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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended January 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number 0-19714
PERFUMANIA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA (State or other jurisdiction of incorporation or organization)
65-0026340 (I.R.S. Employer Identification Number)
11701 NW 101 ST. ROAD, MIAMI, FL (Address of principal executive offices)
33178 (Zip Code)
(305) 889-1600 (Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K [ ].
As of April 15, 1999, the number of shares of the registrant's Common
Stock outstanding was 7,397,360. The aggregate market value of the Common Stock
held by non affiliates of the registrant as of April 15, 1999 was approximately
$10.8 million, based on the closing price of the Common Stock ($2.34) as
reported by the Nasdaq National Market on such date. For purposes of the
foregoing computation, all executive officers, directors and 5 percent
beneficial owners of the registrant are deemed to be affiliates. Such
determination should not be deemed to be an admission that such executive
officers, directors or 5 percent beneficial owners are, in fact, affiliates of
the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated to the Proxy
Statement for the Annual Meeting of Shareholders of the company, which will be
filed no later than 120 days after the close of the fiscal year end.
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TABLE OF CONTENTS
PART I
ITEM
PAGE
----
1. BUSINESS 3
2. PROPERTIES 10
3. LEGAL PROCEEDINGS 10
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 11
PART II
5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED 12
STOCKHOLDER MATTERS
6. SELECTED FINANCIAL DATA 13
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 15
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS 25
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 26
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING 53
AND FINANCIAL DISCLOSURE
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT 54
11. EXECUTIVE COMPENSATION 54
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND 54
MANAGEMENT
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 54
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS 55
ON FORM 8-K
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FORWARD-LOOKING STATEMENTS
Certain statements within this Form 10-K constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company or its industry to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, the
Company's seasonality, lack of long-term agreements with suppliers, dependence
on line of credit, dependence on key personnel, the ability to manage the
Company's growth and potential litigation. See "Risk Factors That May Affect
Future Results" in Item 7.
PART I
ITEM 1. BUSINESS
GENERAL
Perfumania, Inc. ("Perfumania" or the "Company") is a leading
specialty retailer and wholesale distributor of a wide range of brand name and
designer fragrances. As of January 30, 1999, the Company operated a chain of
289 retail stores specializing in the sale of fragrances at discounted prices
up to 60% below the manufacturer's suggested retail prices. The Company's
wholesale division distributes approximately 1,100 stock keeping units (SKUs)
of fragrances and related products to approximately 44 customers, including
national and regional chains and other wholesale distributors throughout North
America and overseas. The Company's wholesale business is managed and owned by
the parent company, Perfumania, Inc. and the Company's retail business is
managed and owned by Magnifique Parfumes and Cosmetics, Inc., a wholly owned
subsidiary of Perfumania, Inc. The parent and subsidiary are separate and
distinct legal entities, but for ease of reference in this Form 10-K, they are
referred to as segments. See Item 6 for Selected Financial Data by segment.
RETAIL SEGMENT
MARKETING AND MERCHANDISING. Each of the Company's retail stores
offers approximately 175 different brands of fragrances for women and men at
prices up to 60% below the manufacturer's suggested retail prices. Stores stock
brand name and designer brands such as Estee Lauder(R), Fendi(R), Yves Saint
Laurent(R), Fred Hayman(R), Karl Lagerfeld(R), Gucci(R), Ralph Lauren/Polo(R),
Perry Ellis(R), Liz Claiborne(R), Giorgio(R), Hugo Boss(R), Halston(R),
Christian Dior(R), Chanel(R) and Cartier(R). Historically, the Company has
carried a narrow private line of bath and body and treatment under the name
Jerome Privee. The Company has spent 1998 expanding, repackaging and
redesigning its bath and body line. The new line includes approximately 250
SKU's and was reintroduced during April 1998. Also during 1998, the Company
continued to develop its own private label Nature's Elements line of cosmetics,
treatment and aromatherapy. The cosmetics line, which stresses quality for
value, was introduced in May 1998. The treatment line was launched in the
fourth quarter of 1998 and the aromatherapy line is expected during the fourth
quarter of 1999. The Company believes that the continued expansion of its sales
in the bath, body, cosmetic and treatment categories is very important
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to its future business. These private label lines could generate more frequent
visits to the Company's stores and thereby increase sales. The Company also
intends to continue to expand its gift accessories category by offering a wider
assortment of vanity trays, perfume bottles and oil burners.
The cornerstone of the Company's marketing philosophy is customer
awareness that Perfumania's stores offer an extensive assortment of brand name
and designer fragrances at discount prices. Perfumania posts highly visible
price tags for each item in a store, listing both the manufacturers' suggested
retail price and the Company's discounted prices in order to enable customers
to make price comparisons. In addition, the Company utilizes sales promotions
such as "gift with purchase" and "purchase with purchase" offers. From time to
time the Company test markets in its stores additional specialty gift items.
The Company's stores are "full-service" stores. Accordingly, store
personnel are trained to establish a personal rapport with each customer, to
identify customer preferences with respect to both product and price range, and
to successfully conclude a sale. Management believes that attentive personal
service and knowledgeable sales personnel are key factors to the success of the
Company's retail stores. The Company's store personnel are compensated on a
salary plus bonus basis. The Company has several bonus programs that provide
incentives for store personnel to sell merchandise on which the Company has
higher profit margins. In addition, to provide an incentive to reduce expenses,
district and area managers are eligible to receive a bonus if store profit
goals are met. Management believes that a key component of the Company's
ability to increase profitability will be its ability to locate, train and
retain store personnel and regional and district managers. The Company conducts
comprehensive training programs designed to increase customer satisfaction.
The Company primarily relies on its distinctive store design and
window displays to attract the attention of prospective customers. The Company
also distributes flyers and brochures in its stores and in the malls in which
its stores are located. The Company has refocused a substantial portion of its
advertising from national and local newspapers, television and radio to less
expensive billboards and in-store promotions. The amount of advertising varies
with the seasonality of the business.
RETAIL STORES. The Company's standard store design includes signs and
merchandise displays which are designed to enhance customer recognition of
Perfumania's stores. The Company's stores average approximately 1,500 square
feet, although stores located in manufacturer's outlet malls tend to be larger
than the Company's other stores. Each store is managed by one manager and one
assistant manager. The average number of employees in a Perfumania store is
five, including part-time help. District or area managers visit stores on a
regular basis in an effort to ensure knowledgeable and attentive customer
service.
INFORMATION SYSTEMS. The Company has a point-of-sale and management
information system which integrates data from every significant phase of the
Company's operations and provides the Company with information for planning,
purchasing, pricing, distribution, financial and human resources decisions. The
system also provides, on a real-time basis, information to manage store and
warehouse inventories efficiently and to closely monitor individual store and
each salesperson's performance. In addition, the system prepares price labels
and pick orders and provides for automatic reordering, minimum and maximum
stocking levels and optimum order quantities based on actual sales. Further,
the system permits analysis of the Company's retail sales data based on product
groups,
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items and manufacturers, enabling the Company to respond to changes in sales
patterns. The management information system has bar scanners to record sales,
track inventories and conduct physical inventories. The information system also
has automated time and attendance modules to capture payroll information
through the stores' point-of-sale systems, E-Mail systems allowing daily
communication among the stores, district managers and the corporate office, and
automated scheduling for store personnel. During the second quarter of 1999,
the Company will upgrade the merchandising, inventory management and
distribution and finance components of its management information system.
During the third quarter of 1999, the Company intends to upgrade its register
software so that it will be able to perform promotional discounts
automatically, calculate bonuses for employees at store level, perform
inventories at store level and expand its E-Mail and printing capabilities. The
costs for improvements and upgrades to the Company's management information
systems and related point-of-sale software are expected to be approximately
$1.5 million in fiscal 1999. See "Year 2000" discussion under Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
ACQUISITION. During November 1996, the Company acquired substantially
all of the assets of Nature's Elements Holding Corporation (Nature's) which
included the service mark and trade name "Nature's Elements" and the stock of
its subsidiary. Prior to the acquisition, all of Nature's liabilities, both at
the parent and subsidiary level were transferred to a liquidating trust.
Subsequent to the purchase, the stock of the subsidiary was liquidated and the
Company received inventory and store fixtures, and assumed the obligation for
34 leases (including 1 seasonal store). The Company has since closed 11
locations, renovated 18 locations during 1998 and the remaining locations will
either be renovated or subleased during 1999. The Company continues to use the
trade name Nature's Elements for its in-house developed cosmetic, treatment,
aromatherapy and bath line.
STORE LOCATION AND EXPANSION. Perfumania's 289 stores are located in
36 states, the District of Columbia and Puerto Rico, including 51 in Florida,
25 in New York, 26 in California and 21 in Texas. Perfumania's strategy for
opening new stores is to seek locations throughout the United States
principally in regional malls and manufacturers' outlet malls and, selectively,
on a stand-alone basis in suburban shopping centers in metropolitan areas. To
achieve economies of scale with respect to advertising and management costs,
the Company emphasizes opening additional stores in markets where it already
has a presence. The Company also plans to expand into additional markets that
it believes have a population density to support a cluster of stores. Prior to
selecting new store locations, the Company analyzes, among other things, the
potential adverse effect of competition from new stores on the sales of
existing stores.
The number of stores opened by the Company will depend on several
factors such as locating satisfactory sites, obtaining leases on favorable
terms and general economic and business conditions in the localities of the new
stores. Furthermore, although the Company may have executed a lease for a
future location, a store may not open if, for example, a developer decides not
to construct a mall. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources".
Currently, the Company's average cost for opening a store is
approximately $175,000, including equipment, furniture and fixtures, and other
items (which average approximately $50,000 per store), build-out costs (which
average approximately $120,000 per store), and preopening expenses,
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such as the hiring and training of new employees and travel (which average
approximately $5,000 per store). In addition, initial inventory in a new store
ranges from approximately $100,000 during the first fiscal quarter to
approximately $140,000 during the Christmas holiday season. To supplement the
inventory in its stores, the Company carries at least four months supply of
inventory at its warehouse.
Through April 15, 1999, the Company had opened 2 stores and closed 2
stores in fiscal year 1999. The Company opened 36 stores in fiscal year 1998,
40 stores in fiscal year 1997 (excluding 18 seasonal locations) and 74 stores
in fiscal year 1996, (including 33 stores acquired from Nature's). The Company
continuously monitors store performance and from time to time has closed
underperforming stores, which typically have been older stores in undesirable
locations. The Company attempts to schedule store closings after the Christmas
holiday season. During fiscal year 1998, 1997 and 1996, the Company closed 32
stores, 17 stores and 6 stores, respectively. For fiscal 1999, the Company will
slow its growth and focus on improving its existing stores profitability. The
Company will open a maximum of 7 stores and will close 5 to 15 stores during
1999.
WHOLESALE SEGMENT
The Company is one of the largest wholesale distributors of fragrances
in the United States. The Company distributes fragrances on a wholesale basis
to national and regional retail chains and other wholesale distributors
throughout North America and overseas. During fiscal years 1998 and 1997, the
wholesale division sold to approximately 41 and 44 customers, respectively. One
of the Company's customers accounted for 24.8% and 37.0% of net wholesale sales
during fiscal year 1998 and 1997, respectively. Foreign wholesale sales during
fiscal year 1998 were $2.9 million, compared to $1.7 million during fiscal year
1998. See Note 14 to the Company's Consolidated Financial Statements included
in Item 8 hereof.
The wholesale division offers its customers approximately 1,100 SKUs.
The wholesale division's strategy for purchasing merchandise is to capitalize
on market opportunities, to purchase those products that are in demand and to
purchase merchandise available due to overstock situations or close-out sales.
In addition, it takes the Company approximately 70 days after purchase to
receive inventory for its wholesale division and an additional 20 days for the
inventory to arrive at the Company's stores. As a result, the wholesale
division generally carries at least four months' supply of inventory. The
Company's warehouse inventory is generally higher than other retailers and
wholesalers since the Company purchases a large amount of its inventories from
the manufacturers and the secondary market and must assure itself of having
consistent supplies of desirable inventories at favorable prices. Some of the
Company's suppliers require monetary advances to purchase the inventory.
Jerome Falic, the Company's President, is primarily responsible for
activities of the wholesale division. The Company believes that Mr. Falic has
developed strong, reliable relationships with suppliers and customers in the
United States, Europe, Asia and South America. The Company continuously seeks
to develop new supplier and customer relationships. The wholesale division
works closely with the retail division when determining which merchandise to
purchase on behalf of the Company and the retail division will frequently
direct the wholesale division to locate and purchase particular products. The
Company purchases merchandise on behalf of both the wholesale division and the
retail division which, the Company believes, allows both divisions to benefit
from the Company's
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supplier relationships and volume discounts thereby obtaining a more reliable
source of inventory at lower prices than many other wholesalers or retailers of
perfume.
The Company believes that its ability to extend credit has been an
important factor of wholesale sales. Most sales are made on open account terms,
generally net 30 to 60 days following the receipt of goods. Other sales, with
the exception of sales to the Company's largest customer, are made on a basis
of cash on or in advance of delivery or upon receipt of a letter of credit. The
receivable from the Company's largest customer was $0.1 million as of January
30, 1999, compared to $0.9 million as of January 31, 1998. Historically, the
credit terms for this customer have been up to six months. See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources.
SOURCES OF SUPPLY
During fiscal years 1998 and 1997, the Company purchased fragrances
from 155 and 126 different suppliers, respectively, including national and
international manufacturers, distributors, wholesalers, importers and
retailers. The Company generally makes its purchases based on the most
favorable available combination of prices, quantities and merchandise selection
and, accordingly, the extent and nature of the Company's purchases from its
various suppliers change constantly. As is customary in the perfume industry,
the Company has no long-term or exclusive contract with any supplier.
Merchandise is purchased both directly from manufacturers and
secondary sources such as distributors, wholesalers, importers and retailers.
Merchandise purchased by the Company from secondary sources includes
trademarked and copyrighted products manufactured in foreign countries and
trademarked and copyrighted products manufactured in the United States that may
have been sold to foreign distributors. Substantially all of the Company's
merchandise is covered by trademarks or copyrights owned by others. From time
to time, United States trademark and copyright owners and their licensees and
trade associations have initiated litigation or administrative agency
proceedings seeking to halt the importation into the United States of such
foreign manufactured or previously exported trademarked products or restrict
the sale of such goods in the United States, and Federal legislation for such
purposes has been proposed but not yet adopted.
In May 1988, the United States Supreme Court in K-MART v. CARTIER
("K-Mart"), upheld United States Customs Service regulations permitting the
importation, without the consent of the United States trademark owner, of
products manufactured overseas having legitimate foreign trademarks identical
to United States trademarks, when the foreign and United States trademarks are
owned by the same entity or entities under "common ownership or control."
K-MART also held that where the foreign trademarked goods are produced by an
unaffiliated entity authorized, but not controlled, by the United States
trademark holder, the United States Customs Service cannot permit the
importation of the goods without the consent of the United States trademark
owner. Certain federal courts have narrowly interpreted the K-MART case as
applying to a particular tariff statute, and the courts remain divided on the
extent to which trademark, copyright or other laws or regulations may restrict
the importation or sale of trademarked or copyrighted merchandise without the
consent of the trademark or copyright owner, even where the entities owning and
applying the trademark or copyright involved are under common ownership or
control. For example, in LEVER BROS. v. UNITED STATES ("LEVER BROS."), a 1993
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decision, the District of Columbia Circuit Court of Appeals held that the
"common ownership or control" exception does not apply to foreign goods with an
identical trademark but with physical material differences from the product
produced by the United States trademark holder. Under LEVER BROS., such goods
are barred from importation without the permission of the United States
trademark holder. In addition, on November 23, 1992, the U.S. District Court
for the Central District of California, in an unreported decision in PARFUMS
GIVENCHY, INC. v. DRUG EMPORIUM, INC. ("PARFUMS"), which purports to follow a
decision of the Ninth Circuit Court of Appeals, held that the sale of products
manufactured abroad and imported into the United States, which would be covered
by a U.S. copyright, without the consent of the U.S. copyright holder, is a
copyright violation. This decision was upheld by the 9th Circuit Court of
Appeals and on March 6, 1995, the U.S. Supreme Court denied Certiorari, without
giving any reason. In March 1998, however, the United States Supreme Court in
QUALITY KING DISTRIBUTORS v. L'ANZA RESEARCH INTERNATIONAL ("L'ANZA"), was
faced with a situation in which a United States manufacturer had manufactured
and sold certain goods with copyrighted labels affixed to a foreign purchaser.
These goods somehow found their way from the foreign purchaser back into the
United States without L'anza's permission, and were sold by Quality King to
unauthorized retailers at discounted prices. The L'ANZA Court unanimously held
that there was no copyright violation by Quality King because the "first sale"
doctrine applied to imported copies. Although L'ANZA appears favorable to those
involved in purchasing through secondary sources, it is still too early to tell
how the L'ANZA decision will be applied to future situations.
As is often the case in the fragrance and cosmetics business, some of
the merchandise purchased by suppliers such as the Company may have been
manufactured by entities, particularly foreign licensees and others, who are
not the owners of the trademarks or copyrights for the merchandise. If the
Company were called upon or challenged by the owner of a particular trademark
or copyright to demonstrate that specific merchandise was produced and sold
with the proper authority and the Company were unable to do so, the Company
could, among other things, be restricted from reselling the particular
merchandise or be subjected to other liabilities, which could have an adverse
effect on the Company's business and results of operations. The Company may not
always be able to know or to demonstrate that the manufacturer of specific
merchandise had proper authority from the trademark or copyright owner to
produce the merchandise or permit it to be resold in the United States.
During fiscal 1998, less than 30 percent of the Company's merchandise
was purchased from grey market sources. The Company's grey market sources
generally will not disclose the identity of their suppliers, which they
consider to be proprietary trade information. As a result, the Company cannot
determine specifically what portion of its merchandise purchased from grey
market sources could be affected by the potential actions discussed above or
actions on other grounds. See "Item 3. Legal Proceedings" for a description of
certain pending litigation predicated on grounds of patent infringement. There
can be no assurance that future judicial, legislative or administrative agency
action, including possible import, export, tariff or other trade restrictions,
will not limit or eliminate some of the secondary sources of supply used by the
Company or any of the Company's business activities. In addition, there can be
no assurance that the Company's business activities will not become the subject
of legal or administrative actions brought by manufacturers, distributors or
others.
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DISTRIBUTION
The Company's retail and wholesale operations are served by its
warehouse in Miami, Florida. The lease for the facility expires in July 2003.
The warehouse is approximately 139,000 square feet, of which 20,000 square feet
is utilized as office space. The Company's wholesale division also utilizes
space in a third party bonded warehouse.
The Company delivers merchandise utilizing its own trucks to its South
Florida stores and the Company utilizes independent national trucking companies
to deliver merchandise to stores outside of the South Florida area. Deliveries
generally are made weekly, with more frequent deliveries during the Christmas
holiday season. Such deliveries permit the stores to minimize inventory storage
space, and increase the space available for display and sale of merchandise.
The Company ships merchandise to wholesale customers by truck, ship or plane.
In addition, in order to expedite delivery of merchandise to its customers, the
Company sometimes instructs its suppliers to ship merchandise directly to
wholesale division customers.
COMPETITION
The retail and wholesale perfume businesses are highly competitive.
The Company's retail competitors include department stores, regional and
national retail chains, independent drug stores, duty free shops and other
specialty retail stores. The Company is the largest specialty retailer of
discounted fragrances in the United States in terms of number of stores. Some
of the Company'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 the Company. The Company's stores compete
on the basis of selling price, customer service, merchandise variety, store
location and ambiance. The Company believes that its European-style perfumeries
concept, full-service sales staff, discount prices, large and varied selection
of brand name and designer fragrances and attractive shopping environment are
important to its competitive position.
The Company is one of the largest wholesale distributors of fragrances
in the United States. The wholesale division competes directly with other
perfume wholesalers and perfume manufacturers, some of which have substantially
greater resources or merchandise variety than the Company. The wholesale
division competes principally on the basis of merchandise selection and
availability, selling price and rapid delivery.
EMPLOYEES
At January 30, 1999, the Company had 1,834 employees, of whom 1,632
were employed in the Company's retail stores, 92 were employed in the Company's
warehouse and distribution operations and the balance were employed in
executive, administrative and other positions. Temporary and part-time
employees are usually added during peak sales periods (principally between
Thanksgiving and Christmas). None of the Company's employees are covered by a
collective bargaining agreement and the Company considers its relationship with
its employees to be good.
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TRADE NAME AND SERVICE MARK
The Company's stores use the trade name and service mark
Perfumania(R). The Company also operates 18 stores under the trade name
"Nature's Elements" (as of January 31, 1998; see "Acquisition"- page 5), 3
stores under the trade name "Class Perfumes" in malls where the Company also
operates a Perfumania(R) store, and 10 stand-alone stores under the trade name
"Perfumania Plus". The Company has common law rights to its trade names and
service mark in those general areas in which its existing stores are located
and has registered the service mark Perfumania(R) with the U.S. Patent and
Trademark Office. The registration expires in 2009 and may be renewed for
10-year terms thereafter.
RECENT DEVELOPMENTS
In February 1999, the Company, through its wholly-owned subsidiary,
Perfumania.com, Inc., began operation of an Internet commerce site,
Perfumania.com. The Company intends to capitalize on its name recognition and
cross marketing opportunities with its stores to become a top discount retailer
of fragrance and related products on the Internet. All orders placed with the
Internet site are shipped from the Company's existing distribution center in
Miami, Florida.
In April 1999, Perfumania.com, Inc. announced that it intends to make
an initial public offering of its common stock. Perfumania.com, Inc. plans to
raise approximately $15 - $20 million representing approximately 33% of the
common stock to be outstanding following the offering. A registration statement
for the offering is expected to be filed by the end of June 1999, and the
offering should be completed as soon as practicable after the registration
statement becomes effective. The net proceeds of the offering will be used for
working capital and other general corporate purposes and also repayment of any
outstanding indebtedness to the Company.
ITEM 2. PROPERTIES
The Company's executive offices and warehouse are leased for a ten
(10) year period pursuant to a lease which currently provides for monthly rent
of approximately $70,000 and specified annual increases thereafter.
All of the Company's retail stores are located in leased premises.
Most of the Company's store leases provide for the payment of a fixed amount of
base rent plus a percentage of sales, ranging from 3% to 10%, over certain
minimum sales levels. Store leases typically require the Company to pay all
utility charges, insurance premiums, increases in property taxes and certain
other costs. Certain of the Company's leases permit the lessor to terminate the
lease if specified minimum sales levels are not met. See Note 13 of Notes to
the Company's Consolidated Financial Statements for additional information with
respect to the Company's store leases.
ITEM 3. LEGAL PROCEEDINGS
BOUCHERON. In December 1993, the patent holder and exclusive licensee
in the U.S. of Boucheron filed a complaint against the Company in the United
States District Court for the Southern District of New York for infringing upon
their exclusive right to sell the Boucheron bottle. The
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plaintiffs' theory is based on the fact that they have a valid patent for the
bottles and that Perfumania's sales of such bottles infringes upon their patent
rights. The Company believes that a patentee cannot control by resort to an
infringement suit the resale of a patented article which it has sold. The
Company filed a motion to dismiss during February 1994. On March 20, 1995, the
Court denied the Company's motion to dismiss and on April 14, 1995, the Company
filed its answer to the Complaint. Discovery is in progress.
OTHER. The Company has been characterized as an insider in the
liquidating plan of reorganization filed on April 6, 1998 by L. Luria & Son,
Inc. ("Luria's") in the United States Bankruptcy Court, Southern District of
Florida. In October 1998, the committee of unsecured creditors in Luria's
bankruptcy proceedings filed a complaint with the United States Bankruptcy
Court, Southern District of Florida to recover substantial funds from the
Company. The complaint alleges that Luria's made preference payments, as
defined by the Bankruptcy Court, to the Company and seeks recovery of said
preference payments, as well as disallowing any and all claims of the Company
against Luria's until full payment of the preference payments have been made.
Management cannot presently predict the outcome of these matters, although
management believes, upon the advice of counsel, that the Company would have
meritorious defenses and that the ultimate resolution of these matters should
not have a materially adverse effect on the Company's financial position or
result of operations.
From time to time, the Company is involved in various legal
proceedings in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 16, 1998 the Company held its annual meeting of shareholders. At
the annual meeting, the sharehoulders elected Ilia Lekach, Simon Falic, Jerome
Falic, Marc Finer, Robert Pliskin and Carole Ann Taylor to the Board of
Directors.
TOTAL SHARES SHARES
SHARES VOTED VOTED ABSTAIN/ NON-
VOTED FOR AGAINST WITHHELD VOTES
--------- --------- ------- -------- -----
Ilia Lekach 3,304,273 3,299,973 -- 4,300 --
Simon Falic 3,304,273 3,299,973 -- 4,300 --
Jerome Falic 3,304,273 3,299,973 -- 4,300 --
Marc Finer 3,304,273 3,299,973 -- 4,300 --
Robert Pliskin 3,304,273 3,299,973 -- 4,300 --
Carole Ann Taylor 3,304,273 3,299,973 -- 4,300 --
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is traded on the Nasdaq Stock Market under
the symbol PRFM. The following table sets forth the high and low closing sales
prices for the Company's Common Stock for the periods indicated, as reported by
the Nasdaq Stock Market.
FISCAL 1997 HIGH LOW
- ----------- --------- ---------
First Quarter $ 3 11/16 $ 2 19/64
Second Quarter $ 4 5/16 $ 2 7/8
Third Quarter $ 3 7/8 $ 2 5/8
Fourth Quarter $ 3 3/4 $ 2 1/4
FISCAL 1998 HIGH LOW
- ----------- --------- --------
First Quarter $ 3 1/4 $ 2 1/4
Second Quarter $ 2 13/16 $ 1 9/16
Third Quarter $ 1 11/16 $13/32
Fourth Quarter $12 $17/32
As of April 15, 1999, there were 81 holders of record of the 7,397,360
outstanding shares of Common Stock, not including security positions listings.
The closing sales price for the Common Stock on April 15, 1999 was $2 15/16.
DIVIDEND POLICY
The Company has not declared or paid any dividends on the 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 discretion of
the Board of Directors after taking into account various factors, including the
Company's financial condition, results of operations, current and anticipated
cash needs and plans for expansion. The Company is prohibited from paying cash
dividends under its line of credit with LaSalle National Bank. See Note 8 of
Notes to the Company's Consolidated Financial Statements contained in Item 8
hereof.
12
13
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for the last five fiscal
years and as of the end of each such fiscal years are derived from the
Company's consolidated financial statements and should be read in conjunction
with such financial statements and related notes.
The Company's fiscal year end is the Saturday closest to January 31.
All references herein to fiscal years are to the calendar year in which the
fiscal year begins; for example, fiscal year 1998 refers to the fiscal year
that began on February 1, 1998 and ended on January 30, 1999.
FISCAL YEAR ENDED
--------------------------------------------------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1999 1998 1997 1996 1995
-------------- --------------- ----------------- --------------- ---------------
(In thousands, except for per share amounts)
STATEMENT OF OPERATIONS DATA:
Net sales, wholesale division $40,466 $34,032 $30,317 $36,200 $38,484
Net sales, retail division 134,790 129,562 108,603 92,957 77,094
------------- --------------- ----------------- --------------- ---------------
Total net sales 175,256 163,594 138,920 129,157 115,578
------------- -------------- ----------------- -------------- --------------
Gross profit, wholesale division 8,186 8,249 7,614 8,784 7,573
Gross profit, retail division 60,196 59,535 52,536 43,384 36,076
------------- -------------- ----------------- -------------- --------------
Total gross profit 68,382 67,784 60,150 52,168 43,649
------------- -------------- ----------------- -------------- --------------
Selling, general and administrative expenses 72,502 64,219 48,165 43,372 37,081
Provision for doubtful accounts -- 1,730 500 310 27
Provision for potential inventory losses 3,765 1,810 190 -- --
Provision for impairment of assets and store
closings 1,035 2,515 169 1,232 623
Depreciation and amortization 4,480 4,698 3,772 3,300 2,903
------------- -------------- ----------------- -------------- --------------
Total operating expenses 81,782 74,972 52,796 48,214 40,634
------------- -------------- ----------------- -------------- --------------
Income (loss) from operations before other
income (expense) (13,400) (7,188) 7,354 3,954 3,015
------------- -------------- ----------------- -------------- --------------
Other income (expense)
Interest expense, net* (4,882) (4,696) (4,110) (3,144) (2,415)
Other, net 645 762 478 396 357
------------- -------------- ----------------- -------------- --------------
Income (loss) before income taxes* (17,637) (11,122) 3,722 1,206 957
(Provision) benefit for income taxes (1,337) 321 (1,647) 796 368
------------- -------------- ----------------- -------------- --------------
Income (loss) before cumulative effect of
change in accounting principle* (18,974) (10,801) 2,075 2,002 1,325
------------- -------------- ----------------- -------------- --------------
Cumulative effect of change in accounting
principle, net of income tax benefit of
$380,958 -- (632) -- -- --
Net income (loss)* ($18,974) ($11,433) $2,075 $2,002 $1,325
============= ============== ================= ============== ==============
Weighted average shares outstanding:
Basic 6,659,237 7,025,236 7,183,462 6,973,670 6,155,733
Diluted 6,659,237 7,025,236 ,633,588 7,067,291 6,210,542
Basic income (loss) per share net of
cumulative effect of change in
accounting principle* ($2.85) ($1.63) $0.29 $0.29 $0.22
============= ============== ================= ============== ==============
Diluted income (loss) per share net of
cumulative effect of change in
accounting principle* ($2.85) ($1.63) $0.27 $0.28 $0.21
============= ============== ================= ============== ==============
*As disclosed in Note 11 to the consolidated
financial statement Statements, the net income
and the net income per common share for
1996 was restated to account for the value
attributable to the beneficial conversion
feature on certain debt issued in 1996.
SELECTED OPERATING DATA:
Number of stores open at end of period 289 285 262 194 175
Comparable store sales increase 0% 0% 3.6% 4.1% 5.9%
13
14
JANUARY 30, JANUARY 31, FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1999 1998 1997 1996 1995
-------------- -------------- ----------------- --------------- ---------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital (deficit) $(3,750) $ 19,287 $ 33,157 $30,227 $26,865
Total assets 95,672 114,722 129,908 93,565 79,329
Long-term debt, less current portion(1) 2,933 5,643 5,708 1,815 1,367
Total stockholders' equity 18,178 35,983 49,325 45,300 43,359
The fiscal 1998 financial statements have been prepared assuming the
Company will continue as a going concern. The Company has violated certain debt
covenants contained in its bank line of credit agreement. These debt covenant
violations have not been waived by the bank as of April 29, 1999 and there is
no assurance that such waivers shall be obtained. See additional discussion
under "Liquidity and Capital Resources" and Notes 2 and 8 of the consolidated
financial statements.
(1) Amount does not include long-term severance payables for fiscal 1998.
14
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
During the last three fiscal years, the Company's retail division has
accounted for the majority of the Company's net sales and gross profit. The
Company's overall profitability depends principally on the Company's ability to
purchase a wide selection of merchandise at favorable prices. Other factors
affecting the Company's profitability include general economic conditions, the
availability to the Company of volume discounts and, in the retail division,
the number of stores in operation, the timing of store openings and closings
and the effect of special promotions offered by the Company.
The following table sets forth items from the Company's Consolidated
Statements of Operations expressed as a percentage of net sales for the periods
indicated.
PERCENTAGE OF NET SALES
---------------------------------------------------------
FISCAL YEAR
---------------------------------------------------------
1998 1997 1996
----------------- --- ---------------- --- --------------
Net sales, wholesale division 23.1% 20.8% 21.8%
Net sales, retail division 76.9 79.2 78.2
----------------- ---------------- --------------
Total net sales 100.0 100.0 100.0
Gross profit, wholesale division 20.2 24.2 25.1
Gross profit, retail division 44.7 46.0 48.4
----------------- ---------------- --------------
Total gross profit 39.0 41.4 43.3
Selling, general and administrative expenses 41.4 39.2 34.6
Provision for doubtful accounts -- 1.1 0.4
Provision for potential inventory losses 2.1 1.1 0.1
Provision for impairment of assets and
store closings 0.6 1.5 0.2
Depreciation and amortization 2.6 2.9 2.7
----------------- ---------------- --------------
Total operating expenses 46.7 45.8 38.0
----------------- ---------------- --------------
Income (loss) from operations
before other income (expenses) (7.7) (4.4) 5.3
----------------- ---------------- --------------
Other income (expense):
Interest, net (2.8) (2.9) (2.9)
Other, net 0.4 0.5 0.3
----------------- ---------------- --------------
Income (loss) before income taxes* (10.1) (6.8) 2.7
----------------- ---------------- --------------
(Provision) benefit for income taxes (0.8) 0.2 (1.2)
----------------- ---------------- --------------
Income (loss) before cumulative effect
of change in accounting principle (10.9) (6.6) 1.5
----------------- ---------------- --------------
Cumulative effect of change in
accounting principle, net of
income tax benefit -- (0.4) --
----------------- ---------------- --------------
Net income (loss)* (10.9%) (7.0%) 1.5%
================= ================ ==============
*As disclosed in Note 11 to the Consolidated Financial Statements, the net
income and net income per share for 1996 was restated to account for the value
of the beneficial conversion feature of certain debt issued in fiscal year
1996.
15
16
RESULTS OF OPERATIONS
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
Perfumania does not provide forecasts of future financial performance.
Forward-looking statements in this Annual Report are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995, and,
in connection therewith, the Company wishes to caution readers that the
following important factors, among others, in some cases have affected and in
the future could affect the Company's actual results and could cause such
results to differ materially from those expressed in forward-looking statements
made by or on behalf of the Company.
SEASONALITY. The Company has historically experienced higher sales in
the third and fourth fiscal quarters than in the first and second fiscal
quarters. Significantly higher fourth fiscal quarter retail sales result from
increased purchases of fragrances as gift items during the Christmas holiday
season. The Company's quarterly results may also vary due to the timing of new
store openings, net sales contributed by new stores and fluctuations in
comparable sales of existing stores. A variety of factors affect the sales
levels of new and existing stores, including the retail sales environment and
the level of competition, the effect of marketing and promotional programs,
acceptance of new product introductions, adverse weather conditions and general
economic conditions.
LACK OF LONG-TERM AGREEMENTS WITH SUPPLIERS. The Company's success
depends to a large degree on its ability to provide an extensive assortment of
brand name and designer fragrances. The Company has no long-term purchase
contracts or other contractual assurance of continued supply, pricing or access
to new products. While the Company believes it has good relationships with its
vendors, the inability to obtain merchandise from one or more key vendors on a
timely basis, or a material change in the Company's ability to obtain necessary
merchandise could have a material adverse effect on its results of operations.
DEPENDENCE ON LINE OF CREDIT. As discussed above, the Company
experiences significant seasonal fluctuations in its sales and operating
results, as is common with many specialty retailers. The Company utilizes its
line of credit to fund inventory purchases and to support new retail store
openings. Any future limitation on the Company's borrowing ability and access
to financing could limit the Company's ability to open new stores and to obtain
merchandise on satisfactory terms. The Company has violated certain debt
covenants contained in its bank line of credit agreement. These debt covenant
violations have not been waived by the bank as of April 30, 1999 and there is
no assurance that such waiver will be obtained. See additional discussion under
"Liquidity and Capital Resources."
DEPENDENCE ON KEY PERSONNEL. Jerome Falic, the Company's President, is
primarily responsible for the Company's merchandise purchases, and has
developed strong, reliable relationships with suppliers, as well as customers
of the Wholesale division in the United States, Europe, Asia and South America.
The loss of service his, or any of the Company's other current executive
officers could have a material adverse effect on the Company.
QUALIFIED ACCOUNTANTS' REPORT. In reporting on the Company's audited
consolidated financial statements as of January 30, 1999 and January 31, 1998
and for each of the three years in the period ended January 30, 1999, the report
of the Company's independent accountants contained an explanatory paragraph
indicating factors which create substantial doubt about the Company's ability to
continue as a going concern. Such factors include recurring net losses in fiscal
1998 and 1997 and a loan default, which has not yet been waived by the bank as
of April 29, 1999, on its bank line of credit agreement as a result of its
violation of certain debt covenants.
16
17
ABILITY TO MANAGE GROWTH. While the Company has grown significantly in
the past several years, there is no assurance that the Company will sustain the
growth in the number of retail stores and revenues that it has achieved
historically. The Company's growth is dependent, in large part, upon the
Company's ability to open and operate new retail stores on a profitable basis,
which in turn is subject to, among other things, the Company's ability to
secure suitable store sites on satisfactory terms, the Company's ability to
hire, train and retain qualified management and other personnel, the
availability of adequate capital resources and the successful integration of
new stores into existing operations. There can be no assurance that the
Company's new stores will achieve sales and profitability comparable to
existing stores, or that the opening of new locations will not cannibalize
sales at existing locations.
LITIGATION. As is often the case in the fragrance and cosmetics
business, some of the merchandise purchased by suppliers such as the Company
may have been manufactured by entities who are not the owners of the trademarks
or copyrights for the merchandise. If the Company were called upon or
challenged by the owner of a particular trademark or copyright to demonstrate
that the specific merchandise was produced and sold with the proper authority
and the Company were unable to do so, the Company could, among other things, be
restricted from reselling the particular merchandise or be subjected to other
liabilities, which could have an adverse effect on the Company's business and
results of operations.
YEAR 2000 READINESS. The Year 2000 issue is the result of computer and
other business systems being written using two digits rather than four to
represent the year. Many of the time sensitive applications and business
systems of the Company and its business partners may recognize a date using
"00" as the year 1900 rather than the year 2000, which could result in system
failure or disruption of operations. Although the Year 2000 problem will impact
the Company and its business partners, a preliminary assessment of the Year
2000 exposure has been made by the Company and, primarily because the Company's
major management information systems are in the process of being upgraded, the
Company believes it will be able to achieve Year 2000 readiness for its
internal systems by the fourth quarter of 1999. The Company is also developing
a plan of communication with significant business partners to obtain
appropriate assurances that the Year 2000 issues are resolved in a timely
manner. The Company believes that it will satisfactorily resolve all
significant Year 2000 problems and that the related costs will not be material.
However, estimates of Year 2000 related costs are based on numerous
assumptions, including the continued availability of certain resources, the
ability to acquire accurate information regarding third party suppliers, and
the ability to correct all relevant applications and third party modification
plans. There is no guarantee that the estimates will be achieved and actual
costs could differ materially from those anticipated. Moreover, the failure of
a major vendor's systems to operate properly with respect to the Year 2000
problem on a timely basis or a Year 2000 conversion that is incompatible with
the Company's systems could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, a
significant portion of the purchases from the Company's stores are made with
credit cards, and the Company's operations may be materially adversely affected
to the extent its customers are unable to use their credit cards due to Year
2000 problems that are not remedied by their credit card vendors.
17
18
OTHER. The Company has been characterized as an insider in the
liquidating plan of reorganization filed on April 6, 1998 by L. Luria & Son,
Inc. ("Luria's") in the United States Bankruptcy Court, Southern District of
Florida. In October 1998, the committee of unsecured creditors in Luria's
bankruptcy proceedings filed a complaint with the United States Bankruptcy
Court, Southern District of Florida to recover substantial funds from the
Company. The complaint alleges that Luria's made preference payments, as
defined by the Bankruptcy Court, to the Company and seeks recovery of said
preference payments, as well as disallowing any and all claims of the Company
against Luria's until full payment of the preference payments have been made.
Management cannot presently predict the outcome of these matters, although
management believes, upon the advice of counsel, that the Company would have
meritorious defenses and that the ultimate resolution of these matters should
not have a materially adverse effect on the Company's financial position or
result of operations.
RESTATEMENT OF 1996 NET INCOME PER COMMON SHARE TO REFLECT RECENT SEC
ANNOUNCEMENT REGARDING CERTAIN TREATMENT OF CONVERTIBLE DEBT TRANSACTIONS
In a 1997 announcement, the staff of the Securities and Exchange
Commission ("SEC") indicated that when debt is convertible at a discount from
the then current common stock market price, the discounted amount reflects at
that time an incremental yield, e.g. a "beneficial conversion feature", which
should be recognized as a return to the debt holders. In March 1996, the
Company issued $3,000,000 of 5% Convertible Debentures (the "Debentures") in a
Regulation S offering to non-U.S. persons. The debentures were convertible into
shares of common stock of the Company at any time after May 21, 1996. Based on
the market price of the Company's common stock, the debentures had a beneficial
conversion feature of $529,412 at such point in time. Because of the SEC
announcement, the Company has restated its 1996 net income and net income per
common share information to reflect such accounting treatment. The net effect
of the restatement represents a non-cash interest charge in the determination
of net income.
COMPARISON OF FISCAL YEARS 1998 AND 1997
Net sales increased 7.1% from $163.6 million in fiscal year 1997 to $175.3
million in fiscal year 1998. The increase in net sales during fiscal year 1998
was due to a 4.0% increase in retail sales (from $129.6 million to $134.8
million), and a 18.9% increase in wholesale sales (from $34.0 million to $40.5
million). The increase in retail sales was principally due to an increase in
the number of stores operated during fiscal year 1998 compared to fiscal year
1997, as comparable store sales were flat compared to the prior year. The
Company believes that various sales promotions held during the year to
stimulate sales and reduce inventory levels resulted in lower average sales per
customer, which contributed to the flat comparable store sales. The Company
operated 289 and 285 stores at the end of fiscal years 1998 and 1997,
respectively. The increase in wholesale sales was due to the Company's efforts
to reduce inventory levels of certain non-designer fragrances.
Gross profit increased 0.8% from $67.8 million in fiscal year 1997 (41.4%
of total net sales) to $68.4 million in fiscal year 1998 (39.0% of total net
sales) as a result of higher sales and gross profit in the retail division
offset by lower gross profit in the wholesale division.
Gross profit for the wholesale division remained flat at $8.2 million in
fiscal years 1997 and 1998. The wholesale division's gross margin in fiscal
1998 was 20.2% compared to 24.2% in fiscal year
18
19
1997. The decrease in gross margin was due to the increase in sales of
non-designer fragrances in the wholesale division and the overall ratio of
wholesale sales to retail sales in fiscal year 1998. Wholesale sales
historically yield a lower gross margin when compared to retail sales.
Gross profit for the retail division increased 1.1% from $59.5 million in
fiscal year 1997 to $60.2 million in fiscal year 1998, principally as a result
of higher retail sales volume. As a percentage of net retail sales, gross
profit for the retail division decreased from 46.0% in fiscal year 1997 to
44.7% in fiscal year 1998. The decrease was due to store promotions discussed
above as well as increases in freight expense and inventory shrinkage.
Operating expenses increased $6.8 million in fiscal year 1998 compared to
fiscal year 1997, due principally to 1) a $8.3 million increase in selling,
general and administrative expenses, which includes a non-recurring charge of
$1.9 million related to severance agreements with two executive officers, 2) a
$1.0 million provision for disposition of fixed assets relating to retail
stores which were either closed during fiscal year 1998, or are scheduled to
close during fiscal year 1999 and 3) a $3.8 million provision for potential
inventory losses. The increase in selling, general and administrative expense
was primarily the result of increases in rent, payroll and other costs
associated with the operation of an average of 10 additional stores during
fiscal year 1998. Depreciation and amortization decreased $0.2 million in
fiscal year 1998 compared to fiscal year 1997. As a percentage of net sales,
operating expenses increased from 45.8% in fiscal year 1997 to 46.6% in fiscal
year 1998.
Interest expense (net) increased 4.6% from $4.7 million in fiscal year
1997 to $4.9 million in fiscal 1998. The increase was principally due to
increased use of lease financing for new store furniture and fixtures. See
"Liquidity and Capital Resources".
The provision for income taxes in fiscal 1998 was $1.3 million, which
includes an increase in the valuation allowance of $1.2 million to provide fully
for the net deferred tax assets since management believes that it is more likely
than not that these amounts will not be realized due to the Company's recurring
losses.
As a result of the foregoing, the Company had a net loss of $18.9 million
in fiscal 1998 compared to a net loss of $11.4 million in fiscal 1997.
COMPARISON OF FISCAL YEARS 1997 AND 1996
Net sales increased 17.8% from $138.9 million in fiscal year 1996 to
$163.6 million in fiscal year 1997. The increase in net sales during fiscal
year 1997 was due to a 16.8% increase in retail sales (from $108.6 million to
$129.6 million), and a 16.3% increase in wholesale sales (from $30.3 million to
$34.0 million). The increase in retail sales was principally due to an increase
in the number of stores operated during fiscal year 1997 compared to fiscal
year 1996, as comparable store sales were flat compared to the prior year. The
Company believes that various promotions held during the year to stimulate
sales and reduce and rebalance inventory levels resulted in lower average sales
per customer, which contributed to the flat comparable store sales. The Company
operated 285 and 262 stores at the end of fiscal years 1997 and 1996,
respectively.
19
20
Gross profit increased 12.7% from $60.2 million in fiscal year 1996 (43.3%
of total net sales) to $67.8 million in fiscal year 1997 (41.4% of total net
sales) as a result of higher sales and gross profit in both the wholesale and
retail divisions.
Gross profit for the wholesale division increased from $7.6 million in
fiscal year 1996 to $8.3 million in fiscal year 1997. The wholesale division's
gross margin in fiscal 1997 was 24.2% compared to 25.1% in fiscal year 1996.
Gross profit for the retail division increased 13.3% from $52.5 million in
fiscal year 1996 to $59.5 million in fiscal year 1997, principally as a result
of higher retail sales volume. As a percentage of net retail sales, gross
profit for the retail division decreased from 48.4% in fiscal year 1996 to
46.0% in fiscal year 1997. The decrease was due to promotions discussed above.
Operating expenses increased $22.2 million in fiscal year 1997 compared to
fiscal year 1996, due principally to 1) a $16.1 million increase in selling,
general and administrative expenses, which includes $1.7 million of losses
suffered from operating its Nature's Elements stores prior to their conversion
and/or closure, 2) a $2.4 million increase in provision for impairment of
assets and store closing, 3) a $1.2 million write off of accounts receivable
from L. Luria & Son, Inc. and 4) a $1.8 million provision for potential
inventory losses. The increase in selling, general and administrative expense
was primarily the result of increases in rent, payroll and other costs
associated with the operation of an average of 64 additional stores during
fiscal year 1997. The average number of stores during fiscal 1997 includes 20
temporary holiday only stores. The Company intends to continue to use temporary
stores in an effort to reduce its inventories. The increase in provision for
doubtful account occurred primarily because of increased write offs of
wholesale accounts receivable. See "Liquidity and Capital Resources". After
performing a review of certain retail store locations with significant negative
cash flows, the Company recognized a non-cash impairment charge of $2.2
million, representing a reduction of the carrying amounts of fixed assets at
those store locations to their estimated recoverable amounts. The Company also
recorded a loss of $0.3 million on disposition of fixed assets relating to
retail stores which were closed during fiscal year 1997. Due to the heavy
concentration of sales in the fourth quarter of each fiscal year, the Company
does not believe it is meaningful to make impairment determinations on an
interim basis during the year. During fiscal year 1998, the Company intends to
reduce its inventories of certain non-designer products; consequently the
Company recorded a $1.8 million provision to reduce the carrying cost of such
inventories to their estimated market value. Depreciation and amortization
increased $0.9 million in fiscal year 1997 compared to fiscal year 1996, due to
increased fixed assets associated with retail stores. As a percentage of net
sales, operating expenses increased from 38.0% in fiscal year 1996 to 45.8% in
fiscal year 1997 due to the above reasons.
Interest expense (net) increased 14.3% from $4.2 million in fiscal year
1996 to $4.7 million in fiscal 1997. The increase was principally due to the
increase in the Company's line of credit from $30 to $35 million during fiscal
1997, as well increased use of lease financing for new store furniture and
fixtures, offset by a one-time non-cash interest charge of $529,412 for a
beneficial conversion feature of convertible debt in fiscal 1996 (see Note 11
to the consolidated financial statements). See "Liquidity and Capital
Resources".
20
21
The benefit for income taxes in fiscal 1997 was $0.3 million, which
includes an increase in the valuation allowance of $3.4 million for deferred
tax assets due to their uncertain realization.
As a result of the foregoing, the Company had a loss before cumulative
effect of a change in accounting principle of $10.8 million in fiscal 1997
compared to a net income of $2.1 million in fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund inventory
purchases and for new store openings. The Company has financed these capital
requirements primarily through borrowings under its working capital lines of
credit, cash flows from operations, lease financing of store furniture and
fixtures and short-term borrowings from related parties and other individuals.
On May 15, 1998, the Company's $35 million revolving line of credit
facility with LaSalle National Bank (LNB), was extended from April 1999 to
April 2001. Advances made under the line of credit are based on a formula of
eligible inventories and receivables, bear interest at 2% above the bank's
prime rate (12.5% at January 30, 1999), and are payable on demand. Advances are
secured by a first lien on all of the Company's assets and assignment of a life
insurance policy on one of the Company's officers.
The Company's $35 million line of credit contains covenants requiring
the maintenance of minimum tangible net worth, book value and achieving
specified levels of quarterly results of operations. The line of credit also
contains limitations on additional borrowings, capital expenditures, number of
new store openings, purchases of treasury stock and prohibits distribution of
dividends. As of January 30, 1999, the Company was in violation of certain of
the above covenants and as a result of these violations, the Company is in
default under the line of credit agreement. As a result, the bank can demand
payment of the amounts outstanding under the line of credit agreement. As of
April 29, 1999, the bank has not waived these covenant violations and there is
no assurance that these violations will be waived by the bank. Although
management believes that a waiver will be obtained for all covenant violations
and that the covenants will be revised to be less restrictive, there can be no
assurance that such waiver or revisions will be provided by the bank. Should
the Company be unable to obtain the required waiver from the bank, the Company
may be required to obtain alternative sources of financing. The Company could
also be required to take other actions to reduce its reliance on working
capital financing and generate additional working capital, which could include
delaying the opening of new stores, reducing inventory purchases and/or
reducing its wholesale and retail selling prices to generate more cash. Any
such actions, or the Company's failure to obtain additional financing in an
amount sufficient to support its current and planned levels of operation could
adversely affect the Company's business and operating results. In addition, as
a result of these violations, the Company incurred the default rate of
interest, prime plus 4% (12.5%) from December 1998 through April 1999.
In March 1999, the Company entered into a subscription agreement for the
sale of 235,294 shares of the Company's common stock to a group of private
investors at a price of $8.50 per share. The proceeds of $2 million were
received in January 1999. The agreement requires that the Company file the
appropriate registration statements with the Securities and Exchange Commission
within six months from the date of the agreement to permit the registered resale
of the shares by the investors in open market transactions. If on the effective
date of the registration statement, the market price is less than $8.50 per
share, the Company is obligated to reimburse the investor group the lesser of 1)
the product of the difference between $8.50 and the fair market value of the
Company's common stock on the effective date of the registration statement
multiplied by the number of shares issued under the agreement or 2) the product
of $2.00 multiplied by the number of shares issued under the agreement. As of
January 31, 1999, the potential redeemable amount of $470,588 was recorded as
redeemable common equity and the remaining $1,529,412 was recorded as capital in
excess of par value in the accompanying balance sheets.
21
22
On March 21, 1996, the Company sold 180,000 shares of common stock for
approximately $956,000 in a private placement.
On March 25, 1996, the Company issued $3,000,000 of 5% Convertible
Debentures (the "Debentures") in a Regulation S offering to non-U.S. persons.
The debentures were convertible at any time after May 21, 1996 into shares of
common stock of the Company, at a conversion price for each share of common
stock equal to eighty-five percent of the market price of the common stock on
the date of conversion, not to exceed $8.50 per share of common stock. The
debentures were converted to approximately 918,000 shares of the Company's
common stock in the second quarter of fiscal 1996. See Note 11 of the
consolidated financial statements.
In fiscal year 1998, net cash provided by operating activities was
approximately $12.7 million, which was primarily due to the Company's reduction
in inventories and receivables.
The Company's trade receivables primarily relate to its wholesale
business. At fiscal year end 1998, approximately $1.3 million of the Company's
trade receivables, net, were more than 90 days past due. Of the $4.1 million in
trade receivables due from customers at January 30, 1999, $0.1 million was due
from one customer which also accounted for 24.8% of the Company's fiscal 1998
wholesale sales. The Company's sales to this customer are made on open account
terms, and since late 1991, the Company has extended credit to this customer on
terms of up to six months. The Company has not experienced any write-offs of
accounts receivable from this customer due to collectibility. The Company's
allowance for doubtful accounts of approximately $0.7 million at January 30,
1999 is considered adequate by management based on its write-off experience
during the last three years and an analysis of the aging of its trade
receivables at January 30, 1999.
During fiscal year 1998, inventories decreased by approximately $15.5
million due to 1) efforts by the Company to reduce inventory levels and 2) an
inventory provision during the fourth quarter of $3.8 million related primarily
to non-designer fragrances the Company intends to liquidate in fiscal 1999. See
"Comparison of fiscal years 1998 and 1997" above.
Net cash used in investing activities in fiscal year 1998 was
approximately $9.5 million, principally due to capital expenditures related to
opening new stores and renovating existing stores. The Company intends to
slow its growth and open only 7 stores in fiscal 1999 versus 36 stores in
fiscal 1998. In addition, the Company does not plan any significant renovations
of existing stores in fiscal 1999, whereas 18 Nature's stores (see discussion
under "Acquisition", Item 1. Business - Retail Division) were completely
remodeled in fiscal 1998. Thus, store related capital expenditures for fiscal
1999 are projected to be significantly lower than fiscal 1998. Although the
Company intends to upgrade various components of its management information
systems and will also make various hardware and software enhancements (see Year
2000 discussion below), total capital expenditures for fiscal 1999 are
projected to be $4.0 million of which approximately $1.8 million pertains to
new store
22
23
openings and $2.2 million pertains to hardware, software and other corporate
improvements. Currently, the Company's average capital expenditure for opening a
store is approximately $175,000, including furniture and fixtures, equipment and
other items, which average approximately $50,000 per store, build-out costs,
which average approximately $120,000 per store, and pre-opening expenses, such
as the hiring and training of new employees and travel, which average
approximately $5,000 per store. In addition, initial inventory (not including
inventory replenishment) in a new store ranges from approximately $100,000
during the first fiscal quarter to approximately $140,000 during the Christmas
holiday season. The Company's wholesale inventory levels vary significantly
during the fiscal year depending upon availability, price and selection of
merchandise available for purchase, and seasonality. The Company generally
carries at least four months' supply of inventory for its retail and wholesale
divisions.
The Company also repurchased approximately 294,000 shares of its common
stock for $0.9 million in fiscal 1998.
SEASONALITY AND QUARTERLY RESULTS
The Company's operations have historically been seasonal, with
generally higher sales in the third and fourth fiscal quarters than in the
first and second fiscal quarters. Significantly higher fourth fiscal quarter
retail sales result from increased purchases of fragrances as gift items during
the Christmas holiday season. The Company's quarterly results may also vary due
to the timing of new store openings, net sales contributed by new stores and
fluctuations in comparable sales of existing stores. Wholesale sales vary by
fiscal quarter as a result of the selection of merchandise available for sale
and the need for the Company to stock its retail stores for the Christmas
holiday season. Therefore, the results of any interim period are not
necessarily indicative of the results that may be expected during a full fiscal
year. See Note 15 of the Notes to the Consolidated Financial Statements for
additional information regarding quarterly financial data.
YEAR 2000
The following critical application systems areas are the focus of the
Company's Y2K compliance efforts; (1) Merchandising, (2) Inventory Management
and Distribution, (3) Point-of-sales systems, (4) Human Resources and (5)
Finance and Accounting. The Merchandising and Finance and Accounting systems
are currently being upgraded utilizing vendor software certified as Y2K
compliant. The Inventory Management and Distribution systems as well as the
Point-of-sales and Human Resources systems will be upgraded in the third
quarter of 1999. The Company's hardware and communications network is currently
being inventoried, assessed, and where instances of non-compliance are noted,
upgraded and tested.
The Company has not incurred material costs to date in the process, and
does not believe that the cost of additional actions will have a material effect
on its operating results or financial condition. However, the Company has
established a budget totaling approximately $1.5 million for the acquisition of
computer hardware and software that will assist in the Year 2000 assessment and
remediation activities to be completed no later than the third quarter of 1999.
The Company's current systems may contain undetected errors or defects with Year
2000 date functions that may result in material costs. In
23
24
addition, the Company utilizes third-party equipment, software, including
non-information technology systems, such as facilities and distribution
equipment that may not be Year 2000 compliant. Failure of third-party equipment,
software or content to operate properly with regard to the Year 2000 issue could
require the Company to incur unanticipated expenses to remedy problems, which
could have a material adverse effect on its business, operating results and
financial condition.
The Company is currently assessing whether third parties in its supply
and distribution chain are adequately addressing their Year 2000 compliance
issues. The Company has initiated formal communications with its significant
suppliers and service providers to determine the extent to which its systems
may be vulnerable if such suppliers and providers fail to address and correct
their own Year 2000 issues. The Company cannot guarantee that the systems of
suppliers or other companies on which the Company relies will be Year 2000
compliant.
The Company will track the Year 2000 compliance status of its material
vendors and suppliers via the Company's own internal vendor compliance effort.
Year 2000 correspondence will be sent to critical vendors and suppliers by the
second quarter of 1999, with continued follow up for those who fail to respond.
All vendor responses will be evaluated to assess any possible risk to or effect
on the Company's operations. Prior to mid 1999, the Company expects to
implement additional procedures for assessing the Year 2000 compliance status
of its most critical vendors and will modify its contingency plans accordingly.
The Company is in the process of preparing its contingency plans which
will include the identification of its most reasonably likely worst case
scenarios. Currently, the most reasonably likely sources of risk to the Company
include (1) the disruption of the Company's internal inventory management
system, (2) the inability of principal suppliers or logistics providers to be
Year 2000-ready, which could result in delays in product deliveries from such
suppliers or logistics providers and (3) failure of hardware and software
utilized by transportation vendors as a result of a general failure of systems
and necessary infrastructure such as electricity supply. The Company is
preparing plans to flow inventory around an assumed period of disruption to the
Company's stores, which could include accelerating distribution of high volume
merchandise and critical products to reduce the impact of significant failure.
Based on its current assessment efforts, the Company does not believe
that Year 2000 issues will have a material adverse effect on its financial
condition or results of operations. However, the Company's Year 2000 issues and
any potential business interruptions, costs, damages or losses related thereto,
are dependent, to a significant degree, upon the Year 2000 compliance of third
parties, such as government agencies, vendors and suppliers. Consequently, the
Company is unable to determine at this time whether Year 2000 failures will
materially affect the Company. The Company believes that its compliance efforts
have and will reduce the impact on the Company of any such failures.
OTHER
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income," which establishes standards for reporting and display of
comprehensive income and its components. In June 1997, the FASB also issued
Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures
24
25
about Segments of an Enterprise and Related Information." This Statement
establishes standards for reporting information about a company's operating
segments and related disclosures about its products, services, geographic areas
of operations and major customers. Both Statements were adopted by the Company
in 1998.
In March 1998, the AICPA issued Statement of Financial Position 98-1,
("SOP 98-1") "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". SOP 98-1 provides guidance for capitalization of
certain costs incurred in the development of internal-use software and is
effective for financial statements for years beginning after December 15, 1998.
SOP 98-1 was adopted in fiscal 1998 and had no significant impact on the
Company's results of operations, cash flows or financial position.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of
Start-Up Activities", which requires the Company to expense preopening expenses
as incurred. The Company early adopted SOP 98-5 in fiscal year 1997. See Note 2
of Notes to the Consolidated Financial Statements contained in Item 8 hereof.
Although large fluctuations in foreign exchange rates could have a
material effect on the prices the Company pays for products it purchases from
outside the United States, the prices obtainable for sales denominated in
foreign currencies and wholesale sales to foreign customers, such fluctuations
have not been material to the Company's results of operations to date.
Transactions with foreign suppliers generally are in United States dollars. The
Company believes that inflation has not had a material impact on its results of
operations and that it is generally able to pass through any cost increases in
the form of increased sales prices.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's exposure to market risk for changes in interest rates
relates primarily to its bank line of credit. The bank line of credit bears
interest at a variable rate, as discussed above under "Liquidity and Capital
Resources". The Company mitigates interest rate risk by continuously monitoring
the interest rates.
The table below presents the outstanding principal amount and the
related fair value, together with maturity date as of January 30, 1999 and the
weighted average interest rate for the Company's bank line of credit. (See
"Liquidity and Capital Resources" and Notes 2 and 8 of the Notes to
Consolidated Financial Statements.)
WEIGHTED
OUTSTANDING AVERAGE
PRINCIPAL FAIR INTEREST MATURITY
AMOUNT VALUE RATE DATE
----------------- ------------------ ----------------- ---------------
Bank Line of Credit $30,035,019 $30,035,019 10.83% April 2001
25
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial information and the supplementary data required in
response to this Item are as follows:
PAGE
----
Report of Independent Certified Public Accountants 27
Consolidated Balance Sheets as of January 30, 1999 and January 31, 1998 28
Consolidated Statements of Operations for the Fiscal Years Ended January 30, 1999,
January 31, 1998 and February 1, 1997. 29
Consolidated Statements of Changes in Stockholders' Equity for the Fiscal Years Ended
January 30, 1999, January 31, 1998 and February 1, 1997. 30
Consolidated Statements of Cash Flows for the Fiscal Years Ended January 30, 1999,
January 31, 1998 and February 1, 1997. 31
Notes to Consolidated Financial Statements 32
Schedule II - Valuation and Qualifying Accounts and Reserves 52
26
27
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Perfumania, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 8 and Item 14(a)(1) and (2) of this Form 10-K present
fairly, in all material respects, the financial position of Perfumania, Inc.
and its subsidiaries at January 30, 1999 and January 31, 1998, and the results
of its operations and its cash flows for each of the three years in the period
ended January 30, 1999 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred recurring net losses
in fiscal 1998 and 1997 and has a working capital deficit of $3.8 million at
January 30, 1999. In addition, the Company was in default of its bank line of
credit agreement as a result of its violation of certain debt covenants. These
debt covenant violations have not been waived by the bank as of April 29, 1999.
There is no assurance that the Company will be able to generate future net
income nor obtain the required waivers of default from the bank, which creates
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As discussed in Note 11, in 1997 the Company restated its fiscal 1996 net income
and net income per common share calculation to comply with new requirements of
the Securities and Exchange Commission Staff position on accounting for
convertible securities having beneficial conversion features.
As explained in Note 2, in 1997 the Company changed its method of accounting for
preopening expenses to conform with new requirements of the American Institute
of Certified Public Accountants.
PricewaterhouseCoopers LLP
Miami, Florida
April 29, 1999
27
28
PERFUMANIA, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 30, JANUARY 31,
1999 1998
----------- -----------
ASSETS:
Current assets:
Cash and cash equivalents $1,745,603 $1,554,117
Trade receivables,
less allowance for doubtful accounts of $704,954 4,108,847 5,186,473
in 1999 and 1998
Advances to suppliers 8,065,301 7,611,036
Inventories, net of reserve of $4,163,251 and $2,750,000 53,880,132 73,137,842
Prepaid expenses and other current assets 1,502,087 2,086,118
Tax refund receivable -- 814,766
Deferred tax asset, net -- 1,219,856
Due from related parties -- 772,855
---------------- ----------------
Total current assets 69,301,970 92,383,063
Property and equipment, net 23,180,462 18,307,240
Leased equipment under capital leases, net 1,373,878 2,266,674
Other assets, net 1,357,966 1,764,906
Due from related parties 457,243 --
---------------- ----------------
Total assets $95,671,519 $114,721,883
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Bank line of credit and current portion of notes payable $32,800,627 $ 34,139,766
Accounts payable - non-affiliates 14,329,013 13,308,914
Accounts payable - affiliates 15,812,240 16,958,163
Accrued expenses and other liabilities 9,205,316 6,848,923
Income taxes payable 485,098 505,098
Current portion of obligations under capital leases 419,487 1,030,340
Due to related parties -- 304,483
---------------- ----------------
Total current liabilities 73,051,781 73,095,687
Long-term portion of notes payable 2,370,684 4,709,434
Long-term portion of obligations under capital leases 562,552 933,615
Long-term severance payables 1,037,859 --
---------------- ----------------
Total liabilities 77,022,876 78,738,736
Commitments and contingencies -- --
Redeemable common equity (Note 11) 470,588 --
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued -- --
Common stock, $.01 par value, 25,000,000
shares authorized, 8,614,491 and
7,845,291 shares issued and outstanding 86,145 78,453
Capital in excess of par value 54,440,009 52,386,361
Treasury stock, at cost, 1,512,406 and 1,218,360 shares in 1999
and 1998 (5,413,002) (4,521,068)
Accumulated deficit (30,935,097) (11,960,599)
---------------- ----------------
Total stockholders' equity 18,178,055 35,983,147
---------------- ----------------
Total liabilities and stockholder's equity $95,671,519 $114,721,883
================ ================
See accompanying notes to consolidated financial statements.
28
29
PERFUMANIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEAR ENDED
------------------------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
------------- - ----------- ------------
(as restated,
Note 11)
Net sales:
Non-affiliated customers $175,255,633 $161,593,736 $136,446,104
Affiliates -- 1,999,823 2,473,623
---------------- ----------------- -------------------
175,255,633 163,593,559 138,919,727
---------------- ----------------- -------------------
Cost of goods sold:
Non-affiliated customers 106,873,767 94,243,329 76,516,903
Affiliates 1,566,489 2,252,850
---------------- ----------------- -------------------
106,873,767 95,809,818 78,769,753
---------------- ----------------- -------------------
Gross profit 68,381,866 67,783,741 60,149,974
---------------- ----------------- -------------------
Operating expenses:
Selling, general and administrative expenses 72,501,987 64,219,379 48,165,392
Provision for doubtful accounts -- 1,730,000 500,000
Provision for potential inventory losses 3,764,665 1,810,000 190,000
Provision for impairment of assets and store closings 1,034,717 2,514,818 169,159
Depreciation and amortization 4,480,681 4,697,816 3,771,508
---------------- ----------------- -------------------
Total operating expenses 81,782,050 74,972,013 52,796,059
---------------- ----------------- -------------------
Income (loss) from operations
before other income (expense) (13,400,184) (7,188,272) 7,353,915
---------------- ----------------- -------------------
Other income (expense):
Interest expense:
Affiliates (22,486) (124,250) (148,647)
Other (4,938,365) (4,617,070) (4,004,754)
---------------- ----------------- -------------------
(4,960,851) (4,741,320) (4,153,401)
---------------- ----------------- -------------------
Interest income:
Affiliates 43,440 42,450 39,480
Other 35,057 2,660 3,499
---------------- ----------------- -------------------
78,497 45,110 42,979
---------------- ----------------- -------------------
Other income 645,446 762,138 478,179
---------------- ----------------- -------------------
Total other income (expense) (4,236,908) (3,934,072) (3,632,243)
---------------- ----------------- -------------------
Income (loss) before income taxes (17,637,092) (11,122,344) 3,721,672
(Provision) benefit for income taxes (1,337,406) 321,192 (1,646,731)
---------------- ----------------- -------------------
Income (loss) before cumulative effect of change in
accounting principle (18,974,498) (10,801,152) 2,074,941
Cumulative effect of change in accounting principle,
net of income tax benefit of $380,958 -- (631,418) --
================ ================= ===================
Net income (loss) $(18,974,498) $(11,432,570) $ 2,074,941
================ ================= ===================
Basic earnings (loss) per common share:
Income (loss) before cumulative effect of
change in accounting principle $(2.85) $(1.54) $0.29
Cumulative effect of change in accounting principle -- (0.09) --
================ ================= ===================
Net income (loss) $(2.85) $(1.63) $0.29
================ ================= ===================
Diluted earnings (loss) per common share:
Income (loss) before cumulative effect of
change in accounting principle $(2.85) $(1.54) $0.27
Cumulative effect of change in accounting principle -- (0.09) --
================ ================= ===================
Net income (loss) $(2.85) $(1.63) $0.27
================ ================= ===================
Weighted average number of shares outstanding:
Basic 6,659,237 7,025,236 7,183,462
================ ================= ===================
Diluted 6,659,237 7,025,236 7,633,588
================ ================= ===================
See accompanying notes to consolidated financial statements.
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30
PERFUMANIA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1997 (AS RESTATED, NOTE 11)
FISCAL YEAR ENDED JANUARY 31, 1998
AND FISCAL YEAR ENDED JANUARY 30, 1999
COMMON STOCK CAPITAL TREASURY STOCK
------------------- IN EXCESS --------------------- ACCUMLATED
SHARES AMOUNT OF PAR VALUE SHARES AMOUNT DEFICIT TOTAL
--------- ------- ------------ -------- ------ ---------- -----------
Balance at February 3, 1996 6,707,700 $67,077 $47,959,464 23,000 $ (123,323) $ (2,602,970) $ 45,300,248
Exercise of stock options 2,000 20 8,230 -- -- -- 8,250
Conversion of debentures 918,091 9,181 2,978,085 -- -- -- 2,987,266
Beneficial conversion feature
of debentures -- -- 529,412 -- -- -- 529,412
Issuance of common stock 180,000 1,800 954,450 -- -- -- 956,250
Purchases of treasury stock -- -- -- 644,900 (2,531,787) -- (2,531,787)
Net income for the fiscal
year ended February 1, 1997 -- -- -- -- -- 2,074,941 2,074,941
------------ ---------- -------------- ----------- -------------- --------------- --------------
Balance at February 1,1997 7,807,791 78,078 52,429,641 667,900 (2,655,110) (528,029) 49,324,580
Exercise of stock options 37,500 375 116,812 -- -- -- 117,187
Purchases of treasury stock -- -- -- 550,460 (1,865,958) -- (1,865,958)
Other -- -- (160,092) -- -- -- (160,092)
Net loss for the fiscal
year ended January 31, 1998 -- -- -- -- -- (11,432,570) (11,432,570)
------------ ---------- -------------- ----------- -------------- --------------- --------------
Balance at January 31, 1998 7,845,291 78,453 52,386,361 1,218,360 (4,521,068) (11,960,599) 35,983,147
Exercise of stock options 684,200 6,842 310,865 -- -- -- 317,707
Purchases of treasury stock -- -- -- 294,046 (891,934) -- (891,934)
Issuance of common stock 85,000 850 213,371 -- -- -- 214,221
Proceeds on common stock
to be issued -- -- 1,529,412 -- -- -- 1,529,412
Net loss for the fiscal
year ended January 30, 1999 -- -- -- -- -- (18,974,498) (18,974,498)
------------ ---------- -------------- ----------- -------------- --------------- -------------
Balance at January 30, 1999 8,614,491 $86,145 $54,440,009 1,512,406 $(5,413,002) $(30,935,097) $18,178,055
============ ========== ============== =========== ============== =============== ==============
See accompanying notes to consolidated financial statements.
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31
PERFUMANIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED ENDED
-----------------------------------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
----------------- -------------------- -----------------------
(As restated, Note 11)
Cash flows from operating activities:
Net income (loss) $(18,974,498) $(11,432,570) $ 2,074,941
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Provision for deferred taxes 1,219,856 -- 380,528
Capitalized preopening costs -- -- (940,550)
Provision for doubtful accounts -- 1,730,000 500,000
Provision/writedown for inventory losses 3,764,665 1,810,000 190,000
Depreciation and amortization 4,480,681 4,697,816 3,771,508
Provisions for impairment of assets -- 2,200,000 --
Loss on disposition of property and equipment 1,034,717 314,818 169,159
Beneficial conversion feature of debentures -- -- 529,412
Cumulative effect of change in accounting principle,
net of tax benefit -- 631,418 --
Stock compensation 214,221 -- --
Change in operating assets and liabilities,
(increase) decrease in:
Trade receivables:
Customers 1,077,626 5,358,686 716,959
Affiliates -- 653,657 (653,657)
Advances to suppliers (454,265) (2,587,318) (712,058)
Inventories 15,493,045 10,162,581 (24,288,235)
Prepaid expenses 584 031 (186,798) (747,225)
Due from related parties -- (269,479) 34,689
Tax refund receivable 814,766 (814,766) --
Other assets 406,940 (539,266) (123,998)
Increase (decrease) in:
Accounts payable (125,824) (5,861,438) 17,314,213
Accrued expenses and other liabilities 2,356,398 2,908,483 1,088,386
Income taxes payable (20,006) (816,105) 1,321,203
Long term severance payable 1,037,859 -- --
Negative goodwill -- (470,000) --
----------------- -------------------- -----------------------
Net cash provided by
operating activities 12,910,212 7,489,719 625,275
----------------- -------------------- -----------------------
Cash flows from investing activities:
Additions to property and equipment (9,495,824) (7,207,114) (7,341,901)
----------------- -------------------- -----------------------
Net cash used in financing activities (9,495,824) (7,207,114) (7,341,901)
----------------- -------------------- -----------------------
Cash flows from financing activities:
Net borrowings under bank line of credit and loans
payable (3,677,888) 2,957,170 7,208,943
Net increase (decrease) in due to related parties 11,129 (465,517) 90,000
Principal payments under capital lease obligations (981,916) (952,805) (639,892)
Issuance of debentures -- -- 2,935,361
Proceeds from issuance of common stock 2,000,000 -- 956,250
Proceeds from exercise of stock options 317,707 117,187 8,250
Stock issuance costs -- (160,092) --
Purchases of treasury stock (891,934) (1,865,958) (2,531,787)
----------------- -------------------- -----------------------
Net cash provided by (used in)
financing activities (3,222,902) (370,015) 8,027,125
----------------- -------------------- -----------------------
Increase (decrease) in cash and cash equivalents 191,486 (87,410) 1,310,499
Cash and cash equivalents at beginning of period 1,554,117 1,641,527 331,028
----------------- -------------------- -----------------------
Cash and cash equivalents at end of period $ 1,745,603 $ 1,554,117 $ 1,641,527
================= ==================== =======================
See accompanying notes to consolidated financial statements.
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PERFUMANIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS:
Perfumania, Inc. ("Perfumania") and its subsidiaries (collectively,
the "Company") is a specialty retailer and wholesaler of fragrances and related
products. The Company's retail stores consist of stores located in regional
malls, manufacturer's outlet malls, airports and on a stand-alone basis in
suburban strip shopping centers. The number of retail stores in operation at
January 30, 1999, January 31, 1998 and February 1, 1997 were 289, 285 and 262,
respectively.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES:
Significant accounting principles and practices used by the Company in
the preparation of the accompanying consolidated financial statements are as
follows:
FISCAL YEAR END
The Company's fiscal year ends the Saturday closest to January 31 to
enable the Company's operations to be reported in a manner which more closely
coincides with general retail reporting practices and the financial reporting
needs of the Company. In the accompanying notes, fiscal year 1998, 1997 and
1996 refers to the year ended January 30, 1999, January 31, 1998 and February
1, 1997, respectively.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The most significant estimates made by management in the
accompanying financial statements relate to the allowance for doubtful
accounts, inventory reserves, self insurance health care reserves, long-lived
asset impairments and estimated useful lives of property and equipment. Actual
results could differ from those estimates.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
consolidated financial statements, the Company incurred net losses of
approximately $18.9 million and $11.4 million during the fiscal years ended
January 30, 1999 and January 31, 1998, respectively, and has a working capital
deficit of $3.8 million at January 30, 1999. In addition, the Company was in
violation of certain debt covenants contained in its bank line of credit
agreement (Note 8). These debt covenant violations have not been waived by the
bank
32
33
as of April 29, 1999 and there is no assurance that the Company will be able to
obtain the required waivers of default from the bank
Management's plan initially consists of obtaining a waiver for the
debt covenant violations and amending the line of credit agreement. In
addition, management's plan to improve the results of operations include
decreasing the number of store openings in 1999, closing a number of its
non-profitable stores, improving the effectiveness of its sales promotions
practices, continuing to improve the existing merchandise mix and to promote
the private label bath, body and cosmetic line, continuing to liquidate slow
moving inventories and reducing selling, general and administrative expenses.
There is no assurance, however, that the Company will be able to improve its
results of operations based on management's plan.
These factors among others may indicate that the Company will be
unable to continue as a going concern for a reasonable period of time. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Perfumania and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Revenue from wholesale transactions is recorded upon shipment of
inventory. Revenue from retail sales is recorded upon customer purchase.
ADVANCES TO SUPPLIERS
Advances to suppliers represent prepayments to wholesale vendors on
pending inventory purchase orders.
INVENTORIES
Inventories, consisting predominantly of finished goods, are stated at
the lower of cost or market, cost being determined on a moving average cost
basis. The cost of inventory includes product cost and freight charges.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost, less accumulated
depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the term of the lease or the
estimated useful lives of the improvements, whichever is shorter. Costs of
major additions and improvements are capitalized and expenditures for
maintenance and repairs which do not extend the useful life of the
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asset are expensed when incurred. Gains or losses arising from sales or
retirements are included in income currently.
PREOPENING EXPENSES
Prior to fiscal 1997, the Company capitalized expenses associated with
the opening of new retail locations and training of personnel. These costs
typically included occupancy costs incurred prior to store opening, travel
expenses, store managers' salaries and grand opening costs paid to the mall.
The Company amortized these amounts over 18 months.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of
Start-Up Activities", which requires the Company to expense preopening expenses
as incurred. SOP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998, does not require restatement of prior
periods and is applied as of the beginning of the fiscal year in which the SOP
is first adopted. The Company early adopted SOP 98-5 in fiscal 1997 and has
reported the initial application as a cumulative effect of a change in
accounting principle in the Consolidated Statement of Operations for the year
ended January 31, 1998. The effect of the change in accounting principle was to
increase the net loss before cumulative effect of change in accounting
principle reported for 1997 by approximately $733,000 or $0.10 per share.
INCOME TAXES
Income tax expense is based principally on pre-tax financial income.
Deferred tax assets and liabilities are recognized for the difference between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
BASIC AND DILUTED INCOME (LOSS) PER SHARE
Basic income (loss) per common share is computed by dividing income
(loss) available to common stockholders, after giving effect in fiscal 1996 to
the restatement related to the beneficial conversion feature in connection with
convertible debt (Note 11), by the weighted average number of common shares
outstanding during the period. Diluted income (loss) per common share includes
the dilutive effect of those stock options where the option exercise prices
were greater than the average market price of the common shares during the
respective fiscal years.
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35
Basic and diluted earnings per share for income (loss) before
cumulative effect of change in accounting principle is computed as follows:
FISCAL YEAR
----------------------------------------------------------------------
1998 1997 1996
-------------------- ------------------ ----------------------
(as restated, Note 11)
Numerator:
Income (loss) before cumulative
effect of change in accounting principle $(18,974,498) $(10,801,152) $2,074,941
-------------------- ------------------ ----------------------
Denominator:
Denominator for basic income
(loss) per share 6,659,237 7,025,236 7,183,462
Effect of dilutive securities:
Options to purchase common stock -- -- 450,126
-------------------- ------------------ ----------------------
Denominator for dilutive
income (loss) per share 6,659,237 7,025,236 7,633,588
-------------------- ------------------ ----------------------
Income (loss) per share before cumulative effect of
change in accounting principle:
Basic $(2.85) $(1.54) $0.29
==================== ================== ======================
Diluted $(2.85) $(1.54) $0.27
==================== ================== ======================
Antidilutive securities not included in the
diluted earnings (loss) per share
computation:
Options to purchase common stock 391,222 1,724,150 1,472,861
Exercise price $0.41 - $2.75 $2.75 - $5.63 $2.75 - $8.50
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, trade receivables,
advances to suppliers, accounts payable, bank line of credit, obligations under
capital leases and loans payable approximate fair value as of January 30, 1999
and January 31, 1998.
ASSET IMPAIRMENT
The Company reviews long-lived assets and makes a provision for
impairment whenever events or changes in circumstances indicate that the
projected cash flows of related activities may not provide for cost recovery.
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STOCK BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for stock Issued to Employees ("APB 25"), and provides proforma
disclosure of net income and earnings per share as if the fair value based
method prescribed by SFAS 123 had been applied in measuring compensation
expense for options granted in 1998 and 1997. In accordance with APB 25
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock.
RECLASSIFICATION
Certain fiscal 1996 and 1997 amounts have been reclassified to conform
with the fiscal 1998 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the AICPA issued Statement of Financial Position 98-1,
("SOP 98-1") "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". SOP 98-1 provides guidance for capitalization of
certain costs incurred in the development of internal-use software and is
effective for financial statements for years beginning after December 15, 1998.
The Company adopted SOP 98-1 in fiscal 1998 which did not have a significant
impact on the Company's results of operations, cash flows or financial
position.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income," which establishes standards for reporting and displaying
comprehensive income and its components. In June 1997, the FASB issued
Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures
about Segments of an Enterprise and Related Information," which requires the
Company to present certain information about operating segments and related
information. The Company adopted both statements in fiscal 1998.
NOTE 3 - ACQUISITION:
In November 1996, the Company acquired substantially all of the assets
of Nature's Elements Holding Corporation ("Nature's") which included the
service mark and trade name "Nature's Elements" and the stock of its
subsidiary. Prior to the acquisition, all of Nature's liabilities, both at the
parent and subsidiary level were transferred to a liquidating trust. Subsequent
to the acquisition, the stock of the subsidiary was liquidated and the Company
received inventory and store fixtures and assumed the obligation for 34 leases
(including 1 seasonal store) for approximately $2.2 million, of which $1.7
million was represented by a note payable. The Company has since closed 11
locations, renovated 18 locations and the remaining locations will either be
renovated or subleased by mid 1999. The acquisition was accounted for as a
purchase and accordingly, Nature's results are included in the consolidated
financial statements since the date of acquisition. The estimated fair value of
the acquired assets exceeded the purchase price. The excess of estimated fair
value of the assets acquired over cost
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was $3.5 million of which $3 million reduced the fair value of non-current
assets acquired to a zero value and $0.5 million was allocated to negative
goodwill, which was reduced to zero in 1997 due to writedown of inventory
purchased. The assets and business acquired were not material in relation to
consolidated financial statements.
NOTE 4 - STATEMENTS OF CASH FLOWS:
Supplemental disclosures of cash flow information:
FISCAL YEAR ENDED
------------------------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
----------- ----------- -----------
Cash paid during the period for:
Interest $4,830,230 $4,671,039 $3,459,563
========== ========== ==========
Income taxes $ 20,000 $1,012,000 $ 71,138
========== ========== ==========
Supplemental disclosures of noncash activities:
The Company issued in 1996 a $1.7 million note payable due to the
acquisition discussed in Note 3.
In December 1996, the Company entered into an agreement with a vendor
whereby approximately $3.6 million of accounts payable was converted to a note
payable (see Note 8).
NOTE 5 - INVENTORIES:
During 1998, 1997 and 1996, the Company recorded a provision of $3.8
million, $1.8 million and $0.2 million, respectively, to reduce the carrying
value of certain fragrances the Company intends to liquidate. These amounts
represent management's best estimate of the inventories' net realizable value.
NOTE 6 - PROPERTY AND EQUIPMENT:
Property and equipment includes the following:
ESTIMATED
JANUARY 30, JANUARY 31, USEFUL LIVES
1999 1998 (IN YEARS)
------------ ------------ -----------
Furniture, fixtures and equipment $ 15,959,500 $ 15,213,721 5-7
Leasehold improvements 21,235,443 14,995,361 10
------------ ------------
37,194,943 30,209,082
Less: Accumulated depreciation
and amortization (14,014,481) (11,901,842)
------------ ------------
$23,180,462 $ 18,307,240
=========== ============
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NOTE 7 - RELATED PARTY TRANSACTIONS:
Due from related parties consists of the following:
JANUARY 30, JANUARY 31,
1999 1998
----------- -----------
Amounts due from officers $ -- $315,612
Note receivable from shareholder 457,243 457,243
-------- --------
$457,243 $772,855
======== ========
The note receivable from shareholder results from the sale of a
condominium to the shareholder at its book value in 1991. The shareholder
assumed the balance of the related mortgage and issued an unsecured note payable
to the Company for $282,519, bearing interest at 9.5%. The note initially
matured in December 1993 and has been subsequently renewed through December
2000. Total interest income recognized during 1998, 1997 and 1996 was
approximately $43,000, $43,000 and $40,000, respectively. Accrued interest
receivable at January 30, 1999 and January 31, 1998 amounted to approximately
$85,000 and $42,000, respectively.
Purchases of products from a company affiliated through common
ownership amounted to $24,333,032, $21,436,855, and $30,735,244, in fiscal year
1998, 1997 and 1996, respectively. The amount due to this company at January
30, 1999 and January 31, 1998, was $15,812,240 and $16,958,163, respectively.
Amounts due to this affiliate are non-interest bearing.
Other income in fiscal year 1996 includes $110,000 of warehousing fees
received from an affiliated company.
Prior to signing an employment agreement effective February 1, 1999,
the Company's Chief Executive Officer provided consulting services to the
Company. Total consulting expense to this officer was $500,000 during 1998, of
which $325,000 was accrued as of January 30, 1999.
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NOTE 8 - BANK LINE OF CREDIT AND NOTES PAYABLE:
The bank line of credit and notes payable consist of the following:
JANUARY 30, JANUARY 31,
1999 1998
------------ ------------
Bank line of credit, bearing interest at the bank's
prime rate plus 2% (12.5% at January 30, 1999),
interest payable monthly, expiring in April 2001,
secured by a pledge of substantially all of the
Company's assets $ 30,035,019 $ 31,657,946
Notes payable bearing interest ranging from approximately
10.0% - 14.7%, payable in monthly installments
ranging from $481 to $7,500 including interest, through
July 1999 secured by equipment 14,928 61,374
Notes payable bearing interest ranging from approximately
8.5%-10.8%, payable in monthly installments of $109,315,
including interest, through December 2001, secured by fixtures 2,841,267 3,394,396
Note payable bearing interest at approximately 10.25%, payable in
monthly installments of $50,000, including interest, with final
payment of $200,000 in November 1999 (See Note 3) 727,609 1,119,744
Note payable bearing interest at approximately 10.25%, payable
in monthly installments of $75,000, including interest, with
final payment of $65,736 in November 2000 (See Note 4) 1,552,488 2,615,740
------------ ------------
35,171,311 38,849,200
Less: current portion (32,800,627) (34,139,766)
------------ ------------
Long-term portion $ 2,370,684 $ 4,709,434
============ =============
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The aggregate maturities of the bank line of credit and notes payable
at January 30, 1999 are as follows:
FISCAL YEAR
-----------
1999 $32,800,627
2000 1,698,120
2001 528,540
2002 123,966
2003 20,058
===========
$35,171,311
===========
The Company's $35 million line of credit contains covenants requiring
the maintenance of minimum tangible net worth, book value and achieving
specified levels of quarterly results of operations. The line of credit also
contains limitations on additional borrowings, capital expenditures, number of
new store openings, purchases of treasury stock and prohibits distribution of
dividends. As of January 30, 1999, the Company was in violation of certain of
the above covenants and as a result of these violations, the Company is in
default under the line of credit agreement. As a result, the bank can demand
payment of the amounts outstanding under the line of credit agreement. As of
April 29, 1999, the bank has not waived these covenant violations and there is
no assurance that these violations will be waived by the bank. In addition, as
a result of these violations, the Company incurred the default rate of
interest, prime plus 4% (12.5%) from December 1998 through April 1999.
Advances made under the line of credit are based on a formula of
eligible inventories and receivables. Advances are secured by a first lien on
substantially all of the Company's assets and assignment of a life insurance
policy on one of the Company's officers.
The Company's line of credit is guaranteed to the extent of $3,000,000
each by two stockholders of the Company.
NOTE 9 - IMPAIRMENT OF ASSETS:
Based on reviews of the Company's retail store locations with
significant negative cash flows, the Company recognized in fiscal year 1998,
1997 and 1996, non-cash charges of $1.0 million, $2.5 million and $0.2 million,
respectively, representing a reduction of the carrying amounts of the impaired
assets (fixtures and leasehold improvements) to their estimated recoverable
amount. These impairment losses are included in "Provision for impairment of
assets and store closings," in the Consolidated Statements of Operations.
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41
NOTE 10 - INCOME TAXES:
The (provision) benefit for income taxes is comprised of the following
amounts:
FISCAL YEAR ENDED
----------------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
----------- ----------- -----------
Current:
Federal $ -- $ 814,766 $(1,084,088)
State (117,550) (459,000) (182,244)
---------- ---------- -----------
(117,550) 355,766 (1,266,332)
----------- ---------- -----------
Deferred:
Federal (1,219,856) 346,384 (380,399)
State -- -- --
----------- ---------- -----------
(1,219,856) 346,384 (380,399)
----------- ---------- -----------
Total tax (provision) benefit $(1,337,406) $ 702,150 $(1,646,731)
=========== ========== ===========
The income tax provision differs from the amount obtained by applying
the statutory Federal income tax rate to pretax income as follows:
FISCAL YEAR ENDED
---------------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
----------- ----------- -----------
Benefit (provision) at federal $ 7,161,669 $ 4,066,060 $(1,531,251)
statutory rates
Valuation allowance against current
year benefit (7,161,669)
State taxes (117,550)
Recognized net operating loss
carryforward -- -- 115,810
(Increase) reduction in the valuation
allowance (1,219,856) (3,405,000) --
Beneficial conversion feature
of debentures -- -- (205,000)
Other -- 41,090 (26,290)
----------- ----------- -----------
(Provision) benefit for income taxes $(1,337,406) $ 702,150 $(1,646,731)
=========== =========== ===========
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Net deferred tax assets reflect the tax effect of the following
differences between financial statement carrying amounts and tax bases of
assets and liabilities:
JANUARY 30, JANUARY 31,
1999 1998
------------ -----------
Assets:
Net operating losses carryforward $ 7,473,729 $ 244,771
Inventory 1,166,750 1,944,521
Property and equipment 1,807,118 1,283,375
Allowance for doubtful accounts and other 319,011 319,011
Reserves 883,760 714,970
Other 136,157 118,208
------------ -----------
Total deferred tax assets 11,786,525 4,624,856
------------ -----------
Valuation allowance (11,786,525) (3,405,000)
------------ -----------
Net deferred tax assets $ -- $ 1,219,856
============ ===========
During fiscal 1998, the Company provided a valuation allowance of
$11,786,525 for deferred tax assets as management believes that it is more
likely than not that the benefit of the deferred tax asset will not be realized.
Realization of future tax benefits related to the deferred tax assets is
dependent on many factors, including the Company's ability to generate taxable
income within the net operating loss carryforward period. Management has
considered these factors in reaching its conclusion as to the valuation
allowance for financial reporting purposes. The Company has net operating loss
carryforwards of approximately $21 million which begin to expire in the year
2017.
NOTE 11 - STOCKHOLDERS' EQUITY:
STOCK SUBSCRIPTION
In March 1999, the Company entered into a subscription agreement for
the sale of 235,294 shares of the Company's common stock to a group of private
investors at a price of $8.50 per share. The proceeds of $2 million were
received in January 1999. The agreement requires that the Company file the
appropriate registration statements with the Securities and Exchange Commission
within six months from the date of the agreement to permit the registered resale
of the shares by the investors in open market transactions. If on the effective
date of the registration statement, the market price is less than $8.50 per
share, the Company is obligated to reimburse the investor group the lesser of 1)
the product of the difference between $8.50 and the fair market value of the
Company's common stock on the effective date of the registration statement
multiplied by the number of shares issued under the agreement or 2) the product
of $2.00 multiplied by the number of shares issued under the agreement. As of
January 31, 1999, the potential redeemable amount of $470,588 was recorded as
redeemable common equity and the remaining $1,529,412 was recorded as capital in
excess of par value in the accompanying balance sheets
In March 1996, the Company sold 180,000 shares of common stock for
approximately $956,000 in a private placement.
DEBENTURES
In March 1996, the Company issued $3,000,000 of 5% Convertible
Debentures (the "Debentures") in a Regulation S offering to non-U.S. persons.
The debentures were convertible into shares of common stock of the Company, at
any time after May 21, 1996, at a conversion price for each share of common
stock equal to eighty-five percent of the market price of the common stock on
the date of conversion, not to exceed $8.50 per share of common stock. The
debentures were converted into approximately 918,000 shares of common stock in
the second quarter of 1996.
In a 1997 announcement, the staff of the Securities and Exchange
Commission ("SEC") indicated that when debt is convertible at a discount from
the then current common stock market price, the discounted amount represents an
incremental yield, e.g. a "beneficial conversion feature", which should be
recognized as a return to the debt holders. Based on the market price of the
Company's debentures at the date of issuance, the debentures issued by the
Company had a beneficial conversion feature of $529,412 at such point in time.
Because of the SEC announcement, the Company has restated its 1996 net income
and net income per common share information to reflect such accounting
treatment. The net effect of the restatement represents a non-cash interest
charge to net income.
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STOCK WARRANTS
In connection with its initial public offering, the Company issued
warrants to purchase 150,000 shares of common stock. The warrants were
exercisable until December 19, 1996 at an exercise price equal to $12.75. The
holders of such warrants attempted to exercise the warrants in fiscal 1996. The
Company disputed the method of determining the exercise price for such warrants
which resulted in litigation. During fiscal year 1997, the Company settled the
litigation and agreed to issue an aggregate of 85,000 shares of common stock.
These shares were issued during the first quarter of fiscal year 1998 and
accordingly, the Company recorded an expense of approximately $214,000 which
represented the fair value of the common stock on the date of issuance.
PREFERRED STOCK
The Company's Articles of Incorporation authorize the issuance of up
to 1,000,000 shares of preferred stock. The preferred stock may be issued from
time to time at the discretion of the Board of Directors without stockholders'
approval. The Board of Directors is authorized to issue these shares in
different series and, with respect to each series, to determine the dividend
rate, and provisions regarding redemption, conversion, liquidation preference
and other rights and privileges. As of January 30, 1999, no preferred stock had
been issued.
STOCK OPTION PLANS
Under the Company's Stock Option Plan (the "Stock Option Plan") and
Directors Stock Option Plan (the "Directors Plan") (collectively, the "Plans"),
2,500,000 shares of Common Stock and 60,000 shares of Common Stock,
respectively, are reserved for issuance upon exercise of options. The Company's
Board of Directors, or a committee thereof, administers and interprets the
Stock Option Plan. The Stock Option Plan provides for the granting of both
"incentive stock options" (as defined in Section 422A of the Internal Revenue
Code) and non-statutory stock options. Options can be granted under the Stock
Option Plan on such terms and at such prices as determined by the Board, except
that the per share exercise price of options will not be less than the fair
market value of the Common Stock on the date of grant. Only non-employee
directors are eligible to receive options under the Directors Plan. The
Directors Plan provides for an automatic grant of an option to purchase 2,000
shares of Common Stock upon election as a director of the Company and an
automatic grant of 4,000 shares of Common Stock upon such person's re-election
as a director of the Company, in both instances at an exercise price equal to
the fair value of the Common Stock on the date of grant.
During October 1998, the Company offered each employee, who had
previously been granted options to purchase the Company's stock, the opportunity
to change the option price effective October 27, 1998 (the "Repricing"). Under
the terms of the Repricing, all previously granted stock options would be
cancelled, and the employee would be granted the same number of options at the
fair market
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44
value of the Company's common stock on October 27, 1998, which was $0.50 per
share. No other terms to the stock options were amended. At the time of the
offer, the Company had approximately 80 employees who had been granted options
to purchase the Company's common stock with option prices ranging from $2.75
to $6.84. The Repricing plan was accepted by all employees with respect to
outstanding stock options.
The Company uses the measurement prescribed by Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). Had
compensation costs for the Company's Plans been determined based on the fair
market value at the grant dates of options granted consistent with the method of
SFAS 123, the Company's net (loss) income and diluted net (loss) income per
share would have been reduced (increased) to the proforma amounts indicated
below:
1998 1997 1996
---- ---- ----
(as restated, Note 11)
Net (loss) income As reported ($18,974,498) $(11,432,570) $2,074,941
Proforma ($19,735,008) $(11,939,613) $1,946,867
Diluted net (loss) As reported ($2.85) $(1.63) $0.27
income per share Proforma ($2.96) $(1.68) $0.26
In calculating the proforma net (loss) income and net (loss) income
per share for 1998, 1997 and 1996, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions used for grants in 1998, 1997
and 1996:
1998 1997 1996
---- ---- ----
Expected life (years) 3 - 7 years 3 - 7 years 4 - 7 years
Interest rate 6.02% 6.52% 6.39%
Volatility 102% 39% 41%
Dividend yield 0% 0% 0%
Options granted under the Stock Option Plan are exercisable after the
period or periods specified in the option agreement, and options granted under
the Directors Plan are exercisable immediately. Options granted under the Plans
are not exercisable after the expiration of 10 years from the date of grant.
The Plans also authorize the Company to make loans to optionees to enable them
to exercise their options.
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45
A summary of the Company's option activity, and related information for each of
the three fiscal years ended January 30, 1999 follows:
1998 1997 1996
----------------------------- ------------------------------ --------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----------------------------- ------------------------------ --------------------------------
Outstanding at beginning of year 1,724,150 $3.18 1,494,600 $3.19 1,348,800 $3.16
Granted 1,926,750 (1) $0.46 332,750 3.28 149,000 3.50
Exercised (684,200) 0.45 (37,500) 3.13 (2,000) 4.13
Cancelled (1,208,100)(1) 2.99 (65,700) 3.84 (1,200) 2.96
----------------------------- ------------------------------ --------------------------------
Outstanding at end of year 1,758,600 $0.46 1,724,150 $3.18 1,494,600 $3.19
----------------------------- ------------------------------ --------------------------------
Options exercisable
at end of year 1,600,275 $0.46 1,541,400 $3.14 1,475,500 $3.17
Weighted-average fair value of
options granted during the year 1,926,750 $0.46 332,750 $1.48 149,000 $1.49
- --------------------
(1) Includes 1,130,600 options cancelled and then subsequently re-granted as
part of the repricing.
The following table summarizes information about stock options
outstanding at January 30, 1999:
Options Outstanding Options Exercisable
- ------------- --------------------------------------------------- -------------------------------------
Weighted- Weighted- Weighted-
Range of Average Average Average
Exercise Number Exercise Contractual Number Exercise
Prices Outstanding Price Life Outstanding Prices
-------- ----------- --------- ----------- ----------- ---------
$0.41 - $0.50 1,750,600 $0.46 7 1,592,275 $0.46
$2.75 8,000 2.75 7 8,000 2.75
-------------------------------- --------- ----------------- ------------------
1,758,600 $0.46 7 1,600,275 $0.46
-------------------------------- --------- ----------------- ------------------
NOTE 12 - EMPLOYEE BENEFIT PLANS:
The Company has a 401(k) Savings and Investment Plan ("the Plan").
Pursuant to such plan, participants may make contributions to the Plan up to a
maximum of 15% of total compensation or $9,500 (or such higher amount as is
prescribed by the Secretary of the Treasury for cost of living adjustments),
whichever is less, and the Company, in its discretion, may match such
contributions to the extent of 25% of the first 4% of a participant's
contribution. The Company's matching contributions vest over a 5-year period.
In addition to matching contributions, the Company may make additional
contributions on a discretionary basis in order to comply with certain Internal
Revenue Code regulations prohibiting discrimination in favor of highly
compensated employees. The Company's matching contributions during fiscal years
1998, 1997 and 1996 were not significant.
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46
NOTE 13 - COMMITMENTS AND CONTINGENCIES:
The Company is self-insured for employee medical benefits under the
Company's group health plan. The Company maintains stop loss coverage for
individual medical claims in excess of $50,000 and for annual Company medical
claims which exceed approximately $2,000,000 in the aggregate. While the
ultimate amount of claims incurred are dependent on future developments, in
management's opinion, recorded reserves are adequate to cover the future
payment of claims. However, it is possible that recorded reserves may not be
adequate to cover the future payment of claims. Adjustments, if any, to
estimates recorded resulting from ultimate claim payments will be reflected in
operations in the periods in which such adjustments are known. The
self-insurance reserve at January 30, 1999 and January 31, 1998 was
approximately $520,000 and $338,000, respectively.
In the fourth quarter of 1998, the Company entered into severance
agreements with two executive officers resulting in a non-recurring charge of
approximately $1,900,000. Under the terms of the agreements, both officers will
receive severance payments over a three-year term beginning December 1998. The
resulting expense is reflected in selling, general and administrative expenses
in the accompanying consolidated statements of operation. In addition, as part
of the severance agreement with one of the executive officers, the officer
received 429,000 shares of common stock at no cost and, accordingly, the Company
recorded additional compensation expense of approximately $176,000.
The Company leases space for its office, warehouse and retail stores.
The lease terms vary from one to ten years, in some cases with options to renew
for longer periods. Various leases contain clauses which adjust the base rental
rate by the prevailing Consumer Price Index, as well as additional rent based
on a percentage of gross sales in excess of a specified amount.
Rent expense for fiscal year 1998, 1997, and 1996 approximated
$15,972,000, $14,398,000, and $11,223,000, respectively. Future minimum lease
commitments under these operating leases at January 30, 1999 are as follows:
FISCAL YEAR
-----------
1999 $15,750,000
2000 14,196,000
2001 11,575,000
2002 8,556,000
2003 5,855,000
Thereafter 12,908,000
-----------
Total future minimum lease payments $68,840,000
===========
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The following is a schedule of future minimum lease payments under
capital leases together with the present value of the net minimum lease
payments, at January 30, 1999:
FISCAL YEAR
-----------
1999 $ 526,050
2000 265,314
2001 190,485
2002 194,724
2003 8,774
----------
Total future minimum lease payments 1,185,347
Less: amount representing interest (203,308)
----------
Present value of minimum lease payments $ 982,039
Less: current portion (419,487)
----------
$ 562,552
==========
The depreciation expense relating to capital leases is included in
depreciation and amortization expense.
As of January 30, 1999, the Company had entered into 7 additional store
leases at locations under construction.
In December of 1993, the patent holder and exclusive licensee in the
U.S. of Boucheron filed a complaint against the Company in the Southern
District of New York for infringing upon their exclusive right to sell the
Boucheron bottle. The plaintiffs' theory is based on the fact that they have a
valid patent for the bottles and that Perfumania's sales of such bottles
infringes upon their patent rights. The Company believes that a patent holder
cannot in any way control by resort to an infringement suit the resale of a
patented article which he has sold. The Company filed a motion to dismiss
during February 1994. On March 20, 1995 the Court denied the Company's motion
to dismiss and on April 14, 1995, the Company filed its answer to the
complaint. Discovery is in progress.
The Company is also involved in various other legal proceedings in the
ordinary course of business.
In the opinion of management and counsel, the ultimate outcome of the
aforementioned litigation will not have a material effect on the accompanying
financial statements.
During 1997 and 1996, the Company made sales to L. Luria & Son, Inc,
("Luria's") in the amounts of $1,999,823 and $2,473,623, respectively. The
Company wrote off in 1997 receivables from Luria's in the approximate amount of
$1,200,000. The Company has been characterized as an insider in the liquidating
plan of reorganization filed on April 6, 1998 by Luria's in the United States
Bankruptcy Court, Southern District of Florida. In October 1998, the committee
of unsecured creditors in Luria's bankruptcy proceedings filed a complaint with
the United States Bankruptcy Court, Southern District of Florida to recover
substantial funds from the Company. The complaint alleges that Luria's made
preference payments, as defined by the Bankruptcy Court, to the Company and
seeks recovery of said preference payments, as well as disallowing any and all
claims of the Company against Luria's until full payment of the preference
payments have been made.
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48
Management cannot presently predict the outcome of these matters, although
management believes, upon the advice of legal counsel, that the Company would
have meritorious defenses and that the ultimate resolution of these matters
should not have a materially adverse effect on the Company's financial postion
or result of operations.
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49
NOTE 14 - SEGMENT INFORMATION:
The Company operates in two industry segments, specialty retail sale
and wholesale distribution of fragrances and related products. Financial
information for these segments is summarized in the following table.
FISCAL YEAR ENDED
------------------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
------------ ------------ ------------
Net sales:
Wholesale $ 40,465,689 $ 34,031,744 $ 30,316,598
Retail 134,789,944 129,561,815 108,603,129
------------ ------------ -----------
Total net sales $175,255,633 $163,593,559 $138,919,727
============ ============ ============
Cost of goods sold:
Wholesale $ 32,280,324 $ 25,782,695 $22,702,968
Retail 74,593,443 70,027,123 56,066,785
------------ ------------ -----------
Total cost of goods sold $106,873,767 $ 95,809,818 $78,769,753
============ ============ ============
Gross profit:
Wholesale $ 8,185,365 $ 8,249,049 $ 7,613,630
Retail 60,196,501 59,534,692 52,536,344
------------ ------------ -----------
Total gross profit $ 68,381,866 $ 67,783,741 $60,149,974
============ ============ ============
Inventories:
Wholesale $ 8,227,522 $ 20,368,792 $32,051,346
Retail 45,652,610 52,769,050 53,059,077
------------ ------------ -----------
Total inventories $ 53,880,132 $ 73,137,842 $85,110,423
============ ============ ============
Depreciation and amortization:
Wholesale $ -- $ -- $ --
Retail 4,480,681 $ 4,697,816 3,771,508
------------ ------------ -----------
$ 4,480,681 $ 4,697,816 $ 3,771,508
============ ============ ============
Capital expenditures:
Wholesale $ -- $ -- $ --
Retail 8,849,837 6,831,944 6,798,159
------------ ------------ ------------
$ 8,849,837 $ 6,831,944 $ 6,798,159
============ ============ ============
An unaffiliated customer of the wholesale segment accounted for
approximately 6%, 8% and 11% of the consolidated net sales in fiscal year 1998,
1997 and 1996, respectively, and 0% and 18% of the consolidated net trade
accounts receivable balance at January 30, 1999 and January 31, 1998,
respectively.
In fiscal year 1998, 1997 and 1996, the wholesale segment included
foreign sales of approximately $2.9 million, $1.7 million and $3.8 million,
respectively.
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NOTE 15 - QUARTERLY FINANCIAL DATA (UNAUDITED):
The following table sets forth the Company's unaudited quarterly
summarized financial data for the periods indicated (dollar amounts are in
thousands). Certain of the quarterly information has been restated, as
described below.
FISCAL YEAR 1998 FISCAL YEAR 1997
---------------------------------------- ----------------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
QTR QTR QTR QTR QTR QTR QTR QTR
---------------------------------------- ----------------------------------------
Wholesale division $13,468 $10,235 $ 6,993 $ 9,770 $ 6,541 $ 8,333 $ 8,590 $10,568
Retail division 25,000 29,450 30,091 50,249 23,447 28,952 30,185 46,978
Total net sales 38,468 39,685 37,084 60,019 29,988 37,285 38,775 57,546
Gross profit 14,806 16,511 15,020 22,045 12,906 15,628 15,913 23,337
Loss before cumulative effect of
change in accounting principle (2,772) (1,273) (3,859) (11,070) (1,998) (457) (1,226) (7,122)
Cumulative effect of change in
accounting principle -- -- -- -- (632) -- -- --
Net loss (2,772) (1,273) (3,859) (11,070) (2,630) (457) (1,226) (7,122)
Basic loss per common share:
Loss before cumulative effect of
change in accounting principle $ (0.42) $ (0.20) $ (0.59) $ (1.64) $ (0.28) $ (0.06) $ (0.17) $ (1.05)
Cumulative effect of change in
accounting principle -- -- -- -- (0.09) -- -- --
Net loss $ (0.42) $ (0.20) $ (0.59) $ (1.64) $ (0.37) $ (0.06) $ (0.17) $ (1.05)
Diluted loss per common share:
Loss before cumulative effect of
change in accounting principle $ (0.42) $ (0.20) $ (0.59) $ (1.64) $ (0.28) $ (0.06) $ (0.17) $ (1.05)
Cumulative effect of change in
accounting principle -- -- -- -- $ (0.09) -- -- --
Net loss $ (0.42) $ (0.20) $ (0.59) $ (1.64) $ (0.37) $ (0.06) $ (0.17) $ (1.05)
% of total net sales for fiscal year 21.9% 22.6% 21.2% 34.3% 18.3% 22.8% 23.7% 35.2%
# of retail stores at end of each
period 284 287 294 289 270 271 283 285
Net loss as previously reported $(2,772) $(1,273) $(3,859) $(11,070) $(2,039) $ (498) $ (878) $(7,555)
Cumulative effect of change in
accounting principle -- -- -- -- (564) 68 121 21
Provision for doubtful accounts -- -- -- -- -- -- (700) 700
Income tax (provision) benefit -- -- -- -- (27) (27) 231 (288)
Net loss as adjusted $(2,772) $(1,273) $(3,859) $(11,070) $(2,630) $ (457) $(1,226) $(7,122)
Per Share Amounts:
Basic:
Net loss as previously reported $ (0.42) $ (0.20) $ (0.59) $ (1.64) $ (0.29) $ (0.07) $ (0.12) $ (1.11)
Cumulative effect of change in
accounting accounting principle -- -- -- -- (0.08) 0.01 0.02 --
Provision for doubtful accounts -- -- -- -- -- -- (0.10) 0.10
50
51
Income tax (provision) benefit -- -- -- -- -- -- 0.03 (0.04)
Net loss as adjusted $ (0.42) $ (0.20) $ (0.59) $ (1.64) $ (0.37) $ (0.06) $ (0.17) $ (1.05)
Per Share Amounts:
Diluted:
Net loss as previously reported $ (0.42) $ (0.20) $ (0.59) $ (1.64) $ (0.29) $ (0.07) $ (0.12) $ (1.11)
Cumulative effect of change in
accounting principle -- -- -- -- (0.08) 0.01 0.02 --
Provision for doubtful accounts -- -- -- -- -- -- (0.10) 0.10
Income tax (provision) benefit -- -- -- -- -- -- 0.03 (0.04)
Net loss as adjusted $ (0.42) $ (0.20) $ (0.59) $ (1.64) $ (0.37) $ (0.06) $ (0.17) $ (1.05)
As disclosed in Note 2, the Company changed its method of accounting
for preopening expenses in 1997 and has reported the initial applications as a
cumulative effect of a change in accounting principle. Accordingly, the
Company's net loss and net loss per common share for all quarters in 1997 in
the above table has been restated to reflect this change.
During the fourth quarter of fiscal year 1998 and 1997, the Company
recorded a reserve for inventory losses of approximately $3.8 million and $2.8
million, respectively (see Note 5).
NOTE 16 - SUBSEQUENT EVENTS (UNAUDITED):
Subsequent to January 30, 1999 and through April 15, 1999, the Company
has opened 2 stores and closed 2 stores.
In February 1999, the Company entered into three-year employment
agreements with two of its executive officers. The agreements provide for
aggregate annual salaries of approximately $718,000 to these officers subject
to the higher of the increase in adjustments for cost-of-living or 5%. The
agreements also contain a performance bonus plan and grant of stock options if
the Company meets certain net income levels.
In March 1999, the Company entered into a subscription agreement for
the sale of 235,294 shares of the Company's common stock to a group of private
investors at a price of $8.50 per share. The agreement requires that the Company
file the appropriate registration statements with the Securities and Exchange
Commission within six months to permit the registered resale of the shares by
the investors in open market transactions. The proceeds of $2,000,000 were
received by the Company in January 1999 and is included in capital in excess of
par value in the accompanying consolidated balance sheet as of January 30, 1999.
Subsequent to this initial subscription agreement of $2,000,000, the Company
received an additional $2,000,000 from the same group of private investors.
In February 1999, the Company, through its wholly-owned subsidiary,
Perfumania.com, Inc., began operation of an Internet commerce site,
Perfumania.com. The Company intends to capitalize on its name recognition and
cross marketing opportunities with its stores to become a top discount retailer
of fragrance and related products on the Internet. All orders placed with the
Internet site are shipped from the Company's existing distribution center in
Miami, Florida.
In April 1999, Perfumania.com, Inc. announced that it intends to make
an initial public offering of its common stock. Perfumania.com, Inc. plans to
raise approximately $15 - $20 million representing approximately 33% of the
common stock to be outstanding following the offering. A registration statement
for the offering is expected to be filed by the end of June 1999, and the
offering should be completed as soon as practicable after the registration
statement becomes effective. The net proceeds of the offering will be used for
working capital and other general corporate purposes and also repayment of any
outstanding indebtedness to the Company.
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PERFUMANIA, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
ADDITIONS
----------------------------
BALANCE AT CHARGES TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSE ACCOUNTS DEDUCTIONS PERIOD
- ----------- ---------- ---------- ---------- ---------- --------
FOR THE YEAR ENDED
FEBRUARY 1, 1997:
Accounts receivable $ 472,804 $ 500,000 $ -- $ (724,418)(1) $ 248,386
Inventory 750,000 190,000 -- -- 940,000
FOR THE YEAR ENDED
JANUARY 31, 1998:
Accounts receivable 248,386 1,730,000 -- (1,273,432)(1) 704,954
Inventory 940,000 1,810,000 -- -- 2,750,000
Self insurance -- 297,710 187,449(2) (146,937)(3) 338,222
Deferred tax asset valuation
allowance -- 3,405,000 -- -- 3,405,000
FOR THE YEAR ENDED
JANUARY 30, 1999:
Accounts receivable 704,954 -- -- -- 704,954
Inventory 2,750,000 3,764,665 -- (2,351,414)(4) 4,163,251
Self insurance 338,222 1,295,410 541,484(2) (1,654,491)(3) 520,625
Deferred tax asset valuation
allowance 3,405,000 8,381,525 -- -- 11,786,525
- ------------------
(1) Represents amounts written off against accounts receivable.
(2) Represents employee contributions.
(3) Represents benefit/premium payments.
(4) Represents amounts written off against inventory.
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53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference
from the Perfumania, Inc. Annual Meeting of Shareholders - Notice and Proxy
Statement (to be filed pursuant to Regulation 14A not later than 120 days after
the close of the fiscal year) in accordance with General Instruction 6 to the
Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference
from the Perfumania, Inc. Annual Meeting of Shareholders - Notice and Proxy
Statement (to be filed pursuant to Regulation 14A not later than 120 days after
the close of the fiscal year) in accordance with General Instruction 6 to the
Annual Report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference
from the Perfumania, Inc. Annual Meeting of Shareholders - Notice and Proxy
Statement (to be filed pursuant to Regulation 14A not later than 120 days after
the close of the fiscal year) in accordance with General Instruction 6 to the
Annual Report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference
from the Perfumania, Inc. Annual Meeting of Shareholders - Notice and Proxy
Statement (to be filed pursuant to Regulation 14A not later than 120 days after
the close of the fiscal year) in accordance with General Instruction 6 to the
Annual Report on Form 10-K.
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55
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) Financial Statements
An index to financial statements for the fiscal years ended
January 30, 1999, January 31, 1998 and February 1, 1997 appears on page 23.
(2) Financial Statement Schedule
The following statement schedule for the fiscal years ended
January 30, 1999, January 31, 1998 and February 1, 1997 are submitted herewith:
ITEM FORM 10-K
NUMBER PAGE
--------------
Schedule II - Valuation and Qualifying Accounts and Reserves 52
All other financial schedules are omitted because they are not
applicable, or the required information is otherwise shown in the financial
statements or notes thereto.
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56
(3) Exhibits
Page
Number or
Incorporated by
Exhibit Description Reference From
- ------- ----------- ---------------
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Bylaws (2)
4.1 Warrant Agreement between the Company and Josephthal, Lyon & Ross Incorporated (3)
10.1 Executive Compensation Plans and Arrangements (5)
(a) Employment Agreement, dated as of February 1, 1995, between the Company
and Simon Falic
(b) Employment Agreement, dated as of February 1, 1995, between the Company and
Jerome Falic
(c) Employment Agreement, dated as of February 1, 1995, between the Company and
Ron Friedman
(d) Consulting Agreement, dated as of January 1, 1994, between the Company and
Rachmil Lekach
(e) Consulting Agreement, dated as of May 2, 1995, between the Company and
Ilia Lekach
10.3 Amendments to the Loan and Security Agreements between the Company and
LaSalle National Bank dated July 29, 1994, and September 30, 1994 (5)
10.4 Amendments to the Loan and Security Agreements between the Company and LaSalle
National Bank dated March 29, 1996 (6)
10.5 1991 Stock Option Plan, as amended (6)
10.6 1992 Directors Stock Option Plan, as amended (6)
10.7 Regulation S 5% Convertible Debentures Agreement (6)
10.8 Regulation S Stock Subscription Agreement (6)
10.9 Amendments to the Loan and Security Agreements between LaSalle
National Bank dated April 16, 1997 (7)
21.1 Subsidiaries of the Registrant (6)
23.1 Consent of PricewaterhouseCoopers LLP (9)
27.1 Financial Data Schedule (9)
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57
(1) Incorporated by reference to the exhibit of the same description filed
with the Company's 1993 Form 10-K (filed April 28, 1994).
(2) Incorporated by reference to the exhibit of the same description filed
with the Company's Registration Statement on Form S-1 (No. 33-46833).
(3) Incorporated by reference to the exhibit of the same description filed
with the Company's Registration Statement on Form S-1 (No. 33-43556).
(4) Incorporated by reference to the exhibit of the same description filed
with the Company's Registration Statement on Form S-8 (filed October
13, 1994).
(5) Incorporated by reference to the exhibit of the same description filed
with the Company's 1994 Form 10-K (filed April 20, 1995).
(6) Incorporated by reference to the exhibit of the same description filed
with the Company's 1995 Form 10-K (filed April 26, 1996).
(7) Incorporated by reference to the exhibit of the same description filed
with the Company's 1996 Form 10-K (filed May 2, 1997)
(8) Incorporated by reference to the exhibit of the same description filed
with the Company's 1997 Form 10-K (filed May , 1998)
(9) Filed herewith.
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
April __, 1999 PERFUMANIA, INC.
By: /s/ Ilia Lekach
------------------------------------
Ilia Lekach, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Ilia Lekach Chairman of the Board and April 30, 1999
- ------------------------------- Chief Executive Officer
Ilia Lekach
/s/ Jerome Falic President and Vice Chairman April 30, 1999
- ------------------------------- of the Board
Jerome Falic
/s/ Donovan Chin Chief Financial Officer April 30, 1999
- ------------------------------- and Director
Donovan Chin
/s/ Marc Finer President of the Retail Division April 30, 1999
- ------------------------------- and Director
Marc Finer
/s/ Robert Pliskin Director April 30, 1999
- -------------------------------
Robert Pliskin
/s/ Carole Ann Taylor Director April 30, 1999
- -------------------------------
Carole Ann Taylor
/s/ Horacio Groisman, M.D. Director April 30, 1999
- -------------------------------
Horacio Groisman, M.D.
58