-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P/hGyfDFpX8AWLUXiUbA4EaIN36m2wM9ZDSFhdPUOlzC9gDwHwiytQVYzcTY6iI/ nbfKjKPHgbxhT1POmz4BZg== 0000950144-97-005032.txt : 19970505 0000950144-97-005032.hdr.sgml : 19970505 ACCESSION NUMBER: 0000950144-97-005032 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970201 FILED AS OF DATE: 19970502 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PERFUMANIA INC CENTRAL INDEX KEY: 0000880460 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DRUG STORES AND PROPRIETARY STORES [5912] IRS NUMBER: 650026340 STATE OF INCORPORATION: FL FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19714 FILM NUMBER: 97594621 BUSINESS ADDRESS: STREET 1: 11701 N W 101 RD CITY: MIAMI STATE: FL ZIP: 33178 BUSINESS PHONE: 3058891600 MAIL ADDRESS: STREET 1: 11701 N W 101 RD CITY: MIAMI STATE: FL ZIP: 33178 10-K 1 PERFUMANIA, INC. FORM 10-K 02/01/97 1 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 February 1, 1997 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, 1997, the number of shares of the registrant's Common Stock outstanding was 7,807,791. The aggregate market value of the Common Stock held by non affiliates of the registrant as of April 15, 1997 was approximately $14.5 million, based on a closing price of $3.125 for the Common Stock 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. 1 2 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. The Company operates a chain of 269 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 62 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 divisions. See Item 6 for Selected Financial Data by division. RETAIL DIVISION 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 stores, which are located primarily in regional malls, sell cosmetics, treatments, bath and body products, candles, as well as a limited selection of fragrance under the "Nature's Elements" name. Marketing and Merchandising. As of April 15, 1997 the Company operated 269 specialty retail stores. Each store 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 products such as Estee Lauder(R), Anne Klein(R), Fendi(R), Gucci(R), Ralph Lauren/Polo(R), Perry Ellis(R), Liz Claiborne(R), Giorgio(R), Calvin Klein(R), Hugo Boss(R), Ted Lapidus(R), Halston(R), Lancome(R), Christian Dior(R), Chanel(R) and Cartier(R). During the second quarter of fiscal 1993, the Company introduced limited lines of treatments and cosmetics which it purchased directly from manufacturers. During fiscal 1994 through 1996, the Company developed its own private label of treatment, cosmetic, bath and body spa lines under the name of "Jerome Privee." The Company intends to continue to expand the Jerome Privee line. 2 3 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. The Company also utilizes five color codes to identify the most economical merchandise for the consumer. 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. During the past two years, the Company 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 1,400 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. 3 4 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 and distributing 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, 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. Store Location and Expansion. Perfumania's 269 stores are located in 37 states, the District of Columbia and Puerto Rico, including 45 in Florida, 34 in New York, 27 in California and 16 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 capital expenditure for opening a store is approximately $110,000, including equipment, furniture and fixtures, and other items (which average approximately $30,000 per store), build-out costs (which average approximately $75,000 per store), and start-up costs, 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. 4 5 Through April 15, 1997, the Company had opened 7 stores in fiscal year 1997. The Company opened 74 stores in fiscal year 1996, (including 33 stores acquired from Nature's), 27 stores in fiscal year 1995, 41 stores in fiscal year 1994 and 47 stores in fiscal year 1993. 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 1996, 1995 and 1994, the Company closed 6 stores, 8 stores and 14 stores, respectively. WHOLESALE DIVISION 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 1996 and 1995, the wholesale division sold to approximately 57 and 62 customers, respectively. One of the Company's customers accounted for 51.3% and 23.2% of net wholesale sales during fiscal year 1996 and 1995, respectively. Foreign wholesale sales during fiscal year 1996 were $3.8 million, compared to $9.0 million during fiscal year 1995. See Note 15 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. Simon Falic, the Company's Chairman of the Board and Chief Executive Officer and Jerome Falic, the Company's Vice President, are primarily responsible for activities of the wholesale division. The Company believes that these executives have developed strong, reliable relationships with suppliers and customers in the United States, Europe, Asia and South America over the past 8 years. 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's buyers purchase 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 supplier relationships and volume discounts thereby obtaining a more reliable source of inventory at lower prices than many other wholesalers or retailers of perfume. 5 6 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 approximately $9.2 million as of February 1, 1997, compared to $8.0 million as of February 3, 1996. 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 1996 and 1995, the Company purchased fragrances from approximately 114 different suppliers, 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 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 6 7 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. The Company's retail division was a party to a related action by Parfums Givenchy, Inc., and settled the case for a nominal fee and for further agreeing not to distribute the two different products for which Givenchy, Inc. is the U.S. distributor. 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. Historically, at least twenty-five percent of the Company's merchandise has been purchased from secondary sources. The Company's secondary 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 secondary 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. 7 8 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 138,600 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's own trucks deliver merchandise 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 February 1, 1997, the Company had 1,426 employees, of whom 1,274 were employed in the Company's retail stores, 82 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. 8 9 TRADE NAME AND SERVICE MARK The Company's stores use the trade name and service mark Perfumania(R). The Company also operates 33 stores under the trade name "Nature's Elements" (see "Acquisition"- page 2), 3 stores under the trade name "Class Perfumes" in malls where the Company also operates a Perfumania(R) store, as well as 7 stores under the trade name "Designer Fragrances" located within a national discount department chain's locations and 5 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. ITEM 2. PROPERTY 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 $52,000 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 14 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 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 was completed on April 30, 1997. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any actions for shareholder approval during the fourth quarter of fiscal year 1996. 9 10 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 National 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 National Market.
FISCAL 1995 HIGH LOW - --------------------------------------------------------------- First Quarter $4 1/2 $3 Second Quarter $4 5/8 $2 7/8 Third Quarter $7 $3 11/16 Fourth Quarter $6 $4 1/4 FISCAL 1996 HIGH LOW - --------------------------------------------------------------- First Quarter $7 3/8 $3 3/4 Second Quarter $6 1/2 $3 1/4 Third Quarter $4 3/4 $3 5/16 Fourth Quarter $4 1/8 $3
As of April 15, 1997, there were 73 holders of record of the 7,807,791 outstanding shares of Common Stock, not including security positions listings. The closing sales price for the Common Stock on April 15, 1997 was $3.125. 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 9 of Notes to the Company's Consolidated Financial Statements contained in Item 9 hereof. 10 11 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 1996 refers to the fiscal year that began on February 4, 1996 and ended on February 1, 1997.
FISCAL YEAR ENDED ------------------------------------------------------------- FEBRUARY 1, FEBRUARY 3, JANUARY 28, JANUARY 29, JANUARY 30, --------- --------- --------- -------- ---------- 1997 1996 1995 1994 1993 --------- --------- --------- -------- ---------- (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) ------------------------------------------------------------- STATEMENT OF OPERATIONS DATA: Net sales, wholesale division $ 30,317 $ 36,200 $ 38,484 $ 36,376 $ 30,286 Net sales, retail division 108,603 92,957 77,094 55,944 42,111 --------- --------- --------- -------- -------- Total net sales 138,920 129,157 115,578 92,320 72,397 --------- --------- --------- -------- -------- Gross profit, wholesale division 7,614 8,784 7,573 6,153 5,946 Gross profit, retail division 52,536 43,384 36,076 27,598 20,080 --------- --------- --------- -------- -------- Total gross profit 60,150 52,168 43,649 33,751 26,026 --------- --------- --------- -------- -------- Selling, general and administrative expenses 48,665 43,682 37,108 31,733 23,410 Provision for potential inventory losses 190 -- -- 750 3,318 Provision for settlement of litigation -- -- -- -- 700 Provision for impairment of assets and store closings 169 1,232 623 25 236 Depreciation and amortization 3,772 3,300 2,903 2,100 1,502 --------- --------- --------- -------- -------- Total operating expenses 52,796 48,214 40,634 34,608 29,166 --------- --------- --------- -------- -------- Income from operations before other income (expense) 7,354 3,954 3,015 (857) (3,140) --------- --------- --------- -------- -------- Other income (expense) Interest expense, net (3,581) (3,144) (2,415) (1,823) (1,416) Other, net 478 396 357 115 (132) --------- --------- --------- -------- -------- Income (loss) before income taxes 4,251 1,206 957 (2,565) (4,688) (Provision) benefit for income taxes (1,647) 796 368 168 376 --------- --------- --------- -------- -------- Net income (loss) $ 2,604 $ 2,002 $ 1,325 ($ 2,397) ($ 4,312) ========= ========= ========= ======== ======== Weighted average shares outstanding 7,634 7,067 6,209 5,675 5,286 Net income (loss)per common and common equivalent share $ 0.34 $ 0.28 $ 0.21 ($ 0.42) ($ 0.82) ========= ========= ========= ======== ======== FEBRUARY 1, FEBRUARY 3, JANUARY 28, JANUARY 29, JANUARY 30, ----------- ----------- ----------- ----------- ----------- 1997 1996 1995 1994 1993 (IN THOUSANDS) ------------------------------------------------------------- BALANCE SHEET DATA: Working capital $ 33,157 $ 30,227 $ 26,865 $ 24,612 $ 30,555 Total assets 129,908 93,565 79,329 68,993 68,765 Long-term debt, less current portion 5,708 1,815 1,367 733 31 Total stockholders' equity 49,325 45,300 43,359 38,847 41,172
11 12 The provision for potential inventory losses in the fiscal year ended January 30, 1993 represents a reserve for alleged non-genuine inventory. The exclusive licensor of this inventory filed a lawsuit against the Company in December 1992. Without admitting any wrongdoing, the Company subsequently entered into a final settlement agreement with the licensor and destroyed the inventory. The provision for settlement of litigation in the fiscal year ended January 30, 1993 represents a reserve to cover the settlement of litigation and associated legal costs arising from a class action complaint filed against the Company in June and July 1992, alleging violations of the anti-fraud provisions of federal securities laws and alleged common law claims of negligent misrepresentation. The Company subsequently settled all claims related to the class action. 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 ------------------------------- 1996 1995 1994 ------------------------------- Net sales, wholesale division 21.8% 28.0% 33.3% Net sales, retail division 78.2 72.0 66.7 ------- ------- ------- Total net sales 100.0 100.0 100.0 Gross profit, wholesale division 25.1 24.3 19.7 Gross profit, retail division 48.4 46.7 46.8 ------- ------- ------- Total gross profit 43.3 40.4 37.8 Selling, general and administrative expenses 35.0 33.8 32.1 Provision for potential inventory losses 0.1 -- -- Provision for impairment of assets and store 0.2 1.0 0.5 closings Depreciation and amortization 2.7 2.6 2.5 ------- ------- ------- Total operating expenses 38.0 37.3 35.1 ------- ------- ------- Income from operations before other income (expenses) 5.3 3.1 2.6 ------- ------- ------- Other income (expense): Interest, net (2.5) (2.4) (2.1) Other, net 0.3 0.3 0.3 ------- ------- ------- Income before income taxes 3.1 0.1 0.8 ------- ------- ------- (Provision) benefit for income taxes (1.2) 0.6 0.3 ------- ------- ------- Net income 1.9% 1.6% 1.1% ======= ======= =======
12 13 RESULTS OF OPERATIONS Comparison of fiscal years 1996 and 1995 Net sales increased 7.6% from $129.2 million in fiscal year 1995 to $138.9 million in fiscal year 1996. The increase in net sales during fiscal year 1996 was due to a 16.8% increase in retail sales (from $93.0 million to $108.6 million), offset by a 16.3% decrease in wholesale sales (from $36.2 million to $30.3 million). The increase in retail sales was principally due to an increase in the number of stores operated during fiscal year 1996 compared to fiscal year 1995, as well as a 3.6% increase in comparable store sales. The Company operated 262 and 194 stores at the end of fiscal years 1996 and 1995, respectively. The Company believes that the increase in comparable store sales was primarily the result of improved assortments of merchandise at the stores and the continued development of the Jerome Privee treatment, cosmetic and bath and body spa line. During fiscal 1996, a few wholesale distributors had financial difficulties which caused the reduction in wholesale sales. Gross profit increased 15.3% from $52.2 million in fiscal year 1995 (40.4% of total net sales) to $60.2 million in fiscal year 1996 (43.3% of total net sales) principally as a result of higher retail sales and gross profit which was offset by lower wholesale sales and gross profit. Gross profit for the wholesale division decreased from $8.8 million in fiscal year 1995 to $7.6 million in fiscal year 1996, primarily due to a decrease in sales for the wholesale division (see above), partially offset by an increase in gross profit as a percentage of sales. The wholesale division's gross margin in fiscal 1996 was 25.1% compared to 24.3% in fiscal year 1995. Gross profit for the retail division increased 21.1% from $43.4 million in fiscal year 1995 to $52.5 million in fiscal year 1996, principally as a result of higher retail sales. As a percentage of net retail sales, gross profit for the retail division increased from 46.7% in fiscal year 1995 to 48.4% in fiscal year 1996. The increase was due to a reduction in the use of sales promotions in the stores. Operating expenses increased $4.6 million in fiscal year 1996 compared to fiscal year 1995, due principally to a $5.0 million increase in selling, general and administrative expenses. Also, the Company recorded a $1.2 million provision for impairment of assets and store closings in fiscal year 1995. See Note 10 of Notes to the Consolidated Financial Statements contained in item 8 hereof. 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 27 additional stores during fiscal year 1996, as well as the addition of 33 Nature's stores in November 1996. Depreciation and amortization increased $0.5 million in fiscal year 1996 compared to fiscal year 1995, due to increased stores fixed assets. As a percentage of net sales, operating expenses increased from 37.3% in fiscal year 1995 to 38.0% in fiscal year 1996. Interest expense (net) increased 13.9% from $3.1 million in fiscal year 1995 to $3.6 million in fiscal 1996. The increase was principally due to the increase in the Company's line of credit during fiscal 1996, as well increased use of lease financing for new store furniture and fixtures. See "Liquidity and Capital Resources." 13 14 The provision for income taxes in fiscal 1996 was $1.6 million compared to a benefit for income taxes in fiscal year 1995 of $0.8 million. The Company had net income of $2.6 million, or $0.34 per share, in fiscal year 1996, compared to a net income of $2.0 million, or $0.28 per share, in fiscal year 1995. The weighted average number of shares outstanding during fiscal year 1996 and 1995 were 7,633,588 and 7,067,291, respectively. Comparison of fiscal years 1995 and 1994 Net sales increased 11.8% from $115.6 million in fiscal year 1994 to $129.2 million in fiscal year 1995. The increase in net sales during fiscal year 1995 was due to a 20.6% increase in retail sales (from $77.1 million to $93.0 million), offset by a 6.0% decrease in wholesale sales (from $38.5 million to $36.2 million). The increase in retail sales was principally due to an increase in the number of stores operated during fiscal year 1995 compared to fiscal year 1994, as well as a 4.1% increase in comparable store sales. The Company operated 194 and 175 stores at the end of fiscal years 1995 and 1994, respectively. The Company believes that the increase in comparable store sales was primarily the result of improved assortments of merchandise at the stores and the continued development of the Jerome Privee treatment, cosmetic and bath and body spa line. The decrease in wholesale sales was principally attributable to reduced buying by other wholesalers. Gross profit increased 19.7% from $43.6 million in fiscal year 1994 (37.8% of total net sales) to $52.2 million in fiscal year 1995 (40.4% of total net sales) principally as a result of higher retail sales and higher wholesale gross profit. Gross profit for the wholesale division increased from $7.6 million in fiscal year 1994 to $8.8 million in fiscal year 1995, primarily due to an increase in gross margin for the wholesale division from 19.7% to 24.3% of net wholesale sales in fiscal year 1994 compared to 1995. The increase in the wholesale division's gross margin in fiscal 1995 was primarily the result of lower cost of merchandise and an increase in higher margin sales. Gross profit for the retail division increased 20.2% from $36.1 million in fiscal year 1994 to $43.4 million in fiscal year 1995, principally as a result of higher retail sales. As a percentage of net retail sales, gross profit for the retail division decreased slightly from 46.8% in fiscal year 1994 to 46.7% in fiscal year 1995. Operating expenses increased $7.6 million in fiscal year 1995 compared to fiscal year 1994, due principally to a $6.6 million increase in selling, general and administrative expenses. 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 23 additional stores during fiscal year 1995. Depreciation and amortization increased $0.4 million in fiscal year 1995 compared to fiscal year 1994, due to increased stores fixed assets. As a percentage of net sales, operating expenses increased from 35.1% in fiscal year 1994 to 37.3% in fiscal year 1995. The increase is primarily the result of the provision for impairment of assets and store closings. See Note 10 of Notes to the Consolidated Financial Statements contained in Item 8 hereof. 14 15 Interest expense (net) increased 30.2% from $2.4 million in fiscal year 1994 to $3.1 million in fiscal 1995. The increase was principally due to the increase in the Company's line of credit and increases in the bank's prime rate during fiscal 1995, as well as the issuance of a $5.9 million promissory note payable to FoxMeyer, in August 1994. See "Liquidity and Capital Resources." The Company had net income of $2.0 million, or $0.28 per share, in fiscal year 1995, compared to a net income of $1.3 million, or $0.21 per share, in fiscal year 1994. The weighted average number of shares outstanding during fiscal year 1995 and 1994 were 7,067,291 and 6,209,559, respectively. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its working capital requirements over the past three fiscal years primarily through short-term borrowings under working capital lines of credit, cash flows from operations and short-term borrowings from related parties and other individuals. 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. On March 29, 1996, the Company's revolving line of credit facility with LaSalle National Bank (LNB), which expires on April 30, 1999, was increased to $30 million. 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 (10.25% at February 1, 1997), 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. On April 16, 1997, LNB increased the line to $35 million on similar interest and payment terms. The Company's line of credit with LNB contains covenants requiring maintenance of minimum tangible net worth, book value and quarterly results. The line also contains limitations on additional borrowings, capital expenditures, number of new store openings, purchases of treasury stock and prohibits payment of dividends. As of February 1, 1997, the Company was in breach of certain of the above covenants. On April 21, 1997, the bank agreed to waive the defaults and its right to demand repayment of the line as a result of the Company's failure to meet such covenants. In connection with its increase of the line on April 16, 1997, the bank also revised certain covenant requirements, making them less restrictive. In fiscal year 1996, net cash provided by operating activities was approximately $0.6 million, which was primarily due to the Company's net income of $2.6 million offset by the changes in inventories and accounts payable, as well as non-cash charges for depreciation and amortization. 15 16 The Company's trade receivables primarily relate to its wholesale business. At fiscal year end, approximately $ 0.2 million of the Company's trade receivables were more than 90 days past due. Of the $12.9 million in trade receivables due from customers at February 1, 1997, $9.2 million was due from one customer which also accounted for 51.3% of the Company's fiscal 1996 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 $248,000 at February 1, 1997 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 February 1, 1997. As a result of financial difficulties of several wholesale distributors during the early part of 1996, the Company wrote off approximately $724,000 of its trade receivables in fiscal 1996. During fiscal year 1996, inventories increased by approximately $29.1 million due to a substantial amount of purchases by the Company in the fourth quarter as well as the overall increase in the number of retail stores and the decrease in wholesale sales in fiscal 1996. The Company's principal needs for working capital have been new store openings (including related inventory) and purchases of inventory to meet seasonal requirements. Net cash used in investing activities in fiscal year 1996 was approximately $7.3 million, principally due to capital expenditures related to opening new stores and renovation of existing stores. Currently, the Company's average capital expenditure for opening a store is approximately $110,000, including furniture and fixtures, equipment and other items, which average approximately $30,000 per store, build-out costs, which average approximately $75,000 per store, and start-up costs, 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 month's supply of inventory for its retail and wholesale divisions. During fiscal 1996, the Company began using lease financing for its furniture and fixtures for new stores. The Company intends to continue to use such financing to support the expansion of its business. In August 1994, the Company acquired $10.4 million of fragrance inventory from Merchandise Coordinator Services Corporation d/b/a FoxMeyer Trading Company ("FoxMeyer"). The purchase was paid by $4.5 million in cash and a note in the principal amount of approximately $5.9 million. The note was repaid in January 1996. The Company obtained the $4.5 million in cash to fund the inventory purchase from the issuance of 1 million shares of its common stock to FoxMeyer. 16 17 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. 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. The following table sets forth the Company's unaudited net sales by division for the periods indicated (dollar amounts are in thousands).
FISCAL YEAR 1996 FISCAL YEAR 1995 ------------------------------------------ ------------------------------------------ 1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH QTR QTR QTR QTR QTR QTR QTR QTR -------- ------- ------- ------- -------- ------- ------- ------- Wholesale division $ 5,028 $ 6,116 $ 8,565 $10,608 $ 7,915 $ 6,686 $11,106 $10,493 Retail division 18,192 22,755 26,012 41,644 15,621 20,696 23,224 33,415 Total net sales 23,220 28,871 34,577 52,252 23,536 27,382 34,330 43,909 Net income(loss) (1,189) 200 885 2,708 (2,339) 10 1,232 3,099 Net income(loss) per share $ (0.16) $ 0.03 $ 0.10 $ 0.37 $ (0.34) $ 0.00 $ 0.18 $ 0.44 % of total net sales for fiscal year 16.7% 20.8% 24.9% 37.6% 18.2% 21.2% 26.6% 34.0% # of retail stores at end of each period 195 195 207 262 179 184 195 194
Fiscal Year 1994 -------------------------------------------- 1st 2nd 3rd 4th Qtr Qtr Qtr Qtr -------------------------------------------- Wholesale division $ 14,168 $ 6,604 $ 6,755 $10,957 Retail division 12,106 16,658 19,508 28,823 Total net sales 26,274 23,261 26,263 39,780 Net income(loss) (1,365) (59) 514 2,235 Net income(loss) per share $ (0.24) $ (0.01) $ 0.08 $ 0.38 % of total net sales for fiscal year 22.7% 20.1% 22.7% 34.5% # of retail stores at end of each period 150 155 171 175
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. 17 18 OTHER Effective fiscal year 1995, the Company adopted the provisions of Statement of Financial Accounting Standards No.121 ("SFAS 121"). See Note 10 of Notes to the Consolidated Financial Statements contained in Item 8 hereof. Effective fiscal year 1996, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 ("SFAS 123"). See Note 12 of Notes to the Consolidated Financial Statements contained in Item 8 hereof. 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, Price Waterhouse LLP 19 Consolidated Balance Sheets as of February 1, 1997 and February 3, 1996 20 Consolidated Statements of Operations for the Fiscal Years Ended February 1,1997, February 3, 1996 and January 28, 1995 21 Consolidated Statements of Changes in Stockholders' Equity for the Fiscal Years Ended February 1, 1997, February 3, 1996 and January 28, 1995 22 Consolidated Statements of Cash Flows for the Fiscal Years Ended February 1,1997, February 3, 1996 and January 28, 1995 23 Notes to Consolidated Financial Statements 24 Schedule VIII - Valuation and Qualifying Accounts and Reserves 41
18 19 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Perfumania, Inc. In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Perfumania, Inc. and its subsidiaries at February 1, 1997 and February 3, 1996, and the results of their operations and their cash flows for each of the three years in the period ended February 1, 1997 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. /s/ Price Waterhouse LLP Miami, Florida April 24, 1997 19 20 PERFUMANIA, INC. CONSOLIDATED BALANCE SHEETS
FEBRUARY 1, FEBRUARY 3, ASSETS: 1997 1996 ------------- ------------ Current assets: Cash and cash equivalents $ 1,641,527 $ 331,028 Trade receivables, net: Customers, less allowance for doubtful accounts of $248,386 and $472,804 12,275,159 13,492,118 Affiliates 653,657 -- Advances to suppliers 5,023,718 4,311,660 Inventories, net of reserve of $940,000 and $750,000 85,110,423 56,014,501 Prepaid expenses and other current assets 1,899,320 1,152,095 Deferred tax asset, net 873,472 1,254,000 Due from related parties 85,613 122,538 ------------- ------------ Total current assets 107,562,889 76,677,940 Property and equipment, net 17,709,758 13,453,780 Leased equipment under capital leases, net 2,013,857 1,606,497 Other assets, net 2,203,442 1,411,579 Due from related parties 417,763 415,527 ------------- ------------ $ 129,907,709 $ 93,565,323 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Bank line of credit and current portion of notes payable $ 31,372,171 $ 23,553,897 Accounts payable 36,128,515 18,814,302 Accrued expenses and other liabilities 3,940,440 2,903,959 Income taxes payable 1,321,203 -- Current portion of obligations under capital leases 873,425 498,348 Due to related parties 770,000 680,000 ------------- ------------ Total current liabilities 74,405,754 46,450,506 Long-term portion of notes payable 4,519,859 601,503 Long-term portion of obligations under capital leases 1,187,516 1,213,066 ------------- ------------ Total liabilities 80,113,129 48,265,075 ------------- ------------ Excess of fair value of assets acquired over cost 470,000 -- ------------- ------------ Commitments and contingencies -- -- ------------- ------------ Stockholders' equity Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued -- -- Common stock, $.01 par value, 25,000,000 shares authorized, 7,807,791 and 6,707,700 shares issued and outstanding 78,078 67,077 Capital in excess of par value 51,900,229 47,959,464 Treasury stock, at cost (2,655,110) (123,323) Retained earnings (accumulated deficit) 1,383 (2,602,970) ------------- ------------ Total stockholders' equity 49,324,580 45,300,248 ------------- ------------ $ 129,907,709 $ 93,565,323 ============= ============
See accompanying notes to consolidated financial statements. 20 21 PERFUMANIA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEAR ENDED ------------------------------------------------ FEBRUARY 1, FEBRUARY 3, JANUARY 28, 1997 1996 1995 ------------- ------------- ------------- Net sales: Unaffiliated customers $ 136,446,104 $ 129,156,506 $ 115,577,805 Affiliates 2,473,623 -- -- ------------- ------------- ------------- 138,919,727 129,156,506 115,577,805 ------------- ------------- ------------- Cost of goods sold: Unaffiliated customers 76,516,903 76,988,603 71,929,300 Affiliates 2,252,850 -- -- ------------- ------------- ------------- 78,769,753 76,988,603 71,929,300 ------------- ------------- ------------- Gross profit 60,149,974 52,167,903 43,648,505 ------------- ------------- ------------- Operating expenses: Selling, general and administrative expenses 48,165,392 43,371,621 37,080,590 Provision for doubtful accounts 500,000 310,000 27,310 Provision for potential inventory losses 190,000 -- -- Provision for impairment of assets and store closings 169,159 1,232,303 623,210 Depreciation and amortization 3,771,508 3,299,746 2,902,607 ------------- ------------- ------------- Total operating expenses 52,796,059 48,213,670 40,633,717 ------------- ------------- ------------- Income from operations before other income (expense) 7,353,915 3,954,233 3,014,788 ------------- ------------- ------------- Other income (expense): Interest expense: Affiliates (148,647) (88,874) (39,283) Other (3,475,342) (3,101,422) (2,406,364) ------------- ------------- ------------- (3,623,989) (3,190,296) (2,445,647) ------------- ------------- ------------- Interest income: Affiliates 39,480 36,240 27,658 Other 3,499 10,496 3,133 ------------- ------------- ------------- 42,979 46,736 30,791 ------------- ------------- ------------- Other income 478,179 395,437 357,148 ------------- ------------- ------------- (3,102,831) (2,748,123) (2,057,708) ------------- ------------- ------------- Income before income taxes 4,251,084 1,206,110 957,080 (Provision) benefit for income taxes (1,646,731) 796,000 368,000 ------------- ------------- ------------- Net income $ 2,604,353 $ 2,002,110 $ 1,325,080 ============= ============= ============= Weighted average common shares outstanding 7,633,588 7,067,291 6,209,559 ============= ============= ============= Earnings per common and common equivalent share $ 0.34 $ 0.28 $ 0.21 ============= ============= =============
See accompanying notes to consolidated financial statements. 21 22 PERFUMANIA, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE FISCAL YEAR ENDED JANUARY 28, 1995, FISCAL YEAR ENDED FEBRUARY 3, 1996 AND FISCAL YEAR ENDED FEBRUARY 1, 1997
COMMON STOCK CAPITAL TREASURY STOCK RETAINED ------------------- IN EXCESS --------------------- EARNINGS SHARES AMOUNT OF PAR VALUE SHARES AMOUNT (DEFICIT) TOTAL --------- ------- ----------- ------- ----------- ----------- ------------ Balance at January 29, 1994 5,688,700 $56,887 $44,720,029 -- $ -- ($5,930,160) $ 38,846,756 Issuance of common stock in inventory purchase agreement 1,000,000 10,000 3,177,500 -- -- -- 3,187,500 Net income for the fiscal year ended January 28, 1995 -- -- -- -- -- 1,325,080 1,325,080 --------- ------- ----------- ------- ----------- ----------- ------------ Balance at January 28, 1995 6,688,700 66,887 47,897,529 -- -- (4,605,080) 43,359,336 Exercise of stock options 19,000 190 61,935 -- -- -- 62,125 Purchase of treasury stock -- -- -- 23,000 (123,323) -- (123,323) Net income for the fiscal year ended February 3, 1996 -- -- -- -- -- 2,002,110 2,002,110 --------- ------- ----------- ------- ----------- ----------- ------------ 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 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 -- -- -- -- -- 2,604,353 2,604,353 --------- ------- ----------- ------- ----------- ----------- ------------ Balance at February 1,1997 7,807,791 $78,078 $51,900,229 667,900 ($2,655,110) $ 1,383 $ 49,324,580 ========= ======= =========== ======= =========== =========== ============
See accompanying notes to consolidated financial statements. 22 23 PERFUMANIA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED ------------------------------------------- FEBRUARY 1, FEBRUARY 3, JANUARY 28, 1997 1996 1995 ------------ ------------ ----------- Cash flows from operating activities: Net income $ 2,604,353 $ 2,002,110 $ 1,325,080 Adjustments to reconcile net income to net cash provided by operating activities: Provision (benefit) for deferred taxes 380,528 (796,000) (403,000) Capitalized preopening costs (940,550) (339,004) (291,113) Provision for doubtful accounts 500,000 310,000 27,310 Provision for potential inventory losses 190,000 -- -- Depreciation and amortization 3,771,508 3,299,746 2,902,607 Provisions for impairment of assets -- 814,308 125,000 Loss on disposition of property and equipment 169,159 464,431 498,210 Change in assets and liabilities, (Increase) decrease in: Trade receivables: Customers 716,959 (5,819,981) (1,732,224) Affiliates (653,657) -- 546,469 Advances to suppliers (712,058) 2,045,016 (2,373,124) Inventories (24,288,235) (11,377,890) 5,603,865 Prepaid expenses (747,225) 43,198 (535,831) Tax refund receivable -- 378,681 161,668 Other assets (123,998) 40,795 (276,606) Increase (decrease) in: Accounts payable 17,314,213 10,634,590 (1,074,599) Accrued expenses and other liabilities 1,088,386 399,585 94,521 Income taxes payable 1,321,203 (35,000) 35,000 ------------ ------------ ----------- Net cash provided by operating activities 590,586 2,064,585 4,633,233 ------------ ------------ ----------- Cash flows from investing activities: Additions to property and equipment (7,341,901) (3,302,678) (4,580,232) Proceeds from sale of other property -- 617,914 -- ------------ ------------ ----------- Net cash used in financing activities (7,341,901) (2,684,764) (4,580,232) ------------ ------------ ----------- Cash flows from financing activities: Borrowings under bank line of credit and loans payable 7,208,943 954,356 -- Repayments under loans payable -- -- (522,085) Net (increase) decrease in due from related parties 34,689 (125,542) (43,004) Net increase (decrease) in due to related parties 90,000 51,832 626,168 Principal payments under capital lease obligations (639,892) (374,113) (115,761) Issuance of debentures 2,935,361 -- -- Proceeds from issuance of common stock 956,250 -- -- Proceeds from exercise of stock options 8,250 62,125 -- Purchases of treasury stock (2,531,787) (123,323) -- ------------ ------------ ----------- Net cash provided by (used in) financing activities 8,061,814 445,335 (54,682) ------------ ------------ ----------- Increase (decrease) in cash and cash equivalents 1,310,499 (174,844) (1,681) Cash and cash equivalents at beginning of period 331,028 505,872 507,553 ------------ ------------ ----------- Cash and cash equivalents at end of period $ 1,641,527 $ 331,028 $ 505,872 ============ ============ ===========
See accompanying notes to consolidated financial statements. 23 24 PERFUMANIA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF BUSINESS: Perfumania, Inc. ("Perfumania") and its subsidiaries (collectively, the "Company") is a wholesaler and specialty retailer of fragrances and related products. The Company's retail stores consist of stand-alone stores and stores located in regional malls, manufacturer's outlet malls and airports. The number of retail stores in operation at February 1, 1997, February 3, 1996 and January 28, 1995 were 262, 194 and 175, respectively (see Note 16). 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: 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. 24 25 PROPERTY AND EQUIPMENT Property and equipment is carried at cost, less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the term of the lease or the estimated useful lives of the improvements, whichever is shorter. Costs of major additions and improvements are capitalized and expenditures for maintenance and repairs which do not extend the useful life of the asset are expensed when incurred. Gains or losses arising from sales or retirements are included in income currently. PREOPENING EXPENSES The Company capitalizes expenses associated with the opening of new retail locations and training of personnel. These costs typically include occupancy costs incurred prior to store opening, travel expenses, store managers' salaries and grand opening costs paid to the mall. The Company amortizes these amounts over 18 months. INCOME TAXES Income tax expense is based 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. 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. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE Earnings per common and common equivalent share are computed by dividing net income by the weighted average number of common and, when dilutive, common equivalent shares outstanding. Stock options are the only common share equivalents. There is no material difference between primary and fully diluted earnings per share. 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. As a result, fiscal year 1995 had an additional week (53 weeks, versus 52 weeks in fiscal year 1996 and 1994). In the accompanying notes, fiscal year 1996, 1995 and 1994 refers to the year ended February 1, 1997, February 3, 1996 and January 28, 1995, respectively. 25 26 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 February 1, 1997 and February 3, 1996. 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 accounts receivable allowances, inventory reserves and estimated useful lives of property and equipment. Actual results could differ from those estimates. ASSET IMPAIRMENT As discussed in Note 10, the Company early adopted Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" in fiscal 1995. Under this Statement, 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. STOCK BASED COMPENSATION On February 4, 1996 the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 establishes a fair value based method of accounting for stock based compensation, the effect of which can either be recorded or disclosed. The Company has chosen to continue to account 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 is providing 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 1996 and 1995. 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. 26 27 RECLASSIFICATION Certain fiscal 1995 and 1994 amounts have been reclassified to conform with the fiscal 1996 presentation. 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 is represented by a note payable. The stores, which are located primarily in regional malls sell cosmetics, treatments, bath and body products, candles, as well as a limited selection of fragrance. 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 exceeds the purchase price. The excess of estimated fair value of the assets acquired over cost was $3.5 million of which $3 million reduced the fair value of non-current assets acquired to a zero value and $0.5 million was allocated to negative goodwill. This preliminary purchase price allocation is subject to change when additional information concerning asset valuations is obtained. Therefore, the final allocation may differ from the preliminary allocation. 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 ------------------------------------------ FEBRUARY 1, FEBRUARY 3, JANUARY 28, 1997 1996 1995 ----------- ---------- ------------ Cash paid during the period for: Interest $3,459,563 $3,353,072 $2,342,455 Income taxes $ 71,138 $ 35,000 $ 203,316
Supplemental disclosures of noncash activities: The Company issued 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 9). 27 28 On August 12, 1994, the Company acquired approximately $10.4 million of fragrance inventory from Merchandise Coordinator Services Corporation d/b/a/ FoxMeyer Trading Company ("FoxMeyer"). The purchase price was paid by $4.5 million in cash and a note in the principal amount of approximately $5.9 million. The note was secured by a second lien on all of the Company's assets and properties, and was repaid in January 1996. The Company obtained the $4.5 million in cash to fund the inventory purchase from the issuance of 1 million shares of its common stock to FoxMeyer. NOTE 5 - PROPERTY AND EQUIPMENT: Property and equipment includes the following:
ESTIMATED FEBRUARY 1, FEBRUARY 3, USEFUL LIVES 1997 1996 (IN YEARS) Furniture, fixtures and equipment $ 14,440,604 $ 11,277,410 5-7 Leasehold improvements 13,384,693 9,689,524 10 Vehicles 114,665 114,665 5 ------------ ------------ $ 27,939,962 $ 21,081,599 Less: Accumulated depreciation and amortization (10,230,204) (7,627,819) ------------ ------------ $ 17,709,758 $ 13,453,780 ============ ============
NOTE 6 - OTHER PROPERTY: The Company owned approximately 2.5 acres of unincorporated land in Dade County, Florida, which was purchased at a cost of $664,350. The land was sold in 1995 at a loss of approximately $46,000. NOTE 7 - OTHER ASSETS: Other assets consist of the following:
FEBRUARY 1, FEBRUARY 3, 1997 1996 ---------- ----------- Capitalized preopening costs, net $1,012,293 $ 343,695 Security deposits 721,563 645,240 Other 469,586 422,644 ---------- ---------- $2,203,442 $1,411,579 ========== ==========
28 29 NOTE 8 - RELATED PARTY TRANSACTIONS: Due from related parties consists of the following:
FEBRUARY 1, FEBRUARY 3, 1997 1996 ---------- ---------- Amounts due from affiliates $ 85,613 $ 122,538 Note receivable from shareholder 417,763 415,527 ---------- ---------- $ 503,376 $ 538,065 ========== ==========
The note receivable from shareholder results from the sale of a condominium to the shareholder at net 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 1998 for $415,527, which includes the outstanding principal of the note and interest accrued thereof as of December 30, 1995. Purchases of products from a company affiliated through common ownership amounted to $30,735,244, $21,464,375, and $15,668,542, in fiscal year 1996, 1995 and 1994, respectively. The amount due to this company at February 1, 1997 and February 3, 1996 was $19,263,929 and $4,902,434, respectively. Due to related parties at February 1, 1997 consists of a $770,000 note payable on demand which bears interest at 15%. Other income in fiscal year 1996, 1995 and 1994 includes $110,000, $230,000 and $115,000, respectively, of warehousing fees received from an affiliated company. On January 1, 1994 and May 2, 1994, respectively, the Company entered into three-year consulting agreements with two former officers, who are also shareholders of the Company. Pursuant to the agreements, the Company paid $275,000 for consulting services to be rendered in fiscal years 1994, 1995 and 1996. During fiscal year 1995, the Company's former officers became directors of the Company's retail subsidiary. In their capacity as directors, these individuals were issued options to purchase 525,000 shares of common stock at an exercise price equal to the market price of the Company's common stock at the time of the grant. 29 30 NOTE 9 - BANK LINE OF CREDIT AND NOTES PAYABLE: The bank line of credit and notes payable consist of the following:
FEBRUARY 1, FEBRUARY 3 1997 1996 ------------ ------------ Bank line of credit, bearing interest at the bank's prime rate plus 2% (10.25% at February 1, 1997), with weighted average rate of 10.25% , interest payable monthly, expiring on April 30, 1999, secured by a pledge of substantially all of the Company's assets $ 29,883,357 $ 23,403,213 Notes payable bearing interest ranging from approximately 10.0% - 14.7%, with weighted average rates 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 176,783 146,473 Notes payable bearing interest ranging from approximately 9.6%-10.8%, with weighted average rates ranging from approximately 9.6%-10.8% payable in monthly installments of $33,890, including interest, through October 2001, secured by fixtures 1,402,726 605,714 Note payable bearing interest at approximately 10.25%, with weighted average rate of 10.25%, payable in monthly installments of $50,000, including interest, with final payment of $200,000 in November 1999 (See Note 3) 1,592,417 -- Note payable bearing interest at approximately 10.25%, with weighted average rate of 10.25%, payable in monthly installments of $75,000, including interest, with final payment of $65,736 in November 2000 (See Note 4) 2,836,747 -- ------------ ------------ 35,892,030 24,155,400 Less: Current portion (31,372,171) (23,553,897) ------------ ------------ Long-term portion $ 4,519,859 $ 601,503 ============ ============
The aggregate maturities of the bank line of credit and notes payable at February 1, 1997 are as follows:
FISCAL YEAR - ------------ 1997 $31,372,171 1998 1,564,352 1999 1,759,653 2000 1,037,332 Thereafter 158,522 ----------- $35,892,030 ===========
30 31 The Company's line of credit contains covenants requiring maintenance of minimum tangible net worth, book value and quarterly results. The line also contains limitations on additional borrowings, capital expenditures, number of new store openings, purchases of treasury stock and prohibits distribution of dividends. As of February 1, 1997, the Company was in breach of certain of the above covenants. On April 21, 1997, the bank agreed to waive the resulting defaults and its right to demand repayment of the line as a result of the Company's failure to meet such covenants. Advances made under the line of credit are based on a formula of eligible inventories and receivables and are payable on demand. 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. On April 16, 1997, the bank increased the line to $35 million on similar interest and payment terms. In connection with its increase of the line on April 16, 1997, the bank also revised certain covenant requirements, making them less restrictive. The Company's line of credit is guaranteed to the extent of $3,000,000 each by two stockholders of the Company. NOTE 10 - IMPAIRMENT OF ASSETS: The Company recognized in fiscal 1995 a non-cash charge of $814,308, representing a reduction of the carrying amounts of the impaired assets at certain retail store locations to their estimated recoverable amount. This impairment loss is included in "Provision for impairment of assets and store closings," in the Consolidated Statement of Operations for fiscal 1995. The "Provision for impairment of assets and store closings" in the Consolidated Statement of Operations also includes $169,059, $417,995 and $498,210 for the loss on disposition of property and equipment relating to retail stores which were closed during fiscal 1996, 1995 and 1994, respectively. 31 32 NOTE 11 - INCOME TAXES: The (provision) benefit for income taxes is comprised of the following amounts:
FISCAL YEAR ENDED ----------------------------------------- FEBRUARY 1, FEBRUARY 3, JANUARY 28, 1997 1996 1995 ----------- ----------- ----------- Current: Federal $(1,084,088) $( 25,000) ($ 25,000) State (182,244) (30,000) (10,000) ----------- --------- --------- (1,266,332) (55,000) (35,000) ----------- --------- --------- Deferred: Federal (380,399) 851,000 403,000 State -- -- -- ----------- --------- --------- (380,399) 851,000 403,000 ----------- --------- --------- Total tax (provision) benefit $(1,646,731) $ 796,000 $ 368,000 =========== ========= =========
The income tax provision differs from the amount obtained by applying the statutory Federal income tax rate to pretax income as follows:
FISCAL YEAR ENDED ---------------------------------------- FEBRUARY 1, FEBRUARY 3, JANUARY 28, 1997 1996 1995 ---------------------------------------- (Provision) benefit at statutory rates $(1,736,251) $(442,139) $(334,978) (Unrecognized) recognized net operating loss carryforward 115,810 910,000 366,302 Reduction of deferred tax asset valuation allowance -- 404,000 403,000 Other (26,290) (95,861) (66,324) ----------- --------- --------- (Provision) benefit for income taxes $(1,646,731) $ 796,000 $ 368,000 =========== ========= =========
32 33 Net deferred tax assets reflect the tax effect of the following differences between financial statement carrying amounts and tax bases of assets and liabilities:
FEBRUARY 1, FEBRUARY 3, 1997 1996 ----------- ----------- Assets: Net operating losses carryforward $ -- $ 313,000 Inventory 742,081 646,000 Property and equipment 255,100 83,000 Allowance for doubtful accounts and other 71,235 262,000 Other 159,359 70,000 ---------- ---------- Total deferred tax assets 1,227,775 1,374,000 ---------- ---------- Liabilities: Deferred expenses (354,303) (120,000) ---------- ---------- Total deferred tax liabilities (354,303) (120,000) ---------- ---------- Net deferred tax assets $ 873,472 $1,254,000 ========== ==========
During fiscal 1993, the Company established a valuation allowance for deferred tax assets due to their uncertain realization. In fiscal 1994, the net change in the valuation allowance was a decrease of $784,000 due to the utilization of a portion of net operating loss carryforward in 1994, and to management's estimate that it was more likely than not that deferred tax assets of approximately $403,000 would be realized. In fiscal 1995, the reduction in the valuation allowance was $1,418,000 due to the realization of operating loss carryforward in 1995, and management's estimate that it was more likely than not that deferred tax assets will be realized and no valuation allowance was required. NOTE 12 - STOCKHOLDERS' EQUITY: 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. 33 34 STOCK SUBSCRIPTION In March 1996, the Company sold 180,000 shares of common stock for approximately $956,000 in a private placement. STOCK WARRANTS The Company had outstanding 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 Company is now involved in litigation with the warrant holders who claim, among other things, that they are entitled to approximately 148,000 shares. STOCK PURCHASE AGREEMENT In connection with its inventory purchase agreement with FoxMeyer in August 1994, the Company issued 1 million shares of its common stock (See Note 4). 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 February 1, 1997, 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"), 1,900,000 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. 34 35 On February 4, 1996 the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 establishes a fair value based method of accounting for stock based compensation, the effect of which can either be recorded or disclosed. The Company will continue to use the measurement prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") and accordingly, SFAS 123 will not affect the Company's financial position or results of operation in accounting for the plans. 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 income and net income per share would have been reduced to the proforma amounts indicated below:
1996 1995 ---------- --------- Net income As reported $2,604,353 $2,002,110 Proforma $2,476,279 $1,507,134 Net income per share As reported $ 0.34 $ 0.28 Proforma $ 0.32 $ 0.21
In calculating the proforma net income and net income per share for 1996 and 1995, the fair market 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 1996 and 1995: volatility of 41%, risk-free interest rates of 6.39% and 6.11% in fiscal 1996 and 1995, respectively, zero dividend yield and expected lives ranging from 4 to 7 years. Options granted under the Stock Option Plan are exerciseable after the period or periods specified in the option agreement, and options granted under the Directors Plan are exerciseable immediately. Options granted under the Plans are not exerciseable after the expiration of 10 years from the date of grant. The Plans also authorize the Company to make loans to optionees to enable them to exercise their options. A summary of the Company's option activity, and related information for each of the three fiscal years ended February 1, 1997, follows:
1996 1995 1994 ------------------------ ------------------------- ------------------------ WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ------------------------ ------------------------- ------------------------ Outstanding at beginning of year 1,348,800 $ 3.16 1,346,400 $ 3.13 169,200 $ 4.38 Granted 149,000 3.50 561,750 3.30 1,300,400 3.06 Exercised (2,000) 4.13 (19,000) 3.27 -- -- Cancelled (1,200) (2.96) (540,350) 3.23 (123,200) 4.13 ------------------------ ------------------------ ----------------------- Outstanding at end of year 1,494,600 $ 3.19 1,348,800 $ 3.16 1,346,400 $ 3.13 ------------------------ ------------------------ ----------------------- Options exercisable at end of year 1,475,500 $ 3.17 1,332,700 $ 3.15 1,330,200 $ 3.13 Weighted-average fair value of options granted during the year 149,000 $ 1.49 561,750 $ 1.48 1,300,400 $ 1.55
35 36 The following table summarizes information about stock options outstanding at February 1, 1997:
Options Outstanding Options Exercisable - ------------- ---------------------------------------------------- ----------------------------- Range of Weighted-Average Weighted-Average Weighted-Average Exercise Number Exercise Remaining Number Exercise Prices Outstanding Price Contractual Life Outstanding Prices - ------------- ----------- ---------------- ---------------- ----------- ---------------- $2.75 - $4.00 $1,451,850 $3.11 8 1,441,700 $3.11 $4.13 - $5.88 29,000 $4.77 8 24,000 4.79 $6.00 - $8.50 13,750 $8.00 9 10,000 8.50 ---------- ----- ----------- --------- ----- 1,494,600 $3.19 8 1,475,700 $3.17 ---------- ----- ----------- --------- -----
NOTE 13 - EMPLOYEE BENEFIT PLANS: The Company has a 401(k) Savings and Investment Plan ("the Plan"). Pursuant to such plan, participants may make contributions to the Plan up to a maximum of 15% of total compensation or $9,500 (or such higher amount as is prescribed by the Secretary of the Treasury for cost of living adjustments), whichever is less, and the Company, in its discretion, may match such contributions to the extent of 25% of the first 4% of a participant's contribution. The Company's matching contributions vest over a 5-year period. In addition to matching contributions, the Company may make additional contributions on a discretionary basis in order to comply with certain Internal Revenue Code regulations prohibiting discrimination in favor of highly compensated employees. The Company's matching contributions during fiscal years 1996, 1995 and 1994 were not significant. 36 37 NOTE 14 - COMMITMENTS AND CONTINGENCIES: Effective February 1, 1995, the Company entered into three-year employment agreements with three of its executive officers. The agreements provide for aggregate annual salaries of $725,000 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 which provides for additional compensation and grant of stock options if the Company meets certain net income levels. The Company leases space for its office, warehouse and retail stores. The lease terms vary from one to ten years, in some cases with options to renew for longer periods. Various leases contain clauses which adjust the base rental rate by the prevailing Consumer Price Index, as well as additional rent based on a percentage of gross sales in excess of a specified amount. Rent expense for fiscal year 1996, 1995, and 1994 approximated $11,223,000, $10,131,000, and $8,379,000, respectively. Future minimum lease commitments under these operating leases at February 1, 1997 are as follows:
FISCAL YEAR - ----------- 1997 $12,348,015 1998 11,277,283 1999 10,973,872 2000 9,392,974 2001 6,049,636 Thereafter 15,541,644 ----------- Total future minimum lease payments $65,583,424 ===========
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 February 1, 1997:
FISCAL YEAR - ----------- 1997 $ 1,124,662 1998 976,327 1999 249,334 2000 22,608 -------------- Total future minimum lease payments 2,372,931 Less: amount representing interest (311,990) -------------- Present value of minimum lease payments $ 2,060,941 ==============
37 38 The depreciation expense relating to capital leases is included in depreciation and amortization expense. At February 1, 1997, the Company had entered into 8 additional store leases at locations under construction. Future minimum lease commitments under these leases aggregate $3,411,000 the terms of which average approximately 7 years. 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 was completed on April 30, 1997. 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. 38 39 NOTE 15 - 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 ---------------------------------------------- FEBRUARY 1, FEBRUARY 3, JANUARY 28, 1997 1996 1995 ------------ ------------ ------------ Net sales: Wholesale $ 30,316,598 $ 36,200,103 $ 38,483,483 Retail 108,603,129 92,956,403 77,094,322 ------------ ------------ ------------ Total net sales $138,919,727 $129,156,506 $115,577,805 ============ ============ ============ Cost of goods sold: Wholesale $ 22,702,968 $ 27,416,218 $ 30,910,792 Retail 56,066,785 49,572,385 41,018,508 ------------ ------------ ------------ Total cost of goods sold $ 78,769,753 $ 76,988,603 $ 71,929,300 ============ ============ ============ Gross profit: Wholesale $ 7,613,630 $ 8,783,885 $ 7,572,691 Retail 52,536,344 43,384,018 36,075,814 ------------ ------------ ------------ Total gross profit $ 60,149,974 $ 52,167,903 $ 43,648,505 ============ ============ ============ Inventories: Wholesale $ 32,051,346 $ 17,260,449 $ 13,061,119 Retail 53,059,077 38,754,052 31,575,492 ------------ ------------ ------------ Total inventories $ 85,110,423 $ 56,014,501 $ 44,636,611 ============ ============ ============ Identifiable other assets: Wholesale $ 12,567,630 $ 13,187,640 $ 7,634,919 Retail 17,243,510 12,251,874 12,556,241 Corporate 14,986,146 12,056,308 14,501,602 ------------ ------------ ------------ Total assets, other than inventories $ 44,797,286 $ 37,495,822 $ 34,692,762 ============ ============ ============ Depreciation and amortization: Wholesale $ -- $ -- $ -- Retail 3,771,508 3,299,746 2,902,607 ------------ ------------ ------------ $ 3,771,508 $ 3,299,746 $ 2,902,607 ============ ============ ============ Capital expenditures: Wholesale $ -- $ -- $ -- Retail 6,798,159 2,888,019 3,580,005 Corporate 543,742 414,659 1,000,227 ------------ ------------ ------------ $ 7,341,901 $ 3,302,678 $ 4,580,232 ============ ============ ============
39 40 An unaffiliated customer of the wholesale segment accounted for approximately 11%, 7% and 10% of the consolidated net sales in fiscal year 1996, 1995 and 1994, respectively, and 71 % and 59% of the consolidated net trade accounts receivable balance at February 1, 1997 and February 3, 1996, respectively. In fiscal year 1996, 1995 and 1994, the wholesale segment included foreign sales of approximately $3.8 million, $9.0 million and $6.1 million, respectively. NOTE 16 - SUBSEQUENT EVENTS: RETAIL STORE OPENINGS Subsequent to February 1, 1997 and through April 15, 1997, the Company has opened 7 stores. 40 41 PERFUMANIA, INC. SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
ADDITIONS ---------------------------- CHARGED TO BALANCE AT CHARGES TO OTHER BALANCE BEGINNING COSTS AND ACCOUNTS- DEDUCTIONS AT END OF DESCRIPTION OF PERIOD EXPENSE DESCRIBE DESCRIBE PERIOD - ------------------- ---------- ----------- -------------- ------------ ------------ FOR THE YEAR ENDED JANUARY 28, 1995 Accounts receivable $285,333 $ 27,310 - $( 3,470)(1) $309,173 Inventory 750,000 -- - -- 750,000 FOR THE YEAR ENDED FEBRUARY 3, 1996: Accounts receivable 309,173 310,000 - (146,369)(1) 472,804 Inventory 750,000 -- - -- 750,000 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
(1) Represents amounts written off against accounts receivable. 41 42 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. 42 43 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT As of April 15, 1997 the Directors and Executive Officers of the Company were as follows:
NAME AGE POSITION - ---- --- -------- Simon Falic 36 Chairman of the Board and Chief Executive Officer Ron A. Friedman 37 President, Chief Financial Officer, Chief Operating Officer, Treasurer, Secretary and Director Jerome Falic 33 Vice President and Vice Chairman of the Board Marc Finer 36 President of the Retail Division and Director Jose Retelny 36 Chief Information Officer Claire Fair 37 Vice President of Human Resources Robert Pliskin 74 Director Daniel J. Manella 71 Director Carole Ann Taylor 52 Director
SIMON FALIC is a co-founder of the Company and has been a Director and the President of the Company since its inception in February 1988. Mr. Falic became the Company's Chief Executive Officer and Chairman of the Board, effective May 2, 1994. Effective April 4, 1997, Mr. Falic relinquished his duties as President. His principal responsibilities include overseeing the operations of the Company's wholesale and retail divisions. Mr. Falic is a member of the Company's Stock Option Committee. RON A. FRIEDMAN has been Chief Financial Officer and Treasurer of the Company since June 1991, and the Secretary and a Director of the Company since October 1991. Mr. Friedman was appointed the Company's President and Chief Operating Officer, effective April 4, 1997 and September 1, 1994, respectively. From May 1981 through June 1991, Mr. Friedman was employed by KPMG Peat Marwick, and was a Senior Manager from July 1987 to June 1991. JEROME FALIC has been Vice President of the Company since the Company's inception in February 1988 and a Director of the Company since August 1994. Mr. Falic was appointed the Company's Vice Chairman of the Board, effective September 1, 1994. His principal responsibilities include purchases of all of the Company's inventory needs and sales for the Company's wholesale division. Mr. Falic is the brother of Simon Falic, the Company's Chairman of the Board, Chief Executive Officer and President. 43 44 MARC FINER has been the President of the Company's Retail Division since March 29, 1994 and a Director of the Company since August 1994. Mr. Finer was the President of Parfums Expresso, Inc. and Parfums D'Arte, wholesale distributors of fragrances in Puerto Rico, from their inception in August 1986 until March 1994. (See Item 13 - "Certain Relationships and Related Transactions"). JOSE RETELNY joined the Company in March 1991 as the Company's MIS Director and has been Chief Information Officer of the Company since February 1, 1995. Prior to joining Perfumania, Mr. Retelny was Senior Programmer at IBM's Austin Programming Center working in communications and database analysis for operating systems including DOS, OS/2, and AIX. CLAIRE FAIR was appointed Vice President of Human Resources in August 1996. From November 1993 to August 1996, she served as the Company's Director of Human Resources. Previously, Ms. Fair was the Director of Employee Relations with Sterling, Inc. ROBERT PLISKIN was appointed a Director of the Company in October 1991. Mr. Pliskin served as President of Longines Wittnauer Watch Company from 1971 to 1980 when he became President of the Seiko Time Corporation, a position he held until 1987. In 1987 Mr. Pliskin served as the President of Hattori Corporation of America, a distributor of watches and clocks, until his retirement in 1990. Mr. Pliskin is a member of the Company's Audit Committee. DANIEL J. MANELLA was appointed a Director of the Company in April 1992. From December 1990 to present, Mr. Manella has been engaged in personal investment activities. From August 1989 to December 1990, he served as the Chairman of the Board and Chief Executive Officer of McGregor Corporation, a manufacturer of men's and boy's apparel. From 1984 to August 1989, Mr. Manella served as the Chairman of the Board and Chief Executive Officer of Faberge Incorporated ("Faberge"), a manufacturer of toiletries and fragrances. In addition, from December 1987 to August 1989, he served as the Chairman of the Board and Chief Executive Officer of Elizabeth Arden, Inc., a manufacturer of cosmetics and fragrances and a wholly owned subsidiary of Faberge. Mr. Manella is a member of the Company's Audit Committee. CAROLE ANN TAYLOR was appointed a Director of the Company in June 1993. From 1987 to present, Ms. Taylor has been the owner and president of the Bayside Company Store, a retail souvenir and logo store at Bayside Marketplace in Miami, Florida. During this time she has also been a partner of the Jardin Bresilien Restaurant also located at the Bayside Marketplace. Currently, Ms. Taylor is also the president of C.A. Taylor Enterprises, a public affairs and marketing consulting firm in Miami, Florida. Ms. Taylor serves as president and a director of the Bayside Merchants Assn., and as a director of the Miami-Dade Chamber of Commerce, the Greater Miami Convention & Visitors Bureau and the Miami Film Festival. Ms. Taylor is a member of the Company's Audit Committee and Stock Option Committee. The Company's officers are elected annually by the Board of Directors and serve at the discretion of the Board. The Company's directors hold office until the next annual meeting of shareholders and until their successors have been duly elected and qualified. The other information called for by this item is incorporated by reference from the Perfumania, Inc. Annual Meeting of Shareholders - Notice and Proxy Statement - 1997 (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. 44 45 ITEM 11. EXECUTIVE COMPENSATION The information called for by this is incorporated by reference from the Perfumania, Inc. Annual Meeting of Shareholders - Notice and Proxy Statement - 1997 (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 called for by this item is incorporated by reference from the Perfumania, Inc. Annual Meeting of Shareholders - Notice and Proxy Statement - 1997 (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 called for by this item is incorporated by reference from the Perfumania, Inc. Annual Meeting of Shareholders - Notice and Proxy Statement - 1997 (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. 45 46 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 February 1, 1997, February 3, 1996 and January 28, 1995 appears on page 18. (2) Financial Statement Schedules The following statement schedules for the fiscal years ended February 1, 1997, February 3, 1996 and January 28, 1995 are submitted herewith:
ITEM FORM 10-K NUMBER PAGE -------------- Schedule VIII - Valuation and Qualifying Accounts and Reserves 41
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. 46 47 (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 the Company and LaSalle National Bank dated April 16, 1997 (7) 21.1 Subsidiaries of the Registrant (6) 23.1 Consent of Price Waterhouse LLP (7) 27.1 Financial Data Schedule (for SEC use only). (7)
47 48 (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) Filed herewith. (b) Reports on Form 8-K None. 48 49 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 25, 1997 PERFUMANIA, INC. By: /s/ Simon Falic --------------------------------------- Simon Falic, 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/Simon Falic Chairman of the Board and April 25, 1997 --------------------- Chief Executive Officer Simon Falic /s/Ron A. Friedman President, Chief Financial Officer, April 25, 1997 --------------------- Chief Operating Officer, Treasurer, Ron A Friedman Secretary and Director (principal financial and accounting officer) /s/Jerome Falic Vice President and Vice Chairman April 25, 1997 --------------------- of the Board Jerome Falic /s/Marc Finer President of the Retail Division April 25, 1997 --------------------- and Director Marc Finer /s/Robert Pliskin Director April 25, 1997 --------------------- Robert Pliskin /s/Carole Ann Taylor Director April 25, 1997 --------------------- Carole Ann Taylor /s/ Daniel J. Manella Director April 25, 1997 --------------------- Daniel J. Manella
49 EX-10.9 2 AMENDMENT TO LOAN & SECURITY AGREEMENT 1 EXHIBIT 10.9 LASALLE NATIONAL BANK - -------------------------------------------------------------------------------- [LASALLE BANKS LETTERHEAD] April 16, 1997 Perfumania, Inc. 11701 N.W. 101st Road Miami, Florida 33178 Gentlemen: PERFUMANIA, INC., a Florida corporation ("Borrower") and LaSalle National Bank, a national banking association ("Bank") have entered into that certain Loan and Security Agreement dated June 25, 1992 (the "Security Agreement"). From time to time thereafter, Borrower and Bank may have executed various amendments (each an "Amendment" and collectively the "Amendments") to the Security Agreement (the Security Agreement and the Amendments hereinafter are referred to, collectively, as the "Agreement"). Borrower and Bank now desire to further amend the Agreement as provided herein, subject to the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing recitals, the mutual covenants and agreements set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. The Agreement hereby is amended as follows: (a) Paragraph 11.(o) of the Agreement is deleted in its entirety and the following is substituted in its place: (o) Borrower and Magnifique shall at all times maintain an aggregate net worth of not less than the Minimum Tangible Net Worth, as hereinafter defined. At all times during Borrower and Magnifique's fiscal years, with the exception of the last day of each fiscal year, "Minimum Tangible Net Worth" shall equal $29,000,000.00. On the last day of each of Borrower and Magnifique's fiscal years, beginning 2 LASALLE - -------------------------------------------------------------------------------- LASALLE NATIONAL BANK Perfumania, Inc. April 16, 1997 Page 2 with fiscal 1998, Minimum Tangible Net Worth shall equal $34,000,000.00; "Tangible Net Worth" being defined for purposes of this paragraph as Borrower's and Magnifique's shareholders' equity (including retained earnings) less the book value of all intangible assets, as determined solely by Bank on a consistent basis, plus the amount of any LIFO reserve plus the amount any debt subordinated to Bank, all as determined under generally accepted accounting principles applied on a basis consistent with the consolidated financial statement dated February 1, 1997 except as set forth herein; and (b) Paragraph (1) of Exhibit A of the Agreement is deleted in its entirety and the following is substituted in its place: (1) LOAN LIMIT: Bank may, in its sole discretion, advance an amount up to the sum of the following sublimits (the "Loan Limit"): (a) Up to sixty-five percent (65%) of the face amount (less maximum discounts, credits and allowances which may be taken by or granted to Account Debtors in connection therewith) of Borrower's Eligible Accounts, or Four Million and No/100 Dollars ($4,000,000.00), whichever is less; plus (b) Subject to subparagraph (3)(a) of Exhibit A of the Agreement, up to forty percent (40%) of the lower of the cost or market value of Borrower's Eligible Inventory (excluding the Inventory described in subparagraph (1)(c) of Exhibit A of the Agreement); plus (c) Subject to subparagraph (3)(c) of Exhibit A of the Agreement, up to forty percent (40%) of the lower of the cost or market value of Borrower's Eligible Inventory (excluding the 3 LASALLE - -------------------------------------------------------------------------------- LASALLE NATIONAL BANK Perfumania, Inc. April 16, 1997 page 3 Inventory described in subparagraph (1)(b) of Exhibit A of the Agreement); plus (d) Subject to Paragraph (2) of Exhibit A of the Agreement, up to forty percent (40%) against the face amount of Commercial Letters of Credit issued by Bank for the purpose of purchasing Inventory, provided that such Commercial Letters of Credit are in form and substance satisfactory to Bank; minus (e) Such reserves as Bank elects, in its sole discretion, to establish from time to time; provided, that the advances made pursuant to subparapgraphs (1)(b), (1)(c) and (1)(d) above shall in no event exceed Six Million and No/100 Dollars ($6,000,000.00); further provided that, subject to subparagraph (13)(e) below, the aggregate Loan Limit shall in no event exceed Thirty-Five Million and No/100 Dollars ($35,000,000.00) during the time period of February 6th through December 19th of each year, which shall decrease to Thirty-Two Million and No/100 Dollars ($32,000,000.00) during the time period of December 20th of each year through February 5th of the following year, minus the then outstanding amount of all loans and advances to Magnifique Parfumes and Cosmetics, Inc. ("Magnifique") under that certain Loan and Security Agreement dated June 25, 1992 by and between Bank and Magnifique, except as such amount may be increased by Bank, in its sole discretion, from time to time. (c) Subparagraphs (3)(a) and (3)(c) of Exhibit A of the Agreement are deleted in their entirety and the following is substituted in their place: 4 LASALLE - -------------------------------------------------------------------------------- LASALLE NATIONAL BANK Perfumania, Inc. April 16, 1997 Page 4 (a) With respect to the advance described in subparagraph (1)(b) of Exhibit A of the Agreement, such Inventory shall consist solely of wholesale Inventory stored in the Miami warehouse. (c) With respect to the advance described in subparagraph (1)(c) of Exhibit A of the Agreement, such Inventory shall consist solely of wholesale Inventory stored in a bonded warehouse on which a duty has not been paid and which is stored in a duty free warehouse. (d) Subparagraph (5)(c) of Exhibit A of the Agreement is deleted in its entirety and the following is substituted in its place: (c) ONE-TIME FEE: In consideration of Bank increasing the Loan Limit, Borrower and Magnifique shall jointly pay to Bank a fee in the amount of $5,208.00, which fee shall be fully earned by Bank and payable at the time of execution of this Amendment. (e) Paragraph (7) and subparagraphs (7).(1), (7).(2), (7).(3) and (7).(5) (but not subparagraph (7).(4)) of Exhibit A of the Agreement are deleted in their entirety and the following is substituted in their place: (7) STORE OPENINGS: Borrower, together with Magnifique shall have no store openings between November 20 and January 31 of each fiscal year during the Original Term or any Renewal Term. In addition, Borrower, together with Magnifique shall open no more than 50 new retail stores during fiscal year ending 1998. 5 LASALLE - -------------------------------------------------------------------------------- LASALLE NATIONAL BANK Perfumania, Inc. April 16, 1997 Page 5 (7).(1) CAP ON CAPITAL EXPENDITURES: Notwithstanding the provisions of subparagraph 11(k) of the Agreement, Borrower and Magnifique may make capital expenditures during any fiscal year in an amount not to exceed $8,500,000.00 in the aggregate. For purposes of this subparagraph, capital expenditures shall include, but is not limited to, new store asset acquisitions, pre opening store costs, and capitalized construction costs and are net of capital expenditures financed with indebtedness. (7).(2) PROFIT/LOSS COVENANTS: Borrower and Magnifique's profit/loss on a consolidated basis shall be in accordance with the following schedule commencing with the year beginning February 1997 (1998 fiscal year) and for each fiscal year thereafter: 2/1 through 4/30 net loss of not more than $3,500,000.00; 2/1 through 10/31 net loss of not more than $4,000,000.00; 2/1 through 12/31 net loss of not more than $2,000,000.00; and 2/1 through 1/31 net profit of at least $1,275,000.00. (7).(3) MINIMUM CASH FLOW: Borrower and Magnifique's Minimum Cash Flow in the aggregate shall be in accordance with the following schedule commencing with the year beginning February 1997 (1998 fiscal year) and for each fiscal year thereafter: 2/1 through 4/30 not less than a negative $2,500,000.00; 6 LASALLE - -------------------------------------------------------------------------------- LASALLE NATIONAL BANK Perfumania, Inc. April 16, 1997 Page 6 2/1 through 7/31 not less than a negative $3,500,000.00; 2/1 through 10/31 not less than a negative $4,000,000.00; and 2/1 through 1/31 not less than zero. (7).(5) Intentionally Omitted. (f) Paragraph (13) of Exhibit A of the Agreement is amended to add the following subparagraph: (13)(e) PARTICIPATION AGREEMENT: Borrower shall cause CoreStates Bank, N.A. as Assignee of Meridian Commercial Finance Corporation to execute a Participation Agreement on terms acceptable to Bank, which Agreement shall supercede the Participation Agreement dated as of April 1, 1996. 2. This Amendment shall not become effective until fully executed by all parties hereto. 3. Except as expressly amended hereby and by any other supplemental documents or instruments executed by either party hereto in order to effectuate the transactions contemplated hereby, the Agreement and Exhibit A thereto hereby are ratified and confirmed by the parties hereto and remain in full force and effect in accordance with the terms thereof. LASALLE NATIONAL BANK, A NATIONAL BANKING ASSOCIATION By: /S/ ------------------------------ Title: Senior Vice President --------------------------- 7 LASALLE - ------------------------------------------------------------------------------ LaSalle National Bank Perfumania, Inc. April 16, 1997 Page 7 Accepted and agreed to this 16 day of April, 1997. PERFUMANIA, INC. By: /s/ Simon Falic -------------------------- Simon Falic Title: President and CEO Consented and agreed to by the following guarantors of the obligations of Perfumania, Inc. to LaSalle National Bank. Ilia Lekach Dated: ----------------------------- /s/ Simon Falic - ----------------------------------- Simon Falic Date: 4/16/97 ------------------------------ Magnifique Parfumes and Cosmetics, Inc. By: /s/ Simon Falic -------------------------------- Simon Falic Title: Vice Presidenet Date: 4/16/97 Ten Kesef II, Inc. By: /s/ Simon Falic ------------------------------- Simon Falic Title: President Date: 4/16/97 ------------------------------ 8 FIFTH AMENDMENT AND ALLONGE TO THAT CERTAIN DEMAND NOTE DATED JUNE 25, 1992 EXECUTED BY PERFUMANIA, INC. ("UNDERSIGNED") IN FAVOR OF LASALLE NATIONAL BANK ("BANK") IN THE ORIGINAL PRINCIPAL AMOUNT OF $15,000,000.00 ("NOTE") This Fifth Amendment and Allonge to the Note is made and accepted by the Undersigned as of this 16 day of April, 1997. All capitalized terms used herein but not otherwise defined will have the same meanings herein as in the Note. Bank and the Undersigned have agreed to amend the Note as herein provided. Accordingly the Note is hereby amended as follows: 1. The face amount of the Note is hereby amended to read Thirty-Five million and no/100 dollars ($35,000,000.00) from Thirty Million and No/100 Dollars ($30,000,000.00). Except as specifically amended hereby, the Note shall remain in full force and effect as issued. An executed original of this Fifth Amendment and Allonge shall be attached to the original Note and will constitute an integral part thereof. PERFUMANIA, INC. By: /s/ Simon Falic -------------------------- Simon Falic Accepted and Agreed to this 18th day of April, 1997. LaSalle National Bank By: /s/ -------------------- Title: Sr. Vice President - ------------------------------------------------------------------------------ FOR BANK USE ONLY Officer Initial: /s/ --------- Approval: /s/ --------- 9 LaSalle National Bank - ------------------------------------------------------------------------------- LASALLE BANKS 135 South LaSalle Street Chicago, Illinoise 60603 (312) 904-2500 April 16, 1997 Magnifique Perfumes and Cosmetics, Inc. 11701 N.W. 101st Road Miami, Florida 33178 Gentlemen: Magnifique Parfumes and Cosmetics, Inc., a Florida corporation ("Borrower") and LaSalle National Bank, a national banking association ("Bank") have entered into that certain Loan and Security Agreement dated June 25, 1992 (the "Security Agreement"). From time to time thereafter, Borrower and Bank may have executed various amendments (each an "Amendment" and collectively the "Amendments") to the Security Agreement (the Security Agreement and the Amendments hereinafter are referred to, collectively, as the "Agreement"). Borrower and Bank and now desire to further amend the Agreement as provided herein, subject to the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing recitals, the mutual covenants and agreements set forth herein and other good and valuable consideration, the receiipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. The Agreement hereby is amended as follows: (a) Paragraph 11.(o) of the Agreement is deleted in its entirety and the following is substituted in its place: (o) Borrower and Perfumania shall at all times maintain an aggregate tangible net worth of not less than the Minimum Tangible Net Worth, as hereinafter defined. At all times during Borrower and Perfumania's fiscal years, with the exception of the last day of each fiscal year, "Minimum Tangible Net Worth" shall equal $29,000,000.00. On the last day of each of Borrower and Perfumania's fiscal years, beginning the fiscal 1998, Minimum Tangible Net Work shall equal $34,000,000.00; "Tangible Net Worth" being defined for purposes of 10 LaSalle - ------------------------------------------------------------------------------- LASALLE National Bank Magnifique Parfumes and Cosmetics, Inc. April 16, 1997 Page this paragraph as Borrower's and Perfumania's shareholder's equity (including retained earnings) less the book value of all intangible assets, as determined solely by Bank on a consistenet basis, plus the amount of any LIFO reserve plus the amount of any LIFO reserve plus the amount any debt subordinated to Bank, all as determined under generally accepted accounting principles applied on a basis consistent with the consolidated financial statements dated February 1, 1997 except as set forth herein; and (b) Paragraph (1) of Exhibit A of the Agreement is deleted in its entirety and the following is substituted in its place: (1) LOAN LIMIT: Bank may, in its sole discretion, advance an amount up to the sum of the following sublimits (the "Loan Limit"); (a) Up to fifty percent (50%) of the lower of the cost or market value of Borrower's Eligible Inventory, or Sixty-Five Thousand and No/100 Dollars ($65,000.00) per store, whichever is less; plus (b) Subject to subparagraph (2)(b) of Exhibit A of the Agreement, up to fifty percent (50%) of the lower of the cost or market value of Borrower's Eligible Inventory, (excluding the Inventory described in subparagraph (1)(a) or Thirty-Seven Thousand Five Hundred and No/100 Dollars ($37,500.00) per store, whichever is less; minus (c) Such reserves as Bank elects, in its sole discretion, to establish from time to time; 11 LaSalle - ------------------------------------------------------------------------------- LASALLE National Bank Magnifique Parfumes and Cosmetics, Inc. April 16, 1997 Page 3 provided, that the aggregate Loan Limit shall in no event exceed Thirty-Five Million and No/100 Dollars ($35,000,000.00) during the time period of February 6th through December 19th of each year, which shall decrease to Thirty-Two Million and No/100 Dollars (32,000,000.00) during the time period of December 20th of each year through February 5th of the following year, minus the then outstanding amount of all loans and advances to Perfumania, Inc. ("Perfumania") under that certain Loan and Security Agreement dated June 25, 1992 by and between Bank and Perfumania, except as such amount may be increased by Bank, in its sole discretion, from time to time. (c) Paragraph (2) of Exhibit A of the Agreement is amended to add the following subparagraph: (b) With respect to the advance described in subParagraph (1)(b) of Exhibit A of the Agreement, such Inventory shall consist solely of retail Inventory stored in the Miami warehouse. (d) Subparagraph (4)(c) of Exhibit A of the Agreement is deleted in its entirety and the following is substituted in its place: (c) ONE-TIME FEE: In consideration of Bank increasing the Loan Limit, Borrower and Perfumania shall jointly pay to Bank a fee in the amount of $5,208.00, which shall be fully earned by Bank and payable at the time of execution of this Amendment. 12 LASALLE - -------------------------------------------------------------------------------- LASALLE NATIONAL BANK Magnifique Parfumes and Cosmetics, Inc. April 16, 1997 Page 4 (e) Paragraph (6) and subparagraphs (6).(1), (6).(2) and (6).(3) (but not subparagraph (6).(4)) of Exhibit A of the Agreement are deleted in their entirety and the following is substituted in their place: (6) STORE OPENINGS: Borrower, together with Perfumania shall have no store openings between November 20 and January 31 of each fiscal year during the Original Term or any Renewal Term. In addition, Borrower, together with Perfumania shall open no more than 50 new retail stores during fiscal year ending 1998. (6).(1) CAP ON CAPITAL EXPENDITURES: Notwithstanding the provisions of subparagraph 11(k) of the Agreement, Borrower and Perfumania may make capital expenditures during any fiscal year in an amount not to exceed $8,500,000.00 in the aggregate. For purposes of this subparagraph, capital expenditures shall include, but is not limited to, new store asset acquisitions, pre opening store costs, and capitalized construction costs and are net of capital expenditures financed with indebtedness. (6).(2) PROFIT/LOSS COVENANTS: Borrower and Perfumania's profit/loss on a consolidated basis shall be in accordance with the following schedule commencing with the year beginning February 1997 (1998 fiscal year) and for each fiscal year thereafter: 2/1 through 4/30 net loss of not more than $3,500,000.00; 2/1 through 10/30 net loss of not more than $4,000,000.00; 13 LASALLE - -------------------------------------------------------------------------------- LASALLE NATIONAL BANK Magnifique Parfumes and Cosmetics, Inc. April 16, 1997 Page 5 2/5 through 12/31 net loss of not more than $2,000,000.00; and 2/1 through 1/31 net profit of at least $1,275,000.00. (6).(3) MINIMUM CASH FLOW: Borrower and Perfumania's Minimum Cash Flow in the aggregate shall be in accordance with the following schedule commencing with the year beginning February, 1997 (1998 fiscal year) and for each fiscal year thereafter: 2/1 through 4/30 not less than a negative $2,500,000.00; 2/1 through 7/31 not less than a negative $3,500,000.00; 2/1 through 10/31 not less than a negative $4,000,000.00; and 2/1 through 1/31 not less than zero. (f) Paragraph (11) of Exhibit A of the Agreement is amended to add the following subparagraph: (11)(e) PARTICIPATION AGREEMENT: Borrower shall cause CoreStates Bank, N.A. as Assignee of Meridian Commercial Finance Corporation to execute a Participation Agreement on terms acceptable to Bank, which Agreement shall supercede the Participation Agreement dated as of April 1, 1996. 2. This Amendment shall not become effective until fully executed by all parties hereto. 14 LASALLE - -------------------------------------------------------------------------------- LASALLE NATIONAL BANK Magnifique Parfumes and Cosmetics, Inc. April 16, 1997 Page 6 3. Except as expressly amended hereby and by any other supplemental documents or instruments executed by either party hereto in order to effectuate the transactions contemplated hereby, the Agreement and Exhibit A thereto hereby are ratified and confirmed by the parties hereto and remain in full force and effect in accordance with the terms thereof. LASALLE NATIONAL BANK, a national banking association By: /s/ ------------------------------------ Title: Sr. Vice President Accepted and agreed to this 16th day of April, 1997. MAGNIFIQUE PARFUMES AND COSMETICS, INC. By: /s/ ------------------------------- Title: Vice President Consented and agreed to by the following guarantors of the obligations of Magnifique Parfumes and Cosmetics, Inc. to LaSalle National Bank - ----------------------------------- Ilia Lekach Date: ------------------------------ 15 LASALLE - -------------------------------------------------------------------------------- LaSalle National Bank Magnifique Parfumes and Cosmetics, Inc. April 16, 1997 Page 7 /s/ Simon Falic - ------------------- Simon Falic Date: 4/16/97 -------------- Perfumania, Inc. By: /s/ Simon Falic ------------------ Simon Falic Title: President and CEO Date: 4/16/97 -------------- Ten Kesef II, Inc. By: /s/ Simon Falic ---------------- Simon Falic Title: President Date: 4/16/97 -------------- 16 THIRD AMENDMENT AND ALLONGE TO THAT CERTAIN DEMAND NOTE DATED JUNE 25, 1992 EXECUTED BY MAGNIFIQUE PARFUMES AND COSMETICS, INC. ("UNDERSIGNED") IN FAVOR OF LASALLE NATIONAL BANK ("BANK") IN THE ORIGINAL PRINCIPAL AMOUNT OF $15,000,000.00 ("NOTE") This Third Amendment and Allonge to the Note is made and accepted by the Undersigned as of this 16 day of April, 1997. All capitalized terms used herein but not otherwise defined will have the same meanings herein as in the Note. Bank and the Undersigned have agreed to amend the Note as herein provided. Accordingly the Note is hereby amended as follows: 1. The face amount of the Note is hereby amended to read Thirty-Five Million and No/100 dollars ($35,000,000.00) from Twenty Million and No/100 Dollars ($20,000,000.00). Except as specifically amended hereby, the Note shall remain in full force and effect as issued. An executed original of this Third Amendment and allonge shall be attached to the original Note and will constitute an integral part thereof. MAGNIFIQUE PARFUMES AND COSMETICS, INC. By:/s/ Simon Falic -------------------- Simon Falic Title: Vice President Accepted and Agreed to this 18th day of April, 1997. LaSalle National Bank By: /s/ Bruce A. Denby ----------------------- Bruce A. Denby Title: Sr. Vice President - ------------------------------------------------------------------------------- FOR BANK USE ONLY Officer Initial: /s/ ------ Approval: /s/ ----- EX-23.1 3 CONSENT OF PRICE WATERHOUSE 1 EXHIBIT 23.1 Consent of Independent Certified Public Accountants We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 of Perfumania, Inc. of our report dated April 24, 1997 appearing on page 19 of Perfumania, Inc.'s Annual Report on Form 10-K for the year ended February 1, 1997. /s/ Price Waterhouse LLP Miami, Florida May 1, 1997 EX-27.1 4 FINANCIAL DATA SCHEDULE
5 YEAR FEB-01-1997 FEB-04-1996 FEB-01-1997 1,641,527 0 12,928,816 248,386 85,110,423 107,562,889 17,709,758 0 129,907,709 74,405,754 0 0 0 78,078 49,246,502 129,907,709 138,919,727 138,919,727 78,769,753 78,769,753 51,584,901 500,000 3,623,989 4,251,084 1,646,731 2,604,353 0 0 0 2,604,353 0.34 0.34
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