10-Q 1 g64144e10-q.txt E COM VENTURES 10-Q DATED 07/29/00 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 29, 2000 COMMISSION FILE NUMBER 0-19714 E COM VENTURES, INC. STATE OF FLORIDA I.R.S. NO. 65-0977964 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 AUGUST 25, 2000, 9,937,276 2 TABLE OF CONTENTS E COM VENTURES, INC. 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 OPERATION........................12 ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS........................................................18 PART II OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS...................................................18 ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS...........................18 ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K....................................18 SIGNATURES..................................................................19 2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS E COM VENTURES, INC. CONSOLIDATED BALANCE SHEETS
JULY 29, 2000 JANUARY 29, 2000 ------------- ---------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents ................................... $ 2,397,650 $ 1,995,610 Trade receivables, less allowance for doubtful accounts of $39,802 and $60,000 as of July 29, 2000 and January 29, 2000, respectively ....................................... 2,850,910 1,150,035 Advances to suppliers ....................................... 9,996,565 4,826,179 Inventories, net of reserve of $1,842,897 and $2,369,953 as of July 29, 2000 and January 29, 2000, respectively ...... 68,274,916 68,727,528 Note and interest receivable, related party ................. -- 779,594 Prepaid expenses and other current assets ................... 2,305,925 951,544 ------------- ------------- Total current assets .................................... 85,825,966 78,430,490 Property and equipment, net .................................... 22,856,276 22,671,385 Investments in and advances to partially-owned equity affiliates ................................................. 15,393,990 2,845,972 Other assets ................................................... 2,190,641 1,708,551 ------------- ------------- Total assets ............................................ $ 126,266,873 $ 105,656,398 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank line of credit and current portion of notes payable .... $ 40,389,028 $ 32,741,575 Accounts payable - non affiliates ........................... 12,905,118 15,666,781 Accounts payable - affiliates ............................... 10,142,054 9,350,315 Accrued expenses and other liabilities ...................... 7,675,830 7,870,634 Income taxes payable ........................................ 223,098 223,098 Subordinated note payable - affiliate ....................... 4,500,000 3,500,000 Current portion of obligations under capital leases ......... 301,239 391,220 ------------- ------------- Total current liabilities ............................... 76,136,367 69,743,623 Long term debt, less current portion ........................... 923,082 888,765 Long-term portion of obligations under capital leases .......... 469,187 634,571 Convertible notes payable ...................................... 9,881,214 3,700,000 ------------- ------------- Total liabilities ....................................... 87,409,850 74,966,959 ------------- ------------- Commitments and contingencies .................................. -- -- Stockholders' equity: Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued ............................................... -- -- Common stock, $.01 par value, 25,000,000 shares authorized, 10,761,305 and 9,282,386 shares issued, respectively ....... 107,613 92,825 Additional paid-in capital ..................................... 72,856,728 65,440,135 Treasury stock, at cost, 1,442,228 and 815,646 shares as of July 29, 2000 and January 29, 2000, respectively ............ (5,424,184) (3,419,957) Accumulated deficit ............................................ (35,574,371) (29,890,915) Net unrealized gain on investments ............................. 10,424,896 -- Notes and interest receivable from shareholder and officers .... (3,533,659) (1,532,649) ------------- ------------- Total stockholders' equity .............................. 38,857,023 30,689,439 ------------- ------------- Total liabilities and stockholders' equity .............. $ 126,266,873 $ 105,656,398 ============= =============
See accompanying notes to consolidated financial statements. 3 4 E COM VENTURES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
THIRTEEN THIRTEEN TWENTY-SIX TWENTY-SIX WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED JULY 29, 2000 JULY 31, 1999 JULY 29, 2000 JULY 31, 1999 -------------- -------------- -------------- -------------- Net sales ................................. $ 48,637,574 $ 45,952,514 $ 88,252,318 $ 85,353,478 Cost of goods sold ........................ 29,253,558 26,798,751 52,445,611 50,946,546 ------------ ------------ ------------ ------------ Gross profit .............................. 19,384,016 19,153,763 35,806,707 34,406,932 ------------ ------------ ------------ ------------ Operating expenses: Selling, general and administrative ..... 20,167,919 16,296,549 37,800,620 32,927,454 Provision for impairment of assets and store closing .................... 118,572 -- 118,572 -- Depreciation and amortization ........... 1,319,097 1,149,275 2,535,901 2,314,427 ------------ ------------ ------------ ------------ Total operating expenses ............ 21,605,588 17,445,824 40,455,093 35,241,881 ------------ ------------ ------------ ------------ Income (loss) from operations before other income (expense) ........... (2,221,572) 1,707,939 (4,648,386) (834,949) Interest expense, net ..................... (1,555,620) (2,255,240) (5,557,719) (3,782,635) Equity in loss of partially-owned affiliate (148,782) -- (1,388,248) -- Gain on sale of affiliate common stock .... 5,531,498 -- 5,531,498 -- Other income (expense) .................... (666,041) 236,161 379,399 214,578 ------------ ------------ ------------ ------------ Income (loss) before income taxes ........ 939,483 (311,140) (5,683,456) (4,403,006) Benefit for income taxes .................. -- -- -- -- ------------ ------------ ------------ ------------ Net income (loss) ......................... $ 939,483 $ (311,140) $ (5,683,456) $ (4,403,006) ------------ ------------ ------------ ------------ Net income (loss) per common share: Basic ..................................... $ 0.10 $ (0.04) $ (0.64) $ (0.58) ------------ ------------ ------------ ------------ Diluted ................................... $ 0.07 $ (0.04) $ (0.64) $ (0.58) ------------ ------------ ------------ ------------ Weighted average number of common shares outstanding: Basic ................................... 9,222,481 7,629,043 8,848,212 7,614,410 Diluted ................................. 12,850,252 7,629,043 8,848,212 7,614,410
See accompanying notes to consolidated financial statements. 4 5 E COM VENTURES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
TWENTY-SIX TWENTY-SIX WEEKS ENDED WEEKS ENDED JULY 29, 2000 JULY 31, 1999 ------------- ------------- Cash flows from operating activities: Net loss ............................................... $ (5,683,456) $ (4,403,006) Adjustments to reconcile net loss to net cash used in operating activities: Provision for doubtful accounts ..................... 36,682 30,000 Recovery of previously written off asset ............ (1,006,333) -- Gain on sale of affiliate stock ..................... (5,531,498) -- Provision for impairment of assets and store closing 118,572 -- Depreciation and amortization ....................... 2,535,901 2,314,427 Equity in loss of partially-owned affiliate ......... 1,388,248 -- Beneficial conversion feature of convertible notes payable ................................. 2,636,764 1,365,384 Change in operating assets and liabilities: Trade receivables .............................. (1,657,212) (1,987,835) Advance to suppliers ........................... (5,170,386) (251,031) Inventories .................................... 2,301,043 (9,094,210) Prepaid and other current assets ............... (1,354,381) (579,269) Other assets ................................... (482,093) (275,080) Accounts payable ............................... 1,030,076 8,036,813 Other current liabilities ...................... (170,290) (1,023,383) Income taxes payable ........................... -- (116,835) ------------ ------------ Net cash used in operating activities .......... (11,008,363) (5,984,025) ------------ ------------ Cash flows from investing activities: Additions to property and equipment ............ (2,531,755) (1,812,939) Investments in and advances to partially-owned affiliates ................................. (3,302,411) -- ------------ ------------ Net cash used in investing activities .......... (5,834,166) (1,812,939) ------------ ------------ Cash flows from financing activities: Borrowings and repayments under bank line of credit 7,074,025 3,532,679 Repayment under subordinated notes payable ........ (2,000,000) -- Principal payments under capital lease obligations (255,365) (267,541) Net advances to shareholder and officers .......... (1,221,416) (21,720) Issuance of convertible notes payable ............. 9,000,000 4,000,000 Proceeds from sale of affiliate common stock ...... 6,500,000 -- Exercise of stock options ......................... 151,552 152,825 Purchase of treasury stock ........................ (2,004,227) -- ------------ ------------ Net cash provided by financing activities ...... 17,244,569 7,396,243 ------------ ------------ Increase (decrease) in cash and cash equivalents 402,040 (400,721) Cash and cash equivalents at beginning of period .... 1,995,610 1,745,603 ------------ ------------ Cash and cash equivalents at end of period .......... $ 2,397,650 $ 1,344,882 ============ ============
See accompanying notes to consolidated financial statements. 5 6 E COM VENTURES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - OPERATIONS AND BASIS OF PRESENTATION We were incorporated in Florida and previously operated under the name Perfumania, Inc. In order to provide greater flexibility for expansion, broaden the alternatives available for future financing and generally provide for greater administrative and operational flexibility, on February 1, 2000, we reorganized into a holding company structure with E Com Ventures, Inc. ("ECOMV" or "Company") as the holding company and Perfumania, Inc. ("Perfumania") as our wholly owned subsidiary. Our objective is to facilitate cross marketing and cross-promotional opportunities between our company, e-commerce investments and Perfumania. Our Internet strategy includes taking strategic positions in Internet related companies that have synergies with our other businesses. Our strategy envisions and promotes opportunities for synergistic business relationships among companies with which we are affiliated. We entered into three letters of intent during the current reporting periods subject to due diligence. Based on the developments in the Internet economy, among other reasons, the proposed transactions were not completed and have been terminated. Through Perfumania we are a leading specialty retailer and wholesale distributor of a wide range of brand name and designer fragrances. As of July 29, 2000 and July 31, 1999, we operated a chain of 262 and 281, respectively, retail stores specializing in the sale of fragrances at discounted prices up to 60% below the manufacturer's suggested retail prices. Perfumania's wholesale division distributes approximately 1,100 stock keeping units of fragrances and related products to approximately 41 customers, including national and regional chains and other wholesale distributors throughout North America and overseas. Perfumania manages and owns the wholesale business and the retail business is managed and owned by Magnifique Parfumes and Cosmetics, Inc., Perfumania's wholly owned subsidiary. Effective May 2000, we acquired perfumania.com, an Internet commerce site and online retailer of fragrances and related products (See Note 6). The consolidated financial statements include the accounts of ECOMV and subsidiaries. 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 adjustments which, in the opinion of management, are necessary for a fair presentation of the interim unaudited consolidated financial statements. It is suggested that these consolidated 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 29, 2000 filed with the SEC on May 15, 2000. Certain fiscal 1999 amounts have been reclassified to conform with the fiscal 2000 presentation. 6 7 NOTE 2 - COMPREHENSIVE INCOME We reported comprehensive income in accordance with Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income". Comprehensive income for the periods presented was as follows:
THIRTEEN THIRTEEN TWENTY-SIX TWENTY-SIX WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED JULY 29, 2000 JULY 31, 1999 JULY 29, 2000 JULY 31, 1999 ------------- ------------- ------------- ------------- Net income (loss) .... $ 939,483 ($ 311,140) ($ 5,683,456) ($ 4,403,006) Net unrealized gain on investments ...... 10,246,461 -- 10,424,896 -- ------------ ------------ ------------ ------------ Total comprehensive income (loss) .... $ 11,185,944 ($ 311,140) $ 4,741,440 ($ 4,403,006) ============ ============ ============ ============
NOTE 3 - BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE Basic income (loss) per common share has been computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted income 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 statements of operations, with the exception of the thirteen weeks ended July 29, 2000, incremental shares attributed to outstanding stock options and convertible notes were not included because the results would be anti-dilutive. The following data shows the amounts used in computing earnings per share and the effect on income and the weighted average number of shares of dilutive potential Common Stock.
THIRTEEN THIRTEEN WEEKS ENDED WEEKS ENDED JULY 29, 2000 JULY 31, 1999 ------------- ------------- Weighted average number of Common shares used in basic EPS 9,222,481 7,629,043 Effects of dilutive securities: Stock Options 983,159 -- Convertible Common Stock 2,644,612 -- ---------- --------- Weighted number of shares and dilutive potential Common Stock used in dilutive EPS 12,850,252 7,629,043 ========== =========
NOTE 4 - BANK LINE OF CREDIT On May 12, 2000, Perfumania entered into a three-year senior secured credit facility with GMAC Commercial Credit LLC ("GMAC") that provides for borrowings of up to $40 million. The new credit facility replaced the LaSalle National Bank credit facility. Advances under the line of credit are based on a formula of eligible inventories and bears interest at the lender's prime rate for the first six months of the term (9.5% as of July 29, 2000). After the first six months, the interest rate will be adjusted on a quarterly basis and will vary based on a formula as defined by the lender. Advances are secured by a first lien on all assets of Perfumania and the assignment of life insurance policies on two of our officers. The line contains limitations on additional borrowings, capital expenditures and other items, and contains various financial covenants including net worth and fixed charges coverage, as defined by the lender. As of July 29, 2000, Perfumania had outstanding borrowings under its credit facility of approximately $38.5 million. Perfumania was not in compliance with one financial covenant relating to minimum fixed charged coverage ratio as of July 29, 2000. Management believes that GMAC will waive the instance of non-compliance, and will amend the fixed charge coverage ratio covenant to be less restrictive. 7 8 NOTE 5 - SEGMENT INFORMATION Perfumania operates in two industry segments, specialty retail sale and wholesale distribution of fragrances and related products. The basis for determining Perfumania's operating segments is the manner in which financial information is used by Perfumania in its operations. Financial information for these segments is summarized in the following table.
THIRTEEN WEEKS THIRTEEN WEEKS TWENTY-SIX TWENTY-SIX ENDED ENDED WEEKS ENDED WEEKS ENDED JULY 29, 2000 JULY 31, 1999 JULY 29, 2000 JULY 31, 1999 --------------- --------------- -------------- -------------- Net sales to external customers Wholesale .................... $ 6,446,393 $10,948,201 $12,761,155 $22,214,955 Retail ....................... 42,191,181 35,004,313 75,491,163 63,138,523 ----------- ----------- ----------- ----------- Total net sales to external customers ............... $48,637,574 $45,952,514 $88,252,318 $85,353,478 ----------- ----------- ----------- ----------- Intersegment sales Wholesale ................... $ -- $ 4,771,477 $ 66,247 $ 7,532,244 ----------- ----------- ----------- ----------- Total intersegment sales .. $ -- $ 4,771,477 $ 66,247 $ 7,532,244 ----------- ----------- ----------- ----------- Gross profit Wholesale ................... $ 1,384,226 $ 2,473,395 $ 2,778,138 $ 4,667,405 Retail ...................... 17,999,790 16,680,368 33,028,569 29,739,527 ----------- ----------- ----------- ----------- Total gross profit ........ $19,384,016 $19,153,763 $35,806,707 $34,406,932 ----------- ----------- ----------- ----------- Depreciation and amortization Retail ...................... $ 1,319,097 $ 1,149,275 $ 2,535,901 $ 2,314,427 ----------- ----------- ----------- ----------- Total depreciation and amortization ............ $ 1,319,097 $ 1,149,275 $ 2,535,901 $ 2,314,427 ----------- ----------- ----------- ----------- Capital expenditures Retail ..................... $ 1,329,011 $ 882,376 $ 2,531,755 $ 1,812,939 ----------- ----------- ----------- ----------- Total capital expenditures $ 1,329,011 $ 882,376 $ 2,531,755 $ 1,812,939 ----------- ----------- ----------- -----------
JULY 29, JULY 31, 2000 1999 ----------- ----------- Inventory Wholesale .... $ 1,300,939 $ 9,075,491 Retail ...... 66,973,977 53,898,851 ----------- ----------- $68,274,916 $62,974,342 ----------- ----------- Number of Stores 262 281 An unaffiliated customer of the wholesale segment accounted for approximately 11% and 0% of the consolidated net sales for the thirteen weeks ended July 29, 2000 and July 31, 1999, respectively, and 49% and 35% of the consolidated net trade accounts receivable balance at July 29, 2000 and January 29, 2000, respectively. In the twenty-six week period ending July 29, 2000 and July 31, 1999, the wholesale segment included foreign sales of approximately $0.3 million and $1.9 million, respectively. 8 9 NOTE 6 - INVESTMENT IN AFFILIATES In May 2000, we acquired 100% of the outstanding common stock of perfumania.com, inc., a wholly owned subsidiary of Envision Development Corporation ("EDC"), in exchange for 400,000 shares of EDC common stock. The acquisition of perfumania.com has been accounted for using the purchase method of accounting, and accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. Net assets acquired consisted primarily of merchandise inventories. The results of operations for perfumania.com are included with our results from the date of acquisition. Prior to May 2000, our ownership in EDC was accounted for under the equity method of accounting for investments. As of July 29, 2000, the exchange of EDC shares for the acquisition of perfumania.com has been recorded based on the book value. We are currently awaiting the completion of an independent appraisal on the market value of the EDC shares exchanged to accurately record both the acquisition price and gain, if any. We believe the appraisal will be completed in the third quarter, and accordingly, any adjustment to either the acquisition price or the related gain on the sale of the shares will be recognized at that time. Additionally, in May 2000 we sold 100,000 shares of EDC common stock for $2.5 million to a majority shareholder of EDC, and in a related transaction, an investment firm exercised its option to acquire from us 500,000 shares of EDC common stock at $8.00 per share. As a result of these transactions, we received total cash proceeds of $6.5 million and realized a gain of approximately $5.5 million. As of July 29, 2000 we owned 1,000,000 shares of EDC, representing approximately an 8.0% interest in the outstanding shares of common stock of EDC. On June 13, 2000, we purchased 250,000 shares of Take To Auction.Com, Inc., ("Take To Auction") for $2,000,000. As of July 29, 2000, we own 5.9% of the outstanding shares of common stock of Take To Auction. Ilia Lekach, our Chairman and Chief Executive Officer and Horacio Groisman, M.D. one of our Directors, are also the Chairman and Vice Chairman, respectively, of Take To Auction (See Note 9). During the twenty-six week period ending July 29, 2000, we purchased approximately 343,000 shares of common stock, representing approximately 7% of the outstanding shares of common stock of The Sportsman's Guide, Inc., ("SGI"), a marketer of value priced outdoor gear and general merchandise for cash totaling approximately $1.6 million. During the thirteen weeks ended July 29, 2000, we sold approximately 222,000 shares of SGI and realized a loss on the sale of these securities of approximately $0.7 million, which is included in other expense on the accompanying consolidated statements of operations. All investments are accounted for as available-for-sale securities and are carried at fair value based on quoted market prices pursuant to Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Unrealized gains and losses are included in comprehensive income and is included in shareholders' equity of the accompanying consolidated balance sheet as of July 29, 2000. NOTE 7 - CONVERTIBLE NOTES PAYABLE On March 9, 2000, we entered into a Securities Purchase Agreement and issued an aggregate of $4 million worth of Series C Convertible Notes, which are convertible into our common stock. The notes bear interest at 8% and are payable in full in March 2003. The conversion price is the lower of (A) $9.58 per share, subject to adjustment or (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. On March 27, 2000, we entered into a Securities Purchase Agreement and issued an aggregate of $5 million worth of Series D Convertible Notes, which are convertible into our common stock. The notes bear interest at 8% and are payable 9 10 in full in March 2003. The conversion price is the lower of (A) $7.76 per share, subject to adjustment or (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. The SEC has indicated that when debt is convertible at a discount from the then current common stock market price, the discounted amount represents an incremental yield, e.g. a "beneficial conversion feature", which should be recognized as a return to the debt holders. Based on the market price of our common stock at the date of issuance, our Series C and Series D Notes had a beneficial conversion feature of approximately $1.2 million and $1.4 million, respectively, at such point in time which represented a non-cash charge and was included in interest expense for the thirteen week period ending April 29, 2000. NOTE 8 - RELATED PARTY TRANSACTIONS Notes receivable from a shareholder and officer were approximately $3.5 million as of July 29, 2000. The notes are secured by certain stock options held by the shareholder and officer, mature December 31, 2001 and bear interest at the rate charged by the Company's major lender. Principal and interest are payable in full at maturity. On June 1, 2000, Perfumania signed a $5,000,000 subordinated note agreement with Parlux Fragrances, Inc., whose Chairman of the Board of Directors and Chief Executive Officer Ilia Lekach, is the Company's Chairman of the Board and Chief Executive Officer. The note includes the refinancing of a $2,000,000 balance due to Parlux remaining under a previous $8,000,000 subordinated secure note dated October 4, 1999, and a reduction of $3,000,000 in trade payables due to Parlux. The note is due on December 29, 2000 with various periodic principal payments, bears interest at prime plus 1% and is subordinate to all bank related indebtedness. The outstanding amount of the indebtedness as of July 29, 2000 is included in the accompanying consolidated balance sheet as subordinated note payable, affiliate. NOTE 9 - CONVERTIBLE NOTES RECEIVABLE In December 1999, we loaned $1 million to Take To Auction pursuant to the terms of a convertible promissory note. The principal balance of the note is payable on December 20, 2001, and interest, which accrues at a rate of six percent per annum was payable semi-annually on the 21st day of each June and December commencing June 21, 2000. We had the right to convert, for a period of 14 days after Take To Auction's initial public offering, all of the principal amount of the note into shares of the Take to Auction's common stock at a conversion price per share equal to the initial public offering price. Take To Auction commenced its initial public offering on June 13, 2000 and we converted the $1.0 million note into 138,889 shares of Take To Auction's common stock. In March 2000, we loaned Take To Auction an additional $1.0 million pursuant to the terms of a convertible promissory note. The terms of the note were the same as the December 1999 note described above, except that the principal balance is payable on March 8, 2002 and interest is payable semi-annually on the 9th day of each September and March, commencing September 9, 2000. The note was repaid in full in June 2000. Take To Auction also granted us warrants to purchase 200,000 shares of its common stock at its initial public offering price. The warrants are exercisable in whole or in part until June 13, 2001. Due to the previous uncertainty of Take To Auction's initial public offering and collectability of the notes as of January 29, 2000, we expensed the principal balance of the note and related interest receivable. As a result of Take To Auction's initial public offering which commenced on June 13, 2000, the $1.0 million principal balance and related interest previously expensed was reversed in the first quarter of fiscal 2000. 10 11 NOTE 10 - TREASURY STOCK In December 1999, our Board of Directors approved a 1,500,000 stock repurchase program. Pursuant to this program, we repurchased approximately 816,000 and 626,000 shares of common stock for $3.4 million and $2.0 million in the fourth quarter of fiscal 1999 and the first two quarters of fiscal 2000, respectively. NOTE 11 - CONTINGENCIES We are involved in various legal proceedings in the ordinary course of business. Management believes that the ultimate resolution of these matters should not cause serious harm to our financial position or results of operations. NOTE 12 - NON CASH TRANSACTIONS Supplemental disclosures of non-cash investing and financing activities are as follows:
FOR THE TWENTY-SIX WEEKS ENDED ----------------------------------------- JULY 29, 2000 JULY 31, 1999 ------------------ --------------- Conversion of debt and accrued interest payable in exchange for common stock $2,843,300 -- Increase in subordinated notes payable $3,000,000 -- Net unrealized gain on marketable securities $10,424,896 -- Cash paid during the period for: Interest $3,022,210 $2,375,113
11 12 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 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 the actual results, performance or achievements of ECOMV or its industry to be materially different from any future results, performance or achievements expressed or implied by those forward-looking statements. WE MAY HAVE PROBLEMS RAISING THE MONEY NEEDED IN THE FUTURE. Our growth strategy includes investment in and acquisition of Internet related businesses. 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. OUR SUCCESS DEPENDS SIGNIFICANTLY ON INCREASED USE OF THE INTERNET BY BUSINESSES AND INDIVIDUALS. Our success depends significantly on increased use of the Internet for advertising, marketing, providing services, and conducting business. Commercial use of the Internet is currently at an early stage of development and the future of the Internet is not clear. Our business strategy will suffer if commercial use of the Internet fails to grow in the future. OUR STRATEGY OF EXPANDING OUR BUSINESS THROUGH ACQUISITIONS AND INVESTMENTS IN OTHER BUSINESSES AND TECHNOLOGIES PRESENTS SPECIAL RISKS. We intend to 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 to incur additional debt; 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. In addition, many of our investments will be in early-stage companies with limited operating histories and limited or no revenues. We may not be able to successfully develop these early-stage companies. 12 13 IF THE UNITED STATES OR OTHER GOVERNMENTS REGULATE THE INTERNET MORE CLOSELY, OUR BUSINESS MAY BE HARMED. Because of the Internet's popularity and increasing use, new laws and regulations may be adopted. These laws and regulations may cover issues such as privacy, pricing, taxation and content. The enactment of any additional laws or regulations may impede the growth of the Internet and our Internet-related business and could place additional financial burdens on our business. TO SUCCEED, WE MUST RESPOND TO THE RAPID CHANGES IN TECHNOLOGY AND DISTRIBUTION CHANNELS RELATED TO THE INTERNET. The markets for our Internet products and services are characterized by: o rapidly changing technology; o evolving industry standards; o frequent new product and service introductions; o shifting distribution channels; and o changing customer demands. Our success will depend on our ability to adapt to this rapidly evolving marketplace. We may not be able to adequately adapt our products and services or to acquire new products and services that can compete successfully. WE ARE SUBJECT TO INTENSE COMPETITION. The market for Internet products and services is highly competitive. Moreover, the market for Internet products and services lacks significant barriers to entry, enabling new businesses to enter this market relatively easily. Competition in the market for Internet products and services may intensify in the future. Numerous well-established companies and smaller entrepreneurial companies are focusing significant resources on developing and marketing products and services that will compete with our products and services. In addition, many of our 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 services. Competitive pressures may also force prices for Internet goods and services down and such price reductions may affect our potential future revenue. 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 will 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. PERFUMANIA'S BUSINESS IS SUBJECT TO SEASONAL FLUCTUATIONS, WHICH COULD LEAD TO FLUCTUATIONS IN OUR STOCK PRICE. The operation of Perfumania has historically experienced higher sales in the third and fourth fiscal quarters than in the first and second fiscal quarters. People increase their purchases of fragrances as gift items during the Christmas holiday season which results in significantly higher fourth fiscal quarter retail sales. If our quarterly operating results are below the expectations of stock market analysts, our stock price would likely decline. Our quarterly 13 14 results may also vary as a result of the timing of new store openings, 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. While we believe that Perfumania has good relationships with its vendors, if Perfumania is unable to obtain merchandise from one or more key vendors 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 IN ORDER FOR THE ADDITION OF OUR NEW STORES TO BE PROFITABLE. Even though Perfumania has grown significantly in the past several years, it may not be able to sustain the growth in revenues that it has achieved historically. Perfumania's growth is dependent, somewhat, 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 effect 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. This practice is common in the fragrance and cosmetics business. 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 and if Perfumania is unable to demonstrate this, it could, among other things, be restricted from reselling the particular merchandise. This type of restriction could seriously harm Perfumania's business and results of operations. 14 15 RESULTS OF OPERATIONS COMPARISON OF THE THIRTEEN WEEKS ENDED JULY 29, 2000 WITH THE THIRTEEN WEEKS ENDED JULY 31, 1999. Net sales increased from $46.0 million in the thirteen weeks ended July 31, 1999, to $48.6 million in the thirteen weeks ended July 29, 2000. Wholesale sales decreased 41.1% (from $10.9 million to $6.5 million) and retail sales increased by 20.5% (from $35.0 million to $42.2 million). The decrease in wholesale sales was due to an overall slowdown in the wholesale fragrance market, which is expected to continue into the third quarter of fiscal year 2000. The increase in retail sales was principally due to the increase in comparable retail stores sales. Comparable store sales during the current period increased 22% when compared to last year. Gross profit increased 1.2% from $19.2 million in the thirteen weeks ended July 31, 1999 (41.7% of net sales) to $19.4 million in the thirteen weeks ended July 29, 2000 (39.9% of net sales) due to an increase in gross profit for the retail division which was offset by a decrease in the wholesale division. Gross profit for the wholesale division decreased from $2.5 million in the thirteen weeks ended July 29, 2000 to $1.4 million in the thirteen weeks ended July 29, 2000 as a result of lower wholesale sales. As a percentage of net sales, gross profit for the wholesale division decreased from 22.6% in the thirteen weeks ended July 31, 1999 to 21.5% in the thirteen weeks ended July 29, 2000. Gross profit for the retail division increased to $18.0 million in the thirteen weeks ended July 29, 2000 from $16.7 million in the thirteen weeks ended July 31, 1999 as a result of higher retail sales. As a percentage of net sales, gross profit for the retail division decreased from 47.7% in the thirteen weeks ended July 31, 1999 to 42.7% in the thirteen weeks ended July 29, 2000 primarily as a result of 1) an improvement in merchandise assortment and product mix which has contributed to an increase in net sales and the average sales ticket, but at slightly lower margins, and 2) a July clearance promotion which resulted in a greater percentage of merchandise sold at discounted prices compared to the prior year. Operating expenses, which include selling, general and administrative expenses as well as depreciation, increased 23.8% from $17.4 million in the thirteen weeks ended July 31, 1999 to $21.6 million in the thirteen weeks ended July 29, 2000. As a percentage of net sales, operating expenses increased from 37.9% during the thirteen weeks ended July 31, 1999 to 44.4% during the thirteen weeks ended July 29, 2000. Operating expenses as a percentage of net sales increased due to 1) the negative sales leverage due to the reduction in wholesale sales 2) approximately $0.8 million of severance and consulting costs accrued for various senior management whose employment with the Company was terminated during the second quarter of fiscal year 2000, 3) higher store payroll associated with higher average hourly wage rates, 4) higher overhead and administrative expense, and 5) the reversal of $700,000 of accrued expenses for the Luria's litigation in July 1999. Interest expense, net decreased by 31.0% from $2.3 million for the thirteen weeks ended July 31, 1999 to $1.6 million for the thirteen weeks ended July 29, 2000. The decrease is primarily due to the issuance of $4 million of Series B convertible notes in July 1999 which resulted in a non-cash beneficial conversion interest charge of approximately $1.0 million during the prior period. Gain on sale of affiliate's common stock of $5.5 million arose from the sale of shares of EDC (See Note 6). As a result of the foregoing, we had a net income of $939,483, or $0.07 per diluted share, in the thirteen weeks ended July 29, 2000 compared to a net loss of $311,140, or ($0.04) per diluted share, in the thirteen weeks ended July 31, 1999. 15 16 COMPARISON OF THE TWENTY-SIX WEEKS ENDED JULY 29, 2000 WITH THE TWENTY-SIX WEEKS ENDED JULY 31, 1999. Net sales increased 3.4% from $85.4 million in the twenty-six weeks ended July 31, 1999 to $88.3 million in the twenty-six weeks ended July 29, 2000. The increase in net sales was due primarily to a 19.6% increase in retail sales (from $63.1 million to $75.5 million), offset by a 42.6% decrease in wholesale sales (from $22.2 million to $12.8 million). The decrease in wholesale sales was due to an overall slowdown in the wholesale fragrance market, which is expected to continue into the third quarter of fiscal year 2000. The increase in retail sales was principally due to the increase in comparable retail store sales. Comparable store sales during the twenty-six weeks ended July 29, 2000 increased 23.1% when compared to last year. Gross profit increased 4.1% from $34.4 million in the twenty-six weeks ended July 31, 1999 (40.3% of net sales) to $35.8 million in the twenty-six weeks ended July 29, 2000 (40.6% of net sales) as a result of increases in retail sales which was offset by decreases in wholesale sales. Gross profit for the wholesale division decreased 40.5% from $4.7 million in the twenty-six weeks ended July 31, 1999 to $2.8 million in the twenty-six weeks ended July 29, 2000. As a percentage of net sales, gross profit for the wholesale division increased from 21.0% in the twenty-six weeks ended July 31, 1999 to 21.8% in the twenty-six weeks ended July 29, 2000. Gross profit for the retail division increased 11.1% from $29.7 million in the twenty-six weeks ended July 31, 1999 to $33.0 million in the twenty-six weeks ended July 29, 2000. The retail division's gross margin decreased from 47.1% in the twenty-six weeks ended July 31, 1999 to 43.8% in the twenty-six weeks ended July 29, 2000 as a result of 1) an improvement in merchandise assortment and product mix which has contributed to an increase in net sales and the average sales ticket, but at slightly lower margins, and 2) a July clearance promotion which resulted in a greater percentage of merchandise sold at discounted prices compared to the prior year. Operating expenses, which include depreciation and amortization, increased $5.2 million in the twenty-six weeks ended July 29, 2000 compared to the twenty-six weeks ended July 31, 1999. As a percentage of net sales, operating expenses increased from 41.3% during the twenty-six weeks ended July 31, 1999 to 45.8% during the twenty-six weeks ended July 29, 2000. Operating expenses as a percentage of net sales increased due to 1) the negative sales leverage due to the reduction in wholesale sales, 2) approximately $0.8 million of severance and consulting costs accrued for various senior management whose employment with the Company was terminated during the second quarter of fiscal year 2000, 3) higher store payroll associated with higher average hourly wage rates, 4) higher overhead and administrative expense and 5) the reversal of $700,000 of accrued expenses for the Luria's litigation in July 1999. Interest expense, net increased by 46.9% from $3.8 million for the twenty-six weeks ended July 31, 1999 to $5.6 million for the twenty-six weeks ended July 29, 2000. The increase is principally due to the non-cash beneficial conversion cost of approximately $2.6 million associated with the issuance of the convertible notes in March 2000 (See Note 7), compared with a similar non-cash beneficial conversion cost of $1.1 million in fiscal 1999. In addition, we have incurred higher interest costs due to the increased outstanding balances on these convertible notes and our bank line of credit. Equity in loss of partially-owned affiliate of $1.4 million represents our share of EDC's net loss for the period we owned in excess of 20% of EDC's outstanding shares (February through April 2000). (See Note 6). Gain on sale of affiliate's common stock of $5.5 million arose from the sale of shares of EDC (See Note 6). 16 17 During the twenty-six weeks ended July 29, 2000 the Company had a net loss of $5,683,456 or $(0.64) per diluted share, compared to a net loss of $4,403,006 or ($0.58) per diluted share during the twenty-six weeks ended July 31, 1999. LIQUIDITY AND CAPITAL RESOURCES Our principal capital requirements are to fund working capital needs and to renovate existing stores. For the first twenty-six weeks of fiscal 2000, these capital requirements generally were satisfied through borrowings under our credit facility, cash flows from operations and issuance of convertible notes. At July 29, 2000, we had working capital of approximately $9.7 million compared to working capital of approximately $8.7 million at January 29, 2000. The increase was primarily due to an increase in advances to suppliers offset by increases in our bank line of credit. Net cash used in operating activities during the current period was approximately $11.0 million compared with approximately $6.0 million for the same period in the prior year. The increase in cash used in operating activities was principally a result of the loss for the period and the net change in our trade receivables, advances to suppliers, inventories and accounts payable. Net cash used in investing activities was approximately $5.8 million, compared with approximately $1.8 million for the same period in the prior year. Investing activities represent purchases of furniture, fixtures and equipment for store openings and the renovation of existing stores, information system advancements, as well as investments in other companies. Investments in and advances to partially owned affiliates increased by approximately $3.3 million primarily as a result of a $1.4 investment made to The Sportsman's Guide, Inc. and a $2.0 million investment in Take To Auction (See Notes 6 and 9). Net cash provided by financing activities during the current period was approximately $17.2 million compared with approximately $7.4 million for the same time period in the prior year. The increase was primarily the result of the issuance of $9 million convertible notes in March 2000, $6.5 million of proceeds received on the sale of common stock of EDC (See Note 6), and an increase in the outstanding balance on our bank line of credit. On May 12, 2000, Perfumania entered into a three-year senior secured credit facility with GMAC Commercial Credit LLC ("GMAC") that provides for borrowings of up to $40 million. The new credit facility replaces the LaSalle National Bank credit facility. Advances under the line of credit are based on a formula of eligible inventories and will bear interest at the lender's prime rate for the first six months of the term (9.5% as of July 29, 2000). After the first six months, the interest rate will be adjusted on a quarterly basis and will vary based on a formula set forth in the credit agreement. Advances are secured by a first lien on all assets of Perfumania and the assignment of life insurance policies on two of our officers. The line contains limitations on additional borrowings, capital expenditures and other items, and contains various financial covenants including net worth and fixed charges coverage, as defined by the lender. As of July 29, 2000, Perfumania had outstanding borrowings under its credit facility of approximately $38.5 million. Perfumania was not in compliance with one financial covenant relating to minimum fixed charged coverage ratio as of July 29, 2000. Management believes that GMAC will waive the instance of non-compliance, and will amend the fixed charge coverage ratio covenant to be less restrictive. Management believes that Perfumania's borrowing capacity under the new bank line of credit, projected cash flows from operations and other short term borrowings will be sufficient to support its working capital needs and capital expenditures, including remodeling of existing stores and debt service for at least the next twelve months. During the twenty-six weeks ended July 29, 2000, Perfumania opened 3 stores and closed 17 underperforming stores. At July 29, 2000, Perfumania operated 262 stores. Perfumania intends to continue focusing on improving the profitability of its existing stores and plans to open no more than 10 new stores in fiscal 2000, and close approximately 3 stores in the third and fourth quarters of fiscal 2000. 17 18 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS During the quarter ended July 29, 2000, there have been no material changes in the information about our market risks as of January 29, 2000 as set forth in Item 7A of the 1999 Form 10-K. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. 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) Reports on Form 8-K. On July 14, 2000, we filed a current report on Form 8-K reporting that we engaged Deloitte and Touche LLP as our independent certified public accountants effective July 10, 2000. On May 19, 2000, we filed a current report on Form 8-K reporting that we executed a Stock Purchase Agreement and acquired 100% of the issued and outstanding common stock of perfumania.com in consideration for 400,000 shares of Envision Development Corporation, Inc. common stock that were held by us. 18 19 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 11, 2000 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) 19