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 April 26, 2003
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 by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). 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 June 6, 2003
----- -----------------
Common Stock, $.01 par value 18,909,074 shares
ELIZABETH ARDEN, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Unaudited Consolidated Statements of Operations
Three Months Ended April 26, 2003 and April 27, 2002. . . . 3
Consolidated Balance Sheets
April 26, 2003 (Unaudited) and January 31, 2003 . . . . . . 4
Unaudited Consolidated Statement of Shareholders' Equity
Three Months Ended April 26, 2003 . . . . . . . . . . . . . 5
Unaudited Consolidated Statements of Cash Flow
Three Months Ended April 26, 2003 and April 27, 2002. . . . 6
Notes to Unaudited Consolidated Financial Statements. . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 21
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . 22
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . 23
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Certifications . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands except per share data)
Three Months Ended
April 26, 2003 April 27, 2002
-------------- --------------
Net sales $134,754 $140,284
Cost of sales (excludes
depreciation of $785 and $1,016,
respectively, included below) 86,022 86,379
-------- --------
Gross profit 48,732 53,905
Selling, general and administrative 55,609 53,630
Depreciation and amortization 5,129 5,368
-------- --------
Loss from operations (12,006) (5,093)
Other income (expense):
Interest expense (10,134) (10,404)
Other 152 (19)
-------- --------
Other income (expense) (9,982) (10,423)
Loss before income taxes (21,988) (15,516)
Benefit from income taxes (6,313) (5,587)
-------- --------
Net loss (15,675) (9,929)
Accretion and dividend on
preferred stock 976 914
-------- --------
Net loss attributable to common
shareholders $(16,651) $(10,843)
======== ========
Loss per common share:
Basic $ (0.93) $ (0.61)
======== ========
Diluted $ (0.93) $ (0.61)
======== ========
Weighted average number of
common shares:
Basic 17,888,716 17,711,733
========== ==========
Diluted 17,888,716 17,711,733
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
3
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
As of
April 26, 2003 January 31, 2003
-------------- ----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 20,933 $ 22,663
Accounts receivable, net 127,476 118,844
Inventories 215,453 200,876
Deferred income taxes 7,614 7,614
Prepaid expenses and other assets 20,572 17,297
-------- --------
Total current assets 392,048 367,294
-------- --------
Property and equipment, net 34,963 36,216
-------- --------
Other assets:
Exclusive brand licenses,
trademarks and intangibles, net 203,200 205,534
Debt financing costs 13,495 13,978
Other 4,788 4,598
-------- --------
Total other assets 221,483 224,110
-------- --------
Total assets $648,494 $627,620
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 59,500 $ 2,068
Accounts payable trade 76,121 79,997
Other payables and accrued expenses 54,072 66,398
Current portion of long-term debt 2,374 2,370
-------- --------
Total current liabilities 192,067 150,833
-------- --------
Long-term debt 312,523 317,959
Deferred income taxes and other 11,134 11,350
-------- --------
Total long-term liabilities 323,657 329,309
-------- --------
Total liabilities 515,724 480,142
-------- --------
Commitments and contingencies
(See Note 7)
Convertible, redeemable preferred
stock, Series D, $.01 par value
(liquidation preference of $50,000);
1,000,000 shares authorized; 421,875
and 416,667 shares issued and
outstanding, respectively 16,609 15,634
-------- --------
Shareholders' equity:
Common stock, $.01 par value,
50,000,000 shares authorized;
18,804,557 and 18,809,952 shares
issued, respectively 188 188
Additional paid-in capital 89,989 89,782
Retained earnings 33,037 49,688
Treasury stock (234,741 and 290,299
shares at cost, respectively) (1,989) (2,336)
Accumulated other comprehensive
income 444 5
Unearned deferred compensation (5,508) (5,483)
-------- --------
Total shareholders' equity 116,161 131,844
-------- --------
Total liabilities and shareholders'
equity $648,494 $627,620
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
4
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
(Amounts in thousands)
Common Stock Additional Accumulated
------------ Paid-In Retained Treasury Comprehensive
Shares Amount Capital Earnings Stock Loss
---------------------------------------------------------------------
Balance at
January 31, 2003 18,810 $188 $89,782 $49,688 $(2,336) $ 5
Issuance of common
stock upon exercise
of stock options 1 -- 4 -- -- --
Issuance of
restricted stock,
net of forfeitures (6) -- 203 -- 347 --
Amortization of
unearned deferred
compensation, net
of forfeitures -- -- -- -- -- --
Accretion and
dividend on Series
D preferred stock -- -- -- (976) -- --
Comprehensive loss:
Net loss -- -- -- (15,675) -- --
Foreign currency
translation -- -- -- -- -- 439
---------------------------------------------------------------------
Total comprehensive
loss -- -- -- (15,675) -- 439
---------------------------------------------------------------------
Balance at
April 26, 2003 18,805 $188 $89,989 $33,037 $(1,989) $444
=====================================================================
RESTUBBED TABLE
CONTINUED FROM ABOVE
Total
Unearned Share-
Deferred holders'
Compensation Equity
------------------------
Balance at
January 31, 2003 $(5,483) $131,844
Issuance of common
stock upon exercise
of stock options -- 4
Issuance of
restricted stock,
net of forfeitures (557) (7)
Amortization of
unearned deferred
compensation, net
of forfeitures 532 532
Accretion and
dividend on Series
D preferred stock -- (976)
Comprehensive loss:
Net loss -- (15,675)
Foreign currency
translation 439
------------------------
Total comprehensive
loss -- 15,236
------------------------
Balance at
April 26, 2003 $(5,508) $116,161
========================
The accompanying notes are an integral part of the consolidated financial statements.
5
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three Months Ended
April 26, 2003 April 27, 2002
-------------- --------------
Operating Activities:
Net loss $(15,675) $ (9,929)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 5,129 5,368
Amortization of senior note offering
costs and note premium 772 643
Amortization of unearned deferred
compensation 532 291
Changes in assets and liabilities:
Increase in accounts receivable (8,632) (38,449)
Increase in inventories (14,577) (1,376)
Increase in prepaid expenses and
other assets (3,877) (4,639)
Decrease in accounts payable (3,876) (3,698)
(Decrease) increase in other payables
and accrued expenses (7,043) 9,720
Other 700 705
-------- --------
Net cash used in
operating activities (46,547) (41,364)
Investing Activities:
Additions to property and equipment (1,501) (2,176)
-------- --------
Net cash used in
investing activities (1,501) (2,176)
-------- --------
Financing Activities:
Proceeds from short-term debt 57,436 56,875
Payments on long-term debt (10,861) (49)
Proceeds from the exercise of stock options 4 42
-------- --------
Net cash provided by
financing activities 46,579 56,868
Effect of exchange rate changes on cash and
cash equivalents (261) (191)
Net (decrease) increase in cash and cash
equivalents (1,730) 13,137
Cash and cash equivalents at
beginning of period 22,663 15,913
-------- --------
Cash and cash equivalents at
end of period $ 20,933 $ 29,050
======== ========
Supplemental Disclosure of Cash Flow
Information:
Interest paid during the period $ 10,375 $ 10,333
======== ========
Income taxes paid during the period $ 8 $ 33
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND BASIS OF PRESENTATION
Elizabeth Arden, Inc. (the "Company") is a manufacturer and marketer of
prestige 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") following which the
name of the Company was then changed to Elizabeth Arden, Inc.
The consolidated financial statements include the accounts of the
Company's wholly owned subsidiaries and all significant intercompany accounts
and transactions have been eliminated in consolidation.
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, 2003, filed with the Commission.
The consolidated balance sheet of the Company as of January 31, 2003 is
audited. The other consolidated financial statements are unaudited, but
include all adjustments, which are of a normal recurring nature, 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, 2004.
NOTE 2. STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 148,
"Accounting for Stock-Based Compensation Transition and Disclosure an
Amendment of FASB Statement No. 123." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair market value based method of
accounting for stock-based employee compensation. In addition, this statement
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method
of accounting for stock-based employee compensation and the
effect of the method used on reported results.
The Company has three stock option plans. As of April 26, 2003 the
Company has elected not to make a change to the fair market value of
accounting. The Company will continue to account for these plans under the
intrinsic value recognition and measurement principles prescribed by
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. No stock-based
compensation cost is reflected in net income, as all options granted under
those plans had an exercise price equal to the market value of the underlying
common stock on the date of grant.
The following table illustrates the effect on net loss and net loss
attributable to common shareholders if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based compensation:
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. STOCK-BASED COMPENSATION (Continued)
Three Months Ended
(Dollars in thousands except April 26, 2003 April 27, 2002
per share data) -------------- --------------
Net loss attributable to common
shareholders, as reported $(16,651) $(10,843)
Stock-based employee compensation
cost, net of tax, determined
under fair value-based method (1,181) (1,313)
-------- --------
Pro forma net loss attributable to
common shareholders $(17,832) $(12,156)
======== ========
Loss per common share
Basic
As reported $ (0.93) $ (0.61)
Pro forma $ (1.00) $ (0.69)
Diluted
As reported $ (0.93) $ (0.61)
Pro forma $ (1.00) $ (0.69)
NOTE 3. RECENTLY ADOPTED ACCOUNTING STANDARDS
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addresses the accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated retirement costs. SFAS No. 143 was effective for the Company
on February 1, 2003. The adoption of SFAS No. 143 is not expected to have a
material effect on the Company's Consolidated Financial Statements.
NOTE 4. INVENTORIES
The components of inventory were as follows:
(Dollars in thousands) April 26, 2003 January 31, 2003
-------------- ----------------
Raw materials $ 43,028 $ 35,500
Work in progress 18,929 19,792
Finished goods 153,496 145,584
-------- --------
$215,453 $200,876
======== ========
NOTE 5. SHORT-TERM DEBT
The Company has a revolving credit facility with a syndicate of banks,
for which JP Morgan Chase Bank is the administrative agent, that provides for
borrowings on a revolving basis up to $200 million with a $25 million sublimit
for letters of credit (the "Credit Facility"). The Credit Facility matures in
January 2006 and is guaranteed by certain of the Company's U.S. subsidiaries.
Borrowings under the Credit Facility are limited to eligible accounts
receivable and inventory 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 in 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 has only one financial maintenance covenant, which
is a fixed charge coverage ratio that applies only if average borrowing
availability declines to less than $50 million. No financial covenant was
applicable for the three months ended April 26, 2003. The Credit Facility
prohibits the payment of dividends on the Company's common stock, $.01 par
value per share ("Common Stock"), and other distributions to common
shareholders and restricts the Company from incurring additional non-trade
indebtedness, except that the Company is permitted to repurchase up to $4
million of Common Stock.
8
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. SHORT-TERM DEBT (Continued)
Borrowings under the revolving credit portion of the Credit Facility
bear interest at a floating rate based on the "Applicable Margin," which is
determined by reference to the Company's ratio of consolidated debt to
EBITDA (net income plus the provision for income taxes or net loss less the
benefit from income taxes, plus interest expense, plus depreciation and
amortization). At the Company's option, the Applicable Margin may be
applied to either the LIBOR or the prime rate. The Applicable Margin for
LIBOR and prime rate borrowings ranges from 2.25% to 3.00% and .5% to 1.25%,
respectively. As of April 26, 2003, the Applicable Margin was 2.75% for LIBOR
loans and 1.00% for prime rate loans. The commitment fee on the unused portion
of the Amended Credit Facility ranges from .375% to .5% per year.
As of April 26, 2003, the Company had an outstanding balance under the
Credit Facility of $59.5 million and outstanding letters of credit of
$133,000, as compared with a balance of $2.1 million and letters of credit of
$286,000 outstanding as of January 31, 2003. As of April 26, 2003, the
remaining availability under the Credit Facility, based upon eligible
receivables and inventories, was approximately $78 million.
NOTE 6. LONG-TERM DEBT
The Company's long-term debt consisted of the following:
(Dollars in thousands)
Description April 26, 2003 January 31, 2003
----------- -------------- ----------------
10 3/8% Senior Notes due May 2007 $145,595 $150,977
11 3/4% Senior Secured Notes
due May 2011 160,000 160,000
8.5% Subordinated Debentures
payable in equal installments
due May 2003 and 2004 4,314 4,314
8.84% Miami Lakes Facility
Mortgage Note due July 2004 4,988 5,038
Total long-term debt 314,897 320,329
Less current portion of
long-term debt 2,374 2,370
-------- --------
Long-term debt, net $312,523 $317,959
======== ========
NOTE 7. COMMITMENTS AND CONTINGENCIES
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$38 million at April 26, 2003), against each of
Unilever and the Company plus punitive damages of Canadian $35 million
(approximately US$24 million at April 26, 2003). 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 8. CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Convertible Preferred Stock. At April 26, 2003 and January 31, 2003,
the Company had outstanding 421,875 and 416,667 shares, respectively, $120 per
share liquidation preference, of Series D Convertible Preferred Stock, $.01
par value (the "Series D Convertible Preferred Stock") that was 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 at an initial conversion price of $12 per share of Common Stock,
subject to certain restrictions. The holder of the Series D Convertible
Preferred Stock was entitled to convert up to 33.33% of its shares after
January 23, 2002 and up to 66.66% after January 23, 2003 and will be entitled
to convert all of its shares after January 23, 2004. In addition, cumulative
dividends of 5% of the outstanding
9
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (Continued)
liquidation preference of the Series D Convertible Preferred Stock began to
accrue on January 23, 2003 and will be payable quarterly, at the Company's
option, in cash or in additional shares of Series D Convertible Preferred
Stock, subject to restrictions on the payment of dividends under the Amended
Credit Facility and the Indentures. On March 17, 2003, the Company issued to
an affiliate of Unilever 5,208 shares of Series D Convertible Preferred Stock
as payment of the quarterly dividend. No beneficial conversion was recorded
as the amount of the quarterly dividend associated with the Series D
Convertible Preferred Stock approximated the fair value of the common shares
to be received upon conversion. 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 Credit
Facility and compliance with certain limitations under the Indentures
governing its senior notes, at a redemption price of $25.00 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 reclassified to additional paid-in capital.
The difference between the liquidation value of $50 million and the balance
recorded in the Convertible, redeemable preferred stock Series D 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 April
26, 2003 and April 27, 2002, the aggregate accretion and dividend relating to
the Series D Convertible Preferred Stock was approximately $976,000 and
$914,000, respectively.
Performance-Accelerated and other Restricted Common Stock. During the
three months ended April 26, 2003, the Company granted 76,702 shares of
restricted stock to certain employees that vest one year from the date of
grant. At April 26, 2003, these restricted shares were recorded as unearned
deferred compensation in shareholders' equity in the amount of approximately
$782,000 ($557,000 net of forfeitures from prior grants) on the balance sheet
and are being amortized over the vesting period. During the fiscal year ended
January 31, 2003, the Company granted 157,333 shares of restricted stock to
certain employees that vest one year from the date of grant. These shares
were recorded as unearned deferred compensation in shareholders' equity on the
balance sheet of January 31, 2003 in the amount of approximately $1.6 million.
Also, during the fiscal year ended January 31, 2003, 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 at January 31, 2003, and are being amortized over the
currently expected six-year vesting period.
At April 26, 2003 and January 31, 2003, the shares of Common Stock
outstanding included 639,291 shares and 661,333 shares, respectively, of
restricted stock that are subject to vesting requirements and forfeiture
provisions. Compensation expense for the three months ended April 26, 2003
and April 27, 2002 related to the PARS and the restricted stock granted to
employees, net of forfeitures, amounted to approximately $532,000 and
$291,000, respectively.
NOTE 9. LOSS PER SHARE
Basic loss per share is computed by dividing the net loss attributable
to common shareholders by the weighted average shares of outstanding Common
Stock. Diluted loss per share equals basic loss per share for the three
months ended April 26, 2003 and April 27, 2002, as the assumed conversion of
convertible securities and the assumed exercise of outstanding options and
warrants would have an anti-dilutive effect.
10
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. LOSS PER SHARE (Continued)
The following table represents the computation of loss per share (in
thousands except per share data):
Three Months Ended
April 26, 2003 April 27, 2002
-------------- --------------
Basic
Net loss attributable to common
shareholders $(16,651) $(10,843)
======== ========
Weighted average shares
outstanding 17,889 17,712
======== ========
Net loss per basic share $ (0.93) $ (0.61)
======== ========
Diluted
Net loss attributable to common
shareholders $(16,651) $(10,843)
Accretion and Dividend on
Series D Convertible Preferred
Stock --
-------- --------
Net loss as adjusted $(16,651) $(10,843)
======== ========
Weighted average shares outstanding 17,889 17,712
-------- --------
Potential common shares -
treasury method - --
Assumed conversion of 7.5%
Convertible Subordinated
Debentures -- --
Series D Convertible Preferred
Stock - -
-------- --------
Weighted average shares and
potential dilutive shares 17,889 17,712
======== ========
Net loss per diluted share $ (0.93) $ (0.61)
======== ========
The following table shows the options to purchase shares of Common Stock
that were outstanding during the three months ended April 26, 2003 and April
27, 2002 where the option exercise price was greater than the average market
price of the common shares over the applicable period:
Three Months Ended
April 26, 2003 April 27, 2002
-------------- --------------
Number of shares 2,748,750 2,828,250
=============== ===============
Range of exercise price $10.88 - $20.64 $11.33 - $20.64
=============== ===============
NOTE 10. 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 the Company's accounting
policies 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.
11
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
Three Months Ended
Statement of Operations April 26, 2003
Company Guarantors Eliminations Consolidated
------- ---------- ------------ ------------
Net sales $ 83,547 $53,803 $(2,596) $134,754
Cost of sales 62,089 23,933 -- 86,022
-------- ------- ------- --------
Gross profit 21,458 29,870 (2,596) 48,732
Selling, general and
administrative 29,248 28,957 (2,596) 55,609
Depreciation and
amortization 3,279 1,850 -- 5,129
-------- ------- ------- --------
Loss from operations (11,069) (937) - (12,006)
Interest and other
income (expense) (8,673) (6,887) 5,578 (9,982)
-------- ------- ------- --------
Loss before income taxes (19,742) (7,824) 5,578 (21,988)
Benefit from income taxes (4,067) (2,246) -- (6,313)
-------- ------- ------- --------
Net loss $(15,675) $(5,578) $ 5,578 $(15,675)
======== ======= ======= ========
Three Months Ended
Statement of Operations April 27, 2002
Company Guarantors Eliminations Consolidated
------- ---------- ------------ ------------
Net sales $86,340 $62,274 $(8,330) $140,284
Cost of sales 60,320 26,059 -- 86,379
------- ------- ------- --------
Gross profit 26,020 36,215 (8,330) 53,905
Selling, general and
administrative 29,151 32,809 (8,330) 53,630
Depreciation and
amortization 4,064 1,304 -- 5,368
------- ------- ------- --------
Loss from operations (7,195) 2,102 - (5,093)
Interest and other
income (expense) (6,857) (6,168) 2,602 (10,423)
------- ------- ------- --------
Loss before income taxes (14,052) (4,066) 2,602 (15,516)
Benefit from income taxes (4,123) (1,464) - (5,587)
------- ------- ------- --------
Net loss $(9,929) $(2,602) $ 2,602 $ (9,929)
======= ======= ======= ========
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
As of
Balance Sheet April 26, 2003
Company Guarantors Eliminations Consolidated
------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 12,913 $ 8,020 $ - $ 20,933
Accounts receivable, net 74,339 53,137 - 127,476
Inventories 153,457 61,996 - 215,453
Intercompany receivable 283,615 (283,615) - --
Deferred income taxes 7,614 - -- 7,614
Prepaid expenses and
other assets 11,249 9,323 -- 20,572
-------- --------- ------- --------
Total current assets 543,187 (151,139) -- 392,048
-------- --------- ------- --------
Property and equipment, net 25,998 8,965 -- 34,963
-------- --------- ------- --------
Other assets:
Investment in guarantors'
subsidiaries (1,549) -- 1,549 --
Exclusive brand licenses,
trademarks and
intangibles, net 31,413 171,787 - 203,200
Other assets 15,884 2,399 -- 18,283
-------- --------- ------- --------
Total other assets 45,748 174,186 1,549 221,483
-------- --------- ------- --------
Total assets $614,933 $ 32,012 $ 1,549 $648,494
======== ========= ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 59,500 $ -- $ -- $ 59,500
Accounts payable trade 67,752 8,369 -- 76,121
Other payables and
accrued expenses 30,052 24,020 -- 54,072
Current portion of
long-term debt 2,374 - - 2,374
-------- --------- ------- --------
Total current
liabilities 159,678 32,389 -- 192,067
Long-term debt 312,523 -- -- 312,523
Deferred income taxes and
other 9,962 1,172 - 11,134
Total liabilities 482,163 33,561 -- 515,724
Convertible, redeemable
preferred stock 16,609 - 16,609
-------- --------- ------- --------
Shareholders' equity 116,161 (1,549) 1,549 116,161
-------- --------- ------- --------
Total liabilities and
shareholders' equity $614,933 $ 32,012 $ 1,549 $648,494
======== ========= ======= ========
13
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
As of
Balance Sheet January 31, 2003
Company Guarantors Eliminations Consolidated
------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,850 $ 14,813 $ -- $ 22,663
Accounts receivable, net 71,753 47,091 -- 118,844
Inventories 143,339 57,537 -- 200,876
Intercompany receivable (111,166) 111,166 -- --
Deferred income taxes 7,614 -- -- 7,614
Prepaid expenses and
other assets 10,936 6,361 -- 17,297
-------- -------- ------- --------
Total current assets 130,326 236,968 - 367,294
-------- -------- ------- --------
Property and equipment, net 26,705 9,511 -- 36,216
-------- -------- ------- --------
Other assets:
Investment in guarantors'
subsidiaries 3,590 -- (3,590) --
Exclusive brand licenses,
trademarks and
intangibles, net 33,269 172,265 -- 205,534
Other assets 21,888 (3,312) - 18,576
-------- -------- ------- --------
Total other assets 58,747 168,953 (3,590) 224,110
-------- -------- ------- --------
Total assets $215,778 $415,432 $(3,590) $627,620
======== ======== ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 2,068 $ -- $ -- $ 2,068
Accounts payable trade 72,980 7,017 -- 79,997
Intercompany payable (380,835) 380,835 -- --
Other payables and
accrued expenses 43,552 22,846 -- 66,398
Current portion of
long-term debt 2,370 -- -- 2,370
-------- -------- ------- --------
Total current
liabilities (259,865) 410,698 -- 150,833
-------- -------- ------- --------
Long-term debt 317,959 - - 317,959
Deferred income taxes
and other 10,206 1,144 -- 11,350
-------- -------- ------- --------
Total liabilities 68,300 411,842 - 480,142
-------- -------- ------- --------
Convertible, redeemable
preferred stock 15,634 -- - 15,634
-------- -------- ------- --------
Shareholders' equity 131,844 3,590 (3,590) 131,844
-------- -------- ------- --------
Total liabilities and
shareholders' equity $215,778 $415,432 $(3,590) $627,620
======== ======== ======= ========
14
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
Three Months Ended
Statement of Cash Flow April 26, 2003
Company Guarantors Eliminations Consolidated
------- ---------- ------------ ------------
Operating Activities:
Net cash used in
operating activities $(40,809) $(5,738) $ - $(46,547)
-------- ------- ------- --------
Investing Activities:
Additions to property and
equipment, net of
disposals (707) (794) - (1,501)
-------- ------- ------- --------
Net cash used in
investing activities (707) (794) -- (1,501)
-------- ------- ------- --------
Financing Activities:
Proceeds from
short-term debt 57,436 - -- 57,436
Payments on
long-term debt (10,861) - -- (10,861)
Proceeds from the
exercise of stock
options 4 -- -- 4
-------- ------- ------- --------
Net cash provided by
financing activities 46,579 - -- 46,579
Effects of exchange rate
changes on cash and cash
equivalents - (261) - (261)
Net increase (decrease) in
cash and cash equivalents 5,063 (6,793) - (1,730)
Cash and cash equivalents
at beginning of period 7,850 14,813 -- 22,663
-------- ------- ------- --------
Cash and cash equivalents
at end of period $12,913 $ 8,020 $ -- $ 20,933
======== ======= ======= ========
Three Months Ended
Statement of Cash Flow April 27, 2002
Company Guarantors Eliminations Consolidated
------- ---------- ------------ ------------
Operating Activities:
Net cash (used in)
provided by operating
activities $(56,243) $14,879 $ -- $(41,364)
-------- ------- ------- --------
Investing Activities:
Additions to property
and equipment, net of
disposals (645) (1,531) -- (2,176)
-------- ------- ------- --------
Net cash used in
investing activities (645) (1,531) -- (2,176)
-------- ------- ------- --------
Financing Activities:
Proceeds from short-term
debt 56,875 - - 56,875
Payments on long-term debt (49) - -- (49)
Proceeds from the exercise
of stock options 42 -- -- 42
-------- ------- ------- --------
Net cash provided by
financing activities 56,868 - - 56,868
Effects of exchange rate
changes on cash and cash
equivalents - (191) -- (191)
Net (decrease) increase in
cash and cash equivalents (20) 13,157 - 13,137
Cash and cash equivalents
at beginning of period 3,616 12,297 -- 15,913
-------- ------- ------- --------
Cash and cash equivalents
at end of period $ 3,596 $25,454 $ -- $ 29,050
======== ======= ======= ========
15
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. RELATED PARTY TRANSACTION
In March 2002, the Company provided a loan to its current chairman and
chief executive officer in the principal amount of $500,000 (the "Note"),
which matures on March 31, 2004 and bears interest at an annual rate of 5%.
This loan replaced earlier loans made by the Company to its chairman and chief
executive officer during the fiscal year ended January 31, 1999. In July
2002, the chairman 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 12. SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING
ACTIVITIES
The Company incurred the following non-cash financing and investing
activities:
(Dollars in thousands) Three Months Ended
April 26, 2003 April 27, 2002
-------------- --------------
Accretion and dividend on Series D
Convertible Preferred Stock $976 $ 914
Issuance of Restricted Stock and
PARS, net of forfeitures from
prior grants $557 $6,336
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 are not historical facts and 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; 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; diseases affecting the customer purchasing
patterns, including the Severe Acute Respiratory Syndrome (SARS) epidemic;
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,
2003. 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's period.
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 2003, approximately 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, results of operations, working capital
requirements and cash flows can vary between quarters of the same and
different years. As a result, we expect to experience variability in net
sales, net income, working capital requirements and cash flows on a quarterly
basis.
18
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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Securities and Exchange Commission has recently 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 our 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, 2003 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.
Our intangible assets generally consist of exclusive brand licenses and
trademarks. We do not carry any goodwill. 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, at least annually or more often as circumstances
dictate, for impairment using the guidance of applicable accounting
literature.
In fiscal 2003, we adopted Statement of Financial Accounting Standards
("SFAS") No. 142 "Goodwill and Other Intangible Assets. In accordance with
SFAS No. 142, we have determined that the Elizabeth Arden trademarks have
indefinite useful lives. During the three months ended April 26, 2003, we
completed our annual impairment testing of these assets with the assistance of
a third party valuation firm. The analysis and assessments of these assets
indicated that no impairment adjustment was required.
Revenue Recognition. Sales are recognized when title and risk of loss
transfers to the customer and collectibility of the resulting receivable is
probable. Sales are recorded net of estimated returns and other allowances.
The provision for sales returns represents management's estimate of future
returns based on historical experience and considering current external
factors and market conditions.
Allowances for Sales Returns and Markdowns. As is customary in the
prestige beauty business, we grant certain of our customers, subject to our
authorization and approval, the right to either return product or to receive a
markdown allowance for certain promotional product. Upon sale, we record a
provision for product returns and markdowns estimated based on our historical
and projected experience, economic trends and changes in customer demand.
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.
18
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.
Provisions for Inventory Obsolescence. We record a provision for
estimated obsolescence and shrinkage of inventory. Our estimates consider the
cost of inventory, forecasted demand, the estimated market value, the shelf
life of the inventory and our historical experience. If there are changes to
these estimates, additional provisions for inventory obsolescence may be
necessary.
Stock-Based Compensation. At January 31, 2003, we had three stock
option plans in effect. We account for those plans under the recognition and
measurement principles prescribed by Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. No stock-based compensation cost is reflected in net income
for employee and director option grants, as such grants had an exercise price
equal to the market value of the underlying common stock on the date of grant.
Income Taxes and Valuation Reserves. A valuation allowance may be
required to reduce deferred tax assets to the amount that is more likely than
not to be realized. We consider projected future taxable income and ongoing
tax planning strategies in assessing a potential 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, or that new estimates indicate that a
previously recorded valuation allowance is no longer required, an adjustment
to the deferred tax asset would be charged or credited to net income in the
period of such determination.
RESULTS OF OPERATIONS
Three Months Ended April 26, 2003 Compared to the Three Months Ended
April 27, 2002
Net Sales. Net sales decreased 3.9% to $134.8 million for the three
months ended April 26, 2003, from $140.3 million for the three months ended
April 27, 2002. The decrease reflects a continued soft retail environment in
U.S. department stores, which was further impacted by adverse weather
conditions during the quarter, especially in the Northeast. Additionally, net
sales in our international markets decreased as compared to last year due in
large part to lower travel retail volumes from depressed air travel, related
to the outbreak of the Severe Acute Respiratory Syndrome (SARS) epidemic,
particularly in Asia and Canada, as well as geopolitical instability in the
Middle East. Sales also decreased due to the timing of certain new product
launches compared to the prior year period. These decreases were partially
offset by favorable foreign currency rates and increased sales to certain mass
market customers.
Gross Profit. Gross profit decreased 9.6% to $48.7 million for the
three months ended April 26, 2003, from $53.9 million for the three months
ended April 27, 2002. Gross margin was 36.2% for the first quarter of
fiscal 2004 compared with 38.4% for the first quarter of fiscal 2003. The
change in gross margin reflects a greater percentage of total sales volume to
our mass-market customers and a higher percentage of sales generated from
certain distributed brands that carry lower gross margins. The adverse impact
on gross margin from the change in mix was partially offset by reduced gift
with purchase costs. Our gross margin is expected to increase on an
annualized basis over the course of the year.
SG&A. Selling, general and administrative expenses increased
approximately $2.0 million, or 3.7%, to $55.6 million for the three months
ended April 26, 2003, from $53.6 million for the three months ended April 27,
2002. The increase was driven by additional advertising support, incremental
selling costs reflecting the adverse impact of foreign exchange rates,
additional employee costs, and higher costs associated with product
development. These increases were partially offset by lower promotional-
related expenditures. As a percentage of net sales, selling, general and
administrative expenses increased to 41.2% for the three months ended April
27, 2003, from 38.3% in the prior year quarter. The increase as a percentage
of net sales versus the prior year reflects increased costs leveraged against
lower sales volume. Selling, general and administrative expenses as a
percentage of net sales are expected to decrease on an annualized basis over
the balance of the year.
19
Depreciation and Amortization. Depreciation and amortization decreased
$300,000 to $5.1 million in the three months ended April 26, 2003, as compared
to $5.4 million for the three months ended April 27, 2002, principally as a
result of assets that were fully depreciated after April 27, 2002.
Interest Expense. Interest expense decreased by approximately $300,000
to $10.1 million for the three months ended April 26, 2003, as compared to
$10.4 million for the three months ended April 27, 2002, principally as a
result of our repurchase of approximately $10.9 million aggregate principal
amount of 10 3/8% Senior Notes, as well as lower interest rates under our
credit facility during the three months ended April 26, 2003.
Benefit from Income Taxes. The benefit from income taxes for the three
months ended April 26, 2003 was $6.3 million as compared to $5.6 million for
the three months ended April 27, 2002. The effective tax rate calculated as a
percentage of loss before income taxes was 28.7% and 36.0% for the respective
periods. The current year tax rate reflects the projected mix of our
international income and the corresponding tax rates for the respective
jurisdictions.
Net Loss. Net loss was $15.7 million for the three months ended April
26, 2003, as compared to $9.9 million in the prior year period. The higher
net loss reflects lower sales volume and associated gross profit, an increase
in selling, general and administrative expenses and a lower effective tax
rate, partially offset by lower depreciation, amortization and interest
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 began accruing in January 2003. The accretion
and dividend on preferred stock, which is a non-cash charge to net loss
attributable to common shareholders, of $976,000 for the three months ended
April 26, 2003 and $914,000 for the three months ended April 27, 2002,
represents accretion on the fair value of the preferred stock and the imputed
dividends on the preferred stock.
Net Loss Attributable to Common Shareholders. Net loss attributable to
common shareholders was $16.7 million for quarter ended April 26, 2003. The
net loss for the prior year period was $10.8 million.
EBITDA. EBITDA (net income plus the provision for income taxes (or net
loss less the benefit from income taxes), plus interest expense, plus
depreciation and amortization), was a loss of $6.7 million for the three
months ended April 26, 2003 as compared to an income of $256,000 for the three
months ended April 27, 2002. The decrease in EBITDA reflects lower sales
volume and associated gross profit, as well as higher selling, general and
administrative costs.
EBITDA should not be considered as an alternative to operating income
(loss) or net income (loss) (as determined in accordance with generally
accepted accounting principles) as a measure of our operating performance or
to net cash provided by operating, investing and financing activities (as
determined in accordance with generally accepted accounting principles) as a
measure of our ability to meet cash needs. We believe that EBITDA is a
measure commonly reported and widely used by investors and other interested
parties as a measure of a company's operating performance and debt servicing
ability because it assists in comparing performance on a consistent basis
without regard to capital structure (particularly when acquisitions are
involved), depreciation and amortization, which can vary significantly
depending upon accounting methods (particularly when acquisitions are
involved) or non-operating factors (such as historical cost). Accordingly, as
a result of our capital structure and the accounting method used for our
acquisitions, we believe EBITDA is a relevant measure. This information has
been disclosed here to permit a more complete comparative analysis
of our operating performance relative to other companies and of our debt
servicing ability. EBITDA, may not, however, be comparable in all instances to
other similar types of measures.
20
The following is a reconciliation of net loss, as determined in
accordance with generally accepted accounting principles, to EBITDA:
(Unaudited)
Three Months Ended
April 26, 2003 April 27, 2002
-------------- --------------
Net loss $(15,675) $(9,929)
Plus (less):
Benefit from income taxes (6,313) (5,587)
Interest expense 10,134 10,404
Depreciation and amortization 5,129 5,368
-------- -------
EBITDA $ (6,725) $ 256
======== =======
FINANCIAL CONDITION
For the three months ended April 26, 2003, net cash used in operating
activities totaled $46.5 million, compared with $41.4 million of net cash used
in operating activities for the three months ended April 27, 2002. The
increase in cash used versus a year ago is due to a higher net loss and
increased working capital utilization. Accounts receivable increased during
the three months ended April 26, 2003, due primarily to the traditionally
higher percentage of sales being recognized in the latter part of the first
quarter due to shipments of spring promotions. Inventories increased due to
the purchase of certain additional distributed brands, while other payables
and accrued expenses decreased primarily due to the payment of prior fiscal
year incentive accruals and royalty payments relating to prior year net sales
of licensed brands.
Net cash used in investing activities totaled $1.5 million for the three
months ended April 26, 2003, compared to $2.2 million for the three months
ended April 27, 2002, due to the timing of capital expenditures. Net cash
provided by financing activities totaled $46.6 million for the three months
ended April 26, 2003, compared to $56.9 million in the prior year, due to our
repurchase of approximately $10.9 million in aggregate principal amount of 10
3/8% Senior Notes during the current three-month period.
We currently have a credit facility with a syndicate of banks that
provides for borrowings on a revolving basis of up to $200 million with a $25
million sublimit for letters of credit. The facility matures in January 2006.
Borrowings under this facility are limited to a "borrowing base," based on
eligible accounts receivable and inventories and are collateralized by a first
priority lien on all of our U.S. accounts receivable and inventory. Our
obligations under the credit facility rank pari passu, or equal in right of
payment, with our senior notes. The credit facility has only one financial
maintenance covenant, which is a fixed charge coverage ratio that applies
only if average borrowing availability under the credit facility is less than
$50 million. No financial covenant was applicable for the three months ended
April 26, 2003.
Borrowings under the revolving credit portion of the credit facility
bear interest at a floating rate based on the "Applicable Margin," which is
determined by reference to our ratio of consolidated debt to EBITDA (net
income plus the provision for income taxes or net loss less the benefit from
income taxes, plus interest expense, plus depreciation and amortization). At
our option, the Applicable Margin may be applied to either the LIBOR or the
prime rate. The Applicable Margin for LIBOR and prime rate borrowings ranges
from 2.25% to 3.00% and .5% to 1.25%, respectively. As of May 1, 2003, the
applicable margin was 2.50% for LIBOR loans and 0.75% for prime rate loans.
As of April 26, 2003, we had an outstanding balance under the credit facility
of $59.5 million, and the remaining availability, based upon eligible
receivables and inventories as of that date, was approximately $78 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 significantly from our projections, however, we may not remain in
compliance with the covenant of the credit facility and would not be allowed
to borrow under the credit facility. In addition, a default under our
revolving credit facility that causes acceleration of the debt under this
facility could trigger a default on our senior notes. In the event we are not
able to borrow under our credit facility, we would be required to develop an
alternative source of liquidity. There is no assurance that we could obtain
replacement financing or what the terms of such financing, if available, would
be.
22
RECENTLY ADOPTED ACCOUNTING STANDARDS
In August 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No.143, "Accounting for Asset Retirement Obligations," which addresses
the accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated retirement costs. SFAS No. 143
was effective for us on February 1, 2003. The adoption of SFAS No. 143 did
not have a material effect on our financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation Transition and Disclosure an Amendment of FASB
Statement No. 123." This statement amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair market value based method of accounting for
stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures
in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. As of April 26, 2003, we have elected not to make a change
to the fair market value of accounting for stock-based compensation; however,
we did adopt the disclosure provisions of SFAS No. 148. We will continue to
account for employee stock options under the intrinsic value method pursuant
to APB No. 25, "Accounting for Stock Issued to Employees" and related
interpretations, under which no compensation cost are required to be
recognized by us for the periods presented.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. As of April 26, 2003, we had $59.5 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 with respect to our interest-bearing debt.
Foreign Currency Risk. We sell our products in approximately 90
countries around the world. For the three months ended April 26, 2003, we
derived approximately 38% of our net sales from our international
operations. We derive our sales in various different currencies, including
the Euro, British pound, Swiss franc, Canadian dollar and Australian dollar,
as well as the U.S. dollar. With respect to our international operations,
our sales and expenses are typically denominated in local currency, while
costs of goods sold are denominated in a combination of local currency and the
U.S. dollar. Our results of operations are reported in U.S. dollars.
Fluctuations in currency rates can adversely affect our product prices,
margins and operating costs as well as our reported results. Most of our skin
care and cosmetic products are produced in a manufacturing facility
located in Roanoke, Virginia. A weakening of the foreign currencies in which
we generate sales relative to the currencies in which our costs are
denominated, which is primarily the U.S. dollar, may decrease our reported
cash flow and operating profits. Our competitors may or may not be subject to
the same fluctuations in currency rates, and our competitive position could be
affected by these changes.
While we may engage in currency hedging transactions, primarily forward
exchange contracts, to reduce the exposure of our cash flows to fluctuations
in currency rates, we did not engage in foreign currency hedging activities
during the three months ended April 26, 2003. There can be no assurance that
our hedging operations, if any, will eliminate or substantially reduce risks
associated with fluctuating exchange rates.
22
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chairman 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 13a 14 of the Securities Exchange Act of
1934, as amended, within 90 days of the filing of this report (the "Evaluation
Date"). Based upon such evaluation, they have concluded that, as of the
Evaluation Date, 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.
The Company's Chairman and Chief Executive Officer and Executive Vice
President and Chief Financial Officer have determined that 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 Date.
23
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)).
4.1 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 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)).
4.7 Second Amended and Restated Credit Agreement dated as of December
24, 2002 among the Company, JP Morgan Chase Bank, as administrative
agent, Fleet National Bank, as collateral agent, and the banks
listed on the signature pages thereto (incorporated by reference
to Exhibit 4.1 filed as part of the Company's Form 8-K dated
December 30, 2002 (Commission File No. 1-6370)).
4.8 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)).
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)).
24
Exhibit
Number Description
- ------- ------------------------------------------------------------------
10.2 Amended Non-Employee Director Stock Option Plan.
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 Amended 2002 Employee Stock Purchase Plan.
10.5 Amended and Restated Deed of Lease dated as of January 17, 2003,
between the Company and Liberty Property Limited Partnership.
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 March 19, 2003, was filed on March
19, 2003, reporting the issuance of two press releases to (i) report the
operating results for the Company's fiscal year ended January 31, 2003, (ii)
provide sales and diluted earnings per share guidance for fiscal year 2004,
and (iii) announce the appointment of our Chief Operating Officer to the
position of President of the Company under Item 5. Other events and Regulation
FD Disclosure and attaching the press releases dated March 19, 2003.
25
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: June , 2003 /s/ E. Scott Beattie
--------------------
E. Scott Beattie
Chairman, Chief Executive Officer and
Director
(Principal Executive Officer)
Date: June , 2003 /s/ Stephen J. Smith
--------------------
Stephen J. Smith
Executive Vice President and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
26
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: June , 2003
/s/ E. Scott Beattie
--------------------
E. Scott Beattie
Chairman and Chief Executive Officer
(Principal Executive Officer)
27
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: June , 2003
/s/ Stephen J. Smith
--------------------
Stephen J. Smith
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
28