<PAGE> 1
UNITED STATES
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 May 1, 1999
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 Section 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
May 1, 1999 - 7,384,485
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TABLE OF CONTENTS
PERFUMANIA, INC.
PART I
FINANCIAL INFORMATION
<TABLE>
<S> <C>
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets..................................................... 3
Consolidated Condensed Statements of Operations................................. 4
Consolidated Statements of Cash Flows........................................... 5
Notes to Condensed Consolidated Financial Statements............................ 6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................................. 11
ITEM 3 QUANITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISKS.................................................................... 16
PART II
OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS..................................................................... 17
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS............................................. 17
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K...................................................... 17
SIGNATURES............................................................................ 18
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PERFUMANIA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 1, 1999 January 30, 1999
------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,420,259 $ 1,745,603
Trade receivables, less allowance for doubtful
accounts of $719,954 and $704,954 as of May 1, 1999
and January 30, 1999, respectively 5,222,998 4,108,847
Advances to suppliers 7,428,843 8,065,301
Inventories, net of reserve of $3,722,924 and $4,163,251
as of May 1, 1999 and January 30, 1999, respectively 63,769,253 53,880,132
Prepaid expenses and other current assets 1,719,584 1,502,087
------------- -------------
Total current assets 79,560,937 69,301,970
Property and equipment, net 23,109,608 23,180,462
Leased equipment under capital leases, net 1,210,314 1,373,878
Other assets 1,357,379 1,357,966
Due from related parties 457,243 457,243
------------- -------------
Total assets $ 105,695,481 $ 95,671,519
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit and current portion of
notes payable $ 34,644,318 $ 32,800,627
Accounts payable - non affiliates 12,762,162 14,329,013
Accounts payable - affiliates 25,827,932 15,812,240
Accrued expenses and other liabilities 8,775,309 9,205,316
Advances from customers 2,500,000 --
Income taxes payable 368,263 485,098
Current portion of obligations under capital leases 317,765 419,487
------------- -------------
Total current liabilities 85,195,749 73,051,781
Long term portion of notes payable 1,935,402 2,370,684
Long-term portion of obligations under capital leases 509,745 562,552
Convertible notes payable 1,996,000 --
Long-term severance payable 975,423 1,037,859
------------- -------------
Total liabilities 90,612,319 77,022,876
------------- -------------
Commitments and contingencies -- --
Redeemable common equity 470,588 470,588
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued -- --
Common stock, $.01 par value, 25,000,000 shares
authorized, 8,896,891 and 8,614,491 shares issued,
respectively 88,969 86,145
Capital in excess of par 54,963,570 54,440,009
Treasury stock, at cost, 1,512,406 shares as of
May 1, 1999 and January 30, 1999 (5,413,002) (5,413,002)
Accumulated deficit (35,026,963) (30,935,097)
------------- -------------
Total stockholders' equity 14,612,574 18,178,055
------------- -------------
Total liabilities and stockholders' equity $ 105,695,481 $ 95,671,519
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
3
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PERFUMANIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THIRTEEN THIRTEEN
WEEKS ENDED WEEKS ENDED
MAY 1, 1999 MAY 2, 1998
------------ ------------
<S> <C> <C>
Net sales $ 39,400,964 $ 38,467,975
Cost of goods sold 24,147,795 23,662,458
------------ ------------
Gross profit 15,253,169 14,805,517
------------ ------------
Operating expenses:
Selling, general and administrative 16,630,905 15,337,548
Depreciation and amortization 1,165,152 1,082,258
------------ ------------
Total operating expenses 17,796,057 16,419,806
------------ ------------
Loss from operations before other expense (2,542,888) (1,614,289)
Other expense (1,548,978) (1,157,323)
------------ ------------
Net loss $ (4,091,866) $ (2,771,612)
============ ============
Net loss per common share:
Basic $ (0.56) $ (0.42)
============ ============
Diluted $ (0.56) $ (0.42)
============ ============
Weighted average number of common shares outstanding:
Basic 7,364,485 6,560,354
============ ============
Diluted 7,364,485 6,560,354
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
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PERFUMANIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THIRTEEN THIRTEEN
WEEKS ENDED WEEKS ENDED
MAY 1, 1999 MAY 2, 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(4,091,866) $(2,771,612)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Provision for doubtful accounts 15,000 30,000
Depreciation and amortization 1,165,151 1,082,258
Beneficial conversion feature
of convertible notes payable 384,615 --
Change in operating assets and liabilities,
(Increase) decrease in:
Trade receivables (1,129,151) 1,034,806
Advance to suppliers 636,458 (1,359,268)
Inventories (9,889,121) 2,964,817
Other current assets (217,497) 209,335
Due from related parties -- (105,000)
Other assets 417 (77,189)
Increase (decrease) in:
Accounts payable 8,448,841 1,122,047
Advances from customers 2,500,000 --
Accrued expenses and other current liabilities (430,007) (459,768)
Income taxes payable (116,835) (117,556)
Long term severance payable (62,436) --
----------- -----------
Total adjustments 1,305,435 4,324,482
----------- -----------
Net cash (used in) provided by operating
activities (2,786,431) 1,552,870
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (930,563) (2,978,471)
----------- -----------
Net cash used in investing activities (930,563) (2,978,471)
----------- -----------
Cash flows from financing activities:
Net borrowings and repayments under bank
line of credit and notes payable 1,408,409 2,020,558
Net borrowing and repayment to related parties -- 30,486
Principal payments under capital lease obligations (154,529) (331,578)
Issuance of convertible notes payable 1,996,000 --
Exercise of stock options 141,770 --
Purchases of treasury stock -- (564,367)
----------- -----------
Net cash provided by financing activities 3,391,650 1,155,099
----------- -----------
Decrease in cash and cash equivalents (325,344) (270,502)
Cash and cash equivalents at beginning of period 1,745,603 1,155,117
----------- -----------
Cash and cash equivalents at end of period $ 1,420,259 $ 1,283,615
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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PERFUMANIA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1) OPERATIONS AND BASIS OF PRESENTATION
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 accompanying unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC"). 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, reflect all adjustments which, in the
opinion of management, are necessary for a fair presentation of the interim
unaudited condensed consolidated financial statements. 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 30, 1999 filed with the
SEC on April 30, 1999.
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
condensed consolidated financial statements, the Company incurred a net loss
during the thirteen week period ended May 1, 1999 of approximately $4.1 million
and has a working capital deficit of approximately $5.6 million as of May 1,
1999. In addition, the Company was in violation of certain debt covenants
contained in its bank line of credit at both January 30, 1999 and May 1, 1999.
These debt violations have not been waived by the bank as of June 15, 1999 and
there is no assurance that these debt violations will be waived.
Management's plan to continue operating as a going concern initially consists
of obtaining a waiver for the debt covenant violations and amending the line of
credit agreement. In addition, management's plan to improve the results of
operations includes decreasing the number of store openings, closing a number of
its non-profitable stores, improving the effectiveness of its sales merchandise
mix and to promote the private label bath, body and cosmetic line, continuing to
liquidate slow moving inventories and reducing selling, general, and
administrative expenses. There is no assurance, however, that the Company will
be able to improve its results of operations based on management's plan.
These factors among others may indicate that the Company will be unable to
continue as a going concern for a reasonable period of time. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
6
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2) STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN TREASURY STOCK
-------------------------- EXCESS ------------------------- ACCUMULATED
SHARES AMOUNT OF PAR SHARES AMOUNT DEFICIT TOTAL
------------ ------------ ------------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 30, 1999 8,614,491 $ 86,145 $ 54,440,009 1,512,406 $ (5,413,002) $(30,935,097) $ 18,178,055
Exercise of
Stock options 282,400 2,824 138,946 -- -- -- 141,770
Beneficial conversion
feature of notes payable -- -- 384,615 -- -- -- 384,615
Net loss for the
thirteen weeks ended
May 1, 1999 -- -- -- -- -- (4,091,866) (4,091,866)
------------ ------------ ------------ ---------- ------------ ------------ ------------
Balance at
May 1, 1999 8,896,891 $ 88,969 $ 54,963,570 1,512,406 $ (5,413,002) $(35,026,963) $ 14,612,574
============ ============ ============ ========== ============ ============ ============
</TABLE>
3) BANK LINE OF CREDIT
As of May 1, 1999, the Company was in violation of certain financial and
operating covenants and as a result of these violations, the Company is in
default under the line of credit agreement. As a result, the bank can demand
payment of the amounts outstanding under the line of credit. As of June 15,
1999, the bank has not waived these covenant violations and there is no
assurance that the bank will waive these violations. Due to these violations,
the Company incurred the default rate of interest, prime plus 4% (11.75% at May
1, 1999) since December 1998.
4) BASIC AND DILUTED LOSS PER COMMON SHARE
Basic loss per common share has been computed by dividing net loss by the
weighted average number of common shares outstanding during the period. Diluted
loss per share includes, in periods in which they have a dilutive effect, the
impact of common shares issuable upon exercise of stock options and other common
stock equivalents. For all periods presented in the accompanying condensed
consolidated statements of operations, incremental shares attributed to
outstanding stock options and convertible notes were not included because the
results would be anti-dilutive.
7
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5) SEGMENT INFORMATION
The Company operates in two industry segments, specialty retail sale and
wholesale distribution of fragrances and related products. The basis for
determining the Company's operating segments is the manner in which financial
information is used by the Company in its operations. Financial information for
these segments is summarized in the following table.
<TABLE>
<CAPTION>
Thirteen Weeks Thirteen Weeks
Ended Ended
May 1, 1999 May 2, 1998
----------- -----------
<S> <C> <C>
Sales
Wholesale $11,266,754 $13,467,930
Retail 28,134,210 25,000,045
----------- -----------
Total net sales $39,400,964 $38,467,975
----------- -----------
Cost of goods sold
Wholesale $ 9,072,744 $10,280,190
Retail 15,075,051 13,382,268
----------- -----------
Total cost of goods sold $24,147,795 $23,662,458
----------- -----------
Gross profit
Wholesale $ 2,194,010 $ 3,187,740
Retail 13,059,159 11,617,777
----------- -----------
Total gross profit $15,253,169 $14,805,517
----------- -----------
Depreciation and amortization
Retail $ 1,165,151 $ 1,082,258
----------- -----------
Total depreciation and amortization $ 1,165,151 $ 1,082,258
----------- -----------
Capital expenditures
Retail $ 930,563 $ 2,978,471
----------- -----------
Total capital expenditures $ 930,563 $ 2,978,471
----------- -----------
Number of stores 288 284
May 1, 1999 May 2, 1998
----------- -----------
INVENTORY
Wholesale $11,049,365 $16,500,647
Retail 52,719,888 53,672,378
----------- -----------
$63,769,253 $70,173,025
----------- -----------
</TABLE>
An unaffiliated customer of the wholesale segment accounted for approximately
13% and 23% of the consolidated net sales for the thirteen weeks ended May 1,
1999 and May 2, 1998, respectively, and 2% and 32% of the consolidated net trade
accounts receivable balance at May 1, 1999 and January 30, 1999, respectively.
8
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6) STOCK SUBSCRIPTION
In March 1999, the Company entered into a subscription agreement for the sale of
235,294 shares of the Company's common stock to a group of private investors at
a price of $8.50 per share. The proceeds of $2 million were received in January
1999. The agreement requires that the Company file the appropriate registration
statements with the Securities and Exchange Commission within six months from
the date of the agreement to permit the registered resale of the shares by the
investors in open market transactions. If on the effective date of the
registration statement, the market price is less than $8.50 per share, the
Company is obligated to reimburse the investor group the lesser of 1) the
product of the difference between $8.50 and the fair market value of the
Company's common stock on the effective date of the registration statement
multiplied by the number of shares issued under the agreement or 2) the product
of $2.00 multiplied by the number of shares issued under the agreement. As of
May 1, 1999, the potential redeemable amount of $470,588 was recorded as
redeemable common equity and the remaining $1,529,412 was recorded as capital in
excess of par value in the accompanying balance sheets.
7) CONVERTIBLE NOTES
During April 1999, the Company issued $2 million of 8% convertible notes (the
"Notes") with a three-year term to a group of private investors. The proceeds
were received in April 1999. Interest is payable each October 28 and April 28
during the term of the Notes, commencing October 29, 1999. At the Company's
option, interest is payable either in cash or shares of the Company's common
stock subject to certain conversion terms. The Company will not be required to
make any accrued or future interest payments if, at any time, the closing bid
price of the Company's common stock is greater than $8.70 for ten consecutive
trading days. The Notes are immediately convertible into shares of the Company's
common stock at any time at the lower of $4.35 per common share or 80% of the
average closing bid price for the three consecutive days preceding the date of
conversion.
In a 1997 announcement, the staff of the 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 common stock at the date of issuance, the
Notes issued by the Company had a beneficial conversion feature of $384,615 at
such point in time which represents a non-cash charge and is included in
interest expense for the thirteen week period ending May 1, 1999.
The Company is required to file the appropriate registration statement with the
SEC to permit the registered resale of the shares by the investors in open
market transactions within forty-five days of April 28, 1999. This registration
statement must be declared effective by the SEC within one hundred fifty days of
April 28, 1999. On June 11, 1999, the Company filed the registration statement
with the SEC and is currently waiting for the registration statement to become
effective pending SEC review.
8) PERFUMANIA.COM
In February 1999, the Company, through its wholly-owned subsidiary,
perfumania.com, inc. began operation of an Internet commerce site,
perfumania.com. The Company intends to capitalize on its name recognition and
cross marketing opportunities with its stores to become a top discount retailer
of fragrance and related products on the Internet. All orders placed with the
Internet site are shipped from the Company's existing distribution center in
Miami, Florida.
In June 1999, perfumania.com, inc. filed a registration statement with the SEC
for an initial public offering of its common stock. Perfumania.com, inc. plans
to raise approximately $15-$20 million representing approximately 33% of the
common stock to be outstanding following the offering. The offering should be
completed as soon as practicable after the registration statement becomes
effective. The net proceeds of the offering will be used for working capital and
other general corporate purposes of perfumania.com and also repayment of any
outstanding indebtedness to the Company.
9
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9) OTHER
In December of 1993, the patent holder and exclusive licensee in the U.S. of
Boucheron filed a compliant against the Company in the Southern District of New
York for infringing upon their exclusive right to sell the Boucheron bottle. The
plaintiff's theory is based on the fact that they have a valid patent for the
bottles and that Perfumania's sales of such bottles 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 compliant. Discovery is in progress.
The Company has been characterized as an insider in the liquidating plan of
reorganization filed on April 6, 1998 by L. Luria & Son, Inc. ("Luria's") in the
United States Bankruptcy Court, Southern District of Florida. In October 1998,
the committee of unsecured creditors in Luria's bankruptcy proceedings filed a
complaint with the United States Bankruptcy Court, Southern District of Florida
to recover substantial funds from the Company. The complaint alleges that
Luria's made preference payments, as defined by the Bankruptcy Court, to the
Company and seeks recovery of said preference payments, as well as disallowing
any and all claims of the Company against Luria's until full payment of the
preference payments have been made.
Management cannot presently predict the outcome of these matters, although
management believes, upon the advice of 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.
10
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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 timing of new
store openings, net sales contributed by new stores and fluctuations in
comparable sales of existing stores. A variety of factors affect the sales
levels of new and existing stores, including the retail sales environment and
the level of competition, the effect of marketing and promotional programs,
acceptance of new product introductions, adverse weather conditions and general
economic conditions.
LACK OF LONG-TERM AGREEMENTS WITH SUPPLIERS. The Company's success
depends to a large degree on its ability to provide an extensive assortment of
brand name and designer fragrances. The Company has no long-term purchase
contracts or other contractual assurance of continued supply, pricing or access
to new products. While the Company believes it has good relationships with its
vendors, the inability to obtain merchandise from one or more key vendors on a
timely basis, or a material change in the Company's ability to obtain necessary
merchandise could have a material adverse effect on its results of operations.
DEPENDENCE ON LINE OF CREDIT. As discussed above, the Company
experiences significant seasonal fluctuations in its sales and operating
results, as is common with many specialty retailers. The Company utilizes its
line of credit to fund inventory purchases and to support new retail store
openings. Any future limitation on the Company's borrowing ability and access to
financing could limit the Company's ability to open new stores and to obtain
merchandise on satisfactory terms. The Company has violated certain debt
covenants contained in its bank line of credit agreement. These debt covenant
violations have not been waived by the bank as of June 15, 1999 and there is no
assurance that such waiver will be obtained.
DEPENDENCE ON KEY PERSONNEL. Jerome Falic, the Company's President, is
primarily responsible for the Company's merchandise purchases, and has developed
strong, reliable relationships with suppliers, as well as customers of the
Wholesale division in the United States, Europe, Asia and South America. The
loss of service of his, or any of the Company's other current executive officers
could have a material adverse effect on the Company.
QUALIFIED ACCOUNTANTS' REPORT. In reporting on the Company's audited
consolidated financial statements as of January 30, 1999 and January 31, 1998
and for each of the three years in the period ended January 30, 1999, the report
of the Company's independent accountants contained an explanatory paragraph
indicating factors which create substantial doubt about the Company's ability to
continue as a going concern. Such factors include recurring net losses in fiscal
1998 and 1997 and a violation of certain debt covenants, which has not yet been
waived by the bank as of June 15, 1999, on its bank line of credit agreement as
a result of its violation of certain debt covenants.
11
<PAGE> 12
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 resources and the successful integration of new stores into
existing operations. There can be no assurance that the Company's new stores
will achieve sales and profitability comparable to existing stores, or that the
opening of new locations will not cannibalize sales at existing locations.
LITIGATION. As is often the case in the fragrance and cosmetics
business, some of the merchandise purchased by suppliers such as the Company may
have been manufactured by entities who are not the owners of the trademarks or
copyrights for the merchandise. If the Company were called upon or challenged by
the owner of a particular trademark or copyright to demonstrate that the
specific merchandise was produced and sold with the proper authority and the
Company were unable to do so, the Company could, among other things, be
restricted from reselling the particular merchandise or be subjected to other
liabilities, which could have an adverse effect on the Company's business and
results of operations.
YEAR 2000 READINESS. The Year 2000 issue is the result of computer and
other business systems being written using two digits rather than four to
represent the year. Many of the time sensitive applications and business systems
of the Company and its business partners may recognize a date using "00" as the
year 1900 rather than the year 2000, which could result in system failure or
disruption of operations. Although the Year 2000 problem will impact the Company
and its business partners, a preliminary assessment of the Year 2000 exposure
has been made by the Company and, primarily because the Company's major
management information systems are in the process of being upgraded, the Company
believes it will be able to achieve Year 2000 readiness for its internal systems
by the fourth quarter of 1999. The Company believes that it will satisfactorily
resolve all significant Year 2000 problems and that the related costs will not
be material. However, estimates of Year 2000 related costs are based on numerous
assumptions, including the continued availability of certain resources, the
ability to acquire accurate information regarding third party suppliers, and the
ability to correct all relevant applications and the third party modification
plans. There is no guarantee that the estimates will be achieved and actual
costs could differ materially from those anticipated. Moreover, the failure of a
major vendor's systems to operate properly with respect to the Year 2000 problem
on a timely basis or a Year 2000 conversion that is incompatible with the
Company's systems could have a material adverse effect on the Company's
business, financial condition and results of operations.
OTHER. The Company has been characterized as an insider in the
liquidating plan of reorganization filed on April 6, 1998 by L. Luria & Son,
Inc. ("Luria's") in the United States Bankruptcy Court, Southern District of
Florida. In October 1998, the committee of unsecured creditors in Luria's
bankruptcy proceedings filed a complaint with the United States Bankruptcy
Court, Southern District of Florida to recover substantial funds from the
Company. The complaint alleges that Luria's made preference payments, as defined
by the Bankruptcy Court, to the Company and seeks recovery of said preference
payments, as well as disallowing any and all claims of the Company against
Luria's until full payment of the preference payments have been made. Management
cannot presently predict the outcome of these matters, although management
believes, upon the advice of counsel, that the Company would have meritorious
defenses and that the ultimate resolution of these matters should not have a
materially adverse effect on the Company's financial position or result of
operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund working capital needs,
to open new stores and to renovate existing stores. For the first thirteen weeks
of fiscal 1999, these capital requirements have generally been satisfied by
short-term borrowings and issuance of convertible notes.
12
<PAGE> 13
At May 1, 1999, the Company had a working capital deficit of approximately $5.6
million compared to a working capital deficit of approximately $3.8 million at
January 30, 1999. The decrease was primarily due to a combination of the current
period loss as well as an increase in accounts payable offset by increases in
inventories.
Net cash used in operating activities during the current period was
approximately $2.8 million and net cash provided by operating activities was
approximately $1.6 million for the same period in the prior year. The increase
in cash used was principally a result of the net change in the Company's trade
receivables, inventories, accounts payable and advances from customers. Of the
$5.3 million in trade receivables, $0.1 million was due from one customer which
also accounted for 45% of the Company's wholesale sales during the thirteen
weeks ended May 1, 1999. The Company has not experienced any write-offs of
accounts receivable from this customer due to collectibility. Inventories
increased $9.9 million primarily from purchases from affiliate.
Net cash used in investing activities during the current period was
approximately $0.9 million, compared with approximately $3.0 million for the
same period in the prior year. Investment activities represent purchases of
furniture, fixtures and equipment for store openings and the renovation of
existing stores. The decrease in the net cash used in investing activities is
due to less store openings during the current period.
Net cash provided by financing activities during the current period was
approximately $3.4 million compared with approximately $1.2 million for the same
time period in the prior year. The increase was primarily the result of the
issuance of $2 million convertible notes in April 1999.
The Company's $35 million line of credit contains covenants requiring the
maintenance of minimum tangible net worth and book value and the achievement of
specified levels of quarterly results of operations. The line of credit also
contains limitations on additional borrowings, capital expenditures, number of
new store openings and purchases of treasury stock and prohibits distribution of
dividends. As of May 1, 1999, the Company was in violation of some of the above
covenants and, as a result of these violations, was in default under the line of
credit agreement and the bank could demand payment of the amounts outstanding.
As of June 15 1999, the bank has not yet waived these convenant violations and
there is no assurance that these violations will be waived by the bank. Although
management believes that a waiver will be obtained for all covenant violations
and that the covenants will be revised to be less restrictive, there can be no
assurance of this. Should the Company be unable to obtain the required waiver
from the bank, the Company may be required to obtain alternative sources of
financing. The Company could also be required to take other actions to reduce
the Company's reliance on working capital financing and generate additional
working capital, which could include delaying the opening of new stores,
reducing inventory purchases and/or reducing our wholesale and retail selling
prices to generate more cash. Any such actions, or the Company's failure to
obtain additional financing in an amount sufficient to support current and
planned levels of operation, could adversely affect the Company's business and
operating results. In addition, as a result of these violations, the Company
incurred the default rate of interest, prime plus 4%, (ll.75% at May 1, 1999),
since December 1998.
During the thirteen weeks ended May 1, 1999, the Company opened 2 stores and
closed 3 underperforming stores. At May 1, 1999, the Company operated 288
stores.
13
<PAGE> 14
RESULTS OF OPERATIONS
COMPARISON OF THE THIRTEEN WEEKS ENDED MAY 1, 1999 WITH THE THIRTEEN WEEKS ENDED
MAY 2, 1998.
Net sales increased 2.4% from $38.5 million in the first thirteen weeks of 1998
to $39.4 million in the first thirteen weeks of 1999. The increase in net sales
was the result of a 12.5% increase in retail sales (from $25.0 million to $28.1
million) offset by a 16.3% decrease in wholesale sales (from $13.5 million to
$11.3 million). The decrease in wholesale sales was primarily due to unusually
large sales to a wholesale customer during the first thirteen weeks of 1998. The
increase in retail sales was due to the increase in the number of stores
operated during the first thirteen weeks of 1999 compared to the first thirteen
weeks of 1998 as well as an increase in comparable store sales of 3%. The
Company operated 288 and 284 stores at May 1, 1999 and 1998, respectively.
Gross profit increased 3.0% from $14.8 million in the first thirteen weeks of
1998 (38.5% of total net sales) to $15.3 million in the first thirteen weeks of
1999 (38.7% of total net sales) primarily due to an increase in gross profit for
the retail division.
Gross profit for the wholesale division decreased 31.2% from $3.2 million in the
first thirteen weeks of 1998 to $2.2 million in the first thirteen weeks of
1999. As a percentage of net sales, gross profit for the wholesale division
decreased from 23.7% in the first thirteen weeks of 1998 to 19.5% in the first
thirteen weeks of 1999. The decrease in gross profit and gross profit as a
percentage of net wholesale sales was attributable to decreased sales volume and
liquidation of certain slow moving inventory items. Wholesale sales historically
yield a lower gross margin when compared to retail sales.
Gross profit for the retail division increased 12.4% to $13.1 million in the
first thirteen weeks of 1999 from $11.6 million in the first thirteen weeks of
1998 as a result of higher retail sales associated with the operation of more
stores during the current period as compared to the thirteen week period ended
May 2, 1998 as well as an increase in comparable store sales of 3%. As a
percentage of net retail sales, gross profit for the retail division decreased
slightly from 46.5% in the first thirteen weeks of 1998 to 46.4% in the first
thirteen weeks of 1999.
Operating expenses, which include selling, general and administrative expenses,
as well as depreciation, increased 8.4% from $16.4 million in the first thirteen
weeks of 1998 to $17.8 million in the first thirteen weeks of 1999. As a
percentage of net sales, operating expenses increased from 42.7% in the first
thirteen weeks of fiscal 1998 to 45.2% in the first thirteen weeks of fiscal
1999. The increase was primarily attributable to costs associated with the
operation of an average of 5 additional stores during the current period as well
as expenses of $0.7 million attributable to perfumania.com, the Company's
wholly-owned internet commerce site which began operations in February 1999.
Other expenses, which include interest expense, increased by 33.9% from $1.2
million for the thirteen weeks ended May 2, 1998 to $1.5 million for the
thirteen weeks ended May 1, 1999. The increase is principally due to the
beneficial conversion cost of approximately $385,000 associated with the
issuance of the convertible notes.
As a result of the foregoing, the Company had a net loss of $4,091,866 in the
first thirteen weeks of 1999 compared to a net loss of $2,771,612 in the first
thirteen weeks of 1998. Net loss per share for the thirteen week periods ended
May 1, 1999 and May 2, 1998, was $0.56 and $0.42 per share, respectively.
14
<PAGE> 15
YEAR 2000
The following critical application systems areas are the focus of the Company's
Y2K compliance efforts; (1) Merchandising, (2) Inventory Management and
Distribution, (3) Point-of-sales systems, (4) Human Resources and (5) Finance
and Accounting. The Merchandising and Finance and Accounting systems are
currently being upgraded utilizing vendor software certified as Y2K compliant.
The Inventory Management and Distribution systems as well as the Point-of-sales
and Human Resources systems will be upgraded in the third quarter of 1999. The
Company's hardware and communications network is currently being inventoried,
assessed, and where instances of non-compliance are noted, upgraded and tested.
The Company has established a budget totaling approximately $1.5 million for the
acquisition of computer hardware and software that will assist in the Year 2000
assessment and remediation activities. The Company expects to complete
substantially all of the Year 2000 assessment and remediation activities no
later than the fourth quarter of 1999. The Company's current systems may contain
undetected errors or defects with Year 2000 date functions that may result in
material costs. In addition, the Company utilizes third-party equipment,
software, including non-information technology systems, such as facilities and
distribution equipment that may not be Year 2000 compliant. Failure of
third-party equipment, software or content to operate properly with regard to
the Year 2000 issue could require the Company to incur unanticipated expenses to
remedy problems, which could have a material adverse effect on its business,
operating results and financial condition.
The Company is currently assessing whether third parties in its supply and
distribution chain are adequately addressing their Year 2000 compliance issues.
The Company has initiated formal communications with its significant suppliers
and service providers to determine the extent to which its systems may be
vulnerable if such suppliers and providers fail to address and correct their own
Year 2000 issues. The Company cannot guarantee that the systems of suppliers or
other companies on which the Company relies will be Year 2000 compliant.
The Company will track the Year 2000 compliance status of its material vendors
and suppliers via the Company's own internal vendor compliance effort. Year 2000
correspondence will be sent to critical vendors and suppliers by the second
quarter of 1999, with continued follow up for those who fail to respond. All
vendor responses will be evaluated to assess any possible risk to or effect on
the Company's operations. Prior to mid 1999, the Company expects to implement
additional procedures for assessing the Year 2000 compliance status of its most
critical vendors and will modify its contingency plans accordingly.
The Company is in the process of preparing its contingency plans which will
include the identification of its most reasonably likely worst case scenarios.
Currently, the most reasonably likely sources of risk to the Company include (1)
the disruption of the Company's internal inventory management system, (2) the
inability of principal suppliers or logistics providers to be Year 2000-ready,
which could result in delays in product deliveries from such suppliers or
logistics providers and (3) failure of hardware and software utilized by
transportation vendors as a result of a general failure of systems and necessary
infrastructure such as electricity supply. The Company is preparing plans to
flow inventory around an assumed period of disruption to the Company's stores,
which could include accelerating distribution of high volume merchandise and
critical products to reduce the impact of significant failure.
15
<PAGE> 16
Based on its current assessment efforts, the Company does not believe that Year
2000 issues will have a material adverse effect on its financial condition or
results of operations. However, the Company's Year 2000 issues and any potential
business interruptions, costs, damages or losses related thereto, are dependent,
to a significant degree, upon the Year 2000 compliance of third parties, such as
government agencies, vendors and suppliers. Consequently, the Company is unable
to determine at this time whether Year 2000 failures will materially affect the
Company. The Company believes that its compliance efforts have and will reduce
the impact on the Company of any such failures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
During the quarter ended May 1, 1999, there have been no material changes in the
information about the Company's market risks as of January 30, 1999 as set forth
in Item 7A of the 1999 Form 10-K.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a discussion of the legal contingencies associated with the Luria's and
Boucheron cases, see Note 9 of the Notes to Consolidated Financial Statements in
Item 1 of Part I of this report.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In March 1999, the Company entered into a subscription agreement for the sale of
235,294 shares of the Company's common stock to a group of private investors at
a price of $8.50 per share. The proceeds of $2 million were received in January
1999. The agreement requires that the Company file the appropriate registration
statements with the Securities and Exchange Commission within six months from
the date of the agreement to permit the registered resale of the shares by the
investors in open market transactions. If on the effective date of the
registration statement, the market price is less than $8.50 per share, the
Company is obligated to reimburse the investor group the lesser of 1) the
product of the difference between $8.50 and the fair market value of the
Company's common stock on the effective date of the registration statement
multiplied by the number of shares issued under the agreement or 2) the product
of $2.00 multiplied by the number of shares issued under the agreement. As of
May 1, 1999, the potential redeemable amount of $470,588 was recorded as
redeemable common equity and the remaining $1,529,412 was recorded as capital in
excess of par value in the accompanying balance sheets.
During April 1999, the Company issued $2 million of 8% convertible notes (the
"Notes") with a three-year term to a group of private investors. The proceeds
were received in April 1999. Interest is payable each October 28 and April 28
during the term of the Notes, commencing October 29, 1999. At the Company's
option, interest is payable either in cash or shares of the Company's common
stock subject to certain conversion terms. The Company will not be required to
make any accrued or future interest payments if, at any time, the closing bid
price of the Company's common stock is greater than $8.70 for ten consecutive
trading days. The Notes are convertible into shares of the Company's common
stock at any time at the lower of $4.35 per common share or 80% of the average
closing bid price for the three consecutive days preceding the date of
conversion.
The Company has used the proceeds from the aforementioned stock subscription and
issuance of convertible debentures, net of expenses incurred in the registration
of such shares as prescribed in the respective agreements, for capital and
operating expenditures.
The following table provides information regarding to whom the shares were
issued pursuant to the subscription agreement. Additionally, the table provides
information regarding to whom the shares were issued pursuant to the Notes and
assumed conversion of the Notes as of June 8, 1999.
No. Of Shares
To Be
Name Registered Proceeds Received
- ---- ------------ -----------------
S. Robert Productions, LLC 165,966 (1) $ 800,000
Cranshire Capital, L.P. 331,933 (2) $1,600,000
Namax Corp. 165,966 (1) $ 800,000
EP Opportunity Fund, L.L.C. 167,857 (3) $ 470,000
EP Opportunity Fund
International, LTD. 10,714 (4) $ 30,000
JJP Partnership 107,143 (5) $ 300,000
---------- ----------
Total $4,000,000
==========
- ------------------------
(1) Of the shares being registered, 58,823 were issued pursuant to the
Subscription Agreement, dated March 22, 1999, and 214,286 represents the
number of shares of common stock that would have been received if the
$300,000 of convertible notes received under the Securities Purchase
Agreement, dated April 28, 1999, were converted on June 8, 1999.
(2) Of the shares being registered, 117,647 were issued pursuant to the
Subscription Agreement, dated March 22, 1999 and 214,286 represent the
number of shares of common stock that would have been received if the
$600,000 of convertible notes received under the Securities Purchase
Agreement, dated April 28, 1999, were converted on June 8, 1999.
(3) The 167,857 shares represent the number of shares of common stock that
would have been received if the $470,000 of convertible notes received under
the Securities Purchase Agreement, dated April 28, 1999, were converted on
June 8, 1999.
(4) The 10,714 shares represent the number of shares of common stock that would
have been received if the $30,000 of convertible notes received under the
Securities Purchase Agreement, dated April 28, 1999, were converted on
June 8, 1999.
(5) The 107,143 shares represent the number of shares of common stock that would
have been received if the $300,000 of convertible notes received under the
Securities Purchase Agreement, dated April 28, 1999, were converted on
June 8, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Index to Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- ----------------------
27.1 Financial Data Schedule (1)
- ------------------------
(1) Filed herewith.
(b) The Company did not file any reports on Form 8-K during the quarter ended
May 1, 1999.
17
<PAGE> 18
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: June 15, 1999 By: /s/ Ilia Lekach
------------------------------
Ilia Lekach
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Donovan Chin
------------------------------
Donovan Chin
Chief Financial Officer,
Treasurer, and Secretary
(Principal Financial and
Accounting Officer)
18
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<PERIOD-START> JAN-31-1999
<PERIOD-END> MAY-01-1999
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