Acquisition of Parlux

6 Months Ended

Jul. 28, 2012

ACQUISITION OF PARLUX [Abstract]

Business Combination Disclosure [Text Block]

ACQUISITION OF PARLUX

On April 18, 2012, pursuant to the Agreement and Plan of Merger, dated as of December 23, 2011 (the “Merger Agreement”), by and among Perfumania, Parlux, a Delaware corporation, and PFI Merger Corp., a Delaware corporation and wholly owned subsidiary of Perfumania (“Merger Sub”), Perfumania acquired all the outstanding shares of Parlux common stock via a merger of Parlux with Merger Sub, with Parlux surviving the merger. Parlux was then merged into PFI Merger Sub I, LLC,which survived this second merger as a wholly owned subsidiary of Perfumania and changed its name to Parlux Fragrances, LLC. ("Parlux, LLC") We refer to these two transactions as the “merger.” The merger was consummated following the approval and adoption of the Merger Agreement by Parlux shareholders and the approval by Perfumania shareholders of the issuance of shares of Perfumania common stock to the Parlux shareholders pursuant to the Merger Agreement. Trading in Parlux's common stock on the NASDAQ stock market terminated after market close on April 18, 2012.

The accompanying unaudited condensed consolidated financial statements include the results of operations and cash flows for Parlux, LLC beginning on April 18, 2012. Parlux, LLC has been integrated into the Company's operations and is not considered a separate segment for financial reporting purposes.  Total net sales of $9.7 million and a net loss of $16.1 million are attributable to Parlux, LLC and are included in the Company's unaudited condensed consolidated statement of operations for the twenty-six weeks ended July 28, 2012. These amounts include $2.1 million in certain acquisition-related expenses incurred by Parlux, LLC, which are included in merger related expenses on the accompanying condensed consolidated statements of operations.

Under the terms of the Merger Agreement, each share of Parlux common stock issued and outstanding immediately before the merger was cancelled and converted into the right to receive either (i) 0.533333 shares of Perfumania common stock or (ii) 0.20 shares of Perfumania common stock plus $4.00 in cash, depending on the elections made by Parlux shareholders, without proration or other adjustments. Parlux shareholders received cash for any fractional shares of Perfumania common stock which they might otherwise have received in the merger. As a result, Perfumania issued approximately 6.014 million shares of its common stock and paid approximately $62.1 million in cash to the former Parlux shareholders in the merger. The Perfumania shares issued to Parlux shareholders represent approximately 40% of Perfumania's issued and outstanding common stock after the merger.

The cash portion of the merger consideration was financed through a combination of $32.1 million that Perfumania borrowed under Perfumania's Senior Credit Facility and $30 million that a Perfumania subsidiary borrowed from family trusts of the Nussdorf family, its principal shareholders, each on April 18, 2012. These borrowings, the Senior Credit Facility and the Nussdorf Trusts are described in greater detail in Note 6.

Each outstanding and unexercised option to purchase shares of Parlux common stock under Parlux's equity-based compensation plans was assumed by Perfumania and converted into an option to purchase a number of shares of Perfumania common stock, at an exercise price, determined by applying the merger exchange ratio. In addition, subject in some cases to the terms of existing executive employment agreements, (a) the vesting schedule of each assumed option was accelerated by one year, (b) an assumed stock option will vest immediately if the holder's employment by Perfumania is terminated before the first anniversary of the merger closing either (i) by Perfumania other than for cause or (ii) by the holder with good reason, and (c) the period for exercising each assumed stock option following termination of employment is extended to 90 days. Perfumania also assumed an outstanding warrant held by one of Parlux's directors, which is exercisable for 5,333 shares of Perfumania common stock at $3.38 per share.

Pursuant to various licensing arrangements entered into by Parlux, in connection with the closing of the merger, Perfumania issued 300,000 shares of common stock and warrants for the purchase of an aggregate of 4,799,971 shares of Perfumania common stock at $8.00 per share.

The merger was structured to qualify as a reorganization for U.S. Federal income tax purposes; accordingly, each Parlux shareholder generally should recognize taxable gain (but not loss) for U.S. Federal income tax purposes as a result of the merger only to the extent of the lesser of (x) the sum of the amount of cash and the fair market value of the Perfumania stock received, minus the adjusted tax basis of the Parlux common stock surrendered in exchange therefor, and (y) the amount of cash received (other than cash received in lieu of a fractional share).

Glenn Nussdorf, a principal shareholder of Perfumania, owned approximately 9.9% of the outstanding common stock of Parlux before the merger. In addition, Perfumania has purchased merchandise from Parlux for about 20 years and was one of Parlux's largest customers. See further discussion at Note 11.

The merger has been accounted for using the acquisition method of accounting (“purchase accounting”), which requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. No material assets or liabilities arose from contingencies recognized at the acquisition date. Certain estimated values are not yet finalized and are subject to change. The Company will finalize the amounts recognized as it obtains the information necessary to complete the analyses. In accordance with US GAAP, the Company expects to finalize these amounts prior to the end of its current fiscal year, February 2, 2013. The following tables summarize the purchase price and the assets acquired and liabilities assumed as of the acquisition date at estimated fair value:

(in thousands except price per share)
Proceeds from Senior Credit Facility		$	32,062
Proceeds from notes payable to affiliates		30,000
Total cash consideration		62,062
Total shares of Perfumania common stock issued (1)	6,314
Perfumania price per share, April 18, 2012	$9.38	59,225
Fair value of Perfumania stock options and warrants issued		30,082
Total purchase price		$	151,369

(1) Includes 300 shares issued pursuant to various licensing agreements

(in thousands)
Cash	$	17,114
Accounts receivable	21,242
Inventories	62,648
Other current assets	9,793
Property and equipment	1,107
Other non-current assets	178
Identified intangible assets	24,676
Goodwill	49,672
Accounts payable	(16,032		)
Deferred tax liabilities	(15,043		)
Other liabilities assumed	(3,986		)
Net assets acquired	$	151,369

Identifiable intangibles were acquired as a result of the acquisition of Parlux, which will be amortized as follows:

•Customer relationships: amortized on a straight-line basis based on the expected period of benefit.

• License agreements: amortized on a straight-line basis over their useful lives based on the terms of the respective license agreements.

Amortization expense for these identified intangible assets was $2.6 million for both the thirteen and twenty-six weeks ended July 28, 2012, and is included in depreciation and amortization expense on the accompanying condensed consolidated statements of operations. 

Estimated aggregate amortization expense for the remainder of fiscal 2012 and the five succeeding years and thereafter for identified intangible assets created as a result of the acquisition is as follows (in thousands):

Fiscal Year	Amortization Expense
Remainder of 2012	$	3,622
2013	6,664
2014	4,562
2015	3,475
2016	1,010
2017	517
Thereafter	2,161
	$	22,011

The following table is a summary of the fair value estimates of the acquired identifiable intangible assets and weighted-average useful lives as of the acquisition date.

	Estimated fair value of asset (in thousands)		Weighted-average useful life (in years)
Customer relationships	$	5,171	10.0
License agreements	19,505		3.2
Total	$	24,676	4.0

Goodwill in the amount of $49.7 million was recorded as a result of the acquisition of Parlux. Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill will not be amortized, but will be tested for impairment at least annually. None of the goodwill is deductible for tax purposes.

The recorded amounts for assets and liabilities are provisional and subject to change. The following items are subject to change:

• Amounts for inventory, intangibles and deferred income taxes and liabilities, pending finalization of valuations; and

•The purchase price allocable to goodwill, as a result of changes to the aforementioned items.

A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. The Company's judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact its results of operations.

The unaudited pro forma results presented below include the effects of the Parlux acquisition as if it had been consummated as of January 30, 2011. The pro forma results include the amortization associated with estimates (certain of which are preliminary) for the acquired intangible assets. In addition, the pro forma results do not include any anticipated synergies, operating efficiencies or cost savings or other expected benefits of the acquisition or any integration costs. Accordingly, the unaudited pro forma financial information below is not necessarily indicative of either future results of operations or results that might have been achieved had the acquisition been consummated as of January 30, 2011.

	Thirteen Weeks Ended July 28, 2012			Thirteen Weeks Ended July 30, 2011			Twenty-six Weeks Ended  July 28, 2012			Twenty-six Weeks Ended  July 30, 2011
	(in thousands, except per share data)
Net sales	$	108,158		$	119,754		$	233,747		$	244,699
Net loss	(18,562		)	(15,209		)	(33,531		)	(29,668		)
Net loss per share - basic	$	(1.21	)	$	(0.99	)	$	(2.19	)	$	(1.94	)
Net loss per share - diluted	(1.21		)	(0.99		)	(2.19		)	(1.94		)