424B3 1 d281642d424b3.htm 424B3 424B3
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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-179124

 

LOGO   LOGO

MERGER PROPOSAL—YOUR VOTE IS VERY IMPORTANT

Perfumania Holdings, Inc. (“Perfumania”) and Parlux Fragrances, Inc. (“Parlux”) have entered into an Agreement and Plan of Merger providing for Perfumania’s acquisition of Parlux, which we refer to as the “merger agreement.” Under the merger agreement, Parlux will become a wholly owned subsidiary of Perfumania in a transaction that we refer to as the “merger.” We ask for your support in voting to approve the proposals necessary to complete the merger that will be presented at the Perfumania and Parlux stockholder meetings described in the accompanying joint proxy statement/prospectus.

Under the merger agreement, Parlux stockholders may elect to receive consideration consisting of shares of Perfumania common stock or a combination of shares and cash in exchange for their shares of Parlux common stock. Subject to adjustments as described below, Parlux stockholders electing to receive only shares will receive 0.533333 shares of Perfumania common stock in exchange for each Parlux share, and Parlux stockholders electing to receive a mix of cash and stock consideration and stockholders who do not make a timely election will receive $4.00 in cash and 0.20 shares of Perfumania common stock in exchange for each Parlux share. However, the maximum amount of cash that will be paid is $61,895,288, and the maximum amount of Perfumania common stock that will be issued is 5,919,052 shares. Both of these amounts are subject to adjustment in certain circumstances. In addition, if Parlux stockholders elect, in the aggregate, to receive more Perfumania shares than the maximum number available, which we believe is probable, holders electing to receive all stock consideration will receive a proportionate amount of the maximum available shares plus cash for the shares elected but not issued. These potential adjustments are more fully described in the accompanying joint proxy statement/prospectus.

Based on the $9.78 closing sale price of Perfumania common stock on the Nasdaq Stock Market on March 2, 2012, the aggregate value of the merger consideration to be delivered by Perfumania to Parlux stockholders was approximately $19.8 million. Based on that Perfumania stock price and depending on the stockholder elections described above, the merger agreement values a share of Parlux stock at between $5.22 and $5.96, assuming no adjustments under the merger agreement other than such elections. Parlux’s closing market price on March 2, 2012 was $5.16 per share, and there were 20,771,537 shares of Parlux common stock outstanding on that date. See “The Merger Agreement—Consideration to be Received in the Merger” in the accompanying joint proxy statement/prospectus for more information.

Current Perfumania stockholders will continue to own their existing Perfumania shares following the merger. We anticipate that, upon completion of the merger, Parlux stockholders will own approximately 40% of the outstanding shares of common stock of the combined company and current Perfumania stockholders will own approximately 60% (assuming issuance of the maximum number of shares, which we believe is probable). Following the merger, the Nussdorf family, members of which are currently the owners of approximately 74% of Perfumania’s outstanding shares and 9.9% of Parlux’s outstanding shares (and who have agreed to vote all such shares in favor of the proposals to be presented at both the Perfumania and the Parlux stockholder meetings), are expected to continue to own a majority of Perfumania’s outstanding shares.

THE PERFUMANIA BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT PERFUMANIA STOCKHOLDERS VOTE FOR THE PROPOSALS TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF PERFUMANIA’S COMMON STOCK AND TO ISSUE SHARES IN CONNECTION WITH THE MERGER, WHICH ARE NECESSARY TO COMPLETE THE MERGER.

THE PARLUX BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT PARLUX STOCKHOLDERS VOTE FOR THE PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT, WHICH IS NECESSARY TO COMPLETE THE MERGER.

The accompanying joint proxy statement/prospectus contains detailed information about the stockholder meetings and the merger. We encourage you to read this entire document, as well as the annexes and exhibits, carefully and in their entirety.

Your vote is very important, regardless of the number of shares you own. Whether or not you expect to attend the stockholder meeting in person, please submit a proxy to vote your shares as promptly as possible so that your shares may be represented and voted at the applicable stockholder meeting. For a discussion of certain risks relating to the merger, see “Risk Factors” beginning on page 32.

 

LOGO   LOGO

Michael W. Katz

President and Chief Executive Officer

Perfumania Holdings, Inc.

 

Frederick E. Purches

Chairman and Chief Executive Officer

Parlux Fragrances, Inc.

 

The accompanying joint proxy statement/prospectus is dated March 6, 2012 and, together with a proxy card for the applicable company, is first being mailed to Perfumania and Parlux stockholders on or about March 7, 2012.


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LOGO

Perfumania Holdings, Inc.

35 Sawgrass Drive, Suite 2

Bellport, New York 11713

www.perfumaniaholdingsinc.com

 

 

Notice of Special Meeting of Stockholders

To be Held on April 17, 2012

 

 

Notice is hereby given that a Special Meeting of Stockholders of Perfumania Holdings, Inc. will be held at the Edwards Wildman Palmer LLP New York office, 750 Lexington Avenue, New York, NY 10022, on April 17, 2012, at 10:00 a.m. Eastern Time for the following purposes, as set forth in the accompanying Joint Proxy Statement/Prospectus:

 

  1. To approve an amendment of Perfumania’s Amended and Restated Articles of Incorporation to increase the number of authorized shares of Perfumania common stock to 35,000,000 shares;

 

  2. To approve the issuance of shares of Perfumania common stock in connection with the proposed merger between Perfumania and Parlux Fragrances, Inc.; and

 

  3. To transact such other business as may be in furtherance of or incidental to the foregoing.

The joint proxy statement/prospectus accompanying this Notice contains further information about the business to be transacted at the Special Meeting.

The Board of Directors is not aware of any other business to be presented for action at the Special Meeting. If any other matter properly comes before the Special Meeting, the persons named in the accompanying form of proxy intend to vote on it in accordance with the judgment of management. Any action may be taken on the foregoing proposals at the Special Meeting on the date specified above, or on any date or dates to which the Special Meeting may be adjourned.

Only holders of record of Perfumania common stock as of the close of business on March 1, 2012, the record date, are entitled to receive notice of and to vote at the Perfumania Special Meeting or any adjournments thereof.

By Order of the Board of Directors,

 

LOGO

Michael W. Katz

President and Chief Executive Officer

Bellport, New York

March 6, 2012

 

YOUR VOTE IS IMPORTANT

IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING IN PERSON, PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY AS SOON AS POSSIBLE IN THE ENCLOSED POSTAGE PRE-PAID ENVELOPE, AS DESCRIBED IN THE INSTRUCTIONS WITH YOUR PROXY CARD.


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LOGO

Parlux Fragrances, Inc.

5900 N. Andrews Avenue, Suite 500

Fort Lauderdale, Florida 33309

www.parlux.com

 

 

Notice of Special Meeting of Stockholders

To be Held on April 17, 2012

 

 

Notice is hereby given that a Special Meeting of Stockholders of Parlux Fragrances, Inc. will be held at the Westin Fort Lauderdale, 400 Corporate Drive, Fort Lauderdale, FL 33334, on April 17, 2012, at 10:00 a.m. Eastern Time for the following purposes as set forth in the accompanying Joint Proxy Statement/Prospectus:

 

  1. To approve and adopt the Agreement and Plan of Merger, dated December 23, 2011 (as it may be amended from time to time), among Perfumania Holdings, Inc., Parlux, and PFI Merger Corp., a wholly owned subsidiary of Perfumania, under which Parlux will become a wholly owned subsidiary of Perfumania;

 

  2. To approve, on an advisory and non-binding basis, certain compensation payable to certain executive officers of Parlux in connection with the merger;

 

  3. To approve the adjournment of the special meeting for any purpose, including to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the first proposal described above; and

 

  4. To transact such other business as may be in furtherance of or incidental to the foregoing.

The joint proxy statement/prospectus accompanying this Notice contains further information about the business to be transacted at the Special Meeting.

The Board of Directors is not aware of any other business to be presented for action at the Special Meeting. If any other matter properly comes before the Special Meeting, the persons named in the accompanying form of proxy will vote as recommended by the Parlux board of directors or, if no recommendation is given, in accordance with their best judgment. Any action may be taken on the foregoing proposals at the Special Meeting on the date specified above, or on any date or dates to which the Special Meeting may be adjourned.

Only holders of record of Parlux common stock as of the close of business on March 1, 2012, the record date, are entitled to receive notice of and to vote at the Parlux Special Meeting or any adjournments thereof.

By order of the Board of Directors,

 

LOGO

Frederick E. Purches

Chairman and Chief Executive Officer

Fort Lauderdale, Florida

March 6, 2012

 

YOUR VOTE IS IMPORTANT

IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING IN PERSON, PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY AS SOON AS POSSIBLE IN THE ENCLOSED POSTAGE PRE-PAID ENVELOPE, OR VOTE BY TELEPHONE OR THE INTERNET, AS DESCRIBED IN THE INSTRUCTIONS WITH YOUR PROXY CARD.


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This joint proxy statement/prospectus contains important information about both companies and the proposed merger.

ADDITIONAL INFORMATION

Important Notice Regarding the Availability of Proxy Materials for the Special Meeting of Perfumania Stockholders to be held on April 17, 2012: The accompanying joint proxy statement/prospectus is available at www.perfumaniaholdingsinc.com/proxy_materials.aspx.

Important Notice Regarding the Availability of Proxy Materials for the Special Meeting of Parlux Stockholders to be held on April 17, 2012: The accompanying joint proxy statement/prospectus is available at www.parlux.com/corporate/index.html.

Parlux and Perfumania each make available additional information that is not required to be included in or distributed with this joint proxy statement/prospectus on their Internet websites at www.parlux.com and www.perfumaniaholdingsinc.com, respectively. Information contained on these websites does not constitute part of this joint proxy statement/prospectus. They also provide information in periodic and other filings with the SEC. If you would like more information on Parlux or Perfumania, see “Where You Can Find More Information” beginning on page 241 of this joint proxy statement/prospectus.

Documents filed with the SEC are available to you without charge through the SEC’s web site (www.sec.gov) or by requesting them in writing or by telephone from the respective company at the following addresses and telephone numbers:

 

Perfumania Holdings, Inc.

35 Sawgrass Drive, Suite 2

Bellport, New York 11713

Attention: Andrea Petruzzo

(631) 866-4100

 

Parlux Fragrances, Inc.

5900 N. Andrews Avenue, Suite 500

Fort Lauderdale, Florida 33309

Attention: Corporate Secretary

(954) 316-9008

You may also obtain documents without charge by requesting them in writing or by telephone from Georgeson Shareholder Communications Corporation, Parlux’s proxy solicitor, at the following address and telephone number:

Georgeson Inc.

199 Water Street, 26th Floor

New York, New York 10038

(212) 440-9879

Stockholders requesting documents should do so no later than April 10, 2012 in order to receive timely delivery before the respective stockholder meeting.

VOTING METHODS

Parlux stockholders have four voting options. You may vote using one of the following methods:

Telephone. You can vote by touch-tone telephone by calling the number given on your proxy card or voting instruction form. You will then be prompted to enter the control number printed on the card or form and to follow the subsequent instructions. Telephone voting is available 24 hours a day until 11:59 p.m., Eastern time, on April 16, 2012. If you vote by telephone, you do not need to return your proxy card or voting instruction form.


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Internet. You can vote over the Internet by accessing the secure web site indicated on your proxy card or voting instruction form and following the instructions on the site. Internet voting is available 24 hours a day until 11:59 p.m., Eastern time, on April 16, 2012. If you vote over the Internet, you do not need to return your proxy card or voting instruction form.

Mail. You can vote by mail by completing, signing, dating and mailing your proxy card or voting instruction form in the postage-paid envelope included with this joint proxy statement/prospectus.

In Person. You may come to the Parlux special meeting and cast your vote there. The board of directors of Parlux recommends that you vote by proxy even if you plan to attend the special meeting. If your shares are held in a stock brokerage account or through a bank, broker or other nominee, or, in other words, in street name, and you wish to vote in person at the special meeting, you must bring a letter from your bank, broker or nominee identifying you as the beneficial owner of the shares and authorizing you to vote such shares at the special meeting. For information on how to obtain directions to be able to attend the meeting and vote in person, please contact Parlux’s corporate secretary at 5900 N. Andrews Avenue, Suite 500, Fort Lauderdale, Florida 33309 or by phone at (954) 316-9008.

Perfumania stockholders of record have two voting options. You may vote using one of the following methods:

Mail. You can vote by mail by completing, signing, dating and mailing your proxy card or voting instruction form in the postage-paid envelope included with this joint proxy statement/prospectus.

In Person. You may come to the Perfumania special meeting and cast your vote there. The board of directors of Perfumania recommends that you vote by proxy even if you plan to attend the special meeting. If your shares are held in a stock brokerage account or through a bank, broker or other nominee, or, in other words, in street name, and you wish to vote in person at the special meeting, you must bring a letter from your bank, broker or nominee identifying you as the beneficial owner of the shares and authorizing you to vote such shares at the special meeting. For information on how to obtain directions to be able to attend the meeting and vote in person, please contact Andrea Petruzzo of Perfumania Holdings, Inc. at 35 Sawgrass Drive, Suite 2, Bellport, New York 11713 or by phone at (631) 866-4100.

Beneficial owners of Perfumania common stock held in street name may also be able to vote by telephone or Internet if their bank or broker makes those methods available, in which case the bank or broker will enclose voting instructions with this joint proxy statement/prospectus.


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TABLE OF CONTENTS

 

     Page  

QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE MEETINGS

     1   

SUMMARY

     7   

The Companies

     7   

The Merger

     7   

Structure of the Merger

     7   

Consideration to be Received in the Merger by Parlux Stockholders

     7   

Treatment of Parlux Options and Warrants

     11   

Additional Agreements

     12   

Financings

     13   

Reasons for the Merger; Recommendations of the Boards of Directors

     14   

Opinions of Financial Advisors

     15   

Matters to be Considered at the Meetings

     17   

Voting by Perfumania and Parlux Directors, Executive Officers and Principal Stockholders

     17   

Ownership of Perfumania Following the Merger

     17   

Directors and Executive Officers After the Merger

     18   

Interests of Certain Persons in the Merger

     18   

United States Federal Income Tax Consequences of the Merger

     19   

Regulatory Matters

     19   

Conditions to Completion of the Merger

     20   

Timing of the Merger

     20   

Restrictions on Alternative Transactions

     21   

Termination of the Merger

     21   

Comparison of Rights of Perfumania Stockholders and Parlux Stockholders

     22   

Accounting Treatment

     22   

Appraisal Rights

     23   

Litigation Related to the Merger

     23   

Nasdaq Listing of Perfumania Common Stock Issued in the Merger

     23   

SELECTED HISTORICAL FINANCIAL DATA

     24   

Perfumania

     24   

Parlux

     25   

SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA

     27   

COMPARATIVE HISTORICAL AND UNAUDITED PRO FORMA PER SHARE DATA

     28   

COMPARATIVE MARKET PRICE AND DIVIDEND INFORMATION

     30   

RISK FACTORS

     32   

Risks Relating to the Merger

     32   

Risks Relating to the Combined Company After the Merger

     36   

Risks Relating to Perfumania and Parlux

     37   

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

     48   

THE MERGER

     50   

Background of the Merger

     50   

Perfumania Special Committee’s and Board of Directors’ Recommendations

     64   

Parlux Board of Directors’ Recommendation

     66   

Opinions of Financial Advisors to the Parlux Independent Committee

     70   

Opinion of Peter J. Solomon Company

     70   

 

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Opinion of American Appraisal Associates, Inc.

     78   

Opinion of Financial Advisor to the Perfumania Special Committee

     86   

Certain Unaudited Prospective Financial Information

     96   

Interests of Certain Persons in the Merger

     100   

Ownership of Common Stock of the Combined Company After the Merger

     103   

Regulatory Approvals Required for the Merger

     104   

Restrictions on Sales of Shares of Perfumania Securities Received in the Merger

     104   

Listing of Perfumania Common Stock Issued in the Merger

     104   

Delisting of Parlux Common Stock

     105   

Accounting Treatment

     105   

Appraisal Rights

     105   

Litigation Related to the Merger

     108   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER

     110   

Tax Consequences of the Merger Generally

     111   

Cash Instead of a Fractional Share

     112   

Backup Withholding

     112   

THE MERGER AGREEMENT

     113   

Form and Effective Time of the Merger

     113   

Consideration to be Received in the Merger

     113   

Allocation of Merger Consideration

     114   

Treatment of Parlux Stock Options

     115   

Treatment of Warrants

     115   

Procedures for Exchange of Certificates

     116   

Representations and Warranties

     117   

Conduct of Business Pending the Merger

     119   

Conditions to Completion of the Merger

     122   

Solicitation; Restrictions on Solicitation

     124   

Termination

     127   

Effect of Termination

     129   

Termination Fee

     129   

Expenses

     130   

Employee Matters

     130   

Indemnification and Insurance

     131   

Amendment; Extension and Waiver

     132   

Governing Law

     132   

Additional Agreements

     132   

PERFUMANIA’S FINANCING ARRANGEMENTS

     135   

Overview

     135   

Bank Credit Facility

     135   

Nussdorf Trust Loans

     135   

Subordination Agreements

     136   

THE PARLUX SPECIAL MEETING

     137   

Meeting Matters

     137   

Parlux Proposal 1: Approval and Adoption of the Merger Agreement

     140   

Parlux Proposal 2: Advisory Vote on Certain Compensation Payable by Parlux to Executive Officers in Connection with the Merger

     140   

Parlux Proposal 3: Adjournment of the Parlux Special Meeting

     144   

About the Parlux Directors

     144   

 

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THE PERFUMANIA SPECIAL MEETING

     147   

Meeting Matters

     147   

Perfumania Proposal 1: Amendment of the Perfumania Charter

     149   

Perfumania Proposal 2: Issuance of Perfumania Common Stock in Connection with the Merger

     150   

INFORMATION ABOUT PERFUMANIA

     152   

Description of Business

     152   

Description of Property

     157   

Legal Proceedings

     157   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     158   

Material Contracts with Parlux

     169   

INFORMATION ABOUT PARLUX

     170   

Description of Business

     170   

Description of Property

     179   

Legal Proceedings

     179   

Management’s Discussion and Analysis Of Financial Condition and Results of Operations

     181   

Certain Parlux Executive Compensation Information

     211   

DIRECTORS AND EXECUTIVE OFFICERS OF PERFUMANIA AFTER THE MERGER

     214   

About the Directors and Executive Officers

     214   

Director Independence

     215   

Indemnification of Perfumania’s Directors and Officers

     215   

Executive Compensation

     216   

Certain Relationships and Related Party Transactions

     217   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     223   

Ownership of Perfumania before the Merger

     223   

Ownership of Parlux before the Merger

     224   

Pro Forma Ownership of Combined Company

     225   

DESCRIPTION OF CAPITAL STOCK OF PERFUMANIA

     228   

Common Stock

     228   

Preferred Stock

     228   

Anti-takeover Provisions

     228   

COMPARISON OF RIGHTS OF PERFUMANIA STOCKHOLDERS AND PARLUX STOCKHOLDERS

     229   

LEGAL MATTERS

     240   

EXPERTS

     240   

FUTURE STOCKHOLDER MEETINGS

     240   

Perfumania Stockholder Proposals

     240   

Parlux Stockholder Proposals

     241   

Stockholders Sharing an Address

     241   

WHERE YOU CAN FIND MORE INFORMATION

     241   

FINANCIAL STATEMENTS

     F-1   

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

     F-100   

ANNEX A

   AGREEMENT AND PLAN OF MERGER      A-1   

ANNEX B

   FAIRNESS OPINIONS OF FINANCO SECURITIES LLC      B-1   

ANNEX C

   FAIRNESS OPINION OF PETER J. SOLOMON COMPANY      C-1   

ANNEX D

   FAIRNESS OPINION OF AMERICAN APPRAISAL ASSOCIATES, INC.      D-1   

ANNEX E

   SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW.      E-1   

 

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QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE MEETINGS

The following is intended to address briefly some commonly asked questions about the merger and the stockholder meetings. It may not address all questions that may be important to you as a Perfumania or Parlux stockholder. To better understand these matters, and for a description of the legal terms governing the merger, you should carefully read this entire joint proxy statement/prospectus, including the annexes. For additional information regarding Perfumania and Parlux, see “Where You Can Find More Information” beginning on page 241. All references in this joint proxy statement/prospectus to “Perfumania” refer to Perfumania Holdings, Inc., a Florida corporation; all references in this joint proxy statement/prospectus to “Parlux” refer to Parlux Fragrances, Inc., a Delaware corporation; unless otherwise indicated or as the context requires, all references in this joint proxy statement/prospectus to “we” refer to Perfumania and Parlux; and all references to the “merger agreement” refer to the Agreement and Plan of Merger, dated December 23, 2011, among Perfumania, Parlux and PFI Merger Corp., a wholly owned subsidiary of Perfumania (which we refer to as “Merger Sub”), a copy of which is attached as Annex A to this joint proxy statement/prospectus.

Q: Why am I receiving this joint proxy statement/prospectus?

A: Perfumania and Parlux have entered into a merger agreement under which Parlux will be acquired by Perfumania through two merger transactions, which we refer to collectively in this joint proxy statement/prospectus as the “merger.” Perfumania and Parlux are seeking stockholder approval of several actions necessary to complete the merger, as described below. We will be unable to complete the merger unless both the Perfumania and Parlux stockholders approve these matters.

We have included in this joint proxy statement/prospectus important information about the merger, the merger agreement, the Perfumania and Parlux stockholder meetings and both companies. You should read this information carefully and in its entirety. The enclosed voting materials allow you to vote your shares without attending your company’s stockholder meeting. Your vote is very important, and we encourage you to submit your proxy as soon as possible.

Questions about the merger:

Q: What will happen in the merger?

A: The proposed merger will combine the businesses of Perfumania and Parlux. Upon completion of the merger, Parlux will cease to exist and Perfumania will continue as a public company. Following the merger the combined company will be an independent fragrance company, owned by the stockholders of both companies, with an anticipated enterprise value of approximately $315 million, based on the closing price of Perfumania common stock on March 2, 2012.

Q: What will I receive in the merger in exchange for my shares of Parlux common stock?

A: Under the merger agreement, Parlux stockholders may elect to receive consideration consisting of shares of Perfumania common stock or a combination of shares of Perfumania common stock and cash in exchange for their shares of Parlux common stock. Because there is a cap on the number of shares of Perfumania common stock that may be issued in the merger and certain Parlux stockholders have entered into agreements that obligate them to elect all stock as consideration, we believe that it is probable that all Parlux stockholders will receive some cash, as well as shares, in the merger. The determination and allocation of the merger consideration is explained in “Summary—Consideration to be Received in the Merger by Parlux Stockholders” beginning on page 7, the “The Merger Agreement—Consideration to be Received in the Merger” beginning on page 113 and “The Merger Agreement—Allocation of Merger Consideration” beginning on page 114.

Q: If I am a Parlux stockholder, how do I make my election?

A: Parlux stockholders will receive an election form in a separate mailing. If you are a Parlux stockholder and wish to elect the type of merger consideration you prefer to receive in the merger, you should review and follow


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carefully the instructions in or with the election form. A properly completed and signed election form must be received by the exchange agent by the election deadline, which is 5:00 p.m., Eastern time, on April 16, 2012. If either stockholder meeting is postponed or adjourned to a later date, the election deadline will also be delayed, and you will be given notice of the new deadline. If you do not submit a properly completed and signed election form by the election deadline, you will be deemed to have made an election to receive $4.00 in cash and 0.20 shares of Perfumania common stock, subject to applicable adjustments, in exchange for each Parlux share that you hold.

Q: Why have Perfumania and Parlux decided to merge?

A: Perfumania and Parlux believe that the merger will provide strategic and financial benefits to their stockholders, customers and employees, including:

 

   

a larger, independent, national vertically integrated manufacturer, wholesale distributor and specialty retailer of perfumes and fragrances;

 

   

a better positioned company to compete in the marketplace and drive growth;

 

   

increased operating scale;

 

   

increased licensing opportunities; and

 

   

synergies expected to result from the merger.

Q: What happens if I am a Parlux stockholder and I sell my shares of Parlux common stock before the Parlux special meeting or the merger?

A: The record date of the Parlux special meeting, which we refer to in this joint proxy statement/prospectus as the “Parlux record date,” is earlier than the date of the Parlux special meeting and the date that the merger is expected to be completed. If you transfer your shares after the Parlux record date but before the Parlux special meeting, you will retain your right to vote at the Parlux special meeting, but will have transferred the right to receive the merger consideration in the merger. In order to receive the merger consideration, you must own your shares through completion of the merger.

Q: Do I have appraisal rights in the merger?

A: If the merger is completed, Parlux stockholders who did not vote in favor of the merger proposal and who otherwise comply with the requirements and procedures of Section 262 of the Delaware General Corporation Law (which we refer to as the “DGCL”) will be entitled to exercise appraisal rights. A detailed description of the appraisal rights and procedures under the DGCL is included in “The Merger—Appraisal Rights” beginning on page 105. The full text of Section 262 of the DGCL, as in effect as of the date of this joint proxy statement/prospectus, is attached as Annex E to this joint proxy statement/prospectus.

Perfumania stockholders do not have appraisal rights in connection with the merger.

Q: Are there any risks in the merger that I should consider?

A: Yes. There are risks associated with all business combinations, including the proposed merger. We have described certain of these risks and other risks to Perfumania’s and Parlux’s businesses in more detail under “Risk Factors” beginning on page 32.

Q: Will Perfumania stockholders receive any shares as a result of the merger?

A: No. If you are a Perfumania stockholder, you will keep your existing stock certificates, which will continue to represent the number of shares of Perfumania common stock you now hold.

 

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Q: When do you expect to complete the merger?

A: Perfumania and Parlux expect to complete the merger during the first half of 2012, although we cannot assure completion by any particular date.

Q: Is receipt of the merger consideration expected to be taxable to Parlux stockholders?

A: We expect that the merger will be treated as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, which we refer to as the “Code.” Therefore, we expect that Parlux stockholders will not recognize any gain or loss for federal income tax purposes with respect to the value of the shares of Perfumania common stock they receive in exchange for shares of Parlux common stock in the merger. However, to the extent Parlux stockholders receive cash in exchange for their Parlux common stock, they will recognize gain or loss for tax purposes.

You should read “Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 110 for a description of the material United States federal income tax consequences of the merger. Tax matters can be complicated, and the tax consequences of the merger to you will depend on your particular situation. You should consult your tax advisor to determine the tax consequences of the merger to you.

Q: Should I send in my Parlux stock certificates now?

A: No. Please do not send your stock certificates with your proxy card. Instead, before the election deadline, send your completed, signed election form, together with your Parlux common stock certificate(s) (or a properly completed notice of guaranteed delivery) to the exchange agent. The election form for your Parlux shares is being delivered to you with instructions in a separate mailing.

If you do not submit your Parlux stock certificate with the election form, you will receive instructions on how to do so after the merger is completed.

Questions about voting at the stockholder meetings:

Q: What proposals are Parlux stockholders being asked to consider?

A: Parlux stockholders are being asked to:

 

   

approve and adopt the merger agreement to permit the merger to occur;

 

   

if necessary, approve the adjournment of the special meeting for any purpose, including to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the merger agreement; and

 

   

approve, on an advisory and non-binding basis, certain compensation payable to certain Parlux executive officers in connection with the merger.

Q: What proposals are Perfumania stockholders being asked to consider?

A: Perfumania stockholders are being asked to:

 

   

approve an amendment to Perfumania’s articles of incorporation (which we refer to as its “charter”) to increase the number of shares of common stock that Perfumania is authorized to issue from 20 million to 35 million in order to provide enough shares for issuance in connection with the merger as well as for other corporate purposes; and

 

   

approve the issuance of shares of Perfumania common stock in connection with the merger.

 

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Q: What do the Perfumania and Parlux boards of directors recommend?

A: Each company’s board of directors has unanimously approved the merger agreement and the other transactions it contemplates and has determined that the merger agreement and the merger are advisable and in the best interests of the Perfumania stockholders and the Parlux stockholders, as applicable. In addition, Perfumania’s board of directors has unanimously approved the Perfumania charter amendment and the issuance of common stock in connection with the merger and has determined that the Perfumania charter amendment and the issuance of common stock in connection with the merger are advisable and in the best interests of Perfumania’s stockholders.

The Parlux Board of Directors unanimously recommends that Parlux stockholders vote FOR the approval and adoption of the merger agreement and FOR the other proposals at the special meeting. See “The Merger—Parlux Board of Directors’ Recommendation” beginning on page 66.

The Perfumania Board of Directors unanimously recommends that Perfumania stockholders vote FOR the amendment to the Perfumania charter increasing the authorized shares of common stock and FOR the issuance of common stock in connection with the merger. See “The Merger—Perfumania Special Committee’s and Board of Directors’ Recommendations” beginning on page 64.

Q: When and where will the stockholder meetings be held?

A: The special meeting of Parlux stockholders will be held at the Westin Fort Lauderdale, 400 Corporate Drive, Fort Lauderdale, FL 33334 on April 17, 2012 at 10:00 a.m., Eastern time.

The special meeting of Perfumania stockholders will be held at the Edwards Wildman Palmer LLP New York office, 750 Lexington Avenue, New York, NY 10022 on April 17, 2012 at 10:00 a.m., Eastern time.

Q: Who is entitled to vote at the stockholder meetings?

A: Holders of shares of Parlux common stock as of the close of business on March 1, 2012, the Parlux record date, are entitled to vote at the Parlux special meeting or any adjournment or postponement thereof.

Holders of shares of Perfumania common stock as of the close of business on March 1, 2012, the record date for the Perfumania special meeting are entitled to vote at the Perfumania special meeting or any adjournment or postponement thereof.

Q: What stockholder vote is required to approve the proposals at the Parlux special meeting?

A: Approval and adoption of the merger agreement requires the affirmative vote of holders of a majority of the outstanding shares of Parlux common stock entitled to vote on the proposal. Approval, on an advisory and non-binding basis, of certain compensation payable to certain Parlux executive officers in connection with the merger and approval of any proposal to adjourn the special meeting each requires the affirmative vote of holders of a majority of the shares entitled to vote on the proposal and present or represented by proxy at the Parlux special meeting.

Q: What stockholder vote is required to approve the proposals at the Perfumania special meeting?

A: Approval of the amendment to Perfumania’s charter increasing the number of shares of authorized common stock requires that the number of votes cast in favor of approval exceed the number cast in opposition. Approval of the issuance of shares of Perfumania common stock in connection with the merger requires the affirmative vote of a majority of the total votes cast on the proposal. These two standards are the same in operation. As a result of their ownership of approximately 74% of the outstanding shares of Perfumania common stock, members

of the Nussdorf family have the right, and have agreed, to vote a sufficient number of shares at the Perfumania special meeting to approve both proposals. Accordingly, the approval of both proposals at the Perfumania special meeting is assured without the vote of any other stockholder.

 

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Q: How do Parlux stockholders vote?

A: Parlux stockholders have four voting options. You may vote using one of the following methods:

 

   

Telephone. You can vote by touch-tone telephone by calling the number given on your proxy card or voting instruction form. You will then be prompted to enter the control number printed on the card or form and to follow the subsequent instructions. Telephone voting is available 24 hours a day until 11:59 p.m., Eastern time, on April 16, 2012. If you vote by telephone, you do not need to return your proxy card or voting instruction form.

 

   

Internet. You can vote over the Internet by accessing the secure web site indicated on your proxy card or voting instruction form and following the instructions on the site. Internet voting is available 24 hours a day until 11:59 p.m., Eastern time, on April 16, 2012. If you vote over the Internet, you do not need to return your proxy card or voting instruction form.

 

   

Mail. You can vote by mail by completing, signing, dating and mailing your proxy card or voting instruction form in the postage-paid envelope included with this joint proxy statement/prospectus.

 

   

In Person. You may come to the Parlux special meeting and cast your vote there. The Parlux board of directors recommends that you vote by proxy even if you plan to attend the special meeting. If your shares are held in a stock brokerage account or through a bank, broker or other nominee, or, in other words, in street name, and you wish to vote in person at the special meeting, you must bring a letter from your bank, broker or nominee identifying you as the beneficial owner of the shares and authorizing you to vote such shares at the special meeting.

Q: How do Perfumania stockholders vote?

A: Perfumania stockholders of record have two voting options. You may vote using one of the following methods:

 

   

Mail. You can vote by mail by completing, signing, dating and mailing your proxy card or voting instruction form in the postage-paid envelope included with this joint proxy statement/prospectus.

 

   

In Person. You may come to the Perfumania special meeting and cast your vote there. The board of directors of Perfumania recommends that you vote by proxy even if you plan to attend the special meeting. If your shares are held in a stock brokerage account or through a bank, broker or other nominee, or, in other words, in street name, and you wish to vote in person at the special meeting, you must bring a letter from your bank, broker or nominee identifying you as the beneficial owner of the shares and authorizing you to vote such shares at the special meeting. For directions to attend the meeting and vote in person, please contact Andrea Petruzzo of Perfumania Holdings, Inc. at 35 Sawgrass Drive, Suite 2, Bellport, New York 11713 or by phone at (631) 866-4100.

Beneficial owners of Perfumania common stock held in street name may also be able to vote by telephone or Internet if their bank or broker makes those methods available, in which case the bank or broker will enclose voting instructions with this joint proxy statement/prospectus.

Q: Why is it important that I vote or give voting instructions to the broker or nominee holding my shares?

A: If you are a Parlux stockholder and you abstain from voting on any proposal, or if you fail to instruct your broker or other nominee how to vote (resulting in a broker non-vote), it will have the same effect as a vote against that proposal.

If you are a Perfumania stockholder and you abstain from voting or if you fail to instruct your broker or other nominee how to vote on either proposal, it will have no effect on the result.

If you send in your signed proxy or voting instruction form but do not indicate how you want to vote on the proposal, your vote will be cast in accordance with the respective board of directors’ recommendations.

 

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Q: May I change my vote after I have delivered my proxy or voting instruction form?

A: Yes. You may change your vote at any time before your proxy is voted at your stockholder meeting. If you are a stockholder of record, you may do this in one of three ways:

 

   

by sending a notice of revocation to the corporate secretary of Perfumania or Parlux, as applicable, dated as of a later date than the date of the original proxy card and received before the Perfumania or Parlux stockholder meeting, as applicable;

 

   

by sending a completed proxy card bearing a later date than your original proxy card and mailing it so that it is received before the Perfumania or Parlux stockholder meeting, as applicable; or

 

   

by attending your stockholder meeting, notifying the inspector of election that you are revoking your original proxy, and voting in person.

Your attendance at the stockholder meeting alone will not revoke any proxy.

If your shares are held in an account at a broker or other nominee, you should contact your broker or other nominee to change your vote.

Q: Who should I call if I have questions about the proxy materials or voting procedures?

A: You may have questions about the merger, or need assistance in submitting your proxy or voting your shares or need additional copies of this joint proxy statement/prospectus or the enclosed proxy card. If you are a Perfumania stockholder, you should contact Perfumania Investor Relations at (631) 866-4100 or InvestorRelations@perfumaniaholdingsinc.com. If you are a Parlux stockholder, you should contact Georgeson Inc., the proxy solicitation agent for Parlux, at 800-509-1078. If your shares are held in a stock brokerage account or by a bank or other nominee, you should contact your broker, bank, or other nominee for additional information.

Q: What do I need to do now?

A: After carefully reading and considering the information contained in this joint proxy statement/prospectus, including the annexes, please vote your shares as soon as possible so that your shares will be represented at your company’s stockholder meeting. Please follow the instructions set forth on your proxy card or voting instruction form.

 

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SUMMARY

This summary highlights selected information contained in this joint proxy statement/prospectus and may not contain all the information that is important to you. We urge you to read this joint proxy statement/prospectus carefully and in its entirety, as well as the annexes. For additional important information regarding Perfumania and Parlux, see “Where You Can Find More Information” beginning on page 241.

The Companies

Perfumania Holdings, Inc.

Perfumania is an independent, national, vertically integrated wholesale distributor and specialty retailer of perfumes and fragrances that does business through five primary operating subsidiaries. Perfumania operates in two industry segments, wholesale distribution and specialty retail sales of designer fragrances and related products. Perfumania’s common stock is traded on the Nasdaq Stock Market under the symbol “PERF.” For the fiscal year ended January 29, 2011, Perfumania had net sales of $484.8 million and a net loss of $3.7 million.

The principal executive office of Perfumania is located at 35 Sawgrass Drive, Suite 2, Bellport, New York 11713 and its phone number is (631) 866-4100.

As described in “The Merger Agreement,” the merger will be accomplished by merging PFI Merger Corp., a wholly owned subsidiary of Perfumania (“Merger Sub”), into Parlux, then merging that company into another wholly owned subsidiary of Perfumania (“Merger Sub I”). Merger Sub was formed and Merger Sub I will be formed by Perfumania to accomplish the merger. Neither company has carried on any activities to date except for those incidental to its formation or undertaken in connection with the merger.

Parlux Fragrances, Inc.

Parlux is engaged in the business of creating, designing, manufacturing, distributing and selling prestige fragrances and beauty related products marketed primarily through specialty stores, national department stores and perfumeries on a worldwide basis. Parlux’s common stock is traded on the Nasdaq Stock Market under the symbol “PARL.” For the fiscal year ended March 31, 2011, Parlux had net sales of $123 million and net income of $1.2 million.

The principal executive office of Parlux is 5900 N. Andrews Avenue, Suite 500, Fort Lauderdale, Florida 33309 and its phone number is (954) 316-9008.

The Merger

Structure of the Merger

Perfumania and Parlux have entered into a merger agreement under which Merger Sub will merge with Parlux and then Parlux will merge with Merger Sub I, which will survive as a subsidiary of Perfumania. Upon completion of the merger, Parlux common stock will be no longer be publicly traded.

Consideration to be Received in the Merger by Parlux Stockholders

Under the merger agreement, Parlux stockholders may elect to receive consideration consisting of shares of Perfumania common stock or a combination of shares of Perfumania common stock and cash in exchange for their shares of Parlux common stock. Subject to adjustments as described below, Parlux stockholders electing to receive only shares will receive 0.533333 shares of Perfumania common stock in exchange for each Parlux share, and Parlux stockholders electing to receive a mix of cash and stock consideration and stockholders who don’t

 

 

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make a timely election will receive $4.00 in cash and 0.20 shares of Perfumania common stock in exchange for each Parlux share. However, the maximum amount of cash that will be paid is $61,895,288, and the maximum amount of Perfumania common stock that will be issued is 5,919,052 shares, subject to upward adjustment for any increase in the number of Parlux shares outstanding and to replace, on a pro rata and proportionate basis as necessary, a decrease in cash consideration in certain circumstances (the “Aggregate Cap”). Both of these amounts are subject to adjustment in certain circumstances, including a downward adjustment of the maximum cash consideration for each share of Parlux stock as to which appraisal rights have been exercised and for any shortfall of Parlux cash or cash equivalents, and an upward adjustment of the Aggregate Cap for any increase in the number of Parlux shares outstanding and to replace, on a pro rata and proportionate basis as necessary, any decrease in maximum cash consideration resulting from a shortfall of Parlux cash or cash equivalents. See “The Merger Agreement—Consideration to be Received in the Merger” on page 113.

If Parlux stockholders elect, in the aggregate, to receive more shares of Perfumania common stock than the Aggregate Cap, which we believe is probable, those holders electing to receive all stock consideration will be prorated downward and will receive in exchange for each share of Parlux stock (1) a number of shares of Perfumania common stock equal to the difference between (a) the Aggregate Cap and (b) the product of (i) the total number of shares as to which holders have elected mixed consideration or made no election and (ii) 0.20 (such difference, the “Available Stock Election Amount”), divided by the total number of shares as to which the holders have elected all stock consideration, rounded to the nearest ten thousandth of a share, and (2) an amount of cash (without interest) equal to the product of (a) the difference between (i) the number of shares as to which holders have elected all stock consideration multiplied by 0.533333 and (ii) the Available Stock Election Amount and (b) $12.00, divided by the total number of shares as to which the holders have elected all stock consideration. As a result, Parlux stockholders who make a valid election to receive all stock consideration would not receive merger consideration entirely in that form. See “Risk Factors—Parlux stockholders electing to receive only Perfumania common stock may receive cash and stock and Parlux stockholders electing to receive a mix of cash and stock may receive more stock and less cash than expected” on page 32.

Perfumania will not issue any fractional shares of common stock in the merger. For each fractional share that would otherwise be issued, Perfumania will pay cash (without interest) in an amount equal to the product of (i) the applicable fraction and (ii) $12.00. See “The Merger Agreement—Procedures for Exchange of Certificates” on page 116.

To facilitate the merger’s compliance with the “continuity of interest” requirement for tax-free reorganizations under the Code, and therefore to provide greater assurance that the respective tax counsel of Perfumania and Parlux will be able to deliver the tax opinion that is a condition to each party’s obligation to complete the merger, the merger consideration is subject to adjustment depending on the number of stockholders (if any) who choose to exercise their appraisal rights.

Illustrative Values of the Merger Consideration

The following tables illustrate the consideration that would be received by holders of Parlux common stock in the merger under four different hypothetical scenarios. Each scenario assumes (i) that the value of Perfumania common stock at the closing of the merger is $9.78, the closing price of Perfumania common stock on Nasdaq on March 2, 2012, (ii) that a certain percentage of stockholders elect to receive all stock as consideration, (iii) that no adjustment of a type described in “The Merger Agreement—Consideration to be Received in the Merger” on page 113, other than any based upon the elections of Parlux stockholders, is made to the cash and stock components of the merger consideration, and (iv) that the aggregate number of shares of stock to be issued as merger consideration is equal to the Aggregate Cap.

 

 

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Upon execution of the merger agreement, Perfumania entered into voting agreements with certain Parlux stockholders as described in “The Merger Agreement—Additional Agreements” on page 132. Among other things, these voting agreements require those Parlux stockholders to make an election to receive all stock consideration. If only these Parlux stockholders elect to receive all stock consideration and all other Parlux stockholders elect to receive mixed consideration (or any of these Parlux stockholders do not make a valid election and are therefore deemed to have made an election to receive mixed consideration), then (absent adjustments to the Aggregate Cap) no Parlux stockholder will receive merger consideration in an amount or form other than as elected, and the total number of shares to be issued in connection with the merger to stockholders electing all stock and stockholders electing mixed consideration will be equal to the Aggregate Cap. Therefore, if any Parlux stockholder other than those bound by the voting agreements elects to receive all stock consideration, which we believe is probable, the number of shares received by all Parlux stockholders electing all stock consideration (including those subject to the voting agreements) will be prorated downward and the consideration received by every stockholder will include some amount of cash. The amount of cash per share of Parlux common stock received by each Parlux stockholder who elected all stock will equal the product of the number of shares as to which stockholders elect all stock consideration in excess of the Aggregate Cap and $12.00, divided by the total number of shares as to which stockholders elect all stock consideration. See also “The Merger Agreement—Consideration to be Received in the Merger.”

Because every Parlux stockholder, regardless of which election the stockholder makes or whether the stockholder makes an election at all, will receive some portion of the merger consideration in the form of shares of Perfumania common stock, the value of the consideration received at the effective time of the merger will depend upon the market price of Perfumania common stock at that time. It is important to note, however, that fluctuations in the market price per share of Perfumania common stock will not impact the amount of cash or the number of shares of Perfumania common stock received by any stockholder.

To illustrate this, the tables below provide examples of the value of the merger consideration that may be received by a Parlux stockholder, depending on the outcome of various stockholders’ elections, that were prepared based on the assumptions noted above. The tables should be read and used in conjunction with the qualifications noted in the paragraphs below the tables. You may use these tables to calculate the value of merger consideration at different values of Perfumania common stock by multiplying a testing price for a share of Perfumania common stock by the decimal representing the “Perfumania common stock component of merger consideration per share of Parlux common stock” shown below to give you the “Illustrative value of Perfumania common stock component of merger consideration per share of Parlux common stock.” To compute the “Illustrative value of total merger consideration per share of Parlux common stock,” add the value of the stock component of the merger consideration received to the cash component of the merger consideration received.

Example #1: All Parlux stockholders (except those bound by the voting agreements)

elect mixed consideration

 

Mixed Consideration

 

All-Stock Consideration

Cash component

of merger
consideration per share
of Parlux common
stock

 

Perfumania common
stock component of
merger consideration
per share of Parlux
common stock

 

Illustrative value of
Perfumania common
stock component of
merger consideration
per share of Parlux
common stock

 

Illustrative value
of total merger
consideration per
share of Parlux
common stock

 

Perfumania common
stock component of
merger consideration
per share of Parlux
common stock

 

Illustrative value of
Perfumania common
stock component of
merger consideration
per share of Parlux
common stock

$4.00

  0.20  

$1.96

 

$5.96

  0.533333  

$5.22

 

 

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Example #2: 50% of all Parlux stockholders elect mixed consideration and 50% (including those bound by the voting agreements) elect stock consideration

 

Mixed Consideration

 

All-Stock Consideration

Cash component
of merger
consideration
per share of
Parlux

common stock

 

Perfumania
common stock
component of
merger
consideration
per share of
Parlux

common stock

 

Illustrative value
of Perfumania
common stock
component of
merger
consideration
per share of
Parlux
common stock

 

Illustrative

value of total
merger
consideration
per share of
Parlux

common stock

 

Cash component
of merger
consideration
per share of
Parlux

common stock

 

Perfumania
common stock
component of
merger
consideration
per share of
Parlux

common stock

 

Illustrative value
of Perfumania
common stock
component of
merger
consideration
per share of
Parlux

common stock

 

Illustrative value
of total merger
consideration
per share of
Parlux

common stock

$4.00

  0.20  

$1.96

 

$5.96

  $1.96   0.369979  

$3.62

 

$5.58

Example #3: 25% of all Parlux stockholders elect mixed consideration and 75% (including those bound by the voting agreements) elect stock consideration

 

Mixed Consideration

   All-Stock Consideration

Cash

component
of

merger

consideration

per share of

Parlux
common

stock

   Perfumania
common stock
component of
merger
consideration
per share of
Parlux
common stock
   Illustrative
value of
Perfumania
common stock
component of
merger
consideration
per share of
Parlux
common stock
   Illustrative
value of total
merger
consideration
per share of
Parlux common
stock
   Cash
component of
merger
consideration
per share of
Parlux common
stock
   Perfumania
common stock
component of
merger
consideration
per share of
Parlux common
stock
   Illustrative
value of
Perfumania
common stock
component of
merger
consideration
per share of
Parlux common
stock
   Illustrative
value of total
merger
consideration
per share of
Parlux common
stock

$4.00

   0.20    $1.96    $5.96    $2.64    0.313319    $3.06    $5.70

Example #4: All Parlux stockholders (including those bound by the voting agreements) elect stock consideration

 

All-Stock Consideration

Cash component of

merger

consideration per

share of Parlux

common stock

   Perfumania common
stock component of
merger consideration
per share of Parlux
common stock
   Illustrative value of
Perfumania common
stock component of
merger consideration
per share of Parlux
common stock
   Illustrative value of
total merger
consideration per share
of Parlux
common stock

$2.98

   0.284490    $2.78    $5.76

It is important to note that, if the market value of Perfumania common stock at the closing of the merger is higher than $12.00/share, while Parlux stockholders who have made an all stock election will receive consideration with a higher value than those who elected to receive mixed consideration, as the number of shares with respect to which stockholders have elected all stock as merger consideration increases, the portion of cash consideration received by holders of such shares will increase due to proration, and the number of shares of Perfumania common stock that they receive will decrease. Thus, if Perfumania common stock is valued at more than $12.00/share at closing, the aggregate value of the consideration received by stockholders making an all stock consideration election will decrease as the number of stockholders making that election increases.

You are cautioned not to rely unduly on these examples, which are provided for illustrative purposes only and should not be seen as a prediction of the value of the merger consideration that any particular Parlux stockholder will receive. Stockholders’ elections in the aggregate will affect the form and amount of merger consideration to be received by any individual stockholder, and the aggregate result of these elections cannot be predicted.

 

 

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Additionally, the market price of Perfumania common stock will probably be different on the date Parlux common stockholders receive shares of Perfumania common stock than it was on the date the merger agreement was signed, the date of this joint proxy statement/prospectus, or the date of the stockholder meetings. Changes in the price of Perfumania common stock before completion of the merger will affect the value that Parlux common stockholders will receive in the merger, so the actual value of the consideration delivered in the merger will probably differ from the amounts set forth in the tables above. For a more complete description of risks related to fluctuations in the value of Perfumania common stock, please refer to “Risk Factors” beginning on page 32.

Treatment of Parlux Options and Warrants

Employee Options and Warrants

At the effective time of the merger, each outstanding and unexercised option to purchase Parlux common stock under Parlux’s equity-based compensation plan will be assumed by Perfumania and converted into an option to purchase a number of shares of Perfumania common stock equal to the product of (i) the number of shares of Parlux common stock subject to the option and (ii) the equity award exchange ratio of 0.533333, rounded down to the nearest whole share. The per share exercise price for the Perfumania common stock issuable upon the exercise of each assumed stock option will be equal to (i) the per share exercise price of Parlux common stock at which the option was exercisable immediately before the effective time of the merger divided by (ii) the equity award exchange ratio of 0.533333, rounded up to the nearest whole cent. Except as set forth above, each assumed stock option will be subject to the same terms and conditions as were applicable to the corresponding option to purchase Parlux common stock immediately before the effective time of the merger; provided, that the vesting schedule of each assumed option will be accelerated by one year, and if the holder’s employment is terminated within one year of the effective time of the merger without cause or good reason, the option will vest in full and the exercisability of the option will continue for 90 days following termination. The equity award exchange ratio for options is the same exchange rate applicable to an election to receive all stock consideration, 0.533333.

Gopman Warrant

Glenn Gopman, a director of Parlux, currently holds warrants to purchase 10,000 shares of Parlux common stock, which we refer to as the “Gopman warrant.” Upon completion of the merger, the outstanding Gopman warrant will be automatically converted into a warrant to purchase a number of shares of Perfumania common stock equal to the product of (i) the number of shares of Parlux common stock then subject to the Gopman warrant and (ii) the equity award exchange ratio of 0.533333, rounded down to the nearest whole share. The per share exercise price of the Gopman warrant will be equal to (i) the per share exercise price of Parlux common stock at which the Gopman warrant was exercisable immediately before the effective time of the merger, divided by (ii) the equity award exchange ratio, rounded up to the nearest whole cent. Except as set forth above, the Gopman warrant will be subject to the same terms and conditions as were applicable to the Gopman warrant before the effective time of the merger. Perfumania has agreed to include the shares issued upon exercise of the Gopman warrant in the resale registration statement it files after the completion of the merger, as described under “Licensor Warrants” below.

Licensor Warrants

Rene Garcia and certain family trusts and affiliated companies of Rene Garcia, which we refer to as the “Garcia Group,” collectively are the beneficial owner of 19.2% of the shares of Parlux common stock and the beneficial owner of 8.4% of the shares of Perfumania common stock, and Artistic Brands Development LLC (formerly known as Iconic Fragrances, LLC) (“Artistic Brands”), whom we refer to collectively as the “licensors,” currently hold, in conjunction with certain other parties, warrants to purchase an aggregate of 6,000,000 shares of Parlux common stock, which we refer to as the “licensor warrants.” Concurrently with the signing of the merger agreement, Parlux, the licensors and other holders of the licensor warrants entered into an amendment to the

 

 

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licensor warrants to govern the treatment of the licensor warrants upon completion of the merger. The warrant amendment will be effective only if the merger is consummated. Under the warrant amendment, upon completion of the merger, each outstanding licensor warrant will be automatically converted into a warrant to purchase the number of shares of Perfumania common stock equal to the product of (i) the number of shares of Parlux common stock subject to the licensor warrant and (ii) the equity award exchange ratio, rounded down to the nearest whole share. The per share exercise price of each licensor warrant will be equal to $8.00. The warrant amendment also provides that after the completion of the merger, Perfumania will register the shares issuable upon exercise of the licensor warrants for resale under the Securities Act of 1933, as amended, which we refer to in this joint proxy statement/prospectus as the “Securities Act.” All of the warrants related to Artistic Brands vest at the effective time of the merger.

See “The Merger Agreement—Treatment of Parlux Stock Options” and “—Treatment of Warrants” on page 115.

Additional Agreements

Voting Agreements

Simultaneously with the execution of the merger agreement, Perfumania entered into voting agreements with Glenn Nussdorf and the Garcia Group, who hold an aggregate of approximately 24.3% of Parlux’s outstanding common shares pursuant to which they agreed that they will vote their shares of Parlux common stock (i) in favor of approval and adoption of the merger agreement, and (ii) against any proposal made in opposition to or competition with the merger agreement or that may impede, interfere with, delay or otherwise adversely affect the consummation of the merger. Those stockholders also agreed to elect to receive all stock consideration for all their shares of Parlux common stock.

In addition, simultaneously with the execution of the merger agreement, the directors and certain of the officers of Parlux holding approximately 5.3% of the outstanding shares of Parlux common stock, including its Chairman and Chief Executive Officer, each entered into a voting agreement with Perfumania pursuant to which each officer and director agreed that he or she will vote his or her shares of Parlux common stock (i) in favor of approval and adoption of the merger agreement and (ii) against any proposal made in opposition to or competition with the merger agreement or that would impede, interfere with, delay or otherwise adversely affect the consummation of the merger.

Also simultaneously with the execution of the Merger Agreement, Parlux entered into a voting agreement with The Nussdorfs, who hold approximately 74% of Perfumania’s outstanding common shares pursuant to which they agreed to vote their shares of Perfumania common stock (i) in favor of the increase in authorized shares of Perfumania and the issuance of shares pursuant to the merger agreement and (ii) against any proposal that is in opposition to or competition with the merger agreement or that would impede, interfere with, delay or otherwise adversely affect the consummation of the merger.

Each of the voting agreements described above expires upon the earliest of consummation of the merger, termination of the merger agreement or, in the case of the voting agreements regarding Parlux shares, a change of recommendation by the Parlux board of directors.

Licensor Agreements

In connection with the merger agreement, Parlux, Artistic Brands and Rene Garcia entered into an amendment to their Letter Agreement dated April 3, 2009 providing that the merger will not be a “Fundamental Transaction” under the terms of the letter agreement, which would have required the payment by Parlux of certain additional sums to Artistic Brands at the effective time of the merger.

 

 

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Perfumania, Parlux, Artistic Brands and Mr. Garcia also entered into a Letter Agreement, dated December 23, 2011 (the “Proposal Agreement”) providing that Artistic Brands and Mr. Garcia will not solicit or negotiate with parties other than Perfumania in connection with the treatment of the licensor warrants or the Letter Agreement. However, in the event that, consistent with the provisions of the merger agreement, Parlux engages in discussions or negotiations with a third party regarding an alternative acquisition proposal or enters into an agreement relating to a superior proposal, then Mr. Garcia and Artistic Brands may enter into discussions or negotiations with such third party with regard to the treatment of the licensor warrants and/or the Letter Agreement in connection with such acquisition proposal. The parties to the Proposal Agreement also acknowledged that Artistic Brands and S. Carter Enterprises, LLC have agreed to enter into a license agreement and Artistic Brands, Perfumania and S. Carter Enterprises have agreed to enter into a sublicense agreement, both to be effective upon the consummation of the merger, and subject to certain closing conditions contained in the Proposal Agreement. The Proposal Agreement also provides for the issuance to Artistic Brands or its designee of 300,000 shares of Perfumania common stock after the effective time of the merger as consideration for the transactions contemplated in the Proposal Agreement. These shares will be entitled to the same registration rights as the shares underlying the licensor warrants.

On December 23, 2011, Perfumania and the Garcia Group entered into a stockholders agreement. The stockholders agreement provides that, commencing upon the consummation of the merger and until either December 23, 2015, or until Glenn Nussdorf, Stephen Nussdorf and Arlene Nussdorf (principal stockholders of Perfumania, to whom we refer as the “Nussdorfs”) and trusts related to them cease to own at least one third of the outstanding Perfumania stock (the “Term”), the Garcia Group will not vote any of their shares of Perfumania stock (and all Perfumania stock that they later acquire) in favor of certain matters if the Perfumania board has recommended a vote against that matter. These matters include, among other things, (i) certain merger, reorganization, business combination, recapitalization, dissolution, liquidation or similar transactions involving Perfumania constituting more than 50% or more of its assets, revenues or earnings, (ii) an acquisition of more than 50% of Perfumania’s consolidated assets or 50% of Perfumania’s outstanding common stock, (iii) the issuance of Perfumania common stock that after giving effect to that issuance represents more than 50% of Perfumania’s outstanding common stock, or (iv) a tender offer or exchange offer that, if consummated, would result in any person or group beneficially owning more than 50% of the Perfumania’s outstanding common stock, other than the Nussdorfs. The Garcia Group also agreed in the stockholders agreement that during the Term they will not vote for any director unless the director is recommended by Perfumania’s board. The stockholders agreement also restricts the Garcia Group’s ability to enter into voting agreements or transfer their shares of Perfumania common stock, subject to certain exceptions. Under the stockholders agreement the Garcia Group also agreed to not seek to acquire ownership of more than 28% of Perfumania’s common stock, engage in a solicitation of proxies or a proxy contest, seek to control Perfumania’s management, nominate directors not nominated by Perfumania’s then-incumbent directors or join a group or announce their intent to do any of the foregoing during the Term, unless approved by Perfumania’s board of directors.

See “The Merger Agreement—Additional Agreements” for additional information regarding these agreements.

Financings

Perfumania will obtain financing for the cash portion of the merger consideration from two sources.

Perfumania may use borrowings under its senior bank credit facility of up to $32 million (which amount would be reduced to the extent that cash and cash equivalents held by Parlux at the closing of the merger are less than $15 million) to fund a portion of the merger consideration and up to $11 million to fund costs of the merger and related transactions. At the closing of the merger Perfumania is required to apply all cash and cash equivalents held by Parlux to repayment of the senior credit facility and to ensure that Parlux’s existing bank credit facility is terminated.

 

 

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Second, effective December 23, 2011, Perfumania’s subsidiary, Model Reorg Acquisition LLC (“Model”), received commitments from six family trusts of the Nussdorfs (which we refer to as the “Nussdorf Trusts”) to make a total of $30 million in new loans (which new loans in such amount we refer to as the Nussdorf Trust loans) to finance the balance of the cash consideration. The new loans will be subordinated to the senior bank credit facility on the same basis as the existing indebtedness to the Nussdorf Trusts.

The foregoing is a summary of the terms of the contemplated debt financings. For a more complete description of the financing for the merger, see the section entitled “Perfumania’s Financing Arrangements” beginning on page 135 of this joint proxy statement/prospectus. For a discussion of risks related to Perfumania’s failure to obtain financing, please see “Risk Factors—Perfumania may be unable to obtain the financing necessary to consummate the merger” beginning on page 32.

Reasons for the Merger; Recommendations of the Boards of Directors

Perfumania

The Perfumania board of directors unanimously recommends that Perfumania stockholders approve the merger by voting to approve the charter amendment to increase the number of authorized shares of Perfumania common stock and to approve the issuance of shares of Perfumania common stock in connection with the merger. The Perfumania board of directors’ approval of these matters was based on the recommendation of a committee of the Perfumania board of directors, consisting of all the independent directors of Perfumania (which we refer to in this joint proxy/prospectus as the “Perfumania special committee”).

Perfumania’s board of directors believes that the merger will provide substantial benefits to Perfumania’s stockholders, as well as those of Parlux, including, among other reasons: improvement in the existing strengths of both companies; anticipated profit maximization through increased vertical integration; being able to attract more and better licenses due to the combined company’s increased size and distribution capabilities; the accretion in earnings per share expected to result over several years; an increase in liquidity for stockholders due to the expanded public stockholder base; improved bank and private financing capability and greater access to public capital markets; and certain synergies anticipated to result from the merger.

For a more complete description of Perfumania’s reasons for the merger and the recommendations of the Perfumania board of directors and special committee, see “The Merger—Perfumania Special Committee’s and Board of Directors’ Recommendations” beginning on page 64.

Parlux

The Parlux board of directors unanimously recommends that Parlux stockholders approve the merger by voting to approve and adopt the merger agreement. The Parlux board of directors’ approval of the merger agreement was based on the recommendation of a committee of the Parlux board of directors, consisting of all the independent directors of Parlux (which we refer to in this joint proxy/prospectus as the “Parlux independent committee”).

Parlux’s board of directors believes that the merger will provide substantial benefits to Parlux’s stockholders, including, among others: the prospect that the combined company will be better positioned than Parlux is now to overcome the current and future challenges of the fragrance industry; the benefits that the Parlux stockholders are expected to derive from the future performance of the combined company and the synergies expected to result from the merger; the membership of Parlux directors on the combined company’s board of directors and their ability to exercise fiduciary oversight responsibilities in the interests of all the combined company’s common stockholders; the ability of Parlux stockholders to elect the form of consideration that they will receive; the expectation that receipt of the stock portion of the merger consideration will not be taxable for United States

 

 

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federal income tax purposes; and their belief that the proposed merger with Perfumania will be more favorable to Parlux stockholders than other strategic alternatives reasonably available to Parlux and its stockholders.

For a more complete description of Parlux’s reasons for the merger and the recommendations of the Parlux board of directors and independent committee, see “The Merger—Parlux Board of Directors’ Recommendation” beginning on page 66.

Opinions of Financial Advisors

Financial Advisor to Perfumania’s Special Committee

On December 23, 2011, Financo Securities, LLC, which we refer to in this joint proxy statement/prospectus as “Financo,” rendered its written fairness opinion, which we refer to as the “Financo Opinion,” to the Perfumania special committee that, as of that date, and based upon and subject to the various assumptions and limitations set forth therein, the aggregate merger consideration to be paid by Perfumania under the merger agreement, including the Perfumania options and warrants issuable upon conversion of outstanding Parlux options and warrants, was fair, from a financial point of view, to Perfumania. The Financo Opinion excluded any opinion on the fairness of the merger consideration to the stockholders of Perfumania who own, or whose affiliates own, a controlling interest in Perfumania or who own, or whose affiliates own, shares of Parlux common stock.

Also on December 23, 2011, Financo delivered to the Perfumania special committee its written opinion, which we refer to as the “Financo Loan Opinion,” that, as of that date, and based upon and subject to the various assumptions and limitations set forth therein, the loans to be made by the Nussdorf Trusts (described on page 135) to help finance the acquisition, were fair, from a financial point of view, to Perfumania. The Financo Loan Opinion excluded any opinion on the fairness of those loans to any stockholders of Perfumania who own, or whose affiliates own, a controlling interest in Perfumania.

Financo was paid a fee in part upon beginning its engagement and in part upon delivery of its opinions. None of Financo’s compensation was contingent upon reaching a particular opinion regarding the financial fairness of the merger consideration or the Nussdorf Trust loans or upon the ultimate consummation of the transaction.

The full text of each of the Financo Opinion and the Financo Loan Opinion is included in Annex B to this joint proxy statement/prospectus. Financo provided its opinion with respect to the fairness of the merger consideration for the information and use of the Perfumania special committee and its opinion with respect to the fairness of the Nussdorf Trust loans solely for the information and use of the Perfumania special committee. Financo’s opinions do not constitute a recommendation as to how any holder of Perfumania common stock should vote on any matter relating to the merger. The summary and the description of the opinions included in this joint proxy statement/prospectus are qualified in their entirety by reference to the full text of the opinions. We encourage you to read Financo’s opinions, as well as a description thereof and of Financo’s compensation in the section titled “The Merger—Opinion of Financial Advisor to the Perfumania Special Committee” beginning on page 86, carefully and in their entirety.

Financial Advisors to the Independent Committee of Parlux’s Board of Directors

Peter J. Solomon Company

On December 19, 2011, Parlux’s financial advisor, Peter J. Solomon Company, which we refer to in this joint proxy statement/prospectus as “PJSC,” rendered its oral opinion to the Parlux independent committee, which was subsequently confirmed by delivery of a written opinion on that same date, that, as of December 19, 2011, and based upon and subject to the assumptions, procedures, factors, qualifications and other matters and limitations set forth in PJSC’s opinion, and other factors it deemed relevant, the merger consideration to be paid to holders of Parlux common stock (other than members of the Nussdorf family and any trusts or entities controlled by the Nussdorf family) in the merger was fair from a financial point of view to such holders.

 

 

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PJSC’s compensation for its financial advisory services consists in part of fees that were paid upon its engagement and its delivery of its opinion and in part of a transaction fee that is contingent upon the consummation of the merger.

The full text of PJSC’s written opinion, dated December 19, 2011, which sets forth, among other things, the assumptions made, procedures followed, matters considered and qualifications and limitations on the opinion and the review undertaken in connection with the opinion, is attached as Annex C to this joint proxy statement/prospectus. PJSC provided its opinion for the information and use of the Parlux independent committee in connection with its evaluation of the merger and did not address any other aspect of the merger. PJSC’s opinion does not constitute a recommendation as to how any holder of Parlux common stock should vote or act with respect to the merger or any matter relating thereto. The summary and the description of the opinion included in this joint proxy statement/prospectus are qualified in their entirety by reference to the full text of the opinion. We encourage you to read PJSC’s opinion, as well as the description thereof and of PJSC’s compensation in the section titled “The Merger—Opinions of Financial Advisors to the Parlux Independent Committee” beginning on page 70, carefully and in their entirety.

American Appraisal Associates, Inc.

In connection with the execution of the merger agreement, the Parlux independent committee received an oral opinion on December 19, 2011, confirmed by a written opinion dated December 23, 2011, from American Appraisal Associates, Inc., which we refer to in this joint proxy statement/prospectus as “American Appraisal,” and based upon and subject to the assumptions, procedures, factors, qualifications and other matters and limitations set forth in American Appraisal’s opinion, and other factors it deemed relevant, the merger consideration to be paid to holders of Parlux common stock in the merger was fair, from a financial point of view, to such holders.

American Appraisal was paid a fee upon delivery of its opinion. None of American Appraisal’s compensation was contingent upon reaching a particular opinion regarding the financial fairness of the merger or upon the ultimate consummation of the transaction.

The full text of the written opinion of American Appraisal, dated December 23, 2011, which sets forth, among other things, the assumptions made, procedures followed, matters considered, and qualifications and limitations on the opinion and the review undertaken by American Appraisal in connection with rendering its opinion, is attached as Annex D to this joint proxy statement/prospectus. American Appraisal provided its opinion for the information and use of the Parlux independent committee in connection with its evaluation of the merger. American Appraisal’s opinion is not a recommendation as to how any holder of Parlux common stock should vote or act with respect to the merger or any matter relating thereto. The summary and the description of the American Appraisal opinion included in this joint proxy statement/prospectus are qualified in their entirety by reference to the full text of the opinion. We encourage you to read American Appraisal’s opinion, as well as the description thereof and of American Appraisal’s compensation in the section titled “The Merger—Opinions of Financial Advisors to the Parlux Independent Committee” beginning on page 70, carefully and in their entirety.

The Parlux independent committee determined to engage American Appraisal to provide advice with respect to the financial fairness of the merger to holders of Parlux common stock because the Parlux independent committee believed it would be useful to have information and advice with respect to the transaction from a different financial perspective and because a substantial portion of PJSC’s compensation is contingent upon consummation of the merger.

 

 

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Matters to be Considered at the Meetings

Perfumania

Perfumania stockholders will be asked to vote to approve (i) an amendment of the Perfumania charter to increase the number of authorized shares of Perfumania common stock and (ii) the issuance of shares of Perfumania common stock in connection with the merger. Approval of these proposals is required for completion of the merger. The Perfumania board of directors unanimously recommends that Perfumania stockholders vote to approve both the proposal to amend the Perfumania charter to increase the number of authorized shares of Perfumania common stock and the proposal to approve the issuance of Perfumania common stock in connection with the merger, as more fully described under “The Perfumania Special Meeting” beginning on page 147.

Parlux

Parlux stockholders will be asked to vote on the proposal to approve and adopt the merger agreement. Approval of the merger proposal is required for completion of the merger. Parlux stockholders will also be asked to vote on the proposal to approve, on an advisory and non-binding basis, certain compensation payable to certain Parlux executive officers in connection with the merger. Approval of this proposal is not required for completion of the merger. The Parlux board of directors unanimously recommends that Parlux stockholders vote to approve both these proposals, as more fully described under “The Parlux Special Meeting” beginning on page 137.

Voting by Perfumania and Parlux Directors, Executive Officers and Principal Stockholders

On the Perfumania record date, directors and executive officers of Perfumania and their affiliates, and certain other principal stockholders, owned and were entitled to vote approximately 81% of the total voting power of the shares of Perfumania common stock outstanding on that date, and all of such persons have entered into agreements to, or have informed us that they intend to, vote to approve both proposals to be voted on at the Perfumania special meeting. On the Parlux record date, directors and executive officers of Parlux and their affiliates, and certain other principal stockholders, owned and were entitled to vote approximately 5.3% of the shares of Parlux common stock outstanding on that date, and such persons holding approximately 29.6% of the shares have entered into voting agreements obligating them to vote to approve all the proposals to be voted on at the Parlux special meeting.

Ownership of Perfumania Following the Merger

Upon completion of the merger and Perfumania’s issuance of 300,000 new shares to Artistic Brands or its designee under the Proposal Agreement, Perfumania and Parlux expect that former Parlux stockholders will own approximately 40% of the outstanding shares of Perfumania common stock and current Perfumania stockholders will own approximately 60% of the outstanding shares of Perfumania common stock, or approximately 49% and 51%, respectively, measured on a “fully-diluted” basis as of December 31, 2011 (as described under “The Merger—Ownership of Common Stock of the Combined Company After the Merger” beginning on page 103). The foregoing ownership percentages assume issuance of the maximum number of shares in the merger.

Following the merger, the Nussdorfs, who are currently the beneficial owners of approximately 82% of Perfumania’s outstanding shares and 9.9% of Parlux’s outstanding shares, are expected to continue to own a majority of Perfumania’s outstanding shares.

 

 

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Directors and Executive Officers After the Merger

Following the merger, the Perfumania board of directors will consist of the members of the Perfumania and Parlux boards of directors in office at the time of closing. The current Perfumania directors are Stephen Nussdorf, Michael W. Katz, Carole Ann Taylor, Joseph Bouhadana and Paul Garfinkle, and the current Parlux directors are Frederick E. Purches, Glenn Gopman, Esther Egozi Choukroun, Anthony D’Agostino and Robert Mitzman. Each member of Perfumania’s board of directors following the merger will serve until Perfumania’s next annual meeting, which Perfumania expects to take place in the fourth quarter of calendar 2012, and until his or her successor has been elected.

Stephen Nussdorf, Michael W. Katz and Donna Dellomo will continue to serve as Perfumania’s Executive Chairman, President and Chief Executive Officer, and Chief Financial Officer, respectively, following the merger.

For more information, see “Directors and Executive Officers of Perfumania After the Merger” beginning on page  214.

Interests of Certain Persons in the Merger

In considering the recommendation of Parlux’s board of directors to approve the merger agreement and related matters, Parlux stockholders should be aware that some of Parlux’s executive officers and directors have financial interests in the merger that are different from, or in addition to, those of Parlux’s stockholders generally. The Parlux board of directors, including the Parlux independent committee, was aware of these interests and considered them, among other matters, in negotiating and approving the merger agreement and making its recommendation that the Parlux stockholders approve and adopt the merger agreement and approve, on an advisory and non-binding basis, compensation payable to certain officers of Parlux in connection with the merger.

As described under “Directors and Executive Officers After the Merger” above, assuming that they are still in office at the effective time of the merger and in accordance with the merger agreement, Frederick E. Purches, Glenn Gopman, Esther Egozi Choukroun, Anthony D’Agostino and Robert Mitzman, who are currently directors of Parlux, will be appointed to the board of directors of Perfumania upon completion of the merger.

Parlux has employment arrangements with each of Frederick E. Purches, Frank A. Buttacavoli and Raymond J. Balsys that provide for certain severance benefits that will remain in place following the effective time of the merger. For further information regarding payments to Parlux officers upon termination, see “The Parlux Special Meeting—Parlux Proposal 2: Advisory Vote on Certain Compensation Payable by Parlux to Executive Officers in Connection with the Merger” beginning on page 140.

At the effective time of the merger, each outstanding option to purchase shares of Parlux common stock (including those options held by Parlux’s executive officers and directors) will be converted into an option to purchase shares of Perfumania common stock at a predetermined conversion rate. Additionally the vesting schedule of each converted option will be accelerated by one year, and if the holder’s employment is terminated within one year of the effective time of the merger without cause or good reason, the option will vest in full and the exercisability of the option will continue for 90 days following termination.

Glenn Gopman, a director of Parlux, currently holds warrants to purchase 10,000 shares of Parlux common stock. Upon completion of the merger, such warrant will be automatically converted into a warrant to purchase a number of shares of Perfumania common stock at a predetermined conversion rate. Perfumania has agreed to include the shares issued upon exercise of this warrant in a future resale registration statement.

 

 

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Based on Parlux directors’ and executive officers’ equity compensation holdings as of December 31, 2011, (i) the number of shares of Parlux common stock relating to options held by each of Messrs. Purches, Balsys, Buttacavoli and the four Parlux non-employee directors as a group that would vest and become exercisable as of the effective time of the merger (assuming an effective date of March 31, 2012 or after) is: 0; 12,500; 0 and 0 (in the aggregate), respectively and (ii) the number of shares of Parlux common stock underlying a warrant held by Mr. Gopman that will be converted into the right to receive a Perfumania warrant at the effective time of the merger is 10,000.

Under the merger agreement, Parlux directors and officers are entitled to continued indemnification and insurance coverage for six years following completion of the merger.

In considering the recommendation of Perfumania’s board of directors with respect to the matters related to the merger, Perfumania stockholders should be aware that Glenn Nussdorf, who owns 28.7% of the shares of Perfumania common stock entitled to vote at the special meeting, and who is the brother of Stephen Nussdorf, owns approximately 9.9% of the outstanding shares of Parlux common stock and will be entitled to receive merger consideration on the same basis as other Parlux stockholders. Glenn Nussdorf has agreed to elect to receive all stock consideration in connection with the merger. In addition, Perfumania’s subsidiary, Model, has received commitments from the Nussdorf Trusts to make a total of $30 million in new loans to finance a portion of the cash consideration in the merger.

For a more complete description of the interests of the Parlux directors and executive officers, as well as the Nussdorfs, in the merger, see “The Merger—Interests of Certain Persons in the Merger” beginning on page 100.

United States Federal Income Tax Consequences of the Merger

The merger is intended to be treated as a reorganization within the meaning of Section 368(a) of the Code, and it is a condition to the respective obligations of Perfumania and Parlux to complete the merger that each of Perfumania and Parlux receives a legal opinion to that effect. Accordingly, a Parlux common stockholder generally will recognize gain, but not loss, in an amount equal to the lesser of (1) the sum of the amount of cash and the fair market value of the Perfumania stock received, minus the adjusted tax basis of the Parlux common stock surrendered in exchange therefor, and (2) the amount of cash received (other than cash received in lieu of a fractional share). Further, a Parlux common stockholder generally will recognize gain or loss with respect to cash received instead of fractional shares of Perfumania common stock that the Parlux common stockholder would otherwise be entitled to receive. For further information, please refer to “Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 110.

The United States federal income tax consequences described above may not apply to all holders of Parlux common stock. Your tax consequences will depend on your individual situation. Accordingly, we strongly urge you to consult your tax advisor for a full understanding of the particular tax consequences of the merger to you.

Regulatory Matters

The applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which we refer to in this joint proxy statement/prospectus as the “HSR Act,” expiration of which was a condition to the merger, has expired. For a more complete discussion of regulatory matters relating to the merger, see “The Merger—Regulatory Approvals Required for the Merger” beginning on page 104.

 

 

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Conditions to Completion of the Merger

Each party’s obligation to complete the merger is subject to the satisfaction or waiver of various conditions by one or both of the parties, including the following:

 

   

approval of the holders of common stock of Parlux and Perfumania of the proposals required for the completion of the merger;

 

   

expiration of the waiting period under the HSR Act, which has occurred, and no action being instituted by the Department of Justice or Federal Trade Commission challenging or seeking to enjoin the merger transactions that has not been withdrawn or terminated;

 

   

the authorization for listing on Nasdaq, subject to official notice of issuance, of the shares of Perfumania common stock to be issued to holders of Parlux common stock;

 

   

the number of Parlux stockholders for which demands of appraisal have been exercised and not been withdrawn does not exceed 7.5% of the outstanding shares of Parlux common stock;

 

   

Perfumania depositing the cash and shares representing the merger consideration with the exchange agent;

 

   

Perfumania increasing the number of members of its board and adopting resolutions to add the Parlux board members to the Perfumania board;

 

   

no law, injunction, judgment, order, decree, ruling or other action from a governmental entity that enjoins, restrains, prevents or prohibits the consummation of the merger or makes it illegal;

 

   

the registration statement, of which this joint proxy statement/prospectus is a part, having been declared effective by the SEC under the Securities Act and not being the subject of any stop order or threatened or pending proceedings seeking a stop order;

 

   

the accuracy of the other party’s representations and warranties in the merger agreement, subject to various materiality and other qualifiers, on the date of the closing of the merger (or in the case of representations and warranties that are made as of a particular date or as of the date of the merger agreement, as of such date);

 

   

subject to certain qualifiers, no material adverse effect on the other party having occurred between the date of the merger agreement and the date of the closing; and

 

   

the other party’s compliance in all material respects with its obligations and covenants under the merger agreement.

The merger agreement provides that any or all of these conditions may be waived, in whole or in part, by Perfumania or Parlux, to the extent legally allowed. Neither Perfumania nor Parlux currently expects to waive any material condition to the completion of the merger. If either Perfumania or Parlux determines to waive any condition to the merger that would result in a material change in the terms of the merger to Perfumania stockholders or Parlux stockholders (including any material change in the tax consequences of the transaction to Parlux stockholders), proxies would be resolicited from the Perfumania stockholders or Parlux stockholders, as applicable. For a more complete discussion of the conditions to the merger, see “The Merger Agreement—Conditions to Completion of the Merger” beginning on page 122.

Timing of the Merger

The merger is expected to be completed in the first half of 2012, subject to the receipt of necessary regulatory approvals, and the satisfaction or waiver of other closing conditions.

 

 

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Restrictions on Alternative Transactions

The merger agreement contains restrictions on the ability of Parlux to solicit or engage in discussions or negotiations with a third party with respect to a proposal to acquire a significant interest in Parlux. Notwithstanding these restrictions, the merger agreement permitted Parlux, until January 22, 2012, to do the following:

 

   

initiate, solicit and/or encourage the submission of acquisition proposals from third parties;

 

   

engage and participate in discussions or negotiations with respect to third party acquisition proposals or proposals that could lead to third party acquisition proposals; and

 

   

take any action to facilitate third party acquisition proposals or proposals that could lead to third party acquisition proposals.

Following the announcement of the merger, PJSC contacted 39 potential alternative acquirors of Parlux. None expressed an interest in making an alternative acquisition proposal during that period. See “The Merger—Background of the Merger” starting on page 50 for additional information.

The merger agreement also provides that under specified circumstances, if a third party makes an unsolicited request for information, including nonpublic information, for the purpose of making a competing acquisition proposal, Parlux may furnish such information, and if Parlux receives an unsolicited competing acquisition proposal from a third party that constitutes, or is reasonably likely to lead to, a superior proposal, as defined in the merger agreement, it may furnish nonpublic information to that third party and engage in negotiations to enter into a definitive agreement regarding the superior proposal with that third party. Before withdrawing its recommendation in favor of the applicable merger-related proposal in light of a superior proposal or entering into a definitive agreement regarding a superior proposal, Parlux must, if requested by Perfumania, allow Perfumania to propose revisions of the terms and conditions of the merger agreement and the agreements related to the merger agreement so that the third party proposal is no longer a superior offer. See “The Merger Agreement—Solicitation; Restrictions on Solicitation” on page 124.

The restrictions on Parlux limiting its ability to engage in alternative transactions with a third party may discourage a third party from pursuing a competing acquisition proposal that could result in greater value to Parlux’s stockholders.

Termination of the Merger

The merger agreement may be terminated by Perfumania or Parlux before completion of the merger in certain circumstances, including after Parlux stockholder approval, and after Perfumania’s stockholders have approved the amendment to its charter and the issuance of its common stock to Parlux stockholders in connection with the merger. The merger agreement may also be terminated if the merger has not been consummated by June 30, 2012. In addition, the merger agreement provides that Parlux is required to pay a termination fee to Perfumania equal to $4 million if the circumstances generally described below occur after January 22, 2012 or a termination fee equal to the greater of $2 million or Perfumania’s out-of-pocket expenses if any of the following occur before that date:

 

   

if Parlux terminates the merger agreement before receiving stockholder approval of the matters contained in this joint proxy statement/prospectus and the Parlux board has changed its recommendations regarding how Parlux stockholders should vote their shares at the special meeting;

 

   

if Parlux terminates the merger agreement because it has entered into an alternative acquisition agreement with a third party that the Parlux board has determined is a superior proposal to the one proposed by Perfumania; or

 

 

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if Perfumania terminates the merger agreement because either (i) the Parlux board has failed to include its recommendation regarding the approval and adoption of the merger agreement in this joint proxy statement/prospectus, (ii) the Parlux board adopts, approves, endorses or recommends to the Parlux stockholders an acquisition proposal from a third party, (iii) a tender or exchange offer for outstanding shares of Parlux common stock has commenced and the Parlux board either recommends that Parlux stockholders tender their shares or fails to recommend against accepting the offer, within certain timeframes, (iv) Parlux enters into an alternative acquisition agreement with a third party, or (v) Parlux or its board announces its intention to do any of the foregoing.

In addition, the merger agreement provides that Perfumania is required to pay a termination fee equal to $4 million plus Parlux’s out-of-pocket expenses of up to $2 million in the circumstances generally described below:

 

   

if Parlux terminates the merger agreement because Perfumania failed to get the approval of its stockholders necessary to approve the proposals required by the merger agreement at the Perfumania special meeting;

 

   

if Parlux terminates the merger agreement because Perfumania has failed to deposit with the exchange agent the shares of Perfumania common stock and cash consideration in an aggregate amount sufficient to pay all of the merger consideration and all other closing conditions are satisfied; or

 

   

if Parlux terminates the merger agreement because Perfumania has materially breached certain of its representations and covenants and the breach either was not cured in 20 business days after Perfumania received notice of the breach or the breach was unable to be cured within those 20 business days.

Parlux’s obligation to pay the termination fee may discourage a third party from pursuing a competing acquisition proposal that could result in greater value to Parlux’s stockholders. Although payment of the termination fee could have an adverse effect on the financial condition of Parlux, neither Perfumania nor Parlux believes that such effect would be material. The boards of directors of each of Perfumania and Parlux determined, based in part on advice from their legal advisors, that the amount of the termination fee and the circumstances in which it would become payable were generally typical for a transaction of the magnitude of the merger and would not unduly inhibit an alternative acquisition proposal.

See “The Merger Agreement—Termination,” “—Effect of Termination,” and “—Termination Fee” beginning on pages 127, 129 and 130, respectively, for a discussion of the circumstances under which Parlux or Perfumania will be required to pay the termination fee to the other party.

Comparison of Rights of Perfumania Stockholders and Parlux Stockholders

Parlux is a Delaware corporation. The shares that Parlux stockholders will receive in the merger will be shares of common stock of Perfumania, a Florida corporation. The rights of stockholders of Delaware and Florida corporations are, in some respects, different. In addition, the charter and bylaws of Perfumania contain provisions that are different from the certificate of incorporation and bylaws of Parlux, as currently in effect.

For a summary of certain differences between the rights of Perfumania stockholders and Parlux stockholders, see “Comparison of Rights of Perfumania Stockholders and Parlux Stockholders” beginning on page 229.

Accounting Treatment

Perfumania will account for the merger using the acquisition method of accounting, as prescribed in Accounting Standards Codification 805, “Business Combinations,” under generally accepted accounting principles in the United States, which we refer to as “GAAP.”

 

 

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Appraisal Rights

Section 262 of the DGCL provides holders of Parlux common stock with the ability to dissent from the transaction and seek appraisal of their shares. A holder of Parlux common stock who properly seeks appraisal and complies with the applicable requirements under the DGCL, which we refer to in this joint proxy statement/prospectus as a “dissenting stockholder,” will forego the merger consideration and instead receive a cash payment equal to the fair value of its shares of Parlux common stock in connection with the merger. Fair value will be determined by a court following an appraisal proceeding. Dissenting stockholders will not know the appraised fair value at the time such holders must elect whether to seek appraisal. The ultimate amount dissenting stockholders receive in an appraisal proceeding may be more or less than, or the same as, the amount such holders would have received under the merger agreement. A detailed description of the appraisal rights available to holders of Parlux common stock and procedures required to exercise statutory appraisal rights is included in the section entitled “The Merger—Appraisal Rights” beginning on page 105.

To seek appraisal, you must deliver a written demand for appraisal to Parlux before the vote on the merger agreement at the Parlux special meeting, and you must not vote in favor of the approval and adoption of the merger agreement, however, you may elect the form of merger consideration that you would like to receive, and such election will not impact your appraisal rights under Delaware law. Failure to follow exactly the procedures specified under the DGCL will result in the loss of appraisal rights. For a further description of the appraisal rights available to Parlux stockholders and procedures required to exercise appraisal rights, see the section entitled “The Merger—Appraisal Rights” beginning on page 105.

Due to the complexity of the procedures described above, Parlux stockholders who are considering exercising such rights are encouraged to seek the advice of legal counsel. The full text of Section 262 of the DGCL is attached as Annex E to this joint proxy statement/prospectus.

Litigation Related to the Merger

Parlux, the members of the Parlux board of directors, Perfumania and Merger Sub have been named as defendants in three lawsuits brought by purported Parlux stockholders challenging the proposed merger and seeking, among other things, injunctions to prevent the defendants from completing the merger. Additional lawsuits may be filed against Parlux, Perfumania, Merger Sub and/or their directors and officers in connection with the merger. See “The Merger—Litigation Related to the Merger” on page 108 for more information about the lawsuits that have been filed.

Nasdaq Listing of Perfumania Common Stock Issued in the Merger

Perfumania common stock received by Parlux stockholders in connection with the merger will be listed on Nasdaq under the symbol “PERF.” After completion of the merger, it is expected that Perfumania common stock will continue to be traded on Nasdaq, but Parlux common stock will no longer be listed or traded on Nasdaq.

 

 

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SELECTED HISTORICAL FINANCIAL DATA

The following tables present selected historical financial data of both companies.

Perfumania

Perfumania’s fiscal year is based on the 52 or 53-week retail calendar ending on the Saturday closest to January 31. All references in the body of this joint proxy statement/prospectus to Perfumania’s “fiscal years” are to the calendar year in which the fiscal year begins. For example, “fiscal 2008” refers to the fiscal year that began on February 3, 2008 and ended on January 31, 2009. The earlier fiscal years presented below comprised different periods for the following reason. On August 11, 2008, Perfumania (then known as “E Com Ventures, Inc.”) completed its acquisition of Model, issuing shares of its common stock and warrants to the Model shareholders. Because the former Model shareholders held a substantial majority of Perfumania’s outstanding shares following that merger, Model was considered to be the acquiror for accounting purposes. Accordingly, Perfumania’s historical financial statements reflect the results of Model for periods before August 11, 2008, not those of E Com Ventures. Model’s fiscal year end before that merger had been October 31; however, Perfumania changed its fiscal year end to the Saturday closest to January 31. Accordingly, the fiscal periods before fiscal 2008 presented below are a 13-week transition period that ended February 2, 2008, and Model’s last two full fiscal years, ended October 31, 2007 and 2006, respectively.

The consolidated statement of operations data for the fiscal years provided in the table, and for the thirteen-week period ended February 2, 2008, and the consolidated balance sheet data as of the end of each of those periods have been derived from the audited consolidated financial statements of Perfumania and its subsidiaries for those periods. The financial data as of and for the 39-week periods ended October 29, 2011 and October 30, 2010 have been derived from the unaudited consolidated financial statements of Perfumania and its subsidiaries. Perfumania’s management believes that the unaudited financial statements include all adjustments, consisting of normal recurring adjustments, that Perfumania considers necessary for a fair presentation of the financial position and the results of operations for these periods. The selected historical consolidated financial data provide only a summary and are not necessarily indicative of the results of future operations of Perfumania. They should be read in conjunction with Perfumania’s audited consolidated financial statements and notes thereto included in this joint proxy statement/prospectus beginning on page F-2 and “Information about Perfumania—Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 158, as well as other information that Perfumania has filed with the SEC. See “Where You Can Find More Information” beginning on page 241.

 

 

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Perfumania Selected Financial Data

 

    39-Week Period
Ended
    Fiscal Year Ended     13-Week
Period
Ended
    Fiscal Year Ended  
    October 29,
2011
    October 30,
2010
    January 29,
2011
    January 30,
2010
    January 31,
2009
    February 2,
2008
    October 31,
2007
    October 31,
2006
 
    (in thousands, except per share amounts)  

Net sales, retail division

  $ 224,121      $ 206,641      $ 327,291      $ 344,295      $ 225,867      $ 30,363      $ 76,369      $ 73,990   

Net sales, wholesale division

    105,380        115,227        157,509        166,627        203,427        85,106        251,343        264,371   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

    329,501        321,868        484,800        510,922        429,294        115,469        327,712        338,361   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit sales, retail division

    101,484        89,211        143,034        145,631        92,540        11,758        30,040        29,945   

Gross profit, wholesale division

    24,265        25,742        37,815        33,159        42,280        21,899        60,469        63,092   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit

    125,749        114,953        180,849        178,790        134,820        33,657        90,509        93,037   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

               

Selling, general and administrative expenses

    118,056        117,262        162,157        164,141        119,994        19,622        60,113        57,548   

Asset impairment

    —          —          3,001        2,320        68,078        —          —          —     

(Recovery) provision on vendor advances

    —          —          —          —          —          —          (2,367     2,367   

Depreciation and amortization

    5,839        6,595        8,909        9,766        7,423        340        1,411        1,721   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    123,895        123,857        174,067        176,227        195,495        19,962        59,157        61,636   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    1,854        (8,904     6,782        2,563        (60,675     13,695        31,352        31,401   

Interest expense

    5,920        10,094        12,857        18,202        12,023        3,201        12,749        14,506   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision (benefit)

    (4,066     (18,998     (6,075     (15,639     (72,698     10,494        18,603        16,895   

Income tax (benefit) provision

    —          (2,447     (2,351     189        14,262        4,387        7,353        6,854   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (4,066   $ (16,551   $ (3,724   $ (15,828   $ (86,960   $ 6,107      $ 11,250      $ 10,041   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares outstanding:

               

Basic

    8,967,162        8,966,565        8,966,612        8,966,417        7,364,203        5,900,000        5,368,468        5,315,315   

Diluted

    8,967,162        8,966,565        8,966,612        8,966,417        7,364,203        5,900,000        5,368,468        5,315,315   

Basic net income (loss) per common share

  $ (0.45   $ (1.85   $ (0.42   $ (1.77   $ (15.41   $ 1.04      $ 2.10      $ 1.89   

Diluted net income (loss) per common share

  $ (0.45   $ (1.85   $ (0.42   $ (1.77   $ (15.41   $ 1.04      $ 2.10      $ 1.89   

Working capital

  $ 201,928      $ 121,351      $ 197,040      $ 125,112      $ 124,088      $ 225,502      $ 267,174      $ 238,922   

Total assets

    345,060        370,661        300,472        306,585        400,130        299,373        344,988        306,844   

Long-term debt, excluding current portion

    153,655        95,366        153,245        95,739        96,379        167,603        215,227        197,521   

Total stockholders’ equity

  $ 56,472      $ 47,623      $ 60,508      $ 64,091      $ 79,881      $ 90,718      $ 84,611      $ 61,635   

Parlux

Parlux’s fiscal year ends on March 31. The consolidated statement of operations data for the fiscal years provided in the table and the consolidated balance sheet data as of the end of each of those years have been derived from the audited consolidated financial statements of Parlux and its subsidiaries for those periods. The financial data as of and for the nine-month periods ended December 31, 2011 and 2010 have been derived from the unaudited consolidated financial statements of Parlux and its subsidiaries. Parlux’s management believes that the unaudited financial statements include all adjustments, consisting of normal recurring adjustments, that Parlux considers necessary for a fair presentation of the financial position and the results of operations for these periods. The selected historical consolidated financial data provide only a summary and are not necessarily indicative of the results of future operations of Parlux. They should be read in conjunction with Parlux’s audited consolidated

 

 

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financial statements and notes thereto included in this joint proxy statement/prospectus beginning on page F-39 and “Information about Parlux—Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 181, as well as other information that Parlux has filed with the SEC. See “Where You Can Find More Information” beginning on page 241.

Parlux Selected Financial Data

 

     Nine-Month Period Ended
December 31,
     Fiscal Year Ended
March 31,
 
           2011                 2010            2011      2010     2009     2008      2007  
     (in thousands, except per share amounts)  

Net Sales

   $ 100,897      $ 94,090       $ 123,006       $ 148,102      $ 151,155      $ 153,696       $ 134,365   

Net income (loss) from continuing operations

   $ (2,911   $ 1,058       $ 1,242       $ (14,759   $ (4,284   $ 5,011       $ (27,864

Income from discontinued operations(1)

     —          —           —           —          —          25         30,746   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net Income (loss)

   $ (2,911   $ 1,058       $ 1,242       $ (14,759 )(2)    $ (4,284   $ 5,036       $ 2,882   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Diluted earnings per share:

                 

Continuing operations

   $ (0.19   $ 0.05       $ 0.06       $ (0.73   $ (0.21   $ 0.24       $ (1.53

Discontinued operations

     —          —           —           —          —          —           1.69   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ (0.14   $ 0.05       $ 0.06       $ (0.73   $ (0.21   $ 0.24       $ 0.16   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Current assets

   $ 110,164      $ 101,812       $ 103,994       $ 103,373      $ 128,674      $ 122,333       $ 114,065   

Current liabilities

     18,336        10,458         10,975         14,532        26,220        15,040         34,605   

Working capital

     91,828        91,354         93,019         88,841        102,454        107,293         79,460   

Trademarks and licenses, net

     3,747        4,350         4,195         4,654        1,885        2,770         3,913   

Long-term borrowings, net

     59        —           —           —          —          543         1,537   

Total assets

     117,632        111,722         112,706         114,332        136,704        131,148         144,896   

Total liabilities

     18,395        10,458         10,975         14,532        26,220        15,583         36,142   

Stockholders’s equity

   $ 99,237      $ 101,264       $ 101,731       $ 99,800      $ 110,484      $ 115,565       $ 108,754   

 

(1) Discontinued operations relates to the sale of the Perry Ellis license in December 2006.
(2) Includes additional charges of $7.6 million to cost of sales to reduce the recorded value of Parlux’s GUESS? brand inventories, due to the expiration of the GUESS? brand license on December 31, 2009. In addition, collateral material of $1.7 million related to the GUESS? brand products was written off and recorded to Advertising & Promotional expense.

 

 

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SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA

The following tables set forth certain selected unaudited pro forma condensed combined financial statement data of Perfumania, giving effect to the merger as if it had occurred on October 29, 2011 for balance sheet data and on January 31, 2010, the beginning of the earliest period presented, for statement of operations data.

Perfumania’s fiscal year ends on the Saturday closest to January 31, while Parlux’s fiscal year ends on March 31. The unaudited pro forma statement of operations data for the fiscal year ended January 29, 2011 combines Perfumania’s audited consolidated statement of operations for the fiscal year ended January 29, 2011 with the audited consolidated statement of operations of Parlux for the fiscal year ended March 31, 2011. The unaudited pro forma statement of operations data for the 39 weeks ended October 29, 2011 combines Perfumania’s unaudited consolidated statement of income for the 39 weeks ended October 29, 2011 with Parlux’s unaudited consolidated statement of income for the nine months ended December 31, 2011. The unaudited pro forma balance sheet data combines Perfumania’s October 29, 2011 unaudited condensed consolidated balance sheet with Parlux’s December 31, 2011 unaudited condensed consolidated balance sheet.

The data in the tables below should be read in conjunction with the historical financial statements of Perfumania and Parlux that are included in this joint proxy statement/prospectus beginning on page F-2 and the unaudited pro forma condensed combined financial information beginning on page F-100. The unaudited pro forma condensed combined financial data are provided for informational purposes only and are not necessarily indicative of the operating results or financial position that would have occurred if the merger had been completed as of the dates set forth above, nor are they indicative of the future results or financial position of the combined company.

 

     39 Weeks Ended
October 29, 2011
    Year Ended
January 29, 2011
 
     (in thousands, except weighted average and
per share amounts)
 

Pro Forma Condensed Combined Statement of Operations Data:

    

Total net sales

   $ 397,330      $ 560,298   

Costs of goods sold

     222,173        340,786   
  

 

 

   

 

 

 

Gross profit

     175,157        219,512   

Selling, general and administrative expenses

     172,353        225,211   

Depreciation and amortization

     7,990        12,195   

Asset impairment

     —          3,001   
  

 

 

   

 

 

 

Loss from operations

     (5,186     (20,895

Interest expense

     8,609        16,304   
  

 

 

   

 

 

 

Loss before income taxes

     (13,795     (37,199

Income tax (benefit)

     (1,784     (1,718
  

 

 

   

 

 

 

Net loss

   $ (12,011   $ (35,481
  

 

 

   

 

 

 

Weighted average shares outstanding (basic and diluted)

     15,188,000        15,186,000   

Net loss per share (basic and diluted)

   $ (0.79   $ (2.34

 

     As of October 29, 2011  
     (in thousands)  

Pro Forma Condensed Combined Balance Sheet Data:

  

Working Capital

   $ 278,883   

Total Assets

     479,710   

Long-Term Debt—excluding current portion

     217,250   

Total stockholders’ equity

     115,480   

 

 

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COMPARATIVE HISTORICAL AND UNAUDITED PRO FORMA PER SHARE DATA

The following table sets forth selected historical and unaudited pro forma combined per share data of Perfumania and Parlux.

Historical Per Share Information of Perfumania and Parlux. The historical per share information of each of Perfumania and Parlux presented below is derived from the audited financial statements as of and for the fiscal year ended January 29, 2011 for Perfumania and as of and for the fiscal year ended March 31, 2011 for Parlux, and the unaudited condensed consolidated financial statements as of and for the 39 weeks ended October 29, 2011 for Perfumania and as of and for the nine months ended December 31, 2011 for Parlux.

Pro Forma Combined Per Share Data. The unaudited pro forma combined per share data presented below gives effect to the merger under the acquisition method of accounting, as if the merger had become effective on February 1, 2010, in the case of net income per share and cash dividends per share data, and October 29, 2011, in the case of book value per share data, and assuming that 0.533333 of a share of Perfumania common stock had been issued in exchange for each outstanding share of Parlux common stock.

Equivalent Pro Forma Combined Per Share Information of Parlux. The unaudited equivalent pro forma combined per share amounts of Parlux presented below are calculated by multiplying the unaudited pro forma combined per share amounts of Perfumania by 0.533333.

As explained in more detail in “Unaudited Pro Forma Condensed Combined Financial Information” on page F-100, the unaudited pro forma data presented below reflect the preliminary allocation of the estimated purchase price to identifiable net assets acquired, and the final allocation will be determined after the merger is completed and is subject to further adjustments. Accordingly, the pro forma purchase price adjustments reflected in these data are preliminary, and there can be no assurance that the final valuations will not result in changes, which could be material. Furthermore, this illustrative, unaudited pro forma data is not necessarily indicative of the results that the combined company will experience following the merger.

You should read the information below in conjunction with the selected historical financial data beginning on page 24 and the historical financial statements of Perfumania and Parlux and related notes beginning on page F-2.

 

            Perfumania
Historical
    Parlux
Historical
    Pro
Forma
Combined
    Per
Equivalent
Parlux
Share(1)
 

As of and for the year ended January 29, 2011

           

Earnings per share from continuing operations:

           

Basic

     (2)       $ (0.42   $ (0.06   $ (2.34   $ (1.25

Diluted

     (2)       $ (0.42   $ (0.06   $ (2.34   $ (1.25

Dividends per share:

           

Basic

     (2)       $ —        $ —        $ —        $ —     

Diluted

     (2)       $ —        $ —        $ —        $ —     

As of and for the thirty-nine weeks ended October 29, 2011

           

Earnings per share from continuing operations:

           

Basic

     (2)       $ (0.45   $ (0.14   $ (0.79   $ (0.42

Diluted

     (2)       $ (0.45   $ (0.14   $ (0.79   $ (0.42

Dividends per share:

           

Basic

     (2)       $ —        $ —        $ —        $ —     

Diluted

     (2)       $ —        $ —        $ —        $ —     

Book value per share:

           

Basic

     (3)       $ 6.30      $ 4.78      $ 7.60      $ 4.05   

Diluted

     (3)       $ 6.30      $ 4.78      $ 7.60      $ 4.05   

 

 

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(1) Calculated based on pro forma combined multiplied by the exchange ratio of 0.533333 shares of Perfumania common stock for each share of Parlux common stock.
(2) Pro forma earnings and dividends per share are based upon pro forma combined net income and pro forma combined weighted average common shares outstanding during the period.
(3) Pro forma book value per share is based on pro forma combined equity and pro forma combined common stock outstanding at the end of the period.

 

 

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COMPARATIVE MARKET PRICE AND DIVIDEND INFORMATION

Perfumania’s common stock is listed on Nasdaq under the symbol “PERF” and Parlux’s common stock is listed on Nasdaq under the symbol “PARL.” The following table sets forth, for the calendar quarters indicated, the high and low sale prices per share of Perfumania common stock and the high and low sale prices of Parlux common stock, in each case as reported on Nasdaq. The table also sets forth, for both Perfumania and Parlux, cash dividend information with respect to their common stock for the calendar quarters indicated.

 

     Perfumania Common Stock(1)  
     High      Low      Cash Dividends
Declared(2)
 

Fiscal Year Ending January 26, 2013

        

First Quarter (through March 2)

   $ 10.81       $ 9.57       $ —     

Fiscal Year Ended January 28, 2012:

        

First Quarter

   $ 13.17       $ 7.67       $ —     

Second Quarter

   $ 16.20       $ 9.72       $ —     

Third Quarter

   $ 19.50       $ 11.55       $ —     

Fourth Quarter

   $ 20.00       $ 9.75       $ —     

Fiscal Year Ended January 29, 2011:

        

First Quarter

   $ 9.61       $ 5.08       $ —     

Second Quarter

   $ 11.99       $ 7.01       $ —     

Third Quarter

   $ 10.00       $ 7.42       $ —     

Fourth Quarter

   $ 10.50       $ 7.86       $ —     

Fiscal Year Ended January 30, 2010:

        

First Quarter

   $ 5.69       $ 1.00       $ —     

Second Quarter

   $ 4.84       $ 2.02       $ —     

Third Quarter

   $ 3.57       $ 1.60       $ —     

Fourth Quarter

   $ 7.49       $ 3.22       $ —     
     Parlux Common Stock(1)  
     High      Low      Cash Dividends
Declared(2)
 

Fiscal Year Ending March 31, 2012:

        

First Quarter

   $ 3.75       $ 3.06       $ —     

Second Quarter

   $ 3.86       $ 2.27       $ —     

Third Quarter

   $ 6.60       $ 3.04       $ —     

Fourth Quarter (through March 2)

   $ 5.49       $ 4.90       $ —     

Fiscal Year Ended March 31, 2011:

        

First Quarter

   $ 2.41       $ 1.68       $ —     

Second Quarter

   $ 2.34       $ 1.69       $ —     

Third Quarter

   $ 2.96       $ 2.09       $ —     

Fourth Quarter

   $ 3.79       $ 2.85       $ —     

Fiscal Year Ended March 31, 2010:

        

First Quarter

   $ 2.57       $ 0.77       $ —     

Second Quarter

   $ 2.50       $ 1.52       $ —     

Third Quarter

   $ 2.61       $ 1.88       $ —     

Fourth Quarter

   $ 2.18       $ 1.52       $ —     

 

(1) Because Perfumania and Parlux have different fiscal years, the quarters presented are not the same time periods for both companies.
(2)

Perfumania has not declared or paid cash dividends on its common stock and does not currently intend to declare or pay cash dividends in the foreseeable future. Payment of dividends, if any, will be at the

 

 

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  discretion of the board of directors after taking into account various factors, including Perfumania’s financial condition, results of operations, current and anticipated cash needs and plans for expansion. Parlux also has not paid a cash dividend on its common stock nor has it contemplated paying any dividend in the near future. In addition, both companies’ bank credit facilities prohibit the payment of dividends or making other distributions to stockholders without the respective lenders’ prior approval.

The following table sets forth the closing price per share of Perfumania and Parlux common stock as reported on Nasdaq as of December 22, 2011, the last trading day before the public announcement of the merger agreement, and as of March 2, 2012, the most recent practicable trading day before the date of this joint proxy statement/prospectus.

 

     Perfumania
Common Stock
     Parlux
Common Stock
     Mix of Cash and Stock
Consideration
Equivalent Per
Share of Parlux
Common Stock(1)
     All Stock Consideration
Equivalent Per
Share of Parlux
Common Stock(2)
 

December 22, 2011

   $ 19.55       $ 3.40       $ 7.91       $ 10.43   

March 2, 2012

   $ 9.78       $ 5.16       $ 5.96       $ 5.22   

 

(1) The equivalent per share data for Parlux common stock for a mix of cash and stock consideration has been determined by multiplying the closing sales price of a share of Perfumania common stock, on the dates presented above, by the exchange ratio for the merger of 0.2, plus $4.00 in cash, without interest, assuming no adjustments are made as described in “The Merger Agreement—Consideration to be Received in the Merger” on page 113.
(2) The equivalent per share data for Parlux common stock for all stock consideration has been determined by multiplying the closing sales price of a share of Perfumania common stock, on the dates presented above, by the exchange rate of 0.533333, without interest, assuming no adjustments are made as described in “The Merger Agreement—Consideration to be Received in the Merger” on page 113.

The information in the preceding tables is historical only. The market prices of Perfumania and Parlux common stock will fluctuate between the date of this proxy statement/prospectus and the completion of the merger. No assurance can be given concerning the market prices of Perfumania or Parlux common stock before the completion of the merger or Perfumania common stock after the completion of the merger. The market value of the Perfumania common stock that Parlux’s stockholders will receive in connection with the merger may vary significantly from the prices shown in the table above. Perfumania and Parlux urge stockholders to obtain current market quotations for shares of Perfumania common stock and Parlux common stock before making any decision regarding which form of merger consideration to elect to receive, the issuance of shares of Perfumania common stock pursuant to the merger agreement or the approval and adoption of the merger agreement by Parlux stockholders.

 

 

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RISK FACTORS

You should consider carefully the following risk factors, together with all of the other information included in this document before deciding how to vote. If the merger is consummated, Perfumania and Parlux will operate as a combined company in a market environment that cannot be predicted with certainty and that involves significant risks, many of which will be beyond the combined company’s control. We have described below the risks and uncertainties that we believe to be material to a decision on how to vote your shares. If any of the following risks and uncertainties develops into actual events, the combined company, its results of operation or its financial condition could be adversely affected. In such an event, the trading price of Perfumania common stock could decline, and you may lose all or part of your investment. This document also contains forward-looking statements that involve risks and uncertainties. Please read “Cautionary Statement Regarding Forward-Looking Statements” on page 48.

Risks Relating to the Merger

We may not realize the benefits of integrating our companies.

To be successful after the merger, Perfumania will need to combine and integrate the operations of Perfumania and Parlux into one company. Integration will require substantial management attention and could detract attention from the day-to-day business of the combined company. Perfumania could encounter difficulties in the integration process, such as the need to revisit assumptions about reserves, future production, revenues, capital expenditures and operating costs, including synergies, the loss of key employees or commercial relationships or the need to address unanticipated liabilities. If Perfumania cannot integrate the Perfumania and Parlux businesses successfully, it may fail to realize the expected benefits of the merger.

Parlux’s directors and executive officers have interests in the merger that may be different from, and in addition to, the interests of other Parlux stockholders.

Parlux’s directors and executive officers are parties to agreements or participants in other arrangements that give them interests in the merger that may be different from, or in addition to, your interests as a stockholder of Parlux, which could create conflicts of interest in their determinations to recommend the merger. You should consider these interests in voting on the merger. We have described these different interests under “The Merger—Interests of Certain Persons in the Merger.”

Parlux stockholders electing to receive only Perfumania common stock may receive cash and stock and Parlux stockholders electing to receive a mix of cash and stock may receive more stock and less cash than expected.

While each Parlux stockholder may elect to receive consideration consisting of shares of Perfumania common stock or a combination of cash and shares of Perfumania common stock in exchange for their shares of Parlux common stock, the aggregate stock consideration to be received by Parlux stockholders pursuant to the merger will be fixed at 5,919,052 shares, subject to upward adjustment for any increase in the number of Parlux shares outstanding and to replace, on a pro rata and proportionate basis as necessary, a decrease in cash consideration in certain circumstances, which we refer to as the “Aggregate Cap,” and the maximum amount of cash that will be paid is $61,895,288. Both of these amounts are subject to adjustment in certain circumstances, including a downward adjustment of the maximum cash consideration for each share of Parlux stock as to which appraisal rights have been exercised and for any shortfall of Parlux cash or cash equivalents, and an upward adjustment of the Aggregate Cap for any increase in the number of Parlux shares outstanding and to replace, on a pro rata and proportionate basis as necessary, any decrease in maximum cash consideration resulting from a shortfall of Parlux cash or cash equivalents, as calculated pursuant to the merger agreement.

Accordingly, if Parlux stockholders elect to receive, and non-electing stockholders would receive, in the aggregate, stock in an amount greater than the Aggregate Cap, which we believe is probable based on the

 

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obligations of certain parties to elect all stock contained in their voting agreements, the number of shares of Perfumania common stock received by those holders electing to receive all stock consideration will be prorated down and those holders will receive per share of Parlux common stock: (1) a number of shares of Perfumania common stock equal to the difference between (a) the Aggregate Cap and (b) the product of (i) the total number of shares as to which holders have elected mixed consideration or made no election and (ii) 0.20 (such difference, the “Available Stock Election Amount”), divided by the total number of shares as to which the holders have elected all stock consideration, rounded to the nearest ten thousandth of a share, and (2) an amount of cash (without interest) equal to the product of (a) the difference of (i) the number of shares as to which holders have elected all stock consideration multiplied by 0.533333 and (ii) the Available Stock Election Amount and (b) $12.00, divided by the total number of shares held by stockholders electing all stock consideration. As a result, as discussed in “Summary—Consideration to be Receive in the Merger by Parlux Stockholders,” Parlux stockholders who make a valid election to receive all stock consideration are likely to receive some cash in their merger consideration.

Reductions in the maximum amount of cash payable to Parlux stockholders will also be made if cash and cash equivalents of Parlux when the merger is completed are less than a target amount of $15 million, after adding amounts owed by Perfumania to Parlux according to a pre-established and agreed to accounts receivable schedule, and subtracting any abnormalities in accounts payable, or if Parlux stockholders exercise appraisal rights. Reductions will be shared pro rata among Parlux stockholders based on their elections. In addition, the Aggregate Cap would be increased to replace the reduction in cash due to a shortfall below the target amount of cash and cash equivalents based upon a value of $12.00 per share of Perfumania common stock. The maximum cash amount would be reduced by the amount of any shortfall in cash and cash equivalents and by an amount equal to $6.40 for each share of Parlux common stock as to which appraisal rights are exercised. See “The Merger Agreement—Allocation of Merger Consideration” on page 114.

As a result of the consideration election and because the market price of Perfumania common stock will fluctuate, Parlux stockholders cannot be sure of the aggregate value of the merger consideration they will receive.

Subject to proration, as discussed in “Summary—Consideration to be Receive in the Merger by Parlux Stockholders,” Parlux stockholders may elect to receive consideration consisting of shares of Perfumania common stock or a combination of cash and shares of Perfumania common stock in exchange for their shares of Parlux common stock.

The price of Perfumania common stock will likely vary from the market price of Perfumania common stock on the date the merger agreement was announced, on the date that this joint proxy statement/prospectus is mailed to Parlux stockholders, on the date a Parlux stockholder makes an election with respect to the merger consideration, on the date of the special meeting of Parlux stockholders and on the date a Parlux stockholder receives the merger consideration. Therefore, the consideration actually received by Parlux stockholders may have a current value that is higher or lower than the amount per Parlux share on any of these dates, as calculated based on Perfumania common stock trading prices prevailing at that time.

If you tender shares of Parlux common stock to make an election, you will not be able to sell those shares unless you revoke your election before the election deadline.

If you are a Parlux stockholder and want to make a mixed cash and stock or stock election, you must deliver your stock certificates (or follow the procedures for guaranteed delivery) and a properly completed and signed election form to the exchange agent. The deadline for doing this is 5:00 p.m., Eastern time, on April 16, 2012. You will not be able to sell any shares of Parlux common stock that you have delivered unless you revoke your election before the deadline by providing written notice to the exchange agent. If you do not revoke your election, you will not be able to liquidate your investment in Parlux common stock for any reason until you receive cash and Perfumania common stock or Perfumania common stock pursuant to the merger. In the time between delivery of your shares and the closing of the merger, the market price of Parlux or Perfumania common stock may increase

 

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or decrease and you might otherwise want to sell your shares of Parlux to gain access to cash, make other investments or reduce the potential for a decrease in the value of your investment.

Perfumania may be unable to obtain the financing necessary to consummate the merger.

Perfumania and its subsidiaries entered into an amendment to its existing senior, secured revolving credit facility with a syndicate of banks for which Wells Fargo Bank, National Association, which we refer to as Wells Fargo Bank, serves as administrative agent, collateral agent and swing line lender. The amendment permits Perfumania to use borrowings under its senior credit facility of up to $32 million (which amount would be reduced to the extent that cash and cash equivalents held by Parlux at the closing of the merger are less than $15 million) to fund a portion of the merger consideration and up to $11 million to fund costs of the merger and related transactions. In addition, Perfumania’s subsidiary, Model, received commitments from the Nussdorf Trusts to make a total of $30 million in new loans to finance the balance of the cash consideration. The newly committed financings will be used to fund the cash portion of the merger consideration and pay merger-related transaction costs. Perfumania’s receipt of the financing arrangements contemplated by the merger agreement is not a condition to closing the merger. Accordingly, under the merger agreement, if the conditions to the closing of the merger are satisfied, and financing is not available in full, the closing of the merger must still proceed or Perfumania must pay a termination fee and expenses to Parlux.

The date that Parlux stockholders will receive the merger consideration is uncertain.

The date that Parlux stockholders will receive the merger consideration depends on the completion date of the merger, which is uncertain. While we expect to complete the merger in the first half of 2012, the completion date of the merger might be later than expected because of unforeseen events.

Business uncertainties and contractual restrictions while the merger is pending may have an adverse effect on Perfumania or Parlux.

Uncertainty about the effect of the merger on employees, suppliers, partners, regulators and customers may have an adverse effect on Parlux or Perfumania. These uncertainties may impair Parlux’s ability to attract, retain and motivate key personnel until the merger is consummated and could cause suppliers, customers and others that deal with Parlux to defer purchases or other decisions concerning Parlux or seek to change existing business relationships with Parlux. In addition, the merger agreement restricts both Perfumania and Parlux from making certain acquisitions and taking other specified actions without the other’s approval. These restrictions could prevent either party from pursuing attractive business opportunities that may arise before the completion of the merger.

Failure to complete the merger or delays in completing the merger could negatively affect Perfumania’s and Parlux’s stock prices and future businesses and operations.

If the merger is not completed for any reason, Perfumania and Parlux may be subject to a number of risks, including the following:

 

   

the separate companies will not realize the benefits expected from the merger, including a potentially enhanced financial and competitive position;

 

   

the current market price of Perfumania common stock or Parlux common stock may reflect a market assumption that the merger will occur and a failure to complete the merger could result in a negative perception by the stock market of either company or both generally and a resulting decline in the market price of its or their common stock;

 

   

certain costs relating to the merger, including certain investment banking, financing, legal and accounting fees and expenses, must be paid even if the merger is not completed, and Parlux or Perfumania may be required to pay substantial fees to the other party if the merger agreement is terminated under specified circumstances; and

 

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there may be substantial disruption to each of Perfumania’s and Parlux’s business and distraction of each company’s management and employees from day-to-day operations because matters related to the merger (including integration planning) may require substantial commitments of time and resources, which could otherwise have been devoted to other opportunities that could have been beneficial to Perfumania or Parlux, as applicable.

Delays in completing the merger could exacerbate uncertainties concerning the effect of the merger, which may have an adverse effect on the business following the merger and could defer or detract from the realization of the benefits expected to result from the merger.

The merger agreement restricts Parlux’s ability to pursue alternatives to the merger.

The merger agreement contains provisions that, subject to a “go shop” period of 30 days following the signing of merger agreement and limited fiduciary exceptions, restrict Parlux’s ability to initiate, solicit, encourage or facilitate, discuss, negotiate or accept a competing third party proposal to acquire all or a significant part of Parlux. Further, there are a limited number of exceptions that would allow Parlux’s board of directors to withdraw or change its recommendation to holders of Parlux common stock that they vote in favor of the adoption of the merger agreement. Although Parlux’s board of directors is permitted to take these actions if it determines in good faith that these actions are likely to be required to comply with its fiduciary duties, doing so in specified situations could entitle Perfumania to terminate the merger agreement and to be paid a termination fee of $4 million or $2 million, depending on the timing of the termination.

Perfumania required that Parlux agree to these provisions as a condition to Perfumania’s willingness to enter into the merger agreement. However, these provisions could discourage a potential acquiror that might have an interest in acquiring all or a significant part of Parlux from considering or proposing that acquisition, even if it were prepared to pay consideration with a higher per share cash or market value than the consideration Perfumania proposes to pay in the merger or might result in a potential competing acquiror proposing to pay a lower per share price to acquire Parlux than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable to Perfumania in certain circumstances.

Perfumania is subject to financial risks if it fails to complete the merger under certain circumstances.

Perfumania is required to pay a termination fee equal to $4 million plus Parlux’s out-of-pocket expenses if Parlux terminates the merger agreement under certain circumstances. Such fees may result in payments of up to $6 million to Parlux and represent a financial risk to Perfumania if the merger agreement is terminated for a reason that would trigger the payment of the termination fee.

Ownership by Perfumania stockholders will be diluted by the issuance of Perfumania shares in connection with the merger.

The issuance of Perfumania shares in the merger will dilute the ownership position of the current stockholders of Perfumania. Assuming that the maximum 5,919,052 shares issuable under the merger agreement are issued and the 300,000 new shares of Perfumania common stock are issued to Artistic Brands or its designee pursuant to the Proposal Agreement, the number of Perfumania shares outstanding will increase by approximately 69% compared with December 31, 2011. As a result, Perfumania stockholders would hold approximately 60% of the Perfumania common stock outstanding after the completion of the merger, and Parlux stockholders would hold approximately 40%. In addition, holders of outstanding Parlux options and warrants would have their options and warrants converted into the right to receive Perfumania options or warrants, as applicable, resulting in new options and warrants to purchase approximately 4,000,000 shares of Perfumania common stock. As a result, Perfumania stockholders will hold approximately 51% of Perfumania’s common stock and Parlux stockholders will hold approximately 49% of Perfumania’s common stock after completion of the merger, calculated on a “fully-diluted” basis. In addition to these convertible securities, Perfumania will issue to Artistic Brands or its designee warrants to purchase 1,599,999 shares of Perfumania common stock pursuant to the existing license agreement between Parlux and Artistic Brands upon execution of a license agreement and a sublicense agreement among Perfumania, Artistic Brands and S. Carter Enterprises, LLC. These warrants are not included in the fully-diluted calculations above.

 

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The rights of former Parlux stockholders will be governed by Florida corporate law and Perfumania’s charter and bylaws.

All Parlux stockholders who receive shares of Perfumania common stock in the merger will become Perfumania stockholders and their rights as stockholders will be governed by Florida corporate law and Perfumania’s charter and its bylaws. There are material differences between the current rights of Parlux stockholders, which are governed by Delaware corporate law and Parlux’s amended and restated articles of incorporation and bylaws, and the rights of holders of Perfumania common stock. See “Comparison of Rights of Perfumania Stockholders and Parlux Stockholders” beginning on page 229.

Risks Relating to the Combined Company After the Merger

The combined company will be more leveraged after the merger than it has been historically and may not be able to obtain adequate financing to execute its operating strategy.

Perfumania will be more leveraged after the merger than it has been historically. Upon the amendment to Perfumania’s senior credit facility and the issuance of new subordinated debt contemplated by the merger agreement, Perfumania will add up to $73 million of new debt. (See “Perfumania’s Financing Arrangements” beginning on page 135). Borrowings under the amended credit facility combined with Perfumania’s existing debt and the issuance of new subordinated debt are expected to be approximately $192 million of total pro forma combined long-term debt after the completion of the merger. This level of indebtedness could result in Perfumania having difficulty accessing capital markets or raising capital on favorable terms and Perfumania’s financial results could be negatively affected by its inability to raise capital or because of the cost of such capital.

Upon consummation of the merger, Perfumania and all of its subsidiaries must comply with various restrictive covenants contained in its credit facility and any of its future debt arrangements. These covenants will, among other things, limit the ability of Perfumania and all of its subsidiaries to:

 

   

pay dividends;

 

   

make distributions; and

 

   

take other actions, such as making advances to suppliers.

Perfumania’s substantial debt following the merger could have important consequences to you. For example, it could:

 

   

increase Perfumania’s vulnerability to general adverse economic and industry conditions;

 

   

limit Perfumania’s ability to fund future working capital and capital expenditures, to engage in future acquisitions or development activities, or to otherwise realize the value of its assets and opportunities fully because of the need to dedicate a substantial portion of its cash flow from operations to payments on its debt or to comply with any restrictive terms of its debt;

 

   

limit Perfumania’s flexibility in planning for, or reacting to, changes in the industry in which it operates; or

 

   

place Perfumania at a competitive disadvantage as compared to its competitors that have less debt.

Realization of any of these factors could adversely affect Perfumania’s financial condition.

The combined company may experience an impairment of its goodwill.

Perfumania expects to recognize a substantial amount of goodwill in connection with consummation of the merger and the allocation of the purchase price thereto. Perfumania tests goodwill for impairment annually during the fourth quarter, or between annual tests if an event occurs or circumstances change that may indicate the fair value of its reporting unit is less than the carrying amount. The need to test for impairment can be based on several indicators, including but not limited to changes in Perfumania’s stock price, book value or market capitalization, and the operating performance and cash flows of Perfumania’s retail and wholesale segments.

 

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Fair value calculated for the purpose of testing for impairment of Perfumania’s goodwill is estimated using the expected present value of future cash flows method and comparative market prices when appropriate. A significant amount of judgment is involved in performing these fair value estimates for goodwill since the results are based on estimated future cash flows and assumptions related thereto. Significant assumptions include estimates of future sales and expense trends, liquidity and capitalization, among other factors. Perfumania bases its fair value estimates on projected financial information which Perfumania believes to be reasonable. However, actual results may differ from those projections.

Risks Relating to Perfumania and Parlux

In addition to the risks described above, the following risks will continue to apply to the businesses of Perfumania and Parlux following the merger.

Perfumania

Perfumania could face liquidity and working capital constraints if it is unable to generate sufficient cash flows from operations.

If Perfumania is unable to generate sufficient cash flows from operations to service its obligations, it could face liquidity and working capital constraints, which could adversely impact future operations and growth. If Perfumania needs to raise additional funds to support its operations, it may not be able to do so on favorable terms, or at all. Without such funding, Perfumania may need to modify or abandon its growth strategy or eliminate product offerings, any of which could negatively impact its financial position.

Perfumania may have problems raising money needed in the future, which could adversely impact operations or existing stockholders.

Perfumania’s growth strategy includes selectively opening and operating new Perfumania retail locations and increasing the average retail sales per store. Perfumania may need to obtain funding to achieve its growth strategy. Additional financing may not be available on acceptable terms, if at all, which would adversely affect operations. In order to obtain additional liquidity, Perfumania might issue additional common stock which could dilute existing stockholders’ ownership interest or Perfumania may be required to issue securities with greater rights than those currently possessed by holders of Perfumania common stock. Perfumania may also be required to take other actions, which may lessen the value of Perfumania common stock, including borrowing money on terms that are not favorable.

The beauty industry is highly competitive and if Perfumania cannot effectively compete its business and results of operations will suffer.

The beauty industry is highly competitive and can change rapidly due to consumer preferences and industry trends. Some of Perfumania’s 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. Perfumania’s stores compete on the basis of selling price, customer service, merchandise variety and store location. Many of Perfumania’s current and potential competitors have greater financial, technical, operational, and marketing resources. Perfumania may not be able to compete successfully against these competitors in developing products and services. These factors, as well as demographic trends, economic conditions and discount pricing strategies by competitors, could result in increased competition and could have a material adverse effect on Perfumania’s profitability, operating cash flow, and many other aspects of Perfumania’s business, prospects, results of operations and financial condition.

Perfumania’s retail business is sensitive to and may be adversely affected by general economic conditions and overall consumer confidence.

Perfumania’s business is sensitive to a number of factors that influence the levels of consumer spending, including political and economic conditions such as recessionary environments, the levels of disposable

 

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consumer income, consumer debt, interest rates, fuel and energy prices, the level of unemployment and consumer confidence. During periods of economic uncertainty where consumer confidence is affected, consumer spending levels and customer traffic could decline, which would have an adverse effect on Perfumania’s business and its results of operations.

Adverse U.S. and global economic conditions could affect Perfumania’s wholesale business.

A U.S. or global economic downturn could reduce the availability of credit for businesses. Some of Perfumania’s customers could experience a decline in financial performance. These conditions affect their ability to pay amounts owed to Perfumania on a timely basis or at all. There can be no assurance that government responses to potential economic disruptions would increase liquidity and the availability of credit, and as a result, Perfumania’s wholesale customers may be unable to borrow funds on acceptable terms. Any economic decline affecting Perfumania’s customers would adversely affect its business and results of operations.

If Perfumania cannot successfully manage its growth, its business will be adversely affected.

Perfumania may not be able to sustain growth in revenues. Perfumania’s growth has been somewhat dependent 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. Circumstances outside Perfumania’s control could negatively affect these anticipated store openings. Perfumania’s new stores may take up to three years to reach planned operating levels. It is possible that Perfumania’s new stores might not achieve sales and profitability comparable to existing stores, and it is possible that the opening of new locations might adversely affect sales at existing locations. The failure to expand by successfully opening new stores as planned or the failure of a significant number of these stores to perform as planned, could have a material adverse effect on Perfumania’s business and its results of operations.

The market for real estate is competitive, which could adversely impact Perfumania’s results.

Perfumania’s ability to effectively obtain real estate to open new stores depends upon the availability of real estate that meets Perfumania’s criteria, including traffic, square footage, co-tenancies, lease economics, demographics, and other factors, and Perfumania’s ability to negotiate terms that meet financial targets. In addition, Perfumania must be able to effectively renew existing store leases. Failure to secure real estate locations adequate to meet annual targets, as well as effectively managing the profitability of existing stores, could have a material adverse effect on Perfumania’s business and its results of operations.

If Perfumania is unable to effectively manage the inventory it sells on consignment, it will not achieve its expected results.

Perfumania’s business includes a significant portion of consigned sales, and its revenue recognition policy defers recognition of revenue for this type of sales. Consignment sales remain in inventory until the products are sold to end users and, if not sold, the inventory may be returned upon termination of the consignment relationships. The turnover frequency of inventory on consignment is critical to generating regular cash flow in amounts necessary to keep financing costs to targeted levels and to purchase additional inventory. If this turnover is not sufficiently frequent, financing costs may exceed targeted levels and Perfumania may be unable to generate regular cash flow in amounts necessary to purchase additional inventory to meet the demand for other products. In addition, slow inventory turnover may force Perfumania to reduce prices and accept lower margins to sell consigned products.

Perfumania’s business is subject to seasonal fluctuations, which could lead to fluctuations in its stock price.

Perfumania has historically experienced and expects to continue experiencing higher sales in the fourth fiscal quarter than in any of the first three fiscal quarters. Purchases of fragrances as gift items increase during the holiday season, which results in significantly higher fourth fiscal quarter retail sales. Sales levels of new and

 

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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, general economic conditions and other factors beyond Perfumania’s control. Perfumania’s quarterly results may also vary as a result of the timing of new store openings and store closings, net sales contributed by new stores and fluctuations in comparable sales of existing stores. If Perfumania’s quarterly operating results are below expectations, its stock price might decline.

Perfumania may experience shortages of the merchandise its needs because it does not have long-term agreements with suppliers.

Perfumania’s success depends to a large degree on its ability to provide an extensive assortment of brand name and designer fragrances. Perfumania has no long-term purchase contracts or other contractual assurance of continued supply, pricing or access to new products. If Perfumania is unable to obtain merchandise from one or more key suppliers on a timely basis or acceptable terms, or if there is a material change in its ability to obtain necessary merchandise, its results of operations could be adversely affected.

Perfumania could be subject to litigation because of the merchandising aspect of its business.

Some of the merchandise Perfumania purchases from suppliers might be manufactured by entities that are not the owners of the trademarks or copyrights for the merchandise. The owner of a particular trademark or copyright may challenge Perfumania to demonstrate that the specific merchandise was produced and sold with the proper authority, and if Perfumania is unable to demonstrate this, it could, among other things, be restricted from reselling the particular merchandise or be subjected to other liabilities. This type of restriction could adversely affect its business and results of operations.

Perfumania’s stock price volatility could result in litigation, substantial cost, and diversion of management’s attention.

The price of Perfumania’s common stock has been and likely will continue to be subject to wide fluctuations in response to a number of events, such as:

 

   

quarterly variations in operating results;

 

   

acquisitions, capital commitments or strategic alliances by Perfumania or its competitors;

 

   

legal and regulatory matters that are applicable to its business;

 

   

the operating and stock price performances of other companies that investors may deem comparable to Perfumania;

 

   

news reports relating to trends in its markets; and

 

   

the amount of shares constituting its public float.

In addition, the stock market in general has experienced significant price and volume fluctuations that often have been unrelated to the performance of specific companies. The broad market fluctuations may adversely affect the market price of Perfumania’s common stock, regardless of its operating performance. Perfumania’s stock price volatility could result in litigation, including class action lawsuits, which would require substantial monetary cost to defend, as well as the diversion of management attention from day-to-day activities which could negatively affect operating performance. Such litigation could also have a negative impact on the price of Perfumania’s common stock due to the uncertainty and negative publicity associated with litigation.

Future growth may place strains on Perfumania’s managerial, operational and financial resources.

If Perfumania grows as anticipated, a significant strain on managerial, operational and financial resources may occur. Future growth or increase in the number of strategic relationships could strain Perfumania’s managerial,

 

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operational and financial resources, inhibiting Perfumania’s ability to achieve the execution necessary to successfully implement its business plan.

The loss of or disruption in Perfumania’s distribution facility could have a material adverse effect on business.

Perfumania currently has one distribution facility located in Bellport, New York. In addition, it uses third-party fulfillment centers in New York and New Jersey. The loss of, or damage to any of these facilities, as well as the inventory stored therein, could adversely affect Perfumania’s business, prospects, results of operations, financial condition or cash flows.

Current economic conditions and the global financial crisis may have an impact on Perfumania’s business and financial condition in ways that Perfumania currently cannot predict.

The global economy has experienced a significant contraction, with an almost unprecedented lack of availability of business and consumer credit. This decrease and any future decrease in economic activity in the United States or in other regions of the world in which Perfumania does business could adversely affect its financial condition and results of operations. Continued and potentially increased volatility, instability and economic weakness and a resulting decrease in discretionary consumer and business spending may result in a reduction in revenues. Perfumania currently cannot predict the extent to which revenues may be impacted.

In addition, Perfumania’s ability to make acquisitions depends, in part, on the availability of equity and debt financing. The credit markets and the general economy have experienced a period of large scale turmoil and upheaval. As a result, equity and debt financing from the capital markets may not be available to Perfumania on acceptable terms and may not be available for some time. This may limit Perfumania’s ability to pursue an acquisition-based strategy.

Perfumania maintains operating bank accounts at a number of financial institutions in the United States. Some of Perfumania’s cash balances in the United States are in excess of the government’s Federal Deposit Insurance Corporation insurance limits. The FDIC insures deposits in most banks and savings associations located in the United States. Perfumania could incur substantial losses if the underlying financial institutions fail or are otherwise unable to return its deposits.

Any weakness in internal control over financial reporting or disclosure controls and procedures could result in a loss of investor confidence in Perfumania’s financial reports and lead to a stock price decline.

Perfumania is required to maintain effective internal control over financial reporting, as well as effective disclosure controls and procedures, complying with SEC rules and covering all business operations. Any failure to have effective internal control over financial reporting or disclosure controls and procedures covering Perfumania’s business could cause investors to lose confidence in the accuracy and completeness of its financial reports, limit its ability to raise financing or lead to regulatory sanctions, any of which could result in a material adverse effect on business or a decline in the market price of common stock.

If Perfumania fails to protect the security of personal information about retail customers, its reputation could suffer and it could suffer financial harm.

Perfumania receives and stores personal information about the customers of its retail businesses. The regulatory environment for information security is increasingly demanding, and customers have a high expectation that Perfumania will protect their personal information. If Perfumania experiences a data security breach, it could be exposed to costly government enforcement actions and private litigation. In addition, this could damage its reputation and customers could lose confidence in Perfumania, which could cause them to stop using credit cards to purchase Perfumania’s products or stop shopping at Perfumania stores altogether. Such events could lead to lost future sales, fines or lawsuits, which would adversely affect Perfumania’s results of operations.

 

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Control of Perfumania’s management and policies is with its principal stockholders, who could take actions that are not in the best interest of the other stockholders.

We expect that following the completion of the merger, the Nussdorfs will continue to own a majority of Perfumania’s common stock. As a result, they will be able to direct corporate policies and can act unilaterally to approve most actions requiring stockholder approval under law or Perfumania’s governing documents. The Nussdorfs’ collective stock ownership may have the effect of delaying or preventing policies or actions deemed desirable by Perfumania’s board of directors, such as a business combination that might be in the interests of other stockholders, which in turn could materially and adversely affect the market price of Perfumania common stock. Conversely, such ownership may cause Perfumania to implement policies that are not in the best interests of other stockholders.

Perfumania also has a material amount of indebtedness to the Nussdorfs and their affiliates and expects to incur more in connection with the merger. As significant creditors, the Nussdorfs may refuse consent to actions Perfumania’s Board may consider necessary.

Perfumania has agreed that, in certain circumstances, it will register with the SEC the resale of certain shares of common stock held by the Nussdorfs. They may require that, in the event of any marketing limitation on the number of shares included in an applicable registration statement, their shares be registered on a pro rata basis with shares being registered for parties that have obtained registration rights in connection with providing financing to Perfumania. This may limit Perfumania’s ability to obtain financing in the future.

The absence of contracts with customers or suppliers could result in the loss of key customers or suppliers, which would have a material adverse effect on Perfumania’s business.

Perfumania does not have long-term or exclusive contracts with customers or with the suppliers of distributed brands. Suppliers of distributed brands generally may choose to reduce or eliminate the volume of their products Perfumania distributes, including supplying products to wholesale customers directly or through another distributor. Perfumania’s wholesale customers are generally able to cancel orders or delay the delivery of products on short notice. The loss of any key suppliers or customers, or a change in Perfumania’s relationship with any of them, could have a material adverse effect on Perfumania’s business, prospects, and financial condition.

Parlux

The following risk factors relate to Parlux on a standalone basis. However, they would also apply, to an extent that cannot be accurately predicted, to the combined company following the merger.

The Paris Hilton line is Parlux’s primary source of revenue following the expiration of its GUESS? license.

During the year ended March 31, 2010, licensed Paris Hilton and GUESS? brand products generated approximately $68.4 million and $46.2 million, respectively, in gross sales for Parlux. The Paris Hilton and GUESS? brands of fragrances and accessories accounted for approximately 42% and 28%, respectively, of Parlux gross sales from continuing operations during the fiscal year ended March 31, 2010. The GUESS? license expired on December 31, 2009, and was not renewed. As a result, licensed Paris Hilton brand products accounted for the majority of Parlux gross sales and constituted Parlux’s primary source of revenue for the year ending March 31, 2011. During the fiscal year ended March 31, 2011, licensed Paris Hilton brand products accounted for $80.1 million in gross sales or approximately 60% of gross sales. If Paris Hilton’s appeal as a celebrity were to diminish it could result in a material reduction in sales of licensed Paris Hilton brand products, and have a material adverse effect on Parlux’s financial condition, results of operations, and operating cash flows. The Paris Hilton fragrance license is scheduled to expire on June 30, 2014.

 

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If Parlux is unable to acquire or license additional brands, secure additional distribution arrangements, or obtain the required financing for these agreements and arrangements, the growth of its business could be impaired.

Parlux’s business strategy contemplates growing its portfolio of licensed brands. Future expansion through acquisitions or new product licensing arrangements, if any, is dependent on the availability of capital resources and working capital. Parlux may be unsuccessful in identifying, negotiating, financing and consummating such acquisitions and licensing arrangements on commercially acceptable terms, or at all, which could hinder its ability to increase revenues and grow its portfolio of licensed brands and its business. Additionally, even if Parlux is able to consummate such acquisitions and licensing arrangements, it may not be able to successfully integrate them with its existing operations and portfolio of licenses or generate the expected levels of increased revenue as a result of such acquisitions and licensing arrangements.

The development of new products by Parlux involves considerable costs and any new product may not generate sufficient consumer interest and sales to become a profitable brand or to cover the costs of its development and subsequent promotions.

Generally, a significant number of new prestige fragrance products have been introduced annually on a worldwide basis. The beauty industry in general is highly competitive and consumer preferences change rapidly. The initial appeal of these new fragrances, launched for the most part in U.S. department stores, has fueled the growth of the industry. Department stores tend to lose sales to the mass market as a product matures. To counter the effect of lower department store sales, companies strategically introduce new products quickly, which requires additional spending for development, advertising and promotional expenses. Parlux’s success with new fragrance products depends on its products’ appeal to a broad range of consumers, whose preferences are subject to change and cannot be predicted with certainty, and on Parlux’s ability to anticipate and respond to market trends through product innovation. In addition, a number of the new launches are with celebrities (either entertainers or athletes) which require substantial royalty commitments and whose careers and/or appeal could change dramatically, either positively or negatively, based on a single event. If one or more of Parlux’s new product introductions were to be unsuccessful, or if the appeal of the celebrity related to a product were to diminish, it could result in a reduction in profitability and operating cash flows.

The loss of or interruption in Parlux’s arrangements with manufacturers, suppliers and customers could have a material adverse affect on sales, financial condition, and operating cash flow.

Parlux generally does not have long-term or exclusive contracts with its domestic customers, certain international distributors or suppliers. Virtually all of its finished products are assembled from multiple components and manufactured by third parties. If Parlux experiences delays in the delivery of the finished products or the raw materials or components used to make such products, or if these suppliers were unable to supply such products, or if there were transportation problems between the suppliers and Parlux’s distribution center, sales, financial condition, and operating cash flow could be materially and adversely impacted. In addition, the loss of key distributors or customers, such as Macy’s or Perfumania, or a change in Parlux’s relationship with such distributors or customers, could result in excess inventory and reduced sales, profitability, and operating cash flows.

The fragrance and cosmetic industry is highly competitive, and if Parlux is unable to compete effectively it could have a material adverse effect on its sales, financial condition, operating cash flow, and many other aspects of its business, prospects, results of operations and financial condition.

The fragrance and cosmetic industry is highly competitive and, at times, changes rapidly due to consumer preferences and industry trends. Parlux competes primarily with global prestige fragrance companies, most of whom have significantly greater resources than Parlux and may be able to respond to changes in business and economic conditions more quickly or effectively than Parlux. Competition in the fragrance and cosmetic industry

 

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is based on a number of factors including innovation and new product introductions, pricing of products, promotional activities and advertising, special events and electronic commerce initiatives. Parlux’s products compete for consumer recognition and shelf space with products that have achieved significant international, national and regional brand name recognition and consumer loyalty. Parlux’s products also compete with new products that often are accompanied by substantial promotional campaigns. In addition, these factors, as well as demographic trends, economic conditions and discount pricing strategies by competitors could result in increased competition and could have a material adverse effect on profitability, operating cash flow, and many other aspects of Parlux’s business, prospects, results of operations and financial condition.

Parlux’s net sales, operating income and inventory levels fluctuate on a seasonal basis and a decrease in sales or profit margins during peak seasons could have a disproportionate effect on its financial condition and results of operations.

Parlux’s net sales and operating income fluctuate seasonally, with a significant portion of operating income typically realized during peak holiday gift-giving seasons. Any decrease in sales or profit margins during these periods could have a disproportionate effect on Parlux’s financial condition and results of operations. Parlux provides allowances for sales returns based on its historical “sell-through” experience, economic trends and changes in its assessment of customer demand. Parlux’s customers generally request approval for the return of unsold items after a specific holiday gift-giving season and fluctuations in the allowance balance are generally higher after holiday gift-giving seasons. An increase in sales returns due to a change in economic conditions, or otherwise, may result in Parlux’s estimated allowances being insufficient and may have a material adverse impact on its operations. Seasonal fluctuations also affect its inventory levels. Parlux must carry a significant amount of inventory, especially before the holiday season selling period. If Parlux is not successful in selling its inventory, it may have to write down inventory or sell it at significantly reduced prices or Parlux may not be able to sell such inventory at all, any of which could have a material adverse effect on its financial condition and results of operations.

The continued consolidation of the U.S. department store segment could have a material adverse effect on Parlux’s sales, financial condition, and operating cash flow.

Over the last few years, the United States department store market has experienced a significant amount of consolidation, the most recent significant example of which is the consolidation of Macy’s various regional divisions into one centralized purchasing function. Such consolidations have resulted in Parlux becoming increasingly dependent on key retailers, who have increased their bargaining strength and implemented measures such as store closings, increased inventory control and management changes, as well as changes in administrative and purchasing responsibilities. This consolidation trend has also resulted in an increased risk related to the concentration of Parlux’s customers. The continued consolidation of department stores, whether successful or unsuccessful, could have a material adverse effect on sales, financial condition, and operating cash flow.

Consumers have reduced discretionary purchases of Parlux products as a result of the general economic downturn, and may further reduce discretionary purchases of Parlux products in the event of further economic decline, terrorism threats or other external factors.

Consumer spending is generally affected by a number of factors beyond Parlux’s control, including general economic conditions, inflation, interest rates, energy costs and consumer confidence generally. Consumer purchases of discretionary items, such as fragrance products, tend to decline during recessionary periods, when disposable income is lower, and may impact sales of Parlux products. As a result of the severe economic downturn, Parlux has experienced a decline in sales since the quarter ended December 31, 2008. In addition, this general economic downturn has resulted in reduced traffic in customers’ stores which, in turn, resulted in reduced net sales to Parlux’s customers. Parlux faced continued economic challenges in fiscal year 2011 because consumers continued to have less money for discretionary purchases as a result of job losses, foreclosures, bankruptcies, reduced access to credit and falling home prices, among other things. If current economic

 

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conditions continue or worsen, Parlux could experience further declines in sales, profitability and operating cash flows due to reduced orders, payment delays, supply chain disruptions or other factors caused by the economic challenges faced by customers, prospective customers and suppliers. In addition, sudden disruptions in business conditions as a result of a terrorist attack, retaliation and the threat of further attacks or retaliation, war, adverse weather conditions or other natural disasters, or pandemic situations can have a short or, sometimes, long-term impact on consumer spending.

Failure to manage inventory effectively could negatively impact Parlux operations.

The composition of Parlux’s inventory at any given time may vary considerably depending on launches of new products, forecasted sales of significant amounts of Parlux products during the peak holiday gift-giving seasons and as a result of termination or expiration of fragrance licenses and sub-licenses. If Parlux misjudges consumer preferences or demands or future sales do not reach forecasted levels, it could have excess inventory that may need to be held for a long period of time, written down, sold at prices lower than expected, or discarded in order to clear excess inventory at the end of a selling season. Conversely, if Parlux underestimates consumer demand, Parlux may not be able to provide products to Parlux customers to meet their demand. Either event could have a material adverse impact on Parlux’s business, financial condition and results of operations. The termination or expiration of fragrance licenses may result in inventory which Parlux may need to write down to the amounts which it estimates could be realized upon their sale or liquidation. During the year ended March 31, 2010, Parlux recorded additional charges of $7.6 million to cost of sales to reduce the recorded value of inventories related to its GUESS? license as a result of the expiration of this license on December 31, 2009. In addition, inventory shrink (inventory theft or loss) rates can also significantly impact business performance and financial results.

The value of Parlux’s long-lived assets, including brand licenses and trademarks, may be adversely affected if Parlux experiences declines in operating results or significant negative industry or economic trends.

The majority of Parlux’s long-lived assets are the result of the acquisition of existing license brands or sublicensing opportunities. For newly launched brands Parlux’s long-lived assets are generally the result of investment in trademarking brand names and designs, and are generally not a material portion of its assets. At least on an annual basis, long-lived assets are reviewed for impairment. Impairment losses are recognized if expected undiscounted future cash flows of the long-lived assets are less than their carrying values. Future cash flows can be affected by changes in industry or market conditions. The assumptions used include an analysis by license, and by fragrance produced under each license, which may vary depending on the age of the product. Expected sales along with related costs of sales, direct expenses and certain allocated charges are projected through the end of each given license period. Expected sales estimates incorporate the age of a product and its market distribution. If actual operating results differ from management’s estimates, or if Parlux experiences the impact of negative industry or economic trends, write downs of long-lived assets, including brand licenses and trademarks, may be required which could have a material adverse effect on operating results.

If Parlux is unable to protect its intellectual property rights, specifically trademarks and trade names, its ability to compete could be negatively impacted.

The market for Parlux’s products depends to a significant extent upon the value associated with its trademarks and trade names. Parlux owns, or has licenses or other rights to use, the material trademark and trade name rights used in connection with the packaging, marketing and distribution of its major products both in the United States and in other countries where such products are principally sold; therefore, trademark and trade name protection is important to its business. Although most of Parlux’s brand names are registered in the United States and in certain foreign countries in which Parlux operates, Parlux may not be successful in asserting trademark or trade name protection. In addition, the laws of certain foreign countries may not protect intellectual property rights to the same extent as the laws of the United States, especially in the product class that includes fragrance products. The costs required to protect trademarks and trade names may be substantial.

 

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If other parties infringe on Parlux’s intellectual property rights or the intellectual property rights that it licenses, the value of Parlux’s brands in the marketplace may be diluted. Any infringement of Parlux’s intellectual property rights would also likely result in a commitment of its time and resources to protect these rights through litigation or otherwise. Additionally, Parlux may infringe or be accused of infringing on others’ intellectual property rights and one or more adverse judgments with respect to these intellectual property rights could negatively impact ability to compete and could materially adversely affect business, prospects, results of operations, financial condition or cash flows.

If Parlux experiences privacy breaches and liability for online content, it could negatively affect its reputation, credibility and business.

Parlux relies on third-party computer hardware and software for various social media tools and websites that it utilizes as part of its marketing strategy. There is a growing concern over the security of personal information transmitted over the internet, consumer identity theft and user privacy. Despite the implementation of reasonable security measures by Parlux and its third-party providers, these sites and systems may be susceptible to electronic or physical computer break-ins and security breaches. Any perceived or actual unauthorized disclosure of personally-identifiable information regarding Parlux customers or website visitors could harm Parlux’s reputation and credibility, impair its ability to attract website visitors and reduce its ability to attract and retain customers. Additionally, as the number of users of forums and social media features on its websites increases, Parlux could be exposed to liability in connection with material posted on Parlux websites by users and other third parties. Finally, Parlux could incur significant costs in complying with the multitude of state, federal and foreign laws regarding unauthorized disclosure of personal information.

The loss of, or disruption in Parlux’s distribution facility, could have a material adverse effect on its sales and its relationships with its customers.

Parlux has one distribution facility, located in New Jersey, which is close to where its fragrance products are manufactured and packaged. The loss of, or any damage to, its New Jersey facility, as well as the inventory stored therein, would require Parlux to find replacement facilities. In addition, weather conditions, such as inclement weather or other natural disasters, could disrupt its distribution operations. Certain of its components require purchasing lead times in excess of 180 days. If Parlux cannot replace its distribution capacity and inventory in a timely, cost-efficient manner, it could reduce the inventory Parlux has available for sale, adversely affecting profitability and operating cash flows, as well as damaging relationships with customers who are relying on deliveries of Parlux products.

Parlux’s success depends, in part, on the quality and safety of its fragrance and related products.

Parlux’s success depends, in part, on the quality and safety of its fragrance and related products. If Parlux products are found to be unsafe or defective, or if they otherwise fail to meet customers or consumers’ standards and expectations, Parlux’s reputation could be adversely affected, relationships with customers or consumers could suffer, the appeal of one or more of Parlux brands could be diminished, sales could be adversely affected and/or Parlux may become subject to liability claims, any of which could result in a material adverse effect on business, results of operations and financial condition.

Parlux is subject to risks related to its international operations.

Parlux operates on a global basis, with sales in approximately 80 countries. Parlux’s international operations could be adversely affected by:

 

   

import and export license requirements;

 

   

trade restrictions;

 

   

changes in tariffs and taxes;

 

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product registration, permitting and regulatory compliance;

 

   

restrictions on repatriating foreign profits back to the United States;

 

   

the imposition of foreign and domestic governmental controls;

 

   

changes in, or Parlux’s unfamiliarity with, foreign laws and regulations;

 

   

difficulties in staffing and managing international operations;

 

   

changes in economic, social, legal and other conditions;

 

   

the volatility or weakening of the U.S. dollar against other currencies;

 

   

greater difficulty enforcing intellectual property rights and weaker laws protecting such rights; and

 

   

geo-political conditions, such as terrorist attacks, war or other military action, public health problems and natural disasters.

Reductions in worldwide travel could hurt sales volumes in Parlux’s duty-free related business.

Parlux depends on consumer travel for sales to “duty free” customers in airports and other locations throughout the world. Any reductions in travel, including as a result of general economic downturns, natural disasters, or acts of war or terrorism, or disease epidemics, could result in a material decline in sales and profitability for this channel of distribution, which could negatively affect Parlux’s operating results, financial condition, and operating cash flow.

If Parlux loses the services of executive officers and senior management, it could have a negative impact on business.

Parlux’s success is dependent upon the continued service and skills of its executive officers and senior management. If it loses the services of executive officers and senior management, it could have a negative impact on Parlux’s business because of their skills, years of industry experience and the difficulty of promptly finding qualified replacement personnel.

If Parlux loses its key personnel, or fails to attract and retain additional qualified experienced personnel, it will be unable to continue to develop its prestige fragrance products and attract and obtain new licensing partners.

Parlux believes that its future success depends upon the continued contributions of its highly qualified sales, creative, marketing, and management personnel and on its ability to attract and retain those personnel. These individuals have developed strong reliable relationships with customers and suppliers. There can be no assurance that Parlux’s current employees will continue to work for Parlux or that Parlux will be able to hire any additional personnel necessary for its growth. Parlux’s future success also depends on its continuing ability to identify, hire, train and retain other highly qualified managerial personnel. Competition for these employees can be intense. Parlux may not be able to attract, assimilate or retain qualified managerial personnel in the future, and failure to do so would limit the growth potential of its business and potential licensing partners may not be as attracted to the organization.

Parlux may unknowingly infringe on others’ intellectual property rights which could result in litigation.

Parlux may unknowingly produce and sell products in a country where another party has already obtained intellectual property rights. One or more adverse judgments with respect to these intellectual property rights could negatively impact Parlux’s ability to compete and continue to sell products in the worldwide marketplace and may require the destruction of inventory produced under the infringed name, both of which would adversely affect profitability, and, ultimately operating cash flow.

 

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Parlux is involved in litigation from time to time in the ordinary course of business, which, if the outcome of such litigation is adverse, could materially adversely affect its business, results of operations, financial condition, and cash flows.

Given the nature of Parlux’s business, Parlux is involved in litigation from time to time in the ordinary course of business. No assurance can be given as to the final outcome of any legal proceedings or that the ultimate resolution of any legal proceedings will not have a material adverse effect on Parlux’s business, results of operations, financial condition, and cash flows.

Parlux’s quarterly results of operations could fluctuate significantly due to retailing peaks related to gift giving seasons and delays in new product launches, which could adversely affect its stock price.

Parlux may experience variability in net sales and net income on a quarterly basis as a result of a variety of factors, including timing of customer orders and returns, sell-through of products by the retailer to the ultimate consumer or gift giver, delays in new product launches, as well as additions or losses of brands or distribution rights. Any resulting material reduction in sales could have an adverse effect on Parlux’s business, its profitability and operating cash flows, and correspondingly, the price of its common stock.

Parlux’s information systems and websites may be susceptible to outages and other risks.

Parlux has information systems that support its business processes, including product development, marketing, sales, order processing, production, distribution, finance and intracompany communications throughout the world. These systems may be susceptible to outages due to fire, floods, power loss, telecommunications failures, break-ins and similar events. Despite the implementation of network security measures, Parlux’s systems may be vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering. The occurrence of these or other events could disrupt or damage Parlux’s information systems, result in the dissemination of confidential information and adversely affect its financial condition and results of operations.

Parlux’s business is subject to regulation in the United States and internationally.

The manufacturing, distribution, formulation, packaging and advertising of Parlux’s fragrance and related products are subject to numerous federal, state and foreign governmental regulations. Compliance with these regulations is costly and difficult. If Parlux fails to adhere, or are alleged to have failed to adhere, to any applicable federal, state or foreign laws or regulations, its business, prospects, results of operation, financial condition or cash flows may be adversely affected. In addition, future results could be adversely affected by changes in applicable federal, state and foreign laws and regulations, or the interpretation or enforcement thereof, including those relating to product liability, trade rules and customs regulations, intellectual property, consumer laws, privacy laws and product regulation, as well as accounting standards and taxation requirements (including tax-rate changes, new tax laws and revised tax law interpretations).

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This joint proxy statement/prospectus, including information included or incorporated by reference in this joint proxy statement/prospectus, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are typically identified by words or phrases such as “may,” “will,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “target,” “forecast,” “objective,” “assume,” “strategies” and other words and terms of similar meaning. Forward-looking statements involve estimates, expectations, projections, goals, forecasts, assumptions, risks and uncertainties. Perfumania and Parlux caution readers that any forward-looking statement is not a guarantee of future performance and that actual results could differ materially from those contained in the forward-looking statement.

Such forward-looking statements include, but are not limited to, statements regarding:

 

   

the anticipated closing date of the merger;

 

   

the successful closing of the merger;

 

   

the integration of Parlux as well as opportunities for operational improvement including but not limited to cost reduction and capital investment;

 

   

the strategic opportunity and perceived value to Perfumania’s stockholders and Parlux’s stockholders of the merger; and

 

   

the merger’s impact on, among other things, Perfumania’s business mix, margins, transitional costs and ability to achieve certain synergies and the timing of such costs and synergies.

With respect to these forward-looking statements, Perfumania and Parlux have made assumptions regarding, among other things:

 

   

whether and when the proposed merger will be approved;

 

   

whether and when the proposed merger will close;

 

   

the availability of financing on satisfactory terms;

 

   

the results and impacts of the merger;

 

   

preliminary purchase price allocations of acquired assets and liabilities which may include material adjustments to the reported amounts of Parlux assets and liabilities in the financial statements included in its Form 10-K for the most recently ended fiscal year;

 

   

economic, competitive and market conditions generally;

 

   

volumes and price levels of purchases by, and sales to, customers; and

 

   

competitive conditions in Perfumania and Parlux’s businesses and possible adverse reactions of Perfumania and Parlux’s respective customers, competitors and suppliers to the merger.

Further, Perfumania and Parlux’s businesses are subject to a number of general risks that would affect any such forward-looking statements including, among others:

 

   

decreases in demand for Perfumania and Parlux products;

 

   

changes in discretionary spending by consumers;

 

   

failure of general economic conditions to improve;

 

   

Perfumania’s ability to comply with financial covenants under Perfumania’s financing arrangements;

 

   

the ability to raise additional capital;

 

   

credit and performance risk from customers and vendors;

 

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intense competition;

 

   

the potential loss of certain customers; and

 

   

adverse changes in general market and industry conditions.

Such risks and other factors that may impact management’s assumptions are more particularly described in the “Risk Factors” section of this joint proxy statement/prospectus.

The information contained in this joint proxy statement/prospectus speaks as of the date hereof, and neither Perfumania nor Parlux have or undertake any obligation to update or revise its forward-looking statements, whether as a result of new information, future events or otherwise.

 

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THE MERGER

The following is a discussion of the merger and the material terms of the merger agreement among Perfumania, Merger Sub and Parlux. You are urged to read carefully the merger agreement in its entirety, a copy of which is attached as Annex A to this joint proxy statement/prospectus and incorporated by reference herein. You are also urged to read the opinions of Perfumania’s and Parlux’s financial advisors, which are attached as Annex B, and Annexes C and D, respectively, to this joint proxy statement/prospectus, and are incorporated by reference herein.

Background of the Merger

Perfumania and Parlux have had a commercial relationship for about 20 years, as described in detail elsewhere in this joint proxy statement/prospectus. Glenn Nussdorf has owned approximately 10% of the shares of Parlux common stock since 2006, and he and his siblings, Stephen Nussdorf, the Executive Chairman and a director of Perfumania, and Arlene Nussdorf, have acquired, in the aggregate, a majority of the voting stock of Perfumania in a number of transactions since then. The following describes the discussions and events relating to the merger that led up to the signing of the merger agreement.

During 2006, Glenn Nussdorf engaged in discussions with the management and board of directors of Parlux seeking to encourage actions to enhance stockholder value. In November 2006, Mr. Nussdorf commenced a solicitation of stockholder consents seeking to remove all of the then-existing members of the Parlux board of directors and to elect his nominees to the Parlux board of directors. Parlux filed a lawsuit against Mr. Nussdorf and his nominees seeking to prevent the solicitation. The parties entered into a settlement agreement, terminating the consent solicitation and dismissing the lawsuit, on February 6, 2007. The agreement provided, among other things, for certain management changes at Parlux and for the appointment to the Parlux board of directors of three of Mr. Nussdorf’s nominees, including Anthony D’Agostino and Robert Mitzman who are current Parlux directors. In addition, Mr. Nussdorf agreed, subject to certain exceptions, that he would not engage in a proxy or consent solicitation with respect to Parlux shares before August 2008 and that he would not make any proposal to acquire Parlux before February 2009.

After the waiting periods under the 2007 settlement agreement had expired, Glenn and Stephen Nussdorf and members of Perfumania management periodically discussed the possibility of a business combination between Parlux and Perfumania. On January 11, 2010, Mr. Katz, Glenn and Stephen Nussdorf and a Perfumania employee met with Frederick Purches, Chairman and Chief Executive Officer of Parlux, Parlux directors D’Agostino and Glenn Gopman, Frank A. Buttacavoli, Parlux’s Executive Vice President and Chief Operating Officer, Raymond J. Balsys, Parlux’s Chief Financial Officer, and a Parlux consultant at Parlux’s offices in Fort Lauderdale, Florida to inquire whether Parlux had any interest in a possible business combination with Perfumania. The Parlux representatives indicated that Parlux was not interested in a business combination at that time.

In the regular course of business, Parlux has discussions with its customers, including Perfumania, about their business relationships, including merchandise, products, distribution channels, inventory management, pricing and terms of payment. In January and February of 2011, Mr. Purches met several times in New York with Glenn Nussdorf, on behalf of Perfumania, to discuss such issues. Mr. Nussdorf suggested to Mr. Purches at that time that Parlux and Perfumania should consider a business combination between the companies.

After Mr. Nussdorf’s meetings with Mr. Purches, Mr. Katz discussed with the Perfumania board of directors contacting Parlux informally about Perfumania’s interest in a business combination with Parlux.

In early 2011, Michael W. Katz, President and Chief Executive Officer of Perfumania, asked Wells Fargo Securities LLC, with which Perfumania has had a long-standing relationship, to assist Perfumania in evaluating potential strategic opportunities, including a possible business combination with Parlux.

 

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On March 9, 2011, Mr. Katz and Mr. Purches met in New York and discussed whether there was a basis on which Parlux and Perfumania could pursue a business combination on mutually agreeable terms.

During the early part of 2011, Perfumania analyzed the possible terms of a business combination and projected that consideration payable under a potential merger with Parlux would include $60 million to $65 million of cash. Also during this time, Wells Fargo Bank indicated that Perfumania would be permitted to borrow no more that $30 million to $35 million under its senior credit facility to fund cash merger consideration. Mr. Katz, co-trustee of the Nussdorf Trusts, suggested to the other co-trustees the possibility of using a $30 million distribution that Quality King Distributors, Inc. (“Quality King”) to be made to its stockholders, the Nussdorf Trusts, to fund an increase in the aggregate amount of subordinated loans previously made by the Nussdorf Trusts to Model, which could then be used to supplement the potential cash merger consideration.

On April 12, 2011, Mr. Katz, Stephen Nussdorf and Paul Garfinkle, a director of Perfumania, met informally in Fort Lauderdale, Florida with Mr. Purches, Parlux directors D’Agostino, Gopman, Mitzman and Esther Egozi Choukroun, and Mr. Buttacavoli to discuss the companies’ commercial relationship. The attendees discussed the reasons favoring a business combination as well as the form of consideration. Mr. Purches informed the representatives of Perfumania that he expected that the Parlux board of directors would prefer that the consideration for Parlux stockholders in any such transaction be all or predominantly cash.

Informal discussions between representatives of Parlux and Perfumania continued, during the course of which Mr. Katz indicated, on May 2, 2011, that Perfumania was considering a possible offer. Mr. Purches apprised the Parlux directors of the discussions.

On June 3, 2011, Mr. Katz and Mr. Purches met in New York and discussed the timing of a possible business combination, possible closing conditions, disclosure requirements under federal securities laws, and the views of the Parlux board of directors as to the value of Parlux. Mr. Purches invited Mr. Katz to meet with the Parlux board of directors.

On June 17, 2011, the Parlux board of directors held a telephonic board meeting, during which Mr. Purches reviewed the discussions with Mr. Katz and noted that no offer or specific terms had been proposed. The board discussed the possible engagement of an investment bank should the exploratory discussions warrant that, and discussed, in general terms, how Perfumania common stock, if it were a component of an offer for a business combination, might properly be valued following any such business combination. The board also discussed the terms of the licensor warrants (for the purchase of 6,000,000 shares of Parlux common stock), which had been issued to Artistic Brands, with whom Parlux has license and sublicense agreements, in connection with a license agreement and Artistic Brands side letter dated April 3, 2009. The Artistic Brands side letter contains a change in control provision that would require Parlux to pay up to $10 per share covered by the licensor warrants in the event of an acquisition or similar change in control of Parlux before April 12, 2012. The board also discussed the fact that Rene Garcia, who is a principal of Artistic Brands, together with the rest of the Garcia Group, are collectively the beneficial owners of 19.2% of the shares of Parlux common stock and 8.4% of the shares of Perfumania common stock.

On June 24, 2011, Mr. Purches and Mr. Katz met and discussed alternative approaches for effecting a business combination including, if the Parlux board of directors was not amenable to such a combination, a possible unsolicited acquisition offer or proposal for the election of a new board of directors of Parlux.

On July 1, 2011, Parlux engaged Peter J. Solomon Company as financial advisor in connection with the board’s consideration of strategic alternatives.

During July 2011, Mr. Katz and Mr. Garfinkle agreed that, if a proposal for a business combination were made, it should be conditioned on the approval of a special committee of independent, disinterested members of the Perfumania board of directors because of Glenn Nussdorf’s stock ownership in Parlux and because of the possible role of the Nussdorf Trusts in providing a portion of the requisite financing. They also discussed the retention of legal and financial advisors by such a special committee.

 

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Also during July 2011, Mr. Katz and Donna Dellomo, Chief Financial Officer of Perfumania, commenced discussions with Wells Fargo Bank concerning Perfumania’s ability to borrow under its credit facility with Wells Fargo Bank and other lenders a portion of any cash consideration to be paid to Parlux stockholders in a business combination as well as expenses related to the transaction. Periodically, through the middle of December 2011, members of Perfumania management or their representatives communicated with Wells Fargo Bank about amendments of the existing credit facility documents and consents or waivers from the lenders to permit borrowings or transactions contemplated by a potential merger.

On July 26, 2011, Mr. Katz and Mr. Purches spoke about the process, the Parlux board of directors meeting scheduled for August 4, 2011 and the possibility of an informal meeting between Mr. Katz and the members of the Parlux board of directors on August 5, 2011.

On August 4, 2011, the Parlux board met with representatives of PJSC, Parlux’s outside business and financial consultant, Al Vercillo of Cambridge Development Corp., and a representative of Parlux’s legal counsel, Squire Sanders & Dempsey (US) LLP (now Squire Sanders (US) LLP). Mr. Purches reviewed the discussions with Mr. Katz and again noted that no offer or specific terms had been proposed. The Parlux board also discussed, on a general basis, with Mr. Vercillo other potential parties to a business combination with Parlux, the change of control payment provisions in the Artistic Brands side letter as a potential barrier to possible acquisition offers on terms acceptable to Parlux, and the strategic options available to Glenn Nussdorf and the Garcia Group if an agreement for a business combination with Perfumania were not reached. A representative of Squire Sanders discussed with the members of the board their fiduciary duty as directors to act in the best interests of Parlux and its stockholders, and, on a general basis, certain alternatives the board could consider in the event of an attempt to acquire Parlux without the board’s approval.

Informal, exploratory discussions between Mr. Purches and Mr. Katz continued in early August, during which they discussed, in general terms, their views on ranges of value for Parlux common stock that might be reflected in a possible offer, as well as a possible mix of cash and stock as consideration.

In one such discussion, Mr. Katz and Mr. Purches met in New York to discuss the value of Parlux, the next steps if Parlux and Perfumania determined that there was a reasonable basis to proceed with discussions of a business combination, and the timing of Parlux’s annual stockholders’ meeting. Mr. Katz indicated that, should an offer be made, and if Parlux did not agree to the consideration offered, Perfumania might seek to acquire Parlux without the agreement of the Parlux board. Following that meeting, Mr. Purches met with Mr. Vercillo and a representative of Squire Sanders. Mr. Purches discussed the valuation and liquidity of Perfumania common stock. They also discussed other companies that might be interested in a business combination with Parlux, as well as actions Parlux might take in light of Mr. Katz’s statements regarding a possible unsolicited acquisition attempt.

On August 10, 2011, the Parlux board of directors held a telephonic meeting in which it authorized management to continue the discussions with Perfumania. Mr. Purches then met with Mr. Katz and Glenn Nussdorf in the Edwards Wildman offices in New York to discuss the general terms of a possible business combination. Also on that day, Mr. Purches, Mr. Katz and representatives of Edwards Wildman and Squire Sanders had conversations regarding due diligence, a mutual confidentiality agreement, drafting of definitive agreements, and the fiduciary duties of the companies’ boards of directors. Each company then filed with the SEC a Current Report on Form 8-K, and Glenn Nussdorf filed an amendment to his Schedule 13D on file with the SEC, reporting the parties’ preliminary discussions.

On August 12, 2011, Edwards Wildman sent Squire Sanders a draft of a nondisclosure agreement between Parlux and Perfumania. On August 16, 2011, a representative of Edwards Wildman outlined to representatives of Squire Sanders certain provisions for discussion with respect to a possible business combination including indicative per share consideration, at the election of Parlux stockholders, of (1) all cash consideration of $6.40, (2) mixed consideration of $4.00 cash and 0.2 shares of Perfumania stock or (3) 0.533333 shares of Perfumania stock, with

 

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a maximum cash consideration of $62,858,000, and a maximum stock consideration of 5,833,333 shares, based on a mixed consideration election by holders of approximately 15,700,000 shares of Parlux stock and an all-stock election by holders of approximately 5,000,000 shares. In addition, the discussion points included, among other things, Perfumania’s expectation that it would negotiate the terms of the Artistic Brands side letter and licensor warrants if and when a merger agreement was executed, the structure of the merger as a tax-free reorganization, and the payment of Perfumania’s commercial payables to Parlux in accordance with an agreed-upon schedule. The Perfumania discussion points contemplated that any business combination would be conditioned on Parlux’s having at least $15 million of cash and no outstanding bank debt at the time of closing. Edwards Wildman also conveyed Perfumania’s proposal that Parlux defer its annual stockholders’ meeting to allow time to develop a proposal for a business combination that the Parlux stockholders could approve at a deferred annual meeting, or to permit Mr. Nussdorf, should he choose to do so, to propose an alternative slate of directors at a deferred annual meeting.

Also on August 16, 2011, the Perfumania board of directors appointed the Perfumania special committee to consider and approve any proposed business combination. The Perfumania special committee consisted of Mr. Garfinkle, Joseph Bouhadana, and Carole Ann Taylor, three members of the board of directors who are not employees or consultants of Perfumania, are independent directors under SEC rules and Nasdaq listing standards, and are not shareholders of Parlux. None of the members of the Special Committee directly owns any Perfumania securities other than options to purchase shares of common stock granted under Perfumania stock option plans (an aggregate of 33,500 shares among them), and none has any other interest in the proposed transactions.

At this meeting, the Perfumania board of directors authorized the special committee to evaluate and make recommendations to the Perfumania board on whether a merger would be in the best interests of Perfumania and its shareholders and whether a modification of the loans between the Nussdorfs and Model in order to help finance the proposed merger would be in the best interests of the Perfumania shareholders other than the Nussdorfs. The Perfumania board of directors authorized the Perfumania special committee to incur appropriate expenses in connection with its work, including retaining, at Perfumania’s expense, an independent investment banking firm, legal counsel, and such other advisors as the Perfumania special committee deemed necessary, useful or advisable. The Perfumania board of directors authorized the payment of a fee of $10,000 to each of the members of the Perfumania special committee for their services in considering these transactions.

On August 18, 2011, Edwards Wildman sent a draft merger agreement for discussion to Squire Sanders, which Squire Sanders provided to the Parlux board of directors the following day.

Between August 19, 2011 and September 7, 2011, representatives of Edwards Wildman and Squire Sanders negotiated by telephone on a number of occasions and exchanged drafts of the nondisclosure agreement, an agreement among Parlux, Perfumania and Glenn Nussdorf and a letter agreement between Parlux and Perfumania. In addition to providing for the confidentiality of information exchanged by Parlux and Perfumania, these agreements provided for the deferral by Parlux of its annual meeting until December 9, 2011 or later and the deferral of the setting of a record date for that meeting until November 4, 2011 or later. They also included, until October 28, 2011 or the earlier termination of negotiations, Parlux’s agreement not to take action to amend its bylaws to insert an “advance notice” provision for nominations of directors to the Parlux board of directors and a prohibition on certain actions by Perfumania or Glenn Nussdorf with respect to acquiring Parlux, seeking to influence or control Parlux, or seeking representation on the Parlux board of directors, which we refer to as the “standstill” agreement. All of these proposals were conveyed to Parlux’s directors and senior management, who continued to analyze the possibility of a merger and related matters.

The Independent Committee of the Parlux board of directors (which we refer to as the “Parlux independent committee”) is a standing committee of the board originally formed during April 2003 to address a possible tender offer; such offer was subsequently withdrawn in June 2003. The Parlux independent committee reconvened during June 2006 to address a second possible tender offer, which was also subsequently withdrawn in July 2006. To date, the Parlux independent committee’s responsibilities have been to evaluate, negotiate, and

 

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ultimately recommend approval or disapproval to the Board of Directors and the stockholders, of offers made to acquire all of the Parlux common stock or to act on consent actions seeking control of Parlux.

On August 22, 2011, the Parlux independent committee, consisting of all of the directors who are independent directors under SEC rules and Nasdaq listing standards, and chaired by Mr. Gopman, met to discuss the proposed merger. The committee also discussed the compensation to be paid to members of the committee in connection with any merger negotiations, which consisted of a one-time fee per committee member of $20,000, an additional one-time payment of $20,000 for the chairman of the committee and compensation of $1,000 for each meeting of the committee, which was subsequently approved by the Parlux board of directors. The following day, representatives of Squire Sanders delivered to Mr. Gopman a list of business and legal issues presented in the draft merger agreement, including the degree of conditionality associated with the proposal. The committee discussed the need for information regarding Perfumania’s capital structure following any proposed merger, to enable Parlux’s financial advisor to understand the value of the stock component of the possible merger consideration, as well as the need for information regarding Perfumania’s suggested condition to closing that it have bank or related party financing for any merger. Squire Sanders then sent to Edwards Wildman comments on the draft nondisclosure agreement, including standstill provisions. On August 23, Edwards Wildman sent a revised draft of the nondisclosure agreement.

On August 25, 2011 the Parlux board of directors met and resolved that any merger proposal and negotiations would be handled by the Parlux independent committee. Subsequently, the Parlux independent committee met and engaged Squire Sanders as counsel to advise the committee on the transaction and discussed the role of PJSC in the process. The committee also determined to meet telephonically twice weekly to receive updates and discuss any proposed transaction. Accordingly, from the end of August through December 21, 2011, the Parlux independent committee met twice weekly, and more frequently in December, to discuss the transaction and negotiations except when a meeting was deemed not necessary due to lack of significant developments Mr. Purches, the only member of the board not a member of the Parlux independent committee, was invited to attend a number of meetings of the independent committee to provide management’s views on various issues discussed at those meetings. During this period, Mr. Gopman, as chairman of the independent committee, consulted with representatives of Squire Sanders and PJSC and participated directly in the negotiations with representatives of Perfumania.

On August 26, 2011 Mr. Katz contacted Mr. Purches and reiterated Perfumania’s desire to reach an agreement with the Parlux board with regard to a friendly business combination.

On August 29, 2011, in a telephonic meeting, the Parlux independent committee, which had been advised by representatives of PJSC that the value of Perfumania stock post-transaction would be a key issue in evaluating the proposal, determined to put financial due diligence of Perfumania, including the capital structure and financing of the transaction, in the forefront of the document production request.

Also on August 29, 2011, Mr. Katz, Ms. Dellomo, Mr. Gopman and representatives of Edwards Wildman and Squire Sanders discussed by telephone a range of topics, including the potential dilutive effect of any Perfumania merger-related financing on the value of Perfumania stock, transaction timing, closing conditions, financing of the cash portion of the consideration, the treatment of outstanding options and warrants to acquire Parlux common stock, an amendment to Perfumania’s credit agreement with Wells Fargo Bank, voting agreements to be entered into by principal stockholders of both companies, a draft of a commitment letter from the Nussdorf Trusts to finance $30 million of the cash merger consideration and transactions costs relating to the merger, a possible agreement among Artistic Brands, Mr. Garcia and Parlux to amend the Artistic Brands side letter with respect to the amounts payable to Artistic Brands in the event of a change of control of Parlux to be executed contemporaneously with the execution of the merger agreement, and the nondisclosure and standstill agreements.

From August 30 through Sept. 7, 2011, the parties continued negotiations on the nondisclosure and standstill agreements and representatives of Parlux and Squire Sanders engaged in regular communications about the transaction proposal overall and about specific issues, including the need for information relating to a post-merger valuation of Perfumania’s stock.

 

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On September 7, 2011, Parlux and Perfumania executed the nondisclosure agreement and Parlux, Perfumania and Glenn Nussdorf executed the standstill agreement. Parlux issued a press release and filed a Current Report on Form 8-K disclosing these agreements, and Glenn Nussdorf amended his Schedule 13D disclosing the standstill agreement.

On September 8, 2011 the Parlux independent committee held a meeting at which it discussed, among other things, the need to reach an agreement with Perfumania regarding a payment schedule for Perfumania’s outstanding commercial account balance through the closing of a merger; PJSC’s obtaining information necessary to assist Parlux in evaluating the Perfumania stock proposed as merger consideration; the consideration of other parties who might be interested in a business combination with Parlux; the outlook for the amount of cash held by Parlux at the closing of a merger and the impact of the timing of transaction on Parlux’s cash position; putting Parlux in a position to negotiate an alternative transaction with other companies that might be more favorable to Parlux stockholders in the event an agreement with Perfumania was signed; and the need to have the Nussdorfs agree to vote their shares of Perfumania and Parlux stock in favor of a merger, should the parties arrive at an agreement, to ensure their commitment to a closing of a merger.

The Parlux independent committee also received a presentation from management on the terms of the Artistic Brands side letter and licensor warrants, including the provisions for payment upon a change in control of Parlux. Since that payment would, in effect, significantly reduce the amount of merger consideration otherwise payable to all of the holders of Parlux common stock, management and the independent committee confirmed, as had previously been conveyed by management and by Mr. Gopman to Perfumania, that Perfumania would have to negotiate with Artistic Brands, Mr. Garcia and any related warrant holders to address this change in control provision before entering into a merger agreement.

On September 8, 2011, Edwards Wildman distributed to Squire Sanders a request list of due diligence items regarding Parlux. Through the date that the merger agreement was executed, Perfumania and its advisors reviewed information and documents relating to Parlux contained in public filings or made available by Parlux in an online data room or on-site at Parlux’s facilities. During that time, Parlux and its advisors also conducted due diligence as to Perfumania based on information that was posted in an online data room, available in Perfumania’s public securities filings or separately provided by Perfumania. The parties engaged in due diligence discussions with representatives of each other and their respective advisors.

On September 14, 2011, representatives of PJSC participated via teleconference in a meeting of the Parlux independent committee and reported on the status of their initial financial due diligence requests. Given the importance of obtaining definitive information from Perfumania with respect to the financing structure, leverage and capital structure, the committee determined to focus on financial due diligence for the near term.

On September 15, 2011, Edwards Wildman sent to Squire Sanders a second draft of the merger agreement. The treatment of options and licensor warrants in the transaction remained an open point of negotiation, as did the post-merger capital structure of Perfumania. The draft was accompanied by an email message from Edwards Wildman indicating that the merger agreement would require that voting agreements would be executed by the Nussdorfs and their affiliates who own stock of Parlux and Perfumania and by the directors and officers of Parlux who own stock in Parlux, and indicated that the post-merger capitalization and the treatment of options and warrants, other than the licensor warrants, still needed to be addressed. Squire Sanders forwarded the draft merger agreement and accompanying message to the members of the independent committee and certain officers of Parlux.

In a conference call meeting of the Perfumania board of directors held on September 28, 2011, Mr. Garfinkle advised the board that, after a review of various legal advisors, the special committee had selected Carlton Fields, P.A., to provide legal advice regarding both the merger and the proposed Nussdorf Trust loans. He also recommended that the special committee be authorized to retain an investment banking firm to render its opinion to the special committee regarding the proposed transactions.

 

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On October 3, 2011, at a meeting of the Parlux independent committee, the committee discussed various matters, including the outstanding request for Perfumania to provide pro forma financial information to enable PJSC to proceed with its evaluation of the economic terms a proposed transaction, and the committee to be in a position to proceed with negotiations. The committee also discussed with representatives of Squire Sanders the status of Perfumania’s plans with respect to the Artistic Brands side letter and licensor warrants.

On October 4, 2011, Mr. Gopman and Mr. Katz discussed, among other things, the Perfumania financial information requested by PJSC, the amount and nature of the Nussdorfs’ proposed new loans to Perfumania to finance the merger, the status of discussions with Wells Fargo Bank regarding Perfumania’s borrowing under its credit facility to fund the balance of any cash merger consideration and the status of negotiations with Artistic Brands. Mr. Katz advised that the new Nussdorf loans might be in the form of convertible debt and that Perfumania was considering conversion of the licensor warrants at the same exchange ratio that would apply to other Parlux stockholders, extension of the warrant exercise period and a cancellation of the change of control provision in exchange for the issuance of additional shares of Perfumania stock.

From October 4, 2011, through the execution of the merger agreement on December 23, 2011, discussions and negotiations regarding the terms of the proposed merger continued between Mr. Gopman and Mr. Katz, and between representatives of Squire Sanders and representatives of Edwards Wildman, and the parties continued to exchange due diligence information. Messrs. Gopman and Katz kept their respective board committees advised of the progress.

On October 11, 2011, the Perfumania special committee met with Carlton Fields in Miami. Mr. Garfinkle was appointed Chairman of the Perfumania special committee. Mr. Garfinkle provided background information regarding Perfumania and the proposed merger and Carlton Fields discussed in detail with the committee its duties and responsibilities under Florida law in transactions such as the proposed merger and proposed Nussdorf Trust loans. Carlton Fields also reviewed the latest draft of the merger agreement with the special committee. The special committee then discussed with Carlton Fields the engagement of an investment banking firm to provide opinions as to the fairness, from a financial point of view, of the merger consideration and the Nussdorf Trust loans.

On October 19, 2011, Edwards Wildman circulated a draft voting agreement under which Glenn Nussdorf and his mother would vote their shares of Parlux common stock for approval of the merger and would make elections to receive merger consideration for those shares only in the form of Perfumania common stock. Thereafter, Edwards Wildman and Squire Sanders exchanged drafts of voting agreements relating to the Parlux shares held by the Garcia Group and by directors and officers of Parlux. The firms also exchanged drafts of agreements with the Nussdorfs requiring them to vote their shares of Perfumania common stock in favor of the merger. Drafts of the voting agreements were provided to Carlton Fields.

On October 24, at a meeting of the Parlux independent committee, Parlux management discussed preliminary estimates of cost synergies expected from a merger with Perfumania, the methodology employed to arrive at the expected synergies, and that the expected synergies would not be fully realized until fiscal year 2014. The committee also discussed outstanding stock options and the impact of a transaction on Parlux’s employees. Because the Parlux independent committee believed it would be useful to have information and advice with respect to the transaction from a different financial perspective and because a substantial portion of PJSC’s compensation is contingent upon consummation of the merger, the committee also discussed the engagement of a second financial advisor to advise the committee on the fairness, from a financial point of view, of the merger consideration to the holders of Parlux common stock.

On October 26, 2011, the Perfumania special committee met via conference call with members of Perfumania management to discuss its duties and responsibilities to Perfumania’s minority shareholders, and it requested detailed information from management. There was a general discussion of the proposed merger and Nussdorf Trust loans and the anticipated timeline. In addition, at that meeting, the Perfumania special committee, after

 

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review and discussion of the advisability of engaging an investment banking firm, authorized Mr. Garfinkle to negotiate the terms of an engagement with Financo to provide opinions as to the fairness, from a financial point of view, of the merger consideration and the Nussdorf Trust loans to Perfumania, in each case excluding fairness, from a financial point of view, to any Perfumania stockholders who owned, or whose affiliates owned, a controlling interest in Perfumania (and in the case of the merger consideration opinion, Perfumania stockholders who owned, or whose affiliates owned, any securities, including common stock, of Parlux).

On October 28, 2011, representatives of Edwards Wildman and Carlton Fields participated in a conference call regarding the proposed terms of the merger. Thereafter, Perfumania management continued to provide the Perfumania special committee with the financial and other information about the companies and the various proposed transactions that the committee requested, and representatives of Edwards Wildman and Carlton Fields spoke periodically by telephone concerning the status of negotiations over the terms of the merger agreement, the voting agreements, the Artistic Brands agreement, proposed amendments to Perfumania’s credit agreement with Wells Fargo Bank, documents relating to the merger and other matters, and they discussed the comments and questions of the Perfumania special committee related to the merger.

On October 28, Perfumania, Parlux and Glenn Nussdorf executed an extension of the standstill agreement to January 13, 2011, subject to earlier termination if the merger negotiations terminated or upon execution of a merger agreement. Mr. Nussdorf filed an amendment to his Schedule 13D disclosing the extension.

At the beginning of November 2011, Mr. Katz commenced discussions with Mr. Garcia regarding the treatment of the licensor warrants in connection with the merger. They spoke periodically until December 19, 2011, when they reached agreement that, upon the consummation of the merger, each of the licensor warrants would be converted into a warrant to acquire a number of shares of Perfumania common stock based upon the ratio at which shares of Parlux common stock were to be converted under the merger agreement, and Perfumania would issue an additional 300,000 shares of common stock to Artistic Brands or its designee. Mr. Katz reported periodically to Mr. Gopman and the Perfumania special committee on the progress of these negotiations.

In early November 2011, nondisclosure agreements with Artistic Brands, Mr. Garcia, and Marcy Fragrances, an owner of Artistic Brands and affiliate of Shawn Carter, a party to the licenses and sublicenses related to the licensor warrants, were negotiated and entered into. These agreements permitted Artistic Brands, Mr. Garcia, and Marcy Fragrances access to confidential information as to the merger, Parlux, and Perfumania.

On November 1, 2011, in a discussion between Mr. Gopman and Mr. Katz, Mr. Katz communicated Perfumania’s revised proposal that Parlux stockholders be able to make either an all stock election or a mixed cash and stock election for the merger consideration. Mr. Gopman requested a price collar that would provide for the issuance of an increased amount of Perfumania stock if the market value of that stock declined below a certain amount in exchange for a decreased amount of Perfumania stock payable if the market value of that stock increased above a certain amount. Mr. Katz objected to this request. Mr. Gopman and Mr. Katz also discussed the Parlux independent committee’s request for information with respect to the debt and capital structure of Perfumania after the merger, including term sheets for the loan from Perfumania’s credit facility, the proposed Nussdorf Trust loans and the licensor warrants. Mr. Katz and Mr. Gopman also discussed “break-up” fees and reimbursement of expenses if the merger agreement were terminated under certain circumstances. Mr. Katz agreed that termination fees should be bi-lateral and in customary amounts. Mr. Gopman and Mr. Katz also discussed matters related to Parlux employees, including the treatment of stock options and integration of stock option, severance and other employee benefits plans, and the retention of Parlux’s employees both before and after the merger.

On November 2, 2011, the Parlux independent committee held a meeting at which, among other things, representatives of PJSC, who participated by teleconference, reviewed their updated stand-alone valuation of Parlux. Also on November 2, Edwards Wildman sent Squire Sanders a draft term sheet with respect to the Artistic Brands side agreement and licensor warrants for review and comment.

 

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On November 4, 2011 Edwards Wildman provided a revised draft merger agreement to Squire Sanders and the Parlux independent committee. Discussions and negotiations continued between representatives of Squire Sanders and Edwards Wildman, with reports to and instructions from the Parlux independent committee and the Perfumania special committee, respectively, and between Messrs. Gopman and Katz. Significant issues discussed during November included:

 

   

Perfumania’s proposed condition that Parlux have $15 million in cash at the time of closing and Parlux’s proposal that the amount of cash at closing be subject to adjustment and, rather than being a condition to closing, included among adjustments to the merger consideration;

 

   

the schedule for payment by Perfumania to Parlux of its commercial account balance as outstanding monthly through the closing date of a merger;

 

   

Perfumania’s proposed condition that the holders of not more than 5% of the Parlux common stock demand their rights of appraisal under applicable law, and Parlux’s position that such a condition was not appropriate or should be a higher percentage;

 

   

treatment of the licensor warrants, including a condition proposed by Perfumania that Artistic Brands negotiate exclusively with Perfumania;

 

   

the length of the period after signing a merger agreement where Parlux would be free to solicit and negotiate alternative acquisition proposals, which we refer to as the “go-shop” period;

 

   

the terms relating to the ability of Parlux’s board to negotiate proposals for alternative transactions following the go-shop period;

 

   

the circumstances under which the parties would be entitled to break-up fees and expenses, and the amounts of break-up fees payable by Parlux and Perfumania; and

 

   

the terms and documentation of the financing to be provided from Perfumania’s credit facility and from the Nussdorf Trusts.

On November 14, 2011, the Perfumania special committee met with Carlton Fields to discuss the terms of the potential engagement of Financo. On November 18, 2011, the Perfumania special committee entered into an engagement letter for Financo to provide an opinion as to the fairness, from a financial point of view, of the merger consideration to Perfumania, with such opinion explicitly excluding fairness, from a financial point of view, of the merger consideration to any Perfumania stockholders who owned, or whose affiliates owned, a controlling interest in Perfumania or who owned, or whose affiliates owned, any securities, including common stock, of Parlux, and a separate engagement letter, also dated as of November 18, 2011 for Financo to provide an opinion as to the fairness, from a financial point of view, of the Nussdorf Trust loans to Perfumania, with such opinion explicitly excluding fairness of the loans to any stockholders of Perfumania who owned, or whose affiliates owned, a controlling interest in Perfumania, and including in its review of the Nussdorf Trust loans only the interest rate thereon, the covenants thereto, and the principal and maturity thereof. By this point, the Nussdorf Trust loans had been negotiated by Perfumania management to include terms substantially providing for the Nussdorfs to loan $30 million to Perfumania in return for subordinated notes paying interest at the then current Senior Debt Rate (as defined herein) plus two percent (2%) per annum.

At the request of Wells Fargo Bank, Perfumania provided Wells Fargo Bank with information about Parlux, the merger, updated projections as to Perfumania’s business, and the business of the combined companies. Counsel to Wells Fargo Bank, Otterbourg, Steindler, Houston & Rosen, P.C., circulated a first draft of an amendment to Perfumania’s senior credit facility on November 15, 2011. Thereafter, through the date of its execution on December 23, 2011, representatives of Edwards Wildman and Otterbourg negotiated the terms of an amendment to the senior credit facility to permit Perfumania to use borrowings under that facility to fund a portion of the cash merger consideration. Drafts of the proposed amendment were provided to Carlton Fields for review and comment.

 

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On November 21, 2011, at a meeting of the Parlux independent committee, the committee continued its discussions with representatives of Squire Sanders on the advisability of engaging a second independent financial advisor to provide an opinion to the committee, in addition to the opinion that would be provided by PJSC, with respect to the fairness of the merger consideration, from a financial point of view, to the holders of shares, other than members of the Nussdorf family and any trusts or entities controlled by the Nussdorf family, of the Parlux common stock, assuming the parties reach agreement on the terms of a merger agreement and related agreements. After reviewing and discussing proposals from several financial advisors, the committee decided to engage American Appraisal Associates, Inc. and authorized Mr. D’Agostino to negotiate, with the assistance of Squire Sanders, the terms of a formal engagement letter with American Appraisal, and an engagement letter with American Appraisal was executed on December 7, 2011.

At that meeting of the Parlux independent committee, in which management also participated, representatives of Squire Sanders discussed the terms of the agreement being negotiated by Perfumania with Artistic Brands, under which it was proposed to require Artistic Brands to deal exclusively with Perfumania with respect to an acquisition of Parlux, and the advisability of permitting Artistic Brands to negotiate with a third party with respect to the treatment of the Artistic Brands side letter and licensor warrants in the event the Parlux board became involved in acquisition discussions with a third party. Squire Sanders had previously proposed a 60-day go-shop period, and Edwards Wildman responded with a proposal for a 15-day go-shop period. At the meeting, representatives of Squire Sanders advised the committee that Perfumania had agreed to a 30-day go-shop period. The committee discussed the proposed go-shop period, including the fact that discussions between Parlux and Perfumania as to a possible acquisition of Parlux by Perfumania had been publicly disclosed by Parlux and Perfumania beginning August 11, 2011, that no third parties had expressed an interest in discussing a business combination or similar transaction since that date, and PJSC’s view that it could effectively solicit alternative acquisition proposals within a 30-day go-shop period, and concluded that the proposed go-shop period was acceptable. The independent committee also discussed the information still to be provided by Perfumania that was necessary for an evaluation of the proposed merger. Other matters being negotiated with Perfumania were discussed, including negotiating the terms of a Parlux severance policy for its employees separate from any provisions for severance in the merger agreement, the proposed voting agreements with the Nussdorfs, the Garcia Group and the directors and executive officers of Parlux, and the appropriate exceptions to such agreements relating to the voting of Parlux shares. Representatives of Squire Sanders advised the committee on the process that would follow execution of a merger agreement, including a meeting of Parlux stockholders to approve the merger.

Also on November 21, 2011, Glenn Nussdorf, Mr. Garcia, Alfred R. Paliani, the General Counsel of Quality King, and representatives of Edwards Wildman met in Edwards Wildman’s New York office to discuss negotiations with Mr. Carter relating to the treatment of the licensor warrants, a new license to be negotiated by Artistic Brands with S. Carter Enterprises, LLC as to celebrity fragrances under the name “Jay-Z,” and a related sublicense between Artistic Brands and Parlux. Each of these agreements, which we refer to as the “Carter license documents,” would be effective upon the closing of the merger.

On November 22, 2011, Edwards Wildman provided Squire Sanders for review and comment initial drafts of proposed amendments to Perfumania’s credit agreement with Wells Fargo Bank, documents to amend the licensor warrants, an agreement of Artistic Brands as to its obligations in connection with alternative proposals received by the Parlux board of directors, and a letter amending the Artistic Brands side letter. Edwards Wildman also provided drafts of these documents to Carlton Fields for review and comment.

On November 23, 2011, Edwards Wildman delivered to Squire Sanders, Otterbourg and Carlton Fields drafts of the proposed commitment letter for the Nussdorf Trust loans.

Also on November 23, 2011, Mr. Katz and Mr. Gopman discussed, among other things and in general terms, the post-merger capital structure of Perfumania and the related agreements with Wells Fargo and the Nussdorf Trusts, as well as Perfumania’s negotiations of proposed agreements with Artistic Brands.

 

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Squire Sanders provided copies of the draft documents it received on November 22 and 23 to the independent committee and management and received and discussed comments from the committee and management as these documents continued to be negotiated by and among the various parties until the signing date.

At a meeting of the Parlux independent committee on November 28, 2011, Mr. Gopman reported on the conversation with Mr. Katz on November 23, and Mr. Purches expressed his views on the proposed condition of $15 million cash at closing in light of the likely time period for a closing if the parties were to approve a merger agreement.

Negotiations among the parties continued in December 2011. Parlux management, representatives of Squire Sanders, representatives of PJSC and Mr. Gopman advised the Parlux independent committee on significant developments and the status of open points, and the committee discussed those developments and provisions relating to the proposed agreement that might affect the operation of Parlux’s business after the signing of a merger agreement and before closing, with the possibility that the merger agreement might be terminated under certain conditions by either party. Representatives of Squire Sanders discussed with the committee the decision-making process, and the fiduciary duties of the members of the committee in the context of a potential business combination transaction.

On December 2, 2011, the Perfumania special committee held a meeting with Perfumania management, Stephen Nussdorf and Carlton Fields in which Perfumania management made a detailed presentation regarding the reasoning behind, and the pricing of, the merger. The committee discussed with management the value Parlux would be providing Perfumania in its present form, the synergies between the two entities, the total price of the transaction including the goodwill calculation, various brands held by Parlux, and the benefits of purchasing Parlux versus internal expansion. They also discussed the need to amend Perfumania’s articles of incorporation to increase the number of authorized shares of Perfumania common stock by 15 million shares to allow for the proposed issuances in connection with the merger and other corporate purposes. During the discussion, Carlton Fields responded to various legal questions regarding the merger. Afterwards, Carlton Fields discussed in detail with the Perfumania special committee the provisions of the present version of the draft merger agreement, financing arrangements related to the merger, and various related ancillary agreements.

Through early and mid-December, Edwards Wildman communicated about developments to Carlton Fields, which continued to provide the Perfumania special committee with legal guidance on the various forms and iterations of the merger agreement and all relevant documents related to the merger.

Beginning on December 13, 2011, representatives of Edwards Wildman commenced negotiations with Artistic Brands’ counsel, Littman Krooks LLP and Mr. Carter’s counsel, Cummings & Lockwood, relating to the Artistic Brands agreements. Mr. Paliani negotiated the terms of the Carter license documents with Littman Krooks and Cummings & Lockwood during the same period. Mr. Katz and Mr. Garcia negotiated additional provisions in the voting agreement relating to shares of Parlux stock held by the Garcia Group restricting their acquisition of shares of Perfumania common stock and certain actions by them relating to the change of control of Perfumania or seeking representation on the Perfumania board of directors. These negotiations were informed by comments from the Perfumania special committee, Edwards Wildman, and Littman Krooks.

On December 15, 2011, at a meeting of the Parlux independent committee, representatives of American Appraisal presented, by telephone, a report on their preliminary fairness analysis and the assumptions made in that analysis, and responded to questions from the committee. Representatives of Squire Sanders discussed with the committee the primary unresolved transaction issues, including whether Perfumania would be able to finance the cash merger consideration, and the committee discussed its position on those issues, including the need for confirmation that Perfumania have commitments for the financing of the cash consideration.

On December 16, 2011, the Parlux independent committee spoke via teleconference with representatives of PJSC who gave a preliminary presentation with respect to the transaction and responded to questions from the

 

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committee. Squire Sanders discussed with the committee certain unresolved issues, including the requirement for Parlux to have $15 million of cash at closing, and the committee discussed with counsel possible approaches to resolve that issue including, as previously proposed on behalf of the independent committee, that rather then being a condition to closing, any provision relating to a minimum amount of cash at closing be included among adjustments to the merger consideration, and that the amount of cash at closing be subject to certain adjustments including a credit for any shortfall in the schedule of payments by Perfumania to Parlux of its commercial account balances.

On December 19, 2011, the Perfumania special committee held a meeting with representatives of Financo and Carlton Fields. Financo presented its analysis of the merger consideration and responded to questions from the committee. On December 23, 2011, Financo provided a written opinion that, as of such date, and based upon and subject to the various assumptions and limitations set forth in its written opinion, the merger consideration to be provided by Perfumania in the proposed merger was fair from a financial point of view to Perfumania, with such opinion explicitly excluding fairness, from a financial point of view, of the merger consideration to any shareholders of Perfumania who owned, or whose affiliates owned, a controlling interest in Perfumania, or who owned, or whose affiliates owned, any securities, including common stock, of Parlux.

On December 19, 2011, Financo also presented to the Perfumania special committee its analysis of the Nussdorf Trust loans and responded to questions from the committee. On December 23, 2011, Financo provided a written opinion that, as of such date, and based upon and subject to the various assumptions and limitations set forth in its written opinion, the Nussdorf Trust loans were fair from a financial point of view to Perfumania, with such opinion explicitly excluding fairness, from a financial point of view, of the loans to any shareholders of Perfumania who owned, or whose affiliates owned, a controlling interest in Perfumania and including in its review of the Nussdorf Trust loans only the interest rate thereon, the covenants thereto, and the principal and maturity thereof.

On December 19, 2011, the Parlux independent committee held a meeting at which the proposed business combination with Perfumania was further discussed and the merger agreement was considered. Also attending the meeting were Parlux’s consultant, Mr. Vercillo, members of Parlux management, and representatives from Squire Sanders. The Squire Sanders representatives reviewed with the committee legal principles relating to director independence, fiduciary responsibility, and the value of receiving information from financial advisors to further the committee’s decision-making process. In addition, the Squire Sanders representatives discussed with the committee the material provisions of the proposed merger agreement and the material terms of the proposed Artistic Brands side letter and of the proposed Carter license documents, which would be effective upon the closing of the merger and were still being negotiated. They also discussed the material terms of the proposed letter agreement among Perfumania, Parlux, Artistic Brands and Mr. Garcia providing that Artistic Brands and Mr. Garcia will not solicit or negotiate with parties other than Perfumania in connection with the treatment of the licensor warrants or the letter agreement, noting that, in the event that, consistent with the provisions of the merger agreement, Parlux engages in discussions or negotiations with a third party regarding an alternative acquisition proposal or enters into an agreement relating to a superior proposal, then Mr. Garcia and Artistic Brands may enter into discussions or negotiations with such third party with regard to the treatment of the licensor warrants and/or the letter agreement in connection with such acquisition proposal. The Squire Sanders representatives also discussed with the committee the material terms of a proposed voting agreement among Parlux and the Nussdorfs, pursuant to which such stockholders agreed that they will vote their shares of Perfumania common stock in favor of the matters to be proposed to the Perfumania stockholders for approval in connection with the proposed merger. They also discussed the material terms of the proposed voting agreements among Perfumania and the Garcia Group, as well as the material terms of the voting agreements between Perfumania and the directors and certain of the officers of Parlux, pursuant to which the Garcia Group and each officer and director, respectively, agreed that he or she will vote their shares of Parlux common stock in favor of adoption of the merger agreement. The Squire Sanders representatives noted that each of the voting agreements expires upon termination of the merger agreement or, in the case of the voting agreements regarding Parlux shares, a change of recommendation by the Parlux board of directors that the Parlux stockholders vote in favor of

 

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the approval and adoption of the merger agreement. Drafts of all of the foregoing agreements had been distributed to the committee and the board prior to the meeting. The committee discussed the proposed transaction, including, among other things, the terms of the transaction, its strategic rationale and the proposed composition of the Perfumania board of directors following the closing of the merger.

Responding to questions from the committee, representatives from PJSC confirmed PJSC’s lack of potential conflicts of interest, and that it has not otherwise received compensation during the last two years for providing investment banking services to Parlux, Perfumania or any of their affiliates. They then made a presentation on the economic terms of the proposed merger and delivered to the Parlux independent committee PJSC’s oral opinion, subsequently confirmed in writing as of December 19, 2011, that, as of such date, based upon and subject to the assumptions, procedures, factors, qualifications and other matters and limitations set forth in PJSC’s opinion, and other factors it deemed relevant, the merger consideration in the proposed merger was fair from a financial point of view, to the Parlux stockholders, excluding members of the Nussdorf family and any trusts or other entities controlled by the Nussdorf family. The PJSC representatives responded to questions from the committee, and then left the meeting.

Representatives from American Appraisal joined the meeting. Upon questioning, they verified American Appraisal’s independence and that it had no conflicts of interest with respect to its engagement. They made a presentation to the committee on American Appraisal’s financial analysis of the proposed merger and delivered to the Parlux independent committee American Appraisal’s oral opinion, subsequently confirmed in writing as of December 23, 2011, that, as of such date, based upon and subject to the assumptions, procedures, factors, qualifications and other matters and limitations set forth in American Appraisal’s opinion, and other factors it deemed relevant, that the merger consideration in the proposed merger was fair from a financial point of view, to the Parlux stockholders. The American Appraisal representatives responded to questions from the committee, and then departed the meeting. A representative of Squire Sanders reviewed with the members of the Parlux independent committee their fiduciary duties in the context of the potential merger transaction. The committee then discussed the fact that there were certain documents relating to the transaction that had not yet been finalized, and determined to meet once the remaining contractual uncertainties were resolved.

Following the meeting of the Parlux independent committee, a meeting of the compensation committee of the Parlux board of directors was held to consider approval of the Parlux Fragrances, Inc. Severance Policy for the Parlux employees. The material terms of the Severance Policy had been negotiated with Perfumania and discussed by the Parlux independent committee in connection with its consideration of the merger agreement and related agreements. After discussion, the compensation committee approved the severance plan and recommended that the board approve the severance plan.

On December 21, 2011, the Parlux independent committee held a meeting at which the proposed business combination with Perfumania was further discussed and the merger agreement and related agreements were considered for final approval. Representatives of Squire Sanders updated the committee on the status of transaction documents and related agreements, including the voting agreements and the licensor-related agreements, including the Carter license documents, and other related matters, including the continuing negotiations of the Carter license documents by Perfumania. After discussion, the committee concluded that there were no material issues outstanding that would impact the merger consideration or impact the fairness opinions, which conclusion was confirmed by the December 23, 2011 written fairness opinion of American Appraisal to the committee.

The Parlux independent committee discussed at length the merits of the proposed merger, including the matters described in “The Merger—Parlux Board of Directors’ Recommendation” and the uncertainties facing Parlux on a stand-alone basis. The committee also discussed risk factors associated with the proposed merger that are outside the control of Parlux, including a possible decrease in the market value of Perfumania’s stock and the risk to Parlux stockholders receiving Perfumania stock in the merger of the possibility that the combined company might not perform as well as projected. In addition, the committee discussed the fact that, under the terms of the

 

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merger agreement, if Parlux stockholders elect, in the aggregate, to receive more Perfumania shares than the maximum number available under the merger agreement, holders electing to receive all stock consideration will receive a proportionate amount of the maximum available shares plus cash for the shares elected but not issued.

Following discussion of the terms of the merger agreement and its provisions, and taking into consideration the opinions of PJSC and American Appraisal, the committee determined that the merger agreement and the transactions contemplated by the merger agreement were advisable for, fair to, and in the best interest of Parlux and its stockholders, and unanimously approved a recommendation that the board of directors authorize, approve and direct the execution of the merger agreement, and recommend that the stockholders approve and adopt the merger agreement, subject to the terms and conditions set forth in the merger agreement. The Parlux independent committee’s approval was subject to confirmation by the Chairman of the committee that the final merger agreement and related agreements are not materially different from those previously presented for consideration by the committee, which confirmation was made by the Chairman on December 23, 2011.

Following the meeting of the independent committee, a meeting of the full Parlux board of directors was held. Representatives of Squire Sanders attended the meeting. Mr. Purches was brought up to date on recent developments, the deliberations of the committee and the fairness opinions received by the committee. After discussion, the board unanimously resolved that the merger agreement and the transactions contemplated by the merger agreement were advisable for, fair to, and in the best interest of Parlux and its stockholders, authorized, approved and directed the execution of the merger agreement, and resolved to recommend that the stockholders approve and adopt the merger agreement, subject to the terms and conditions set forth in the merger agreement. Such approval was subject to confirmation by the Chairman of the independent committee that the final merger agreement and related agreements are not materially different from those previously presented for consideration by the committee. Such confirmation was made by the Chairman on December 23, 2011. In addition, upon recommendation of the compensation committee and after discussion, the board unanimously approved the severance plan.

On December 22 and 23, 2011, the Perfumania special committee held meetings by conference call that were attended by representatives of Carlton Fields. The committee discussed the merger and related documentation in depth, considering the Financo presentations and opinions, advice from Carlton Fields regarding the final forms of the merger agreement and all other documentation related to the merger, as well as the factors described under “The Merger—Perfumania Special Committee’s and Board of Directors’ Recommendation,” among others. Carlton Fields reviewed the fiduciary duties of the Perfumania directors and the legal standards applicable to their consideration of the proposed merger and Nussdorf Trust loans. After discussion, the Perfumania special committee unanimously approved the merger, the Nussdorf Trust loans and the amendment of Perfumania’s articles of incorporation increasing the number of authorized shares of Perfumania common stock, and unanimously recommended to the board of directors that it adopt the merger agreement and approve all other documents and actions related to the merger and recommend that the stockholders approve the amendment to the Perfumania charter and the issuances of Perfumania common stock in connection with the merger.

Following the meeting of the Perfumania special committee on December 23, 2011, the full board of directors of Perfumania met by conference call, with Ms. Dellomo and a representative of Edwards Wildman in attendance. Mr. Katz reviewed the terms of the proposed merger and related arrangements. Mr. Garfinkle, as Chairman of the Perfumania special committee, reported on the deliberations and resolutions of the committee. After discussion, the directors unanimously, including the affirmative vote of each of the disinterested, independent directors, approved Perfumania’s entering into the merger agreement, issuing the shares of Perfumania common stock required under the merger agreement and ancillary agreements, amending the articles of incorporation and taking all the actions necessary or appropriate to consummate the merger and related transactions, and resolved to recommend that the Perfumania shareholders approve the amendment of the Perfumania charter and the issuances of Perfumania common stock in connection with the merger.

 

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On December 23, 2011, Perfumania, Parlux and the other respective parties executed the Merger Agreement, the voting agreements, the Nussdorf Trust loan commitment letter, and the Artistic Brands agreements, as applicable, and Perfumania and Parlux made a public announcement. Each company then filed with the SEC a Current Report on Form 8-K, reporting the execution of the merger agreement and the related agreements. Glenn Nussdorf also filed an amendment to his Schedule 13D regarding his voting agreement.

The merger agreement permitted Parlux, until January 22, 2012 (the “go-shop” period), to seek proposals from third parties to acquire Parlux in a transaction that is an alternative to the merger. The independent committee instructed PJSC to develop and implement a thorough and aggressive process to seek alternative bids for Parlux during the “go shop” period. Following the announcement of the merger, PJSC contacted 39 potentially interested parties. One of the parties that was contacted expressed an interest in receiving confidential information in order to evaluate Parlux and entered into a non-disclosure agreement. Of the 39 parties that were contacted, 25 expressed no interest in receiving confidential information in order to evaluate Parlux. 14 of the 39 parties did not respond to follow-up inquiries made by PJSC. None of these 39 parties expressed an interest in making an acquisition proposal for Parlux during the “go-shop” period.

The terms of the merger agreement and related agreements are more fully described in the section entitled “The Merger Agreement.”

Perfumania Special Committee’s and Board of Directors’ Recommendations

At meetings on December 23, 2011, the Perfumania special committee and the Perfumania board of directors each unanimously (1) determined that the merger and the merger agreement are advisable and in the best interests of Perfumania and its stockholders, (2) approved the merger and the merger agreement and (3) determined to recommend that the holders of Perfumania common stock vote FOR the proposal to amend the Perfumania charter to increase the number of authorized shares of Perfumania common stock and FOR the proposal to approve the issuance of shares of Perfumania common stock in connection with the merger, which are both necessary to effect the merger.

Perfumania’s board of directors believes that the merger will provide substantial benefits to Perfumania’s stockholders, as well as those of Parlux. The combination with Parlux will create a larger, independent, national, vertically integrated manufacturer, wholesale distributor and specialty retailer of perfumes and fragrances that the Perfumania board expects will be well-positioned to compete in the marketplace and drive growth, as well as to benefit from increased operating scale and licensing opportunities.

In making its determination to recommend to the board that Perfumania should proceed with the merger, the Perfumania special committee consulted with Perfumania’s management regarding the strategic and operational aspects of the combination. In the course of reaching their determinations, the Perfumania special committee and board considered a variety of positive factors, including the following anticipated benefits:

 

   

the improvement in the existing strengths of both companies, in particular, for Perfumania, wholesale sales, retail sales, warehousing and logistics and financing, and for Parlux, licensing, design and development of brands and international opportunities;

 

   

the benefits of increased vertical integration, including maximizing profits by taking advantage of Parlux’s reduced costs on fragrances owned or licensed by Parlux, and diversification of the business, including reducing the risks of limited scope of activities and a limited number of customers;

 

   

that the increased size and distribution capabilities of the combined company (including approximately 2,900 Perfumania retail and consignment stores through which Parlux product may be sold) are expected to attract more and better licenses;

 

   

the increased ability to maximize product brand potential by diversifying offerings in different markets as well as diversifying retail outlets, and by increased ability to control the positioning of brands in certain markets;

 

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the improved control over inventory management expected from servicing all customers through a single inventory;

 

   

the addition of experienced directors, management and purchasing personnel while reducing the overall costs of public company compliance;

 

   

that the increased size of the company is expected to increase the opportunities for acquiring additional companies and assets, and the increased number of authorized shares will make it easier to accomplish such acquisitions;

 

   

the accretion in earnings per share for Perfumania’s existing stockholders expected to result from the merger over several years (after pass-through of the write-up of inventory and amortization of intangible assets recognized under purchase accounting);

 

   

the expected increased liquidity for our stockholders due to the expanded public stockholder base;

 

   

the anticipated increase in interest from new investors because of the company’s larger size and scope of operations;

 

   

the higher consolidated capitalization, revenues and earnings base of the combined company that should result in both improved bank and private financing capability and afford us greater access to public capital markets;

 

   

the greater scale and stronger financial position that is expected to result in additional bargaining power and improved terms with suppliers and landlords; and

 

   

synergies anticipated to result from the merger, including those discussed below.

The anticipated synergies include reduced aggregate costs in a number of areas, particularly distribution, promotional activities, administration, operations and accounting and other efficiencies. No assurance can be given that any of the foregoing benefits will actually be achieved, including without limitation our achieving synergies of any particular magnitude.

In addition, in their respective meetings, the Perfumania special committee and the board of directors also considered the following factors:

 

   

Parlux’s prospects based on Perfumania’s due diligence, the review and analysis of Parlux’s financial condition, results of operations, business, reputation and risks, including the results of the business, financial, accounting and legal due diligence investigations of Parlux;

 

   

the presentation by Financo of its financial analyses of the proposed merger to the Perfumania special committee, and its written opinions with respect to the fairness, from a financial point of view, of the merger consideration and the Nussdorf Trust loans to Perfumania, as discussed in more detail below;

 

   

the fact that stockholder approval of the transaction would be required from both Perfumania and Parlux stockholders and that, upon completion of the merger, it was expected that Parlux stockholders would own approximately 40% of the outstanding shares of Perfumania common stock and existing Perfumania stockholders would own approximately 60% of the outstanding shares of Perfumania common stock, based on the number of shares issued and outstanding as of December 23, 2011, the date of the execution of the merger agreement, and assuming the issuance of the maximum number of shares under the merger agreement;

 

   

the fact that, following the merger, the Perfumania board of directors will consist of the five current members of the Perfumania board as well as the five members of the Parlux Board;

 

   

the presentations by and discussions with Perfumania management and representatives of Carlton Fields and Edwards Wildman, respectively, regarding the terms and conditions of the merger agreement and the fiduciary duties of the Perfumania special committee and board of directors, respectively, in considering the merger and the financing arrangements;

 

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the potential effect of the terms of the merger agreement with respect to possible third party proposals to acquire Parlux after execution of the merger agreement, including the “go shop” provision that permits Parlux to solicit additional acquisition proposals from third parties for a limited period of time and a provision whereby, if any third party makes an acquisition proposal that is or is reasonably likely to lead to a superior proposal (as described under “The Merger Agreement—Solicitation; Restrictions on Solicitation” beginning on page 124) before the approval of the merger agreement by Parlux stockholders, the Parlux board of directors may provide information to and engage in negotiations with that third party, subject to the terms and conditions of the merger agreement;

 

   

the fact that the termination fee provisions are the product of arms’ length negotiations; and

 

   

the ability to complete the merger as a reorganization for U.S. federal income tax purposes.

The Perfumania special committee and board of directors also considered a number of potentially negative factors in their deliberations on the merger, including:

 

   

the potential negative impact on Perfumania’s future financial results of the purchase accounting treatment of the acquisition, including amortization of the fair value of Parlux’s licenses, the write-up of its inventory, and the possible need to recognize impairment of goodwill;

 

   

the possibility that the merger might not be completed as a result of the failure to obtain the required approval from Parlux’s stockholders or required regulatory approvals and the effect the resulting termination of the merger agreement may have on the trading price of Perfumania common stock and Perfumania’s operating results;

 

   

the possibility that the necessary financing may be unavailable to Perfumania at the time the merger is otherwise required to close and the potential effects of Perfumania’s inability to consummate the merger, including the ability of Parlux to seek specific performance or damages in the event of a breach;

 

   

the risk that the synergies and benefits sought in the merger might not be fully achieved or achieved in the anticipated time period;

 

   

the risk that additional debt incurred in connection with the merger could have a negative impact on Perfumania’s ratings and operational flexibility; and

 

   

other risks among those described in the section entitled “Risk Factors” beginning on page 32 of this joint proxy statement/prospectus.

However, in the judgment of the Perfumania special committee and board, these concerns were outweighed by the anticipated benefits for Perfumania and its stockholders.

In view of the wide variety of factors considered in connection with its evaluation of the merger and the merger agreement and the complexity of these matters, the Perfumania board of directors did not find it useful to and did not attempt to quantify, rank or otherwise assign relative weights to these factors.

In addition, the Perfumania special committee and board of directors did not undertake to make any specific determination as to whether any particular factor, or any aspect of any particular factor, was favorable or unfavorable to its ultimate determination, but rather they conducted an overall analysis of the factors described above, including discussions with Perfumania’s leadership team and outside legal, financial and accounting advisors. In considering the factors described above, individual members of the Perfumania special committee and board of directors may have given different weight to different factors.

Parlux Board of Directors’ Recommendation

At a meeting of the Parlux independent committee held on December 19, 2011 detailed presentations were made by Parlux’s management, legal counsel and financial advisors with respect to the proposed merger. At a meeting of the Parlux independent committee held on December 21, 2011, additional presentations by Parlux’s management and legal counsel were made, and the Parlux independent committee unanimously approved the

 

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merger agreement and the transactions contemplated by the merger agreement, including the merger, and determined to recommend the merger agreement and the transactions contemplated thereby to the full Parlux board of directors. At a subsequent meeting of the Parlux board of directors, based upon the presentations by Parlux’s management and legal counsel and review of the presentations by and opinions of financial advisors to the Parlux independent committee, and the recommendation from the Parlux independent committee, the Parlux board of directors unanimously determined that the merger agreement, including the merger and the other transactions contemplated by the merger agreement, was advisable and in the best interests of Parlux and its stockholders, unanimously approved the merger agreement and the transactions contemplated by the merger agreement, including the merger, and unanimously resolved to recommend that the stockholders of Parlux vote FOR the proposal to approve and adopt the merger agreement. The approval by the Parlux stockholders is necessary for the merger to occur.

Considerations Supporting the Transaction

The Parlux independent committee and the Parlux board of directors considered the following factors as generally supporting their respective decisions to recommend approval of, and to approve and enter into, the merger agreement and the transactions contemplated by the merger agreement:

 

   

that the merger consideration represented a premium to the recent trading prices of the Parlux common stock based on the cash being offered and the recent and historical market prices of Perfumania common stock, as well as the value of the merger consideration that would be implied at various other Perfumania share prices;

 

   

the current and future landscape of the fragrance industry, the competitive challenges facing industry participants, the respective positions of Parlux and Perfumania in the industry and the likelihood that the combined company would be better positioned to overcome these challenges if the expected strategic and financial benefits of the transaction were fully realized;

 

   

the Parlux independent committee and the Parlux board of directors considered that the existing Parlux stockholders would benefit from the future performance of the combined company, the synergies expected to result from the merger, and the other strengths of the combined company as set forth above;

 

   

that members of the Parlux board of directors would be elected to the combined company board of directors in connection with consummation of the merger and, during their service on that board, would have the ability to exercise their fiduciary oversight responsibilities in the interests of all holders of the combined company common stock;

 

   

their knowledge of Parlux’s business, operations, financial condition, earnings and prospects and of Perfumania’s business, operations, financial condition, earnings and prospects, taking into account the results of Parlux’s due diligence review of Perfumania and the historical relationship of Parlux and Perfumania;

 

   

recent and historical market prices of Parlux common stock, as well as the limited trading market in Parlux common stock;

 

   

the adequacy of the merger consideration and the other value provided to Parlux stockholders including:

 

   

the ability of Parlux stockholders to elect the form of consideration that they would like to receive and the fact that certain Parlux stockholders would agree to choose to receive stock consideration (see “The Merger Agreement—Consideration to be Received in the Merger” beginning on page 113; and

 

   

the historical, present and anticipated financial performance and position of Perfumania and the anticipated future financial performance and position of the combined company;

 

   

their belief that the merger agreement and the transactions contemplated by the merger agreement were more favorable to Parlux stockholders than other strategic alternatives reasonably available to Parlux and its stockholders;

 

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the fact that the principal shareholders support the transaction and have executed voting agreements undertaking to vote in favor of it;

 

   

the presentation of PJSC, including the opinion of PJSC, dated December 19, 2011 to the Parlux independent committee to the effect that, as of that date and based upon and subject to the assumptions, procedures, factors, qualifications and other matters and limitations set forth in that opinion, and other factors it deemed relevant, the merger consideration to be paid to holders of Parlux common stock (other than members of the Nussdorf family and any trusts or entities controlled by the Nussdorf family) in the merger was fair from a financial point of view to such holders, as more fully described below under the caption “—Opinions of Financial Advisors to the Parlux Independent Committee”;

 

   

the financial analyses and presentation of American Appraisal, including an oral opinion to the Parlux independent committee on December 19, 2011, confirmed by a written opinion dated December 23, 2011, to the effect that, as of those dates and based upon and subject to the assumptions, procedures, factors, qualifications and other matters and limitations set forth in American Appraisal’s opinion, and other factors it deemed relevant, the merger consideration to be paid to holders of Parlux common stock in the merger was fair from a financial point of view to such holders, as more fully described below under the caption “—Opinions of Financial Advisors to the Parlux Independent Committee”;

 

   

the financial and other terms and conditions of the merger agreement, including:

 

   

the fact that the “go shop” provision enables Parlux to solicit additional acquisition proposals from third parties for a thirty-day period following execution of the merger agreement;

 

   

the fact that Parlux is permitted to terminate the merger agreement in order to approve an alternative transaction proposed by a third party that is a “Superior Proposal” as defined in the merger agreement, upon the payment of a $2 million or $4 million termination fee, depending on the timing of such a termination, and its belief that such termination fee is reasonable and should not preclude another party from making a competing proposal if another party desires to do so; and

 

   

the extent of the commitments to obtain required antitrust regulatory approvals that Perfumania has made under the merger agreement;

 

   

the commitment of Perfumania’s lenders to provide financing to Perfumania for the purpose of financing a portion of cash merger consideration and the commitment of the Nussdorf Trusts to provide financing to Perfumania for the remainder of the cash merger consideration, and the conditions relating to such commitments (see “Perfumania’s Financing Arrangements” on page 135);

 

   

the conditions to the merger agreement, which the Parlux independent committee and the Parlux board of directors viewed as providing a reasonable level of assurance that the merger would be completed;

 

   

the expectation that the merger would qualify as a reorganization for U.S. federal income tax purposes and that, as a result, receipt of the stock portion of any merger consideration by Parlux stockholders in exchange for their shares of Parlux common stock would not be taxable to Parlux stockholders that are U.S. persons for U.S. federal income tax purposes; and

 

   

the fact that a vote of Parlux stockholders on the merger is required under Delaware law, and that Parlux stockholders who do not vote in favor of the merger will have the right to dissent from the merger and to demand appraisal of the fair value of their shares under Delaware law.

Countervailing Considerations

The Parlux independent committee and the Parlux board of directors weighed these positive factors against a number of countervailing factors identified in its deliberations, including:

 

   

the challenges inherent in the combination of two businesses of the size and scope of Parlux and Perfumania and the size of the companies relative to each other, including the risk that integration costs may be greater than anticipated and the possible diversion of management attention for an extended period of time;

 

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the risk that changes in the regulatory or competitive landscape may adversely affect the business benefits anticipated to result from the transaction;

 

   

the risk of not capturing all the anticipated cost savings and operational synergies between Parlux and Perfumania and the risk that other anticipated benefits might not be realized;

 

   

the risk that the financing required by Perfumania to consummate the transaction would not be available (see “Perfumania’s Financing Arrangements” beginning on page 135);

 

   

the risk that the conditions to the merger would not be met, including the conditions requiring stockholder and regulatory approvals, or the risk that the merger agreement could be terminated and the potential adverse impact on Parlux if the merger does not close, including the diversion of management and employee attention, potential employee attrition and the effect on business and customer relationships (see “The Merger Agreement—Conditions to Completion of the Merger” beginning on page 122);

 

   

the fact that, as a result of the fixed exchange ratios for the stock component of the merger consideration, the value of that component would decline in the event of a decline in the price of Perfumania common stock before the closing of the merger;

 

   

the fact that, following the merger, the Nussdorfs would own a majority of the Perfumania common stock, and the existing Parlux stockholders would own a minority interest in a larger combined company;

 

   

the potential impact of the merger announcement and the consummation of the transaction on employees;

 

   

the restrictions on the conduct of Parlux’s business before the consummation of the merger, requiring Parlux to conduct its business in all material respects only in the ordinary course, subject to specific limitations, which may delay or prevent Parlux from undertaking business opportunities that may arise during the term of the merger agreement, whether or not the merger is consummated;

 

   

the fact that the cash portion of any merger consideration will be taxable to Parlux stockholders that are U.S. persons for U.S. federal income tax purposes;

 

   

the merger agreement’s limitations on Parlux’s ability to solicit other offers after the end of the go-shop period; and

 

   

the risks of the type and nature described under “Risk Factors” beginning on page 32 and the matters described under “Cautionary Statement Regarding Forward-Looking Statements” beginning on page 48.

Conclusion

The Parlux independent committee and the Parlux board of directors concluded that the anticipated benefits of the merger would outweigh the countervailing considerations. In addition, the Parlux independent committee and the Parlux board of directors were aware of and considered the interests that Parlux’s directors and executive officers may have with respect to the merger that differ from, or are in addition to, their interests as stockholders of Parlux generally, as described in “—Interests of Certain Persons in the Merger.”

The reasons set forth above are not intended to be exhaustive, but include the material facts considered by the Parlux independent committee in recommending, and by the Parlux board of directors in approving, the merger agreement. In view of the wide variety of factors considered in connection with their evaluation of the merger and the complexity of these matters, the Parlux independent committee and the Parlux board of directors did not find it useful and did not attempt to quantify or assign any relative or specific weights to the various factors that they considered in reaching their determinations to recommend approval of, and to approve, the merger and the merger agreement and to recommend approval of the merger and the merger agreement to Parlux stockholders.

 

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In addition, individual members of the Parlux independent committee and the Parlux board of directors may have given differing weights to different factors. The Parlux independent committee and the Parlux board of directors conducted an overall review of the factors described above, including thorough discussions with Parlux’s management and outside legal and financial advisors.

Opinions of Financial Advisors to the Parlux Independent Committee

Opinion of Peter J. Solomon Company

Pursuant to an engagement letter dated July 1, 2011, Parlux engaged PJSC to act as financial and strategic advisor to Parlux in connection with a possible merger or similar transaction, and, if requested, to render to the Parlux independent committee an opinion as to the fairness, from a financial point of view, to the holders of Parlux common stock of the consideration to be paid in connection with any transaction.

On December 19, 2011, PJSC delivered its oral opinion to the Parlux independent committee, which was subsequently confirmed by delivery of a written opinion dated the same date (which we refer to as the “PJSC Opinion”), that, as of such date and subject to the assumptions, qualifications and limitations set forth in the PJSC Opinion, the merger consideration proposed to be paid to the holders (other than members of the Nussdorf family and any trusts or entities controlled by the Nussdorf family) of Parlux common stock in connection with the merger pursuant to the terms of the merger agreement was fair, from a financial point of view, to such holders.

The summary of the PJSC Opinion set forth in this joint proxy statement/prospectus is qualified in its entirety by reference to the full text of such opinion, which is incorporated herein by reference. The full text of the PJSC Opinion, which sets forth assumptions made, procedures followed, matters considered, and limitations on and scope of the review undertaken by PJSC in rendering the PJSC Opinion, is attached as Annex C to this joint proxy statement/prospectus. Holders of Parlux common stock are encouraged to read the PJSC Opinion carefully and in its entirety. The PJSC Opinion was directed only to the fairness, from a financial point of view, to the holders (other than members of the Nussdorf family and any trusts or entities controlled by the Nussdorf family) of Parlux common stock of the merger consideration proposed to be paid to such holders in connection with the merger pursuant to the merger agreement, was provided to the Parlux independent committee in connection with their evaluation of the proposed merger, did not address any other aspect of the merger, and did not, and does not, constitute a recommendation to any holder of Parlux common stock or any other person as to whether or not any such holder should vote or act on any matter relating to the merger.

In connection with the PJSC Opinion, PJSC:

(i) reviewed certain publicly available business and financial information relating to Parlux and Perfumania that PJSC deemed to be relevant;

(ii) reviewed certain non-public internal financial statements and other non-public financial and operating data relating to Parlux and Perfumania that were prepared and provided to PJSC by the managements of Parlux and Perfumania, respectively;

(iii) reviewed certain financial projections relating to Parlux and Perfumania that were provided to or discussed with PJSC by the managements of Parlux and Perfumania, respectively;

(iv) discussed the past and current operations, financial condition and prospects of Parlux and Perfumania with the managements of Parlux and Perfumania, respectively, including information relating to certain strategic, financial and operational benefits anticipated from the merger;

(v) reviewed the reported prices and trading activity of the Parlux common stock and the Perfumania common stock;

 

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(vi) compared the financial performance and condition of Parlux and Perfumania and the reported prices and trading activity of the Parlux common stock and the Perfumania common stock with that of certain other publicly traded companies that PJSC deemed relevant;

(vii) reviewed publicly available information regarding the financial terms of certain transactions that PJSC deemed relevant, in whole or in part, to the merger;

(viii) participated in certain discussions with representatives of Parlux and Perfumania;

(ix) reviewed a draft of the merger agreement dated December 14, 2011; and

(x) performed such other analyses and reviewed such other material and information that PJSC deemed relevant.

PJSC assumed and relied upon the accuracy and completeness of the information provided to PJSC for the purposes of the PJSC Opinion, and PJSC did not assume any responsibility for independent verification of such information. With respect to the financial projections, PJSC assumed that the financial projections were reasonably prepared on bases reflecting the best currently available estimates and judgments of the future financial performance of Perfumania. With Parlux’s consent, PJSC has relied upon the estimates made by the managements of Parlux and Perfumania of certain potential strategic, financial and operational benefits anticipated from the merger without independent assessment. PJSC did not conduct a physical inspection of the facilities or property of Parlux. PJSC did not assume any responsibility for any independent valuation or appraisal of the assets or liabilities of Parlux, nor was PJSC furnished with any such valuation or appraisal. Furthermore, PJSC did not consider any tax, accounting or legal effects of the merger or the structure of the merger on any person or entity.

PJSC assumed that the final form of the merger agreement would be substantially the same as the last draft of the merger agreement reviewed by PJSC and would not vary therefrom in any respect material to PJSC’s analysis. PJSC further assumed that the merger will be consummated in accordance with the terms of the merger agreement, without waiver, modification or amendment of any material term, condition or agreement (including, without limitation, the consideration proposed to be paid to the holders of Parlux common stock in connection with the merger), and that, in the course of obtaining the necessary regulatory or third party approvals, consents and releases for the merger, no delay, limitation, restriction or condition will be imposed that would have an adverse effect on Parlux and that Perfumania will obtain the necessary financing to effect the merger in accordance in all material respects with the terms of financing commitments in the forms provided by Perfumania. PJSC further assumed that all representations and warranties set forth in the merger agreement and all related agreements are and will be true and correct as of all of the dates made or deemed made and that all parties to the merger agreement and all agreements related thereto will comply with all covenants of such parties thereunder.

The PJSC Opinion was necessarily based on economic, market and other conditions as in effect on, and the information made available to PJSC as of, December 19, 2011. In particular, PJSC did not express any opinion as to the prices at which the Parlux common stock may trade at any future time. Additionally, PJSC did not express any opinion as to what the value of the Perfumania common stock actually will be when issued pursuant to the merger or the price at which the Perfumania common stock may trade at any future time. Furthermore, the PJSC Opinion does not address Parlux’s underlying business decision to undertake the merger or the relative merits of the merger as compared to any alternative transactions that might be available to Parlux. The PJSC Opinion does not address any other aspect or implication of the merger or any other agreement, arrangement or understanding entered into in connection with the merger or otherwise except as expressly identified in the PJSC Opinion.

In arriving at its opinion, PJSC was not authorized to solicit, and did not solicit, interest from any party with respect to a merger or other business combination transaction involving Parlux or any of its assets.

 

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The following summarizes the material financial analyses performed by PJSC and reviewed with the Parlux independent committee on December 19, 2011, in connection with the delivery of the PJSC Opinion. The financial analyses summarized below include information presented in tabular format. In order to fully understand PJSC’s financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of PJSC’s financial analyses.

Selected Publicly Traded Companies.

Using publicly available information, PJSC compared selected financial data of each of Parlux and Perfumania with similar data for selected publicly traded companies having operations that, for purposes of PJSC’s analysis and based on PJSC’s experience, PJSC deemed similar to Parlux and Perfumania. The selected companies were:

Parlux

 

   

Revlon, Inc.

 

   

Elizabeth Arden, Inc.

 

   

Inter Parfums, Inc.

 

   

Physicians Formula Holdings, Inc.

Perfumania

 

   

Sally Beauty Holdings Inc.

 

   

Ulta Salon, Cosmetics & Fragrance, Inc.

 

   

Elizabeth Arden, Inc.

 

   

rue21, Inc.

 

   

Charming Shoppes Inc.

 

   

Cost Plus Inc.

 

   

Body Central Corp.

 

   

Big 5 Sporting Goods Corp.

 

   

Hot Topic Inc.

For each of the selected companies, PJSC used publicly available information to calculate:

 

   

enterprise value (which represents total equity value plus book value of total debt, including preferred stock and minority interests less cash) as a multiple of each of (i) net sales and (ii) earnings before interest, taxes, depreciation and amortization (which is commonly referred to as “EBITDA”) as described below; and

 

   

closing stock prices on December 16, 2011, as a multiple of earnings per share (which is commonly referred to as “EPS”) as described below.

 

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Based on this analysis, PJSC then applied the following ranges of multiples for the selected companies to similar financial data for Parlux and Perfumania:

Parlux

Enterprise Value as a Multiple of:

 

Last Twelve Months’
(“LTM”)

Net Sales

 

LTM EBITDA

 

Estimated Calendar
Year (“CY”) 2011
EBITDA (12/31/11)

 

Estimated Fiscal Year
(“FY”) 2012 EBITDA
          (3/31/12)          

 

Estimated CY 2012
EBITDA (12/31/12)

0.70x – 1.20x

  7.5x – 9.0x   7.5x – 9.0x   7.0x – 8.5x   6.0x – 8.0x

Equity Value as a Multiple of:

 

LTM Net Income

 

Estimated CY 2011 Net
     Income (12/31/11)     

 

Estimated FY 2012 Net

     Income (3/31/12)     

 

Estimated CY 2012 Net
     Income (12/31/12)     

14.0x – 20.0x

  13.5x – 18.5x   13.0 x – 18.0x   10.5x – 15.0x

Perfumania

Enterprise Value as a Multiple of:

 

LTM EBITDA

 

Estimated FY 2011 EBITDA

(1/31/12)

 

Estimated FY 2012 EBITDA

(1/31/13)

8.5x – 11.5x

  8.0x – 11.0x   7.0x – 10.0x

Equity Value as a Multiple of:

 

LTM Net Income

 

Estimated FY 2011 Net Income
(1/31/12)

 

Estimated FY 2012 Net Income
(1/31/13)

15.0x – 18.0x

  14.5x -17.5x   13.0x – 15.5x

PJSC then calculated a range of implied equity values per share of Parlux common stock based on the Parlux multiple ranges set forth above, both excluding and including a control premium. In performing this analysis, PJSC utilized data for Parlux provided to PJSC by Parlux’s management. PJSC utilized a control premium of 35.8%, which was the median control premium paid (one day prior to announcement) in all completed and announced merger and acquisition transactions involving U.S. targets (excluding transactions involving financial services, real estate and insurance companies) with enterprise values between $50 million and $250 million since January 1, 2008, as publicly reported.

PJSC also calculated a range of implied equity values per share of the Perfumania common stock based on the Perfumania multiple ranges set forth above. In performing this analysis, PJSC utilized data for Perfumania provided by Perfumania’s management.

Based on this analysis, PJSC derived reference ranges of implied equity values per share of the Parlux common stock of $2.00 to $4.50, excluding a control premium, and $2.72 to $6.11, including a control premium. PJSC derived reference ranges of implied equity values per share of the Perfumania common stock of $8.00 to $17.00.

Selected Precedent Transactions.

Using publicly available information, PJSC reviewed the following precedent transactions that, for purposes of PJSC’s analysis, and based on PJSC’s experience, PJSC deemed similar to the merger:

 

   

Unilever plc / Concern Kalina

 

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Edmond de Rothschild Investment Partners, SAS / Maesa

 

   

Coty, Inc. / OPI Products

 

   

Coty, Inc. / Philosophy

 

   

Dermoviva Skin Essentials / Namaste Laboratories

 

   

Unilever / Alberto-Culver

 

   

PZ Cussons / St Tropez Ltd.

 

   

Estee Lauder / Smashbox Beauty Cosmetics

 

   

L’Oreal SA / Essie Cosmetics

 

   

Shiseido / Bare Escentuals

 

   

Sanofi / Chattem

 

   

Alberto-Culver / Simple Health & Beauty Ltd.

 

   

LG Household & Health Care / THEFACESHOP Korea Co.

 

   

Procter & Gamble Co. / The Art of Shaving

 

   

Energizer Holdings / S.C. Johnson (Edge, Skintimate Brands)

 

   

Castanea Partners, Inc. / Urban Decay Cosmetics

 

   

Alberto-Culver / Noxzema (From Procter & Gamble Co.)

 

   

Courtin-Clarins Family / Grupo Clarins

 

   

L’Oreal SA / YSL Beauté (from PPR, subsidiary of Gucci Group)

 

   

Coty, Inc. / Sally Hansen (Del Laboratories)

 

   

Morris Profumi SpA / Atkinsons of London Ltd.

 

   

Wipro Ltd. / UNZA Holdings Ltd.

 

   

The Carlyle Group / Philosophy Inc.

 

   

Perry Ellis International / Perry Ellis Fragrance License (from Parlux)

 

   

Hain Celestial Group, Inc. / Avalon Natural Products Inc.

 

   

L’Oreal SA / The Body Shop International PLC

 

   

Kao Corp. / Kanebo Cosmetics, Inc.

 

   

Lornamead / Yardley

 

   

Kao Prestige, Ltd. / Molton Brown

 

   

Coty, Inc. / Unilever Cosmetics International

Using publicly available estimates, PJSC reviewed the enterprise value for each of the selected transactions as a multiple of LTM, net sales and EBITDA that was publicly available preceding the transaction. Based on this analysis, PJSC then applied the following ranges of multiples for the selected transactions to similar financial data for Parlux:

Enterprise Value as a Multiple of:

 

LTM Net Sales

 

LTM EBITDA

 

Estimated CY 2011

EBITDA (12/31/11)

 

Estimated FY 2012

EBITDA (3/31/12)

1.0x – 1.5x

  8.0x – 12.0x   8.0x – 12.0x   8.0x – 12.0x

 

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PJSC then calculated a range of implied equity values per share of Parlux common stock based on these multiple ranges. In performing this analysis, PJSC utilized financial data for the Parlux provided to PJSC by the Parlux’s management.

Based on this analysis, PJSC derived a reference range of implied equity value per share of Parlux common stock of $2.00 to $5.50.

Discounted Cash Flow Analysis.

PJSC conducted a discounted cash flow analysis to determine the implied equity value per share of the Parlux common stock and the Perfumania common stock based on the future free cash flows for Parlux for the period from January 1, 2012 through March 31, 2014, and for Perfumania for the period from February 1, 2012 through January 31, 2015, as estimated and provided to PJSC by the managements of Parlux and Perfumania, respectively. In arriving at the implied equity values per share of the Parlux common stock, PJSC calculated terminal values by applying EBITDA terminal value multiples ranging from 7.0x to 9.0x, and with respect to the Perfumania common stock, PJSC calculated terminal values by applying EBITDA terminal value multiples ranging from 8.0x to 10.0x. The free cash flows for each of Parlux and Perfumania were then discounted to present values using a range of discount rates from 12.0% to 16.0%, in the case of Parlux, and 10.5% to 13.5% in the case of Perfumania. PJSC used its professional judgment and experience, including taking into account, among other things, the weighted average cost of capital of Parlux and Perfumania and other companies deemed comparable to Parlux and Perfumania, in determining these ranges of discount rates.

Based on this analysis, PJSC derived a reference range of implied equity values per share of Parlux common stock of $6.75 to $8.00 and a reference range of implied equity values per share of Perfumania common stock of $12.50 to $19.50.

Pro Forma Transaction Analysis.

Selected Publicly Traded Companies

Using publicly available information, PJSC compared selected financial data of Perfumania on a pro forma basis after giving effect to the consummation of the merger with similar data for selected publicly traded companies having operations that, for the purposes of PJSC’s analysis and based on PJSC’s experience, PJSC deemed similar to Perfumania and Parlux. The selected companies were:

 

   

Revlon, Inc.

 

   

Elizabeth Arden, Inc.

 

   

Inter Parfums, Inc.

 

   

Sally Beauty Holdings Inc.

 

   

Ulta Salon, Cosmetics & Fragrance, Inc.

 

   

rue21, Inc.

 

   

Charming Shoppes Inc.

 

   

Cost Plus Inc.

 

   

Body Central Corp.

 

   

Big 5 Sporting Goods Corp.

 

   

Hot Topic Inc.

 

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For each of these companies, PJSC used publicly available information to calculate: enterprise value (which represents total equity value plus book values of total debt, including preferred stock and minority interests less cash) as a multiple of EBITDA as described below and closing stock prices on December 16, 2011 as a multiple of EPS as described below.

Based on this analysis, PJSC then applied the following ranges of multiples for the selected companies to similar data for the pro forma Perfumania:

Parlux

Enterprise Value as a Multiple of:

 

LTM EBITDA

 

Estimated FY 2011 EBITDA
                (1/31/12)                

 

Estimated FY 2012 EBITDA
                (1/31/13)                

8.5x – 11.5x

  8.0x – 11.0x   7.5x – 10.0x

Equity Value as a Multiple of:

 

LTM Net Income

 

Estimated FY 2011 Net Income
                (1/31/12)                      

 

Estimated FY 2012 Net Income
                    (1/31/13)                     

14.0x – 17.0x

  13.0x – 16.0x   11.0x – 15.0x

PJSC then calculated a range of implied equity values per share of the Perfumania common stock on a pro forma basis based on these multiple ranges. In performing this analysis, PJSC utilized data for Perfumania on a pro forma basis provided to PJSC by the managements of Perfumania and Parlux.

Based on this analysis, PJSC derived reference ranges of implied equity values per share of Perfumania common stock, on a pro forma basis after giving effect to the consummation of the merger, of $8.00 to $15.00.

Discounted Cash Flow Analysis.

PJSC conducted a discounted cash flow analysis to determine the implied equity value per share of the Perfumania common stock on a pro forma basis after giving effect to the consummation of the merger based on the future free cash flows for Perfumania on a pro forma basis for the period from February 1, 2012 through January 31, 2014, as estimated and provided to PJSC by the managements of Perfumania and Parlux. In arriving at the implied equity value per share of the Perfumania common stock, PJSC calculated terminal values by applying EBITDA terminal value multiples ranging from 7.5x to 9.5x. The free cash flows for Perfumania were then discounted to present values using a range of discount rates from 9.0% to 12.0%. PJSC used its professional judgment and experience, including taking into account, among other things, the weighted average cost of capital of Parlux and Perfumania and other companies deemed comparable to Parlux and Perfumania, in determining these ranges of discount rates.

Based on this analysis, PJSC derived a reference range of implied equity values per share of Perfumania common stock of $12.50 to $17.00, without synergies and $18.00 to $24.00 with synergies.

Miscellaneous.

In arriving at its opinion, PJSC performed a variety of financial analyses, the material portions of which are summarized above. The preparation of a fairness opinion is a complex process involving various determinations as to the most appropriate and relevant methods of financial analyses and the application of those methods to the particular circumstances and, therefore, such an opinion is not necessarily susceptible to a partial analysis or summary description. In arriving at its opinion, PJSC did not attribute any particular weight to any analysis or

 

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factor considered by it, but rather made qualitative judgments as to significance and relevance of each analysis and factor. Accordingly, PJSC believes that its analyses must be considered as a whole and that selecting portions of its analyses or of the summary set forth above, without considering all such analyses, could create an incomplete view of the process underlying the PJSC Opinion.

In performing its analyses, PJSC relied on numerous assumptions made by the managements of Parlux and Perfumania, respectively, and made numerous judgments of its own with regard to current and future industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of Parlux. Actual values will depend upon several factors, including changes in interest rates, dividend rates, market conditions, general economic conditions and other factors that generally influence the price of securities. The results of the analyses performed by PJSC are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by such analyses. Such analyses were prepared solely as a part of PJSC’s analysis of the fairness, from a financial point of view, to the holders (other than members of the Nussdorf family and any trusts or entities controlled by the Nussdorf family) of Parlux common stock of the merger consideration proposed to be paid to such holders in connection with the merger and were provided to the Parlux independent committee in connection with the delivery of the PJSC Opinion. The analyses do not purport to be appraisals or necessarily reflect the prices at which businesses or securities might actually be sold, which may be higher or lower than the merger consideration proposed to be paid to the holders of Parlux common stock in the merger and which are inherently subject to uncertainty. Because such analyses are inherently subject to uncertainty, none of Parlux, PJSC or any other person assumes responsibility for their accuracy.

With regard to the selected public company analysis and the precedent transactions analysis summarized above, PJSC selected such public companies on the basis of various factors for reference purposes only; however, no public company or transaction utilized as a comparison is identical to Parlux or the merger. Accordingly, an analysis of the foregoing was not mathematical; rather, it involved complex considerations and judgments concerning differences in financial and operating characteristics of the selected companies and other factors that could affect the acquisition or public trading values of the selected companies and transactions to which Parlux and the merger were being compared. The consideration proposed to be paid to the holders of Parlux common stock in the merger was determined through negotiations between Perfumania, the Parlux independent committee and the Parlux board of directors and was approved by the Parlux board of directors upon recommendation by the Parlux independent committee. PJSC did not recommend any specific consideration to the Parlux independent committee or the Parlux board of directors or that any given consideration constituted the only appropriate consideration for the merger. In addition, as described elsewhere in this joint proxy statement/prospectus the PJSC Opinion was one of many factors taken into consideration by the Parlux independent committee and the Parlux board of directors in evaluating the merger. Consequently, the PJSC analyses described above should not be viewed as determinative of the respective opinions of the Parlux independent committee or the Parlux board of directors with respect to the merger.

As part of its investment banking activities, PJSC is regularly engaged in the evaluation of businesses and their securities in connection with mergers and acquisitions, restructurings and valuations for corporate or other purposes. The Parlux independent committee selected PJSC to deliver an opinion with respect to the fairness, from a financial point of view, to the holders (other than members of the Nussdorf family and any trusts or entities controlled by the Nussdorf family) of Parlux common stock of the merger consideration proposed to be paid to such holders in connection with the merger on the basis of such experience.

Pursuant to the engagement letter dated July 1, 2011, Parlux is obligated to pay PJSC a fee for its financial advisory services, a substantial portion of which will become payable only if the merger is consummated. A retainer fee of $125,000 was paid upon Parlux’s execution of the engagement letter, $125,000 was paid upon the delivery of PJSC’s valuation analysis, and $50,000 was payable upon the rendering of the PJSC Opinion. In addition, PJSC will be due a transaction fee contingent upon the consummation of the merger (less any amounts paid and not previously credited pursuant to the retainer and opinion fees), payable at closing. The transaction fee is based on a percentage of the “Aggregate Consideration,” as defined in PJSC’s engagement letter, received

 

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by Parlux, its stockholders or other parties in connection with the merger. The market value of Perfumania’s stock that will be used, in part, to calculate Aggregate Consideration will be determined on the basis of the last market closing price prior to the consummation of the merger. Based on the closing prices of Perfumania common stock on December 22, 2011 and January 19, 2012, respectively, the transaction fee would range from approximately $2.5 million to $3.5 million. Parlux has also agreed to reimburse PJSC for its out-of-pocket expenses, including fees and disbursements of its counsel, incurred in connection with its engagement and to indemnify PJSC and certain related persons against liabilities and expenses, including liabilities under the federal securities laws, relating to or arising out of its engagement.

PJSC has not otherwise received compensation during the last two years for providing investment banking services to Parlux, Perfumania or any of their affiliates. In addition, PJSC and its affiliates may provide in the future financial services to Perfumania and its affiliates, for which PJSC or its affiliates would expect to receive compensation. The issuance of the PJSC Opinion was authorized by its fairness opinion committee.

Opinion of American Appraisal Associates, Inc.

By letter dated November 30, 2011, the Parlux independent committee retained American Appraisal to evaluate the fairness of the consideration, from a financial point of view, to be paid to the holders of Parlux common stock in connection with the merger. American Appraisal has received a fee of $185,000 in connection with its opinion, and Parlux has agreed to reimburse American Appraisal for its out-of-pocket expenses, including fees and disbursements of its counsel, incurred in connection with its engagement. American Appraisal has not otherwise received compensation during the last two years for providing services to Parlux, Perfumania or any of their affiliates.

American Appraisal is an independent global valuation consulting firm providing financial and property valuation services, including fairness and solvency opinion services, to private and public entities in connection with transactions and other business needs. American Appraisal was retained by the Parlux independent committee solely as an independent valuation consultant for the purpose of providing a fairness opinion in connection with the Transaction, and did not otherwise advise Parlux or its board of directors. American Appraisal is not a broker-dealer and does not provide broker-dealer services. No portion of American Appraisal’s fee was contingent on the merger closing or on any other particular outcome or event.

As described in “Background of the Merger,” at a meeting of the Parlux independent committee held on November 21, 2011, the committee determined to seek proposals from a second independent financial advisor to provide an opinion to the committee with respect to the fairness of the merger consideration, from a financial point of view, to the holders of Parlux common stock, other than members of the Nussdorf family and any trusts or entities controlled by the Nussdorf family. After reviewing and discussing proposals from several financial advisors, the Parlux independent committee decided to engage American Appraisal and authorized Mr. D’Agostino to negotiate, with the assistance of Squire Sanders, the terms of a formal engagement letter with American Appraisal.

On December 19, 2011, the Parlux independent committee met to review the terms of the proposed merger agreement. During that meeting, American Appraisal reviewed with the Parlux independent committee certain financial analyses, as described below, and rendered its oral opinion to the Parlux independent committee that, as of that date, and based upon and subject to certain assumptions and qualifications disclosed by American Appraisal, the merger consideration to be paid to the holders of Parlux common stock in connection with the merger agreement was fair, from a financial point of view, to such holders. American Appraisal later confirmed its oral opinion by delivery of a written opinion dated December 23, 2011, to the effect that, as of December 23, 2011, and based on and subject to various assumptions and limitations described in the opinion (which were same as those disclosed in connection with rendering its oral opinion on December 19, 2011), the merger consideration to be received by the holders of shares of Parlux common stock in connection with the merger agreement is fair, from a financial point of view, to such holders of shares of Parlux common stock.

 

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The consideration proposed to be paid to the holders of Parlux common stock in the merger was determined through negotiations between Perfumania, the Parlux independent committee and the Parlux board of directors and was approved by the Parlux board of directors upon recommendation by the Parlux independent committee. American Appraisal did not recommend any specific consideration to the Parlux independent committee or the Parlux board of directors or indicate that any given consideration constituted the only appropriate consideration for the merger. In addition, as described elsewhere in this joint proxy statement/prospectus, the American Appraisal Opinion was one of many factors taken into consideration by the Parlux independent committee and the Parlux board of directors in evaluating the merger.

The full text of American Appraisal’s opinion describes the assumptions made, procedures followed, matters considered and limitations on the review undertaken by American Appraisal. The opinion is attached as Annex D to this joint proxy statement/prospectus and is incorporated herein in its entirety by reference. Holders of Parlux common stock are encouraged to read the full opinion carefully. American Appraisal’s opinion was provided for the benefit of the Parlux independent committee in connection with, and for the purpose of, its evaluation of the merger consideration, from a financial point of view, and does not address any other aspect of the merger. The opinion does not address the relative merits of the merger as compared to other business strategies or transactions that might be available with respect to Parlux or the Parlux’s underlying business decision to effect the merger. The opinion does not constitute advice or a recommendation to any stockholder as to how to vote or act with respect to the merger. The following summary of American Appraisal’s opinion is qualified in its entirety by reference to the full text of American Appraisal’s opinion.

In connection with its engagement, American Appraisal performed the analyses and reviews that it deemed necessary and appropriate under the circumstances, including but not limited to the following:

 

   

reviewed certain publicly available business and financial information relating to Parlux and Perfumania;

 

   

held discussions with certain members of the management of Parlux regarding the operations, financial condition, future prospects and projected operations and performance of Parlux and certain matters regarding the proposed transaction;

 

   

held discussions with the Chief Financial Officer of Perfumania regarding the operations, financial condition, future prospects and projected operations and performance of Perfumania, and Perfumania, including Parlux, following the merger;

 

   

reviewed copies of agreements, presentations and/or documents including but not limited to:

 

   

Agreement and Plan of Merger, dated December 23, 2011

 

   

License Agreement by and between S. Carter Enterprises, LLC and Artistic Brands Development LLC, dated December 23, 2011

 

   

Sublicense Agreement, dated December 23, 2011

 

   

Amendment to Warrant Certificates, dated December 23, 2011

 

   

Amendment to Letter Agreement, dated December 23, 2011

 

   

reviewed financial profit and loss forecasts and projections with respect to Parlux prepared by the management of Parlux for the fiscal years ending March 31, 2012 through March 31, 2014;

 

   

reviewed financial forecasts and projections with respect to Perfumania prepared by the management of Perfumania for the fiscal years ending January 28, 2012 through January 31, 2015;

 

   

reviewed pro forma combined projections including synergies for Perfumania and Parlux, following the merger, prepared by the management of Perfumania for the fiscal years ending January 2013 through January 2014;

 

   

compared the proposed financial terms of the proposed transaction with publicly available financial terms of certain transactions involving companies it deemed relevant and the consideration received for such companies;

 

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reviewed selected economic, financial, and market information relating to the businesses of other companies whose operations it considered relevant in evaluating Parlux;

 

   

reviewed the historical market prices and trading volumes for each of Parlux’s and Perfumania’s publicly traded securities and those of certain publicly traded companies it deemed relevant; and

 

   

conducted such other financial studies, analyses and inquiries as it deemed appropriate.

In connection with the analysis underlying this opinion, American Appraisal relied upon and assumed, without independent verification or investigation, the accuracy and completeness of all of the financial forecasts and other information and selected data with respect to Parlux and Perfumania made available or furnished to or otherwise reviewed by or discussed with American Appraisal by management of Parlux and of Perfumania for purposes of this opinion. American Appraisal did not independently verify or investigate any of the assumptions, estimates, or judgments referred to in such financial forecasts, information, data and material and it is not responsible for any errors or inaccuracies in such forecasts, information, data and material. Further, it assumed that there had been no material change in the assets, financial condition, business or prospects of Parlux, since the date of the most recent financial statements and forecasts made available to it.

With respect to financial analyses and forecasts regarding Parlux provided to or otherwise reviewed by or discussed with American Appraisal, it was advised by the management of Parlux and it assumed for the purposes of its opinion that such analyses and forecasts had been prepared based on reasonable assumptions reflecting the best currently available estimates and judgments of the management of Parlux as to the expected future results of operations and financial conditions of Parlux to which such analyses or forecasts relate. American Appraisal can give no assurances, however, that such financial analyses and forecasts can be realized or that actual results will not vary materially from those projected.

In connection with all forecasts, information, data and material provided to American Appraisal by the management of Parlux, American Appraisal was advised by the management of Parlux, and it assumed for the purposes of its opinion that Parlux management did not omit or fail to provide, or cause to be omitted or undisclosed to American Appraisal any analyses, data, material or other information necessary in order to make any financial data, material or other information provided to American Appraisal by the management of Parlux not misleading in light of the circumstances under which such forecasts, information, data or material were provided.

With respect to financial analyses and forecasts regarding Perfumania and Perfumania including Parlux following the merger, American Appraisal assumed for the purposes of its opinion that such analyses and forecasts had been prepared based on reasonable assumptions reflecting the best currently available estimates and judgments of Perfumania to which such analyses or forecasts relate. American Appraisal can give no assurances, however, that such financial analyses and forecasts can be realized or that actual results will not vary materially from those projected.

American Appraisal has not conducted or been provided with an independent valuation or appraisal of the assets or liabilities of Parlux nor Perfumania, nor has it made any physical inspection of the properties or assets of Parlux or Perfumania. In connection with its engagement, American Appraisal was not requested to, and did not, solicit third party indications of interest in the possible acquisition of all or a part of Parlux, nor did it negotiate the terms of the proposed transaction, and therefore, it assumed that such terms are the most beneficial, from Parlux’s perspective, that could, under the circumstances, be negotiated among the parties to the merger.

The analysis American Appraisal undertook in connection with rendering this opinion involved the exercise of judgment on the part of American Appraisal, as to which differences of opinion may exist. American Appraisal’s opinion is necessarily based on market, economic and other conditions and circumstances existing and made known to it on, and the forecasts, information and data made available to it as of, the date of the opinion. Except as set forth in the engagement letter between American Appraisal and Parlux dated November 30, 2011, American Appraisal does not have any obligation to, and has not undertaken to, update, revise or reaffirm its opinion.

 

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In connection with rendering its opinion to the Parlux independent committee, American Appraisal performed a variety of financial and comparative analyses which are summarized below. The following summary is not a complete description of all analyses performed and factors considered by American Appraisal in connection with its opinion. The preparation of a financial opinion is a complex process involving subjective judgments and is not necessarily susceptible to partial analysis or summary description. With respect to the guideline publicly-traded company method and the guideline transaction method summarized below, no company or transaction used as a comparison was identical to Parlux, Perfumania or the post-merger Perfumania including Parlux. These analyses necessarily involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the trading or acquisition values of the companies concerned.

American Appraisal believes that its analyses and the summary below must be considered as a whole and that selecting portions of its analyses and factors or focusing on information presented in tabular format, without considering all analyses and factors or the narrative description of the analyses, could create a misleading or incomplete view of the processes underlying American Appraisal’s analyses and opinion. American Appraisal did not draw, in isolation, conclusions from or with regard to any one factor or method of analysis for purposes of its opinion, but rather arrived at its ultimate opinion based on the results of all analyses undertaken by it and assessed as a whole.

The following is a brief summary of the material financial analyses performed by American Appraisal and reviewed with the Parlux independent committee on December 19, 2011 in connection with American Appraisal’s opinion relating to the proposed merger. Considering the data below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of American Appraisal’s financial analyses.

Parlux Standalone Valuation

Discounted Cash Flow Method

American Appraisal performed a discounted cash flow analysis of Parlux using financial forecasts and estimates prepared by Parlux’s management. American Appraisal calculated a range of implied present values of the standalone unlevered, after-tax free cash flows that Parlux was forecasted to generate for fiscal years ending March 31, 2012 through March 31, 2014. American Appraisal calculated a range of values for Parlux by sensitizing the base discount rate concluded of 15.5% within a range of 14.5% to 16.5% and the base perpetuity rate concluded of 4.0% within a range of 2.0% to 6.0%. The terminal value was calculating by applying capitalization rates to the free cash flows in the normalized period under the Gordon Growth Model methodology. This discounted cash flow method resulted in a range of implied present values of approximately $4.62 to $5.39 per share of Parlux common stock.

Guideline Publicly-Traded Company Method

American Appraisal calculated multiples of invested capital value based on certain financial data for Parlux and six selected companies operating in the perfume and cosmetics industry. The guideline companies are as follows:

 

   

Coach, Inc.

 

   

Elizabeth Arden, Inc.

 

   

International Parfums, Inc.

 

   

L’Oreal

 

   

Revlon, Inc.

 

   

The Estee Lauder Companies Inc

American Appraisal calculated each selected company’s invested capital value as a multiple of its operating EBITDA for the latest 12 months and estimates of operating EBITDA for fiscal years 2012 and 2013. Forecasted operating EBITDA for the selected guideline companies was based on consensus analyst estimates provided by

 

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Bloomberg. Based on consideration of the comparative size, riskiness, growth expectations, and profitability of Parlux relative to the selected guideline companies, the low selected operating EBITDA multiples were concluded to be 5.6x for the latest 12 months period and 5.7x for forecast fiscal years 2012 and 2013. The high selected operating EBITDA multiples were concluded to be 7.5x for the latest 12 months period and 7.6x for fiscal years 2012 and 2013. A premium for control of 15.0% was included in the analysis, based on consideration of premiums paid for recent acquisitions in the perfume and cosmetics industry. The guideline publicly traded company method resulted in a range of implied per share equity values of $5.10 to $6.67 per share of Parlux common stock.

Guideline Transaction Method

American Appraisal calculated multiples of invested capital value based on the estimated purchase prices paid in eight selected guideline transactions in the perfume and cosmetics industries. The calculations expressed the invested capital value of each target as a multiple of such target’s latest 12 month EBITDA. The guideline transaction method resulted in a range of implied per share equity values of $3.67 to $5.38 per share of Parlux common stock.

 

Target Company

  

Target Business Description

  

Acquiring Company

Avon Products—Japanese Subsidiary

   Manufactures and sells cosmetics    TPG Capital LP

Alberto-Culver Co.

   Manufactures and markets personal care and household products    Unilever PLC

Spectrum Brands, Inc.

   Makes and sells personal care products, general batteries, and other consumer products    Harbinger Capital Partners

The Body Shop International PLC

   Produces and sells naturally-based skin & hair care products    L’Oreal SA

Natural Beauty Bio-Technology Ltd.

   Manufactures and sells skin care, beauty and aromatherapy products    Global Radiance Holdings Ltd.

CCA Industries, Inc.

   Develops, manufactures and markets high quality health and beauty care products    Dubilier & co.

Mirato SpA

   Manufacturer of personal hygiene and hair care products    Benefit SpA

FEM Care Pharma Ltd.

   Produces and deals in cosmetics and pharmaceuticals    Dabur India Ltd.

Market Capitalization Method

American Appraisal reviewed the historical trading price per share of Parlux common stock for the period starting on December 10, 2010 through December 9, 2011. The analysis incorporated the closing price as of December 9, 2011, as well as the 30-day average, 3-month average, and 1-year average prior to December 9, 2011. Additionally, the 52-week high and low stock prices over the aforementioned period were considered. As these stock prices represent a minority position, a 15.0% premium for control was included in the analysis, based on consideration of premiums paid for recent acquisitions in the perfume and cosmetics industry. The market capitalization method resulted in a range of implied per share equity values of $2.78 to $4.30 per share of Parlux common stock.

Conclusion

Based on the aforementioned analyses, a range of $4.00 to $5.50 per share of Parlux common stock was concluded. The concluded range was based on the discounted cash flow method of the income approach, which is

 

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supported by the lower end of the guideline publicly traded company method of the market approach. The guideline transaction and market capitalization methods of the market approach were used as benchmarks and not directly considered in the overall valuation conclusion. For the conclusion and the above analyses, the per share values are calculated using diluted shares outstanding. The diluted shares outstanding are calculated using the Treasury Share Method, whereby the share base is calculated based on the indicated per share value in an iterative process.

Perfumania Standalone Valuation

Discounted Cash Flow Method

American Appraisal performed a discounted cash flow analysis of Perfumania using financial forecasts and estimates prepared by Perfumania’s management. American Appraisal calculated a range of implied present values of the standalone unlevered, after-tax free cash flows that Perfumania was forecasted to generate for fiscal years ending January 31, 2012 through January 31, 2015. American Appraisal calculated a range of values for Perfumania by sensitizing the base discount rate concluded of 13.3% within a range of 12.3% to 14.3% and the base perpetuity rate concluded of 4.0% within a range of 2.0% to 6.0%. The terminal value was calculating by applying capitalization rates to the free cash flows in the normalized period under the Gordon Growth Model methodology. This discounted cash flow method resulted in a range of implied present values of approximately $2.77 to $7.51 per share of Perfumania common stock.

Guideline Publicly-Traded Company Method

American Appraisal calculated multiples of invested capital value based on certain financial data for Perfumania and four selected companies operating as retailers within the perfume and cosmetics industry. The guideline companies are as follows:

 

   

Coach, Inc.

 

   

Elizabeth Arden, Inc.

 

   

Sally Beauty Holdings, Inc.

 

   

Ulta Salon, Cosmetics & Fragrances, Inc.

American Appraisal calculated each selected company’s invested capital value as a multiple of its operating EBITDA for the latest 12 months and estimates of operating EBITDA for the fiscal years 2012 and 2013. Forecasted operating EBITDA for the selected guideline companies was based on consensus analyst estimates provided by Bloomberg. Based on consideration of the comparative size, riskiness, growth expectations, and profitability of Perfumania relative to the selected guideline companies, the low selected operating EBITDA multiples were concluded to be 7.9x for the latest 12 months, 7.3x for the forecast fiscal year 2012, and 6.9x for the forecast fiscal year 2013. The high selected operating EBITDA multiples were concluded to be 9.5x in the latest 12 months, 8.8x for the forecast fiscal year 2012, and 8.2x for the forecast fiscal year 2013. As the Parlux shareholders will receive minority marketable shares of Perfumania under the proposed transaction, no premium for control was included in the analysis. The guideline publicly traded company method resulted in a range of implied per share equity values of $7.34 to $12.25 per share of Perfumania common stock.

Guideline Transaction Method

American Appraisal calculated multiples of invested capital value based on the estimated purchase prices paid in four selected guideline transactions for retailers in the perfume and cosmetics industries. The calculations expressed the invested capital value of each target as a multiple of such target’s latest 12 month EBITDA. The guideline transaction method resulted in a range of implied per share equity values of $6.35 to $14.14 per share of Perfumania common stock.

 

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Target Company

  

Target Business Description

  

Acquiring Company

Bare Essentials, Inc.

   Sells beauty care products and owns boutique shops under the Bare Essentials name    Shiseido Co.

Dufry South America, Ltd.

   Operates duty free stores in major South American airports    Dufry AG

The Body Shop International PLC

   Produces and sells naturally-based skin & hair care products    L’Oreal SA

NetOnNet AB

   Operates online retail stores    Waldir AB

Market Capitalization Method

American Appraisal reviewed the historical trading price per share of Perfumania common stock for the period starting on December 10, 2010 through December 9, 2011. The analysis incorporated the closing price as of December 9, 2011, as well as the 30-day average, 3-month average, and 1-year average prior to December 9, 2011. Additionally, the 52-week high and low stock prices over the aforementioned period were considered. As these stock prices represent a minority position, and Parlux shareholders will receive minority marketable shares of Perfumania under the proposed transaction, no premium for control was included in the analysis. The market capitalization method resulted in a range of implied per share equity values of $7.67 to $19.60 per share of Perfumania common stock.

Conclusion

Based on the aforementioned analyses, a range of $3.00 to $7.50 per share of Perfumania common stock was concluded. The concluded range was based on the discounted cash flow method of the income approach, which is supported by the lower end of the guideline publicly traded company method of the market approach. The guideline transaction and market capitalization methods of the market approach were used as benchmarks and not directly considered in the overall valuation conclusion. For the conclusion and the above analyses, the per share values are calculated using diluted shares outstanding. The diluted shares outstanding are calculated using the Treasury Share Method, whereby the share base is calculated based on the indicated per share value in an iterative process.

Combined Company Valuation

Discounted Cash Flow Method

American Appraisal performed a discounted cash flow analysis of Perfumania following the merger using financial forecasts and estimates prepared by Perfumania’s management. American Appraisal calculated a range of implied present values as of January 31, 2012 of the unlevered, after-tax free cash flows that Perfumania was forecasted to generate following the merger for fiscal years ending January 26, 2013 and January 25, 2014. American Appraisal calculated a range of values for Perfumania following the merger by sensitizing the base discount rate concluded of 14.5% within a range of 13.3% to 15.3% and the base perpetuity rate concluded of 4.0% within a range of 2.0% to 6.0%. The terminal value was calculating by applying capitalization rates to the free cash flows in the normalized period under the Gordon Growth Model methodology. This discounted cash flow method resulted in a range of implied present values of approximately $5.95 to $8.81 per share of Perfumania common stock.

 

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Guideline Publicly-Traded Company Method

American Appraisal calculated multiples of invested capital value based on certain financial data for Perfumania following the merger and eight selected companies operating as manufacturers and/or retailers within the perfume and cosmetics industry. The guideline companies are as follows:

 

   

Coach, Inc.

 

   

Elizabeth Arden, Inc.

 

   

Inter Parfums, Inc.

 

   

L’Oreal

 

   

Revlon, Inc.

 

   

Sally Beauty Holdings, Inc.

 

   

The Estee Lauder Companies Inc

 

   

Ulta Salon, Cosmetics & Fragrances, Inc.

American Appraisal calculated each selected company’s invested capital value as a multiple of estimates of operating EBITDA for the fiscal year ending 2013. Forecasted operating EBITDA for the selected guideline companies was based on consensus analyst estimates provided by Bloomberg. Based on consideration of the comparative size, riskiness, growth expectations, and profitability of Perfumania relative to the selected guideline companies, the low selected operating EBITDA multiple was concluded to be 7.3x, and the high selected operating EBITDA multiple was concluded to be 8.8x. As the Parlux shareholders will receive minority marketable shares of Perfumania under the proposed transaction, no premium for control was included in the analysis. The guideline publicly traded company method resulted in a range of implied per share equity values of $9.43 to $13.01 per share of Perfumania common stock following the merger.

Guideline Transaction Method

American Appraisal calculated multiples of invested capital value based on the estimated purchase prices paid in ten selected guideline transactions for manufacturers and/or retailers in the perfume and cosmetics industries. The calculations expressed the invested capital value of each target as a multiple of such target’s latest 12-month EBITDA. The guideline transaction method resulted in a range of implied per share equity values of $6.35 to $13.66 per share of Perfumania common stock following the merger.

 

Target Company

  

Target Business Description

  

Acquiring Company

Avon Products—Japanese Subsidiary

   Manufactures and sells cosmetics    TPG Capital LP

Alberto-Culver Co.

   Manufactures and markets personal care and household products    Unilever PLC

Spectrum Brands, Inc.

   Makes and sells personal care products, general batteries, and other consumer products    Harbinger Capital Partners

Bare Essentials, Inc.

   Sells beauty care products and owns boutique shops under the Bare Essentials name    Shiseido Co.

Dufry South America, Ltd.

   Operates duty free stores in major South American airports    Dufry AG

The Body Shop International PLC

   Produces and sells naturally-based skin & hair care products    L’Oreal SA

 

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Target Company

  

Target Business Description

  

Acquiring Company

Natural Beauty Bio-Technology Ltd.

   Manufactures and sells skin care, beauty and aromatherapy products    Global Radiance Holdings Ltd.

CCA Industries, Inc.

   Develops, manufactures and markets high quality health and beauty care products    Dubilier & co.

Mirato SpA

   Manufacturer of personal hygiene and hair care products    Benefit SpA

FEM Care Pharma Ltd.

   Produces and deals in cosmetics and pharmaceuticals    Dabur India Ltd.

Conclusion

Based on the aforementioned analyses, a range of $6.00 to $9.50 per share of Perfumania common stock was concluded. The concluded range was based on the discounted cash flow method of the income approach, which is supported by the lower end of the guideline publicly traded company method of the market approach. The guideline transaction method of the market approach was used as a benchmark and not directly considered in the overall valuation conclusion. For the conclusion and the above analyses, the per share values are calculated using diluted shares outstanding. The diluted shares outstanding are calculated using the Treasury Share Method, whereby the share base is calculated based on the indicated per share value in an iterative process. American Appraisal’s conclusions are summarized in the table below:

 

Shareholder Election

   Low End
($6.00/share)
     High End
($9.50/share)
 

Stock and Cash Mixed Election
($4.00 cash and 0.20 shares)

   $ 5.20       $ 5.90   

Stock Election
(0.533333 shares)

   $ 3.20       $ 5.07   

Summary Analysis

Based upon and subject to the foregoing, American Appraisal expressed the opinion that as of December 19, 2011 and as of December 23, 2011, the merger consideration to be received by the holders of shares of Parlux common stock, in connection with the merger, was fair to such holders, from a financial point of view.

Parlux Financial Advisors

The Parlux independent committee determined to engage American Appraisal to provide advice with respect to the financial fairness of the merger to holders of Parlux common stock because the Parlux independent committee believed it would be useful to have information and advice with respect to the transaction from a different financial perspective and because a substantial portion of PJSC’s compensation was contingent upon consummation of the merger. None of American Appraisal’s compensation was contingent upon reaching a particular opinion regarding the financial fairness of the merger or upon the ultimate consummation of the transaction.

Opinion of Financial Advisor to the Perfumania Special Committee

Opinion with respect to the Aggregate Merger Consideration

Pursuant to a letter agreement dated as of November 18, 2011, Financo was engaged to provide the Financo Opinion to the Perfumania special committee. The Perfumania special committee selected Financo based on Financo’s reputation and experience in the retail and consumer industries. Financo is an investment banking firm

 

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that, as part of its investment banking business, regularly is engaged in the evaluation of businesses and their securities in connection with mergers, acquisitions, corporate restructurings, private placements of capital, and for other purposes. In this capacity, Financo is continually engaged in valuing these businesses. At the meeting of the Perfumania special committee on December 19, 2011, Financo delivered to Perfumania special committee a presentation, followed by the delivery of the Financo Opinion dated December 23, 2011, stating that, as of such date, and based upon and subject to the various assumptions and limitations set forth in its written opinion, the Aggregate Merger Consideration (as defined below) was fair, from a financial point of view, to Perfumania. Financo’s analysis explicitly excluded an opinion on fairness, from a financial point of view, of the Aggregate Merger Consideration to any stockholders of Perfumania who own, or whose affiliates own, a controlling interest in Perfumania or who own, or whose affiliates own, any securities, including Parlux common stock, of Parlux.

For purposes of the Financo Opinion, “Aggregate Merger Consideration” means, collectively, (i) the aggregate Per Share Merger Consideration and (ii) the options and warrants to purchase Perfumania common stock resulting from conversion of Parlux stock options and the Gopman warrants and licensor warrants (further described below under “The Merger Agreement—Treatment of Parlux Stock Options” and “—Treatment of Warrants”) at the effective time as set forth in the merger agreement; and “Per Share Merger Consideration” means, with respect to each share of Parlux common stock (other than excluded shares), either (A) a combination of (x) $4.00 in cash and (y) 0.2 shares of Perfumania common stock, $0.01 par value, or (B) 0.533333 shares of Perfumania common stock. In addition, the Financo Opinion did not take into consideration, and Financo expressed no opinion on, the validity or effectiveness of any election to receive stock, or cash and stock, pursuant to the terms of the merger agreement, or the occurrence or the amount of any adjustment to the Per Share Merger Consideration provided for in the merger agreement.

The full text of the Financo Opinion, which sets forth assumptions made, matters considered and limitations on the review undertaken in connection with the Financo Opinion, is included in Annex B to this joint proxy statement/prospectus and is incorporated herein by reference. The Financo Opinion is addressed to the Perfumania special committee and relates only to the fairness of the Aggregate Merger Consideration to Perfumania from a financial point of view. The Financo Opinion does not address any other aspect of the proposed merger and does not constitute a recommendation to any stockholder as to any matters relating to the merger. The summary of the Financo Opinion described herein is qualified in its entirety by reference to the full text of the Financo Opinion. Holders of Perfumania common stock are urged to, and should, read the Financo Opinion carefully and in its entirety.

The Financo Opinion does not address the underlying business decision to enter into the merger agreement or the merger, nor does it evaluate alternative transaction structures or other financial or strategic alternatives. Financo was not authorized to solicit, and did not solicit, third party indications of interest for the acquisition of all or any part of Perfumania or the Perfumania common stock and did not (other than services in connection with fairness opinions) participate in the transaction process.

In arriving at the Financo Opinion, Financo reviewed and analyzed such financial and other matters as Financo deemed relevant, including, among other things:

 

   

certain publicly available information concerning Perfumania and Parlux that Financo believed to be relevant to its inquiry, including without limitation Perfumania’s Proxy Statement on Schedule 14A dated September 23, 2010 and Parlux’s Proxy Statement on Schedule 14A dated September 7, 2010;

 

   

certain financial and operating information with respect to the past and current business operations, financial condition and prospects of Perfumania and Parlux furnished to Financo by Perfumania, including without limitation, for Perfumania, the audited financial statements for the fiscal year ended January 29, 2011 and unaudited financial information for the 9-month period ended October 29, 2011, and for Parlux, the audited financial statements for the fiscal year ended March 31, 2011 and unaudited financial information for the 6-month period ended September 30, 2011;

 

   

a trading history of Perfumania common stock from December 16, 2008 to December 16, 2011;

 

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a trading history of Parlux common stock from December 16, 2008 to December 16, 2011;

 

   

a comparison of the current quoted market prices of Perfumania and Parlux common stock to that of other operators that are similar to, respectively, Perfumania and Parlux that Financo deemed relevant and appropriate;

 

   

a comparison of the financial terms of the merger with the terms of certain other recent transactions that Financo deemed relevant;

 

   

a draft of the merger agreement dated December 17, 2011, not including the exhibits or schedules thereto except as expressly stated in the written opinion;

 

   

projected pro forma financial information and projected synergies for, respectively, Perfumania and Parlux, after giving effect to the merger, provided to Financo by Perfumania management; and

 

   

such other financial, strategic and market information that Financo deemed relevant.

In addition, Financo had discussions with Perfumania management, staff, and advisors concerning the material terms of the merger and Perfumania’s and Parlux’s business and operations, assets, present condition and future prospects, and undertook such other studies, analyses and investigations as Financo deemed relevant and appropriate.

In preparing the Financo Opinion, Financo assumed and relied upon the accuracy and completeness of, and did not independently verify, information (including without limitation the representations and warranties contained in the merger agreement) supplied or otherwise made available to Financo, discussed or reviewed by or for Financo or publicly available, and did not assume any responsibility for, nor make any independent verification of, any of the information. Financo further relied on the assurances of Perfumania management, staff, and advisors that they were unaware of any facts that would make portions of the information supplied to Financo by them incomplete or misleading.

Financo did not subject such information to either (i) any independent review of any kind by Financo or a third party, or (ii) an audit in accordance with generally accepted accounting attestation standards or the Statement on Standards for Prospective Financial Information issued by the American Institute of Certified Public Accountants. Further, the preparation of the Financo Opinion did not include a detailed review of any Perfumania or Parlux transactions, and cannot be expected to identify errors, irregularities or illegal acts, including fraud or defalcations, that may exist. In addition, Financo assumed and relied upon the reasonableness and accuracy of all financial projections, forecasts and analyses provided to Financo, and assumed that such projections, forecasts and analyses were reasonably prepared in good faith and on bases reflecting the best currently available judgments and estimates of Perfumania’s management. Accordingly, Financo did not express an opinion or any other form of assurance on, and assumed no responsibility for, the accuracy, completeness, correctness, assumptions or achievability of such projections, forecasts and analyses.

For purposes of rendering the Financo Opinion, Financo assumed that all representations and warranties set forth in the merger agreement were and will be true and correct as of all the dates made or deemed made and that each party would comply with all of the covenants required to be performed by it under the merger agreement. Financo assumed that the merger would be consummated without waiver or modification, by any party thereto, of any of the material terms or conditions contained in the merger agreement prior to Financo’s delivery of the Financo Opinion and that the final form of the draft merger agreement would be substantially the same as the merger agreement reviewed by Financo. Financo also assumed that any and all regulatory and third party approvals, consents and releases in respect of the merger, including with respect to any arrangement, contract or license of Perfumania or Parlux or their respective subsidiaries, have been or will be obtained without any delay, limitation, restriction or condition that would have an adverse effect on Perfumania or Parlux or the contemplated benefits of the merger.

The Financo Opinion was necessarily based upon economic, market and other conditions and circumstances as they existed and could be evaluated as of the date thereof. Although such conditions and circumstances may have

 

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changed and may change in the future, Financo assumed no obligation to update, revise or reaffirm its opinion. Further, Financo expressed no opinion as to the prices at which either Perfumania common stock or Parlux common stock may trade at any time. The Financo Opinion was limited to the fairness of the Aggregate Merger Consideration, from a financial point of view, to Perfumania, and Financo assumed that there would be no material changes to the financial terms of the merger agreement after the date thereof. Financo expressed no opinion as to the fairness of the amount or nature of the compensation to any of the officers, directors or employees of Perfumania or Parlux following the merger. Financo expressed no view or opinion as to any terms or other aspects of the merger (other than the Aggregate Merger Consideration solely to the extent expressly specified in the Financo Opinion), including, without limitation, the form or structure of the merger.

In arriving at its opinion, Financo did not conduct a physical inspection of the properties or facilities of Perfumania or Parlux, and did not review any of the books and records of Perfumania or Parlux, except as expressly described in the Financo Opinion. Financo neither made nor obtained any evaluations or appraisals from a third party of the assets of Perfumania, Parlux or market competitors of either. Financo did not consider any tax, accounting or legal effects of the merger or the transaction structure on any person or entity. In arriving at the Financo Opinion, Financo considered the weighted average exercise price, the weighted average remaining contractual life and the number of shares of Parlux common stock issuable in respect of Parlux stock options or the Gopman warrants and licensor warrants, as provided by Parlux, and Financo did not consider nor express an opinion on, any other terms, conditions, rights or obligations (including vesting) in respect of such securities or the Perfumania stock options and warrants into which such securities will be converted at the closing of the merger. Financo did not evaluate the solvency or fair value of Perfumania or Parlux under any state, federal or other laws relating to bankruptcy, insolvency or similar matters.

The following is a summary explanation of the various sources of information and valuation methodologies employed by Financo in its presentation to the Perfumania special committee. These analyses were presented to the Perfumania special committee at its meeting on December 19, 2011. This summary describes the financial analyses used by Financo and deemed to be material, but does not purport to be a complete description of analyses performed by Financo in arriving at the Financo Opinion. Financo did not explicitly assign any relative weights to the various factors or analyses considered. This summary of financial analyses includes information presented in tabular format. In order to fully understand the financial analyses used by Financo, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses.

For purposes of its analysis, Financo evaluated on a standalone basis each of Perfumania, Parlux, and the pro forma combined company (which is referred to in this section as the “Combined Company”).

Perfumania Valuation

Perfumania Comparable Companies Analysis

Financo compared Perfumania to a group of comparable public domestic specialty retail companies referred to as the “Perfumania Comparable Companies.” The Perfumania Comparable Companies are public companies that Financo deemed comparable to Perfumania’s limited universe. Financo identified the eleven public companies listed below as being comparable to Perfumania with respect to their industry sector, operating model, size and profitability. The companies selected had enterprise values between approximately $88.8 million and $15.1 billion as of December 16, 2011.

 

•      bebe stores, inc.

  

•      Kirkland’s, Inc.

 

•      Build-A-Bear Workshop, Inc.

  

•      Limited Brands, Inc.

 

•      Casual Male Retail Group, Inc.

  

•      Sally Beauty Holdings, Inc.

 

•      Citi Trends, Inc.

  

•      Ulta Salon, Cosmetics & Fragrances, Inc.

 

•      Destination Maternity Corporation

  

•      Wet Seal, Inc.

 

•      Golfsmith International Holdings, Inc.

  

 

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The financial information reviewed by Financo for these companies in the course of this analysis was based on historical financial information available as of December 16, 2011 and market data as of December 16, 2011. For each of the selected comparable companies, Financo compared, among other things:

 

   

the ratio of the company’s total enterprise value based on the company’s closing price per common share on December 16, 2011, referred to as “EV,” to estimated sales for its fiscal year 2011;

 

   

the ratio of the company’s EV on December 16, 2011, to estimated EBITDA for its fiscal year 2011 (for purposes of Financo’s analyses, “EBITDA” means earnings before interest, taxes, depreciation and amortization, as adjusted for one-time unusual charges and non-recurring items);

 

   

the ratio of the company’s EV on December 16, 2011, to projected sales for its fiscal year 2012; and

 

   

the ratio of the company’s EV on December 16, 2011, to projected EBITDA for its fiscal year 2012.

The following table presents the range of multiples reviewed by Financo in its comparable company analysis with respect to Perfumania:

 

     Comparable Companies
Absolute Low/Absolute
High Range

Fiscal 2011 Estimated Sales Revenue

   0.14x - 2.43x

Fiscal 2012 Projected Sales Revenue

   0.13x - 2.04x

Fiscal 2011 Estimated EBITDA

   3.1x - 16.0x

Fiscal 2012 Projected EBITDA

   2.5x - 12.8x

Based on the information for the comparable companies, Financo applied a selected range of multiples to corresponding metrics of Perfumania in order to derive a series of ranges for the implied per share value of Perfumania ranging from $0.00 to $6.08.

None of the comparable companies have characteristics identical to Perfumania. In evaluating the comparables, Financo made numerous assumptions with respect to the domestic specialty retail industry’s performance and general economic conditions, many of which are beyond the control of Perfumania. Mathematical analysis, such as determining the median, average or range, is not in itself a meaningful method of using comparable company data.

Perfumania Precedent Transactions Analysis

Financo considered ratios of EV to sales and EBITDA, in each case, with regards to the last twelve months, or “LTM,” then applicable, to derive multiples that strategic and financial acquirers have been willing to pay for companies in this particular market segment. In order to perform this analysis, Financo reviewed a number of transactions, including those involving companies deemed by Financo to be comparable to Perfumania based on financial performance, market focus and business model. Financo reviewed seven precedent merger and acquisition transactions announced from September 4, 2008 through June 22, 2011 involving companies in the domestic specialty retail industry.

Financo considered the following precedent transactions for its analysis:

 

Announcement Date

  

Acquiror

  

Target

June 22, 2011

   The William Carter Company    Bonnie Togs Children’s Wear Ltd.

October 10, 2010

   Dollar Tree, Inc.    Dollar Giant Store (B.C.) Ltd.

June 30, 2010

   Billabong International Ltd.    West 49 Inc.

August 24, 2009

   Advent International    Charlotte Russe Holding, Inc.

August 10, 2009

   Barnes & Noble, Inc.    Barnes & Noble College Booksellers, Inc.

June 25, 2009

   The Dress Barn, Inc.    Tween Brands, Inc.

September 4, 2008

   Dufry AG    Hudson Group

 

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For each precedent transaction above, Financo derived and compared to the extent publicly available, among other things:

 

   

the ratio of the EV of the acquired company to the acquired company’s LTM sales revenue based on the latest publicly available financial statements of the acquired company relating to the period prior to the announcement of the acquisition; and

 

   

the ratio of the EV of the acquired company to the acquired company’s LTM EBITDA.

The following table presents the range of multiples reviewed by Financo in its precedent transactions analysis with respect to Perfumania:

 

     Precedent Transactions
Absolute Low/Absolute High Range

EV to LTM sales revenue

   0.25x - 1.26x

EV to LTM EBITDA

   4.1x - 13.0x

Based on the information derived for each of the precedent transactions above, Financo applied a selected range of multiples to corresponding metrics of Perfumania in order to derive a series of ranges for the implied per share value of Perfumania ranging from $0.00 to $8.01.

No transaction utilized in the precedent transactions analysis is identical to the merger. In evaluating the precedent transactions, Financo made numerous assumptions with respect to the domestic specialty retailing industry’s performance and general economic conditions, many of which are beyond the control of Perfumania. Mathematical analysis, such as determining the average, median or range, is not in itself a meaningful method of using comparable transaction data.

Perfumania Discounted Cash Flow Analysis

Financo examined the value of Perfumania on a standalone basis, based on projected free cash flow estimates that were derived from financial projections provided by Perfumania management. The free cash flow estimates were generated by applying financial projections for the fiscal year ending January 2013 through the fiscal year ending January 2016.

Financo performed a discounted cash flow analysis to calculate a range of present value for Perfumania using a range of discount rates from 10.3% to 11.7%, determined by Financo in its judgment and experience based on its estimated weighted average cost of capital of Perfumania, a range of perpetuity growth rates from 2.0% to 3.0% and implied Perfumania share prices ranging from $7.60 to $15.44.

Parlux Valuation

Parlux Comparable Companies Analysis

Financo compared Parlux to a group of comparable public fragrance and beauty wholesale companies referred to as the “Parlux Comparable Companies.” The Parlux Comparable Companies are public companies that Financo deemed comparable to Parlux’s limited universe. Financo identified the eight public companies listed below as being comparable to Parlux with respect to their industry sector, operating model, size and profitability. The companies selected had enterprise values between approximately $24.1 million and $22.1 billion as of December 16, 2011.

 

•      CCA Industries, Inc.

  

•      Inter Parfums, Inc.

 

•      Elizabeth Arden, Inc.

  

•      Physicians Formula Holdings, Inc.

 

•      The Estee Lauder Companies Inc.

  

•      Revlon, Inc.

 

•      International Flavors & Fragrances Inc.

  

•      Sensient Technologies Corporation

 

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The financial information reviewed by Financo for these companies in the course of this analysis was based on historical financial information available as of December 16, 2011 and market data as of December 16, 2011. For each of the selected comparable companies, Financo performed similar analyses as it did for the Perfumania Comparable Companies in connection with its standalone analyses of Perfumania.

The following table presents the range of multiples reviewed by Financo in its comparable companies analyses with respect to Parlux:

 

     Comparable Companies
Absolute  Low/Absolute

High Range

FTME* January 2012 Estimated Sales Revenue

   0.63x - 2.28x

FTME January 2013 Projected Sales Revenue

   0.58x - 2.13x

FTME January 2012 Estimated EBITDA

   8.1x - 12.9x

FTME January 2013 Projected EBITDA

* “FTME” is fiscal twelve months ending

   4.4x - 11.5x

Based on the information for the comparable companies, Financo applied a selected range of multiples to corresponding metrics of Parlux in order to derive a range for the implied enterprise value of Parlux of $64.7 million to $218.2 million and, when applying a control premium, an implied enterprise value up to $303.1 million.

None of the comparable companies have characteristics identical to Parlux. In evaluating the comparables, Financo made numerous assumptions with respect to the fragrance and beauty wholesale industry’s performance and general economic conditions, many of which are beyond the control of Parlux. Mathematical analysis, such as determining the median, average or range, is not in itself a meaningful method of using comparable company data.

Parlux Precedent Transactions Analysis

Financo performed a similar analysis for purpose of its valuation of Parlux as it did in connection with its valuation of Perfumania on a standalone basis. Financo reviewed publicly available information on ten precedent merger and acquisition transactions announced from September 25, 2009 through October 27, 2011 involving companies in the fragrance and beauty wholesale companies industry. Financo considered the following precedent transactions for its analysis:

 

Announcement Date

  

Acquiror

  

Target

October 27, 2011

   LG Household & Health Care, Ltd.    VOV Corp.

August 3, 2011

   AmorePacific Co.    Annick Goutal SAS

September 27, 2010

   Unilever PLC    Alberto-Culver Company

September 27, 2010

   PZ Cussons plc    St. Tropez Ltd.

April 28, 2010

   Valeant Pharmaceuticals International    VitalScience Corp.

January 14, 2010

   Shiseido Company, Limited    Bare Escentuals, Inc.

December 21, 2009

   sanofi-aventis    Chattem, Inc.

December 13, 2009

   Alberto-Culver Company, (U.K.), Limited    Simple Health & Beauty Group Limited

December 8, 2009

   Valeant Canada Ltd.    Laboratoire Dr. Renaud

September 25, 2009

   Unilever PLC    Sara Lee Personal Care and European Laundry business

 

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The following table presents the ranges of multiples reviewed by Financo in its precedent transactions analysis with respect to Parlux:

 

     Precedent Transactions
Absolute Low/Absolute High Range

EV to LTM sales revenue

   0.95x - 5.00x

EV to LTM EBITDA

   8.4x - 15.2x

Based on the information derived for each of the precedent transactions above, Financo applied a selected range of multiples to corresponding metrics of Parlux in order to derive a range for the implied enterprise value of Parlux of $73.7 million to $284.4 million.

No transaction utilized as a precedent in the transaction precedent analysis is identical to the merger. In evaluating the precedent transactions, Financo made numerous assumptions with respect to the fragrance and beauty wholesale industry’s performance and general economic conditions, many of which are beyond the control of Parlux. Mathematical analysis, such as determining the average, median or range, is not in itself a meaningful method of using comparable transaction data.

Parlux Discounted Cash Flow Analysis

Financo examined the value of Parlux on a standalone basis, based on projected free cash flow estimates with and without synergies that were derived from financial projections provided by Perfumania and Parlux management. The free cash flow estimates were generated by applying financial projections for FTME January 2013 through FTME January 2016.

Financo performed a discounted cash flow analysis to calculate a range of present values for Parlux, both with and without synergies, using a range of discount rates from 16.7% to 19.6%, determined by Financo in its judgment and experience based on its estimated weighted average cost of capital of Parlux, and perpetuity growth rates from 2.0% to 3.0%. Based on these assumptions, for the discounted cash flow analysis without synergies, Financo calculated for Parlux total EVs ranging from $85.4 million to $107.9 million. For the discounted cash flow analysis including synergies, Financo calculated for Parlux total EVs ranging from $140.3 million to $177.6 million.

Combined Company Valuation

Combined Company Comparable Companies Analysis

Based on certain information for the comparable companies of each of Perfumania and Parlux, Financo applied a selected range of multiples to corresponding metrics of the Combined Company, including synergies, in order to derive a series of ranges for the implied per share value of the Combined Company ranging from $9.59 to $19.99.

None of the comparable companies have characteristics identical to the Combined Company. In evaluating the comparables, Financo made numerous assumptions with respect to the domestic specialty retail industry’s performance and general economic conditions, many of which are beyond the control of each of Perfumania and Parlux. Mathematical analysis, such as determining the median, average or range, is not in itself a meaningful method of using comparable company data.

Combined Company Precedent Transactions Analysis

Based on certain information derived for the precedent transactions reviewed with regards to each of Perfumania and Parlux, Financo applied a selected range of multiples to corresponding metrics of the Combined Company in order to derive a series of ranges for the implied per share value of the Combined Company ranging from $5.72 to $29.62.

 

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No transaction utilized in the precedent transactions analysis is identical to the merger. In evaluating the precedent transactions, Financo made numerous assumptions with respect to the domestic specialty retailing industry’s performance and general economic conditions, many of which are beyond the control of each of Perfumania and Parlux. Mathematical analysis, such as determining the average, median or range, is not in itself a meaningful method of using comparable transaction data.

Combined Company Discounted Cash Flow Analysis

Financo examined the value of the Combined Company on a standalone basis, based on projected free cash flow estimates that were derived from financial projections provided by Perfumania management. The free cash flow estimates were generated by applying financial projections from the fiscal year ending January 2013 through the fiscal year ending January 2016.

As with the Parlux Discounted Cash Flow Analysis, Financo performed two discounted cash flow analyses for the Combined Company, one without synergies and one with synergies. Based on a range of implied perpetuity growth rates from 2.0% to 3.0% and a range of discount rates from 9.2% to 10.5%, determined by Financo in its judgment and experience based on its estimated weighted average cost of capital of the Combined Company, Financo calculated for the Combined Company, without synergies, implied pro forma Perfumania share prices ranging from $14.64 to $23.01. Based on a range of implied perpetuity growth rates from 2.0% to 3.0% and a range of discount rates from 9.2% to 10.5%, Financo calculated for the Combined Company, with synergies, implied pro forma Perfumania share prices ranging from $20.24 to $30.50.

The preparation of a fairness opinion is a complex process involving determinations as to the most appropriate and relevant methods of financial analysis and the application of these methods to the particular circumstances and, therefore, is not necessarily susceptible to partial analysis or summary description. Selecting portions of the analysis or the summary set forth above, without considering the analysis as a whole, could create an incomplete view of the processes underlying the Financo Opinion. In arriving at its fairness determination, Financo considered the results of all these constituent analyses and did not attribute any particular weight to any particular factor or analysis considered by it; rather, Financo made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all such analyses. Certain Financo analyses are based upon forecasts of future results and are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by such analyses. The foregoing summary does not purport to be a complete description of the analyses performed by Financo. Additionally, analyses relating to the value of businesses or securities are not appraisals. Accordingly, such analyses and estimates are inherently subject to substantial uncertainty.

In performing its analyses, Financo both made and relied upon assumptions with respect to Perfumania, Parlux, industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of Perfumania and Parlux. The analyses performed by Financo are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than suggested by such analyses. Financo’s analyses were prepared solely as part of Financo’s analysis of whether, as of the date of the Financo Opinion, from a financial point of view, the Aggregate Merger Consideration offered under the merger was fair to Perfumania. Financo’s analysis explicitly excluded any opinion on fairness, from a financial point of view, of the Aggregate Merger Consideration to any stockholders of Perfumania who own, or whose affiliates own, a controlling interest in Perfumania or who own, or whose affiliates own, any securities, including Parlux common stock, of Parlux.

Financo was retained by the Perfumania special committee to give a presentation of its analysis to the Perfumania special committee and, separately, provide the Financo Opinion as to the fairness, from a financial point of view, to Perfumania of the Aggregate Merger Consideration to be paid by Perfumania in connection with the merger of Parlux. In the past, Financo has provided investment banking or other financial advisory services to Perfumania and received compensation for rendering such services. No such engagement has occurred in the past two years. Financo received an initial fee of $125,000 upon engagement, a fee of $150,000 upon notice by

 

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Financo that it was prepared to deliver its analysis, and a fee of $375,000 upon notice by Financo that the Financo Opinion was available for delivery (less the analysis fee of $150,000 if paid to Financo prior to the delivery of the Financo Opinion). If, after delivery of the analysis or the Financo Opinion, the Perfumania special committee informs Financo that the terms of the proposed transaction materially change and, therefore, it desires an updated analysis and/or opinion, then Perfumania will pay an additional fee of $75,000 per occurrence. No portion of Financo’s fee is contingent upon the consummation of the merger.

Opinion with respect to the Loans

Pursuant to a letter agreement dated as of November 18, 2011, Financo was also engaged to provide the Financo Loan Opinion to the Perfumania special committee in connection with the Loans (as defined below). At the meeting of the Perfumania special committee on December 19, 2011, Financo delivered to the Perfumania special committee a presentation, followed by the delivery of the Financo Loan Opinion dated December 23, 2011, stating that, as of such date, and based upon and subject to the various assumptions and limitations set forth in its written opinion, the Loans were fair, from a financial point of view, to Perfumania. For the purposes of the opinion, in determining such fairness, from a financial point of view, Financo’s review of the Loans was restricted to the interest rate thereon, the covenants thereto, and the principal and maturity thereof. Financo’s analysis explicitly excluded an opinion on fairness, from a financial point of view, of the Loans to any stockholders of Perfumania who own, or whose affiliates own, a controlling interest in Perfumania.

In connection with the merger, Model (A) received a letter (the “Note Commitment Letter”), pursuant to which the Nussdorf Trusts severally committed to provide or cause to be provided debt financing to Perfumania through Model on the terms and subject to the conditions contained therein, (B) will issue Second Amended and Restated Subordinated Promissory Notes, dated as of the date the merger closes (the “Closing”), in the aggregate principal amount of the sum of the aggregate unpaid principal balance of the amended and restated notes on the date of Closing plus $30,000,000 (the “Nussdorf Trust Notes”) reflecting additional loans to be funded by the Nussdorf Trusts on the date of Closing in an aggregate amount of $30,000,000 in cash (the “Loans”), and (C) will contribute, either by way of intercompany loan or dividend, the proceeds of the Loans to Perfumania in order to permit Perfumania to perform its obligations at closing of the merger. Pursuant to the Note Commitment Letter, each Nussdorf Trust Note will provide, among other things, (A) that the principal amount thereof shall be payable in full on April 30, 2015 and (B) that Model shall pay or cause to be paid to the holder of each Nussdorf Trust Note in