFUMANIA, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
JANUARY 31, JANUARY 30, JULY 31,
1998 1999 1999
------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents............................ $ 1,554,117 $ 1,745,603 $ 1,344,882
Trade receivables, less allowance for doubtful
accounts of $704,954 in 1998 and 1999.............. 5,186,473 4,108,847 6,066,682
Advances to suppliers................................ 7,611,036 8,065,301 8,316,332
Inventories, net of reserve of $2,750,000 and
$4,163,251 in 1998 and 1999, respectively.......... 73,137,842 53,880,132 62,974,342
Prepaid expenses and other current assets............ 2,044,658 1,417,187 1,996,456
Tax refund receivable................................ 814,766 -- --
Deferred tax asset, net.............................. 1,219,856 -- --
------------ ----------- ------------
Total current assets............................... 91,568,748 69,217,070 80,698,694
Property and equipment, net.......................... 18,307,240 23,180,462 23,073,219
Leased equipment under capital leases, net........... 2,266,674 1,373,878 1,058,998
Other assets, net.................................... 1,764,906 1,357,966 1,632,707
------------ ----------- ------------
Total assets....................................... $113,907,568 $95,129,376 $106,463,618
============ =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Bank line of credit and current portion of notes
payable............................................ $ 34,139,766 $32,800,627 $ 37,783,279
Accounts payable -- non-affiliates................... 13,308,914 14,329,013 15,844,533
Accounts payable -- affiliates....................... 16,958,163 15,812,240 22,333,533
Accrued expenses and other liabilities............... 6,848,923 9,205,316 8,181,933
Income taxes payable................................. 505,098 485,098 368,263
Current portion of obligations under capital
leases............................................. 1,030,340 419,487 284,982
Due to related parties............................... 304,483 -- --
------------ ----------- ------------
Total current liabilities.......................... 73,095,687 73,051,781 84,796,523
Long-term portion of notes payable................... 4,709,434 2,370,684 1,397,439
Long-term portion of obligations under capital
leases............................................. 933,615 562,552 508,542
Convertible notes payable............................ -- -- 4,000,000
Long-term severance payables......................... -- 1,037,859 561,131
------------ ----------- ------------
Total liabilities.................................. 78,738,736 77,022,876 91,263,635
Commitments and contingencies........................ -- -- --
Redeemable common equity (Note 11)................... -- 470,588 470,588
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued............................ -- -- --
Common stock, $.01 par value, 25,000,000 shares
authorized, 7,845,291 and 8,614,491 shares issued
at 1998 and 1999, respectively..................... 78,453 86,145 91,514
Capital in excess of par value....................... 52,386,361 54,440,009 55,952,849
Treasury stock, at cost, 1,218,360 and 1,512,406
shares at 1998 and 1999, respectively.............. (4,521,068) (5,413,002) (5,413,002)
Accumulated deficit.................................. (11,960,599) (30,935,097) (35,338,103)
Notes and interest receivable from shareholder and
officers........................................... (814,315) (542,143) (563,863)
------------ ----------- ------------
Total stockholders' equity......................... 35,168,832 17,635,912 14,729,395
------------ ----------- ------------
Total liabilities and stockholders' equity......... $113,907,568 $95,129,376 $106,463,618
============ =========== ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE> 55

PERFUMANIA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FISCAL YEAR ENDED TWENTY-SIX WEEKS ENDED
------------------------------------------- -------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30, AUGUST 1, JULY 31,
1997 1998 1999 1998 1999
------------- ------------ ------------ ----------- -----------
(AS RESTATED, (UNAUDITED)
NOTE 11)
<S> <C> <C> <C> <C> <C>
Net sales:
Non-affiliated customers............. $136,446,104 $161,593,736 $175,255,633 $78,152,339 $85,353,478
Affiliates........................... 2,473,623 1,999,823 -- -- --
------------ ------------ ------------ ----------- -----------
138,919,727 163,593,559 175,255,633 78,152,339 85,353,478
------------ ------------ ------------ ----------- -----------
Cost of goods sold:
Non-affiliated customers............. 76,706,903 96,053,329 110,638,432 46,836,147 50,946,546
Affiliates........................... 2,252,850 1,566,489 -- -- --
------------ ------------ ------------ ----------- -----------
78,959,753 97,619,818 110,638,432 46,836,147 50,946,546
------------ ------------ ------------ ----------- -----------
Gross profit....................... 59,959,974 65,973,741 64,617,201 31,316,192 34,406,932
------------ ------------ ------------ ----------- -----------
Operating expenses:
Selling, general and administrative
expenses........................... 48,165,392 64,219,379 72,501,987 30,800,322 32,897,454
Provision for doubtful accounts...... 500,000 1,730,000 -- 60,000 30,000
Provision for impairment of assets
and store closings................. 169,159 2,514,818 1,034,717 -- --
Depreciation and amortization........ 3,771,508 4,697,816 4,480,681 2,176,473 2,314,427
------------ ------------ ------------ ----------- -----------
Total operating expenses........... 52,606,059 73,162,013 78,017,385 33,036,795 35,241,881
------------ ------------ ------------ ----------- -----------
Income (loss) from operations before
other income (expense)............... 7,353,915 (7,188,272) (13,400,184) (1,720,603) (834,949)
------------ ------------ ------------ ----------- -----------
Other income (expense):
Interest expense:
Affiliates......................... (148,647) (124,250) (22,486) (11,571) --
Other.............................. (4,004,754) (4,617,070) (4,938,365) (2,503,682) (3,826,798)
------------ ------------ ------------ ----------- -----------
(4,153,401) (4,741,320) (4,960,851) (2,515,253) (3,826,798)
------------ ------------ ------------ ----------- -----------
Interest income:
Affiliates......................... 39,480 42,450 43,440 21,719 21,719
Other.............................. 3,499 2,660 35,057 11,395 1,512
------------ ------------ ------------ ----------- -----------
42,979 45,110 78,497 33,114 23,231
------------ ------------ ------------ ----------- -----------
Other income......................... 478,179 762,138 645,446 158,472 235,510
------------ ------------ ------------ ----------- -----------
Total other income (expense)....... (3,632,243) (3,934,072) (4,236,908) (2,323,667) (3,568,057)
------------ ------------ ------------ ----------- -----------
Income (loss) before income taxes...... 3,721,672 (11,122,344) (17,637,092) (4,044,270) (4,403,006)
(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) (4,044,270) (4,403,006)
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) $(4,044,270) $(4,403,006)
============ ============ ============ =========== ===========
Basic income (loss) per common share:
Income (loss) before cumulative effect
of change in accounting principle.... $ 0.29 $ (1.54) $ (2.85) $ (0.62) $ (0.58)
Cumulative effect of change in
accounting principle................. -- (0.09) -- -- --
------------ ------------ ------------ ----------- -----------
Net income (loss)...................... $ 0.29 $ (1.63) $ (2.85) $ (0.62) $ (0.58)
============ ============ ============ =========== ===========
Diluted income (loss) per common share:
Income (loss) before cumulative effect
of change in accounting principle.... $ 0.27 $ (1.54) $ (2.85) $ (0.62) $ (0.58)
Cumulative effect of change in
accounting principle................. -- (0.09) -- -- --
------------ ------------ ------------ ----------- -----------
Net income (loss)...................... $ 0.27 $ (1.63) $ (2.85) $ (0.62) $ (0.58)
============ ============ ============ =========== ===========
Weighted average number of shares
outstanding:
Basic................................ 7,183,462 7,025,236 6,659,882 6,519,440 7,614,410
============ ============ ============ =========== ===========
Diluted.............................. 7,633,588 7,025,236 6,659,882 6,519,440 7,614,410
============ ============ ============ =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE> 56

PERFUMANIA, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1997 (AS RESTATED, NOTE 11)
FISCAL YEAR ENDED JANUARY 31, 1998,
FISCAL YEAR ENDED JANUARY 30, 1999

AND TWENTY-SIX WEEKS ENDED JULY 31, 1999

<TABLE>
<CAPTION>
NOTES AND
INTEREST
RECEIVABLE
FROM
COMMON STOCK CAPITAL TREASURY STOCK SHAREHOLDER
------------------- IN EXCESS ----------------------- ACCUMULATED AND
SHARES AMOUNT OF PAR VALUE SHARES AMOUNT DEFICIT OFFICERS
--------- ------- ------------ --------- ----------- ------------- -----------
<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) $(538,065)
Exercise of stock options......... 2,000 20 8,230 -- -- -- --
Conversion of debentures.......... 918,091 9,181 2,978,085 -- -- -- --
Beneficial conversion feature of
debentures....................... -- -- 529,412 -- -- -- --
Issuance of common stock.......... 180,000 1,800 954,450 -- -- -- --
Purchases of treasury stock....... -- -- -- 644,900 (2,531,787) -- --
Net change in notes and interest
receivable from shareholder and
officers......................... -- -- -- -- -- -- (4,791)
Net income for the fiscal year
ended February 1, 1997........... -- -- -- -- -- 2,074,941 --
--------- ------- ----------- --------- ----------- ------------- ---------
Balance at February 1, 1997....... 7,807,791 78,078 52,429,641 667,900 (2,655,110) (528,029) (542,856)
Exercise of stock options......... 37,500 375 116,812 -- -- -- --
Purchases of treasury stock....... -- -- -- 550,460 (1,865,958) -- --
Net change in notes and interest
receivable from shareholder and
officers......................... -- -- -- -- -- -- (271,459)
Other............................. -- -- (160,092) -- -- -- --
Net loss for the fiscal year ended
January 31, 1998................. -- -- -- -- -- (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) (814,315)
Exercise of stock options......... 684,200 6,842 310,865 -- -- -- --
Purchases of treasury stock....... -- -- -- 294,046 (891,934) -- --
Issuance of common stock.......... 85,000 850 213,371 -- -- -- --
Proceeds on common stock to be
issued........................... -- -- 1,529,412 -- -- -- --
Net change in notes and interest
receivable from shareholder and
officers......................... -- -- -- -- -- -- 272,172
Net loss for the fiscal year ended
January 30, 1999................. -- -- -- -- -- (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) (542,143)
Exercise of stock options
(unaudited)...................... 301,600 3,016 149,809 -- -- -- --
Beneficial conversion feature of
notes payable (unaudited)........ -- -- 1,365,384 -- -- -- --
Net change in notes and interest
receivable from shareholder and
officers (unaudited)............. -- -- -- -- -- -- (21,720)
Issuance of common stock in
private placement (unaudited).... 235,293 2,353 (2,353) -- -- -- --
Net loss for the twenty-six weeks
ended July 31, 1999
(unaudited)...................... -- -- -- -- -- (4,403,006) --
--------- ------- ----------- --------- ----------- ------------- ---------
Balance at July 31, 1999
(unaudited)...................... 9,151,384 $91,514 $55,952,849 1,512,406 $(5,413,002) $(35,338,103) $(563,863)
========= ======= =========== ========= =========== ============= =========

TOTAL
-----------
<S> <C>
Balance at February 3, 1996....... $44,762,183
Exercise of stock options......... 8,250
Conversion of debentures.......... 2,987,266
Beneficial conversion feature of
debentures....................... 529,412
Issuance of common stock.......... 956,250
Purchases of treasury stock....... (2,531,787)
Net change in notes and interest
receivable from shareholder and
officers......................... (4,791)
Net income for the fiscal year
ended February 1, 1997........... 2,074,941
-----------
Balance at February 1, 1997....... 48,781,724
Exercise of stock options......... 117,187
Purchases of treasury stock....... (1,865,958)
Net change in notes and interest
receivable from shareholder and
officers......................... (271,459)
Other............................. (160,092)
Net loss for the fiscal year ended
January 31, 1998................. (11,432,570)
-----------
Balance at January 31, 1998....... 35,168,832
Exercise of stock options......... 317,707
Purchases of treasury stock....... (891,934)
Issuance of common stock.......... 214,221
Proceeds on common stock to be
issued........................... 1,529,412
Net change in notes and interest
receivable from shareholder and
officers......................... 272,172
Net loss for the fiscal year ended
January 30, 1999................. (18,974,498)
-----------
Balance at January 30, 1999....... 17,635,912
Exercise of stock options
(unaudited)...................... 152,825
Beneficial conversion feature of
notes payable (unaudited)........ 1,365,384
Net change in notes and interest
receivable from shareholder and
officers (unaudited)............. (21,720)
Issuance of common stock in
private placement (unaudited).... --
Net loss for the twenty-six weeks
ended July 31, 1999
(unaudited)...................... (4,403,006)
-----------
Balance at July 31, 1999
(unaudited)...................... $14,729,395
===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE> 57

PERFUMANIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FISCAL YEAR ENDED TWENTY-SIX WEEKS ENDED
----------------------------------------------------- -------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30, AUGUST 1, JULY 31,
1997 1998 1999 1998 1999
----------------------- ------------ ------------ ----------- -----------
(AS RESTATED, (UNAUDITED)
NOTE 11)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $ 2,074,941 $(11,432,570) $(18,974,498) $(4,044,270) $(4,403,006)
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 -- 60,000 30,000
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 2,176,473 2,314,427
Provisions for impairment of assets...... -- 2,200,000 -- -- --
Loss on disposition of property and
equipment.............................. 169,159 314,818 1,034,717 -- --
Beneficial conversion feature of
debentures and convertible notes
payable................................ 529,412 -- -- -- 1,365,384
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 (880,842) (1,987,835)
Affiliates............................. (653,657) 653,657 -- -- --
Advances to suppliers.................... (712,058) (2,587,318) (454,265) (1,127,424) (251,031)
Inventories.............................. (24,288,235) 10,162,581 15,493,045 3,092,194 (9,094,210)
Prepaid expenses and other current
assets................................. (707,745) (184,818) 627,471 443,280 (579,269)
Tax refund receivable.................... -- (814,766) 814,766 807,489 --
Other assets............................. (123,998) (539,266) 406,940 169,825 (275,080)
Increase (decrease) in:
Accounts payable....................... 17,314,213 (5,861,438) (125,824) 4,630,219 8,036,813
Advances from customers................ -- -- -- -- --
Accrued expenses and other
liabilities.......................... 1,088,386 2,908,483 2,356,398 (663,013) (1,023,383)
Income taxes payable................... 1,321,203 (816,105) (20,006) (137,556) (116,835)
Long term severance payable............ -- -- 1,037,859 -- (476,728)
Negative goodwill...................... -- (470,000) -- -- --
------------ ------------ ------------ ----------- -----------
Net cash provided by (used in) operating
activities............................. 630,066 7,761,178 12,953,652 4,526,375 (6,460,753)
------------ ------------ ------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment...... (7,341,901) (7,207,114) (9,495,824) (5,204,301) (1,812,939)
------------ ------------ ------------ ----------- -----------
Net cash used in investing activities.... (7,341,901) (7,207,114) (9,495,824) (5,204,301) (1,812,939)
------------ ------------ ------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under bank line of credit
and loans payable...................... 7,208,943 2,957,170 (3,677,888) 2,060,792 4,009,407
Net increase (decrease) in due to related
parties................................ 90,000 (465,517) (304,483) 40,954 --
Principal payments under capital lease
obligations............................ (639,892) (952,805) (981,916) (578,755) (267,541)
Net advances to shareholder and
officers............................... (4,791) (271,459) 272,172 (150,000) (21,720)
Issuance of convertible notes payable.... -- -- -- -- 4,000,000
Issuance of debentures................... 2,935,361 -- -- -- --
Proceeds from issuance of common stock... 956,250 -- 2,000,000 -- --
Proceeds from exercise of stock
options................................ 8,250 117,187 317,707 -- 152,825
Stock issuance costs..................... -- (160,092) -- -- --
Purchases of treasury stock.............. (2,531,787) (1,865,958) (891,934) (564,367) --
------------ ------------ ------------ ----------- -----------
Net cash provided by (used in) financing
activities............................. 8,022,334 (641,474) (3,266,342) 808,624 7,872,971
------------ ------------ ------------ ----------- -----------
Increase (decrease) in cash and cash
equivalents.............................. 1,310,499 (87,410) 191,486 130,698 (400,721)
Cash and cash equivalents at beginning of
period................................... 331,028 1,641,527 1,554,117 1,554,117 1,745,603
------------ ------------ ------------ ----------- -----------
Cash and cash equivalents at end of
period................................... $ 1,641,527 $ 1,554,117 $ 1,745,603 $ 1,684,815 $ 1,344,882
============ ============ ============ =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE> 58

PERFUMANIA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 NATURE OF BUSINESS

Perfumania, Inc. ("Perfumania") and its subsidiaries (collectively, the
"Company") is a specialty retailer and wholesaler of fragrances and related
products. The Company's retail stores consist of stores located in regional
malls, manufacturer's outlet malls, airports and on a stand-alone basis in
suburban strip shopping centers. The number of retail stores in operation at
February 1, 1997, January 31, 1998, January 30, 1999 and July 31, 1999 were 262,
285, 289 and 281 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.

INTERIM FINANCIAL STATEMENTS

The financial statements for the twenty-six week periods ended July 31,
1999 and August 1, 1998 and all related footnote information for these periods
are unaudited and reflect all normal and recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of the financial
position, operating results and cash flows for the interim periods. The results
of operations for the twenty-six week period ended July 31, 1999 are not
necessarily indicative of the results to be achieved for the entire fiscal year
ending January 29, 2000.

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.

F-7
<PAGE> 59
PERFUMANIA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

BASIS OF PRESENTATION

The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
consolidated financial statements, the Company incurred net losses of
approximately $11.4 million, $18.9 and $4.4 million (unaudited) during the
fiscal years ended January 31, 1998, January 30, 1999 and the twenty-six week
period ended July 31, 1999, respectively, and has a working capital deficit of
$3.8 million and $4.1 million (unaudited) at January 30, 1999 and July 31, 1999,
respectively. In addition, the Company was in violation of certain debt
covenants contained in its bank line of credit agreement as of and for the year
ended January 30, 1999. These debt covenant violations have been subsequently
waived by the bank as of July 14, 1999 (See Note 8).

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.

In order to obtain additional funding the Company plans to make an initial
public offering of the common stock of perfumania.com, inc., a wholly owned
subsidiary of the Company, to raise approximately $25-$32 million. The net
proceeds of the offering will be used for working capital and other general
corporate purposes and also repayment of any outstanding indebtedness to the
Company as well as reduction of the outstanding balance in the Company's line of
credit (See Note 16).

Additionally, in April 1999 and July 1999, the Company issued a total of $4
million of convertible notes to a group of private investors (See Note 16) and
in July 1999 the Company obtained a $2.5 million short-term unsecured loan from
a wholesale customer (See Note 8).

Although management believes that its borrowing capacity under the current
line of credit facility, or from an alternative line of credit facility,
projected cash flows from operations, anticipated proceeds from the initial
public offering of perfumania.com, inc. and other short term borrowings will be
sufficient to support working capital needs, capital expenditures and debt
service for the next twelve months, there is no assurance, however, that the
Company will be able to improve its results of operations based on management's
plan or obtain such funding on a timely basis.

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.

F-8
<PAGE> 60
PERFUMANIA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Perfumania
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.

REVENUE RECOGNITION

Revenue from wholesale transactions is recorded upon shipment of inventory.
Revenue from retail sales is recorded, net of discounts and estimated returns,
upon customer purchase. Estimates of returns are based on the Company's
operating history and are reviewed on a quarterly basis for adequacy.

ADVANCES TO SUPPLIERS

Advances to suppliers represent prepayments to wholesale vendors on pending
inventory purchase orders.

INVENTORIES

Inventories, consisting predominantly of finished goods, are stated at the
lower of cost or market, cost being determined on a moving average cost basis.
The cost of inventory includes product cost and freight charges. Provision for
potentially slow moving or damaged inventory is recorded based on management's
analysis of inventory levels, turnover ratios, future sales forecasts and
through specific identification of obsolete or damaged merchandise.

PROPERTY AND EQUIPMENT

Property and equipment is carried at cost, less accumulated depreciation
and amortization. Depreciation is calculated using the straight-line method over
the estimated useful lives of the related assets. Leasehold improvements are
amortized over the term of the lease or the estimated useful lives of the
improvements, whichever is shorter. Costs of major additions and improvements
are capitalized and expenditures for maintenance and repairs which do not extend
the useful life of the asset are expensed when incurred. Gains or losses arising
from sales or retirements are included in income currently.

PREOPENING EXPENSES

Prior to fiscal year 1997, the Company capitalized expenses associated with
the opening of new retail locations and training of personnel. These costs
typically included occupancy costs incurred prior to store opening, travel
expenses, store managers' salaries and grand opening costs paid to the mall. The
Company amortized these amounts over 18 months.

In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of
Start-Up Activities", which requires the Company to expense preopening expenses
as incurred.

F-9
<PAGE> 61
PERFUMANIA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SOP 98-5 is effective for financial statements for fiscal years beginning after
December 15, 1998, does not require restatement of prior periods and is applied
as of the beginning of the fiscal year in which the SOP is first adopted. The
Company early adopted SOP 98-5 in fiscal year 1997 and has reported the initial
application as a cumulative effect of a change in accounting principle in the
Consolidated Statement of Operations for the year ended January 31, 1998. The
effect of the change in accounting principle was to increase the net loss
reported for fiscal year 1997 by $631,418 or $0.09 per share.

INCOME TAXES

Income tax expense is based principally on pre-tax financial income.
Deferred tax assets and liabilities are recognized for the difference between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.

BASIC AND DILUTED INCOME (LOSS) PER SHARE

Basic income (loss) per common share is computed by dividing income (loss)
available to common stockholders, after giving effect in fiscal year 1996 to the
restatement related to the beneficial conversion feature in connection with
convertible debt (See 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 average market price of the
common shares exceeds the option exercise prices for the respective years, and
the dilutive effect of those convertible notes which are convertible into common
stock.

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 TWENTY-SIX WEEKS ENDED
------------------------------------------- ------------------------------
1996 1997 1998 AUGUST 1, 1998 JULY 31, 1999
------------- ------------ ------------ -------------- -------------
(AS RESTATED, (UNAUDITED)
NOTE 11)
<S> <C> <C> <C> <C> <C>
Numerator:
Income (loss) before
cumulative effect of
change in accounting
principle............... $ 2,074,941 $(10,801,152) $(18,974,498) $ (4,044,270) $ (4,403,006)
------------- ------------ ------------ ------------- -------------
Denominator:
Denominator for basic
income (loss) per
share(1)................ 7,183,462 7,025,236 6,659,882 6,519,440 7,614,410
Effect of dilutive
securities:
Options to purchase common
stock................... 450,126 -- -- -- --
------------- ------------ ------------ ------------- -------------
Denominator for dilutive
income (loss) per
share(1)................ 7,633,588 7,025,236 6,659,882 6,519,440 7,614,410
------------- ------------ ------------ ------------- -------------
</TABLE>

F-10
<PAGE> 62
PERFUMANIA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
FISCAL YEAR TWENTY-SIX WEEKS ENDED
------------------------------------------- ------------------------------
1996 1997 1998 AUGUST 1, 1998 JULY 31, 1999
------------- ------------ ------------ -------------- -------------
(AS RESTATED, (UNAUDITED)
NOTE 11)
<S> <C> <C> <C> <C> <C>
Income (loss) per share
before cumulative effect
of change in accounting
principle:
Basic..................... $ 0.29 $ (1.54) $ (2.85) $ (0.62) $ (0.58)
============= ============ ============ ============= =============
Diluted................... $ 0.27 $ (1.54) $ (2.85) $ (0.62) $ (0.58)
============= ============ ============ ============= =============
Antidilutive securities
not included in the
diluted earnings (loss)
per share computation:
Options to purchase common
stock................... 1,472,861 1,724,150 391,222 1,819,650 1,502,075
Exercise price............ $2.75 - $8.50 $2.75 - $5.63 $0.41 -$2.75 $2.75 - $5.63 $0.41 - $3.75
</TABLE>

- -------------------------

(1) Amounts include the weighted average effect of 235,293 shares, which were
contingently issuable as of January 30, 1999, for the fiscal year ended
January 30, 1999 and the twenty-six week period ended July 31, 1999.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107 ("SFAS 107"),
"Disclosures about Fair Value of Financial Instruments" requires disclosure on
the fair value of financial instruments held by the Company. SFAS 107 defines
the fair value of a financial instrument as the amount at which the instrument
could be exchanged in a current transaction between willing parties. The
following methods and assumptions were used to estimate fair value:

- The carrying amounts of cash and cash equivalents, accounts receivable
and accounts payable approximate fair value due to their short-term
nature;

- The Company's bank line of credit, obligations under capital leases and
loans payable approximate fair value because they are based on current
interest rates and repayment terms of the individual notes, and;

- Long-term severance payable approximates fair value because discounted
cash flows using current interest rates for debt with similar
characteristics and maturity were used to estimate its carrying value.

F-11
<PAGE> 63
PERFUMANIA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ASSET IMPAIRMENT

The Company reviews long-lived assets and makes a provision for impairment
whenever events or changes in circumstances indicate that the projected cash
flows of related activities may not provide for cost recovery. An impairment
loss is recorded when the net book value of assets exceeds projected
undiscounted future cash flows on a store by store basis. The impairment loss is
determined based on the difference between the carrying amount and the fair
value of the assets at a particular store location. The estimated fair value is
based on anticipated future cash flows discounted at a rate commensurate with
the risk involved.

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
the Statement of Financial Accounting Standards No. 123 ("SFAS 123") had been
applied in measuring compensation expense for options granted in 1997 and 1998.
In accordance with APB 25 compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at the date of
the grant over the amount an employee must pay to acquire the stock.

RECLASSIFICATION

Certain fiscal year 1996 and 1997 amounts have been reclassified to conform
with the fiscal year 1998 presentation.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income," which establishes standards for reporting and displaying
comprehensive income and its components. In June 1997, the FASB issued Statement
of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about
Segments of an Enterprise and Related Information," which requires the Company
to present certain information about operating segments and related information.
The Company adopted both statements in fiscal year 1998.

In March 1998, the AICPA issued Statement of Financial Position 98-1, ("SOP
98-1") "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". SOP 98-1 provides guidance for capitalization of certain costs
incurred in the development of internal-use software and is effective for
financial statements for years beginning after December 15, 1998. The Company
adopted SOP 98-1 in fiscal year 1998 which did not have a significant impact on
the Company's results of operations, cash flows or financial position.

F-12
<PAGE> 64
PERFUMANIA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3 ACQUISITION

In November 1996, the Company acquired substantially all of the assets of
Nature's Elements Holding Corporation ("Nature's") which included the service
mark and trade name "Nature's Elements" and the stock of its subsidiary. Prior
to the acquisition, all of Nature's liabilities, both at the parent and
subsidiary level were transferred to a liquidating trust. Subsequent to the
acquisition, the stock of the subsidiary was liquidated and the Company received
inventory and store fixtures and assumed the obligation for 34 leases (including
1 seasonal store) for approximately $2.2 million, of which $1.7 million was
represented by a note payable. The Company has since closed 11 locations,
renovated 18 locations and the remaining locations will either be renovated or
subleased by mid 1999. The acquisition was accounted for as a purchase and
accordingly, Nature's results are included in the consolidated financial
statements since the date of acquisition. The estimated fair value of the
acquired assets exceeded the purchase price. The excess of estimated fair value
of the assets acquired over cost was $3.5 million of which $3 million reduced
the fair value of non-current assets acquired to a zero value and $0.5 million
was allocated to negative goodwill, which was reduced to zero in 1997 due to
writedown of inventory purchased. The assets and business acquired were not
material in relation to consolidated financial statements.

NOTE 4 STATEMENTS OF CASH FLOWS

Supplemental disclosures of cash flow information:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED TWENTY-SIX WEEKS ENDED
---------------------------------------- -----------------------
FEBRUARY 1, JANUARY 31, JANUARY 30, AUGUST 1, JULY 31,
1997 1998 1999 1998 1999
------------ ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash paid during the
period for:
Interest............ $ 3,459,563 $4,671,039 $4,830,230 $2,512,626 $2,251,625
Income taxes........ 71,138 1,012,000 20,000 137,556 --
</TABLE>

Supplemental disclosures of noncash activities:

The Company issued in 1996 a $1.7 million note payable due to the
acquisition discussed in Note 3.

F-13
<PAGE> 65
PERFUMANIA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In December 1996, the Company entered into an agreement with a vendor
whereby approximately $3.6 million of accounts payable was converted to a note
payable (See Note 8).

NOTE 5 INVENTORIES

During fiscal years 1996, 1997 and 1998, the Company recorded a provision
of $0.2 million, $1.8 million and $3.8 million, respectively, to reduce the
carrying value of certain fragrances the Company intends to liquidate. No
amounts were provided for during the twenty-six week periods ended August 1,
1998 and July 31, 1999, respectively. These amounts represent management's best
estimate of the inventories' net realizable value.

NOTE 6 PROPERTY AND EQUIPMENT

Property and equipment includes the following:

<TABLE>
<CAPTION>
ESTIMATED
JANUARY 31, JANUARY 30, JULY 31, USEFUL LIVES
1998 1999 1999 (IN YEARS)
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Furniture, fixtures and
equipment................. $ 15,213,721 $ 15,959,500 $ 17,471,636 5-7
Leasehold improvements...... 14,995,361 21,235,443 21,468,283 10
------------ ------------ ------------
30,209,082 37,194,943 38,939,919
Less: Accumulated
depreciation and
amortization.............. (11,901,842) (14,014,481) (15,866,700)
------------ ------------ ------------
$ 18,307,240 $ 23,180,462 $ 23,073,219
============ ============ ============
</TABLE>

NOTE 7 NOTES AND INTEREST RECEIVABLE FROM SHAREHOLDER AND OFFICERS

Notes and interest receivable from shareholder and officers consists of the
following:

<TABLE>
<CAPTION>
JANUARY 31, 1998 JANUARY 30, 1999 JULY 31, 1999
---------------- ---------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Notes and interest receivable from
officers........................... $315,612 $ -- $ --
Note and interest receivable from
shareholder........................ 498,703 542,143 563,863
-------- -------- --------
$814,315 $542,143 $563,863
======== ======== ========
</TABLE>

The note receivable from shareholder resulted from the sale of a
condominium to the shareholder at its book value in 1991. The shareholder
assumed the balance of the related mortgage and issued an unsecured note payable
to the Company for $282,519, bearing interest at 9.5%. The note initially
matured in December 1993 and has been subsequently renewed through December
2000. Total interest income recognized during fiscal years 1996, 1997 and 1998
was approximately $40,000, $43,000 and $43,000, respectively, and during the
twenty-six week period ended July 31, 1999 interest income recognized was
approximately $22,000 (unaudited). Accrued interest receivable at January 31,
1998,

F-14
<PAGE> 66
PERFUMANIA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

January 30, 1999 and July 31, 1999 amounted to approximately $42,000, $85,000
and $107,000 (unaudited), respectively.

Purchases of products from a company affiliated through common ownership
amounted to approximately $30,735,000, $21,437,000 and $24,333,000, in fiscal
year 1996, 1997 and 1998, respectively, and $13,566,000 (unaudited) and
$15,137,000(unaudited) for the twenty-six week periods ended August 1, 1998 and
July 31, 1999, respectively. The amount due to this company at January 31, 1998,
January 30, 1999 and July 31, 1999, was approximately $16,958,163, $15,812,000
and $22,34,000 (unaudited), respectively. Amounts due to this affiliate are
non-interest bearing.

Other income in fiscal year 1996 includes $110,000 of warehousing fees
received from an affiliated company.

Prior to signing an employment agreement effective February 1, 1999, the
Company's Chief Executive Officer provided consulting services to the Company.
Total consulting expense to this officer was $500,000 during 1998, of which
$325,000 was accrued as of January 30, 1999.

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, JANUARY 30, JULY 31,
1998 1999 1999
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Bank line of credit, bearing interest
at the bank's prime rate plus 4%
(11.75% at January 30, 1999),
interest payable monthly, expiring in
April 2001, secured by a pledge of
substantially all of the Company's
assets............................... $ 31,657,946 $ 30,035,019 $ 32,916,926

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 7,050

Notes payable bearing interest ranging
from approximately 8.5%-10.8%,
payable in monthly installments of
$109,315, including interest, through
December 2001, secured by fixtures... 3,394,396 2,841,267 2,244,263

Notes payable to wholesale customer,
bearing interest at 24%, interest
payable monthly, principal due
December 1999........................ -- -- 2,500,000
</TABLE>

F-15
<PAGE> 67
PERFUMANIA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
JANUARY 31, JANUARY 30, JULY 31,
1998 1999 1999
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
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)......................... 1,119,744 727,609 403,397

Note payable bearing interest at
approximately 10.25%, payable in
monthly installments of $75,000,
including interest, with final
payment of $65,736 in November 2000
(See Note 4)......................... 2,615,740 1,552,488 1,109,082
------------ ------------ ------------
38,849,200 35,171,311 39,180,718
Less: current portion.................. (34,139,766) (32,800,627) (37,783,279)
------------ ------------ ------------
Long-term portion...................... $ 4,709,434 $ 2,370,684 $ 1,397,439
============ ============ ============
</TABLE>

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. As a result, the bank can demand payment of the amounts outstanding
under the line of credit agreement. In addition, as a result of these
violations, the Company incurred the default rate of interest, prime plus 4%
(11.75% at January 30, 1999) beginning December 1998. On July 14, 1999, the
Company obtained a waiver of default from the bank through September 30, 1999 as
of and for the year ended January 30, 1999 (See Note 16).

Advances made under the line of credit are based on a formula of eligible
inventories and receivables. At January 30, 1999 and July 31, 1999, the Company
had available under the line of credit approximately $4,248,000 and $245,000
(unaudited), respectively. Advances are secured by a first lien on substantially
all of the Company's assets and assignment of a life insurance policy on one of
the Company's officers.

F-16
<PAGE> 68
PERFUMANIA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company's line of credit is guaranteed to the extent of $3,000,000 each
by two stockholders of the Company.

NOTE 9 IMPAIRMENT OF ASSETS

Based on a review of the Company's retail store locations with negative
cash flows, the Company recognized non-cash impairment charges relating to its
retail segment of $0.2 million, $2.5 million and $1.0 million during fiscal
years ended 1996, 1997 and 1998, respectively. No impairment charges were
recognized during the twenty-six week periods ended August 1, 1998 and July 31,
1999. These charges were determined based on the difference between the carrying
amount of the assets, representing primarily fixtures and leasehold
improvements, at a particular store location and the fair value of the assets on
a store by store basis. The estimated fair value was based on anticipated future
cash flows discounted at a rate commensurate with the risk involved. These
impairment losses are included in "Provision for impairment of assets and store
closings," in the accompanying Consolidated Statement of Operations.

NOTE 10 INCOME TAXES

The (provision) benefit for income taxes is comprised of the following
amounts:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 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>

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, JANUARY 31, JANUARY 30,
1997 1998 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)
</TABLE>

F-17
<PAGE> 69
PERFUMANIA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, JANUARY 30,
1998 1999
----------- ------------
<S> <C> <C>
Assets:
Net operating losses carryforward.................. $ 244,771 $ 7,473,729
Inventory.......................................... 1,944,521 1,923,888
Property and equipment............................. 1,283,375 1,904,756
Allowance for doubtful accounts and other.......... 319,011 319,011
Reserves........................................... 714,970 982,601
Other.............................................. 118,208 136,157
----------- ------------
Total deferred tax assets....................... 4,624,856 12,740,142
----------- ------------
Valuation allowance.................................. (3,405,000) (12,740,142)
----------- ------------
Net deferred tax assets.............................. $ 1,219,856 $ --
=========== ============
</TABLE>

During fiscal year 1998, the Company provided a valuation allowance of
$12,740,142 for deferred tax assets as management believes that it is more
likely than not that the benefit of the deferred tax asset will not be realized.
Realization of future tax benefits related to the deferred tax assets is
dependent on many factors, including the Company's ability to generate taxable
income within the net operating loss carryforward period. Management has
considered these factors in reaching its conclusion as to the valuation
allowance for financial reporting purposes.

NOTE 11 STOCKHOLDERS' EQUITY

STOCK SUBSCRIPTION

In March 1999, the Company entered into Subscription Agreements for the
sale of 235,293 shares of the Company's common stock to a group of private
investors at the agreed upon price of $8.50 per share. The proceeds of $2
million were received in January 1999. The Subscription Agreements require that
the Company file the appropriate registration statements with the Securities and
Exchange Commission within six months from the date of the Subscription
Agreements to permit the registered resale of the shares by the investors in
open market transactions. If on the effective date of the registration
statement, the market price is less than $8.50 per share, the Company is
obligated to reimburse the investor group the lesser of 1) the product of the
difference between $8.50 and the closing bid price of the Company's common stock
on the effective date of the registration statement multiplied by the number of
shares issued under the Subscription

F-18
<PAGE> 70
PERFUMANIA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Agreement 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 fiscal year 1996
net income and net income per common share information to reflect such
accounting treatment. The net effect of the restatement represents a non-cash
interest charge to net income.

STOCK WARRANTS

In connection with its initial public offering, the Company issued warrants
to purchase 150,000 shares of common stock. The warrants were exercisable until
December 19, 1996 at an exercise price equal to $12.75. The holders of such
warrants attempted to exercise the warrants in fiscal year 1996. The Company
disputed the method of determining the exercise price for such warrants which
resulted in litigation. During fiscal year 1997, the Company settled the
litigation and agreed to issue an aggregate of 85,000 shares of common stock.
These shares were issued during the first quarter of fiscal year 1998 and
accordingly, the Company recorded an expense of approximately $214,000 which
represented the fair value of the common stock on the date of issuance.

PREFERRED STOCK

The Company's Articles of Incorporation authorize the issuance of up to
1,000,000 shares of preferred stock. The preferred stock may be issued from time
to time at the discretion of the Board of Directors without 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

F-19
<PAGE> 71
PERFUMANIA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 APB 25. Had compensation
costs for the Company's Plans been determined based on the fair market value at
the grant dates of options granted consistent with the method of SFAS 123, the
Company's net (loss) income and diluted net (loss) income per share would have
been reduced (increased) to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
FISCAL YEARS
---------------------------------------------
1996 1997 1998
------------- ------------ ------------
(AS RESTATED,
NOTE 11)
<S> <C> <C> <C>
Net income (loss):
As reported....................... $2,074,941 $(11,432,570) $(18,974,498)
Proforma.......................... 1,946,867 (11,939,613) (19,735,008)
Diluted net income (loss) per share:
As reported....................... $ 0.27 $ (1.63) $ (2.85)
Proforma.......................... $ 0.26 $ (1.68) $ (2.96)
</TABLE>

F-20
<PAGE> 72
PERFUMANIA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In calculating the pro forma net income (loss) and net income (loss) 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>

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
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE 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
------------------------------------------------- ------------------------------
NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICE OUTSTANDING EXERCISE PRICE EXERCISE PRICE 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

F-21
<PAGE> 73
PERFUMANIA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the Treasury for cost of living adjustments), whichever is less, and the
Company, in its discretion, may match such contributions to the extent of 25% of
the first 4% of a participant's contribution. The Company's matching
contributions vest over a 5-year period. In addition to matching contributions,
the Company may make additional contributions on a discretionary basis in order
to comply with certain Internal Revenue Code regulations prohibiting
discrimination in favor of highly compensated employees. The Company's matching
contributions during fiscal years 1996, 1997 and 1998 and the twenty-six week
periods ended August 1, 1998 and July 31, 1999 were not significant.

NOTE 13 COMMITMENTS AND CONTINGENCIES

The Company is self-insured for employee medical benefits under the
Company's group health plan. The Company maintains stop loss coverage for
individual medical claims in excess of $50,000 and for annual Company medical
claims which exceed approximately $2,000,000 in the aggregate. While the
ultimate amount of claims incurred are dependent on future developments, in
management's opinion, recorded reserves are adequate to cover the future payment
of claims. However, it is possible that recorded reserves may not be adequate to
cover the future payment of claims. Adjustments, if any, to estimates recorded
resulting from ultimate claim payments will be reflected in operations in the
periods in which such adjustments are known. The self-insurance reserve at
January 31, 1998 and January 30, 1999 was approximately $338,000 and $520,000,
respectively.

In the fourth quarter of 1998, the Company entered into severance
agreements with two executive officers. The Company, using the borrowing
interest rate on its line of credit (prime rate plus 2%), discounted its future
commitment payments resulting in a non-recurring charge of approximately
$1,900,000. Under the terms of the agreements, both officers will receive
severance payments over a three-year term beginning December 1998. The resulting
expense is reflected in selling, general and administrative expenses in the
accompanying consolidated statements of operation. In addition, as part of the
severance agreement with one of the executive officers, the officer received
429,000 shares of common stock at no cost and, accordingly, the Company recorded
additional compensation expense of approximately $176,000.

In February 1999, the Company entered into three-year employment agreements
with two of its executive officers. The agreements provide for aggregate annual
salaries of approximately $718,000 to these officers subject to the higher of
the increase in adjustments for cost-of-living or 5%. The agreements also
contain a performance bonus plan and grant of stock options if the Company meets
certain net income levels.

The Company leases space for its office, warehouse and retail stores. The
lease terms vary from one to ten years, in some cases with options to renew for
longer periods. Various leases contain clauses which adjust the base rental rate
by the prevailing Consumer Price Index, as well as additional rent based on a
percentage of gross sales in excess of a specified amount.

Rent expense for fiscal year 1996, 1997, and 1998 approximated $11,223,000,
$14,398,000, and $15,972,000, respectively. For the twenty-six week periods
ended

F-22
<PAGE> 74
PERFUMANIA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

August 1, 1998 and July 31, 1999, rent expense approximated $7,472,000
(unaudited) and $7,755,000 (unaudited), respectively. Future minimum lease
commitments under these operating leases at January 30, 1999 are as follows:

<TABLE>
<CAPTION>
FISCAL YEAR
- -----------
<S> <C>
1999...................................................... $15,750,000
2000...................................................... 14,196,000
2001...................................................... 11,575,000
2002...................................................... 8,556,000
2003...................................................... 5,855,000
Thereafter................................................ 12,908,000
-----------
Total future minimum lease payments.................... $68,840,000
===========
</TABLE>

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.

As of January 30, 1999, the Company had entered into 7 additional store
leases at locations under construction.

In December of 1993, the patent holder and exclusive licensee in the U.S.
of Boucheron filed a complaint against the Company in the Southern District of
New York for infringing upon their exclusive right to sell the Boucheron bottle
and is seeking $1.5 million in damages. The plaintiffs' theory is based on the
fact that they have a valid patent for the bottles and that Perfumania's sales
of such bottles infringes upon their patent rights. The Company believes that a
patent holder cannot in any way control by resort to an infringement suit the
resale of a patented article which he has sold. The Company filed a motion to
dismiss during February 1994. On March 20, 1995 the Court denied the Company's
motion to dismiss and on April 14, 1995, the Company filed its answer to the
complaint. Discovery is in progress.

In the opinion of management and counsel, the ultimate outcome of the
aforementioned litigation will not have a material effect on the accompanying
financial statements.

F-23
<PAGE> 75
PERFUMANIA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 as defined by the
United States Bankruptcy Code, in the liquidating plan of reorganization filed
on April 6, 1998 by Luria's in the United States Bankruptcy Court, as defined by
the United States Bankruptcy Code, 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 (See Note 16).

The Company is also involved in various other legal proceedings in the
ordinary course of business.

Management cannot presently predict the outcome of these matters, although
management believes, upon the advice of legal counsel, that the Company would
have meritorious defenses and that the ultimate resolution of these matters
should not have a materially adverse effect on the Company's financial position
or result of operations.

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.

F-24
<PAGE> 76
PERFUMANIA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED TWENTY-SIX WEEKS ENDED
------------------------------------------ -------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30, AUGUST 1, JULY 31,
1997 1998 1999 1998 1999
------------ ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cost of goods sold:
Wholesale............ $ 22,702,968 $ 26,090,395 $ 32,920,317 $18,602,370 $17,547,550
Retail............... 56,256,785 71,529,423 77,718,115 28,233,777 33,398,996
------------ ------------ ------------ ----------- -----------
Total cost of goods
sold............ $ 78,959,753 $ 97,619,818 $110,638,432 $46,836,147 $50,946,546
============ ============ ============ =========== ===========
Gross profit:
Wholesale............ $ 7,613,630 $ 7,941,349 $ 7,545,372 $ 5,100,422 $ 4,667,405
Retail............... 52,346,344 58,032,392 57,071,829 26,215,770 29,739,527
------------ ------------ ------------ ----------- -----------
Total gross
profit.......... $ 59,959,974 $ 65,973,741 $ 64,617,201 $31,316,192 $34,406,932
============ ============ ============ =========== ===========
Inventories:
Wholesale............ $ 32,051,346 $ 20,368,792 $ 8,227,522 $13,348,871 $ 9,075,491
Retail............... 53,059,077 52,769,050 45,652,610 56,696,777 53,898,851
------------ ------------ ------------ ----------- -----------
Total
inventories..... $ 85,110,423 $ 73,137,842 $ 53,880,132 $70,045,648 $62,974,342
============ ============ ============ =========== ===========
Depreciation and
amortization:
Retail............... $ 3,771,508 $ 4,697,816 $ 4,480,681 $ 2,176,473 $ 2,314,427
------------ ------------ ------------ ----------- -----------
$ 3,771,508 $ 4,697,816 $ 4,480,681 $ 2,176,473 $ 2,314,427
============ ============ ============ =========== ===========
Capital expenditures:
Retail............... $ 6,798,159 $ 6,831,944 $ 8,849,837 $ 5,204,301 $ 1,812,939
------------ ------------ ------------ ----------- -----------
$ 6,798,159 $ 6,831,944 $ 8,849,837 $ 5,204,301 $ 1,812,939
============ ============ ============ =========== ===========
</TABLE>

An unaffiliated customer of the wholesale segment accounted for
approximately 11%, 8%, 6%, 12% (unaudited) and 14% (unaudited) of the
consolidated net sales in fiscal year 1996, 1997, 1998 and the twenty-six week
periods ending August 1, 1998 and July 31, 1999, respectively, and 18%, 0% and
20% (unaudited) of the consolidated net trade accounts receivable balance at
January 31, 1998, January 30, 1999 and July 31, 1999, respectively.

In fiscal year 1996, 1997, 1998 and the twenty-six week periods ending
August 1, 1998 and July 31, 1999, the wholesale segment included foreign sales
of approximately $3.8 million, $1.7 million, $2.9 million, $1.8 million
(unaudited) and $1.9 million (unaudited), respectively.

F-25
<PAGE> 77
PERFUMANIA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 FISCAL YEAR 1999
------------------------------------- -------------------------------------- ------------------
1ST QTR 2ND QTR 3RD QTR 4TH QTR 1ST QTR 2ND QTR 3RD QTR 4TH QTR 1ST QTR 2ND QTR
------- ------- ------- ------- ------- ------- ------- -------- ------- --------
<S> <C> <C> <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 $11,267 $ 10,948
Retail division.......... 23,447 28,952 30,185 46,978 25,000 29,450 30,091 50,249 28,134 35,004
Total net sales........ 29,988 37,285 38,775 57,546 38,468 39,685 37,084 60,019 39,401 45,952
Gross profit............. 12,906 15,628 15,913 21,527 14,806 16,511 15,020 18,280 15,253 19,154
Loss before cumulative
effect of change in
accounting principle... (1,998) (457) (1,226) (7,122) (2,772) (1,273) (3,859) (11,070) (4,092) (311)
Cumulative effect of
change in accounting
principle.............. (632) -- -- -- -- -- -- -- -- --
Net loss................. $(2,630) $ (457) $(1,226) $(7,122) $(2,772) $(1,273) $(3,859) $(11,070) $(4,092) $ (311)
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) $ (0.54) $ (0.04)
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) $ (0.54) $ (0.04)
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) $ (0.54) $ (0.04)
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) $ (0.54) $ (0.04)
% 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......... 270 271 283 285 284 287 294 289 288 281
Net loss as previously
reported............... $(2,039) $ (498) $ (878) $(7,555) $(2,772) $(1,273) $(3,859) $(11,070) $(4,092) $ (311)
Cumulative effect of
change in accounting
principle.............. (564) 68 121 21 -- -- -- -- -- --
Provision for doubtful
accounts............... -- -- (700) 700 -- -- -- -- -- --
Income tax (provision)
benefit................ (27) (27) 231 (288) -- -- -- -- -- --
Net loss as adjusted..... $(2,630) $ (457) $(1,226) $(7,122) $(2,772) $(1,273) $(3,859) $(11,070) $(4,092) $ (311)
</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

F-26
<PAGE> 78
PERFUMANIA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

common share for all quarters in 1997 in the above table has been restated to
reflect this change.

The Company originally recorded a $700,000 provision for doubtful accounts
in relation to Luria's (See Note 13) in the fourth quarter of 1997. It was
subsequently determined that the provision should have been recorded in the
third quarter of 1997, the time of Luria's filing its liquidating plan of
reorganization.

During the fourth quarter of fiscal year 1997 and 1998, the Company
recorded a reserve for inventory losses of approximately $1.8 million and $3.8
million, respectively (See Note 5).

NOTE 16 EVENTS SUBSEQUENT TO THE REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS (UNAUDITED)

In April 1999, the Company entered into a Securities Purchase Agreement
whereby it issued an aggregate of $2 million worth of the Company's Series A
Convertible Notes (the "Notes"), which are convertible into common stock. The
Notes contain a beneficial conversion feature of approximately $385,000 which
will be taken by the Company as a non-cash interest charge to income in the
first quarter of fiscal year 1999. The agreement requires the Company to file a
registration statement with the Securities and Exchange Commission within
forty-five days after the date of issuance of the convertible notes. The
conversion price is the lower of (A) $4.35 per share, subject to adjustment and
(B) the floating conversion price determined by multiplying (1) the average
closing bid price of the common stock for the three trading days immediately
preceding the date of determination, by (2) 80%, subject to adjustment. The
conversion price may be adjusted pursuant to antidilution provisions in the
convertible note. If the conversion price decreases, we are obligated to issue
additional shares of common stock.

In April 1999, perfumania.com, inc., a wholly-owned subsidiary of the
Company, announced that it intends to make an initial public offering of its
common stock. perfumania.com, inc. plans to raise approximately $25-$32 million
representing approximately 53% of the common stock to be outstanding following
the offering. perfumania.com, inc. is offering 3,500,000 shares of its common
stock, which includes 1,000,000 shares held by the Company. A registration
statement for the offering was filed on June 4, 1999, and the offering should be
completed as soon as practicable after the registration statement becomes
effective. The net proceeds of the offering will be used for working capital and
other general corporate purposes and also repayment of any outstanding
indebtedness to the Company as well as reduction of the outstanding balance in
the Company's line of credit.

On July 14, 1999, the Company obtained a waiver of default from the bank
though September 30, 1999 as of and for the year ended January 30, 1999. Future
outstanding borrowings will bear interest at the prime rate plus four percent.
The bank agreed to less restrictive covenants provided that certain events
commence prior to September 30, 1999. One such event includes that
perfumania.com, inc. (a wholly-owned subsidiary) is to receive at least $10
million from a contemplated initial public offering of its shares, of which at
least $2 million is to be repaid to the Company.

F-27
<PAGE> 79
PERFUMANIA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In July 1999, the Company agreed with the committee of unsecured creditors
to settle all claims held by Luria's against us for the sum of $1.2 million,
payable over the next nine months according to a repayment schedule. This
settlement is subject to the approval of the Bankruptcy Court. The full amount
of the settlement was accrued for in the Company's financial statements as of
January 31, 1998, January 30, 1999 and July 31, 1999.

In July 1999, the Company entered into a Securities Purchase Agreement and
issued an aggregate of $2 million worth of our Series B Convertible Notes, which
are convertible into common stock. The Notes contain a beneficial conversion
feature of approximately $981,000 which will be taken by the Company as a
non-cash interest charge to income in the second quarter of fiscal year 1999.
The agreement requires the Company to file a registration statement with the
Securities and Exchange Commission within forty-five days after the date of
issuance of the convertible notes. The Conversion Price is the lower of (A)
$3.40625 per share, subject to adjustment and (B) the floating conversion price
determined by multiplying (1) the average closing bid price of the common stock
for the three trading days immediately preceding the date of determination, by
(2) 80%, subject to adjustment. The conversion price may be adjusted pursuant to
antidilution provisions in the convertible note.

In July 1999, the Company entered into a short-term unsecured note payable
agreement with one of its wholesale customers for the principal amount of $2.5
million due in December 1999. The agreement calls for monthly interest payments
with the principal payable at maturity.

F-28
<PAGE> 80

SCHEDULE S-1

PERFUMANIA, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

<TABLE>
<CAPTION>
ADDITIONS
---------
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND CHARGED TO BALANCE AT
DESCRIPTION PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF PERIOD
----------- ------------ ---------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
For the year ended
February 1, 1997:
Accounts receivable.. $ 472,804 $ 500,000 $ -- $ (724,418)(1) $ 248,386
Inventory............ 750,000 190,000 -- -- 940,000
For the year ended
January 31, 1998:
Accounts receivable.. 248,386 1,730,000 -- (1,273,432)(1) 704,954
Inventory............ 940,000 1,810,000 -- -- 2,750,000
Self-insurance....... -- 297,710 187,449(2) (146,937)(3) 338,222
Deferred tax asset
valuation
allowance.......... -- 3,405,000 -- -- 3,405,000
For the year ended
January 30, 1999:
Accounts receivable.. 704,954 -- -- -- 704,954
Inventory............ 2,750,000 3,764,665 -- (2,351,414)(4) 4,163,251
Self-insurance....... 338,222 1,295,410 541,484(2) (1,654,491)(3) 520,625
Deferred tax asset
valuation
allowance.......... 3,405,000 9,335,142 -- -- 12,740,142
For the twenty-six
weeks ended
July 31, 1999:
Accounts Receivable.. 704,954 30,000 -- -- 734,954
Inventory............ 4,163,251 -- -- (1,304,967)(4) 2,858,284
Self-insurance....... 520,625 384,281 386,648 (633,258)(3) 658,296
Deferred tax asset
valuation
allowance.......... 12,740,142 -- -- -- 12,740,142
</TABLE>

- -------------------------

(1) Represents amounts written off against accounts receivable.

(2) Represents employee contributions.

(3) Represents benefit/premium payments.

(4) Represents amounts written off against inventory.

S-1
<PAGE> 81

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The estimated expenses in connection with the offering are as follows:

<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 2,730
Legal Fees and Expenses..................................... 45,000
Accounting Fees and Expenses................................ 40,000
Printing and Engraving Expenses............................. 10,000
Fees and Expenses (including Legal Fees) for qualifications
under State Securities Laws............................... 0
Registrar and Transfer Agents Fees and Expenses............. 3,500
Miscellaneous............................................... 49,707
--------
Total..................................................... $150,937
========
</TABLE>

All amounts except the Securities and Exchange Commission registration fee
are estimated.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Registrant has authority under Section 607.0850 of the Florida Business
Corporation Act to indemnify its directors and officers to the extent provided
in such statute. The Registrant's Articles of Incorporation provide that the
Registrant may indemnify its executive officers and directors to the fullest
extent permitted by law whether now or hereafter. The Registrant has entered or
will enter into an agreement with each of its directors and certain of its
officers wherein it has agreed to indemnify each of them to the fullest extent
permitted by law.

The provisions of the Florida Business Corporation Act that authorize
indemnification do not eliminate the duty of care of a director, and in
appropriate circumstances equitable remedies such as injunctive or other forms
of nonmonetary relief will remain available under Florida law. In addition, each
director will continue to be subject to liability for (a) violations of the
criminal law, unless the director had reasonable cause to believe his conduct
was lawful or had no reasonable cause to believe his conduct was unlawful; (b)
deriving an improper personal benefit from a transaction; (c) voting for or
assenting to an unlawful distribution; and (d) willful misconduct or a conscious
disregard for the best interests of the Registrant in a proceeding by or in the
right of the Registrant to procure a judgment in its favor or in a proceeding by
or in the right of a shareholder. The statute does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

II-1
<PAGE> 82

the Securities and Exchange Commission within forty-five days after the date of
issuance of the convertible notes. The Conversion Price is the lower of (A)
$3.40625 per share, subject to adjustment and (B) the floating conversion price
determined by multiplying (1) the average closing bid price of the common stock
for the three trading days immediately preceding the date of determination, by
(2) 80%, subject to adjustment. The conversion price may be adjusted pursuant to
antidilution provisions in the convertible note. If the conversion price
decreases, we are obligated to issue additional shares of common stock.

In April 1999, we entered into a Securities Purchase Agreement and issued
an aggregate of $2 million worth of our Series A Convertible Notes, which are
convertible into common stock. The agreement requires us to file a registration
statement with the Securities and Exchange Commission within forty-five days
after the date of issuance of the convertible notes. The conversion price is the
lower of (A) $4.35 per share, subject to adjustment and (B) the floating
conversion price determined by multiplying (1) the average closing bid price of
the common stock for the three trading days immediately preceding the date of
determination, by (2) 80%, subject to adjustment. The conversion price may be
adjusted pursuant to antidilution provisions in the convertible note.

In March 1999, Perfumania entered into subscription agreements for the sale
of 235,293 shares of Perfumania's common stock to a group of private investors
at an agreed upon price of $8.50 per share. The proceeds of $2 million were
received in January 1999. The subscription agreements require that we file the
appropriate registration statements with the Securities and Exchange Commission
within six months from the date of the subscription agreements to permit the
registered resale of the shares by the investors in open market transactions. If
on the effective date of the registration statement, the market price is less
than $8.50 per share, we are obligated to reimburse the investor group the
lesser of 1) the product of the difference between $8.50 and the closing bid
price of our common stock on the effective date of the registration statement
multiplied by the number of shares issued under the subscription agreements or
2) the product of $2.00 multiplied by the number of shares issued under the
subscription agreements. As of January 31, 1999, the potential redeemable amount
of $470,588 was recorded as redeemable common equity and the remaining
$1,529,412 was recorded as capital in excess of par value in the accompanying
balance sheets.

On March 21, 1996, we sold 180,000 shares of common stock for approximately
$956,000 in a private placement.

On March 25, 1996, we issued $3,000,000 of 5% Convertible Debentures (the
"Debentures") in a Regulation S offering to non-U.S. persons. The debentures
were convertible at any time after May 21, 1996 into shares of our common stock,
at a conversion price for each share of common stock equal to eighty-five
percent of the market price of the common stock on the date of conversion, not
to exceed $8.50 per share of common stock. The debentures were converted to
approximately 918,000 shares of our common stock in the second quarter of fiscal
1996. See Note 11 of the consolidated financial statements.

The foregoing securities were all issued without registration under the
Securities Act of 1933, as amended, by reason of the exemption from registration
afforded by the provisions of Section 4(2) thereof, as transactions by an issuer
not involving public offering, each recipient of such securities having
consented to the imposition of restrictive legends upon the certificates
evidencing such securities.

II-2
<PAGE> 83

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
<C> <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 National Bank dated July 29, 1994, and
September 30, 1994.......................................... (4)
10.4 -- Amendments to the Loan and Security Agreements between the
Company and LaSalle National Bank dated March 29, 1996...... (5)
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)
10.13 -- Securities Purchase Agreement, dated July 8, 1999, between
the Company and the investors set forth therein............. (8)
21.1 -- Subsidiaries of the Registrant.............................. (5)
23.1 -- Consent of PricewaterhouseCoopers LLP....................... (11)
</TABLE>

II-3
<PAGE> 84

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
<C> <S> <C> <C>
24.0 -- Reference is made to the Signatures section of this
Registration Statement for the Power of Attorney contained
therein..................................................... (8)
27.1 -- Financial Data Schedule for the fiscal year ended
January 30, 1999............................................ (8)
27.2 -- Financial Data Schedule for the fiscal year ended
January 31, 1998............................................ (8)
27.3 -- Financial Data Schedule for the fiscal year ended
February 1, 1997............................................ (8)
27.4 -- Financial Data Schedule for the quarterly period ended
May 1, 1999................................................. (9)
27.5 -- Financial Data Schedule for the quarterly period ended
July 31, 1999............................................... (10)
</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) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (No. 333-80525).

(9) Incorporated by reference to the exhibit of the same description filed with
the Company's Form 10-Q for the quarterly period ended May 1, 1999 (filed
on June 15, 1999).

(10) Incorporated by reference to the exhibit of the same description filed with
the Company's Form 10-Q for the quarterly period ended July 31, 1999 (filed
on September 14, 1999).

(11) Filed herewith.

(b) Financial Statement Schedules:

Valuation and Qualifying Accounts

II-4
<PAGE> 85

ITEM 17. UNDERTAKINGS

(a) The undersigned Registrant hereby undertakes:

(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:

(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement; and

(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;

(2) that, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof, and

(3) to remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.

(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the Registration Statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been, settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

II-5
<PAGE> 86

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Miami,
State of Florida on this 22nd day of September, 1999.

PERFUMANIA, INC.

By: /s/ ILIA LEKACH
-----------------------------------
Ilia Lekach
Chairman of the Board and Chief
Executive Officer

Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>

/s/ ILIA LEKACH Chairman of the Board and September 22, 1999
- ------------------------------------------ Chief Executive Officer
Ilia Lekach

* President and Vice Chairman September 22, 1999
- ------------------------------------------ of the Board
Jerome Falic

* Chief Financial Officer and September 22, 1999
- ------------------------------------------ Director (Principal
Donovan Chin Financial and Accounting
Officer)

* President of the Retail September 22, 1999
- ------------------------------------------ Division and Director
Marc Finer

* Director September 22, 1999
- ------------------------------------------
Robert Pliskin

* Director September 22, 1999
- ------------------------------------------
Carole Ann Taylor

* Director September 22, 1999
- ------------------------------------------
Horatio Groisman, M.D.

*By: /s/ ILIA LEKACH
------------------------------------
Ilia Lekach
Attorney-In-Fact
</TABLE>

II-6

<PAGE> 1
EXHIBIT 23.1

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We hereby consent to the use in this Registration Statement on Amendment No. 2
to Form S-1 of our reports dated April 29, 1999, expect for the fifth paragraph
of Note 2 and second paragraph of Note 8 as to which the date is July 14, 1999,
relating to the consolidated financial statements of Perfumania, Inc., which
appear in such Registration Statement. We also consent to the reference to us
under the heading "Experts" in such Registration Statement.

PricewaterhouseCoopers LLP

Miami, Florida
September 22, 1999