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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 1, 2003 OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-19714
E COM VENTURES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA (State or other jurisdiction of incorporation or organization)
65-0977964 (I.R.S. Employer Identification Number)
11701 NW 101 ST. ROAD, MIAMI, FL (Address of principal executive offices)
33178 (Zip Code)
(305) 889-1600 (Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K |X|.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
As of April 17, 2003, the number of shares of the registrant's Common Stock
outstanding was 2,462,237. The aggregate market value of the Common Stock held
by non affiliates of the registrant as of August 3, 2002 was approximately $5.9
million, based on the closing price of the Common Stock ($4.00) as reported by
the NASDAQ National Market on such date. For purposes of the foregoing
computation, all executive officers, directors and 5% beneficial owners of the
registrant are deemed to be affiliates. Such determination should not be deemed
to be an admission that such executive officers, directors or 5% beneficial
owners are, in fact, affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information called for by Part III is incorporated from the Proxy
Statement for the Annual Meeting of Shareholders of the company, which will be
filed no later than 120 days after the close of the fiscal year end.
1
TABLE OF CONTENTS
ITEM PAGE
---- ----
PART I
1. Business 3
2. Properties 8
3. Legal Proceedings 8
4. Submission of Matters to a Vote of Security Holders 8
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters 9
6. Selected Financial Data 10
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
7A. Quantitative and Qualitative Disclosures About Market Risk 21
8. Financial Statements and Supplementary Data 22
9. Changes in and Disagreements with Accountants on 45
Accounting and Financial Disclosure
PART III
10. Directors and Executive Officers of the Registrant 46
11. Executive Compensation 46
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters 46
13. Certain Relationships and Related Transactions 46
14. Controls and Procedures 46
15. Principal Accountant Fees and Services 46
PART IV
16. Exhibits, Financial Statement Schedules and Reports on Form 8-K 47
FORWARD-LOOKING STATEMENTS
Certain statements within this Form 10-K constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. All forward-looking statements are based on current expectations
regarding important risk factors. Accordingly, actual results may differ
materially from those expressed in the forward-looking statements, and the
making of such statements should not be regarded as a representation by the
Company or any other person that the results expressed in the statements will be
achieved. See "Risk Factors That May Affect Future Results" in Item 7.
PART I.
ITEM 1. BUSINESS
BUSINESS STRATEGY
E Com Ventures, Inc., a Florida corporation ("ECOMV" or the "Company"),
is a holding company that operates two wholly-owned subsidiaries, Perfumania,
Inc. ("Perfumania"), a Florida corporation, which is a specialty retailer and
wholesaler of fragrances and related products and perfumania.com, inc., a
Florida corporation which is an Internet retailer of fragrances and other
specialty items.
Perfumania is a leading specialty retailer and wholesale distributor of a
wide range of brand name and designer fragrances. As of February 1, 2003,
Perfumania operated a chain of 238 retail stores specializing in the sale of
fragrances at discounted prices up to 75% below the manufacturer's suggested
retail prices. Perfumania's wholesale division distributes fragrances and
related products to national and regional chains and other wholesale
distributors throughout North America and overseas. Our E-commerce site,
www.perfumania.com offers a selection of our more popular products for sale and
serves as an extension of the Perfumania shopping experience. For a description
of perfumania.com's September 1999 initial public offering, the sale of a
majority of our interest in perfumania.com and our subsequent repurchase of that
interest, see Note 11 of Notes to Consolidated Financial Statements included in
Item 8.
Perfumania and perfumania.com, inc., are the sole operating subsidiaries
of the Company. Perfumania operates its wholesale business as an unincorporated
division. Its retail business is managed and owned by Magnifique Parfumes and
Cosmetics, Inc. ("Magnifique"), a wholly-owned subsidiary of Perfumania. For
ease of reference in this Form 10-K, our retail and wholesale business are
referred to as divisions; our Internet sales are included with those of our
retail business. See Item 6 for Selected Financial Data by division.
RETAIL DIVISION
MARKETING AND MERCHANDISING. Each of Perfumania's retail stores generally
offers approximately 175 different brands of fragrances for women and men at
prices up to 75% below the manufacturer's suggested retail prices. Stores stock
brand name and designer brands such as Estee Lauder(R), Fendi(R), Yves Saint
Laurent(R), Fred Hayman(R), Calvin Klein(R), Giorgio Armani(R), Gucci(R), Ralph
Lauren/Polo(R), Perry Ellis(R), Liz Claiborne(R), Giorgio(R), Hugo Boss(R),
Halston(R), Christian Dior(R), Chanel(R) and Cartier(R). Perfumania also carries
a private label line of bath & body treatment products under the name Jerome
Privee(R), and a private label line of cosmetics, treatment and aromatherapy
under the name Nature's Elements(R).
The cornerstone of Perfumania's marketing philosophy is customer
awareness that its stores offer an extensive assortment of brand name and
designer fragrances at discount prices. Perfumania posts highly visible price
tags for each item in its stores, listing both the manufacturers' suggested
retail prices and Perfumania's discounted prices to enable customers to make
price comparisons. In addition, we utilize sales promotions such as "gift with
purchase" and "purchase with purchase" offers. From time to time, we test market
in our stores additional specialty gift items.
Perfumania's stores are "full-service" stores. Accordingly, store
personnel are trained to establish personal rapport with customers, to identify
customer preferences with respect to both product and price range, and to
successfully conclude a sale. Management believes that attentive personal
service and knowledgeable sales personnel are key factors to the success of
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Perfumania's retail stores. Perfumania's store personnel are compensated on a
salary plus bonus basis. Perfumania has several bonus programs that provide
incentives for store personnel to sell merchandise which have higher profit
margins. In addition, to provide an incentive to reduce expenses and increase
sales, district managers are eligible to receive a bonus if store profitability
and operational goals are met. Management believes that a key component of
Perfumania's ability to increase profitability will be its ability to hire,
train and retain store personnel and district managers. Perfumania conducts
comprehensive training programs designed to increase customer satisfaction.
Perfumania primarily relies on its distinctive store design and window
displays to attract the attention of prospective customers. In addition,
Perfumania distributes advertising flyers and brochures by mail and in its
stores and malls in which its stores are located. The amount of advertising
varies with the seasonality of the business.
RETAIL STORES. Perfumania's standard store design includes signs and
merchandise displays which are designed to enhance customer recognition of
Perfumania's stores. Perfumania's stores average approximately 1,400 square
feet; however, stores located in manufacturer's outlet malls tend to be larger
than Perfumania's other stores. Each store is managed by one manager and one
assistant manager. The average number of employees in a Perfumania store is
five, including part-time help. District managers visit stores on a regular
basis in an effort to ensure knowledgeable and attentive customer service and
compliance with operational policies and procedures.
INFORMATION SYSTEMS. Perfumania has an integrated information system
including E-commerce, retail outlet and corporate systems. These systems
encompass every significant phase of our operations and provide information for
planning, purchasing, pricing, distribution, finance and human resource
decisions. E-mail and other information are communicated between the corporate
office and store locations through an enterprise-wide Intranet. Daily
compilation of sales, gross margin, and inventory levels enables management to
analyze profitability and sell-through by item and product line as well as
monitor the success of sale promotions. Inventory is tracked through its entire
life cycle. During 2003, a new Point of Sale system is being implemented in all
stores. This system enables improved pricing and promotion programs, time and
attendance reporting, and enhanced inventory control.
STORE LOCATION AND EXPANSION. Perfumania's stores are located in 35
states, the District of Columbia and Puerto Rico, including 47 in Florida, 26 in
New York, 18 in California, 14 in Texas and 14 in Puerto Rico. Perfumania's
current business strategy focuses on maximizing sales by raising the average
dollar sale per transaction, reducing expenses at existing stores, selectively
closing under-performing stores and on a limited basis, opening new stores in
proven geographic markets. When opening new stores, Perfumania seeks locations
primarily in regional and manufacturers' outlet malls and, selectively, on a
stand-alone basis in suburban shopping centers in metropolitan areas. To achieve
economies of scale with respect to advertising and management costs, Perfumania
evaluates opening additional stores in markets where it already has a presence
or expanding into additional markets that it believes have a population density
to support a cluster of stores.
Perfumania's current average cost for opening a store is approximately
$130,000, including furniture and fixtures, build-out costs and other items. In
addition, initial inventory in a new store ranges from approximately $150,000
during the first fiscal quarter to approximately $200,000 during the Christmas
holiday season. To support inventory in its stores, Perfumania carries at least
four months supply of inventory in its warehouse.
In fiscal years 2002, 2001 and 2000, Perfumania opened 4 stores, 5 stores
and 9 stores (including 6 acquired stores) respectively. Perfumania continuously
monitors store performance and from time to time has closed under-performing
stores, which typically have been older stores in undesirable locations. During
fiscal years 2002, 2001 and 2000, Perfumania closed 13 stores, 15 and 28 stores,
respectively. For fiscal year 2003, Perfumania will continue to focus on
improving the profitability of its existing stores; and management expects to
open a maximum of 10 stores and close up to 10 stores.
WHOLESALE DIVISION
Perfumania distributes fragrances on a wholesale basis to national and
regional retail chains and other wholesale distributors throughout North America
and overseas. During fiscal years 2002, 2001 and 2000, the wholesale division
sold to approximately 5, 9 and 13 customers, respectively. One Perfumania
customer, unaffiliated with the Company, accounted for 49.4%, 92.0% and 62.9% of
net wholesale sales during fiscal years 2002, 2001 and 2000, respectively. There
were no foreign wholesale sales during fiscal years 2002 and 2001; during fiscal
2000, there was $1.1 million of foreign wholesale sales. The absence of
wholesale sales was due to our continuing strategic initiative to redirect our
managerial, administrative and inventory resources to our retail operations. We
expect the wholesale business will not increase significantly during fiscal year
2003.
4
PERFUMANIA.COM
Perfumania.com provides a number of advantages for retail and wholesale
fragrance sales. Our Internet site enables us to display a larger number of
products than traditional store-based or catalog sellers. In addition, the
ability to frequently adjust featured selections and edit content and pricing
provides significant merchandising flexibility. Our Internet site benefits from
the ability to reach a large group of customers from a central location.
Additionally, we can also easily obtain demographic and behavioral data of
customers, increasing opportunities for direct marketing and personalized
services. Because brand loyalty is a primary factor influencing a fragrance
purchase, the ability to physically sense the fragrance product is not critical
to the purchasing decision. Perfumania.com's online store provides its customers
with value, selection, pricing and convenience.
Our online store offers visitors several special features arranged in
simple, easy-to-use formats to enhance product search, discovery and selection.
By clicking on the displayed products and product categories, users can move
directly to the location of the site that contains details about the particular
products. In addition, customers can browse the online store by linking to
specially designed pages dedicated to products of well known national and
specialty brands. Customers can also link to pages by product category, such as
women's and men's brand name perfumes and colognes, children's fragrances, gift
set specials and bath and body products.
Customers are offered a choice of over 2,000 designer and private label
fragrances, fragrance related products, accessories and bath and body products
for men and women at discounted prices. High levels of customer service and
support are critical to retain and expand our customer base. Perfumania.com
monitors orders from the time they are placed through delivery by providing
numerous points of electronic, telephonic and personal communication to
customers. All orders and shipments are confirmed by e-mail. Customer service
representatives are available during regular business hours by telephone.
A variety of relationships have been established with several Internet
sites to build traffic and attract customers. Although perfumania.com obtains
most of its inventory from Perfumania, it may obtain inventory from suppliers
depending on which offers the most favorable selection, pricing, quality and
terms. Products are generally shipped within 24 hours of customer's orders. For
a description of perfumania.com's September 1999 initial public offering, the
sale of a majority of our interest in perfumania.com and our subsequent
repurchase of that interest, see Note 11 of Notes to Consolidated Financial
Statements included in Item 8.
In September 2001, we entered into a licensing agreement with an
affiliate to license our retail fragrance Internet Web site. In January 2003, we
issued a letter of default regarding the licensing agreement. In February 2003,
we regained control of the retail fragrance Internet web site. See Investment in
Nimbus Group, Inc. in this Item 1 and Note 6 of Notes to Consolidated Financial
Statements included in Item 8.
SOURCES OF SUPPLY
During fiscal years 2002 and 2001, Perfumania purchased fragrances from
approximately 100 and 140 different suppliers, respectively, including national
and international manufacturers, distributors, wholesalers, importers and
retailers. Perfumania generally makes its purchases based on the most favorable
available combination of prices, credit terms, quantities and merchandise
selection and, accordingly, the extent and nature of Perfumania's purchases from
its various suppliers change constantly. As is customary in the fragrance
industry, Perfumania has no long-term or exclusive contracts with suppliers.
Approximately 10% and 17% of Perfumania's total merchandise purchased in
fiscal years 2002 and 2001, respectively, was from our affiliate, Parlux
Fragrances, Inc. ("Parlux"), a manufacturer and distributor of prestige
fragrances and related beauty products. Ilia Lekach, our Chairman of the Board
and Chief Executive Officer and one of our principal shareholders, is the
Chairman of the Board and Chief Executive Officer of Parlux and beneficially
owns approximately 27% of Parlux's outstanding common stock. No other supplier
accounted for more than 10% of our merchandise purchases during 2002 or 2001.
Approximately 9% and 4% of Perfumania's total merchandise purchased in
fiscal years 2002 and 2001, respectively, was from Grupo Tulin, a company owned
by a former Director and brother of Ilia Lekach. Approximately 5% and less than
1%, respectively, of Perfumania's total merchandise purchased in fiscal years
2002 and 2001 was acquired from S&R Fragrances, Inc., a company owned by another
brother of Ilia Lekach. Purchases from these affiliates are at lower prices or
on better terms than would otherwise be available from other sources. These
purchases do not include products manufactured or distributed by Parlux.
5
A substantial portion of Perfumania's merchandise is purchased from
secondary sources such as distributors, wholesalers, importers and retailers.
Merchandise purchased from secondary sources includes trademarked and
copyrighted products that were manufactured in the United States, sold to
foreign distributors and then re-imported into the United States, as well as
trademarked and copyrighted products manufactured and intended for sale in
foreign countries. From time to time, U.S. trademark and copyright owners and
their licensees and trade associations have initiated litigation or
administrative agency proceedings, based on U.S. Customs Service regulations or
trademark or copyright laws, seeking to halt the importation into the United
States of such "gray market" merchandise or to restrict its resale in the United
States, and some of these actions have been successful. However, but the U.S.
courts remain divided on the extent to which trademark, copyright or other
existing laws or regulations can be used to restrict the importation or sale of
"gray market" merchandise. In addition, from time to time federal legislation to
restrict the importation or sale of "gray market" merchandise has been proposed,
but no such legislation has been adopted.
As is often the case in the fragrance and cosmetics business, some of the
merchandise purchased by Perfumania may have been manufactured by entities,
particularly foreign licensees and others, who are not the owners of the
trademarks or copyrights for the merchandise. Perfumania's secondary market
sources generally will not disclose the identity of their suppliers, which they
consider to be proprietary trade information, and Perfumania may not always be
able to demonstrate that the manufacturer of specific merchandise had proper
authority from the trademark or copyright owner to produce the merchandise or
permit it to be resold in the United States. Accordingly, there is a risk that
if Perfumania were called upon or challenged by the owner of a particular
trademark or copyright to demonstrate that specific merchandise was produced and
sold with the proper authority and it was unable to do so, Perfumania could,
among other things, be restricted from reselling the particular merchandise or
be subjected to other liabilities.
Perfumania's business activities could become the subject of legal or
administrative actions brought by manufacturers, distributors or others, any of
which actions could have a material adverse effect on our business or financial
condition. In addition, future judicial, legislative or administrative agency
action, including possible import, export, tariff or other trade restrictions,
could limit or eliminate some of Perfumania's secondary sources of supply or any
of its business activities.
DISTRIBUTION
Perfumania's retail and wholesale operations are served by its
distribution facility in Miami, Florida. The lease for the facility expires in
July 2003, at which time the distribution facility will be relocated to a
facility in Sunrise, Florida. The current facility is approximately 139,000
square feet of which 20,000 square feet is utilized as office space. The Sunrise
facility has approximately 179,000 square feet of which approximately 20,000
square feet will be utilized as office space, and is expected to have the
capacity for our future growth.
Perfumania utilizes independent national trucking companies to deliver
merchandise to its stores. Deliveries generally are made weekly, with more
frequent deliveries during the Christmas holiday season. Such deliveries permit
the stores to minimize inventory storage space and increase the space available
for display and sale of merchandise. Perfumania generally ships merchandise to
wholesale customers by truck or ship. To expedite delivery of merchandise to its
customers, Perfumania sometimes instructs its suppliers to ship merchandise
directly to wholesale division customers.
COMPETITION
Retail and wholesale perfume businesses are highly competitive.
Perfumania's retail competitors include department stores, regional and national
retail chains, independent drug stores, duty-free shops and other specialty
retail stores. Perfumania is the largest specialty retailer of discounted
fragrances in the United States in terms of number of stores. 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, promotions, customer service, merchandise variety, store location
and ambiance. Perfumania believes that its perfumery concept, full-service sales
staff, discount prices, large and varied selection of brand name and designer
fragrances and attractive shopping environment are important to its competitive
position.
Perfumania's wholesale division competes directly with other perfume
wholesalers and perfume manufacturers, some of which have substantially greater
resources or merchandise variety than Perfumania. The wholesale division
competes principally on the basis of merchandise selection, price, availability
and delivery.
EMPLOYEES
6
At February 1, 2003, we had 1,564 employees, of whom 1,392 were employed
in Perfumania's retail stores, 73 were employed in Perfumania's warehouse and
distribution operations and 99 were employed in executive, administrative and
other positions. Temporary and part-time employees are usually added during peak
sales periods (principally between Thanksgiving and Christmas). None of our
employees are covered by a collective bargaining agreement and we consider our
relationship with our employees to be good.
TRADE NAME AND SERVICE MARK
Perfumania's stores use the trade name and service mark Perfumania(R);
Perfumania also operates 1 store under the trade name "Also Perfumania," 2
stores under the trade name "Class Perfumes" in malls where we also operate a
Perfumania(R) store, one store under the trade name "Touch at Perfumania," one
store under the trade name "Perfumania Too," and 8 stand-alone stores under the
trade name "Perfumania Plus". Perfumania has common law rights to its trade
names and service mark in those general areas in which its existing stores are
located and has registered the service mark Perfumania(R) with the U.S. Patent
and Trademark Office. The registration expires in 2009 and may be renewed for
10-year terms thereafter.
INVESTMENT IN NIMBUS GROUP, INC.
During fiscal year 2000, we purchased 314,000 shares of common stock of
Take to Auction.Com, Inc. ("TTA"), an Internet auction site, for approximately
$2.5 million. Our Chairman of the Board and Chief Executive Officer, Ilia
Lekach, was also the Chairman of the Board and Chief Executive Officer of TTA at
that time. In June 2000, we acquired approximately 139,000 shares of TTA's
common stock upon conversion of a $1.0 million convertible promissory note
receivable. See "Item 7" Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
In January 2001, we received 250,000 shares of TTA common stock as
partial payment on a loan receivable from Ilia Lekach. These shares were valued
at $252,500 ($1.01 per share).
As of February 3, 2001, the market price for TTA's common stock was below
our average cost per share of $5.38. In consideration of accounting guidance
that considers a six to nine month decline in stock price to be
other-than-temporary, we valued the shares at $1.01 per share and recorded a
non-cash charge of approximately $3.1 million to realized loss on investments on
the consolidated statement of operations for fiscal year 2000. As of November 2,
2002, the market price of the shares was again below our carrying value and
approximately $700,000 was recorded as a non-cash charge to realized loss on
investments on the consolidated statement of operations for fiscal year 2002.
In September 2001, TTA effected a corporate reorganization
("Reorganization") as a result of which TTA became a wholly owned subsidiary of
Nimbus Group, Inc. ("Nimbus"). As a result of the Reorganization; our shares of
TTA common stock were exchanged for an equal number of shares of Nimbus common
stock. Ilia Lekach was Chairman of the Board of TTA from October 1999 until the
Reorganization and has been Chairman of the Board of Nimbus since the
Reorganization and was Interim Chief Executive Officer until March 21, 2003.
In January 2002, we received 300,000 shares of Nimbus common stock as
partial payment on a loan receivable from Ilia Lekach. These shares were valued
at $357,000 ($1.19 per share).
As of February 1, 2002, the amount due from TTA was approximately
$811,000, and was included in prepaid expenses and other current assets in the
accompanying consolidated balance sheet as of February 1, 2002. During fiscal
year 2002, the amount due from TTA increased to approximately $2 million and a
provision for impairment of the receivable was recorded. In January 2003, we
issued a letter of default to TTA regarding the licensing agreement. In February
2003, we regained control of our retail Internet website.
As of February 1, 2003, we owned approximately 1,003,000 shares of Nimbus
common stock representing approximately 13% of its total outstanding common
stock. The investment in Nimbus is shown on our balance sheet as investments
available for sale in the amount of approximately $211,000 representing the
market value of $0.21 per share at that date.
7
ITEM 2. PROPERTIES
Our executive offices and distribution facility are leased through July
2003 pursuant to a lease, which currently provides for monthly rent of
approximately $78,000 and specified annual increases. The option to renew the
existing lease will not be exercised. Alternatively, the executive offices and
distribution facility will be relocated to a 179,000 square foot facility in
Sunrise, Florida. We entered into an approximate fifteen-year lease for the
Sunrise location effective September 2002. The current monthly rent for the
Sunrise location is approximately $73,000 with specified future increases.
All of Perfumania's retail stores are located in leased premises. Most of
the store leases provide for the payment of a fixed amount of base rent plus a
percentage of sales, ranging from 3% to 15%, over certain minimum sales levels.
Store leases typically require Perfumania to pay all utility charges, insurance
premiums, real estate taxes and certain other costs. Some of Perfumania's leases
permit the termination of the lease if specified minimum sales levels are not
met. See Note 13 to our Consolidated Financial Statements included in Item 8
hereof, for additional information with respect to our store leases.
ITEM 3. LEGAL PROCEEDINGS
We are involved in legal proceedings in the ordinary course of business.
Management cannot presently predict the outcome of these matters, although
management believes that the ultimate resolution of these matters should not
have a materially adverse effect on our financial position or result of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 24, 2003, we held our annual meeting of shareholders. At the
annual meeting, the shareholders elected Ilia Lekach, Donovan Chin, Carole Ann
Taylor, Joseph Bouhadana, Miles Raper, and James Fellus to the Board of
Directors. In addition, the shareholders ratified the appointment of Deloitte &
Touche LLP as our independent auditors. The following table reflects the results
of the meeting:
ELECTION OF DIRECTORS:
---------------------
SHARES SHARES VOTED SHARES VOTED ABSTAIN/
TOTAL VOTED FOR AGAINST WITHHELD NON-VOTES
--------------------- ----- ----------------- ----------------- ------------ -------------
Ilia Lekach 2,316,892 2,297,125 -- 19,767 92,439
Donovan Chin 2,316,892 2,298,350 -- 18,542 92,439
Carole Ann Taylor 2,316,892 2,298,350 -- 18,542 92,439
James Fellus 2,316,892 2,298,365 -- 18,527 92,439
Joseph Bouhadana 2,316,892 2,298,365 -- 18,527 92,439
Miles Raper 2,316,892 2,298,365 -- 18,527 92,439
RATIFICATION OF AUDITORS:
------------------------
SHARES SHARES VOTED SHARES VOTED ABSTAIN/
TOTAL VOTED FOR AGAINST WITHHELD NON-VOTES
---------------------- --------- ---------------- ----------------- ------------ ------------
Ratify Appointment of Deloitte & 2,316,892 2,310,048 3,744 3,100 92,439
Touche LLP
8
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our Common Stock is traded on the NASDAQ Stock Market under the symbol
ECMV. The following table sets forth the high and low closing sales prices for
our Common Stock for the periods indicated, as reported by the NASDAQ Stock
Market. All prices have been adjusted to give effect to the one-for-four reverse
stock-split effective March 20, 2002.
FISCAL 2002 HIGH LOW
----------------- ------------ ------------
First Quarter $3.32 $2.00
Second Quarter 5.45 2.40
Third Quarter 5.50 3.80
Fourth Quarter 4.25 3.69
FISCAL 2001 HIGH LOW
----------------- ------------ ------------
First Quarter $4.76 $2.12
Second Quarter 4.48 2.80
Third Quarter 4.40 2.20
Fourth Quarter 4.12 2.04
As of April 17, 2003, there were 67 holders of record, which excluded
Common Stock held in street name. The closing sales price for the Common Stock
on April 17, 2003 was $3.15 per share.
REVERSE STOCK-SPLIT
Our Board of Directors authorized a one-for-four reverse stock-split of
our outstanding shares of common stock for shareholders of record on March 20,
2002. Accordingly, all share and per share data shown in this Form 10-K have
been retroactively adjusted to reflect this reverse stock split.
DIVIDEND POLICY
We have not declared or paid any dividends on our Common Stock and do not
currently intend to declare or pay cash dividends in the foreseeable future.
Payment of dividends, if any, will be at the discretion of the Board of
Directors after taking into account various factors, including our financial
condition, results of operations, current and anticipated cash needs and plans
for expansion. Perfumania is prohibited from paying cash dividends under its
line of credit agreement with GMAC Commercial Finance LLC.
9
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for the last five fiscal
years and as of the end of each such fiscal years are derived from our
consolidated financial statements and should be read in conjunction with such
financial statements and related notes.
Our fiscal year ends on the Saturday closest to January 31. All
references herein to fiscal years are to the calendar year in which the fiscal
year begins; for example, fiscal year 2002 refers to the fiscal year that began
on February 3, 2002 and ended on February 1, 2003. Fiscal year 2000 included 53
weeks as compared to 52 weeks for all other years presented.
FISCAL YEAR ENDED
-----------------------------------------------------------------------------------
FEBRUARY 1, 2003 FEBRUARY 2, 2002 FEBRUARY 3, 2001 JANUARY 29, 2000 JANUARY 30, 1999
---------------- ---------------- ---------------- ---------------- ----------------
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Net sales, retail division $ 199,369 $ 184,142 $ 185,371 $ 155,953 $ 134,790
Net sales, wholesale division 2,145 9,210 21,199 36,975 40,466
---------------- ---------------- ---------------- ---------------- ----------------
Total net sales 201,514 193,352 206,570 192,928 175,256
---------------- ---------------- ---------------- ---------------- ----------------
Gross profit, retail division 84,159 78,468 79,218 68,613 57,072
Gross profit, wholesale division 435 1,767 4,216 7,019 7,545
---------------- ---------------- ---------------- ---------------- ----------------
Total gross profit 84,594 80,235 83,434 75,632 64,617
---------------- ---------------- ---------------- ---------------- ----------------
Selling, general & administrative expenses 76,178 72,918 79,884 71,354 72,502
Provision for doubtful accounts - 55 55 60 -
Provision for impairment of receivable from afiliate 1,961 - - - -
Provision (recovery) for impairment of assets
and store closings 663 727 (506) 3,427 1,035
Depreciation & amortization 6,024 6,825 5,819 4,725 4,480
---------------- ---------------- ---------------- ---------------- ----------------
Total operating expenses 84,826 80,525 85,252 79,566 78,017
---------------- ---------------- ---------------- ---------------- ----------------
Loss from operations before other
income (expense) (232) (290) (1,818) (3,934) (13,400)
Other income (expense)
Interest expense, net (1,883) (3,095) (8,179) (6,589) (4,882)
Share of loss of partially-owned affiliate - - (1,388) (3,165) -
Gain on sale of affiliate's common stock - - 9,999 14,974 -
Realized loss on investments (711) - (4,819) - -
Miscellaneous (expense) income, net - (18) 85 (118) 645
---------------- ---------------- ---------------- ---------------- ----------------
Income (loss) before income taxes (2,826) (3,403) (6,120) 1,168 (17,637)
Benefit (provision) for income taxes - 211 - (124) (1,337)
---------------- ---------------- ---------------- ---------------- ----------------
Net income (loss) $ (2,826) $ (3,192) $ (6,120) $ 1,044 $ (18,974)
================ ================ ================ ================ ================
Weighted average shares outstanding:
Basic 2,528,326 2,420,467 2,360,456 2,054,660 1,664,971
Diluted 2,528,326 2,420,467 2,360,456 2,566,905 1,664,971
Basic income (loss) per share $ (1.12) $ (1.32) $ (2.59) $ 0.51 $ (11.40)
Diluted income (loss) per share $ (1.12) $ (1.32) $ (2.59) $ 0.41 $ (11.40)
SELECTED OPERATING DATA:
Number of stores open at end of period 238 247 257 276 289
Comparable store sales increase 10.2% 2.5% 16.9% 12.9% 0.0%
BALANCE SHEET DATA:
Working capital (deficiency) $ 1,804 $ 2,760 $ 7,015 $ 8,687 $ (3,835)
Total assets 103,423 102,559 107,329 105,656 95,129
Long-term debt, less current portion (1) 7,600 5,204 11,531 5,032 3,404
Total shareholders' equity 21,853 22,603 26,395 30,689 17,636
(1) Amount indicates redeemable common equity of $471 as of January 30, 1999 but
does not include long-term severance payables of $284, $191 and $1,038 as of
February 3, 2001, January 29, 2000 and January 30, 1999, respectively.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Perfumania's retail division accounts for most of our net sales and gross
profit. Perfumania's overall profitability depends principally on our ability to
attract customers and successfully conclude retail sales. Other factors
affecting our profitability include general economic conditions, competition,
availability of volume discounts, number of stores in operation, timing of store
openings and closings and the effect of special promotions offered by
Perfumania.
The following table sets forth items from our Consolidated Statements of
Operations expressed as a percentage of total net sales for the periods
indicated:
PERCENTAGE OF NET SALES
FISCAL YEAR
---------------------------------
2002 2001 2000
-------- -------- --------
Net sales, retail division.................................. 98.9% 95.2% 89.7%
Net sales, wholesale division............................... 1.1 4.8 10.3
-------- -------- --------
Total net sales.......................................... 100.0 100.0 100.0
-------- -------- --------
Gross profit, retail division............................... 42.2 42.6 42.7
Gross profit, wholesale division............................ 20.3 19.2 19.9
-------- -------- --------
Total gross profit....................................... 42.0 41.4 40.4
-------- -------- --------
Selling, general and administrative expenses 37.8 37.7 38.7
Provision for impairment of receivable from affiliate 1.0 -- --
Provision (recovery) for impairment of assets and
store closings........................................... 0.3 0.4 (0.2)
Depreciation and amortization............................... 3.0 3.5 2.8
-------- -------- --------
Total operating expenses................................. 42.1 41.6 41.3
-------- -------- --------
Loss from operations before other income (expense).......... (0.1) (0.2) (0.9)
-------- -------- --------
Other income (expense):
Interest expense, net.................................... (0.9) (1.6) (4.0)
Equity in loss of partially-owned affiliate -- -- (0.7)
Gain on sale of affiliate's common stock -- -- 4.9
Realized loss on investments............................. (0.4) -- (2.3)
Miscellaneous expense, net............................... -- -- --
-------- -------- --------
Loss before income taxes.................................... (1.4) (1.8) (3.0)
Benefit for income taxes.................................... -- 0.1 --
-------- -------- --------
Net loss.................................................... (1.4)% (1.7)% (3.0)%
-------- -------- --------
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
Some of the statements in this annual 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 actual results, performance or
achievements of our company or our 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
11
Our growth strategy includes selectively opening and operating new
Perfumania retail locations and increasing the average retail sales per store.
We may need to obtain funding to achieve our growth strategy. Additional
financing may not be available on acceptable terms, if at all. In order to
obtain additional financing, we may be required to issue securities with greater
rights than those currently possessed by holders of our common stock. We may
also be required to take other actions which may lessen the value of our common
stock, including borrowing money on terms that are not favorable to us.
PERFUMANIA'S BUSINESS IS SUBJECT TO SEASONAL FLUCTUATIONS, WHICH COULD LEAD TO
FLUCTUATIONS IN OUR STOCK PRICE
Perfumania has historically experienced and expects to continue
experiencing higher sales in the third and fourth fiscal quarters than in the
first and second fiscal quarters. Purchases of fragrances as gift items increase
during the Christmas holiday season which results in significantly higher fourth
fiscal quarter retail sales. If our quarterly operating results are below
expectations of stock market analysts, our stock price might decline. Our
quarterly results may also vary as a result of the timing of new store openings
and store closings, net sales contributed by new stores and fluctuations in
comparable sales of existing stores. Sales levels of new and existing stores are
affected by a variety of factors, including the retail sales environment, the
level of competition, the effect of marketing and promotional programs,
acceptance of new product introductions, adverse weather conditions and general
economic conditions.
PERFUMANIA MAY EXPERIENCE SHORTAGES OF THE MERCHANDISE IT NEEDS BECAUSE IT DOES
NOT HAVE LONG-TERM AGREEMENTS WITH SUPPLIERS
Perfumania's success depends to a large degree on our ability to provide
an extensive assortment of brand name and designer fragrances. Perfumania has no
long-term purchase contracts or other contractual assurance of continued supply,
pricing or access to new products. If Perfumania is unable to obtain merchandise
from one or more key suppliers on a timely basis, or if there is a material
change in Perfumania's ability to obtain necessary merchandise, our results of
operations could be seriously harmed.
PERFUMANIA NEEDS TO SUCCESSFULLY MANAGE ITS GROWTH
Perfumania may not be able to sustain the growth in revenues that it has
achieved historically. Perfumania's growth is somewhat dependent upon opening
and operating new retail stores on a profitable basis, which in turn is subject
to, among other things, securing suitable store sites on satisfactory terms,
hiring, training and retaining qualified management and other personnel, having
adequate capital resources and successfully integrating new stores into existing
operations. It is possible that Perfumania's new stores might not achieve sales
and profitability comparable to existing stores, and it is possible that the
opening of new locations might adversely affect sales at existing locations.
PERFUMANIA COULD BE SUBJECT TO LITIGATION BECAUSE OF THE MERCHANDISING ASPECT OF
ITS BUSINESS
Some of the merchandise Perfumania purchases from suppliers is
manufactured by entities who are not the owners of the trademarks or copyrights
for the merchandise. The owner of a particular trademark or copyright may
challenge Perfumania to demonstrate that the specific merchandise was produced
and sold with the proper authority 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 adversely affect Perfumania's
business and results of operations.
FUTURE GROWTH MAY PLACE STRAINS ON OUR MANAGERIAL, OPERATIONAL AND FINANCIAL
RESOURCES
If we grow as expected, a significant strain on our managerial,
operational and financial resources may occur. Further, as the number of our
users, advertisers and other business partners grow, we will be required to
manage multiple relationships with various customers, strategic partners and
other third parties. Future growth or increase in the number of our strategic
relationships could strain our managerial, operational and financial resources,
inhibiting our ability to achieve the rapid execution necessary to successfully
implement our business plan. In addition, our future success will also depend on
our ability to expand our sales and marketing organization and our support
organization commensurate with the growth of our business and the Internet.
WE ARE SUBJECT TO INTENSE COMPETITION
12
Some of Perfumania's competitors sell fragrances at discount prices and
some are part of large national or regional chains that have substantially
greater resources and name recognition than Perfumania. Perfumania's stores
compete on the basis of selling price, customer service, merchandise variety and
store location. Many of our current and potential competitors have greater
financial, technical, operational, and marketing resources. We may not be able
to compete successfully against these competitors in developing our products or
services.
PERFUMANIA'S BUSINESS MAY BE AFFECTED BY THE CONTINUING ECONOMIC DOWNTURN
Sales levels at Perfumania's retail stores may be adversely affected
during fiscal year 2003 and beyond by the continuing economic downturn and
recession in the United States. Due to increased unemployment, stagnant business
growth rates and the continuing poor performance of the stock market, consumer
spending in general and especially on discretionary items, may decline. The
length of this economic downturn may adversely impact our business and the
results of our operations in the future.
EFFECT OF WAR IN IRAQ
The recent military action taken by the United States and other nations
in Iraq may cause a disruption to commerce throughout the world. To the extent
that such disruptions further slow the global economy and negatively impact
consumer spending in the United States, our business and the results of our
operations in fiscal year 2003 and beyond may be adversely affected. We are
unable to predict whether the threat of new terrorist attacks in the United
States or the military action in Iraq will have a long-term adverse effect on
our business.
EXPANDING OUR BUSINESS THROUGH ACQUISITIONS AND INVESTMENTS IN OTHER BUSINESSES
AND TECHNOLOGIES PRESENTS SPECIAL RISKS
We may expand through the acquisition of and investment in other
businesses. Acquisitions involve a number of special problems, including:
o difficulty integrating acquired technologies, operations, and
personnel with our existing business;
o diversion of management's attention in connection with both
negotiating the acquisitions and integrating the assets;
o the need for additional financing;
o strain on managerial and operational resources as management
tries to oversee larger operations; and
o exposure to unforeseen liabilities of acquired companies.
We may not be able to successfully address these problems. Moreover, our
future operating results will depend to a significant degree on our ability to
successfully manage growth and integrate acquisitions.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
Preparation of these statements requires management to make judgments and
estimates. Some accounting policies have a significant impact on amounts
reported in these financial statements. A summary of significant accounting
policies can be found in Notes to the Consolidated Financial Statements as Note
2.
We have also identified certain accounting policies that we consider
critical to understanding our business and our results of operations and have
provided below additional information on those policies.
Inventory Adjustments and Reserves
Inventories are stated at the lower of cost or market. We review our
inventory on a regular basis for excess and potentially slow moving inventory
based on prior sales, future sales forecasts and through specific identification
of obsolete or damaged merchandise.
Impairment of Long-Lived Assets
When facts and circumstances indicate that the values of long-lived assets,
including intangibles, may be impaired, an evaluation of recoverability is
performed by comparing the carrying value of the assets to projected future cash
flows in addition to other quantitative and qualitative analyses. Inherent in
this process is significant management judgment as to the projected cash flows.
13
Upon indication that the carrying value of such assets may not be recoverable,
the Company recognizes an impairment loss as a charge against current
operations. Cash flows for retail assets are identified at the individual store
level. Judgments are also made as to whether under-performing stores should be
closed. Even if a decision has been made not to close an under-performing store,
the assets at that store may be impaired.
COMPARISON OF FISCAL YEARS 2002 AND 2001
Net sales increased 4.2% from $193.4 million in fiscal year 2001 to
$201.5 million in fiscal year 2002. The increase in net sales during fiscal year
2002 was due to an 8.3% increase in retail sales (from $184.1 million to $199.4
million) and a decrease in wholesale sales (from $9.2 million to $2.1 million).
The increase in sales was principally due to a 10.2% increase in comparable
store sales. The average number of stores operated decreased from 250 during
fiscal year 2001 to 242 in fiscal year 2002. The increase in Perfumania's
comparable store sales was due to an improved merchandise assortment and product
promotions at our retail stores. The decrease in wholesale sales was due to
management's decision to concentrate on the more profitable retail operations.
Gross profit increased 5.4% from $80.2 million in fiscal year 2001 (41.4%
of total net sales) to $84.6 million in fiscal year 2002 (42.0% of total net
sales) as a result of higher sales and gross profit in the retail division
offset by lower sales and gross profit in the wholesale division.
Gross profit for the retail division increased 7.3% from $78.5 million in
fiscal year 2001 to $84.2 million in fiscal year 2002, principally as a result
of higher retail sales volume. As a percentage of net retail sales, gross profit
for the retail division decreased slightly from 42.6% in fiscal year 2001 to
42.2% in fiscal year 2002.
Gross profit for the wholesale division decreased from $1.8 million in
fiscal year 2001 to $0.4 million in fiscal year 2002. The wholesale division's
gross margin in fiscal 2002 was 20.3% compared to 19.2% in fiscal year 2001. The
decrease in gross profit was due to lower wholesale sales. Wholesale sales
historically yield a lower gross margin compared to retail sales.
Selling, general and administrative expenses increased 4.5% from $73.0
million in fiscal year 2001 to $76.2 million in fiscal year 2002. As a
percentage of net sales, selling, general and administrative expenses increased
slightly from 37.7% in fiscal year 2001 to 37.8% in fiscal year 2002. The
increase is attributable primarily to higher employee compensation costs,
including incentive compensation paid to store personnel due to higher retail
sales. The majority of our selling, general and administrative expenses relate
to the retail division.
Provision for impairment of receivable from an affiliate was $2.0 million
during fiscal year 2002 and represents a provision for a receivable which
management has determined may not be collectible. No comparable receivable
impairment was recorded during fiscal year 2001. See further discussion at Note
6 of the Notes to Consolidated Financial Statements.
A provision for impairment of assets and store closings of $0.7 million
was recorded in both fiscal years 2002 and 2001. The asset impairment charges in
both fiscal years relate to retail store locations with negative cash flows that
were either closed or are targeted for closure.
Loss from operations was $0.2 million in fiscal year 2002 compared with
$0.3 million in fiscal year 2001 despite the provision for impairment of
receivable from an affiliate of $2.0 million in fiscal year 2002.
We define EBITDA(a), as loss from operations less depreciation and
amortization. EBITDA decreased 11.4% or $0.7 million from $6.5 million in fiscal
year 2001 to $5.8 million in fiscal year 2002. The decrease was due to a
provision for impairment of receivable from an affiliate and an increase in
selling, general and administrative expenses, offset by an increase in gross
profit. EBITDA should not be considered as an alternative to, or more meaningful
than, operating income as determined in accordance with GAAP, or as a measure of
liquidity. Management believes EBITDA provides meaningful additional information
on our operating results. Because EBITDA is not calculated in the same manner by
all companies, the representation herein may not be comparable to other
similarly titled measures of other companies.
Depreciation and amortization decreased $0.8 million, or 11.7%, in fiscal
year 2002 compared to fiscal year 2001 due primarily to the adoption of SFAS 142
on February 3, 2002 which eliminated the amortization of goodwill and other
intangible assets with indefinite useful lives.
14
Interest expense (net) decreased from $3.1 million in fiscal year 2001 to
$1.9 million in fiscal year 2002. The decrease was primarily due to lower
interest rates and a reduction in the outstanding balance of convertible notes
payable.
Realized loss on investments of $0.7 million in fiscal year 2002 is due
to a decline in the market prices on securities available for sale which
resulted in the Company recording a non-cash charge. See further discussion at
Note 11 of the Notes to Consolidated Financial Statements.
As a result of the foregoing, we had a net loss of $2.8 million in fiscal
year 2002 compared to a net loss of $3.2 million in fiscal year 2001.
COMPARISON OF FISCAL YEARS 2001 AND 2000
Net sales decreased 6.4% from $206.6 million in fiscal year 2000 to
$193.4 million in fiscal year 2001. The decrease in net sales during fiscal year
2001 was due to a slight decrease in retail sales (from $185.4 million to $184.1
million) and a 56.6% decrease in wholesale sales (from $21.2 million to $9.2
million). The decrease in retail sales was due to a reduction in the average
number of stores operated, from 264 during fiscal year 2000 to 250 in fiscal
year 2001 as well as weakness in the United States economy. Comparable retail
store sales increased 2.5% in fiscal year 2001 compared with fiscal year 2000.
The increase in Perfumania's comparable store sales was due to an improved
merchandise assortment and product promotions at our retail stores. The decrease
in wholesale sales was due to our continuing strategic initiative to redirect
our managerial, administrative and inventory resources to our retail operations.
Gross profit decreased 4.0% from $83.4 million in fiscal year 2000 (40.4%
of total net sales) to $80.2 million in fiscal year 2001 (41.4% of total net
sales) as a result of lower sales and gross profit in both the retail and
wholesale divisions.
Gross profit for the retail division decreased 1.1% from $79.2 million in
fiscal year 2000 to $78.5 million in fiscal year 2001, principally as a result
of lower retail sales volume. As a percentage of net retail sales, gross profit
for the retail division decreased from 42.7% in fiscal year 2000 to 42.5% in
fiscal year 2001.
Gross profit for the wholesale division decreased from $4.2 million in
fiscal year 2000 to $1.8 million in fiscal year 2001. The wholesale division's
gross margin in fiscal 2001 was 19.2% compared to 19.9% in fiscal year 2000. The
decrease in gross profit was due to lower wholesale sales. Wholesale sales
historically yield a lower gross margin when compared to retail sales.
Selling, general and administrative expenses decreased 8.7% from $79.9
million in fiscal year 2000 to $72.9 million in fiscal year 2001. The decrease
was attributable to lower store operating expenses resulting from a reduction in
the average number of stores operated from 264 during fiscal year 2000 to 250 in
fiscal year 2001 as well as better expense control. Also, approximately $1.1
million of severance costs were incurred in fiscal year 2000 for various senior
management whose employment with the Company was terminated in that year. We
also incurred additional payroll and other administrative costs associated with
our reorganization into a holding company in fiscal year 2000. As a percentage
of net sales, selling, general and administrative expenses decreased from 38.7%
in fiscal year 2000 to 37.7% in fiscal year 2001. The majority of our selling,
general and administrative expenses relate to the retail division.
A provision for impairment of assets and store closings of $0.7 million
was recorded in fiscal year 2001 compared with a recovery of $0.5 million in
fiscal year 2000. The recovery in fiscal year 2000 was attributable to the $1.0
million reversal of a write-off on a convertible note receivable offset by $0.5
million of impairment charges for assets related to retail stores which were
closed during fiscal year 2000. The asset impairment charges in fiscal 2001
relate to retail store locations with negative cash flows that were either
closed or are targeted for closure.
As a result of the foregoing, loss from operations was $0.3 million in
fiscal year 2001 compared with $1.8 million in fiscal year 2000.
EBITDA(a) increased 63.3% or $2.5 million from $4.0 million in fiscal
year 2000 to $6.5 million in fiscal year 2001. The increase was primarily
attributable to decreases in selling, general and administrative expenses
described above.
15
Depreciation and amortization increased $1.0 million, or 17.3%, in fiscal
year 2001 compared to fiscal year 2000 due primarily to amortization of goodwill
related to the acquisition of perfumania.com in May 2000 (see Note 11 of Notes
to Consolidated Financial Statements) and to increases in capital spending for
systems improvements over the past two years.
Interest expense (net) decreased from $8.2 million in fiscal year 2000 to
$3.1 million in fiscal year 2001. The decrease was primarily due to the issuance
of $9.0 million of convertible notes in March 2000 and the resulting non-cash
interest charges of approximately $2.6 million in fiscal year 2000, a reduction
in the outstanding balance of convertible notes payable and a lower average
outstanding balance and interest rate on our bank line of credit. See "Liquidity
and Capital Resources."
Gain on the sale of an affiliate's common stock totaled $10.0 million in
fiscal year 2000; the gain was attributable to the sale of 600,000 shares of
Envision Development Corporation ("EDC") and the exchange of 400,000 shares of
EDC common stock for the acquisition of perfumania.com.
Realized loss on investments totaled $4.8 million in fiscal year 2000.
The losses were primarily attributable to realized losses of approximately $1.1
million on the sale of securities and a decline in the market prices on
securities available for sale which resulted in the Company recording a non-cash
charge of $3.7 million.
As a result of the foregoing, we had a net loss of $3.2 million in fiscal
year 2001 compared to a net loss of $6.1 million in fiscal year 2000.
FISCAL YEARS
----------------------------------------------------
EBITDA Reconciliation (a): 2002 2001 2000
- -------------------------------- ----------------------------------------------------
Loss from operations $ (232,183) $ (290,050) $ (1,817,450)
Depreciation and amortization 6,024,400 6,824,861 5,818,964
--------------- ------------- --------------
EBITDA $ 5,792,217 $ 6,534,811 $ 4,001,514
=============== ============= ==============
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements for operating purposes are to fund
Perfumania's inventory purchases, renovate existing stores and selectively open
new stores. During fiscal years 2002 and 2001, we financed these requirements
primarily through cash flows from operations, borrowings under our line of
credit, capital equipment leases and other short-term borrowings.
Perfumania's three year senior secured credit facility with GMAC
Commercial Finance LLC ("GMAC") provides for borrowings of up to $40.0 million,
of which $32.1 million was outstanding and $0.9 million was available as of
February 1, 2003, to support normal working capital requirements and other
general corporate purposes. Advances under the line of credit are based on a
formula of eligible inventories and bears interest at a floating rate ranging
from (a) prime less 0.75% to prime plus 1% or (b) LIBOR plus 1.75% to 3.50%
depending on a financial ratio test. As of February 1, 2003, the credit facility
bore interest at 3.4%. Borrowings are secured by a first lien on all assets of
Perfumania and the assignment of a life insurance policy on our Chairman and
Chief Executive Officer. The credit facility contains limitations on additional
borrowings, capital expenditures and other items, and contains various covenants
including maintenance of minimum net worth, and certain key ratios, as defined
by the lender. As of February 1, 2003, Perfumania was in compliance with all
financial covenants of the credit facility.
Pursuant to the terms of the credit agreement with GMAC, the credit
facility was extended from May 13, 2003 to May 13, 2004.
In October 2000, we entered into a capital lease of approximately $3.9
million of new point-of-sale equipment for our retail stores. The lease is for a
thirty-six month term. Approximately $1.1 million remains outstanding as of
February 1, 2003.
In April 1999 and July 1999, we issued an aggregate of $2.0 million
Series A and $2.0 million Series B Convertible Notes, respectively. The Series A
and Series B Notes were convertible into our common stock, bore interest at 8%
and any remaining non-redeemed portion was payable in full in April 2002 and
July 2002, respectively. In April 2002 and December 2002, we repaid the Series A
and Series B debt, respectively. The conversion price was the lower of (A) $4.35
per share for the Series A Notes and $3.41 per share for the Series B Notes,
16
subject to adjustment or (B) a 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 could have been adjusted pursuant to
antidilution provisions in the convertible notes.
On March 9, 2000 and March 27, 2000, we issued an aggregate of $4.0
million of Series C Convertible Notes and $5.0 million of Series D Convertible
Notes, respectively. The notes are convertible into our common stock, bear
interest at 8% and were payable in full in March 2003. The conversion price is
the lower of (A) $9.58 per share for the Series C and $7.76 for the Series D,
subject to adjustment or (B) a 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 notes.
In February 2001, we entered into a Convertible Note Option Repurchase
Agreement (the "Agreement") with the holders of our outstanding Series A, B, C,
and D Convertible Notes. The Agreement provided that we had the monthly option
to repurchase the then outstanding $8.8 million convertible notes over an
eleven-month period, 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 varied
as per a specified redemption schedule. In the event that we made redemption
payments as per the schedule, the note holders were restricted from converting
any part of the remaining outstanding and unpaid principal balance of such
holder's notes into our common stock. During fiscal year 2001, we repaid $4.1
million to the note holders. As of February 1, 2003 the Series A and B
Convertible Notes had been repaid in full.
In February 2002, we entered into a Convertible Note Option Repurchase
Agreement (the "Agreement") with the holders of our outstanding Series C and D
Convertible Notes. The Agreement provides that we have the monthly option to
repurchase the approximate $4.9 million outstanding notes over an eleven month
period beginning February 2002, 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 we
exercise our 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 our common stock. During fiscal year 2002, we repaid approximately
$4.2 million to the note-holders.
In December 2002, we entered into an Amendment to the February 2002
Convertible Note Option Repurchase Agreement. The Amendment provides an
extension of the maturity date of the Series C and D Convertible Notes to
September 15, 2003 with a monthly option to repurchase the approximately $1.2
million in Notes over the extended maturity date.
The holders of all the remaining Convertible Notes are restricted from
converting to the extent that the holder owns more than 9.9% of our outstanding
common stock.
In accordance with accounting literature, when debt is convertible at a
discount from the then current common stock market price, the discounted amount
represents an incremental yield, or 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
beneficial conversion features of approximately $1.2 million and $1.4 million,
respectively, at such point in time which represented a non-cash charge that is
included in interest expense on the accompanying consolidated statement of
operations in fiscal year 2000.
In December 1999, we loaned $1.0 million to TTA pursuant to the terms of
a convertible promissory note. The principal balance of the note was payable on
December 20, 2001, and interest, which accrued at a rate of 6% per annum, was
payable semi-annually commencing June 2000. We had the right to convert, for a
period of 14 days after TTA's initial public offering, all of the principal
amount of the note into shares of TTA's common stock at a conversion price per
share equal to the initial public offering price. TTA commenced its initial
public offering on June 13, 2000 and we converted the $1.0 million note into
138,889 shares of TTA's common stock.
Due to the uncertainty of TTA's initial public offering and
collectability of the note, we wrote off the principal balance of the note and
related interest receivable as of February 3, 2001. As a result of TTA's
successful initial public offering which occurred on June 13, 2000, the $1.0
million principal balance and related interest previously written off was
reversed in the first quarter of fiscal 2000.
In March 2000, we loaned TTA 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 was
payable on March 8, 2002 and interest was payable semi-annually, commencing
17
September 2000. The note was repaid in full in June 2000. As an incentive to
provide the loans, TTA granted us warrants to purchase 200,000 shares of its
common stock at its initial public offering price. The warrants were exercisable
in whole or in part until June 13, 2001 but were not exercised.
On October 12, 2000, we borrowed $500,000 from TTA. The loan was
unsecured, matured on December 31, 2000 and bore interest at the rate charged by
our major lender. The loan was repaid in December 2000.
On September 30, 2002 and June 30, 2001, Perfumania signed $3.0 million
subordinated note agreements with Parlux. The notes were in consideration for
the reduction of $3.0 million in trade payables due to Parlux. The notes were
due on March 31, 2003 and March 31, 2002 with various periodic principal
payments, bore interest at prime plus 1% and was subordinated to all bank
related indebtedness. As of February 1, 2003 and February 2, 2002, the
outstanding principal balance due on the notes was $100,000. The notes were
repaid in full in April 2003 and April 2002, respectively.
In fiscal year 2002, net cash provided by operating activities was
approximately $8.7 million compared with $14.3 million in fiscal year 2001. The
decrease in net cash provided by operating activities was principally a result
of the net change in our accounts payable to affiliates and non-affiliates.
Net cash used in investing activities in fiscal year 2002 was
approximately $1.9 million, principally due to capital expenditures related to
opening new stores and renovating existing stores. We intend to focus on
continuing to improve the profitability of our existing stores and anticipate
that we will open no more than 10 stores in fiscal 2003. Currently, our average
capital expenditure for opening a store is approximately $130,000, including
furniture and fixtures, equipment, build-out costs and other items. In addition,
initial inventory (not including inventory replenishment) in a new store ranges
from approximately $150,000 during the first fiscal quarter to approximately
$200,000 during the Christmas holiday season.
In fiscal year 2002, net cash used in financing activities was $5.4
million. This was principally due to the use of $4.2 million to redeem
convertible notes payable, $3.0 million to repay subordinated debt, and $1.8
million for capital lease obligations. These amounts paid were partially offset
by the net proceeds from a note receivable and interest from Ilia Lekach in the
amount of $3.0 million and bank borrowings of approximately $0.9 million.
In December 1999, our Board of Directors approved the repurchase by the
Company of up to 375,000 shares of our common stock, reflecting its belief that
our common stock represented a significant value at its then current trading
price. In January 2001, the Board approved an increase in the stock repurchase
program by an additional 250,000 shares and in February 2002, the Board approved
an increase in the stock repurchase program by an additional 250,000 shares.
Pursuant to these authorizations, we have repurchased approximately 780,000
shares of common stock for approximately $7.1 million during fiscal 2000, 2001
and 2002, including approximately 13,000 shares for $47,000 in fiscal year 2002.
Management believes that Perfumania's borrowing capacity under the credit
facility, projected cash flows from operations and other short term borrowings
will be sufficient to support our working capital needs, capital expenditures
and debt service for at least the next twelve months.
SEASONALITY AND QUARTERLY RESULTS
Our operations historically have been seasonal, with higher sales in the
fourth fiscal quarter than the other three fiscal quarters. Significantly higher
fourth quarter retail sales result from increased purchases of fragrances as
gift items during the Christmas holiday season. Our quarterly results may vary
due to the timing of new store openings, net sales contributed by new stores and
fluctuations in comparable sales of existing stores. Results of any interim
period are not necessarily indicative of the results that may be expected during
a full fiscal year.
RECENT ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets. This Statement affected our treatment of goodwill and other
intangible assets at the start of fiscal year 2002. The Statement requires 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
18
be assessed and classified consistent with the Statements' criteria.
Amortization of goodwill and other intangible assets with indefinite useful
lives will cease. Intangible assets with estimated useful lives will continue to
be amortized over those periods. Goodwill amortization will no longer be
recorded. The adoption of SFAS No. 142 in fiscal year 2002 did not have a
significant impact on our financial position or results of operations.
In accordance with SFAS No. 142, we conducted an internal valuation based
on discounted future cash flows of perfumania.com (see Note 3 for further
discussion). Based on this valuation, no significant impairment was identified.
SFAS No. 142 does not permit the restatement of previously issued financial
statements, but does require the disclosure of prior results adjusted to exclude
amortization expense related to goodwill and intangible assets, which are no
longer being amortized. On an as adjusted basis, basic and diluted loss per
share for fiscal years 2002, 2001 and 2000, respectively, are adjusted to
exclude amounts no longer being amortized under the provisions of SFAS No. 142.
FISCAL YEARS
------------------------------------------------
2002 2001 2000
-------------- --------------- --------------
Net loss as reported $ (2,825,700) $ (3,191,657) $ (6,120,291)
Goodwill amortization - 573,051 436,236
-------------- --------------- --------------
Adjusted net loss $ (2,825,700) $ (2,618,606) $ (5,684,055)
============== =============== ==============
Basic loss per share
Reported basic loss per share $ (1.12) $ (1.32) $ (2.59)
Goodwill amortization - 0.24 0.18
-------------- --------------- --------------
Adjusted basic loss per share $ (1.12) $ (1.08) $ (2.41)
============== =============== ==============
Diluted loss per share
Reported diluted loss per share $ (1.12) $ (1.32) $ (2.59)
Goodwill amortization - 0.24 0.18
-------------- --------------- --------------
Adjusted diluted loss per share $ (1.12) $ (1.08) $ (2.41)
============== =============== ==============
In July 2001, the FASB issued SFAS No. 143, Accounting For Asset
Retirement Obligations. This Statement requires capitalizing any retirement
costs as part of the total cost of the related long-lived asset and subsequently
allocating the total expense to future periods using a systematic and rational
method. Adoption of this Statement is required for fiscal years beginning after
June 15, 2002. We do not expect a significant impact on our financial position
and results of operations from the adoption of this Statement.
In October 2001, the FASB issued SFAS No. 144, Accounting For The
Impairment Or Disposal Of Long-Lived Assets. This Statement supersedes Statement
No. 121 but retains many of its fundamental provisions. SFAS No. 144 also
supersedes the accounting and reporting provisions of APB Opinion 30, Reporting
the Results of Operations - Reporting the Effects of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business. Additionally, this Statement expands
the scope of discontinued operations to include more disposal transactions. The
adoption of SFAS No. 144 in fiscal year 2002 did not have a significant impact
on our financial position and results of operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS No. 145 which all but eliminates the presentation in income
statements of debt extinguishments as extraordinary items. SFAS No. 145 will be
effective for fiscal years beginning after May 15, 2002. SFAS No. 145 is not
expected to have a significant effect on our financial position and results of
operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity. The provisions of the Statement are effective for exit of disposal
activities that are initiated after December 31, 2002, with early application
encouraged. We do not expect a significant impact on our financial position and
results of operations from the adoption of this Statement.
19
In September 2002, the FASB Emerging Issues Task Force issued EITF No.
02-16, Accounting by a Reseller for Cash Consideration Received from a Vendor.
EITF No. 02-16 addresses how a reseller of a vendor's products should account
for cash consideration (as that term is defined in EITF No. 01-9, Accounting for
Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's
Products) received from a vendor. EITF 02-16 did not have a material effect on
our financial position and results of operation.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligations undertaken. The initial recognition and measurement provisions of
the Interpretation are applicable to guarantees issued or modified after
December 31, 2002 and are not expected to have a material effect on the
Company's financial position and results of operations. The disclosure
requirements are effective for financial statements of interim and annual
periods ending after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financial statements.
FISCAL YEARS
---------------------------------------------------------
2002 2001 2000
------------------ ----------------- ------------------
Net loss as reported: $ (2,825,700) $ (3,191,657) $ (6,120,291)
Deduct: Total stock based employee
compensation expense included in reported
net loss, net - - -
Add: Total stock based employee
compensation expense not included in reported
net loss, net $ (478,449) $ (396,704) $ (565,061)
------------------ ----------------- ------------------
Proforma net loss: $ (3,304,149) $ (3,588,361) $ (6,685,352)
================== ================= ==================
Proforma net loss per share:
Basic $ (1.31) $ (1.47) $ (2.84)
================== ================= ==================
Diluted $ (1.31) $ (1.47) $ (2.84)
================== ================= ==================
CHANGES IN FOREIGN EXCHANGE RATES CREATE RISK
Although large fluctuations in foreign exchange rates could have a
material effect on the prices we pay for products purchased from outside the
United States, such fluctuations have not been material to our results of
operations to date. Transactions with foreign suppliers are in United States
dollars. We believe inflation has not had a material impact on our results of
operations and we are generally able to pass through cost increases by
increasing sales prices.
20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We conduct business in the United States where the functional currency of
the country is the United States dollar. As a result, we are not at risk to any
foreign exchange translation exposure on a prospective basis.
Our exposure to market risk for changes in interest rates relates
primarily to our bank line of credit. The bank line of credit bears interest at
a variable rate, as discussed above under "Liquidity and Capital Resources". We
mitigate interest rate risk by continuously monitoring the interest rates. As a
result of borrowings associated with our operating and investing activities, we
are exposed to interest rate risk. As of February 1, 2003 and February 2, 2002,
our primary source of funds for working capital and other needs is a line of
credit that provides for borrowings up to $40.0 million.
Of the $42.1 million and $39.2 million of short-term and long-term
borrowings on our balance sheet as of February 1, 2003 and February 2, 2002,
respectively, approximately 23.7% and 20.4%, respectively, represented fixed
rate instruments. The line of credit bears interest at a floating rate ranging
from (a) prime less .075% to prime plus 1.0%, or (b) LIBOR plus 1.75% to 3.5%
depending on a financial ratio test. For fiscal year 2002, the credit facility
bore interest at an average rate of 4.1%. A hypothetical 10% adverse move in
interest rates would increase fiscal years 2002 and 2001 interest expense by
approximately $0.1 million and $0.3 million, respectively.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial information and the supplementary data required in response
to this Item are as follows:
PAGE
----
E Com Ventures, Inc. and Subsidiaries
Independent Auditors' Report........................................................ 23
Consolidated Balance Sheets as of February 1, 2003 and February 2, 2002............. 24
Consolidated Statements of Operations for the Fiscal Years Ended February 1, 2003,
February 2, 2002 and February 3, 2001............................................... 25
Consolidated Statements of Changes in Shareholders' Equity for the Fiscal Years Ended
February 1, 2003, February 2, 2002, and February 3, 2001.......................... 26
Consolidated Statements of Cash Flows for the Fiscal Years Ended February 1, 2003,
February 2, 2002, and February 3, 2001.............................................. 27
Notes to Consolidated Financial Statements.......................................... 28
Schedule II - Valuation and Qualifying Accounts and Reserves........................ 45
22
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
E Com Ventures, Inc.:
We have audited the accompanying consolidated balance sheets of E Com Ventures,
Inc. and subsidiaries (the "Company") as of February 1, 2003 and February 2,
2002, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended February 1, 2003. Our audits also included the financial statement
schedule listed in the Index at Item 14(a)(2). These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of E Com Ventures, Inc. and
subsidiaries as of February 1, 2003 and February 2, 2002, and the results of
their operations and their cash flows for each of the three years in the period
ended February 1, 2003, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for intangible assets to conform to Statement
of Financial Accounting Standard No. 142.
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
April 18, 2003
23
E COM VENTURES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS: FEBRUARY 1, 2003 FEBRUARY 2, 2002
----------------------------- -------------------------
Current assets:
Cash and cash equivalents $ 2,964,645 $ 1,600,787
Trade receivables, net 744,456 635,240
Advances to suppliers 1,814,935 3,426,525
Inventories, net 68,717,163 68,387,570
Prepaid expenses and other current assets 1,169,524 1,336,287
Receivable from affiliate - 811,169
Investments available for sale 210,607 1,313,740
----------------------------- -------------------------
Total current assets 75,621,330 77,511,318
Property and equipment, net 24,556,691 21,348,967
Goodwill and other intangible assets 2,508,775 2,740,315
Other assets, net 735,828 958,026
----------------------------- -------------------------
Total assets $ 103,422,624 $ 102,558,626
============================= =========================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Bank line of credit $ 32,081,831 $ 30,734,662
Current portion of long-term debt 31,860 454,219
Accounts payable, non-affiliates 20,905,826 17,924,889
Accounts payable, affiliates 13,331,718 16,767,667
Accrued expenses and other liabilities 5,168,634 5,956,743
Subordinated note payable, affiliate 100,000 100,000
Current portion of obligations under capital leases 981,784 1,664,827
Current portion of convertible notes payable 1,215,215 1,148,429
----------------------------- -------------------------
Total current liabilites 73,816,868 74,751,436
Long-term debt, less current portion - 31,860
Long-term portion of obligations under capital leases 7,752,315 1,076,106
Convertible notes payable - 4,095,811
----------------------------- -------------------------
Total liabilities 81,569,183 79,955,213
----------------------------- -------------------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.10 par value, 1,000,000
shares authorized, none issued - -
Common stock, $.01 par value, 6,250,000 shares
authorized; 3,215,761 and 2,980,305 shares issued
in fiscal years 2002 and 2001, respectively 32,158 29,803
Additional paid-in capital 71,387,794 71,455,401
Treasury stock, at cost, 779,952 and 766,802 shares
in fiscal years 2002 and 2001, respectively (7,085,940) (7,038,638)
Accumulated deficit (42,028,563) (39,202,863)
Notes and interest receivable from shareholder and officer (311,604) (2,881,624)
Accumulated other comprehensive (loss) income (140,404) 241,334
----------------------------- -------------------------
Total shareholders' equity 21,853,441 22,603,413
----------------------------- -------------------------
Total liabilities and shareholders' equity $ 103,422,624 $ 102,558,626
============================= =========================
See accompanying notes to consolidated financial statements.
24
E COM VENTURES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED
-------------------------------------------------------------
FEBRUARY 1, 2003 FEBRUARY 2, 2002 FEBRUARY 3, 2001
------------------ ------------------ -------------------
Net sales $ 201,513,897 $ 193,351,611 $ 206,569,581
Cost of goods sold 116,919,385 113,116,861 123,135,117
------------------ ------------------ -------------------
Gross profit 84,594,512 80,234,750 83,434,464
------------------ ------------------ -------------------
Operating expenses:
Selling, general and administrative expenses 76,177,549 72,972,938 79,938,537
Provision for impairment of receivable
from an affiliate 1,961,355 - -
Provision (recovery) for impairment of
assets and store closings 663,391 727,001 (505,587)
Depreciation and amortization 6,024,400 6,824,861 5,818,964
------------------ ------------------ -------------------
Total operating expenses 84,826,695 80,524,800 85,251,914
------------------ ------------------ -------------------
Loss from operations (232,183) (290,050) (1,817,450)
------------------ ------------------ -------------------
Other income (expense):
Interest expense:
Affiliates (43,049) (102,269) (308,545)
Other (2,029,290) (3,293,929) (8,230,910)
------------------ ------------------ -------------------
(2,072,339) (3,396,198) (8,539,455)
------------------ ------------------ -------------------
Interest income:
Affiliates 173,526 272,944 287,649
Other 16,176 28,065 73,240
------------------ ------------------ -------------------
189,702 301,009 360,889
------------------ ------------------ -------------------
Share of loss of partially-owned affiliate - - (1,388,248)
Gain on sale of affiliate's common stock - - 9,998,454
Realized loss on investments (710,880) - (4,819,441)
Miscellaneous income (expense), net - (17,716) 84,960
------------------ ------------------ -------------------
Total other income (expense) (710,880) (17,716) (4,302,841)
------------------ ------------------ -------------------
Loss before income taxes (2,825,700) (3,402,955) (6,120,291)
Benefit for income taxes - 211,298 -
------------------ ------------------ -------------------
Net loss $ (2,825,700) $ (3,191,657) $ (6,120,291)
================== ================== ===================
Basic loss per common share $ (1.12) $ (1.32) $ (2.59)
================== ================== ===================
Diluted loss per common share $ (1.12) $ (1.32) $ (2.59)
================== ================== ===================
Weighted average number of shares
outstanding:
Basic 2,528,326 2,420,467 2,360,456
================== ================== ===================
Diluted 2,528,326 2,420,467 2,360,456
================== ================== ===================
See accompanying notes to consolidated financial statements.
25
E COM VENTURES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED FEBRUARY 1, 2003, FEBRUARY 2, 2002 AND FEBRUARY 3, 2001
Accumulated
Common Stock Additional Treasury Stock Other
-------------------- Paid-In ---------------------- Comprehensive Accumulated
Shares Amount Capital Shares Amount Income (Loss) Deficit
---------- --------- ----------- -------- ------------ ------------- -------------
Balance at January 29, 2000 2,320,597 $23,205 $65,509,755 203,912 $(3,419,957) $ - $(29,890,915)
Components of comprehensive loss:
Net loss - - - - - - (6,120,291)
Unrealized loss on investments - - - - - (150,095) -
Total comprehensive loss - - - - - - -
Exercise of stock options 46,056 461 148,502 - - - -
Purchase of treasury stock - - - 204,720 (2,223,420) - -
Conversion of debt and
accrued interest to common
stock 563,917 5,640 3,719,252 - - - -
Net change in notes
and interest receivable from
shareholder and officer - - - - - - -
Beneficial conversion
feature of notes payable - - 2,636,764 - - - -
---------- --------- ----------- -------- ------------ ------------- -------------
Balance at February 3, 2001 2,930,570 29,306 72,014,273 408,632 (5,643,377) (150,095) (36,011,206)
Components of comprehensive loss:
Net loss - - - - - - (3,191,657)
Unrealized gain
on investments - - - - - 391,429 -
Total comprehensive loss - - - - - - -
Exercise of stock options 4,750 48 9,452 - - - -
Purchase of treasury stock - - - 358,170 (1,395,261) - -
Conversion of debt and
accrued interest to
common stock 44,985 449 115,009 - - - -
Net change in notes and
interest receivable from
shareholder and officer - - - - - - -
Premium repayment of
convertible notes payable - - (683,333) - - - -
---------- --------- ----------- -------- ------------ ------------- -------------
Balance at February 2, 2002 2,980,305 29,803 71,455,401 766,802 (7,038,638) 241,334 (39,202,863)
Components of comprehensive loss:
Net loss - - - - - - (2,825,700)
Unrealized loss
on investments - - - - - (381,738) -
Total comprehensive loss - - - - - - -
Exercise of stock options 59,808 598 112,949 - - - -
Purchase of treasury stock - - - 13,150 (47,302) - -
Conversion of debt and
accrued interest to
common stock 175,648 1,757 515,277 - - - -
Net change in notes and
interest receivable from
shareholder and officer - - - - - - -
Premium repayment of
convertible notes payable - - (695,833) - - - -
---------- --------- ----------- -------- ------------ ------------- -------------
Balance at February 1, 2003 3,215,761 $32,158 $71,387,794 779,952 $(7,085,940) $ (140,404) $(42,028,563)
========== ========= =========== ======== ============ ============= =============
Notes and
Interest Receivable
From Shareholders
and Officers Total
----------------- --------------
Balance at January 29, 2000 $ (1,532,649) $ 30,689,439
--------------
Components of comprehensive loss:
Net loss - (6,120,291)
Unrealized loss on investments - (150,095)
--------------
Total comprehensive loss - (6,270,386)
--------------
Exercise of stock options - 148,963
Purchase of treasury stock - (2,223,420)
Conversion of debt and
accrued interest to common
stock - 3,724,892
Net change in notes
and interest receivable from
shareholder and officer (2,311,629) (2,311,629)
Beneficial conversion
feature of notes payable - 2,636,764
--------------- --------------
Balance at February 3, 2001 (3,844,278) 26,394,623
--------------
Components of comprehensive loss:
Net loss - (3,191,657)
Unrealized gain
on investments - 391,429
--------------
Total comprehensive loss - (2,800,228)
--------------
Exercise of stock options - 9,500
Purchase of treasury stock - (1,395,261)
Conversion of debt and
accrued interest to
common stock - 115,458
Net change in notes and
interest receivable from
shareholder and officer 962,654 962,654
Premium repayment of
convertible notes payable - (683,333)
--------------
Balance at February 2, 2002 (2,881,624) 22,603,413
--------------- --------------
Components of comprehensive loss:
Net loss - (2,825,700)
Unrealized loss
on investments - (381,738)
--------------
Total comprehensive loss - (3,207,438)
--------------
Exercise of stock options - 113,547
Purchase of treasury stock - (47,302)
Conversion of debt and
accrued interest to
common stock - 517,034
Net change in notes and
interest receivable from
shareholder and officer 2,570,020 2,570,020
Premium repayment of
convertible notes payable - (695,833)
--------------- --------------
Balance at February 1, 2003 $ (311,604) $ 21,853,441
=============== ==============
References to share amounts in the schedule above reflect the effect of the one
for four reverse stock-split.
See accompanying notes to consolidated financial statements.
26
E COM VENTURES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED
----------------------------------------------------------------
February 1, 2003 February 2, 2002 February 3, 2001
-------------------- -------------------- --------------------
Cash flows from operating activities:
Net loss $ (2,825,700) $ (3,191,657) $ (6,120,291)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Provision for doubtful accounts - 55,000 55,000
Provision for impairment of receivable from affiliate 1,961,355 - -
Gain on sale of affiliate's common stock - - (9,998,454)
Provision (recovery) for impairment of assets and store closings 663,391 727,001 (505,587)
Depreciation and amortization 6,024,400 6,824,861 5,818,964
Share of loss of partially-owned affiliate - - 1,388,248
Realized loss on investments 710,880 - 3,727,022
Beneficial conversion feature of convertible notes payable - - 2,636,764
Change in operating assets and liabilities:
Trade receivables (109,215) 1,216,166 (731,026)
Advances to suppliers 1,611,590 2,510,581 (3,381,647)
Inventories (329,593) (5,885,858) 8,656,891
Prepaid expenses and other current assets 166,763 1,515,592 (1,981,881)
Due from affiliate (1,150,186) (659,623) -
Other assets 216,091 278,757 507,663
Accounts payable, non-affiliate (4,593,171) 8,471,392 (3,728,334)
Accounts payable, affiliate 7,138,159 3,438,808 7,062,496
Accrued expenses and other liabilities (788,111) (933,988) (687,614)
Income taxes payable - (72,707) (150,391)
-------------------- -------------------- --------------------
Net cash provided by operating activities 8,696,653 14,294,325 2,567,823
-------------------- -------------------- --------------------
Cash flows from investing activities:
Additions to property and equipment (1,893,664) (1,614,636) (4,298,081)
Acquisition, net of cash acquired - - (1,534,769)
(Purchases) proceeds of investments available for sale 10,515 - (1,497,027)
-------------------- -------------------- --------------------
Net cash used in investing activities (1,883,149) (1,614,636) (7,329,877)
-------------------- -------------------- --------------------
Cash flows from financing activities:
Net borrowings and (repayments) under bank line
of credit and notes payable 892,950 (3,954,816) 691,439
Principal payments under capital lease obligations (1,771,037) (1,479,795) (853,735)
Net advances to shareholders and officers (400,000) (171,000) (2,311,629)
Proceeds from note and interest receivable, shareholder and officer 2,970,020 692,702 779,594
Repayments under subordinated debt (3,000,000) (2,900,000) (6,500,000)
Issuance of convertible notes payable - - 9,000,000
Repayments of convertible notes payable (4,207,824) (4,100,000) (245,000)
Proceeds from sale of affiliate's common stock - - 6,500,000
Proceeds from exercise of stock options 113,547 9,500 148,963
Purchases of treasury stock (47,302) (1,395,261) (2,223,420)
-------------------- -------------------- --------------------
Net cash (used in ) provided by financing activities (5,449,646) (13,298,670) 4,986,212
-------------------- -------------------- --------------------
(Decrease) increase in cash and cash equivalents 1,363,858 (618,981) 224,158
Cash and cash equivalents at beginning of period 1,600,787 2,219,768 1,995,610
-------------------- -------------------- --------------------
Cash and cash equivalents at end of period $ 2,964,645 $ 1,600,787 $ 2,219,768
==================== ==================== ====================
See accompanying notes to consolidated financial statements.
27
E COM VENTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED FEBRUARY 1, 2003,
FEBRUARY 2, 2002 AND FEBRUARY 3, 2001
NOTE 1 - NATURE OF BUSINESS
E Com Ventures, Inc., a Florida Corporation (the "Company"), is
structured as a holding company that owns and operates Perfumania Inc.
("Perfumania"), a Florida Corporation, a specialty retailer and wholesaler of
fragrances and related products, and perfumania.com, inc., an Internet retailer
of fragrance and other specialty items.
Perfumania is incorporated in Florida and operates under the name
Perfumania. Perfumania's retail stores are located in regional malls,
manufacturers' outlet malls, airports and on a stand-alone basis in suburban
strip shopping centers. The number of retail stores in operation at February 1,
2003, February 2, 2002, and February 3, 2001 were 238, 247 and 257,
respectively.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Significant accounting principles and practices used by the Company in
the preparation of the accompanying consolidated financial statements are as
follows:
FISCAL YEAR END
The Company's fiscal year ends the Saturday closest to January 31 to
enable the Company's operations to be reported in a manner which more closely
coincides with general retail reporting practices and the financial reporting
needs of the Company. In the accompanying notes, fiscal year 2002, 2001 and 2000
refer to the years ended February 1, 2003, February 2, 2002 and February 3,
2001, respectively. The fiscal year ended February 3, 2001 included 53 weeks as
compared to 52 weeks for the fiscal years ended February 1, 2003 and February 2,
2002.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The most significant estimates made by
management in the accompanying consolidated financial statements relate to the
allowance for doubtful accounts, inventory reserves, self-insured health care
reserves, long-lived asset impairments and estimated useful lives of property
and equipment. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. The Company's accumulated
deficit as of February 1, 2003 of approximately $42.0 million includes the
Company's share of the cumulative net loss of perfumania.com, inc. of
approximately $1.4 million prior to May 2000 when perfumania.com became a wholly
owned subsidiary of the Company (see Note 11).
REVENUE RECOGNITION
Revenue from retail sales is recorded, net of discounts, upon customer
purchase. Revenue from wholesale transactions is recorded upon shipment of
inventory.
CASH AND CASH EQUIVALENTS
28
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
ADVANCES TO SUPPLIERS
Advances to suppliers represent prepayments to vendors on pending
inventory purchase orders.
INVENTORIES
Inventories, consisting of finished goods, are stated at the lower of
cost or market, cost being determined on a weighted average cost basis. The cost
of inventory includes product cost and freight charges. Provision for
potentially slow moving or damaged inventory is recorded based on management's
analysis of inventory levels, future sales forecasts and through specific
identification of obsolete or damaged merchandise. The Company's reserve for
inventory was approximately $1.2 million and $1.7 million as of February 1, 2003
and February 2, 2002, respectively.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost, less accumulated depreciation
and amortization. Depreciation is calculated using the straight-line method over
the estimated useful lives of the related assets. Leasehold improvements are
amortized over the shorter of the term of the lease including probable renewal
periods, or the estimated useful lives of the improvements, generally ten years.
Costs of major additions and improvements are capitalized and expenditures for
maintenance and repairs which do not extend the useful life of the asset are
expensed when incurred. Gains or losses arising from sales or retirements are
included in income currently.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets represent the excess purchase price
paid over net assets of businesses acquired and identifiable intangible assets
resulting from the application of the purchase method of accounting (see Note
3). As a result of a new accounting rule adopted in fiscal year 2002, goodwill
will no longer be amortized but will be tested annually for impairment (see
Recent Accounting Pronouncements). For each year through fiscal year 2001,
goodwill was amortized on a straight-line basis over five years. Accumulated
amortization for goodwill and other intangible assets as of February 1, 2003 and
February 2, 2002 was approximately $1.6 million and $1.3 million, respectively.
INCOME TAXES
Income tax expense is based principally on pre-tax financial income.
Deferred tax assets and liabilities are recognized for the differences between
the financial reporting carrying values and the tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. A valuation allowance is
recognized to reduce net deferred tax assets to amounts that management believes
are expected to be realized.
BASIC AND DILUTED INCOME (LOSS) PER SHARE
Basic income (loss) per common share is computed by dividing income
(loss) attributable to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted income (loss) per common
share includes, in periods in which they have a dilutive effect, the dilutive
effect of those common stock equivalents where the average market price of the
common shares exceeds the exercise prices for the respective years, and the
dilutive effect of those convertible notes which are convertible into common
stock. For all periods presented in the accompanying consolidated financial
statements of operations, incremental shares attributed to common stock
equivalents and convertible notes were not included because the results would be
anti-dilutive.
29
Basic and diluted loss per share are computed as follows:
FISCAL YEAR
------------------------------------------------
2002 2001 2000
-------------- --------------- --------------
Numerator:
Net loss: $ (2,825,700) $ (3,191,657) $ (6,120,291)
============== =============== ==============
Denominator:
Denominator for basic loss per share 2,528,326 2,420,467 2,360,456
Effect of dilutive securities:
Options to purchase common
stock and convertible notes - - -
-------------- --------------- --------------
Denominator for dilutive loss per share 2,528,326 2,420,467 2,360,456
============== =============== ==============
Antidilutive securities not included
in the diluted loss per share computation:
Options to purchase common stock 666,501 606,594 570,115
Exercise price $1.64 - $21.52 $1.64 - $21.52 $1.64 - $21.52
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosures about
Fair Value of Financial Instruments" ("SFAS 107"), requires disclosure of the
fair value of financial instruments held by the Company. SFAS 107 defines the
fair value of a financial instrument as the amount at which the instrument could
be exchanged in a current transaction between willing parties. The following
methods and assumptions were used to estimate fair value:
- - The carrying amounts of cash and cash equivalents, accounts receivable
and accounts payable approximate fair value due to their short-term
nature;
- - The fair value of investments are based on quoted market prices, if
available, and;
- - The fair value of the Company's bank line of credit, convertible notes
payable, obligations under capital leases and loans payable are based on
current interest rates and repayment terms of the individual notes.
ASSET IMPAIRMENT
The Company reviews long-lived assets and makes a provision for
impairment whenever events or changes in circumstances indicate that the
projected cash flows of related activities may not provide for cost recovery. An
impairment loss is generally recorded when the net book value of assets exceeds
projected undiscounted future cash flows. The impairment loss is determined
based on the difference between the net book value and the fair value of the
assets. The estimated fair value is based on anticipated discounted future cash
flows. Any impairment is charged to operations in the period in which it is
identified.
STOCK BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and provides proforma
disclosure of net income and earnings per share as if the fair value based
method prescribed by Statement of Financial Accounting Standards No. 123 ("SFAS
123") had been applied in measuring compensation expense for options granted to
employees and directors in fiscal years 2002, 2001 and 2000. In accordance with
APB 25, compensation cost for stock options is measured as the excess, if any,
of the quoted market price of the Company's stock at the date of the grant over
the amount an employee or director must pay to acquire the stock (See Note 11
for proforma disclosure).
30
UNREALIZED GAIN (LOSS) ON INVESTMENTS
Equity securities classified as available for sale are adjusted to fair
market value as of the balance sheet date based on quoted market prices. The
related unrealized gain (loss) on investments is reflected in other
comprehensive income (loss) and accumulated other comprehensive income (loss) on
the consolidated statements of changes in shareholders' equity and consolidated
balance sheets, respectively. Realized losses on investments resulting from the
sale or other-than-temporary declines in fair market values of securities
classified as available for sale are included in the results of operations.
PRE-OPENING EXPENSES
Pre-opening expenses related to opening new stores are expensed as
incurred.
SHIPPING AND HANDLING FEES AND COSTS
Income generated from shipping and handling fees is classified as
revenues. The Company classifies the costs related to shipping and handling as
cost of goods sold.
ADVERTISING COSTS
Advertising costs are charged to expense when incurred. Cooperative
advertising of approximately $120,000 has been received from vendors and is
recorded as an offset to advertising expense.
RECLASSIFICATION
Certain fiscal 2001 and 2000 amounts have been reclassified to conform
with the fiscal 2002 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets. This Statement affected the Company's treatment of goodwill
and other intangible assets at the start of fiscal year 2002. The Statement
requires 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. Intangible assets with estimated useful
lives will continue to be amortized over those periods. Goodwill amortization
will no longer be recorded. The adoption of SFAS No. 142 in fiscal year 2002 did
not have a significant impact on the Company's financial position or results of
operations.
In accordance with SFAS No. 142, the Company conducted an internal
valuation based on discounted future cash flows of perfumania.com (see Note 3
for further discussion). Based on this valuation, no significant impairment was
identified. SFAS No. 142 does not permit the restatement of previously issued
financial statements, but does require the disclosure of prior results adjusted
to exclude amortization expense related to goodwill and intangible assets, which
are no longer being amortized. On an as adjusted basis, basic and diluted loss
per share for fiscal years 2002, 2001 and 2000, respectively, are adjusted to
exclude amounts no longer being amortized under the provisions of SFAS No. 142.
31
FISCAL YEARS
------------------------------------------------
2002 2001 2000
-------------- --------------- --------------
Net loss as reported $ (2,825,700) $ (3,191,657) $ (6,120,291)
Goodwill amortization - 573,051 436,236
-------------- --------------- --------------
Adjusted net loss $ (2,825,700) $ (2,618,606) $ (5,684,055)
============== =============== ==============
Basic loss per share
Reported basic loss per share $ (1.12) $ (1.32) $ (2.59)
Goodwill amortization - 0.24 0.18
-------------- --------------- --------------
Adjusted basic loss per share $ (1.12) $ (1.08) $ (2.41)
============== =============== ==============
Diluted loss per share
Reported diluted loss per share $ (1.12) $ (1.32) $ (2.59)
Goodwill amortization - 0.24 0.18
-------------- --------------- --------------
Adjusted diluted loss per share $ (1.12) $ (1.08) $ (2.41)
============== =============== ==============
In July 2001, the FASB issued SFAS No. 143, Accounting For Asset
Retirement Obligations. This Statement requires capitalizing any retirement
costs as part of the total cost of the related long-lived asset and subsequently
allocating the total expense to future periods using a systematic and rational
method. Adoption of this Statement is required for fiscal years beginning after
June 15, 2002. We do not expect a significant impact on the Company's financial
position and results of operations from the adoption of this Statement.
In October 2001, the FASB issued SFAS No. 144, Accounting For The
Impairment Or Disposal Of Long-Lived Assets. This Statement supersedes Statement
No. 121 but retains many of its fundamental provisions. SFAS No. 144 also
supersedes the accounting and reporting provisions of APB Opinion 30, Reporting
the Results of Operations - Reporting the Effects of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business. Additionally, this Statement expands
the scope of discontinued operations to include more disposal transactions. The
adoption of SFAS No. 144 in fiscal year 2002 did not have a significant impact
on the Company's financial position and results of operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS No. 145 which all but eliminates the presentation in income
statements of debt extinguishments as extraordinary items. SFAS No. 145 will be
effective for fiscal years beginning after May 15, 2002. SFAS No. 145 is not
expected to have a significant effect on the Company's financial position or
results of operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity. The provisions of the Statement are effective for exit of disposal
activities that are initiated after December 31, 2002, with early application
encouraged. We do not expect a significant impact on the Company's financial
position and results of operations from the adoption of this Statement.
In September 2002, the FASB Emerging Issues Task Force issued EITF No.
02-16, Accounting by a Reseller for Cash Consideration Received from a Vendor.
EITF No. 02-16 addresses how a reseller of a vendor's products should account
for cash consideration (as that term is defined in EITF No. 01-9, Accounting for
Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's
Products) received from a vendor. EITF 02-16 is not expected to have a material
effect on the Company's financial position and results of operation.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
32
voluntary change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financial statements.
NOTE 3 - ACQUISITION
In August 2000, Perfumania purchased six fragrance retail locations for
approximately $2.2 million. The purchase price was offset against advances
previously paid to the seller to source merchandise for Perfumania. The
acquisition was accounted for as an asset purchase and accordingly, the results
of operations are included in the Company's consolidated statements of
operations from the date of acquisition. The cost of the acquisition has been
allocated to the assets acquired based on their relative fair values at the date
of acquisition as determined by management with the assistance of an independent
valuation consultant. The excess of the purchase price over the fair value of
net assets acquired of approximately $1.1 million was recorded as an intangible
asset and is currently being amortized over 5 years. The retail locations
acquired were not material to the Company's results of operations for fiscal
year 2000; therefore no proforma results are presented.
In addition, in May 2000, the Company acquired 100% of the outstanding
common stock of perfumania.com which resulted in goodwill of approximately $2.9
million. See Note 11 for further discussion.
NOTE 4 - STATEMENTS OF CASH FLOWS
Supplemental disclosures of non-cash investing and financing activities:
FISCAL YEAR ENDED
-------------------------------------------------------------------
NON-CASH TRANSACTIONS February 1, 2003 February 2, 2002 February 3, 2001
- ------------------------------------------ --------------------- --------------------- ---------------------
Equipment and building under capital leases $ 7,764,203 $ 68,201 $ 3,980,471
Unrealized gain (loss) on investments (381,738) 391,429 (150,095)
Subordinated debt issued to affiliate 3,000,000 3,000,000 3,000,000
Change in investment as a result of
transfer of shares in an affiliate - 440,952 -
Conversion of debt and accrued interest
payable in exchange for common stock 517,034 115,458 3,724,892
Cash paid during the period for:
Interest $ 2,196,062 $ 3,466,420 $ 6,116,313
Income taxes $ - $ 150,000 $ 150,391
33
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment includes the following:
Estimated Useful Lives
February 1, 2003 February 2, 2002 (In Years)
--------------------- --------------------- --------------------------------
Furniture, fixtures and equipment $ 21,017,998 $ 21,274,751 5-7
Leasehold improvements 21,758,680 21,591,254 10
Equipment under capital leases 6,774,897 6,374,908 shorter of 5 years or lease term
Building under capital lease 7,310,790 - 15
--------------------- ---------------------
56,862,365 49,240,913
Less:
Accumulated depreciation and amortization (32,305,674) (27,891,946)
--------------------- ---------------------
$ 24,556,691 $ 21,348,967
===================== =====================
See Note 13 for further discussion of capital leases.
Depreciation and amortization expense for fiscal years 2002, 2001, and
2000 was $6,024,400, $6,019,720 and $5,229,185, respectively. Accumulated
depreciation for equipment under capital leases was $4,208,728 and $2,901,101 as
of February 1, 2003 and February 2, 2002, respectively.
NOTE 6 - RELATED PARTY TRANSACTIONS
Notes receivable from a shareholder and officer were $311,604 and
$2,881,624 as of February 1, 2003 and February 2, 2002, respectively. The
remaining notes are unsecured, mature in five years and bear interest at prime
plus 1% per annum. Principal and interest are payable in full at maturity. Total
interest income recognized during fiscal years 2002, 2001, and 2000 was
approximately $174,000, $264,000 and $236,000, respectively. Accrued interest
receivable was approximately $12,000 at February 1, 2003. There was no accrued
interest receivable as of February 2, 2002.
During fiscal year 2000, we purchased 314,000 shares of common stock of
Take to Auction.Com, Inc. ("TTA"), an Internet auction site, for approximately
$2.5 million. Our Chairman of the Board and Chief Executive Officer Ilia Lekach
was also the Chairman of the Board and Chief Executive Officer of TTA at that
time. In June 2000, we acquired approximately 139,000 shares of TTA's common
stock upon conversion of a $1.0 million convertible promissory note receivable.
In January 2001, the Company received 250,000 shares of TTA common stock
as partial payment on a loan receivable from Ilia Lekach. These shares were
valued at $252,500 ($1.01 per share).
As of February 3, 2001, the market price for TTA's common stock was below
the Company's average cost per share of $5.38. In consideration of accounting
guidance that considers a six to nine month decline in stock price to be
other-than-temporary, the Company valued the shares at $1.01 per share and
recorded a non-cash charge of approximately $3.1 million to realized loss on
investments on the consolidated statement of operations for fiscal year 2000. As
of November 2, 2002, the market price of the shares was again below the
Company's carrying value and approximately $700,000 was recorded as a non-cash
charge to realized loss on investments on the consolidated statement of
operations for fiscal year 2002.
In September 2001, TTA effected a corporate reorganization
("Reorganization") as a result of which TTA became a wholly-owned subsidiary of
Nimbus Group, Inc. ("Nimbus"). As a result of the Reorganization, the Company's
shares of TTA common stock were exchanged for an equal number of shares of
Nimbus common stock. Ilia Lekach has been Chairman of the Board of Nimbus since
the Reorganization and was Interim Chief Executive Officer until March 21, 2003.
In January 2002, the Company received 300,000 shares of Nimbus common
stock as partial payment of a loan receivable from Ilia Lekach. These shares
were valued at $357,000 ($1.19 per share).
34
As of February 1, 2003 the Company owned approximately 1,003,000 shares
of Nimbus common stock representing approximately 13% of its total outstanding
common stock. The investment in Nimbus is shown on the Company's balance sheet
as investments available for sale in the amount of approximately $211,000
representing the market value of $0.21 per share at that date.
Purchases of products from Parlux Fragrances, Inc. ("Parlux"), whose
Chairman of the Board of Directors and Chief Executive Officer is Ilia Lekach,
amounted to approximately $11,613,000, $19,598,000 and $22,149,000 in fiscal
years 2002, 2001 and 2000, representing approximately 10%, 17% and 20%,
respectively, of the Company's total purchases. The amount due to Parlux on
February 1, 2003 and February 2, 2002 was approximately $10,739,000 and
$14,673,000, respectively, of which both amounts included a $100,000
subordinated interest bearing secured note payable. Accounts payable due to
Parlux are non-interest bearing.
On September 30, 2002 and June 30, 2001, Perfumania signed $3,000,000
subordinated note agreements with Parlux. The notes were in consideration for
the reduction of $3,000,000 in trade payable due to Parlux during fiscal years
2002 and 2001, respectively. The notes were due on March 31, 2003 and March 31,
2002 with various periodic principal payments, bore interest at prime plus 1%
and were subordinated to all bank related indebtedness. As of February 1, 2003
and February 2, 2002 the outstanding principal balance due on the notes was
$100,000. The notes were repaid in full in April 2003 and April 2002,
respectively.
The Company purchased approximately $10,562,000 and $4,491,000 of
merchandise in fiscal years 2002 and 2001, respectively, from a company owned by
Zalman Lekach, a former director of the Company, and a brother of Ilia Lekach.
The amount due to Zalman Lekach's company at February 1, 2003 and February 2,
2002 was approximately $1,383,000 and $2,025,000, respectively, and are included
in accounts payable affiliates in the accompanying consolidated balance sheets.
The Company purchased approximately $6,021,000 and $170,000 of
merchandise in fiscal years 2002 and 2001, respectively from a company owned by
another brother of Ilia Lekach. The amount due to this brother was approximately
$1,310,000 and $170,000, respectively, at February 1, 2003 and February 2, 2002
and are included in accounts payable affiliates in the accompanying consolidated
balance sheets.
In December 1999, the Company loaned $1,000,000 to TTA. Due to the
uncertainty of collectability of the note, the Company wrote off the note and
the related interest receivable which together totaled approximately $1.0
million as of February 3, 2001. The related expense is included in the provision
for impairment of assets and store closings in the accompanying consolidated
statements of operations in fiscal year 1999. The Company converted the loan
into 138,889 shares of TTA's common stock and, as a result of TTA's successful
initial public offering, the $1.0 million principal balance and related interest
previously expensed was reversed in the first quarter of fiscal 2000.
In March 2000, the Company loaned an additional $1,000,000 to TTA. The
note was repaid in full in June 2000. In connection with both the December 1999
and March 2000 loans to TTA, the Company was granted warrants (the "Warrants")
to purchase a total of 200,000 shares of the common stock of TTA at $8 per
share. The Warrants were exercisable in whole or in part at any time commencing
on the business day immediately following the effective date of the initial
public offering registration statement and expiring on the first anniversary of
the effective date of that registration statement. The Company did not exercise
the Warrants.
In October 2000, TTA loaned the Company $500,000. The loan was unsecured
with interest at the rate charged by the Company's major lender. The loan,
including interest, was repaid in December 2000.
In October 2000, the Company entered into a six-month service agreement
with TTA to provide distribution and logistics functions. This agreement, unless
otherwise terminated, would automatically renew for successive one-year terms.
This service agreement provided for order processing, inventory management,
warehousing, fulfillment and shipping of product. The service fee was variable
based on the volume of TTA sales. Monthly minimum fees applied if specified
volume levels were not obtained. Total fees earned during fiscal years 2001 and
2000 were approximately $177,000 and $72,000, respectively. The service
agreement was terminated effective September 1, 2001.
In September 2001, the Company entered into a licensing agreement with
TTA to license the Company's retail fragrance Internet Web site. Under the terms
of the agreement, TTA pays the Company a royalty of 5% of defined product sales
for sales up to $8 million per annum, decreasing to 3% on sales exceeding $11
million per annum. Royalty income under this agreement for the year ended
February 1, 2002 was approximately $88,000. As of February 1, 2002, the amount
due from TTA was approximately $811,000, and was included in prepaid expenses
and other current assets in the accompanying consolidated balance sheet as of
February 1, 2002.
35
During fiscal year 2002, the amount due from TTA increased to
approximately $2 million and a provision for impairment of the receivable was
recorded. In January 2003, the Company issued a letter of default to TTA
regarding the licensing agreement. In February 2003, the Company regained
control of the Company's retail Internet website.
In January 2001, the Company entered into a severance agreement with an
executive officer and incurred a charge of approximately $371,000. Additionally,
in May 2000 and July 2000, the Company entered into severance agreements with
two executive officers. Based upon the borrowing interest rate on the Company's
line of credit, the Company discounted the future payments required by these
agreements resulting in a charge of approximately $724,000. The resulting
expense is reflected in selling, general and administrative expenses in the
accompanying consolidated statements of operations for fiscal year 2000.
NOTE 7 - BANK LINE OF CREDIT AND NOTES PAYABLE
The bank line of credit and notes payable consist of the following:
February 1, 2003 February 2, 2002
--------------------- ---------------------
Bank line of credit, which is classified as a current liability, interest
payable monthly, expiring May 2004, secured by a pledge of substantially all
of Perfumania's assets (see below) $ 32,081,831 $ 30,734,662
===================== =====================
Note payable bearing interest at 9.7% payable in a monthly installment of
$11,050 including interest, through March 2003,
secured by fixtures $ 31,860 $ 154,836
Severances payable bearing interest at 9.5% payable in monthly installments
ranging from $4,000-$22,000 including interest, through December 2002 - 331,243
--------------------- ---------------------
31,860 486,079
Less: current portion (31,860) (454,219)
--------------------- ---------------------
Long-term portion $ - $ 31,860
===================== =====================
Perfumania's three-year senior secured credit facility with GMAC
Commercial Finance LLC ("GMAC") provides for borrowings of up to $40 million, of
which $32.1 million was outstanding and $0.9 million was available as of
February 1, 2003, to support normal working capital requirements and other
general corporate purposes. Advances under the line of credit are based on a
formula of eligible inventories and bears interest at a floating rate ranging
from (a) prime less 0.75% to prime plus 1% or (b) LIBOR plus 1.75% to 3.50%
depending on a financial ratio test. As of February 1, 2003, the credit facility
bore interest at 3.4%. Borrowings are secured by a first lien on all assets of
Perfumania and the assignment of a life insurance policy on the Chairman and
Chief Executive Officer of the Company. The credit facility contains limitations
on additional borrowings, capital expenditures and other items, and contains
various covenants including maintenance of minimum net worth, and certain key
ratios, as defined by the lender. As of February 1, 2003, Perfumania was in
compliance with all financial covenants of the line.
Pursuant to the terms of the credit agreement with GMAC, the credit
facility was extended from May 13, 2003 to May 13, 2004.
NOTE 8 - CONVERTIBLE NOTES PAYABLE
In April 1999 and July 1999, the Company issued an aggregate of $2
million Series A and $2 million Series B Convertible Notes, respectively. The
Series A and Series B Notes were convertible into the Company's common stock,
bore interest at 8% and the remaining non-redeemed portion were payable in full
in April 2002 and July 2002, respectively. The conversion price was the lower of
(A) $4.35 per share for the Series A Notes and $3.41 per share for the Series B
Notes, subject to adjustment or (B) a 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%,
36
subject to adjustment. The conversion price may be adjusted pursuant to
antidilution provisions in the convertible note. In April 2002 and December
2002, the Company repaid the Series A and Series B debt, respectively.
On March 9, 2000 and March 27, 2000, the Company issued an aggregate of
$4 million of Series C Convertible Notes and $5 million of Series D Convertible
Notes, respectively. The notes are convertible into the Company's common stock,
bear interest at 8% and were payable in full in March 2003. The conversion price
is the lower of (A) $9.58 per share for the Series C and $7.76 for the Series D,
subject to adjustment or (B) a 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 holders of all the Convertible Notes are restricted from converting
to the extent that the holder owns more than 9.9% of the Company's outstanding
common stock.
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 provided that
the Company had the monthly option to repurchase the outstanding $8.8 million
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 varied as per a specified
redemption schedule. In the event that the Company exercised its monthly option,
the note holders were restricted from converting any part of the remaining
outstanding and unpaid principal balance of such holder's notes into the
Company's common stock. During fiscal year 2001, the Company repaid $4.1 million
to the note holders. The premium paid of approximately $0.7 million upon the
repurchase of the convertible notes has been reflected in additional paid in
capital.
In February 2002, we entered into a Convertible Note Option Repurchase
Agreement (the "Agreement") with certain holders of the Company's outstanding
Series C and D Convertible Notes. The Agreement provides that the Company had
the monthly option to repurchase the approximate $4.9 million outstanding notes
over an eleven month period beginning February 2002, 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
fiscal year 2002, the Company repaid $4.2 million to the note holders and
approximately $0.5 million of Series A and B Convertible Notes principal and
interest were converted into common stock. The premium paid of approximately
$0.7 million upon the repurchase of the convertible notes has been reflected in
additional paid in capital.
In December 2002, the Company entered into an Amendment to the February
2002 Convertible Note Option Repurchase Agreement. The Amendment provides an
extension of the maturity date of the Series C and D Convertible Notes to
September 15, 2003 and a monthly option to repurchase the approximately $1.2
million in Notes over the extended maturity date.
In accordance with accounting literature, when debt is convertible at a
discount from the then current common stock market price, the discounted amount
represents an incremental yield, or a "beneficial conversion feature", which
should be recognized as a return to the debt holders. Based on the market price
of the Company's common stock at the date of issuance, our Series C and Series D
Notes had beneficial conversion features of approximately $1.2 million and $1.4
million, respectively, at such point in time which represented a non-cash charge
that is included in interest expense on the accompanying consolidated statements
of operations in fiscal year 2000.
NOTE 9 - IMPAIRMENT OF ASSETS
Based on a review of the Company's retail store locations with negative
cash flows, the Company recognized non-cash impairment charges relating to its
retail operation of approximately $0.7 million, $0.7 million and $0.5 million
during fiscal years 2002, 2001 and 2000, respectively. These charges were
determined based on the difference between the carrying amounts of the assets,
representing primarily fixtures and leasehold improvements, at particular store
locations and the fair values of the assets on a store-by-store basis. The
estimated fair values are based on anticipated future cash flows discounted at a
rate commensurate with the risk involved. These impairment losses are included
37
in provision (recovery) for impairment of assets and store closings in the
accompanying consolidated statements of operations.
NOTE 10 - INCOME TAXES
The benefit for income taxes is comprised of the following amounts:
FISCAL YEAR ENDED
---------------------------------------------------------
February 1, 2003 February 2, 2002 February 3, 2001
------------------ ------------------ -----------------
Current:
Federal $ - $ 211,298 $ -
State - - -
------------------ ------------------ -----------------
- 211,298 -
------------------ ------------------ -----------------
Deferred:
Federal - - -
State - - -
------------------ ------------------ -----------------
- - -
------------------ ------------------ -----------------
Total tax
benefit $ - $ 211,298 $ -
================== ================== =================
The fiscal year 2001 tax benefit is primarily due to a change in the
Federal tax law.
The income tax benefit differs from the amount obtained by applying the
statutory Federal income tax rate to pretax income as follows:
FISCAL YEAR ENDED
---------------------------------------------------------
February 1, 2003 February 2, 2002 February 3, 2001
----------------- ------------------ ------------------
Benefit at federal statutory rates $ 960,738 $ 1,157,005 $ 2,080,899
Non-deductible expenses (283,319) (1,326,569) (2,221,453)
Reduction (increase) in the valuation allowance 584,247 372,561 (44,370)
Other (1,261,666) 8,301 184,924
----------------- ------------------ ------------------
Benefit for income taxes $ - $ 211,298 $ -
================= ================== ==================
Net deferred tax assets reflect the tax effect of the following
differences between financial statement carrying amounts and tax basis of assets
and liabilities:
38
FISCAL YEAR ENDED
-------------------------------------
February 1, 2003 February 2, 2002
----------------- ------------------
Assets:
Net operating loss & tax credit carryforwards $ 5,518,987 $ 5,121,307
Inventories 820,368 942,835
Property and equipment 2,343,692 3,389,797
Allowance for doubtful accounts & other 110,295 120,444
Reserves 83,566 188,837
Goodwill 322,933 340,030
Unrealized loss on securities 1,508,416 1,076,905
Other 46,902 159,251
----------------- ------------------
Total deferred tax assets 10,755,159 11,339,406
Valuation allowance (10,755,159) (11,339,406)
----------------- ------------------
Net deferred tax assets $ - $ -
================= ==================
A valuation allowance is provided for deferred tax assets as management
believes that the benefit of the deferred tax asset may not be realized in
accordance with SFAS No. 109, Accounting for Income Taxes. Realization of future
tax benefits related to the deferred tax assets is dependent on many factors,
including the Company's ability to generate taxable income within the net
operating loss carryforward period. Management has considered these factors in
reaching its conclusion as to the valuation allowance for financial reporting
purposes. As of February 1, 2003, the Company has net operating loss
carryforwards of approximately $14.4 million, which begin to expire in the year
2017.
NOTE 11 - SHAREHOLDERS' EQUITY
REVERSE STOCK SPLIT
The Company's Board of Directors authorized a one-for-four reverse stock
split of the Company's outstanding shares of common stock for shareholders of
record as of March 20, 2002. Accordingly, all data shown in the accompanying
consolidated financial statements and notes have been retroactively adjusted to
reflect this change.
INVESTMENT IN AFFILIATE
During September 1999, perfumania.com, inc., the Company's then
wholly-owned subsidiary, completed an initial public offering (the "Offering")
of its common stock representing approximately 47% of the common stock
outstanding following the Offering. perfumania.com, inc. offered 3,500,000
shares of its common stock, which included 1,000,000 shares held by the Company.
The Company recorded a gain on its sale of the 1,000,000 shares of
perfumania.com, inc. common stock in the Offering totaling approximately $5.9
million. The gain recorded was net of issuance costs of approximately $1.1
million which included the Company's portion of the fair value of common stock
warrants issued by perfumania.com, inc. (approximately $0.4 million) and is
included in gain on sale of affiliate's common stock in the accompanying
consolidated statement of operations for fiscal year 2000.
In connection with the public offering, the Company recorded a $9.7
million increase in additional paid-in capital representing its then 53% (four
million shares) interest in perfumania.com, inc.'s net proceeds in the initial
public offering under the equity method of accounting. On October 4, 1999,
Perfumania sold certain assets to perfumania.com, inc. consisting primarily of
an e-commerce greeting card website for $500,000, of which $450,000 was
reflected as a dividend, since the Company's cost basis in such assets amounted
to $50,000.
During December 1999, Perfumania signed an Option Agreement (the
"Agreement") with an investment firm granting the investment firm two options to
acquire up to 2,500,000 shares of perfumania.com, inc. from the Company for
consideration in the amount of $12,500. The first option provided that the
investment firm could purchase 2,000,000 shares for $6.00 per share on or prior
to January 15, 2000 and provided that this option was exercised, a second option
to purchase 500,000 shares for $8.00 per share on or prior to the earlier to
occur of December 31, 2000 or various other events, as defined in the Agreement.
The investment firm exercised the first option for the 2,000,000 shares on
January 11, 2000 and the Company realized proceeds of $12,000,000. As a result,
39
the Company recognized a gain of approximately $9.1 million which is included in
the accompanying consolidated statement of operations for fiscal year 1999 as a
gain on sale of affiliate's common stock. The Agreement provided that when the
first option was exercised, nominees of the investment firm would be appointed
to constitute the majority of the members of the Board of Directors of
perfumania.com, inc. subject to satisfaction of applicable SEC regulations.
Subject to the exercise of the first option, the Agreement limited the amount of
shares of perfumania.com, inc. that could be sold by the Company, as well as the
timing of these sales.
On February 10, 2000, Envision Development Corporation ("EDC") entered
into a plan of merger with perfumania.com, inc. The plan of merger provided for
among other things, the merger of EDC with perfumania.com, inc. As a result,
perfumania.com, inc. became a direct wholly owned subsidiary of EDC and each
share of common stock, par value $0.01 per share, of perfumania.com, inc. issued
and outstanding before the plan of merger was converted into and exchanged for
one share of common stock, (par value $0.01 per share), of EDC.
In May 2000, the Company acquired 100% of the outstanding common stock of
perfumania.com, inc. from EDC in exchange for 400,000 shares of EDC common
stock. As a result, perfumania.com, inc. became a wholly owned subsidiary of the
Company. The acquisition of perfumania.com, inc. was 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 relative
fair values at the acquisition date. Tangible assets acquired consisted
primarily of merchandise inventories. Based on an independent appraisal, the
transaction was valued at approximately $4.7 million. As a result, the Company
recognized a gain of approximately $4.5 million, which is included in the
accompanying consolidated statement of operations for fiscal year 2000 as a gain
on sale of affiliate's common stock. The excess of the purchase price over the
fair value of tangible net assets acquired of approximately $2.9 million is
included in goodwill in the accompanying consolidated balance sheets and is
being amortized over 5 years. The results of operations for perfumania.com, inc.
are included with the Company's results from the date of acquisition. Prior to
May 2000, the Company's ownership in EDC was accounted for under the equity
method of accounting. The acquisition of perfumania.com, inc. was not material
to the Company's results of operation, and therefore no proforma results are
presented.
Additionally, in May 2000, the Company sold 100,000 shares of EDC common
stock for $2.5 million to a majority shareholder of EDC. In a related
transaction, the second option of the Agreement was exercised and an investment
firm acquired from the Company 500,000 shares of EDC common stock at $8.00 per
share. As a result of these transactions, the Company received total cash
proceeds of $6.5 million and realized a gain of approximately $5.5 million. As
of February 3, 2001, Perfumania's investment in and advances to partially-owned
equity affiliates consisted of a 26.67% (two million shares) interest in
perfumania.com, inc. which totaled approximately $2.6 million and advances in
the amount of approximately $0.2 million. Effective May 2000, perfumania.com
became a wholly-owned subsidiary of the Company.
In December 2000, the Company wrote off the remaining investment in EDC
of approximately $0.6 million, representing 1,000,000 shares of EDC's common
stock, due to EDC ceasing operations. This loss is included in realized loss on
investments on the accompanying consolidated statement of operations for fiscal
year 2000.
INVESTMENTS AVAILABLE FOR SALE
During fiscal year 2000, the Company purchased 314,000 shares of TTA
common stock for approximately $2.5 million. In June 2000, the Company acquired
approximately 139,000 shares of TTA's common stock upon conversion of a $1
million convertible promissory note receivable from them. In January 2002 and
2001, the Company received 300,000 and 250,000, respectively, shares of TTA's
common stock as partial payment on a loan receivable from Ilia Lekach. In
September 2001, TTA effected a corporate reorganization ("Reorganization") and
as a result TTA became a wholly-owned subsidiary of Nimbus Group, Inc.
("Nimbus").
As of February 1, 2003, the Company owned approximately 1,003,000 shares
of Nimbus' common stock representing approximately 13% of their total
outstanding shares. See also TTA Reorganization in Note 6 to these consolidated
financial statements.
The investment in Nimbus is shown on the Company's consolidated balance
sheets as investments available for sale. As of February 1, 2003, the market
price for Nimbus' common stock was below the Company's average cost per share of
$4.13. In consideration of accounting guidance that considers a six to nine
month decline in stock price to be other than temporary, the Company recorded a
non-cash charge of approximately $0.7 million in realized loss on investments on
the consolidated statements of operations for fiscal year 2002 and $3.1 million
for fiscal year 2000.
40
During fiscal year 2000, the Company purchased for cash totaling
approximately $1.6 million approximately 343,000 shares of common stock of The
Sportsman's Guide, Inc. ("SGI"), representing approximately 7.0% of SGI's
outstanding shares of common stock. SGI is a marketer of value priced outdoor
gear and general merchandise. During fiscal year 2000, the Company sold
approximately 340,000 shares of SGI and realized a loss on the sale of these
securities of approximately $1.1 million, which is included in realized loss on
investments on the accompanying consolidated statements of operations. The
remaining shares of SGI were sold in fiscal year 2002.
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 (loss) and is included in shareholders' equity as
accumulated other comprehensive loss in the amount of $140,404 on the
accompanying consolidated balance sheet as of February 1, 2003.
PREFERRED STOCK
The Company's Articles of Incorporation authorize the issuance of up to
1,000,000 shares of preferred stock. The preferred stock may be issued from time
to time at the discretion of the Board of Directors without stockholders'
approval. The Board of Directors is authorized to issue these shares in
different series and, with respect to each series, to determine the dividend
rate, and provisions regarding redemption, conversion, liquidation preference
and other rights and privileges. As of February 1, 2003, no preferred stock had
been issued.
TREASURY STOCK
As of February 2, 2001, the Company's board of Directors had approved the
repurchase by the Company of up to 625,000 shares of the Company's common stock,
reflecting management's belief that the Company's common stock represented a
significant value at its then current trading price. In February 2002, the Board
approved an increase in the stock repurchase program by an additional 250,000
shares. Pursuant to these authorizations, the Company has repurchased
approximately 780,000 shares of common stock for approximately $7,086,000 as of
February 1, 2003, including approximately 13,000 shares for $0.1 million in
fiscal year 2002 and approximately 358,000 shares for $1.4 million in fiscal
year 2001.
STOCK OPTION PLANS
Under the Company's 2000 Stock Option Plan (the "Stock Option Plan") and
2000 Directors Stock Option Plan (the "Directors Plan") (collectively, the
"Plans"), both of which superseded the previously existing plans effective
October 2000, 375,000 shares of common stock and 30,000 shares of common stock,
respectively, are reserved for issuance upon exercise of options. Additionally,
the number of shares available under the Stock Option Plan shall automatically
increase each year by 3% of the shares of common stock of the Company
outstanding at the end of the immediate preceding year. The Company's Board of
Directors, or a committee thereof, administers and interprets the Stock Option
Plan. The Stock Option Plan provides for the granting of both "incentive stock
options" (as defined in Section 422A of the Internal Revenue Code) and
non-statutory stock options. Options can be granted under the Stock Option Plan
on such terms and at such prices as determined by the Board, except that the per
share exercise price of options will not be less than the fair market value of
the common stock on the date of grant. Only non-employee directors are eligible
to receive options under the Directors Plan. The Directors Plan provides for an
automatic grant of an option to purchase 500 shares of common stock upon
election as a director of the Company and an automatic grant of 1,000 shares of
common stock upon such person's re-election as a director of the Company, in
both instances at an exercise price equal to the fair value of the common stock
on the date of grant.
Had compensation cost for options granted been determined in accordance
with the fair value provisions of SFAS No. 123, the Company's net loss and net
loss per share would have been increased to the proforma amounts presented below
for fiscal years 2002, 2001 and 2000:
41
FISCAL YEARS
---------------------------------------------------------
2002 2001 2000
------------------ ----------------- ------------------
Net loss as reported: $ (2,825,700) $ (3,191,657) $ (6,120,291)
Deduct: Total stock based employee
compensation expense included in reported
net loss, net - - -
Add: Total stock based employee
compensation expense not included in reported
net loss, net $ (478,449) $ (396,704) $ (565,061)
------------------ ----------------- ------------------
Proforma net loss: $ (3,304,149) $ (3,588,361) $ (6,685,352)
================== ================= ==================
Proforma net loss per share:
Basic $ (1.31) $ (1.47) $ (2.84)
================== ================= ==================
Diluted $ (1.31) $ (1.47) $ (2.84)
================== ================= ==================
In calculating the proforma net loss per share for 2002, 2001 and 2000,
the fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in fiscal years 2002, 2001 and 2000:
2002 2001 2000
------------------ ------------------ -----------------
Expected life (years) 7 years 7 years 7 years
Interest rate 4.88% 4.80% 6.07%
Volatility 148% 158% 101%
Dividend yield 0% 0% 0%
Options granted under the Stock Option Plan are exercisable after the
period or periods specified in the option agreement, and options granted under
the Directors Plan are exercisable immediately. Options granted under the Plans
are not exercisable after the expiration of 10 years from the date of grant.
A summary of the Company's option activity, and related information for
each of the three fiscal years ended February 1, 2003 is as follows:
2002 2001 2000
------------------------ ---------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercisable Exercisable Exercisable
Shares Price Shares Price Shares Price
----------- ------------ ---------- ----------- ---------- ------------
Outstanding at beginning of year 606,594 $ 5.60 570,115 $ 6.44 496,713 $ 5.24
Granted 160,000 3.67 78,625 3.40 147,625 11.20
Exercised (59,807) 1.90 (4,750) 2.00 (46,056) 2.72
Cancelled (40,286) 8.19 (37,396) 14.12 (28,167) 16.32
----------- ---------- ----------
Outstanding at end of year 666,501 $ 5.32 606,594 $ 5.60 570,115 $ 6.44
=========== ========== ==========
Options exercisable at end of year 449,714 $ 5.80 480,304 $ 5.24 460,824 $ 5.36
Weighted-average fair value
of options granted during
the year 160,000 $ 3.31 78,625 $ 3.31 147,625 $ 9.36
The following table summarizes information about stock options
outstanding at February 1, 2003:
42
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
Weighted Weighted
Weighted Average Average
Average Remaining Remaining
RANGE OF NUMBER Exercise Contractual NUMBER Exercise
EXERCISE PRICES OUTSTANDING Price Life EXERCISABLE Price
- ---------------- ------------- ---------- -------- ---------- ---------
$1.64 - $2.00 251,572 $ 1.81 5 251,572 $ 1.81
$2.27 - $4.00 227,665 3.60 9 28,571 3.48
$4.09 - $12.52 163,068 11.28 7 150,376 11.43
$12.88 - $20.00 22,944 17.72 7 17,943 17.08
$21.52 - $21.52 1,252 21.52 7 1,252 21.52
------------- ----------
666,501 $ 5.32 7 449,714 $ 5.80
============= ==========
NOTE 12- EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Savings and Investment Plan ("the Plan").
Pursuant to such Plan, participants may make contributions to the Plan up to a
maximum of 20% of total compensation or $10,500, whichever is less, and the
Company, at its discretion, may match such contributions to the extent of 25% of
the first 6% of a participant's contribution. The Company's matching
contributions vest over a 4-year period. In addition to matching contributions,
the Company may make additional contributions on a discretionary basis in order
to comply with certain Internal Revenue Code regulations prohibiting
discrimination in favor of highly compensated employees. The Company's matching
contributions during fiscal years 2002, 2001 and 2000 were not significant.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
The Company is self-insured for employee medical benefits under the
Company's group health plan. The Company maintains stop loss coverage for
individual medical claims in excess of $80,000 and for annual Company medical
claims which exceed approximately $2.2 million in the aggregate. While the
ultimate amount of claims incurred are dependent on future developments, in
management's opinion, recorded reserves are adequate to cover the future payment
of claims. However, it is possible that recorded reserves may not be adequate to
cover the future payment of claims. Adjustments, if any, to estimates recorded
resulting from ultimate claim payments will be reflected in operations in the
periods in which such adjustments are known. The self-insurance reserve at
February 1, 2003 and February 2, 2002 was approximately $220,000 and $166,000,
respectively, which is included in accrued expenses and other liabilities in the
accompanying consolidated balance sheets.
The Company leases space for its office, warehouse and retail stores. The
lease terms vary from one to ten years, in some cases with options to renew for
longer periods. Various leases contain clauses which adjust the base rental rate
by the prevailing Consumer Price Index, as well as additional rent based on a
percentage of gross sales in excess of a specified amount.
Rent expense for fiscal years 2002, 2001, and 2000 was approximately
$15,879,000, $15,482,000, and $16,156,000, respectively. Future minimum lease
commitments under non-cancelable operating leases at February 1, 2003 are as
follows:
FISCAL YEAR
- --------------------------------------
2003 $ 11,463,949
2004 9,086,013
2005 7,707,243
2006 5,984,030
2007 3,990,538
Thereafter 2,632,432
---------------------
Total future minimum lease payments $ 40,864,205
=====================
The Company's capitalized leases consist of a corporate office and
distribution facility to which the Company will relocate in fiscal year 2003, as
well as computer hardware and software. The lease for the corporate office and
43
distribution facility is for approximately 15 years with monthly rent ranging
from approximately $73,000 to $104,000. Included in the capitalized cost of the
corporate office and distribution facility as of February 1, 2003 is
approximately $360,000 of interest. The lease terms for the computer hardware
and software vary from one to three years. The following is a schedule of future
minimum lease payments under capital leases together with the present value of
the net minimum lease payments, at February 1, 2003:
FISCAL YEAR
- ----------------------------------------
2003 $ 1,939,001
2004 1,156,061
2005 1,106,246
2006 1,084,058
2007 1,072,752
Thereafter 12,069,295
----------------------
Total future minimum lease payments 18,427,413
Less: Amount representing interest (9,693,314)
----------------------
Present value of minimum lease payments 8,734,099
Less: Current portion (981,784)
----------------------
$ 7,752,315
======================
The depreciation expense relating to capital leases is included in
depreciation and amortization expense in the accompanying consolidated
statements of operations.
The Company is party to irrevocable standby letters of credit totaling
approximately $0.6 million as of February 1, 2003 which serves as security for
performance of equipment leases. Management believes that the carrying values
approximate fair value and does not expect any material losses from their
resolution since performance is not likely to be required.
The Company is involved in various legal proceedings in the ordinary
course of business. Management cannot presently predict the outcome of these
matters, although management believes 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 14- QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited summarized financial results for fiscal years 2002 and 2001
follows (in thousands, except for per share data):
2002 QUARTER FIRST SECOND THIRD FOURTH
------------- ------------- ------------ -------------
Net sales $ 40,169 $ 48,089 $ 43,112 $ 70,144
Gross profit 17,329 19,999 17,902 29,364
Net income (loss) (1,940) (686) (4,960) 4,760
Net income (loss) per basic share (0.80) (0.28) (1.92) 1.81
Net income (loss) per diluted share (0.80) (0.28) (1.92) 1.81
2001 QUARTER FIRST SECOND THIRD FOURTH
------------- ------------- ------------ -------------
Net sales $ 40,583 $ 44,202 $ 41,865 $ 66,702
Gross profit 16,662 18,667 17,319 27,587
Net income (loss) (3,402) (1,715) (2,945) 4,870
Net income (loss) per basic share (1.35) (0.70) (1.24) 1.97
Net income (loss) per diluted share (1.35) (0.70) (1.24) 1.97
The Company realizes higher sales, gross profit and net income in the fourth
fiscal quarter than the other three fiscal quarters due to increased purchases
of fragrances as gift items during the Christmas holiday season.
44
E COM VENTURES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
ADDITIONS
---------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS & OTHER AT END
OF PERIOD EXPENSE ACCOUNTS DEDUCTIONS OF PERIOD
------------ ------------ ------------ --------------- ------------
FOR THE YEAR ENDED
FEBRUARY 3, 2001
Inventories $ 2,369,953 $ - $ - $ (167,110)(3) $ 2,202,843
Self-insurance 363,552 1,054,170 713,137(1) (1,681,056)(2) 449,803
FOR THE YEAR ENDED
FEBRUARY 2, 2002
Inventories $ 2,202,843 $ - $ - (509,674)(3) $ 1,693,169
Self-insurance 449,803 1,257,446 864,731(1) (2,405,759)(2) 166,221
FOR THE YEAR ENDED
FEBRUARY 1, 2003
Inventories $ 1,693,169 $ - $ - $ (503,435)(4) $ 1,189,734
Self-insurance 166,221 1,539,984 928,267(1) (2,414,331)(2) 220,141
- ------------------
(1) Represents employee contributions.
(2) Represents payments of claims and fees.
(3) Represents amounts written off against inventory.
(4) Represents reductions of expense and amounts written off against inventory.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
45
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this item is incorporated by reference from
E Com Ventures, Inc. Annual Meeting of Shareholders - Notice and Proxy Statement
- - 2003 (to be filed pursuant to Regulation 14A not later than 120 days after the
close of the fiscal year) in accordance with General Instruction 6 to the Annual
Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item is incorporated by reference from
E Com Ventures, Inc. Annual Meeting of Shareholders - Notice and Proxy Statement
- - 2003 (to be filed pursuant to Regulation 14A not later than 120 days after the
close of the fiscal year) in accordance with General Instruction 6 to the Annual
Report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information is required by Item 403 of Regulation S-K relating to the
ownership of our common stock by certain beneficial owners and management and is
incorporated by reference from E Com Ventures, Inc. Annual Meeting of
Shareholders - Notice and Proxy Statement - 2003 (to be filed pursuant to
Regulation 14A not later than 120 days after the close of the fiscal year) in
accordance with General Instruction 6 to the Annual Report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information is incorporated by reference from E Com Ventures, Inc.
Annual Meeting of Shareholders - Notice and Proxy Statement - 2003 (to be filed
pursuant to Regulation 14A not later than 120 days after the close of the fiscal
year) in accordance with General Instruction 6 to the Annual Report on Form
10-K.
ITEM 14. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have concluded,
based on their evaluation within 90 days of the filing date of this report, that
our disclosure controls and procedures are effective for gathering, analyzing
and disclosing the information we are required to disclose in our reports filed
under the Securities Exchange Act of 1934. There have been no significant
changes in our internal controls or in other factors that could significantly
affect these controls subsequent to the date of the previously mentioned
evaluation.
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
The aggregate fees billed by Deloitte & Touche LLP for the audit of our
annual financial statements for the fiscal year ended February 1, 2003 and for
its reviews of the financial statements included in our Form 10-Q's for the
fiscal year ended February 1, 2003, were approximately $221,400.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
The Company was not billed by Deloitte & Touche LLP for financial
information systems design and implementation for the fiscal year ended February
1, 2003.
OTHER FEES
The aggregate of all other fees billed to us by Deloitte & Touche LLP
were approximately $15,000 for the fiscal year ended February 1, 2003.
46
PART IV.
ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) Financial Statements
An index to financial statements for the fiscal years ended February 1,
2003, February 2, 2002 and February 3, 2001 appears on page 22.
(2) Financial Statement Schedule
The following statement schedule for the fiscal years ended February 1,
2003, February 2, 2002 and February 3, 2001 are submitted herewith:
ITEM
FORM 10-K
NUMBER
PAGE
---------
Schedule II - Valuation and Qualifying Accounts
and
Reserves 45
All other financial schedules are omitted because they are not
applicable, or the required information is otherwise shown in the financial
statements or notes thereto.
(3) Exhibits
PAGE NUMBER
OR INCORPORATED
BY REFERENCE
EXHIBIT DESCRIPTION FROM
------- ----------- ----
3.1 Amended and Restated Articles of Incorporation (12)
3.2 Bylaws (2)
10.1 Executive Compensation Plans and Arrangements
(a) Employment Agreement, dated as of February 16, 2001, between (11)
the Company and A. Mark Young
(b) Employment Agreement, dated as of February 1, 2002, between (12)
the Company and Ilia Lekach
10.5 1991 Stock Option Plan, as amended (6)
10.6 1992 Directors Stock Option Plan, as amended (6)
10.7 Series A Securities Purchase Agreement (3)
10.8 Series B Securities Purchase Agreement (4)
10.9 Series C Securities Purchase Agreement (5)
10.10 Series D Securities Purchase Agreement (5)
10.11 2000 Stock Option Plan (10)
10.12 2000 Directors Stock Option Plan (10)
10.13 Revolving Credit and Security Agreement with GMAC Commercial Credit LLC, (9)
dated May 12, 2000
10.14 Waiver and Amendment to the Revolving Credit and Security Agreement (11)
with
GMAC Commercial Credit LLC, dated November 8, 2000
10.15 Waiver and Amendment to the Revolving Credit and Security Agreement (11)
with
GMAC Commercial Credit LLC, dated April 26, 2001
10.16 Lease agreement with Victory Investment Group, LLC, dated October 21, (13)
2002
47
21.1 Subsidiaries of the Registrant (13)
23.1 Consent of Deloitte & Touche LLP (13)
99.1 Certification of the Chief Executive Officer and Chief Financial (13)
Officer pursuant to 18 U.S.C., Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
- ---------------------
(1) Incorporated by reference to the exhibit of the same description filed with
the Company's 1993 Form 10-K (filed April 28, 1994).
(2) Incorporated by reference to the exhibit of the same description filed with
the Company's Registration Statement on Form S-1 (No. 33-46833).
(3) Incorporated by reference to the exhibit of the same description filed with
the Company's Registration Statement on Form S-1 filed June 11, 1999 (No.
333-80525).
(4) Incorporated by reference to the exhibit of the same description filed with
the Company's Registration Statement on Form S-1/A, filed August 31, 1999
(No. 333-80525).
(5) Incorporated by reference to the exhibit of the same description filed with
the Company's Registration Statement on Form S-3 filed April 25, 2000 (No.
333-35580).
(6) Incorporated by reference to the exhibit of the same description filed with
the Company's 1995 Form 10-K (filed April 26, 1996).
(7) Not used.
(8) Incorporated by reference to the exhibit of the same description filed with
the Company's 1999 Form 10-K/A (filed May 30, 2000).
(9) Incorporated by reference to the exhibit of the same description filed with
the Company's 1999 Form 10-Q (filed June 13, 2000).
(10) Incorporated by reference to the exhibit of the same description filed with
the Company's Proxy Statement (filed October 6, 2000).
(11) Incorporated by reference to the exhibit of the same description filed with
the Company's 2000 Form 10-K (filed May 4, 2001).
(12) Incorporated by reference to the exhibit of the same description filed with
the Company's 2001 Form 10-K (filed May 3, 2002).
(13) Filed herewith.
(b) Reports on Form 8-K
On April 25, 2003, the Company filed a Form 8-K disclosing its
financial results for the fiscal year ended February 1, 2003.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, April 28, 2003.
E Com Ventures, Inc.
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 Accounting Officer)
POWER OF ATTORNEY
We, the undersigned, hereby constitute Ilia Lekach and A. Mark Young, or
either of them, our true and lawful attorneys-in-fact with full power to sign
for us in our name and in the capacity indicated below any and all amendments
and supplements to this report, and to file the same, with exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorneys-in-fact or
their substitutes, each acting alone, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ILIA LEKACH Chairman of the Board and April 28, 2003
------------------------------
Ilia Lekach Chief Executive Officer,
(Principal Executive Officer)
/s/ JEFFREY GELLER President and Chief Operating Officer April 28, 2003
------------------------------
Jeffrey Geller of Perfumania, Inc.
/s/ A. MARK YOUNG Chief Financial Officer, April 28, 2003
------------------------------
A. Mark Young (Principal Accounting Officer)
/s/ DONOVAN CHIN Chief Financial Officer April 28, 2003
------------------------------
Donovan Chin Perfumania, Inc.,
Secretary and Director
/s/ CAROLE ANN TAYLOR Director April 28, 2003
------------------------------
Carole Ann Taylor
/s/ JOSEPH BOUHADANA Director April 28, 2003
------------------------------
Joseph Bouhadana
/s/ MILES RAPER Director April 28, 2003
------------------------------
Miles Raper
49
CERTIFICATIONS
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Ilia Lekach, certify that:
(1) I have reviewed this annual report on Form 10-K of E Com Ventures, Inc.;
(2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
(3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
(4) The registrant's other certifying officer and I (herein the "Certifying
Officers") are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and we have:
(a) designed such internal controls to ensure that material information
relating to the registrant, including its consolidated subsidiaries
(collectively the "Company") is made known to the Certifying Officers
by others within the Company, particularly during the period in which
this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's internal controls as
of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
(c) presented in this annual report the conclusions of the Certifying
Officers about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
(5) The registrant's Certifying Officers have disclosed, based on our most
recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors:
(a) all significant deficiencies (if any) in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
(6) The registrant's Certifying Officers have indicated in this annual report
whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: April 28, 2003
By: /S/ ILIA LEKACH
- --------------------
Ilia Lekach
Chief Executive Officer
50
CERTIFICATIONS
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, A. Mark Young, certify that:
(1) I have reviewed this annual report on Form 10-K of E Com Ventures, Inc.;
(2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
(3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
(4) The registrant's other certifying officer and I (herein the "Certifying
Officers") are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and we have:
(a) designed such internal controls to ensure that material information
relating to the registrant, including its consolidated subsidiaries
(collectively the "Company") is made known to the Certifying Officers
by others within the Company, particularly during the period in which
this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's internal controls as
of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
(c) presented in this annual report the conclusions of the Certifying
Officers about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
(5) The registrant's Certifying Officers have disclosed, based on our most
recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors:
(a) all significant deficiencies (if any) in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
(6) The registrant's Certifying Officers have indicated in this annual report
whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: April 28, 2003
By: /S/ A. MARK YOUNG
- ----------------------
A. Mark Young
Chief Financial Officer
51