-----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, Cr/A11Alx4fHfsY/qVFfwoR2qWq2e3bwYmrnhsexPFTqVAwKa3vGKdPNaTBGMNt2 fCivnOaPYGjeFIy6gfKKBA== 0000950144-98-006940.txt : 19980529 0000950144-98-006940.hdr.sgml : 19980529 ACCESSION NUMBER: 0000950144-98-006940 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980528 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: SEC FILE NUMBER: 000-19714 FILM NUMBER: 98632888 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 DATED 03/31/98 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 January 31, 1998 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, 1998, the number of shares of the registrant's Common Stock outstanding was 7,845,291. The aggregate market value of the Common Stock held by non affiliates of the registrant as of April 15, 1998 was approximately $14.0 million, based on the closing price of the Common Stock ($3.00) 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 TABLE OF CONTENTS PART I
ITEM PAGE 1. BUSINESS 3 2. PROPERTIES 10 3. LEGAL PROCEEDINGS 10 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 11 PART II 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED 12 STOCKHOLDER MATTERS 6. SELECTED FINANCIAL DATA 13 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS 23 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 23 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING 46 AND FINANCIAL DISCLOSURE PART III 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT 47 11. EXECUTIVE COMPENSATION 49 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND 49 MANAGEMENT 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 49 PART IV 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS 50 ON FORM 8 - K
2 3 FORWARD-LOOKING STATEMENTS Certain statements within this Form 10-K constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company or its industry to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the Company's seasonality, lack of long-term agreements with suppliers, dependence on line of credit, dependence on key personnel, the ability to manage the Company's growth and potential litigation. See "Risk Factors That May Affect Future Results" in Item 7. PART I ITEM 1. BUSINESS GENERAL Perfumania, Inc. ("Perfumania" or the "Company") is a leading specialty retailer and wholesale distributor of a wide range of brand name and designer fragrances. As of January 31, 1998, the Company operated a chain of 285 retail stores specializing in the sale of fragrances at discounted prices up to 60% below the manufacturer's suggested retail prices. The Company's wholesale division distributes approximately 1,100 stock keeping units (SKUs) of fragrances and related products to approximately 44 customers, including national and regional chains and other wholesale distributors throughout North America and overseas. The Company's wholesale business is managed and owned by the parent company, Perfumania, Inc. and the Company's retail business is managed and owned by Magnifique Parfumes and Cosmetics, Inc., a wholly owned subsidiary of Perfumania, Inc. The parent and subsidiary are separate and distinct legal entities, but for ease of reference in this Form 10-K, they are referred to as 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 Company has subsequently closed 10 locations, renovated 10 locations and the remaining locations will either be renovated or subleased during 1998. The Company continues to use the trade name Nature's Elements for its in-house developed cosmetic, treatment, aromatherapy and bath line. Marketing and Merchandising. Each of the Company's retail stores offers approximately 175 different brands of fragrances for women and men at prices up to 60% below the manufacturer's suggested retail prices. Stores stock brand name and designer products such as Estee Lauder(R), Anne 3 4 Klein(R), Fendi(R), Gucci(R), Ralph Lauren/Polo(R), Perry Ellis(R), Liz Claiborne(R), Giorgio(R), Hugo Boss(R), Ted Lapidus(R), Halston(R), Lancome(R), Christian Dior(R), Chanel(R) and Cartier(R). Historically, the Company has carried a narrow private line of bath and body and treatment under the name Jerome Privee. The Company has spent 1997 expanding, repackaging and redesigning its bath and body line. The new line includes 56 SKU's and was reintroduced during April of 1998. During the first quarter of 1998, the Company liquidated its old Jerome Privee line. Also during 1997, the Company developed its own private label Nature's Elements line of cosmetics. The line, which stresses quality for value, is being introduced in May 1998. The Company has also been developing its own private label line of treatment and aromatherapy under the name of Nature's Elements. The launch of these lines is expected during the third quarter of 1998. The Company believes that expanding its sales in the bath, body, cosmetic and treatment categories is very important to its future business. These private label lines could generate more frequent visits to the Company's stores and thereby increase sales. During 1997, the Company has allocated resources to this effort and will continue to do so during 1998. The Company also intends to continue to expand its gift accessories category be offering vanity trays, perfume bottles and oil burners. The cornerstone of the Company's marketing philosophy is customer awareness that Perfumania's stores offer an extensive assortment of brand name and designer fragrances at discount prices. Perfumania posts highly visible price tags for each item in a store, listing both the manufacturers' suggested retail price and the Company's discounted prices in order to enable customers to make price comparisons. In addition, the Company utilizes sales promotions such as "gift with purchase" and "purchase with purchase" offers. From time to time the Company test markets in its stores additional specialty gift items. The Company's stores are "full-service" stores. Accordingly, store personnel are trained to establish a personal rapport with each customer, to identify customer preferences with respect to both product and price range, and to successfully conclude a sale. Management believes that attentive personal service and knowledgeable sales personnel are key factors to the success of the Company's retail stores. The Company's store personnel are compensated on a salary plus bonus basis. The Company has several bonus programs that provide incentives for store personnel to sell merchandise on which the Company has higher profit margins. In addition, to provide an incentive to reduce expenses, district and area managers are eligible to receive a bonus if store profit goals are met. Management believes that a key component of the Company's ability to increase profitability will be its ability to locate, train and retain store personnel and regional and district managers. The Company conducts comprehensive training programs designed to increase customer satisfaction. The Company primarily relies on its distinctive store design and window displays to attract the attention of prospective customers. The Company also distributes flyers and brochures in its stores and in the malls in which its stores are located. The Company has refocused a substantial portion of its advertising from national and local newspapers, television and radio to less expensive billboards and in-store promotions. The amount of advertising varies with the seasonality of the business. Retail Stores. The Company's standard store design includes signs and merchandise displays which are designed to enhance customer recognition of Perfumania's stores. The Company's stores average approximately 1,500 square feet, although stores located in manufacturer's outlet malls tend to be larger than the Company's other stores. Each store is managed by one manager and one assistant 4 5 manager. The average number of employees in a Perfumania store is five, including part-time help. District or area managers visit stores on a regular basis in an effort to ensure knowledgeable and attentive customer service. Information Systems. The Company has a point-of-sale and management information system which integrates data from every significant phase of the Company's operations and provides the Company with information for planning, purchasing, pricing, distribution, financial and human resources decisions. The system also provides, on a real-time basis, information to manage store and warehouse inventories efficiently and to closely monitor individual store and each salesperson's performance. In addition, the system prepares price labels and pick orders and provides for automatic reordering, minimum and maximum stocking levels and optimum order quantities based on actual sales. Further, the system permits analysis of the Company's retail sales data based on product groups, items and manufacturers, enabling the Company to respond to changes in sales patterns. The management information system has bar scanners to record sales, track inventories and conduct physical inventories. The information system also has automated time and attendance modules to capture payroll information through the stores' point-of-sale systems, E-Mail systems allowing daily communication among the stores, district managers and the corporate office, and automated scheduling for store personnel. During the third quarter of 1998, the Company intends to upgrade its register software so that it will be able to perform promotional discounts automatically, calculate bonuses for employees at store level, perform inventories at store level, communicate with the stores through the internet, expand its E-Mail and printing capabilities and use Power Point presentations for training. To make this upgrade possible, during 1998 the Company will place a computer in each store. The costs for improvements and upgrades to the Company's management information systems and related point-of-sale software are expected to be approximately $1.6 million in fiscal 1998 and 1999. The Company has made an evaluation of the steps necessary to address issues related to required changes in its computer systems for the Year 2000. While the Company has determined that it currently has computer systems that require modification to be Year 2000 compliant, most of the modifications are being accomplished as part of the systems improvements referred to above. With respect to those systems which are not impacted by the improvements referred to above, the Company is in the process of identifying those which require modification or replacement to address the Year 2000 issue. Management believes that the Company will be able to address the Year 2000 issue in a timely manner. Additionally, the Company believes that the Year 2000 issue will not have a material effect on its financial condition. Store Location and Expansion. Perfumania's 285 stores are located in 36 states, the District of Columbia and Puerto Rico, including 48 in Florida, 34 in New York, 23 in California and 21 in Texas. Perfumania's strategy for opening new stores is to seek locations throughout the United States principally in regional malls and manufacturers' outlet malls and, selectively, on a stand-alone basis in suburban shopping centers in metropolitan areas. To achieve economies of scale with respect to advertising and management costs, the Company emphasizes opening additional stores in markets where it already has a presence. The Company also plans to expand into additional markets that it believes have a population density to support a cluster of stores. Prior to selecting new store locations, the Company analyzes, among other things, the potential adverse effect of competition from new stores on the sales of existing stores. 5 6 The number of stores opened by the Company will depend on several factors such as locating satisfactory sites, obtaining leases on favorable terms and general economic and business conditions in the localities of the new stores. Furthermore, although the Company may have executed a lease for a future location, a store may not open if, for example, a developer decides not to construct a mall. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources". Currently, the Company's average cost for opening a store is approximately $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 preopening expenses, such as the hiring and training of new employees and travel (which average approximately $5,000 per store). In addition, initial inventory in a new store ranges from approximately $100,000 during the first fiscal quarter to approximately $140,000 during the Christmas holiday season. To supplement the inventory in its stores, the Company carries at least four months supply of inventory at its warehouse. Through April 15, 1998, the Company had opened 6 stores and closed 9 stores in fiscal year 1998. The Company opened 40 stores in fiscal year 1997 (excluding 18 seasonal locations), 74 stores in fiscal year 1996, (including 33 stores acquired from Nature's) and 41 stores in fiscal year 1995. 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 1997, 1996 and 1995, the Company closed 17 stores, 6 stores and 8 stores, respectively. For fiscal 1998, the Company intends to open approximately 40 stores and close 5 to 15 stores. The leases for the new stores were signed during 1997. For 1999, the Company intends to slow its growth and focus on improving its existing stores. 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 1997 and 1996, the wholesale division sold to approximately 44 and 57 customers, respectively. One of the Company's customers accounted for 37.0% and 51.3% of net wholesale sales during fiscal year 1997 and 1996, respectively. Foreign wholesale sales during fiscal year 1997 were $1.7 million, compared to $3.8 million during fiscal year 1996. See Note 14 to the Company's Consolidated Financial Statements included in Item 8 hereof. The wholesale division offers its customers approximately 1,100 SKUs. The wholesale division's strategy for purchasing merchandise is to capitalize on market opportunities, to purchase those products that are in demand and to purchase merchandise available due to overstock situations or close-out sales. In addition, it takes the Company approximately 70 days after purchase to receive inventory for its wholesale division and an additional 20 days for the inventory to arrive at the Company's stores. As a result, the wholesale division generally carries at least four months' supply of inventory. The Company's warehouse inventory is generally higher than other retailers and wholesalers since the Company purchases a large amount of its inventories from the manufacturers and the secondary market and must assure itself of having consistent supplies of desirable inventories at 6 7 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. 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. 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 $0.9 million as of January 31, 1998, compared to $9.2 million as of February 1, 1997. 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 1997 and 1996, the Company purchased fragrances from 126 and 114 different suppliers, respectively, including national and international manufacturers, distributors, wholesalers, importers and retailers. The Company generally makes its purchases based on the most favorable available combination of prices, quantities and merchandise selection and, accordingly, the extent and nature of the Company's purchases from its various suppliers change constantly. As is customary in the perfume industry, the Company has no long-term or exclusive contract with any supplier. Merchandise is purchased both directly from manufacturers and secondary sources such as distributors, wholesalers, importers and retailers. Merchandise purchased by the Company from secondary sources includes trademarked and copyrighted products manufactured in foreign countries and trademarked and copyrighted products manufactured in the United States that may have been sold to foreign distributors. Substantially all of the Company's merchandise is covered by trademarks or copyrights owned by others. From time to time, United States trademark and copyright owners and their licensees and trade associations have initiated litigation or administrative agency proceedings seeking to halt the importation into the United States of such foreign manufactured or previously exported trademarked products or restrict the sale of such goods in the United States, and Federal legislation for such purposes has been proposed but not yet adopted. 7 8 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 Bros., such goods are barred from importation without the permission of the United States trademark holder. In addition, on November 23, 1992, the U.S. District Court for the Central District of California, in an unreported decision in Parfums Givenchy, Inc. v. Drug Emporium, Inc. ("Parfums"), which purports to follow a decision of the Ninth Circuit Court of Appeals, held that the sale of products manufactured abroad and imported into the United States, which would be covered by a U.S. copyright, without the consent of the U.S. copyright holder, is a copyright violation. This decision was upheld by the 9th Circuit Court of Appeals and on March 6, 1995, the U.S. Supreme Court denied Certiorari, without giving any reason. In March 1998, however, the United States Supreme Court in Quality King Distributors v. L'anza Research International ("L'anza"), was faced with a situation in which a United States manufacturer had manufactured and sold certain goods with copyrighted labels affixed to a foreign purchaser. These goods somehow found their way from the foreign purchaser back into the United States without L'anza's permission, and were sold by Quality King to unauthorized retailers at discounted prices. The L'anza Court unanimously held that there was no copyright violation by Quality King because the "first sale" doctrine applied to imported copies. Although L'anza appears favorable to those involved in purchasing through secondary sources, it is still too early to tell how the L'anza decision will be applied to future situations. As is often the case in the fragrance and cosmetics business, some of the merchandise purchased by suppliers such as the Company may have been manufactured by entities, particularly foreign licensees and others, who are not the owners of the trademarks or copyrights for the merchandise. If the Company were called upon or challenged by the owner of a particular trademark or copyright to demonstrate that specific merchandise was produced and sold with the proper authority and the Company were unable to do so, the Company could, among other things, be restricted from reselling the particular merchandise or be subjected to other liabilities, which could have an adverse effect on the Company's business and results of operations. The Company may not always be able to know or to demonstrate that the manufacturer of specific merchandise had proper authority from the trademark or copyright owner to produce the merchandise or permit it to be resold in the United States. During fiscal 1997, less than 10 percent of the Company's merchandise was purchased from grey market sources. The Company's grey market sources generally will not disclose the identity of 8 9 their suppliers, which they consider to be proprietary trade information. As a result, the Company cannot determine specifically what portion of its merchandise purchased from grey market sources could be affected by the potential actions discussed above or actions on other grounds. See "Item 3. Legal Proceedings" for a description of certain pending litigation predicated on grounds of patent infringement. There can be no assurance that future judicial, legislative or administrative agency action, including possible import, export, tariff or other trade restrictions, will not limit or eliminate some of the secondary sources of supply used by the Company or any of the Company's business activities. In addition, there can be no assurance that the Company's business activities will not become the subject of legal or administrative actions brought by manufacturers, distributors or others. DISTRIBUTION The Company's retail and wholesale operations are served by its warehouse in Miami, Florida. The lease for the facility expires in July 2003. The warehouse is approximately 139,000 square feet, of which 20,000 square feet is utilized as office space. The Company's wholesale division also utilizes space in a third party bonded warehouse. The Company'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. 9 10 EMPLOYEES At January 31, 1998, the Company had 1,386 employees, of whom 1,196 were employed in the Company's retail stores, 90 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. TRADE NAME AND SERVICE MARK The Company's stores use the trade name and service mark Perfumania(R). The Company also operates 26 stores under the trade name "Nature's Elements" (as of January 31, 1998; see "Acquisition"- page 2), 3 stores under the trade name "Class Perfumes" in malls where the Company also operates a Perfumania(R) store, and 8 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 $67,000 and specified annual increases thereafter. All of the Company's retail stores are located in leased premises. Most of the Company's store leases provide for the payment of a fixed amount of base rent plus a percentage of sales, ranging from 3% to 10%, over certain minimum sales levels. Store leases typically require the Company to pay all utility charges, insurance premiums, increases in property taxes and certain other costs. Certain of the Company's leases permit the lessor to terminate the lease if specified minimum sales levels are not met. See Note 13 of Notes to the Company's Consolidated Financial Statements for additional information with respect to the Company's store leases. ITEM 3. LEGAL PROCEEDINGS Boucheron. In December 1993, the patent holder and exclusive licensee in the U.S. of Boucheron filed a complaint against the Company in the United States District Court for the Southern District of New York for infringing upon their exclusive right to sell the Boucheron bottle. The plaintiffs' theory is based on the fact that they have a valid patent for the bottles and that Perfumania's sales of such bottles infringes upon their patent rights. The Company believes that a patentee cannot control by resort to an infringement suit the resale of a patented article which it has sold. The Company filed a motion to dismiss during February 1994. On March 20, 1995, the Court denied the Company's motion to dismiss and on April 14, 1995, the Company filed its answer to the Complaint. Discovery is in progress. 10 11 From time to time, the Company is involved in various legal proceedings in the ordinary course of business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any actions for shareholder approval during the fourth quarter of fiscal year 1997. 11 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The Company's Common Stock is traded on the Nasdaq Stock Market under the symbol PRFM. The following table sets forth the high and low closing sales prices for the Company's Common Stock for the periods indicated, as reported by the Nasdaq Stock Market.
FISCAL 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 FISCAL 1997 HIGH LOW - ---------------------------------------------------------------------------------- First Quarter $3 11/16 $2 19/64 Second Quarter $4 5/16 $2 7/8 Third Quarter $3 7/8 $2 5/8 Fourth Quarter $3 3/4 $2 1/4
As of April 15, 1998, there were 73 holders of record of the 7,845,291 outstanding shares of Common Stock, not including security positions listings. The closing sales price for the Common Stock on April 15, 1998 was $3.00. DIVIDEND POLICY The Company has not declared or paid any dividends on the Common Stock and does not currently intend to declare or pay cash dividends in the foreseeable future. Payment of dividends, if any, will be at the discretion of the Board of Directors after taking into account various factors, including the Company's financial condition, results of operations, current and anticipated cash needs and plans for expansion. The Company is prohibited from paying cash dividends under its line of credit with LaSalle National Bank. See Note 8 of Notes to the Company's Consolidated Financial Statements contained in Item 8 hereof. 12 13 ITEM 6. SELECTED FINANCIAL DATA The selected financial data presented below for the last five fiscal years and as of the end of each such fiscal years are derived from the Company's consolidated financial statements and should be read in conjunction with such financial statements and related notes. The Company's fiscal year end is the Saturday closest to January 31. All references herein to fiscal years are to the calendar year in which the fiscal year begins; for example, fiscal year 1997 refers to the fiscal year that began on February 2, 1997 and ended on January 31, 1998.
FISCAL YEAR ENDED -------------------------------------------------------------------------------- JANUARY 31, FEBRUARY 1, FEBRUARY 3, JANUARY 28, JANUARY 29, --------------- -------------- ----------------- --------------- -------------- 1998 1997 1996 1995 1994 --------------- --------------- ----------------- --------------- -------------- (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) -------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA: Net sales, wholesale division $ 34,032 $ 30,317 $ 36,200 $ 38,484 $ 36,376 Net sales, retail division 129,562 108,603 92,957 77,094 55,944 -------------- ------------- ---------------- -------------- -------------- Total net sales 163,594 138,920 129,157 115,578 92,320 -------------- ------------- ---------------- -------------- -------------- Gross profit, wholesale division 8,249 7,614 8,784 7,573 6,153 Gross profit, retail division 59,535 52,536 43,384 36,076 27,598 -------------- ------------- ---------------- -------------- -------------- Total gross profit 67,784 60,150 52,168 43,649 33,751 -------------- ------------- ---------------- -------------- -------------- Selling, general and administrative expenses 65,949 48,665 43,682 37,108 31,733 Provision for potential inventory losses 1,810 190 - - 750 Provision for impairment of assets and store 2,515 169 1,232 623 25 closings Depreciation and amortization 4,698 3,772 3,300 2,903 2,100 -------------- ------------- ---------------- -------------- -------------- Total operating expenses 74,972 52,796 48,214 40,634 34,608 -------------- ------------- ---------------- -------------- -------------- Income (loss) from operations before other income (expense) (7,188) 7,354 3,954 3,015 (857) -------------- ------------- ---------------- -------------- -------------- Other income (expense) Interest expense, net * (4,696) (4,110) (3,144) (2,415) (1,823) Other, net 762 478 396 357 115 -------------- ------------- ---------------- -------------- -------------- Income (loss) before income taxes * (11,122) 3,722 1,206 957 (2,565) (Provision) benefit for income taxes 321 (1,647) 796 368 168 -------------- ------------- ---------------- -------------- -------------- Income (loss) before cumulative effect of change in accounting principle * (10,801) 2,075 2,002 1,325 (2,397) -------------- ------------- ---------------- -------------- -------------- Cumulative effect of change in accounting principle, net of income tax benefit of $380,958 (632) - - - - Net income (loss) * $ (11,433) $ 2,075 $ 2,002 $ 1,325 $ (2,397) ============== ============= ================ ============== ============== Weighted average shares outstanding: Basic 7,025,236 7,183,462 6,973,670 6,155,733 5,690,784 Diluted 7,111,929 7,633,588 7,067,291 6,210,542 5,734,078 Basic income (loss) per share net of cumulative effect of change in accounting principle * $ (1.63) $ 0.29 $ 0.29 $ 0.22 $ (0.42) Diluted income (loss) per share net of cumulative effect of change in accounting principle * $ (1.63) $ 0.27 $ 0.28 $ 0.21 $ (0.42) ============== ============= ================ ============== ============== *As disclosed in Note 11 to the consolidated financial statements, the net income and the net income per share for 1996 was restated to account for the value attributable to the beneficial conversion feature on certain debt issued in 1996. SELECTED OPERATING DATA: Number of stores open at end of period 285 262 194 175 148 Comparable store sales increase 0% 3.6% 4.1% 5.9% (7.5%)
13 14
JANUARY 31, FEBRUARY 1, FEBRUARY 3, JANUARY 28, JANUARY 29, --------------- -------------- ----------------- --------------- --------------- 1998 1997 1996 1995 1994 (IN THOUSANDS) --------------------------------------------------------------------------------- BALANCE SHEET DATA: Working capital $ 19,287 $ 33,157 $30,227 $26,865 $24,612 Total assets 114,722 129,908 93,565 79,329 68,993 Long-term debt, less current portion 5,643 5,708 1,815 1,367 733 Total stockholders' equity 35,983 49,325 45,300 43,359 38,847
14 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL During the last three fiscal years, the Company's retail division has accounted for the majority of the Company's net sales and gross profit. The Company's overall profitability depends principally on the Company's ability to purchase a wide selection of merchandise at favorable prices. Other factors affecting the Company's profitability include general economic conditions, the availability to the Company of volume discounts and, in the retail division, the number of stores in operation, the timing of store openings and closings and the effect of special promotions offered by the Company. The following table sets forth items from the Company's Consolidated Statements of Operations expressed as a percentage of net sales for the periods indicated.
PERCENTAGE OF NET SALES ---------------------------------------------------------- FISCAL YEAR ------------------ ----------------- --------------- 1997 1996 1995 ------------------ ----------------- --------------- Net Sales, wholesale division 20.8% 21.8% 28.0% Net sales, retail division 79.2 78.2 72.0 ------------------ ----------------- --------------- Total net sales 100.0 100.0 100.0 Gross profit, wholesale division 24.2 25.1 24.3 Gross profit, retail division 46.0 48.4 46.7 ------------------ ----------------- --------------- Total gross profit 41.4 43.3 40.4 Selling, general and administrative expenses 40.3 35.0 33.8 Provision for potential inventory losses 1.1 0.1 - Provision for impairment of assets and 1.5 0.2 1.0 store closings Depreciation and amortization 2.9 2.7 2.6 ------------------ ----------------- --------------- Total operating expenses 45.8 38.0 37.3 ------------------ ----------------- --------------- Income (loss) from operations before other income (expenses) (4.4) 5.3 3.1 ------------------ ----------------- --------------- Other income (expense): Interest, net (2.9) (3.0) (2.4) Other, net 0.5 0.3 0.3 ------------------ ----------------- --------------- Income (loss) before income taxes * (6.8) 2.7 0.1 ------------------ ----------------- --------------- (Provision) benefit for income taxes 0.2 (1.2) 0.6 ------------------ ----------------- --------------- Income (loss) before cumulative effect of change in accounting principle (6.6) 1.5 1.6 ------------------ ----------------- --------------- Cumulative effect of change in accounting principle, net of income tax benefit (0.4) - - Net income (loss) * (7.0%) 1.5% 1.6% ================== ================= ===============
* As disclosed in Note 11 to the consolidated financial statements, the net income and net income per share for 1996 was restated to account for the value of the beneficial conversion feature of certain debt issued in fiscal year 1996. 15 16 RESULTS OF OPERATIONS Risk Factors That May Affect Future Results Perfumania does not provide forecasts of future financial performance. Forward-looking statements in this Annual Report are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and, in connection therewith, the Company wishes to caution readers that the following important factors, among others, in some cases have affected and in the future could affect the Company's actual results and could cause such results to differ materially from those expressed in forward-looking statements made by or on behalf of the Company. Seasonality. The Company has historically experienced higher sales in the third and fourth fiscal quarters than in the first and second fiscal quarters. Significantly higher fourth fiscal quarter retail sales result from increased purchases of fragrances as gift items during the Christmas holiday season. The Company's quarterly results may also vary due to the timing of new store openings, net sales contributed by new stores and fluctuations in comparable sales of existing stores. A variety of factors affect the sales levels of new and existing stores, including the retail sales environment and the level of competition, the effect of marketing and promotional programs, acceptance of new product introductions, adverse weather conditions and general economic conditions. Lack of Long-Term Agreements With Suppliers. The Company's success depends to a large degree on its ability to provide an extensive assortment of brand name and designer fragrances. The Company has no long-term purchase contracts or other contractual assurance of continued supply, pricing or access to new products. While the Company believes it has good relationships with its vendors, the inability to obtain merchandise from one or more key vendors on a timely basis, or a material change in the Company's ability to obtain necessary merchandise could have a material adverse effect on its results of operations. Dependence on Line of Credit. As discussed above, the Company experiences significant seasonal fluctuations in its sales and operating results, as is common with many specialty retailers. The Company utilizes its line of credit to fund inventory purchases and to support new retail store openings. Any future limitation on the Company's borrowing ability and access to financing could limit the Company's ability to open new stores and to obtain merchandise on satisfactory terms. The Company's current line of credit contains financial covenants, including a net income covenant. Should the Company not be able to meet its covenants, its borrowing ability and, thus, its operations will be seriously affected. Dependence on Key Personnel. 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 the Company's merchandise purchases, and have developed strong, reliable relationships with suppliers, as well as customers of the Wholesale division in the United States, Europe, Asia and South America. The loss of service of either of these, or any of the Company's other current executive officers could have a material adverse effect on the Company. Ability to Manage Growth. While the Company has grown significantly in the past several years, there is no assurance that the Company will sustain the growth in the number of retail stores and 16 17 revenues that it has achieved historically. The Company's growth is dependent, in large part, upon the Company's ability to open and operate new retail stores on a profitable basis, which in turn is subject to, among other things, the Company's ability to secure suitable store sites on satisfactory terms, the Company's ability to hire, train and retain qualified management and other personnel, the availability of adequate capital resources and the successful integration of new stores into existing operations. There can be no assurance that the Company's new stores will achieve sales and profitability comparable to existing stores, or that the opening of new locations will not cannibalize sales at existing locations. Litigation. As is often the case in the fragrance and cosmetics business, some of the merchandise purchased by suppliers such as the Company may have been manufactured by entities who are not the owners of the trademarks or copyrights for the merchandise. If the Company were called upon or challenged by the owner of a particular trademark or copyright to demonstrate that the specific merchandise was produced and sold with the proper authority and the Company were unable to do so, the Company could, among other things, be restricted from reselling the particular merchandise or be subjected to other liabilities, which could have an adverse effect on the Company's business and results of operations. Other. The Company has been characterized as an insider in the liquidating plan of reorganization filed on April 6, 1998 by L. Luria & Son, Inc. ("Luria's") in the United States Bankruptcy Court, Southern District of Florida. The committee of unsecured creditors in Luria's bankruptcy proceedings is investigating potential actions to recover substantial funds from alleged insiders of Luria's and their affiliates, which might include actions against the Company to recover amounts paid for merchandise sold to Luria's. Management cannot presently predict the outcome of these matters, although management believes, upon the advice of counsel, that the Company would have meritorious defenses and that the ultimate resolution of these matters should not have a materially adverse effect on the Company's financial position or result of operations. Restatement of 1996 Net Income Per Common Share to Reflect Recent SEC Announcement Regarding Certain Treatment of Convertible Debt Transactions In a 1997 announcement, the staff of the Securities and Exchange Commission ("SEC") indicated that when debt is convertible at a discount from the then current common stock market price, the discounted amount reflects at that time an incremental yield, e.g. a "beneficial conversion feature", which should be recognized as a return to the debt holders. In March 1996, the Company issued $3,000,000 of 5% Convertible Debentures (the "Debentures") in a Regulation S offering to non-U.S. persons. The debentures were convertible into shares of common stock of the Company at any time after May 21, 1996. Based on the market price of the Company's common stock, the debentures had a beneficial conversion feature of $529,412 at such point in time. Because of the SEC announcement, the Company has restated its 1996 net income and net income per common share information to reflect such accounting treatment. The net effect of the restatement represents a non-cash interest charge to net income. 17 18 Comparison of fiscal years 1997 and 1996 Net sales increased 17.8% from $138.9 million in fiscal year 1996 to $163.6 million in fiscal year 1997. The increase in net sales during fiscal year 1997 was due to a 16.8% increase in retail sales (from $108.6 million to $129.6 million), and a 16.3% increase in wholesale sales (from $30.3 million to $34.0 million). The increase in retail sales was principally due to an increase in the number of stores operated during fiscal year 1997 compared to fiscal year 1996, as comparable store sales were flat compared to the prior year. The Company believes that various promotions held during the year to stimulate sales and reduce and rebalance inventory levels resulted in lower average sales per customer, which contributed to the flat comparable store sales. The Company operated 285 and 262 stores at the end of fiscal years 1997 and 1996, respectively. Gross profit increased 12.7% from $60.2 million in fiscal year 1996 (43.3% of total net sales) to $67.8 million in fiscal year 1997 (41.4% of total net sales) as a result of higher sales and gross profit in both the wholesale and retail divisions. Gross profit for the wholesale division increased from $7.6 million in fiscal year 1996 to $8.3 million in fiscal year 1997. The wholesale division's gross margin in fiscal 1997 was 24.2% compared to 25.1% in fiscal year 1996. Gross profit for the retail division increased 13.3% from $52.5 million in fiscal year 1996 to $59.5 million in fiscal year 1997, principally as a result of higher retail sales volume. As a percentage of net retail sales, gross profit for the retail division decreased from 48.4% in fiscal year 1996 to 46.0% in fiscal year 1997. The decrease was due to promotions discussed above. Operating expenses increased $22.2 million in fiscal year 1997 compared to fiscal year 1996, due principally to 1) a $16.1 million increase in selling, general and administrative expenses, which includes $1.7 million of losses suffered from operating its Nature's Elements stores prior to their conversion and/or closure, 2) a $2.4 million increase in provision for impairment of assets and store closing, 3) a $1.2 million write off of accounts receivable from L. Luria and Son, Inc. and 4) a $1.8 million provision for potential inventory losses. The increase in selling, general and administrative expense was primarily the result of increases in rent, payroll and other costs associated with the operation of an average of 64 additional stores during fiscal year 1997. The average number of stores during fiscal 1997 includes 20 temporary holiday only stores. The Company intends to continue to use temporary stores in an effort to reduce its inventories. The increase in provision for doubtful account occurred primarily because of increased write offs of wholesale accounts receivable. See "Liquidity and Capital Resources". After performing a review of certain retail store locations with significant negative cash flows, the Company recognized a non-cash impairment charge of $2.2 million, representing a reduction of the carrying amounts of fixed assets at those store locations to their estimated recoverable amounts. The Company also recorded a loss of $0.3 million on disposition of fixed assets relating to retail stores which were closed during fiscal year 1997. Due to the heavy concentration of sales in the fourth quarter of each fiscal year, the Company does not believe it is meaningful to make 18 19 impairment determinations on an interim basis during the year. During fiscal year 1998, the Company intends to reduce its inventories of non-designer products; consequently the Company has recorded a $1.8 million provision to reduce the carrying cost of such inventories to their estimated market value. Depreciation and amortization increased $0.9 million in fiscal year 1997 compared to fiscal year 1996, due to increased fixed assets associated with retail stores. As a percentage of net sales, operating expenses increased from 38.0% in fiscal year 1996 to 45.8% in fiscal year 1997 due to the above reasons. Interest expense (net) increased 14.3% from $4.2 million in fiscal year 1996 to $4.7 million in fiscal 1997. The increase was principally due to the increase in the Company's line of credit from $30 to $35 million during fiscal 1997, as well increased use of lease financing for new store furniture and fixtures, offset by a one-time non-cash interest charge of $529,412 for a beneficial conversion feature of convertible debt in fiscal 1996 (see Note 11 to the consolidated financial statements). See "Liquidity and Capital Resources". The benefit for income taxes in fiscal 1997 was $0.3 million, which includes an increase in the valuation allowance of $3.4 million for deferred tax assets due to their uncertain realization. As a result of the foregoing, the Company had a loss before cumulative effect of a change in accounting principle of $10.8 million in fiscal 1997 compared to a net income of $2.1 million in fiscal 1996. 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. 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. 19 20 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 9 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 fixed assets associated with retail stores. 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 30.2% from $3.1 million in fiscal year 1995 to $4.1 million in fiscal 1996. The increase was principally due to the increase in the Company's line of credit during fiscal 1996, increased use of lease financing for new store furniture and fixtures and a one-time non-cash interest charge of $529,412 for a beneficial conversion feature of convertible debt (see Note 11 to the consolidated financial statements). See "Liquidity and Capital Resources." 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 $2.1 million in fiscal year 1996, compared to a net income of $2.0 million in fiscal year 1995. LIQUIDITY AND CAPITAL RESOURCES The Company's principal capital requirements are to fund inventory purchases and for new store openings. The Company has financed these capital requirements primarily through borrowings under its working capital lines of credit, cash flows from operations, lease financing of store furniture and fixtures and short-term borrowings from related parties and other individuals. On March 21, 1996, the Company sold 180,000 shares of common stock for approximately $956,000 in a private placement. On March 25, 1996, the Company issued $3,000,000 of 5% Convertible Debentures (the "Debentures") in a Regulation S offering to non-U.S. persons. The debentures were convertible at any time after May 21, 1996 into shares of common stock of the Company, at a conversion price for each share of common stock equal to eighty-five percent of the market price of the common stock on the date of conversion, not to exceed $8.50 per share of common stock. The debentures were converted to approximately 918,000 shares of the Company's common stock in the second quarter of fiscal 1996. See note 11 of the consolidated financial statements. On April 16, 1997, the Company's revolving line of credit facility with LaSalle National Bank (LNB), which expires on April 30, 1999, was increased to $35 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 (10.5% at January 31, 1998), 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. 20 21 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 January 31, 1998, the Company was in breach of certain of the above covenants. Due to these covenant violations, the Company incurred the default rate of interest, prime plus 4% (12.5%), during the period November 1997 through May 1998. On May 15, 1998, 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 waivers, LNB also extended its $35 million Line of Credit from April 1999 to April 2001, and revised certain covenants. In fiscal year 1997, net cash provided by operating activities was approximately $7.5 million, which was primarily due to the Company's reduction in inventories and receivables offset by a decrease in accounts payable. The Company's trade receivables primarily relate to its wholesale business. At fiscal year end, approximately $ 1.1 million of the Company's trade receivables were more than 90 days past due. Of the $5.2 million in trade receivables due from customers at January 31, 1998, $0.9 million was due from one customer which also accounted for 37% of the Company's fiscal 1997 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 $705,000 at January 31, 1998 is considered adequate by management based on its write-off experience during the last three years and an analysis of the aging of its trade receivables at January 31, 1998. The Company wrote off approximately $1.7 million of its trade receivables in fiscal 1997. Of this amount, approximately $1.2 million was due from Luria's, a Company affiliated by common ownership, which filed for relief under Chapter 11 of the United States Bankruptcy Code in August 1997. See related matter at Note 13 to the consolidated financial statements. During fiscal year 1997, inventories decreased by approximately $12.0 million due to 1) efforts by the Company to reduce and rebalance inventory levels and 2) substantial wholesale purchases in the fourth quarter of 1996, resulting in an unusually high level of inventory in the prior year and 3) an inventory provision during the fourth quarter of fiscal year 1997 of $1.8 million related to fragrances the Company intends to liquidate in fiscal 1998. See "Comparison of fiscal years 1997 and 1996" above. Net cash used in investing activities in fiscal year 1997 was approximately $7.2 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 pre-opening expenses, such as the hiring and training of new employees and travel, which average approximately $5,000 per store. In addition, initial inventory (not including inventory replenishment) in a new store ranges from approximately $100,000 during the first fiscal quarter to approximately $140,000 during the Christmas holiday season. The Company's wholesale inventory levels vary significantly during the fiscal year 21 22 depending upon availability, price and selection of merchandise available for purchase, and seasonality. The Company generally carries at least four months' supply of inventory for its retail and wholesale divisions. The Company also repurchased approximately 550,000 shares of its common stock for $1.9 million in fiscal year 1997. SEASONALITY AND QUARTERLY RESULTS The Company's operations have historically been seasonal, with generally higher sales in the third and fourth fiscal quarters than in the first and second fiscal quarters. Significantly higher fourth fiscal quarter retail sales result from increased purchases of fragrances as gift items during the Christmas holiday season. The Company's quarterly results may also vary due to the timing of new store openings, net sales contributed by new stores and fluctuations in comparable sales of existing stores. Wholesale sales vary by fiscal quarter as a result of the selection of merchandise available for sale and the need for the Company to stock its retail stores for the Christmas holiday season. Therefore, the results of any interim period are not necessarily indicative of the results that may be expected during a full fiscal year. See Note 15 of the Notes to the Consolidated Financial Statements for additional information regarding quarterly financial data. OTHER Effective fiscal year 1996, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 ("SFAS 123"). See Note 11 of Notes to the Consolidated Financial Statements contained in Item 8 hereof. In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components. In June 1997, the FASB also issued Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information." This Statement establishes standards for reporting information about a company's operating segments and related disclosures about its products, services, geographic areas of operations and major customers. Both Statements will be adopted by the Company in 1998. The Company does not expect that the adoption of these Statements will impact the Company's results of operations, cash flows or financial position. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up Activities", which requires the Company to expense preopening expenses as incurred. The Company early adopted SOP 98-5 in fiscal year 1997. See Note 2 of Notes to the Consolidated Financial Statements contained in Item 8 hereof. Although large fluctuations in foreign exchange rates could have a material effect on the prices the Company pays for products it purchases from outside the United States, the prices obtainable for sales denominated in foreign currencies and wholesale sales to foreign customers, such fluctuations have not been material to the Company's results of operations to date. Transactions with foreign suppliers generally are in United States dollars. The Company believes that inflation has not had a material impact on its results of operations and that it is generally able to pass through any cost increases in the form of increased sales prices. 22 23 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS Inapplicable 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 24 Consolidated Balance Sheets as of January 31, 1998 and February 1, 1997 25 Consolidated Statements of Operations for the Fiscal Years Ended January 31,1998, February 1, 1997 and February 3, 1996. 26 Consolidated Statements of Changes in Stockholders' Equity for the Fiscal Years Ended January 31, 1998, February 1, 1997 and February 3, 1996. 27 Consolidated Statements of Cash Flows for the Fiscal Years Ended January 31, 1998, February 1, 1997 and February 3, 1996. 28 Notes to Consolidated Financial Statements 29 Schedule VIII - Valuation and Qualifying Accounts and Reserves 45
23 24 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 January 31, 1998 and February 1, 1997, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 1998 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. As discussed in Note 11, the Company has restated its fiscal 1996 net income and net income per common share calculation to comply with a recently announced Securities and Exchange Commission Staff position on accounting for convertible securities having beneficial conversion features. As explained in Note 2, the Company changed its method of accounting for preopening expenses to conform with new requirements of the American Institute of Certified Public Accountants. Price Waterhouse LLP Miami, Florida May 18, 1998 24 25 PERFUMANIA, INC. CONSOLIDATED BALANCE SHEETS
JANUARY 31, FEBRUARY 1, ASSETS: 1998 1997 -------------------- ------------------ Current assets: (as restated, Note 11) Cash and cash equivalents $ 1,554,117 $ 1,641,527 Trade receivables, net: Customers, less allowance for doubtful accounts of $704,954 and $248,386 5,186,473 12,275,159 Affiliates - 653,657 Advances to suppliers 7,611,036 5,023,718 Inventories, net of reserve of $2,750,000 and $940,000 73,137,842 85,110,423 Prepaid expenses and other current assets 2,086,118 1,899,320 Tax refund receivable 814,766 -- Deferred tax asset, net 1,219,856 873,472 Due from related parties 772,855 85,613 ------------------- ----------------- Total current assets 92,383,063 107,562,889 Property and equipment, net 18,307,240 17,709,758 Leased equipment under capital leases, net 2,266,674 2,013,857 Other assets, net 1,764,906 2,203,442 Due from related parties - 417,763 ------------------- ----------------- $ 114,721,883 $129,907,709 =================== ================= LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Bank line of credit and current portion of notes payable $ 34,139,766 $ 31,372,171 Accounts payable - non affiliates 13,308,914 16,864,586 Accounts payable - affiliates 16,958,163 19,263,929 Accrued expenses and other liabilities 6,848,923 3,940,440 Income taxes payable 505,098 1,321,203 Current portion of obligations under capital leases 1,030,340 873,425 Due to related parties 304,483 770,000 ------------------- ----------------- Total current liabilities 73,095,687 74,405,754 Long-term portion of notes payable 4,709,434 4,519,859 Long-term portion of obligations under capital leases 933,615 1,187,516 ------------------- ----------------- Total liabilities 78,738,736 80,113,129 ------------------- ----------------- 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, 7,845,291 and 7,807,791 shares issued and outstanding 78,453 78,078 Capital in excess of par value 52,386,361 52,429,641 Treasury stock, at cost (4,521,068) (2,655,110) Accumulated deficit (11,960,599) (528,029) ------------------- ----------------- Total stockholders' equity 35,983,147 49,324,580 ------------------- ----------------- $ 114,721,883 $ 129,907,709 =================== =================
See accompanying notes to consolidated financial statements. 25 26 PERFUMANIA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEAR ENDED JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 ---------------- ------------------- ---------------- Net sales: (as restated, Note 11) Unaffiliated customers $ 161,593,736 $ 136,446,104 $ 129,156,506 Affiliates 1,999,823 2,473,623 - --------------- ------------------ --------------- 163,593,559 138,919,727 129,156,506 --------------- ------------------ --------------- Cost of goods sold: Unaffiliated customers 92,243,329 76,516,903 76,988,603 Affiliates 1,566,489 2,252,850 - --------------- ------------------ --------------- 95,809,818 78,769,753 76,988,603 --------------- ------------------ --------------- Gross profit 67,783,741 60,149,974 52,167,903 --------------- ------------------ --------------- Operating expenses: Selling, general and administrative expenses 64,219,379 48,165,392 43,371,621 Provision for doubtful accounts 1,730,000 500,000 310,000 Provision for potential inventory losses 1,810,000 190,000 - Provision for impairment of assets and store closings 2,514,818 169,159 1,232,303 Depreciation and amortization 4,697,816 3,771,508 3,299,746 --------------- ------------------ --------------- Total operating expenses 74,972,013 52,796,059 48,213,670 --------------- ------------------ --------------- Income (loss) from operations before other income (expense) (7,188,272) 7,353,915 3,954,233 --------------- ------------------ --------------- Other income (expense): Interest expense: Affiliates (124,250) (148,647) (88,874) Other (4,617,070) (4,004,754) (3,101,422) --------------- ------------------ --------------- (4,741,320) (4,153,401) (3,190,296) --------------- ------------------ --------------- Interest income: Affiliates 42,450 39,480 36,240 Other 2,660 3,499 10,496 --------------- ------------------ --------------- 45,110 42,979 46,736 --------------- ------------------ --------------- Other income 762,138 478,179 395,437 --------------- ------------------ --------------- (3,934,072) (3,632,243) (2,748,123) --------------- ------------------ --------------- Income (loss) before income taxes (11,122,344) 3,721,672 1,206,110 (Provision) benefit for income taxes 321,192 (1,646,731) 796,000 --------------- ------------------ --------------- Income (loss) before cumulative effect of change in accounting principle (10,801,152) 2,074,941 2,002,110 Cumulative effect of change in accounting principle, net of income tax benefit of $380,958 (631,418) - - =============== ================== =============== Net income (loss) $ (11,432,570) $ 2,074,941 $ 2,002,110 =============== ================== =============== Basic earnings (loss) per common share: Income (loss) before cumulative effect of change in accounting principle $ (1.54) $ 0.29 $ 0.29 Cumulative effect of change in accounting principle (0.09) - - =============== ================== =============== Net income (loss) $ (1.63) $ 0.29 $ 0.29 =============== ================== =============== Diluted earnings (loss) per common share: Income (loss) before cumulative effect of change in accounting principle $ (1.54) $ 0.27 $ 0.28 Cumulative effect of change in accounting principle (0.09) - - =============== ================== =============== Net income (loss) $ (1.63) $ 0.27 $ 0.28 =============== ================== =============== Weighted average number of shares outstanding: Basic 7,025,236 7,183,462 6,973,670 =============== ================== =============== Diluted 7,111,929 7,633,588 7,067,291 =============== ================== ===============
See accompanying notes to consolidated financial statements. 26 27 PERFUMANIA, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE FISCAL YEAR ENDED FEBRUARY 3, 1996 FISCAL YEAR ENDED FEBRUARY 1, 1997 (AS RESTATED, NOTE 11) AND FISCAL YEAR ENDED JANUARY 31, 1998
COMMON STOCK CAPITAL TREASURY STOCK RETAINED ------------------------- IN EXCESS ------------------------- EARNINGS SHARES AMOUNT OF PAR VALUE SHARES AMOUNT (DEFICIT) TOTAL ------------- ---------- -------------- ---------- ------------- -------------- ------------- Balance at January 28, 1995 6,688,700 $ 66,887 $ 47,897,529 - - ($ 4,605,080) $ 43,359,336 Exercise of stock 19,000 190 61,935 - - - 62,125 options Purchases 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 2,000 20 8,230 - - - 8,250 options Conversion of debentures 918,091 9,181 2,978,085 - - - 2,987,266 Beneficial conversion feature of debentures - - 529,412 - - - 529,412 Issuance of common stock 180,000 1,800 954,450 - - - 956,250 Purchases of treasury stock - - - 644,900 (2,531,787) - (2,531,787) Net income for the fiscal year ended February 1, 1997 - - - - - 2,074,941 2,074,941 ------------- ---------- -------------- ---------- ------------- -------------- ------------- Balance at February 1, 1997 7,807,791 78,078 52,429,641 667,900 (2,655,110) (528,029) 49,324,580 Exercise of stock options 37,500 375 116,812 - - - 117,187 options Purchases of treasury stock - - - 550,460 (1,865,958) - (1,865,958) Other - - (160,092) - - - (160,092) Net loss for the fiscal year ended January 31, 1998 - - - - - (11,432,570) (11,432,570) ------------- ---------- -------------- ---------- ------------- -------------- ------------- Balance at January 31, 1998 7,845,291 $ 78,453 $ 52,386,361 1,218,360 ($ 4,521,068) ($ 11,960,599) $ 35,983,147 ============= ========== ============== ========== ============= ============== =============
See accompanying notes to consolidated financial statements. 27 28 PERFUMANIA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED ----------------------------------------------------------------- JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 ------------------ ---------------------- --------------------- (As Restated, Note 11) Cash flows from operating activities: Net income (loss) $ (11,432,570) $ 2,074,941 $ 2,002,110 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision (benefit) for deferred taxes - 380,528 (796,000) Capitalized preopening costs - (940,550) (339,004) Provision for doubtful accounts 1,730,000 500,000 310,000 Provision/writedown for inventory losses 1,810,000 190,000 - Depreciation and amortization 4,697,816 3,771,508 3,299,746 Provisions for impairment of assets 2,200,000 - 814,308 Loss on disposition of property and equipment 314,818 169,159 464,431 Beneficial conversion feature of debentures - 529,412 - Cumulative effect of change in accounting principle, net of tax benefit 631,418 - - Change in assets and liabilities, (Increase) decrease in: Trade receivables: Customers 5,358,686 716,959 (5,819,981) Affiliates 653,657 (653,657) - Advances to suppliers (2,587,318) (712,058) 2,045,016 Inventories 10,162,581 (24,288,235) (11,377,890) Prepaid expenses (186,798) (747,225) 43,198 Due from related parties (269,479) 34,689 (125,542) Tax refund receivable (814,766) - 378,681 Other assets (539,266) (123,998) 40,795 Increase (decrease) in: Accounts payable (5,861,438) 17,314,213 10,634,590 Accrued expenses and other liabilities 2,908,483 1,088,386 399,585 Income taxes payable (816,105) 1,321,203 (35,000) Negative goodwill (470,000) -- -- ----------------- ------------------- -------------------- Net cash provided by operating activities 7,489,719 625,275 1,939,043 ----------------- ------------------- -------------------- Cash flows from investing activities: Additions to property and equipment (7,207,114) (7,341,901) (3,302,678) Proceeds from sale of other property - - 617,914 ----------------- ------------------- -------------------- Net cash used in financing activities (7,207,114) (7,341,901) (2,684,764) ----------------- ------------------- -------------------- Cash flows from financing activities: Net borrowings under bank line of credit and loans payable 2,957,170 7,208,943 954,356 Net increase (decrease) in due to related parties (465,517) 90,000 51,832 Principal payments under capital lease obligations (952,805) (639,892) (374,113) Issuance of debentures - 2,935,361 - Proceeds from issuance of common stock - 956,250 - Proceeds from exercise of stock options 117,187 8,250 62,125 Stock issuance costs (160,092) - - Purchases of treasury stock (1,865,958) (2,531,787) (123,323) ----------------- ------------------- -------------------- Net cash provided by (used in) financing activities (370,015) 8,027,125 570,877 ----------------- ------------------- -------------------- Increase (decrease) in cash and cash equivalents (87,410) 1,310,499 (174,844) Cash and cash equivalents at beginning of period 1,641,527 331,028 505,872 ----------------- ------------------- -------------------- Cash and cash equivalents at end of period 1,554,117 $ 1,641,527 $ 331,028 ================= =================== ====================
See accompanying notes to consolidated financial statements. 28 29 PERFUMANIA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF BUSINESS: Perfumania, Inc. ("Perfumania") and its subsidiaries (collectively, the "Company") is a specialty retailer and wholesaler of fragrances and related products. The Company's retail stores consist of stores located in regional malls, manufacturer's outlet malls, airports and on a stand-alone basis in suburban strip shopping centers. The number of retail stores in operation at January 31, 1998, February 1, 1997 and February 3, 1996 were 285, 262 and 194, respectively. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES: Significant accounting principles and practices used by the Company in the preparation of the accompanying consolidated financial statements are as follows: FISCAL YEAR END The Company's fiscal year ends the Saturday closest to January 31 to enable the Company's operations to be reported in a manner which more closely coincides with general retail reporting practices and the financial reporting needs of the Company. As a result, fiscal year 1995 had an additional week (53 weeks, versus 52 weeks in fiscal years 1997 and 1996). In the accompanying notes, fiscal year 1997, 1996 and 1995 refers to the year ended January 31, 1998, February 1, 1997 and February 3, 1996, respectively. MANAGEMENT ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates made by management in the accompanying financial statements relate to accounts receivable allowances, inventory reserves, self insurance healthcare reserve, long-lived asset impairments and estimated useful lives of property and equipment. Actual results could differ from those estimates. BASIS OF PRESENTATION The Company incurred a loss of approximately $11 million during fiscal year 1997. As a result, the company was in default of certain of the covenants contained in its loan agreement. In May 1998, these defaults were waived and the loan was amended. Management's plans to improve the results of operations include, among other things, the introduction of a new line of products under its Nature's Elements cosmetic line, improving the effectiveness of its promotion practices, opening less stores in fiscal year 1998 and disposing of a number of non-designer fragrances currently in inventory. The Company, as part of its loan agreement, is subject to certain financial covenants among others, regarding 1998 net income and tangible net worth, as defined. If the Company were not able to return to profitability and, thus, be able to meet such covenants, the loan may become payable on demand, and, if unable to secure alternative financing, its operations and the realization of its assets may be seriously impaired. In management's opinion, the Company will be able to meet the required covenants. 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. 29 30 ADVANCES TO SUPPLIERS Advances to suppliers represent prepayments to wholesale vendors on pending inventory purchase orders. INVENTORIES Inventories, consisting predominantly of finished goods, are stated at the lower of cost or market, cost being determined on a moving average cost basis. The cost of inventory includes product cost and freight charges. PROPERTY AND EQUIPMENT Property and equipment is carried at cost, less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the term of the lease or the estimated useful lives of the improvements, whichever is shorter. Costs of major additions and improvements are capitalized and expenditures for maintenance and repairs which do not extend the useful life of the asset are expensed when incurred. Gains or losses arising from sales or retirements are included in income currently. PREOPENING EXPENSES Prior to fiscal 1997, the Company capitalized expenses associated with the opening of new retail locations and training of personnel. These costs typically included occupancy costs incurred prior to store opening, travel expenses, store managers' salaries and grand opening costs paid to the mall. The Company amortized these amounts over 18 months. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up Activities", which requires the Company to expense preopening expenses as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998, does not require restatement of prior periods and is applied as of the beginning of the fiscal year in which the SOP is first adopted. The Company early adopted SOP 98-5 in fiscal 1997 and has reported the initial application as a cumulative effect of a change in accounting principle in the Consolidated Statement of Operations for the year ended January 31, 1998. The effect of the change in accounting principle was to increase the net loss before cumulative effect of change in accounting principle reported for 1997 by approximately $733,000, or $0.10 per share. INCOME TAXES Income tax expense is based principally on pre-tax financial income. Deferred tax assets and liabilities are recognized for the difference between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. 30 31 BASIC AND DILUTED INCOME (LOSS) PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS 128"), "Earnings Per Share," which establishes new standards for computing and presenting basic and diluted earnings per share. As required by SFAS No. 128, the Company adopted the provisions of the new standards and earnings per share for all periods have been restated to reflect the provisions of this statement. Basic income (loss) per common share is computed by dividing income (loss) available to common stockholders, after giving effect in fiscal 1996 to the restatement related to the beneficial conversion feature in connection with convertible debt (Note 11), by the weighted average number of common shares outstanding during the period. Diluted income (loss) per common share includes the dilutive effect of those stock options where the option exercise prices were greater than the average market price of the common shares for the respective fiscal years. Basic and diluted earnings per share for income (loss) before cumulative effect of change in accounting principle is computed as follows:
FISCAL YEAR --------------------------------------------------------------------- 1997 1996 1995 -------------------- ----------------------- ----------------- (as restated, Note 11) Numerator: Income (loss) before cumulative effect of change in accounting principle ($10,801,152) $ 2,074,941 $ 2,002,110 -------------------- ----------------------- ----------------- Denominator: Denominator for basic income (loss) per share 7,025,236 7,183,462 6,973,670 Effect of dilutive securities: Options to purchase common stock -- 450,126 93,261 -------------------- ----------------------- ----------------- Denominator for dilutive Income (loss) per share 7,025,236 7,633,588 7,067,291 -------------------- ----------------------- ----------------- Income (loss) per share before cumulative effect of change in accounting principle: Basic ($1.54) $ 0.29 $ 0.29 ==================== ======================= ================= Diluted ($1.54) $ 0.27 $ 0.28 ==================== ======================= ================= Antidilutive securities not included in the diluted earnings (loss) per share computation: Options to purchase common stock 1,724,150 1,472,861 1,255,539 Exercise price $2.75-$5.63 $2.75-$8.50 $2.75-$8.50
CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. 31 32 FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash and cash equivalents, trade receivables, advances to suppliers, accounts payable, bank line of credit, obligations under capital leases and loans payable approximate fair value as of January 31, 1998 and February 1, 1997. ASSET IMPAIRMENT The Company reviews long-lived assets and makes a provision for impairment whenever events or changes in circumstances indicate that the projected cash flows of related activities may not provide for cost recovery. STOCK BASED COMPENSATION The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for stock Issued to Employees ("APB 25"), and 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 1997 and 1996. In accordance with APB 25 compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. RECLASSIFICATION Certain fiscal 1996 and 1995 amounts have been reclassified to conform with the fiscal 1997 presentation. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income," which establishes standards for reporting and displaying comprehensive income and its components. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information," which requires the Company to present certain information about operating segments and related information. The Company will adopt both statements in fiscal 1998. The Company believes that the adoption of these statements will not materially impact the manner of presentation of its financial statements as currently reported. 32 33 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 Company subsequently closed 10 locations, renovated 10 locations and the remaining locations will either be renovated or subleased by mid 1998. 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, which was reduced to zero in 1997 due to writedown of inventory purchased. The assets and business acquired were not material in relation to consolidated financial statements. NOTE 4 - STATEMENTS OF CASH FLOWS: Supplemental disclosures of cash flow information:
FISCAL YEAR ENDED -------------------------------------------- JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 ----------- ----------- ----------- Cash paid during the period for: Interest $ 4,671,039 $ 3,459,563 $3,353,072 Income taxes $ 1,012,000 $ 71,138 $ 35,000
Supplemental disclosures of noncash activities: The Company issued in 1996 a $1.7 million note payable due to the acquisition discussed in Note 3. In December 1996, the Company entered into an agreement with a vendor whereby approximately $3.6 million of accounts payable was converted to a note payable (see Note 8). NOTE 5 - INVENTORIES: During 1997, the Company recorded a provision of $1,810,000 to reduce the carrying value of certain fragrances the Company intends to liquidate to management's best estimate of net realizable value. 33 34 NOTE 6 - PROPERTY AND EQUIPMENT: Property and equipment includes the following:
ESTIMATED JANUARY 31, FEBRUARY 1, USEFUL LIVES 1998 1997 (IN YEARS) ----------- ----------- ------------ Furniture, fixtures and equipment $15,213,721 $14,555,269 5-7 Leasehold improvements 14,995,361 13,384,693 10 ----------- ----------- $30,209,082 $27,939,962 Less: Accumulated depreciation and amortization (11,901,842) (10,230,204) ------------ ----------- $18,307,240 $17,709,758 =========== ===========
NOTE 7 - RELATED PARTY TRANSACTIONS: Due from related parties consists of the following:
JANUARY 31, FEBRUARY 1, 1998 1997 ------------ ----------- Amounts due from officers $ 315,612 $ 85,613 Note receivable from shareholder 457,243 417,763 ----------- ----------- $ 772,855 $ 503,376 =========== ===========
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. Purchases of products from a company affiliated through common ownership amounted to $21,436,855, $30,735,244, and $21,464,375, in fiscal year 1997, 1996 and 1995, respectively. The amount due to this company at January 31, 1998 and February 1, 1997, was $16,958,163 and $19,263,929, respectively. Amounts due to this affiliate are non-interest bearing. Due to related parties at January 31, 1998 consists of a note payable on demand which bears interest at the same rate charged by the Company's major lender. Other income in fiscal year 1996 and 1995 includes $110,000 and $230,000, respectively, of warehousing fees received from an affiliated company. 34 35 NOTE 8 - BANK LINE OF CREDIT AND NOTES PAYABLE: The bank line of credit and notes payable consist of the following:
JANUARY 31, FEBRUARY 1 1998 1997 ----------- ----------- Bank line of credit, bearing interest at the bank's prime rate plus 2% (10.5% at January 31, 1998), with weighted average rate of 10.5%, interest payable monthly, expiring on April 30, 1999, secured by a pledge of substantially all of the Company's assets $31,657,946 $29,883,357 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 61,374 176,783 Notes payable bearing interest ranging from approximately 8.5% - 10.8%, with weighted average rates ranging from approximately 8.5% - 10.8% payable in monthly installments of $109,315, including interest, through December 2001, secured by fixtures 3,394,396 1,402,726 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) 1,119,744 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) 2,615,740 2,836,747 ----------- ----------- 38,849,200 35,892,030 Less: Current portion (34,139,766) (31,372,171) ----------- ----------- Long-term portion $ 4,709,434 $ 4,519,859 =========== ===========
The aggregate maturities of the bank line of credit and notes payable at January 31, 1998 are as follows:
FISCAL YEAR ----------- 1998 $ 34,139,766 1999 2,657,665 2000 1,635,811 2001 415,958 ------------ $ 38,849,200 ============
35 36 The Company's $35 million 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 January 31, 1998, the Company was in breach of certain of the above covenants. As a result of these covenant violations, the Company incurred the default rate of interest, prime plus 4% (12.5%) from November 1997 through May 1998. On May 15, 1998, 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 and also extended the line of credit from April 1999 to April 2001. In connection with its waivers, the bank revised certain 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. The Company's line of credit is guaranteed to the extent of $3,000,000 each by two stockholders of the Company. NOTE 9 - IMPAIRMENT OF ASSETS: Based on reviews of the Company's retail store locations with significant negative cash flows, the Company recognized in fiscal years 1997 and 1995, non-cash charges of $2,200,000 and $814,308, respectively, representing a reduction of the carrying amounts of the impaired assets (fixtures and leasehold improvements) to their estimated recoverable amount. These impairment losses are included in "Provision for impairment of assets and store closings," in the Consolidated Statements of Operations for fiscal years 1997 and 1995. The "Provision for impairment of assets and store closings" in the Consolidated Statement of Operations also includes $314,818, $169,059 and $417,995 for the loss on disposition of property and equipment relating to retail stores which were closed during fiscal 1997, 1996 and 1995, respectively. It is management's intention to close a number of these stores as soon as practicable. NOTE 10 - INCOME TAXES: The (provision) benefit for income taxes is comprised of the following amounts:
FISCAL YEAR ENDED ----------------------------------------- JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 ----------- ----------- ----------- Current: Federal $ 814,766 ($1,084,088) ($25,000) State (459,000) (182,244) (30,000) ---------- ----------- ----------- 355,766 (1,266,332) (55,000) ---------- ----------- ----------- Deferred: Federal 346,384 (380,339) 851,000 State - - - ---------- ----------- ----------- 346,384 (380,399) 851,000 ---------- ----------- ----------- Total tax (provision) benefit $ 702,150 ($1,646,731) $796,000 ========== =========== ===========
36 37 The income tax provision differs from the amount obtained by applying the statutory Federal income tax rate to pretax income as follows:
FISCAL YEAR ENDED ---------------------------------------------- JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 ------------- ------------- ------------- Benefit (provision) at federal statutory rates $ 4,066,060 $ (1,531,251) $ (422,139) Recognized net operating loss carryforward -- 115,810 910,000 (Increase) reduction in the valuation allowance (3,405,000) -- 404,000 Beneficial conversion feature of debentures -- (205,000) -- Other 41,090 (26,290) (95,861) ------------- ------------- ------------- (Provision) benefit for income taxes $ 702,150 $ 1,646,731 $ 796,000 ============= ============= =============
Net deferred tax assets reflect the tax effect of the following differences between financial statement carrying amounts and tax bases of assets and liabilities:
JANUARY 31, FEBRUARY 1, 1998 1997 ----------- ----------- Assets: Net operating losses carryforward $ 244,771 $ -- Inventory 1,944,521 742,081 Property and equipment 1,283,375 255,100 Allowance for doubtful accounts and other 319,011 71,235 Reserves 714,970 -- Other 118,208 159,359 ----------- ----------- Total deferred tax assets 4,624,856 1,227,775 ----------- ----------- Valuation allowance $(3,405,000) -- ----------- ----------- Liabilities: Deferred expenses -- (354,303) ----------- ----------- Total deferred tax liabilities -- (354,303) ----------- ----------- Net deferred tax assets $ 1,219,856 $ 873,472 =========== ===========
During fiscal 1997, the Company established a valuation allowance of $3,405,000 for deferred tax assets due to their uncertain realization. Realization of future tax benefits related to the deferred tax assets is dependent on many factors, including the Company's ability to generate taxable income within the net operating loss carryforward period. Management has considered these factors in reaching its conclusion as to the valuation allowance for financial reporting purposes. 37 38 NOTE 11 - 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. In a 1997 announcement, the staff of the Securities and Exchange Commission ("SEC") indicated that when debt is convertible at a discount from the then current common stock market price, the discounted amount represents an incremental yield, e.g. a "beneficial conversion feature", which should be recognized as a return to the debt holders. Based on the market price of the Company's debentures at the date of issuance, the debentures issued by the Company had a beneficial conversion feature of $529,412 at such point in time. Because of the SEC announcement, the Company has restated its 1996 net income and net income per common share information to reflect such accounting treatment. The net effect of the restatement represents a non-cash interest charge to 1996 net income. STOCK SUBSCRIPTION In March 1996, the Company sold 180,000 shares of common stock for approximately $956,000 in a private placement. STOCK WARRANTS In connection with its initial public offering, the Company issued warrants to purchase 150,000 shares of common stock. The warrants were exercisable until December 19, 1996 at an exercise price equal to $12.75. The holders of such warrants attempted to exercise the warrants in fiscal 1996. The Company disputed the method of determining the exercise price for such warrants which resulted in litigation. During fiscal year 1997, the Company settled the litigation and agreed to issue an aggregate of 85,000 shares of common stock. PREFERRED STOCK The Company's Articles of Incorporation authorize the issuance of up to 1,000,000 shares of preferred stock. The preferred stock may be issued from time to time at the discretion of the Board of Directors without stockholders' approval. The Board of Directors is authorized to issue these shares in different series and, with respect to each series, to determine the dividend rate, and provisions regarding redemption, conversion, liquidation preference and other rights and privileges. As of January 31, 1998, no preferred stock had been issued. 38 39 STOCK OPTION PLANS Under the Company's Stock Option Plan (the "Stock Option Plan") and Directors Stock Option Plan (the "Directors Plan") (collectively, the "Plans"), 2,500,000 shares of Common Stock and 60,000 shares of Common Stock, respectively, are reserved for issuance upon exercise of options. The Company's Board of Directors, or a committee thereof, administers and interprets the Stock Option Plan. The Stock Option Plan provides for the granting of both "incentive stock options" (as defined in Section 422A of the Internal Revenue Code) and non-statutory stock options. Options can be granted under the Stock Option Plan on such terms and at such prices as determined by the Board, except that the per share exercise price of options will not be less than the fair market value of the Common Stock on the date of grant. Only non-employee directors are eligible to receive options under the Directors Plan. The Directors Plan provides for an automatic grant of an option to purchase 2,000 shares of Common Stock upon election as a director of the Company and an automatic grant of 4,000 shares of Common Stock upon such person's re-election as a director of the Company, in both instances at an exercise price equal to the fair value of the Common Stock on the date of grant. The Company uses the measurement prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). Had compensation costs for the Company's Plans been determined based on the fair market value at the grant dates of options granted consistent with the method of SFAS 123, the Company's net (loss) income and diluted net (loss) income per share would have been reduced to the proforma amounts indicated below:
1997 1996 ------------ ---------- (as restated, Note 11) Net (loss) income As reported $(11,432,570) $2,074,941 Proforma $(11,939,613) $1,946,867 Diluted net (loss) income per share As reported $ (1.63) $ 0.27 Proforma $ (1.68) $ 0.26
In calculating the proforma net (loss) income and net (loss) income per share for 1997 and 1996, 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 1997 and 1996:
1997 1996 ---- ---- Expected life (years) 3-7 years 4-7 years Interest Rate 6.52% 6.39% Volatility 39% 41% Dividend yield 0% 0%
Options granted under the Stock Option Plan are exercisable after the period or periods specified in the option agreement, and options granted under the Directors Plan are exercisable immediately. Options granted under the Plans are not exercisable after the expiration of 10 years from the date of grant. The Plans also authorize the Company to make loans to optionees to enable them to exercise their options. 39 40 A summary of the Company's option activity, and related information for each of the three fiscal years ended January 31, 1998 follows:
1997 1996 1995 ------------------------------ ------------------------------ -------------------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ------------------------------ ------------------------------ -------------------------------- Outstanding at beginning of year 1,494,600 $3.19 1,348,800 $3.16 1,346,400 $3.13 Granted 332,750 3.28 149,000 3.50 561,750 3.30 Exercised (37,500) 3.13 (2,000) 4.13 (19,000) 3.27 Cancelled (65,700) 3.84 (1,200) 2.96 (540,350) 3.23 ------------------------------ ------------------------------ -------------------------------- Outstanding at end of year 1,724,150 $3.18 1,494,600 $3.19 1,348,800 $3.16 ------------------------------ ------------------------------ -------------------------------- Options exercisable at end of year 1,541,400 $3.14 1,475,500 $3.17 1,332,700 $3.15 Weighted-average fair value of options granted during the 332,750 $1.48 149,000 $1.49 561,750 $1.48 year
The following table summarizes information about stock options outstanding at January 31, 1998:
Options Outstanding Options Exercisable - ---------------- --------------------------------------------------- ------------------------------------ Weighted- Weighted-Average Range of Average Remaining Weighted-Average Exercise Number Exercise Contractual Number Exercise Prices Outstanding Price Life Outstanding Prices - ---------------- --------------------------------- ---------------- ---------------- ------------------ $2.75 - $4.00 1,706,150 $3.17 7 1,523,400 $3.13 $4.13 - $5.63 18,000 5.13 7 18,000 5.13 --------------------------------- ---------------- ---------------- ------------------ 1,724,150 $3.18 7 1,541,400 $3.14 --------------------------------- ---------------- ---------------- ------------------
NOTE 12 - EMPLOYEE BENEFIT PLANS: The Company has a 401(k) Savings and Investment Plan ("the Plan"). Pursuant to such plan, participants may make contributions to the Plan up to a maximum of 15% of total compensation or $9,500 (or such higher amount as is prescribed by the Secretary of the Treasury for cost of living adjustments), whichever is less, and the Company, in its discretion, may match such contributions to the extent of 25% of the first 4% of a participant's contribution. The Company's matching contributions vest over a 5-year period. In addition to matching contributions, the Company may make additional contributions on a discretionary basis in order to comply with certain Internal Revenue Code regulations prohibiting discrimination in favor of highly compensated employees. The Company's matching contributions during fiscal years 1997, 1996 and 1995 were not significant. 40 41 NOTE 13 - COMMITMENTS AND CONTINGENCIES: The Company is self-insured for employee medical benefits under the Company's group health plan. The Company maintains stop loss coverage for individual medical claims in excess of $50,000 and for annual Company medical claims which exceed approximately $2,000,000 in the aggregate. While the ultimate amount of claims incurred are dependent on future developments, in management's opinion, recorded reserves are adequate to cover the future payment of claims. However, it is possible that recorded reserves may not be adequate to cover the future payment of claims. Adjustments, if any, to estimates recorded resulting from ultimate claim payments will be reflected in operations in the periods in which such adjustments are known. The self-insurance reserve at January 31, 1998 was approximately $338,000. Effective February 1, 1995, the Company entered into three-year employment agreements with three of its executive officers. The Company also entered into a three-year employment agreement with one of its executive officers on August 11, 1996. The agreements provide for aggregate annual salaries of $900,000 to these officers subject to the higher of the increase in adjustments for cost-of-living or 5%. The agreements also contain a performance bonus plan and grant of stock options if the Company meets certain net income levels. The Company leases space for its office, warehouse and retail stores. The lease terms vary from one to ten years, in some cases with options to renew for longer periods. Various leases contain clauses which adjust the base rental rate by the prevailing Consumer Price Index, as well as additional rent based on a percentage of gross sales in excess of a specified amount. Rent expense for fiscal year 1997, 1996, and 1995 approximated $14,398,000, $11,223,000, and $10,131,000, respectively. Future minimum lease commitments under these operating leases at January 31, 1998 are as follows:
FISCAL YEAR ----------- 1998 $13,149,475 1999 12,723,204 2000 11,169,489 2001 8,654,438 2002 6,056,774 Thereafter 10,958,032 ----------- Total future minimum lease payments $62,711,412 ===========
41 42 The following is a schedule of future minimum lease payments under capital leases together with the present value of the net minimum lease payments, at January 31, 1998:
FISCAL YEAR ----------- 1998 $1,239,705 1999 512,713 2000 250,698 2001 180,039 2002 147,676 ---------- Total future minimum lease payment 2,330,831 Less: amount representing interest (366,876) ---------- Present value of minimum lease payments $1,963,955 ==========
The depreciation expense relating to capital leases is included in depreciation and amortization expense. At January 31, 1998, the Company had entered into 7 additional store leases at locations under construction. Future minimum lease commitments under these leases aggregate $4,647,000 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 is in progress. The Company is also involved in various other legal proceedings in the ordinary course of business. In the opinion of management and counsel, the ultimate outcome of the aforementioned litigation will not have a material effect on the accompanying financial statements. During 1997 and 1996, the Company made sales to L. Luria & Son, Inc, ("Luria's") in the amounts of $1,999,823 and $2,473,623, respectively. The Company wrote off in 1997 receivables from Luria's in the approximate amount of $1,200,000. The Company has been characterized as an insider in the liquidating plan of reorganization filed on April 6, 1998 by Luria's in the United States Bankruptcy Court, Southern District of Florida. The committee of unsecured creditors in Luria's bankruptcy proceedings is investigating potential actions to recover substantial funds from alleged insiders of Luria's and their affiliates, which might include actions against the Company to recover amounts paid for merchandise sold to Luria's. Management cannot presently predict the outcome of these matters, although management believes, upon the advice of legal counsel, that the Company would have meritorious defenses and that the ultimate resolution of these matters should not have a materially adverse effect on the Company's financial position or result of operations. 42 43 NOTE 14 - SEGMENT INFORMATION: The Company operates in two industry segments, specialty retail sale and wholesale distribution of fragrances and related products. Financial information for these segments is summarized in the following table.
FISCAL YEAR ENDED -------------------------------------------- JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 ------------ ------------ ------------ Net sales: Wholesale $ 34,031,744 $ 30,316,598 $ 36,200,103 Retail 129,561,815 108,603,129 92,956,403 ------------ ------------ ------------ Total net sales $163,593,559 $138,919,727 $129,156,506 ============ ============ ============ Cost of goods sold: Wholesale $ 25,782,695 $ 22,702,968 $ 27,416,218 Retail 70,027,123 56,066,785 49,572,385 ------------ ------------ ------------ Total cost of goods sold $ 95,809,818 $ 78,769,753 $ 76,988,603 ============ ============ ============ Gross profit: Wholesale $ 8,249,049 $ 7,613,630 $ 8,783,885 Retail 59,534,692 52,536,344 43,384,018 ------------ ------------ ------------ Total gross profit $ 67,783,741 $ 60,149,974 $ 52,167,903 ============ ============ ============ Inventories: Wholesale $ 20,368,792 $ 32,051,346 $ 17,260,449 Retail 52,769,050 53,059,077 38,754,052 ------------ ------------ ------------ Total inventories $ 73,137,842 $ 85,110,423 $ 56,014,501 ============ ============ ============ Identifiable other assets: Wholesale $ 5,079,320 $ 12,567,630 $ 13,187,640 Retail 18,598,853 17,243,510 12,251,874 Corporate 17,905,868 14,986,146 12,056,308 ------------ ------------ ------------ Total assets, Other than inventories $ 41,584,041 $ 44,797,286 $ 37,495,822 ============ ============ ============ Depreciation and amortization: Wholesale $ - $ - $ - Retail 4,697,816 3,771,508 3,299,746 ------------ ------------ ------------ $ 4,697,816 $ 3,771,508 $ 3,299,746 ============ ============ ============ Capital expenditures: Wholesale $ - $ - $ - Retail 6,831,944 6,798,159 2,888,019 Corporate 375,170 543,742 414,659 ------------ ------------ ------------ $ 7,207,114 $ 7,341,901 $ 3,302,678 ============ ============ ============
An unaffiliated customer of the wholesale segment accounted for approximately 8%, 11% and 7% of the consolidated net sales in fiscal year 1997, 1996 and 1995, respectively, and 18% and 71% of the consolidated net trade accounts receivable balance at January 31, 1998 and February 1, 1997, respectively. In fiscal year 1997, 1996 and 1995, the wholesale segment included foreign sales of approximately $1.7 million, $3.8 million and $9.0 million, respectively. 43 44 NOTE 15 - QUARTERLY FINANCIAL DATA (UNAUDITED): The following table sets forth the Company's unaudited quarterly summarized financial data for the periods indicated (dollar amounts are in thousands). Certain of the quarterly information has been restated, as described below.
FISCAL YEAR 1997 FISCAL YEAR 1996 ----------------------------------- ------------------------------------- 1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH QTR QTR QTR QTR QTR QTR QTR QTR ----------------------------------- ------------------------------------- Wholesale division $ 6,541 $ 8,333 $ 8,590 $10,568 $ 5,028 $ 6,116 $ 8,565 $10,608 Retail division 23,447 28,952 30,185 46,978 18,192 22,755 26,012 41,644 Total net sales 29,988 37,285 38,775 57,546 23,220 28,871 34,577 52,252 Gross profit 12,906 15,628 15,913 23,337 9,908 12,825 15,040 22,377 Income (loss) before cumulative effect of change in accounting principle (1,998) (457) (1,226) (7,122) (1,718) 200 885 2,708 Cumulative effect of change in accounting principle (632) - - - - - - - Net income (loss) (2,630) (457) (1,226) (7,122) (1,718) 200 885 2,708 Basic earnings (loss) per common share: Income (loss) before cumulative effect of change in accounting principle $ (0.28) $ (0.06) $ (0.17) $ (1.05) $ (0.26) $ 0.03 $ 0.12 $ 0.37 Cumulative effect of change in accounting principle $ (0.09) - - - - - - - Net income (loss) $ (0.37) $ (0.06) $ (0.17) $ (1.05) $ (0.26) $ 0.03 $ 0.12 $ 0.37 Diluted earnings (loss) per common share: Income (loss) before cumulative effect of change in accounting principle $ (0.28) $ (0.06) $ (0.17) $ (1.05) $ (0.26) $ 0.03 $ 0.11 $ 0.36 Cumulative effect of change in accounting principle $ (0.09) - - - - - - - Net income (loss) $ (0.37) $ (0.06) $ (0.17) $ (1.05) $ (0.26) $ 0.03 $ 0.11 $ 0.36 % of total net sales for fiscal year 18.3% 22.8% 23.7% 35.2% 16.7% 20.8% 24.9% 37.6% # of retail stores at end of each period 270 271 283 285 195 195 207 262 period Net income (loss) as previously reported $(2,039) $ (498) $ (878) $(7,555) $ (1,189) $ 200 $ 885 $2,708 Cumulative effect of change in accounting principle (564) 68 121 21 - - - - Provision for doubtful accounts - - (700) 700 - - - - Beneficial conversion feature of certain debt - - - - (529) - - - Income tax (provision) benefit (27) (27) 231 (288) - - - - Net income (loss) as adjusted $(2,630) $ (457) $(1,226) $(7,122) $ (1,718) $ 200 $ 885 $2,708 Per Share Amounts: Basic: Net income (loss) as previously reported $ (0.29) $(0.07) $ (0.12) $ (1.11) $ (0.18) $ 0.03 $ 0.12 $ 0.37 Cumulative effect of change in accounting principle (0.08) 0.01 0.02 - - - - - Provision for doubtful accounts - - (0.10) 0.10 - - - - Beneficial Conversion feature of certain debt - - - - (0.08) - - - Income tax (provision) benefit - - 0.03 (0.04) - - - - Net income (loss) as adjusted $ (0.37) $(0.06) $ (0.17) $ (1.05) $ (0.26) $ 0.03 $ 0.12 $ 0.37 Diluted: Net income (loss) as previously reported $ (0.29) $(0.07) $ (0.12) $ (1.11) $ (0.18) $ 0.03 $ 0.11 $ 0.36 Cumulative effect of change in accounting principle (0.08) 0.01 0.02 - - - - - Provision for doubtful accounts - - (0.10) 0.10 - - - - Beneficial Conversion feature of certain debt - - - - (0.08) - - - Income tax (provision) benefit - - 0.03 (0.04) - - - - Net income (loss) as adjusted $ (0.37) $(0.06) $ (0.17) $ (1.05) $ (0.26) $ 0.03 $ 0.11 $ 0.36
In 1997, the Company recorded in the fourth quarter a provision for doubtful accounts in the amount of approximately $700,000 that should had been recorded in the third quarter based on available information at the time. As disclosed in Note 11, the Company has restated its net income and net income per common share for 1996 to account for the value attributable for the beneficial conversion feature on certain debt issued in March 1996. Accordingly, the Company's first quarter net income and net income per common share in the above table has been restated to reflect this change. As disclosed in Note 2, the Company changed its method of accounting for preopening expenses in 1997 and has reported the initial application as a cumulative effect of a change in accounting principle. Accordingly, the Company's net income and net income per common share for all quarters in 1997 in the above table has been restated to reflect this change. During the fourth quarter of fiscal year 1997, the Company recorded an impairment loss of $2,200,000 (see Note 9) and a reserve for inventory of $1,810,000 (see Note 5). NOTE 16 - SUBSEQUENT EVENTS (UNAUDITED): Retail store openings Subsequent to January 31, 1998 and through April 15, 1998, the Company has opened 6 stores. 44 45 PERFUMANIA, INC. SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
ADDITIONS -------------------------- CHARGED BALANCE CHARGES TO OTHER BALANCE BEGINNING COSTS AND ACCOUNTS- DEDUCTIONS AT END OF DESCRIPTION OF PERIOD EXPENSE DESCRIBE DESCRIBE PERIOD - ----------- --------- ---------- --------- ----------- --------- 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 FOR THE YEAR ENDED JANUARY 31, 1998: Accounts receivable 248,386 1,730,000 - (1,273,432)(1) 704,954 Inventory 940,000 1,810,000 - -- 2,750,000 Self insurance -- 297,710 187,449(2) (146,937)(3) 338,222 Valuation allowance $ -- $3,405,000 -- -- $3,405,000
(1) Represents amounts written off against accounts receivable. (2) Represents employee contributions. (3) Represents benefit/premium payments. 45 46 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. 46 47 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT As of April 15, 1998 the Directors and Executive Officers of the Company were as follows:
NAME AGE POSITION Simon Falic 37 Chairman of the Board and Chief Executive Officer Ron A. Friedman 38 President, Chief Financial Officer, Chief Operating Officer, Treasurer, Secretary and Director Jerome Falic 34 Vice President and Vice Chairman of the Board Marc Finer 37 President of the Retail Division and Director Claire Fair 38 Vice President of Human Resources Robert Pliskin 75 Director Daniel J. Manella 72 Director Carole Ann Taylor 53 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 and Chief Executive Officer. 47 48 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"). 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 and resigned May 20, 1998. 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 - 1998 (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. 48 49 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 - - 1998 (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 - 1998 (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 - 1998 (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. 49 50 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report: (1) Financial Statements An index to financial statements for the fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996 appears on page 23. (2) Financial Statement Schedules The following statement schedules for the fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996 are submitted herewith:
ITEM FORM 10-K NUMBER PAGE Schedule VIII - Valuation and Qualifying Accounts and Reserves 45
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. 50 51 (3) Exhibits
Page Number or Incorporated by Exhibit Description Reference From - ------- ----------- --------------- 3.1 Amended and Restated Articles of Incorporation (1) 3.2 Bylaws (2) 4.1 Warrant Agreement between the Company and Josephthal, Lyon & Ross Incorporated (3) 10.1 Executive Compensation Plans and Arrangements (5) (a) Employment Agreement, dated as of February 1, 1995, between the Company and Simon Falic (b) Employment Agreement, dated as of February 1, 1995, between the Company and Jerome Falic (c) Employment Agreement, dated as of February 1, 1995, between the Company and Ron Friedman (d) Consulting Agreement, dated as of January 1, 1994, between the Company and Rachmil Lekach (e) Consulting Agreement, dated as of May 2, 1995, between the Company and Ilia Lekach 10.3 Amendments to the Loan and Security Agreements between the Company and LaSalle National Bank dated July 29, 1994, and September 30, 1994 (5) 10.4 Amendments to the Loan and Security Agreements between the Company and LaSalle National Bank dated March 29, 1996 (6) 10.5 1991 Stock Option Plan, as amended (6) 10.6 1992 Directors Stock Option Plan, as amended (6) 10.7 Regulation S 5% Convertible Debentures Agreement (6) 10.8 Regulation S Stock Subscription Agreement (6) 10.9 Amendments to the Loan and Security Agreements between LaSalle National Bank dated April 16, 1997 (7) 21.1 Subsidiaries of the Registrant (6) 23.1 Consent of Price Waterhouse LLP (8)
51 52 (1) Incorporated by reference to the exhibit of the same description filed with the Company's 1993 Form 10-K (filed April 28, 1994). (2) Incorporated by reference to the exhibit of the same description filed with the Company's Registration Statement on Form S-1 (No. 33-46833). (3) Incorporated by reference to the exhibit of the same description filed with the Company's Registration Statement on Form S-1 (No. 33-43556). (4) Incorporated by reference to the exhibit of the same description filed with the Company's Registration Statement on Form S-8 (filed October 13, 1994). (5) Incorporated by reference to the exhibit of the same description filed with the Company's 1994 Form 10-K (filed April 20, 1995). (6) Incorporated by reference to the exhibit of the same description filed with the Company's 1995 Form 10-K (filed April 26, 1996). (7) Incorporated by reference to the exhibit of the same description filed with the Company's 1996 Form 10-K (filed May 2, 1997) (8) Filed herewith. (b) Reports on Form 8-K None. 52 53 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. May 20, 1998 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 May 20, 1998 - ------------------------------- Chief Executive Officer Simon Falic /s/ Ron A. Friedman President, Chief Financial Officer, May 20, 1998 - ------------------------------- Chief Operating Officer, Treasurer, Ron A Friedman Secretary and Director (principal financial and accounting officer) /s/ Jerome Falic Vice President and Vice Chairman May 20, 1998 - ------------------------------- of the Board Jerome Falic /s/ Marc Finer President of the Retail Division May 20, 1998 - ------------------------------- and Director Marc Finer /s/ Robert Pliskin Director May 20, 1998 - ------------------------------- Robert Pliskin /s/ Carole Ann Taylor Director May 20, 1998 - ------------------------------- Carole Ann Taylor
53 EX-23.1 2 CONSENT OF PRICE WATERHOUSE 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 May 18, 1998 appearing on page 24 of Perfumania, Inc.'s Annual Report on Form 10-K for the year ended January 31, 1998. /s/ Price Waterhouse LLP Price Waterhouse LLP Miami, Florida May 18, 1998 EX-27 3 FINANCIAL DATA SCHEDULE
5 YEAR JAN-31-1998 FEB-02-1997 JAN-31-1998 1,554,117 0 5,186,473 0 73,137,842 92,383,063 18,307,240 0 114,721,883 73,095,687 0 0 0 78,453 35,904,694 35,983,147 163,593,559 163,593,559 95,809,818 95,809,818 74,972,013 0 4,741,320 (11,122,344) (321,192) (10,801,152) 0 0 (631,418) (11,432,570) (1.63) (1.63)
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