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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 3, 2003
COMMISSION FILE NUMBER 0-19714
E COM VENTURES, INC.
STATE OF FLORIDA I.R.S. NO. 65-0977964
251 INTERNATIONAL PARKWAY
SUNRISE, FL 33325
TELEPHONE NUMBER: (954) 335-9100
Indicate by check mark whether the registrant, (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES |_| NO |X|
As of June 6, 2003, the registrant had 2,483,213 shares of its common stock,
$0.01 par value, outstanding.
TABLE OF CONTENTS
E COM VENTURES, INC. AND SUBSIDIARIES
PART I
FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS (unaudited)......................... 3
Consolidated Condensed Balance Sheets.................... 3
Consolidated Condensed Statements of Operations.......... 4
Consolidated Condensed Statements of Cash Flow........... 5
Notes to Consolidated Condensed Financial Statements..... 6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 9
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.............................................. 13
ITEM 4 CONTROLS AND PROCEDURES.................................. 13
PART II
OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS........................................ 13
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS................ 13
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.......................... 13
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...... 13
ITEM 5 OTHER INFORMATION........................................ 13
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K......................... 14
SIGNATURES................................................................. 15
CERTIFICATIONS............................................................. 16
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
E COM VENTURES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
ASSETS: MAY 3, 2003 FEBRUARY 1, 2003
------------- ----------------
Current assets:
Cash and cash equivalents $ 1,671,357 $ 2,964,645
Trade receivables, net 1,091,706 744,456
Advances to suppliers 1,722,388 1,814,935
Inventories, net 74,808,725 68,717,163
Prepaid expenses and other current assets 891,029 1,169,524
Investments available for sale 230,664 210,607
------------- ---------------
Total current assets 80,415,869 75,621,330
Property and equipment, net 25,116,662 24,556,691
Goodwill, net 1,904,448 1,904,448
Other assets, net 1,220,924 1,340,155
------------- ---------------
Total assets $ 108,657,903 $ 103,422,624
============= ===============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Bank line of credit $ 37,071,481 $ 32,081,831
Current portion of long-term debt -- 31,860
Accounts payable, non-affiliates 23,581,776 20,905,826
Accounts payable, affiliates 15,225,947 13,331,718
Accrued expenses and other liabilities 4,667,487 5,168,634
Subordinated note payable, affiliate -- 100,000
Current portion of obligations under capital leases 778,704 981,784
Convertible notes payable 840,215 1,215,215
------------- ---------------
Total current liabilites 82,165,610 73,816,868
Long-term portion of obligations under capital leases 7,557,870 7,752,315
------------- ---------------
Total liabilities 89,723,480 81,569,183
------------- ---------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.10 par value, 1,000,000
shares authorized, none issued -- --
Common stock, $.01 par value, 6,250,000 shares
authorized; 3,256,161 and 3,215,761 shares issued
in fiscal years 2003 and 2002, respectively 32,562 32,158
Additional paid-in capital 71,382,389 71,387,794
Treasury stock, at cost, 779,952 shares in fiscal year 2003 and 2002 (7,085,940) (7,085,940)
Accumulated deficit (44,958,710) (42,028,563)
Notes and interest receivable from shareholder and officer (315,531) (311,604)
Accumulated other comprehensive loss (120,347) (140,404)
------------- ---------------
Total shareholders' equity 18,934,423 21,853,441
------------- ---------------
Total liabilities and shareholders' equity $ 108,657,903 $ 103,422,624
============= ===============
See accompanying notes to consolidated condensed financial statements.
3
E COM VENTURES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
THIRTEEN WEEKS ENDED THIRTEEN WEEKS ENDED
MAY 3, 2003 MAY 4, 2002
-------------------- --------------------
Net sales $ 36,887,829 $ 40,168,682
Cost of goods sold 20,072,336 22,839,423
-------------------- --------------------
Gross profit 16,815,493 17,329,259
-------------------- --------------------
Operating expenses:
Selling, general and administrative 17,839,116 17,234,099
Depreciation and amortization 1,454,741 1,491,645
-------------------- --------------------
Total operating expenses 19,293,857 18,725,744
-------------------- --------------------
Loss from operations (2,478,364) (1,396,485)
Interest expense, net (451,783) (543,846)
-------------------- --------------------
Net loss $ (2,930,147) $ (1,940,331)
==================== ====================
Net loss per common share:
Basic $ (1.19) $ (0.80)
==================== ====================
Diluted $ (1.19) $ (0.80)
==================== ====================
Weighted average number of common shares outstanding:
Basic 2,459,052 2,421,408
==================== ====================
Diluted 2,459,052 2,421,408
==================== ====================
See accompanying notes to consolidated condensed financial statements.
4
E COM VENTURES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
THIRTEEN WEEKS ENDED THIRTEEN WEEKS ENDED
MAY 3, 2003 MAY 4, 2002
-------------------- --------------------
Cash flows from operating activities:
Net loss $ (2,930,147) $ (1,940,331)
Adjustments to reconcile net loss to net cash
used in operating acitivites:
Provision for impairment of assets and store closings 57,755 113,974
Depreciation and amortization 1,454,741 1,491,645
Change in operating assets and liabilities:
Trade receivables (347,250) (300,978)
Advances to suppliers 92,547 (765,497)
Inventories (6,091,562) (7,013,017)
Prepaid and other current assets 278,495 3,521
Other assets 64,758 56,627
Accounts payable, non-affiliates 2,675,950 4,541,600
Accounts payable, affiliates 1,894,229 1,337,325
Accrued expenses and other liabilities (501,147) (439,095)
-------------------- --------------------
Net cash used in operating activities (3,351,631) (2,914,226)
-------------------- --------------------
Cash flows from investing activities:
Additions to property and equipment (2,017,994) (170,466)
Proceeds from sale of investments -- 11,733
-------------------- --------------------
Net cash used in investing activities (2,017,994) (158,733)
-------------------- --------------------
Cash flows from financing activities:
Net borrowings under bank line of credit and notes payable 4,957,790 5,117,799
Repayments of notes payable -- (109,004)
Repayment of subordinated notes payable, affiliate (100,000) (100,000)
Principal payments under capital lease obligations (397,525) (395,905)
Proceeds from note and interest receivable, related party (3,927) --
Net borrowings from shareholders and officers -- (141,310)
Repayment of convertible notes payable (450,000) (1,183,157)
Exercise of stock options 69,999 --
Purchases of treasury stock -- (14,773)
-------------------- --------------------
Net cash provided by financing activities 4,076,337 3,173,650
-------------------- --------------------
(Decrease) increase in cash and cash equivalents (1,293,288) 100,691
Cash and cash equivalents at beginning of period 2,964,645 1,600,787
-------------------- --------------------
Cash and cash equivalents at end of period $ 1,671,357 $ 1,701,478
==================== ====================
See accompanying notes to consolidated condensed financial statements.
5
E COM VENTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - OPERATIONS AND BASIS OF PRESENTATION
E Com Ventures, Inc., a Florida Corporation ("ECOMV"), is structured as a
holding company that owns and operates Perfumania Inc. ("Perfumania"), 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 May 3, 2003
and May 4, 2002 were 237 and 244, respectively.
The consolidated condensed financial statements include the accounts of
ECOMV and subsidiaries (collectively, the "Company"). All material intercompany
balances and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with the rules and regulations of the Securities and
Exchange Commission (the "SEC"). Certain information and note disclosures
normally included in annual financial statements, prepared in accordance with
accounting principles generally accepted in the United States of America, have
been condensed or omitted pursuant to those rules and regulations. The financial
information presented herein, which is not necessarily indicative of results to
be expected for the current fiscal year, reflect all adjustments which, in the
opinion of management, are necessary for a fair presentation of the interim
unaudited consolidated condensed financial statements. It is suggested that
these consolidated condensed financial statements be read in conjunction with
the financial statements and the notes thereto included in our Annual Report on
Form 10-K for the fiscal year ended February 1, 2003 filed with the SEC on April
30, 2003.
As of May 3, 2003, the Company has a seasonal working capital deficiency of
$1.7 million, cash balances of approximately $1.7 million and additional
borrowing capacity of $1.5 million under its bank line of credit; this could
have an effect on the Company`s ability to meet its obligations over the next
twelve months. Management believes that the cash balances, the available
borrowing capacity, and the projected future operating results will generate
sufficient liquidity to support the Company`s working capital needs and capital
expenditures for the next twelve months; however, there can be no assurance that
management`s plans will be successful. If the Company is unable to generate
sufficient cash flows from operations in the future to service its obligations
and/or refinance its existing debt, the Company could face liquidity and working
capital constraints, which could adversely impact future operations and growth.
RECLASSIFICATION
Certain fiscal year 2002 amounts have been reclassified to conform with the
fiscal year 2003 presentation.
NOTE 2 - ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." Accordingly, because the grant price equals the market price on
the date of the grant, no compensation expense is recognized by the Company for
stock options issued pursuant to its stock-based compensation plans. The pro
forma information below is based on provisions of Statement of Financial
Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation,"
as amended by SFAS 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure," issued in December 2002.
6
THIRTEEN WEEKS ENDED THIRTEEN WEEKS ENDED
MAY 3, 2003 MAY 4, 2002
------------------------- -------------------------
Net loss as reported $ (2,930,147) $ (1,940,331)
Add: Total fair value of stock based employee compensation
expense not included in reported net loss, net (103,381) (86,275)
------------------------- -------------------------
Proforma net loss $ (3,033,528) $ (2,026,606)
========================= =========================
Proforma net loss per share:
Basic $ (1.23) $ (0.84)
========================= =========================
Diluted $ (1.23) $ (0.84)
========================= =========================
NOTE 3 - BANK LINE OF CREDIT
Perfumania's senior secured credit facility with GMAC Commercial Credit LLC
provides for borrowings of up to $40 million, of which approximately $1.5
million was available at May 3, 2003, and supports normal working capital
requirements and other general corporate purposes. The facility expires in May
2004. 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% - 3.50% depending on a financial
ratio test. As of May 3, 2003, the credit facility bore interest at 4.0%.
Borrowings are secured by a first lien on all assets of Perfumania and the
assignment of a life insurance policy on Ilia Lekach, the Company's Chairman of
the Board of Directors 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 May 3, 2003, Perfumania was
not in compliance with its fixed charge ratio and leverage ratio. On June 16,
2003, Perfumania obtained a waiver from GMAC for all instances of non-compliance
as of May 3, 2003.
NOTE 4 - BASIC AND DILUTED LOSS PER COMMON SHARE
Basic loss per common share has been computed by dividing net loss by the
weighted average number of common shares outstanding during the period. Diluted
loss per share includes, in periods in which they have a dilutive effect, the
impact of common shares issuable upon exercise of stock options and other common
stock equivalents. For all periods presented in the accompanying consolidated
condensed statements of operations, incremental shares attributed to outstanding
stock options and convertible notes were not included because the results would
be anti-dilutive.
NOTE 5 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) represents all non-owner changes in
shareholders' equity and consists of the following:
THIRTEEN WEEKS ENDED THIRTEEN WEEKS ENDED
MAY 3, 2003 MAY 4, 2002
------------------------- -------------------------
Net loss $ (2,930,147) $ (1,940,331)
Net unrealized gain on investments available for sale 20,057 51,893
------------------------- -------------------------
Total comprehensive loss $ (2,910,090) $ (1,888,438)
========================= =========================
NOTE 6 - CONVERTIBLE NOTES PAYABLE
In December 2002, the Company entered into an amended Convertible Note
Option Repurchase Agreement (the "Agreement") with holders of the Company's
outstanding Series C and D Convertible Notes. The Agreement provides an
extension of the maturity date of the Convertible Notes to September 15, 2003
and a monthly option to repurchase the Notes over the extended maturity date.
The portion of the notes redeemable in each month varies as per a specified
redemption schedule. In the event that the Company exercises its monthly option,
the note holders
7
are restricted from converting any part of the remaining outstanding and unpaid
principal balance of such holder's notes into the Company's common stock During
the first thirteen weeks of fiscal year 2003, the Company paid $450,000 to the
note holders, which represented $375,000 of principal and $75,000 of premiums.
NOTE 7 - CONTINGENCIES
The Company is involved in legal proceedings in the ordinary course of
business. Management cannot presently predict the outcome of these matters.
Management believes that the Company would have meritorious defenses and that
the ultimate resolution of these matters should not have a material adverse
effect on the Company's financial position or result of operations.
NOTE 8 - RELATED PARTY TRANSACTIONS
Notes and interest receivable from a shareholder and officer were
approximately $316,000 as of May 3, 2003. The 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.
The Company's Chairman of the Board of Directors and Chief Executive
Officer, Ilia Lekach, is also the Chairman of the Board of Directors and Chief
Executive Officer of Parlux Fragrances, Inc. ("Parlux"). Purchases of product
from Parlux was approximately $3,469,000 for the first thirteen weeks of fiscal
2003, representing approximately 13.8% of the Company's total purchases. The
amount due to Parlux at May 3, 2003 was approximately $12,891,000. Accounts
payable due to Parlux are non-interest bearing and are included in accounts
payable affiliates in the accompanying consolidated condensed balance sheets.
During the first thirteen weeks of 2003, the Company purchased
approximately $891,000 of merchandise from a company owned by a brother of Ilia
Lekach and approximately $1,259,000 from a company owned by another brother of
Ilia Lekach. The amounts due to these companies at May 3, 2003 was approximately
$1,280,000 and $1,056,000, respectively, and are included in accounts payable
affiliates in the accompanying consolidated condensed balance sheets. Purchases
from these brothers did not include products manufactured or distributed by
Parlux. Purchases from related parties are on an arms-length basis with prices
and/or terms generally better then would otherwise be available from third
parties.
As of May 3, 2003, the Company owned approximately 1,003,000 shares of
Nimbus Group, Inc. ("Nimbus") common stock representing approximately 13% of its
total outstanding common stock. The investment in Nimbus appears on the
Company's consolidated condensed balance sheets as investments available for
sale. Ilia Lekach previously served as Chairman of the Board and Interim Chief
Executive Officer of Nimbus.
NOTE 9 - NON CASH TRANSACTIONS
Supplemental disclosures of non-cash investing and financing activities are
as follows:
For the Thirteen Weeks Ended
-----------------------------------------------------
May 3, 2003 May 4, 2002
------------------------- -------------------------
Conversion of debt and accrued interest
payable in exchange for common stock $ - $ 26,160
Unrealized gain on investments available for sale 20,057 51,893
Cash paid during the period for:
Interest 403,717 683,201
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of the Thirteen Weeks Ended May 3, 2003 with the Thirteen Weeks Ended
May 4, 2002.
Net sales decreased 8.2% from $40.2 million in the first thirteen weeks
of 2002 to $36.9 million in the first thirteen weeks of 2003. The decrease in
sales was primarily due to a 6.1% decrease in Perfumania's comparable retail
store sales and a reduction in the average number of stores operated during the
first thirteen weeks of 2003 compared to the first thirteen weeks of 2002. The
decrease in comparable store sales was primarily due to a contracted retail
environment, inclement weather and a slow economy. During the first thirteen
weeks of 2003, the average number of stores operated was 238 versus 245 in the
prior year's comparable period.
Gross profit decreased 3.0% from $17.3 million in the first thirteen
weeks of 2002 (43.1% of total net sales) to $16.8 million in the first thirteen
weeks of 2003 (45.6% of total net sales). The decrease in gross profit was due
to the decrease in sales. As a percentage of net sales, gross profit in the
first thirteen weeks of 2003 increased versus the first thirteen weeks of 2002
due to price increases and improved product mix.
Selling, general and administrative expenses increased 3.5% from $17.2
million in the first thirteen weeks of 2002 to $17.8 million in the first
thirteen weeks of 2003. The increase was attributable to higher payroll and
employee related costs compared with 2002. Depreciation and amortization was
approximately $1.5 million in the first thirteen weeks of both 2003 and 2002.
EBITDA(a), defined as net income (loss) less depreciation, amortization
and interest expense, net declined by $1.1 million from $0.1 million in the
first thirteen weeks of 2002 to ($1.0) million in the first thirteen weeks of
2003, due to reduced sales and increased expenses.
Interest expense, net was approximately $544,000 for the first thirteen
weeks of 2002 compared with $452,000 in 2003. In the current period, lower
interest rates and slightly lower average borrowings resulted in the reduction
in interest expense for the first thirteen weeks of 2003 versus the comparable
period of 2002.
As a result of the foregoing, our net loss increased to $2.9 million in
the first thirteen weeks of 2003 compared to a net loss of $1.9 million in the
first thirteen weeks of 2002. Net loss per share for the first thirteen weeks of
2003 and 2002 was $1.19 and $0.80, respectively.
THIRTEEN WEEKS ENDED
----------------------------------------
EBITDA Reconciliation (a): May 3, 2003 May 4, 2002
- -------------------------------- ----------------------------------------
Net loss $ (2,930,147) $ (1,940,331)
Interest expense 451,783 543,846
Depreciation and amortization 1,454,741 1,491,645
------------------- ----------------
EBITDA $ (1,023,623) $ 95,160
=================== ================
In order to fully assess our financial operating results, management
believes that EBITDA is an appropriate measure of evaluating our operating and
liquidity performance, because it reflects the resources available for strategic
opportunities including, among others, to invest in the business and strengthen
the balance sheet. However, these measures should be considered in addition to,
not as a substitute, or superior to, operating income, cash flows, or other
measures of financial performance prepared in accordance with generally accepted
accounting principles. 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. 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.
9
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements are to fund Perfumania's inventory
purchases, renovate existing stores, and selectively open new stores. For the
first thirteen weeks of fiscal 2003, these capital requirements generally were
satisfied through borrowings under our credit facility.
At May 3, 2003, we had a working capital deficiency of approximately $1.7
million compared to a working capital of approximately $1.8 million at February
1, 2003. The decrease was primarily due to the net loss during the current
period, increased purchases of property and equipment and lower long-term debt.
Net cash used in operating activities during the current period was
approximately $3.4 million compared with approximately $2.9 million for the same
period in the prior year. The increase in cash used in operating activities was
primarily due to the $1.0 million increase in net loss for the first thirteen
weeks of 2003 compared with the same period in the prior year.
Net cash used in investing activities was approximately $2.0 million in the
first thirteen weeks of fiscal year 2003 compared to $0.2 million in the first
thirteen weeks of 2002. Investing activities represent spending for the
renovation of existing stores and new store openings.
Net cash provided by financing activities during the current period was
approximately $4.1 million compared with approximately $3.2 million for the same
period in the prior year. The increase was due primarily to a reduction of
convertible debenture payments of approximately $0.7 million.
Perfumania's senior secured credit facility with GMAC Commercial Credit LLC
provides for borrowings of up to $40 million, of which approximately $1.5
million was available at May 3, 2003, and supports normal working capital
requirements and other general corporate purposes. The facility expires in May
2004. 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% - 3.50% depending on a financial
ratio test. As of May 3, 2003, the credit facility bore interest at 4.0%.
Borrowings are secured by a first lien on all assets of Perfumania and the
assignment of a life insurance policy on Ilia Lekach. 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 May 3, 2003,
Perfumania was not in compliance with its fixed charge ratio and leverage ratio.
On June 16, 2003, Perfumania obtained a waiver from GMAC for all instances of
non-compliance as of May 3, 2003.
As of May 3, 2003, we have a seasonal working capital deficiency of $1.7
million, cash balances of approximately $1.7 million and additional borrowing
capacity of $1.5 million under our bank line of credit; this could have an
effect on our ability to meet our obligations over the next twelve months.
Management believes that the cash balances, the available borrowing capacity,
and the projected future operating results will generate sufficient liquidity to
support our working capital needs and capital expenditures for the next twelve
months; however, there can be no assurance that management`s plans will be
successful. If we are unable to generate sufficient cash flows from operations
in the future to service our obligations and/or refinance our existing debt, we
could face liquidity and working capital constraints, which could adversely
impact future operations and growth.
During the thirteen weeks ended May 3, 2003, Perfumania closed 3 stores and
opened 2 new stores. In addition, Perfumania remodeled 11 more stores than the
year's comparable period. At May 3, 2003, Perfumania operated 237 stores
compared to 244 stores as of May 4, 2002. Management's focus is on improving the
profitability of existing stores and plans to open a maximum of 8 new stores for
the remainder of fiscal year 2003.
RECENT ACCOUNTING STANDARDS
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity." This statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or asset in some circumstance). Many of those
instruments were previously classified as equity. The statement is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS No. 150 is not expected to have a material impact
on our consolidated financial position, results of operations or disclosures.
10
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative and Hedging Activities." In general, this statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. This statement is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. The adoption of SFAS No. 149 is not expected to have a material impact on
our consolidated financial position, results of operations or disclosures.
CRITICAL ACCOUNTING POLICIES
Our condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America. As such, some accounting policies have a significant impact on amounts
reported in these financial statements. A summary of those significant
accounting policies and a description of accounting policies that are considered
critical can be found in our 2002 Annual Report on Form 10-K, filed on April 30,
2003 in the notes to the Consolidated Financial Statements, Note 1 and the
Critical Accounting Policies Section. These policies have been consistently
applied in all material respects and address such matters as principles of
consolidation, allowance for doubtful accounts, investments, impairment of
long-lived assets, accrued self-insurance, revenue recognition and stock based
compensation. While the estimates and judgments associated with the application
of these policies may be affected by different assumptions or conditions, we
believe the estimates and judgments associated with the reported amounts are
appropriate in the circumstances.
FORWARD LOOKING STATEMENTS
Some of the statements in this quarterly report, including those that
contain the words "anticipate," "believe," "plan," "estimate," "expect,"
"should," "intend" and other similar expressions, are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Those forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements or those of our industry to be materially different from any
future results, performance or achievements expressed or implied by those
forward-looking statements.
RISK FACTORS
WE MAY HAVE PROBLEMS RAISING MONEY NEEDED IN THE FUTURE
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.
11
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; 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
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 a continuing economic downturn in the United
States. Due to higher 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, the results of our operations and
our liquidity in the future.
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:
12
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
During the quarter ended May 3, 2003, there have been no material changes
in the information about our market risks as of February 1, 2003 as set forth in
Item 7A of the 2002 Form 10-K.
ITEM 4. 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.
PART II. OTHER INFORMATION
ITEM 1 . LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Index to Exhibits
Exhibit No. Description of Exhibit
---------- ----------------------
99.1 Certification by Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes - Oxley Act of 2002.
99.2 Certification by Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes - Oxley Act of 2002.
(b) Reports on Form 8-K.
None
14
E COM VENTURES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused the report to be signed on its behalf by the
undersigned, thereunto duly authorized.
E COM VENTURES, INC.
---------------------------
(Registrant)
Date: June 13, 2003 By: /S/ ILIA LEKACH
--------------------------
Ilia Lekach
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By: /S/ A. MARK YOUNG
-------------------------
A. Mark Young
Chief Financial Officer
(Principal Financial and
Accounting Officer)
15
CERTIFICATIONS
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Ilia Lekach, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of E Com Ventures, Inc.;
(2) Based on my knowledge, this quarterly 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 quarterly report; and
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly 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
quarterly 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: June 13, 2003
By: /S/ ILIA LEKACH
- -----------------------
Ilia Lekach
Chief Executive Officer
16
CERTIFICATIONS
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, A. Mark Young, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of E Com Ventures, Inc.;
(2) Based on my knowledge, this quarterly 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 quarterly report; and
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly 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 quarterly
report (the "Evaluation Date"); and
(c) presented in this quarterly 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 quarterly
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: June 13, 2003
By: /S/ A. MARK YOUNG
- ------------------------
A. Mark Young
Chief Financial Officer
17