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 JULY 31, 2004
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 10, 2004, THE REGISTRANT HAD 2,884,201 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.......................................................12
ITEM 4 CONTROLS AND PROCEDURES............................................12
PART II
OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS..................................................12
ITEM 2 CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES..................................................12
ITEM 3 DEFAULTS UPON SENIOR SECURITIES....................................13
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................13
ITEM 5 OTHER INFORMATION..................................................13
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K...................................13
SIGNATURES ...................................................................14
CERTIFICATIONS................................................................15
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
E COM VENTURES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS: JULY 31, 2004 JANUARY 31, 2004
--------------- ----------------
Current assets:
Cash and cash equivalents $ 1,620,225 $ 1,961,310
Trade receivables, net 2,077,216 777,186
Advances to suppliers 120,484 114,041
Inventories 80,776,704 60,877,451
Prepaid expenses and other current assets 1,705,341 1,347,452
Notes and interest receivable from shareholder and officers -- 327,311
--------------- ----------------
Total current assets 86,299,970 65,404,751
Property and equipment, net 23,545,295 24,414,624
Goodwill 1,904,448 1,904,448
Other assets, net 1,044,364 739,575
--------------- ----------------
Total assets $ 112,794,077 $ 92,463,398
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Bank line of credit $ 40,041,614 $ 30,472,027
Accounts payable, non-affiliates 16,052,411 16,459,786
Accounts payable, affiliates 29,154,385 17,440,492
Accrued expenses and other liabilities 5,653,264 9,614,287
Subordinated note payable, affiliate 5,000,000 250,000
Current portion of obligations under capital leases 268,682 258,700
--------------- ----------------
Total current liabilities 96,170,356 74,495,292
Long-term portion of obligations under capital leases 8,069,020 7,746,262
--------------- ----------------
Total liabilities 104,239,376 82,241,554
--------------- ----------------
Commitments and contingencies (see Note 6)
Shareholders' equity:
Preferred stock, $.10 par value, 1,000,000
shares authorized, none issued -- --
Common stock, $.01 par value, 6,250,000 shares
authorized; 3,782,450 and 3,285,758 shares issued
in fiscal years 2004 and 2003, respectively 37,825 32,858
Additional paid-in capital 75,161,296 73,666,193
Treasury stock, at cost, 898,249 shares (8,576,944) (8,576,944)
Accumulated deficit (58,067,476) (54,900,263)
--------------- ----------------
Total shareholders' equity 8,554,701 10,221,844
--------------- ----------------
Total liabilities and shareholders' equity $ 112,794,077 $ 92,463,398
=============== ================
See accompanying notes to consolidated condensed financial statements.
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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
JULY 31, 2004 AUGUST 2, 2003 JULY 31, 2004 AUGUST 2, 2003
-------------- -------------- -------------- ---------------
Net sales $ 48,470,731 $ 50,747,969 $ 92,042,197 $ 87,635,798
Cost of goods sold 27,602,927 30,175,240 53,669,507 50,247,576
-------------- -------------- -------------- --------------
Gross profit 20,867,804 20,572,729 38,372,690 37,388,222
-------------- -------------- -------------- --------------
Operating expenses:
Selling, general and administrative 19,092,761 19,618,635 37,042,226 37,457,751
Depreciation and amortization 1,480,585 1,469,397 3,032,897 2,924,138
-------------- -------------- -------------- --------------
Total operating expenses 20,573,346 21,088,032 40,075,123 40,381,889
-------------- -------------- -------------- --------------
Income (loss) from operations 294,458 (515,303) (1,702,433) (2,993,667)
Interest expense, net (824,123) (408,537) (1,464,780) (860,320)
-------------- -------------- -------------- --------------
Net loss $ (529,665) $ (923,840) $ (3,167,213) $ (3,853,987)
============== ============== ============== ==============
Net loss per common share:
Basic $ (0.18) $ (0.37) $ (1.15) $ (1.56)
============== ============== ============== ==============
Diluted $ (0.18) $ (0.37) $ (1.15) $ (1.56)
============== ============== ============== ==============
Weighted average number of common
shares outstanding:
Basic 2,866,544 2,493,562 2,758,348 2,476,307
============== ============== ============== ==============
Diluted 2,866,544 2,493,562 2,758,348 2,476,307
============== ============== ============== ==============
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
JULY 31, 2004 AUGUST 2, 2003
---------------------- ----------------------
Cash flows from operating activities:
Net loss $ (3,167,213) $ (3,853,987)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Provision for impairment of assets and store closing 55,328 180,172
Realized loss on investment -- 3,880
Depreciation and amortization 3,032,897 2,924,138
Change in operating assets and liabilities:
Trade receivables (1,300,030) (804,600)
Advances to suppliers (6,443) 311,080
Inventories (19,899,253) 1,900,622
Prepaid expenses and other current assets (357,889) 116,224
Other assets (420,898) 80,533
Accounts payable, non-affiliates (407,375) (3,786,008)
Accounts payable, affiliates 11,463,893 5,521,285
Accrued expenses and other liabilities (3,961,023) 383,872
---------------- ----------------
Net cash (used in) provided by operating activities (14,968,006) 2,977,211
---------------- ----------------
Cash flows from investing activities:
Additions to property and equipment (1,639,262) (4,151,188)
Proceeds from sale of investments -- 3,120
---------------- ----------------
Net cash used in investing activities (1,639,262) (4,148,068)
---------------- ----------------
Cash flows from financing activities:
Net borrowings under bank line of credit 9,569,587 2,894,492
Repayment of notes payable -- (31,860)
Principal payments under capital lease obligations (130,785) (266,852)
Proceeds (advances) from notes and interest receivable,
shareholder and officer 327,311 (7,854)
Proceeds from subordinated note payable, affiliate 5,000,000 --
Repayment of convertible notes payable -- (1,000,000)
Exercise of stock options 1,500,070 110,271
Purchases of treasury stock -- (111,595)
---------------- ----------------
Net cash provided by financing activities 16,266,183 1,586,602
---------------- ----------------
(Decrease) increase in cash and cash equivalents (341,085) 415,745
Cash and cash equivalents at beginning of period 1,961,310 2,964,645
---------------- ----------------
Cash and cash equivalents at end of period $ 1,620,225 $ 3,380,390
================ ================
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"), performs all of
its operations through two wholly-owned subsidiaries, Perfumania, Inc.
("Perfumania"), a Florida corporation, which is a specialty retailer and
wholesaler of fragrances and related products, and perfumania.com, Inc.,
("perfumania.com"), a Florida corporation, which is an Internet retailer of
fragrances and other specialty items.
Perfumania is a leading specialty retailer and wholesale distributor of a
wide range of brand name and designer fragrances. Perfumania sells fragrances at
discounted prices up to 75% below the manufacturers' suggested retail prices.
Perfumania's wholesale division distributes fragrances and related products to
other wholesale distributors throughout North America and overseas.
Perfumania.com offers a selection of our more popular products for sale over the
Internet and serves as an alternative shopping experience to the Perfumania
shopping experience. The number of retail stores in operation at July 31, 2004,
and August 2, 2003, were 231 and 234, 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.
Effective January 30, 2004, Ilia Lekach, the Company's then Chairman of
the Board and Chief Executive Officer, and several other parties controlled by
Mr. Lekach and his wife Deborah Lekach (collectively, "Lekach"), entered into
the Nussdorf Option Agreement, with Stephen Nussdorf and Glenn Nussdorf (the
"Nussdorfs"), pursuant to which the Nussdorfs were granted options to acquire up
to an aggregate 720,954 shares of the Company's common stock beneficially owned
by Lekach, for a purchase price of $12.70 per share, with the acquisition price
to be paid in specified installments.
As of May 10, 2004, Mr. Lekach had exercised his options from the Company
to acquire 443,750 shares and the Nussdorfs had acquired all 720,954 shares
pursuant to the Nussdorf Option Agreement. In accordance with the Nussdorf
Option Agreement, the Nussdorfs own an aggregate of 1,128,144 shares of the
Company's common stock or approximately 39% of the total number of shares of the
Company's common stock outstanding.
As of July 31, 2004, the Company has a seasonal working capital
deficiency of approximately $9.9 million, cash balances of approximately $1.6
million and additional borrowing capacity of $6.8 million under its bank line of
credit. Management believes that the cash balances, the available borrowing
capacity under its three-year line of credit (see Note 3), and the projected
future operating results will generate sufficient liquidity to support the
Company's needs for the next twelve months; however, there can be no assurance
that management's plans will be successful. Management is currently discussing
the possible conversion of the outstanding $5 million subordinated note payable,
affiliate to a long-term note with the holders of the note. If the Company is
unable to generate sufficient cash flows from operations in the future to
service its obligations, the Company could face liquidity and working capital
constraints, which could adversely impact future operations and growth.
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 January 31, 2004 filed with
the SEC on May 17, 2004, and as amended on May 18, 2004 and June 1, 2004.
-6-
RECLASSIFICATION
Certain fiscal year 2003 amounts have been reclassified to conform with
the fiscal year 2004 presentation.
NOTE 2 - ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and provides proforma
disclosure of net income (loss) and earnings (loss) per share as if the fair
value based method prescribed by Statement of Financial Accounting Standards No.
123 "Accounting for Stock-Based Compensation," ("SFAS 123") as amended, had been
applied in measuring compensation expense for options granted to employees and
directors. In accordance with APB 25, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee or director must pay
to acquire the stock. Had compensation cost for options granted been determined
in accordance with the fair value provisions of SFAS No. 123, the Company's net
loss and net loss per share would have been increased to the proforma amounts
presented below.
THIRTEEN WEEKS THIRTEEN WEEKS TWENTY-SIX WEEKS TWENTY-SIX WEEKS
ENDED ENDED ENDED ENDED
JULY 31, 2004 AUGUST 2, 2003 JULY 31, 2004 AUGUST 2, 2003
------------- -------------- ---------------- ----------------
Net loss as reported $ (529,665) $ (923,840) $ (3,167,213) $ (3,853,987)
Add: Total fair value of stock based
employee compensation expense not included
in reported net loss, net (6,357) (74,923) (18,529) (219,168)
------------- ------------- ------------- -------------
Proforma net loss $ (536,022) $ (998,763) $ (3,185,742) $ (4,073,155)
============= ============= ============= =============
Proforma net loss per share:
Basic $ (0.18) $ (0.40) $ (1.15) $ (1.64)
============= ============= ============= =============
Diluted $ (0.18) $ (0.40) $ (1.15) $ (1.64)
============= ============= ============= =============
NOTE 3 - BANK LINE OF CREDIT
On May 12, 2004, the Company entered into a three-year amended and
restated senior secured revolving credit facility with GMAC Commercial Finance
LLC and Congress Financial Corporation which provides for borrowings of up to
$60 million and supports normal working capital requirements and other general
corporate needs. Advances under the line of credit are based on a formula of
eligible inventories and bear interest depending on the Company's financial
ratios ranging from (a) prime to prime plus 1.25% or (b) LIBOR plus 2.50% to
3.75%. Borrowings are secured by a first lien on all assets of Perfumania. The
credit facility contains limitations on additional borrowings, capital
expenditures and other items, and contains various covenants including a fixed
charge coverage ratio and minimum EBITDA amounts as defined. Approximately $6.8
million was available under the credit facility as of July 31, 2004.
On March 9, 2004, Glen and Stephen Nussdorf ("Nussdorfs") made a
$5,000,000 subordinated secured demand loan to Perfumania. The demand loan bears
interest at the prime rate plus 1%, requires quarterly interest payments and is
secured by a security interest in Perfumania's assets pursuant to a Security
Agreement, by and among Perfumania and the Nussdorfs. There are no prepayment
penalties and the loan is subordinate to all bank related indebtedness.
-7-
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. 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:
THIRTEEN WEEKS THIRTEEN WEEKS TWENTY-SIX WEEKS TWENTY-SIX WEEKS
ENDED ENDED ENDED ENDED
JULY 31, 2004 AUGUST 2, 2003 JULY 31, 2004 AUGUST 2, 2003
------------- ------------- --------------- ----------------
Net loss $ (529,665) $ (923,840) $ (3,167,213) $ (3,853,987)
Other comprehensive loss -
net unrealized loss on investments -- (56,573) -- (36,516)
------------- ------------- ------------- -------------
Total comprehensive loss $ (529,665) $ (980,413) $ (3,167,213) $ (3,890,503)
============= ============= ============= =============
NOTE 6 - CONTINGENCIES
The Company is involved in legal proceedings in the ordinary course of
business. Management believes that the Company has 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; however,
management cannot presently predict the outcome of these matters.
NOTE 7 - RELATED PARTY TRANSACTIONS
Parlux Fragrances, Inc. ("Parlux") owns 378,102 shares, or approximately
13%, of the Company's outstanding common stock. The Nussdorfs own approximately
39% of the Company's outstanding common stock and they are officers and
principals of Quality King Distributors, Inc. ("Quality King"). Purchases of
product from these related parties were approximately $38.1 million and $11.2
million for the first twenty-six weeks of fiscal years 2004 and 2003
respectively, representing approximately 52% and 23% of the Company total
purchases, respectively. The amount due to related parties at July 31, 2004, is
approximately $29.2 million and is included in accounts payable, affiliates in
the accompanying consolidated condensed balance sheets.
Sales of wholesale merchandise to Quality King were approximately $6.7
million and $2.6 million for the first twenty-six weeks of fiscal years 2004 and
2003, respectively. Amounts due from Quality King at July 31, 2004 are
approximately $0.9 million and is included in trade receivables, net in the
accompanying consolidated condensed balance sheets.
-8-
NOTE 8 - NON CASH TRANSACTIONS
Supplemental disclosures of non-cash investing and financing activities are as
follows:
FOR THE TWENTY-SIX WEEKS ENDED
---------------------------------------
JULY 31, 2004 AUGUST 2, 2003
---------------------------------------
Building under capital lease $ 463,525 $ --
Decrease in accounts payable in exchange for
subordinated notes payable - affiliate -- 5,000,000
Unrealized loss on investments available for sale -- (36,516)
Cash paid during the period for:
Interest $ 1,351,084 $ 905,217
NOTE 9 - SEGMENT INFORMATION
The Company operates in two industry segments, specialty retail sales and
wholesale distribution of fragrances and related products. Financial information
for these segments is summarized in the following table.
THIRTEEN WEEKS THIRTEEN WEEKS TWENTY-SIX WEEKS TWENTY-SIX WEEKS
ENDED ENDED ENDED ENDED
JULY 31, 2004 AUGUST 2, 2003 JULY 31, 2004 AUGUST 2, 2003
-------------- -------------- ---------------- ----------------
Net sales to external customers:
Retail $ 44,884,432 $ 46,205,443 $ 83,083,089 $ 82,344,431
Wholesale 3,586,299 4,542,526 8,959,108 5,291,367
-------------- -------------- -------------- --------------
$ 48,470,731 $ 50,747,969 $ 92,042,197 $ 87,635,798
============== ============== ============== ==============
Gross profit:
Retail $ 20,673,744 $ 20,071,659 $ 37,824,145 $ 36,749,967
Wholesale 194,060 501,070 548,545 638,255
-------------- -------------- -------------- --------------
$ 20,867,804 $ 20,572,729 $ 38,372,690 $ 37,388,222
============== ============== ============== ==============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THE THIRTEEN WEEKS ENDED JULY 31, 2004 WITH THE THIRTEEN WEEKS
ENDED AUGUST 2, 2003.
Net sales decreased 4% from $50.7 million in the thirteen weeks ended
August 2, 2003 to $48.5 million in the thirteen weeks ended July 31, 2004. The
decrease in sales was due to a decrease in Perfumania's wholesale sales from
$4.5 million in the thirteen weeks ended August 2, 2003 to $3.6 million in the
thirteen weeks ended July 31, 2004. In addition there was a 3% decrease in
Perfumania's retail sales due to a reduction in the average number of stores
opened, along with higher sales prices which resulted in a 7% decrease in the
number of customer transactions. The Company decided to increase its retail
sales prices, which resulted in a 3% increase in retail gross margins.
Perfumania's comparable store sales decreased 3% in the thirteen weeks ended
July 31, 2004. Comparable store sales measure sales from stores that have been
open for a year or more. During the thirteen weeks ended July 31, 2004, the
average number of stores operated was 231 versus 235 in the prior year's
comparable period. All wholesale sales during the second quarter of fiscal 2004
were made to Quality King.
-9-
Gross profit increased 1% from $20.6 million in the thirteen weeks ended
August 2, 2003 (40.5% of total net sales) to $20.9 million in the thirteen weeks
ended July 31, 2004 (43.1% of total net sales). The increase in gross profit was
due to the higher sale prices on retail sales and the reduction in wholesale
sales which realize lower gross profits.
Selling, general and administrative expenses decreased 3% from $19.6
million in the thirteen weeks ended August 2, 2003 to $19.1 million in the
thirteen weeks ended July 31, 2004. The decrease was attributable to lower store
payroll and employee related costs compared with 2003. Depreciation and
amortization was approximately $1.5 million in both the thirteen weeks ended
July 31, 2004 and August 2, 2003.
As a result of the foregoing, our income from operations during this
period was $0.3 million compared to a loss from operations of $0.5 for the
corresponding period of 2003.
Interest expense, net was approximately $0.4 million for the thirteen
weeks ended August 2, 2003 compared with $0.8 million in for the thirteen weeks
ended July 31, 2004. The increase in interest expense was due to interest
incurred on the capital lease for our corporate office and distribution center
to which we relocated during the second quarter of fiscal 2003, in addition to
higher interest rates and higher average borrowings for the thirteen weeks ended
July 31, 2004 versus the comparable period of 2003.
As a result of the foregoing, our net loss was ($0.9) million in the
thirteen weeks ended August 2, 2003 compared to a net loss of ($0.5) million in
the thirteen weeks ended July 31, 2004. Net loss per share for the thirteen
weeks ended in 2003 and 2004 was ($0.37) and ($0.18), respectively.
COMPARISON OF THE TWENTY-SIX WEEKS ENDED JULY 31, 2004 WITH THE TWENTY-SIX WEEKS
ENDED AUGUST 2, 2003.
Net sales increased 5% from $87.6 million in the twenty-six weeks ended
August 2, 2003 to $92.0 million in the twenty-six weeks ended July 31, 2004. The
increase in sales was primarily due to a 69% increase in Perfumania's wholesale
sales and a 1% increase in retail sales. The increase in retail sales is
attributable to an increase in Perfumania's comparable store sales of 2% in the
first twenty-six weeks of fiscal 2004. Comparable store sales measure sales from
stores that have been open for a year or more. During the twenty-six weeks ended
July 31, 2004, the average number of stores operated was 231 versus 237 in the
prior year's comparable period.
Gross profit increased 3% from $37.4 million in the twenty-six weeks
ended August 2, 2003 (42.7% of total net sales) to $38.4 million in the
twenty-six weeks ended July 31, 2004 (41.7% of total net sales). As a percentage
of net sales, gross profit in the twenty-six weeks ended July 31, 2004 decreased
versus the twenty-six weeks ended August 2, 2003, due to larger number of
wholesale transactions for the corresponding period in 2004 compared to 2003.
The Company, through its supplier relationships, is able to obtain certain
merchandise at better prices and quantities than Quality King. Wholesale sales
yield lower margins than retail sales.
Selling, general and administrative expenses decreased 1% from $37.5
million in the twenty-six weeks ended August 2, 2003 to $37.0 million in the
twenty-six weeks ended July 31, 2004. The decrease was attributable to lower
payroll and employee related costs compared with 2003. Depreciation and
amortization was approximately $3.0 million in the twenty-six weeks ended July
31, 2004 and $2.9 million in the twenty-six weeks ended August 2, 2003.
Interest expense, net was approximately $0.9 million for the twenty-six
weeks ended August 2, 2003 compared with $1.5 million in the comparable period
of 2004. The increase in interest expense was due to interest incurred on the
capital lease of our corporate office and distribution center to which we
relocated during the second quarter of fiscal 2003, in addition to higher
interest rates and higher average borrowings for the twenty-six weeks ended July
31, 2004 versus the comparable period of 2003.
As a result of the foregoing, our net loss decreased from ($3.9) million
in the twenty-six weeks ended August 2, 2003, to a net loss of ($3.2) million in
the twenty-six weeks ended July 31, 2004. Net loss per share for the twenty-six
weeks ended August 2, 2003 and July 31, 2004 was ($1.56) and ($1.15),
respectively.
-10-
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 2004, these capital requirements generally were
satisfied through borrowings under our credit facility.
At July 31, 2004, we had a working capital deficiency of approximately
$9.9 million compared to a working capital deficiency of approximately $9.1
million at January 31, 2004. The increase was primarily due to the net loss
during the current period.
Net cash used in operating activities during the current period was
approximately $15.0 million compared with approximately $3.0 million provided by
operating activities for the same period in the prior year. The increase in cash
used in operating activities was primarily due to a $19.9 million increase in
inventories resulting from management's decisions to increase the levels and
assortment of product offerings in the stores. In addition there was a decrease
in accrued expenses of $4.0 million resulting from payments made in connection
with a change in management control, offset by a $11.5 million increase in
accounts payable as a result of the increased inventory purchases. With respect
to purchases of inventory from related parties, the Company believes that those
purchases are at prices and/or on terms generally better than would otherwise be
available from third parties.
Net cash used in investing activities was approximately $1.6 million in
the twenty-six weeks ended July 31, 2004, compared to $4.1 million in the
twenty-six weeks ended August 2, 2003. Investing activities represent spending
for the renovation of existing stores and new store openings. Approximately $1.1
million of the $4.1 million used in investing activities in the twenty-six weeks
ended August 2, 2003 was attributable to the relocation of the Company's
corporate office and distribution center to Sunrise, Florida in the second
quarter of the fiscal year 2003.
Net cash provided by financing activities during the current period was
approximately $16.3 million compared with approximately $1.6 million for the
same period in the prior year. The increase was due primarily to borrowings
under our bank line of credit to fund inventory purchases and $5 million in
proceeds from a subordinated note payable to an affiliate.
Perfumania's senior secured credit facility, with GMAC Commercial Credit
LLC and Congress Financial Corporation, provides for borrowings of up to $60
million, of which approximately $6.8 million was available at July 31, 2004, and
supports normal working capital requirements and other general corporate
purposes. Advances under the line of credit are based on a formula of eligible
inventories and bears interest depending on the Company's financial ratios
ranging from (a) prime to prime plus 1.25% or (b) LIBOR plus 2.50% - 3.75%.
Borrowings are secured by a first lien on all assets of Perfumania. 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 July 31, 2004,
Perfumania was in compliance with its covenant requirements.
We believe our cash balances, our available borrowing capacity and our
projected future operating results will generate sufficient liquidity to support
our working capital and capital expenditures needs for the next twelve months;
however, there can be no assurance that our plans and expectations will be
successful. Management is currently discussing the possible conversion of the
outstanding $5 million subordinated note payable, affiliate to a long-term note
with the holders of the note. If we are unable to generate sufficient cash flows
from operations in the future to service our obligations and/or refinance our
existing debt, we could face liquidity and working capital constraints, which
could adversely impact future operations and growth.
During the twenty-six weeks ended July 31, 2004, Perfumania closed 7
stores and opened 6 new stores. At July 31, 2004, Perfumania operated 231 stores
compared to 235 stores as of August 2, 2003. Management's focus is on improving
the profitability of existing stores and plans to open 5 stores and close 1
store for the remainder of fiscal year 2004.
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CRITICAL ACCOUNTING POLICIES
Our consolidated condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim information. Presentation of these statements requires
management to make judgments and estimates. As such, some accounting policies
have a significant impact on amounts reported in these financial statements. The
judgments and estimates made can significantly affect results. Materially
different amounts would be reported under different conditions or by using
different assumptions. A summary of those critical accounting policies can be
found in our 2003 Annual Report on Form 10-K.
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 our 2003 Annual Report on Form
10-K which are incorporated herein by this reference to them. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
During the quarter ended July 31, 2004, there have been no material
changes in the information about our market risks as of January 31, 2004 as set
forth in Item 7A of the 2003 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 July 31,
2004, 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
changes in our internal control over financial reporting during the quarter
ended July 31, 2004 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, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Not applicable.
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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.
On June 22, 2004, the Company filed a report on Form
8-K announcing the departure of Jeffrey Geller,
Chief Operating Officer of Perfumania Marketing, a
wholly-owned subsidiary.
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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 10, 2004 By: /s/ Michael W. Katz
-------------------------------------
Michael W. Katz
Chief Executive Officer and President
By: /s/ A. Mark Young
-------------------------------------
A. Mark Young
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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