10-Q 1 g71731e10-q.txt E COM VENTURES 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 AUGUST 4, 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 AUGUST 31, 2001, 9,577,412 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 Flows........................................5 Notes to Consolidated Condensed Financial Statements...................................6 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................................................11 ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS..........................................................................17
PART II OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS.....................................................................17 ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS.............................................17 ITEM 3 DEFAULTS UPON SENIOR SECURITIES.......................................................17 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................17 ITEM 5 OTHER INFORMATION.....................................................................17 ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K......................................................17 SIGNATURES..............................................................................................18
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS E COM VENTURES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
AUGUST 4, 2001 FEBRUARY 3, 2001 -------------- ---------------- ASSETS: Current assets: Cash and cash equivalents $ 2,188,185 $ 2,219,768 Trade receivables, net 968,809 1,906,406 Advances to suppliers 6,212,962 5,937,106 Inventories, net 63,130,406 62,501,712 Prepaid expenses and other current assets 1,945,159 3,003,425 Investments available for sale 174,885 565,311 ------------- ------------- Total current assets 74,620,406 76,133,728 Property and equipment, net 23,511,152 26,412,851 Goodwill and other intangible assets 3,141,751 3,558,397 Other assets 1,066,876 1,223,841 ------------- ------------- Total assets $ 102,340,185 $ 107,328,817 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Bank line of credit $ 32,026,009 $ 33,526,504 Current portion of long term debt 613,250 1,210,554 Accounts payable, non-affiliates 14,090,426 12,453,497 Accounts payable, affiliate 13,855,785 13,412,811 Accrued expenses and other liabilities 7,288,635 6,964,758 Subordinated note payable, affiliate 3,000,000 -- Current portion of obligations under capital leases 1,606,229 1,551,093 ------------- ------------- Total current liabilities 72,480,334 69,119,217 Long term debt, less current portion 462,065 438,499 Long term portion of obligations under capital leases 1,782,113 2,601,434 Convertible notes payable 7,327,573 8,775,044 ------------- ------------- Total liabilities 82,052,085 80,934,194 ------------- ------------- Commitments and contingencies Shareholders' equity: Preferred stock, $0.10 par value, 1,000,000 shares authorized, none issued -- -- Common stock, $.01 par value, 25,000,000 shares authorized; 11,921,221 and 11,722,280 shares issued in 2001 and 2000, respectively 119,213 117,224 Additional paid-in capital 71,782,658 71,926,355 Treasury stock, at cost, 2,343,809 and 1,634,528 shares in 2001 and 2000, respectively (6,376,176) (5,643,377) Accumulated deficit (41,128,942) (36,011,206) Notes and interest receivable from shareholder and officers (3,568,132) (3,844,278) Accumulated other comprehensive loss (540,521) (150,095) ------------- ------------- Total shareholders' equity 20,288,100 26,394,623 ------------- ------------- Total liabilities and shareholders' equity $ 102,340,185 $ 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 Thirteen Weeks Twenty-Six Weeks Twenty-Six Weeks Ended Ended Ended Ended August 4, 2001 July 29, 2000 August 4, 2001 July 29, 2000 -------------- -------------- ---------------- ---------------- Net sales $ 44,201,926 $ 48,702,148 $ 84,784,441 $ 88,316,892 Cost of goods sold 25,534,755 29,318,132 49,455,585 52,510,185 ------------ ------------ ------------ ------------ Gross profit 18,667,171 19,384,016 35,328,856 35,806,707 ------------ ------------ ------------ ------------ Operating expenses: Selling, general and administrative 17,854,714 20,286,491 35,140,697 37,919,192 Depreciation and amortization 1,724,488 1,464,509 3,494,038 2,681,313 ------------ ------------ ------------ ------------ Total operating expenses 19,579,202 21,751,000 38,634,735 40,600,505 ------------ ------------ ------------ ------------ Loss from operations before other (expense) income (912,031) (2,366,984) (3,305,879) (4,793,798) ------------ ------------ ------------ ------------ Interest expense, net (803,257) (1,555,620) (1,811,857) (5,557,719) Equity in loss of partially-owned affiliate -- (148,782) -- (1,388,248) Gain on sale of affiliate common stock -- 9,998,454 -- 9,998,454 Other (expense) income -- (666,041) -- 379,399 ------------ ------------ ------------ ------------ Net (loss) income $ (1,715,288) $ 5,261,027 $ (5,117,736) $ (1,361,912) ============ ============ ============ ============ Net (loss) income per common share: Basic $ (0.18) $ 0.57 $ (0.52) $ (0.15) ============ ============ ============ ============ Diluted $ (0.18) $ 0.41 $ (0.52) $ (0.15) ============ ============ ============ ============ Weighted average number of common shares outstanding: Basic 9,768,969 9,222,481 9,938,276 8,848,212 ============ ============ ============ ============ Diluted 9,768,969 12,850,252 9,938,276 8,848,212 ============ ============ ============ ============
See accompanying notes to consolidated condensed financial statements. 4 5 E COM VENTURES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Twenty-Six Weeks Ended Twenty-Six Weeks Ended August 4, 2001 July 29, 2000 ---------------------- ---------------------- Cash flows from operating activities: Net loss $(5,117,736) $ (1,361,912) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Provision for doubtful accounts 30,000 36,682 Reversal for impairment of assets -- (1,006,333) Gain on sale of affiliate stock -- (9,998,454) Provision for impairment of inventory 279,155 -- Provision for impairment of assets and store closing 493,713 118,572 Depreciation and amortization 3,494,038 2,681,313 Equity in loss of partially-owned affiliate -- 1,388,248 Beneficial conversion feature of convertible notes payable -- 2,636,764 Change in operating assets and liabilities: Trade receivables 907,597 (1,657,212) Advances to suppliers (275,856) (5,170,386) Inventories (907,849) 2,301,043 Prepaid expenses and other current assets 1,058,266 (1,354,381) Other assets 170,246 (482,093) Accounts payable 5,079,903 1,030,076 Accrued expenses and other liabilities 325,198 (170,290) ----------- ------------ Net cash provided by (used in) operating activities 5,536,675 (11,008,363) ----------- ------------ Cash flows from investing activities: Additions to property and equipment (682,687) (2,531,755) Investments in and advances to partially-owned affiliates -- (3,302,411) ----------- ------------ Net cash used in investing activities (682,687) (5,834,166) ----------- ------------ Cash flows from financing activities: Net (repayments) and borrowings under bank line of credit and notes payable (2,074,233) 7,074,025 Repayment of subordinated notes -- (2,000,000) Principal payments under capital lease obligations (764,185) (255,365) Net repayments (advances) to shareholders and officers 276,146 (1,221,416) (Repayment) issuance of convertible notes payable (1,600,000) 9,000,000 Proceeds from sale of affiliate common stock -- 6,500,000 Exercise of stock options 9,500 151,552 Purchases of treasury stock (732,799) (2,004,227) ----------- ------------ Net cash (used in) provided by financing activities (4,885,571) 17,244,569 ----------- ------------ (Decrease) increase in cash and cash equivalents (31,583) 402,040 Cash and cash equivalents at beginning of period 2,219,768 1,995,610 ----------- ------------ Cash and cash equivalents at end of period $ 2,188,185 $ 2,397,650 =========== ============
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 ("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. ECOMV and its subsidiaries (the "Company") also provides Internet fulfillment and services. 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 August 4, 2001 and July 29, 2000, were 248 and 262, respectively. The consolidated condensed financial statements include the accounts of ECOMV and its subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by those rules and regulations. 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. RECLASSIFICATION Certain fiscal 2000 amounts have been reclassified to conform with the fiscal 2001 presentation. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), Accounting for Business Combinations, and Statement of Financial Accounting Standards No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets. These Statements modify accounting for business combinations after June 30, 2001 and will affect the Company's treatment of goodwill and other intangible assets at the start of fiscal year 2002. The Statements require that goodwill existing at the date of adoption be reviewed for possible impairment and that impairment tests be periodically repeated, with impaired assets written-down to fair value. Additionally, existing goodwill and intangible assets must be assessed and classified consistent with the Statements' criteria. Amortization of goodwill and other intangible assets with indefinite useful lives will cease. At this time, the Company has not determined the complete impact of these Statements. For the twenty-six weeks ended August 4, 2001, the Company has recognized approximately $0.4 million of goodwill amortization. 6 7 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 $32.0 million was outstanding and $2.8 million was available at August 4, 2001. The credit facility supports normal working capital requirements and other general corporate purposes. As of August 4, 2001, the credit facility bore interest at 6.3%. 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 and capital expenditures among other items, and contains various covenants including maintenance of minimum net worth, and certain key ratios, as defined by the lender. As of August 4, 2001, Perfumania was in compliance with all financial covenants. 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 (loss) per share includes, in periods in which common stock equivalents 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, 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. NOTE 4 - 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 August 4, 2001 July 29, 2000 August 4, 2001 July 29, 2000 -------------- -------------- --------------- ---------------- Net (loss) income $(1,715,288) $ 5,261,027 $(5,117,736) $ (1,361,912) Other comprehensive (loss) income - Net unrealized (loss) gain on investments (110,302) 10,246,461 (390,426) 10,424,896 ----------- ----------- ----------- ------------ Total comprehensive (loss) income $(1,825,590) $15,507,488 $(5,508,162) $ 9,062,984 ----------- ----------- ----------- ------------
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 Thirteen Weeks Twenty-Six Weeks Twenty-Six Weeks Ended Ended Ended Ended August 4, 2001 July 29, 2000 August 4, 2001 July 29, 2000 -------------- -------------- ---------------- ---------------- Net sales to external customers: Wholesale $ 1,822,713 $ 6,446,393 $ 7,505,446 $12,761,155 Retail 42,379,213 42,255,755 77,278,995 75,555,737 ----------- ----------- ----------- ----------- Total net sales to external customers $44,201,926 $48,702,148 $84,784,441 $88,316,892 ----------- ----------- ----------- ----------- Cost of goods sold: Wholesale $ 1,440,141 $ 5,062,167 $ 5,917,663 $ 9,983,017 Retail 24,094,614 24,255,965 43,537,922 42,527,168 ----------- ----------- ----------- ----------- Total cost of goods sold: $25,534,755 $29,318,132 $49,455,585 $52,510,185 ----------- ----------- ----------- ----------- Gross profit: Wholesale $ 382,572 $ 1,384,226 $ 1,587,783 $ 2,778,138 Retail 18,284,599 17,999,790 33,741,073 33,028,569 ----------- ----------- ----------- ----------- Total gross profit $18,667,171 $19,384,016 $35,328,856 $35,806,707 ----------- ----------- ----------- ----------- Depreciation and amortization: Retail $ 1,106,855 $ 996,446 $ 2,322,293 $ 1,827,934 Corporate 617,633 468,063 1,171,745 853,379 ----------- ----------- ----------- ----------- Total depreciation and amortization $ 1,724,488 $ 1,464,509 $ 3,494,038 $ 2,681,313 ----------- ----------- ----------- ----------- Capital expenditures: Retail $ 420,761 $ 676,377 $ 540,102 $ 917,841 Corporate 71,261 652,634 142,585 1,613,914 ----------- ----------- ----------- ----------- Total capital expenditures $ 492,022 $ 1,329,011 $ 682,687 $ 2,531,755 ----------- ----------- ----------- -----------
August 4, 2001 February 3, 2001 -------------- ---------------- Inventory: Wholesale $ 51,616 $ 1,213,000 Retail 63,078,790 61,288,712 ----------- ----------- $63,130,406 $62,501,712 ----------- -----------
An unaffiliated customer of the wholesale segment accounted for approximately 4% and 11%, and 8% and 12%, of the consolidated net sales for the thirteen and twenty-six weeks, respectively, ended August 4, 2001 and July 29, 2000. NOTE 6 - INVESTMENTS AVAILABLE FOR SALE The Company has investments in Internet related businesses. The carrying value of these investments as of August 4, 2001 totaled $0.2 million. The decline in carrying values from original cost resulted primarily from non-temporary impairments recorded as a charge to income in fiscal 2000. There were no investment transactions during the first twenty-six weeks of fiscal 2001. As of August 31, 2001, the market value of the investments was $0.7 million. 8 9 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 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 the Company exercises its 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 twenty-six weeks of fiscal year 2001, the Company repaid $1.6 million to the note holders. NOTE 8 - RELATED PARTY TRANSACTIONS Notes receivable from a shareholder and officer were approximately $3.6 million as of August 4, 2001. The notes are secured by certain stock options held by the shareholder and officer, mature December 31, 2001 and bear interest at 8% per annum. Principal and interest are payable in full at maturity. On June 30, 2001, Perfumania signed a $3,000,000 subordinated note agreement with Parlux Fragrances, Inc., ("Parlux") 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 represents the reduction of $3,000,000 in trade payables due to Parlux. The note is due on March 31, 2002 with monthly principal and interest payments beginning October 31, 2001, bears interest at prime plus 1% and is subordinate to all bank related indebtedness. The outstanding amount of the indebtedness as of August 4, 2001 is reflected in the accompanying consolidated condensed balance sheet as subordinated note payable, affiliate. NOTE 9 - TREASURY STOCK As of August 4, 2001, the Company had acquired approximately 2.3 million shares of Treasury Stock for a total cost of approximately $6.4 million. For the thirteen and twenty-six week periods ended August 4, 2001, the Company acquired approximately 639,000 and 709,000 shares of common stock for approximately $660,000 and $735,000 at an average cost per share of $1.03. NOTE 10 - CONTINGENCIES The Company is involved in legal proceedings in the ordinary course of business. Management cannot presently predict the outcome of these matters. Management believes that the Company has 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. 9 10 NOTE 11 - NON-CASH TRANSACTIONS Supplemental disclosures of non-cash activities are as follows:
For the Twenty-Six Weeks Ended -------------------------------------- August 4, 2001 July 29, 2000 -------------- ------------- Conversion of notes payable and accrued interest payable in exchange for common stock $ 115,459 $ 2,843,300 Decrease in accounts payable in exchange for subordinated notes payable--affiliate $ 3,000,000 $ 3,000,000 Net unrealized (loss) gain on marketable securities $ (390,426) $10,424,896 Cash paid during the period for: Interest $ 1,969,665 $ 2,547,693 Income taxes $ 150,000 --
10 11 PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 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 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 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 11 12 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. FUTURE GROWTH MAY PLACE STRAINS ON OUR MANAGERIAL, OPERATIONAL AND FINANCIAL RESOURCES Future growth may place a significant strain on our managerial, operational and financial resources. 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 might 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 international, national or regional chains that have substantially greater resources and name recognition than Perfumania. Perfumania's stores compete on the basis of selling price, customer service, merchandise variety and store location. Many of our 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. EXPANDING OUR BUSINESS THROUGH ACQUISITIONS AND INVESTMENTS IN OTHER BUSINESSES AND TECHNOLOGIES PRESENTS SPECIAL RISKS We may expand through the acquisition of and investment in other businesses. Acquisitions involve a number of special problems, including: - 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 financing; - 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 might 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 RESULTS OF OPERATIONS COMPARISON OF THE THIRTEEN WEEKS ENDED AUGUST 4, 2001 WITH THE THIRTEEN WEEKS ENDED JULY 29, 2000. Net sales decreased from $48.7 million in the thirteen weeks ended July 29, 2000, to $44.2 million in the thirteen weeks ended August 4, 2001. Wholesale sales decreased 71.7% (from $6.4 million to $1.8 million) and retail sales increased by 0.3% (from $42.3 million to $42.4 million). The decrease in wholesale sales was due to our continuing strategic initiative to redirect our managerial, administrative and inventory resources to our retail operations. Wholesale Sales are expected to decrease during the second half of fiscal 2001 when compared to the prior year. The increase in retail sales was principally due to the increase in Internet sales as comparable store sales during the current period were unchanged when compared to last year. Gross profit decreased 3.7% from $19.4 million in the thirteen weeks ended July 29, 2000 (39.8% of net sales) to $18.7 million in the thirteen weeks ended August 4, 2001 (42.2% of net sales) due to a decrease in gross profit for the wholesale division which was offset by an increase in gross profit for the retail division. Gross profit for the wholesale division decreased from $1.4 million in the thirteen weeks ended July 29, 2000 to $0.4 million in the thirteen weeks ended August 4, 2001 as a result of lower wholesale sales. As a percentage of wholesale sales, gross profit for the wholesale division decreased from 21.5% in the thirteen weeks ended July 29, 2000 to 21.0% in the thirteen weeks ended August 4, 2001. Gross profit for the retail division increased to $18.3 million in the thirteen weeks ended August 4, 2001 from $18.0 million in the thirteen weeks ended July 29, 2000. As a percentage of retail sales, gross profit for the retail division increased from 42.6% in the thirteen weeks ended July 29, 2000 to 43.1% in the thirteen weeks ended August 4, 2001, primarily as a result of higher margins on merchandise sold. Selling, general and administrative expenses decreased 12.0% from $20.3 million in the thirteen weeks ended July 29, 2000 to $17.9 million in the thirteen weeks ended August 4, 2001. The decrease is attributable to 1) approximately $0.8 million of severance and consulting costs accrued during fiscal 2000 for various senior management whose employment with the Company was terminated during the second quarter of that year, 2) a reduction in the number of retail stores in operation and, 3) improved cost control efforts. The average number of stores operated during the thirteen weeks ended August 4, 2001 compared to the thirteen weeks ended July 29, 2000 decreased from 264 to 249. Depreciation and amortization expense increased 17.8% from $1.5 million in the thirteen weeks ended July 29, 2000 to $1.7 million in the thirteen weeks ended August 4, 2001 due primarily to increases in capital spending for system enhancements over the past year, and amortization of goodwill resulting from the acquisition of perfumania.com, inc. in May 2000. EBITDA, defined as earnings (loss) from operations less depreciation and amortization, improved by $1.7 million from ($0.9) million in the thirteen weeks ended July 29, 2000 to $0.8 million in the thirteen weeks ended August 4, 2001, due primarily to lower selling, general and administrative expenses as described above. Interest expense, net decreased by 48.4% from $1.6 million for the thirteen weeks ended July 29, 2000 to $0.8 million for the thirteen weeks ended August 4, 2001. The decrease results from lower interest rates on our bank line of credit, a lower outstanding balance on our bank line of credit and a reduction in the outstanding balance of convertible notes payable in the thirteen weeks ended August 4, 2001 compared to the thirteen weeks ended July 29, 2000. Equity in loss of partially-owned affiliate of $0.2 million in fiscal year 2000 represents our share of Envision Development Corporation's (EDC) net loss for the thirteen weeks ended July 29, 2000. 13 14 Gain on sale of affiliate's common stock of $10.0 million in fiscal year 2000 resulted from the sale of shares of Envision Development Corporation. There were no similar transactions during the thirteen weeks ended August 4, 2001. Other expense of $0.7 million in the thirteen weeks ended July 29, 2000 resulted from prior realized losses on the sale of equity investments. There were no such transactions during the thirteen weeks ended August 4, 2001. As a result of the foregoing, we had a net loss of $1.7 million, or ($0.18) per diluted share, in the thirteen weeks ended August 4, 2001 compared to a net income of $5.3 million, or $0.41 per diluted share, in the thirteen weeks ended July 29, 2000. COMPARISON OF THE TWENTY-SIX WEEKS ENDED AUGUST 4, 2001 WITH THE TWENTY-SIX WEEKS ENDED JULY 29, 2000. Net sales decreased 4.0% from $88.3 million in the twenty-six weeks ended July 29, 2000 to $84.8 million in the twenty-six weeks ended August 4, 2001. The decrease in net sales was due primarily to a 41.2% decrease in wholesale sales (from $12.8 million to $7.5 million) offset by a 2.3% increase in retail sales (from $75.6 million to $77.3 million). The decrease in wholesale sales was due to our continuing strategic initiative to redirect our managerial, administrative and inventory resources to our retail operations. Wholesale sales are expected to decrease during the second half of fiscal 2001 when compared to the prior year. The increase in retail sales was principally due to an increase in Internet sales and the opening of 6 new stores over the past year as comparable store sales during the twenty-six weeks ended August 4, 2001 were unchanged when compared to last year. Gross profit decreased 1.3% from $35.8 million in the twenty-six weeks ended July 29, 2000 (40.5% of net sales) to $35.3 million in the twenty-six weeks ended August 4, 2001 (41.7% of net sales) as a result of decreases in wholesale sales which was offset by an increase in retail sales. Gross profit for the wholesale division decreased 42.8% from $2.8 million in the twenty-six weeks ended July 29, 2000 to $1.6 million in the twenty-six weeks ended August 4, 2001. As a percentage of wholesale sales, gross profit for the wholesale division decreased from 21.8% in the twenty-six weeks ended July 29, 2000 to 21.2% in the twenty-six weeks ended August 4, 2001. Gross profit for the retail division increased 2.2% from $33.0 million in the twenty-six weeks ended July 29, 2000 to $33.7 million in the twenty-six weeks ended August 4, 2001. The retail division's gross margin was 43.7% in both the twenty-six weeks ended August 4, 2001 and July 29, 2000. Selling, general and administrative expenses decreased 7.3% from $37.9 million in the twenty-six weeks ended July 29, 2000 to $35.1 million in the twenty-six weeks ended August 4, 2001. The decrease was attributable to 1) approximately $0.8 million of severance and consulting costs accrued during fiscal 2000 for various senior management whose employment with the Company was terminated during the second quarter of that year, 2) a reduction in the number of retail stores in operation and 3) improved cost control efforts. The average number of stores operated during the twenty-six weeks ended August 4, 2001 compared to the twenty-six weeks ended July 29, 2000 decreased from 267 to 252. Depreciation and amortization expense increased 30.3% from $2.7 million in the twenty-six weeks ended July 29, 2000 to $3.5 million in the twenty-six weeks ended August 4, 2001 due primarily to increases in capital spending for system enhancements over the past year, and amortization of goodwill resulting from the acquisition of perfumania.com, inc. in May 2000. 14 15 EBITDA, defined as earnings (loss) from operations less depreciation and amortization, improved by $2.3 million from ($2.1) million in the first twenty-six weeks of 2000 to $0.2 million in the first twenty-six weeks of 2001, due to increased gross profit and lower selling, general and administrative expenses as described above. Interest expense, net decreased by 67.4% from $5.6 million for the twenty-six weeks ended July 29, 2000 to $1.8 million for the twenty-six weeks ended August 4, 2001. The decrease is principally due to the non-cash beneficial conversion cost of approximately $2.6 million associated with the issuance of convertible notes in March 2000 combined with lower interest costs on our bank line of credit, a reduction in the outstanding balance of convertible notes payable and a lower outstanding balance on our bank line of credit in the twenty-six weeks ended August 4, 2001 compared to the twenty-six weeks ended July 29, 2000. Equity in loss of partially-owned affiliate of $1.4 million in fiscal year 2000 represents our share of Envision Development Corporation's (EDC) net loss for the period we owned in excess of 20% of EDC's outstanding shares (February through May 2000). Gain on sale of affiliate's common stock of $10.0 million in fiscal year 2000 resulted from the sale of shares of EDC. During the twenty-six weeks ended August 4, 2001 the Company had a net loss of $5.1 million or $(0.52) per diluted share, compared to a net loss of $1.4 million or ($0.15) per diluted share during the twenty-six weeks ended July 29, 2000. 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 2001, these capital requirements generally were satisfied through borrowings under our credit facility and cash flows from operations. At August 4, 2001, we had working capital of approximately $2.1 million compared to working capital of approximately $7.0 million at February 3, 2001. The decrease was primarily due to a reduction in trade receivables and inventories offset by increases in accounts payable and subordinated note payable, affiliate. Net cash provided by operating activities during the current period was approximately $5.5 million compared with net cash used of approximately $11.0 million for the same period in the prior year. The change in cash provided by operating activities was principally a result of the loss for the period, the gain on sale of affiliate stock in fiscal 2000 and the net change in our trade receivables, inventories and accounts payable. Net cash used in investing activities was approximately $0.7 million, compared with approximately $5.8 million for the same period in the prior year. Investing activities represent purchases of fixtures and equipment for store openings and the renovation of existing stores, information system improvements, as well as investments in other companies. Investments in and advances to partially owned affiliates for the same period in the previous year was approximately $3.3 million primarily as a result of a $1.4 million investment made in The Sportsman's Guide, Inc. and a $2.0 million investment in Take To Auction. Net cash used in financing activities during the current period was approximately $4.9 million compared with net cash provided of approximately $17.2 million for the same time period in the prior year. The change was primarily the result of the issuance of $9 million convertible notes in March 2000 and $6.5 million of proceeds received on the sale of common stock of EDC. Perfumania's three year senior secured credit facility with GMAC Commercial Credit LLC provides for borrowings of up to $40 million of which $32.0 million was outstanding and $2.8 million was available at August 4, 2001. The credit facility supports normal working capital requirements and other general corporate purposes. As of August 4, 2001, the credit facility bore interest at 6.3%. 15 16 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 August 4, 2001, Perfumania was in compliance with all financial covenants of the line. 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, capital expenditures and debt service for at least the next twelve months. During the twenty-six weeks ended August 4, 2001, Perfumania closed 9 stores and did not open any new stores. At August 4, 2001, Perfumania operated 248 stores. Management intends to focus on improving the profitability of its existing stores and plans to open a maximum of 5 new stores during the third and fourth quarters of fiscal 2001. 16 17 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS During the quarter ended August 4, 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 ------ ---------------------- 12.1 Subordinated Secured Note (b) Reports on Form 8-K. None.
17 18 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 17, 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 (Principal Financial and Accounting Officer) 18