UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A, AMENDMENT NO. 2
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
-------------------- -------------------
COMMISSION FILE NUMBER: 0-10714
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
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
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
EXPLANATORY NOTE
This amendment number 2 to our Form 10-K is being filed to revise the
description of our acquisition of perfumania.com contained in Items 6 and 7 of
Part II of the Form 10-K and to incorporate information required by Items 10,
11, 12, 13 and 15 of Part III of the Form 10-K.
PART II.
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.
FISCAL YEAR ENDED
----------------------------------------------------------
(1)
JANUARY FEBRUARY FEBRUARY FEBRUARY JANUARY
31, 2004 1, 2003 2, 2002 3, 2001 29, 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) (8,179) (6,589)
Share of loss of partially-owned affiliate - - - (1,388) (3,165)
Gain on sale of affiliate's common stock - - - 33,399 (1) 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
2
(1) Reflects a revision of previously reported amounts applicable to the
perfumania.com acquisition. The revision 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 impairment of goodwill at
the date of the acquisition, May 10, 2000. 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 held by the Company which were
restricted securities under Rule 144 of the Securities Act of 1933, as amended,
and subject to a lock-up agreement as well as certain other restrictions
including approval by an affiliate of EDC prior to the sale of shares by the
Company. The lock-up agreement did not allow the Company to dispose of any of
their EDC shares until May 2000, after which the Company was allowed to dispose
of up to 50,000 shares per month from May through December 2000, up to 75,000
shares per month from January through July 2001 and up to 100,000 shares per
month thereafter. Approval required by the affiliate of EDC allowing the Company
to sell 50,000 shares in May 2000 was withheld and the Company believed that it
would not obtain approval to sell such shares or any additional shares in
subsequent months. 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 completed in December 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 from the previously
reported amounts to reflect the accounting treatment that would result from
using the quoted market price of the EDC shares on the acquisition date rather
than the appraised value as the more clearly evident indicator of the value of
the transaction. The market price of EDC shares on the acquisition date was
$70.25 per share and would have valued perfumania.com in the aggregate at
approximately $28.1 million resulting in an increase in the gain on the sale of
affiliate's common stock of $23.4 million, an increase in the acquisition price
from $5.4 million to $28.8 million, and the recognition of additional goodwill
of $23.4 million at the time of the transaction. Based on the results of the
independent appraisal of the value of perfumania.com using the discounted cash
flow method, goodwill would have been impaired by $23.4 million. 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:
3
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 the 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.
4
Impairment of Long-Lived Assets
When facts and circumstances indicate that the values of long-lived
assets, including intangibles, may be impaired, an evaluation of recoverability
is performed by comparing the carrying value of the assets to projected future
cash flows in addition to other quantitative and qualitative analyses. Inherent
in this process is significant management judgment as to the projected cash
flows. 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)
January 31, Percentage of February 1, Percentage Percentage
2004 Revenue 2003 of Revenue Increase (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
$11.4 million of sales made to Quality King. The Company, through its supplier
relationships, is able to obtain certain merchandise at better prices and
quantities than Quality King. Wholesale sales in 2004 are expected to
approximate fiscal year levels. See Note 5 to our Consolidated Financial
Statements for further discussion. Comparable store sales measure the sales from
stores that have been open for one year or more. Perfumania's comparable store
sales increased 1.1% in fiscal year 2003. However, the average number of stores
operated decreased from 242 during fiscal year 2002 to 235 in fiscal year 2003
primarily due to the closure of older, underperforming stores. We believe that
Perfumania's retail sales were negatively impacted for part of fiscal year 2003
by the overall soft United States economy, the war in Iraq and disruption in our
inventory supplies due to the relocation of our distribution facility.
COST OF REVENUES:
For the year ended
-------------------------------------------------------
($ in thousands)
January 31, 2004 February 1, 2003 Percentage Increase
------------------ ----------------- -----------------
Wholesale $12,635 $1,710 638.9%
Retail 116,556 115,210 1.2%
------------------ ----------------- -----------------
Total cost
of Revenues $129,191 $116,920 10.5%
================== ================= =================
5
GROSS PROFIT:
For the year ended
-------------------------------------------------------
($ 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)%
================== ================== =================
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 $2.6 million as of fiscal year end 2003, which represents the
difference between the estimated selling value and the historical cost of this
inventory. This writeoff is included in cost of goods sold and accounts for 1.4%
of the decrease in our retail gross profit as a percentage of net retail sales
for fiscal year 2003.
The increase in gross profit in the wholesale division was due to higher
wholesale sales as discussed above. Wholesale sales historically yield a lower
gross margin compared to retail sales.
GROSS PROFIT MARGIN PERCENTAGES:
For the year ended
-------------------------------------
January 31, 2004 February 1, 2003
------------------ ------------------
Wholesale 10.3% 20.3%
Retail 41.7% 43.0%
Gross profit margin 39.2% 42.0%
The decrease in wholesale gross profit margins was primarily attributable
to larger number of units per wholesale transaction in fiscal 2003 compared to
fiscal 2002. Large unit orders yield lower margins than small orders.
6
OPERATING EXPENSES:
For the year ended
-------------------------------------------------------
($ 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 $2.3 million represents a non-cash charge for stock option
expenses, also relating to these same employment and consulting agreements. See
further discussion in Item 1 and also Note 5 to our Consolidated Financial
Statements.
The asset impairment charges in both fiscal years relate to retail store
locations with negative cash flows that were either closed or are targeted for
closure.
The provision for receivables during fiscal year 2002 relates to an
affiliate receivable which management determined was not collectible. See
further discussion at Note 5 of the Notes to Consolidated Financial Statements.
LOSS FROM OPERATIONS:
For the year ended
-------------------------------------------------------
($ in thousands)
January 31, 2004 February 1, 2003 Percentage Increase
------------------ ----------------- ------------------
Loss from operations $10,547 $232 4446.1%
7
OTHER EXPENSE:
For the year ended
-------------------------------------------------------
($ 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 $2,826 355.5%
As a result of the foregoing reasons our net loss was increased as
indicated above.
COMPARISON OF FISCAL YEARS 2002 AND 2001
REVENUES:
For the year ended
--------------------------------------------------------------------------------------------
($ in thousands)
Percentage Percentage Percentage
February 1, 2003 of Revenues February 2, 2002 of Revenues Increase (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% $193,352 100.0% 4.2%
================= ================== ================== ================= =================
The increase in net sales during fiscal year 2002 was due to an increase
in retail sales offset by a decrease in wholesale sales. The increase in sales
was principally due to a 10.2% increase in comparable store sales. The average
number of stores operated decreased from 250 during fiscal year 2001 to 242 in
fiscal year 2002. The increase in Perfumania's comparable store sales was due to
an improved merchandise assortment and product promotions at our retail stores.
The decrease in wholesale sales was due to management's decision to concentrate
on the more profitable retail operations.
8
COST OF REVENUES:
For the year ended
-------------------------------------------------------
($ in thousands)
Percentage
February 1, 2003 February 2, 2002 Increase (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
February 1, 2003 February 2, 2002 Increase (Decrease)
----------------- ------------------ ------------------
Wholesale $435 $1,767 (75.4)%
Retail 84,159 78,468 7.3%
----------------- ------------------ ------------------
Total
gross profit $84,594 $80,235 5.4%
================= ================== ==================
Gross profit increased as a result of higher sales and gross profit in the
retail division offset by lower sales and gross profit in the wholesale
division. Gross profit for the retail division increased principally as a result
of higher retail sales volume. Gross profit for the wholesale division decreased
due to lower wholesale sales. Wholesale sales historically yield a lower gross
margin compared to retail sales.
GROSS PROFIT MARGIN PERCENTAGES:
For the year ended
-------------------------------------
February 1, 2003 February 2, 2002
------------------ ------------------
Wholesale 20.3% 19.2%
Retail 42.2% 42.6%
Gross profit margin 42.0% 41.5%
9
OPERATING EXPENSES:
For the year ended
-------------------------------------------------------
($ in thousands)
Percentage
February 1, 2003 February 2, 2002 Increase (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 $80,525 5.3%
================= ================= ==================
The increase in selling, general and administrative expenses is
attributable primarily to higher employee compensation costs, including
incentive compensation paid to store personnel due to higher retail sales. The
majority of our selling, general and administrative expenses relate to the
retail division.
The asset impairment charges in both fiscal years relate to retail store
locations with negative cash flows that were either closed or are targeted for
closure.
The provision for receivables during fiscal year 2002 relates to an
affiliate receivable from Nimbus which management determined was not
collectible. No comparable receivable impairment was recorded during fiscal year
2001. See further discussion at Note 5 of the Notes to Consolidated Financial
Statements.
Depreciation and amortization decreased primarily due to the adoption of
SFAS 142 on February 3, 2002, which eliminated the amortization of goodwill and
other intangible assets with indefinite useful lives.
LOSS FROM OPERATIONS:
For the year ended
-------------------------------------------------------
($ in thousands)
February 1, 2003 February 2, 2002 Percentage Increase
----------------- ----------------- ------------------
Loss from operations $232 $290 (20.0)%
10
OTHER EXPENSE:
For the year ended
-------------------------------------------------------
($ in thousands)
February 1, 2003 February 2, 2002 Percentage 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 Decrease
----------------- ----------------- ------------------
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
=====================
11
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.
12
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 $1.5 million in
fiscal year 2003.
Management believes that Perfumania's borrowing capacity under the new
credit facility, projected cash flows from operations and other short term
borrowings will be sufficient to support our working capital needs, capital
expenditures and debt service for at least the next twelve months. There can be
no assurance that management's plans and expectations will be successful.
Payments due by period
------------------------------------------------------------------
($ in thousands)
less than more than
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 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.
13
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.
14
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The following are our executive officers and directors:
NAME AGE POSITION
---- --- --------
Stephen Nussdorf 53 Chairman of the Board
Michael W. Katz 55 Chief Executive Officer and President
A. Mark Young 43 Chief Financial Officer
Jeffrey Geller 30 President and Chief Operating Officer of Retail Division of Perfumania, Inc.
Donovan Chin 37 Chief Financial Officer of Perfumania, Inc., Secretary and Director
Leon Geller 49 Vice President of Purchasing, Perfumania, Inc.
Alan Grobman 34 Vice President of Logistics and Distribution, Perfumania, Inc.
Joel Lancaster 45 Vice President of Stores, Perfumania, Inc.
Carole Ann Taylor(1)(2)(3) 58 Director
Joseph Bouhadana(1)(2)(3) 35 Director
Paul Garfinkle(1) 63 Director
---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Stock Option Committee
STEPHEN NUSSDORF was appointed our Chairman of the Board in February 2004.
Mr. Nussdorf is one of the principal shareholders in, and an executive officer
of Quality King Distributors, Inc. ("Quality King"). Quality King is a privately
held promotional wholesaler of pharmaceuticals, health and beauty care products,
and fragrances with annual sales approximating $2.5 billion. Mr. Nussdorf joined
Quality King in 1972 and has served Quality King in various capacities in all
divisions of its business.
MICHAEL W. KATZ joined us in February 2004 as our Chief Executive Officer
and President. He was also appointed a Director. Mr. Katz has served in various
capacities at Quality King and its affiliated companies; primarily responsible
for overseeing administration, finance, mergers and acquisitions. Mr. Katz has
participated in the design and implementation of the business strategy which has
fostered the growth of Quality King and its affiliated companies. From 1994
until 1996 he was Senior Vice President of Quality King. Since 1996 he has
served as Executive Vice President of Quality King and in the Office of the
Chief Executive and as a Director of Model Reorg., Inc., an affiliate of Quality
King which sells designer fragrances at wholesale and retail. Mr. Katz became
Executive Vice President, Chief Financial Officer and Treasurer of QK
Healthcare, Inc. a wholly owned subsidiary of Quality King in 2000. Mr. Katz is
a Certified Public Accountant.
A. MARK YOUNG joined us in February 2000 and became our Chief Financial
Officer in May 2000. He served as one of our directors from April 2001 until his
resignation as a director in September 2002. Prior to February 2000, Mr. Young
was employed in the Business Assurance practice of the Middle Market Group of
PricewaterhouseCoopers LLP. Mr. Young is a Certified Public Accountant.
15
JEFFREY GELLER joined us in March 2000 and was appointed the President and
Chief Operating Officer of our Retail division in May 2000. He served as one of
our directors from April 2001 until his resignation as a director in September
2002. Prior to joining us, Mr. Geller was the Director, General Manager and
Development Agent for an international restaurant chain in Peru which operated
company owned and franchised locations.
DONOVAN CHIN serves as the Chief Financial Officer of Perfumania. He was
appointed Corporate Secretary in February 1999, director in March 1999 and Chief
Financial Officer of Perfumania in May 2000. He has also served as our Chief
Financial Officer from February 1999 to May 2000. From May 1995 to February
1999, Mr. Chin was our Corporate Controller and from May 1993 to May 1995 he was
Assistant Corporate Controller. Previously, Mr. Chin was employed by
Pricewaterhouse LLP in its Miami audit practice. Mr. Chin is a Certified Public
Accountant.
LEON GELLER joined us in March 2001 as Vice President of Purchasing of
Perfumania, Inc. Prior to joining us, Mr. Geller was the Executive Director of a
textile distributor in Peru. Leon Geller is the uncle of Jeffrey Geller, the
President and Chief Operating Officer of our retail division.
ALAN GROBMAN has served as the Vice President of Logistics and
Distribution for Perfumania, Inc. since February 2003. He also served as our
Director of Fulfillment from November 2000 to February 2003. Previously, Mr.
Grobman was Plant Manager of Crown Cork and Seal del Peru, a manufacturer of
food and specialty packaging from March 1999 to October 2000, and prior to that
he was the General Manager of Corporacion Lealha, a beverage and entertainment
company from May 1997 to March 1999.
JOEL LANCASTER has served as the Vice President of Stores for Perfumania,
Inc. since July 2000. He also served as our Director of Stores from August 1997
to July 2000, and as a District Supervisor from October 1995 to August 1997.
Previously, Mr. Lancaster was employed by Lillie Rubin, Inc. as its National
Director of Stores for four years.
CAROLE ANN TAYLOR has been a director since June 1993. From 1987 to 1998,
Ms. Taylor was the owner and president of the Bayside Company Store, a retail
souvenir and logo store at Bayside Marketplace in Miami, Florida. During this
time she was a partner of the Jardin Bresilien Restaurant also located at the
Bayside Marketplace. Currently, Ms. Taylor is the owner of Miami To Go, Inc., a
retail and wholesale logo and souvenir merchandising and silk-screening company.
She is a partner at Miami Airport Duty Free Joint Venture with Greyhound Leisure
Services which owns and operates the 19 duty free stores at Miami International
Airport. She serves as director of the Miami-Dade Chamber of Commerce, the
Greater Miami Convention & Visitors Bureau and the Miami Film Festival. Ms.
Taylor is a member of our Audit, Compensation and Stock Option Committees.
PAUL GARFINKLE joined us in February 2004. Mr. Garfinkle retired from the
public accounting firm of BDO Seidman, LLP, in June 2000 after a thirty-six year
career. While at BDO Seidman, LLP, Mr. Garfinkle was an audit partner and client
service director for many of the firm's most significant clients. He also served
for many years as a member of the firm's Board of Directors and, during his last
six years, at the firm as national director of Real Estate and Hospitality
Service. Mr. Garfinkle is a member of our Audit Committee.
JOSEPH BOUHADANA was appointed a director in September 2002. Mr. Bouhadana
has served as Vice President of Information Technology of Tutopia.com, a
privately owned Internet service provider with a presence in nine countries in
Latin America, since September 2000. Previously, Mr. Bouhadana was the Director
of Information Technology of Hotelworks.com or Parker Reorder, a publicly traded
company specializing in hospitality business to business procurement,
distribution and logistics systems. Mr. Bouhadana is a member of our Audit,
Compensation and Stock Option Committees.
Our directors hold office until the next annual meeting of shareholders
and until their successors have been duly elected and qualified.
AUDIT COMMITTEE
Our board of directors has an Audit Committee consisting of Carole Ann
Taylor, Joseph Bouhadana and Paul Garfinkle. Each of the members of the Audit
Committee is independent as defined under Nasdaq Marketplace Rule 4200(a)(15).
The board of directors designated Paul Garfinkle the "audit committee financial
expert" as defined by SEC rules.
16
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires directors
and executive officers, and persons who own more than 10 percent of our common
stock, to file with SEC initial reports of ownership and reports of changes in
ownership of common stock. Officers, directors and greater than 10 percent
shareholders are required by SEC regulation to furnish us with copies of all
Section 16(a) forms they file.
To our knowledge, based solely on review of the copies of such reports
furnished to us and written representations that no other reports were required,
during the fiscal year ended January 31, 2004, filing deficiencies under Section
16(a) included one late report filed by A. Mark Young, Jeffrey Geller, Leon
Geller, Alan Grobman and Joel Lancaster with respect to one transaction each.
ITEM 11. EXECUTIVE COMPENSATION
The following tables set forth certain information concerning compensation
for the fiscal years ended February 1, 2004 (Fiscal 2003), February 1, 2003
(Fiscal 2002) and February 2, 2002 (Fiscal 2001) of the Chief Executive Officer
and the most four highly compensated executive officers who were serving as
executive officers of the Company at the end of the last fiscal year and whose
total annual salary and bonus exceeded $100,000 for fiscal 2003 (collectively,
the "Named Executive Officers").
17
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------------------------------------------------------------------------
AWARDS PAYOUTS
---------------------------------------------------------------------------------------------------
Restricted
Fiscal Other Annual Stock LTIP All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($)(1) Awards($) Options(#)(2) Payouts($) Compensation($)
-----------------------------------------------------------------------------------------------------------------------------------
Ilia Lekach 2003 509,101 1,012,521 - 125,000 - -
Formerly Chairman of the Board 2002 441,000 - - - - - -
And Chief Executive Officer 2001 438,577 250,000 - - 125,000 - -
A. Mark Young 2003 217,640 469,183 - 25,000 - -
Chief Financial Officer 2002 196,153 - - - - - -
2001 166,152 - - - 12,500 - -
Jeffrey Geller 2003 220,256 472,072 - 25,000 - -
President and Chief
Operating Officer 2002 192,561 - - - - - -
Perfumania, Inc. 2001 162,197 - - 10,000
Leon Geller (3) 2003 181,209 183,899 - 12,500 - -
Vice President of Purchasing, 2002 173,166 - - - - - -
Perfumania, Inc. 2001 159,341 - - - 12,500 - -
Joel Lancaster 2003 149,371 - 145,167 - 16,252 - -
Vice President of Purchasing, 2002 131,945 - - - - - -
Perfumania, Inc. 2001 123,171 - - - 3,752 - -
(1) Amounts included represent payments made to the persons indicated pursuant
to the terms of their employment agreements as a result of the change of
control, described below. These payments were made as a consequence of the
determination on February 3, 2004 by the disinterested and independent
members of the Board of Directors that a change of control had occurred
under the terms of such employment agreements, and the subsequent
authorization on such date of such payments by Ilia Lekach, the Company's
then Chairman and Chief Executive Officer. The column for "Other Annual
Compensation" does not include any amounts for executive perquisites and
any other personal benefits, such as the cost of automobiles, life
insurance and disability insurance because the aggregate dollar amount per
executive does not exceed the lesser of $50,000 or 10% of his annual
salary and bonus.
(2) 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
2, 2002. Accordingly, all share and per share data shown in this
information statement have been retroactively adjusted to reflect this
reverse stock-split. Options issued in Fiscal 2003 represent those options
issued as a consequence of the change of control pursuant to the Company's
contractual obligations under existing employment agreements.
(3) Leon Geller joined us in October 2000 and was appointed Vice President of
Purchasing of Perfumania, Inc. in March 2001.
18
OPTIONS GRANTS TABLE
The following table sets forth certain information concerning grants of
stock options made during fiscal year 2003 to the Named Executive Officers.
Individual Option Grants in Fiscal Year 2003
---------------------------------------------------------------------------------------------------------------
Potential Realizable Value
at Assumed Annual Rate
% of Total of Stock Price Appreciation
Number Options Granted For Option Term
of Options to Employees in Exercise Price Expiration -----------------------------------------
Name Granted Fiscal Year 2003(1) Per Share Date 5% (2) 10% (2)
----------------------------------------------------------------- ----------------- ---------------- --------------------
Ilia Lekach 125,000 49% $ 4.00 2013 $ 2,350,566 $ 4,039,049
A. Mark Young 12,500 5% $ 7.76 2013 $ 188,057 $ 356,905
12,500 5% $ 3.52 2013 $ 241,057 $ 409,905
Jeffrey Geller 15,000 6% $ 11.24 2013 $ 173,468 $ 376,086
10,000 4% $ 3.52 2013 $ 192,845 $ 327,924
Leon Geller 12,500 5% $ 3.52 2013 $ 241,057 $ 409,905
Joel Lancaster 5,000 2% $ 13.00 2013 $ 49,023 $ 116,562
7,500 3% $ 8.24 2013 $ 109,234 $ 210,543
3,752 1% $ 3.52 2013 $ 72,356 $ 123,037
--------------------
(1) Total stock option grants during fiscal year 2003 were 254,252.
(2) In accordance with the rules of the Securities and Exchange Commission,
the potential realizable values for such options shown in the table
presented above are based on assumed rates of stock price appreciation of
5% and 10% compounded annually from the date the options were granted to
their expiration date. These assumed rates of appreciation do not
represent our estimate or projection of the appreciation of shares of our
common stock.
STOCK OPTION EXERCISES AND YEAR-END OPTION VALUE TABLE
The following table sets forth certain information concerning option
exercises in fiscal year 2003 and the number of unexercised stock options held
by the Named Executive Officers as of January 31, 2004.
Value of Unexercised
Number of Unexercised In-The-Money Options at
Options at Fiscal Year-End Fiscal Year-End
Number of Shares Value (#) Exercisable / ($)(1)(2) Exercisable /
Name Acquired on Exercise Realized Unexercisable (1) Unexercisable
-------- -------------------- -------- --------------------------- -----------------------
Ilia Lekach - 443,750/0 $4,861,000/0
A. Mark Young - - 50,000/0 $418,000/0
Jeffrey Geller - - 50,000/0 $292,400/0
Leon Geller - - 25,000/0 $262,000/0
Joel Lancaster 32,504/0 $175,042/0
19
(1) Includes options issued to such persons as a result of the change of
control discussed in Item 12, Security Ownership of Certain Beneficial
Owners And Management And Related Stockholder Matters. Assumes all
outstanding options are currently exercisable based on the change of
control.
(2) Based on the spread between the exercise price of the options and the
closing price of $14.00 per share on January 30, 2004.
DIRECTOR COMPENSATION
We pay each nonemployee director a $10,000 annual retainer, and reimburse
their expenses in connection with their activities as directors. In addition,
nonemployee directors are eligible to receive stock options under the Directors
Stock Option Plan.
The Directors Stock Option Plan currently provides for an automatic grant
of an option to purchase 500 shares of our common stock upon a person's election
as director and an automatic grant of options to purchase 1,000 shares of our
common stock upon re-election to the Board, in both instances at an exercise
price equal to the fair market value of the common stock on the date of the
option grant.
EMPLOYMENT AND SEVERANCE AGREEMENTS
Effective February 1, 2002, we entered into a 3-year employment agreement
with Ilia Lekach. Mr. Lekach's employment agreement was terminated effective as
of February 10, 2004. Pursuant to the terms of the employment agreement, Mr.
Lekach was to receive an annual salary of $460,000, subject to cost-of-living
increases or 5% if higher. The employment agreement provided that Mr. Lekach
would continue to receive his annual salary until the expiration of the term of
the agreement if his employment was terminated by us for any reason other than
death, disability or cause (as defined in the employment agreement). The
employment agreement contained a performance bonus plan, which provided for
additional compensation and grant of stock options, if we met certain specified
net income levels. The employment agreement prohibited Mr. Lekach from directly
or indirectly competing with us during the term of his employment and for one
year after termination of employment except in the case of our termination of
employment without cause. Pursuant to the terms of the employment agreement, Mr.
Lekach received a signing bonus of $250,000 and was granted 125,000 options to
purchase our common stock at an exercise price of $4.00 per share (the closing
market price of our common stock on January 31, 2002).
On February 10, 2004, our Board of Directors terminated without cause Ilia
Lekach's employment with the Company as Chairman of the Board and Chief
Executive Officer. In addition, as a consequence of the Nussdorf Option
Agreement described herein, the Board of Directors determined that a change of
control occurred under the Company's employment agreement with Mr. Lekach, and
that the terms of the employment agreement required the Company to issue Mr.
Lekach 125,000 options. Upon termination of the employment agreement, and as a
consequence of the change of control, Mr. Lekach was paid approximately
$1,012,000 (two times the remaining compensation under the Agreement).
Effective January 31, 2003, we entered into 3-year employment agreements
subject to termination in accordance with the agreements, with A. Mark Young and
Jeffrey Geller providing for annual salaries of $210,000, subject to specified
increases. In addition, effective May 16, 2002, we entered into 2-year
employment agreements with Leon Geller and Joel Lancaster, subject to
termination in accordance with the agreements, providing for annual salaries of
$175,142 and $138,225, respectively, subject to specified increases. As a
consequence of the change of control described below, Mr. Young, Mr. Jeffrey
Geller, Mr. Leon Geller, Mr. Lancaster and Mr. Alan Grobman received
approximately $469,000, $472,000, $184,000, $125,000 and $145,000, respectively,
under the terms of their employment agreements with the Company. These payments
were made as a consequence of the determination on February 3, 2004 by the
disinterested and independent members of the Board of Directors that a change of
control had occurred under the terms of such employment agreements, and the
subsequent authorization on such date of such payments by Ilia Lekach, the
Company's then Chairman and Chief Executive Officer.
20
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following directors served as members of the compensation committee
during the 2003 fiscal year: Carole Ann Taylor and Joseph Bouhadana. None of the
members of the compensation committee was, at any time either during or before
such fiscal year, an officer or employee of ours or any of our subsidiaries, or
has any relationship requiring disclosure under Item 13, Certain Relationships
and Related Party Transactions.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table shows the amount of common stock beneficially owned as
of May 17, 2004 by: (a) each of our directors, (b) each of our executive
officers named in the Executive Compensation Table (set forth above), (c) all of
our directors and executive officers as a group and (d) each person known by us
to beneficially own more than 5% of our outstanding common stock. Unless
otherwise provided, the address of each holder is c/o E Com Ventures, Inc., 251
International Parkway, Sunrise, Florida, 33325.
Common Stock Beneficially Owned
Name and Address Total Number of Shares Percent of Shares
of Beneficial Owner Beneficially Owned Outstanding
-------------------------------------------------------------------------------
Ilia Lekach 150,000 (1)(2)(3) 5.2%
Rachmil Lekach 224,776 (1)(2)(4) 7.8%
Glenn and Stephen Nussdorf 1,128,144 (6)(8) 39.2%
A. Mark Young 51,925 (1)(4) 1.8%
Jeffrey Geller 53,555 (1)(4) 1.9%
Donovan Chin 27,250 (1)(4) 1.0%
Leon Geller 25,000 (1)(4) *
Alan Grobman 21,000 (1)(4) *
Joel Lancaster 32,504 (1)(4) 1.2%
Carole A. Taylor 6,000 (1)(4) *
Paul Garfinkle 0 (1)(8) *
Michael Katz 0 (1)(8) *
Joseph Bouhadana 1,500 (1)(4) *
Parlux Fragrances, Inc 378,102 (5) 13.1%
All directors and executive
officers as a group
(11 persons) 1,346,878 (7) 46.8%
------------------
*Less than 1%.
(1) For purposes of this table, beneficial ownership is computed pursuant to
Rule 13d-3 under the Exchange Act; the inclusion of shares as beneficially
owned should not be construed as an admission that such shares are
beneficially owned for purposes of the Exchange Act. Under the rules of
the Securities and Exchange Commission, a person is deemed to be a
"beneficial owner" of a security he or she has or shares the power to vote
or direct the voting of such security or the power to dispose of or direct
the disposition of such security. Accordingly, more than one person may be
deemed to be a beneficial owner of the same security.
(2) Ilia Lekach and Rachmil Lekach jointly own with their spouses the shares
set forth opposite their respective names.
(3) Does not include shares subject to the Nussdorf Option Agreement,
including the 125,000 shares issuable upon a like number of options
required to be granted to Mr. Lekach as a consequence of the change of
control. The 150,000 shares included in the table are not subject to the
Nussdorf Option Agreement. Mr. Lekach has sole dispositive and voting
power over such 150,000 shares.
(4) With respect to the specified beneficial owner, includes shares of common
stock issuable upon the exercise of stock options currently exercisable or
exercisable within 60 days of May 17, 2004 in the following amounts:
Rachmil Lekach (25,000); Jeffrey Geller (50,000); A. Mark Young (50,000);
Donovan Chin (27,250); Leon Geller (25,000); Alan Grobman (21,000); Joel
Lancaster (32,504); Carole A. Taylor (6,000); and Joseph Bouhadana
(1,500).
21
(5) The address of Parlux Fragrances, Inc. is 3725 S.W. 30th Avenue, Ft.
Lauderdale, Florida 33154. Ilia Lekach, our former Chairman and Chief
Executive Officer, is the Chairman of the Board of Parlux Fragrances, Inc.
(6) The principal business address of Messrs. Glenn and Stephen Nussdorf is
2060 Ninth Avenue, Ronkonkoma, New York 11779.
(7) Includes shares of common stock issuable upon the exercise of stock
options currently exercisable or exercisable within 60 days of May 17,
2004, as set forth in Note 4 above.
(8) Does not include shares issuable upon the exercise of stock options that
are provided for under the Company's 2000 Directors Stock Option Plan as a
result of their appointment to the Board but not yet granted to each of
Michael Katz, Paul Garfinkle and Stephen Nussdorf. Each of these
directors, who are not employees of the Company, may be granted options to
acquire 500 shares.
EQUITY COMPENSATION PLAN INFORMATION
This table summarizes share and exercise price information about our
equity compensation plans as of January 31, 2004.
Weighted Average Number of Securities
Exercise Price Of Available For Future
Number of Securities Outstanding Options, Issuance Under Equity
Plan Category To Be Issued Warrants and Rights Compensation Plans
-------------------------------------------------- ------------------------- --------------------------------------
Equity compensation
plans approved
by security holders 666,501 $5.32 236,473
Equity compensation
plans not approved
by security holders - - -
------------------------ ------------------------- --------------------------------------
TOTAL 666,501 $5.32 236,473
======================== ========================= ======================================
CHANGE OF CONTROL
Effective January 30, 2004, Ilia Lekach, our former 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 an option agreement (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 the installments indicated
on or after the dates set forth in the table below:
DATE NUMBER OF SHARES
---------------- ----------------
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 was payable in cash; provided that the Nussdorfs
may have elected to pay a portion of the purchase price for the shares that were
subject to the option installment that first became exercisable in April 2004,
by offsetting the principal and accrued interest then owed under a $1,000,000
demand note, dated December 8, 2003, made by Mr. Lekach and payable to the order
of Stephen Nussdorf.
22
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. To date, Mr. Lekach has exercised options to
acquire all 443,750 of those shares and the Nussdorfs have acquired all 720,954
shares pursuant to the Nussdorf Option Agreement.
The Nussdorfs now own an aggregate 1,128,144 shares of the Company's
common stock or approximately 39% of the total number of shares of the Company
common stock currently outstanding.
On March 11, 2004, the Nussdorfs made a $5,000,000 secured demand loan to
Perfumania. Such loan is evidenced by a subordinated secured demand note of
Perfumania. The demand loan 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Notes receivable from Ilia Lekach, our 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 notes and all accrued interest
were 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, 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.
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 agreement 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.
We 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 ours, 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.
23
We 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 Company's consolidated
balance sheets.
As described above, effective January 30, 2004, Ilia Lekach, our then
Chairman of the Board and Chief Executive Officer and several other parties
controlled by Lekach, entered into the Nussdorf Option Agreement with the
Nussdorfs, pursuant to which the Nussdorfs were granted options to acquire up to
an aggregate 720,954 shares of our 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 Nussdorf Option Agreement to vote any shares owned by
Lekach that are the subject of the Nussdorf Option Agreement.
As of May 17, 2004, Mr. Lekach has exercised options to acquire 443,750 of
those shares and the Nussdorfs have acquired 720,954 shares pursuant to the
Nussdorf Option Agreement. The Nussdorfs own an aggregate of 1,128,144 shares of
our common stock or approximately 39% of the total number of shares of our
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, we issued a total of 244,252 options for our common stock in January
2004. Since the various exercise prices of the options were less than the market
price of our common stock on the grant date, we incurred a non-cash charge of
approximately $2,286,000. In addition, pursuant to the same employment and
consulting agreements, we 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 our 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, we 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.
ITEM 15. PRINCIPAL ACCOUNTANT FEES SERVICES
The aggregate fees billed by Deloitte & Touche LLP ("Deloitte") for fiscal
years 2003 and 2002 are as follows:
FEES FISCAL 2003 FISCAL 2002
------------- ---------------- ---------------
Audit Fees (1) $263,000 $237,000
Tax Fees (2) 14,000 15,000
---------------------------------
Total Fees $277,000 $252,000
================ ===============
(1) "Audit Fees" consist of fees billed for professional services rendered in
connection with the audit of our consolidated annual financial statements
and the review of our interim consolidated financial statements included
in quarterly reports.
(2) "Tax Fees" consist of fees billed for professional services rendered for
tax compliance and tax service.
There were no fees for audit related services or other services for fiscal
years 2003 and 2002.
The Audit Committee has considered and has agreed that the provision of
services as described above are compatible with maintaining Deloitte's
independence.
24
The Audit Committee pre-approves the engagement of Deloitte for all
professional services. The pre-approval process generally involves the full
Audit Committee evaluating and approving the particular engagement prior to the
commencement of services.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment to be signed
on its behalf by the undersigned, thereunto duly authorized, May 28, 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 28, 2004
------------------------------ President
Michael W. Katz (Principal Executive Officer)
/s/ STEPHEN NUSSDORF Chairman of the May 28, 2004
------------------------------ Board of Directors
Stephen Nussdorf
/s/ JEFFREY GELLER President and Chief May 28, 2004
------------------------------ Operating Officer of
Jeffrey Geller Perfumania, Inc.
/s/ A. MARK YOUNG Chief Financial Officer, May 28, 2004
------------------------------ (Principal Accounting Officer)
A. Mark Young
/s/ DONOVAN CHIN Chief Financial Officer May 28, 2004
------------------------------ Perfumania, Inc.,
Donovan Chin
/s/ CAROLE ANN TAYLOR Director May 28, 2004
------------------------------
Carole Ann Taylor
/s/ JOSEPH BOUHADANA Director May 28, 2004
------------------------------
Joseph Bouhadana
/s/ PAUL GARFINKLE Director May 28, 2004
------------------------------
Paul Garfinkle
25
EXHIBIT DESCRIPTION
------- -----------
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
26