UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 26, 2002
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 1-6370
ELIZABETH ARDEN, INC.
(Exact name of registrant as specified in its charter)
Florida 59-0914138
(State of incorporation) (I.R.S. Employer Identification No.)
14100 N.W. 60th Avenue, Miami Lakes, Florida 33014
(Address of principal executive offices) (Zip Code)
(305) 818-8000
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Outstanding at
Class December 6, 2002
----- ----------------
Common Stock, $.01 par value 18,816,343 shares
ELIZABETH ARDEN, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets -
October 26, 2002 and January 31, 2002. . . . . . . . . . . . .3
Unaudited Consolidated Statements of Operations -
Three and Nine Months Ended October 26, 2002 and
October 27, 2001 . . . . . . . . . . . . . . . . . . . . . . .4
Unaudited Consolidated Statement of Shareholders' Equity -
Nine Months Ended October 26, 2002 . . . . . . . . . . . . . .5
Unaudited Consolidated Statements of Cash Flow -
Nine Months Ended October 26, 2002 and October 27, 2001. . . .6
Notes to Unaudited Consolidated Financial Statements . . . . .7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk . 24
Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . 24
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 25
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Certifications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
October 26, 2002 January 31, 2002
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 14,347 $ 15,913
Accounts receivable, net 285,367 79,720
Inventories 199,702 192,736
Deferred income taxes 15,970 15,970
Prepaid expenses and other assets 15,789 24,372
-------- --------
Total current assets 531,175 328,711
-------- --------
Property and equipment, net 35,843 38,268
-------- --------
Other assets:
Exclusive brand licenses and trademarks, net 204,773 212,011
Debt financing costs 13,228 14,518
Other 6,179 3,257
-------- --------
Total other assets 224,180 229,786
-------- --------
Total assets $791,198 $596,765
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $125,000 $ 7,700
Accounts payable - trade 111,880 69,150
Other payables and accrued expenses 73,312 59,259
Current portion of long-term debt 2,365 2,312
-------- --------
Total current liabilities 312,557 138,421
-------- --------
Long-term debt 323,597 326,121
Deferred income taxes and other 10,144 8,309
-------- --------
Total long-term liabilities 333,741 334,430
-------- --------
Total liabilities 646,298 472,851
-------- --------
Commitments and contingencies (See Note 6)
Convertible, redeemable preferred stock,
Series D, $.01 par value (liquidation preference
of $50,000); 1,000,000 shares authorized;
416,667 shares issued and outstanding 14,720 11,980
-------- --------
Shareholders' equity:
Common stock, $.01 par value, 50,000,000
shares authorized; 18,789,676 and 18,575,708
shares issued, respectively 188 186
Additional paid-in capital 89,387 85,919
Retained earnings 50,117 35,191
Treasury stock (293,060 and 950,128 shares
at cost, respectively) (2,277) (6,541)
Accumulated other comprehensive loss (1,085) (2,348)
Unearned deferred compensation (6,150) (473)
-------- --------
Total shareholders' equity 130,180 111,934
-------- --------
Total liabilities and shareholders' equity $791,198 $596,765
======== ========
See Accompanying Notes to Unaudited Consolidated Financial Statements.
3
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands except per share data)
Three Months Ended Nine Months Ended
October 26, October 27, October 26, October 27,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales $ 314,807 $ 286,202 $ 582,277 $ 523,897
Cost of sales 177,738 166,737 342,577 325,177
----------- ----------- ----------- -----------
Gross profit 137,069 119,465 239,700 198,720
Operating expenses:
Selling, general and
administrative 61,537 49,325 163,196 158,668
Depreciation and amortization 5,874 7,683 17,280 22,819
----------- ----------- ----------- -----------
Total operating expenses 67,411 57,008 180,476 181,487
----------- ----------- ----------- -----------
Income from operations 69,658 62,457 59,224 17,233
----------- ----------- ----------- -----------
Other income (expense):
Interest expense, net (11,265) (11,622) (32,321) (34,303)
Other 77 (50) 218 (22)
----------- ----------- ----------- -----------
Other expense, net (11,188) (11,672) (32,103) (34,325)
----------- ----------- ----------- -----------
Income (loss) before
income taxes 58,470 50,785 27,121 (17,092)
Provision for (benefit from)
income taxes 20,738 17,340 9,455 (6,416)
----------- ----------- ----------- -----------
Net income (loss) 37,732 33,445 17,666 (10,676)
Accretion and dividend on
preferred stock 913 833 2,740 2,500
----------- ----------- ----------- -----------
Net income (loss) attributable
to common shareholders $ 36,819 $ 32,612 $ 14,926 $ (13,176)
=========== =========== =========== ===========
Income (loss) per common share:
Basic $ 2.07 $ 1.85 $ 0.84 $ (0.77)
=========== =========== =========== ===========
Diluted $ 1.64 $ 1.48 $ 0.77 $ (0.77)
=========== =========== =========== ===========
Weighted average number of
common shares:
Basic 17,764,698 17,617,096 17,732,545 17,187,247
=========== =========== =========== ===========
Diluted 22,979,693 22,538,031 23,039,669 22,855,025
=========== =========== =========== ===========
See Accompanying Notes to Consolidated Financial Statements.
4
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
(Amounts in thousands)
Accumulated Unearned
Additional Other Deferred Total
Common Stock Paid-In Retained Treasury Comprehensive Compen- Shareholders'
Shares Amount Capital Earnings Stock Loss sation Equity
----------------------------------------------------------------------------------------
Balance at
January 31, 2002 18,576 $186 $85,919 $35,191 $(6,541) $(2,348) $ (473) $111,934
Issuance of
common stock
upon exercise of
stock options 214 2 462 464
Issuance of
restricted stock,
net 3,006 4,264 (7,270) --
Amortization of
unearned deferred
compensation 1,593 1,593
Accretion and
dividend on
Series D preferred
Stock (2,740) (2,740)
Comprehensive income:
Net income 17,666 17,666
Foreign currency
Translation 1,263 1,263
----------------------------------------------------------------------------------------
Total comprehensive
Income 17,666 1,263 18,929
----------------------------------------------------------------------------------------
Balance at
October 26, 2002 18,790 $188 $89,387 $50,117 $(2,277) $(1,085) $(6,150) $130,180
========================================================================================
See Accompanying Notes to Unaudited Consolidated Financial Statements.
5
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine Months Ended
October 26, October 27,
2002 2001
----------- -----------
Operating Activities:
Net income (loss) $ 17,666 $ (10,676)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 17,280 22,819
Amortization of senior note offering costs and
note premium 1,965 1,881
Amortization of unearned deferred compensation 1,593 --
Provision for write down of inventory -- 10,300
Changes in assets and liabilities:
Increase in accounts receivable (205,647) (182,009)
Increase in inventories (6,966) (13,924)
Decrease (increase) in prepaid expenses and
other assets 3,661 (20,665)
Increase in accounts payable 42,730 63,085
Increase in other payables and accrued expenses 15,888 44,962
Other 1,054 (70)
----------- -----------
Net cash used in operating activities (110,776) (84,297)
----------- -----------
Investing Activities:
Additions to property and equipment, net of disposals (6,498) (7,518)
----------- -----------
Net cash used in investing activities (6,498) (7,518)
----------- -----------
Financing Activities:
Net proceeds from short-term debt 117,353 110,647
Payments on long-term debt (2,318) (1,091)
Proceeds from the exercise of stock options 464 1,416
Proceeds from the exercise of stock purchase warrants -- 8,287
Repurchase of common stock -- (402)
----------- -----------
Net cash provided by financing activities 115,499 118,857
----------- -----------
Effect of exchange rate changes on cash and
cash equivalents 209 --
Net (decrease) increase in Cash and Cash Equivalents (1,566) 27,042
Cash and Cash Equivalents at Beginning of Period 15,913 17,695
----------- -----------
Cash and Cash Equivalents at End of Period $ 14,347 $ 44,737
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Interest paid during the period $ 30,918 $ 23,617
=========== ===========
Income taxes paid during the period $ 57 $ 8,810
=========== ===========
See Accompanying Notes to Unaudited Consolidated Financial Statements.
6
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND BASIS OF PRESENTATION
Elizabeth Arden, Inc. (the "Company") is a manufacturer and marketer of
prestige designer fragrances, skin treatment and cosmetic products to
retailers in the United States and over 90 countries internationally. The
Company was formerly known as French Fragrances, Inc. until the acquisition of
the Elizabeth Arden business on January 23, 2001(the "Arden acquisition").
The accompanying unaudited consolidated financial statements included
herein have been prepared by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission (the "Commission") for interim
financial information. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statement presentation
and should be read in conjunction with the consolidated financial statements
and related footnotes included in the Company's Annual Report on Form 10-K for
the year ended January 31, 2002, filed with the Commission.
The consolidated balance sheet of the Company as of January 31, 2002 is
audited. The other consolidated financial statements are unaudited, but
include all adjustments, which are of a normal recurring nature (except for
the $10.3 million inventory adjustment in the second quarter of fiscal 2002),
that management considers necessary to fairly present the results for the
interim periods. Results for interim periods are not necessarily indicative
of results for the full fiscal year ending January 31, 2003. In order to
conform to the current fiscal year presentation, certain reclassifications
were made to the prior periods' consolidated financial statements and the
accompanying footnotes.
NOTE 2. RECENTLY ADOPTED ACCOUNTING STANDARDS
ACCOUNTING FOR CERTAIN SALES INCENTIVES
Effective February 1, 2002, the Company adopted Emerging Issues Task
Force ("EITF") 01-09, "Accounting for Consideration Given by a Vendor to a
Customer," which codified and reconciled EITF No. 00-14, "Accounting for
Certain Sales Incentives." EITF No. 00-14 provides guidance on accounting for
discounts, coupons, rebates and free products, as well as the income statement
classification of these discounts, coupons, rebates and free products. Upon
adoption of this pronouncement, the Company classified gift-with-purchase
activities, which were previously reported as selling, general and
administrative expenses, as cost of sales. For comparison purposes, certain
amounts in the Consolidated Statement of Operations for the nine months ended
October 27, 2001 were reclassified to reflect the adoption of EITF 01-09. The
adoption of EITF 01-09 on this issue had no impact on operating income;
however, for the three months ended October 26, 2002 and October 27, 2001,
gross profit decreased by approximately $7.3 and $12.8 million, respectively,
offset by an equal decrease in selling, general and administrative expenses.
For the nine months ended October 26, 2002 and October 27, 2001, gross profit
decreased by approximately $22.8 and $30.2 million respectively, offset by an
equal decrease in selling, general and administrative expenses.
EITF 01-09 also codified and reconciled EITF No. 00-25, "Accounting for
Consideration from a Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendor's Products." EITF No. 00-25 provides guidance on
the income statement classification of consideration from a vendor to a
retailer in connection with the retailer's purchase of the vendor's products
or to promote sales of the vendor's products. Upon adoption of this
pronouncement, the Company classified amounts paid to retailers for co-op
advertising and beauty consultant expenses as a reduction of net sales. These
costs were previously reported within selling, general and administrative
expenses. For comparison purposes, certain amounts in the Consolidated
Statement of Operations for the nine months ended October 27, 2001 were
reclassified to reflect the adoption of EITF 01-09. The adoption of EITF 01-09
on this issue had no impact on operating income; however, for the three months
ended October 26, 2002 and October 27, 2001, gross profit decreased
by approximately $17.0 and $16.8 million, respectively, offset by an equal
decrease in selling, general and administrative expenses. For the nine months
ended October 26, 2002 and October 27, 2001, gross profit decreased by
approximately $44.4 and $48.2 million, respectively, offset by an equal
decrease in selling, general and administrative expenses.
7
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. RECENTLY ADOPTED ACCOUNTING STANDARDS -- (Continued)
ACCOUNTING FOR BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS
Effective February 1, 2002, the Company adopted SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS
No. 141" and "SFAS No. 142," respectively). These standards establish
financial accounting and reporting standards for acquired goodwill and other
intangible assets. Specifically, the standards address how acquired
intangible assets should be accounted for both at the time of acquisition and
after they have been recognized in the financial statements. The provisions
of SFAS No. 141 apply to all business combinations initiated after June 30,
2001. In accordance with SFAS No. 142, intangible assets, including goodwill,
must be evaluated for impairment. Those intangible assets that will continue
to be classified as goodwill or as other intangibles with indefinite lives are
no longer amortized.
The Company's intangible assets generally consist of exclusive brand
licenses and trademarks. The Company does not carry any goodwill. The
Company evaluated which of its intangible assets were considered to have
indefinite lives and determined that the Elizabeth Arden trademarks have
indefinite useful lives. Thus, the Company ceased amortizing these trademarks
on February 1, 2002. In accordance with SFAS No. 142, the Company completed
its transitional impairment testing of this asset. That effort and
assessments of this asset with the assistance of a third party evaluation
firm indicated that no impairment adjustment was required upon adoption of
this pronouncement. The following table presents pro forma net income (loss)
and income (loss) per share data had SFAS No. 142 been adopted at the
beginning of fiscal 2002.
(Dollars in thousands, except Three Months Ended Nine Months Ended
per share data) October 27, 2001 October 27, 2001
------------------ -----------------
Reported net income (loss)
attributable to common shareholders $32,612 $(13,176)
Elizabeth Arden trademarks
amortization, net of tax 994 3,038
------- --------
Adjusted net income (loss) attributable
to common shareholders 33,606 (10,138)
Accretion and dividend on preferred
stock and other 833 2,523
------- --------
Net income (loss) as adjusted $34,439 $ (7,615)
======= ========
Basic and diluted net income (loss)
per common share:
Reported-basic net income (loss)
per share $1.85 $(0.77)
Reported-diluted net income (loss)
per share $1.48 $(0.77)
Adjusted-basic net income (loss)
per share $1.91 $(0.59)
Adjusted-diluted net income (loss)
per share $1.53 $(0.59)
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
Effective February 1, 2002, the Company adopted SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," which
addresses the accounting and reporting for the impairment and disposal of
long-lived assets. The adoption of SFAS No. 144 did not have an impact on the
financial statements of the Company.
NOTE 3. INVENTORIES
The components of inventory were as follows:
(Dollars in thousands) October 26, 2002 January 31, 2002
---------------- ----------------
Raw materials $ 35,516 $ 35,191
Work in progress 17,955 20,067
Finished goods 146,231 137,478
-------- --------
$199,702 $192,736
======== ========
8
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. SHORT-TERM DEBT
The Company has a revolving credit facility with a syndicate of banks
for which Fleet National Bank is the administrative agent (the "Credit
Facility") and which provides for borrowings on a revolving basis of up to
$175 million, with a $25 million sub limit for letters of credit. The Credit
Facility is guaranteed by certain of the Company's U.S. subsidiaries and
matures in January 2006. On March 13, 2002, as a result of weaker than
expected financial performance in fiscal 2002, the Company negotiated an
amendment of certain terms in the Credit Facility. Under the amendment, the
Company received a waiver of non-compliance with certain financial covenants
for the fourth quarter of fiscal 2002, in particular, the debt to EBITDA
(income from operations, plus depreciation and amortization) ratio and
EBITDA to net interest expense ratio, and an amendment of the related
covenant levels for each of fiscal 2003 and the first three quarters of
fiscal 2004. The amendment with the bank group also amends selected
additional sections of the Credit Facility. Loans under the revolving credit
portion of the Credit Facility, as amended, bear interest at a floating
rate of the "Applicable Margin," or spread above selected base rates. The
Company's ratio of consolidated debt to EBITDA can impact the applicable
margin. At the Company's option, the Applicable Margin may be applied to
either the London InterBank Offered Rate (LIBOR) or the Prime Rate. For the
three and nine months ended October 26, 2002, the Applicable Margin was 3.50%
for LIBOR loans and 2.25% for prime rate loans. Borrowings under the Credit
Facility are limited to eligible accounts receivable and inventories and are
collateralized by a first priority lien on all of the Company's U.S. accounts
receivable and inventory. The Company's obligations under the Credit Facility
rank pari passu or equal to right of payment with the Company's 10 3/8% Senior
Notes due 2007 and the 11 3/4% Senior Secured Notes due 2011.
The Credit Facility contains several covenants, the more significant of
which are that the Company: (i) cannot exceed certain levels of debt to
EBITDA; (ii) must maintain certain ratios of EBITDA to consolidated net
interest expense; (iii) must maintain a minimum amount of shareholders'
equity; (iv) must achieve a minimum amount of EBITDA in each quarter of fiscal
2003; and (v) cannot exceed certain limits on capital expenditures. Based upon
the Company's internal projections, the Company believes that the amended
covenants provide sufficient flexibility so that the Company can maintain
compliance with the covenants. If the actual results deviate from
projections, however, the Company may not remain in compliance with the
covenants and would not be allowed to borrow under the revolving credit
facility. In addition, a default under the revolving credit facility which
causes acceleration of the debt under this facility could trigger a default on
the Company's senior notes. In the event the Company is not able to borrow
under its credit facility, the Company would be required to develop an
alternative source of liquidity. There is no assurance that the Company could
obtain replacement financing or what the terms of such financing, if
available, would be. The Credit Facility also includes a prohibition on the
payment of dividends on its common stock, $.01 par value per share
("Common Stock") and other distributions to shareholders and restrictions on
the incurrence of additional non-trade indebtedness; provided, however, that
the Company is permitted to repurchase up to $4 million of Common Stock.
Based on the Company's performance for the nine months ended October 26, 2002,
the Company is in compliance with the revised covenants of the Credit
Facility. At October 26, 2002, the Company had an outstanding balance under
the Credit Facility of $125 million together with approximately $286,000 in
outstanding letters of credit issued. At October 26, 2002, the remaining
availability under the Credit Facility, based upon eligible receivables and
inventories as of that date, was approximately $50 million. At January 31,
2002, the Company had an outstanding balance under the Credit Facility of
approximately $7.7 million together with $286,000 in outstanding letters of
credit issued.
NOTE 5. LONG-TERM DEBT
The Company's long-term debt consisted of the following:
(Dollars in thousands) October 26, January 31,
Description 2002 2002
- ----------- ----------- -----------
10 3/8% Senior Notes due May 2007 $156,563 $156,769
11 3/4% Senior Secured Notes due May 2011 160,000 160,000
8.5% Subordinated Debenture due in equal
installments in May 2003 and 2004 4,313 6,480
8.84% Miami Lakes Facility Mortgage Note
due July 2004 5,086 5,184
-------- --------
Total long-term debt 325,962 328,433
Less current portion of long-term debt 2,365 2,312
-------- --------
Total long-term debt, net $323,597 $326,121
======== ========
9
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. COMMITMENTS AND CONTINGENCIES
In May 2002, the Company entered into an agreement with two unaffiliated
third parties for order fulfillment and logistics services in a distribution
facility in Beville, France. The agreements terminate in May 2004, provided
that they automatically renew for one additional year unless notice of non-
renewal is given by August 2003. Pricing on the order fulfillment agreement is
based on the quantity of products shipped and the type of service provided.
The Company is required to make payments of approximately $2.0 million Euros
(approximately US$2.0 million at October 26, 2002) annually under the
logistics services agreement. Except for the logistics services and order
fulfillment agreements for the Beville, France facility, the Company has not
entered into any new material commitments since January 31, 2002.
In December 2000, the Company was named in a lawsuit by a Canadian
customer of Unilever who alleges that Unilever breached obligations owed to
the plaintiff and that the Company interfered with the contractual
relationship. The plaintiff currently seeks compensatory damages of Canadian
$55 million (approximately US$35 million at October 26, 2002), against each of
Unilever and the Company plus punitive damages of Canadian $35 million
(approximately US$22 million at October 26, 2002). Management believes that
the Company would be entitled to indemnification from Unilever under our
agreement to acquire the Elizabeth Arden business to the extent the Company
incurs losses as a result of actions by Unilever. Management believes the
claims as to the Company lack merit and the Company is vigorously contesting
the matter.
The Company is also a party to a number of other legal actions,
proceedings or claims. While any action, proceeding or claim contains an
element of uncertainty, management of the Company believes that the outcome of
such actions, proceedings or claims will not have a material adverse effect on
the Company's business, financial position or results of operations.
NOTE 7. CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
At October 26, 2002 and January 31, 2002, the Company had outstanding
416,667 shares, $120 per share liquidation preference, of Series D Convertible
Preferred Stock, $.01 par value (the "Series D Convertible Preferred Stock"),
issued to an affiliate of Unilever in connection with the Arden acquisition.
Each share of Series D Convertible Preferred Stock is convertible into 10
shares of Common Stock, subject to certain restrictions. The holder of the
Series D Convertible Preferred Stock will be entitled to convert up to 33.33%
of its shares after January 23, 2002, up to 66.66% after January 23, 2003 and
all of its shares after January 23, 2004. In addition, cumulative dividends
of 5% of the outstanding liquidation preference of the Series D Convertible
Preferred Stock will begin to accrue on January 23, 2003 and will be payable,
at the Company's option, in cash or in additional shares of Series D
Convertible Preferred Stock. The Company is required to redeem the Series D
Convertible Preferred Stock on January 23, 2013 at the aggregate
liquidation value of all of the then outstanding shares plus accrued and
unpaid dividends. In addition, the Company may redeem all or part of the
Series D Convertible Preferred Stock plus accrued and unpaid dividends at any
time after February 2, 2002, subject to the waiver of certain restrictions
under its bank credit facility and compliance with certain limitations under
the Indentures governing its senior notes, at a redemption price of $25
multiplied by the number of shares of Common Stock into which the shares of
Series D Convertible Preferred Stock can be converted plus accrued and unpaid
dividends. Upon issuance, the Series D Convertible Preferred Stock was
recorded at its fair market value of $35 million, with an allocation of $26.5
million made for the beneficial conversion feature and recorded as additional
paid-in capital. The difference between the liquidation value of $50 million
and the balance recorded in the Convertible, redeemable preferred stock
account on the Company's Consolidated Balance Sheet is being accreted over the
life of the Series D Convertible Preferred Stock. For the three months ended
October 26, 2002 and October 27, 2001, the aggregate accretion and dividend on
the Series D Convertible Preferred Stock was approximately $913,000 and
$833,000, respectively. For the nine months ended October 26, 2002 and
October 27, 2001, the aggregate accretion and dividend on the Series D
Convertible Preferred Stock was approximately $2.7 and $2.5 million,
respectively.
10
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY -- (Continued)
During the nine months ended October 26, 2002, the Company granted
504,000 shares of performance-accelerated restricted stock ("PARS") to certain
key employees. PARS are restricted stock awards with a pre-defined
vesting period of six years that also provide for accelerated vesting to
three, four or five years from the date of grant if the Company's total
shareholder return exceeds the total shareholder return of the median of the
companies comprising the Russell 2000 Index over the respective three, four or
five-year period. A new grant of PARS will occur when the initial grant
vests. The PARS were recorded as unearned deferred compensation in the amount
of $5.7 million on the balance sheet and are being amortized over the
currently expected six-year vesting period. In March 2002 and September 2002,
the Company also granted 77,913 shares and 79,420 shares, respectively, of
restricted stock to certain employees that vest one year from the date of
grant. At October 26, 2002, these restricted shares were recorded as unearned
deferred compensation in the amount of approximately $1.6 million on the
balance sheet and are being amortized over the vesting period. Compensation
expense for the three and nine months ended October 26, 2002, related to the
PARS and the restricted stock granted to employees, amounted to approximately
$654,000 and $1.6 million, respectively. At October 26, 2002 and January 31,
2002, the shares of Common Stock outstanding included 661,333 shares and
64,181 shares, respectively, of restricted stock that are subject to vesting
requirements.
NOTE 8. EARNINGS (LOSS) PER SHARE
Basic earnings per share is computed by dividing the net income
attributable to common shareholders by the weighted average shares of
outstanding Common Stock. The calculation of diluted earnings per share is
similar to basic earnings per share except that the denominator includes
dilutive potential Common Stock such as stock options, warrants and
convertible securities. In addition, for the dilutive earnings per share
calculation, the interest incurred on the convertible securities, net of tax,
and the imputed preferred dividend and accretion is added back to net income.
Diluted loss per share equals basic loss per share for the nine months ended
October 27, 2001, as the assumed conversion of convertible securities and the
assumed exercise of outstanding options and warrants would have an anti-
dilutive effect.
11
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. EARNINGS (LOSS) PER SHARE -- (Continued)
The following table represents the computation of income (loss) per
share (in thousands except per share data):
Three Months Ended Nine Months Ended
October 26, October 27, October 26, October 27,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Basic
Net income (loss)
attributable to common
shareholders $36,819 $32,612 $14,926 $(13,176)
======= ======= ======= ========
Weighted average shares
Outstanding 17,765 17,617 17,733 17,187
====== ====== ====== ======
Net income (loss) per
basic share $ 2.07 $ 1.85 $ 0.84 $(0.77)
====== ====== ====== ======
Diluted
Net income (loss)
attributable to common
shareholders $36,819 $32,612 $14,926 $(13,176)
Add: 7.5% Convertible
Subordinated
Debentures interest,
net of tax -- -- -- 23
Add: Accretion and Dividend
on Series D Convertible
Preferred Stock 913 833 2,740 2,500
------- ------- ------- -------
Net income (loss),
as adjusted $37,732 $33,445 $17,666 $(10,653)
======= ======= ======= ========
Weighted average shares
Outstanding 17,765 17,617 17,733 17,187
Potential common shares --
treasury method 1,048 754 1,140 1,407
Assumed conversion of
7.5% Convertible Subordinated
Debentures -- -- -- 94
Series D Convertible Preferred
Stock 4,167 4,167 4,167 4,167
------- ------- ------- -------
Weighted average shares and
potential dilutive shares 22,980 22,538 23,040 22,855
======= ======= ======= =======
Net income (loss)
per diluted share $1.64 $1.48 $0.77 $(0.77)
===== ===== ===== ======
The following table shows the options to purchase shares of Common Stock
that were outstanding during the three and nine months ended October 26, 2002
and October 27, 2001, but were not included in the computation of diluted
income (loss) per share because the option exercise price was greater than
the average market price of the common shares over the applicable period:
Three Months Ended Nine Months Ended
October 26, October 27, October 26, October 27,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Number of shares under
Option 2,820,750 112,000 1,937,974 7,000
========= ======= ========= =====
Range of exercise $11.33-$20.64 $14.80-$20.30 $12.50-$20.64 $20.30
============= ============= ============= ======
12
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following condensed financial statements of the Company show in
separate columns those subsidiaries that are guarantors of the 11 3/4% Senior
Secured Notes due 2011 which were issued to finance a portion of the purchase
price for the acquisition of the Elizabeth Arden business in January 2001,
elimination adjustments and the consolidated total. The Company's direct
subsidiaries DF Enterprises, Inc., FD Management, Inc. and Elizabeth Arden
International Holding, Inc., are guarantors of the 11 3/4% Senior Secured
Notes. Entities included in this footnote follow Elizabeth Arden, Inc.'s (the
"Company") accounting policies as described in Footnote 1 of the consolidated
financial statements, except with respect to accounting for investment in
guarantors subsidiaries, which the Company has accounted for using the equity
method of accounting. Equity income of the guarantors subsidiaries is
included in interest and other expense, net. All information presented is in
thousands.
BALANCE SHEET October 26, 2002
Company Guarantors Eliminations Consolidated
------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 4,499 $ 9,848 $ -- $ 14,347
Accounts receivable, net 207,350 78,017 -- 285,367
Inventories 151,415 48,287 -- 199,702
Intercompany receivable 915,496 (791,164) (124,332) --
Deferred income taxes 15,970 -- -- 15,970
Prepaid expenses and
other assets 10,198 5,591 -- 15,789
---------- --------- --------- ---------
Total current assets 1,304,928 (649,421) (124,332) 531,175
---------- --------- --------- ---------
Property and equipment, net 26,546 9,297 -- 35,843
---------- --------- --------- ---------
Other assets:
Investment in guarantor's
subsidiaries 6,698 -- (6,698) --
Exclusive brand licenses and
trademarks, net 32,101 172,672 -- 204,773
Other assets 16,078 3,329 -- 19,407
---------- --------- --------- ---------
Total other assets 54,877 176,001 (6,698) 224,180
---------- --------- --------- ---------
Total assets $1,386,351 $(464,123) $(131,030) $ 791,198
========== ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 125,000 $ -- $ -- $ 125,000
Accounts payable - trade 102,906 8,974 -- 111,880
Intercompany payable 626,913 (502,581) (124,332) --
Other payables and accrued
expenses 51,483 21,829 -- 73,312
Current portion of long-term debt 2,365 -- -- 2,365
---------- --------- --------- ---------
Total current liabilities 908,667 (471,778) (124,332) 312,557
---------- --------- --------- ---------
Long-term debt, net 323,597 -- -- 323,597
Deferred income taxes and other 9,187 957 -- 10,144
---------- --------- --------- ---------
Total liabilities 1,241,451 (470,821) (124,332) 646,298
---------- --------- --------- ---------
Convertible, redeemable
preferred stock 14,720 -- -- 14,720
---------- --------- --------- ---------
Shareholders' equity 130,180 6,698 (6,698) 130,180
---------- --------- --------- ---------
Total liabilities and
shareholders' equity $1,386,351 $(464,123) $(131,030) $ 791,198
========== ========= ========= =========
13
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION -- (Continued)
BALANCE SHEET January 31, 2002
Company Guarantors Eliminations Consolidated
------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,616 $ 12,297 $ -- $ 15,913
Accounts receivable, net 47,543 32,177 -- 79,720
Inventories 152,883 39,853 -- 192,736
Intercompany receivable 615,368 (388,272) (227,096) --
Deferred income taxes 15,970 -- -- 15,970
Prepaid expenses and other assets 16,133 8,239 -- 24,372
-------- --------- --------- --------
Total current assets 851,513 (295,706) (227,096) 328,711
-------- --------- --------- --------
Property and equipment, net 29,403 8,865 -- 38,268
-------- --------- --------- --------
Other assets:
Investment in guarantor's
subsidiaries (4,497) -- 4,497 --
Exclusive brand licenses and
trademarks, net 38,624 173,387 -- 212,011
Other assets 22,771 (4,996) -- 17,775
-------- --------- --------- --------
Total other assets 56,898 168,391 4,497 229,786
-------- --------- --------- --------
Total assets $937,814 $(118,450) $(222,599) $596,765
======== ========= ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 7,700 $ -- $ -- $ 7,700
Accounts payable - trade 60,228 8,922 -- 69,150
Intercompany payable 357,972 (130,876) (227,096) --
Other payables and accrued expenses 52,271 6,988 -- 59,259
Current portion of long-term debt 2,312 -- -- 2,312
-------- --------- --------- --------
Total current liabilities 480,483 (114,966) (227,096) 138,421
-------- --------- --------- --------
Long-term debt 326,121 -- -- 326,121
Deferred income taxes and other 7,296 1,013 -- 8,309
-------- --------- --------- --------
Total liabilities 813,900 (113,953) (227,096) 472,851
-------- --------- --------- --------
Convertible, redeemable
preferred stock 11,980 -- -- 11,980
-------- --------- --------- --------
Shareholders' equity 111,934 (4,497) 4,497 111,934
-------- --------- --------- --------
Total liabilities and
shareholders' equity $937,814 $(118,450) $(222,599) $596,765
======== ========= ========= ========
For The Three Months Ended
Statement of Operations October 26, 2002
Company Guarantors Eliminations Consolidated
------------------------------------------------------
Net sales $233,912 $94,212 $(13,317) $314,807
Cost of sales 139,920 37,818 -- 177,738
-------- ------- -------- --------
Gross profit 93,992 56,394 (13,317) 137,069
-------- ------- -------- --------
Selling, general and
administrative expenses 41,135 33,719 (13,317) 61,537
Depreciation and amortization 3,977 1,897 -- 5,874
-------- ------- -------- --------
Income from operations 48,880 20,778 -- 69,658
Interest and other expense, net 3,667 (4,078) (10,777) (11,188)
-------- ------- -------- --------
Income before income taxes 52,547 16,700 (10,777) 58,470
Provision for income taxes 14,815 5,923 -- 20,738
-------- ------- -------- --------
Net income $ 37,732 $10,777 $(10,777) $ 37,732
======== ======= ======== ========
14
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION - (Continued)
For The Three Months Ended
Statement of Operations October 27, 2001
Company Guarantors Eliminations Consolidated
------------------------------------------------------
Net sales $226,144 $73,058 $(13,000) $286,202
Cost of sales 139,014 27,723 -- 166,737
-------- ------- -------- --------
Gross profit 87,130 45,335 (13,000) 119,465
-------- ------- -------- --------
Selling, general and
administrative expenses 36,296 26,029 (13,000) 49,325
Depreciation and amortization 3,853 3,830 -- 7,683
-------- ------- -------- --------
Income from operations 46,981 15,476 -- 62,457
Interest and other expense, net 666 (6,285) (6,053) (11,672)
-------- ------- -------- --------
Income before income taxes 47,647 9,191 (6,053) 50,785
Provision for income taxes 14,202 3,138 -- 17,340
-------- ------- -------- --------
Net income $ 33,445 $ 6,053 $ (6,053) $ 33,445
======== ======= ======== ========
For The Nine Months Ended
Statement of Operations October 26, 2002
Company Guarantors Eliminations Consolidated
------------------------------------------------------
Net sales $403,932 $204,919 $(26,574) $582,277
Cost of sales 257,646 84,931 -- 342,577
-------- -------- -------- --------
Gross profit 146,286 119,988 (26,574) 239,700
-------- -------- -------- --------
Selling, general and
administrative expenses 105,908 83,862 (26,574) 163,196
Depreciation and amortization 11,952 5,328 -- 17,280
-------- -------- -------- --------
Income from operations 28,426 30,798 -- 59,224
Interest and other expense, net (6,621) (15,549) (9,933) (32,103)
-------- -------- -------- --------
Income before income taxes 21,805 15,249 (9,933) 27,121
Provision for income taxes 4,139 5,316 -- 9,455
-------- -------- -------- --------
Net income $ 17,666 $ 9,933 $ (9,933) $ 17,666
======== ======== ======== ========
For The Nine Months Ended
Statement of Operations October 27, 2001
Company Guarantors Eliminations Consolidated
------------------------------------------------------
Net sales $370,132 $180,086 $ (26,321) $523,897
Cost of sales 260,973 64,204 -- 325,177
-------- -------- --------- --------
Gross profit 109,159 115,882 (26,321) 198,720
-------- -------- --------- --------
Selling, general and
administrative expenses 97,635 87,354 (26,321) 158,668
Depreciation and amortization 12,462 10,357 -- 22,819
-------- -------- --------- --------
(Loss) income from operations (938) 18,171 -- 17,233
Interest and other expense, net (15,876) (18,914) 465 (34,325)
-------- -------- --------- --------
Loss before income taxes (16,814) (743) 465 (17,092)
Benefit from income taxes (6,138) (278) -- (6,416)
-------- -------- --------- --------
Net loss $(10,676) $ (465) $ 465 $(10,676)
======== ======== ========= ========
15
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION - (Continued)
For The Nine Months Ended
Statement of Cash Flow October 26, 2002
Company Guarantors Eliminations Consolidated
------------------------------------------------------
Operating Activities:
Net cash (used in) provided
by operating activities $(112,237) $ 1,461 $ -- $(110,776)
--------- -------- ------ ---------
Investing Activities:
Additions to property and equipment,
net of disposals (2,379) (4,119) -- (6,498)
--------- -------- ------ ---------
Net cash used in investing
activities (2,379) (4,119) -- (6,498)
--------- -------- ------ ---------
Financing Activities:
Net proceeds from short-term debt 117,353 -- -- 117,353
Payments on long-term debt (2,318) -- -- (2,318)
Proceeds from the exercise of
stock options 464 -- -- 464
--------- -------- ------ ---------
Net cash provided by financing
activities 115,499 -- -- 115,499
Effects of exchange rate changes
on cash and cash equivalents -- 209 -- 209
Net increase (decrease) in cash
and cash equivalents 883 (2,449) -- (1,566)
Cash and cash equivalents at
beginning of period 3,616 12,297 -- 15,913
--------- -------- ------ ---------
Cash and cash equivalents at
end of period $ 4,499 $ 9,848 $ -- $ 14,347
========= ======== ====== =========
For The Nine Months Ended
Statement of Cash Flow October 27, 2001
Company Guarantors Eliminations Consolidated
------------------------------------------------------
Operating Activities:
Net cash (used in) provided
by operating activities $(92,990) $ 8,693 $ -- $ (84,297)
-------- --------- -------- ---------
Investing Activities:
Additions to property and equipment,
net of disposals (3,982) (3,536) -- (7,518)
-------- --------- -------- ---------
Net cash used in investing
activities (3,982) (3,536) -- (7,518)
-------- --------- -------- ---------
Financing Activities:
Net proceeds from short-term debt 110,647 -- -- 110,647
Payments on long-term debt (1,091) -- -- (1,091)
Proceeds from the exercise of
stock options 1,416 -- -- 1,416
Proceeds from the exercise of
stock purchase warrants 8,287 -- -- 8,287
Repurchase of common stock (402) -- -- (402)
-------- --------- -------- ---------
Net cash provided by
financing activities 118,857 -- -- 118,857
Net increase in cash and
cash equivalents 21,885 5,157 -- 27,042
Cash and cash equivalents at
beginning of period 4,004 13,691 -- 17,695
-------- --------- -------- ---------
Cash and cash equivalents at
end of period $ 25,889 $ 18,848 $ -- $ 44,737
======== ========= ======== =========
16
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. RELATED PARTY TRANSACTIONS
In March 2002, the Company provided a loan to its president and chief
executive officer in the principal amount of $500,000 (the "Note"), which
matures on March 31, 2004 and bears quarterly interest at 5%. This loan
replaced earlier loans made by the Company to its president and chief
executive officer for payment of certain Canadian tax liabilities resulting
from his relocation to Florida during the fiscal year ended January 31, 1999.
In July 2002, the president and chief executive officer repaid to the Company
$100,000 of the principal amount of the Note. In accordance with the Sarbanes-
Oxley Act of 2002 (the "Act") which became law on July 31, 2002, the Company
is prohibited from extending loans such as the Note to executive officers and
directors. Under the Act, the Note is permitted to continue in effect, but
may not be renewed or materially modified.
NOTE 11. SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING ACTIVITIES
The Company incurred the following non-cash financing and investing
activities:
(Dollars in thousands) Nine Months Ended
October 26, 2002 October 27, 2001
---------------- ----------------
Accretion and dividend on
Series D Convertible
Preferred Stock $2,740 $2,500
====== ======
Conversion of 7.5%
Convertible Subordinated
Debentures (including
accrued interest) into
Common Stock $2,410
======
Issuance of Restricted Stock
and PARS, net of forfeitures $7,270
======
NOTE 12. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board issued Financial
Accounting Statement No. 146 (SFAS No. 146), "Accounting for Costs Associated
with Exit or Disposal Activities." The objectives of SFAS No. 146 are to
address financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The principal difference between SFAS No. 146 and Issue No.
94-3 relates to SFAS No. 146 requirements for recognition of a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under Issue No. 94-3 a liability for an exit cost as
defined in Issue No. 94-3 was recognized at the date of an entity's commitment
to an exit plan. The provisions of SFAS No. 146 will be effective for the
Company for exit or disposal activities that are initiated after December 31,
2002.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
In connection with the Safe Harbor Provisions of the Private Securities
Litigation Reform Act of 1995, Elizabeth Arden, Inc., is hereby providing
cautionary statements identifying important factors that could cause our
actual results to differ materially from those projected in forward-looking
statements (as defined in such act) made in this Quarterly Report on Form 10-
Q. Any statements that express, or involve discussions as to, expectations,
beliefs, plans, objectives, assumptions or future events or performance
(often, but not always, through the use of words or phrases such as "will
likely result," "are expected to," "will continue," "is anticipated,"
"estimated," "intends," "plans" and "projection") are not historical facts and
may be forward-looking and may involve estimates and uncertainties which could
cause actual results to differ materially from those expressed in the forward-
looking statements. Accordingly, any such statements are qualified in their
entirety by reference to, and are accompanied by, the following key factors
that have a direct bearing on our results of operations: our substantial
indebtedness and debt service obligations; our ability to successfully and
cost-effectively integrate acquired businesses or new brands; our absence of
contracts with customers or suppliers and our ability to maintain and develop
relationships with customers and suppliers; international and domestic
economic and business changes that could impact consumer confidence, our
customers' financial condition, our ability to access capital for acquisitions
and the assumptions underlying our critical accounting estimates; the
retention and availability of key personnel; changes in the retail, fragrance
and cosmetic industries; our ability to launch new products and implement our
growth strategy; the impact of competitive products and pricing; changes in
product mix to less profitable products; risks of international operations,
including foreign currency fluctuations; economic and political consequences
of terrorist attacks and political instability in certain regions of the
world; delays in shipments, inventory shortages and higher costs of production
due to interruption of operations at key manufacturing or fulfillment
facilities that, after consolidations of manufacturing and fulfillment
locations, manufacture or provide logistic services for the majority of our
supply of certain products; changes in the legal, regulatory and political
environment that impact, or will impact, our business, including changes to
customs or trade regulations or accounting standards; legal and regulatory
proceedings that affect, or will affect, our business; and other risks and
uncertainties. We caution that the factors described herein could cause actual
results to differ materially from those expressed in any forward-looking
statements we make and that investors should not place undue reliance on any
such forward-looking statements. Further, any forward-looking statement
speaks only as of the date on which such statement is made, and we undertake
no obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made or to reflect the
occurrence of anticipated or unanticipated events or circumstances. New
factors emerge from time to time, and it is not possible for us to predict all
of such factors. Further, we cannot assess the impact of each such factor on
our results of operations or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements.
GENERAL
This discussion should be read in conjunction with the Notes to Unaudited
Consolidated Financial Statements contained herein and Management's Discussion
and Analysis of Financial Condition and Results of Operations appearing in our
Annual Report on Form 10-K for the year ended January 31, 2002. The results
of operations for an interim period may not give a true indication of results
for the year. In the following discussions, all comparisons are with the
corresponding items in the prior year.
Our operations have historically been seasonal, with higher sales
generally occurring in the second half of the fiscal year as a result of
increased demand by retailers in anticipation of and during the holiday
season. In fiscal 2002, 64% of our net sales were made during the second half
of the fiscal year. Due to the size and timing of certain orders from our
customers, sales and results of operations can vary widely between quarters of
the same and different years. As a result we expect to experience variability
in net sales, gross margin and net income on a quarterly basis.
We experience seasonality in our working capital, with peak inventory and
receivable balances in the third quarter of our fiscal year. Our working
capital borrowings are also seasonal and are normally highest in the months of
September, October and November. During the fourth fiscal quarter ending
January 31 of each year, significant cash is normally generated as customer
payments on holiday season orders are received.
In the first quarter of the current fiscal year, we adopted Emerging
Issues Task Force ("EITF") Issue No. 01-09, "Accounting for Consideration
given by a Vendor to a Customer" which codified and reconciled EITF 00-14,
"Accounting for Certain Sales Incentives," which provides guidance on
accounting for and the income statement classification of discounts, coupons,
rebates and free products, and EITF 00-25, "Accounting for Consideration from
a
18
Vendor to a Retailer in Connection with the Purchase or Promotion of the
Vendor's Products," which provides guidance on the income statement
classification of consideration from a vendor to a retailer in connection with
the retailer's purchase of the vendor's products or to promote sales of the
vendor's products. The effects of these accounting pronouncements have been
incorporated into all periods presented. See "Recently Adopted Accounting
Standards" for a further discussion of these pronouncements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The SEC has issued Financial Reporting Release No. 60, "Cautionary Advice
Regarding Disclosure About Critical Accounting Policies" ("FRR 60"),
suggesting companies provide additional disclosure and commentary on those
accounting policies considered most critical. FRR 60 considers an accounting
policy to be critical if it is important to the Company's financial condition
and results, and requires significant judgment and estimates on the part of
management in its application. We believe the accounting policies below
represent our critical accounting policies as contemplated by FRR 60. See our
Annual Report on Form 10-K for the year ended January 31, 2002 for a detailed
discussion on the application of these and other accounting policies.
ACCOUNTING FOR ACQUISITIONS. We have accounted for our acquisitions,
including the acquisition of the Elizabeth Arden business, under the purchase
method of accounting for business combinations. Under the purchase method of
accounting, the cost, including transaction costs, are allocated to the
underlying net assets, based on their respective estimated fair values. The
excess of the purchase price over the estimated fair values of the net assets
acquired is recorded as goodwill.
The judgments made in determining the estimated fair value and expected
useful lives assigned to each class of assets and liabilities acquired can
significantly affect net income. For example, different classes of assets
will have useful lives that differ--the useful life of property, plant, and
equipment acquired will differ substantially from the useful life of brand
licenses and trademarks. Consequently, to the extent a longer-lived asset is
ascribed greater value under the purchase method than a shorter-lived asset,
net income in a given period may be higher.
Determining the fair value of certain assets and liabilities acquired is
judgmental in nature and often involves the use of significant estimates and
assumptions. One of the areas that requires more judgment in determining fair
values and useful lives is intangible assets. To assist in this process, we
often obtain appraisals from independent valuation firms for certain
intangible assets.
The value of our intangible assets, including brand licenses, trademarks
and intangibles, is exposed to future adverse changes if we experience
declines in operating results or experience significant negative industry or
economic trends. We periodically review intangible assets for impairment
using the guidance of applicable accounting literature.
In the first quarter of our current fiscal year, we adopted Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets"
("SFAS No. 142"), new rules for measuring the impairment of brand licenses,
trademarks and intangibles. In accordance with SFAS No. 142, we completed our
transitional impairment testing of the Elizabeth Arden trademarks. That
effort and assessments of this asset with the assistance of a third party
valuation firm indicated that no impairment adjustment was required upon
adoption of this pronouncement.
ALLOWANCES FOR SALES RETURNS AND MARKDOWNS. As is customary in the
prestige beauty business, we grant certain of our customers the right, subject
to our authorization and approval, to either return product or to receive a
markdown allowance for product which does not "sell-through" to consumers.
Upon sale, we record a provision for product returns and markdowns estimated
based on our historical experience, "sell-through" levels, economic trends
and changes in customer demand. Based upon this information, we provide an
allowance for sales returns and markdown allowances. There is considerable
judgment used in evaluating the factors influencing the allowance for returns
and markdowns and additional allowances in any particular period may be
needed, reducing net income or increasing net loss.
ALLOWANCES FOR DOUBTFUL ACCOUNTS RECEIVABLE. We maintain allowances for
doubtful accounts to cover uncollectible accounts receivable, and we evaluate
our accounts receivable to determine if they will ultimately be collected.
This evaluation includes significant judgments and estimates, including an
analysis of receivables aging and a customer-by-customer review for large
accounts. If, for example, the financial condition of our customers
deteriorates resulting in an impairment of their ability to pay, additional
allowances may be required.
19
PROVISIONS FOR INVENTORY OBSOLESCENCE. We record a provision for
estimated obsolescence and shrinkage of inventory. Our estimates consider the
cost of inventory, the estimated market value, the shelf life of the
inventory, our historical experience and alternate methods of sale. If there
are changes to these estimates, additional provisions for inventory
obsolescence may be necessary.
INCOME TAXES AND VALUATION RESERVES. We record a valuation allowance to
reduce deferred tax assets to the amount that is more likely than not
anticipated to be realized. We consider projected future taxable income and
ongoing tax planning strategies in assessing the valuation allowance. In the
event we determine that we may not be able to realize all or part of our
deferred tax asset in the future, an adjustment to the deferred tax asset
would be charged to earnings in the period of such determination.
RESULTS OF OPERATIONS
Three Months Ended October 26, 2002 Compared to the Three Months Ended
October 27, 2001
- ----------------------------------------------------------------------
Net Sales. Net sales increased approximately 10% to $314.8 million for
the three months ended October 26, 2002, from $286.2 million for the three
months ended October 27, 2001. The increase was driven primarily by the
performance of the "open sell" program with certain retailers, new product
launches, including the fragrances ardenbeauty and Forever Elizabeth, and the
addition of certain distribution brands. The "open sell" program allows
retailers to display fragrances on open counters and shelves rather than in
locked cases, giving consumers easier access to our products. The increase in
net sales was partially offset by continuing weak sales in U.S. department
stores and fewer U.S. prestige department store doors.
Gross Profit. Gross profit increased approximately 15% to $137.1 million
for the three months ended October 26, 2002, from $119.5 million for the three
months ended October 27, 2001. Gross margin increased to 43.5% for the
third quarter in the current fiscal year from 41.7% in the prior year. The
increase in gross profit reflects increased sales, a reduction in the effect
of the "high cost" Elizabeth Arden inventory purchased prior to the
acquisition of the Elizabeth Arden business, lower gift with purchase costs,
and supply chain efficiencies. The increase in gross profit was partially
offset by lower sales in U.S. department stores and increased sales of certain
distributed brands which have lower margins than owned and licensed brands.
During the three months ended October 27, 2001, the Company's gross profit was
reduced by approximately $8.3 million, and the gross margin was reduced by
2.7%, due to sales of "high cost" Elizabeth Arden product purchased prior to
the Elizabeth Arden acquisition.
SG&A. Selling, general and administrative expenses increased
approximately $12.2 million, or 25%, to $61.5 million for the three months
ended October 26, 2002, from $49.3 million for the three months ended October
27, 2001. As a percentage of net sales, selling, general and administrative
expenses increased to 19.5% for the three months ended October 26, 2002, as
compared with 17.2% in the prior year period. The increase in selling,
general and administrative expenses was driven in large part by increased
investment in advertising and promotion to support new products and higher
costs for incentive compensation.
Depreciation and Amortization. Depreciation and amortization decreased
approximately $1.8 million to $5.9 million in the three months ended October
26, 2002, as compared to $7.7 million for the three months ended October
27, 2001, principally as a result of the adoption of SFAS 142. In accordance
with SFAS 142, the Elizabeth Arden trademarks were determined to be
indefinite-lived assets and will no longer be amortized. Amortization relating
to these trademarks amounted to $1.6 million for the three months ended
October 27, 2001. See "Recently Adopted Accounting Standards."
Interest Expense. Interest expense, net of interest income, decreased by
approximately $357,000 to $11.3 million for the three months ended October 26,
2002, as compared to $11.6 million for the three months ended October 27,
2001. The decrease resulted from a reduction in both average short-term debt
outstanding and interest rates and interest rates paid on that debt.
Provision for Income Taxes. The provision for income taxes was
approximately $20.7 million for the three months ended October 26, 2002, as
compared with $17.3 million for the three months ended October 27, 2001, due
to higher operating income. The effective tax rate, calculated as a
percentage of income before taxes, for the three months ended October 26, 2002
and October 27, 2001 was 35.5% and 34.1%, respectively.
Net Income. Net income increased approximately $4.3 million, or 13%, to
$37.7 million for the three months ended October 26, 2002 as compared with net
income of $33.4 million in the prior year period. The improved
20
performance was driven by higher net sales and gross profit coupled with lower
depreciation, amortization and interest expense, partially offset by higher
selling general and administrative expenses.
Accretion and Dividend on Preferred Stock. As part of the purchase price
for the acquisition of the Elizabeth Arden business, we issued to Unilever
416,667 shares of Series D convertible preferred stock. The Series D
convertible preferred stock was recorded at a $35 million fair value with an
allocation of $26.5 million made for the beneficial conversion feature and
recorded as additional paid-in capital. The Series D convertible preferred
stock has a $50 million liquidation preference, and carries a 5% annual
dividend yield, which begins accruing in January 2003. The accretion and
dividend on preferred stock, which is a non-cash charge to net income
attributable to common shareholders, of $913,000 for the three months ended
October 26, 2002 and $833,000 for the three months ended October 27, 2001,
represents accretion on the fair value of the preferred stock and the imputed
dividends on the preferred stock.
Net Income Attributable to Common Shareholders. Net income attributable
to common shareholders increased by approximately $4.2 million, or 13%, to
income of $36.8 million for the three months ended October 26, 2002, as
compared with $32.6 million for the three months ended October 27, 2001.
EBITDA. EBITDA (income from operations, plus depreciation and
amortization) increased approximately $5.4 million, or 8%, to $75.5 million
for the three months ended October 26, 2002 as compared to $70.1 million for
the prior year period. The increase in EBITDA reflects higher net sales and
gross profit, partially offset by higher selling general and administrative
expenses.
Nine Months Ended October 26, 2002 Compared to the Nine Months Ended
October 27, 2001
- --------------------------------------------------------------------
Net Sales. Net sales increased approximately 11% to $582.3 million for
the nine months ended October 26, 2002, from $523.9 million for the nine
months ended October 27, 2001. The increase was driven primarily by new
product launches, including the fragrances ardenbeauty and Forever Elizabeth,
expansion of the "open sell" program with certain retailers and the addition
of certain distribution brands. These increases were partially offset by
continuing weak sales in U.S. department stores and fewer U.S. prestige
department store doors.
Gross Profit. Gross profit increased approximately 21% to $239.7 million
for the nine months ended October 26, 2002, from $198.7 million for the nine
months ended October 27, 2001. Gross margin increased to 41.2% of net sales
for the nine months ending October 27, 2002 from 37.9% in the corresponding
prior year period. The increase in gross profit was due to higher sales, a
reduction in the effect of the "high cost" Elizabeth Arden inventory purchased
prior to the acquisition of the Elizabeth Arden business, and a $10.3 million
inventory write-down recorded in fiscal 2002, partially offset by the
continued weakness in U.S. department stores and higher sales of certain
distributed brands which have lower gross margins than owned and licensed
brands. For the nine months ended October 27, 2001, the Company's gross profit
was reduced by approximately $16.5 million, and the gross margin 4.7%, due to
sales of "high" cost Elizabeth Arden product purchased prior to the Elizabeth
Arden acquisition.
SG&A. Selling, general and administrative expenses increased
approximately $4.5 million, or approximately 3%, to $163.2 million for the
nine months ended October 26, 2002, from $158.7 million for the nine months
ended October 27, 2001. The increase in selling, general and administrative
expenses as compared to prior year was due to additional advertising and
promotion support for new product launches and higher incentive compensation
costs. This increase was partially offset by reduced expenses from management
initiatives, including the restructuring of certain international operations
and reduction of overhead expenses, as well as the effects of favorable
foreign currency rates. As a percentage of net sales, selling, general and
administrative expenses declined to 28.0% for the nine months ended October
26, 2002, as compared with 30.3% in the prior year. The decline in selling,
general and administrative expenses as a percentage of net sales reflects the
leveraging of our cost structure, improvements due to management initiatives,
and the effects of favorable foreign currency rates, partially offset by
increased incentive compensation.
Depreciation and Amortization. Depreciation and amortization decreased
approximately $5.5 million to $17.3 million in the nine months ended October
26, 2002, as compared to $22.8 million for the nine months ended October
27, 2001, principally as a result of the adoption of SFAS 142. In adopting
SFAS 142, it was concluded that the Elizabeth Arden trademarks are considered
indefinite-lived assets and will no longer be amortized. Amortization relating
to these trademarks amounted to $4.8 million for the nine months ended October
27, 2001. See "Recently Adopted Accounting Standards."
21
Interest Expense. Interest expense, net of interest income, decreased by
approximately $2.0 million to $32.3 million for the nine months ended October
26, 2002, as compared to $34.3 million for the nine months ended October
27, 2001. The decrease resulted from a reduction in both average short-term
debt outstanding and interest rates paid on that debt.
Provision for (Benefit from) Income Taxes. The provision for income
taxes was approximately $9.5 million for the nine months ended October 26,
2002, as compared with the benefit from income taxes of $6.4 million for the
nine months ended October 27, 2001, reflecting higher operating income. The
effective tax rate calculated as a percentage of income (loss) before income
taxes for the nine months ended October 26, 2002 and October 27, 2001 was
34.9% and 37.5%, respectively.
Net Income (Loss). Net income increased approximately $28.3 million, or
265.5%, to income of $17.7 million for the nine months ended October 26, 2002
as compared with a loss of $10.7 million in the prior year period. The
increase was a result of higher net sales and gross profit and lower
depreciation and amortization, partially offset by higher selling, general and
administrative expenses.
Accretion and Dividend on Preferred Stock. The accretion and dividend on
preferred stock, which is a non-cash charge to net loss attributable to common
shareholders, of $2.8 million for the nine months ended October 26, 2002 and
$2.5 million for the nine months ended October 27, 2001, represents accretion
on the fair value of, and the imputed dividends on, the Series D convertible
preferred stock issued to Unilever as part of the purchase price for the
acquisition of the Elizabeth Arden business. See Note 7 to the Notes to
Unaudited Consolidated Financial Statements.
Net Income (Loss) Attributable to Common Shareholders. Net income
attributable to common shareholders increased by approximately $28.1 million,
or 213.3%, to income of $14.9 million for the nine months ended October 26,
2002 as compared with a loss of $13.2 million for the nine months ended
October 27, 2001.
EBITDA. EBITDA (income from operations, plus depreciation and
amortization) increased approximately $36.5 million, or 91%, to $76.5 for the
nine months ended October 26, 2002, as compared to income of $40.1 million for
the nine months ended October 27, 2001. The increase in EBITDA was the result
of higher net sales and gross profit, partially offset by higher selling,
general and administrative expenses.
FINANCIAL CONDITION
For the nine months ended October 26, 2002, net cash used in operating
activities totaled $110.8 million compared with $84.3 million of net cash used
in operating activities for the nine months ended October 27, 2001.
Seasonal increases in our working capital requirements more than offset
incremental cash flow from improved operating performance. In January 2001, we
acquired certain assets of the Elizabeth Arden business, and the operating
cash flows for the nine months ended October 27, 2001 reflect the build-up of
receivables and payables related to operating the business, as receivables and
payables were not included in the acquired assets. Accounts receivable of
$285.4 million as of October 26, 2002 exceeded accounts receivable of $230.4
million as of October 27, 2001 due to higher sales. At October 26, 2002,
inventories were $13.9 million lower than at October 27, 2001, reflecting both
a reduction in "high cost" Arden inventory and management initiatives
undertaken to reduce inventory levels.
Net cash used in investing activities totaled $6.5 million for the nine
months ended October 26, 2002 compared to $7.5 million for the nine months
ended October 27, 2001, resulting from reduced capital expenditures. Net cash
provided by financing activities was $115.5 million for the nine months ended
October 26, 2002 compared to $118.9 million in the prior year. The decrease
for the nine months ended October 27, 2001 reflects the receipt by the Company
in the prior year period of proceeds from the exercise of stock purchase
warrants.
We have a credit facility with a syndicate of banks, for which Fleet
National Bank is administrative agent, which provides borrowings of up to $175
million on a revolving basis with a $25 million sub limit for letters of
credit. Borrowings under the credit facility are limited to eligible accounts
receivable and inventories and are collateralized by a first priority lien on
our total U.S. accounts receivable and inventory. On March 13, 2002, as a
result of weaker than expected performance in fiscal 2002, we entered into an
amendment of our credit facility with the bank group. The amendment included
the bank group's waiver of non-compliance with certain financial ratios for
the fourth quarter of fiscal 2002, in particular the debt to EBITDA ratio and
the EBITDA to net interest expense ratio, and modifications of related
covenant levels for each quarter of fiscal 2003 and the first three quarters
of fiscal 2004. The amendment also modified selected additional sections of
the credit facility. We have been in compliance with the revised covenants of
the credit facility for each of the three quarters of the current fiscal year.
At October 26, 2002, we had an outstanding
22
balance under the credit facility of $125.0 million, and the remaining
availability, based upon eligible receivables and inventories as of that date,
was approximately $50.0 million. At October 27, 2001, we had an outstanding
balance under the credit facility of approximately $133.6 million. We believe
that cash from operations and the availability under our credit facility
should be adequate to support currently planned business operations and
capital expenditures. If our actual operating results deviate from our
projections, however, we may not remain in compliance with the covenants of
the credit facility and would not be allowed to borrow under the credit
facility. In the event that we were not able to borrow under our credit
facility, we would be required to develop an alternative source of liquidity.
There can be no assurance that we could obtain replacement financing or what
the terms of such financing, if available, would be.
RECENTLY ADOPTED ACCOUNTING STANDARDS
Effective February 1, 2002, we adopted Emerging Issues Task Force
("EITF") 01-09, "Accounting for Consideration Given by a Vendor to a
Customer," which codified and reconciled EITF No. 00-14, "Accounting for
Certain Sales Incentives." EITF No. 00-14 provides guidance on accounting for
discounts, coupons, rebates and free products, as well as the income statement
classification of these discounts, coupons, rebates and free products. Upon
adoption of this pronouncement, we classified gift-with-purchase activities,
which were previously reported as selling, general and administrative
expenses, as cost of sales. For comparison purposes, certain amounts in the
Consolidated Statement of Operations for the nine months ended October 27,
2001 were reclassified to reflect the adoption of EITF 01-09. The adoption of
EITF 01-09 on this issue had no impact on operating income; however, for the
three months ended October 26, 2002 and October 27, 2001, gross profit
decreased by approximately $7.3 and $12.8 million, respectively, offset by
an equal decrease in selling, general and administrative expenses. For the
nine months ended October 26, 2002 and October 27, 2001, gross profit
decreased by approximately $22.8 and $30.2 million respectively, offset by an
equal decrease in selling, general and administrative expenses.
EITF 01-09 also codified and reconciled EITF No. 00-25, "Accounting for
Consideration from a Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendor's Products." EITF No. 00-25 provides guidance on
the income statement classification of consideration from a vendor to a
retailer in connection with the retailer's purchase of the vendor's products
or to promote sales of the vendor's products. Upon adoption of this
pronouncement, we classified amounts paid to retailers for co-op advertising
and beauty consultant expenses as a reduction of net sales. These costs were
previously reported within selling, general and administrative expenses. For
comparison purposes, certain amounts in the Consolidated Statement of
Operations for the nine months ended October 27, 2001 were reclassified to
reflect the adoption of EITF 01-09. The adoption of EITF 01-09 on this issue
had no impact on operating loss; however, for the three months ended October
26, 2002 and October 27, 2001, gross profit decreased by approximately $17.0
and $16.8 million, respectively, offset by an equal decrease in selling,
general and administrative expenses. The adoption of EITF 01-09 had no impact
on operating income. For the nine months ended October 26, 2002 and October
27, 2001, gross profit decreased by approximately $44.4 and $48.2 million,
respectively, offset by an equal decrease in selling, general and
administrative expenses.
Effective February 1, 2002, we adopted SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS
No. 141" and "SFAS No. 142," respectively). These standards establish
financial accounting and reporting standards for acquired goodwill and other
intangible assets. Specifically, the standards address how acquired intangible
assets should be accounted for both at the time of acquisition and after they
have been recognized in the financial statements. The provisions of SFAS No.
141 apply to all business combinations initiated after June 30, 2001. In
accordance with SFAS No. 142, intangible assets, including goodwill, must be
evaluated for impairment. Those intangible assets that will continue to be
classified as goodwill or as other intangibles with indefinite lives are no
longer amortized.
Our intangible assets generally consist of exclusive brand licenses and
trademarks. We do not carry any goodwill. We evaluated which of our
intangible assets were considered to have indefinite lives and determined that
the Elizabeth Arden trademarks have indefinite useful lives. Thus, we ceased
amortizing these trademarks on February 1, 2002. In accordance with SFAS No.
142, we completed our transitional impairment testing of this asset. That
effort and assessments of this asset with the assistance of a third party
valuation firm indicated that no impairment adjustment was required. On a pro
forma basis, if SFAS 142 had been adopted for the third quarter of fiscal
2002, net income attributable to common shareholders would have been $1.6
million higher for the three months ended October 27, 2001, and net loss would
have been $4.8 million lower for the nine months ended October 27, 2001.
Effective February 1, 2002, we adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses the accounting
and reporting for the impairment and disposal of long-lived assets. The
adoption of SFAS No. 144 did not have an impact on our financial statements.
23
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board issued Financial
Accounting Statement No. 146 (SFAS No. 146), "Accounting for Costs Associated
with Exit or Disposal Activities." The objectives of SFAS No. 146 are to
address financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The principal difference between SFAS No. 146 and Issue No.
94-3 relates to SFAS No. 146 requirements for recognition of a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under Issue No. 94-3 a liability for an exit cost as
defined in Issue No. 94-3 was recognized at the date of an entity's commitment
to an exit plan. The provisions of SFAS No. 146 will be effective for us for
exit or disposal activities that are initiated after December 31, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. As of October 26, 2002, we had $125 million
outstanding under our credit facility subject to variable interest rates. Our
borrowings under our credit facility are seasonal with peak borrowings in the
third quarter of our fiscal year. To date, we have not engaged in derivative
transactions to mitigate interest rate risk as most of our debt bears a fixed
rate.
Foreign Currency Risk. We conduct our business in various regions of the
world and export and import products to and from several countries.
Approximately 30% of our sales are derived internationally in a variety of
currencies, principally the Euro, British pound, U.S. dollar and Australian
dollar. With respect to our international operations, our cost of sales is
denominated in U.S. dollars and local currency, and selling, general and
administrative expenses are typically denominated in local currency.
Currently, substantially all of our skin care products are produced in the
United States. Fluctuations in currency rates could adversely affect our
product prices, margins and operating costs as well as our reported results.
A weakening of the currencies in which we generate sales relative to the
currencies in which our costs are denominated, particularly the U.S. dollar,
may decrease our cash flow and profits. Changes in currency rates favorably
impacted our results of operations by approximately $3.5 million pre-tax for
the nine months ended October 26, 2002. There can be no assurance that this
trend will continue.
In the past, we have engaged in currency hedging operations, primarily
forward exchange contracts, to reduce the exposure of our cash flows to
fluctuations in currency rates, we did not have any open contracts as of
October 26, 2002. The impact of foreign currency hedging activities was not
material to our results in fiscal 2002. There can be no assurance that our
hedging operations will eliminate or substantially reduce risks associated
with fluctuating exchange rates.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chairman, President and Chief Executive Officer and the
Company's Executive Vice President and Chief Financial Officer, who are the
principal executive officer and principal financial officer, respectively,
have evaluated the effectiveness and operation of the Company's disclosure
controls and procedures (as defined in Rule 13(a) - 14(c) and of the
Securities Exchange Act of 1934) within 90 days of the filing of this report.
Based upon such evaluation, they have concluded that the Company's disclosure
controls and procedures are functioning effectively to provide reasonable
assurance that information required to be disclosed by the Company in its
reports filed or submitted by it under the Securities Exchange Act of 1934, as
amended, has been recorded, processed, summarized and reported within the time
periods specified in the Commission's rules and forms.
There were no significant changes in internal controls or in other
factors that could significantly affect these controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses, subsequent to the evaluation by the principal executive officer
and principals financial officer.
24
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
- ------- -------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation of the Company dated
January 24, 2001 (incorporated herein by reference to Exhibit 3.1
filed as part of the Company's Form 8-K dated February 7, 2001
(Commission File No. 1-6370)).
3.2 Amended and Restated By-laws of the Company (incorporated herein by
reference to Exhibit 3.3 filed as part of the Company's Form 10-Q
for the three months ended October 31, 2000 (Commission File No. 1-
6370)).
3.1 Indenture, dated as of May 13, 1997, between the Company and HSBC
Bank USA (formerly Marine Midland Bank), as trustee (incorporated
herein by reference to Exhibit 4.1 filed as part of the Company's
Form 8-K dated May 13, 1997 (Commission File No. 1-6370)).
4.2 Second Supplemental Indenture, dated as of January 23, 2001, to
Indenture dated as of May 13, 1997, by and among the Company, the
guarantors signatory thereto and HSBC Bank USA, as trustee
(incorporated herein by reference to Exhibit 4.2 filed as part of
the Company's Registration Statement on Form S-4 on February 21,
2001 (Registration No. 333-55310)).
4.3 Indenture, dated as of April 27, 1998, between the Company and HSBC
Bank USA, as trustee (incorporated herein by reference to Exhibit
4.1 filed as part of the Company's Form 8-K dated April 27, 1998
(Commission File No. 1-6370)).
4.4 Second Supplemental Indenture, dated as of January 23, 2001, to
Indenture dated as of April 27, 1998, by and among the Company, the
guarantors signatory thereto and HSBC Bank USA, as trustee
(incorporated herein by reference to Exhibit 4.4 filed as part of
the Company's Registration Statement on Form S-4 on February 21,
2001 (Registration No. 333-55310)).
4.5 Indenture, dated as of January 23, 2001, among the Company, FD
Management, Inc., DF Enterprises, Inc., FFI International, Inc.,
Elizabeth Arden GmbH, as guarantors, and HSBC Bank USA, as trustee
(incorporated herein by reference to Exhibit 4.1 filed as part of
the Company's Form 8-K dated February 7, 2001 (Commission File No.
1-6370)).
4.6 Amended and Restated Credit Agreement dated as of January 29, 2001
among the Company, the banks listed on the signature pages thereto,
Fleet National Bank, as administrative agent, issuing bank and
swingline lender, Credit Suisse First Boston, as syndication agent,
and Fleet Securities, Inc. and Credit Suisse First Boston, as joint
lead arrangers and joint book managers (incorporated herein by
reference to Exhibit 4.3 filed as part of the Company's Form 8-K
dated February 7, 2001 (Commission File No. 1-6370)).
4.7 First Amendment to Amended and Restated Credit Agreement dated as of
July 20, 2001, between Fleet National Bank, as administrative agent,
the banks listed on the signature pages thereto and the Company
(incorporated herein by reference to Exhibit 4.7 filed as part of
the Company's Form 10-Q for the three months ended July 28, 2001
(Commission File No. 1-6370)).
4.8 Second Amendment to Amended and Restated Credit Agreement dated as
of March 13, 2002, between Fleet National Bank, as administrative
agent, the banks listed on the signature pages thereto and the
Company (incorporated herein by reference to Exhibit 4.1 filed as
part of the Company's Form 8-K dated March 13, 2002 (Commission File
No. 1-6370)).
25
Exhibit
Number Description
- ------- -------------------------------------------------------------------
4.9 Amended and Restated Security Agreement dated as of January 29,
2001, made by the Company and certain of its subsidiaries in favor
of Fleet National Bank, as administrative agent (incorporated herein
by reference to Exhibit 4.5 filed as part of the Company's Form 8-K
dated February 7, 2001 (Commission File No. 1-6370)).
4.10 Security Agreement, dated as of January 23, 2001, made by the
Company and certain of its subsidiaries in favor of HSBC Bank USA,
as collateral agent (incorporated herein by reference to Exhibit 4.4
of the Company's Form 8-K on February 7, 2001 (Commission File No.
1-6370)).
10.1 2000 Stock Incentive Plan (incorporated herein by reference to
Exhibit E filed as a part of the Company's Proxy Statement on
December 12, 2000 (Commission File No. 1-6370)).
10.2 Amended Non-Employee Director Stock Option Plan (incorporated herein
by reference to Exhibit F filed as a part of the Company's Proxy
Statement on December 12, 2000 (Commission File No. 1-6370)).
10.3 Amended 1995 Stock Option Plan (incorporated herein by reference to
Exhibit 4.12 filed as a part of the Company's Registration Statement
on Form S-8 dated July 7, 1999 (Commission File No. 1-6370)).
10.4 Asset Purchase Agreement, dated as of October 30, 2000, between the
Company and Conopco, Inc. (incorporated herein by reference to
Exhibit 10.6 of the Company's Form 10-Q for the three months ended
October 31, 2000 (Commission File No. 1-6370)).
10.5 Amendment dated as of December 11, 2000 to the Asset Purchase
Agreement dated as of October 30, 2000, between the Company and
Conopco, Inc. (incorporated herein by reference to Exhibit 2.2 filed
as part of the Company's Form 8-K dated February 7, 2001 (Commission
File No. 1-6370)).
10.6 Second Amendment dated as of January 23, 2001 to the Asset Purchase
Agreement dated as of October 30, 2000, between the Company and
Conopco, Inc. (incorporated herein by reference to Exhibit 2.3 filed
as part of the Company's Form 8-K dated February 7, 2001
(Commission File No. 1-6370)).
10.7 Third Amendment dated as of February 7, 2001, to the Asset Purchase
Agreement dated as of October 30, 2000, between the Company and
Conopco, Inc. (incorporated herein by reference to Exhibit 10.11
filed as part of Amendment No. 1 to the Company's Registration
Statement on Form S-4 on February 21, 2001 (Registration No. 333-
55310)).
10.8 Fourth Amendment dated as of February 21, 2001, to the Asset
Purchase Agreement dated as of October 30, 2000, between the Company
and Conopco, Inc. (incorporated herein by reference to Exhibit 10.12
filed as part of Amendment No. 1 to the Company's Registration
Statement on Form S-4 on February 21, 2001 (Registration No. 333-
55310)).
10.9 Fifth Amendment dated as of April 19, 2001, to the Asset Purchase
Agreement dated as of October 30, 2000, between the Company and
Conopco, Inc. (incorporated herein by reference to Exhibit 10.12 of
the Company's Form 10-K for the year ended January 31, 2001
(Commission File No. 1-6370)).
10.10 Sixth Amendment dated as of July 13, 2001, to the Asset Purchase
Agreement dated as of October 30, 2000, between the Company and
Conopco, Inc. (incorporated herein by reference to Exhibit 10.13 of
the Company's Form 10-Q for the three months ended July 28, 2001
(Commission File No. 1-6370)).
26
Exhibit
Number Description
- ------- -------------------------------------------------------------------
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
The foregoing list omits instruments defining the rights of holders of
our long-term debt where the total amount of securities authorized thereunder
does not exceed 10% of our total assets. We hereby agree to furnish a copy
of each such instrument or agreement to the Commission upon request.
(b) Reports on Form 8-K.
A current report on Form 8-K dated September 4, 2002 was filed on
September 6, 2002, reporting the issuance of a news release to (i) report the
operating results for the Company's second quarter ended July 27, 2002, and
(ii) provide sales and EBITDA (earnings before interest, taxes, depreciation
and amortization) guidance for the remainder of fiscal year 2003 under Item 5.
Other events and Regulation FD Disclosure and attaching the press release
dated September 4, 2002.
27
SIGNATURES
Pursuant to the requirements 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.
ELIZABETH ARDEN, INC.
Date: December 6, 2002 /s/ E. Scott Beattie
--------------------
E. Scott Beattie
Chairman, President, Chief Executive
Officer and Director
(Principal Executive Officer)
Date: December 6, 2002 /s/ Stephen J. Smith
--------------------
Stephen J. Smith
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
28
CERTIFICATION
I, E. Scott Beattie, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Elizabeth Arden,
Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: December 6, 2002
/s/ E. Scott Beattie
--------------------
E. Scott Beattie
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
29
CERTIFICATION
I, Stephen J. Smith, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Elizabeth Arden,
Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: December 6, 2002
/s/ Stephen J. Smith
--------------------
Stephen J. Smith
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
30