-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HDq6UasaXhQg/aftVbBcwUBhdlEe4TUmhlt5DWm8zaKIC+rA8OTD6HlKlNc/bFIb vcR0vIecvr0MVCIWyaFdQw== 0000950144-99-010828.txt : 19990902 0000950144-99-010828.hdr.sgml : 19990902 ACCESSION NUMBER: 0000950144-99-010828 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19990831 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PERFUMANIA INC CENTRAL INDEX KEY: 0000880460 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DRUG STORES AND PROPRIETARY STORES [5912] IRS NUMBER: 650026340 STATE OF INCORPORATION: FL FISCAL YEAR END: 0130 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-80525 FILM NUMBER: 99704121 BUSINESS ADDRESS: STREET 1: 11701 N W 101 RD CITY: MIAMI STATE: FL ZIP: 33178 BUSINESS PHONE: 3058891600 MAIL ADDRESS: STREET 1: 11701 N W 101 RD CITY: MIAMI STATE: FL ZIP: 33178 S-1/A 1 PERFUMANIA S-1 AMEND #1 333-80525 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 31, 1999 REGISTRATION NO. 333-80525 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- PERFUMANIA, INC. (Exact Name of Registrant as Specified in Its Charter) -------------- FLORIDA 5912 65-0026340 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification No.)
-------------- 11701 N.W. 101ST ROAD MIAMI, FLORIDA 33178 (305) 889-1600 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Office) -------------- ILIA LEKACH CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER PERFUMANIA, INC. 11701 N.W. 101ST ROAD MIAMI, FLORIDA 33178 (305) 889-1600 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) ------------------- COPIES OF COMMUNICATIONS TO: Kenneth C. Hoffman, Esq. Greenberg Traurig, P.a. 1221 Brickell Avenue Miami, Florida 33131 Phone: (305) 579-0500 Fax: (305) 579-0717 -------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box: [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]_____ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]_______ If this Form is filed to register additional securities for an offering pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement of the earlier effective registration statement for the same offering. [ ]_______ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. ----------------- CALCULATION OF REGISTRATION FEE
================================================================================================================================= TITLE OF EACH CLASS OF SECURITIES AMOUNT TO PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TO BE REGISTERED BE REGISTERED OFFERING PRICE PER UNIT AGGREGATE OFFERING PRICE (2) REGISTRATION FEE - -------------------------------------------------------------------------------------------------------------------------------- Common Stock, $.01 par value per share(1) 3,339,795 Shares $ 2.94 $9,818,997.30 2,729.68(3) ================================================================================================================================
(1) A portion of the common stock to be registered are issuable upon conversion of certain convertible notes issued by the registrant. Pursuant to Rule 416 under the Securities Act, such number of shares of common stock registered hereby shall include an indeterminate number of shares of common stock that may be issued in connection with a stock split, stock dividend, recapitalization or similar event. As the calculation of the conversion price for the convertible notes is based upon the market price for the underlying common stock, the registrant has agreed to register 200% of the number of shares of common stock that would have been received by the holders if all outstanding convertible notes registered hereunder were converted on the day before the date of this filing. (2) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457 under the Securities Act of 1933. (3) $1,793 was previously paid. --------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED AUGUST __, 1999 PROSPECTUS PERFUMANIA, INC. 1,787,544 SHARES COMMON STOCK ------------------------- The selling shareholders are offering up to 1,787,544 shares of our common stock under this prospectus. Our common stock trades on the Nasdaq National Market under the symbol "PRFM." On August 23, 1999 the closing price of one share of common stock on the Nasdaq National Market was $3 7/32. ---------------------- YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 3 OF THIS PROSPECTUS. ---------------------- THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED OF THESE SHARES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------------------- The date of this prospectus is ___________, 1999 3 YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. THE SELLING SHAREHOLDERS ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THE PROSPECTUS OR OF ANY SALE OF THE COMMON STOCK. IN THIS PROSPECTUS, REFERENCES TO "PERFUMANIA," "WE," "OUR" AND "US" REFER TO PERFUMANIA, INC. ------------------------- TABLE OF CONTENTS -------------------------
PAGE ---- Prospectus Summary................................................................................................1 Risk Factors......................................................................................................3 Forward Looking Statements........................................................................................5 Use of Proceeds...................................................................................................5 Price Range of Common Stock.......................................................................................6 Dividend Policy...................................................................................................6 Capitalization....................................................................................................7 Selected Consolidated Financial Data..............................................................................8 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................9 Business.........................................................................................................18 Management.......................................................................................................25 Certain Relationships and Related Transactions...................................................................30 Principal Shareholders...........................................................................................32 Selling Shareholders.............................................................................................33 Plan of Distribution.............................................................................................35 Description of Capital Stock.....................................................................................36 Legal Matters....................................................................................................36 Experts..........................................................................................................36 Where You Can Find More Information..............................................................................36 Index to Financial Statements...................................................................................F-1
------------------------- ii 4 PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION REGARDING PERFUMANIA AND THE COMMON STOCK BEING SOLD IN THIS OFFERING, AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. WHO WE ARE We are a leading specialty retailer and wholesale distributor of a wide range of brand name and designer fragrances. As of August 23, 1999, we operated a chain of 279 retail stores specializing in the sale of fragrances at discounted prices up to 60% below the manufacturer's suggested retail prices. Our wholesale division distributes approximately 1,100 stock keeping units of fragrances and related products to approximately 41 customers, including national and regional chains and other wholesale distributors throughout North America and overseas. We manage and own our wholesale business and our retail business is managed and owned by Magnifique Parfumes and Cosmetics, Inc., our wholly owned subsidiary. Although our wholesale and retail businesses are managed and owned by separate and distinct legal entities, for ease of reference in this Form S-1, the wholesale and retail businesses are referred to as segments. RECENT DEVELOPMENTS In February 1999, through our wholly owned subsidiary, perfumania.com, inc., we began operation of an Internet commerce site, perfumania.com. We intend to capitalize on our name recognition and cross marketing opportunities with our stores to become a top discount retailer of fragrance and related products on the Internet. All orders placed with the Internet site are shipped from our existing distribution center in Miami, Florida. In April 1999, perfumania.com, inc. announced that it intends to make an initial public offering of its common stock. perfumania.com, inc. plans to raise approximately $25 - $32 million representing approximately 53% of the common stock to be outstanding following the offering. Perfumania.com, inc. is offering 3,500,000 shares of its common stock, which includes 1,000,000 shares held by us. A registration statement for the offering was filed on June 4, 1999, and the offering should be completed as soon as practicable after the registration statement becomes effective. The net proceeds of the offering will be used by perfumania.com for repayment of outstanding indebtedness to us and for working capital and other general corporate purposes as well as reduction of the outstanding balance in our bank line of credit. In July 1999, our board approved the transfer of 1,512,406 shares of our treasury stock to a company affiliated through common ownership in consideration for a partial reduction of our outstanding trade indebtedness of approximately $4.5 million. The transfer price was based on a per share price of $2.98. In connection with the transfer of the shares, we are negotiating a registration rights agreement which would obligate us to register their shares for resale to the public. We were incorporated in Florida in January, 1988. Our executive offices are located at 11701 N.W. 101st Road, Miami, Florida 33178, and our telephone number is (305) 889-1600. 1 5 THE OFFERING Common stock offered by the selling shareholders.............................. 1,787,544 shares Common stock to be outstanding after the offering................................ 10,708,685 shares (1) Use of proceeds...................................... We will not receive any proceeds from the sale of the shares by the selling shareholders. See "Use of Proceeds." Nasdaq National Market symbol........................ "PRFM"
- ---------------- (1) Includes all shares outstanding on August 24, 1999. Excludes shares of common stock issuable upon the exercise of outstanding stock options and additional shares of common stock reserved for future issuance under our existing stock option plans. Assumes that the convertible notes issued in April 1999 and July 1999 were converted into common stock on August 24, 1999. SUMMARY FINANCIAL INFORMATION (In thousands, except per share data)
YEAR ENDED THIRTEEN WEEKS ENDED -------------------------------------------------------------- ---------------------- JANUARY 28, FEBRUARY 3, FEBRUARY 1, JANUARY 31, JANUARY 30, MAY 2, MAY 1, 1995 1996 1997 1998 1999 1998 1999 ----------- --------- --------- --------- ----------- --------- --------- STATEMENT OF OPERATIONS DATA: Net sales........................ $115,578 $129,157 $138,920 $163,594 $175,256 $38,468 $39,401 Gross profit..................... 43,649 52,168 59,960 65,974 64,617 14,806 15,253 Total operating expenses......... 40,634 48,214 52,606 73,162 78,017 16,420 17,796 Income (loss) from operations before other income (expenses) 3,015 3,954 7,354 (7,188) (13,400) (1,614) (2,543) Income (loss) before income taxes*........................ 957 1,206 3,722 (11,122) (17,637) (2,772) (4,092) Income (loss) before cumulative effect of change in accounting principle*......... 1,325 2,002 2,075 (10,801) (18,974) (2,772) (4,092) Net income (loss)*............... 1,325 2,002 2,075 (11,433) (18,974) (2,772) (4,092) Weighted average shares outstanding: Basic......................... 6,155,733 6,973,670 7,183,462 7,025,236 6,659,237 6,560,354 7,364,485 Diluted....................... 6,210,542 7,067,291 7,633,588 7,025,236 6,659,237 6,560,354 7,364,485
MAY 1, 1999 ----------- BALANCE SHEET DATA: (UNAUDITED) Working capital deficit.................................................................................... $ (5,731) Total assets............................................................................................... 105,142 Long-term debt, less current portion(1).................................................................... 4,912 Total shareholders' equity................................................................................. 14,060
- --------------- (1) Amount includes redeemable common equity of $471 but does not include long-term severance payables in the amount of $975. * As disclosed in Note 11 to the consolidated financial statements, the net income and net income per common share for fiscal 1996 was restated to account for the value attributable to the beneficial conversion feature on certain debt issued in fiscal 1996. 2 6 RISK FACTORS BEFORE YOU INVEST IN OUR COMMON STOCK, YOU SHOULD BE AWARE OF VARIOUS RISKS, INCLUDING THOSE DESCRIBED BELOW. YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, TOGETHER WITH ALL OF THE INFORMATION INCLUDED IN THIS PROSPECTUS, BEFORE YOU DECIDE WHETHER TO PURCHASE SHARES OF OUR COMMON STOCK. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES WE FACE. ADDITIONAL RISKS AND UNCERTAINTIES THAT WE ARE UNAWARE OF OR THAT WE CURRENTLY DEEM IMMATERIAL ALSO MAY BECOME IMPORTANT FACTORS THAT AFFECT US. IF ANY OF THE FOLLOWING RISKS OCCURS, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD BE MATERIALLY HARMED. IN THAT CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. THIS PROSPECTUS ALSO CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THE RISKS FACED BY US DESCRIBED BELOW AND ELSEWHERE IN THIS PROSPECTUS. OUR BUSINESS IS SUBJECT TO SEASONAL FLUCTUATIONS, WHICH COULD LEAD TO FLUCTUATIONS IN OUR STOCK PRICE. We have historically experienced higher sales in the third and fourth fiscal quarters than in the first and second fiscal quarters. People increase their purchases of fragrances as gift items during the Christmas holiday season which results in significantly higher fourth fiscal quarter retail sales. If our quarterly operating results are below the expectations of stock market analysts, our stock price would likely decline. Our quarterly results may also vary as a result of the timing of new store openings, net sales contributed by new stores and fluctuations in comparable sales of existing stores. Sales levels of new and existing stores are affected by a variety of factors, including the retail sales environment, the level of competition, the effect of marketing and promotional programs, acceptance of new product introductions, adverse weather conditions and general economic conditions. WE MAY EXPERIENCE SHORTAGES OF THE SUPPLIES WE NEED TO MAKE OUR PRODUCTS BECAUSE WE DO NOT HAVE LONG-TERM AGREEMENTS WITH SUPPLIERS. Our success depends to a large degree on our ability to provide an extensive assortment of brand name and designer fragrances. We have no long-term purchase contracts or other contractual assurance of continued supply, pricing or access to new products. While we believe that we have good relationships with our vendors, if we are unable to obtain merchandise from one or more key vendors on a timely basis, or if there is a material change in our ability to obtain necessary merchandise, our results of operations could be seriously harmed. WE MAY NOT BE ABLE TO OBTAIN THE FUNDS NEEDED UNDER OUR LINE OF CREDIT TO OPERATE OUR BUSINESS. As discussed above, our sales and operating results fluctuate by season, like many specialty retailers. Our line of credit funds inventory purchases and supports new retail store openings. Any future limitation on our borrowing ability and access to financing could limit the opening of new stores and obtaining merchandise on satisfactory terms. We were in violation of some debt covenants contained in our bank line of credit agreement. These violations included our failure to maintain the minimum tangible net worth and net income levels established by the financial covenants, purchasing treasury stock and exceeding the limit on new store openings. On July 14, 1999, the bank gave us a waiver through September 30, 1999. Future outstanding borrowings will bear interest at the prime rate plus four percent. The bank agreed to less restrictive covenants if a number of specified events happen before September 30, 1999, including the requirement that perfumania.com, inc., our wholly-owned subsidiary, receives at least $10 million from a contemplated initial public offering of its shares, of which at least $2 million is to be repaid to us. OUR PRESIDENT AND KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS, AND THESE KEY PERSONNEL MAY NOT REMAIN WITH US IN THE FUTURE. Jerome Falic, our President, is primarily responsible for our merchandise purchases. He has developed strong, reliable relationships with suppliers and customers of our wholesale division in the United States, Europe, 3 7 Asia and South America. The loss of his service or any of our other current executive officers could seriously harm us. WE RECEIVED A QUALIFIED ACCOUNTANTS' REPORT WHICH INDICATES THERE ARE DOUBTS ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN. The report of our independent accountants in connection with our audited consolidated financial statements as of January 31, 1998 and January 30, 1999 and for each of the three years in the period ended January 30, 1999, contains an explanatory paragraph indicating factors which create substantial doubt about our ability to continue as a going concern. These factors include our recurring net losses in fiscal 1998 and 1997 and our default on our bank line of credit agreement as a result of our violation of some debt covenants, that, as of April 29, 1999, had not been waived by the bank. WE NEED TO SUCCESSFULLY MANAGE OUR GROWTH IN ORDER FOR THE ADDITION OF OUR NEW STORES TO BE PROFITABLE. Even though we have grown significantly in the past several years, we may not be able to sustain the growth in the number of retail stores and revenues that we have achieved historically. Our growth is dependent, in large part, upon opening and operating new retail stores on a profitable basis, which in turn is subject to, among other things, securing suitable store sites on satisfactory terms, hiring, training and retaining qualified management and other personnel, having adequate capital resources and successfully integrating new stores into existing operations. It is possible that our new stores will not achieve sales and profitability comparable to existing stores, and it is possible that the opening of new locations will adversely effect sales at existing locations. WE COULD BE SUBJECT TO LITIGATION BECAUSE OF THE MERCHANDISING ASPECT OF OUR BUSINESS. Some of the merchandise we purchase from suppliers is manufactured by entities who are not the owners of the trademarks or copyrights for the merchandise. This practice is common in the fragrance and cosmetics business. The owner of a particular trademark or copyright may challenge us to demonstrate that the specific merchandise was produced and sold with the proper authority and if we were unable to demonstrate this, we could, among other things, be restricted from reselling the particular merchandise. This type of restriction could seriously harm our business and results of operations. OUR ELECTRONIC DATA-SENSITIVE EQUIPMENT MAY NOT BE READY FOR YEAR 2000 PROBLEMS. The Year 2000 issue is the result of computer and other business systems being written using two digits rather than four to represent the year. Many of our time sensitive applications and business systems and the applications and business systems of our business partners may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in system failure or disruption of operations. Although the Year 2000 problem will impact us and our business partners, we have made a preliminary assessment of our Year 2000 exposure and, primarily because our major management information systems are in the process of being upgraded, we believe we will be able to achieve Year 2000 readiness for our internal systems by the fourth quarter of 1999. We are also developing a plan of communication with our significant business partners to obtain appropriate assurances that the Year 2000 issues are resolved in a timely manner. We believe that we will satisfactorily resolve all significant Year 2000 problems and that the related costs will not be material. However, our estimates of Year 2000 related costs are based on numerous assumptions, including the continued availability of some resources, the ability to acquire accurate information regarding third party suppliers and the ability to correct all relevant applications and third party modification plans. We may not achieve our estimated costs and actual costs could differ materially from those anticipated. Moreover, the failure of a major vendor's systems to operate properly with respect to the Year 2000 problem on a timely basis or a Year 2000 conversion that is incompatible with our systems could seriously harm our business, financial condition and results of operations. In addition, a significant portion of our stores' purchases are made with credit cards, and our operations may be seriously harmed if our customers are unable to use their credit cards due to Year 2000 problems that are not remedied by their credit card vendors. 4 8 We are preparing contingency plans which will include the identification of our most reasonably likely worst case scenarios. Currently, the most reasonably likely sources of risk to us include (a) the disruption of our internal inventory management system, (b) the inability of principal suppliers or logistics providers to be Year 2000-ready, which could result in delays in product deliveries from the suppliers or logistics providers, and (c) failure of systems and necessary infrastructure including electricity supply. We are preparing plans to flow inventory around an assumed period of disruption to our stores, which could include accelerating distribution of high volume merchandise and critical products to reduce the impact of significant failure. A COMPLAINT HAS BEEN FILED AGAINST US IN CONNECTION WITH THE BANKRUPTCY OF A FORMER CUSTOMER WHICH COULD RESULT IN SUBSTANTIAL DAMAGES. We have been characterized as an insider as defined by the United States Bankruptcy Code, in the liquidating plan of reorganization filed on April 6, 1998 by L. Luria & Son, Inc. in the United States Bankruptcy Court, Southern District of Florida because our Chairman of the Board and Chief Executive Officer was the principal of the entity that controlled Luria's. In October 1998, the committee of unsecured creditors in Luria's bankruptcy proceedings filed a complaint with the United States Bankruptcy Court, Southern District of Florida. The complaint alleges that Luria's made preference payments, as defined by the Bankruptcy Court, to us. The complaint seeks recovery of the preference payments, and disallows any and all of our claims against Luria's until we have made full payment of the preference payments. In July 1999, we agreed with the committee of unsecured creditors to settle all claims held by Luria's against us for the sum of $1.2 million, payable over the next nine months according to a repayment schedule. This settlement is subject to the approval of the Bankruptcy Court. The full amount of the settlement was accrued for in our financial statements for the years ending January 31, 1998 and January 30, 1999. WE ARE INVOLVED IN A LAWSUIT THAT ALLEGES THAT WE HAVE INFRINGED ON PATENT RIGHTS. In December 1993, the patent holder and exclusive licensee in the U.S. of Boucheron filed a complaint against us in the United States District Court for the Southern District of New York alleging that we infringed upon their exclusive right to sell the Boucheron bottle and is seeking $1.5 million in damages. Their theory is that they have a valid patent for the bottles and that our sales of such bottles infringes upon their patent rights. We believe that a patentee cannot control by resort to an infringement suit the resale of a patented article which it has sold. We filed a motion to dismiss during February 1994. On March 20, 1995, the court denied our motion to dismiss, and on April 14, 1995, we filed an answer to the complaint. Discovery is in progress. FORWARD LOOKING STATEMENTS Some of the statements in this prospectus, including those that contain the words "anticipate," "believe," "plan," "estimate," "expect," "should," "intend" and other similar expressions, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Those forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of Perfumania or its industry to be materially different from any future results, performance or achievements expressed or implied by those forward-looking statements. Those factors include, among other things, those risks identified in "Risk Factors." You should carefully consider the risks described in this prospectus. USE OF PROCEEDS We will not receive any of the proceeds from the sale of the common stock by the selling shareholders hereunder. We estimate that our expenses in connection with this offering will be approximately $150,000. 5 9 PRICE RANGE OF COMMON STOCK Our common stock has been traded on the Nasdaq National Market under the symbol "PRFM" since December 19, 1991. The following table sets forth for the periods indicated the range of high and low closing sales prices per share of our common stock as reported by the Nasdaq National Market:
HIGH LOW ---- --- 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
As of August 23, 1999, there were 81 holders of record of the 9,156,434 issued shares of common stock, of which 1,512,406 shares were held in treasury. The closing sales price for the common stock on August 23, 1999 was $3 7/32. DIVIDEND POLICY We have not declared or paid any dividends on our common stock, and we do not currently intend to declare or pay cash dividends in the foreseeable future. Our board of directors, in their discretion, determines the payment of dividends, if any, after taking into account various factors, including our financial condition, results of operations, current and anticipated cash needs and plans for expansion. We are prohibited from paying cash dividends under our line of credit with LaSalle National Bank. 6 10 CAPITALIZATION The following table sets forth our capitalization as of May 1, 1999, and as adjusted for the issuance and assumed conversion into common stock on August 24, 1999, of the convertible notes and the issuance of the shares associated with the January 1999 proceeds from the sale of common stock. This table should be read together with our consolidated financial statements and accompanying notes appearing elsewhere in this prospectus.
AS OF MAY 1, 1999 ------------------------------ ACTUAL AS ADJUSTED ------------ ------------ Long-term obligations, net of current maturities(1) ...... $ 4,911,735 $ 2,911,735 Shareholders' equity: Preferred stock, $0.01 par value; 1,000,000 shares authorized, none issued and outstanding ............. -- -- Common stock, $0.01 par value; 25,000,000 shares authorized, 8,896,891 shares issued, actual; and 10,708,685 shares issued, as adjusted ............... 88,969 107,087 Capital in excess of par value ........................ 54,963,570 59,595,075 Treasury stock, at cost, 1,512,406 shares ............. (5,413,002) (5,413,002) Accumulated deficit ................................... (35,026,963) (35,664,461) ------------ ------------ Total shareholders' equity ........................ 14,612,574 18,624,699 ------------ ------------ Total capitalization ......................... $ 19,524,309 $ 21,536,434 ============ ============
(1) Item includes long-term portion of notes payable, convertible notes payable, capital leases and redeemable common equity. 7 11 SELECTED CONSOLIDATED FINANCIAL DATA This section presents our selected financial data. You should read this selected data with the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section later in this prospectus as well as our financial statements and related notes contained later in this prospectus. Our fiscal year end is the Saturday closest to January 31. All references in this prospectus to fiscal years are to the calendar year in which the fiscal year begins; for example, fiscal year 1998 refers to the fiscal year that began on February 1, 1998 and ended on January 30, 1999. The following selected consolidated financial statements as of and for the fiscal years ended as indicated have been derived from our audited consolidated financial statements, and for the thirteen weeks ended as indicated have been derived from our unaudited consolidated financial statements.
THIRTEEN WEEKS FISCAL YEAR ENDED ENDED -------------------------------------------------------------------- ----------------------- JANUARY 28, FEBRUARY 3, FEBRUARY 1, JANUARY 31, JANUARY 30, MAY 2, MAY 1, 1995 1996 1997 1998 1999 1998 1999 --------- --------- --------- --------- ----------- --------- --------- (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Net sales, wholesale division ... $ 38,484 $ 36,200 $ 30,317 $ 34,032 $ 40,466 $ 13,468 $ 11,267 Net sales, retail division ...... 77,094 92,957 108,603 129,562 134,790 25,000 28,134 --------- --------- --------- --------- --------- --------- --------- Total net sales .............. 115,578 129,157 138,920 163,594 175,256 38,468 39,401 --------- --------- --------- --------- --------- --------- --------- Gross profit, wholesale division 7,573 8,784 7,614 7,942 7,545 3,188 2,194 Gross profit, retail division ... 36,076 43,384 52,346 58,032 57,072 11,618 13,059 --------- --------- --------- --------- --------- --------- --------- Total gross profit ........... 43,649 52,168 59,960 65,974 64,617 14,806 15,253 --------- --------- --------- --------- --------- --------- --------- Selling, general and administrative expenses ...... 37,081 43,372 48,165 64,219 72,502 15,308 16,616 Provision for doubtful accounts.. 27 310 500 1,730 -- 30 15 Provision for impairment of assets and store closings .... 623 1,232 169 2,515 1,035 -- -- Depreciation and amortization ... 2,903 3,300 3,772 4,698 4,480 1,082 1,165 --------- --------- --------- --------- --------- --------- --------- Total operating expenses ..... 40,634 48,214 52,606 73,162 78,017 16,420 17,796 --------- --------- --------- --------- --------- --------- --------- Income (loss) from operations before other income (expense). 3,015 3,954 7,354 (7,188) (13,400) (1,614) (2,543) Other income (expense) Interest expense, net* ....... (2,415) (3,144) (4,110) (4,696) (4,882) (1,279) (1,582) Other, net ................... 357 396 478 762 645 121 33 --------- --------- --------- --------- --------- --------- --------- Income (loss) before income taxes*........................ 957 1,206 3,722 (11,122) (17,637) (2,772) (4,092) (Provision) benefit for income taxes......................... 368 796 (1,647) 321 (1,337) -- -- --------- --------- --------- --------- --------- --------- --------- Income (loss) before cumulative effect of change in accounting principle* ........ 1,325 2,002 2,075 (10,801) (18,974) (2,772) (4,092) Cumulative effect of change in accounting principle, net of income tax benefit of $380,958 -- -- -- (632) -- -- -- --------- --------- --------- --------- --------- --------- --------- Net income (loss)* .............. $ 1,325 $ 2,002 $ 2,075 $ (11,433) $ (18,974) $ (2,772) $ (4,092) ========= ========= ========= ========= ========= ========= ========= Weighted average shares outstanding: Basic ........................ 6,155,733 6,973,670 7,183,462 7,025,236 6,659,237 6,560,354 7,364,485 Diluted ...................... 6,210,542 7,067,291 7,633,588 7,025,236 6,659,237 6,560,354 7,364,485 Basic income (loss) per share net of cumulative effect of change in accounting principle*.................... $ 0.22 $ 0.29 $ 0.29 $ (1.63) $ (2.85) $ (0.42) $ (0.56) Diluted income (loss) per share net of cumulative effect of change in accounting principle*.................... $ 0.21 $ 0.28 $ 0.27 $ (1.63) $ (2.85) $ (0.42) $ (0.56) SELECTED OPERATING DATA: Number of stores open at end of period..................... 175 194 262 285 289 284 288 Comparable store sales increases. 5.9% 4.1% 3.6% 0.0% 0.0% 3.0% 0.0% BALANCE SHEET DATA (AT PERIOD END): Working capital (deficit) ....... $ 26,452 $ 29,688 $ 32,614 $ 18,473 $ (3,835) $ 12,623 $ (5,731) Total assets .................... 78,916 93,026 129,365 113,908 95,129 112,719 105,142 Long-term debt, less current portion(1) ................... 1,367 1,815 5,708 5,643 3,404 5,220 4,912 Total stockholders' equity ...... 42,946 44,761 48,782 35,169 17,636 31,716 14,060
- ----------------- * As disclosed in Note 11 to the consolidated financial statements, the net income and the net income per share for fiscal year 1996 was restated to account for the value attributable to the beneficial conversion feature on certain debt issued in fiscal year 1996. (1) Amount includes redeemable common equity of $471 as of both January 30, 1999 and May 1, 1999 but does not include long-term severance payables of $1,038 and $975 as of January 30, 1999 and May 1, 1999, respectively. The fiscal 1998 financial statements have been prepared assuming we will continue as a going concern. We have violated certain debt covenants contained in our bank line of credit agreement; however, we obtained a waiver from the bank on July 14, 1999. 8 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD BE READ TOGETHER WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED LATER IN THIS PROSPECTUS. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO BUSINESS RISKS AND UNCERTAINTIES, AND OUR ACTUAL RESULTS OF OPERATIONS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS. FOR A MORE DETAILED DISCUSSION OF THESE BUSINESS RISKS AND UNCERTAINTIES, PLEASE SEE "RISK FACTORS." During the last three fiscal years, our retail division has accounted for the majority of our net sales and gross profit. Our overall profitability depends principally on our ability to purchase a wide selection of merchandise at favorable prices. Other factors affecting our profitability include general economic conditions, the availability to us of volume discounts and, in the retail division, the number of stores in operation, the timing of store openings and closings and the effect of special promotions offered by us. The following table sets forth items from our consolidated statements of operations expressed as a percentage of net sales for the periods indicated.
PERCENTAGE OF NET SALES ------------------------------------------------------ FISCAL YEAR ENDED THIRTEEN WEEKS ENDED ----------------------------------- -------------------- JANUARY 1, JANUARY 31, JANUARY 30, MAY 2, MAY 1, 1997 1998 1999 1998 1999 ---------- ----------- ---------- ------ ----- Net sales, wholesale division .................. 21.8% 20.8% 23.1% 35.0% 28.6% Net sales, retail division ..................... 78.2 79.2 76.9 65.0 71.4 ----- ----- ----- ----- ----- Total net sales ....................... 100.0 100.0 100.0 100.0 100.0 Gross profit, wholesale division ............... 25.1 23.3 18.6 23.7 19.5 Gross profit, retail division .................. 48.2 44.8 42.3 46.5 46.4 ----- ----- ----- ----- ----- Total gross profit .................... 43.2 40.3 36.9 38.5 38.7 Selling, general and administrative expenses ... 34.6 39.2 41.4 39.8 42.2 Provision for doubtful accounts ................ 0.4 1.1 -- 0.1 -- Provision for impairment of assets and store closings...................................... 0.2 1.5 0.6 -- -- Depreciation and amortization .................. 2.7 2.9 2.6 2.8 3.0 ----- ----- ----- ----- ----- Total operating expenses .............. 37.9 44.7 44.6 42.7 45.2 ----- ----- ----- ----- ----- Income (loss) from operations before other income (expenses) ................. 5.3 (4.4) (7.7) (4.2) (6.5) ----- ----- ----- ----- ----- Other income (expense): Interest, net ............................. (2.9) (2.9) (2.8) (3.3) (4.0) Other, net ................................ 0.3 0.5 0.4 0.3 0.1 ----- ----- ----- ----- ----- Income (loss) before income taxes* ............. 2.7 (6.8) (10.1) (7.2) (10.4) ----- ----- ----- ----- ----- (Provision) benefit for income taxes ........... (1.2) 0.2 (0.8) -- -- ----- ----- ----- ----- ----- Income (loss) before cumulative effect of change in accounting principle ................... 1.5 (6.6) (10.9) (7.2) (10.4) ----- ----- ----- ----- ----- Cumulative effect of change in accounting principle, net of income tax benefit ...... -- (0.4) -- -- -- ----- ----- ----- ----- ----- Net income (loss)* ............................. 1.5% (7.0%) (10.9%) (7.2%) (10.4%) ===== ===== ===== ===== =====
* As disclosed in Note 11 to the consolidated financial statements, the net income and net income per share for 1996 was restated to account for the value of the beneficial conversion feature of certain debt issued in fiscal year 1996. RESULTS OF OPERATIONS WE RESTATED FISCAL YEAR 1996 NET INCOME PER COMMON SHARE TO REFLECT RECENT SEC ANNOUNCEMENTS REGARDING THE TREATMENT OF CONVERTIBLE DEBT TRANSACTIONS. In a 1997 announcement, the staff of the Securities 9 13 and Exchange Commission indicated that when debt is convertible at a discount from the then current common stock market price, the discounted amount reflects at that time an incremental yield, i.e., a "beneficial conversion feature," which should be recognized as a return to the debt holders. In March 1996, we issued $3,000,000 of 5% convertible debentures in a Regulation S offering to non-U.S. persons. The debentures were convertible into shares of our common stock at any time after May 21, 1996. Based on the market price of our common stock, the debentures had a beneficial conversion feature of $529,412 at that point in time. Because of the SEC announcement, we restated our 1996 net income and net income per common share information to reflect the new accounting treatment. The net effect of the restatement represents a non-cash interest charge in the determination of net income. COMPARISON OF THE THIRTEEN WEEKS ENDED MAY 1, 1999 WITH THE THIRTEEN WEEKS ENDED MAY 2, 1998. NET SALES Net sales increased 2.4% from $38.5 million in the first thirteen weeks of 1998 to $39.4 million in the first thirteen weeks of 1999. The increase in net sales was the result of a 12.5% increase in retail sales (from $25.0 million to $28.1 million) offset by a 16.3% decrease in wholesale sales (from $13.5 million to $11.3 million). The decrease in wholesale sales was primarily due to unusually large sales to a wholesale customer during the first thirteen weeks of 1998. The increase in retail sales was due to the increase in the number of stores operated during the first thirteen weeks of 1999 compared to the first thirteen weeks of 1998, as well as an increase in comparable store sales of 3%. We operated 288 and 284 stores at May 1, 1999 and May 2, 1998, respectively. Although we plan to open only 8 retail stores in fiscal year 1999 and to close approximately 10 unprofitable stores, retail sales are expected to increase in fiscal 1999 compared to fiscal year 1998. This is due to an expected increase in comparable store sales due to improved merchandising variety and clarity and reduced promotional sales of lower price points resulting in a higher average sale per transaction. GROSS PROFIT Gross profit increased 3.0% from $14.8 million in the first thirteen weeks of 1998 (38.5% of total net sales) to $15.3 million in the first thirteen weeks of 1999 (38.7% of total net sales) primarily due to an increase in gross profit for the retail division. Gross profit for the wholesale division decreased 31.2% from $3.2 million in the first thirteen weeks of 1998 to $2.2 million in the first thirteen weeks of 1999. As a percentage of net sales, gross profit for the wholesale division decreased from 23.7% in the first thirteen weeks of 1998 to 19.5% in the first thirteen weeks of 1999. The decrease in gross profit and gross profit as a percentage of net wholesale sales was attributable to decreased sales volume and liquidation of certain slow moving inventory items. Wholesale sales historically yield a lower gross margin when compared to retail sales. Gross profit for the retail division increased 12.4% to $13.1 million in the first thirteen weeks of 1999 from $11.6 million in the first thirteen weeks of 1998. This is a result of higher retail sales associated with the operation of more stores during the thirteen week period ended May 1, 1999 as compared to the thirteen week period ended May 2, 1998, as well as an increase in comparable store sales of 3%. As a percentage of net retail sales, gross profit for the retail division decreased slightly from 46.5% in the first thirteen weeks of 1998 to 46.4% in the first thirteen weeks of 1999. Gross margins are expected to increase slightly during the remainder of fiscal year 1999 due to improved merchandise buying costs, a reduction of non-designer fragrance merchandise and reduced freight costs. OPERATING EXPENSES Operating expenses, which include selling, general and administrative expenses, as well as depreciation, increased 8.4% from $16.4 million in the first thirteen weeks of 1998 to $17.8 million in the first thirteen weeks of 1999. As a percentage of net sales, operating expenses increased from 42.7% in the first thirteen weeks of fiscal year 1998 to 45.2% in the first thirteen weeks of fiscal year 1999. The increase was primarily attributable to costs associated with the operation of an average of 5 additional stores during the 1999 period as well as expenses of $0.7 million attributable to perfumania.com, our wholly-owned internet commerce site which began operations in February 1999. We expect operating expenses to decrease in fiscal year 1999 compared to fiscal year 10 14 1998 as we expect to have a net decrease in the number of stores in operation, due to fewer openings of new stores and the closing of unprofitable locations. In addition, we will not incur any severance expense in fiscal year 1999 and we do not expect to incur any significant expense for disposition for fixed assets due to store closings, as these expenses were recorded in fiscal year 1998 in anticipation of 1999 store closings. Other expenses, which include interest expense, increased by 33.9% from $1.2 million for the thirteen weeks ended May 2, 1998 to $1.5 million for the thirteen weeks ended May 1, 1999. The increase is principally due to the beneficial conversion cost of approximately $385,000 associated with the issuance of the convertible notes. As a result of the foregoing, we had a net loss of $4,091,866 in the first thirteen weeks of 1999 compared to a net loss of $2,771,612 in the first thirteen weeks of 1998. Net loss per share for the thirteen week periods ended May 1, 1999 and May 2, 1998, was $0.56 and $0.42 per share, respectively. COMPARISON OF FISCAL YEARS 1998 AND 1997 NET SALES Net sales increased 7.1% from $163.6 million in fiscal year 1997 to $175.3 million in fiscal year 1998. The increase in net sales during fiscal year 1998 was due to a 4.0% increase in retail sales (from $129.6 million to $134.8 million), and a 18.9% increase in wholesale sales (from $34.0 million to $40.5 million). The increase in retail sales was principally due to an increase in the number of stores operated during fiscal year 1998 compared to fiscal year 1997, as comparable store sales were flat compared to the prior year. We believe that various sales promotions held during the year to stimulate sales and reduce inventory levels resulted in lower average sales per customer, which contributed to the flat comparable store sales. We operated 289 and 285 stores at the end of fiscal years 1998 and 1997, respectively. The increase in wholesale sales was due to our efforts to reduce inventory levels of certain non-designer fragrances. GROSS PROFIT Gross profit decreased 2.1% from $66.0 million in fiscal year 1997 (40.3% of total net sales) to $64.6 million in fiscal year 1998 (36.9% of total net sales) as a result of higher inventory loss provisions (see below), higher sales and gross profit in the retail division offset by lower gross profit in the wholesale division. Gross profit for the wholesale division decreased from $7.9 million in fiscal year 1997 to $7.5 million in fiscal year 1998 due mainly to a $330,000 increase in inventory provisions. The wholesale division's gross margin in fiscal 1998 was 18.6% compared to 23.3% in fiscal year 1997. The decrease in gross margin was due to the increase in sales of non-designer fragrances in the wholesale division and the increase in the overall ratio of wholesale sales to retail sales in fiscal year 1998. Wholesale sales historically yield a lower gross margin when compared to retail sales. Gross profit for the retail division decreased 1.7% from $58.0 million in fiscal year 1997 to $57.1 million in fiscal year 1998, principally as a result of a $1.6 million increase in the inventory provision, offset by higher retail sales volume. As a percentage of net retail sales, gross profit for the retail division decreased from 44.8% in fiscal year 1997 to 42.3% in fiscal year 1998. The decrease was due to store promotions discussed above as well as increases in inventory provisions, freight expense and inventory shrinkage. Inventory provisions were increased to bring the carrying cost of certain non-designer fragrance merchandise to their estimated carrying values. We will reduce inventory levels of this non-designer fragrance merchandise in fiscal year 1999. Freight expenses increased primarily due to the necessity of shipping merchandise from our distribution center to its retail stores using express freight service during the 1998 holiday season. This resulted from a temporary failure in our inventory management system to properly replenish the merchandise at our retail stores. Inventory shrinkage increased due to the replenishment situation discussed above and increased movement of inventory due to the closing of 32 retail stores. We expect these expenses to decrease in fiscal year 1999 because non-designer fragrance merchandise will be reduced to a minimum, the management information system will be upgraded in fiscal year 1999 and we do not expect to close a significant number of retail stores. Furthermore, we have hired additional loss prevention and distribution center management personnel to ensure that shrinkage expense is reduced to an acceptable level. 11 15 OPERATING EXPENSES Operating expenses increased $4.9 million in fiscal year 1998 compared to fiscal year 1997, due principally to (a) a $8.3 million increase in selling, general and administrative expenses, which includes a charge of $1.9 million related to severance agreements with two executive officers and (b) a $1.0 million provision for disposition of fixed assets relating to retail stores which were either closed during fiscal year 1998, or are scheduled to close during fiscal year 1999. We do not expect to incur a significant provision for the disposition of fixed assets in fiscal year 1999 as the fixed assets for all stores expected to be closed in fiscal year 1999 were expensed in fiscal year 1998. The increase in selling, general and administrative expense was primarily the result of increases in rent, payroll and other costs associated with the operation of an average of 10 additional stores during fiscal year 1998. Depreciation and amortization decreased $0.2 million in fiscal year 1998 compared to fiscal year 1997. As a percentage of net sales, operating expenses decreased from 44.7% in fiscal year 1997 to 44.6% in fiscal year 1998. INTEREST EXPENSE Interest expense (net) increased 4.6% from $4.7 million in fiscal year 1997 to $4.9 million in fiscal 1998. The increase was principally due to increased use of lease financing for new store furniture and fixtures. See "Liquidity and Capital Resources." INCOME TAXES The provision for income taxes in fiscal 1998 was $1.3 million, which includes an increase in the valuation allowance of $1.2 million to provide fully for the net deferred tax assets since management believes that it is more likely than not that these amounts will not be realized due to our recurring losses. As a result of the foregoing, we had a net loss of $18.9 million in fiscal 1998 compared to a net loss of $11.4 million in fiscal 1997. COMPARISON OF FISCAL YEARS 1997 AND 1996 NET SALES Net sales increased 17.8% from $138.9 million in fiscal year 1996 to $163.6 million in fiscal year 1997. The increase in net sales during fiscal year 1997 was due to a 16.8% increase in retail sales (from $108.6 million to $129.6 million), and a 16.3% increase in wholesale sales (from $30.3 million to $34.0 million). The increase in retail sales was principally due to an increase in the number of stores operated during fiscal year 1997 (285) compared to fiscal year 1996 (262), as comparable store sales were flat compared to the prior year. We believe that various promotions held during the year to stimulate sales and reduce and rebalance inventory levels resulted in lower average sales per customer, which contributed to the flat comparable store sales. GROSS PROFIT Gross profit increased 10.0% from $60.0 million in fiscal year 1996 (43.2% of total net sales) to $66.0 million in fiscal year 1997 (41.4% of total net sales) as a result of higher sales and gross profit in both the wholesale and retail divisions. Gross profit for the wholesale division increased from $7.6 million in fiscal year 1996 to $7.9 million in fiscal year 1997. The wholesale division's gross margin in fiscal 1997 was 23.3% compared to 25.1% in fiscal year 1996. Gross profit for the retail division increased 10.9% from $52.3 million in fiscal year 1996 to $58.0 million in fiscal year 1997, principally as a result of higher retail sales volume. As a percentage of net retail sales, gross profit for the retail division decreased from 48.4% in fiscal year 1996 to 44.8% in fiscal year 1997. The decrease was due to promotions discussed above as well as a $1.3 million increase in inventory provisions. Inventory provisions were increased to bring the carrying cost of certain non-designer fragrance merchandise to their estimated carrying values. 12 16 OPERATING EXPENSES Operating expenses increased $20.6 million in fiscal year 1997 compared to fiscal year 1996, due principally to (a) a $16.1 million increase in selling, general and administrative expenses, which includes $1.7 million of losses suffered from operating Perfumania's Nature's Elements stores before their conversion and/or closure, (b) a $2.4 million increase in provision for impairment of assets and store closing and (c) a $1.2 million write off of accounts receivable from L. Luria & Son, Inc. The increase in selling, general and administrative expense was primarily the result of increases in rent, payroll and other costs associated with the operation of an average of 64 additional stores during fiscal year 1997. The average number of stores during fiscal 1997 includes 20 temporary holiday-only stores. We intend to continue to use temporary stores in an effort to reduce our inventories. The increase in provision for doubtful account occurred primarily because of increased write-offs of wholesale accounts receivable. See "Liquidity and Capital Resources." After performing a review of certain retail store locations with significant negative cash flows, we recognized a non-cash impairment charge of $2.2 million, representing a reduction of the carrying amounts of fixed assets at those store locations to their estimated recoverable amounts. We also recorded a loss of $0.3 million on disposition of fixed assets relating to retail stores which were closed during fiscal year 1997. Due to the heavy concentration of sales in the fourth quarter of each fiscal year, we do not believe it is meaningful to make impairment determinations on an interim basis during the year. Depreciation and amortization increased $0.9 million in fiscal year 1997 compared to fiscal year 1996, due to increased fixed assets associated with retail stores. As a percentage of net sales, operating expenses increased from 38.0% in fiscal year 1996 to 45.8% in fiscal year 1997 due to the above reasons. INTEREST EXPENSE Interest expense (net) increased 14.3% from $4.2 million in fiscal year 1996 to $4.7 million in fiscal 1997. The increase was principally due to the increase in our line of credit from $30 to $35 million during fiscal 1997, as well as increased use of lease financing for new store furniture and fixtures, offset by a one-time non-cash interest charge of $529,412 for a beneficial conversion feature of convertible debt in fiscal 1996 (see Note 11 to the consolidated financial statements). See "Liquidity and Capital Resources". INCOME TAXES The benefit for income taxes in fiscal 1997 was $0.3 million, which includes an increase in the valuation allowance of $3.4 million for deferred tax assets due to their uncertain realization. As a result of the foregoing, we had a loss before cumulative effect of a change in accounting principle of $10.8 million in fiscal 1997 compared to a net income of $2.1 million in fiscal 1996. LIQUIDITY AND CAPITAL RESOURCES Our principal capital requirements are to fund inventory purchases and for new store openings. We financed these capital requirements primarily through borrowings under our working capital lines of credit, cash flows from operations, lease financing of store furniture and fixtures and short-term borrowings from related parties and other individuals. On May 15, 1998, we extended our $35 million revolving line of credit facility with LaSalle National Bank, from April 1999 to April 2001. Advances made under the line of credit are based on a formula of eligible inventories and receivables, bear interest at 2% above the bank's prime rate (9.75% at January 30, 1999, however, 13 17 see discussion below regarding events of default and default rate interest), and are payable on demand. Advances are secured by a first lien on all of our assets and assignment of a life insurance policy on one of our officers. Our $35 million line of credit contains covenants requiring the maintenance of minimum tangible net worth and book value and the achievement of specified levels of quarterly results of operations. The line of credit also contains limitations on additional borrowings, capital expenditures, number of new store openings and purchases of treasury stock and prohibits distribution of dividends. As of January 30, 1999, we were in violation of some of the above covenants and, as a result of these violations, were in default under the line of credit agreement. As a result, we incurred the default rate of interest, prime plus 4% (11.75%) beginning December 1998 and the bank can demand payment of the amounts outstanding under the line of credit agreement. The violations consist primarily of our failure to maintain the minimum tangible net worth and net income levels established by the financial covenants, purchasing treasury stock and exceeding the limit on new store openings. On July 14, 1999, we obtained a waiver of default from the bank through September 30, 1999 as of and for the year ended January 30, 1999. Future outstanding borrowings will bear interest at the prime rate plus four percent. The bank agreed to less restrictive covenants provided that certain events commence prior to September 30, 1999. One such event includes that perfumania.com, inc., a wholly-owned subsidiary, is to receive at least $10 million from a contemplated initial public offering of its shares, of which at least $2 million is to be repaid to us. Management believes that the conditions included in the waiver will be met by September 30, 1999, however, there can be no assurance of this. Should we be unable to meet these conditions, we may be required to repay outstanding amounts (totaling approximately $33.1 million as of August 11, 1999) and obtain alternative sources of financing. We could also be required to take other actions to reduce our reliance on working capital financing and generate additional working capital, which could include delaying the opening of new stores, reducing inventory purchases and/or reducing our wholesale and retail selling prices to generate more cash. Any such actions, or our failure to obtain additional financing in an amount sufficient to support our current and planned levels of operation, could adversely affect our business and operating results. In July 1999, we entered into a Securities Purchase Agreement and issued an aggregate of $2 million worth of our Series B Convertible Notes, which are convertible into common stock. The Notes contain a beneficial conversion feature of approximately $637,500 which will be taken by us as a non-cash interest charge to income in the second quarter of fiscal year 1999. The agreement requires us to file a registration statement with the Securities and Exchange Commission within forty-five days after the date of issuance of the convertible notes. The conversion price is the lower of (A) $3.40625 per share, subject to adjustment and (B) the floating conversion price determined by multiplying (1) the average closing bid price of the common stock for the three trading days immediately preceding the date of determination, by (2) 80%, subject to adjustment. The conversion price may be adjusted pursuant to antidilution provisions in the convertible note. If the conversion price decreases, we are obligated to issue additional shares of common stock. In April 1999, we entered into a Securities Purchase Agreement and issued an aggregate of $2 million worth of our Series A Convertible Notes, which are convertible into common stock. The agreement requires us to file a registration statement with the Securities and Exchange Commission within forty-five days after the date of issuance of the convertible notes. The conversion price is the lower of (A) $4.35 per share, subject to adjustment and (B) the floating conversion price determined by multiplying (1) the average closing bid price of the common stock for the three trading days immediately preceding the date of determination, by (2) 80%, subject to adjustment. The conversion price may be adjusted pursuant to antidilution provisions in the convertible note. If the conversion price decreases, we are obligated to issue additional shares of common stock. In March 1999, we entered into Subscription Agreements for the sale of 235,293 shares of our common stock to a group of private investors at a price of $8.50 per share. The proceeds of $2 million were received in January 1999. The Subscription Agreements require that we file this registration statement with the Securities and Exchange Commission within six months from the date of the agreement to permit the registered resale of the shares by the investors in open market transactions. If, on the effective date of the registration statement, the market price is less than $8.50 per share, we are obligated to reimburse the investor group the lesser of (a) the product of the difference between $8.50 and the closing bid price of the common stock on the effective date of this registration statement multiplied by the number of shares issued under the Subscription Agreements or (b) the product of $2.00 multiplied by the number of shares issued under the Subscription Agreements. As of January 30, 1999, the potential redeemable amount of $470,588 was recorded as redeemable common equity and the remaining $1,529,412 was recorded as capital in excess of par value in the accompanying balance sheets. 14 18 On March 21, 1996, we sold 180,000 shares of common stock for approximately $956,000 in a private placement. On March 25, 1996, we issued $3,000,000 of 5% Convertible Debentures in a Regulation S offering to non-U.S. persons. The debentures were convertible at any time after May 21, 1996 into shares of common stock, at a conversion price for each share of common stock equal to eighty-five percent of the market price of the common stock on the date of conversion, not to exceed $8.50 per share of common stock. The debentures were converted to approximately 918,000 shares of the common stock in the second quarter of fiscal 1996. See Note 11 of the consolidated financial statements. In fiscal year 1998, net cash provided by operating activities was approximately $13.0 million, which was primarily due to our reduction in inventories and receivables. Trade receivables primarily relate to our wholesale business. Trade receivables due from customers at January 30, 1999 were $4.1 million. Of this, approximately $1.3 million was more than 90 days past due. The allowance for doubtful accounts was approximately $0.7 million at January 30, 1999 and was considered adequate by management based on its write-off experience during the last three years and an analysis of the aging of its trade receivables at January 30, 1999. During fiscal year 1998, inventories decreased by approximately $15.5 million due to (a) our efforts to reduce inventory levels and (b) an inventory provision during the fourth quarter of $3.8 million related primarily to non-designer fragrances we intend to liquidate in fiscal year 1999. Net cash used in investing activities during fiscal year 1998 was approximately $9.5 million, principally due to capital expenditures related to opening new stores and renovation of existing stores. We intend to slow our growth and open only 7 stores in fiscal year 1999 versus 36 stores in fiscal year 1998. In addition, we do not plan any significant renovations of existing stores in fiscal year 1999, whereas 18 Nature's stores were completely remodeled in fiscal year 1998. Thus, store-related capital expenditures for fiscal year 1999 are projected to be significantly lower than fiscal year 1998. Although we intend to upgrade various components of our management information systems and will also make various hardware and software enhancements, total capital expenditures for fiscal year 1999 are projected to be $4.0 million of which approximately $1.8 million pertains to new store openings and $2.2 million pertains to hardware, software and other corporate improvements. Currently, our average capital expenditure for opening a store is approximately $175,000, including furniture and fixtures, equipment and other items, which average approximately $50,000 per store, build-out costs, which average approximately $120,000 per store, and pre-opening expenses, such as the hiring and training of new employees and travel, which average approximately $5,000 per store. In addition, initial inventory (not including inventory replenishment) in a new store ranges from approximately $100,000 during the first fiscal quarter to approximately $140,000 during the Christmas holiday season. Wholesale inventory levels vary significantly during the fiscal year depending upon availability, price and selection of merchandise available for purchase, and seasonality. We generally carry at least four months' supply of inventory for our retail and wholesale divisions. We also repurchased approximately 294,000 shares of our common stock for $0.9 million in fiscal year 1998. SEASONALITY AND QUARTERLY RESULTS Our operations have historically been seasonal, with generally higher sales in the third and fourth fiscal quarters than in the first and second fiscal quarters. Significantly higher fourth fiscal quarter retail sales result from increased purchases of fragrances as gift items during the Christmas holiday season. Our quarterly results may also vary due to the timing of new store openings, net sales contributed by new stores and fluctuations in comparable sales of existing stores. Wholesale sales vary by fiscal quarter as a result of the selection of merchandise available for sale and the need for us to stock our retail stores for the Christmas holiday season. Therefore, the results of any interim period are not necessarily indicative of the results that may be expected during a full fiscal year. See Note 15 of the Notes to Consolidated Financial Statements for additional information regarding quarterly financial data. 15 19 YEAR 2000 COMPLIANCE The following critical application systems areas are the focus of our Y2K compliance efforts: (a) merchandising, (b) inventory management and distribution, (c) point-of-sales systems, (d) human resources and (e) finance and accounting. The merchandising and finance and accounting systems are currently being upgraded utilizing vendor software certified as Y2K compliant. The inventory management and distribution systems as well as the point-of-sales and human resources systems will be upgraded in the third quarter of 1999. Our hardware and communications network is currently being inventoried, assessed, and where instances of non-compliance are noted, upgraded and tested. We have not incurred material costs to date in the process, and do not believe that the cost of additional actions will have a material effect on our operating results or financial condition. However, we have established a budget totaling approximately $1.5 million for the acquisition of computer hardware and software that will assist in the Year 2000 assessment and remediation activities to be completed no later than the third quarter of 1999. Our current systems may contain undetected errors or defects with Year 2000 date functions that may result in material costs. In addition, we use third-party equipment and software, including non-information technology systems, such as facilities and distribution equipment, that may not be Year 2000 compliant. Failure of third-party equipment, software or content to operate properly with regard to the Year 2000 issue could require us to incur unanticipated expenses to remedy problems, which could have a material adverse effect on our business, operating results and financial condition. We are currently assessing whether third parties in our supply and distribution chain are adequately addressing their Year 2000 compliance issues. We have initiated formal communications with our significant suppliers and service providers to determine the extent to which our systems may be vulnerable if suppliers and providers fail to address and correct their own Year 2000 issues. We cannot guarantee that the systems of suppliers or other companies on which we rely will be Year 2000 compliant. We will track the Year 2000 compliance status of our material vendors and suppliers via our own internal vendor compliance effort. Year 2000 correspondence will be sent to critical vendors and suppliers by the second quarter of 1999, with continued follow up for those who fail to respond. All vendor responses will be evaluated to assess any possible risk to or effect on our operations. Prior to mid 1999, we expect to implement additional procedures for assessing the Year 2000 compliance status of our most critical vendors and will modify our contingency plans accordingly. We are preparing contingency plans which will include the identification of our most reasonably likely worst case scenarios. Currently, the most reasonably likely sources of risk to us include (a) the disruption of our internal inventory management system, (b) the inability of principal suppliers or logistics providers to be Year 2000-ready, which could result in delays in product deliveries from such suppliers or logistics providers and (c) failure of hardware and software utilized by transportation vendors as a result of a general failure of systems and necessary infrastructure such as electricity supply. We are preparing plans to flow inventory around an assumed period of disruption to our stores, which could include accelerating distribution of high volume merchandise and critical products to reduce the impact of significant failure. Based on our current assessment efforts, we do not believe that Year 2000 issues will have a material adverse effect on our financial condition or results of operations. However, our Year 2000 issues and any potential business interruptions, costs, damages or losses related thereto, are dependent, to a significant degree, upon the Year 2000 compliance of third parties, such as government agencies, vendors and suppliers. Consequently, we are unable to determine at this time whether Year 2000 failures will materially affect our business. We believe that our compliance efforts have and will reduce the impact of any failures. RECENT ACCOUNTING STANDARDS. In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components. In June 1997, the FASB also issued Statement of 16 20 Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information." This Statement establishes standards for reporting information about a company's operating segments and related disclosures about its products, services, geographic areas of operations and major customers. Both Statements were adopted by us in 1998. In March 1998, the AICPA issued Statement of Financial Position 98-1, ("SOP 98-1") "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance for capitalization of certain costs incurred in the development of internal-use software and is effective for financial statements for years beginning after December 15, 1998. SOP 98-1 was adopted in fiscal 1998 and had no significant impact on the results of operations, cash flows or financial position. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up Activities," which requires us to expense preopening expenses as incurred. We early adopted SOP 98-5 in fiscal year 1997. See Note 2 of Notes to Consolidated Financial Statements. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). Among other provisions, SFAS No. 133 establishes accounting the reporting standards for derivative instruments and for hedging activities. It also requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 is effective for financial statements for fiscal years beginning after June 15, 2000. Management has not determined the effect, if any, of adopting SFAS No. 133. CHANGES IN FOREIGN EXCHANGE RATES CREATE RISK. Although large fluctuations in foreign exchange rates could have a material effect on the prices we pay for products we purchase from outside the United States, the prices obtainable for sales denominated in foreign currencies and wholesale sales to foreign customers, such fluctuations have not been material to our results of operations to date. Transactions with foreign suppliers generally are in United States dollars. We believe that inflation has not had a material impact on our results of operations and that we are generally able to pass through any cost increases in the form of increased sales prices. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS Our exposure to market risk for changes in interest rates relates primarily to our bank line of credit. The bank line of credit bears interest at a variable rate, as discussed above under "Liquidity and Capital Resources." We mitigate interest rate risk by continuously monitoring the interest rates. The table below presents the outstanding principal amount and the related fair value at January 30, 1999, together with the weighted average interest rate and maturity date of our bank line of credit.
OUTSTANDING FAIR WEIGHTED AVERAGE MATURITY PRINCIPAL AMOUNT VALUE INTEREST RATE DATE ---------------- ----- ------------- -------- Bank Line of Credit $30,035,019 $30,035,019 10.83% April 2001
17 21 BUSINESS We are a leading specialty retailer and wholesale distributor of a wide range of brand name and designer fragrances. As of August 23, 1999, we operated a chain of 279 retail stores specializing in the sale of fragrances at discounted prices up to 60% below the manufacturer's suggested retail prices. Our wholesale division distributes approximately 1,100 stock keeping units of fragrances and related products to approximately 44 customers, including national and regional chains and other wholesale distributors throughout North America and overseas. Our wholesale business is managed and owned by Perfumania and our retail business is managed and owned by Magnifique Parfumes and Cosmetics, Inc., a wholly owned subsidiary of Perfumania. The parent and subsidiary are separate and distinct legal entities, but for ease of reference in this prospectus they are referred to as segments. RETAIL SEGMENT MARKETING AND MERCHANDISING PRODUCTS: o Fragrances: Each of our retail stores offers approximately 175 different brands of fragrances for women and men at prices up to 60% below the manufacturer's suggested retail prices. Our stores stock brand name and designer brands including the following: Estee Lauder(R), Fendi(R), Yves Saint Laurent(R), Fred Hayman(R), Karl Lagerfeld(R), Gucci(R), Ralph Lauren/Polo(R), Perry Ellis(R), Liz Claiborne(R), Giorgio(R), Hugo Boss(R), Halston(R), Christian Dior(R), Chanel(R) and Cartier(R). o Bath and body treatment: Historically, we have carried a narrow private line of bath and body and treatment under the name Jerome Privee. During 1998 we expanded, repackaged and redesigned our bath and body line. Our new line was reintroduced during April 1998 and includes approximately 250 stock keeping units. o Cosmetics: Also during 1998, we continued to develop our own private label Nature's Elements line of cosmetics, treatment and aromatherapy. The cosmetics line stresses quality for value and was introduced in May 1998. We launched the treatment line in the fourth quarter of 1998, and we expect to introduce the aromatherapy line during the fourth quarter of 1999. We believe that the continued expansion of sales in the bath, body, cosmetic and treatment categories is very important to our future business. We hope that sales will increase as a result of people more frequently visiting our stores to purchase our private label lines. o Gift accessories: We plan to continue to expand our gift accessories category by offering a wider assortment of vanity trays, perfume bottles and oil burners. MARKETING PHILOSOPHY. The cornerstone of our marketing philosophy is customer awareness that our stores offer an extensive assortment of brand name and designer fragrances at discount prices. We post highly visible price tags for each item in a store, listing both the manufacturers' suggested retail price and our discounted prices in order to enable customers to make price comparisons. In addition, we have sales promotions such as "gift with purchase" and "purchase with purchase" offers. From time to time Perfumania test markets in its stores additional specialty gift items. 18 22 PERSONNEL. Our stores are "full-service" stores. Accordingly, store personnel are trained to establish a personal rapport with each customer, to identify customer preferences with respect to both product and price range, and to successfully conclude a sale. Management believes that attentive personal service and knowledgeable sales personnel are key factors to the success of our retail stores. Our store personnel are compensated on a salary plus bonus basis. We have several bonus programs that provide incentives for store personnel to sell merchandise on which we have higher profit margins. In addition, to provide an incentive to reduce expenses, district and area managers are eligible to receive a bonus if store profit goals are met. Management believes that a key component of our ability to increase profitability will be our ability to locate, train and retain store personnel and regional and district managers. We conduct comprehensive training programs designed to increase customer satisfaction. ADVERTISING. We rely on our distinctive store design and window displays to attract the attention of prospective customers. We also distribute flyers and brochures in our stores and in the malls in which our stores are located. Perfumania has refocused a substantial portion of its advertising from national and local newspapers, television and radio to less expensive billboards and in-store promotions. The amount of advertising varies with the seasonality of the business. RETAIL STORES Our standard store design includes signs and merchandise displays which are designed to enhance customer recognition of Perfumania's stores. Our stores average approximately 1,500 square feet, although stores located in manufacturer's outlet malls tend to be larger than our other stores. Each store is managed by one manager and one assistant manager. The average number of employees in a Perfumania store is five, including part-time help. District or area managers visit stores on a regular basis in an effort to ensure knowledgeable and attentive customer service. INFORMATION SYSTEMS We have a point-of-sale and management information system which integrates data from every significant phase of our operations and provides us with information for planning, purchasing, pricing, distribution, financial and human resources decisions. The system also provides, on a real-time basis, information to manage store and warehouse inventories efficiently and to closely monitor individual store and each salesperson's performance. In addition, the system prepares price labels and pick orders and provides for automatic reordering, minimum and maximum stocking levels and optimum order quantities based on actual sales. Further, the system permits analysis of our retail sales data based on product groups, items and manufacturers, enabling us to respond to changes in sales patterns. The management information system has bar scanners to record sales, track inventories and conduct physical inventories. The information system also has automated time and attendance modules to capture payroll information through the stores' point-of-sale systems, e-mail systems allowing daily communication among the stores, district managers and the corporate office, and automated scheduling for store personnel. During the third quarter of 1999, we will upgrade the merchandising, inventory management and distribution and finance components of our management information system. During the third quarter of 1999, we also intend to upgrade our register software so that it will be able to perform promotional discounts automatically, calculate bonuses for employees at store level, perform inventories at store level and expand our e-mail and printing capabilities. We expect the costs for improvements and upgrades to our management information systems and related point-of-sale software to be approximately $1.5 million in fiscal 1999. ACQUISITION During November 1996, we acquired substantially all of the assets of Nature's Elements Holding Corporation which included the service mark and trade name "Nature's Elements" and the stock of its subsidiary. Prior to the acquisition, all of Nature's Elements' liabilities, both at the parent and subsidiary level, were transferred to a liquidating trust. Subsequent to the purchase, the stock of the subsidiary was liquidated and we received inventory and store fixtures, and assumed the obligation for 34 leases, including 1 seasonal store. We have since closed 11 locations and renovated 18 locations and during 1998; the remaining locations will either be renovated or subleased during 1999. We continue to use the trade name Nature's Elements for our in-house developed cosmetic, treatment, aromatherapy and bath line. 19 23 STORE LOCATION AND EXPANSION Perfumania's 279 stores are located in 36 states, the District of Columbia and Puerto Rico, including the following states: o 49 in Florida, o 33 in New York, o 22 in California and o 20 in Texas. Perfumania's strategy for opening new stores is to seek locations throughout the United States in the following locations o regional malls, o manufacturers' outlet malls and o suburban shopping centers in metropolitan areas. To achieve economies of scale with respect to advertising and management costs, we emphasize opening additional stores in markets where we already have a presence. We also plan to expand into additional markets that we believe have a population density to support a cluster of stores. Prior to selecting new store locations, we analyze, among other things, the potential adverse effect of competition from new stores on the sales of existing stores. The opening of new stores depends on several factors including: o locating satisfactory sites, o obtaining leases on favorable terms and o general economic and business conditions in the localities of the new stores. Currently, the average cost to us for opening a store is approximately $175,000, including equipment, furniture and fixtures, and other items (which average approximately $50,000 per store), build-out costs (which average approximately $120,000 per store), and preopening expenses, such as the hiring and training of new employees and travel (which average approximately $5,000 per store). In addition, initial inventory in a new store ranges from approximately $100,000 during the first fiscal quarter to approximately $140,000 during the Christmas holiday season. To supplement the inventory in our stores, we carry at least four months supply of inventory at our warehouse. Through August 23, 1999, we had opened 4 stores and closed 12 stores in fiscal year 1999. We opened 36 stores in fiscal year 1998, 40 stores in fiscal year 1997 (excluding 18 seasonal locations) and 74 stores in fiscal year 1996 (including 33 stores acquired from Nature's Elements). We continuously monitor store performance and from time to time we have closed underperforming stores, which typically have been older stores in undesirable locations. We attempt to schedule store closings after the Christmas holiday season. During fiscal year 1998, 1997 and 1996, we closed 32 stores, 17 stores and 6 stores, respectively. For fiscal 1999, we plan to slow our growth and focus on improving our existing stores' profitability by opening a maximum of 7 stores and closing 5 to 15 stores during 1999. WHOLESALE SEGMENT We are one of the largest wholesale distributors of fragrances in the United States. We distribute fragrances on a wholesale basis to national and regional retail chains and other wholesale distributors throughout North America and overseas. During fiscal years 1998, 1997 and 1996, the wholesale division sold to approximately 41, 44 and 57 customers, respectively. One of our customers accounted for 24.8%, 37.0% and 51.3% of net wholesale sales during fiscal year 1998, 1997 and 1996, respectively. Foreign wholesale sales during fiscal year 1998 were $2.9 million, compared to $1.7 million during fiscal year 1997. The wholesale division offers its customers approximately 1,100 stock keeping units. 20 24 The wholesale division's strategy for purchasing merchandise is as follows: o capitalize on market opportunities, o purchase products that are in demand and o purchase merchandise available due to overstock situations or close-out sales. In addition, it takes us approximately 70 days after purchase to receive inventory for our wholesale division and an additional 20 days for the inventory to arrive at our stores. As a result, the wholesale division generally carries at least four months' supply of inventory. Perfumania's warehouse inventory is generally higher than other retailers and wholesalers since we purchase a large amount of our inventories from the manufacturers and the secondary market and must assure ourselves of having consistent supplies of desirable inventories at favorable prices. Some of our suppliers require monetary advances to purchase the inventory. Jerome Falic, our President, is primarily responsible for activities of the wholesale division. We believe that Mr. Falic has developed strong, reliable relationships with suppliers and customers in the United States, Europe, Asia and South America. We continuously seek to develop new supplier and customer relationships. The wholesale division works closely with the retail division when determining which merchandise to purchase on behalf of Perfumania and the retail division frequently directs the wholesale division to locate and purchase particular products. We purchase merchandise on behalf of both the wholesale division and the retail division which, we believe, allows both divisions to benefit from our supplier relationships and volume discounts and thereby obtain a more reliable source of inventory at lower prices than many other wholesalers or retailers of fragrances. Perfumania believes that our ability to extend credit has been an important factor of wholesale sales. Most sales are made on open account terms, generally net 30 to 60 days following the receipt of goods. Other sales, with the exception of sales to our largest customer, are made on a basis of cash on or in advance of delivery or upon receipt of a letter of credit. The receivable from our largest customer was $0.1 million as of January 30, 1999, compared to $0.9 million as of January 31, 1998. Historically, the credit terms for this customer have been up to six months. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." SOURCES OF SUPPLY During fiscal years 1998, 1997 and 1996, we purchased fragrances from 155, 126 and 114 different suppliers, respectively. We purchase fragrances from national and international manufacturers, distributors, wholesalers, importers and retailers. As we purchase based on the most favorable available combination of prices, quantities and merchandise selection, the extent and nature of our purchases from our various suppliers changes constantly. Like others in the perfume industry, we have no long-term or exclusive contract with any supplier. We purchase merchandise both directly from manufacturers and secondary sources, including distributors, wholesalers, importers and retailers. MOST OF OUR MERCHANDISE IS COVERED BY TRADEMARKS OR COPYRIGHTS OWNED BY OTHERS Merchandise from secondary sources includes trademarked and copyrighted products manufactured in foreign countries and trademarked and copyrighted products manufactured in the United States that may have been sold to foreign distributors. Occasionally, litigation or administrative agency proceedings seeking to (a) halt the importation of foreign manufactured or previously exported trademarked products into the United States or (b) restrict the sale of such goods in the United States has been initiated by trademark and copyright owners and their licensees and trade associations. Federal legislation addressing this issue has been proposed but not yet adopted. There have been a number of court cases dealing with trademark, copyright and other laws and regulations that restrict the importation or sale of trademarked or copyrighted merchandise without the consent of the trademark or copyright owner. The courts remain divided on the issue even in the circumstances in which the entities owning 21 25 and applying the trademark or copyright are under common ownership or control. Although a recent case appears favorable to those involved in purchasing through secondary sources, it is still too early to tell how the decision will be applied to future situations. THE MERCHANDISING ASPECT OF THE FRAGRANCE BUSINESS HAS LITIGATION EXPOSURE Some of the merchandise we purchase from suppliers is manufactured by other entities who are not the owners of the trademarks or copyrights for the merchandise. This is common in the fragrance and cosmetics business. If we were called upon or challenged by the owner of a particular trademark or copyright to demonstrate that the specific merchandise was produced and sold with the proper authority and we were unable to do so, we could, among other things, be restricted from reselling the particular merchandise or be subjected to other liabilities, which could have an adverse effect on our business and results of operations. During fiscal 1998, less than 30 percent of our merchandise was purchased from sources who do not disclose the identity of their suppliers, because the sources consider supplier information to be proprietary trade information. As a result, we cannot specifically determine what portion of our merchandise purchased from these sources could expose us to the type of actions discussed above or actions on other grounds. We cannot assure you that our secondary sources of supply or other business activities will not be limited or eliminated by future judicial, legislative or administrative agency action, including possible import, export, tariff or other trade restrictions. In addition, we cannot assure you that our business activities will not become the subject of legal or administrative actions brought by manufacturers, distributors or others. DISTRIBUTION Our warehouse in Miami, Florida services our retail and wholesale operations. The facility's lease expires in July 2003. The warehouse has approximately 139,000 square feet, of which 20,000 square feet are used as office space. Our wholesale division also uses space in a bonded warehouse owned by a third party. Perfumania delivers merchandise utilizing our own trucks to our South Florida stores and utilize independent national trucking companies to deliver merchandise to stores outside of the South Florida area. Deliveries generally are made weekly, with more frequent deliveries during the Christmas holiday season. These deliveries permit the stores to minimize inventory storage space, and increase the space available for display and sale of merchandise. Perfumania ships merchandise to wholesale customers by truck, ship or plane. In addition, in order to expedite delivery of merchandise to our customers, we sometimes instruct our suppliers to ship merchandise directly to wholesale division customers. COMPETITION The retail and wholesale fragrance businesses are highly competitive. Retail competitors include: o department stores, including Macy's, Dillards, JC Penney and Sears, o regional retail chains, including Sephora and The Cosmetic Company Store, o national retail chains, including Bath and Body Works, Garden Botanika and Victoria's Secret, o independent drug stores, o duty free shops and o other specialty retail stores. We are the largest specialty retailer of discounted fragrances in the United States in terms of number of stores. Some of our competitors sell fragrances at discount prices, and some are part of large national or regional chains that have substantially greater resources and name recognition than Perfumania. Our stores compete on the basis of selling price, customer service, merchandise variety, store location and ambiance. 22 26 We believe that the following factors give us a competitive advantage: o European-style perfumeries concept, o full-service sales staff, o discount prices, o large and varied selection of brand name and designer fragrances and o attractive shopping environment. Perfumania is one of the largest wholesale distributors of fragrances in the United States. The wholesale division competes directly with other perfume wholesalers and perfume manufacturers, some of which have substantially greater resources or merchandise variety than Perfumania. The wholesale division competes principally on the basis of merchandise selection and availability, selling price and rapid delivery. EMPLOYEES At August 23, 1999, we had 1,624 employees in the following areas: o 1,449 in retail stores, o 70 in warehouse and distribution operations and o 105 in executive, administrative and other positions. We usually hire temporary and part-time employees during peak sales periods, especially between Thanksgiving and Christmas. None of our employees is covered by a collective bargaining agreement, and we consider our relationship with employees to be good. TRADE NAME AND SERVICE MARK Our stores use the trade name and service mark Perfumania(R). We also operate under the following trade names: Nature's Element -- 17 stores Class Perfumes -- 3 stores Perfumania Plus -- 10 stores We have common law rights to our trade names and service mark in those general areas in which our existing stores are located, and we registered the service mark Perfumania(R) with the U.S. Patent and Trademark Office. The registration expires in 2009 and may be renewed for 10-year terms thereafter. RECENT DEVELOPMENTS In February 1999, Perfumania, through its wholly owned subsidiary, perfumania.com, inc., began operation of an Internet commerce site, perfumania.com. We intend to capitalize on our name recognition and cross marketing opportunities to become a top discount retailer of fragrance and related products on the Internet. All orders placed with the Internet site are shipped from our existing distribution center in Miami, Florida. In April 1999, perfumania.com, inc. announced that it intends to make an initial public offering of its common stock. perfumania.com, inc. plans to raise approximately $25 - $32 million representing approximately 53% of the common stock to be outstanding following the offering. perfumania.com, inc. is offering 3,500,000 shares of its common stock, which includes 1,000,000 shares held by us. A registration statement for the offering was filed on June 4, 1999, and the offering should be completed as soon as practicable after the registration statement becomes effective. The net proceeds of the offering will be used for repayment of outstanding indebtedness to us and for working capital and other general corporate purposes as well as reduction of the outstanding balance in our bank line of credit. PROPERTIES The lease for our executive offices is for a ten (10) year term (expiring July 2003) with monthly rental payments of approximately $70,000 and specified annual increases thereafter. 23 27 All of our retail stores are located in leased premises. Most of the store leases have a fixed amount of base rent plus a percentage of sales, ranging from 3% to 10%, over certain minimum sales levels. Store leases typically require us to pay all utility charges, insurance premiums, increases in property taxes and some other costs. Some of our leases permit the lessor to terminate the lease if specified minimum sales levels are not met. LEGAL PROCEEDINGS BOUCHERON. In December 1993, the patent holder and exclusive licensee in the U.S. of Boucheron filed a complaint against us in the United States District Court for the Southern District of New York alleging that we infringed upon their exclusive right to sell the Boucheron bottle and is seeking $1.5 million in damages. Their theory is that they have a valid patent for the bottles and that Perfumania's sales of such bottles infringes upon their patent rights. We believe that a patentee cannot control by resort to an infringement suit the resale of a patented article which it has sold. We filed a motion to dismiss during February 1994. On March 20, 1995, the court denied our motion to dismiss, and on April 14, 1995, we filed an answer to the complaint. Discovery is in progress. OTHER. Perfumania is characterized as an insider as defined by the United States Bankruptcy Code, in the liquidating plan of reorganization filed on April 6, 1998 by L. Luria & Son, Inc. in the United States Bankruptcy Court, Southern District of Florida because our Chairman of the Board and Chief Executive officer was the principal of the entity that controlled Luria's. In October 1998, the committee of unsecured creditors in Luria's bankruptcy proceedings filed a complaint with the United States Bankruptcy Court, Southern District of Florida to recover substantial funds from Perfumania. The complaint alleges that Luria's made preference payments, as defined by the Bankruptcy Court, to us and seeks to recover preference payments, and seeks to disallow any and all claims of Perfumania against Luria's until Perfumania pays for the preference payments. In July 1999, we agreed with the committee of unsecured creditors to settle all claims held by Luria's against us for the sum of $1.2 million, payable over the next nine months according to a repayment schedule. This settlement is subject to the approval of the Bankruptcy Court. The full amount of the settlement was accrued for in our financial statements for the year ending January 31, 1998 and January 30, 1999. From time to time, we are involved in various legal proceedings in the ordinary course of business. 24 28 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS Our directors and executive officers are as follows:
NAME AGE POSITION ---- --- -------- 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
- ----------------- (1) Member of Audit Committee. (2) Member of Compensation Committee. (3) Member of Stock Option Committee. ILIA LEKACH is a co-founder of Perfumania and was Perfumania's Chief Executive Officer and Chairman of the Board since its incorporation in 1988 until his resignation in April 1994. Mr. Lekach was re-appointed the Perfumania's Chief Executive Officer and Chairman of the Board on October 28, 1998. He is also Chairman of the Board and Chief Executive Officer of Parlux Fragrances, Inc., a publicly traded manufacturer of fragrance and related products. In August 1996, Mr. Lekach became an officer and director with L. Luria & Son, Inc., a publicly traded specialty discount retailer. On August 13, 1997, L. Luria & Son, Inc., filed for relief under Chapter 11 of the Bankruptcy Code and has since been liquidated. See "Certain Relationships and Related Transactions." JEROME FALIC was appointed President on October 28, 1998. Mr. Falic has been a Vice President of Perfumania since Perfumania's inception and a director of Perfumania since August 1994. Mr. Falic was appointed Perfumania's Vice Chairman of the Board in September 1994. MARC FINER has been the President of Perfumania's Retail Division since March 1994 and a director since August 1994. Mr. Finer was the President of Parfums Expresso, Inc. and Parfums D'Arte, wholesale distributors of fragrances in Puerto Rico, from their inception in August 1986 until March 1994. DONOVAN CHIN was appointed Chief Financial Officer and Secretary of Perfumania in February of 1999. Prior to this appointment, Mr. Chin served as Corporate Controller of Perfumania from May 1995 to February 1999 and Assistant Corporate Controller from May 1993 to May 1995. Previously, Mr. Chin was employed by Price Waterhouse LLP in its Miami audit practice. CLAIRE FAIR was appointed Vice President of Human Resources in August 1996. From November 1993 to August 1996, she served as Perfumania's Director of Human Resources. Previously, she was the Director of Employee Relations with Sterling, Inc. ROBERT PLISKIN was appointed a director of Perfumania in October 1991. Mr. Pliskin served as President of Longines Wittnauer Watch Company from 1971 to 1980 when he became President of the Seiko Time Corporation, a position he held until 1987. In 1987 he became the President of Hattori Corporation of America, a distributor of watches and clocks, until his retirement in 1993. Mr. Pliskin is a member of our Audit, Compensation and Stock Option Committees. CAROLE ANN TAYLOR was appointed a director of Perfumania in June 1993. From 1987 to 1998, Ms. Taylor was the owner and president of the Bayside Company Store, a retail souvenir and logo store at Bayside Marketplace 25 29 in Miami, Florida. During this time she has also been a partner of the Jardin Bresilien Restaurant also located at the Bayside Marketplace. Currently, Ms. Taylor is the owner of Miami To Go, Inc., a retail and wholesale logo and souvenir merchandising and silkscreening company. She is also a partner at Miami Airport Duty Free Joint Venture with Greyhound Leisure Services which owns and operates the 19 duty free stores at Miami International Airport. She serves as director of the Miami-Dade Chamber of Commerce, the Greater Miami Convention & Visitors Bureau and the Miami Film Festival. Ms. Taylor is a member of our Audit, Compensation and Stock Option Committees. DR. HORATIO GROISMAN was appointed a Director of Perfumania in March 1999. Dr. Groisman has been a practicing physician since 1981, specializing in head and neck surgery, and currently has offices in Miami, Aventura and Hollywood, Florida. Dr. Groisman is a member of our Compensation and Stock Option Committees. Perfumania's officers are elected annually by the Board of Directors and serve at the discretion of the Board. Perfumania's directors hold office until the next annual meeting of shareholders and until their successors have been duly elected and qualified. COMMITTEES OF THE BOARD OF DIRECTORS During fiscal year 1998 the Board took some actions by unanimous written consent and held two meetings. During fiscal year 1998, no director attended fewer than 75 percent of the aggregate of (i) the number of meetings held by the Board during the period he served on the Board and (ii) the number of meetings of committees of the Board held during the period he served on such committee. The Board currently has three committees: an Audit Committee, a Compensation Committee and a Stock Option Committee. The Board does not have a Nominating Committee. Ms. Taylor and Mr. Pliskin are members of the Audit Committee, which held one meeting during fiscal year 1998. The Audit Committee (a) recommends to the full Board the appointment of our auditors and any termination of engagement, (b) reviews the plan and scope of audits, (c) reviews Perfumania's significant accounting policies and internal controls, (d) has general responsibility for all related auditing matters and (e) reports its recommendations and findings to the full Board. Mrs. Taylor, Mr. Pliskin and Dr. Groisman are members of the Stock Option Committee, which held two meetings during fiscal year 1998. The Stock Option Committee administers Perfumania's 1991 Stock Option Plan and Directors Stock Option Plans, and grants stock options to employees and directors. Mr. Simon Falic served on the Stock Option Committee until he resigned from the committee and the Board on January 29, 1999. Ms. Taylor, Dr. Groisman and Mr. Pliskin are members of the Compensation Committee, which held one meeting during fiscal year 1998. The Compensation Committee administers our executive compensation program. DIRECTOR COMPENSATION Perfumania pays each nonemployee director a $6,500 annual retainer and reimburses directors for expenses relating to their activities as directors of Perfumania. In addition, nonemployee directors are eligible to receive stock options under the Directors Stock Option Plan. When a person is elected as a director of Perfumania, pursuant to the terms of the Director Stock Option Plan, the director is automatically granted an option to purchase 2,000 shares of common stock and upon the directors re-election he is granted an option to purchase 4,000 shares of common stock, with the exercise price in both instances equal to the fair market value of the common stock on the date of grant. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Simon Falic, our pervious Chairman of the Board and Chief Executive Officer, was a member of our Stock Option Committee. Mr. Falic did not participate in deliberations, if any, concerning stock option grants for his benefit. 26 30 EXECUTIVE COMPENSATION The following table sets forth compensation awarded to, earned by or paid to (a) our Chief Executive Officer, (b) each of the three other highly compensated executive officers of Perfumania who were serving as executive officers at the end of the last completed fiscal year, other than the Chief Executive Officer, whose compensation exceeded $100,000 at the end of the last fiscal year (collectively, the "Named Executive Officers"), for services rendered to Perfumania during fiscal year 1998, 1997 and 1996, and (c) those individuals for whom disclosures would have been provided but for the fact that the individual was not serving as an executive officer of Perfumania at the end of the last fiscal year. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION ------------------------- ------------------------------ NO. OF OTHER ANNUAL SECURITIES NAME AND FISCAL COMPENSATION UNDERLYING OTHER ANNUAL PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) (1) OPTIONS COMPENSATION ($) ------------------ ----- ---------- --------- ------- ---------- ---------------- Ilia Lekach (2) 1998 0 0 500,000(3) 775,000(8) 0 Chairman of the Board and Chief Executive Officer Jerome Falic (4) 1998 259,034 0 0 334,500(8) 0 President and Vice 1997 246,700 0 0 0 0 Chairman of the Board 1996 236,250 61,000 0 0 0 Marc Finer 1998 200,401 0 0 60,000(8) 0 President, Retail 1997 183,912 0 0 50,000 0 Division 1996 169,962 22,500 0 0 0 Claire Fair 1998 116,855 0 0 26,500(8) 0 Vice President of 1997 114,980 0 0 15,000 0 Human Resources 1996 85,809 0 0 3,000 0 Simon Falic (5) 1998 316,598 0 0 154,500(8) 1,303,588(6) 1997 304,813 0 0 0 0 1996 287,163 75,000 0 0 0 Ron A. Friedman (7) 1998 228,981 0 0 429,000(8) 826,232(6) 1997 246,700 0 0 0 0 1996 236,250 61,000 0 0 0
- ---------- (1) The column for "Other Annual Compensation" does not include any amounts for executive perquisites and any other personal benefits, such as the cost of automobiles, life insurance and disability insurance because the aggregate dollar amount per executive is less than 10% of his annual salary and bonus. (2) Ilia Lekach was re-appointed Chief Executive Officer and Chairman of the Board on October 28, 1998. (3) Amount reported represents consulting fees paid to Ilia Lekach during fiscal 1998 prior to his employment by Perfumania. Signing bonus for services rendered in fiscal 1998. (4) Jerome Falic was appointed as President following the resignation of Simon Falic on January 29, 1999. (5) Simon Falic resigned on January 29, 1999, at which time he served as President, Chief Financial Officer, Chief Operating Officer, Treasurer and Secretary. (6) Represents severance payments in accordance with individual separation agreements with each receiving the amount indicated over a 36-month term. (7) Mr. Friedman resigned on October 28, 1998 as Chief Financial Officer, Chief Operating Officer, Treasurer and Secretary. (8) Includes options repriced effective October 28, 1998 in the following amounts: Ilia Lekach (375,000); Jerome Falic (100,000); Mark Finer (60,000); Claire Fair (21,500), Simon Falic (100,000); and Ron Friedman (429,000). 27 31 OPTION GRANTS DURING FISCAL YEAR 1998 The following table sets forth certain information concerning grants of stock options made during fiscal year 1998 to the Named Executive Officers and the two individuals for whom disclosures would have been provided but for the fact that the individuals were not serving as an executive officer of Perfumania at the end of the last fiscal year. INDIVIDUAL OPTION GRANTS IN FISCAL YEAR 1998
% OF TOTAL OPTIONS POTENTIAL REALIZABLE VALUE AT NUMBER GRANTED TO ASSUMED ANNUAL RATES OF STOCK OF OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION PRICE APPRECIATION FOR OPTION TERM NAME GRANTED (1) FISCAL 1998(4) PER SHARE DATE 5% (1) 10% (1) ------- -------------- -------------- ---------- ---------------- --------------- Ilia Lekach 400,000 21% $0.41 2008 $ 103,156 $ 260,760 375,000(2) 20% $0.50 2008 $ 117,938 $ 298,125 Jerome Falic 34,500(3) 4% $0.50 2008 $ 10,850 $ 27,428 200,000 25% $0.41 2008 $ 51,578 $ 130,380 100,000(2) 5% $0.50 2008 $ 31,450 $ 79,500 Marc Finer 60,000(2) 3% $0.50 2008 $ 18,870 $ 47,700 Claire Fair 5,000(3) * $0.50 2008 $ 1,573 $ 3,975 21,500(2) 1% $0.50 2008 $ 6,762 $ 17,093 Simon Falic 54,500(3) 3% $0.50 2008 $ 71,140 $ 43,328 100,000(2) 13% $0.50 2008 $ 31,450 $ 79,500 Ron Friedman 54,000 3% $0.50 2008 $ 16,983 $ 42,930 375,000 19% $0.50 2008 $ 117,938 $ 298,125
- ---------- * Indicates that amount is less than 1%. (1) In accordance with the rules of the Securities and Exchange Commission, the potential realizable values for such options shown in the table presented above are based on assumed rates of stock price appreciation of 5% and 10% compounded annually from the date the options were granted to their expiration date. These assumed rates of appreciation do not represent the Company's estimate or projection of the appreciation of shares of common stock of the Company. (2) The indicated options were initially granted prior to fiscal 1998 and were subject to the Company's repricing effective October 28, 1998. Pursuant to repricing, these options were cancelled and reissued with an exercise price of $0.50. (3) The indicated options were granted during fiscal 1998 prior to the repricing and were subject to the Company's repricing. Pursuant to repricing, these options were cancelled and reissued with an exercise price of $0.50. (4) Total stock option grants during fiscal 1998 were 1,926,750 of which 1,130,600 represents options cancelled and subsequently re-granted as part of the repricing. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth certain information concerning option exercises in fiscal year 1998 and the number of unexercised stock options held by the Named Executive Officers and the two individuals for whom disclosure would have been provided but for the fact that the individuals were not serving as executive officers of Perfumania at the end of the last fiscal year. 28 32
NUMBER OF VALUE OF UNEXERCISED NUMBER OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS SHARES ACQUIRED VALUE FISCAL YEAR-END (#) AT FISCAL YEAR-END ($) NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - ---- --------------- -------- ------------------------- ------------------------- 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 -- --
LONG-TERM INCENTIVE AND PENSION PLANS We do not have any long-term incentive or pension plans. EMPLOYMENT AGREEMENTS Effective February 1, 1999, we entered into 3-year employment agreements with Ilia Lekach and Jerome Falic. The employment agreements provide for annual salaries of $400,000 and $318,347, respectively, subject to cost-of-living increases, or 5% if higher. The employment agreements provide that Mr. Lekach and Mr. Falic will continue to receive their annual salary until the expiration of the term of their employment agreements if their employment is terminated by us for any reason other than death, disability or cause (as defined in the employment agreements). The agreements contain a performance bonus plan which provides for additional compensation and grant of stock options, if we meet certain net income levels. The employment agreements also prohibit the employees from directly or indirectly competing with us during the term of their employment and for one year after termination of employment except in the case of termination of employment by us without cause. Effective August 1996, Perfumania entered into a 3-year employment agreement with Marc Finer and Claire Fair. The employment agreements provide for an annual salary of $175,000 and $100,000, respectively, subject to cost-of-living increases, or 5% if higher. The agreements provide that Mr. Finer and Ms. Fair will continue to receive their salary until the expiration of the term of the employment agreement if his employment is terminated by us for any reason other than death, disability or cause (as defined in the employment agreements). There is a performance bonus plan in the agreement, which provides for additional compensation and a grant of stock options, if we meet certain net income levels. The employment agreements also prohibit them from directly or indirectly competing with Perfumania during the term of their employment and for one year after termination of employment except in the case of termination of employment by us without cause. SEPARATION AGREEMENTS Upon his resignation, Mr. Simon Falic entered into a separation agreement with us, pursuant to which we will make $1,303,588 in severance payments to him, subject to applicable withholding taxes, which is payable as follows: $300,000 in January 1999 and the balance payable in monthly installments of $26,529 during fiscal 1999, $27,855 during fiscal 2000 and $29,248 during fiscal 2001. Mr. Falic continues to receive health, dental and life insurance coverage, on the same basis as prior to his resignation for an additional 36 months. Upon his resignation, Mr. Friedman entered into a separation agreement with us pursuant to which we will make severance payments of $826,232, subject to applicable withholding taxes, payable as follows: $119,046 in January 1999 and the balance in monthly installments of $20,136 from February through October 1999 and $18,948 from November 1999 through November 2001. Mr. Friedman will continue to receive health, dental and life insurance coverage, on the same basis as prior to his resignation for an additional 36 months. Additionally, we shall convert the previously granted options into shares of common stock. 29 33 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS RELATIONSHIP WITH PARLUX. Parlux Fragrances, Inc. is a public company engaged in the manufacture of fragrances. Ilia Lekach, our Chairman of the Board and Chief Executive Officer, and one of our principal shareholders, is the Chairman of the Board of Parlux. During fiscal year 1998, 1997 and 1996 we purchased approximately $24.3, $21.4 and $30.7 million, respectively, of merchandise from Parlux, representing approximately 27%, 26% and 29%, respectively, of our total purchases. We believe that our purchases of merchandise from Parlux, were, except for credit terms, on terms no less favorable to us than could reasonably be obtained in arm's length transactions with independent third parties. In July 1999, our board approved the transfer of 1,512,406 shares of our treasury stock to Parulx in consideration for a partial reduction of our outstanding trade indebtedness of approximately $4.5 million. The transfer price was based on a per share price of $2.98. In connection with the transfer of the shares, we are negotiating a registration rights agreement which would obligate us to register their shares for resale to the public. RELATIONSHIP WITH L. LURIA & SON, INC. L. Luria & Son, Inc. is a public company that was a specialty discount retailer selling a broad line of products. Ilia Lekach, our Chairman of the Board and Chief Executive Officer, and one of our principal shareholders, was the Chairman of the Board of Luria's. During fiscal year 1998, 1997 and 1996, we sold approximately $0, $2.0 and $2.5 million, respectively, of merchandise to Luria's, representing approximately 0%, 1% and 2%, respectively, of our total sales. We believe that our sales of merchandise to Luria's, were, except for credit terms, on terms no less favorable to us than could reasonably be obtained in arm's length transactions with independent third parties. During August 1997, Luria's filed for relief under Chapter 11 of the United States Bankruptcy Code. We are an unsecured creditor of Luria's and in fiscal year 1997 we wrote off receivables from Luria's in the amount of $1.2 million. We have been characterized as an insider as defined by the United States Bankruptcy Code, in the liquidating plan of reorganization filed on April 6, 1998 by Luria's in the United States Bankruptcy Court, Southern District of Florida because our Chairman of the Board and Chief Executive Officer was the principal of the entity that controlled Luria's. In August 1998, the committee of unsecured creditors in Luria's bankruptcy proceedings filed a complaint with the United States Bankruptcy Court, Southern District of Florida, to recover substantial funds from us. The complaint alleges that Luria's made preference payments, as defined by the Bankruptcy Court, to us and seeks recovery of said preference payments, as well as the disallowment of any and all claims of us against Luria's until full payment of the preference payments have been made. In July 1999, we agreed with the committee of unsecured creditors to settle all claims held by Luria's against us for the sum of $1.2 million, payable over the next nine months according to a repayment schedule. This settlement is subject to the approval of the Bankruptcy Court. The full amount of the settlement was accrued for in our financial statements for the year ending January 31, 1998. RELATED PARTY INDEBTEDNESS. From time to time we have borrowed money for working capital purposes from our principal shareholders and executive officers and members of their immediate families. The highest aggregate amounts of our indebtedness to such persons during fiscal year 1998, 1997 and 1996, respectively, amount outstanding at the end of fiscal year 1998, 1997 and 1996, respectively, the maturity date of such indebtedness and the interest rate payable by us at the end of fiscal year 1998, 1997 and 1996, respectively, were as set forth in the following table:
HIGHEST AMOUNT AMOUNT OUTSTANDING OUTSTANDING AT MATURITY ANNUAL FISCAL YEAR DURING FISCAL YEAR FISCAL YEAR END DATE INTEREST RATE ----------- ------------------ --------------- -------- -------------- 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%
- ----------------- (1) Father of Ron A. Friedman, our previous Chief Financial Officer, Chief Operating Officer and Secretary. As of the end of fiscal year 1998, 1997 and 1996, Ilia Lekach was indebted to us pursuant to an unsecured note, in the amount of $457,243, $457,243 and $417,763, respectively, issued in connection with his purchase of a 30 34 condominium from us in October 1991. The note accrues interest at the rate of 9.5% and matures on December 31, 2000. Prior to becoming employed as our Chief Executive Officer effective February 1, 1999, Ilia Lekach provided consulting services to us. The total consulting fees paid to him during fiscal year 1998 was $500,000. No consulting fees were paid to Mr. Lekach in fiscal 1997 or fiscal 1996. 31 35 PRINCIPAL SHAREHOLDERS The following table sets forth, as of August 23, 1999, information with respect to the beneficial ownership of Perfumania's common stock by (i) each person known by Perfumania to beneficially own more than 5% of the outstanding shares of common stock, (ii) each director of Perfumania, (iii) each Named Executive Officer, and (iv) all directors and executive officers of Perfumania as a group.
COMMON STOCK BENEFICIALLY OWNED -------------------------------- NAME AND ADDRESS OF BENEFICIAL OWNER (1) SHARES PERCENT(8) - ---------------------------------------- ------ ---------- 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%
- ------------- * Less than 1%. (1) The address of each of the beneficial owners identified is 11701 NW 101st Road, Miami, Florida 33178 except as otherwise noted. (2) Ilia Lekach, Simon Falic and Rachmil Lekach jointly own with their spouses the shares set forth opposite their respective names. (3) Includes 12,300 shares of common stock owned by Pacific Investment Group, a corporation wholly owned by Mr. Lekach. (4) Includes shares of common stock issuable upon the exercise of stock options within 60 days of August 23, 1999 in the following amounts: Ilia Lekach (775,000); Rachmil Lekach (150,000); Simon Falic (334,500); Jerome Falic (334,500); Robert Pliskin (4,000); Marc Finer (27,000); Donovan Chin (9,500); Horatio Groisman, M.D. (2,000); Claire Fair (17,000); and Carole A. Taylor (3,800). (5) The address of Mr. Simon Falic is 150 Harbor Way, Bal Harbour, Florida 33154. (6) The address of Parlux is 3725 S.W. 30th Avenue, Ft. Lauderdale, Florida 33312. (7) Includes 1,172,800 shares of common stock issuable upon the exercise of stock options within 60 days of August 23, 1999. (8) Based on 9,156,434 shares outstanding on August 23, 1999. 32 36 SELLING SHAREHOLDERS The following table provides information regarding the beneficial ownership of the common stock by the selling shareholders as of the date of this prospectus and as adjusted to reflect the sale of all of their shares. The selling shareholders either (a) obtained their shares of common stock pursuant to the Subscription Agreements, dated March 22, 1999, (b) obtained Series A Convertible Notes which are convertible into common stock pursuant to the terms of the Securities Purchase Agreement, dated April 28, 1999, or (c) Series B Convertible Notes which are convertible into Common Stock pursuant to the terms of the Securities Purchase Agreement, dated as of July 8, 1999. No selling shareholder has had any position, office or other material relationship with Perfumania within the past three years. The selling shareholders are participating in this offering pursuant to contractual registration rights granted to the selling shareholders in connection with the Subscription Agreements and Securities Purchase Agreements. In connection with the Subscription Agreements and the Securities Purchase Agreements, we have agreed to file and maintain the effectiveness of the registration statement of which this prospectus forms a part and to pay all fees and expenses incident to the registration of this offering, including all registration and filing fees, all fees and expenses of complying with state blue sky or securities laws, all costs of preparation of the registration statement and fees and disbursements of our counsel and independent public accountants.
$ of Series A $ of Series B Convertible Convertible Notes Number of Notes Number of purchased shares purchased shares Shares under assuming under assuming acquired in Securities conversion of Securities conversion Subscription Purchase the Series A Purchase of Series B Agreement Agreement Convertible Agreement Convertible dated dated Notes on dated Notes on Ownership of Shares NAME AND ADDRESS OF March 22, April 28, August 24, July 8, August 24, ------------------------ BENEFICIAL OWNER 1999 1999 1999(1) 1999 1999(1)(2) Shares(3) Percentage(4) ------------ ----------- ------------- ---------- ----------- --------- ------------ S. Robert Productions, LLC ................. 58,823 $ 300,000 137,928 $ 200,000 91,952 288,703 3.1 666 Dundee Road Suite 1801 Northbrook, IL 60062 Cranshire Capital, L.P.. 117,647 600,000 275,856 700,000 72,217 465,720 4.9 666 Dundee Road Suite 1801 Northbrook, IL 60062 Namax Corp.............. 58,823 300,000 137,928 -- -- 196,751 2.1 666 Dundee Road Northbrook, IL 60062 EP Opportunity Fund, L.L.C............... -- 470,000 216,087 637,000 255,695 471,782 4.9 77 West Wacker Drive Chicago, IL 60601 EP Opportunity Fund International, Ltd... -- 30,000 13,792 35,000 16,091 29,883 * 77 West Wacker Drive Chicago, IL 60601 JJP Partnership ........ -- 300,000 137,928 100,000 45,976 183,904 2.0 2 North LaSalle Street Chicago, IL 60602 The dotCom Fund, LLC ... -- -- -- 300,000 137,928 137,928 1.5 666 Dundee Road Northbrook, IL 60062 EP.com Fund, LLC ....... -- -- -- 28,000 12,873 12,873 * 77 West Wacker Drive Chicago, IL 60601 ----------- ---------- --------- ---------- -------- ---------- Total ........... 235,293 $2,000,000 919,519 $2,000,000 632,732 1,787,544 =========== ========== ========= ========== ======== ==========
Ownership After Ownership After Number of the Offering(5) Number of the Offering(5) NAME AND ADDRESS OF Shares ------------------ NAME AND ADDRESS OF Shares ------------------------ BENEFICIAL OWNER Offered Shares Percentage BENEFICIAL OWNER Offered Shares Percentage --------- -------------- ---------- --------- ----------- ---------- S. Robert Productions, EP Opportunity Fund LLC ................. 288,703 0 0% International, Ltd... 29,883 0 0 666 Dundee Road 77 West Wacker Drive Suite 1801 Chicago, IL 60601 Northbrook, IL 60062 JJP Partnership ........ 183,904 0 0 Cranshire Capital, L.P. 465,720 0 0 2 North LaSalle 666 Dundee Road Street Suite 1801 Chicago, IL 60602 Northbrook, IL 60062 The dotCom Fund, LLC ... 137,928 0 0 Namax Corp. ............ 196,751 0 0 666 Dundee Road 666 Dundee Road Northbrook, IL 60062 Northbrook, IL 60062 EP.com Fund, LLC ....... 12,873 EP Opportunity Fund, 77 West Wacker Drive L.L.C................ 471,782 0 0 Chicago, IL 60601 77 West Wacker Drive Chicago, IL 60601 Total ........... 1,787,544 =========
- ---------------- * Less than 1%. (1) Assumes a conversion price of $2.17504, determined as if conversion occurred on August 24, 1999 pursuant to the terms of the convertible note. (2) Under the Series B Convertible Notes, no selling shareholder can convert the Series B Convertible Notes to the extent such conversion would cause such selling shareholder's beneficial ownership of our common stock to exceed 4.9% of the outstanding shares of common stock. (3) Total shares including shares acquired pursuant to the Subscription Agreement and Securities Purchase Agreements. 33 37 (4) Based on 9,156,434 shares issued and outstanding on August 24, 1999, and for each selling shareholder, if applicable, assuming conversion of all such shareholder's Series A Convertible Note and assuming conversion to the extent contractually permitted of such shareholder's Series B Convertible Note. (5) Assumes sale of all of the shares offered by each selling shareholder. 34 38 PLAN OF DISTRIBUTION GENERAL TRANSACTIONS. The selling shareholders may offer and sell the common stock in one or more of the following transactions: o in the over-the-counter market, o in negotiated transactions or o in a combination of any of these transactions. PRICES. The selling shareholders may sell their shares of common stock at any of the following prices: o fixed prices which may be changed, o market prices prevailing at the time of sale, o prices related to prevailing market prices or o negotiated prices. DIRECT SALES; AGENTS, DEALERS AND UNDERWRITERS. The selling shareholders may effect transactions by selling the shares of common stock in any of the following ways: o directly to purchasers or o to or through agents, dealers or underwriters designated from time to time. Agents, dealers or underwriters may receive compensation in the form of underwriting discounts, concessions or commissions from the selling shareholders and/or the purchasers of shares for whom they act as agent or to whom they sell as principals, or both. The selling shareholders and any agents, dealers or underwriters that act in connection with the sale of shares might be deemed to be "underwriters" within the meaning of Section 2(11) of the Securities Act, and any discount or commission received by them and any profit on the resale of shares as principal might be deemed to be underwriting discounts or commissions under the Securities Act. STATE SECURITIES LAW. Under the securities laws of some states, the selling shareholders may only sell the shares in those states through registered or licensed brokers or dealers. In addition, in some states the selling shareholders may not sell the shares unless they have been registered or qualified for sale in that state or an exemption from registration or qualification is available and is satisfied. EXPENSES; INDEMNIFICATION. We will not receive any of the proceeds from the sale of the common stock sold by the selling shareholders hereunder and will bear all expenses related to the registration of this offering but will not pay for any underwriting commissions, fees or discounts, if any. We will indemnify the selling shareholders against some civil liabilities, including some liabilities which may arise under the Securities Act. 35 39 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of Perfumania consists of 25,000,000 shares of common stock, $0.01 par value per share, and 1,000,000 shares of preferred stock, $0.01 par value per share. COMMON STOCK As of August 23, 1999, there were 9,156,434 shares of common stock issued, of which 1,512,406 shares were held in treasury, and held of record by approximately 81 shareholders. The common stock is traded on the Nasdaq National Market under the symbol "PRFM." The issued and outstanding shares of common stock are fully paid and nonassessable. The holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available therefor at a time and in amounts as the Board may from time to time determine. The shares of common stock are not convertible and the holders thereof have no preemptive or subscription rights to purchase any securities of Perfumania. Upon liquidation, dissolution or winding up of Perfumania, the holders of common stock are entitled to receive pro rata the assets of Perfumania that are legally available for distribution, after payment of all debts and other liabilities. Each outstanding share of common stock is entitled to one vote on all matters submitted to a vote of the stockholders, including election of directors. There is no cumulative voting in the election of directors. PREFERRED STOCK As of August 23, 1999, no shares of preferred stock were outstanding. The Board is authorized, without further shareholder approval, to issue from time to time up to an aggregate of 1,000,000 shares of preferred stock in one or more series and to fix or alter the designations, preferences, rights and any qualifications, limitations or restrictions of the shares of each such series thereof, including the dividend rights, dividend rates, conversion rights, voting rights, terms of redemption (including sinking fund provisions), redemption price or prices, liquidation preferences and the number of shares constituting any series or designations of such series. Perfumania has no present plans to issue any shares of preferred stock. LEGAL MATTERS Greenberg Traurig, P.A., Miami, Florida will provide us with an opinion as to legal matters with respect to the common stock offered under this prospectus. EXPERTS The consolidated financial statements as of January 31, 1998 and January 30, 1999 and for each of the three years in the period ending January 30, 1999 included in this Prospectus have been so included in reliance on the report (which contains an explanatory paragraph relating to the Company's ability to continue as a going concern as described in Note 2 to the financial statements) of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy any document we file at the SEC's public reference rooms located at 450 5th Street, N.W., Washington, D.C. 20549, at Seven World Trade Center, 13th Floor, New York, New York 10048 and at Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from the SEC's web site at: http://www.sec.gov. The common stock trades on the Nasdaq National Market. You can also inspect reports, proxy statements and other information concerning our company at the offices of the Nasdaq National Market. 36 40 This prospectus is part of a registration statement we filed with the SEC. You should only rely on the information incorporated by reference or provided in this prospectus or any supplement. We have not authorized anyone else to provide you with different information. The selling shareholders are not offering the common stock in any state where the offer is not permitted. You should not assume that the information in this prospectus or any supplement is accurate as of any date other than the date on the front of those documents. --------------- As used in this prospectus, unless the context requires otherwise, (i) "Securities Act" means the Securities Act of 1933, as amended, and (ii) "Exchange Act" means the Securities Exchange Act of 1934, as amended. 37 41 PERFUMANIA, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---- ANNUAL FINANCIAL STATEMENTS Report of Independent Certified Public Accountants ................................................................ F-2 Consolidated Balance Sheets as of January 31, 1998 and January 30, 1999 and May 1, 1999 (unaudited) ............... F-3 Consolidated Statements of Operations for the Fiscal Years Ended February 1, 1997, January 31, 1998 and January 30, 1999 and the thirteen weeks ended May 2, 1998 (unaudited) and May 1, 1999 (unaudited) .............. F-4 Consolidated Statements of Changes in Stockholders' Equity for the Fiscal Years Ended February 1, 1997, January 31, 1998 and January 30, 1999 and the thirteen weeks ended May 1, 1999 (unaudited) ..................... F-5 Consolidated Statements of Cash Flows for the Fiscal Years Ended February 1, 1997 January 31, 1998 and January 30, 1999 and the thirteen weeks ended May 2, 1998 (unaudited) and May 1, 1999 (unaudited) ........................................................................ F-6 Notes to Consolidated Financial Statements ........................................................................ F-7
F-1 42 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Perfumania, Inc. In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Perfumania, Inc. and its subsidiaries (collectively, the "Company") at January 31, 1998 and January 30, 1999, and the results of their operations and their cash flows for each of the three years in the period ended January 30, 1999 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has incurred recurring net losses in fiscal years 1997 and 1998 and has a working capital deficit of $3.8 million at January 30, 1999. In addition, the Company was in default of its bank line of credit agreement as a result of its violation of certain debt covenants. These debt covenant violations have been subsequently waived by the bank. There is no assurance that the Company will be able to generate future net income or secure a long-term credit facility, which creates substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. As discussed in Note 11, in 1997 the Company restated its fiscal year 1996 net income and net income per common share calculation to comply with new requirements of the Securities and Exchange Commission Staff position on accounting for convertible securities having beneficial conversion features. As explained in Note 2, in 1997 the Company changed its method of accounting for preopening expenses to conform with new requirements of the American Institute of Certified Public Accountants. PricewaterhouseCoopers LLP Miami, Florida April 29, 1999 except for the fourth paragraph of Note 2 and the second paragraph of Note 8 as to which the date is July 14, 1999. F-2 43 PERFUMANIA, INC. CONSOLIDATED BALANCE SHEETS
JANUARY 31, JANUARY 30, MAY 1, 1998 1999 1999 ------------- ------------ ------------- (unaudited) ASSETS: Current assets: Cash and cash equivalents ................................... $ 1,554,117 $ 1,745,603 $ 1,420,259 Trade receivables, less allowance for doubtful accounts of $704,954 in 1998 and 1999 ................................. 5,186,473 4,108,847 5,222,998 Advances to suppliers ....................................... 7,611,036 8,065,301 7,428,843 Inventories, net of reserve of $2,750,000 and $4,163,251 in 1998 and 1999, respectively ............................ 73,137,842 53,880,132 63,769,253 Prepaid expenses and other current assets ................... 2,044,658 1,417,187 1,623,824 Tax refund receivable ....................................... 814,766 -- -- Deferred tax asset, net ..................................... 1,219,856 -- -- ------------- ------------ ------------- Total current assets ...................................... 91,568,748 69,217,070 79,465,177 Property and equipment, net .................................... 18,307,240 23,180,462 23,109,608 Leased equipment under capital leases, net ..................... 2,266,674 1,373,878 1,210,314 Other assets, net .............................................. 1,764,906 1,357,966 1,357,379 ------------- ------------ ------------- Total assets .............................................. $ 113,907,568 $ 95,129,376 $ 105,142,478 ============= ============ ============= LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Bank line of credit and current portion of notes payable .... $ 34,139,766 $ 32,800,627 $ 34,644,318 Accounts payable - non-affiliates ........................... 13,308,914 14,329,013 12,762,162 Accounts payable - affiliates ............................... 16,958,163 15,812,240 25,827,932 Accrued expenses and other liabilities ...................... 6,848,923 9,205,316 8,775,309 Advances from customers ..................................... -- -- 2,500,000 Income taxes payable ........................................ 505,098 485,098 368,263 Current portion of obligations under capital leases ......... 1,030,340 419,487 317,765 Due to related parties ...................................... 304,483 -- -- ------------- ------------ ------------- Total current liabilities ................................. 73,095,687 73,051,781 85,195,749 Long-term portion of notes payable ............................. 4,709,434 2,370,684 1,935,402 Long-term portion of obligations under capital leases .......... 933,615 562,552 509,745 Convertible notes payable ...................................... -- -- 1,996,000 Long-term severance payables ................................... -- 1,037,859 975,423 ------------- ------------ ------------- Total liabilities ......................................... 78,738,736 77,022,876 90,612,319 Commitments and contingencies .................................. -- -- -- Redeemable common equity (Note 11) ............................. -- 470,588 470,588 Stockholders' equity: Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued ................................... -- -- -- Common stock, $.01 par value, 25,000,000 shares authorized, 7,845,291 and 8,614,491 shares issued at 1998 and 1999, respectively ............................... 78,453 86,145 88,969 Capital in excess of par value .............................. 52,386,361 54,440,009 54,963,570 Treasury stock, at cost, 1,218,360 and 1,512,406 shares at 1998 and 1999, respectively ............................... (4,521,068) (5,413,002) (5,413,002) Accumulated deficit ......................................... (11,960,599) (30,935,097) (35,026,963) Notes and interest receivable from shareholder and officers . (814,315) (542,143) (553,003) ------------- ------------ ------------- Total stockholders' equity .............................. 35,168,832 17,635,912 14,059,571 ------------- ------------ ------------- Total liabilities and stockholders' equity .............. $ 113,907,568 $ 95,129,376 $ 105,142,478 ============= ============ =============
See accompanying notes to consolidated financial statements F-3 44 PERFUMANIA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEAR ENDED THIRTEEN WEEKS ENDED ----------------------------------------------- ---------------------------- FEBRUARY 1, JANUARY 31, JANUARY 30, MAY 2, MAY 1, 1997 1998 1999 1998 1999 ------------- ------------- ------------- ------------ ------------ (as restated, (unaudited) note 11) Net sales: Non-affiliated customers ................... $ 136,446,104 $ 161,593,736 $ 175,255,633 $ 38,467,975 $ 39,400,964 Affiliates ................................. 2,473,623 1,999,823 -- ------------- ------------- ------------- ------------ ------------ 138,919,727 163,593,559 175,255,633 38,467,975 39,400,964 ------------- ------------- ------------- ------------ ------------ Cost of goods sold: Non-affiliated customers ................... 76,706,903 96,053,329 110,638,432 23,662,458 24,147,795 Affiliates ................................. 2,252,850 1,566,489 -- -- -- ------------- ------------- ------------- ------------ ------------ 78,959,753 97,619,818 110,638,432 23,662,458 24,147,795 ------------- ------------- ------------- ------------ ------------ Gross profit ............................. 59,959,974 65,973,741 64,617,201 14,805,517 15,253,169 ------------- ------------- ------------- ------------ ------------ Operating expenses: Selling, general and administrative expenses 48,165,392 64,219,379 72,501,987 15,307,548 16,615,905 Provision for doubtful accounts ............ 500,000 1,730,000 -- 30,000 15,000 Provision for impairment of assets and store closings ........................... 169,159 2,514,818 1,034,717 -- -- Depreciation and amortization .............. 3,771,508 4,697,816 4,480,681 1,082,258 1,165,152 ------------- ------------- ------------- ------------ ------------ Total operating expenses ................. 52,606,059 73,162,013 78,017,385 16,419,806 17,796,057 ------------- ------------- ------------- ------------ ------------ Income (loss) from operations before other income (expense).......................... 7,353,915 (7,188,272) (13,400,184) (1,614,289) (2,542,888) ------------- ------------- ------------- ------------ ------------ Other income (expense): Interest expense: Affiliates ............................... (148,647) (124,250) (22,486) (1,103) -- Other .................................... (4,004,754) (4,617,070) (4,938,365) (1,299,151) (1,593,010) ------------- ------------- ------------- ------------ ------------ (4,153,401) (4,741,320) (4,960,851) (1,300,254) (1,593,010) ------------- ------------- ------------- ------------ ------------ Interest income: Affiliates ............................... 39,480 42,450 43,440 21,255 10,860 Other .................................... 3,499 2,660 35,057 316 589 ------------- ------------- ------------- ------------ ------------ 42,979 45,110 78,497 21,571 11,449 ------------- ------------- ------------- ------------ ------------ Other income ............................... 478,179 762,138 645,446 121,360 32,583 ------------- ------------- ------------- ------------ ------------ Total other income (expense) ............... (3,632,243) (3,934,072) (4,236,908) (1,157,323) (1,548,978) ------------- ------------- ------------- ------------ ------------ Income (loss) before income taxes ............. 3,721,672 (11,122,344) (17,637,092) (2,771,612) (4,091,866) (Provision) benefit for income taxes .......... (1,646,731) 321,192 (1,337,406) -- -- ------------- ------------- ------------- ------------ ------------ Income (loss) before cumulative effect of change in accounting principle ............. 2,074,941 (10,801,152) (18,974,498) (2,771,612) (4,091,866) Cumulative effect of change in accounting principle, net of income tax benefit of .... -- (631,418) -- -- -- ============= ============= ============= ============ ============ Net income (loss) ............................. $ 2,074,941 $ (11,432,570) $ (18,974,498) $ (2,771,612) $ (4,091,866) ============= ============= ============= ============ ============ Basic earnings (loss) per common share: Income (loss) before cumulative effect of change in accounting principle ............. $ 0.29 $ (1.54) $ (2.85) $ (0.42) $ (0.56) Cumulative effect of change in accounting principle................................... -- (0.09) -- -- -- ============= ============= ============= ============ ============ Net income (loss) ............................. $ 0.29 $ (1.63) $ (2.85) $ (0.42) $ (0.56) ============= ============= ============= ============ ============ Diluted earnings (loss) per common share: Income (loss) before cumulative effect of change in accounting principle ............. $ 0.27 $ (1.54) $ (2.85) $ (0.42) $ (0.56) Cumulative effect of change in accounting principle................................... -- (0.09) -- -- -- ============= ============= ============= ============ ============ Net income (loss) ............................. $ 0.27 $ (1.63) $ (2.85) $ (0.42) $ (0.56) ============= ============= ============= ============ ============ Weighted average number of shares outstanding: Basic ...................................... 7,183,462 7,025,236 6,659,237 6,560,354 7,364,485 ============= ============= ============= ============ ============ Diluted .................................... 7,633,588 7,025,236 6,659,237 6,560,354 7,364,485 ============= ============= ============= ============ ============
See accompanying notes to consolidated financial statements. F-4 45 PERFUMANIA, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1997 (AS RESTATED, NOTE 11) FISCAL YEAR ENDED JANUARY 31, 1998, FISCAL YEAR ENDED JANUARY 30, 1999 AND THIRTEEN WEEKS ENDED MAY 1, 1999
COMMON STOCK CAPITAL TREASURY STOCK -------------------- IN EXCESS --------------------- SHARES AMOUNT OF PAR VALUE SHARES AMOUNT --------- ------- ------------ ------ ----------- Balance at February 3, 1996.. 6,707,700 $67,077 $ 47,959,464 23,000 $ (123,323) Exercise of stock options.... 2,000 20 8,230 -- -- Conversion of debentures..... 918,091 9,181 2,978,085 -- -- Beneficial conversion feature of debentures..... -- -- 529,412 -- -- Issuance of common stock..... 180,000 1,800 954,450 -- -- Purchases of treasury stock.. -- -- -- 644,900 (2,531,787) Net change in notes and interest receivable from shareholder and officers.. -- -- -- -- -- Net income for the fiscal year ended February 1, -- -- -- -- -- 1997 ..................... --------- ------- ------------ --------- ----------- Balance at February 1, 1997.. 7,807,791 78,078 52,429,641 667,900 (2,655,110) Exercise of stock options.... 37,500 375 116,812 -- -- Purchases of treasury stock.. -- -- -- 550,460 (1,865,958) Net change in notes and interest receivable from shareholder and officers.. -- -- -- -- -- Other ....................... -- -- (160,092) -- -- Net loss for the fiscal year ended January 31, 1998.... -- -- -- -- -- --------- ------- ------------ --------- ----------- Balance at January 31, 1998.. 7,845,291 78,453 52,386,361 1,218,360 (4,521,068) Exercise of stock options.... 684,200 6,842 310,865 -- -- Purchases of treasury stock.. -- -- -- 294,046 (891,934) Issuance of common stock .... 85,000 850 213,371 -- -- Proceeds on common stock to -- -- 1,529,412 -- -- be issued ................ Net change in notes and interest receivable from shareholder and officers.. -- -- -- -- -- Net loss for the fiscal year ended January 30, 1999.... -- -- -- -- -- --------- ------- ------------ --------- ----------- Balance at January 30, 1999.. 8,614,491 86,145 54,440,009 1,512,406 (5,413,002) Exercise of stock options 282,400 2,824 138,946 -- -- (unaudited)............... Beneficial conversion feature of notes payable (unaudited)............... -- -- 384,615 -- -- Net change in notes and interest receivable from shareholder and officers (unaudited)............... -- -- -- -- -- Net loss for the thirteen weeks ended May 1, 1999 (unaudited)............... -- -- -- -- -- --------- ------- ------------ --------- ----------- Balance at May 1, 1999 (unaudited)............... 8,896,891 $88,969 $ 54,963,570 1,512,406 $(5,413,002) ========= ======= ============ ========= ===========
NOTES AND INTEREST RECEIVABLE FROM SHAREHOLDER ACCUMULATED AND DEFICIT OFFICERS TOTAL ------------ --------- ------------ Balance at February 3, 1996.. $ (2,602,970) $(538,065) $ 44,762,183 Exercise of stock options.... -- -- 8,250 Conversion of debentures..... -- -- 2,987,266 Beneficial conversion feature of debentures..... -- -- 529,412 Issuance of common stock..... -- -- 956,250 Purchases of treasury stock.. -- -- (2,531,787) Net change in notes and interest receivable from Shareholder and officers.. -- (4,791) (4,791) Net income for the fiscal year ended February 1, 2,074,941 -- 2,074,941 1997...................... ------------ --------- ------------ Balance at February 1, 1997.. (528,029) (542,856) 48,781,724 Exercise of stock options.... -- -- 117,187 Purchases of treasury stock.. -- -- (1,865,958) Net change in notes and interest receivable from Shareholder and officers.. -- (271,459) (271,459) Other........................ -- -- (160,092) Net loss for the fiscal year ended January 31, 1998.... (11,432,570) -- (11,432,570) ------------ --------- ------------ Balance at January 31, 1998.. (11,960,599) (814,315) 35,168,832 Exercise of stock options.... -- -- 317,707 Purchases of treasury stock.. -- -- (891,934) Issuance of common stock..... -- -- 214,221 Proceeds on common stock to -- -- 1,529,412 be issued................. Net change in notes and interest receivable from Shareholder and officers.. -- 272,172 272,172 Net loss for the fiscal year ended January 30, 1999.... (18,974,498) -- (18,974,498) ------------ --------- ------------ Balance at January 30, 1999.. (30,935,097) (542,143) 17,635,912 Exercise of stock options -- -- 141,770 (unaudited)............... Beneficial conversion feature of notes payable (unaudited)............... -- -- 384,615 Net change in notes and interest receivable from Shareholder and officers (unaudited)............... -- (10,860) (10,860) Net loss for the thirteen weeks ended May 1, 1999 (unaudited)............... (4,091,866) -- (4,091,866) ------------ --------- ------------ Balance at May 1, 1999 (unaudited)............... $(35,026,963) $(553,003) $ 14,059,571 ============ ========= ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-5 46 PERFUMANIA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED THIRTEEN WEEKS ENDED ---------------------------------------------- --------------------------- FEBRUARY 1, JANUARY 31, JANUARY 30, MAY 2, MAY 1, 1997 1998 1999 1998 1999 ------------ ------------ ------------ ----------- ----------- (as restated, (unaudited) note 11) Cash flows from operating activities: Net income (loss) ........................... $ 2,074,941 $(11,432,570) $(18,974,498) $(2,771,612) $(4,091,866) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision for deferred taxes ............. 380,528 -- 1,219,856 -- -- Capitalized preopening costs ............. (940,550) -- -- -- -- Provision for doubtful accounts .......... 500,000 1,730,000 -- 30,000 15,000 Provision/writedown for inventory losses . 190,000 1,810,000 3,764,665 -- -- Depreciation and amortization ............ 3,771,508 4,697,816 4,480,681 1,082,258 1,165,151 Provisions for impairment of assets ...... -- 2,200,000 -- -- -- Loss on disposition of property and equipment .............................. 169,159 314,818 1,034,717 -- -- Beneficial conversion feature of debentures and convertible notes payable 529,412 -- -- -- 384,615 Cumulative effect of change in accounting principle, net of tax benefit .......... -- 631,418 -- -- -- Stock compensation ....................... -- -- 214,221 -- -- Change in operating assets and liabilities, (increase) decrease in: Trade receivables: Customers .............................. 716,959 5,358,686 1,077,626 1,034,806 (1,129,151) Affiliates ............................. (653,657) 653,657 -- -- -- Advances to suppliers .................... (712,058) (2,587,318) (454,265) (1,359,268) 636,458 Inventories .............................. (24,288,235) 10,162,581 15,493,045 2,964,817 (9,889,121) Prepaid expenses and other current assets (707,745) (184,818) 627,471 220,195 (206,637) Tax refund receivable .................... -- (814,766) 814,766 -- -- Other assets ............................. (123,998) (539,266) 406,940 (77,189) 417 Increase (decrease) in: Accounts payable ......................... 17,314,213 (5,861,438) (125,824) 1,122,047 8,448,841 Advances from customers .................. -- -- -- -- 2,500,000 Accrued expenses and other liabilities ... 1,088,386 2,908,483 2,356,398 (459,768) (430,007) Income taxes payable ..................... 1,321,203 (816,105) (20,006) (117,556) (116,835) Long term severance payable .............. -- -- 1,037,859 -- (62,436) Negative goodwill ........................ -- (470,000) -- -- -- ------------ ------------ ------------ ----------- ----------- Net cash provided by (used in) operating activities ............................. 630,066 7,761,178 12,953,652 1,668,730 (2,775,571) ------------ ------------ ------------ ----------- ----------- Cash flows from investing activities: Additions to property and equipment ...... (7,341,901) (7,207,114) (9,495,824) (2,978,471) (930,563) ------------ ------------ ------------ ----------- ----------- Net cash used in investing activities .... (7,341,901) (7,207,114) (9,495,824) (2,978,471) (930,563) ------------ ------------ ------------ ----------- ----------- Cash flows from financing activities: Net borrowings under bank line of credit and loans payable ...................... 7,208,943 2,957,170 (3,677,888) 2,020,558 1,408,409 Net increase (decrease) in due to related parties ................................ 90,000 (465,517) (304,483) 30,486 -- Principal payments under capital lease obligations ............................ (639,892) (952,805) (981,916) (331,578) (154,529) Net advances to shareholder and officers . (4,791) (271,459) 272,172 (115,860) (10,860) Issuance of convertible notes payable .... -- -- -- -- 1,996,000 Issuance of debentures ................... 2,935,361 -- -- -- -- Proceeds from issuance of common stock ... 956,250 -- 2,000,000 -- -- Proceeds from exercise of stock options .. 8,250 117,187 317,707 -- 141,770 Stock issuance costs ..................... -- (160,092) -- -- -- Purchases of treasury stock .............. (2,531,787) (1,865,958) (891,934) (564,367) -- ------------ ------------ ------------ ----------- ----------- Net cash provided by (used in) financing activities ............................ 8,022,334 (641,474) (3,266,342) 1,039,239 3,380,790 ------------ ------------ ------------ ----------- ----------- Increase (decrease) in cash and cash equivalents .............................. 1,310,499 (87,410) 191,486 (270,502) (325,344) Cash and cash equivalents at beginning of period ................................... 331,028 1,641,527 1,554,117 1,554,117 1,745,603 ------------ ------------ ------------ ----------- ----------- Cash and cash equivalents at end of period .. $ 1,641,527 $ 1,554,117 $ 1,745,603 $ 1,283,615 $ 1,420,259 ============ ============ ============ =========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-6 47 PERFUMANIA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- NATURE OF BUSINESS: Perfumania, Inc. ("Perfumania") and its subsidiaries (collectively, the "Company") is a specialty retailer and wholesaler of fragrances and related products. The Company's retail stores consist of stores located in regional malls, manufacturer's outlet malls, airports and on a stand-alone basis in suburban strip shopping centers. The number of retail stores in operation at February 1, 1997, January 31, 1998, January 30, 1999 and May 1, 1999 were 262, 285, 289 and 288 respectively. NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES: Significant accounting principles and practices used by the Company in the preparation of the accompanying consolidated financial statements are as follows: FISCAL YEAR END The Company's fiscal year ends the Saturday closest to January 31 to enable the Company's operations to be reported in a manner which more closely coincides with general retail reporting practices and the financial reporting needs of the Company. In the accompanying notes, fiscal year 1996, 1997 and 1998 refers to the year ended February 1, 1997, January 31, 1998 and January 30, 1999, respectively. MANAGEMENT ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates made by management in the accompanying financial statements relate to the allowance for doubtful accounts, inventory reserves, self insurance health care reserves, long-lived asset impairments and estimated useful lives of property and equipment. Actual results could differ from those estimates. BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the consolidated financial statements, the Company incurred net losses of approximately $11.4 million, $18.9 and $4.1 million (unaudited) during the fiscal years ended January 31, 1998, January 30, 1999 and the thirteen week period ended May 1, 1999, respectively, and has a working capital deficit of $3.8 million and $5.6 million (unaudited) at January 30, 1999 and May 1, 1999, respectively. In addition, the Company was in violation of certain debt covenants contained in its bank line of credit agreement as of and for the year ended January 30, 1999. These debt covenant violations have been subsequently waived by the bank as of July 14, 1999 (See Note 8). In April 1999 and July 1999, the Company issued a total of $4 million of convertible notes to a group of private investors (See Note 16). Management's plan to improve the results of operations include decreasing the number of store openings in 1999, closing a number of its non-profitable stores, improving the effectiveness of its sales promotions practices, continuing to improve the existing merchandise mix and to promote the private label bath, body and cosmetic line, continuing to liquidate slow moving inventories and reducing selling, general and administrative expenses. There is no assurance, however, that the Company will be able to improve its results of operations based on management's plan. F-7 48 These factors among others may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Perfumania and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. REVENUE RECOGNITION Revenue from wholesale transactions is recorded upon shipment of inventory. Revenue from retail sales is recorded, net of discounts and estimated returns, upon customer purchase. ADVANCES TO SUPPLIERS Advances to suppliers represent prepayments to wholesale vendors on pending inventory purchase orders. INVENTORIES Inventories, consisting predominantly of finished goods, are stated at the lower of cost or market, cost being determined on a moving average cost basis. The cost of inventory includes product cost and freight charges. Provision for potentially slow moving or damaged inventory is recorded based on management's analysis of inventory levels, turnover ratios, future sales forecasts and through specific identification of obsolete or damaged merchandise. PROPERTY AND EQUIPMENT Property and equipment is carried at cost, less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the term of the lease or the estimated useful lives of the improvements, whichever is shorter. Costs of major additions and improvements are capitalized and expenditures for maintenance and repairs which do not extend the useful life of the asset are expensed when incurred. Gains or losses arising from sales or retirements are included in income currently. PREOPENING EXPENSES Prior to fiscal year 1997, the Company capitalized expenses associated with the opening of new retail locations and training of personnel. These costs typically included occupancy costs incurred prior to store opening, travel expenses, store managers' salaries and grand opening costs paid to the mall. The Company amortized these amounts over 18 months. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up Activities", which requires the Company to expense preopening expenses as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998, does not require restatement of prior periods and is applied as of the beginning of the fiscal year in which the SOP is first adopted. The Company early adopted SOP 98-5 in fiscal year 1997 and has reported the initial application as a cumulative effect of a change in accounting principle in the Consolidated Statement of Operations for the year ended January 31, 1998. The effect of the change in accounting principle was to increase the net loss reported for fiscal year 1997 by $631,418 or $0.09 per share. INCOME TAXES Income tax expense is based principally on pre-tax financial income. Deferred tax assets and liabilities are recognized for the difference between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. F-8 49 BASIC AND DILUTED INCOME (LOSS) PER SHARE Basic income (loss) per common share is computed by dividing income (loss) available to common stockholders, after giving effect in fiscal year 1996 to the restatement related to the beneficial conversion feature in connection with convertible debt (Note 11), by the weighted average number of common shares outstanding during the period. Diluted income (loss) per common share includes the dilutive effect of those stock options where the option exercise prices were greater than the average market price of the common shares during the respective fiscal years. Basic and diluted earnings per share for income (loss) before cumulative effect of change in accounting principle is computed as follows:
FISCAL YEAR THIRTEEN WEEKS ENDED ----------------------------------------- -------------------------- 1996 1997 1998 MAY 2, 1998 MAY 1, 1999 ---------- ------------ ------------ ----------- ----------- (as restated, (Unaudited) Note 11) Numerator: Income (loss) before cumulative effect of change in accounting principle......... $2,074,941 $(10,801,152) $(18,974,498) $(2,771,612) $(4,091,866) ---------- ------------ ------------ ----------- ----------- Denominator: Denominator for basic income (loss) per share............. 7,183,462 7,025,236 6,659,237 6,560,354 7,364,485 Effect of dilutive securities: Options to purchase common stock 450,126 -- -- -- -- ---------- ------------ ------------ ----------- ----------- Denominator for dilutive income (loss) per share............. 7,633,588 7,025,236 6,659,237 6,560,354 7,364,485 ---------- ------------ ------------ ----------- ----------- Income (loss) per share before cumulative effect of change in accounting principle: Basic........................... $0.29 $(1.54) $(2.85) $(0.42) $(0.56) ========== ============ ============ =========== =========== Diluted......................... $0.27 $(1.54) $(2.85) $(0.42) $(0.56) ========== ============ ============ =========== =========== Antidilutive securities not included in the diluted earnings (loss) per share computation: Options to purchase common stock 1,472,861 1,724,150 391,222 1,818,150 1,477,075 Exercise price.................. $2.75 - $8.50 $2.75 - $5.63 $0.41 - $2.75 $2.75 - $5.63 $0.41-$3.75
CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107 ("SFAS 107"), "Disclosures about Fair Value of Financial Instruments" requires disclosure on the fair value of financial instruments held by the Company. SFAS 107 defines the fair value of a financial instrument as the amount at which the instrument F-9 50 could be exchanged in a current transaction between willing parties. The following methods and assumptions were used to estimate fair value: o The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to their short-term nature; o The Company's bank line of credit, obligations under capital leases and loans payable approximate fair value because they are based on current interest rates and repayment terms of the individual notes, and; o Long-term severance payable approximates fair value because discounted cash flows using current interest rates for debt with similar characteristics and maturity were used to estimate its carrying value. ASSET IMPAIRMENT The Company reviews long-lived assets and makes a provision for impairment whenever events or changes in circumstances indicate that the projected cash flows of related activities may not provide for cost recovery. An impairment loss is recorded when the net book value of assets exceeds projected undiscounted future cash flows on a store by store basis. STOCK BASED COMPENSATION The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for stock Issued to Employees ("APB 25"), and provides pro forma disclosure of net income and earnings per share as if the fair value based method prescribed by SFAS 123 had been applied in measuring compensation expense for options granted in 1997 and 1998. In accordance with APB 25 compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. RECLASSIFICATION Certain fiscal year 1996 and 1997 amounts have been reclassified to conform with the fiscal year 1998 presentation. RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the AICPA issued Statement of Financial Position 98-1, ("SOP 98-1") "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". SOP 98-1 provides guidance for capitalization of certain costs incurred in the development of internal-use software and is effective for financial statements for years beginning after December 15, 1998. The Company adopted SOP 98-1 in fiscal year 1998 which did not have a significant impact on the Company's results of operations, cash flows or financial position. In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income," which establishes standards for reporting and displaying comprehensive income and its components. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information," which requires the Company to present certain information about operating segments and related information. The Company adopted both statements in fiscal year 1998. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). Among other provisions, SFAS No. 133 establishes accounting the reporting standards for derivative instruments and for hedging activities. It also requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 is effective for financial statements for fiscal years beginning after June 15, 2000. Management has not determined the effect, if any, of adopting SFAS No. 133. F-10 51 NOTE 3 -- ACQUISITION: In November 1996, the Company acquired substantially all of the assets of Nature's Elements Holding Corporation ("Nature's") which included the service mark and trade name "Nature's Elements" and the stock of its subsidiary. Prior to the acquisition, all of Nature's liabilities, both at the parent and subsidiary level were transferred to a liquidating trust. Subsequent to the acquisition, the stock of the subsidiary was liquidated and the Company received inventory and store fixtures and assumed the obligation for 34 leases (including 1 seasonal store) for approximately $2.2 million, of which $1.7 million was represented by a note payable. The Company has since closed 11 locations, renovated 18 locations and the remaining locations will either be renovated or subleased by mid 1999. The acquisition was accounted for as a purchase and accordingly, Nature's results are included in the consolidated financial statements since the date of acquisition. The estimated fair value of the acquired assets exceeded the purchase price. The excess of estimated fair value of the assets acquired over cost was $3.5 million of which $3 million reduced the fair value of non-current assets acquired to a zero value and $0.5 million was allocated to negative goodwill, which was reduced to zero in 1997 due to writedown of inventory purchased. The assets and business acquired were not material in relation to consolidated financial statements. NOTE 4 -- STATEMENTS OF CASH FLOWS: Supplemental disclosures of cash flow information:
FISCAL YEAR ENDED THIRTEEN WEEKS ENDED -------------------------------------- ------------------------ FEBRUARY 1, JANUARY 31, JANUARY 30, MAY 2, MAY 1, 1997 1998 1999 1998 1999 ---------- ---------- ---------- ---------- ---------- (UNAUDITED) Cash paid during the period for: Interest .......................... $3,459,563 $4,671,039 $4,830,230 $1,307,562 $1,068,412 Income taxes ...................... $ 71,138 $1,012,000 $ 20,000 $ 117,556 $ --
Supplemental disclosures of noncash activities: The Company issued in 1996 a $1.7 million note payable due to the acquisition discussed in Note 3. In December 1996, the Company entered into an agreement with a vendor whereby approximately $3.6 million of accounts payable was converted to a note payable (see Note 8). NOTE 5 -- INVENTORIES: During fiscal years 1996, 1997 and 1998, the Company recorded a provision of $0.2 million, $1.8 million and $3.8 million, respectively, to reduce the carrying value of certain fragrances the Company intends to liquidate. No amounts were provided for during the thirteen week periods ended May 2, 1998 and May 1, 1999, respectively. These amounts represent management's best estimate of the inventories' net realizable value. NOTE 6 -- PROPERTY AND EQUIPMENT: Property and equipment includes the following:
ESTIMATED USEFUL JANUARY 31, JANUARY 30, MAY 1, LIVES 1998 1999 1999 (IN YEARS) ------------ ------------ ----------- ---------------- (UNAUDITED) Furniture, fixtures and equipment . $ 15,213,721 $ 15,959,500 $17,069,134 5-7 Leasehold improvements ............ 14,995,361 21,235,443 21,054,761 10 ------------ ------------ ----------- 30,209,082 37,194,943 38,123,895 Less: Accumulated depreciation and amortization ................... (11,901,842) (14,014,481) (15,014,287) ------------ ------------ ----------- $ 18,307,240 $ 23,180,462 $23,109,608 ============ ============ ===========
F-11 52 NOTE 7 -- NOTES AND INTEREST RECEIVABLE FROM SHAREHOLDER AND OFFICERS: Notes and interest receivable from shareholder and officers consists of the following:
JANUARY 31, 1998 JANUARY 30, 1999 MAY 1, 1999 ---------------- ---------------- ----------- (unaudited) Notes and interest receivable from officers................ $315,612 $ -- $ -- Note and interest receivable from shareholder ................. 498,703 542,143 553,003 -------- -------- -------- $814,315 $542,143 $553,003 ======== ======== ========
The note receivable from shareholder results from the sale of a condominium to the shareholder at its book value in 1991. The shareholder assumed the balance of the related mortgage and issued an unsecured note payable to the Company for $282,519, bearing interest at 9.5%. The note initially matured in December 1993 and has been subsequently renewed through December 2000. Total interest income recognized during fiscal years 1996, 1997 and 1998 was approximately $40,000, $43,000 and $43,000, respectively, and during the thirteen week period ended May 1, 1999 interest income recognized was approximately $11,000 (unaudited). Accrued interest receivable at January 31, 1998, January 30, 1999 and May 1, 1999 amounted to approximately $42,000, $85,000 and $96,000 (unaudited), respectively. Purchases of products from a company affiliated through common ownership amounted to $30,735,244, $21,436,855 and $24,333,032, in fiscal year 1996, 1997 and 1998, respectively, and $7,527,721 (unaudited) and $13,027,238 (unaudited) for the thirteen week periods ended May 2, 1998 and May 1, 1999, respectively. The amount due to this company at January 31, 1998, January 30, 1999 and May 1, 1999, was $16,958,163, $15,812,240 and $25,827,932 (unaudited), respectively. Amounts due to this affiliate are non-interest bearing. Other income in fiscal year 1996 includes $110,000 of warehousing fees received from an affiliated company. Prior to signing an employment agreement effective February 1, 1999, the Company's Chief Executive Officer provided consulting services to the Company. Total consulting expense to this officer was $500,000 during 1998, of which $325,000 was accrued as of January 30, 1999. F-12 53 NOTE 8 -- BANK LINE OF CREDIT AND NOTES PAYABLE: The bank line of credit and notes payable consist of the following:
JANUARY 31, 1998 JANUARY 30, 1999 MAY 1, 1999 ---------------- ---------------- ------------ (unaudited) Bank line of credit, bearing interest at the bank's prime rate plus 4% (11.75% at January 30, 1999), interest payable monthly, expiring in April 2001, secured by a pledge of substantially all of the Company's assets ....................... $ 31,657,946 $ 30,035,019 $ 32,158,669 Notes payable bearing interest ranging from approximately 10.0% - 14.7%, payable in monthly installments ranging from $481 to $7,500 including interest, through July 1999 secured by equipment ................ 61,374 14,928 11,922 Notes payable bearing interest ranging from approximately 8.5%-10.8%, payable in monthly installments of $109,315, including interest, through December 2001, secured by fixtures .. 3,394,396 2,841,267 2,546,436 Note payable bearing interest at approximately 10.25%, payable in monthly installments of $50,000, including interest, with final payment of $200,000 in November 1999 (See Note 3) .......................... 1,119,744 727,609 492,252 Note payable bearing interest at approximately 10.25%, payable in monthly installments of $75,000, including interest, with final payment of $65,736 in November 2000 (See Note 4) ........................... 2,615,740 1,552,488 1,370,441 ------------ ------------ ------------ 38,849,200 35,171,311 36,579,720 Less: current portion ............................................ (34,139,766) (32,800,627) (34,644,318) ------------ ------------ ------------ Long-term portion ................................................. $ 4,709,434 $ 2,370,684 $ 1,935,402 ============ ============ ============
The aggregate maturities of the bank line of credit and notes payable at January 30, 1999 are as follows: FISCAL YEAR ----------- 1999 $32,800,627 2000 1,698,120 2001 528,540 2002 123,966 2003 20,058 ----------- $35,171,311 =========== The Company's $35 million line of credit contains covenants requiring the maintenance of minimum tangible net worth, book value and achieving specified levels of quarterly results of operations. The line of credit also contains limitations on additional borrowings, capital expenditures, number of new store openings, purchases of treasury stock and prohibits distribution of dividends. As of January 30, 1999, the Company was in violation of certain of the above covenants. As a result, the bank can demand payment of the amounts outstanding under the line of credit agreement. In addition, as a result of these violations, the Company incurred the default rate of interest, F-13 54 prime plus 4% (11.75%) beginning December 1998. On July 14, 1999, the Company obtained a waiver of default from the bank through September 30, 1999 as of and for the year ended January 30, 1999. (See Note 16). Advances made under the line of credit are based on a formula of eligible inventories and receivables. At January 30, 1999 and May 1, 1999, the Company had available under the line of credit approximately $4,248,000 and $1,476,000 (unaudited), respectively. Advances are secured by a first lien on substantially all of the Company's assets and assignment of a life insurance policy on one of the Company's officers. The Company's line of credit is guaranteed to the extent of $3,000,000 each by two stockholders of the Company. NOTE 9 -- IMPAIRMENT OF ASSETS: Based on a review of the Company's retail store locations with negative cash flows, the Company recognized non-cash impairment charges relating to its retail segment of $0.2 million, $2.5 million and $1.0 million during fiscal years ended 1996, 1997 and 1998, respectively. No impairment charges were recognized during the thirteen week periods ended May 2, 1998 and May 1, 1999, respectively. These charges were determined based on the difference between the carrying amount of the assets, representing primarily fixtures and leasehold improvements, at a particular store location in excess of the fair value of the assets on a store by store basis. The estimated fair value was based on anticipated future cash flows discounted at a rate commensurate with the risk involved. These impairment losses are included in "Provision for impairment of assets and store closings," in the accompanying Consolidated Statement of Operations. NOTE 10 -- INCOME TAXES: The (provision) benefit for income taxes is comprised of the following amounts:
FISCAL YEAR ENDED ------------------------------------------------------ FEBRUARY 1, 1997 JANUARY 31, 1998 JANUARY 30, 1999 ---------------- ---------------- ---------------- 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) =========== =========== ===========
F-14 55 The income tax provision differs from the amount obtained by applying the statutory Federal income tax rate to pretax income as follows:
FISCAL YEAR ENDED ----------------------------------------------------- FEBRUARY 1, 1997 JANUARY 31, 1998 JANUARY 30, 1999 ---------------- ---------------- ---------------- Benefit (provision) at federal statutory rates .......................... $(1,531,251) $ 4,066,060 $ 7,161,669 Valuation allowance against current year benefit .... -- -- (7,161,669) State taxes ......................................... -- -- (117,550) Recognized net operating loss carryforward ................................ 115,810 -- -- (Increase) reduction in the valuation allowance ..... -- (3,405,000) (1,219,856) Beneficial conversion feature of debentures ............................ (205,000) -- -- Other ............................................... (26,290) 41,090 -- ----------- ----------- ----------- (Provision) benefit for income taxes ..................................... $(1,646,731) $ 702,150 $(1,337,406) =========== =========== ===========
Net deferred tax assets reflect the tax effect of the following differences between financial statement carrying amounts and tax bases of assets and liabilities:
JANUARY 31, 1998 JANUARY 30, 1999 ---------------- ---------------- 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 $ -- =========== ============
During fiscal year 1998, the Company provided a valuation allowance of $12,740,142 for deferred tax assets as management believes that it is more likely than not that the benefit of the deferred tax asset will not be realized. Realization of future tax benefits related to the deferred tax assets is dependent on many factors, including F-15 56 the Company's ability to generate taxable income within the net operating loss carryforward period. Management has considered these factors in reaching its conclusion as to the valuation allowance for financial reporting purposes. NOTE 11 -- STOCKHOLDERS' EQUITY: STOCK SUBSCRIPTION In March 1999, the Company entered into Subscription Agreements for the sale of 235,293 shares of the Company's common stock to a group of private investors at the agreed upon price of $8.50 per share. The proceeds of $2 million were received in January 1999. The Subscription Agreements require that the Company file the appropriate registration statements with the Securities and Exchange Commission within six months from the date of the Subscription Agreements to permit the registered resale of the shares by the investors in open market transactions. If on the effective date of the registration statement, the market price is less than $8.50 per share, the Company is obligated to reimburse the investor group the lesser of 1) the product of the difference between $8.50 and the closing bid price of the Company's common stock on the effective date of the registration statement multiplied by the number of shares issued under the Subscription Agreement or 2) the product of $2.00 multiplied by the number of shares issued under the Subscription Agreements. As of January 30, 1999 and May 1, 1999, the potential redeemable amount of $470,588 was recorded as redeemable common equity and the remaining $1,529,412 was recorded as capital in excess of par value in the accompanying balance sheets. In March 1996, the Company sold 180,000 shares of common stock for approximately $956,000 in a private placement. DEBENTURES In March 1996, the Company issued $3,000,000 of 5% Convertible Debentures (the "Debentures") in a Regulation S offering to non-U.S. persons. The debentures were convertible into shares of common stock of the Company, at any time after May 21, 1996, at a conversion price for each share of common stock equal to eighty-five percent of the market price of the common stock on the date of conversion, not to exceed $8.50 per share of common stock. The debentures were converted into approximately 918,000 shares of common stock in the second quarter of 1996. In a 1997 announcement, the staff of the Securities and Exchange Commission ("SEC") indicated that when debt is convertible at a discount from the then current common stock market price, the discounted amount represents an incremental yield, e.g. a "beneficial conversion feature", which should be recognized as a return to the debt holders. Based on the market price of the Company's debentures at the date of issuance, the debentures issued by the Company had a beneficial conversion feature of $529,412 at such point in time. Because of the SEC announcement, the Company has restated its fiscal year 1996 net income and net income per common share information to reflect such accounting treatment. The net effect of the restatement represents a non-cash interest charge to net income. STOCK WARRANTS In connection with its initial public offering, the Company issued warrants to purchase 150,000 shares of common stock. The warrants were exercisable until December 19, 1996 at an exercise price equal to $12.75. The holders of such warrants attempted to exercise the warrants in fiscal year 1996. The Company disputed the method of determining the exercise price for such warrants which resulted in litigation. During fiscal year 1997, the Company settled the litigation and agreed to issue an aggregate of 85,000 shares of common stock. These shares were issued during the first quarter of fiscal year 1998 and accordingly, the Company recorded an expense of approximately $214,000 which represented the fair value of the common stock on the date of issuance. PREFERRED STOCK The Company's Articles of Incorporation authorize the issuance of up to 1,000,000 shares of preferred stock. The preferred stock may be issued from time to time at the discretion of the Board of Directors without F-16 57 stockholders' approval. The Board of Directors is authorized to issue these shares in different series and, with respect to each series, to determine the dividend rate, and provisions regarding redemption, conversion, liquidation preference and other rights and privileges. As of January 30, 1999, no preferred stock had been issued. STOCK OPTION PLANS Under the Company's Stock Option Plan (the "Stock Option Plan") and Directors Stock Option Plan (the "Directors Plan") (collectively, the "Plans"), 2,500,000 shares of common stock and 60,000 shares of common stock, respectively, are reserved for issuance upon exercise of options. The Company's Board of Directors, or a committee thereof, administers and interprets the Stock Option Plan. The Stock Option Plan provides for the granting of both "incentive stock options" (as defined in Section 422A of the Internal Revenue Code) and non-statutory stock options. Options can be granted under the Stock Option Plan on such terms and at such prices as determined by the Board, except that the per share exercise price of options will not be less than the fair market value of the common stock on the date of grant. Only non-employee directors are eligible to receive options under the Directors Plan. The Directors Plan provides for an automatic grant of an option to purchase 2,000 shares of common stock upon election as a director of the Company and an automatic grant of 4,000 shares of common stock upon such person's re-election as a director of the Company, in both instances at an exercise price equal to the fair value of the common stock on the date of grant. During October 1998, the Company offered each employee, who had previously been granted options to purchase the Company's stock, the opportunity to change the option price effective October 27, 1998 (the "Repricing"). Under the terms of the Repricing, all previously granted stock options would be cancelled, and the employee would be granted the same number of options at the fair market value of the Company's common stock on October 27, 1998, which was $0.50 per share. No other terms to the stock options were amended. At the time of the offer, the Company had approximately 80 employees who had been granted options to purchase the Company's common stock with option prices ranging from $2.75 to $6.84. The Repricing plan was accepted by all employees with respect to outstanding stock options. The Company uses the measurement prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). Had compensation costs for the Company's Plans been determined based on the fair market value at the grant dates of options granted consistent with the method of SFAS 123, the Company's net (loss) income and diluted net (loss) income per share would have been reduced (increased) to the pro forma amounts indicated below:
FISCAL YEARS -------------------------------------------------------------- 1996 1997 1998 ---------------------- ------------ ------------ (as restated, Note 11) Net (loss) income As reported $2,074,941 $(11,432,570) $(18,974,498) Proforma $1,946,867 $(11,939,613) $(19,735,008) Diluted net (loss) As reported $0.27 $(1.63) ($2.85) income per share Proforma $0.26 $(1.68) ($2.96)
In calculating the pro forma net (loss) income and net (loss) income per share for fiscal years 1996, 1997 and 1998, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in fiscal years 1996, 1997 and 1998:
1996 1997 1998 ----------- ----------- ----------- 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%
F-17 58 Options granted under the Stock Option Plan are exercisable after the period or periods specified in the option agreement, and options granted under the Directors Plan are exercisable immediately. Options granted under the Plans are not exercisable after the expiration of 10 years from the date of grant. The Plans also authorize the Company to make loans to optionees to enable them to exercise their options. A summary of the Company's option activity, and related information for each of the three fiscal years ended January 30, 1999 follows:
1996 1997 1998 ---------------------------- ------------------------- -------------------------- WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE --------- --------------- -------- ---------------- -------- ---------------- 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
- -------------- (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:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------- ---------------------------------------------------------- ------------------------------ RANGE OF WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE EXERCISE PRICE NUMBER OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE OUTSTANDING EXERCISE PRICES -------------- ------------------ -------------- ---------------- ----------- --------------- $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 --------- ----- --- --------- -----
NOTE 12 -- EMPLOYEE BENEFIT PLANS: The Company has a 401(k) Savings and Investment Plan ("the Plan"). Pursuant to such plan, participants may make contributions to the Plan up to a maximum of 15% of total compensation or $9,500 (or such higher amount as is prescribed by the Secretary of the Treasury for cost of living adjustments), whichever is less, and the Company, in its discretion, may match such contributions to the extent of 25% of the first 4% of a participant's contribution. The Company's matching contributions vest over a 5-year period. In addition to matching contributions, the Company may make additional contributions on a discretionary basis in order to comply with certain Internal Revenue Code regulations prohibiting discrimination in favor of highly compensated employees. The Company's matching contributions during fiscal years 1996, 1997 and 1998 and the thirteen week periods ended May 2, 1998 and May 1, 1999 were not significant. NOTE 13 -- COMMITMENTS AND CONTINGENCIES: The Company is self-insured for employee medical benefits under the Company's group health plan. The Company maintains stop loss coverage for individual medical claims in excess of $50,000 and for annual Company medical claims which exceed approximately $2,000,000 in the aggregate. While the ultimate amount of claims incurred are dependent on future developments, in management's opinion, recorded reserves are adequate to cover the future payment of claims. However, it is possible that recorded reserves may not be adequate to cover the future F-18 59 payment of claims. Adjustments, if any, to estimates recorded resulting from ultimate claim payments will be reflected in operations in the periods in which such adjustments are known. The self-insurance reserve at January 31, 1998 and January 30, 1999 was approximately $338,000 and $520,000, respectively. In the fourth quarter of 1998, the Company entered into severance agreements with two executive officers resulting in a non-recurring charge of approximately $1,900,000. Under the terms of the agreements, both officers will receive severance payments over a three-year term beginning December 1998. The resulting expense is reflected in selling, general and administrative expenses in the accompanying consolidated statements of operation. In addition, as part of the severance agreement with one of the executive officers, the officer received 429,000 shares of common stock at no cost and, accordingly, the Company recorded additional compensation expense of approximately $176,000. In February 1999, the Company entered into three-year employment agreements with two of its executive officers. The agreements provide for aggregate annual salaries of approximately $718,000 to these officers subject to the higher of the increase in adjustments for cost-of-living or 5%. The agreements also contain a performance bonus plan and grant of stock options if the Company meets certain net income levels. The Company leases space for its office, warehouse and retail stores. The lease terms vary from one to ten years, in some cases with options to renew for longer periods. Various leases contain clauses which adjust the base rental rate by the prevailing Consumer Price Index, as well as additional rent based on a percentage of gross sales in excess of a specified amount. Rent expense for fiscal year 1996, 1997, and 1998 approximated $11,223,000, $14,398,000, and $15,972,000, respectively. For the thirteen week periods ended May 2, 1998 and May 1, 1999, rent expense approximated $3,991,000 (unaudited) and $4,068,000 (unaudited), respectively. Future minimum lease commitments under these operating leases at January 30, 1999 are as follows:
FISCAL YEAR ----------- 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 ===========
F-19 60 The following is a schedule of future minimum lease payments under capital leases together with the present value of the net minimum lease payments, at January 30, 1999: FISCAL YEAR ----------- 1999 $ 526,050 2000 265,314 2001 190,485 2002 194,724 2003 8,774 ---------- Total future minimum lease payments........ 1,185,347 Less: amount representing interest........ (203,308) ---------- Present value of minimum lease payments.... 982,039 Less: current portion..................... (419,487) ---------- $ 562,552 ========== The depreciation expense relating to capital leases is included in depreciation and amortization expense. As of January 30, 1999, the Company had entered into 7 additional store leases at locations under construction. In December of 1993, the patent holder and exclusive licensee in the U.S. of Boucheron filed a complaint against the Company in the Southern District of New York for infringing upon their exclusive right to sell the Boucheron bottle and is seeking $1.5 million in damages. The plaintiffs' theory is based on the fact that they have a valid patent for the bottles and that Perfumania's sales of such bottles infringes upon their patent rights. The Company believes that a patent holder cannot in any way control by resort to an infringement suit the resale of a patented article which he has sold. The Company filed a motion to dismiss during February 1994. On March 20, 1995 the Court denied the Company's motion to dismiss and on April 14, 1995, the Company filed its answer to the complaint. Discovery is in progress. In the opinion of management and counsel, the ultimate outcome of the aforementioned litigation will not have a material effect on the accompanying financial statements. During 1996 and 1997, the Company made sales to L. Luria & Son, Inc. ("Luria's") in the amounts of $2,473,623 and $1,999,823, respectively. The Company wrote off in 1997 receivables from Luria's in the approximate amount of $1,200,000. The Company has been characterized as an insider as defined by the United States Bankruptcy Code, in the liquidating plan of reorganization filed on April 6, 1998 by Luria's in the United States Bankruptcy Court, Southern District of Florida because our Chairman of the Board and Chief Executive Officer was the principal of the entity that controlled Luria's. In October 1998, the committee of unsecured creditors in Luria's bankruptcy proceedings filed a complaint with the United States Bankruptcy Court, Southern District of Florida to recover substantial funds from the Company. The complaint alleges that Luria's made preference payments, as defined by the Bankruptcy Court, to the Company and seeks recovery of said preference payments, as well as disallowing any and all claims of the Company against Luria's until full payment of the preference payments have been made. (See Note 16). The Company is also involved in various other legal proceedings in the ordinary course of business. Management cannot presently predict the outcome of these matters, although management believes, upon the advice of legal counsel, that the Company would have meritorious defenses and that the ultimate resolution of these matters should not have a materially adverse effect on the Company's financial position or result of operations. F-20 61 NOTE 14 -- SEGMENT INFORMATION: The Company operates in two industry segments, specialty retail sale and wholesale distribution of fragrances and related products. Financial information for these segments is summarized in the following table.
FISCAL YEAR ENDED THIRTEEN WEEKS ENDED ------------------------------------------------ ---------------------------- FEBRUARY 1, JANUARY 31, JANUARY 30, MAY 2, MAY 1, 1997 1998 1999 1998 1999 ------------ ------------ ------------ ----------- ----------- (unaudited) Net sales to external customers: Wholesale ....................... $ 30,316,598 $ 34,031,744 $ 40,465,689 $13,467,930 $11,266,754 Retail .......................... 108,603,129 129,561,815 134,789,944 25,000,045 28,134,210 ------------ ------------ ------------ ----------- ----------- Total net sales to external customers..................... $138,919,727 $163,593,559 $175,255,633 $38,467,975 $39,400,964 ============ ============ ============ =========== =========== Intersegment sales: Wholesale ....................... $ 77,956,573 $ 80,022,607 $ 18,477,729 $ 2,760,767 $14,484,486 Retail .......................... -- -- -- -- -- ------------ ------------ ------------ ----------- ----------- Total intersegment sales ...... $ 77,956,573 $ 80,022,607 $ 18,477,729 $ 2,760,767 $14,484,486 ============ ============ ============ =========== =========== Cost of goods sold: Wholesale ....................... $ 22,702,968 $ 26,090,395 $ 32,920,317 $10,280,190 $ 9,072,744 Retail .......................... 56,256,785 71,529,423 77,718,115 13,382,268 15,075,051 ------------ ------------ ------------ ----------- ----------- Total cost of goods sold ...... $ 78,959,753 $ 97,619,818 $110,638,432 $23,662,458 $24,147,795 ============ ============ ============ =========== =========== Gross profit: Wholesale ....................... $ 7,613,630 $ 7,941,349 $ 7,545,372 $ 3,187,740 $ 2,194,010 Retail .......................... 52,346,344 58,032,392 57,071,829 11,617,777 13,059,159 ------------ ------------ ------------ ----------- ----------- Total gross profit ............ $ 59,959,974 $ 65,973,741 $ 64,617,201 $14,805,517 $15,253,169 ============ ============ ============ =========== =========== Inventories: Wholesale ....................... $ 32,051,346 $ 20,368,792 $ 8,227,522 $16,500,647 $11,049,365 Retail .......................... 53,059,077 52,769,050 45,652,610 53,672,378 52,719,888 ------------ ------------ ------------ ----------- ----------- Total inventories ............. $ 85,110,423 $ 73,137,842 $ 53,880,132 $70,173,025 $63,769,253 ============ ============ ============ =========== =========== Depreciation and amortization: Retail .......................... $ 3,771,508 $ 4,697,816 $ 4,480,681 $ 1,082,258 $ 1,165,151 ------------ ------------ ------------ ----------- ----------- $ 3,771,508 $ 4,697,816 $ 4,480,681 $ 1,082,258 $ 1,165,151 ============ ============ ============ =========== =========== Capital expenditures: Retail .......................... $ 6,798,159 $ 6,831,944 $ 8,849,837 $ 2,978,471 $ 930,563 ------------ ------------ ------------ ----------- ----------- $ 6,798,159 $ 6,831,944 $ 8,849,837 $ 2,978,471 $ 930,563 ============ ============ ============ =========== ===========
An unaffiliated customer of the wholesale segment accounted for approximately 11%, 8%, 6%, 23% (unaudited) and 13% (unaudited) of the consolidated net sales in fiscal year 1996, 1997, 1998 and the thirteen week periods ending May 2, 1998 and May 1, 1999, respectively, and 18%, 0% and 0% (unaudited) of the consolidated net trade accounts receivable balance at January 31, 1998, January 30, 1999 and May 1, 1999, respectively. In fiscal year 1996, 1997, 1998 and the thirteen week periods ending May 2, 1998 and May 1, 1999, the wholesale segment included foreign sales of approximately $3.8 million, $1.7 million, $2.9 million, $0.5 million (unaudited) and $0.1 million (unaudited), respectively. NOTE 15 -- QUARTERLY FINANCIAL DATA (UNAUDITED): The following table sets forth the Company's unaudited quarterly summarized financial data for the periods indicated (dollar amounts are in F-21 62 thousands). Certain of the quarterly information has been restated, as described below.
FISCAL YEAR 1997 -------------------------------------------------------- 1ST QTR 2ND QTR 3RD QTR 4TH QTR -------- -------- -------- -------- Wholesale division ........... $ 6,541 $ 8,333 $ 8,590 $ 10,568 Retail division .............. 23,447 28,952 30,185 46,978 Total net sales .............. 29,988 37,285 38,775 57,546 Gross profit ................. 12,906 15,628 15,913 21,527 Loss before cumulative effect of change in accounting principle ...... (1,998) (457) (1,226) (7,122) Cumulative effect of change in accounting ...... (632) -- -- -- principle Net loss ..................... (2,630) (457) (1,226) (7,122) Basic loss per common share: Loss before cumulative effect of change in accounting principle ...... $ (0.28) $ (0.06) $ (0.17) $ (1.05) Cumulative effect of change in accounting principle ................. (0.09) -- -- -- Net loss ..................... $ (0.37) $ (0.06) $ (0.17) $ (1.05) Diluted loss per common share: Loss before cumulative effect of change in accounting principle ...... $ (0.28) $ (0.06) $ (0.17) $ (1.05) Cumulative effect of change in accounting ...... $ (0.09) -- -- -- principle Net loss ..................... $ (0.37) $ (0.06) $ (0.17) $ (1.05) % of total net sales for fiscal year ............... 18.3% 22.8% 23.7% 35.2% # of retail stores at end of each period ............ 270 271 283 285 Net loss as previously reported .................. $ (2,039) $ (498) $ (878) $ (7,555) Cumulative effect of change in accounting principle ................. (564) 68 121 21 Provision for doubtful accounts .................. -- -- (700) 700 Income tax (provision) benefit.................... (27) (27) 231 (288) Net loss as adjusted ......... $ (2,630) $ (457) $ (1,226) $ (7,122)
FISCAL YEAR 1998 -------------------------------------------------------- 1ST QTR 2ND QTR 3RD QTR 4TH QTR -------- -------- -------- -------- Wholesale division ........... $ 13,468 $ 10,235 $ 6,993 $ 9,770 Retail division .............. 25,000 29,450 30,091 50,249 Total net sales .............. 38,468 39,685 37,084 60,019 Gross profit ................. 14,806 16,511 15,020 18,280 Loss before cumulative effect of change in accounting principle ...... (2,772) (1,273) (3,859) (11,070) Cumulative effect of change in accounting ...... -- -- -- -- principle Net loss ..................... (2,772) (1,273) (3,859) (11,070) Basic loss per common share: Loss before cumulative effect of change in accounting principle ...... $ (0.42) $ (0.20) $ (0.59) $ (1.64) Cumulative effect of change in accounting principle ................. -- -- -- -- Net loss ..................... $ (0.42) $ (0.20) $ (0.59) $ (1.64) Diluted loss per common share: Loss before cumulative effect of change in accounting principle ...... $ (0.42) $ (0.20) $ (0.59) $ (1.64) Cumulative effect of change in accounting ...... -- -- -- -- principle Net loss ..................... $ (0.42) $ (0.20) $ (0.59) $ (1.64) % of total net sales for fiscal year ............... 21.9% 22.6% 21.2% 34.3% # of retail stores at end of each period ............ 284 287 294 289 Net loss as previously reported .................. $ (2,772) $ (1,273) $ (3,859) $(11,070) Cumulative effect of change in accounting principle ................. -- -- -- -- Provision for doubtful accounts .................. -- -- -- -- Income tax (provision) benefit.................... -- -- -- -- Net loss as adjusted ......... $ (2,772) $ (1,273) $ (3,859) $(11,070)
As disclosed in Note 2, the Company changed its method of accounting for preopening expenses in 1997 and has reported the initial applications as a cumulative effect of a change in accounting principle. Accordingly, the Company's net loss and net loss per common share for all quarters in 1997 in the above table has been restated to reflect this change. During the fourth quarter of fiscal year 1997 and 1998, the Company recorded a reserve for inventory losses of approximately $1.8 million and $3.8 million, respectively (see Note 5). NOTE 16 -- EVENTS SUBSEQUENT TO THE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS (UNAUDITED): In April 1999, the Company entered into a Securities Purchase Agreement whereby it issued an aggregate of $2 million worth of the Company's Series A Convertible Notes (the "Notes"), which are convertible into common stock. The Notes contain a beneficial conversion feature of approximately $385,000 which will be taken by the Company as a non-cash interest charge to income in the first quarter of fiscal year 1999. The agreement requires the Company to file a registration statement with the Securities and Exchange Commission within forty-five days after the date of issuance of the convertible notes. In April 1999, perfumania.com, inc., a wholly-owned subsidiary of the Company, announced that it intends to make an initial public offering of its common stock. perfumania.com, inc. plans to raise approximately $25 - $32 million representing approximately 53% of the common stock to be outstanding following the offering. F-22 63 perfumania.com, inc. is offering 3,500,000 shares of its common stock, which includes 1,000,000 shares held by the Company. A registration statement for the offering was filed on June 4, 1999, and the offering should be completed as soon as practicable after the registration statement becomes effective. The net proceeds of the offering will be used for working capital and other general corporate purposes and also repayment of any outstanding indebtedness to the Company as well as reduction of the outstanding balance in the Company's bank line of credit. On July 14, 1999, the Company obtained a waiver of default from the bank though September 30, 1999 as of and for the year ended January 30, 1999. Future outstanding borrowings will bear interest at the prime rate plus four percent. The bank agreed to less restrictive covenants provided that certain events commence prior to September 30, 1999. One such event includes that perfumania.com, inc. (a wholly-owned subsidiary) is to receive at least $10 million from a contemplated initial public offering of its shares, of which at least $2 million is to be repaid to the Company. In July 1999, the Company agreed with the committee of unsecured creditors to settle all claims held by Luria's against us for the sum of $1.2 million, payable over the next nine months according to a repayment schedule. This settlement is subject to the approval of the Bankruptcy Court. The full amount of the settlement was accrued for in the Company's financial statements as of January 31, 1998, January 30, 1999 and May 1, 1999. In July 1999, the Company entered into a Securities Purchase Agreement and issued an aggregate of $2 million worth of our Series B Convertible Notes, which are convertible into common stock. The Notes contain a beneficial conversion feature of approximately $637,500 which will be taken by the Company as a non-cash interest charge to income in the second quarter of fiscal year 1999. The agreement requires the Company to file a registration statement with the Securities and Exchange Commission within forty-five days after the date of issuance of the convertible notes. The Conversion Price is the lower of (A) $3.40625 per share, subject to adjustment and (B) the floating conversion price determined by multiplying (1) the average closing bid price of the common stock for the three trading days immediately preceding the date of determination, by (2) 80%, subject to adjustment. The conversion price may be adjusted pursuant to antidilution provisions in the convertible note. In July 1999, the Company's Board of Directors approved the transfer of 1,512,406 shares of the Company's treasury stock to a company affiliated through common ownership in consideration for a partial reduction of the Company's outstanding trade receivable balance of approximately $4.5 million. The transfer price was based on a per share price of $2.98, which approximates 90% of the closing price on the Company's common stock for the previous 20 business days. In connection with the transfer of the shares, the parties are currently negotiating a registration rights agreement whereby the affiliate would be able to demand registration of the shares with the Securities and Exchange Commission at any time after February 29, 2000. F-23 64 SCHEDULE S-1 PERFUMANIA, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
ADDITIONS --------- BALANCE AT BEGINNING OF CHARGED TO COSTS CHARGED TO BALANCE AT DESCRIPTION PERIOD AND EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF PERIOD ----------- ------ ------------ -------------- ---------- ------------- For the year ended February 1, 1997: Accounts receivable $ 472,804 $ 500,000 $ -- $ (724,418)(1) $ 248,386 Inventory 750,000 190,000 -- -- 940,000 For the year ended January 31, 1998: Accounts receivable 248,386 1,730,000 -- (1,273,432)(1) 704,954 Inventory 940,000 1,810,000 -- -- 2,750,000 Self-insurance -- 297,710 187,449(2) (146,937)(3) 338,222 Deferred tax asset valuation allowance -- 3,405,000 -- -- 3,405,000 For the year ended January 30, 1999: Accounts receivable 704,954 -- -- -- 704,954 Inventory 2,750,000 3,764,665 -- (2,351,414)(4) 4,163,251 Self-insurance 338,222 1,295,410 541,484(2) (1,654,491)(3) 520,625 Deferred tax asset valuation allowance 3,405,000 9,335,142 -- -- 12,740,142 For the thirteen weeks ended May 1, 1999: Accounts Receivable 704,954 15,000 -- -- 719,954 Inventory 4,163,251 -- -- (440,327)(4) 3,722,924 Self-insurance 520,625 172,402 178,528(2) (358,890)(3) 512,665 Deferred tax asset valuation allowance 12,740,142 -- -- -- 12,740,142
(1) Represents amounts written off against accounts receivable. (2) Represents employee contributions. (3) Represents benefit/premium payments. (4) Represents amounts written off against inventory. 65 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The estimated expenses in connection with the offering are as follows: 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 =======
All amounts except the Securities and Exchange Commission registration fee are estimated. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Registrant has authority under Section 607.0850 of the Florida Business Corporation Act to indemnify its directors and officers to the extent provided in such statute. The Registrant's Articles of Incorporation provide that the Registrant may indemnify its executive officers and directors to the fullest extent permitted by law whether now or hereafter. The Registrant has entered or will enter into an agreement with each of its directors and certain of its officers wherein it has agreed to indemnify each of them to the fullest extent permitted by law. The provisions of the Florida Business Corporation Act that authorize indemnification do not eliminate the duty of care of a director, and in appropriate circumstances equitable remedies such as injunctive or other forms of nonmonetary relief will remain available under Florida law. In addition, each director will continue to be subject to liability for (a) violations of the criminal law, unless the director had reasonable cause to believe his conduct was lawful or had no reasonable cause to believe his conduct was unlawful; (b) deriving an improper personal benefit from a transaction; (c) voting for or assenting to an unlawful distribution; and (d) willful misconduct or a conscious disregard for the best interests of the Registrant in a proceeding by or in the right of the Registrant to procure a judgment in its favor or in a proceeding by or in the right of a shareholder. The statute does not affect a director's responsibilities under any other law, such as the federal securities laws or state or federal environmental laws. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES In July 1999, we entered into a Securities Purchase Agreement and issued an aggregate of $2 million worth of our Series B Convertible Notes, which are convertible into common stock. The Notes contain a beneficial conversion feature of approximately $637,500 which will be taken by us as a non-cash interest charge to income in the second quarter of fiscal year 1999. The agreement requires us to file a registration statement with the Securities and Exchange Commission within forty-five days after the date of issuance of the convertible notes. The Conversion Price is the lower of (A) $3.40625 per share, subject to adjustment and (B) the floating conversion price determined by multiplying (1) the average closing bid price of the common stock for the three trading days immediately preceding the date of determination, by (2) 80%, subject to adjustment. The conversion price may be adjusted pursuant to antidilution provisions in the convertible note. If the conversion price decreases, we are obligated to issue additional shares of common stock. In April 1999, we entered into a Securities Purchase Agreement and issued an aggregate of $2 million worth of our Series A Convertible Notes, which are convertible into common stock. The agreement requires us to file a registration statement with the Securities and Exchange Commission within forty-five days after the date of issuance of the convertible notes. The conversion price is the lower of (A) $4.35 per share, subject to adjustment and (B) the floating conversion price determined by multiplying (1) the average closing bid price of the common stock for the three trading days immediately preceding the date of determination, by (2) 80%, subject to adjustment. The conversion price may be adjusted pursuant to antidilution provisions in the convertible note. II-1 66 In March 1999, Perfumania entered into subscription agreements for the sale of 235,293 shares of Perfumania's common stock to a group of private investors at an agreed upon price of $8.50 per share. The proceeds of $2 million were received in January 1999. The subscription agreements require that we file the appropriate registration statements with the Securities and Exchange Commission within six months from the date of the subscription agreements to permit the registered resale of the shares by the investors in open market transactions. If on the effective date of the registration statement, the market price is less than $8.50 per share, we are obligated to reimburse the investor group the lesser of 1) the product of the difference between $8.50 and the closing bid price of our common stock on the effective date of the registration statement multiplied by the number of shares issued under the subscription agreements or 2) the product of $2.00 multiplied by the number of shares issued under the subscription agreements. As of January 31, 1999, the potential redeemable amount of $470,588 was recorded as redeemable common equity and the remaining $1,529,412 was recorded as capital in excess of par value in the accompanying balance sheets. On March 21, 1996, we sold 180,000 shares of common stock for approximately $956,000 in a private placement. On March 25, 1996, we issued $3,000,000 of 5% Convertible Debentures (the "Debentures") in a Regulation S offering to non-U.S. persons. The debentures were convertible at any time after May 21, 1996 into shares of our common stock, at a conversion price for each share of common stock equal to eighty-five percent of the market price of the common stock on the date of conversion, not to exceed $8.50 per share of common stock. The debentures were converted to approximately 918,000 shares of our common stock in the second quarter of fiscal 1996. See Note 11 of the consolidated financial statements. The foregoing securities were all issued without registration under the Securities Act of 1933, as amended, by reason of the exemption from registration afforded by the provisions of Section 4(2) thereof, as transactions by an issuer not involving public offering, each recipient of such securities having consented to the imposition of restrictive legends upon the certificates evidencing such securities. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------ ----------- 3.1 Amended and Restated Articles of Incorporation (1) 3.2 Bylaws (2) 4.1 Warrant Agreement between the Company and Josephthal, Lyon & Ross Incorporated (3) 5.1 Opinion of Greenberg Traurig, P.A. (9) 10.3 Amendments to the Loan and Security Agreements between the Company and LaSalle (4) National Bank dated July 29, 1994, and September 30, 1994 10.4 Amendments to the Loan and Security Agreements between the Company and LaSalle (5) National Bank dated March 29, 1996 10.5 1991 Stock Option Plan, as amended (5) 10.6 1992 Directors Stock Option Plan, as amended (5) 10.7 Regulation S 5% Convertible Debentures Agreement (5) 10.8 Regulation S Stock Subscription Agreement (5) 10.9 Amendments to the Loan and Security Agreements between LaSalle National Bank dated April 16, 1997 (6)
II-2 67
EXHIBIT NUMBER DESCRIPTION ------ ----------- 10.10 Executive Employment Agreements and Separation Agreements (7) (a) Employment Agreement, dated as of June 21, 1996, between the Company and Claire Fair (b) Employment Agreement, dated as of August 11, 1997, between the Company and Marc Finer (c) Employment Agreement, dated as of February 1, 1999, between the Company and Jerome Falic (d) Employment Agreement, dated as of February 1, 1999, between the Company and Ilia Lekach (e) Separation Agreement, dated December 1, 1998, between the Company and Ron Friedman (f) Separation Agreement, dated January 29, 1999, between the Company and Simon Falic 10.11 Form of Subscription Agreement, dated March 22, 1999, between the Company and the investors set forth therein (8) 10.12 Securities Purchase Agreement, dated April 28, 1999, between the Company and the investors set forth therein (8) 10.13 Securities Purchase Agreement, dated July 8, 1999, between the Company and the investors set forth therein (9) 21.1 Subsidiaries of the Registrant (5) 23.1 Consent of PricewaterhouseCoopers LLP (9) 24.0 Reference is made to the Signatures section of this Registration Statement for the Power of Attorney contained therein. (8) 27.1 Financial Data Schedule for the fiscal year ended January 30, 1999 (8) 27.2 Financial Data Schedule for the fiscal year ended January 31, 1998 (8) 27.3 Financial Data Schedule for the fiscal year ended February 1, 1997 (8) - ----------
(1) Incorporated by reference to the exhibit of the same description filed with the Company's 1993 Form 10-K (filed April 28, 1994). (2) Incorporated by reference to the exhibit of the same description filed with the Company's Registration Statement on Form S-1 (No. 33-46833). (3) Incorporated by reference to the exhibit of the same description filed with the Company's Registration Statement on Form S-1 (No. 33-43556). (4) Incorporated by reference to the exhibit of the same description filed with the Company's 1994 Form 10-K (filed April 20, 1995). (5) Incorporated by reference to the exhibit of the same description filed with the Company's 1995 Form 10-K (filed April 26, 1996). (6) Incorporated by reference to the exhibit of the same description filed with the Company's 1996 Form 10-K (filed May 2, 1997). (7) Incorporated by reference to the exhibit of the same description filed with the Company's 1998 Form 10-K/A (filed on May 28, 1999). (8) Incorporated by reference to the exhibit of the same description filed with the Company's Registration Statement on Form S-1 (No. 333-80525). (9) Filed herewith. II-3 68 (b) Financial Statement Schedules: Valuation and Qualifying Accounts ITEM 17. UNDERTAKINGS. (a) The undersigned Registrant hereby undertakes: (1) to file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (iii) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) that, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof, and (3) to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in the Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. (c) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been, settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-4 69 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 1 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Miami, State of Florida on this 31st day of August, 1999. PERFUMANIA, INC. By: /s/ Ilia Lekach -------------------------------------- Ilia Lekach, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Ilia Lekach - ------------------------------------ Chairman of the Board and Chief Executive Officer August 31, 1999 Ilia Lekach (Principal Executive Officer) /s/ Jerome Falic* - ------------------------------------ President and Vice Chairman of the Board August 31, 1999 Jerome Falic /s/ Donovan Chin* - ------------------------------------ Chief Financial Officer and Director (Principal August 31, 1999 Donovan Chin Financial and Accounting Officer) /s/ Marc Finer* - ------------------------------------ President of the Retail Division and Director August 31, 1999 Marc Finer /s/ Robert Pliskin* - ------------------------------------ Director August 31, 1999 Robert Pliskin /s/ Carole Ann Taylor* - ------------------------------------ Director August 31, 1999 Carole Ann Taylor /s/ Horatio Groisman* - ------------------------------------ Director August 31, 1999 Horatio Groisman, M.D. *By: /s/ Ilia Lekach ------------------------------- Ilia Lekach, Attorney in fact
II-5 EX-5.1 2 OPINION OF GREENBERG TRAURIG 1 EXHIBIT 5.1 GREENBERG TRAURIG, P.A. 1221 BRICKELL AVENUE MIAMI, FL 33131 August 31, 1999 Perfumania, Inc. 11701 N.W. 101st Road Miami, FL 33178 Re: OFFERING OF SHARES PURSUANT TO REGISTRATION STATEMENT ON FORM S-1 ----------------------------------------------------------------- Gentlemen: We have acted as counsel to Perfumania, Inc., a Florida corporation (the "Company"), in connection with the preparation and filing by the Company with the Securities and Exchange Commission of a Registration Statement on Form S-1 (the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"). The Registration Statement relates to an aggregate of 1,787,544 shares of the Company's common stock, par value $.01 per share, some of which are issued and outstanding (the "Issued Shares") and some of which will be issued upon conversion of convertible promissory notes (the "Reserved Shares"). In so acting, we have examined originals, or copies certified or otherwise identified to our satisfaction, of (a) the Articles of Incorporation, as amended, and Bylaws of the Company as currently in effect, (b) the Registration Statement and exhibits thereto, (c) certain resolutions adopted by the Board of Directors of the Company, and (d) such other documents, records, certificates and other instruments of the Company as in our judgment are necessary or appropriate for purposes of this opinion. Based on and subject to the foregoing, we are of the opinion that the Issued Shares have been duly and validly authorized and are validly issued, fully paid and nonassessable. Further, we are of the opinion that the Reserved Shares have been duly and validly authorized and when issued upon conversion of the convertible promissory notes, will be validly issued, fully paid and nonassessable. We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement, and further consent to the use of our name wherever appearing in the Registration Statement. In giving such consent, we do not hereby admit that we come within the category of persons whose consent is required under the Securities Act, or the rules or regulations of the Securities and Exchange Commission promulgated thereunder. Very truly yours, /s/ GREENBERG TRAURIG, P.A. GREENBERG TRAURIG, P.A. EX-10.13 3 SECURITIES PURCHASE AGREEMENT 7/8/99 1 Exhibit 10.13 SECURITIES PURCHASE AGREEMENT This SECURITIES PURCHASE AGREEMENT (the "AGREEMENT"), dated as of July 8, 1999, is entered into by and among Perfumania Inc., a Florida corporation, with headquarters located at 11701 N.W. 101st Road, Miami, Florida 33178 (the "COMPANY"), and the investors listed on Schedule 1 attached hereto (individually, a "BUYER" and collectively, the "BUYERS"). WHEREAS: A. The Company and the Buyers are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by Rule 506 of Regulation D ("REGULATION D") as promulgated by the United States Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933 ACT"); B. The Company has authorized the following new series of convertible notes: the Company's Series B Convertible Notes (the "CONVERTIBLE NOTES"), which shall be convertible into shares of the Company's Common Stock, par value $.01 per share (the "COMMON STOCK") (as converted, the "CONVERSION SHARES"), in accordance with the terms of the Company's Series B Convertible Notes, substantially in the form attached hereto as Exhibit A; C. The Buyers wish to purchase, upon the terms and conditions stated in this Agreement, an aggregate of $2,000,000 worth of Convertible Notes in the respective amounts set forth opposite each Buyer's name on Schedule 1; and D. Contemporaneously with the execution and delivery of this Agreement, the parties hereto are executing and delivering a Registration Rights Agreement substantially in the form attached hereto as Exhibit B (the "REGISTRATION RIGHTS AGREEMENT") pursuant to which the Company has agreed to provide certain registration rights under the 1933 Act and the rules and regulations promulgated thereunder, and applicable state securities laws. NOW THEREFORE, the Company and the Buyers hereby agree as follows: 1. PURCHASE AND SALE OF CONVERTIBLE NOTES. a. Purchase of Convertible Notes. Subject to the satisfaction (or waiver) of the conditions set forth in Sections 6 and 7 below, the Company shall issue and sell (the "OFFERING") to each Buyer and each Buyer severally agrees to purchase from the Company the amount of Convertible Notes set forth opposite such Buyer's name on Schedule 1 (the "CLOSING"). The aggregate purchase price (the "PURCHASE PRICE") of all the Convertible Notes offered and sold pursuant to the Offering at the Closing shall be $2,000,000. 2 b. Closing Date. The date and time of the Closing (the "CLOSING DATE") shall be 10:00 a.m. Central Time, within two (2) business days following the date hereof, subject to notification of satisfaction (or waiver) of the conditions to the Closing set forth in Sections 6 and 7 below (or such later date as is mutually agreed to by the Company and the Buyers). The Closing shall occur on the Closing Date at the offices of Katten Muchin & Zavis, 525 West Monroe Street, Suite 1600, Chicago, Illinois 60661-3693. c. Form of Payment. On the Closing Date, (i) each Buyer shall pay the Purchase Price to the Company for the Convertible Notes to be issued and sold to such Buyer at the Closing, by wire transfer of immediately available funds in accordance with the Company's written wire instructions, and (ii) the Company shall deliver to each Buyer, the Convertible Notes (in the denominations as such Buyer shall request) which such Buyer is then purchasing (as indicated opposite such Buyer's name on Schedule 1) hereunder, duly executed on behalf of the Company and registered in the name of such Buyer or its designee. 2. BUYER'S REPRESENTATIONS AND WARRANTIES. Each Buyer represents and warrants with respect to only itself that: a. Investment Purpose. Such Buyer is acquiring the Convertible Notes (the Convertible Notes may also be referred to herein as the "SECURITIES"), for its own account for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof, except pursuant to sales registered or exempt from registration under the 1933 Act; provided, however, that by making the representations herein, such Buyer does not agree to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement or an exemption from registration under the 1933 Act. b. Accredited Investor Status. Such Buyer is an "accredited investor" as that term is defined in Rule 501(a)(3) of Regulation D. c. Reliance on Exemptions. Such Buyer understands that the Securities are being offered and sold to it in reliance on specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying in part upon the truth and accuracy of, and such Buyer's compliance with, the representations, warranties, agreements, acknowledgments and understandings of such Buyer set forth herein in order to determine the availability of such exemptions and the eligibility of such Buyer to acquire such Securities. d. Information. Such Buyer and its advisors, if any, have been furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Securities which have been requested by such Buyer. Such Buyer and its advisors, if any, have been afforded the opportunity to ask questions of the 2 3 Company. Neither such inquiries nor any other due diligence investigations conducted by such Buyer or its advisors, if any, or its representatives shall modify, amend or affect such Buyer's right to rely on the Company's representations and warranties contained in Section 3 below. Such Buyer understands that its investment in the Securities involves a high degree of risk. Such Buyer has sought such accounting, legal and tax advice as it has considered necessary to make an informed investment decision with respect to its acquisition of the Securities. e. No Governmental Review. Such Buyer understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Securities or the fairness or suitability of the investment in the Securities nor have such authorities passed upon or endorsed the merits of the offering of the Securities. f. Transfer or Resale. Such Buyer understands that except as provided in the Registration Rights Agreement: (i) the Securities have not been and are not being registered under the 1933 Act or any state securities laws, and may not be offered for sale, sold, assigned or transferred unless (A) subsequently registered thereunder, (B) such Buyer shall have delivered to the Company an opinion of counsel, in a generally acceptable form, to the effect that such Securities to be sold, assigned or transferred may be sold, assigned or transferred pursuant to an exemption from such registration, or (C) such Buyer provides the Company with reasonable assurance that such Securities can be sold, assigned or transferred pursuant to Rule 144 promulgated under the 1933 Act, as amended, (or a successor rule thereto) ("RULE 144"); (ii) any sale of the Securities made in reliance on Rule 144 may be made only in accordance with the terms of Rule 144 and further, if such Buyer intends to utilize Rule 144 but Rule 144 is not applicable to such resale, any resale of the Securities under circumstances in which such Buyer (or the person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the 1933 Act) may require compliance with some other exemption under the 1933 Act or the rules and regulations of the SEC thereunder; and (iii) neither the Company nor any other person is under any obligation to register such Securities under the 1933 Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder. g. Legends. Such Buyer understands that the certificates or other instruments representing the Convertible Notes and, until such time as the sale of the Conversion Shares has been registered under the 1933 Act as contemplated by the Registration Rights Agreement, the stock certificates representing the Conversion Shares, except as set forth below, shall bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of such stock certificates): THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (1) IN 3 4 THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE 1933 ACT, AND APPLICABLE STATE SECURITIES LAWS, OR (2) IN THE ABSENCE OF AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER THE 1933 ACT OR (3) UNLESS SOLD, TRANSFERRED OR ASSIGNED PURSUANT TO RULE 144 UNDER THE 1933 ACT. The legend set forth above shall be removed and the Company shall issue a certificate without such legend to the holder of the Securities upon which it is stamped, if, unless otherwise required by state securities laws, (i) such Securities are registered for sale under the 1933 Act, (ii) in connection with a sale transaction, such holder provides the Company with an opinion of counsel, in a generally acceptable form, to the effect that a public sale, assignment or transfer of the Securities may be made without registration under the 1933 Act, or (iii) such holder provides the Company with reasonable assurances that the Securities can be sold pursuant to Rule 144 without any restriction as to the number of securities acquired as of a particular date that can then be immediately sold. h. Validity; Enforcement. This Agreement has been duly and validly authorized, executed and delivered on behalf of such Buyer and is a valid and binding agreement of such Buyer enforceable against such Buyer in accordance with its terms, subject as to enforceability to general principles of equity and to applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and other similar laws relating to, or affecting generally, the enforcement of applicable creditors' rights and remedies. i. Residency. Such Buyer is a resident of that state and country specified in its address on Schedule 1. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to each of the Buyers that: a. Organization and Qualification. The Company and its "SUBSIDIARIES" (which for purposes of this Agreement means any entity in which the Company, directly or indirectly, owns a majority of the capital stock or holds a majority equity or similar interest) are corporations duly organized and validly existing in good standing under the laws of the jurisdiction in which they are incorporated, and have the requisite corporate power and authorization to own their properties and to carry on their business as now being conducted. Each of the Company and its Subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which its ownership of property or the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not have a Material Adverse Effect. As used in this Agreement, "MATERIAL ADVERSE EFFECT" means any material adverse effect on the business, 4 5 properties, assets, operations, results or operations, or financial condition of the Company and its Subsidiaries, if any, taken as a whole. b. Authorization; Enforcement; Validity. (i) The Company has the requisite corporate power and authority to enter into and perform this Agreement, the Registration Rights Agreement, the Irrevocable Transfer Agent Instructions (as defined in Section 5) and each of the other agreements entered into by the parties hereto in connection with the transactions contemplated by this Agreement (collectively, the "TRANSACTION DOCUMENTS"), the Convertible Notes, and to issue the Securities in accordance with the terms hereof and thereof, (ii) the execution and delivery of the Transaction Documents and the Convertible Notes by the Company and the consummation by it of the transactions contemplated hereby and thereby, including without limitation the issuance of the Convertible Notes and the reservation for issuance and the issuance of the Conversion Shares issuable upon conversion thereof, have been duly authorized by the Company's Board of Directors and no further consent or authorization is required by the Company, its Board of Directors or its stockholders, (iii) the Transaction Documents have been duly executed and delivered by the Company, and (iv) the Transaction Documents constitute the valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of creditors' rights and remedies. c. Issuance of Securities. The Convertible Notes are duly authorized and, upon issuance in accordance with the terms hereof, shall be (i) validly issued, fully paid and non-assessable, (ii) free from all taxes, liens and charges with respect to the issue thereof and (iii) entitled to the rights and preferences as set forth in the Convertible Notes. 835,000 shares of Common Stock (subject to adjustment pursuant to the Company's covenant set forth in Section 4(d) below) have been duly authorized and reserved for issuance upon conversion of the Convertible Notes. Upon conversion in accordance with the Convertible Notes, the Conversion Shares will be validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof, with the holders being entitled to all rights accorded to a holder of Common Stock. Assuming the accuracy of the representations and warranties of the Buyers set forth herein, and in reliance thereon, the issuance by the Company of the Securities is exempt from registration under the 1933 Act. d. No Conflicts. The execution, delivery and performance of the Transaction Documents by the Company, the performance by the Company of its obligations under the Convertible Notes and the consummation by the Company of the transactions contemplated hereby and thereby (including, without limitation, the reservation for issuance and issuance of the Conversion Shares) will not (i) result in a violation of the Company's Articles of Incorporation, any outstanding series of notes or preferred stock of the Company or the Company's By-laws or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any material agreement, indenture or instrument to which the 5 6 Company or any of its Subsidiaries is a party, or result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations and the rules and regulations of the Principal Market (as defined below)) applicable to the Company or any of its Subsidiaries or by which any property or asset of the Company or any of its Subsidiaries is bound or affected, except in the case of (ii) above, where such conflict or default would not have a Material Adverse Effect. Neither the Company nor its Subsidiaries is in violation of any term of or in default under its Articles of Incorporation, any outstanding series of notes or preferred stock of the Company or By-laws or their organizational charter or by-laws, respectively. Neither the Company nor any of its Subsidiaries is in violation of any term of or in default under any contract, agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or order or any statute, rule or regulation applicable to the Company or its Subsidiaries, except for possible violations or defaults which would not have a Material Adverse Effect. The business of the Company and its Subsidiaries is not being conducted, and shall not be conducted, in violation of any law, ordinance, regulation of any governmental entity, except for possible violations the sanctions for which either individually or in the aggregate would not have a Material Adverse Effect. Except as specifically contemplated by this Agreement and as required under the 1933 Act, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency or any regulatory or self-regulatory agency in order for it to execute, deliver or perform any of its obligations under or contemplated by the Transaction Documents or to perform its obligations under the Convertible Notes, in each case in accordance with the terms hereof or thereof. All consents, authorizations, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof. The Company and its Subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing. The Company is not in violation of the listing requirements of the Principal Market (as defined below). e. SEC Documents; Financial Statements. Since [DECEMBER 16, 1998], the Company has filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "1934 ACT") (all of the foregoing filed prior to the date hereof and all exhibits included therein and financial statements and schedules thereto and documents incorporated by reference therein being hereinafter referred to as the "SEC DOCUMENTS"). The Company has delivered to the Buyers or their respective representatives true and complete copies of the SEC Documents. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the 1934 Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. As of their respective dates, the financial statements of the Company included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied, 6 7 during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). No other information provided by or on behalf of the Company to the Buyers which is not included in the SEC Documents, including, without limitation, information referred to in Section 2(d) of this Agreement, contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstance under which they are or were made, not misleading. Neither the Company nor any of its Subsidiaries or any of their officers, directors, employees or agents have provided the Buyers with any material, nonpublic information. f. Absence of Certain Changes. Since the filing of the most recent SEC Document, there has been no material adverse change and no material adverse development in the business, properties, operations, financial condition, or results of operations of the Company or its Subsidiaries. The Company has not taken any steps, and does not currently expect to take any steps, to seek protection pursuant to any bankruptcy law nor does the Company or any of its Subsidiaries have any knowledge that its creditors intend to initiate involuntary bankruptcy proceedings. g. Absence of Litigation. Except as set forth in the SEC Documents, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the Company or any of its Subsidiaries, threatened against or affecting the Company, the Common Stock or any of the Company's Subsidiaries or any of the Company's or the Company's Subsidiaries' officers or directors in their capacities as such, except as to which an adverse outcome would not have a Material Adverse Effect. h. Acknowledgment Regarding Buyers' Purchase of Convertible Notes. The Company acknowledges and agrees that each of the Buyers is acting solely in the capacity of arm's length purchaser with respect to the Transaction Documents and the transactions contemplated hereby and thereby. The Company further acknowledges that each Buyer is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to the Transaction Documents and the transactions contemplated hereby and thereby and any advice given by any of the Buyers or any of their respective representatives or agents in connection with the Transaction Documents and the transactions contemplated hereby and thereby is merely incidental to such Buyer's purchase of the Securities. The Company further represents to each Buyer that the Company's decision to enter into the Transaction Documents has been based solely on the independent evaluation by the Company and its representatives. i. No Undisclosed Events, Liabilities, Developments or Circumstances. No event, liability, development or circumstance has occurred or exists, or is contemplated to occur, 7 8 with respect to the Company or its Subsidiaries or their respective business, properties, prospects, operations or financial condition, that would be required to be disclosed by the Company under applicable securities laws on a registration statement filed with the SEC relating to an issuance and sale by the Company of its Common Stock and which has not been publicly announced. j. No General Solicitation. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the 1933 Act) in connection with the offer or sale of the Securities. k. No Integrated Offering. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would require registration of any of the Securities under the 1933 Act or cause this offering of the Securities to be integrated with prior offerings by the Company to third parties other than the Buyers for purposes of the 1933 Act so as to render invalid the exemption from registration provided under Rule 506 or any applicable stockholder approval provisions, including, without limitation, under the rules and regulations of any exchange or automated quotation system on which any of the securities of the Company are listed or designated, nor will the Company or any of its Subsidiaries take any action or steps that would require registration of any of the Securities under the 1933 Act or cause the offering of the Securities to be integrated with other offerings so as to render invalid the exemption from registration provided under Rule 506. l. Dilutive Effect. The Company understands and acknowledges that the number of Conversion Shares issuable upon conversion of the Convertible Notes will increase in certain circumstances. The Company further acknowledges that its obligation to issue Conversion Shares upon conversion of the Convertible Notes in accordance with this Agreement and the Convertible Notes is absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other stockholders of the Company. m. Employee Relations. Neither the Company nor any of its Subsidiaries is involved in any union labor dispute nor, to the knowledge of the Company or any of its Subsidiaries, is any such dispute threatened. None of the Company's or its Subsidiaries' employees is a member of a union, neither the Company nor any of its Subsidiaries is a party to a collective bargaining agreement, and the Company and its Subsidiaries believe that their relations with their employees are good. n. Intellectual Property Rights. The Company and its Subsidiaries own or possess adequate rights or licenses to use all trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, governmental authorizations, trade secrets and rights necessary to conduct their respective businesses as now conducted. The Company and its Subsidiaries do not have any knowledge of any infringement by the Company or its Subsidiaries of trademark, trade name 8 9 rights, patents, patent rights, copyrights, inventions, licenses, service names, service marks, service mark registrations, trade secret or other similar rights of others, and there is no claim, action or proceeding which has been brought against, or to the Company's knowledge, being threatened against, the Company or its Subsidiaries regarding trademark, trade name, patents, patent rights, invention, copyright, license, service names, service marks, service mark registrations, trade secret or other infringement. To the extent deemed necessary by the Company, the Company and its Subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality and value of all of their intellectual properties. o. Environmental Laws. The Company and its Subsidiaries (i) are in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval, except, in the case of any of the foregoing where non-compliance or non-receipt would not have a Material Adverse Effect. p. Title. The Company and its Subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them which is material to the business of the Company and its Subsidiaries, in each case free and clear of all liens, encumbrances and defects, except for such liens, encumbrances and defects which do not materially affect the value of such property and do not interfere with the use made of such property by the Company and any of its Subsidiaries. Any real property and facilities held under lease by the Company and any of its Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made of such property and buildings by the Company and its Subsidiaries. q. Regulatory Permits. The Company and its Subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, except where such nonpossession would not have a Material Adverse Effect, and neither the Company nor any such Subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit. r. [RESERVED] s. Tax Status. The Company and each of its Subsidiaries has made or filed all federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject (unless and only to the extent that the Company and each of its Subsidiaries has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) and has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provision 9 10 reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction. t. Transactions With Affiliates. Except as set forth in the SEC Documents, none of the officers, directors, or employees of the Company is presently a party to any material transaction with the Company or any of its Subsidiaries (other than for services as employees, officers and directors), including any material contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner. 4. COVENANTS. a. Best Efforts. Each party shall use its best efforts timely to satisfy each of the conditions to be satisfied by it as provided in Sections 6 and 7 of this Agreement. b. Form D and Blue Sky. The Company agrees to file a Form D with respect to the Securities as required under Regulation D and to provide a copy thereof to each Buyer promptly after such filing. The Company shall, on or before the Closing Date, take such action as the Company shall reasonably determine is necessary in order to obtain an exemption for or to qualify the Securities for sale to the Buyers at the Closing pursuant to this Agreement under applicable securities or "Blue Sky" laws of the states of the United States, and shall provide evidence of any such action so taken to the Buyers on or prior to the Closing Date. The Company shall make all filings and reports relating the offer and sale of the Securities required under applicable securities or "Blue Sky" laws of the states of the United States following the Closing Date. c. Reporting Status. Until the earlier of (i) the date which is one year after the date as of which the Investors (as that term is defined in the Registration Rights Agreement) may sell all of the Conversion Shares without restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or successor thereto), or (ii) the date on which (A) the Investors shall have sold all the Conversion Shares and (B) none of the Convertible Notes is outstanding (the "REGISTRATION PERIOD"), the Company shall file all reports required to be filed with the SEC pursuant to the 1934 Act, and the Company shall not terminate its status as an issuer required to file reports under the 1934 Act even if the 1934 Act or the rules and regulations thereunder would otherwise permit such termination. d. Reservation of Shares. The Company shall take all action necessary to at all times have authorized, and reserved for the purpose of issuance, no less than 200% of the 10 11 number of shares of Common Stock needed to provide for the issuance of the shares of Common Stock upon conversion of all outstanding Convertible Notes; provided that after the Registration Statement (as defined in the Registration Rights Agreement) which covers the Conversion Shares for resale, has been declared effective, this Section 4(d) shall not be violated if the Company reserves greater than 185% of the number of shares of the Common Stock required to be issued upon conversion of the outstanding Convertible Notes, provided, further, however, that the Company utilizes its best efforts to reserve no less than 200% as soon as possible of the number of shares of Common Stock required to be issued upon conversion of the outstanding Convertible Notes. e. Limitation on Beneficial Ownership. The Company shall not effect any conversion of Convertible Notes and no Buyer of Convertible Notes shall have the right to convert any Convertible Notes pursuant to Section 2(b) of such Convertible Note to the extent that after giving effect to such conversion such Buyer (together with such Buyer's affiliates) (A) would beneficially own in excess of 4.9% of the outstanding shares of the Company's Common Stock following such conversion and (B) would have acquired, through conversion of Convertible Notes or otherwise, in excess of 4.9% of the outstanding shares of the Company's Common Stock following such conversion during the 60-day period ending on and including such date of conversion. For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by a Buyer and its affiliates or acquired by a Buyer and its affiliates, as the case may be, shall include the number of shares of Common Stock issuable upon conversion of the Convertible Notes with respect to which the determination of such sentence is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (i) conversion of the remaining, nonconverted Convertible Notes beneficially owned by such Buyer and its affiliates and (ii) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company (including, without limitation, any warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by such Person and its affiliates. Except as set forth in the preceding sentence, for purposes of this Section 4(e), beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended. Notwithstanding anything to the contrary contained herein, each conversion notice shall constitute a representation by the Buyer submitting such conversion notice that, after giving effect to such conversion notice, (A) the holder will not beneficially own (as determined in accordance with this Section 4(e)) and (B) during the 60-day period ending on and including such conversion date, the holder will not have acquired, through conversion of Convertible Notes or otherwise, a number of shares of Common Stock in excess of 4.9% of the outstanding shares of Common Stock as reflected in the Company's most recent Form 10-Q or Form 10-K, as the case may be, or more recent public press release or other public notice by the Company setting forth the number of shares of Common Stock outstanding, but after giving effect to conversions of Convertible Notes by such holder since the date as of which such number of outstanding shares of Common Stock was reported. f. Listing. The Company shall promptly secure the listing of all of the Registrable Securities (as that term is defined in the Registration Rights Agreement) upon each 11 12 national securities exchange and automated quotation system, if any, upon which shares of Common Stock are then listed (subject to official notice of issuance) and shall maintain, so long as any other shares of Common Stock shall be so listed, such listing of all Registrable Securities from time to time issuable under the terms of the Transaction Documents and the Convertible Notes. The Company shall maintain the Common Stock's authorization for quotation on the Nasdaq National Market, The New York Stock Exchange, Inc. or The American Stock Exchange, Inc. (collectively, the "PRINCIPAL MARKET"). Neither the Company nor any of its Subsidiaries shall take any action which would be reasonably expected to result in the delisting or suspension of the Common Stock on the Principal Market. The Company shall promptly, and in no event later than the following business day, provide to each Buyer copies of any notices it receives from the Principal Market regarding the continued eligibility of the Common Stock for listing on such automated quotation system or securities exchange. The Company shall pay all fees and expenses in connection with satisfying its obligations under this Section 4(f). g. Transactions With Affiliates. So long as (i) any Convertible Notes are outstanding or (ii) any Buyer owns Conversion Shares with a market value equal to or greater than $500,000, the Company shall not, and shall cause each of its Subsidiaries not to, enter into, amend, modify or supplement, or permit any Subsidiary to enter into, amend, modify or supplement, any agreement, transaction, commitment or arrangement with any of its or any Subsidiary's officers, directors, person who were officers or directors at any time during the previous two years, stockholders who beneficially own 5% or more of the Common Stock, or affiliates or with any individual related by blood, marriage or adoption to any such individual or with any entity in which any such entity or individual owns a 5% or more beneficial interest (each a "RELATED PARTY"), except for (a) customary employment arrangements and benefit programs on reasonable terms, (b) any agreement, transaction, commitment or arrangement on an arms-length basis on terms no less favorable than terms which would have been obtainable from a person other than such Related Party, or (c) any agreement, transaction, commitment or arrangement which is approved by a majority of the disinterested directors of the Company. For purposes hereof, any director who is also an officer of the Company or any Subsidiary of the Company shall not be a disinterested director with respect to any such agreement, transaction, commitment or arrangement. "AFFILIATE" for purposes hereof means, with respect to any person or entity, another person or entity that, directly or indirectly, (i) has a 5% or more equity interest in that person or entity, (ii) has 5% or more common ownership with that person or entity, (iii) controls that person or entity, or (iv) shares common control with that person or entity. "CONTROL" or "CONTROLS" for purposes hereof means that a person or entity has the power, direct or indirect, to conduct or govern the policies of another person or entity. h. Limitation on Filing Registration Statements. The Company shall not file a registration statement (other than the Registration Statement (as defined in the Registration Rights Agreement) or a registration statement on Form S-8) covering the sale or resale of shares of Common Stock with the SEC during the period beginning on the date hereof and ending on the date which is 180 days after the Registration Statement has been declared effective by the SEC. 12 13 i. Independent Auditors. The Company shall, until at least three (3) years after the Closing Date, maintain as its independent auditors an accounting firm authorized to practice before the SEC. j. Corporate Existence and Taxes. The Company shall, until at least the later of (i) the date that is three (3) years after the Closing Date or (ii) the conversion or redemption of all of the Convertible Notes purchased pursuant to this Agreement, maintain its corporate existence in good standing (provided, however, that the foregoing covenant shall not prevent the Company from entering into any merger or corporate reorganization as long as the surviving entity in such transaction, if not the Company, assumes the Company's obligations with respect to the Convertible Notes and has Common Stock listed for trading on the Principal Market) and shall pay all its taxes when due except for taxes which the Company disputes. 5. TRANSFER AGENT INSTRUCTIONS. The Company shall issue irrevocable instructions to its transfer agent, and any subsequent transfer agent, to issue certificates, registered in the name of each Buyer or its respective nominee(s), for the Conversion Shares in such amounts as specified from time to time by each Buyer to the Company upon conversion of the Convertible Notes (the "IRREVOCABLE TRANSFER AGENT INSTRUCTIONS"). Prior to registration of the Conversion Shares under the 1933 Act, all such certificates shall bear the restrictive legend specified in Section 2(g) of this Agreement. The Company warrants that no instruction other than the Irrevocable Transfer Agent Instructions referred to in this Section 5, and stop transfer instructions to give effect to Section 2(f) hereof (in the case of the Conversion Shares, prior to registration of the Conversion Shares under the 1933 Act) will be given by the Company to its transfer agent and that the Securities shall otherwise be freely transferable on the books and records of the Company as and to the extent provided in this Agreement and the Registration Rights Agreement. Nothing in this Section 5 shall affect in any way each Buyer's obligations and agreements set forth in Section 2(g) to comply with all applicable prospectus delivery requirements, if any, upon resale of the Securities. If a Buyer provides the Company with an opinion of counsel, in a generally acceptable form, to the effect that a public sale, assignment or transfer of the Securities may be made without registration under the 1933 Act or the Buyer provides the Company with reasonable assurances that the Securities can be sold pursuant to Rule 144 without any restriction as to the number of securities acquired as of a particular date that can then be immediately sold, the Company shall permit the transfer, and, in the case of the Conversion Shares, promptly instruct its transfer agent to issue one or more certificates in such name and in such denominations as specified by such Buyer and without any restrictive legend. In the event that the Company appoints a different transfer agent (other than the Company's transfer agent in service as of the Closing) to serve as the Company's transfer agent, the Company shall immediately, but in no event later than five (5) days from such appointment issue irrevocable instructions to such transfer agent in substantially the same form as the Irrevocable Transfer Agent Instructions issued to the Company's transfer agent in service as of the Closing. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Buyers by vitiating the intent and purpose 13 14 of the transaction contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Section 5 will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Section 5, that the Buyers shall be entitled, in addition to all other available remedies, to seek an order and/or injunction restraining any breach and requiring immediate issuance and transfer, without the necessity of showing economic loss and without any bond or other security being required. 6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The obligation of the Company hereunder to issue and sell the Convertible Notes to each Buyer at the Closing is subject to the satisfaction, at or before the Closing Date, of each of the following conditions, provided that these conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion by providing each Buyer with prior written notice thereof: a. Such Buyer shall have executed each of the Transaction Documents to which it is a party and delivered the same to Katten Muchin & Zavis, care of Anthony J. Ribaudo, Esq., as escrow agent (the "ESCROW AGENT") for the transactions contemplated by this Agreement. b. The representations and warranties of such Buyer shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at that time (except for representations and warranties that speak as of a specific date), and such Buyer shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by such Buyer at or prior to the Closing Date. 7. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE. The obligation of each Buyer hereunder to purchase the Convertible Notes at the Closing is subject to the satisfaction, at or before the Closing Date, of each of the following conditions, provided that these conditions are for each Buyer's sole benefit and may be waived by such Buyer at any time in its sole discretion by providing the Company with prior written notice thereof: a. The Company shall have executed each of the Transaction Documents and delivered the same to the Escrow Agent. b. The Company's common stock shall be authorized for quotation on the Principal Market and trading in Company common stock shall not have been suspended by the SEC or the Principal Market. c. The representations and warranties of the Company shall be true and correct as of the date when made and as of the Closing Date as though made at that time (except for 14 15 representations and warranties that speak as of a specific date) and the Company shall have performed, satisfied and complied with the covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by the Company at or prior to the Closing Date. The Company shall have delivered to the Escrow Agent a certificate, executed by the Chief Executive Officer of the Company, dated as of the Closing Date, to the foregoing effect. d. The Company shall have delivered to the Escrow Agent the opinion of the Company's counsel dated as of the Closing Date, in form, scope and substance reasonably satisfactory to such Buyer and in substantially the form of Exhibit C attached hereto. e. The Company shall have executed and delivered to the Escrow Agent the Convertible Notes (in such denominations as such Buyer shall request) being purchased by such Buyer at the Closing. f. The Board of Directors of the Company shall have adopted resolutions consistent with Section 3(b)(ii) above and in a form reasonably acceptable to such Buyer. g. As of the Closing Date, the Company shall have reserved out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion of the Convertible Notes, no less than 200% of the number of shares of Common Stock needed to provide for the issuance of the shares of Common Stock upon conversion of all outstanding Convertible Notes. h. The Irrevocable Transfer Agent Instructions, substantially in the form of Exhibit D attached hereto, shall have been delivered to and acknowledged in writing by the Company's transfer agent and a copy of the executed Irrevocable Transfer Agent Instructions shall have been delivered to the Escrow Agent. i. The Company shall have delivered to the Escrow Agent a certified copy of the Articles of Incorporation as certified by the Secretary of State of the State of Florida within ten (10) days of the Closing Date. j. The Company shall have delivered to the Escrow Agent a secretary's certificate, dated as the Closing Date, as to (i) the resolutions described in Section 7(f), (ii) the Certificate of Incorporation and (iii) the Bylaws, each as in effect at the Closing. k. The Company shall have made all filings under all applicable federal and state securities laws necessary to consummate the issuance of the Securities pursuant to this Agreement in compliance with such laws. 15 16 l. The Company shall have delivered to the Escrow Agent such other documents relating to the transactions contemplated by this Agreement as the Escrow Agent or its counsel may reasonably request. m. Expenses. Subject to Section 9(k) below, at the Closing, the Company shall reimburse the Buyers for one-half (1/2) of the Buyers' expenses (including attorneys' fees and expenses) in due diligence and negotiating and preparing the Transaction Documents and consummating the transactions contemplated thereby up to an aggregate of $8,000. 8. INDEMNIFICATION. a. Indemnification by Company. In consideration of each Buyer's execution and delivery of the Transaction Documents and acquiring the Securities thereunder and in addition to all of the Company's other obligations under the Transaction Documents and the Convertible Notes, the Company shall defend, protect, indemnify and hold harmless each Buyer and each other holder of the Securities and all of their stockholders, partners, officers, directors, employees and direct or indirect investors and any of the foregoing person's agents or other representatives (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "INDEMNITEES") from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective of whether any such Indemnitee is a party to the action for which indemnification hereunder is sought), and including reasonable attorneys' fees and disbursements (the "INDEMNIFIED LIABILITIES"), incurred by any Indemnitee as a result of, or arising out of, or relating to (a) any material misrepresentation or breach of any representation or warranty made by the Company in the Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby, or (b) any material breach of any covenant, agreement or obligation of the Company contained in the Transaction Documents or the Convertible Notes or any other certificate, instrument or document contemplated hereby or thereby. To the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. b. Indemnification by Buyer. In consideration of the Company's execution and delivery of the Transaction Documents and the Company's performance of the transactions contemplated thereunder, each Buyer shall severally but not jointly defend, protect, indemnify and hold harmless the Company, its officers and directors (collectively, the "COMPANY INDEMNITEES") from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith and including reasonable attorneys' fees and disbursements (the "COMPANY INDEMNIFIED LIABILITIES"), incurred by any Company Indemnitee as a result of, or arising out of, or relating to (a) any material representation or breach of any representation or warranty made by such Buyer in the Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby, or (b) any material breach 16 17 of any covenant, agreement or obligation of such Buyer contained in the Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby; provided, however, that any Buyer shall not be jointly liable for the indemnification obligations of any other Buyer or investor and the Buyer subject to an indemnification obligation shall be liable under this Section 8(b) for only that amount of Company Indemnified Liabilities as does not exceed the net proceeds to such Buyer as a result of the sale of Securities and Conversion Shares held by such Buyer. To the extent that the foregoing undertaking by a Buyer may be unenforceable for any reason, such Buyer shall make the maximum contribution to the payment and satisfaction of each of the Company Indemnified Liabilities which is permissible under applicable law; provided, however, that any Buyer shall not be jointly liable for the indemnification obligations of any other Buyer or investor and the Buyer subject to an indemnification obligation shall be liable under this Section 8(b) for only that amount of Company Indemnified Liabilities as does not exceed the net proceeds to such Buyer as a result of the sale of Securities and Conversion Shares held by such Buyer. 9. GOVERNING LAW; MISCELLANEOUS. a. Governing Law; Jurisdiction; Jury Trial. The corporate laws of the State of Florida shall govern all issues concerning the relative rights of the Company and its stockholders. All other questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by the internal laws of the State of Florida, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Florida or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of Florida. Each party hereby irrevocably submits to the non-exclusive jurisdiction of the state and federal courts sitting in the City of Miami, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY. b. Counterparts. This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party; 17 18 provided that a facsimile signature shall be considered due execution and shall be binding upon the signatory thereto with the same force and effect as if the signature were an original, not a facsimile signature. c. Headings. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. d. Severability. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. e. Entire Agreement; Amendments. This Agreement supersedes all other prior oral or written agreements between the Buyers, the Company, their affiliates and persons acting on their behalf with respect to the matters discussed herein, and this Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor any Buyer makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be amended other than by an instrument in writing signed by the Company and the holders of at least two-thirds (2/3) of the Convertible Notes (determined by reference to principal amount) then outstanding, and no provision hereof may be waived other than by an instrument in writing signed by the party against whom enforcement is sought. No such amendment shall be effective to the extent that it applies to less than all of the holders of the Convertible Notes then outstanding. No consideration shall be offered or paid to any person to amend or consent to a waiver or modification of any provision of any of the Transaction Documents or the Convertible Notes unless the same consideration also is offered to all of the parties to the Transaction Documents or holders of Convertible Notes, as the case may be. f. Notices. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one business day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: 18 19 If to the Company: Perfumania, Inc. 11701 N.W. 101st Road Miami, Florida 33178 Telephone: (305) 889-1600 Facsimile: (305) 888-7825 Attention: Ilia Lekach With a copy to: Greenberg Traurig, P.A. 1221 Brickell Avenue Miami, Florida 33131 Telephone: (305) 579-0809 Facsimile: (305) 579-0717 Attention: Ken Hoffman, Esq. If to the Transfer Agent: Continental Stock Transfer and Trust 2 Broadway, 19th Floor New York, New York 10004 Telephone: (212) 509-4000 Facsimile: (212) 509-5150 Attention: Steve Nelson If to a Buyer, to it at the address and facsimile number set forth on Schedule 1 with copies to such Buyer's representatives as set forth on Schedule 1, or at such other address and/or facsimile number and/or to the attention of such other person as the recipient party has specified by written notice given to each other party five days prior to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically generated by the sender's facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission or (C) provided by a nationally recognized overnight delivery service shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively. 19 20 g. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns, including any purchasers of the Convertible Notes. The Company shall not assign this Agreement or any rights or obligations hereunder without the prior written consent of the holders of at least two-thirds (2/3) of the Convertible Notes (determined by reference to principal amount) then outstanding. A Buyer may assign some or all of its rights hereunder without the consent of the Company, provided, however, that any such assignment shall not release such Buyer from its obligations hereunder unless such obligations are assumed by such assignee and the Company has consented to such assignment and assumption. Notwithstanding anything to the contrary contained in the Transaction Documents, the Buyers shall be entitled to pledge the Securities in connection with a bona fide margin account. h. No Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person. i. Survival. Unless this Agreement is terminated under Section 9(k), the agreements and covenants set forth in Sections 4, 5 and 9, and the indemnification provisions set forth in Section 8, shall survive the Closing. Each Buyer shall be responsible only for its own agreements and covenants hereunder. j. Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. k. Termination. In the event that the Closing shall not have occurred with respect to a Buyer on or before three (3) business days from the date hereof due to the Company's or such Buyer's failure to satisfy the conditions set forth in Sections 6 and 7 above (and the nonbreaching party's failure to waive such unsatisfied condition(s)), the nonbreaching party shall have the option to terminate this Agreement with respect to such breaching party at the close of business on such date without liability of any party to any other party; provided, however, that if this Agreement is terminated pursuant to this Section 9(k), the Company shall remain obligated to reimburse the nonbreaching Buyers for the expenses described in Section 7(m) above. l. Placement Agent. The Company acknowledges that it has not engaged a placement agent in connection with the sale of the Convertible Notes. m. No Strict Construction. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. 20 21 n. Remedies. Each Buyer and each holder of the Securities shall have all rights and remedies set forth in the Transaction Documents and the Convertible Notes and all rights and remedies which such holders have been granted at any time under any other agreement or contract and all of the rights which such holders have under any law. Any person having any rights under any provision of this Agreement shall be entitled to enforce such rights specifically (without posting a bond or other security), to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law. o. Payment Set Aside. To the extent that the Company makes a payment or payments to the Buyers hereunder or pursuant to the Convertible Notes or the Buyers enforce or exercise their rights hereunder or thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to the Company, a trustee, receiver or any other person under any law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred. [Signature Page Follows] 21 22 IN WITNESS WHEREOF, the Buyers and the Company have caused this Securities Purchase Agreement to be duly executed as of the date first written above. COMPANY: BUYERS: PERFUMANIA, INC. CRANSHIRE CAPITAL, L.P. By: By: --------------------------- ------------------------------ Name: Name: ------------------------- ------------------------------ Title: Title ------------------------ ---------------------------- S. ROBERT PRODUCTIONS, LLC By: ------------------------------ Name: ---------------------------- Title: --------------------------- THE DOTCOM FUND, LLC By: ------------------------------ Name: ---------------------------- Title: --------------------------- JJP PARTNERSHIP By: ------------------------------ Name: ---------------------------- Title: --------------------------- EP OPPORTUNITY FUND, L.L.C. By: ------------------------------ Name: ---------------------------- Title: --------------------------- [Signature Page Continues] 23 EP OPPORTUNITY FUND INTERNATIONAL, LTD. By: ------------------------------ Name: ---------------------------- Title: --------------------------- EP .COM FUND, L.L.C By: ------------------------------ Name: ---------------------------- Title: --------------------------- 24 SCHEDULE 1: LIST OF INVESTORS
AMOUNT OF INVESTOR ADDRESS CONVERTIBLE INVESTOR'S LEGAL REPRESENTATIVES' INVESTOR'S NAME AND FACSIMILE NUMBER NOTES ADDRESS AND FACSIMILE NUMBER - -------------------------------- ----------------------------------- ------------ ---------------------------------- Cranshire Capital, L.P. 666 Dundee Rd., Ste. 1801 $700,000 Katten Muchin & Zavis Northbrook, IL 60092 525 W. Monroe Street Attention: Mitchell Kopin Chicago, Illinois 60661-3693 Telephone: (847) 562-9030 Attention: Anthony J. Ribaudo, Esq. Facsimile: (847) 562-903 Facsimile: (312) 577-8763 Telephone: (312) 902-5521 S. Robert Productions, LLC 666 Dundee Rd., Ste. 1801 $200,000 Northbrook, IL 60092 Attention: Mitchell Kopin Telephone: (847) 562-9030 Facsimile: (847) 562-9031 The dotCom Fund, LLC 666 Dundee Road $300,000 Northbrook, Illinois 60092 Attention: Mark Rice Telephone: (847) 509-2290 Facsimile: (847) 509-2295 JJP Partnership 2 North LaSalle Street $100,000 Chicago, Illinois 60602 Attention: Tracy Davis Telephone: (312) 621-0647 Facsimile: (312) 621-3807 EP Opportunity Fund, L.L.C. 77 W. Wacker Drive $637,000 Chicago, Illinois 60601 Attention: Jeffrey Eisenberg Telephone: (312) 456-9500 Facsimile: (312) 456-9501 EP Opportunity Fund International, Residency: Cayman Islands $35,000 Ltd. For Notice Purposes Only: 77 W. Wacker Drive Chicago, Illinois 60601 Attention: Jeffrey Eisenberg Telephone: (312) 456-9500 Facsimile: (312) 456-9501 EP .com Fund, L.L.C 77 W. Wacker Drive $28,000 Chicago, Illinois 60601 Attention: Jeffrey Eisenberg Telephone: (312) 456-9500 Facsimile: (312) 456-9501
25 EXHIBITS Exhibit A Form of Convertible Notes Exhibit B Form of Registration Rights Agreement Exhibit C Form of Company Counsel Opinion Exhibit D Form of Irrevocable Transfer Agent Instructions EX-23.1 4 CONSENT OF PRICEWATERHOUSECOOPERS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 of our reports dated April 29, 1999, expect for the fourth paragraph of Note 2 and second paragraph of Note 8 as to which the date is July 14, 1999, relating to the consolidated financial statements of Perfumania, Inc., which appear in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. PricewaterhouseCoopers LLP Miami, Florida August 31, 1999 -----END PRIVACY-ENHANCED MESSAGE-----