-----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, Pn4FLyBYF0/Rp9LzpWCk+D3Ibbl9QGrEsLBSJCXjlS4/pM8niKHuVmVQmh99/uii c3UcrGYygbKyYoxzoBdzRA== 0000950144-98-013861.txt : 19981216 0000950144-98-013861.hdr.sgml : 19981216 ACCESSION NUMBER: 0000950144-98-013861 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19981215 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-Q SEC ACT: SEC FILE NUMBER: 000-19714 FILM NUMBER: 98769760 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-Q 1 PERFUMANIA, INC. 10-Q 10/31/98 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended October 31, 1998 Commission File Number 0-19714 PERFUMANIA, INC. STATE OF FLORIDA I.R.S. NO. 65-0026340 11701 N.W. 101ST ROAD MIAMI, FLORIDA 33178 TELEPHONE NUMBER: (305) 889-1600 Indicate by check mark whether the registrant, (1) has filed all reports required to be filed by Ssection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (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 ninety (90) days. YES [X] NO [ ] Common Stock $.01 Par value Outstanding Shares at october 31, 1998 - 6,519,440 2 TABLE OF CONTENTS PERFUMANIA, INC. PART I FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS Consolidated Balance Sheets ........................ 2 Consolidated Statements of Operations .............. 3 Consolidated Statements of Cash Flows .............. 4 Notes to Condensed Consolidated Financial Statements 5 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................................ 9 PART II OTHER INFORMATION ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K ..................... 13 SIGNATURES ......................................... 14 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PERFUMANIA, INC. CONSOLIDATED BALANCE SHEETS
October 31, 1998 January 31, 1998 ------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 1,806,154 $ 1,554,117 Trade receivables, less allowance for doubtful accounts of $794,954 and $704,954 5,638,831 5,186,473 Advances to suppliers 5,709,779 7,611,036 Inventories, net of reserve of $235,336 and $2,750,000 72,119,410 73,137,842 Prepaid expenses and other current assets 1,570,278 2,086,118 Tax refund receivable -- 814,766 Net deferred tax asset 1,219,856 1,219,856 Due from related parties 622,855 772,855 ------------- ------------- Total current assets 88,687,163 92,383,063 Property and equipment, net 23,495,531 18,307,240 Leased equipment under capital leases, net 1,523,816 2,266,674 Other assets 1,686,492 1,764,906 ------------- ------------- $ 115,393,002 $ 114,721,883 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank line of credit and current portion of notes payable $ 37,970,490 $ 34,139,766 Accounts payable - non affiliates 13,455,773 13,308,914 Accounts payable - affiliates 24,976,620 16,958,163 Accrued expenses and other liabilities 6,049,905 6,848,923 Income taxes payable 367,542 505,098 Current portion of obligations under capital leases 496,516 1,030,340 Due to related parties 356,352 304,483 ------------- ------------- Total current liabilities 83,673,198 73,095,687 ------------- ------------- Long term portion of notes payable 3,586,527 4,709,434 Long-term portion of obligations under capital leases 618,212 933,615 ------------- ------------- Total liabilities 87,877,937 78,738,736 ------------- ------------- 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, 7,930,291 and 7,845,291 shares issued and outstanding 79,303 78,453 Capital in excess of par 52,385,511 52,386,361 Treasury stock (5,085,435) (4,521,068) Accumulated deficit (19,864,314) (11,960,599) ------------- ------------- Total stockholders' equity 27,515,065 35,983,147 ------------- ------------- $ 115,393,002 $ 114,721,883 ============= =============
See accompanying notes to consolidated financial statements 2 4 PERFUMANIA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Thirteen Thirteen Thirty-nine Thirty-nine Weeks Ended Weeks Ended Weeks Ended Weeks Ended October 31, 1998 November 1, 1997 October 31, 1998 November 1, 1997 ------------- ------------- ------------- ------------- Net sales: Unaffiliated customers $ 37,084,488 $ 38,753,773 $ 115,236,827 $ 103,796,306 Affiliates -- 21,257 -- 2,251,978 ------------- ------------- ------------- ------------- 37,084,488 38,775,030 115,236,827 106,048,284 ------------- ------------- ------------- ------------- Cost of goods sold: Unaffiliated customers 22,064,227 22,846,084 68,900,374 59,782,336 Affiliates -- 15,921 -- 1,818,644 ------------- ------------- ------------- ------------- 22,064,227 22,862,005 68,900,374 61,600,980 ------------- ------------- ------------- ------------- Gross profit 15,020,261 15,913,025 46,336,453 44,447,304 ------------- ------------- ------------- ------------- Operating expenses: Selling, general and administrative 16,765,194 16,008,318 47,625,516 44,494,625 Depreciation and amortization 1,104,130 1,206,312 3,280,603 3,492,533 ------------- ------------- ------------- ------------- Total operating expenses 17,869,324 17,214,630 50,906,119 47,987,158 ------------- ------------- ------------- ------------- Loss from operations before other Expense (2,849,063) (1,301,605) (4,569,666) (3,539,854) Other expense (1,010,382) (740,067) (3,334,049) (2,593,656) ------------- ------------- ------------- ------------- Loss before income taxes (3,859,445) (2,041,672) (7,903,715) (6,133,510) Benefit for income taxes -- 816,669 -- 2,453,404 ------------- ------------- ------------- ------------- Net loss before cumulative effect of change in accounting principle (3,859,445) (1,225,003) (7,903,715) (3,680,106) ------------- ------------- ------------- ------------- Cumulative effect of change in acounting principle, net of income tax benefit of $380,958 -- -- -- (631,418) ------------- ------------- ------------- ------------- Net loss $ (3,859,445) $ (1,225,003) $ (7,903,715) $ (4,311,524) ============= ============= ============= ============= Basic loss per common share: Net loss before cumulative effect of change in accounting principle $ (0.59) $ (0.17) $ (1.21) $ (0.52) Cumulative effect of change in accounting principle, net of tax benefit -- -- -- $ (0.09) ------------- ------------- ------------- ------------- Net loss $ (0.59) $ (0.17) $ (1.21) $ (0.61) ------------- ------------- ------------- ------------- Diluted loss per common share: Net loss before cumulative effect of change in accounting principle $ (0.59) $ (0.17) $ (1.21) $ (0.52) Cumulative effect of change in accounting principle, net of tax benefit -- -- -- $ (0.09) ------------- ------------- ------------- ------------- Net loss $ (0.59) $ (0.17) $ (1.21) $ (0.61) ------------- ------------- ------------- ------------- Weighted average number of shares outstanding: Basic 6,519,440 7,062,922 6,533,103 7,133,372 Diluted 6,577,380 7,092,142 6,559,776 7,273,934
See accompanying notes to consolidated financial statements. 3 5 PERFUMANIA, INC CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty-nine Thirty-nine Weeks Ended Weeks Ended October 31, 1998 November 1, 1997 ------------ ------------ Cash flows from operating activities: Net loss $ (7,903,715) $ (4,311,524) Adjustments to reconcile net loss to net cash provided by operating activities: Provision for doubtful accounts 90,000 1,270,000 Benefit for income taxes -- (2,453,404) Depreciation and amortization 3,281,168 3,492,533 Loss on disposition -- 239,970 Cumulative effect of change in accounting principle -- 631,418 Change in assets and liabilities, (Increase) decrease in: -- Trade receivables (542,358) 411,606 Advances to suppliers 1,901,257 (2,512,357) Inventories 1,018,432 (2,434,724) Other current assets 515,840 (399,091) Due from related parties 150,000 -- Tax refund receivable 814,766 -- Other assets 77,849 218,100 Increase (decrease) in: Accounts payable 8,165,316 6,894,941 Other current liabilities (799,018) 171,912 Income taxes payable (137,556) (1,012,694) ------------ ------------ Total adjustments 14,535,696 4,518,210 ------------ ------------ Net cash provided by operating activities 6,631,981 206,686 ------------ ------------ Cash flows from investing activities: Additions to property and equipment (7,726,036) (4,701,006) ------------ ------------ Net cash used in investing activities (7,726,036) (4,701,006) ------------ ------------ Cash flows from financing activities: Borrowings and repayments under loan payable 2,707,817 5,872,764 Borrowings and repayments from related parties 51,869 16,483 Principal payments under capital lease obligations (849,227) (845,627) Purchases of treasury stock (564,367) (578,656) ------------ ------------ Net cash provided by financing activities 1,346,092 4,464,964 ------------ ------------ Increase (decrease) in cash and cash equivalents 252,037 (29,356) Cash and cash equivalents at beginning of period 1,554,117 1,641,527 ------------ ------------ Cash and cash equivalents at end of period $ 1,806,154 $ 1,612,171 ============ ============ Supplemental disclosure of cash flow information: Cash paid for: Interest $ 3,582,915 $ 3,421,770 Income Taxes 137,556 1,012,694
See accompanying notes to consolidated financial statements 4 6 PERFUMANIA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1). SIGNIFICANT ACCOUNTING POLICIES The condensed consolidated financial statements include the accounts of Perfumania and subsidiaries (the Company). All material intercompany balances and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. The financial information presented herein, which is not necessarily indicative of results to be expected for the current fiscal year, reflects all adjustments which, in the opinion of the Company, are necessary for a fair statement of the results for the periods indicated. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1998. (2). STOCKHOLDERS' EQUITY
COMMON STOCK CAPITAL IN TREASURY STOCK ------------------------ EXCESS ------------------------ ACCUMULATED SHARES AMOUNT OF PAR SHARES AMOUNT DEFICIT TOTAL --------- ------------ ------------ --------- ------------ ------------ ------------ 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 Issuance of common stock 85,000 850 (850) -- -- -- -- Purchases of treasury stock -- -- -- 192,491 (564,367) -- (564,367) Net loss for the thirty-nine weeks ended Oct. 31, 1998 -- -- -- -- -- (7,903,715) (7,903,715) --------- ------------ ------------ --------- ------------ ------------ ------------ Balance at October 31, 1998 7,930,291 $ 79,303 $ 52,385,511 1,410,851 $ (5,085,435) $(19,864,314) $ 27,515,065 --------- ------------ ------------ --------- ------------ ------------ ------------
5 7 (3). BASIC AND DILUTED LOSS PER COMMON SHARE Basic and diluted loss per share, net of cumulative effect of change in accounting principle, is computed as follows:
Thirteen Weeks Ended ----------------------------------- October 31, 1998 November 1, 1997 ---------------- ---------------- Net Loss $(3,859,445) $(1,225,003) =========== =========== Weighted average number of shares outstanding used in basic earnings per share calculation 6,519,440 7,062,922 =========== =========== Basic loss per common share $ (0.59) $ (0.17) =========== =========== Weighted average number of shares outstanding used in basic earnings per share calculation 6,519,440 7,062,922 Effect of dilutive securities: Stock options 57,940 29,220 ----------- ----------- Weighted average number of shares used in diluted earnings per share calculation 6,577,380 7,092,142 =========== =========== Diluted net loss per common share $ (0.59) $ (0.17) =========== ===========
Thirty-nine Weeks Ended ----------------------------------- October 31, 1998 November 1, 1997 ---------------- ----------------- Net Loss $(7,903,715) $(4,311,524) =========== =========== Weighted average number of shares outstanding used in basic earnings per share calculation 6,533,103 7,133,372 =========== =========== Basic loss per common share $ (1.21) $ (0.61) =========== =========== Weighted average number of shares outstanding used in basic earnings per share calculation 6,533,103 7,133,372 Effect of dilutive securities: Stock options 26,673 140,562 ----------- ----------- Weighted average number of shares used in diluted earnings per share calculation 6,559,776 7,273,934 =========== =========== Diluted net loss per common share $ (1.21) $ (0.61) =========== ===========
6 8 (4). 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.
THIRTEEN THIRTEEN THIRTY-NINE THIRTY-NINE WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED OCT. 31, 1998 NOV. 1, 1997 OCT. 31, 1998 NOV. 1, 1997 ------------ ------------ ------------ ------------ Sales Wholesale $ 6,993,408 $ 8,590,382 $ 30,696,200 $ 23,464,369 Retail 30,091,080 30,184,648 84,540,627 82,583,915 ------------ ------------ ------------ ------------ Total net sales $ 37,084,488 $ 38,775,030 $115,236,827 $106,048,284 ------------ ------------ ------------ ------------ Cost of goods sold Wholesale $ 6,079,837 $ 6,519,325 $ 24,682,207 $ 17,772,556 Retail 15,984,390 16,342,680 44,218,167 43,828,424 ------------ ------------ ------------ ------------ Total cost of goods sold $ 22,064,227 $ 22,862,005 $ 68,900,374 $ 61,600,980 ------------ ------------ ------------ ------------ Gross profit Wholesale $ 913,571 $ 2,071,057 $ 6,013,993 $ 5,691,813 Retail 14,106,690 13,841,968 40,322,460 38,755,491 ------------ ------------ ------------ ------------ Total gross profit $ 15,020,261 $ 15,913,025 $ 46,336,453 $ 44,447,304 ------------ ------------ ------------ ------------ Number of stores 294 283
October 31, January 31, 1998 1998 ----------- ----------- INVENTORY Wholesale $12,547,590 $20,368,792 Retail 59,571,820 52,769,050 ----------- ----------- $72,119,410 $73,137,842 ----------- ----------- An unaffiliated customer of the wholesale segment accounted for approximately 8% and 7% of the consolidated net sales for the thirty-nine weeks ended October 31, 1998 and November 1, 1997, respectively, and 2% and 47% of the consolidated net trade accounts receivable balance at October 31, 1998 and November 1, 1997, respectively. 7 9 (5). RECENT ACCOUNTING PRONOUNCEMENTS 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. Previously, the Company had capitalized and amortized these expenses over 18 months. 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 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. Accordingly, the Company's net loss and net loss per common share for the thirteen and thirty-nine weeks ended November 1, 1997 in the accompanying Consolidated Statements of Operations has been restated to reflect this change. The effect of the change in accounting principle was to reduce the net loss before cumulative effect of change in accounting principle reported for the first thirty-nine weeks of 1997 by approximately $258,000. (6). OTHER During the fiscal years 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 or reorganization filed on April 6, 1998 by Luria's in the United States Bankruptcy Court, Southern District of Florida. In August 1998, the committee of unsecured creditors in Luria's bankruptcy proceedings filed a complaint with the United States Bankruptcy Court, Southern District of Florida, to recover substantial funds from the Company. The complaint alleges that Luria's made preference payments, as defined by the Bankruptcy Court, to the Company and seeks recovery of said preference payments, as well as disallowing any and all claims of the Company against Luria's until full payment of the preference payments have been made. Management cannot presently predict the outcome of these matters. 8 10 PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS RISK FACTORS THAT MAY AFFECT FUTURE RESULTS Perfumania does not provide forecasts of future financial performance. Forward-looking statements in this Form 10-Q and other Company reports and press releases 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 level of wholesale sales, which is not predictable, as well as 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. Jerome Falic, the Company's President and Simon Falic, the Company's Chief Operating Officer and Chief Financial Officer 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 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 stores sites on satisfactory terms, the Company's ability to hire, train and retain qualified management and other personnel, the availability of adequate capital 9 11 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. In August 1998, the committee of unsecured creditors in Luria's bankruptcy proceedings filed a complaint with the United States Bankruptcy Court, Southern District of Florida, to recover substantial funds from the Company. The complaint alleges that Luria's made preference payments, as defined by the Bankruptcy Court, to the Company and seeks recovery of said preference payments, as well as disallowing any and all claims of the Company against Luria's until full payment of the preference payments have been made. Management cannot presently predict the outcome of these matters. SEASONALITY The Company's operations have historically been seasonal, with generally higher retail sales in the third and fourth fiscal quarters than in the first and second fiscal quarters. Significantly higher fourth fiscal quarter retail sales result from increased purchases of fragrances as gift items during the Christmas holiday season. Wholesale sales also vary by fiscal quarter as a result of the selection of merchandise available for sale as well as 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 might be expected during a full fiscal year. LIQUIDITY AND CAPITAL RESOURCES The Company's principal capital requirements are to fund working capital needs, new store additions and renovation of existing stores. For the first thirty-nine weeks of fiscal 1998, these capital requirements have generally been satisfied by short-term borrowings and cash flows from operations. Net cash provided by operating activities during the thirty-nine weeks ended October 31, 1998 was approximately $6.6 million, principally as a result of the net change in the Company's trade receivables, advances to suppliers, inventories and accounts payable. At October 31, 1998, approximately $0.7 million of the Company's trade receivables were considered past due compared to $0.9 million at January 31, 1998. Of the $5.6 million in trade receivables due from unaffiliated customers at October 31, 1998, $0.1 million was due from one customer, which also accounted for 3.3% of the Company's wholesale sales during the thirteen weeks ended October 31, 1998. The Company's sales to this customer are made on an open account terms and since late 1991 the Company has extended credit terms to this customer of up to one year. The Company has not experienced any write-offs of accounts receivable from this customer due to collectibility. Net cash used in investing activities during the thirty-nine weeks ended October 31, 1998 was $7.7 million. This represents purchases of furniture, fixtures and equipment for new store openings and the renovation of existing stores during fiscal 1998. 10 12 Net cash provided by financing activities during the thirty-nine weeks ended October 31, 1998 was approximately $1.3 million, which was primarily the result of an increase in the Company's use of its line of credit. In May 1998, the Company's $35 million line of credit was extended from April 1999 to April 2001, and certain covenants were revised. As of October 31, 1998, the Company was not in compliance with certain financial covenants required by the line of credit. Management is currently negotiating a waiver of this non-compliance with the Bank and believes that this waiver will be obtained. Management believes that cash provided by operations together with the borrowing under the Company's line of credit will be sufficient to fund estimated capital expenditures associated with the Company's scheduled opening of new stores for at least the next twelve months and other working capital requirements. During the thirty-nine weeks ended October 31, 1998, the Company closed nineteen stores and opened twenty-eight stores. At October 31, 1998, the Company operated 294 stores. RESULTS OF OPERATIONS COMPARISON OF THE THIRTEEN WEEKS ENDED OCTOBER 31, 1998 WITH THE THIRTEEN WEEKS ENDED NOVEMBER 1, 1997. Net sales decreased $1.7 million from $38.8 million in the thirteen weeks ended November 1, 1997 to $37.1 million in the thirteen weeks ended October 31, 1998. The decrease in net sales was primarily the result of a $1.6 million decrease in wholesale sales (from $8.6 million to $7.0 million); retail sales were $30.1, compared to $30.2 million in the prior year. The decrease in retail sales was principally due to a 2.7% decrease in comparable store sales during the current period when compared to last year. Gross profit decreased 5.6% from $15.9 million in the thirteen weeks ended November 1, 1997 (41.0% of net sales) to $15.0 million in the thirteen weeks ended October 31, 1998 (40.5% of total net sales) due primarily to the decrease in wholesale sales. Gross profit for the wholesale division decreased from $2.1 million in the thirteen weeks ended November 1, 1997 to $0.9 million in the thirteen weeks ended October 31, 1998 as a result of lower wholesale sales and also lower margin wholesale sales. As a percentage of net sales, gross profit for the wholesale division decreased from 24.1% in the thirteen weeks ended November 1, 1997 to 13.1% in the thirteen weeks ended October 31, 1998. Gross profit for the retail division increased 1.9% from $13.8 million in the thirteen weeks ended November 1, 1997 to $14.1 million in the thirteen weeks ended October 31, 1998 as a result of higher retail gross margins. As a percentage of net sales, gross profit for the retail division increased from 45.9% in the thirteen weeks ended November 1, 1997 to 46.9% in the thirteen weeks ended October 31, 1998 due primarily to less promotional sales of merchandise at lower margins. Operating expenses, which include selling, general and administrative expenses as well as depreciation, increased from $17.2 million in the thirteen weeks ended November 1, 1997 to $17.9 million in the thirteen weeks ended October 31, 1998. The increase was primarily due to costs associated with the operation of an average of 10 additional stores. As a result of the foregoing, the Company had a net loss of $3,859,445, or ($0.59) per diluted share in the thirteen weeks ended October 31, 1998 compared to a net loss of $1,225,003, or ($0.17) per diluted share, in the thirteen weeks ended November 1, 1997. Excluding the tax benefit of $816,669 in 1997, the loss for the thirteen weeks ended November 1, 1997 was $2,041,672 or ($0.29) per diluted share. 11 13 COMPARISON OF THE THIRTY-NINE WEEKS ENDED OCTOBER 31, 1998 WITH THE THIRTY-NINE WEEKS ENDED NOVEMBER 1, 1997. Net sales increased 8.7% from $106.0 million in the thirty-nine weeks ended November 1, 1997 to $115.2 million in the thirty-nine weeks ended October 31, 1998. The increase in net sales was due to a 30.8% increase in wholesale sales (from $23.5 million to $30.7 million), and a 2.4% increase in retail sales (from $82.6 million to $84.5 million). The increase in wholesale sales was due to continued efforts to reduce inventory levels. The increase in retail sales was principally due to the increase in the number of stores operated during the thirty-nine weeks ended October 31, 1998 compared to the thirty-nine weeks ended November 1, 1997. Comparable store sales during the thirty-nine weeks ended October 31, 1998 decreased 2.7% when compared to last year. Gross profit increased 4.3% from $44.5 million in the thirty-nine weeks ended November 1, 1997 (41.9% of net sales) to $46.3 million in the thirty-nine weeks ended October 31, 1998 (40.2% of net sales) primarily as a result of the increase in net sales. The decrease in gross profit as a percentage of sales is due to the increase in wholesale sales. Wholesale sales yield significantly lower margins compared to retail sales. Gross profit for the wholesale division increased 5.7% from $5.7 million in the thirty-nine weeks ended November 1, 1997 to $6.0 million in the thirty-nine weeks ended October 31, 1998. As a percentage of net sales, gross profit for the wholesale division decreased from 24.3% in the thirty-nine weeks ended November 1, 1997 to 19.6% in the thirty-nine weeks ended October 31, 1998, primarily due to lower margin sales. Gross profit for the retail division increased 4.0% from $38.8 million in the thirty-nine weeks ended November 1, 1997 to $40.3 million in the thirty-nine weeks ended October 31, 1998. The retail division's gross margin increased from 46.9% in the thirty-nine weeks ended November 1, 1997 to 47.7% in the thirty-nine weeks ended October 31, 1998 due primarily to less promotional sales of merchandise at lower margins. Operating expenses increased $2.9 million in the thirty-nine weeks ended October 31, 1998 compared to the thirty-nine weeks ended November 1, 1997. The increase was primarily due to costs associated with the operation of an average of 13 additional stores. During the thirty-nine weeks ended October 31, 1998 the Company had a net loss of $7,903,715 or ($1.21) per diluted share, compared to a net loss of $4,311,524 or ($0.61) per diluted share during the thirty-nine weeks ended November 1, 1997. Excluding the cumulative effect of the change in accounting principle of $631,418 and a tax benefit of $2,453,404 in 1997, the loss for the first thirty-nine weeks of 1997 was $6,133,510 or ($0.84) per diluted share. 12 14 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 27 Financial Data Schedule (for SEC use only) (1) - ----------------------- (1) Filed herewith. (b) The Company did not file any reports on Form 8-K during the quarter ended October 31, 1998. 13 15 PERFUMANIA, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused the report to be signed on its behalf by the undersigned, thereunto duly authorized. PERFUMANIA, INC. (Registrant) Date: December 15, 1998 By: /s/ Ilia Lekach ---------------------------------- Ilia Lekach Chairman of the Board and Chief Executive Officer (Principal Executive Officer) By: /s/ Simon Falic ---------------------------------- Simon Falic Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) 14 EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS JAN-30-1999 AUG-02-1998 OCT-31-1998 1,806,154 0 5,638,831 0 72,119,410 1,570,278 23,495,531 0 115,393,002 83,673,198 0 0 0 79,303 27,435,762 115,393,002 115,236,827 115,236,827 68,900,374 68,900,374 50,906,119 0 0 (7,903,715) 0 (7,903,715) 0 0 0 (7,903,715) (1.21) (1.21)
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