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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 25, 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 Exchange 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 December 5, 2003
---------------------------- ----------------
Common Stock, $.01 par value 24,841,273 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 and Nine Months Ended October 25, 2003 and
October 26, 2002. . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheets October 25, 2003
(Unaudited) and January 31, 2003. . . . . . . . . . . . . . 4
Unaudited Consolidated Statement of Shareholders' Equity
Nine Months Ended October 25, 2003. . . . . . . . . . . . . 5
Unaudited Consolidated Statements of Cash Flow
Nine Months Ended October 25, 2003 and October 26, 2002 . . 6
Notes to Unaudited Consolidated Financial Statements. . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 30
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . 30
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8K . . . . . . . . . . . . . . 31
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Exhibit Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
- 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 Nine Months Ended
------------------------ ------------------------
October 25, October 26, October 25, October 26,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net sales $321,313 $314,807 $600,490 $582,277
Cost of sales (excludes
depreciation of $765, $894,
$2,481 and $2,874,
respectively, included below) 186,276 177,738 359,331 342,577
-------- -------- -------- --------
Gross profit 135,037 137,069 241,159 239,700
Operating expenses:
Selling, general and
administrative 64,490 61,537 176,384 163,196
Depreciation and amortization 5,038 5,874 15,253 17,280
-------- -------- -------- --------
Total operating expenses 69,528 67,411 191,637 180,476
-------- -------- -------- --------
Income from operations 65,509 69,658 49,522 59,224
-------- -------- -------- --------
Other income (expense):
Interest expense, net (10,631) (11,265) (31,007) (32,321)
Other (293) 77 (145) 218
-------- -------- -------- --------
Other expense, net (10,924) (11,188) (31,152) (32,103)
-------- -------- -------- --------
Income before income taxes 54,585 58,470 18,370 27,121
Provision for income taxes 15,664 20,738 5,272 9,455
-------- -------- -------- --------
Net income 38,921 37,732 13,098 17,666
Accretion and dividend on
preferred stock 1,001 913 2,963 2,740
Accelerated accretion on
converted preferred stock 18,584 - 18,584 --
-------- -------- -------- --------
Net income (loss) attributable
to common shareholders $ 19,336 $ 36,819 $ (8,449) $ 14,926
======== ======== ======== ========
Income (loss) per common share
(See Note 2):
Basic $ 1.07 $ 2.07 $ (0.47) $ 0.84
======== ======== ======== ========
Diluted $ 0.88 $ 1.64 $ (0.47) $ 0.77
======== ======== ======== ========
Weighted average number of
common shares:
Basic 18,096,843 17,764,698 17,966,033 17,732,545
========== ========== ========== ==========
Diluted 22,467,531 22,979,693 17,966,033 23,039,669
========== ========== ========== ==========
The accompanying notes are an integral part of the
unaudited consolidated financial statements.
- 3 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
------------- As of ---------------
October 25, 2003 January 31, 2003
---------------- ----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 22,771 $ 22,663
Accounts receivable, net 275,916 118,844
Inventories 213,251 200,876
Deferred income taxes 7,614 7,614
Prepaid expenses and other assets 17,694 17,297
-------- --------
Total current assets 537,246 367,294
-------- --------
Property and equipment, net 36,516 36,216
-------- --------
Other assets
Exclusive brand licenses, trademarks and
intangibles, net 196,702 205,534
Debt financing costs 11,436 13,978
Other 4,920 4,598
-------- --------
Total other assets 213,058 224,110
-------- --------
Total assets $786,820 $627,620
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 87,010 $ 2,068
Accounts payable trade 98,175 79,997
Other payables and accrued expenses 72,047 66,398
Current portion of long-term debt 7,054 2,370
-------- --------
Total current liabilities 264,286 150,833
-------- --------
Long-term debt 284,778 317,959
Deferred income taxes and other 10,613 11,350
-------- --------
Total long-term liabilities 295,391 329,309
-------- --------
Total liabilities 559,677 480,142
-------- --------
Commitments and contingencies (See Note 8)
Convertible, redeemable preferred stock,
Series D, $.01 par value (liquidation
preference of $26,898 and $50,000
respectively); 1,000,000 shares authorized;
224,154 and 416,667 shares issued and
outstanding, respectively 10,253 15,634
-------- --------
Shareholders' equity:
Common stock, $.01 par value, 50,000,000
shares authorized; 24,735,355
and 18,804,057 shares issued, respectively 247 188
Additional paid-in capital 181,776 89,782
Retained earnings 41,239 49,688
Treasury stock (124,429 and 290,299 shares
at cost, respectively) (1,297) (2,336)
Accumulated other comprehensive income 1,275 5
Unearned deferred compensation (6,350) (5,483)
-------- --------
Total shareholders' equity 216,890 131,844
-------- --------
Total liabilities and
shareholders' equity $786,820 $627,620
======== ========
The accompanying notes are an integral part of the
unaudited consolidated financial statements.
- 4 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
(Amounts in thousands)
Accumulated
Common Stock Additional Other
-------------- Paid-In Retained Treasury Comprehensive
Shares Amount Capital Earnings Stock Income
---------------------------------------------------------------------
Balance at
January 31, 2003 18,804 $188 $ 89,782 $ 49,688 $(2,336) $ 5
Issuance of common
stock upon exercise
of stock options 181 2 1,496 - - -
Offering of common
stock 3,667 36 62,632 - - -
Conversion of
Series D preferred
stock and
accelerated
accretion 2,083 21 26,906 (18,584) - -
Issuance of
restricted stock,
net of forfeitures -- -- 960 -- 1,701 --
Repurchase of
common stock - -- -- -- (662) --
Amortization of
unearned deferred
compensation, net
of forfeitures - - -- -- -- --
Accretion and
dividend on Series D
preferred stock -- - - (2,963) -- --
Comprehensive income:
Net income -- - - 13,098 -- --
Foreign currency
translation - -- -- -- -- 1,270
---------------------------------------------------------------------
Total comprehensive
income -- -- -- 13,098 -- 1,270
---------------------------------------------------------------------
Balance at
October 25, 2003 24,735 $247 $181,776 $41,239 $(1,297) $1,275
=====================================================================
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 - 1,498
Offering of common
stock - 62,668
Conversion of
Series D preferred
stock and
accelerated accretion - 8,343
Issuance of
restricted stock,
net of forfeitures (2,661) --
Repurchase of
common stock - (662)
Amortization of
unearned deferred
compensation, net
of forfeitures 1,794 1,794
Accretion and
dividend on Series D
preferred stock - (2,963)
Comprehensive income:
Net income - 13,098
Foreign currency
translation - 1,270
-------------------------
Total comprehensive
income - 14,368
-------------------------
Balance at
October 25, 2003 $(6,350) $216,890
=========================
The accompanying notes are an integral part of the
unaudited consolidated financial statements.
- 5 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine Months Ended
--------------------------
October 25, October 26,
2003 2002
----------- -----------
Operating Activities:
Net income $ 13,098 $ 17,666
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 15,253 17,280
Amortization of senior note offering costs and
note premium 1,939 1,965
Amortization of unearned deferred compensation 1,794 1,593
Changes in assets and liabilities:
Increase in accounts receivable (157,072) (205,647)
Increase in inventories (12,375) (6,966)
(Increase) decrease in prepaid expenses and
other assets (1,065) 3,661
Increase in accounts payable 18,178 42,730
Increase in other payables and accrued expenses 10,422 15,888
Other 832 1,054
--------- ---------
Net cash used in operating activities (108,996) (110,776)
--------- ---------
Investing Activities:
Additions to property and equipment (9,105) (6,498)
Proceeds from disposals of property and equipment 3 -
Price adjustment to trademarks acquired in
Arden acquisition 2,460 -
--------- ---------
Net cash used in investing activities (6,642) (6,498)
--------- ---------
Financing Activities:
Proceeds from short-term debt 84,942 117,353
Payments on long-term debt (33,137) (2,318)
Proceeds from the exercise of stock options 1,498 464
Proceeds from the issuance of new common stock 62,667 -
Repurchase of common stock (662) -
--------- ---------
Net cash provided by financing activities 115,308 115,499
--------- ---------
Effect of exchange rate changes on cash and
cash equivalents 438 209
Net increase (decrease) in cash and cash equivalents 108 (1,566)
Cash and cash equivalents at beginning of period 22,663 15,913
--------- ---------
Cash and cash equivalents at end of period $ 22,771 $ 14,347
========= =========
Supplemental Disclosure of Cash Flow Information:
Interest paid during the period $ 30,836 $ 30,918
========= =========
Income taxes paid during the period $ 129 $ 57
========= =========
The accompanying notes are an integral part of the
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 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 unaudited 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 unaudited 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
derived from the audited financial statements included in the Company's annual
report on form 10-K for the year ended January 31, 2003. 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. Certain reclassifications were made to the prior
years' consolidated financial statements and the accompanying footnotes.
NOTE 2. INCOME (LOSS) PER SHARE
Basic income (loss) per share is computed by dividing the net income
(loss) attributable to common shareholders by the weighted average shares of
outstanding common stock, $.01 par value per share ("Common Stock"). The
calculation of diluted income per share is similar to basic income per share
except that the denominator includes potentially dilutive Common Stock such as
stock options, warrants and convertible securities. In addition, for the
diluted income per share calculation, 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 25, 2003 as the assumed
conversion of convertible securities and the assumed exercise of outstanding
options and warrants would have an anti-dilutive effect.
[Remainder of Page Intentionally Left Blank]
- 7 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. INCOME (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 25, October 26, October 25, October 26,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Basic
Net income (loss)
attributable to common
shareholders $19,336 $36,819 $(8,449) $14,926
======= ======= ======= =======
Weighted average shares
outstanding 18,097 17,765 17,966 17,733
====== ====== ====== ======
Net income (loss) per
basic share $1.07 $2.07 $(0.47) $0.84
===== ===== ====== =====
Diluted
Net income (loss)
attributable to common
shareholders $19,336 $36,819 $(8,449) $14,926
Accretion and Dividend
on Series D Convertible
Preferred Stock not converted
during the period 500 913 - 2,740
------- ------- ------- -------
Net income (loss)
as adjusted $19,836 $37,732 $(8,449) $17,666
======= ======= ======= =======
Weighted average shares
outstanding 18,097 17,765 17,966 17,733
Potential common shares -
treasury method 2,130 1,048 - 1,140
Assumed conversion of
Series D Convertible
Preferred Stock 2,083 4,167 - 4,167
Dividend shares on Series D
Convertible Preferred
Stock 158 -- -- --
------- ------- ------- -------
Weighted average shares and
potential dilutive shares 22,468 22,980 17,966 23,040
======= ======= ======= =======
Net income (loss)
per diluted share $0.88 $1.64 $(0.47) $0.77
===== ===== ====== =====
As a result of the conversion of $25 million of the aggregate liquidation
(representing 208,340 shares) preference of the Company's Series D Convertible
Preferred Stock, $.01 par value (the "Series D Convertible Preferred Stock")
into Common Stock on October 22, 2003 by an affiliate of Unilever (See Note
9), the Company recorded an $18.6 million non-cash charge against net income
to common shareholders to reflect the acceleration of accretion on such
preferred shares. For purposes of the diluted share calculation, the Company
added back to net income attributable to common shareholders for the three
months ended October 25, 2003 50%, or $500,000, of accretion and dividend on
Series D Convertible Preferred Stock, which represents the amount of accretion
and dividend on the preferred stock that was not converted during the period.
The calculation of diluted earnings per share for the three months ended
October 25, 2003 does not consider in the denominator the anti-dilutive
effects of approximately 2.061 million shares of Series D Convertible
Preferred Stock that were converted into Common Stock and would have increased
the shares related to "assumed conversion of Series D Convertible Preferred
Stock" and "weighted average shares and potential dilutive shares" by the same
amount. Similarly, an add-back to net income attributable to common
shareholders in the amount of approximately $18.584 million for the
accelerated accretion charge associated with the conversion of certain of the
Series D Convertible Preferred Stock and $501,000 related to non-accelerated
accretion and dividends on such stock was not made as such add-back would have
had an anti-dilutive effect on the calculation of diluted earnings per share.
- 8 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. INCOME (LOSS) PER SHARE (Continued)
For the nine months ended October 25,2003, the calculation of diluted
earnings per share excludes in addition to the above amounts, 1.596 million
potential common shares under the treasury method, 2.098 million shares of
Series D Convertible Preferred Stock assumed to be converted as of the
beginning of the period, and 15,820 preferred dividend shares on the Series D
Convertible Preferred Stock which upon conversion would equal 158,200 shares
of Common Stock in the denominator and an add-back of $2.462 million to net
income attributable to common shareholders related to non-accelerated
accretion and dividends on such stock, as such amounts and add-backs would
have had an anti-dilutive effect on the calculation of diluted earnings per
share.
The following table shows the options to purchase shares of Common Stock
that were outstanding during the three and nine months ended October 25, 2003
and October 26, 2002 where the option exercise price was greater than the
average market price of the common shares over the applicable period and thus
were excluded from diluted income per share because they were anti-dilutive.
Three Months Ended Nine Months Ended
-------------------------- -------------------------
October 25, October 26, October 25, October 26,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Number of shares 117,000 2,820,750 297,000 1,937,974
======= ========= ======= =========
Range of exercise $18.16-$20.64 $11.33-$20.64 $14.80-$20.64 $12.50-$20.64
============= ============= ============= =============
NOTE 3. 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 October 25, 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 income (loss)
attributable to common shareholders if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based compensation:
(Dollars in thousands except per share data):
Three Months Ended Nine Months Ended
-------------------------- -------------------------
October 25, October 26, October 25, October 26,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income (loss)
attributable to common
shareholders,
as reported $19,336 $36,819 $ (8,449) $14,926
Stock-based employee
compensation expense,
net of tax, determined
under fair value-based
method 1,325 1,375 3,703 4,024
------- ------- -------- -------
Pro forma net income
(loss) attributable to
common shareholders $18,011 $35,444 $(12,152) $10,902
======= ======= ======== =======
Income (loss) per
common share
Basic
As reported $1.07 $2.07 $(0.47) $0.84
Pro forma $1.00 $2.00 $(0.68) $0.61
Diluted
As reported $0.88 $1.64 $(0.47) $0.77
Pro Forma $0.82 $1.58 $(0.68) $0.59
- 9 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity"
("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity in its statement of financial position. It requires
that an issuer classify a financial instrument that is within its scope as a
liability, because the financial instrument embodies an obligation of the
issuer. SFAS 150 became effective for the Company in the third quarter ended
October 25, 2003. This standard did not materially impact the Company's
consolidated financial statements.
NOTE 5. INVENTORIES
The components of inventory were as follows:
(Dollars in thousands) October 25, January 31,
2003 2003
----------- -----------
Raw materials $ 40,555 $ 35,500
Work in progress 18,288 19,792
Finished goods 154,408 145,584
-------- --------
$213,251 $200,876
======== ========
NOTE 6. 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 (the "10 3/8% Senior
Notes") and the 11 3/4% Senior Secured Notes due 2011 (the "11 3/4% 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 declines to less than $50 million. No financial maintenance
covenant was applicable for the nine months ended October 25, 2003. The
Credit Facility prohibits the payment of dividends on the Company's 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.
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
expense). At the Company's option, the Applicable Margin may be applied to
either the London InterBank Offered Rate ("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 October 25, 2003, the Applicable
Margin was 2.75% for LIBOR loans and 1.0% for prime rate loans. The commitment
fee on the unused portion of the Credit Facility ranges from .375% to .5% per
year.
As of October 25, 2003, the Company had an outstanding balance under
the Credit Facility of approximately $87 million and outstanding letters of
credit of $470,010, as compared with a balance of $2.1 million and letters of
credit of $286,000 outstanding as of January 31, 2003. As of October 25,
2003, the Company had approximately $241 million of eligible receivables and
inventories available as collateral under the Credit Facility. Therefore, the
Company had the full $200 million of borrowing capacity under the Credit
Facility with a remaining availability of $112.5 million.
- 10 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. LONG-TERM DEBT
The Company's long-term debt consisted of the following:
(Dollars in thousands)
October 25, January 31,
Description 2003 2003
- ----------- ----------- -----------
10 3/8% Senior Notes due May 2007 $124,778 $150,977
11 3/4% Senior Secured Notes
due May 2011 160,000 160,000
8.5% Subordinated Debentures due May 2004 2,166 4,314
8.84% Miami Lakes Facility Mortgage Note
due July 2004 4,888 5,038
-------- --------
Total long-term debt 291,832 320,329
Less current portion of long-term debt 7,054 2,370
-------- --------
Long-term debt, net $284,778 $317,959
======== ========
On October 24, 2003, the Company repurchased $20 million aggregate
principal amount of its 10 3/8% Senior Notes at a redemption price of 103.458%
of the principal amount plus accrued interest. As a result of this repurchase,
the Company recorded a loss of approximately $290,000. This expense is
comprised of the call premium of approximately $691,000 less approximately
$401,000 for the non-cash write-off of unamortized debt issue premiums, net of
original issue costs. See Note 13 for information on the Company's repurchase
on November 21, 2003 of $56 million aggregate principal amount of 11 3/4%
Senior Notes and the Company's notice of redemption given on November 18, 2003
for $20 million aggregate principal amount of 10 3/8% Senior Notes.
NOTE 8. COMMITMENTS AND CONTINGENCIES
In October 2003, the Company entered into a settlement with an affiliate
of Unilever for the final purchase price adjustments related to the
acquisition of the Arden business. The settlement excludes certain rights to
indemnification the Company is seeking from the Unilever affiliate relating to
pending third party litigation. As a result, the aggregate purchase price was
reduced by approximately $2.5 million. This was recorded as a reduction of
the trademarks acquired and was allocated to the individual assets acquired on
a pro-rata basis.
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$42.1 million at October 25, 2003), against each
of Unilever and the Company plus punitive damages of Canadian $35 million
(approximately US$26.8 million at October 25, 2003). Management believes that
the Company would be entitled to indemnification from Unilever under its
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 9. CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
EQUITY OFFERING. On October 22, 2003, the Company completed a public
offering of 5,750,000 shares of Common Stock at $18.25 per share. The Company
sold 3,666,667 shares of Common Stock in the offering, and an affiliate of
Unilever sold 2,083,333 shares. The gross proceeds, before the offering
discount of $3.8 million and approximately $400,000 of offering expenses, was
approximately $66.9 million, resulting in net proceeds to the Company of
approximately $62.7 million. The Company used the net proceeds on November
21, 2003 to redeem $56 million aggregate principal amount of the 11 3/4%
Senior Notes. See Note 13. The Company did not receive any proceeds from the
sale of the shares by the affiliate of Unilever.
- 11 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (Continued)
CONVERSION OF PREFERRED STOCK. In connection with the public offering on
October 22, 2003, the affiliate of Unilever converted 208,340 shares
(representing $25 million of aggregate liquidation preference) of the
Company's Series D Convertible Preferred Stock into 2,083,340 shares of the
Common Stock. As a result of the conversion of the Series D Convertible
Preferred Stock and sale of the Common Stock by the Unilever affiliate, the
Company's shareholders' equity increased by approximately $8.3 million and the
balance recorded in the Convertible, redeemable preferred stock Series D
account on the Company's consolidated balance sheet was reduced by the same
amount. In addition, the accretion of the Series D Convertible Preferred
Stock converted was accelerated in the amount of $18.6 million, resulting in a
non-cash charge to net income (loss) attributable to common shareholders on
the Company's consolidated statements of operations for the three and nine
months ended October 25, 2003.
CONVERTIBLE PREFERRED STOCK. At October 25, 2003 and January 31, 2003,
the Company had outstanding 224,154 and 416,667 shares, respectively, $120 per
share liquidation preference, of 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 initial
conversion price for the Series D Convertible Preferred Stock of $12 per share
is subject to customary anti-dilution adjustments until January 23, 2007 in
the event the Company issues Common Stock for consideration per share less
than the then current market price of the Common Stock (other than in a bona
fide underwritten offering, in connection with a debt financing and in other
instances specified in the Company's Amended and Restated Articles of
Incorporation (the "Articles")). The initial conversion price for the Series D
Convertible Preferred Stock will also be subject to anti-dilution adjustments
until January 23, 2013 if the Company declares a dividend in shares of Common
Stock or reclassifies or combines the outstanding Common Stock into a greater
or lesser number of shares. The initial conversion price for the Series D
Convertible Preferred Stock is subject to reduction until January 23, 2013 if
the Company repurchases Common Stock during such time in accordance with a
formula set forth in the Articles. In addition, in the event that prior to
January 23, 2013, the Company effects a reorganization of its capital stock,
consolidates or merges with another corporation or sells substantially all of
the Company's assets to another corporation such that the Company's common
stockholders receive stock, securities or assets of another corporation in
exchange for Common Stock, then the Company must make adequate provision so
that each holder of Series D Convertible Preferred Stock has the right to
receive such stock, securities or assets as may be issued with respect to, or
in exchange for, the outstanding shares of Common Stock which would be
received upon conversion of the Series D Convertible Preferred Stock had such
reorganization, consolidation, merger or sale not occurred. 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 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 Credit Facility and the
indentures governing the Company's Senior Notes (the "Indentures"). On March
17, 2003, June 16, 2003 and September 15, 2003, the Company issued to an
affiliate of Unilever 5,208 shares, 5,273 shares and 5,339 shares
respectively, of Series D Convertible Preferred Stock as payment of the first,
second and third quarterly dividends. 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, 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.
- 12 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (Continued)
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 accretion of the beneficial conversion feature is based on the
effective yield method over the period from issue date to the mandatory
redemption date (12 years). The recorded dividend is based on the
straight-line method, which approximates the effective yield method, with the
total amount of the dividend of $25 million to be paid over 10 years amortized
over the period from issue date to the mandatory redemption date (12 years) or
$2.1 million annually. The difference between the liquidation value of $50
million and the $8.5 million balance recorded in 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.
The accretion will be accelerated if the Series D Convertible Preferred Stock
is converted into Common Stock prior to the redemption date. For the three
months ended October 25, 2003 and October 26, 2002, the aggregate accretion
(excluding the accelerated accretion on the converted Series D Convertible
Preferred Stock) and dividend relating to the Series D Convertible Preferred
Stock was approximately $1.0 million and $913,000, respectively. For the nine
months ended October 25, 2003 and October 26, 2002, the aggregate accretion
(excluding the accelerated accretion on the converted preferred stock) and
dividend on the Series D Convertible Preferred Stock was approximately $3.0
and $2.7 million, respectively.
PERFORMANCE-ACCELERATED AND OTHER RESTRICTED COMMON STOCK. On June 25,
2003, the Company granted an aggregate of 175,938 shares of restricted stock
to 104 employees that are due to vest in equal thirds over a three-year period
on the anniversary date of the grant. These grants were recorded as unearned
deferred compensation in shareholders' equity in the amount of approximately
$2.3 million and are being amortized over the vesting period. In addition, on
that same date, the Company granted an aggregate of 6,500 shares of restricted
stock to 13 employees that vest in full one year from the date of grant. These
shares were recorded as unearned deferred compensation in shareholders' equity
in the amount of approximately $85,000 and are being amortized over the
vesting period. Also, on April 26, 2003, the Company granted an aggregate of
76,702 shares of restricted stock to 937 employees that vest in full one year
from the date of grant. These shares were recorded as unearned deferred
compensation in shareholders' equity in the amount of approximately $782,000
and are being amortized over the vesting period.
On March 22, 2002, the Company granted an aggregate of 504,000 shares of
performance-accelerated restricted stock ("PARS") to 108 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 that 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 are recorded as
unearned deferred compensation in the Company's consolidated balance sheets at
October 25, 2003 and January 31, 2003. The PARS are currently being amortized
over the six-year vesting period.
At October 25, 2003 and January 31, 2003, the shares of Common Stock
outstanding included 724,214 shares and 661,133 shares, respectively, of
restricted stock that are subject to vesting requirements and forfeiture
provisions. Compensation expense for the three months ended October 25, 2003
and October 26, 2002 relating to the PARS and the restricted stock granted to
employees, net of forfeitures, amounted to approximately $632,000 and
$654,000, respectively. Compensation expense for the nine months ended
October 25, 2003 and October 26, 2002 relating to the PARS and the restricted
stock granted to employees, net of forfeitures, amounted to approximately $1.8
million and $1.6 million, respectively.
STOCK OPTIONS GRANTED. On June 25, 2003, the Company issued to 127
employees under its 2000 Stock Incentive Plan options to purchase an aggregate
of 420,427 shares of Common Stock of the Company. The exercise price of those
shares is $13.04 per share, which was the closing price of the Company's
Common Stock on the date of grant. These options are due to vest in equal
thirds over a three-year period on the anniversary date of the grant. The
options expire ten years from the date of grant.
- 13 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (Continued)
EMPLOYEE STOCK PURCHASE PLAN. On July 1, 2003, the Company implemented
its Employee Stock Purchase Plan under which employees in certain countries
are permitted to deposit after tax funds from their wages for purposes of
purchasing Common Stock at a 15% discount from the lowest of the closing price
of the Common Stock at either the start of the contribution period or the end
of the contribution period. The first purchases under this plan will be
consummated on January 1, 2004.
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
Notes 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 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.
Three Months Ended
Statement of Operations October 25, 2003
Company Guarantors Eliminations Consolidated
----------------------------------------------------
Net sales $236,607 $91,076 $ (6,370) $321,313
Cost of sales 147,517 38,759 -- 186,276
-------- ------- -------- --------
Gross profit 89,090 52,317 (6,370) 135,037
-------- ------- -------- --------
Selling, general and
administrative expenses 39,781 31,079 (6,370) 64,490
Depreciation and amortization 3,030 2,008 -- 5,038
-------- ------- -------- --------
Income from operations 46,279 19,230 -- 65,509
Interest and other expense, net 4,124 (4,658) (10,390) (10,924)
-------- ------- -------- --------
Income before income taxes 50,403 14,572 (10,390) 54,585
Provision for income taxes 11,482 4,182 -- 15,664
-------- ------- -------- --------
Net income $ 38,921 $10,390 $(10,390) $ 38,921
======== ======= ======== ========
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 10. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
Nine Months Ended
Statement of Operations October 25, 2003
Company Guarantors Eliminations Consolidated
---------------------------------------------------
Net sales $408,997 $203,225 $(11,732) $600,490
Cost of sales 271,906 87,425 -- 359,331
-------- -------- -------- --------
Gross profit 137,091 115,800 (11,732) 241,159
-------- -------- -------- --------
Selling, general and
administrative expenses 100,913 87,203 (11,732) 176,384
Depreciation and amortization 9,514 5,739 -- 15,253
-------- -------- -------- --------
Income from operations 26,664 22,858 -- 49,522
Interest and other expense, net (10,427) (15,426) (5,299) (31,152)
-------- -------- -------- --------
Income before income taxes 16,237 7,432 (5,299) 18,370
Provision for income taxes 3,139 2,133 -- 5,272
-------- -------- -------- --------
Net income $ 13,098 $ 5,299 $ (5,299) $ 13,098
======== ======== ======== ========
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
======== ======== ======== ========
[Remainder of Page Intentionally Left Blank]
- 15 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
As of
Balance Sheet October 25, 2003
Company Guarantors Eliminations Consolidated
---------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 12,332 $ 10,439 $ -- $ 22,771
Accounts receivable, net 198,035 77,881 -- 275,916
Inventories 155,320 57,931 -- 213,251
Intercompany receivable 290,868 (290,868) -- --
Deferred income taxes 7,614 -- -- 7,614
Prepaid expenses and
other assets 9,671 8,023 - 17,694
-------- --------- -------- --------
Total current assets 673,840 (136,594) - 537,246
-------- --------- -------- --------
Property and equipment, net 27,066 9,450 - 36,516
-------- --------- -------- --------
Other assets:
Investment in guarantors'
subsidiaries 10,160 - (10,160) --
Exclusive brand licenses,
trademarks and
intangibles, net 28,220 168,482 - 196,702
Other assets 13,969 2,387 - 16,356
-------- --------- -------- --------
Total other assets 52,349 170,869 (10,160) 213,058
-------- --------- -------- --------
Total assets $753,255 $ 43,725 $(10,160) $786,820
======== ========= ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Short-term debt $ 87,010 $ - $ -- $ 87,010
Accounts payable trade 88,073 10,102 -- 98,175
Other payables and accrued
expenses 48,812 23,235 -- 72,047
Current portion of
long-term debt 7,054 - - 7,054
-------- --------- -------- --------
Total current liabilities 230,949 33,337 - 264,286
-------- --------- -------- --------
Long-term debt 284,778 -- -- 284,778
Deferred income taxes and other 10,385 228 - 10,613
-------- --------- -------- --------
Total liabilities 526,112 33,565 - 559,677
-------- --------- -------- --------
Convertible, redeemable preferred
stock 10,253 - - 10,253
-------- --------- -------- --------
Shareholders' equity 216,890 10,160 (10,160) 216,890
-------- --------- -------- --------
Total liabilities and
shareholders' equity $753,255 $ 43,725 $(10,160) $786,820
======== ========= ======== ========
- 16 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED 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
======== ======== ======= ========
- 17 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
Nine Months Ended
Statement of Cash Flow October 25, 2003
Company Guarantors Eliminations Consolidated
---------------------------------------------------
Operating Activities:
Net cash used in
operating activities $(108,466) $ (530) $ -- $(108,996)
--------- ------- ------ ---------
Investing Activities:
Additions to property and
equipment, net of disposals (4,823) (4,282) -- (9,105)
Proceeds from disposals of
property and equipment 3 - - 3
Price adjustment to trademarks
Acquired in Arden acquisition 2,460 - - 2,460
--------- ------- ------ ---------
Net cash used in investing
activities (2,360) (4,282) -- (6,642)
--------- ------- ------ ---------
Financing Activities:
Proceeds from short-term debt 84,942 -- -- 84,942
Payments on long-term debt (33,137) -- -- (33,137)
Proceeds from the exercise of
stock options 1,498 -- -- 1,498
Proceeds from issuance of new
common stock 62,667 - - 62,667
Repurchase of common stock (662) - - (662)
--------- ------- ------ ---------
Net cash provided by
financing activities 115,308 -- -- 115,308
Effects of exchange rate changes
on cash and cash equivalents -- 438 -- 438
Net increase (decrease) in cash
and cash equivalents 4,482 (4,374) -- 108
Cash and cash equivalents at
beginning of period 7,850 14,813 -- 22,663
--------- ------- ------ ---------
Cash and cash equivalents at
end of period $ 12,332 $10,439 $ -- $ 22,771
========= ======= ====== =========
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 (2,379) (4,119) -- (6,498)
--------- -------- ------ ---------
Net cash used in investing
activities (2,379) (4,119) -- (6,498)
--------- -------- ------ ---------
Financing Activities:
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
========= ======== ====== =========
- 18 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED 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) Nine Months Ended
October 25, October 26,
2003 2002
----------- -----------
Accretion and dividend on
Series D Convertible Preferred Stock $2,963 $2,740
====== ======
Conversion of Series D Convertible
Preferred Stock (See Note 9):
Accelerated accretion on converted
preferred stock 18,584 -
====== ======
Conversion to Common Stock 6,416 -
Accreted dividends not paid on
Convertible Preferred Stock 1,927 -
------ ------
Conversion of Series D Preferred
Stock 8,343 -
====== ======
Issuance of Restricted Stock and PARS,
net of forfeitures 2,661 $7,270
====== ======
NOTE 13. SUBSEQUENT EVENTS
REDEMPTION OF 11 3/4% SENIOR NOTES. On November 21, 2003, the Company
repurchased $56 million aggregate principal amount of 11 3/4% Senior Notes.
The redemption price was 111.75% of the principal amount, plus accrued
interest. The Company used the proceeds received from the public offering of
its Common Stock, which was completed on October 22, 2003, to repurchase the
11 3/4% Senior Notes. See Note 9. As a result of this redemption, the
Company will incur in the fourth quarter ending January 31, 2004 a pre-tax
charge of approximately $8.7 million related to the early extinguishment of
the 11 3/4% Senior Notes. Pending the closing of the redemption, the Company
used the proceeds received from the public offering of Common Stock to
temporarily pay down the borrowings under the Credit Facility.
NOTICE OF REDEMPTION OF 10 3/8% SENIOR NOTES. On November 18, 2003, the
Company issued a notice to the trustee under the Indentures calling for the
redemption of $20 million aggregate principal amount of 10 3/8% Senior Notes.
The redemption price will be 103.458% of the principal amount, plus accrued
interest and the redemption date will be December 17, 2003. The Company
expects to utilize borrowings under the Credit Facility to repurchase the 10
3/8% Senior Notes. As a result of this transaction, the Company expects to
incur in the fourth quarter ending January 31, 2004 a pre-tax charge of
approximately $500,000 related to the early extinguishment of the 10 3/8%
Senior Notes.
CONSOLIDATION OF DISTRIBUTION FACILITIES. On November 3, 2003, the
Company announced that it intends to consolidate its U.S. distribution
operations into a single distribution facility in Roanoke, Virginia by March
2004. The Roanoke facility was expanded to approximately 400,000 square feet
this year in order to accommodate the consolidated distribution activities.
Accordingly, the Company plans to cease conducting distribution activities
from the Miami Lakes facility at the end of January 2004 and sell the
facility. The Company will continue to use the corporate offices located in
the Miami Lakes facility until the facility
- 19 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. SUBSEQUENT EVENTS (Continued)
is sold and then it will move its corporate offices to another location in the
area. In connection with the consolidation, the U.S. workforce will be
reduced by approximately 10%. The consolidation of U.S. distribution
facilities is designed to reduce supply chain, logistics and corporate
overhead expenses, as well as the total level of inventory required to support
the business and enhance working capital efficiency. The single
transportation hub in Virginia is expected to result in lower freight expenses
as well as lower labor, insurance and other overhead expenses.
The Company expects to incur pre-tax charges of approximately $3.5
million by March 2004 related to costs associated with the consolidation,
including severance pay, outplacement services, and health insurance
assistance for severed employees. The Company expects to incur approximately
$2.0 million to $2.5 million in the fourth quarter ending January 31, 2004 and
the balance, of approximately $1.0 million, is expected to be incurred in the
first quarter ending May 1, 2004.
- 20 -
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; 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; 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.
- 21 -
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 as cash flows from the use of the trademarks are
expected to be generated indefinitely. During the nine months ended October
25, 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.
- 22 -
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 October 25, 2003 Compared to the Three Months Ended
October 26, 2002
- ----------------------------------------------------------------------
NET SALES. Net sales increased $6.5 million to $321.3 million for the
three months ended October 25, 2003, from $314.8 million for the three months
ended October 26, 2002. The increase was driven primarily by increased sales
volumes to certain mass retailers and the favorable impact of foreign exchange
rates. The increase in net sales was partially offset by reduced sales of
certain promotional items, fewer fragrance launches than in the prior year
period and economic weakness in certain European markets.
GROSS PROFIT. Gross profit decreased approximately 1.5% to $135.0
million for the three months ended October 25, 2003, from $137.1 million for
the three months ended October 26, 2002. Gross margin decreased to 42% for
the third quarter in the current fiscal year from 43.5% in the prior year.
The decrease in gross profit and gross margin primarily reflects the higher
percentage of sales of distributed brands, which have lower margins than owned
and licensed brands.
SG&A. Selling, general and administrative expenses increased
approximately $3.0 million, or 4.8%, to $64.5 million for the three months
ended October 25, 2003, from $61.5 million for the three months ended October
26, 2002. As a percentage of net sales, selling, general and administrative
expenses increased to 20.1% for the three months ended October 25, 2003, as
compared to 19.5% in the prior year period. The increase in selling, general
and administrative expenses was driven by higher costs for incentive
compensation, the unfavorable impact of foreign exchange rates and increased
investment in advertising and promotions, partially offset by reduced
information technology costs and favorable bad debt experience.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased
approximately $836,000 to $5.0 million in the three months ended October 25,
2003, as compared to $5.9 million for the three months ended October 26, 2002,
principally due to certain assets and intangibles that were fully depreciated
and amortized at the end of the prior fiscal year.
INTEREST EXPENSE. Interest expense, net of interest income, decreased by
approximately $634,000 to $10.6 million for the three months ended October 25,
2003, as compared to $11.3 million for the three months ended October 26,
2002, principally as a result of lower principal balances of the 10 3/8%
Senior Notes due 2007 resulting from our redemption activities as well as
lower interest rates under our credit facility.
- 23 -
OTHER INCOME (EXPENSE). Other expense includes a charge of $290,000
related to the early extinguishment of our 10 3/8% Senior Notes due 2007 on
October 24, 2003. This expense is comprised of the call premium of
approximately $691,000 less approximately $401,000 for the non-cash write-off
of unamortized debt issue premiums, net of original issue costs.
PROVISION FOR INCOME TAXES. The provision for income taxes was
approximately $15.7 million for the three months ended October 25, 2003, as
compared with $20.7 million for the three months ended October 26, 2002, due
to a lower effective tax rate. The effective tax rate, calculated as a
percentage of income before taxes, for the three months ended October 25, 2003
and October 26, 2002 was 28.7% and 35.5%, respectively.
NET INCOME. Net income increased approximately 3.2%, to $38.9 million
for the three months ended October 25, 2003 as compared to net income of $37.7
million in the prior year period. The improved performance was driven by
higher net sales, lower depreciation, amortization and interest expense and a
lower tax rate, partially offset by lower gross margins and 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 an affiliate
of 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
of such preferred stock and recorded as additional paid-in capital. The
Series D convertible preferred stock had an original $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 income attributable to common shareholders, represents
the accretion of the original carrying value of $8.5 million of the Series D
convertible preferred stock to its liquidation preference, and the imputed
dividends on such preferred stock. For the three months ended October 25,
2003 and October 26, 2002, the aggregate accretion (excluding the accelerated
accretion on the converted Series D convertible preferred stock) and dividend
relating to the Series D convertible preferred stock was approximately $1.0
million and $913,000, respectively. See Note 9 to the Notes to Unaudited
Consolidated Financial Statements.
ACCELERATED ACCRETION ON CONVERTED PREFERRED STOCK. In October 2003, we
recorded accelerated accretion on the Series D convertible preferred stock of
$18.6 million for the preferred stock converted into common stock, which was
sold in the public offering in October 2003. See Note 9 to the Notes to
Unaudited Consolidated Financial Statements.
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS. Principally due to the
accelerated accretion of the fair value of the Series D convertible preferred
stock converted into common stock in October 2003, net income attributable to
common shareholders was $19.3 million for the three months ended October 25,
2003, as compared with $36.8 million for the three months ended October 26,
2002. As a result of the accelerated accretion on the conversion of $25
million of the aggregate liquidation preference of our Series D convertible
preferred stock into common stock on October 22, 2003, our fully diluted net
income per share for the three months ended October 25, 2003 was reduced by
$0.71 per share.
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 expense), decreased approximately $5.4 million,
or 7%, to $70.3 million ($70.6 million excluding charges related to the early
extinguishment of debt included in other expenses) for the three months ended
October 25, 2003 as compared to $75.6 million for the prior year period. The
decrease in EBITDA reflects lower gross margins and higher selling, general
and administrative expenses that were partially offset by higher net sales.
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
- 24 -
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.
The following is a reconciliation of net income, as determined in
accordance with generally accepted accounting principles, to EBITDA:
(Unaudited)
(Dollars in thousands) Three Months Ended
--------------------------
October 25, October 26,
2003 2002
----------- -----------
Net income $38,921 $37,732
Plus:
Provision for income taxes 15,664 20,738
Interest expense, net 10,631 11,265
Depreciation and amortization 5,038 5,874
------- -------
EBITDA including debt
extinguishment charges 70,254 75,609
Debt extinguishment charges 290 -
------- -------
EBITDA excluding debt
extinguishment charges $70,544 $75,609
======= =======
Nine Months Ended October 25, 2003 Compared to the Nine Months Ended
October 26, 2002
- --------------------------------------------------------------------
NET SALES. Net sales increased approximately 3.1% to $600.5 million for
the nine months ended October 25, 2003, from $582.3 million for the nine
months ended October 26, 2002. The increase was driven primarily by increased
sales to mass retailers and the favorable impact from foreign currency rates.
These increases were partially offset by reduced sales in U.S. department
stores due to lower sales of certain promotional items, fewer fragrance
launches this year and the adverse impact in travel retail and certain
international markets during the first quarter of the fiscal year from the
Severe Acute Respiratory Syndrome (SARS) epidemic and the Iraqi War.
GROSS PROFIT. Gross profit increased approximately 1.0% to $241.2
million for the nine months ended October 25, 2003, from $239.7 million for
the nine months ended October 26, 2002. Gross margin decreased to 40.2% of net
sales for the nine months ending October 25, 2003 from 41.2% in the
corresponding prior year period. The increase in gross profit was due to
higher sales and lower gift with purchase costs, partially offset by a higher
percentage of sales of distributed brands, which have lower gross margins than
owned and licensed brands.
SG&A. Selling, general and administrative expenses increased
approximately $13.2 million, or approximately 8.1%, to $176.4 million for the
nine months ended October 25, 2003, from $163.2 million for the nine months
ended October 26, 2002. The increase in selling, general and administrative
expenses as compared to the prior year period was due to the unfavorable
impact from foreign currency rates, increased advertising expenses and higher
incentive compensation costs. This increase was partially offset by favorable
bad debt experience and reduced information technology costs. As a percentage
of net sales, selling, general and administrative expenses increased to 29.4%
for the nine months ended October 25, 2003, as compared with 28.0% in the
prior year. In the second quarter of our current fiscal year, we recorded
additional rent expense of approximately $667,000, which is a cumulative
correction to previously recorded amounts and is related to scheduled rent
increases and lease incentives in certain of our operating leases. This
expense was not material to our results of operations during the periods to
which the adjustment related or in the period recorded and, as such, prior
periods were not adjusted.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased
approximately $2.0 million to $15.3 million in the nine months ended October
25, 2003, as compared to $17.3 million for the nine months ended October 26,
2002, principally due to certain assets and intangibles that were fully
depreciated and amortized at the end of the prior fiscal year.
- 25 -
INTEREST EXPENSE. Interest expense, net of interest income, decreased by
approximately $1.3 million to $31.0 million for the nine months ended October
25, 2003, as compared to $32.3 million for the nine months ended October 26,
2002, principally as a result of lower principal balances of the 10 3/8%
Senior Notes due 2007 resulting from our redemption activities as well as
lower interest rates under our credit facility.
OTHER INCOME (EXPENSE). Other expense includes a charge of $290,000
related to the early extinguishment of our 10 3/8% Senior Notes due 2007 on
October 24, 2003. This expense is comprised of the call premium of
approximately $691,000 less approximately $401,000 for the non-cash write-off
of unamortized debt issue premiums, net of original issue costs.
PROVISION FOR INCOME TAXES. The provision for income taxes was
approximately $5.3 million for the nine months ended October 25, 2003, as
compared with $9.5 million for the nine months ended October 26, 2002,
reflecting a lower effective tax rate. The effective tax rate calculated as a
percentage of income before income taxes for the nine months ended October 25,
2003 and October 26, 2002 was 28.7% and 34.9%, respectively.
NET INCOME. Net income decreased approximately $4.6 million, or 25.9%,
to $13.1 million for the nine months ended October 25, 2003, as compared to
$17.7 million in the prior year period. The decrease was a result of higher
selling, general and administrative expenses partially offset by higher net
sales, lower depreciation and amortization expense and a lower tax rate.
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, represents the accretion of the original carrying value
of $8.5 million of the Series D convertible preferred stock to its liquidation
preference, and the imputed dividends on such preferred stock. For the nine
months ended October 25, 2003 and October 26, 2002, the aggregate accretion
(excluding the accelerated accretion on the converted Series D convertible
preferred stock) and dividend relating to the Series D convertible preferred
stock, including the converted Series D convertible preferred stock, was
approximately $3.0 million and $2.7 million, respectively. See Note 9 to the
Notes to Unaudited Consolidated Financial Statements.
ACCELERATED ACCRETION ON CONVERTED PREFERRED STOCK. In October 2003, we
recorded accelerated accretion on the Series D convertible preferred stock of
$18.6 million for the preferred stock converted into common stock that was
sold in the public offering in October 2003. See Note 9 to the Notes to
Unaudited Consolidated Financial Statements.
NET (LOSS) INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS. Principally due
to the accelerated accretion of the fair value of the Series D convertible
preferred stock converted into common stock in October 2003, the net loss
attributable to common shareholders was $8.4 million for the nine months ended
October 25, 2003 as compared with net income attributable to common
shareholders of $14.9 million for the nine months ended October 26, 2002. As a
result of the accelerated accretion on the conversion of $25 million of the
aggregate liquidation preference of our Series D convertible preferred stock
into common stock on October 22, 2003, our fully diluted net income per share
for the nine months ended October 25, 2003 was reduced by $1.02 per share.
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 expense) decreased approximately $12.1 million,
or 15.8%, to $64.6 million ($64.8 million excluding charges related to the
early extinguishment of debt) for the nine months ended October 25, 2003, as
compared to income of $76.7 million for the nine months ended October 26,
2002. The decrease in EBITDA was the result of higher selling, general and
administrative expenses partially offset by higher net sales.
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
- 26 -
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.
The following is a reconciliation of net income, as determined in
accordance with generally accepted accounting principles, to EBITDA:
(Unaudited)
(Dollars in thousands) Nine Months Ended
--------------------------
October 25, October 26,
2003 2002
----------- -----------
Net income $13,098 $17,666
Plus:
Provision for income taxes 5,272 9,455
Interest expense, net 31,007 32 321
Depreciation and amortization 15,253 17,280
------- -------
EBITDA including debt
extinguishment charges 64,630 76,722
Debt extinguishment charges 168 --
------- -------
EBITDA excluding debt
extinguishment charges $64,798 $76,722
======= =======
CONSOLIDATION OF DISTRIBUTION FACILITIES
On November 3, 2003, we announced that we intend to consolidate our U.S.
distribution operations into a single distribution facility in Roanoke,
Virginia by March 2004. We expect to incur pre-tax charges of approximately
$3.5 million by March 2004 related to costs associated with the consolidation,
including severance pay, outplacement services, and health insurance
assistance for severed employees. Approximately $2.0 million to $2.5 million
is expected to be incurred in the fourth quarter ending January 31, 2004 and
the balance, which is approximately $1.0 million, is expected to be incurred
in the first quarter ended May 1, 2004.
In connection with the facility consolidation, we expect to realize
estimated savings of approximately $2 million to $4 million during the fiscal
year ended January 31, 2005, and approximately $4 million to $6 million on an
annual basis for the fiscal years thereafter. The U.S. workforce will be
reduced by approximately 10%.
FINANCIAL CONDITION
For the nine months ended October 25, 2003, net cash used in operating
activities totaled $109.0 million, compared with $110.8 million of net cash
used in operating activities for the nine months ended October 26, 2002. The
decrease in cash used versus a year ago is due primarily to a lower increase
in accounts receivable balance as days sales outstanding in net receivables
has decreased as compared to the prior year period as calculated on a rolling
twelve month basis. This has been partially offset by an increase in
inventories and a smaller increase in accounts payable. These increases are
primarily due to the purchase of inventories for certain additional brands we
began to distribute this year and the timing of payments to suppliers.
Net cash used in investing activities totaled $6.6 million for the nine
months ended October 25, 2003, compared to $6.5 million for the nine months
ended October 26, 2002. Net cash provided by financing activities totaled
$115.3 million for the nine months ended October 25, 2003, compared to $115.5
million in the prior year. Short-term debt decreased primarily due to the pay
down of the credit facility with approximately $63 million in net proceeds
from the offering of common stock completed on October 22, 2003. The decrease
in short-term debt was partially offset by the repurchase of approximately
$30 million in aggregate principal
- 27 -
amount of 10 3/8% Senior Notes due 2007 during this fiscal year from proceeds
from the revolving credit facility.
On October 22, 2003, we closed a public offering of 5,750,000 shares of
common stock at $18.25 per share. We sold 3,666,667 shares of common stock in
the offering, and an affiliate of Unilever sold 2,083,333 shares. The gross
proceeds before the offering discount of $3.8 million and approximately
$400,000 of offering expenses was $66.9 million, resulting in net proceeds to
us of approximately $62.7 million. We used the net proceeds to redeem $56
million aggregate principal amount of the 11 3/4% Senior Notes due 2011 on
November 21, 2003 at a redemption price of 111.75% of the principal amount,
plus accrued interest. We did not receive any proceeds from the sale of the
shares by the affiliate of Unilever. Unilever's affiliate converted $25
million of aggregate liquidation preference of our Series D convertible
preferred stock, $.01 par value into common stock, which it sold in the
offering.
On November 21, 2003, we repurchased $56 million aggregate principal
amount of 11 3/4% Senior Notes due 2011. The redemption price was 111.75% of
the principal amount, plus accrued interest. We used the proceeds received
from the public offering of our common stock, which was completed on October
22, 2003, to repurchase the 11 3/4% Senior Notes due 2011. See Note 9 to the
Notes to Unaudited Consolidated Financial Statements. As a result of this
redemption, we will incur in the fourth quarter ending January 31, 2004 a
pre-tax charge of approximately $8.7 million related to the early
extinguishment of the 11 3/4% Senior Notes due 2011. Pending the closing of
the redemption, we used the proceeds received from the public offering of
common stock to temporarily pay down the credit facility.
On November 18, 2003, we issued a notice to the trustee under the
indentures dated as of May 13, 1997 and April 27, 1998 relating to our 10 3/8%
Senior Notes due 2007 calling for redemption $20 million aggregate principal
amount of 10 3/8% Senior Notes due 2007. The redemption price will be 103.458%
of the principal amount, plus accrued interest. The redemption date will be
December 17, 2003 and we will use our borrowings under the credit facility to
repurchase the 10 3/8% Senior Notes due 2007. As a result of this
transaction, we expect to incur in the fourth quarter ending January 31, 2004
a pre-tax charge of approximately $500,000 related to the early extinguishment
of the 10 3/8% Senior Notes due 2007.
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 nine months ended
October 25, 2003. The credit facility prohibits the payment of dividends on
our common stock and other distributions to common shareholders and restricts
us from incurring additional non-trade indebtedness, except that we are
permitted to repurchase up to $4 million of common stock.
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
expense). 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
October 25, 2003, the applicable margin was 2.75% for LIBOR loans and 1.00%
for prime rate loans. As of October 25, 2003, we had approximately $241
million of eligible receivables and inventories available as collateral under
the credit facility. Therefore, we had the full $200 million of borrowing
capacity under the credit facility with a remaining availability of $112.5
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
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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.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In December 2002, the Financial Accounting Standards Board ("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 October 25, 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
costs were required to be recognized by us for the periods presented.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity"
("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity in its statement of financial position. It requires
that an issuer classify a financial instrument that is within its scope as a
liability, because the financial instrument embodies an obligation of the
issuer. SFAS 150 became effective in the third quarter ended October 25,
2003. This standard did not materially impact our consolidated financial
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. As of October 25, 2003, we had approximately $87
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 and nine months ended October 25,
2003, we derived approximately 26% and 32%, respectively, 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. Our operations may be
subject to volatility because of currency changes, inflation changes and
changes in political and economic conditions in the countries in which we
operate. 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 affect our reported sales, margins, operating costs and the
anticipated settlement of our foreign denominated receivables and payables.
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 nine months ended October 25, 2003. There can be no assurance that
our hedging operations, if any, will eliminate or substantially reduce risks
associated with fluctuating exchange rates.
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ITEM 4. CONTROLS AND PROCEDURES
The Company's Chairman and Chief Executive Officer and 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 Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended, as of the end of the period covered by this
quarterly 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.
There have been no changes in the Company's internal control over
financial reporting during the fiscal quarter covered by this quarterly report
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
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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 as amended on June 25, 2003
(incorporated herein by reference to Exhibit 10.1 filed as part
of the Company's Form 10-Q for the quarter ended July 26, 2003
(Commission File No. 1-6370)).
10.2 Amended Non-Employee Director Stock Option Plan as amended on
March 18, 2003 (incorporated herein by reference to Exhibit 10.2
filed as a part of the Company's Form 10-Q for the quarter ended
April 26, 2003 (Commission File No. 1-6370)).
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Exhibit
Number Description
- ------- ----------------------------------------------------------------
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 (incorporated herein by
reference to Exhibit 10.4 filed as a part of the Company's Form
10-Q for the quarter ended April 26, 2003 (Commission File No.
1-6370)).
10.5 Amended and Restated Deed of Lease dated as of January 17, 2003,
between the Company and Liberty Property Limited Partnership
(incorporated herein by referenced to Exhibit 10.5 filed as a
part of the Company's Form 10-Q for the quarter ended April 26,
2003 (Commission File No. 1-6370)).
31.1 Certification of Chief Executive Officer.
31.2 Certification of Chief Financial Officer.
32 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.
On September 4, 2003 we filed a current report on Form 8-K dated
September 4, 2003, which furnished, under Item 9, the press release announcing
the financial results for our second quarter ended July 26, 2003, and provided
net sales and diluted earnings per share guidance for the remainder of fiscal
2004.
On October 2, 2003 we filed a current report on Form 8-K dated October 2,
2003, which furnished, under Item 9 the press release announcing our
filing with the Commission of a preliminary prospectus supplement to our
existing shelf registration relating to a proposed offering of common stock.
On October 17, 2003 we filed a current report on Form 8-K dated October
17, 2003, which furnished, under Item 9, the press release announcing the
pricing for the common stock to be sold in an offering.
On October 23, 2003 we filed a current report on Form 8-K dated
October 22, 2003, which reported, under Item 5, that the public offering of
5,750,000 shares of our common stock closed and which filed under Item 7 the
underwriting agreement relating to such offering and the opinion of Weil,
Gotshal & Manges, LLP regarding the shares sold in the offering. We also
furnished, under Item 9, the press release relating to the closing of the
public offering for our common stock.
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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 8, 2003 /s/ E. Scott Beattie
---------------- --------------------
E. Scott Beattie
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: December 8, 2003 /s/ Stephen J. Smith
---------------- --------------------
Stephen J. Smith
Executive Vice President and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
EXHIBIT INDEX
Exhibit
Number Description
- ------- ----------------------------------------------------------------
31.1 Certification of Chief Executive Officer.
31.2 Certification of Chief Financial Officer.
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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