UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER: 0-10714
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E COM VENTURES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 65-0977964
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
251 INTERNATIONAL PARKWAY
SUNRISE, FLORIDA 33325
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (954) 335-9100
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK $.01 PAR VALUE
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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. |_|
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes |_| No|X|
The aggregate market value of the voting stock held by non-affiliates
of the Registrant was approximately $8.9 million as of August 2, 2003. 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.
The number of shares outstanding of the Registrant's common stock as of
April 27, 2004: 2,740,830 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for its 2004
annual meeting of shareholders, which proxy statement will be filed no later
than 120 days after the close of the Registrant's fiscal year ended January 31,
2004, are hereby incorporated by reference in Part III of this Annual Report on
Form 10-K
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TABLE OF CONTENTS
ITEM PAGE
PART I
1. Business 3
2. Properties 10
3. Legal Proceedings 10
4. Submission of Matters to a Vote of Security Holders 10
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters 11
6. Selected Financial Data 12
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
7A. Quantitative and Qualitative Disclosures About Market Risk 23
8. Financial Statements and Supplementary Data 23
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 43
9A. Controls and Procedures 43
PART III
10. Directors and Executive Officers of the Registrant 44
11. Executive Compensation 44
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters 44
13. Certain Relationships and Related Transactions 44
14. Principal Accountant Fees and Services 44
PART IV
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 44
2
PART I.
ITEM 1. BUSINESS
BUSINESS STRATEGY
E Com Ventures, Inc., a Florida corporation ("ECOMV" or the
"Company"), performs all of its operations through 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., ("perfumania.com"), 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 January 31, 2004,
Perfumania operated a chain of 232 retail stores specializing in the sale of
fragrances at discounted prices up to 75% below the manufacturers' suggested
retail prices. Perfumania's wholesale division distributes fragrances and
related products to other wholesale distributors throughout North America and
overseas. Perfumania.com offers a selection of our more popular products for
sale over the Internet and serves as an alternative shopping experience to the
Perfumania shopping experience.
Perfumania operates its wholesale business directly. It operates its
retail business through Magnifique Parfumes and Cosmetics, Inc. ("Magnifique"),
a wholly-owned subsidiary of Perfumania, although the stores are generally
operated under the name Perfumania as described below under "Trade Name and
Service Mark." 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 January 31,
2004, February 1, 2003, and February 2, 2002 were 232, 238 and 247,
respectively.
Sales of perfumania.com are included within those of our retail
business in this Form 10-K. For ease of reference in this Form 10-K, our retail
and wholesale business are referred to as divisions. See Item 6 for Selected
Financial Data by division.
RECENT DEVELOPMENTS AND CHANGE OF CONTROL
Effective January 30, 2004, Ilia Lekach, our then Chairman of the
Board and Chief Executive Officer, IZJD Corp. and Pacific Investment Group,
Inc., each of which are wholly-owned by Mr. Lekach and Deborah Lekach, Mr.
Lekach's wife (collectively, "Lekach"), entered into the Nussdorf Option
Agreement (The "Nussdorf Option Agreement"), with Stephen Nussdorf and Glenn
Nussdorf (the "Nussdorfs"), pursuant to which the Nussdorfs were granted options
by Lekach to acquire up to an aggregate 720,954 shares of the Company's common
stock owned or beneficially owned by Lekach, for a purchase price of $12.70 per
share exercisable in the installments indicated on or after the dates set forth
in the table below:
Date Number of Shares
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January 30, 2004 433,070
March 15, 2004 162,884
April 23, 2004 125,000
The purchase price for the shares to be acquired by the Nussdorfs
under the Nussdorf Option Agreement is payable in cash; provided that the
Nussdorfs may elect to pay a portion of the purchase price for the shares that
are subject to the option installment that first becomes exercisable in April
2004, by offsetting the principal and accrued interest then owed by Mr. Lekach
under a $1,000,000 demand note, dated December 8, 2003, payable to the order of
Stephen Nussdorf.
In addition, pursuant to and in accordance with the terms of the
Nussdorf Option Agreement, the Nussdorfs have been granted an irrevocable proxy
for the term set forth in the Agreement to vote any shares owned by Lekach that
are the subject of the Nussdorf Option Agreement.
The Nussdorfs gave notice of the exercise of the first option
installment pursuant to the Nussdorf Option Agreement to acquire 433,070 shares:
298,530 shares by Stephen Nussdorf and 134,540 shares by Glenn Nussdorf (the
"Initial Exercise"). The aggregate purchase price for the Initial Exercise was
paid in cash.
On March 10, 2004, the Nussdorfs gave notice of the exercise of the
second option installment pursuant to the Nussdorf Option Agreement to acquire
162,884 shares: 81,442 shares each by Stephen Nussdorf and Glenn Nussdorf (the
"Second Exercise"). The shares included in the Second Exercise were acquired on
March 19, 2004. The aggregate purchase price for the Second Exercise was paid in
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cash. In connection with the Second Exercise, Mr. Lekach exercised options for
162,884 shares of the Company's common stock in March 2004, of which 125,000
shares were issued upon the exercise of options granted to Mr. Lekach under the
Company's 2000 Stock Option Plan.
Of the 720,954 shares subject to the Nussdorf Option Agreement, an
aggregate 443,750 shares were issuable upon exercise of certain stock options
owned of record by Ilia Lekach. As of April 26, 2004, Mr. Lekach has exercised
options to acquire 318,750 of those shares and the Nussdorfs have acquired
595,954 shares pursuant to the Nussdorf Option Agreement. The remaining 125,000
shares subject to the Nussdorf Option Agreement are those shares issuable upon
exercise of 125,000 options required to be issued to Mr. Lekach pursuant to the
terms of his employment agreement as a consequence of the change of control.
These 125,000 options may only be issued upon approval of an amendment to the
Company's 2000 Stock Option Plan. Such an amendment was voted on and approved at
a special meeting of the Company's shareholders on April 29, 2004.
Assuming the Nussdorfs exercise their option to acquire the remaining
125,000 shares subject to the Nussdorf Option Agreement, the Nussdorfs would own
an aggregate 1,128,144 shares of the Company's Common Stock or approximately
39.7% of the total number of shares of the Company's common stock outstanding as
of April 26, 2004.
On March 11, 2004, following the acquisition of the 433,070 shares
pursuant to the Initial Exercise, the Nussdorfs made a $5,000,000 secured demand
loan to Perfumania. The demand loan bears interest at prime plus 1% and is
secured by a security interest in Perfumania's assets pursuant to a Security
Agreement, by and among Perfumania and the Nussdorfs.
On February 6, 2004, Miles Raper, Donovan Chin and Daniel Bengio
resigned as members of the Company's Board of Directors, and Stephen Nussdorf,
Paul Garfinkle and Michael W. Katz were elected to the Company's Board of
Directors. Effective February 10, 2004, Mr. Lekach's employment with the Company
was terminated and Mr. Lekach ceased serving as an employee and officer of the
Company. In addition, on February 10, 2004, Stephen L. Nussdorf was appointed
the Company's Chairman of the Board and Michael W. Katz was appointed the
Company's Chief Executive Officer and President.
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
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 in the malls in which its stores are located. The amount of
advertising varies with the seasonality of the business.
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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 manufacturers' outlet malls tend to be larger than
Perfumania's other stores. A store is typically 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 retail
outlet and corporate systems. Perfumania.com has a completely integrated
e-commerce system. 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 was implemented in all stores. This system enables improved
communication, pricing and promotion programs, time and attendance reporting,
and enhanced inventory control.
STORE LOCATION AND EXPANSION
Perfumania's stores are located in 36 states, the District of
Columbia and Puerto Rico, including 45 locations in Florida, 19 in California,
16 in Texas and Puerto Rico, and 15 in New York. 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 $160,000, 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 Holiday season.
In fiscal years 2003, 2002 and 2001, Perfumania opened 11 stores, 4
stores and 5 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
2003, 2002 and 2001, Perfumania closed 17 stores, 13 and 15 stores,
respectively. For fiscal year 2004, Perfumania will continue to focus on
improving the profitability of its existing stores and management expects to
open approximately 15 stores and close approximately 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 2003, 2002 and 2001, the wholesale
division sold to approximately 5, 5 and 9 customers, respectively. Quality King
Distributors, Inc. ("Quality King"), an affiliate of ourcurrent Chief Executive
Officer and President, Michael Katz, our principal shareholder, the Nussdorf's,
accounted for 81%, 47% and 0% of net wholesale sales during fiscal years 2003,
2002 and 2001, respectively. See further discussion at Note 5 to our
Consolidated Financial Statements included in Item 8, hereof. A single customer,
unaffiliated with the Company, considerably reduced its purchases in the current
year and accounted for 3%, 49% and 92% of wholesale sales during fiscal years
2003, 2002 and 2001, respectively.
PERFUMANIA.COM
Perfumania.com provides a number of advantages for retail 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 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
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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.
SOURCES OF SUPPLY
During fiscal years 2003 and 2002, Perfumania purchased fragrances
from approximately 100 different suppliers, 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 23% and 10% of Perfumania's total merchandise purchased
in fiscal years 2003 and 2002, respectively, was from an affiliate, Parlux
Fragrances, Inc. ("Parlux"), a manufacturer and distributor of prestige
fragrances and related beauty products. Ilia Lekach, our former Chairman of the
Board and Chief Executive Officer and one of our former principal shareholders,
is the Chairman of the Board and Chief Executive Officer of Parlux and
beneficially owns approximately 20% of Parlux's outstanding common stock. No
other supplier accounted for more than 10% of our merchandise purchases during
2003 or 2002.
Approximately 5% and 1% of Perfumania's total merchandise purchased
in fiscal years 2003 and 2002, respectively, was from Quality King. These
purchases do not include products manufactured or distributed by Parlux.
Approximately 7% and 9% of Perfumania's total merchandise purchased
in fiscal years 2003 and 2002, respectively, was from Grupo Tulin, a company
owned by a former Director and brother of Ilia Lekach. Approximately 4% and 5%,
respectively, of Perfumania's total merchandise purchased in fiscal years 2003
and 2002 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.
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, 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. As a result, 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 utilizes independent national trucking companies to
deliver merchandise to its stores. Deliveries generally are made weekly, with
more frequent deliveries during the holiday season. Such deliveries permit the
stores to minimize inventory storage space and increase the space available for
display and sale of merchandise. To expedite delivery of merchandise to its
customers, Perfumania sometimes instructs its suppliers to ship merchandise
directly to wholesale division customers.
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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 and
availability.
EMPLOYEES
At January 31, 2004, we had 1,338 employees, of whom 1,195 were
employed in Perfumania's retail stores, 44 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 7 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.
Our former Chairman of the Board and Chief Executive Officer, Ilia
Lekach, was also Chairman and interim CEO of Nimbus Group, Inc. ("Nimbus"),
formerly known as TakeToAuction.com ("TTA"), a public company previously
committed to the development of a private jet air taxi network. TTA initially
sold consumer products on Internet auction sites.
From fiscal year 2000 through fiscal year 2002 we acquired
approximately 1,003,000 shares of Nimbus common stock. The investment in Nimbus
was shown on our balance sheets as investments available for sale. During fiscal
year 2003 we disposed of our holding in Nimbus in open market transactions at a
loss of approximately $172,000.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The following set forth certain risk factors that may affect the
Company and results of operations. These may be additional risks not set forth
below or in this annual report on form 10-K, which may also affect the Company
and its operations.
WE COULD FACE LIQUIDITY AND WORKING CAPITAL CONSTRAINTS IF WE ARE UNABLE TO
GENERATE SUFFICIENT CASH FLOWS FROM OPERATIONS
As shown in the accompanying financial statements, we have incurred a
net loss of $12.9 million for the fiscal year ended January 31, 2004. In
addition, as of January 31, 2004, we had a working capital deficiency of $9.1
million and an accumulated deficit of $54.9 million. As of January 31, 2004, we
had cash balances totaling approximately $2.0 million. Additionally, $30.5
million was outstanding and $5.6 million was available under our $40 million
credit facility with GMAC. 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 and expectations will be successful. If we are unable to
generate sufficient cash flows from operations in the future to service our
obligations, finance our existing debt and achieve improved operating results,
we could face liquidity and working capital constraints, which could adversely
impact future operations and growth and, thereby, may raise a question as to our
ability to remain a going concern.
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As of January 31, 2004, Perfumania was not in compliance with its
tangible net worth ratio, fixed charge ratio, leverage ratio and capital
expenditures limitation. On April 29, 2004, Perfumania obtained a waiver from
GMAC for all instances of non-compliance as of January 31, 2004.
On May 12, 2004, Perfumania entered into a new three-year amended and
restated senior secured revolving credit facility with GMAC Commercial Finance
LLC and Congress Financial Corporation that provides for borrowings of up to $60
million.
Advances under the new line of credit are based on a formula of
eligible inventories and will bear interest depending on the Company's financial
ratios from (1) prime to prime plus 1.25% or (b) LIBOR plus 2.50% to 3.75%.
Borrowings are secured by a lien on all assets of Perfumania. The credit
facility contains limitations on additional borrowings, capital expenditures and
other items, and contains various covenants including a fixed charge coverage
ratio and minimum EBITDA amounts as defined. Advances will be secured by a first
lien an all assets of Perfumania.
If we are unable to generate sufficient cash flows from operations
to service our obligations and refinance the credit facility on acceptable
terms, we could face liquidity and working capital constraints, which could
adversely impact our future operations and growth.
FAILURE TO COMPLY WITH COVENANTS IN OUR EXISTING CREDIT FACILITY COULD RESULT IN
OUR INABILITY TO BORROW ADDITIONAL FUNDS
Our credit facility requires us to maintain compliance with various
financial covenants. Our ability to meet those covenants can be affected by
events beyond our control, and therefore we may be unable to meet those
covenants. As described above, Perfumania was not in compliance with certain
financial covenants as of January 31, 2004. If our actual results deviate
significantly from our projections, we may not be in compliance with the
covenants and might not be allowed to borrow under the credit facility. If we
were not able to borrow under our credit facility, we would be required to
develop an alternative source of liquidity, or to sell additional securities
which would result in dilution to existing stockholders. We cannot assure that
we could obtain replacement credit facilities on favorable terms or at all.
Without a source of financing, we could experience cash flow difficulties.
CONSUMERS HAVE REDUCED DISCRETIONARY PURCHASES OF OUR PRODUCTS, WHICH HAS
INCREASED OUR NET LOSS
Sales levels at Perfumania's retail stores were adversely affected
during fiscal year 2003 by an economic downturn in the United States, the war in
Iraq and disruption in our inventory supplies due to the relocation of our
distribution facility. Due to higher unemployment and stagnant business growth
rates, consumer spending in general and especially on discretionary items,
declined. Sales from our retail stores decreased from $199,369,000 for fiscal
year 2002 to $198,479,000 for fiscal year 2003 and our net loss increased to
$(5.24) per share for fiscal year 2003 from $(1.12) per share for fiscal year
2002. We may continue to experience declines in sales as a result of the
economic downturn, or in the event of terrorism or diseases affecting customers'
purchasing patterns. Future economic downturns may adversely impact our
business, the results of our operations and our liquidity.
PERFUMANIA 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.
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 fourth fiscal quarter than in the first three
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. 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. 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.
- 8 -
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
acceptable terms, or if there is a material change in Perfumania's ability to
obtain necessary merchandise, our results of operations could be seriously
harmed.
PERFUMANIA PURCHASES MERCHANDISE FROM PARTIES RELATED TO OUR FORMER CHIEF
EXECUTIVE OFFICER AND ONE OF OUR PRINCIPAL SHAREHOLDERS, WHICH MAY CAUSE A
CONFLICT OF INTEREST
Approximately 30% and 19%, respectively, of Perfumania's total
merchandise purchased in fiscal years 2003 and 2002 were from affiliates of our
former Chief Executive Officer. In addition, in fiscal 2003, we purchased
approximately $5.6 million of merchandise from Quality King and sold
approximately $11.4 million of different merchandise to Quality King. The
Nussdorfs are officers and principals of Quality King. While we believe the
terms of these purchases and sales are more favorable to us than the terms of
third party arrangements, there may be a conflict of interest between our
interest in purchasing or selling merchandise at the best price and those of our
principal shareholders and former officer in obtaining the best price for their
respective companies.
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.
OUR STOCK PRICE VOLATILITY COULD RESULT IN SECURITIES CLASS ACTION LITIGATION,
SUBSTANTIAL COST, AND DIVERSION OF MANAGEMENT'S ATTENTION
The price of our common stock has been and likely will continue to be
subject to wide fluctuations in response to a number of events, such as:
o quarterly variations in operating results;
o acquisitions, capital commitments of strategic alliances by
us or our competitors;
o legal regulatory matters that are applicable to our
business;
o the operating and stock prices performance of other
companies that investors may deem comparable to us; and
o news reports relating to trends in our markets.
In addition, the stock market in general has experienced significant
price and volume fluctuations that often have been unrelated to the performance
of specific companies. The broad market fluctuations may adversely affect the
market price of our common stock, regardless of our operating performance. Our
stock price volatility could result in class action litigation which would
require substantial monetary cost to defend, as well as the diversion of
management attention from day-to-day activities which could negatively affect
operating performance. Such litigation could also have a negative impact on the
price of our common stock due to the uncertainty and negative publicity
associated with litigation.
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
- 9 -
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 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. These factors, as well as demographic trends, economic conditions and
discount pricing strategies by competitors, could result in increased
competition and could have a material adverse effect on our profitability,
operating cash flow, and many other aspects of our business, prospects, results
of operations and financial condition.
THE LOSS OF OR DISRUPTION IN OUR DISTRIBUTION FACILITY COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR SALES
We currently have one distribution facility, which is located in
Sunrise, Florida. The loss of, or any damage to this facility, as well as the
inventory stored therein, would require us to find replacement facilities and
assets. In addition, weather conditions, such as natural disasters, could
disrupt our distribution operations. If we cannot replace our distribution
capacity and inventory in a timely, cost-efficient manner, it could reduce the
inventory we have available for sale, adversely affecting our profitability and
operating cash flows.
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.
ITEM 2. PROPERTIES
We relocated our executive offices and distribution center to a
179,000 square foot facility in Sunrise, Florida in July 2003. The facility is
leased through December 2017 pursuant to a lease which currently provides for
monthly rent of approximately $82,000 with specified 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 11 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 December 12, 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 Daniel Bengio 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:
- 10 -
ELECTION OF DIRECTORS:
---------------------
SHARES SHARES VOTED SHARES VOTED ABSTAIN/
TOTAL VOTED FOR AGAINST WITHHELD NON-VOTES
---------------------------- ----- ----------------- ------------------- -------- ---------
Ilia Lekach 2,316,120 2,287,582 -- 28,538 93,211
Donovan Chin 2,316,120 2,278,782 -- 37,338 93,211
Carole Ann Taylor 2,316,120 2,308,646 -- 7,474 93,211
Daniel Bengio 2,316,120 2,314,396 -- 1,724 93,211
Joseph Bouhadana 2,316,120 2,308,596 -- 7,524 93,211
Miles Raper 2,316,120 2,314,446 -- 1,674 93,211
RATIFICATION OF AUDITORS:
------------------------
SHARES SHARES VOTED SHARES VOTED ABSTAIN/
TOTAL VOTED FOR AGAINST WITHHELD NON-VOTES
---------------------------- ----- ----------------- ------------------- -------- ---------
Ratify Appointment of Deloitte & 2,316,120 2,314,030 2,090 -- 93,211
Touche LLP
On February 6, 2004, Miles Raper, Donovan Chin and Daniel Bengio
resigned as members of the Company's Board of Directors, and Stephen Nussdorf,
Paul Garfinkle and Michael W. Katz were elected to the Company's Board of
Directors. Effective February 10, 2004, Mr. Lekach's employment with the Company
was terminated and Mr. Lekach ceased serving as an employee and officer of the
Company. In addition, on February 10, 2004, Mr. Lekach resigned from the Board
of Directors and Stephen L. Nussdorf was appointed the Company's Chairman of the
Board and Michael W. Katz was appointed the Company's Chief Executive Officer
and President.
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 2003 HIGH LOW
---------------------------- -------------------- --------------------
First Quarter $5.00 $2.61
Second Quarter 12.00 2.60
Third Quarter 15.69 9.92
Fourth Quarter 15.50 11.00
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
As of April 27, 2004, there were 66 holders of record, which excluded
common stock held in street name. The closing sales price for the common stock
on April 27, 2004 was $11.50 per share.
- 11 -
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 for
periods ended prior to March 20, 2003 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.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information as of January 31, 2004,
with respect to our compensation plans under which our equity securities are
authorized for issuance.
Number of securities remaining
Number of securities to be available for future issuance
issued upon exercise of Weighted-average exercise under equity compensation plans
outstanding options, warrants price of outstanding options, excluding securities reflected in
and rights warrants and rights column (a)(1)
----------------------------- ----------------------------- ---------------------------------
Plan Category: (a) (b) (c)
Equity compensation plans
approved by stockholders 809,238 $4.99 156,368
Equity compensation plans
not approved by stockholders -- -- --
-------------- -------------- ---------------
Total 809,238 $4.99 156,368
============== ============== ===============
(1) The number of shares available under our 2000 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.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below 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 2003 refers to the fiscal year that began
on February 2, 2003 and ended on January 31, 2004.
- 12 -
FISCAL YEAR ENDED
---------------------------------------------------------------------------
(1)
JANUARY 31, FEBRUARY 1, FEBRUARY 2, FEBRUARY 3, JANUARY 29,
2004 2003 2002 2001 2000
--------------- ------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Net sales, retail division $ 198,479 $ 199,369 $ 184,142 $ 185,371 $ 155,953
Net sales, wholesale division 14,089 2,145 9,210 21,199 36,975
--------------- ------------- ------------- ------------- -------------
Total net sales 212,568 201,514 193,352 206,570 192,928
--------------- ------------- ------------- ------------- -------------
Gross profit, retail division 81,923 84,159 78,468 79,218 68,613
Gross profit, wholesale division 1,454 435 1,767 4,216 7,019
--------------- ------------- ------------- ------------- -------------
Total gross profit 83,377 84,594 80,235 83,434 75,632
--------------- ------------- ------------- ------------- -------------
Selling, general and administrative expenses 82,297 76,178 72,918 79,884 71,354
Provision for doubtful accounts -- -- 55 55 60
Change of control expenses 4,931 -- -- -- --
Provision for receivables from affiliate -- 1,961 -- -- --
Provision for impairment of assets
and store closings 593 663 727 22,894(1) 3,427
Depreciation and amortization 6,103 6,024 6,825 5,819 4,725
--------------- ------------- ------------- ------------- -------------
Total operating expenses 93,924 84,826 80,525 108,652 79,566
--------------- ------------- ------------- ------------- -------------
Loss from operations (10,547) (232) (290) (25,218) (3,934)
Other income (expense)
Interest expense, net (2,153) (1,883) (3,095) 33,399(1) (6,589)
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 (172) (711) -- (4,819) -
Miscellaneous (expense) income, net -- -- (18) 85 (118)
--------------- ------------- ------------- ------------- -------------
Income (loss) before income taxes (12,872) (2,826) (3,403) (6,120) 1,168
Benefit (provision) for income taxes -- -- 211 -- (124)
--------------- ------------- ------------- ------------- -------------
Net income (loss) $ (12,872) $ (2,826) $ (3,192) $ (6,120) $ 1,044
=============== ============= ============= ============= =============
Weighted average shares outstanding:
Basic 2,454,340 2,528,326 2,420,467 2,360,456 2,054,660
Diluted 2,454,340 2,528,326 2,420,467 2,360,456 2,566,905
Basic income (loss) per share $ (5.24) $ (1.12) $ (1.32) $ (2.59) $ 0.51
Diluted income (loss) per share $ (5.24) $ (1.12) $ (1.32) $ (2.59) $ 0.41
SELECTED OPERATING DATA:
Number of stores open at end of period 232 238 247 257 276
Comparable store sales increase 1.1% 10.2% 2.5% 16.9% 12.9%
BALANCE SHEET DATA:
Working capital (deficiency) $ (9,090) $ 1,804 $ 2,760 $ 7,015 $ 8,687
Total assets 92,463 103,423 102,559 107,329 105,656
Long-term debt, less current portion 7,746 7,752 5,204 11,531 5,032
Total shareholders' equity 10,222 21,853 22,603 26,395 30,689
(1) Amounts reflect a revision of the presentation of the
perfumania.com acquisition. The revised presentation increases the gain on sale
of affiliate's common stock by $23.4 million from $10.0 million to $33.4 million
and reflects a $23.4 million provision to reflect an improvement of goodwill at
the date of the acquisition, May 10, 2002. For a further discussion see
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Acquisition of perfumania.com.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ACQUISITION OF PERFUMANIA.COM
On May 10, 2000, the Company acquired perfumania.com for 400,000
shares of Envision Development Corporation ("EDC") stock that the Company held.
The EDC shares were restricted securities and subject to a lock-up agreement.
The Company was unable to sell any of its EDC shares without the approval of
EDC, which approval was withheld. In addition, management of the Company had
concerns about the direction and business prospects of EDC and the future value
of the EDC shares. The Company recorded the acquisition of perfumania.com at
$5.4 million, which was based on an independent appraisal of the value of
perfumania.com as of May 10, 2000. The Company used this valuation because it
believed that the appraisal was more clearly evident of the fair value of the
transaction than the quoted market price of the EDC stock at the time of the
transaction. In December 2000, the EDC shares were delisted from the American
Stock Exchange and the value of its shares became nominal.
The presentation of this transaction has been revised to reflect the
accounting treatment that would result from using the quoted market price of the
EDC shares at the acquisition date. This presentation results in an increase in
the gain on the sale of affiliate's common stock of $23.4 million. This
presentation also results in an increase in acquisition price from $5.4 million
to $28.8 million, and the recognition of additional goodwill with a
corresponding write down, for goodwill impairment, of $23.4 million at the time
of the transaction. The impairment was recognized based on the results of the
independent appraisal of the value of perfumania.com using the discounted cash
flow method. Gross profit and net income remain unchanged for the fiscal year
ended February 3, 2001.
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:
- 13 -
PERCENTAGE OF NET SALES
FISCAL YEAR
2003 2002 2001
------------ ------------ -----------
Net sales, retail division............................ 93.4% 98.9% 95.2%
Net sales, wholesale division......................... 6.6 1.1 4.8
--------- --------- ---------
Total net sales.................................... 100.0 100.0 100.0
--------- --------- ---------
Gross profit, retail division......................... 38.5 41.8 40.6
Gross profit, wholesale division...................... 0.7 0.0 0.1
--------- --------- ---------
Total gross profit................................. 39.2 42.0 41.5
--------- --------- ---------
Selling, general and administrative expenses.......... 38.7 37.8 37.7
Change of control expense............................. 2.3 -- --
Provision for impairment of receivable from affiliate -- 1.0 --
Provision for impairment of assets and
store closings..................................... 0.3 0.3 0.4
Depreciation and amortization......................... 2.9 3.0 3.5
--------- --------- ---------
Total operating expenses........................... 44.2 42.1 41.6
--------- --------- ---------
Loss from operations before other expense............. (5.0) (0.1) (0.2)
--------- --------- ---------
Other expense:
Interest expense, net.............................. (1.0) (0.9) (1.6)
Realized loss on investments....................... (0.1) (0.4) --
Loss before income taxes.............................. (6.0) (1.4) (1.8)
Benefit for income taxes.............................. 0.1
--------- --------- ---------
Net loss............................................. (6.1)% (1.4)% (1.7)%
--------- --------- ---------
FORWARD LOOKING STATEMENTS
Some of the statements in this Annual Report on Form 10-K, 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 of those of our industry to be materially
different from any future results, performance or achievements expressed or
implied by those forward-looking statements. Among the factors that could cause
actual results, performance or achievement to differ materially from those
described or implied in the forward-looking statements are our ability to
service our obligations and refinance our credit facility on acceptable terms,
our ability to comply with the covenants in our credit facility, general
economic conditions including a continued decrease in discretionary spending by
consumers, competition, potential technology changes, changes in or the lack of
anticipated changes in the regulatory environment in various countries, the
ability to secure partnership or joint-venture relationships with other
entities, the ability to raise additional capital to finance expansion, the
risks inherent in new product and service introductions and the entry into new
geographic markets and other factors included in our filings with the Securities
and Exchange Commission (the "SEC"), including the Risk Factors included in this
Annual Report on Form 10-K. Copies of our SEC filings are available from the SEC
or may be obtained upon request from us. We do not undertake any obligation to
update the information contained herein, which speaks only as of this date.
CRITICAL ACCOUNTING ESTIMATES
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. As such, some accounting policies have a significant impact on
amounts reported in these financial statements. The judgments and estimates made
can significantly affect results. Materially different amounts would be reported
under different conditions or by using different assumptions. A summary of
significant accounting policies can be found in Note 2 to the Consolidated
Financial Statements.
We consider an accounting policy to be critical if it requires
significant judgment and estimates in its application. We have identified
certain accounting policies that we consider critical to 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, cost being
determined on a weighted average cost basis. We review our inventory on a
regular basis for excess and potentially slow moving inventory based on prior
sales, forecasted demand, historical experience and through specific
identification of obsolete or damaged merchandise and we record inventory
writeoffs in accordance with our expectations. If there are material changes to
these estimates, additional writeoffs could be necessary.
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
- 14 -
in this process is significant management judgment as to the projected cash
flows. 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. If there are
material changes to these judgments or estimates, additional charges could be
necessary.
COMPARISON OF FISCAL YEARS 2003 AND 2002
REVENUES:
For the year ended
------------------------------------------------------------------------------------------------------------
($ in thousands)
Percentage of Percentage of Percentage Increase
January 31, 2004 Revenues February 1, 2003 Revenues (Decrease)
--------------------- -------------------- -------------------- -------------------- ---------------------
Wholesale $14,089 6.6% $2,145 1.1% 556.8%
Retail 198,479 93.4% 199,369 98.9% (0.4)%
--------------------- -------------------- -------------------- -------------------- ---------------------
Total Revenues $212,568 100.0% $201,514 100.0% 5.5%
===================== ==================== ==================== ==================== =====================
Net sales increased due to an increase in wholesale sales, offset by
a decrease in retail sales. The increase in wholesale sales was due primarily to
$11.4 million of sales made to Quality King. The Company, through its supplier
relationships, is able to obtain certain merchandise at better prices and
quantities than Quality King. Wholesale sales in 2004 are expected to
approximate fiscal year levels. See Note 5 to our Consolidated Financial
Statements included in Item 8, hereof for further discussion. Comparable store
sales measure the sales from stores that have been open for one year or more.
Perfumania's comparable store sales increased 1.1% in fiscal year 2003. However,
the average number of stores operated decreased from 242 during fiscal year 2002
to 235 in fiscal year 2003 primarily due to the closure of older,
underperforming stores. We believe that Perfumania's retail sales were
negatively impacted for part of fiscal year 2003 by the overall soft United
States economy, the war in Iraq and disruption in our inventory supplies due to
the relocation of our distribution facility.
COST OF REVENUES:
For the year ended
----------------------------------------------------------------
($ in thousands)
Percentage
January 31, 2004 February 1, 2003 Increase
--------------------- -------------------- --------------------
Wholesale $12,635 $1,710 638.9%
Retail 116,556 115,210 1.2%
--------------------- -------------------- --------------------
Total cost of Revenues $129,191 $116,920 10.5%
===================== ==================== ====================
GROSS PROFIT:
For the year ended
----------------------------------------------------------------
($ in thousands)
Percentage Increase
January 31, 2004 February 1, 2003 (Decrease)
--------------------- -------------------- --------------------
Wholesale $1,454 $435 234.3%
Retail 81,923 84,159 (2.7)%
--------------------- -------------------- --------------------
Total gross profit $83,377 $84,594 (1.4)%
===================== ==================== ====================
- 15 -
Gross profit decreased as a result of lower sales and gross profit in
the retail division offset by higher sales and gross profit in the wholesale
division.
Gross profit for the retail division decreased principally as a
result of lower retail sales. Based on a comprehensive review of the Company's
merchandise offerings conducted by management, approximately 3,400 stock keeping
units ("skus") of our 25,000 skus were identified which we intend to discontinue
offering for sale in Perfumania's retail stores. We recorded writeoffs totaling
approximately $2.6 million as of fiscal year end 2003, which represents the
difference between the estimated selling value and the historical cost of this
inventory. This writeoff is included in cost of goods sold and accounts for 1.4%
of the decrease in our retail gross profit as a percentage of net retail sales
for fiscal year 2003.
The increase in gross profit in the wholesale division was due to
higher wholesale sales as discussed above. Wholesale sales historically yield a
lower gross margin compared to retail sales.
GROSS PROFIT MARGIN PERCENTAGES:
For the year ended
--------------------------------------------
January 31, 2004 February 1, 2003
--------------------- --------------------
Wholesale 10.3% 20.3%
Retail 41.7% 43.0%
Gross profit margin 39.2% 42.0%
The decrease in wholesale gross profit margins was primarily
attributable to larger number of units per wholesale transaction in fiscal 2003
compared to fiscal 2002. Large unit orders yield lower margins than small
orders.
OPERATING EXPENSES:
For the year ended
----------------------------------------------------------------
($ in thousands)
Percentage Increase
January 31, 2004 February 1, 2003 (Decrease)
--------------------- -------------------- --------------------
Selling, general and
administrative $82,297 $76,178 8.0%
Change of control expenses 4,931 -- --
Asset impairment charges 593 663 (10.6)%
Receivable impairment
charges -- 1,961 --
Depreciation and
amortization 6,103 6,024 1.3%
--------------------- -------------------- --------------------
Total operating expenses $93,924 $84,826 10.7%
===================== ==================== ====================
The increase in selling, general and administrative expenses is
attributable primarily to higher employee compensation costs and other store
operating costs. During fiscal 2003 we also incurred increased expenses for the
relocation of our corporate headquarters and distribution center as well as the
implementation of new Point of Sale software in our stores. The majority of our
selling, general and administrative expenses relate to the retail division.
Change of control expenses of approximately $4.9 million in fiscal
year 2003 represents expenses incurred as a result of the Nussdorf Option
Agreement which was entered into effective January 30, 2004 between Ilia Lekach,
our then Chairman of the Board and Chief Executive Officer, IZJD Corp. and
Pacific Investment Group Inc., each of which are wholly-owned by Mr. Lekach and
Deborah Lekach, Mr. Lekach's wife, and Stephen and Glenn Nussdorf. Approximately
$2.6 million of these expenses represent amounts paid to certain of our
executive officers and a consultant pursuant to employment and consulting
agreements and approximately $2.3 million represents a non-cash charge for stock
- 16 -
option expenses, also relating to these same employment and consulting
agreements. See further discussion in Item 1 and also Note 5 to our Consolidated
Financial Statements in Item 8, hereof.
The asset impairment charges in both fiscal years relate to retail
store locations with negative cash flows that were either closed or are targeted
for closure.
The provision for receivables during fiscal year 2002 relates to
an affiliate receivable which management determined was not collectible. See
further discussion at Note 5 of the Notes to Consolidated Financial Statements.
LOSS FROM OPERATIONS:
For the year ended
----------------------------------------------------------------
($ in thousands)
January 31, 2004 February 1, 2003 Percentage Increase
--------------------- -------------------- --------------------
Loss from operations $10,547 $232 4446.1%
OTHER EXPENSE:
For the year ended
----------------------------------------------------------------
($ in thousands)
Percentage Increase
January 31, 2004 February 1, 2003 (Decrease)
--------------------- -------------------- --------------------
Interest expense $2,179 $2,072 5.2%
Loss on investments 172 711 (75.8)%
--------------------- -------------------- --------------------
Total other expense $2,351 $2,783 (15.5)%
===================== ==================== ====================
The increase in interest expense was primarily due to interest
incurred on the capital lease for our corporate office and distribution center
to which we relocated in the second quarter of fiscal year 2003.
The realized loss on investments in fiscal year 2002 was due to a
decline in the market prices on securities available for sale that resulted in
the Company recording a non-cash charge. During fiscal year 2003 the Company
recorded a loss from the sale of these same investments. See further discussion
at Note 9 of the Notes to Consolidated Financial Statements.
NET LOSS:
For the year ended
----------------------------------------------------------------
($ in thousands)
January 31, 2004 February 1, 2003 Percentage Increase
--------------------- -------------------- --------------------
Net Loss $12,872 $2,826 355.5%
As a result of the foregoing our net loss was increased as indicated
above.
- 17 -
COMPARISON OF FISCAL YEARS 2002 AND 2001
REVENUES:
For the year ended
--------------------------------------------------------------------------------------------
($ in thousands)
Percentage of Percentage of Percentage Increase
February 1, 2003 Revenues February 2, 2002 Revenues (Decrease)
----------------- ----------------- ------------------ ----------------- -------------------
Wholesale $2,145 1.1% $9,210 4.7% (76.7)%
Retail 199,369 98.9% 184,142 95.3% 8.3%
----------------- ----------------- ------------------ ----------------- -------------------
Total Revenues $201,514 100.0% $193,352 100.0% 4.2%
================= ================= ================== ================= ===================
The increase in net sales during fiscal year 2002 was due to an
increase in retail sales offset by a decrease in wholesale sales. The increase
in sales was principally due to a 10.2% increase in comparable store sales. The
average number of stores operated decreased from 250 during fiscal year 2001 to
242 in fiscal year 2002. The increase in Perfumania's comparable store sales was
due to an improved merchandise assortment and product promotions at our retail
stores. The decrease in wholesale sales was due to management's decision to
concentrate on the more profitable retail operations.
COST OF REVENUES:
For the year ended
----------------------------------------------------------------
($ in thousands)
Percentage Increase
February 1, 2003 February 2, 2002 (Decrease)
--------------------- -------------------- --------------------
Wholesale $1,710 $7,443 (77.0)%
Retail 115,210 105,674 8.6%
--------------------- -------------------- --------------------
Total cost of Revenues $116,920 $113,117 3.4%
===================== ==================== ====================
GROSS PROFIT:
For the year ended
----------------------------------------------------------------
($ in thousands)
Percentage Increase
February 1, 2003 February 2, 2002 (Decrease)
--------------------- -------------------- --------------------
Wholesale $435 $1,767 (75.4)%
Retail 84,159 78,468 7.3%
--------------------- -------------------- --------------------
Total gross profit $84,594 $80,235 5.4%
===================== ==================== ====================
Gross profit increased as a result of higher sales and gross profit
in the retail division offset by lower sales and gross profit in the wholesale
division. Gross profit for the retail division increased principally as a result
of higher retail sales volume. Gross profit for the wholesale division decreased
due to lower wholesale sales. Wholesale sales historically yield a lower gross
margin compared to retail sales.
- 18 -
GROSS PROFIT MARGIN PERCENTAGES:
For the year ended
--------------------------------------------
February 1, 2003 February 2, 2002
--------------------- --------------------
Wholesale 20.3% 19.2%
Retail 42.2% 42.6%
Gross profit margin 42.0% 41.5%
OPERATING EXPENSES:
For the year ended
----------------------------------------------------------------
($ in thousands)
Percentage Increase
February 1, 2003 February 2, 2002 (Decrease)
--------------------- -------------------- --------------------
Selling, general and
administrative $76,178 $72,918 4.5%
Asset impairment charges 663 727 (8.8)%
Provision for doubtful
accounts -- 55 --
Receivable impairment
charges 1,961 -- --
Depreciation and
amortization 6,024 6,825 (11.7)%
--------------------- -------------------- --------------------
Total operating expenses $84,826 $80,525 5.3%
===================== ==================== ====================
The increase in selling, general and administrative expenses is
attributable primarily to higher employee compensation costs, including
incentive compensation paid to store personnel due to higher retail sales. The
majority of our selling, general and administrative expenses relate to the
retail division.
The asset impairment charges in both fiscal years relate to retail
store locations with negative cash flows that were either closed or are targeted
for closure.
The provision for receivable during fiscal year 2002 relates to an
affiliate receivable from Nimbus which management determined was not
collectible. No comparable receivable impairment was recorded during fiscal year
2001. See further discussion at Note 5 of the Notes to Consolidated Financial
Statements.
Depreciation and amortization decreased primarily due to the adoption
of SFAS 142 on February 3, 2002, which eliminated the amortization of goodwill
and other intangible assets with indefinite useful lives.
LOSS FROM OPERATIONS:
For the year ended
----------------------------------------------------------------
($ in thousands)
Percentage
February 1, 2003 February 2, 2002 (Decrease)
--------------------- -------------------- --------------------
Loss from operations $232 $290 (20.0)%
- 19 -
OTHER EXPENSE:
For the year ended
----------------------------------------------------------------
($ in thousands)
Percentage
February 1, 2003 February 2, 2002 (Decrease)
--------------------- -------------------- --------------------
Interest expense $2,072 $3,396 (39.0)%
Loss on investments 711 -- --
Other -- 18 --
--------------------- -------------------- --------------------
$2,783 $3,414 (18.5)%
===================== ==================== ====================
The decrease in interest expense (net) was primarily due to lower
interest rates and a reduction in the outstanding balance of convertible notes
payable.
The realized loss on investments in fiscal year 2002 is due to a
decline in the market prices on securities available for sale which resulted in
the Company recording a non-cash charge. See further discussion at Note 9 of the
Notes to Consolidated Financial Statements.
NET LOSS:
For the year ended
-----------------------------------------------------------------
($ in thousands)
February 1, 2003 February 2, 2002 Percentage Increase
--------------------- -------------------- ---------------------
Net Loss $2,826 $3,192 (11.5)%
As a result of the foregoing our net loss was reduced as indicated
above.
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements for operating purposes are to fund
Perfumania's inventory purchases, renovate existing stores and selectively open
new stores. During fiscal years 2003 and 2002, we financed these requirements
primarily through cash flows from operations, borrowings under our line of
credit, capital equipment leases and other short-term borrowings.
A summary of our cash flows is as follows:
For the year ended
January 31, 2004
----------------------
($ in thousands)
Summary Cash Flow Information:
Cash provided by operations $10,223
Cash used in investing activities (5,728)
Cash used in financing activities (5,498)
----------------------
Decrease in cash and cash equivalents (1,003)
Cash and cash equivalents, February 1, 2003 2,965
----------------------
Cash and cash equivalents, January 31, 2004 $1,961
======================
- 20 -
Perfumania's senior secured credit facility with GMAC Commercial
Finance LLC ("GMAC") provides for borrowings of up to $40.0 million, of which
$30.5 million was outstanding and $5.6 million was available as of January 31,
2004, 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 January 31, 2004, the credit facility bore interest at 4.6%.
Borrowings are secured by a first lien on all assets of Perfumania. 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 January 31, 2004,
Perfumania was not in compliance with its tangible net worth ratio, fixed charge
ratio, leverage ratio and capital expenditures limitation. On April 29, 2004,
Perfumania obtained a waiver from GMAC for all instances of non-compliance as of
January 31, 2004.
On May 12, 2004, Perfumania entered into a new three-year amended and
restated senior secured revolving credit facility with GMAC Commercial Finance
LLC and Congress Financial Corporation that provides for borrowings of up to $60
million.
Advances under the new line of credit are based on a formula of
eligible inventories and will bear interest depending on the Company's financial
ratios from (1) prime to prime plus 1.25% or (b) LIBOR plus 2.50% to 3.75%.
Borrowings are secured by a lien on all assets of Perfumania. The credit
facility contains limitations on additional borrowings, capital expenditures and
other items, and contains various covenants including a fixed charge coverage
ratio and minimum EBITDA amounts as defined. Advances will be secured by a first
lien an all assets of Perfumania.
In March 2004, the Nussdorfs made a $5,000,000 subordinated secured
demand loan to Perfumania. The demand loan bears interest at the prime rate plus
1%, requires quarterly interest payments and is secured by a security interest
in Perfumania's assets pursuant to a Security Agreement, by and among Perfumania
and the Nussdorfs. There are no prepayment penalties and the loan is subordinate
to all bank related indebtedness.
In January 2004 we incurred approximately $4.9 million in change of
control expenses incurred as a result of the Nussdorf Option Agreement.
Approximately $2.6 million of these expenses represent amounts paid to certain
of our executive officers and a consultant pursuant to employment and consulting
agreements and approximately $2.3 million represents a non-cash charge for stock
option expenses, also relating to these same employment and consulting
agreements.
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 provided that we had the monthly
option to repurchase the then 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 varied as per a specified redemption schedule. In the
event that we exercised our 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 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 provided 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. During fiscal year 2003 we
repaid the remaining outstanding balance to the note-holders.
On June 30, 2003 and September 30, 2002, Perfumania signed a $5.0
million and a $3.0 million subordinated note agreement, respectively, with
Parlux. The notes were in consideration for the reduction of $5.0 million and
$3.0 million in trade payables due to Parlux in the respective years. The notes
were due on February 29, 2004 and March 31, 2003, with various periodic
principal payments, bore interest at prime plus 1% and was subordinated to all
bank related indebtedness. As of January 31, 2004 and February 1, 2003, the
outstanding principal balance due on the notes was $250,000 and $100,000,
respectively. The notes were repaid in full in February 2004 and April 2003,
respectively,and in accordance with their terms.
In fiscal year 2003, net cash provided by operating activities was
approximately $10.2 million compared with $5.7 million in fiscal year 2002. The
increase in net cash provided by operating activities was principally a result
of the net change in our inventories, accounts payable to affiliates, accrued
expenses and other liabilities. Due to management's comprehensive review of
certain skus; which the Company does not plan to reorder and intends to
discontinue offering for sale, inventory purchases were delayed at fiscal
year-end 2003.
- 21 -
Net cash used in investing activities in fiscal year 2003 was
approximately $5.7 million, compared with $1.9 million for fiscal year 2002.
Investing activities generally represent spending for the renovation of existing
stores and new store openings. Approximately $1.1 million of the $5.7 million
used in investing activities is attributable to the relocation of the Company's
corporate office and distribution center to Sunrise, Florida in the second
quarter of fiscal year 2003. The balance is due to the opening of 11 new stores
and the remodel/relocation of 12 stores. We intend to focus on continuing to
improve the profitability of our existing stores and anticipate that we will
open no more than 15 stores in fiscal 2004. Currently, our average capital
expenditure for opening a store is approximately $160,000, 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 fourth quarter.
In fiscal year 2003, net cash used in financing activities was
approximately $5.5 million compared with $2.4 million for fiscal year 2002. The
change was principally due to the use of $1.5 million to redeem convertible
notes payable, $1.1 million for capital lease obligations, net repayments of
bank borrowings of $1.6 million and $1.5 million for the repurchase of our
common stock (see further discussion below).
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, in February 2002, the Board
approved an increase in the stock repurchase program by an additional 250,000
shares and in April 2002, the Board approved an increase in the stock repurchase
program by an additional 100,000 shares. Pursuant to these authorizations, we
have repurchased approximately 898,000 shares of common stock for approximately
$8.6 million since December 1999, including approximately 118,000 shares for
$1.5 million in fiscal year 2003.
Management believes that Perfumania's new borrowing capacity under
the credit facility, projected cash flows from operations and other short term
borrowings will be sufficient to support our working capital needs, capital
expenditures and debt service for at least the next twelve months. There can be
no assurance that management's plans and expectations will be successful.
Payments due by period
------------------------------------------------------------------
($ in thousands)
less than 1 more than 5
Contractual Obligations Total years 1-3 years 3-5 years years
-------------------------------------------- ------------ ------------- ------------ ------------- ------------
Long-Term Debt Obligations -- -- -- -- --
Capital Lease Obligations $17,567 $259 $3,087 $2,153 $12,068
Operating Lease Obligations 60,729 12,021 19,046 10,827 18,835
Purchase Obligations -- -- -- -- --
Other Long-Term Liabilities Reflected on the
Registrant's Balance Sheet under GAAP -- -- -- -- --
------------ ------------- ------------ ------------- ------------
Total $78,296 $12,280 $22,133 $12,980 $30,903
============ ============= ============ ============= ============
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 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 May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting for
Certain Financial Instruments and Characteristics of both Liabilities and
Equity." This statement established 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
December 15, 2003. The adoption of SFAS No. 150 did not have a material impact
on our consolidated financial position, results of operations or disclosures.
- 22 -
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 did not have a material impact on our
consolidated financial position, results of operations or disclosures.
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.
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 January 31, 2004 and February 1, 2003,
our primary source of funds for working capital and other needs is a line of
credit that provides for borrowings up to $40 million.
Of the $38.7 million and $42.1 million of short-term and long-term
borrowings on our balance sheet as of January 31, 2004 and February 1, 2003,
respectively, approximately 20.7% and 23.7%, 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 2003, the credit facility
bore interest at an average rate of 3.9%. A hypothetical 10% adverse move in
interest rates would increase fiscal years 2003 and 2002 interest expense by
approximately $0.1 million in both years.
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........................................................ 24
Consolidated Balance Sheets as of January 31, 2004 and February 1, 2003............. 25
Consolidated Statements of Operations for the Fiscal Years Ended January 31, 2004,
February 1, 2003 and February 2, 2002............................................... 26
Consolidated Statements of Changes in Shareholders' Equity for the Fiscal Years
Ended January 31, 2004, February 1, 2003, and February 2, 2002...................... 27
Consolidated Statements of Cash Flows for the Fiscal Years Ended January 31, 2004,
February 1, 2003, and February 2, 2002.............................................. 28
Notes to Consolidated Financial Statements.......................................... 29
Schedule II - Schedule has been omitted as all required information is disclosed or
not applicable.
- 23 -
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 January 31, 2004 and February 1,
2003, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended January 31, 2004. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements 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 January 31, 2004 and February 1, 2003, and the results of
their operations and their cash flows for each of the three years in the period
ended January 31, 2004, in conformity with accounting principles generally
accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
April 30, 2004, except for the fourth paragraph of Note 6,
as to which the date is May 12, 2004.
- 24 -
E COM VENTURES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS: JANUARY 31, 2004 FEBRUARY 1, 2003
--------------------------- ------------------------
Current assets:
Cash and cash equivalents $ 1,961,310 $ 2,964,645
Trade receivables, net 777,186 744,456
Advances to suppliers 114,041 1,814,935
Inventories 60,877,451 68,717,163
Prepaid expenses and other current assets 1,347,452 1,169,524
Notes and interest receivable from shareholder and
officer 327,311 --
Investments available for sale -- 210,607
--------------------------- ------------------------
Total current assets 65,404,751 75,621,330
Property and equipment, net 24,414,624 24,556,691
Goodwill 1,904,448 1,904,448
Other assets, net 739,575 1,340,155
--------------------------- ------------------------
Total assets $ 92,463,398 $ 103,422,624
=========================== ========================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Bank line of credit $ 30,472,027 $ 32,081,831
Current portion of long-term debt -- 31,860
Accounts payable, non-affiliates 16,459,786 20,905,826
Accounts payable, affiliates 17,440,492 13,331,718
Accrued expenses and other liabilities 9,614,287 5,168,634
Subordinated note payable, affiliate 250,000 100,000
Current portion of obligations under capital leases 258,700 981,784
Convertible notes payable -- 1,215,215
--------------------------- ------------------------
Total current liabilites 74,495,292 73,816,868
Long-term portion of obligations under capital leases 7,746,262 7,752,315
--------------------------- ------------------------
Total liabilities 82,241,554 81,569,183
--------------------------- ------------------------
Commitments and contingencies (See Note 11)
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; 3,285,758 and 3,215,761 shares issued
in fiscal years 2003 and 2002, respectively 32,858 32,158
Additional paid-in capital 73,666,193 71,387,794
Treasury stock, at cost, 898,249 and 779,952 shares
in fiscal years 2003 and 2002, respectively (8,576,944) (7,085,940)
Accumulated deficit (54,900,263) (42,028,563)
Notes and interest receivable from shareholder and
officer -- (311,604)
Accumulated other comprehensive loss -- (140,404)
--------------------------- ------------------------
Total shareholders' equity 10,221,844 21,853,441
--------------------------- ------------------------
Total liabilities and shareholders' equity $ 92,463,398 $ 103,422,624
=========================== ========================
See accompanying notes to consolidated financial statements.
- 25 -
E COM VENTURES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED
---------------------------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 2,
2004 2003 2002
---------------- ----------------- ----------------
Net sales $ 212,567,569 $ 201,513,897 $ 193,351,611
Cost of goods sold 129,190,549 116,919,385 113,116,861
---------------- ----------------- ----------------
Gross profit
83,377,020 84,594,512 80,234,750
---------------- ----------------- ----------------
Operating expenses:
Selling, general and administrative
expenses 82,297,031 76,177,549 72,972,938
Change of control expenses 4,931,221 -- --
Provision for receivables
from an affiliate -- 1,961,355 --
Provision for impairment of
assets and store closings 593,109 663,391 727,001
Depreciation and amortization 6,102,823 6,024,400 6,824,861
---------------- ----------------- ----------------
Total operating expenses
93,924,184 84,826,695 80,524,800
---------------- ----------------- ----------------
Loss from operations (10,547,164) (232,183) (290,050)
---------------- ----------------- ----------------
Other income (expense):
Interest expense:
Affiliates (109,217) (43,049) (102,269)
Other (2,070,034) (2,029,290) (3,293,929)
---------------- ----------------- ----------------
(2,179,251) (2,072,339) (3,396,198)
---------------- ----------------- ----------------
Interest income:
Affiliates 15,707 173,526 272,944
Other 10,687 16,176 28,065
---------------- ----------------- ----------------
26,394 189,702 301,009
---------------- ----------------- ----------------
Realized loss on investments (171,679) (710,880) --
Miscellaneous expense, net -- -- (17,716)
---------------- ----------------- ----------------
Total other expense (171,679) (710,880) (17,716)
---------------- ----------------- ----------------
Loss before income taxes (12,871,700) (2,825,700) (3,402,955)
Benefit for income taxes -- -- 211,298
---------------- ----------------- ----------------
Net loss $ (12,871,700) $ (2,825,700) $ (3,191,657)
================ ================= ================
Basic loss per common share $ (5.24) $ (1.12) $ (1.32)
================ ================= ================
Diluted loss per common share $ (5.24) $ (1.12) $ (1.32)
================ ================= ================
Weighted average number of shares outstanding:
Basic 2,454,340 2,528,326 2,420,467
================ ================= ================
Diluted 2,454,340 2,528,326 2,420,467
================ ================= ================
See accompanying notes to consolidated financial statements.
- 26 -
E COM VENTURES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED JANUARY 31, 2004, FEBRUARY 1, 2003 AND
FEBRUARY 2, 2002
ACCUMULATED
COMMON STOCK ADDITIONAL TREASURY STOCK OTHER
--------------------- PAID-IN ----------------------- COMPREHENSIVE ACCUMULATED
SHARES AMOUNT CAPITAL SHARES AMOUNT INCOME (LOSS) DEFICIT
---------- ------- ------------ -------- ----------- -------------- -------------
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)
Components of
comprehensive loss:
Net loss -- -- -- -- -- -- (12,871,700)
Unrealized gain
on investments -- -- -- -- -- 140,404 --
Total comprehensive
loss -- -- -- -- -- -- --
Exercise of stock options 69,997 700 235,805 -- -- -- --
Purchase of treasury
stock -- -- -- 118,297 (1,491,004) -- --
Stock compensation -- -- 2,285,640 -- -- -- --
Net change in notes and
interest receivable
from shareholder and
officer -- -- -- -- -- -- --
Premium repayment of
convertible notes
payable -- -- (243,046) -- -- -- --
---------- ------- ------------ -------- ------------ ----------- -------------
Balance at January 31,
2004 3,285,758 $32,858 $ 73,666,193 898,249 $(8,576,944) -- (54,900,263)
========== ======= ============ ======== ============ =========== =============
NOTES AND
INTEREST
RECEIVABLE
FROM
SHAREHOLDERS
AND OFFICERS TOTAL
----------------- -------------
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
Components of
comprehensive loss:
Net loss -- (12,871,700)
Unrealized gain
on investments -- 140,404
-------------
Total comprehensive
loss -- (12,731,296)
-------------
Exercise of stock options -- 236,505
Purchase of treasury
stock -- (1,491,004)
Stock compensation -- 2,285,640
Net change in notes and
interest receivable
from shareholder and
officer 311,604 311,604
Premium repayment of
convertible notes
payable -- (243,046)
----------------- -------------
Balance at January 31,
2004 $ -- $ 10,221,844
================= =============
- 27 -
E COM VENTURES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED
------------------------------------------------------------
January 31, 2004 February 1, 2003 February 2, 2002
------------------ ----------------- -----------------
Cash flows from operating activities:
Net loss $ (12,871,700) $ (2,825,700) $ (3,191,657)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Provision for doubtful accounts -- -- 55,000
Provision for receivables from affiliate -- 1,961,355 --
Provision for impairment of assets and store closings 593,109 663,391 727,001
Write off of inventories 897,874 1,189,734 1,693,169
Depreciation and amortization 6,102,823 6,024,400 6,824,861
Writeoff of discontinued inventory 2,558,805 -- --
Realized loss on investments 171,679 710,880 --
Stock compensation 2,285,640 -- --
Change in operating assets and liabilities:
Trade receivables (32,730) (109,215) 1,216,166
Advances to suppliers 1,700,894 1,611,590 2,510,581
Inventories 4,383,033 (1,519,327) (7,579,027)
Prepaid expenses and other current assets (193,635) 166,763 1,515,592
Due from affiliate -- (1,150,186) (659,623)
Other assets 368,363 216,091 278,757
Accounts payable, non-affiliate (4,446,040) (4,593,171) 8,471,392
Accounts payable, affiliate 4,258,774 4,138,159 538,808
Accrued expenses and other liabilities 4,445,653 (788,111) (933,988)
Income taxes payable -- -- (72,707)
------------------ ----------------- -----------------
Net cash provided by operating activities 10,222,542 5,696,653 11,394,325
------------------ ----------------- -----------------
Cash flows from investing activities:
Additions to property and equipment (5,907,018) (1,893,664) (1,614,636)
Proceeds from investments available for sale 179,332 10,515 --
------------------ ----------------- -----------------
Net cash used in investing activities (5,727,686) (1,883,149) (1,614,636)
------------------ ----------------- -----------------
Cash flows from financing activities:
Net borrowings and (repayments) under bank line
of credit and notes payable (1,641,664) 892,950 (3,954,816)
Principal payments under capital lease obligations (1,143,767) (1,771,037) (1,479,795)
Net advances to shareholders and officers -- (400,000) (171,000)
Proceeds from note and interest receivable, shareholder and
officer -- 2,970,020 692,702
Repayments of convertible notes payable (1,458,261) (4,207,824) (4,100,000)
Proceeds from exercise of stock options 236,505 113,547 9,500
Purchases of treasury stock (1,491,004) (47,302) (1,395,261)
------------------ ----------------- -----------------
Net cash used in financing activities (5,498,191) (2,449,646) (10,398,670)
------------------ ----------------- -----------------
(Decrease) increase in cash and cash equivalents (1,003,335) 1,363,858 (618,981)
Cash and cash equivalents at beginning of period 2,964,645 1,600,787 2,219,768
------------------ ----------------- -----------------
Cash and cash equivalents at end of period $ 1,961,310 $ 2,964,645 $ 1,600,787
================== ================= =================
See accompanying notes to consolidated financial statements.
- 28 -
E COM VENTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED JANUARY 31, 2004, FEBRUARY 1, 2003
AND FEBRUARY 2, 2002
NOTE 1 - NATURE OF BUSINESS
E Com Ventures, Inc., a Florida corporation ("ECOMV" or the
"Company"), performs all of its operations through 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 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 January 31, 2004, February 1, 2003, and February 2, 2002
were 232, 238 and 247, respectively.
Effective January 30, 2004, Ilia Lekach, the Company's then Chairman
of the Board and Chief Executive Officer, IZJD Corp. and Pacific Investment
Group Inc., each of which are wholly-owned by Mr. Lekach and Deborah Lekach, Mr.
Lekach's wife (collectively, "Lekach"), entered into the Nussdorf Option
Agreement, with Stephen Nussdorf and Glenn Nussdorf (the "Nussdorfs"), pursuant
to which the Nussdorfs were granted options to acquire up to an aggregate
720,954 shares of the Company's common stock beneficially owned by Lekach, for a
purchase price of $12.70 per share exercisable in specified installments.
As of April 30, 2004, Mr. Lekach has exercised stock options to
acquire 318,750 common shares resulting in proceeds to the Company of
approximately $851,000 and the Nussdorfs have acquired 595,954 shares from Mr.
Lekach pursuant to the Nussdorf Option Agreement. Mr. Lekach has stock options
for another 125,000 shares required to be issued to Mr. Lekach by the Company
pursuant to the terms of his employment agreement as a consequence of the change
of control. These 125,000 options may only be issued by the Company to Mr.
Lekach upon approval of an amendment to the Company's 2000 Stock Option Plan.
Such an amendment was approved at a special meeting of the Company's
shareholders on April 29, 2004. Proceeds to the Company will be $500,000 if Mr.
Lekach exercises all of the 125,000 options. Assuming the Nussdorfs exercise
their option to acquire the remaining 125,000 shares subject to the Nussdorf
Option Agreement, the Nussdorfs would own an aggregate 1,128,144 shares of the
Company's common stock or approximately 39.7% of the total number of shares of
the Company's common stock as of April 30, 2004.
Effective February 10, 2004, Mr. Lekach's employment with the Company
was terminated and Mr. Lekach ceased serving as an employee and officer of the
Company. In addition, on February 10, 2004, Mr. Lekach resigned from the Board
of Directors and Stephen L. Nussdorf was appointed the Companys' Chairman of the
Board and Michael W. Katz was appointed the Company's Chief Executive Officer
and President.
See further discussion at Note 5.
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 2003, 2002 and 2001
refer to the years ended January 31, 2004, February 1, 2003 and February 2,
2002, respectively.
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.
- 29 -
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include accounts of E Com
Ventures, Inc. and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Revenue from wholesale transactions is recorded upon shipment of
inventory when risk of ownership and title transfers to the buyer. Revenue from
store sales is recorded net of discounts when the customer pays at the register.
Revenue from Internet sales is recognized at the time products are shipped to
customers. Customers typically receive Internet product sales within a few days
of being shipped. Returns of store and Internet sales are allowed within 30 days
of purchase and are limited to exchanges. Because returns are primarily
exchanged, there is no significant effect on revenue.
CASH AND CASH EQUIVALENTS
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. Writeoffs of potentially
slow moving or damaged inventory are recorded based on management's analysis of
inventory levels, future sales forecasts and through specific identification of
obsolete or damaged merchandise. The Company's writeoffs were approximately $3.5
million and $1.2 million for the years ended January 31, 2004 and February 1,
2003, respectively.
Of the Company's approximately 25,000 stock keeping units ("skus"),
management has identified 3,400 skus which the Company intends to discontinue
offering for sale in Perfumania's retail stores. The Company does not plan to
reorder any of these skus and intends to sell through its existing on hand
inventory of these skus during fiscal year 2004. The total cost of this
inventory as of January 31, 2004 was approximately $9.4 million. The Company has
recorded an income statement charge of approximately $2.6 million, which
represents the difference between the estimated selling value and the weighted
average cost of this inventory. This charge is included in cost of goods sold on
the accompanying consolidated statement of operations for the year ending
January 31, 2004.
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
Goodwill represents the excess purchase price paid over net assets of
businesses acquired resulting from the application of the purchase method of
accounting. In accordance with accounting rules that became effective at the
beginning of fiscal year 2002, goodwill is no longer amortized, but is tested
annually for impairment at the end of the Company's fiscal year. For each year
through fiscal year 2001, goodwill was amortized on a straight-line basis over
five years.
OTHER INTANGIBLE ASSETS
Intangible assets include store design, real estate leases and
non-compete agreements based upon their relative fair values at the date of
acquisition as determined by management with the assistance of an independent
valuation consultant. Intangible assets do not include goodwill. The
- 30 -
amortization of intangible assets amounted to approximately $0.2 million in
fiscal years 2003, 2002 and 2001. Amortization of intangible assets in the
amount of $0.2 million per year is anticipated for each of the next two years,
which is the remaining life of these assets.
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. For all
periods presented in the accompanying consolidated statements of operations,
incremental shares attributed to common stock equivalents and convertible notes
were not included because the results would be anti-dilutive.
Basic and diluted loss per share are computed as follows:
FISCAL YEAR
---------------------------------------------------
2003 2002 2001
--------------- --------------- ---------------
Numerator:
Net loss: $ (12,871,700) $ (2,825,700) $ (3,191,657)
============== ============== ==============
Denominator:
Denominator for basic loss per share 2,454,340 2,528,326 2,420,467
Effect of dilutive securities:
Options to purchase common
stock and convertible notes -- -- ---
--------------- --------------- ---------------
Denominator for dilutive loss per share 2,454,340 2,528,326 2,420,467
============== ============== ==============
Antidilutive securities not included
in the diluted loss per share computation:
Options to purchase common stock 696,436 666,501 606,594
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.
- 31 -
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
"Accounting for Stock-Based Compensation," ("SFAS 123") as amended, had been
applied in measuring compensation expense for options granted to employees and
directors in fiscal years 2003, 2002 and 2001. 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. 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
2003, 2002 and 2001:
FISCAL YEAR
----------------------- --- ---------------------- --- -----------------------
2003 2002 2001
----------------------- ----------------------- ------------------------
Net loss as reported $ (12,871,700) $ (2,825,700) $ (3,191,657)
Add: Total fair value of stock based
employee compensation expense not included
in reported net loss, net (1,425,284) (478,449) (396,704)
----------------------- ----------------------- ------------------------
Proforma net loss $ (14,296,984) $ (3,304,149) $ (3,588,361)
======================= ====================== =======================
Proforma net loss per share:
Basic $ (5.83) $ (1.31) $ (1.47)
======================= ====================== =======================
Diluted $ (5.83) $ (1.31) $ (1.47)
======================= ====================== =======================
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.
- 32 -
ADVERTISING COSTS
Advertising expense for the fiscal years 2003, 2002 and 2001 was
approximately $1,876,000, $1,286,000 and $1,105,000, respectively, and charged
to expense when incurred. Cooperative advertising amounts received from vendors
for fiscal years 2003, 2002 and 2001 were $200,000, $200,000 and $60,000,
respectively, and recorded as an offset to advertising expense.
RECLASSIFICATION
Certain fiscal year 2002 and 2001 amounts have been reclassified to
conform with the fiscal 2003 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
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 established 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
December 15, 2003. The adoption of SFAS No. 150 did not have a material impact
on our consolidated financial position, results of operations or disclosures.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
No. 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 did not have a material impact on
our consolidated financial position, results of operations or disclosures.
NOTE 3 - STATEMENTS OF CASH FLOWS
Supplemental disclosures of non-cash investing and financing activities:
FISCAL YEAR ENDED
--------------------------------------------------------------------
NON-CASH TRANSACTIONS January 31, 2004 February 1, 2003 February 2, 2002
------------------------------------------ ---------------------- ---------------------- ----------------------
Equipment and building under capital leases $ 414,630 $ 7,764,203 $ 68,201
Unrealized gain (loss) on investments 140,404 (381,738) 391,429
Subordinated debt issued to affiliate 5,000,000 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
Cash paid during the period for:
Interest $ 2,034,666 $ 2,196,062 $ 3,466,420
Income taxes -- -- 150,000
- 33 -
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of:
FISCAL YEAR ENDED
----------------------------------------- Estimated Useful Lives
January 31, 2004 February 1, 2003 (In Years)
------------------- ------------------- -------------------------
Furniture, fixtures and equipment $ 21,221,687 $ 21,017,998 5-7
Leasehold improvements 25,369,583 21,758,680 10
shorter of 5 years or
Equipment under capital leases 6,774,897 6,774,897 lease term
Building under capital lease 7,725,420 7,310,790 15
------------------ ------------------
61,091,587 56,862,365
Less:
Accumulated depreciation and
amortization (36,676,963) (32,305,674)
------------------ ------------------
$ 24,414,624 $ 24,556,691
================== ==================
See Note 11 for further discussion of capital leases.
Depreciation and amortization expense for fiscal years 2003, 2002,
and 2001 was $6,102,823, $6,024,400 and $6,019,720, respectively. Accumulated
depreciation for building and equipment under capital leases was $5,428,802 and
$4,208,728 as of January 31, 2004 and February 1, 2003, respectively.
NOTE 5 - RELATED PARTY TRANSACTIONS
Notes receivable from Ilia Lekach, the Company's former Chairman of
the Board of Directors and Chief Executive Officer, were $327,311 and $311,604
as of January 31, 2004 and February 1, 2003, respectively. The notes were
unsecured, mature in five years and bear interest at prime plus 1% per annum.
Principal and interest were payable in full at maturity. Total interest income
recognized during fiscal years 2003, 2002, and 2001 was approximately $16,000,
$174,000 and $264,000, respectively. Accrued interest receivable was
approximately $27,000 and $12,000 as of January 31, 2004 and February 1, 2003.
The loan and all accrued interest was fully repaid in March 2004.
Ilia Lekach was also Chairman and interim CEO of Nimbus Group, Inc.
("Nimbus"), formerly known as TakeToAuction.com ("TTA"), a public company
previously committed to the development of a private jet air taxi network. TTA
initially sold consumer products on Internet auction sites.
From fiscal year 2000 through fiscal year 2002, the Company acquired
approximately 1,003,000 shares of Nimbus common stock. The investment in Nimbus
was shown on our balance sheets as investments available for sale. During fiscal
year 2003 we disposed of our holding in Nimbus in open market transactions at a
loss of approximately $172,000.
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 $27,701,000, $11,613,000 and $19,598,000 in fiscal
years 2003, 2002 and 2001, representing approximately 23%, 10% and 17%,
respectively, of the Company's total purchases. The amount due to Parlux on
January 31, 2004 and February 1, 2003 was approximately $14,506,000 and
$10,739,000, respectively, of which both amounts include a $250,000 and a
$100,000 subordinated interest bearing secured note payable as of January 31,
2004 and February 1, 2003, respectively. Accounts payable due to Parlux are
non-interest bearing. The amount due to Parlux, exclusive of the secured note
payable, are included in the accounts payable affiliates in the accompanying
consolidated balance sheets.
On June 30, 2003 and September 30, 2002, Perfumania signed a
$5,000,000 and a $3,000,000 subordinated note agreements with Parlux. The notes
were in consideration for the reduction of $5,000,000 and $3,000,000 in trade
payables due to Parlux in the respective years. The notes were due on February
29, 2004 and March 31, 2003, respectively, with various periodic principal
payments, bore interest at prime plus 1% and were subordinated to all bank
related indebtedness. As of January 31, 2004 and February 1, 2003 the
outstanding principal balance due on the notes was $250,000 and $100,000,
respectively. The notes were repaid in full in February 2004 and April 2003,
respectively, and in accordance with their terms.
- 34 -
The Company purchased approximately $6,368,000 and $10,562,000 of
merchandise in fiscal years 2003 and 2002, 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 January 31, 2004 and February 1,
2003 was approximately $1,617,000 and $1,383,000, respectively, and are included
in accounts payable affiliates in the accompanying consolidated balance sheets.
The Company purchased approximately $4,305,000 and $6,021,000 of
merchandise in fiscal years 2003 and 2002, respectively, from a company owned by
another brother of Ilia Lekach. The amount due to this company was approximately
$771,000 and $1,310,000, respectively, at January 31, 2004 and February 1, 2003,
and are included in accounts payable affiliates in the accompanying consolidated
balance sheets.
As discussed in Note 1, effective January 30, 2004, Ilia Lekach, the
Company's then Chairman of the Board and Chief Executive Officer and several
other parties controlled by Lekach (collectively, "Lekach"), entered into the
Nussdorf Option Agreement, with Stephen Nussdorf and Glenn Nussdorf (the
"Nussdorfs"), pursuant to which the Nussdorfs were granted options to acquire up
to an aggregate 720,954 shares of the Company's common stock beneficially owned
by Lekach, for a purchase price of $12.70 per share in specified installments.
In addition, pursuant to and in accordance with the terms of the
Nussdorf Option Agreement, the Nussdorfs have been granted an irrevocable proxy
for the term set forth in the Agreement to vote any shares owned by Lekach that
are the subject of the Nussdorf Option Agreement.
As of April 30, 2004, Mr. Lekach has exercised options to acquire
318,750 of those shares and the Nussdorfs have acquired 595,954 shares pursuant
to the Nussdorf Option Agreement. Assuming the Nussdorfs exercise their option
to acquire the remaining 125,000 shares subject to the Nussdorf Option
Agreement, the Nussdorfs would own an aggregate of 1,128,144 shares of the
Company's common stock or approximately 39.7% of the total number of shares of
the Company's common stock outstanding.
As a consequence of the change in control provisions set forth in the
employment agreements of Mr. Lekach, various executive officers and a
consultant, the Company issued a total of 244,252 options for the Company's
common stock in January 2004. Since the various exercise prices of the options
were less than the market price of the Company's common stock on the grant date,
the Company incurred a non-cash charge of approximately $2,286,000. In addition,
pursuant to the same employment and consulting agreements, the Company accrued
approximately $2,645,000 in January 2004, representing amounts subsequently paid
to said persons as a result of the change of control. These charges totaling
approximately $4,931,000 are included in "Change of control expenses" on the
accompanying consolidated statement of operations for the year ended January 31,
2004.
The Nussdorfs are officers and principals of Quality King
Distributors, Inc. ("Quality King"). During fiscal year 2003, the Company
purchased approximately $5,960,000 of merchandise from Quality King and sold
approximately $11,366,000 of different merchandise to Quality King. In fiscal
year 2002, there were approximately $944,000 of purchases from Quality King and
approximately $1,000,000 of merchandise sold to Quality King. The amounts due to
Quality King at January 31, 2004 and February 1, 2003 were approximately
$797,000 and $15,000 respectively.
- 35 -
NOTE 6 - BANK LINE OF CREDIT AND NOTES PAYABLE
The bank line of credit and notes payable consist of the following:
January 31, 2004 February 1, 2003
-------------------- --------------------
Bank line of credit, which is classified as a current liability, interest
payable monthly, secured by a pledge of substantially all
of Perfumania's assets (see below) $ 30,472,027 $ 32,081,831
=================== ===================
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
Less: current portion -- (31,860)
------------------- -------------------
Long-term portion $ -- $ --
=================== ===================
Perfumania's senior secured credit facility with GMAC Commercial
Finance LLC ("GMAC") provides for borrowings of up to $40 million, of which
$30.5 million was outstanding and $5.6 million was available as of January 31,
2004, 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 January 31, 2004, the credit facility bore interest at 4.6%.
Borrowings are secured by a first lien on all assets of Perfumania. 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 January 31, 2004,
Perfumania was not in compliance with its tangible net worth ratio, fixed charge
ratio, leverage ratio and capital expenditures limitation. On April 29, 2004,
Perfumania obtained a waiver from GMAC for all instances of non-compliance as of
January 31, 2004.
As shown in these financial statements, we have incurred a net loss
of $12.9 million for the period ended January 31, 2004. In addition, as of
January 31, 2004, we had a working capital deficiency of $9.1 million and an
accumulated deficit of $54.9 million. As of January 31, 2004, we had cash
balances totaling approximately $2.0 million and an additional borrowing
capacity of $5.6 million under our bank line of credit which is scheduled to
expire in May 2005. 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 and expectations will be successful. If we are unable to
generate sufficient cash flows from operations in the future to service our
obligations, finance our existing debt and achieve improved operating results,
we could face liquidity and working capital constraints, which could adversely
impact future operations and growth and, thereby, may raise a question as to our
ability to remain a going concern.
On May 12, 2004, Perfumania entered into a new three-year amended and
restated senior secured revolving credit facility with GMAC Commercial Finance
LLC and Congress Financial Corporation that provides for borrowings of up to $60
million. Advances under the new line of credit are based on a formula of
eligible inventories and will bear interest depending on the Company's financial
ratios from (1) prime to prime plus 1.25% or (b) LIBOR plus 2.50% to 3.75%.
Borrowings are secured by a lien on all assets of Perfumania. The credit
facility contains limitations on additional borrowings, capital expenditures and
other items, and contains various covenants including a fixed charge coverage
ratio and minimum EBITDA amounts as defined. Advances will be secured by a first
lien an all assets of Perfumania.
During fiscal year 2003, the Company paid approximately $1,458,000 to
the holders of its Series C and D Convertible Notes, in accordance with an
amended Convertible Note Option Repurchase Agreement. This represented the
remaining balance of approximately $1,215,000 of principal and $243,000 of
premiums.
In March 2004, the Nussdorfs made a $5,000,000 subordinated secured
demand loan to Perfumania. The demand loan bears interest at the prime rate plus
1%, requires quarterly interest payments and is secured by a security interest
in Perfumania's assets pursuant to a Security Agreement, by and among Perfumania
and the Nussdorfs. There are no prepayment penalties and the loan is subordinate
to all bank related indebtedness.
- 36 -
NOTE 7 - 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 $0.6 million, $0.7 million and $0.7
million during fiscal years 2003, 2002 and 2001, 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 in provision for impairment of assets and store closings in
the accompanying consolidated statements of operations.
NOTE 8 - INCOME TAXES
The benefit for income taxes is comprised of the following amounts:
FISCAL YEAR ENDED
----------------------------------------------------------
January 31, 2004 February 1, 2003 February 2, 2002
------------------- ------------------- ------------------
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, which provided a longer carryback period for the use of net
operating losses.
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
----------------------------------------------------------
January 31, 2004 February 1, 2003 February 2, 2002
------------------ ------------------- -------------------
Benefit at federal statutory rates $ 4,376,378 $ 960,738 $ 1,157,005
Non-deductible expenses (1,504,335) (283,319) (937,956)
Change in the valuation allowance (3,224,513) (584,247) (372,561)
Other 352,470 (93,172) 364,810
----------------- ------------------ ------------------
Benefit for income taxes $ -- $ -- $ 211,298
================= ================== ==================
- 37 -
Net deferred tax assets reflect the tax effect of the following
differences between financial statement carrying amounts and tax basis of assets
and liabilities:
FISCAL YEAR ENDED
-------------------------------------
January 31, February 1,
2004 2003
----------------- -----------------
Assets:
Net operating loss & tax credit
carryforwards $ 5,962,433 $ 5,518,987
Capital loss carryforward 1,455,119 --
Inventories 1,708,735 820,368
Property and equipment 3,291,432 2,343,692
Allowance for doubtful accounts & other -- 110,295
Reserves 167,436 83,566
Goodwill 306,002 322,933
Unrealized loss on securities -- 1,508,416
Deferred compensation 715,983 --
Other 372,532 46,902
---------------- ----------------
Total deferred tax assets 13,979,672 10,755,159
Valuation allowance (13,979,672) (10,755,159)
---------------- ----------------
Net deferred tax assets $ -- $ --
================ ================
A valuation allowance is provided for deferred tax assets in
accordance with SFAS No. 109, Accounting for Income Taxes as management believes
it is more likely than not that the benefit of the deferred tax asset will not
be realized. 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 January 31, 2004, the Company
has net operating loss carryforwards of approximately $15.6 million, which begin
to expire in the year 2019.
NOTE 9 - 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 for periods ended prior to that date
have been retroactively adjusted to reflect this change.
INVESTMENTS AVAILABLE FOR SALE
The Company's former Chairman of the Board and Chief Executive
Officer, Ilia Lekach, was also Chairman and interim CEO of Nimbus Group, Inc.
("Nimbus"), a public company previously committed to the development of a
private jet air taxi network.
From fiscal year 2000 through fiscal year 2003 the Company acquired
approximately 1,003,000 shares of Nimbus common stock. The investment in Nimbus
was shown on the Company's balance sheet as investments available for sale of
approximately $211,000 representing the market value of $0.21 per share as of
February 1, 2003. The Company subsequently disposed of its holding in Nimbus in
open market transactions at a loss of approximately $172,000.
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
$700,000 in realized loss on investments on the consolidated statements of
operations for 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 are 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
- 38 -
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 January 31, 2004, 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 and in April 2002, the Board approved an additional
increase in the stock repurchase program of 100,000 shares. Pursuant to these
authorizations, the Company has repurchased approximately 898,000 shares of
common stock for approximately $8.6 million as of January 31, 2004, including
approximately 118,000 shares for $1.5 million in fiscal year 2003.
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, were initially 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.
Due to the transaction described in Note 1, a change in control
occurred which resulted in the issuance of 244,252 options which are immediately
exercisable. The Company incurred a charge of approximately $2,286,000 in
non-cash compensation expense as a result of the issuance of these options which
represent the difference between the market price and exercise price on the
issuance date of these options.
In calculating the proforma net loss per share for 2003, 2002 and
2001, as shown in Note 2, 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 2003,
2002 and 2001:
2003 2002 2001
----------------- ---------------- -----------------
Expected life (years) 7 years 7 years 7 years
Interest rate 3.68% 4.88% 4.80%
Volatility 165% 148% 158%
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.
- 39 -
A summary of the Company's option activity, and related information
for each of the three fiscal years ended January 31, 2004 is as follows:
2003 2002 2001
--------------------------- ------------------------------- ------------------------------
Weighted Weighted Weighted
Average Average Average
Exercisable Exercisable Exercisable
Shares Price Shares Price Shares Price
------------ ------------- --------------- ------------- --------------- ------------
Outstanding at beginning of year 666,501 $ 5.32 606,594 $ 5.60 570,115 $ 6.44
Granted 254,252 4.79 160,000 3.67 78,625 3.40
Exercised (69,996) 3.38 (59,807) 1.90 (4,750) 2.00
Cancelled (41,519) 11.93 (40,286) 8.19 (37,396) 14.12
------------ -------------- --------------
Outstanding at end of year 809,238 $ 4.99 666,501 $ 5.32 606,594 $ 5.60
============ ============== ==============
Options exercisable at end of year 696,436 $ 5.10 449,714 $ 5.80 480,304 $ 5.24
Weighted-average fair value of
options granted during the year 254,252 $ 4.79 160,000 $ 3.31 78,625 $ 3.31
The following table summarizes information about stock options
outstanding at January 31, 2004:
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 - $2.27 258,570 $ 1.92 5.80 258,570 $ 1.92
$2.48 - $3.88 121,096 3.50 8.43 96,627 3.50
$4.00 - $4.00 250,000 4.00 9.00 166,667 4.00
$4.14 - $21.52 179,572 11.78 7.00 174,572 11.74
---------------- ---------------
809,238 $ 4.99 7.40 696,436 $ 5.10
================ ===============
NOTE 10- 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 $12,000, 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 2003, 2002 and 2001 were not significant.
NOTE 11 - 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
January 31, 2004 and February 1, 2003 was approximately $441,000 and $220,000,
respectively, which is included in accrued expenses and other liabilities in the
accompanying consolidated balance sheets.
The Company leases space for its retail stores. The lease terms vary
from month to month leases to ten year leases, 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.
- 40 -
Rent expense for fiscal years 2003, 2002, and 2001 was approximately
$15,559,000, $15,879,000, and $15,482,000, respectively. Future minimum lease
commitments under non-cancelable operating leases at January 31, 2004 are as
follows:
FISCAL YEAR
------------------------------------
2004 $ 12,021,020
2005 10,429,042
2006 8,616,614
2007 6,691,418
2008 4,136,147
Thereafter 18,834,881
-------------------
Total future minimum lease payments $ 60,729,122
===================
The Company's capitalized leases consist of a corporate office and
distribution facility in Sunrise, Florida, as well as computer hardware and
software. The lease for the corporate office and distribution facility is for
approximately 15 years with monthly rent ranging from approximately $73,000 to
$104,000. 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 January 31, 2004:
FISCAL YEAR
--------------------------------------
2004 $ 1,156,069
2005 1,105,637
2006 1,083,906
2007 1,072,752
2008 1,080,201
Thereafter 12,068,416
-------------------
Total future minimum lease payments 17,566,981
Less: Amount representing interest (9,562,019)
-------------------
Present value of minimum lease
payments 8,004,962
Less: Current portion (258,700)
-------------------
$ 7,746,262
===================
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 an irrevocable standby letter of credit
totaling approximately $0.1 million as of January 31, 2004 which serves as
security for performance of an equipment lease. The letter of credit requirement
expires October 2004. 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 12 - SEGMENT INFORMATION
The Company operates in two industry segments, specialty retail sales
and wholesale distribution of fragrances and related products. Financial
information for these segments is summarized in the following table.
- 41 -
FISCAL YEARS
---------------------------------------------------------------
2003 2002 2001
----------------- -------------------- --------------------
Net sales to external custormers:
Retail $ 198,478,506 $ 199,369,331 $ 184,141,191
Wholesale 14,089,063 2,144,566 9,210,420
----------------- -------------------- --------------------
$ 212,567,569 $ 201,513,897 $ 193,351,611
================ =================== ===================
Gross profit:
Retail $ 81,923,375 $ 84,159,461 $ 78,467,943
Wholesale 1,453,645 435,051 1,766,807
----------------- -------------------- --------------------
$ 83,377,020 $ 84,594,512 $ 80,234,750
================ =================== ===================
NOTE 13- QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited summarized financial results for fiscal years 2003 and 2002
follows (in thousands, except for per share data):
2003 QUARTER FIRST SECOND THIRD FOURTH
------------ ------------ ------------ ------------
Net sales $ 36,888 $ 50,748 $ 48,058 $ 76,874
Gross profit 16,815 20,573 17,980 30,442
Net loss (2,930) (924) (3,725) (5,293)
Net loss per basic share (1.19) (0.37) (1.51) (2.16)
Net loss per diluted share (1.19) (0.37) (1.51) (2.16)
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 dilutedshare (0.80) (0.28) (1.92) 1.81
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 holiday season. Included in the
fourth quarter results for the year ended January 31, 2004 is approximately $4.9
million attributable to change of control expenses and $2.6 million attributable
to a writedown of inventory which the Company intends to discontinue offering
for sale in its stores.
- 42 -
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation as of January 31, 2004, 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 changes in our internal
control over financial reporting during the quarter ended January 31, 2004 that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
- 43 -
PART II.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except as disclosed below, the information called for by this item is
incorporated by reference from E Com Ventures, Inc. Annual Meeting of
Shareholders - Notice and Proxy Statement - 2004 (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.
The Company has adopted a Code of Business Conduct and Ethics that
applies to all of the Company's officers, directors and employees. The Code of
Business Conduct and Ethics is filed as an exhibit to this 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 - 2004 (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 - 2004 (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 - 2004 (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. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information is incorporated by reference from E Com Ventures,
Inc. Annual Meeting of Shareholders - Notice and Proxy Statement - 2004 (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.
PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND EPORTS 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 January
31, 2004, February 1, 2003 and February 2, 2002 appears on page 23.
- 44 -
All other financial statement schedules are omitted because they are
not applicable, or the required information is otherwise shown in the financial
statements or notes thereto.
(2) Exhibits
PAGE NUMBER
OR INCORPORATED
BY REFERENCE
EXHIBIT DESCRIPTION FROM
------- ----------- ----
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Bylaws (2)
10.5 1991 Stock Option Plan, as amended (3)
10.6 1992 Directors Stock Option Plan, as amended (3)
10.7 Series A Securities Purchase Agreement (4)
10.8 Series B Securities Purchase Agreement (5)
10.9 Series C Securities Purchase Agreement (6)
10.10 Series D Securities Purchase Agreement (6)
10.11 2000 Stock Option Plan (7)
10.12 2000 Directors Stock Option Plan (7)
10.13 Amended and Restated Revolving Credit and Security Agreement with GMAC (9)
Commercial Credit LLC, and Congress Financial Corporation (Florida),
date May 12, 2004
10.14 Nussdorf Subordinated Secured Demand Note (9)
10.15 Lease agreement with Victory Investment Group, LLC, dated October 21, (8)
2002
10.16 Waiver and Amendment to the Revolving Credit and Security Agreement
with GMAC Commercial Credit LLC, dated April 29, 2004 (9)
10.17 Amendment to the 2000 Stock Option Plan (10)
14.1 Code of Business Conduct and Ethics (9)
21.1 Subsidiaries of the Registrant (9)
23.1 Consent of Deloitte & Touche LLP (9)
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of (9)
the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of (9)
the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer pursuant to Section 906 of (9)
the Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer pursuant to Section 906 of (9)
the Sarbanes-Oxley Act of 2002
- 45 -
---------------------
(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 1995 Form 10-K (filed April 26, 1996).
(4) 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).
(5) 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).
(6) 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).
(7) Incorporated by reference to the exhibit of the same description
filed with the Company's Proxy Statement (filed October 6, 2000).
(8) Incorporated by reference to the exhibit of the same description
filed with the Company's 2002 Form 10-K (filed April 30, 2003).
(9) Filed Herewith.
(10) Incorporated by reference to Appendix A to the Company's Proxy Stated
(filed April 16, 2004).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fiscal year
ended January 31, 2004 except those disclosed in our 2003
Quarterly Reports in Form 10-Q,
- 46 -
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, May 12, 2004.
E Com Ventures, Inc.
By: /s/ MICHAEL W. KATZ
-----------------------
Michael W. Katz,
Chief Executive Officer and President
(Principal Executive Officer)
By: /s/ A. MARK YOUNG
---------------------
A. Mark Young,
Chief Financial Officer
(Principal Accounting Officer)
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/ MICHAEL W. KATZ Chief Executive Officer and May 12, 2004
------------------------------ President
Michael W. Katz (Principal Executive Officer)
/s/ STEPHEN NUSSDORF Chairman of the Board of Directors May 12, 2004
------------------------------
Stephen Nussdorf
/s/ JEFFREY GELLER President and Chief Operating May 12, 2004
------------------------------ Officer of Perfumania, Inc.
Jeffrey Geller
/s/ A. MARK YOUNG Chief Financial Officer, May 12, 2004
------------------------------ (Principal Accounting Officer)
A. Mark Young
/s/ DONOVAN CHIN Chief Financial Officer May 12, 2004
------------------------------ Perfumania, Inc.,
Donovan Chin
/s/ CAROLE ANN TAYLOR Director May 12, 2004
------------------------------
Carole Ann Taylor
/s/ JOSEPH BOUHADANA Director May 12, 2004
------------------------------
Joseph Bouhadana
/s/ PAUL GARFINKLE Director May 12, 2004
------------------------------
Paul Garfinkle
- 47 -