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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 30, 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
OCTOBER 30, 1999 9,170,867
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TABLE OF CONTENTS
PERFUMANIA, INC.
<TABLE>
<S> <C>
PART I
FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS .......................................... 3
Consolidated Balance Sheets ................................ 3
Consolidated Statements of Operations ...................... 4
Consolidated Statements of Cash Flows ...................... 5
Notes to Consolidated Financial Statements ................. 6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ......................... 11
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS .... 16
PART II
OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS .............................................. 16
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS ...................... 16
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K ............................... 16
SIGNATURES ..................................................... 17
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PERFUMANIA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 30, 1999 January 30, 1999
------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,052,679 $ 1,745,603
Trade receivables, less allowance for doubtful
accounts of $749,954 and $704,954 9,259,527 4,108,847
Advances to suppliers 9,975,084 8,065,301
Inventories, net of reserve of $2,491,820 and $4,163,251 70,335,820 53,880,132
Prepaid expenses and other current assets 2,327,474 1,417,187
------------- -------------
Total current assets 104,950,584 69,217,070
Property and equipment, net 23,072,496 23,180,462
Leased equipment under capital leases, net 893,353 1,373,878
Other assets 1,554,482 1,357,966
------------- -------------
Total assets $ 130,470,915 $ 95,129,376
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit and current portion of
notes payable $ 41,262,311 $ 32,800,627
Accounts payable - non affiliates 18,297,867 14,329,013
Accounts payable - affiliates 10,765,264 15,812,240
Accrued expenses and other liabilities 7,991,882 9,205,316
Income taxes payable 368,263 485,098
Subordinated note payable-affiliate 5,000,000 --
Current portion of obligations under capital leases 301,076 419,487
------------- -------------
Total current liabilities 83,986,663 73,051,781
Long-term portion of notes payable 1,034,230 2,370,684
Long-term portion of obligations under capital leases 429,142 562,552
Convertible notes payable 4,000,000 --
Long-term severance payable 221,488 1,037,859
Minority interest 7,344,774 --
------------- -------------
Total liabilities 97,016,297 77,022,876
------------- -------------
Commitments and contingencies
Redeemable common equity -- 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, 9,170,867 and 8,614,491 shares issued 91,709 86,145
Additional paid-in capital 64,004,988 54,440,009
Treasury stock, at cost, 1,512,406 shares at January 30, 1999 -- (5,413,002)
Accumulated deficit (29,764,836) (30,935,097)
Notes and interest receivable from shareholder and
officers (877,243) (542,143)
------------- -------------
Total stockholders' equity 33,454,618 17,635,912
------------- -------------
Total liabilities and stockholders' equity $ 130,470,915 $ 95,129,376
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
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PERFUMANIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Thirteen Thirteen Thirty-nine Thirty-nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
October 30, 1999 October 31, 1998 October 30, 1999 October 31, 1998
---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net sales $ 47,696,061 $ 37,084,488 $ 133,049,539 $ 115,236,827
Cost of goods sold 27,558,219 22,064,227 78,504,765 68,900,374
------------- ------------- ------------- -------------
Gross profit 20,137,842 15,020,261 54,544,774 46,336,453
------------- ------------- ------------- -------------
Operating expenses:
Selling, general and administrative 17,424,136 16,765,194 50,351,590 47,625,516
Depreciation and amortization 1,198,481 1,104,130 3,512,908 3,280,603
------------- ------------- ------------- -------------
Total operating expenses 18,622,617 17,869,324 53,864,498 50,906,119
------------- ------------- ------------- -------------
Income (loss) from operations
before other expense 1,515,225 (2,849,063) 680,276 (4,569,666)
Other expenses, net (1,502,283) (1,010,382) (5,070,340) (3,334,049)
------------- ------------- ------------- -------------
Income (loss) before income taxes
and extraordinary items 12,942 (3,859,445) (4,390,064) (7,903,715)
Benefit for income taxes -- -- -- --
------------- ------------- ------------- -------------
Net income (loss) before
extraordinary items 12,942 (3,859,445) (4,390,064) (7,903,715)
Extraordinary items:
Loss on early retirement of debt, net of
income taxes of $0.00 (313,824) -- (313,824) --
Gain on sale of subsidiary stock in
public offering, net of income taxes
of $0.00 5,874,149 -- 5,874,149 --
------------- ------------- ------------- -------------
Net income (loss) $ 5,573,267 $ (3,859,445) $ 1,170,261 $ (7,903,715)
------------- ------------- ------------- -------------
Net income (loss) per common share:
Basic
Basic income before extraordinary items $ 0.00 $ (0.59) $ (0.55) $ (1.21)
Extraordinary items, net of income taxes 0.64 -- 0.70 --
------------- ------------- ------------- -------------
Net income (loss) $ 0.64 $ (0.59) $ 0.15 $ (1.21)
------------- ------------- ------------- -------------
Diluted
Diluted income before extraordinary items $ 0.00 $ (0.59) $ (0.45) $ (1.21)
Extraordinary items, net of income taxes 0.47 -- 0.57 --
------------- ------------- ------------- -------------
Net income (loss) $ 0.47 $ (0.59) $ 0.12 $ (1.21)
------------- ------------- ------------- -------------
Weighted average number of common
shares outstanding:
Basic 8,655,830 6,519,440 7,961,550 6,533,103
Diluted 11,882,328 6,519,440 9,779,216 6,533,103
</TABLE>
See accompanying notes to consolidated financial statements.
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PERFUMANIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Thirty-nine Thirty-nine
Weeks Ended Weeks Ended
October 30, 1999 October 31, 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,170,261 $ (7,903,715)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Provision for doubtful accounts 45,000 90,000
Depreciation and amortization 3,512,908 3,281,168
Minority interest (154,860) --
Extraordinary gain on sale of subsidiary stock (5,874,149) --
Extraordinary loss on early retirement of debt 313,824 --
Beneficial conversion feature of convertible
notes payable 1,365,384 --
Changes in operating assets and liabilities:
Trade receivables (5,195,680) (542,358)
Advances to suppliers (1,909,783) 1,901,257
Inventories (16,455,688) 1,018,432
Prepaid expenses and other current assets (910,287) 515,840
Tax refund receivable -- 814,766
Other assets (195,693) 77,849
Accounts payable - non affiliates 3,672,294 146,859
Accounts payable - affiliates 7,756,554 8,018,457
Accrued expenses and other liabilities (1,213,439) (799,018)
Income taxes payable (116,829) (137,556)
Long term severance payable (816,371) --
------------ ------------
Total adjustments (16,176,815) 14,385,696
------------ ------------
Net cash (used in) provided by operating
activities (15,006,554) 6,481,981
------------ ------------
Cash flows from investing activities:
Additions to property and equipment (2,838,739) (7,726,036)
------------ ------------
Net cash used in investing activities (2,838,739) (7,726,036)
------------ ------------
Cash flows from financing activities:
Borrowings and repayments under loan payable 7,125,229 2,707,817
Borrowings and repayments under subordinated note (3,000,000) --
Repayments and loans to related parties -- 51,869
Principal payments under capital lease obligations (330,847) (849,227)
Net advances to shareholder and officers (335,100) 150,000
Issuance of convertible notes payable 4,000,000 --
Payment of redeemable common equity (470,588) --
Proceeds from initial public offering of
wholly-owned subsidiary 22,010,655 --
Exercise of stock options 153,020 --
Purchase of treasury stock -- (564,367)
------------ ------------
Net cash provided by financing activities 29,152,369 1,496,092
------------ ------------
Increase in cash and cash equivalents 11,307,076 252,037
Cash and cash equivalents, beginning of period 1,745,603 1,554,117
------------ ------------
Cash and cash equivalents, end of period $ 13,052,679 $ 1,806,154
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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PERFUMANIA, INC.
NOTES TO 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 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 normal and recurring
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/A for the fiscal
year ended January 30, 1999 filed with the SEC on September 17, 1999.
Basis of Presentation
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the consolidated
financial statements, the Company incurred a net loss before extraordinary items
during the thirty-nine week period ended October 30, 1999 of approximately $4.4
million. In addition, the Company was in violation of certain debt covenants
contained in its bank line of credit at January 30, 1999. On July 14, 1999, the
Company obtained a waiver of default from the bank through September 30, 1999 as
of and for the year ended January 30, 1999. The waiver was extended until
December 30, 1999 (See Note 2).
Management's plan to improve the results of operations include decreasing the
number of store openings in 1999, closing a number of its non-profitable stores,
improving the effectiveness of its sales promotions practices, continuing to
improve the existing merchandise mix and to promote the private label bath, body
and cosmetic line, continuing to liquidate slow moving inventories and reducing
selling, general and administrative expenses.
In order to obtain additional funding, the Company made an initial public
offering of the common stock of perfumania.com, inc., which was a wholly-owned
subsidiary of the Company until the completion of the initial public offering.
The offering raised approximately $22.0 million, net of offering expenses. The
net proceeds of the offering are being used for working capital and other
general corporate purposes and also repayment of any outstanding indebtedness to
the Company as well as reduction of the outstanding balance in the Company's
line of credit (See Note 7).
Additionally, in April 1999 and July 1999, the Company issued a total of $4
million of convertible notes to a group of private investors (See Note 6) and in
July 1999 the Company obtained a $2.5 million short-term unsecured loan from a
wholesale customer.
Management believes that its borrowing capacity under the current line of credit
facility, or from an alternative line of credit facility, projected cash flows
from operations, proceeds from the initial public offering of perfumania.com,
inc. and other short term borrowings will be sufficient to support working
capital needs, capital expenditures and debt service for the next twelve months.
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2) BANK LINE OF CREDIT
As of January 30, 1999, the Company was in violation of certain financial and
operating covenants and as a result of these violations, the Company was in
default under the line of credit agreement. As a result, the bank could demand
payment of the amounts outstanding under the line of credit agreement. Due to
these violations, the Company has incurred the default rate of interest, prime
plus 4%, since December 1998. On July 14, 1999, the Company obtained a waiver of
default from the bank through September 30, 1999 as of and for the year ended
January 30, 1999. The bank agreed to less restrictive covenants provided that
certain events commenced prior to September 30, 1999. One such event included
that perfumania.com, inc. (a then wholly-owned subsidiary) was to receive at
least $10 million from a contemplated initial public offering of its shares, of
which at least $2 million was to be repaid to the Company. All such required
events occurred and the waiver of default granted by the bank automatically
renewed for an additional 90 day period. The Company is currently in discussions
with the bank to amend certain conditions of the loan to be more favorable and
to extend the term of the loan.
3) BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE
Basic income (loss) per common share is computed by dividing income (loss) by
the weighted average number of common shares outstanding. Diluted income per
share includes the dilutive effect of those stock options where the average
market price of the common shares exceeds the option exercise prices for the
respective years, and the dilutive effect of those convertible notes which are
convertible into common stock.
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.
<TABLE>
<CAPTION>
Thirteen Weeks Thirteen Weeks Thirty-nine Thirty-nine
Ended Ended Weeks Ended Weeks Ended
October 30, 1999 October 31, 1998 October 30, 1999 October 31, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net sales to external customers
Wholesale $ 11,149,562 $ 6,993,408 $ 33,364,517 $ 30,696,200
Retail 36,546,499 30,091,080 99,685,022 84,540,627
------------ ------------ ------------ ------------
Total net sales to external $ 47,696,061 $ 37,084,488 $133,049,539 $115,236,827
------------ ------------ ------------ ------------
customers
Intersegment sales
Wholesale $ 6,790,340 $ 7,393,112 $ 14,322,584 $ 21,259,782
------------ ------------ ------------ ------------
Total intersegment sales $ 6,790,340 $ 7,393,112 $ 14,322,584 $ 21,259,782
------------ ------------ ------------ ------------
Cost of goods sold
Wholesale $ 8,521,012 $ 6,079,837 $ 26,068,562 $ 24,682,207
Retail 19,037,207 15,984,390 52,436,203 44,218,167
------------ ------------ ------------ ------------
Total cost of goods sold $ 27,558,219 $ 22,064,227 $ 78,504,765 $ 68,900,374
------------ ------------ ------------ ------------
Gross profit
Wholesale $ 2,628,550 $ 913,571 $ 7,295,955 $ 6,013,993
Retail 17,509,292 14,106,690 47,248,819 40,322,460
------------ ------------ ------------ ------------
Total gross profit $ 20,137,842 $ 15,020,261 $ 54,544,774 $ 46,336,453
------------ ------------ ------------ ------------
Depreciation and amortization
Retail $ 1,198,481 $ 1,104,130 $ 3,512,908 $ 3,280,603
------------ ------------ ------------ ------------
Total depreciation and
amortization $ 1,198,481 $ 1,104,130 $ 3,512,908 $ 3,280,603
------------ ------------ ------------ ------------
Capital expenditures
Retail $ 1,025,800 $ 2,521,735 $ 2,838,739 $ 7,726,036
------------ ------------ ------------ ------------
Total capital expenditures $ 1,025,800 $ 2,521,735 $ 2,838,739 $ 7,726,036
------------ ------------ ------------ ------------
</TABLE>
Number of Stores 280 294
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October 30, January 30,
1999 1999
----------- -----------
Inventory
Wholesale $ 8,464,675 $ 8,227,522
Retail 61,871,145 45,652,610
----------- -----------
$70,335,820 $53,880,132
----------- -----------
An unaffiliated customer of the wholesale segment accounted for approximately 9%
and 8% of the consolidated net sales for the thirty-nine weeks ended October 30,
1999 and October 31, 1998, respectively, and 6% and 2% of the consolidated net
trade accounts receivable balance at October 30, 1999 and October 31, 1998,
respectively.
During the thirty-nine weeks ended October 30, 1999 and October 31, 1998, the
wholesale segment included foreign sales of approximately $2.0 million and $2.3
million, respectively.
5) STOCK SUBSCRIPTION
In March 1999, the Company entered into subscription agreements for the sale of
235,293 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 and the shares were issued in June 1999. The subscription agreements
required that the Company file the appropriate registration statements with the
SEC within six months from the date of the agreements 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 was less than
$8.50 per share, the Company was obligated to reimburse the investor group the
lesser of (a) the product of the difference between $8.50 and the closing bid
price of the Company's common stock on the effective date of the registration
statement multiplied by the number of shares issued under the agreements or (b)
the product of $2.00 multiplied by the number of shares issued under the
subscription agreements. As of January 30, 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 sheet. Based on the market price of the Company's common stock on the
effective date of the registration, the Company paid the $470,588 to the
investor group in October 1999.
6) CONVERTIBLE NOTES
In April 1999, the Company entered into a securities purchase agreement and
issued an aggregate of $2 million worth of its Series A convertible notes, which
are convertible into common stock. The notes contain a beneficial conversion
feature of approximately $385,000 which represents a non-cash interest charge
and is included in other expense for the thirty-nine weeks ended October 30,
1999. The agreement required the Company to file a registration statement with
the SEC within forty-five days after the date of issuance of the convertible
notes. The conversion price is the lower of (A) $4.35 per share, subject to
adjustment and (B) the floating conversion price determined by multiplying (1)
the average closing bid price of the common stock for the three trading days
immediately preceding the date of determination, by (2) 80%, subject to
adjustment. The conversion price may be adjusted pursuant to antidilution
provisions in the convertible note.
In July 1999, the Company entered into a Securities Purchase Agreement and
issued an aggregate $2 million worth of its Series B convertible notes, which
are convertible into common stock. The notes contain a beneficial conversion
feature of approximately $981,000 which represents a non-cash interest charge
and is included in other expense for the thirty-nine week period ending October
30, 1999. The agreement required the Company to file a registration statement
with the SEC within forty-five days after the date of issuance of the
convertible notes. The conversion price is the lower of (A) $3.40625 per share,
subject to adjustment and (B) the floating conversion price determined by
multiplying (1) the average closing bid price of the common stock for the three
trading days immediately preceding the date of determination, by (2) 80%,
subject to adjustment. The conversion price may be adjusted pursuant to
antidilution provisions in the convertible note.
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7) PERFUMANIA.COM
In February 1999, the Company, through its then 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.
On September 29, 1999, perfumania.com, inc. completed an initial public offering
(the "Offering") of its common stock representing approximately 47% of the
common stock outstanding following the Offering. perfumania.com, inc. offered
3,500,000 shares of its common stock, which included 1,000,000 shares held by
the Company. The offering raised approximately $22.0 million, net of expenses,
including approximately $6.2 million, net of expenses, for the Company's
1,000,000 shares.
The Company has recorded a gain on its sale of the 1,000,000 shares of
perfumania.com inc. common stock in the Offering totaling approximately $5.9
million on its income statement as an extraordinary item in accordance with
generally accepted accounting principles. The gain is net of issuance costs of
approximately $1.1 million which includes the Company's portion of the fair
value of common stock warrants issued by perfumania.com inc. (approximately
$367,000).
Pursuant to the offering on September 29, 1999, perfumania.com, inc. entered
into warrant agreements to issue to the underwriters warrants to purchase up to
350,000 shares of common stock at an exercise price per share equal to $9.80.
The warrants are exerciseable for a period of five years from the date of grant.
The estimated fair value of these warrants at the date of grant were $1,284,500
of which approximately $367,000 was allocated to the Company. In addition,
perfumania.com, inc. granted an option to the underwriters to purchase up to
525,000 shares of common stock at $7.00 per share. Subsequant to the offering
the option was cancelled.
8) CONTINGENCIES
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 and
is seeking $1.5 million in damages. 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
complaint. Discovery is in progress.
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 1996 and 1997, the Company made sales to L. Luria & Son, Inc. ("Luria's")
in the amounts of $2,473,623 and $1,999,823, 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, as defined by the United States
Bankruptcy Code, in the liquidating plan of reorganization filed on April 6,
1998 by Luria's in the United States Bankruptcy Court, Southern District of
Florida. In October 1998, the committee of unsecured creditors in Luria's
bankruptcy proceedings filed a complaint with the United States Bankruptcy
Court, Southern District of Florida to recover substantial funds from the
Company. The complaint alleged 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. In July
1999, the Company agreed with the unsecured creditors to settle all claims held
by Luria's against the Company for the sum of $1.2 million, payable over the
next nine months according to a repayment schedule. This settlement was approved
by the Bankruptcy Court in November 1999. The full amount of the settlement was
accrued for in the Company's financial statements as of October 30, 1999 and for
the year ended January 30, 1999.
The Company is also involved in various other legal proceedings in the ordinary
course of business.
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.
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9) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). Among other provisions, SFAS No. 133
establishes the accounting and reporting standards for derivative instruments
and for hedging activities. It also requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133, as amended,
is effective for all fiscal quarters of fiscal years beginning after June 15,
2000. Management has not determined the effect, if any, of adopting SFAS
No. 133.
10) RELATED PARTY TRANSACTIONS
On August 31, 1999, the Company entered into a stock purchase agreement with a
company affiliated through common ownership. The agreement calls for the
transfer of 1,512,406 shares of the Company's treasury stock to this affiliated
company in consideration for a partial reduction of the Company's outstanding
trade indebtedness balance of approximately $4.5 million. The transfer price was
based on a per share price of $2.98, which approximates 90% of the closing price
on the Company's common stock for the previous 20 business days. Pursuant to
this agreement the parties entered into a registration rights agreement dated
August 31, 1999, which grants the affiliated company demand registration rights.
For the thirteen weeks ended October 30, 1999, the Company recorded an
extraordinary loss of approximately $314,000 representing the difference between
the transfer price and the market price of the shares on August 31, 1999.
On October 4, 1999, the Company signed an $8,000,000 subordinated note agreement
with a company affiliated through common ownership, in exchange for an equal
reduction in the amount of trade payables due the affiliate. The note is due on
May 31, 2000 with various periodic principal payments and bears interest at
prime plus 1%. The note, including principal and interest, is subordinate to all
bank related indebtedness. On October 6, 1999, the Company paid $3,000,000
pursuant to the terms of the note. The outstanding amount of the indebtedness is
included in the consolidated balance sheet as subordinated note
payable-affiliate.
On October 29, 1999, the Company sold certain assets to perfumania.com, inc.
consisting primarily of an e-commerce greeting card website for $500,000. All
gains and losses on the transaction have been eliminated in consolidation.
11) SUBSEQUENT EVENT
On December 10, 1999, the Company signed an Option Agreement (the "Agreement")
with an investment firm granting the investment firm two options to acquire up
to 2,500,000 shares of perfumania.com, inc. from the Company for consideration
in the amount of $12,500. The first option provides that the investment firm may
purchase 2,000,000 shares for $6.00 per share on or prior to January 15, 2000
and provided that this option has been exercised, a second option provides that
the investment firm may purchase 500,000 shares for $8.00 on or prior to the
earlier to occur of December 31, 2000 or various other events, as defined in the
Agreement. The Agreement provides that if the first option is exercised,
nominees of the investment firm will be appointed to constitute the majority of
the members of the board of directors of perfumania.com, inc. subject to
satisfaction of applicable SEC regulations. Subject to the exercise of the first
option, the Agreement also limits the amount of shares of perfumania.com, inc.
that may be sold by the Company, as well as the timing of these sales. Assuming
that both options are exercised for a total of 2,500,000 shares, the Company
will retain 1,500,000 shares of the total 7,500,000 outstanding shares of
perfumania.com, inc.
10
<PAGE> 11
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. On July 14, 1999, the Company obtained a
waiver of default from the bank through September 30, 1999 as of and for the
year ended January 30, 1999. The waiver was subsequently extended until December
30, 1999.
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 either of his, or any of the Company's other current
executive officers could have a material adverse effect on the Company (See Note
2).
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 the Company's default on its bank line of credit agreement as
a result of its violation of certain debt covenants, which has been waived by
the bank on July 14, 1999, through September 30, 1999 as of and for the year
ended January 30, 1999. (See Note 2).
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
11
<PAGE> 12
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 an upgarde of the Company's
major management information systems has been completed, 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.
The Company has prepared contingency plans which include the identification
of the most reasonably likely worst case scenarios. Currently, the most
reasonably likely sources of risk to the Company include (a) the disruption of
the Company's internal inventory management system, (b) 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 (c) 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.
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. In July 1999, the
Company agreed with the unsecured creditors to settle all claims held by Luria's
against the Company for the sum of $1.2 million, payable over the next nine
months according to a repayment schedule. This settlement was approved by the
Bankruptcy Court in November 1999. The full amount of the settlement was accrued
for in the Company's financial statements as of October 30, 1999 and for the
year ended January 30, 1999.
In December 1993, the patent holder and exclusive licensee in the U.S. of
Boucheron filed a complaint against us in the United States District Court for
the Southern District of New York alleging that the Company infringed upon their
exclusive right to sell the Boucheron bottle and is seeking $1.5 million in
damages. Their theory is that they have a valid patent for the bottles and that
our 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 our motion to
dismiss, and on April 14, 1995, the Company filed an answer to the complaint.
Discovery is in progress.
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 1999, these capital requirements have generally been satisfied
by short term borrowings and issuance of convertible notes payable.
Net cash used in operating activities during the thirty-nine weeks ended October
30, 1999 was approximately $15.0 million, principally as a result of the net
change in the Company's inventory, trade receivables and accounts payable. At
October 30, 1999, approximately $1.4 million of the Company's trade receivables
were considered past due compared to $1.1 million at January 30, 1999. Of the
$9.3 million in trade receivables due from unaffiliated customers, $0.5 million
was due from one customer. The Company has not experienced any write-offs of
accounts receivable from this customer due to collectibility.
12
<PAGE> 13
Net cash used in investing activities during the thirty-nine weeks ended October
30, 1999 was $2.8 million compared to $7.7 million for the same period last
year. This primarily represents purchases of furniture, fixtures and equipment
for new store openings, information systems enhancements and the renovation of
existing stores during the first three quarters. The decrease in capital
expenditures is due to fewer store openings in fiscal 1999 compared with fiscal
1998.
Net cash provided by financing activities during the thirty-nine weeks ended
October 30, 1999 was approximately $29.2 million compared with approximately
$1.5 million for the same time period in the prior year. The increase was
primarily the result of the issuance of an aggregate of $4 million convertible
notes (See Note 6), the issuance of a $2.5 million short-term note payable to a
wholesale customer, an increased use of the Company's line of credit during the
first thirty-nine weeks of 1999 and the initial public offering of the Company's
wholly-owned subsidiary, perfumania.com, inc. (See Note 7).
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 January 30, 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. As a result, the Company incurred the default rate of
interest, prime plus four percent beginning December 1998 and the bank could
demand repayment of the amounts outstanding under the line of credit agreement.
On July 14, 1999, the Company obtained a waiver of default from the bank through
September 30, 1999 as of and for the year ended January 30, 1999. Future
outstanding borrowings will bear interest at the prime rate plus four percent.
The bank agreed to less restrictive covenants provided that certain events
commence prior to September 30, 1999. One such event includes that
perfumania.com, inc. (a subsidiary) is to receive at least $10 million from a
contemplated initial public offering of its shares, of which at least $2 million
is to be repaid to the Company. All such required events occurred and the waiver
of default granted by the bank automatically renewed for an additional 90 day
period. The Company is currently in discussions with the bank to amend certain
conditions of the loan to be more favorable and to extend the term of the loan.
In July 1999, the Company obtained a $2.5 million unsecured loan from a
wholesale customer bearing an interest rate of 24%. The loan is payable in full
December 1999.
On August 31, 1999 the Company entered into a stock purchase agreement with a
company affiliated through common ownership. The agreement calls for the
transfer of 1,512,406 shares of the Company's treasury stock to this affiliated
company in consideration for a partial reduction of the Company's outstanding
trade indebtedness balance of approximately $4.5 million. The transfer price was
based on a per share price of $2.98, which approximates 90% of the closing price
on the Company's common stock for the previous 20 business days. Pursuant to
this agreement, the parties entered into a registration rights agreement dated
August 31, 1999, which grants the affiliated company demand registration rights.
The Company recorded an extraordinary loss of approximately $314,000
representing the difference between the transfer price and the market price of
the shares on August 31, 1999, which was recorded during the third quarter of
fiscal year 1999.
During the thirteen weeks ended October 30, 1999, the Company opened 2 stores
and closed 3. At October 30, 1999, the Company operated 280 stores. The Company
currently plans to open 2 additional stores and close up to 5 additional stores
during the fourth quarter of fiscal 1999.
RESULTS OF OPERATIONS
COMPARISON OF THE THIRTEEN WEEKS ENDED OCTOBER 30, 1999 WITH THE THIRTEEN WEEKS
ENDED OCTOBER 31, 1998.
Net sales increased from $37.1 million in the thirteen weeks ended October 31,
1998, to $47.7 million in the thirteen weeks ended October 30, 1999. Wholesale
sales increased 59.4% (from $7.0 million to $11.1 million) and retail sales
increased by 21.5% (from $30.1 million to $36.6 million). The increase in
wholesale sales is attributable to increased availability of merchandise during
the thirteen weeks ended October 30, 1999 compared to the same period in fiscal
1998, as well as efforts to reduce the levels of non-designer fragrance
inventory. Wholesale sales fluctuate from quarter to quarter and sales during a
particular quarter are not indicative of the sales that are expected to occur
for the fiscal year. The increase in retail sales was principally due to the
increase in comparable retail store sales. Comparable store sales during the
current period increased 15.8% when compared to last year.
Gross profit increased 34.1% from $15.0 million in the thirteen weeks ended
October 31, 1998 (40.5% of net sales) to $20.1 million in the thirteen weeks
ended October 30, 1999 (42.2% of net sales) due to increases in gross profit for
both the wholesale and retail divisions.
13
<PAGE> 14
Gross profit for the wholesale division increased from $.9 million in the
thirteen weeks ended October 31, 1998 to $2.6 million in the thirteen weeks
ended October 30, 1999 due to higher wholesale sales. As a percentage of net
sales, gross profit for the wholesale division increased from 13.1% in the
thirteen weeks ended October 31, 1998 to 23.6% in the thirteen weeks ended
October 30, 1999, primarily as a result of higher margin sales.
Gross profit for the retail division increased to $17.5 million in the thirteen
weeks ended October 30, 1999 from $14.1 million in the thirteen weeks ended
October 31, 1998 as a result of higher retail sales. As a percentage of net
sales, gross profit for the retail division increased from 46.9% in the thirteen
weeks ended October 31, 1998 to 47.9% in the thirteen weeks ended October 30,
1999 primarily as a result of higher merchandise gross margins, improved
merchandise assortments and less discounting.
Operating expenses, which include selling, general and administrative expenses
as well as depreciation, increased 3.9% from $17.9 million in the thirteen weeks
ended October 31, 1998 to $18.6 million in the thirteen weeks ended October 30,
1999. As a percentage of net sales, operating expenses decreased from 48.2%
during the thirteen weeks ended October 31, 1998 to 39.0% during the thirteen
weeks ended October 30, 1999. Operating expenses as a percentage of net sales
decreased due to the impact of higher comparable retail store sales, higher
wholesale sales and the closure of underperforming locations in 1998 and 1999.
Other expenses, which include interest expense, increased by 48.7% from $1.0
million for the thirteen weeks ended October 31, 1998 to $1.5 million for the
thirteen weeks ended October 30, 1999. The increase is principally because the
Company has incurred an increase in the interest rate on its bank line of credit
compared to the comparative period in 1998, the issuance of $4.0 million of
convertible notes payable (See Note 6) and a $2.5 million short-term note
payable to a vendor.
As a result of the foregoing, the Company had a net income before extraordinary
items of $12,942, or $0.00 per diluted share, in the thirteen weeks ended
October 30, 1999 compared to a net loss of $3,859,445, or $(0.59) per diluted
share, in the thirteen weeks ended October 31, 1998.
Extraordinary items during the thirteen weeks ended October 30, 1999, totaled
approximately $5.6 million. The increase is a result of a gain of approximately
$5.9 million recognized as a result of the Company's sale of perfumania.com,
inc. common stock in the Offering (see note 7), offset by a loss of
approximately $0.3 million representing the difference between the transfer
price and the market price of the shares issued pursuant to a stock purchase
agreement entered into on August 31, 1999 (See Note 10).
COMPARISON OF THE THIRTY-NINE WEEKS ENDED OCTOBER 30, 1999 WITH THE THIRTY-NINE
WEEKS ENDED OCTOBER 31, 1998
Net sales increased 15.5% from $115.2 million in the thirty-nine weeks ended
October 31, 1998 to $133.0 million in the thirty-nine weeks ended October 30,
1999. The increase in net sales was due to a 17.9% increase in retail sales
(from $84.5 million to $99.7 million), and a 8.7% increase in wholesale sales
(from $30.7 million to $33.4 million).
The increase in retail sales was principally due to the increase in comparable
retail store sales. Comparable store sales during the thirty-nine weeks ended
October 30, 1999 increased 10.8% when compared to last year.
Gross profit increased 17.7% from $46.3 million in the thirty-nine weeks ended
October 31, 1998 (40.2% of net sales) to $54.5 million in the thirty-nine weeks
ended October 31, 1999 (41.0% of net sales) as a result of increases in both
retail and wholesale sales.
Gross profit for the wholesale division increased 21.3% from $6.0 million in the
thirty-nine weeks ended October 31, 1998 to $7.3 million in the thirty-nine
weeks ended October 30, 1999. As a percentage of net sales, gross profit for the
wholesale division increased from 19.6% in the thirty-nine weeks ended October
31, 1998 to 21.9% in the thirty-nine weeks ended October 30, 1999.
Gross profit for the retail division increased 17.2% from $40.3 million in the
thirty-nine weeks ended October 31, 1998 to $47.2 million in the thirty-nine
weeks ended October 30, 1999. The retail division's gross margin decreased from
47.7% in the thirty-nine weeks ended October 31, 1998 to 47.4% in the
thirty-nine weeks ended October 30, 1999.
Operating expenses increased $3.0 million in the thirty-nine weeks ended October
30, 1999 compared to the thirty-nine weeks ended October 31, 1998. As a
percentage of net sales, operating expenses decreased from 44.2% during the
thirty-nine weeks ended October 31, 1998 to 40.5% during the thirty-nine weeks
ended October 30, 1999. Operating expenses as a percentage of net sales
decreased due to the impact of higher comparable retail store sales, the closure
of under-performing locations in 1998 and 1999 and the reversal of $700,000 of
accrued expenses for the Luria's litigation which was settled in July 1999.
14
<PAGE> 15
Other expenses, which include interest expense, increased by 52.1% from $3.3
million for the thirty-nine weeks ended October 31, 1998 to $5.1 million for the
thirty-nine weeks ended October 30, 1999. The increase is principally due to the
beneficial conversion cost of approximately $1.4 million associated with the
issuance of the convertible notes in April 1999 and July 1999 (See Note 7). In
addition, the Company has incurred a higher rate of interest on its bank line of
credit compared to the same period in 1998.
During the thirty-nine weeks ended October 30, 1999 the Company had a net loss
before extraordinary items of $4,390,064 or $(0.45) per diluted share, compared
to a net loss of $7,903,715 or $(1.21) per diluted share during the thirty-nine
weeks ended October 31, 1998.
Extraordinary items during the thirty-nine weeks ended October 30, 1999, totaled
approximately $5.6 million. The increase is a result of a gain of approximately
$5.9 million recognized primarily as a result of the Company's sale of
perfumania.com, inc. shares in the Offering (See Note 7), offset by a loss of
approximately $0.3 million representing the difference between the transfer
price and the market price of the shares issued pursuant to a stock purchase
agreement entered into on August 31, 1999 (See Note 10).
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 Human Resource
system were to be upgraded in the fourth quarter of 1999. The Point-of-Sale
system will be upgraded in the fourth 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 has tracked the Year 2000 compliance status of its material vendors
and suppliers via the Company's own internal vendor compliance effort. Year 2000
correspondence was sent to critical vendors and suppliers during the second and
third quarters 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. During the third quarter of 1999, the Company
implemented additional procedures for assessing the Year 2000 compliance status
of its most critical vendors and will modify its contingency plans accordingly.
The Company is in the process of preparing its contingency plans which will
include the identification of its most reasonably likely worst case scenarios.
Currently, the most reasonably likely sources of risk to the Company include (1)
the disruption of the Company's internal inventory management system, (2) the
inability of principal suppliers or logistics providers to be Year 2000-ready,
which could result in delays in product deliveries from such suppliers or
logistics providers and (3) failure of hardware and software utilized by
transportation vendors as a result of a general failure of systems and necessary
infrastructure such as electricity supply. The Company is preparing plans to
flow inventory around an assumed period of disruption to the Company's stores,
which could include accelerating distribution of high volume merchandise and
critical products to reduce the impact of significant failure.
Based on its current assessment efforts, the Company does not believe that Year
2000 issues will have a material adverse effect on its financial condition or
results of operations. However, the Company's Year 2000 issues and any potential
business interruptions, costs, damages or losses related thereto, are dependent,
to a significant degree, upon the Year 2000 compliance of third parties, such as
government agencies, vendors and suppliers. Consequently, the Company is unable
to determine at this time whether Year 2000
15
<PAGE> 16
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 October 30, 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.
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 8 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
On August 31, 1999, the Company entered into a stock purchase agreement with a
company affiliated through common ownership. The agreement calls for the
transfer of 1,512,406 shares of the Company's treasury stock to this affiliated
company in consideration for a partial reduction of the Company's outstanding
trade indebtedness balance of approximately $4.5 million. The transfer price was
based on a per share price of $2.98, which approximates 90% of the closing price
on the Company's common stock for the previous 20 business days. Pursuant to
this agreement the parties entered into a registration rights agreement dated
August 31, 1999, which grants the affiliated company demand registration rights.
The issuance of these shares are pursuant to the exemption rules of section 4(2)
of the securities act of 1933, as amended.
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 October 30, 1999.
16
<PAGE> 17
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 14, 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)
17
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<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JAN-29-2000 JAN-29-2000
<PERIOD-START> AUG-01-1999 JAN-31-1999
<PERIOD-END> OCT-30-1999 OCT-30-1999
<CASH> 0 13,052,679
<SECURITIES> 0 0
<RECEIVABLES> 0 19,984,565
<ALLOWANCES> 0 (749,954)
<INVENTORY> 0 70,335,820
<CURRENT-ASSETS> 0 104,950,584
<PP&E> 0 44,057,394
<DEPRECIATION> 0 (20,091,545)
<TOTAL-ASSETS> 0 130,470,915
<CURRENT-LIABILITIES> 0 83,986,663
<BONDS> 0 52,248,247
0 0
0 0
<COMMON> 0 91,709
<OTHER-SE> 0 34,262,909
<TOTAL-LIABILITY-AND-EQUITY> 0 34,354,618
<SALES> 47,696,061 133,049,539
<TOTAL-REVENUES> 0 0
<CGS> 27,558,219 78,504,765
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,502,283 5,070,340
<INCOME-PRETAX> 12,942 (4,390,064)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 12,942 4,390,064
<DISCONTINUED> 0 0
<EXTRAORDINARY> 5,560,325 5,560,325
<CHANGES> 0 0
<NET-INCOME> 5,573,267 1,170,261
<EPS-BASIC> 0.64 0.15
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