10-Q 1 g70095e10-q.txt E COM VENTURES 5/5/01 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 -------------------------------------- FOR THE QUARTERLY PERIOD ENDED MAY 5, 2001 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 JUNE 11, 2001, 10,201,393 1 2 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 Flow ............5 Notes to Consolidated Condensed Financial Statements ......6 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATION .............10 ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS .............................................14 PART II OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS ........................................14 ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS ...............14 ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K .........................14 SIGNATURES .................................................................15
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS E COM VENTURES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
MAY 5, 2001 FEBRUARY 3, 2001 -------------- ---------------- ASSETS: Current assets: Cash and cash equivalents $ 2,706,969 $ 2,219,768 Trade receivables, net 972,705 1,906,406 Advances to suppliers 4,391,821 5,937,106 Inventories, net 67,119,178 62,501,712 Prepaid expenses and other current assets 3,222,814 3,003,425 Investments available for sale 285,188 565,311 -------------- -------------- Total current assets 78,698,675 76,133,728 Property and equipment, net 25,036,444 26,412,851 Goodwill and other intangible assets 3,342,469 3,558,397 Other assets, net 1,109,006 1,223,841 -------------- -------------- Total assets $ 108,186,594 $ 107,328,817 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Bank line of credit and current portion of long-term debt $ 36,617,838 $ 34,737,058 Accounts payable, non-affiliates 13,194,509 12,453,497 Accounts payable, affiliate 15,969,681 13,412,811 Accrued expenses and other liabilities 7,031,514 6,964,758 Current portion of obligations under capital leases 1,576,955 1,551,093 -------------- -------------- Total current liabilities 74,390,497 69,119,217 Long term debt, less current portion 553,429 438,499 Long term portion of obligations under capital leases 2,196,123 2,601,434 Convertible notes payable 7,994,240 8,775,044 -------------- -------------- Total liabilities 85,134,289 80,934,194 -------------- -------------- Commitments and contingencies -- -- Shareholders' equity: Preferred stock, $0.1 par value, 1,000,000 shares authorized, none issued -- -- Common stock, $.01 par value, 25,000,000 shares authorized; 11,905,921 and 11,722,280 shares issued in 2001 and 2000, respectively 119,060 117,224 Additional paid-in capital 71,908,494 71,926,355 Treasury stock, at cost, 1,704,528 and 1,634,528 shares in 2001 and 2000, respectively (5,715,929) (5,643,377) Accumulated deficit (39,413,654) (36,011,206) Notes and interest receivable from shareholder and officers (3,415,447) (3,844,278) Accumulated other comprehensive loss (430,219) (150,095) -------------- -------------- Total shareholders' equity 23,052,305 26,394,623 -------------- -------------- Total liabilities and shareholders' equity $ 108,186,594 $ 107,328,817 ============== ==============
See accompanying notes to consolidated condensed financial statements. 3 4 E COM VENTURES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
THIRTEEN WEEKS ENDED THIRTEEN WEEKS ENDED MAY 5, 2001 APRIL 29, 2000 -------------------- -------------------- Net sales $ 40,582,515 $ 39,614,744 Cost of goods sold 23,920,830 23,192,053 ------------ ------------ Gross profit 16,661,685 16,422,691 ------------ ------------ Operating Expenses: Selling, general and administrative 17,285,983 17,632,701 Depreciation and amortization 1,769,550 1,216,804 ------------ ------------ Total operating expenses 19,055,533 18,849,505 ------------ ------------ Loss from operations (2,393,848) (2,426,814) ------------ ------------ Interest expense, net (1,008,600) (4,002,099) Equity in loss of partially-owned affiliate -- (1,239,466) Other income -- 1,045,440 ------------ ------------ Net loss $ (3,402,448) $ (6,622,939) ============ ============ Net loss per common share: Basic $ (0.34) $ (0.78) ============ ============ Diluted $ (0.34) $ (0.78) ============ ============ Weighted average number of common shares outstanding: Basic 10,107,583 8,461,381 ============ ============ Diluted 10,107,583 8,461,381 ============ ============
See accompanying notes to consolidated condensed financial statements. 4 5 E COM VENTURES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
THIRTEEN WEEKS ENDED THIRTEEN WEEKS ENDED MAY 5, 2001 APRIL 29, 2000 -------------------- -------------------- Cash flows from operating activities: Net loss $ (3,402,448) $ (6,622,939) Adjustments to reconcile net loss to net cash used in operating activities: Provision for doubtful accounts 15,000 21,682 Reversal for impairment of assets -- (1,006,333) Depreciation and amortization 1,769,550 1,216,804 Equity in loss of partially-owned affiliate -- 1,239,466 Beneficial conversion feature of convertible notes payable -- 2,636,764 Change in operating assets and liabilities: Trade receivables 918,701 654,775 Advances to suppliers 1,545,285 (4,995,593) Inventories (4,617,466) (4,352,195) Prepaid and other current assets (219,389) (65,804) Other assets 129,605 (674,698) Accounts payable 3,297,882 4,072,369 Accrued expenses and other liabilities 66,756 (371,714) ------------ ------------ Net cash used in operating activities (496,524) (8,247,416) ------------ ------------ Cash flows from investing activities: Additions to property and equipment (190,665) (1,202,400) Investments in and advances to partially-owned affiliates -- (2,883,535) ------------ ------------ Net cash used in investing activities (190,665) (4,085,935) ------------ ------------ Cash flows from financing activities: Net borrowings and repayments under bank line of credit and notes payable 1,995,710 5,957,462 Repayment of subordinated notes -- (1,500,000) Principal payments under capital lease obligations (379,449) (100,814) Net repayments from shareholders and officers 428,831 202,980 (Repayment) issuance of convertible notes payable (800,000) 9,000,000 Exercise of stock options 1,850 47,160 Purchases of treasury stock (72,552) (360,683) ------------ ------------ Net cash provided by financing activities 1,174,390 13,246,105 ------------ ------------ Increase in cash and cash equivalents 487,201 912,754 Cash and cash equivalents at beginning of period 2,219,768 1,995,610 ------------ ------------ Cash and cash equivalents at end of period $ 2,706,969 $ 2,908,364 ============ ============
See accompanying notes to consolidated condensed financial statements. 5 6 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 (the "Company" or "ECOMV"), is structured as a holding company that owns and operates Perfumania Inc. ("Perfumania"), a Florida corporation which is a specialty retailer and wholesaler of fragrances and related products, and perfumania.com, inc., an Internet retailer of fragrance and other specialty items. The Company also provides Internet fulfillment and services to other companies. The core of the Company's business is related to the distribution of fragrances and related products. Perfumania's retail stores are located in regional malls, manufacturer's outlet malls, airports and on a stand-alone basis in suburban strip shopping centers. The number of retail stores in operation at May 5, 2001 and April 29, 2000, were 254 and 268, respectively. The consolidated condensed financial statements include the accounts of ECOMV and subsidiaries (the "Company"). All material intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited consolidated condensed financial statements have been prepared as permitted by 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, 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 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 3, 2001 filed with the SEC on May 4, 2001. RECENT ACCOUNTING PRONOUNCEMENTS In the first quarter of 2001, the Company adopted Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). Among other provisions, SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It also requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The adoption of this standard did not have a material impact on the Company's financial position or the results of operations. NOTE 2 - BANK LINE OF CREDIT Perfumania's three year senior secured credit facility with GMAC Commercial Credit LLC provides for borrowings of up to $40 million, of which $1.0 million was available at May 5, 2001, and supports normal working capital requirements and other general corporate purposes. As of May 5, 2001, the credit facility bore interest at 7.5%. Borrowings are secured by a first lien on all assets of Perfumania and the assignment of a life insurance policy on an officer of the Company. The line 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 May 5, 2001, Perfumania was in compliance with all financial covenants of the line. 6 7 NOTE 3 - 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 4 - COMPREHENSIVE LOSS Comprehensive loss represents all non-owner changes in shareholders' equity and consists of the following:
THIRTEEN WEEKS ENDED THIRTEEN WEEKS ENDED MAY 5, 2001 APRIL 29, 2000 -------------------- -------------------- Net loss $ (3,402,448) $ (6,622,939) Net unrealized loss on investments available for sale (280,124) (178,435) ------------ ------------ Total comprehensive loss $ (3,682,572) $ (6,801,374) ============ ============
7 8 NOTE 5 - SEGMENT INFORMATION Perfumania operates in two industry segments, specialty retail sale and wholesale distribution of fragrances and related products. Financial information for these segments is summarized in the following table.
THIRTEEN WEEKS ENDED THIRTEEN WEEKS ENDED MAY 5, 2001 APRIL 29, 2000 -------------------- -------------------- Sales to external customers: Wholesale $ 5,682,733 $ 6,314,762 Retail 34,899,782 33,299,982 ----------- ----------- Total sales to external customers $40,582,515 $39,614,744 ----------- ----------- Intersegment sales: Wholesale $ 357,586 $ 167,009 ----------- ----------- Total intersegment sales $ 357,586 $ 167,009 ----------- ----------- Cost of goods sold: Wholesale $ 4,477,522 $ 4,920,850 Retail 19,443,308 18,271,203 ----------- ----------- Total cost of goods sold $23,920,830 $23,192,053 ----------- ----------- Gross profit: Wholesale $ 1,205,211 $ 1,393,912 Retail 15,456,474 15,028,779 ----------- ----------- Total gross profit $16,661,685 $16,422,691 ----------- ----------- Depreciation and amortization: Retail $ 1,215,438 $ 831,488 Corporate 554,112 385,316 ----------- ----------- Total depreciation and amortization $ 1,769,550 $ 1,216,804 ----------- ----------- Capital expenditures: Retail $ 119,416 $ 561,253 Corporate 71,249 641,147 ----------- ----------- Total capital expenditures $ 190,665 $ 1,202,400 ----------- ----------- MAY 5, 2001 FEBRUARY 3, 2001 ------------ ---------------- Inventory: Wholesale $ 597,918 $ 1,213,000 Retail 66,521,260 61,288,712 ------------ ------------ $ 67,119,178 $ 62,501,712 ------------ ------------
An unaffiliated customer of the wholesale segment accounted for approximately 13% of the consolidated net sales for both the thirteen weeks ended May 5, 2001 and April 29, 2000. 8 9 NOTE 6 - INVESTMENTS AVAILABLE FOR SALE We have investments in Internet related businesses. The carrying value of these investments as of May 5, 2001 totaled $0.3 million. The decline in carrying values from original cost resulted primarily from non-temporary impairments recorded in fiscal 2000. There were no investment transactions during the first quarter of fiscal 2001. NOTE 7 - CONVERTIBLE NOTES PAYABLE In February 2001, the Company entered into a Convertible Note Option Repurchase Agreement (the "Agreement") with the holders of the Company's outstanding Series A, B, C and D Convertible Notes. The Agreement provides that the Company has the monthly option to repurchase the total outstanding convertible notes over an eleven month period beginning February 2001, at a price equal to the unpaid principal balance plus a 20% premium. The portion of the notes redeemable in each of the eleven months varies as per a specified redemption schedule. In the event that the Company exercises its monthly option, the note holders are 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 quarter of fiscal year 2001, the Company repaid $0.8 million to the note holders. NOTE 8 - CONTINGENCIES The Company is involved in legal proceedings in the ordinary course of business. Management cannot presently predict the outcome of these matters, although management believes that the Company would have meritorious defenses and that the ultimate resolution of these matters should not have a materially adverse effect on the Company's financial position or result of operations. NOTE 9 - NON CASH TRANSACTIONS Supplemental disclosures of non-cash investing and financing activities are as follows:
FOR THE THIRTEEN WEEKS ENDED ----------------------------------- MAY 5, 2001 APRIL 29, 2000 ------------ -------------- Conversion of debt and accrued interest payable in exchange for common stock $ 115,459 $ 624,514 Unrealized loss on investments available for sale 280,124 178,435 Increase in investment in partially-owned affiliate -- 18,557,988 Cash paid during the period for: Interest 1,203,289 1,642,426 Income taxes 150,000 --
9 10 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 the Company 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 increasing Perfumania's average retail sales per store, and cross marketing 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. 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 would likely 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. While we believe that Perfumania has good relationships with its suppliers, 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 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 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 10 11 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. OUR COMMON STOCK MAY BE DELISTED Our Common Stock is currently listed on the Nasdaq national market. Due to the recent decline in trading prices of our Common Stock, Nasdaq has notified us that we do not meet its minimum listing requirements and as a result, our Common Stock may be delisted. These listing requirements include a series of financial tests relating to net tangible assets, public float, number of market makers and shareholders, and maintaining a minimum bid price for listed securities of $1.00. Our Common Stock has traded below $1.00 for more than 30 days and there is no guarantee that it will return to a minimum bid price of $1.00 or higher. If we fail to meet Nasdaq's maintenance criteria our Common Stock may be delisted by Nasdaq. In such event, trading, if any, in our Common Stock may then continue to be conducted in the non-NASDAQ over-the-counter market (commonly referred to as the electronic bulletin board and the "pink sheets"). As a result, an investor may find it more difficult to dispose of or obtain accurate quotations as to the market value of our Common Stock. In addition, we would be subject to a Securities and Exchange Commission Rule that may adversely affect the ability of broker-dealers to sell our Common Stock, which would adversely affect the ability of our shareholders to sell their shares in the secondary market. Delisting could make trading our shares more difficult for investors, potentially leading to further declines in share price. It would also make it more difficult and more expensive for us to raise additional capital. 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. 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, store location and ambiance. 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 products or services. 11 12 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: - difficulty integrating acquired technologies, operations, and personnel with our existing business; - diversion of management's attention in connection with both negotiating the acquisitions and integrating the assets; - the need for additional funding; - strain on managerial and operational resources as management tries to oversee larger operations; and - 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. RESULTS OF OPERATIONS COMPARISON OF THE THIRTEEN WEEKS ENDED MAY 5, 2001 WITH THE THIRTEEN WEEKS ENDED APRIL 29, 2000. Net sales increased 2.4% from $39.6 million in the first thirteen weeks of 2000 to $40.6 million in the first thirteen weeks of 2001. The increase in net sales was the result of a 4.8% increase in retail sales (from $33.3 million to $34.9 million) offset by a 10.0% decrease in wholesale sales (from $6.3 million to $5.7 million). The decrease in wholesale sales was primarily due to our continuing strategic initiative to redirect our managerial, administrative and inventory resources to our retail operations. The increase in retail sales was due to the acquisition of perfumania.com in May 2000 and the opening of 8 new stores over the past year as Perfumania's comparable store sales were flat during the first thirteen weeks of 2001 compared to the same period in 2000. The average number of stores operated during the first thirteen weeks of 2001 compared to the first thirteen weeks of 2000 decreased from 270 to 255. Gross profit increased 1.5% from $16.4 million in the first thirteen weeks of 2000 (41.5% of total net sales) to $16.7 million in the first thirteen weeks of 2001 (41.1% of total net sales) primarily due to an increase in gross profit for the retail division, offset by a decrease in gross profit for the wholesale division. Gross profit for the wholesale division decreased 13.5% from $1.4 million in the first thirteen weeks of 2000 to $1.2 million in the first thirteen weeks of 2001 due to the decrease in wholesale sales discussed above. As a percentage of net sales, gross profit for the wholesale division decreased from 22% in the first thirteen weeks of 2000 to 21% in the first thirteen weeks of 2001. Wholesale sales yield a lower gross margin than retail sales. Gross profit for the retail division increased 2.8% to $15.5 million in the first thirteen weeks of 2001 from $15.0 million in the first thirteen weeks of 2000 as a result of higher retail sales. As a percentage of net retail sales, gross profit for the retail division decreased from 45.1% in the first thirteen weeks of 2000 to 44.3% in the first thirteen weeks of 2001 due to lower merchandise gross margins. Selling, general and administrative expenses decreased 2.0% from $17.6 million in the first thirteen weeks of 2000 to $17.3 million in the first thirteen weeks of 2001. The decrease was primarily attributable to lower store operating costs due to a reduction in the average number of stores in operation in 2001 compared with 2000. Depreciation and amortization increased 45.4% from $1.2 million in the first thirteen weeks of 2000 to $1.8 million in the first thirteen weeks of 2001. The increase is due primarily to the amortization of goodwill related to the acquisition of perfumania.com in May 2000 and depreciation related to information systems improvements during the past year. 12 13 EBITDA, defined as earnings (loss) from operations less depreciation and amortization improved by $0.6 million from ($1.2) million in the first thirteen weeks of 2000 to ($0.6) million in the first thirteen weeks of 2001, due to increased sales and gross profit and lower selling, general and administrative expenses as described above. Interest expense decreased from $4.0 million for the thirteen weeks of 2000 to $1.0 million for the thirteen weeks of 2001. The prior comparative period reflected the issuance of $9 million of Series C and D convertible notes in March 2000 which resulted in a non-cash beneficial conversion interest charge of approximately $2.6 million. Additionally, in the current period, we benefited from a lower cost of borrowing on our bank line of credit because of a decrease in the prime rate. Equity in loss of partially-owned affiliate of $1.2 million in the first thirteen weeks of 2000 resulted from the Company's then 21.8% ownership interest in Envision Development Corporation ("EDC"). In fiscal 2000, the Company wrote off its remaining investment in EDC of approximately $0.6 million due to EDC ceasing operations. Other income of $1.0 million in the first thirteen weeks of 2000 resulted from the recovery of a write-off on a convertible note receivable that had previously been written off in fiscal 1999. As a result of the foregoing, we had a net loss of $3.4 million in the first thirteen weeks of 2001 compared to a net loss of $6.6 million in the first thirteen weeks of 2000. Net loss per share for the thirteen week periods of 2001 and 2000 was $0.34 and $0.78 per share, respectively. LIQUIDITY AND CAPITAL RESOURCES Our principal capital requirements are to fund working capital needs, to open new stores and to renovate existing stores. For the first thirteen weeks of fiscal 2001, these capital requirements generally were satisfied through borrowings under our credit facility and cash flows from operations. At May 5, 2001, we had a working capital of approximately $4.3 million compared to a working capital of approximately $7.0 million at February 3, 2001. The reduction was primarily due to increases in our bank line of credit and accounts payable offset by an increase in inventories as a result of seasonal demands. Net cash used in operating activities during the current period was approximately $0.5 million compared with approximately $8.2 million for the same period in the prior year. The reduction in cash used in operating activities was a result of the net change in our trade receivables, advances to suppliers, inventories and accounts payable. Net cash used in investing activities was approximately $0.2 million, compared with approximately $4.1 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 and information system advancements. Net cash provided by financing activities during the current period was approximately $1.2 million compared with approximately $13.2 million for the same time period in the prior year. The prior year reflected the issuance of $9 million convertible notes in March 2000. Perfumania's three year senior secured credit facility with GMAC Commercial Credit LLC provides for borrowings of up to $40 million and supports normal working capital requirements and other general corporate purposes. As of May 5, 2001, the credit facility bore interest at 7.5%. Borrowings are secured by a first lien on all assets of Perfumania and the assignment of a life insurance policy on an officer of the Company. The line 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 May 5, 2001, Perfumania was in compliance with all financial covenants of the line. 13 14 Management believes that Perfumania's borrowing capacity under its 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 thirteen weeks ended May 5, 2001, Perfumania closed 3 stores and did not open any new stores. At May 5, 2001, Perfumania operated 254 stores. Management intends to focus on improving the profitability of existing stores and plans to open a maximum of 10 new stores in fiscal 2001. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS During the quarter ended May 5, 2001, there have been no material changes in the information about our market risks as of February 3, 2001 as set forth in Item 7A of the 2000 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 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 Number Description of Exhibit ------ ----------------------
--------------- (1) Filed herewith. (b) Reports on Form 8-K. None 14 15 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: June 15, 2001 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 and Director (Principal Financial and Accounting Officer) 15