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 AUGUST 2, 2003
COMMISSION FILE NUMBER 0-19714
E COM VENTURES, INC.
STATE OF FLORIDA I.R.S. NO. 65-0977964
251 INTERNATIONAL PARKWAY
SUNRISE, FLORIDA 33325
TELEPHONE NUMBER: (954) 335-9100
INDICATE BY CHECK MARK WHETHER THE REGISTRANT, (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES |X| NO |_|
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT). YES |_| NO |X|
AS OF SEPTEMBER 12, 2003, THE REGISTRANT HAD 2,474,460 SHARES OF ITS COMMON
STOCK, $0.01 PAR VALUE, OUTSTANDING.
-1-
TABLE OF CONTENTS
E COM VENTURES, INC. AND SUBSIDIARIES
PART I
FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS (unaudited).................................3
Consolidated Condensed Balance Sheets............................3
Consolidated Condensed Statements of Operations..................4
Consolidated Condensed Statements of Cash Flows..................5
Notes to Consolidated Condensed Financial Statements.............6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................9
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISKS....................................................15
ITEM 4 CONTROLS AND PROCEDURES.........................................15
PART II
OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS...............................................15
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS.......................15
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.................................16
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............16
ITEM 5 OTHER INFORMATION...............................................16
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K................................16
SIGNATURES ..................................................................17
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
E COM VENTURES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
ASSETS: AUGUST 2, 2003 FEBRUARY 1, 2003
============== ================
Current assets:
Cash and cash equivalents $ 3,380,390 $ 2,964,645
Trade receivables, net 1,549,056 744,456
Advances to suppliers 1,503,855 1,814,935
Inventories, net 66,816,541 68,717,163
Prepaid expenses and other current assets 1,053,300 1,169,524
Investments available for sale 167,091 210,607
------------- -------------
Total current assets 74,470,233 75,621,330
Property and equipment, net 25,716,097 24,556,691
Goodwill, net 1,904,448 1,904,448
Other assets, net 1,147,095 1,340,155
------------- -------------
Total assets $ 103,237,873 $ 103,422,624
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Bank line of credit $ 34,976,323 $ 32,081,831
Current portion of long-term debt -- 31,860
Accounts payable, non-affiliates 17,119,818 20,905,826
Accounts payable, affiliates 14,203,003 13,331,718
Accrued expenses and other liabilities 5,552,507 5,168,634
Subordinated note payable, affiliate 4,750,000 100,000
Current portion of obligations under capital leases 413,651 981,784
Convertible notes payable 381,882 1,215,215
------------- -------------
Total current liabilites 77,397,184 73,816,868
Long-term portion of obligations under capital leases 8,053,596 7,752,315
------------- -------------
Total liabilities 85,450,780 81,569,183
------------- -------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.10 par value, 1,000,000
shares authorized, none issued -- --
Common stock, $.01 par value, 6,250,000 shares
authorized; 3,271,812 and 3,215,761 shares issued
in fiscal years 2003 and 2002, respectively 32,718 32,158
Additional paid-in capital 71,330,838 71,387,794
Treasury stock, at cost, 794,952 and 779,952 shares
in fiscal years 2003 and 2002, respectively (7,197,535) (7,085,940)
Accumulated deficit (45,882,550) (42,028,563)
Notes and interest receivable from shareholder and officer (319,458) (311,604)
Accumulated other comprehensive loss (176,920) (140,404)
------------- -------------
Total shareholders' equity 17,787,093 21,853,441
------------- -------------
Total liabilities and shareholders' equity $ 103,237,873 $ 103,422,624
============= =============
See accompanying notes to consolidated condensed financial statements.
-3-
E COM VENTURES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
THIRTEEN WEEKS THIRTEEN WEEKS TWENTY-SIX WEEKS TWENTY-SIX WEEKS
ENDED ENDED ENDED ENDED
AUGUST 2, 2003 AUGUST 3, 2002 AUGUST 2, 2003 AUGUST 3, 2002
============== ============== ============== ==============
Net sales $ 50,747,969 $ 48,089,158 $ 87,635,798 $ 88,257,840
Cost of goods sold 30,175,240 28,090,185 50,247,576 50,929,609
------------ ------------ ------------ ------------
Gross profit 20,572,729 19,998,973 37,388,222 37,328,231
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative 19,618,635 18,689,104 37,457,751 35,923,203
Depreciation and amortization 1,469,397 1,455,435 2,924,138 2,947,080
------------ ------------ ------------ ------------
Total operating expenses 21,088,032 20,144,539 40,381,889 38,870,283
------------ ------------ ------------ ------------
Loss from operations (515,303) (145,566) (2,993,667) (1,542,052)
Interest expense, net (408,537) (540,356) (860,320) (1,084,202)
------------ ------------ ------------ ------------
Net loss $ (923,840) $ (685,922) $ (3,853,987) $ (2,626,254)
============ ============ ============ ============
Net loss per common share:
Basic $ (0.37) $ (0.28) $ (1.56) $ (1.07)
============ ============ ============ ============
Diluted $ (0.37) $ (0.28) $ (1.56) $ (1.07)
============ ============ ============ ============
Weighted average number of common shares outstanding:
Basic 2,493,562 2,482,780 2,476,307 2,452,094
============ ============ ============ ============
Diluted 2,493,562 2,482,780 2,476,307 2,452,094
============ ============ ============ ============
See accompanying notes to consolidated condensed financial statements.
-4-
E COM VENTURES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
TWENTY-SIX WEEKS ENDED TWENTY-SIX WEEKS ENDED
AUGUST 2, 2003 AUGUST 3, 2002
============== ==============
Cash flows from operating activities:
Net loss $(3,853,987) $(2,626,254)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Provision for impairment of assets and store closing 180,172 380,470
Realized loss on investment 3,880 --
Depreciation and amortization 2,924,138 2,947,080
Change in operating assets and liabilities:
Trade receivables (804,600) (498,111)
Advances to suppliers 311,080 (1,550,395)
Inventories 1,900,622 1,225,734
Prepaid expenses and other current assets 116,224 362,179
Due from affiliate (1,127,356)
Other assets 80,533 113,728
Accounts payable, non-affiliates (3,786,008) (1,250,707)
Accounts payable, affiliates 5,871,285 2,902,227
Accrued expenses and other liabilities 383,872 (306,151)
----------- -----------
Net cash provided by operating activities 3,327,211 572,444
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (4,151,188) (473,110)
Proceeds from sale of investments 3,120 11,733
----------- -----------
Net cash used in investing activities (4,148,068) (461,377)
----------- -----------
Cash flows from financing activities:
Net borrowings under bank line of credit 2,894,492 4,126,342
Repayment of notes payable (31,860) (237,050)
Repayment of subordinated notes payable, affiliate (350,000) (100,000)
Principal payments under capital lease obligations (266,852) (835,581)
Net advances to shareholders and officers (7,854) (485,518)
Repayment of convertible notes payable (1,000,000) (2,108,157)
Exercise of stock options 110,271 --
Purchases of treasury stock (111,595) (47,302)
----------- -----------
Net cash provided by financing activities 1,236,602 312,734
----------- -----------
Increase in cash and cash equivalents 415,745 423,801
Cash and cash equivalents at beginning of period 2,964,645 1,600,787
----------- -----------
Cash and cash equivalents at end of period $ 3,380,390 $ 2,024,588
=========== ===========
See accompanying notes to consolidated condensed financial statements.
-5-
E COM VENTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - OPERATIONS AND BASIS OF PRESENTATION
E Com Ventures, Inc., a Florida Corporation ("ECOMV"), is structured as
a holding company that owns and operates Perfumania Inc. ("Perfumania"), a
specialty retailer and wholesaler of fragrances and related products, and
perfumania.com, inc., an Internet retailer of fragrance and other specialty
items.
Perfumania is incorporated in Florida and operates under the name
Perfumania. Perfumania's retail stores are located in regional malls,
manufacturers' outlet malls, airports and on a stand-alone basis in suburban
strip shopping centers. The number of retail stores in operation at August 2,
2003 and August 3, 2002 were 234 and 241, respectively.
The consolidated condensed financial statements include the accounts of
ECOMV and subsidiaries (collectively, the "Company"). All material intercompany
balances and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with 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 accounting principles generally accepted in the United States of
America, have been condensed or omitted pursuant to those rules and regulations.
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 consolidated condensed financial statements. It is
suggested that these consolidated condensed financial statements be read in
conjunction with the financial statements and the notes thereto included in our
Annual Report on Form 10-K for the fiscal year ended February 1, 2003 filed with
the SEC on April 30, 2003.
As shown in the accompanying consolidated condensed financial
statements, the Company has incurred a net loss of $3.9 million for the
twenty-six weeks period ended August 2, 2003. In addition, as of August 2, 2003,
the Company has a seasonal working capital deficiency of $2.9 million and an
accumulated deficit of $45.9 million. As of August 2, 2003, the Company has cash
balances totaling approximately $3.4 million and an additional borrowing
capacity of $3.5 million under its bank line of credit which is scheduled to
expire in May 2004. Management believes that the cash balances, the available
borrowing capacity and the expected ability to obtain suitable financing terms
subsequent to May 2004, and the projected future operating results will generate
sufficient liquidity to support the Company's working capital needs and capital
expenditures for the next twelve months; however, there can be no assurance that
management's plans and expectations will be successful. If the Company is unable
to generate sufficient cash flows from operations in the future to service its
obligations and/or refinance its existing debt, the Company could face liquidity
and working capital constraints, which could adversely impact future operations
and growth.
RECLASSIFICATION
Certain fiscal year 2002 amounts have been reclassified to conform with
the fiscal year 2003 presentation.
NOTE 2 - ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." Accordingly, because the grant price equals the market price on
the date of the grant, no compensation expense is recognized by the Company for
stock options issued pursuant to its stock-based compensation plans. The pro
forma information below is based on provisions of Statement of Financial
Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation,"
as
-6-
amended by SFAS 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure," issued in December 2002.
THIRTEEN WEEKS ENDED THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED TWENTY-SIX WEEKS ENDED
AUGUST 2, 2003 AUGUST 3, 2002 AUGUST 2, 2003 AUGUST 3, 2002
============== ============== ============== =============
Net loss as reported $ (923,840) $ (685,922) $(3,853,987) $(2,626,254)
Add: Total fair value of stock based
employee compensation expense not included
in reported net loss, net (74,923) (193,161) (219,168) (377,346)
----------- ----------- ----------- -----------
Proforma net loss $ (998,763) $ (685,922) $(4,073,155) $(3,003,600)
=========== =========== =========== ===========
Proforma net loss per share:
Basic $ (0.40) $ (0.35) $ (1.64) $ (1.22)
=========== =========== =========== ===========
Diluted $ (0.40) $ (0.35) $ (1.64) $ (1.22)
=========== =========== =========== ===========
NOTE 3 - BANK LINE OF CREDIT
Perfumania's senior secured credit facility with GMAC Commercial Credit
LLC ("GMAC") provides for borrowings of up to $40 million, of which
approximately $3.5 million was available at August 2, 2003, and supports normal
working capital requirements and other general corporate purposes. The facility
expires in May 2004. Advances under the line of credit are based on a formula of
eligible inventories and bears interest at a floating rate ranging from (a)
prime less 0.75% to prime plus 1% or (b) LIBOR plus 1.75% - 3.50% depending on a
financial ratio test. As of August 2, 2003, the credit facility bore interest at
3.6%. Borrowings are secured by a first lien on all assets of Perfumania and the
assignment of a life insurance policy on Ilia Lekach, the Company's Chairman of
the Board of Directors and Chief Executive Officer. The credit facility contains
limitations on additional borrowings, capital expenditures and other items, and
contains various covenants including maintenance of minimum net worth, and
certain key ratios, as defined by the lender. As of August 2, 2003, Perfumania
was not in compliance with its tangible net worth ratio, fixed charge ratio and
leverage ratio. On September 9, 2003, Perfumania obtained a waiver from GMAC for
all instances of non-compliance as of the quarter ended August 2, 2003.
NOTE 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
consolidated condensed statements of operations, incremental shares attributed
to outstanding stock options and convertible notes were not included because the
results would be anti-dilutive.
NOTE 5 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) represents all non-owner changes in
shareholders' equity and consists of the following:
-7-
Thirteen Weeks Thirteen Weeks Twenty-Six Weeks Twenty-Six Weeks
Ended Ended Ended Ended
August 2, 2003 August 3, 2002 August 2, 2003 August 3, 2002
============== ============== ============== ==============
Net loss $ (923,840) $ (685,922) $(3,853,987) $(2,626,254)
Other comprehensive loss -
net unrealized loss on investments (56,573) (1,123,236) (36,516) (1,071,343)
----------- ----------- ----------- -----------
Total comprehensive loss $ (980,413) $(1,809,158) $(3,890,503) $(3,697,597)
----------- ----------- ----------- -----------
NOTE 6 - CONVERTIBLE NOTES PAYABLE
In December 2002, the Company entered into an amended Convertible Note
Option Repurchase Agreement (the "Agreement") with holders of the Company's
outstanding Series C and D Convertible Notes. The Agreement provided an
extension of the maturity date of the Convertible Notes to September 15, 2003
and a monthly option to repurchase the Notes over the extended maturity date.
The portion of the notes redeemable in each month varied as per a specified
redemption schedule. In the event that the Company exercised its monthly option,
the note holders were restricted from converting any part of the remaining
outstanding and unpaid principal balance of such holder's notes into the
Company's common stock. During the first twenty-six weeks of fiscal year 2003,
the Company paid $1,000,000 to the note holders, which represented approximately
$833,000 of principal and $167,000 of premiums.
As of September 15, 2003 the Convertible Notes were repaid in full.
NOTE 7 - CONTINGENCIES
The Company is involved in legal proceedings in the ordinary course of
business. Management cannot presently predict the outcome of these matters.
Management believes that the Company would have meritorious defenses and that
the ultimate resolution of these matters should not have a material adverse
effect on the Company's financial position or result of operations.
NOTE 8 - RELATED PARTY TRANSACTIONS
Notes and interest receivable from a shareholder and officer were
approximately $319,000 as of August 2, 2003. The notes are unsecured, mature in
five years and bear interest at prime plus 1% per annum. Principal and interest
are payable in full at maturity.
The Company's Chairman of the Board of Directors and Chief Executive
Officer, Ilia Lekach, is also the Chairman of the Board of Directors and Chief
Executive Officer of Parlux Fragrances, Inc. ("Parlux"). Purchases of product
from Parlux was approximately $9,457,000 and $6,023,000 for the first twenty-six
weeks of fiscal years 2003 and 2002, respectively, representing approximately
20% and 12% of the Company's total purchases, respectively. The amount due to
Parlux at August 2, 2003 was approximately $16,645,000 including a $4,750,000
subordinated note payable bearing interest at prime plus 1% per annum and
$11,714,000 of accounts payable. Accounts payable due to Parlux are non-interest
bearing and are included in accounts payable affiliates in the accompanying
consolidated condensed balance sheets.
During the first twenty-six weeks of 2003, the Company purchased
approximately $1,849,000 of merchandise from a company owned by a brother of
Ilia Lekach, compared to $2,762,000 during the same period of the prior year. In
addition, purchases of $2,659,000 during the first twenty-six weeks of 2003 and
$5,144,000 during the comparable period of the prior year were made from a
company owned by another brother of Ilia Lekach. The amounts due to these
companies at August 2, 2003 was approximately $1,155,000 and $1,334,000,
respectively, and are included in accounts payable affiliates in the
accompanying consolidated condensed balance sheets. In the prior comparable
period the amounts due to these companies was $1,092,000 and $1,769,000.
Purchases from these brothers did not include products manufactured or
distributed by Parlux. Purchases from related parties are on an arms-length
basis with prices and/or terms generally better than would otherwise be
available from third parties.
-8-
During the first twenty-six weeks of 2003, the Company purchased
approximately $1,707,000 of merchandise from Quality King Distributors, Inc.
("Quality King"), and sold approximately $2,589,000 of different merchandise to
Quality King. In the prior comparable period there were $673,000 of purchases
from Quality King and $1,000,000 of merchandise sold to Quality King. Quality
King's Chairman and Chief Executive Officer, Glenn Nussdorf, and his brother
Stephen Nussdorf, the President of the fragrance division of Quality King
(collectively, the "Nussdorfs"), have disclosed in recent filings with the SEC
they collectively own approximately 407,000 shares of common stock representing
approximately 16% of the Company's outstanding shares. The Nussdorfs have also
requested the Company's Board of Directors to approve the potential acquisition
of up to a total of 40% of the Company's outstanding shares, and the request was
approved by the Board. On September 15, 2003, the Company was advised that
Stephen Nussdorf has provided personal loans to Ilia Lekach aggregating $3.5
million at a 6% interest rate payable in 5 years. The Company is not, in any
manner, a guarantor to this loan.
As of August 2, 2003, the Company owned approximately 983,000 shares of
Nimbus Group, Inc. ("Nimbus") common stock representing approximately 13% of the
total outstanding common stock of Nimbus. The investment in Nimbus appears on
the Company's consolidated condensed balance sheets as investments available for
sale. Ilia Lekach previously served as Chairman of the Board and Interim Chief
Executive Officer of Nimbus.
NOTE 9 - NON CASH TRANSACTIONS
Supplemental disclosures of non-cash investing and financing activities are as
follows:
FOR THE TWENTY-SIX WEEKS ENDED
AUGUST 2, 2003 AUGUST 3, 2002
===============================
Conversion of debt and accrued interest
payable in exchange for common stock $ -- $ 517,367
Decrease in accounts payable in exchange for
subordinated notes payable - affiliate 5,000,000 --
Unrealized loss on investments available for sale (36,516) (1,071,343)
Cash paid during the period for:
Interest $ 905,217 $ 1,150,303
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THE THIRTEEN WEEKS ENDED AUGUST 2, 2003 WITH THE THIRTEEN WEEKS
ENDED AUGUST 3, 2002.
Net sales increased 5.5% from $48.1 million in the thirteen weeks
ended August 3, 2002 to $50.7 million in the thirteen weeks ended August 2,
2003. The increase in sales was primarily due to an increase in Perfumania's
wholesale sales from $1.6 million in the thirteen weeks ended August 3, 2002 to
$4.8 million in the thirteen weeks ended August 2, 2003, offset by a 1% decrease
in Perfumania's retail store sales and a reduction in the average number of
stores operated during the thirteen weeks ended August 2, 2003 compared to the
thirteen weeks ended August 3, 2002. The decrease in store sales was primarily
due to a contracted retail environment and a slow economy. During the thirteen
weeks ended August 2, 2003, the average number of stores operated was 235 versus
241 in the prior year's comparable period.
Gross profit increased 2.9% from $20.0 million in the thirteen weeks
ended August 3, 2002 (41.6% of total net sales) to $20.6 million in the thirteen
weeks ended August 2, 2003 (40.5% of total net sales). The increase in gross
profit was due to the increase in sales. As a percentage of net sales, gross
profit in the thirteen weeks ended August 2, 2003 decreased versus the thirteen
weeks ended August 3, 2002 due to a higher proportion of wholesale sales which
realize lower gross margins.
-9-
Selling, general and administrative expenses increased 5.0% from $18.7
million in the thirteen weeks ended August 3, 2002 to $19.6 million in the
thirteen weeks ended August 2, 2003. The increase was attributable to higher
payroll and employee related costs compared with 2002. Depreciation and
amortization was approximately $1.5 million in the thirteen weeks ended August
2, 2003 and August 3, 2002.
Interest expense, net was approximately $0.5 million for the thirteen
weeks ended August 3, 2002 compared with $0.4 in 2003. In the current period,
lower interest rates and slightly lower average borrowings resulted in the
reduction in interest expense for the thirteen weeks ended August 2, 2003 versus
the comparable period of 2002.
As a result of the foregoing, our net loss increased to ($0.9) million
in the thirteen weeks ended August 2, 2003 compared to a net loss of ($0.7)
million in the thirteen weeks ended August 3, 2002. Net loss per share for the
thirteen weeks ended August 2, 2003 and 2002 was $0.37 and $0.28, respectively.
EBITDA(a), defined as net income (loss) less depreciation,
amortization and interest expense decreased by $0.3 million from $1.3 million in
the thirteen weeks ended August 3, 2002 to $1.0 million in the thirteen weeks
ended August 2, 2003, due to reduced retail sales and increased expenses.
THIRTEEN WEEKS ENDED
--------------------------------
EBITDA Reconciliation (a): AUGUST 2, 2003 AUGUST 3, 2002
- --------------------------------------- --------------------------------
Net loss $ (923,840) $ (685,922)
Interest expense 408,537 540,356
Depreciation and amortization 1,469,397 1,455,435
----------- ------------
EBITDA $ 954,094 $ 1,309,869
=========== ============
In order to fully assess our financial operating results, management
believes that EBITDA is an appropriate measure of evaluating our operating
performance, because it is an indicator of the profitability and performance of
our core operations and reflects the changes in our operating results. However,
these measures should be considered in addition to, not as a substitute, or
superior to, net income (loss), cash flows, or other measures of financial
performance prepared in accordance with accounting principles generally accepted
in the United States of America ("GAAP"). EBITDA should not be considered as an
alternative to, or more meaningful than, net income (loss) as determined in
accordance with GAAP, or as a measure of liquidity. Because EBITDA is not
calculated in the same manner by all companies, the representation herein may
not be comparable to other similarly titled measures of other companies.
COMPARISON OF THE TWENTY-SIX WEEKS ENDED AUGUST 2, 2003 WITH THE TWENTY-SIX
WEEKS ENDED AUGUST 3, 2002.
Net sales decreased 0.7% from $88.3 million in the twenty-six weeks
ended August 3, 2002 to $87.6 million in the twenty-six weeks ended August 2,
2003. The decrease in sales was primarily due to a 3% decrease in Perfumania's
retail store sales and a reduction in the average number of stores operated
during the twenty-six weeks ended 2003 compared to the twenty-six weeks ended
2002. The decrease in retail store sales was primarily due to a contracted
retail environment and a slow economy. During the twenty-six weeks ended August
2, 2003, the average number of stores operated was 237 versus 252 in the prior
year's comparable period.
Gross profit increased 0.2% from $37.3 million in the twenty-six weeks
ended August 3, 2002 (42.3% of total net sales) to $37.4 million in the
twenty-six weeks ended August 2, 2003 (42.7% of total net sales). As a
percentage of net sales, gross profit in the twenty-six weeks ended August 2,
2003 increased versus the twenty-six weeks ended August 3, 2002 due to price
increases and improved assortment of merchandise.
Selling, general and administrative expenses increased 4.3% from $35.9
million in the twenty-six weeks ended August 3, 2002 to $37.5 million in the
twenty-six weeks ended August 2, 2003. The increase was attributable to higher
payroll and employee related costs compared with 2002. Depreciation and
amortization was approximately $2.9 million in the twenty-six weeks ended of
both 2003 and 2002.
-10-
Interest expense, net was approximately $1.1 million for the twenty-six
weeks ended August 3, 2002 compared with $0.9 million in the comparable period
of 2002. In the current period, lower interest rates and slightly lower average
borrowings resulted in the reduction in interest expense for the twenty-six
weeks ended August 2, 2003 versus the comparable period of 2002.
As a result of the foregoing, our net loss increased to ($3.9) million
in the twenty-six weeks ended August 2, 2003 compared to a net loss of ($2.6)
million in the twenty-six weeks ended August 3, 2002. Net loss per share for the
twenty-six weeks ended August 2, 2003 and 2002 was ($1.56) and ($1.07),
respectively.
EBITDA(a), defined as net income (loss) less depreciation,
amortization and interest expense decreased by $1.5 million from $1.4 million in
the twenty-six weeks ended August 3, 2002 to ($0.1) million in the twenty-six
weeks ended August 2, 2003, due to reduced sales and increased expenses.
TWENTY-SIX WEEKS ENDED
---------------------------------
EBITDA Reconciliation (a): AUGUST 2, 2003 AUGUST 3, 2002
- ---------------------------------------- ---------------------------------
Net loss $ (3,853,987) $ (2,626,254)
Interest expense 860,320 1,084,202
Depreciation and amortization 2,924,138 2,947,080
------------- -------------
EBITDA $ (69,529) $ 1,405,028
============= =============
In order to fully assess our financial operating results, management believes
that EBITDA is an appropriate measure of evaluating our operating performance,
because it is an indicator of the profitability and performance of our core
operations and reflects the changes in our operating results. However, these
measures should be considered in addition to, not as a substitute, or superior
to, net income (loss), cash flows, or other measures of financial performance
prepared in accordance with GAAP. EBITDA should not be considered as an
alternative to, or more meaningful than, net income (loss) as determined in
accordance with GAAP, or as a measure of liquidity. Because EBITDA is not
calculated in the same manner by all companies, the representation herein may
not be comparable to other similarly titled measures of other companies.
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements are to fund Perfumania's inventory
purchases, renovate existing stores, and selectively open new stores. For the
first twenty-six weeks of fiscal 2003, these capital requirements generally were
satisfied through borrowings under our credit facility.
At August 2, 2003, we had a working capital deficiency of approximately
$2.9 million compared to a working capital of approximately $1.8 million at
February 1, 2003. The decrease was primarily due to the net loss during the
current period, increased purchases of property and equipment and lower
long-term debt.
Net cash provided by operating activities during the current period was
approximately $3.3 million compared with approximately $0.6 million of net cash
provided by operating activities for the same period in the prior year. The
change in cash provided by operating activities was principally a result of the
net change in accounts payable, inventories and advances to suppliers.
Net cash used in investing activities was approximately $4.2 million in
the twenty-six weeks ended August 2, 2003, compared to $0.5 million in the
twenty-six weeks ended August 3, 2002. Investing activities represent spending
for the renovation of existing stores and new store openings. Approximately $1.1
million of the $4.2 million used in investing activities is attributable to the
relocation of the Company's corporate office and
-11-
distribution center to Sunrise, Florida in the second quarter of the fiscal year
2003. The balance is due to the opening of 4 new stores and remodel/relocation
of 12 stores.
Net cash provided by financing activities during the current period was
approximately $1.2 million compared with approximately $0.3 million for the same
period in the prior year. The increase was due primarily to a reduction of
convertible debenture payments of approximately $1.0 million.
Perfumania's senior secured credit facility with GMAC Commercial Credit
LLC provides for borrowings of up to $40 million, of which approximately $3.5
million was available at August 2, 2003, and supports normal working capital
requirements and other general corporate purposes. The facility expires in May
2004. Advances under the line of credit are based on a formula of eligible
inventories and bears interest at a floating rate ranging from (a) prime less
0.75% to prime plus 1% or (b) LIBOR plus 1.75% - 3.50% depending on a financial
ratio test. As of August 2, 2003, the credit facility bore interest at 3.6%.
Borrowings are secured by a first lien on all assets of Perfumania and the
assignment of a life insurance policy on Ilia Lekach. The credit facility
contains limitations on additional borrowings, capital expenditures and other
items, and contains various covenants including maintenance of minimum net
worth, and certain key ratios, as defined by the lender. As of August 2, 2003,
Perfumania was not in compliance with its tangible net worth ratio, fixed charge
ratio and leverage ratio. On September 9, 2003, Perfumania obtained a waiver
from GMAC for all instances of non-compliance as of the quarter ended August 2,
2003.
As shown in the accompanying consolidated condensed financial
statements, we have incurred a net loss of $3.9 million for the twenty-six weeks
period ended August 2, 2003. In addition, as of August 2, 2003, as had a
seasonal working capital deficiency of $2.9 million and an accumulated deficit
of $45.9 million. As of August 2, 2003, we had cash balances totaling
approximately $3.4 million and an additional borrowing capacity of $3.5 million
under its bank line of credit which is scheduled to expire in May 2004.
Management believes that the cash balances, the available borrowing capacity and
the expected ability to obtain suitable financing terms subsequent to May 2004,
and the projected future operating results will generate sufficient liquidity to
support our working capital needs and capital expenditures for the next twelve
months; however, there can be no assurance that management's plans and
expectations will be successful. If we are unable to generate sufficient cash
flows from operations in the future to service its obligations and/or refinance
its existing debt, we could face liquidity and working capital constraints,
which could adversely impact future operations and growth.
During the twenty-six weeks ended August 2, 2003, Perfumania closed 7
stores and opened 4 new stores. In addition, Perfumania remodeled 10 more stores
than the prior year's comparable period. At August 2, 2003, Perfumania operated
234 stores compared to 241 stores as of August 3, 2002. Management's focus is on
improving the profitability of existing stores and plans to open a maximum of 6
new stores for the remainder of fiscal year 2003.
RECENT ACCOUNTING STANDARDS
In May 2003, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity." This statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or asset in some circumstance). Many of those
instruments were previously classified as equity. The statement is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS No. 150 did not have a material impact on our
consolidated financial position, results of operations or disclosures.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative and Hedging Activities." In general, this statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. This statement is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. The adoption of SFAS No. 149 did not have a material impact on our
consolidated financial position, results of operations or disclosures.
-12-
CRITICAL ACCOUNTING POLICIES
Our condensed consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America. As such, some accounting policies have a significant impact on
amounts reported in these financial statements. A summary of those significant
accounting policies and a description of accounting policies that are considered
critical can be found in our 2002 Annual Report on Form 10-K, in the notes to
the Consolidated Financial Statements, Note 1 and the Critical Accounting
Policies Section. These policies have been consistently applied in all material
respects and address such matters as principles of consolidation, allowance for
doubtful accounts, investments, impairment of long-lived assets, accrued
self-insurance, revenue recognition and stock based compensation. While the
estimates and judgments associated with the application of these policies may be
affected by different assumptions or conditions, we believe the estimates and
judgments associated with the reported amounts are appropriate in the
circumstances.
FORWARD LOOKING STATEMENTS
Some of the statements in this quarterly report, including those that
contain the words "anticipate," "believe," "plan," "estimate," "expect,"
"should," "intend" and other similar expressions, are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Those forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements or those of our industry to be materially different from any
future results, performance or achievements expressed or implied by those
forward-looking statements. Among the factors that could cause actual results,
performance or achievement to differ materially from those described or implied
in the forward-looking statements are general economic conditions, competition,
potential technology changes, changes in or the lack of anticipated changes in
the regulatory environment in various countries, the ability to secure
partnership or joint-venture relationships with other entities, the ability to
raise additional capital to finance expansion, the risks inherent In new product
and service introductions and the entry into new geographic markets and other
factors included in our filings with the Securities and Exchange Commission (the
"SEC'), including the Risk Factors included in this report. Copies of our SEC
filings are available form the SEC or may be obtained upon request from us. We
do not undertake any obligation to update the information contained herein,
which speaks only as of this date.
RISK FACTORS
WE COULD FACE LIQUIDITY AND WORKING CAPITAL CONSTRAINTS IF WE ARE UNABLE TO
GENERATE SUFFICIENT CASH FLOWS FROM OPERATIONS
Perfumania's $40 million credit facility with GMAC expires in May
2004. As of August 2, 2003, approximately $35 million was outstanding under the
credit facility. The credit facility contains limitations on additional
borrowings, capital expenditures and other items, and contains various covenants
including maintenance of minimum net worth, and certain key ratios, as defined
by the lender. As of August 2, 2003, Perfumania was not in compliance with its
fixed charge ratio and leverage ratio. On September 9, 2003, Perfumania obtained
a waiver from GMAC for all instances of non-compliance as of the quarter ended
August 2, 2003. If we are unable to generate sufficient cash flows from
operations to service our obligations and/or refinance the credit facility on
acceptable terms, we could face liquidity and working capital constraints, which
could adversely impact our future operations and growth.
WE MAY HAVE PROBLEMS RAISING MONEY NEEDED IN THE FUTURE
Our growth strategy includes selectively opening and operating new
Perfumania retail locations and increasing the average retail sales per store.
We may need to obtain funding to achieve our growth strategy. Additional
financing may not be available on acceptable terms, if at all. In order to
obtain additional financing, we may be required to issue securities with greater
rights than those currently possessed by holders of our common stock. We may
also be required to take other actions, which may lessen the value of our common
stock, including borrowing money on terms that are not favorable to us.
-13-
PERFUMANIA'S BUSINESS IS SUBJECT TO SEASONAL FLUCTUATIONS, WHICH COULD LEAD TO
FLUCTUATIONS IN OUR STOCK PRICE
Perfumania has historically experienced and expects to continue
experiencing higher sales in the third and fourth fiscal quarters than in the
first and second fiscal quarters. Purchases of fragrances as gift items increase
during the Christmas holiday season, which results in significantly higher
fourth fiscal quarter retail sales. If our quarterly operating results are below
expectations of stock market analysts, our stock price might decline. Our
quarterly results may also vary as a result of the timing of new store openings
and store closings, net sales contributed by new stores and fluctuations in
comparable sales of existing stores. Sales levels of new and existing stores are
affected by a variety of factors, including the retail sales environment, the
level of competition, the effect of marketing and promotional programs,
acceptance of new product introductions, adverse weather conditions and general
economic conditions.
PERFUMANIA MAY EXPERIENCE SHORTAGES OF THE MERCHANDISE IT NEEDS BECAUSE IT DOES
NOT HAVE LONG-TERM AGREEMENTS WITH SUPPLIERS
Perfumania's success depends to a large degree on our ability to
provide an extensive assortment of brand name and designer fragrances.
Perfumania has no long-term purchase contracts or other contractual assurance of
continued supply, pricing or access to new products. If Perfumania is unable to
obtain merchandise from one or more key suppliers on a timely basis, or if there
is a material change in Perfumania's ability to obtain necessary merchandise,
our results of operations could be seriously harmed.
PERFUMANIA NEEDS TO SUCCESSFULLY MANAGE ITS GROWTH
Perfumania may not be able to sustain the growth in revenues that it
has achieved historically. Perfumania's growth is somewhat dependent upon
opening and operating new retail stores on a profitable basis, which in turn is
subject to, among other things, securing suitable store sites on satisfactory
terms, hiring, training and retaining qualified management and other personnel,
having adequate capital resources and successfully integrating new stores into
existing operations. It is possible that Perfumania's new stores might not
achieve sales and profitability comparable to existing stores, and it is
possible that the opening of new locations might adversely affect sales at
existing locations.
PERFUMANIA COULD BE SUBJECT TO LITIGATION BECAUSE OF THE MERCHANDISING ASPECT OF
ITS BUSINESS
Some of the merchandise Perfumania purchases from suppliers is
manufactured by entities who are not the owners of the trademarks or copyrights
for the merchandise. The owner of a particular trademark or copyright may
challenge Perfumania to demonstrate that the specific merchandise was produced
and sold with the proper authority; if Perfumania is unable to demonstrate this,
it could, among other things, be restricted from reselling the particular
merchandise. This type of restriction could adversely affect Perfumania's
business and results of operations.
FUTURE GROWTH MAY PLACE STRAINS ON OUR MANAGERIAL, OPERATIONAL AND FINANCIAL
RESOURCES
If we grow as expected, a significant strain on our managerial,
operational and financial resources may occur. Further, as the number of our
users, advertisers and other business partners grow, we will be required to
manage multiple relationships with various customers, strategic partners and
other third parties. Future growth or increase in the number of our strategic
relationships could strain our managerial, operational and financial resources,
inhibiting our ability to achieve the rapid execution necessary to successfully
implement our business plan. In addition, our future success will also depend on
our ability to expand our sales and marketing organization and our support
organization commensurate with the growth of our business and the Internet.
WE ARE SUBJECT TO INTENSE COMPETITION
Some of Perfumania's competitors sell fragrances at discount prices and
some are part of large national or regional chains that have substantially
greater resources and name recognition than Perfumania. Perfumania's stores
compete on the basis of selling price, customer service, merchandise variety and
store location. Many of our
-14-
current and potential competitors have greater financial, technical,
operational, and marketing resources. We may not be able to compete successfully
against these competitors in developing our products or services.
PERFUMANIA'S BUSINESS HAS BEEN AFFECTED BY THE CONTINUING ECONOMIC DOWNTURN
Sales levels at Perfumania's retail stores have been adversely affected
during fiscal year 2003 by a continuing economic downturn in the United States.
Due to higher unemployment, stagnant business growth rates and the continuing
poor performance of the stock market, consumer spending in general and
especially on discretionary items, has declined. The length of this economic
downturn may adversely impact our business, the results of our operations and
our liquidity in the future.
EXPANDING OUR BUSINESS THROUGH ACQUISITIONS AND INVESTMENTS IN OTHER BUSINESSES
AND TECHNOLOGIES PRESENTS SPECIAL RISKS
We may expand through the acquisition of and investment in other
businesses. Acquisitions involve a number of special problems, including:
o difficulty integrating acquired technologies, operations, and
personnel with our existing business;
o diversion of management's attention in connection with both
negotiating the acquisitions and integrating the assets;
o the need for additional financing;
o strain on managerial and operational resources as management
tries to oversee larger operations; and
o exposure to unforeseen liabilities of acquired companies.
We may not be able to successfully address these problems. Moreover, our future
operating results will depend to a significant degree on our ability to
successfully manage growth and integrate acquisitions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
During the quarter ended August 2, 2003, there have been no material
changes in the information about our market risks as of February 1, 2003 as set
forth in Item 7A of the 2002 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have evaluated
our disclosure controls and procedures and have concluded that, as of August 2,
2003, our disclosure controls and procedures are effective for gathering,
analyzing and disclosing the information we are required to disclose in our
reports filed under the Securities Exchange Act of 1934. There have been no
change in our internal control over financial reporting during the quarter ended
August 2, 2003 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
-15-
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Index to Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
31.1 Certification by Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. --
32.1 Certification by Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
None
-16-
E COM VENTURES, 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.
E COM VENTURES, INC.
--------------------
(Registrant)
Date: September 15, 2003 By: /S/ ILIA LEKACH
-----------------------------------
Ilia Lekach
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By: /S/ A. MARK YOUNG
-----------------------------------
A. Mark Young
Chief Financial Officer
(Principal Financial and
Accounting Officer)
-17-