Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 1, 2004
[ ] 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 or other jurisdiction (I.R.S. Employer
of incorporation or organization) 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 June 2, 2004
---------------------------- -----------------
Common Stock, $.01 par value 26,124,263 shares
ELIZABETH ARDEN, INC.
INDEX TO FORM 10-Q
PART I FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Consolidated Balance Sheets -- May 1, 2004 (unaudited)
and January 31, 2004. . . . . . . . . . . . . . . . . . . 3
Unaudited Consolidated Statements of Operations --
Three months ended May 1, 2004 and April 26, 2003 . . . . 4
Unaudited Consolidated Statement of Shareholders' Equity --
Three months ended May 1, 2004. . . . . . . . . . . . . . 5
Unaudited Consolidated Statements of Cash Flow --
Three months ended May 1, 2004 and April 26, 2003 . . . . 6
Notes to Unaudited Consolidated Financial Statements. . . 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . 29
PART II OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities. . . . . . . . . . . . . . . . . . . 31
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . 32
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Exhibit Index. . . . . . . . . . . . . . . . . . . . . . . . . . . 35
- 2 -
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
As of
---------------------------
May 1, January 31,
2004 2004
----------- -----------
ASSETS (Unaudited)
Current Assets
Cash and cash equivalents $ 19,335 $ 89,087
Accounts receivable, net 133,153 137,380
Inventories 218,462 193,382
Deferred income taxes 16,633 16,508
Prepaid expenses and other assets 20,765 15,133
----------- -----------
Total current assets 408,348 451,490
----------- -----------
Property and equipment, net 36,826 38,207
Other Assets
Exclusive brand licenses, trademarks
and intangibles, net 192,938 194,811
Debt financing costs, net 9,195 10,724
Other 2,943 2,847
----------- -----------
Total other assets 205,076 208,382
----------- -----------
Total assets $ 650,250 $ 698,079
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term debt $ 58,000 $ --
Accounts payable -- trade 86,407 84,533
Other payables and accrued expenses 45,268 54,827
Current portion of long-term debt 6,948 91,287
----------- -----------
Total current liabilities 196,623 230,647
----------- -----------
Long-term debt 233,802 233,802
Deferred income taxes and other 12,057 11,878
----------- -----------
Total long-term liabilities 245,859 245,680
----------- -----------
Total liabilities 442,482 476,327
----------- -----------
Commitments and contingencies (See Note 8)
Convertible, redeemable preferred stock,
Series D, $.01 par value (liquidation
preference of $19,230 and $27,235,
respectively); 1,000,000 shares authorized;
160,248 and 226,955 shares issued and
outstanding, respectively 8,469 10,793
----------- -----------
Shareholders' Equity
Common stock, $.01 par value, 50,000,000
shares authorized; 26,056,412 and
24,983,094 shares issued and outstanding,
respectively 260 250
Additional paid-in capital 201,097 185,874
Retained earnings 6,413 29,638
Treasury stock (146,177 and 123,579 shares
at cost, respectively) (1,523) (1,288)
Accumulated other comprehensive income 2,402 2,214
Unearned deferred compensation (9,350) (5,729)
----------- -----------
Total shareholders' equity 199,299 210,959
----------- -----------
Total liabilities and
shareholders' equity $ 650,250 $ 698,079
=========== ===========
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
- 3 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended
------------------------
May 1, April 26,
2004 2003
----------- ----------
Net sales $ 140,780 $ 134,754
Cost of sales (excludes depreciation of
$564 and $785, respectively, included below) 83,926 86,022
----------- ----------
Gross profit 56,854 48,732
Operating expenses:
Selling, general and administrative 66,374 55,609
Depreciation and amortization 5,029 5,129
----------- ----------
Total operating expenses 71,403 60,738
----------- ----------
Loss from operations (14,549) (12,006)
----------- ----------
Other income (expense):
Interest expense, net (5,989) (10,134)
Debt extinguishment (charges) gain (3,874) 123
Other (12) 29
----------- ----------
Other expense, net (9,875) (9,982)
Loss before income taxes (24,424) (21,988)
Benefit from income taxes (7,828) (6,313)
----------- ----------
Net loss (16,596) (15,675)
Accretion and dividend on preferred stock 620 976
Accelerated accretion on converted preferred stock 6,009 --
----------- ----------
Net loss attributable to common shareholders $ (23,225) $ (16,651)
=========== ==========
Loss per common share (See Note 2):
Basic $ (0.95) $ (0.93)
=========== ==========
Diluted $ (0.95) $ (0.93)
=========== ==========
Weighted average number of common shares:
Basic 24,334,990 17,888,716
=========== ==========
Diluted 24,334,990 17,888,716
=========== ==========
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, 2004 24,983 $250 $185,874 $ 29,638 $(1,288) $ 2,214
Issuance of common
stock upon exercise
of stock options 169 2 1,896 -- -- --
Adjustments to
common stock direct
offering costs -- -- (61) -- -- --
Accretion and
dividend on Series
D preferred stock -- -- -- (620) -- --
Conversion of Series
D preferred stock
and accelerated
accretion 695 7 8,946 (6,009) -- --
Issuance of
restricted stock,
net of forfeitures 209 2 4,876 -- (235) --
Repurchase of
common stock -- (1) (434) -- -- --
Amortization of
unearned deferred
compensation,
net of forfeitures -- -- -- -- -- --
Comprehensive loss:
Net loss -- -- -- (16,596) -- --
Foreign currency
translation -- -- -- -- -- (254)
Unrealized cash
flow hedging gain,
net of tax -- -- -- -- -- 442
-------------------------------------------------------------------
Total comprehensive
loss -- -- -- (16,596) -- 188
-------------------------------------------------------------------
Balance at
May 1, 2004 26,056 $260 $201,097 $ 6,413 $(1,523) $ 2,402
===================================================================
RESTUBBED TABLE
CONTINUED FROM ABOVE
Total
Unearned Share-
Deferred holders'
Compensation Equity
------------------------
Balance at January 31, 2004 $(5,729) $210,959
Issuance of common stock
upon exercise of stock
options -- 1,898
Adjustments to common stock
direct offering costs -- (61)
Accretion and
dividend on Series
D preferred stock -- (620)
Conversion of Series
D preferred stock
and accelerated
accretion -- 2,944
Issuance of
restricted stock,
net of forfeitures (4,715) (72)
Repurchase of
common stock -- (435)
Amortization of
unearned deferred
compensation,
net of forfeitures 1,094 1,094
Comprehensive loss:
Net loss -- (16,596)
Foreign currency translation -- (254)
Unrealized cash flow
hedging gain, net of tax -- 442
------------------------
Total comprehensive loss -- (16,408)
------------------------
Balance at May 1, 2004 $(9,350) $199,299
========================
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
- 5 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
(Dollars in thousands)
Three Months Ended
------------------------
May 1, April 26,
2004 2003
----------- ----------
Operating Activities:
Net loss $ (16,596) $ (15,675)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 5,029 5,129
Amortization of senior note offering costs
and note premium 615 772
Amortization of unearned deferred compensation 1,094 532
Debt extinguishment charges 3,874 --
Deferred tax benefit (125) --
Changes in assets and liabilities
Decrease (increase) in accounts receivable 4,227 (8,632)
Increase in inventories (25,080) (14,577)
Increase in prepaid expenses and other assets (5,957) (3,877)
Increase (decrease) in accounts payable 1,874 (3,876)
Decrease in other payables and accrued expenses (9,513) (7,043)
Other 486 700
----------- ----------
Net cash used in operating activities (40,072) (46,547)
----------- ----------
Investing Activities:
Additions to property and equipment (1,588) (1,501)
----------- ----------
Net cash used in investing activities (1,588) (1,501)
----------- ----------
Financing Activities:
Proceeds from short-term debt 58,000 57,436
Payments on long-term debt (87,257) (10,861)
Proceeds from the exercise of stock options 1,898 4
Repurchase of common stock (435) --
----------- ----------
Net cash (used in) provided by
investing activities (27,794) 46,579
----------- ----------
Effect of exchange rate changes on cash and
cash equivalents (298) (261)
Net decrease in cash and cash equivalents (69,752) (1,730)
Cash and cash equivalents at beginning of period 89,087 22,663
----------- ----------
Cash and cash equivalents at end of period $ 19,335 $ 20,933
=========== ==========
Supplemental Disclosure of Cash Flow Information:
Interest paid during the period $ 3,416 $ 10,375
=========== ==========
Income taxes paid during the period $ 30 $ 8
=========== ==========
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 designer fragrances, skin treatment and cosmetic products to
retailers in the United States and approximately 90 countries internationally.
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 audited consolidated financial
statements and related footnotes included in the Company's Annual Report on
Form 10-K for the year ended January 31, 2004, filed with the Commission.
The consolidated balance sheet of the Company as of January 31, 2004 is
derived from the audited financial statements included in the Company's Annual
Report on Form 10-K for the year ended January 31, 2004. 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.
NOTE 2. LOSS PER SHARE
Basic loss per share is computed by dividing the net loss attributable
to common shareholders by the weighted average shares of outstanding common
stock, $.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
three months ended May 1, 2004 and April 26, 2003 as the assumed conversion of
convertible securities and the assumed exercise of outstanding options and
warrants would have an anti-dilutive effect.
The following table represents the computation of loss per share
(amounts in thousands except per share data):
Three Months Ended
----------------------
May 1, April 26,
2004 2003
--------- ---------
Basic
Net loss attributable to common shareholders $ (23,225) $ (16,651)
========= =========
Weighted average shares outstanding 24,335 17,889
========= =========
Net loss per basic share $ (0.95) $ (0.93)
========= =========
Diluted
Net loss attributable to common shareholders $ (23,225) $ (16,651)
Accretion and dividend on Series D
Convertible Preferred Stock not converted
during the period -- --
--------- ---------
Net loss as adjusted $ (23,225) $ (16,651)
========= =========
Weighted average basic shares outstanding 24,335 17,889
Potential common shares-treasury method -- --
Assumed conversion of Series D Convertible
Preferred Stock -- --
Dividend shares on Series D Convertible
Preferred Stock -- --
--------- ---------
Weighted average shares and potential
dilutive shares 24,335 17,889
========= =========
Net loss per diluted share $ (0.95) $ (0.93)
========= =========
- 7 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended May 1, 2004, the calculation of diluted
earnings per share excludes the following: (a) 2.46 million potential common
shares under the treasury method; (b) 1.34 million shares of Common Stock
assumed to be received upon conversion of the Company's Series D Convertible
Preferred Stock, $.01 par value ("Series D Convertible Preferred Stock"), as
of the beginning of the fiscal year; (c) 21,457 shares of Series D Convertible
Preferred Stock that were received as a dividend and are convertible into
214,570 shares of Common Stock in the denominator; and (d) an add-back of
$620,000 to net loss attributable to common shareholders related to
non-accelerated accretion and dividends on the Series D Convertible Preferred
Stock and $6.0 million for the accelerated accretion charge associated with
the conversion of certain shares of Series D Convertible Preferred Stock in
April 2004, as such deductions and add-backs would have had an anti-dilutive
effect on the calculation of diluted earnings per share. See Note 9.
The following table shows the options to purchase shares of Common Stock
that were outstanding during the three months ended May 1, 2004 and three
months ended April 26, 2003 where the option exercise price was greater than
the average market price of the common shares over the applicable period:
Three Months Ended
---------------------------------
May 1, April 26,
2004 2003
--------------- ---------------
Number of shares 372,725 2,748,750
Range of exercise price $20.64 - $21.60 $10.88 - $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.
At May 1, 2004, the Company had three stock incentive plans. The
Company accounts 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, under
which no compensation costs are required to be recognized for the periods
presented. No employee stock-option compensation cost is reflected in net
income, as all options granted under those plans had an exercise price equal
to the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net loss attributable to common
shareholders and loss per common share if the Company had applied the fair
value recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," to stock-option compensation.
- 8 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data) Three Months Ended
-------------------------
May 1, April 26,
2004 2003
----------- -----------
Net loss attributable to common
shareholders, as reported $ (23,225) $ (16,651)
Add: Restricted Stock-based employee
compensation cost, net of tax,
currently included in net loss 744 379
Less: Stock-based employee compensation
expense, net of tax, determined under
fair value-based method 805 1,181
----------- -----------
Pro forma net loss attributable to
common shareholders $ (23,286) $ (17,453)
----------- -----------
Loss per common share
Basic
As reported $ (0.95) $ (0.93)
Pro forma $ (0.96) $ (0.98)
Diluted
As reported $ (0.95) $ (0.93)
Pro Forma $ (0.96) $ (0.98)
NOTE 4. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In January 2003, FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities" ("FIN 46") was issued. FIN 46 provides guidance on
consolidating variable interest entities and applies immediately to variable
interests created after January 31, 2003. In December 2003, the FASB revised
and superseded FIN 46 with the issuance of FIN 46R in order to address certain
implementation issues that will be adopted the first reporting period ending
after March 15, 2004. The interpretation requires variable interest entities
to be consolidated if the equity investment at risk is not sufficient to
permit an entity to finance its activities without support from other parties
or the equity investors lack certain specified characteristics. The effect of
the adoption of FIN 46 and FIN 46R was immaterial to the Company's
consolidated financial statements.
NOTE 5. INVENTORIES
The components of inventory were as follows:
(Dollars in thousands) May 1, January 31,
2003 2004
---------- -----------
Raw materials $ 42,788 $ 35,268
Work in progress 21,642 19,916
Finished goods 154,032 138,198
---------- -----------
$ 218,462 $ 193,382
========== ===========
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 of 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 all of the Company's U.S.
subsidiaries. Borrowings under the Credit Facility are limited to 85% of
eligible accounts receivable and 75% (65% from November 16 through May 15) of
eligible finished goods 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 remaining 11 3/4% Senior Secured Notes
due 2011("11 3/4% Senior Notes") and rank senior to the Company's 7 3/4%
Senior Subordinated Notes due 2014 (the "7 3/4% Senior Subordinated Notes").
- 9 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Credit Facility has only one financial maintenance covenant, which
is a fixed charge coverage ratio that must be maintained at not less than 1.1
to 1 if average borrowing availability declines to less than $50 million. No
financial maintenance covenant was applicable for the fiscal quarter ending
May 1, 2004. 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 (other
than refinancing and certain small amount of indebtedness), except that at May
1, 2004, the Company is permitted to repurchase up to $1.7 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 a specific financial ratio. At the Company's
option, the Applicable Margin may be applied to either the London InterBank
Offered Rate ("LIBOR") or the prime rate. The Company entered into an
amendment to the Credit Facility effective February 25, 2004 to reduce the
interest rates charged on LIBOR loans and base rate loans. The amendment
changed the reference ratio for determining the Applicable Margin from a
consolidated debt to EBITDA (earnings before interest, taxes, depreciation and
amortization) ratio to a fixed charge coverage ratio. As a result of the
amendment, the Applicable Margin was decreased to a range of 2.00% to 2.75%
from a range of 2.25% to 3.00% for LIBOR loans and to a range of 0.25% to
1.00% from a range of 0.5% to 1.25% for prime rate borrowings. As of May 1,
2004, the Applicable Margin was 2.25% for LIBOR loans and 0.50% for prime rate
loans. The commitment fee on the unused portion of the Credit Facility ranges
from 0.25% to 0.5% per year. The Company entered into an amendment to the
Credit Facility effective June 2, 2004 to adjust certain covenants for the
Company's change in fiscal year end. See Note 13.
As of May 1, 2004, the Company had $58 million in outstanding borrowings
under the Credit Facility, $0.1 million in outstanding letters of credit and
$0.1 million in accrued interest, as compared with no borrowings outstanding
and letters of credit of $0.1 million outstanding as of January 31, 2004. As
of May 1, 2004, the remaining availability under the Credit Facility, based
upon eligible receivables and inventories, was approximately $77.4 million.
The Company used a portion of the proceeds from the sale of its 7 3/4% Senior
Subordinated Notes due 2014 completed on January 13, 2004 to temporarily pay
down borrowings under the Credit Facility and then called for redemption of
its remaining 10 3/8% Senior Notes due 2007 ("10 3/8% Senior Notes"), which
were redeemed on February 12, 2004. See Note 7.
NOTE 7. LONG-TERM DEBT
The Company's long-term debt consisted of the following:
Dollars in thousands) May 1, January 31,
Description 2003 2004
- -------------------------------------------- ---------- -----------
11 3/4% Senior Secured Notes due May 2011 $ 8,802 $ 8,802
10 3/8% Senior Notes due May 2007 -- 84,285
7 3/4% Senior Subordinated Notes due
January 2014 225,000 225,000
8.5% Subordinated Debenture due May 2004 2,167 2,167
8.84% Miami Lakes Facility Mortgage Note
due July 2004 4,781 4,835
---------- -----------
Total 240,750 325,089
Less: Current portion of long-term debt 6,948 91,287
---------- -----------
Long-term debt, net $ 233,802 $ 233,802
========== ===========
Senior Subordinated Notes. On January 13, 2004, the Company completed
the sale of $225 million aggregate principal amount of 7 3/4% Senior
Subordinated Notes. The 7 3/4% Senior Subordinated Notes are guaranteed by
the Company's U.S. subsidiaries DF Enterprises, Inc., FD Management, Inc.,
Elizabeth Arden International Holding, Inc., Elizabeth Arden (Financing),
Inc., RDEN Management, Inc. and Elizabeth Arden Travel Retail, Inc. The net
proceeds of approximately $219.4 million were used to redeem $95.2 million
principal amount of its outstanding 11 3/4% Senior Notes and $104.3 million
principal amount of its 10 3/8% Senior Notes, of which $20.0 million principal
amount were redeemed in January 2004 and $84.3 million principal amount were
redeemed in February 2004. As a result of the redemption of the $84.3 million
aggregate principal amount of 10 3/8% Senior Notes, the Company incurred
during the three months ended May 1, 2004, a charge of approximately $3.9
million, comprised of the call premium of $2.9 million and approximately $1.0
million for the non-cash write-off of unamortized debt issue costs. Pending
the closing of
- 10 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
the redemption of the $84.3 million 10 3/8% Senior Notes, the Company used the
proceeds received from the sale of its 7 3/4% Senior Subordinated Notes to
temporarily pay down borrowings under the Credit Facility and to invest in
short-term securities.
In May 2004, the Company redeemed the $2.2 million in remaining
principal amount of 8.5% Subordinated Debenture due 2004 plus accrued interest
with borrowings from the Credit Facility. There was no gain or loss on this
transaction.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Consolidation of Distribution Facilities. In November 2003, the Company
announced that it would consolidate its U.S. distribution operations into a
single distribution facility in Roanoke, Virginia by March 2004. The Roanoke
facility was expanded in 2003 to approximately 400,000 square feet in order to
accommodate the consolidated distribution activities. The Company ceased
conducting distribution activities from the Miami Lakes facility at the end of
January 2004 and is planning to sell the facility. The Company will continue
to use the corporate offices located in the Miami Lakes facility until the
facility 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 was reduced by approximately 10%. The consolidation was
substantially completed in March 2004. The Company incurred and expensed
approximately $1.1 million of restructuring costs during the three months
ended May 1, 2004, including severance pay, outplacement services, and
employee benefit costs for severed employees and expects to incur another $0.4
million of restructuring costs when the Miami Lakes facility is sold.
The Company has commitments to incur promotional and advertising
expenses, which are either fixed commitments or based on net sales for
licensed brands, and minimum royalty guarantees in an aggregate amount of
$33.5 million during the fiscal years ended January 31, 2005 through 2009.
In February 2004, the Company entered into an interest rate swap
agreement that swaps $50.0 million of the outstanding 7 3/4% Senior
Subordinated Notes to a floating interest rate based on LIBOR. The swap
agreement matures in February 2014. The Company can terminate the swap
agreement at its option at any time and the counter party can call the swap
agreement any time after January 2009. The Company has designated the swap
agreement as a fair value hedge.
In March 2004, the Company entered into foreign currency option
contracts for 9.6 million Euros and 5.6 million British pounds to reduce the
exposure of our foreign subsidiary revenues to fluctuations in currency rates.
The Company has designated each foreign currency option contract as cash flow
hedge. The unrealized gain at May 1, 2004 associated with these contracts is
included in accumulated other comprehensive loss.
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$40.1 million at May 1, 2004), against each of
Unilever and the Company plus punitive damages of Canadian $35 million
(approximately US$25.5 million at May 1, 2004). 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
Conversion of Preferred Stock. On April 26, 2004, an affiliate of
Unilever converted 69,542 shares of Series D Convertible Preferred Stock,
(representing approximately $8.3 million of aggregate liquidation preference)
into 695,420 shares of Common Stock. The accretion of the Series D
Convertible Preferred
- 11 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Stock converted was accelerated, resulting in a non-cash charge in the amount
of $6.0 million to net loss attributable to common shareholders on the
Company's unaudited consolidated statements of operations for the three months
ended May 1, 2004.
Convertible Preferred Stock. At May 1, 2004 and January 31, 2004, the
Company had outstanding 160,249 and 226,955 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 January 2001
acquisition of the Elizabeth Arden business. 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 became 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. On March 15, 2004 and June 1,
2004, the Company issued to an affiliate of Unilever 2,836 shares and 2,003
shares, respectively, of Series D Convertible Preferred Stock as payment of
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.
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.
- 12 -
Three Months Ended
---------------------
May 1, April 26,
2004 2003
------ ---------
(Dollars in thousands)
Aggregate accretion (excluding
the accelerated accretion on
the converted preferred stock) $ 327 $ 455
Dividends 293 521
------- -------
Total $ 620 $ 976
======= =======
At May 1, 2004, the fair value of the Common Stock underlying the
convertible preferred stock was approximately $35 million.
PERFORMANCE-ACCELERATED AND OTHER RESTRICTED COMMON STOCK
Stock Options and Restricted Stock Granted. On March 10, 2004, the
Company authorized the grant of stock options to 117 managerial employees for
approximately 364,000 shares of Common Stock. The stock options are due to
vest over three years in thirds each succeeding year from the date of grant,
assuming the person receiving the grant is employed by the Company at the
time of vesting. The exercise price of those stock options is $21.60 per
share, which was the closing price of the Common Stock on the date of grant.
The options expire ten years from the date of grant.
Also, on March 10, 2004, the Company authorized the grant of
performance-based restricted stock to 107 managerial employees for
approximately 192,000 shares of Common Stock. The performance-based
restricted stock will vest as to one third of the stock granted on each of
the first, second and third anniversaries of the date of grant, but only if
the person receiving the grant is employed by the Company at the time of
vesting and the Company achieves a cumulative annualized increase in earnings
per share of 10%, excluding any one-time or extraordinary events (as
determined by the compensation committee), and after giving effect to any
stock splits or other recapitalizations. The restricted stock was recorded
as unearned deferred compensation in shareholders' equity for the three
months ended May 1, 2004 in the amount of approximately $4.1 million and is
being amortized over the three-year vesting period. The vesting dates are
subject to deferral if the Company's fiscal year is less than 12 months long.
On February 13, 2004, the Company authorized the grant of an aggregate
of 40,578 shares of restricted stock to 189 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 $734,000
and amortized over the one-year vesting period.
During the three months ended May 1, 2004, the Company repurchased
20,226 shares of Common Stock at the $21.50 closing price as a result of the
vesting of restricted stock of employees that elected to sell shares to the
Company to cover personal income tax withholding obligations. The repurchase
of these shares is permitted for those purposes under the Company's 2000
Stock Incentive Plan.
NOTE 10. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following condensed financial statements as of May 1, 2004 and for
the three months then ended, and as of January 31, 2004, show the
consolidated financial statements of the Company, and, in separate financial
statements: (i) the financial statements of those subsidiaries that are
guarantors of the 11 3/4% Senior Notes which were issued in January 2001 to
finance a portion of the purchase price for the acquisition of the Elizabeth
Arden business and (ii) and the financial statements of those subsidiaries
that are guarantors of the 7 3/4% Senior Subordinated Notes issued in January
2004, plus in each case elimination adjustments and the consolidated total.
The following condensed financial statements at April 26, 2003 and for the
three months then ended, show the consolidated financial statements of the
Company and the financial statements of those subsidiaries that are
guarantors of the 11 3/4% Senior Notes. The Company's subsidiaries, DF
Enterprises, Inc., FD Management, Inc., Elizabeth Arden International
Holding, Inc. and Elizabeth Arden (Zug) GmbH, are guarantors of the 11 3/4%
Senior Notes. DF Enterprises, Inc., FD Management, Inc., Elizabeth Arden
International Holding, Inc., Elizabeth Arden (Financing), Inc., RDEN
Management, Inc. and Elizabeth Arden
- 13 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Travel Retail, Inc. are guarantors of the 7 3/4% Senior Subordinated Notes.
Equity income of the guarantor subsidiaries is included in other (expense)
income, net. All information presented is in thousands.
Balance Sheet As of May 1, 2004
------------------------------------------------------------
7 3/4% Senior
Subordinated
Company Notes Eliminations Total
------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 19,299 $ 36 $ -- $ 19,335
Accounts receivable, net 133,153 -- -- 133,153
Inventories 218,462 -- -- 218,462
Intercompany receivable 112,055 394,222 (506,277) --
Deferred income taxes 16,621 -- -- 16,621
Prepaid expenses and other
assets 20,719 58 -- 20,777
--------- --------- --------- ---------
Total current assets 520,309 394,316 (506,277) 408,348
--------- --------- --------- ---------
Property and equipment, net 26,826 -- -- 36,826
--------- --------- --------- ---------
Other assets:
Investment in guarantors 267,382 -- (267,382) --
Exclusive brand licenses,
trademarks and intangibles,
net 30,834 162,104 -- 192,938
Other assets 7,004 5,134 -- 12,138
--------- --------- --------- ---------
Total other assets 305,220 167,238 (267,382) 205,076
--------- --------- --------- ---------
Total assets $ 862,355 $ 561,554 $(773,659) $ 650,250
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Short-term debt $ 58,000 $ -- $ -- $ 58,000
Accounts payable - trade 86,407 -- -- 86,407
Intercompany payables 213,111 293,175 (506,286) --
Other payables and accrued
expenses 44,262 997 9 45,268
Current portion of long-term
debt 6,948 -- -- 6,948
--------- --------- --------- ---------
Total current liabilities 408,728 294,172 (506,277) 196,623
Long-term debt 233,802 -- -- 233,802
Deferred income taxes and other 12,057 -- -- 12,057
--------- --------- --------- ---------
Total liabilities 654,587 294,172 (506,277) 442,482
Convertible, redeemable
preferred stock 8,469 -- -- 8,469
--------- --------- --------- ---------
Shareholders' equity
Common stock 260 -- -- 260
Additional paid-in capital 201,067 265,163 (265,133) 201,097
Retained earnings 6,443 2,219 (2,249) 6,413
Treasury stock (1,523) -- -- (1,523)
Accumulated other
comprehensive income 2,402 -- -- 2,402
Unearned deferred compensation (9,350) -- -- (9,350)
--------- --------- --------- ---------
Shareholders' equity 199,299 267,382 (267,382) 199,299
--------- --------- --------- ---------
Total liabilities and
shareholders' equity $ 862,355 $ 561,554 $(773,659) $ 650,250
========= ========= ========= =========
- 14 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet As of May 1, 2004
------------------------------------------------------------
11 3/4%
Senior
Company Notes Eliminations Total
------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 19,305 $ 30 $ -- $ 19,335
Accounts receivable, net 133,153 -- -- 133,153
Inventories 218,462 -- -- 218,462
Intercompany receivable 400,565 105,712 (506,277) --
Deferred income taxes 16,621 -- -- 16,621
Prepaid expenses and other
assets 20,702 75 -- 20,777
--------- --------- --------- ---------
Total current assets 808,808 105,817 (506,277) 408,348
--------- --------- --------- ---------
Property and equipment, net 36,826 -- -- 36,826
--------- --------- --------- ---------
Other assets:
Investment in guarantors (22,866) -- 22,866 --
Exclusive brand licenses,
trademarks and intangibles,
net 25,378 167,560 -- 192,938
Other assets 7,004 5,134 -- 12,138
--------- --------- --------- ---------
Total other assets 9,516 172,694 22,866 205,076
--------- --------- --------- ---------
Total assets $ 855,150 $ 278,511 $(483,411) $ 650,250
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Short-term debt $ 58,000 $ -- $ -- $ 58,000
Accounts payable - trade 86,407 -- -- 86,407
Intercompany payables 205,836 300,450 (506,286) --
Other payables and accrued
expenses 44,334 925 9 45,268
Current portion of long-term
debt 6,948 -- -- 6,948
--------- --------- --------- ---------
Total current liabilities 401,525 301,375 (506,277) 196,623
Long-term debt 233,802 -- -- 233,802
Deferred income taxes and other 12,055 2 -- 12,057
--------- --------- --------- ---------
Total liabilities 647,382 301,377 (506,277) 442,482
Convertible, redeemable
preferred stock 9,077 -- -- 9,077
--------- --------- --------- ---------
Shareholders' equity
Common stock 260 -- -- 260
Additional paid-in capital 200,446 43 -- 200,489
Retained earnings 6,465 (22,918) 22,866 6,413
Treasury stock (1,523) -- -- (1,523)
Accumulated other
comprehensive income 2,393 9 -- 2,402
Unearned deferred compensation (9,350) -- -- (9,350)
--------- --------- --------- ---------
Shareholders' equity 198,691 (22,866) 22,866 198,691
--------- --------- --------- ---------
Total liabilities and
shareholders' equity $ 855,150 $ 278,511 $(483,411) $ 650,250
========= ========= ========= =========
-15-
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet As of January 31, 2004
------------------------------------------------------------
7 3/4% Senior
Subordinated
Company Notes Eliminations Total
------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 89,030 $ 57 $ -- $ 89,087
Accounts receivable, net 137,380 -- -- 137,380
Inventories 193,382 -- -- 193,382
Intercompany receivable 106,364 385,666 (492,030) --
Deferred income taxes 16,508 -- -- 16,508
Prepaid expenses and other
assets 15,133 -- -- 15,133
--------- --------- --------- ---------
Total current assets 557,797 385,723 (492,030) 451,490
--------- --------- --------- ---------
Property and equipment, net 38,207 -- -- 38,207
--------- --------- --------- ---------
Other assets:
Investment in guarantors 264,590 -- (264,590) --
Exclusive brand licenses,
trademarks and intangibles,
net 32,251 162,560 -- 194,811
Other assets 8,437 5,134 -- 13,571
--------- --------- --------- ---------
Total other assets 305,278 167,694 (264,590) 208,382
--------- --------- --------- ---------
Total assets $ 901,282 $ 553,417 $(756,620) $ 698,079
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Accounts payable - trade $ 84,533 $ -- $ -- $ 84,533
Intercompany payables 205,876 286,154 (492,030) --
Other payables and accrued
expenses 52,154 2,673 -- 54,827
Current portion of long-term
debt 91,287 -- -- 91,287
--------- --------- --------- ---------
Total current liabilities 433,850 288,827 (492,030) 230,647
Long-term debt 233,802 -- -- 233,802
Deferred income taxes and other 11,878 -- -- 11,878
--------- --------- --------- ---------
Total liabilities 679,530 288,827 (492,030) 476,327
Convertible, redeemable
preferred stock 10,793 -- -- 10,793
--------- --------- --------- ---------
Shareholders' equity
Common stock 250 -- -- 250
Additional paid-in capital 185,844 265,163 (265,133) 185,874
Retained earnings 29,668 (573) 543 29,638
Treasury stock (1,288) -- -- (1,288)
Accumulated other
comprehensive income 2,214 -- -- 2,214
Unearned deferred compensation (5,729) -- -- (5,729)
--------- --------- --------- ---------
Shareholders' equity 210,959 264,590 (264,590) 210,959
--------- --------- --------- ---------
Total liabilities and
shareholders' equity $ 901,282 $ 553,417 $(756,620) $ 698,079
========= ========= ========= =========
-16-
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet As of January 31, 2004
------------------------------------------------------------
11 3/4%
Senior
Company Notes Eliminations Total
------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 89,029 $ 58 $ -- $ 89,087
Accounts receivable, net 137,380 -- -- 137,380
Inventories 193,382 -- -- 193,382
Intercompany receivable 390,594 101,436 (492,030) --
Deferred income taxes 16,508 -- -- 16,508
Prepaid expenses and other
assets 15,133 -- -- 15,133
--------- --------- --------- ---------
Total current assets 842,026 101,494 (492,030) 451,490
--------- --------- --------- ---------
Property and equipment, net 38,207 -- -- 38,207
--------- --------- --------- ---------
Other assets:
Investment in guarantors 21,363 -- 21,363 --
Exclusive brand licenses,
trademarks and intangibles,
net 26,794 168,017 -- 194,811
Other assets 8,436 5,135 -- 13,571
--------- --------- --------- ---------
Total other assets 13,867 173,152 21,363 208,382
--------- --------- --------- ---------
Total assets $ 894,100 $ 274,646 $(470,667) $ 698,079
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Accounts payable - trade $ 84,533 $ -- $ -- $ 84,533
Intercompany payables 198,474 293,556 (492,030) --
Other payables and accrued
expenses 52,311 2,516 -- 54,827
Current portion of long-term
debt 91,287 -- -- 91,287
--------- --------- --------- ---------
Total current liabilities 426,605 296,072 (492,030) 230,647
Long-term debt 233,802 -- -- 233,802
Deferred income taxes and other 11,941 (63) -- 11,878
--------- --------- --------- ---------
Total liabilities 672,348 296,009 (492,030) 476,327
Convertible, redeemable
preferred stock 10,793 -- -- 10,793
--------- --------- --------- ---------
Shareholders' equity
Common stock 250 -- -- 250
Additional paid-in capital 185,831 43 -- 185,874
Retained earnings 29,690 (21,415) 21,363 29,638
Treasury stock (1,288) -- -- (1,288)
Accumulated other
comprehensive income 2,205 9 -- 2,214
Unearned deferred compensation (5,729) -- -- (5,729)
--------- --------- --------- ---------
Shareholders' equity 210,959 (21,363) 21,363 210,959
--------- --------- --------- ---------
Total liabilities and
shareholders' equity $ 894,100 $ 274,646 $(470,667) $ 698,079
========= ========= ========= =========
-17-
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Statement of Operations For the Three Months Ended May 1, 2004
----------------------------------------------------------
7 3/4% Senior
Subordinated
Company Notes Eliminations Total
----------------------------------------------------------
Net sales $ 140,780 $ 2,961 $ (2,961) $ 140,780
Cost of sales 83,926 -- -- 83,926
--------- -------- -------- ---------
Gross profit 56,854 2,961 (2,961) 56,854
Selling, general and
administrative expenses 70,014 (679) (2,961) 66,374
Depreciation and amortization 4,434 595 -- 5,029
--------- -------- -------- ---------
(Loss) income from operations (17,594) 3,045 -- (14,549)
Other (expense) income:
Interest expense (5,989) -- -- (5,989)
Debt extinguishment charges (3,874) -- -- (3,874)
Other 3,033 (251) (2,794) (12)
--------- -------- -------- ---------
(Loss) income before income taxes (24,424) 2,794 (2,794) (24,424)
Benefit from income taxes (7,828) -- -- (7,828)
--------- -------- -------- ---------
Net (loss) income $ (16,596) $ 2,794 $ (2,794) $ (16,596)
========= ======== ======== =========
Statement of Operations For the Three Months Ended May 1, 2004
----------------------------------------------------------
11 3/4%
Senior
Company Notes Eliminations Total
----------------------------------------------------------
Net sales $ 140,780 $ 2,961 $ (2,961) $ 140,780
Cost of sales 83,926 -- -- 83,926
--------- -------- -------- ---------
Gross profit 56,854 2,961 (2,961) 56,854
Selling, general and
administrative expenses 70,028 (693) (2,961) 66,374
Depreciation and amortization 4,432 597 -- 5,029
--------- -------- -------- ---------
(Loss) income from operations (17,606) 3,057 -- (14,549)
Other (expense) income:
Interest expense (5,989) -- -- (5,989)
Debt extinguishment charges (3,874) -- -- (3,874)
Other 2,894 (4,409) 1,503 (12)
--------- -------- -------- ---------
Loss before income taxes (24,575) (1,352) 1,503 (24,424)
(Benefit from) provision for
income taxes (7,979) 151 -- (7,828)
--------- -------- -------- ---------
Net loss $ (16,596) $ (1,503) $ 1,503 $ (16,596)
========= ======== ======== =========
Statement of Operations For the Three Months Ended April 26, 2003
----------------------------------------------------------
11 3/4%
Senior
Company Notes Eliminations Total
-----------------------------------------------------------
Net sales $ 134,754 $ 2,595 $ (2,595) $ 134,754
Cost of sales 86,022 -- -- 86,022
--------- -------- -------- ---------
Gross profit 48,732 2,595 (2,595) 48,732
Selling, general and
administrative expenses 58,285 (81) (2,595) 55,609
Depreciation and amortization 4,586 543 -- 5,129
--------- -------- -------- ---------
(Loss) income from operations (14,139) 2,133 -- (12,006)
Other (expense) income:
Interest expense (10,134) -- -- (10,134)
Debt extinguishment charges 152 -- -- 152
Other 2,157 (6,107) 3,950 --
--------- -------- -------- ---------
Loss before income taxes (21,964) (3,974) 3,950 (21,988)
Benefit from income taxes (6,289) (24) -- (6,313)
--------- -------- -------- ---------
Net loss $ (15,675) $ (3,950) $ 3,950 $ (15,675)
========= ======== ======== =========
- 18 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Statement of Cash Flow For the Three Months Ended May 1, 2004
----------------------------------------------------------
7 3/4% Senior
Subordinated
Company Notes Eliminations Total
-----------------------------------------------------------
Operating activities:
Net cash used in operating
activities $ (38,507) $ (1,565) $ -- $ (40,072)
--------- -------- --------- ---------
Investing activities:
Additions to property and
equipment (1,588) -- -- (1,588)
--------- -------- --------- ---------
Net cash used in investing
activities (1,588) -- -- (1,588)
--------- -------- --------- ---------
Financing activities:
Payments on short-term debt 58,000 -- -- 58,000
Payments on long-term debt (87,257) -- -- (87,257)
Proceeds from the exercise of
stock options 1,898 -- -- 1,898
Repurchase of common stock (435) -- -- (435)
Net change in intercompany
obligations (1,544) 1,544 -- --
--------- -------- --------- ---------
Net cash (used in) provided
by financing activities (29,338) 1,544 -- (27,794)
--------- -------- --------- ---------
Effect of exchange rate changes
on cash and cash equivalents (298) -- -- (298)
Net decrease in cash and cash
equivalents (69,731) (21) -- (69,752)
Cash and cash equivalents at
beginning of period 89,030 57 -- 89,087
--------- -------- --------- ---------
Cash and cash equivalents at
end of period $ 19,299 $ 36 $ -- $ 19,335
========= ======== ========= =========
Statement of Cash Flow For the Three Months Ended May 1, 2004
----------------------------------------------------------
11 3/4%
Senior
Company Notes Eliminations Total
----------------------------------------------------------
Operating activities:
Net cash (used in) provided
by operating activities $ (42,653) $ 2,581 $ -- $ (40,072)
--------- -------- --------- ---------
Investing activities:
Additions to property and
equipment (1,588) -- -- (1,588)
--------- -------- ---------- ----------
Net cash used in investing
activities (1,588) -- -- (1,588)
--------- -------- ---------- ----------
Financing activities:
Payments on short-term debt 58,000 -- -- 58,000
Payments on long-term debt (87,257) -- -- (87,257)
Proceeds from the exercise of
stock options 1,898 -- -- 1,898
Repurchase of common stock (435) -- -- (435)
Net change in intercompany
obligations 2,609 (2,609) -- --
--------- -------- ---------- ----------
Net cash used in financing
activities (25,185) (2,609) -- (27,794)
--------- -------- ---------- ----------
Effect of exchange rate changes
on cash and cash equivalents (298) -- -- (298)
Net decrease in cash and cash
equivalents (69,724) (28) -- (69,752)
Cash and cash equivalents at
beginning of period 89,029 58 -- 89,087
--------- -------- ---------- ----------
Cash and cash equivalents at
end of period $ 19,305 $ 30 $ -- $ 19,335
========= ======== ========== ==========
- 19 -
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Statement of Cash Flow For the Three Months Ended April 26, 2003
----------------------------------------------------------
11 3/4%
Senior
Company Notes Eliminations Total
----------------------------------------------------------
Operating activities:
Net cash used in operating
activities $ (41,262) $(5,285) $ -- $ (46,547)
--------- -------- --------- ---------
Investing activities:
Additions to property and
equipment (1,501) -- -- (1,501)
--------- -------- --------- ---------
Net cash used in investing
activities (1,501) -- -- (1,501)
--------- -------- --------- ---------
Financing activities:
Payments on short-term debt 57,436 -- -- 57,436
Payments on long-term debt (10,861) -- -- (10,861)
Proceeds from the exercise of
stock options 4 -- -- 4
Net change in intercompany
obligations (5,283) 5,283 -- --
--------- -------- --------- ---------
Net cash provided by
financing activities 41,296 5,283 -- 46,579
--------- -------- --------- ---------
Effect of exchange rate changes
on cash and cash equivalents (261) -- -- (261)
Net decrease in cash and cash
equivalents (1,728) (2) -- (1,730)
Cash and cash equivalents at
beginning of period 22,641 22 -- 22,663
--------- -------- --------- ---------
Cash and cash equivalents at
end of period $ 20,913 $ 20 $ -- $ 20,933
========= ======== ========= =========
[Remainder of Page Intentionally Left Blank]
- 20 -
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 $0.5 million (the "Note"),
which matured on March 31, 2004 and bore 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
$0.1 million of the principal amount of the Note. The remaining loan balance
of $0.4 million plus accrued interest was repaid by the March 31, 2004
maturity date.
NOTE 12. SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING
ACTIVITIES
The Company incurred the following non-cash financing and investing
activities:
(Dollars in thousands) Three Months Ended
-------------------
May 1, April 26,
2004 2003
------ ---------
Accretion $ 620 $ 976
====== =========
Conversion of Series D Convertible Preferred Stock
(See Note 9)
Accelerated accretion on converted preferred
stock 6,009 -
====== =========
Conversion to Common Stock 2,336 --
Accreted dividends not paid on Convertible
Preferred Stock 608 --
------ ---------
Conversion of Series D Convertible Preferred
Stock 2,944 --
====== =========
Issuance of restricted stock, net of forfeitures
from prior grants 4,715 557
====== =========
NOTE 13. SUBSEQUENT EVENTS
On June 2, 2004, the board of directors of the Company approved a
change in the fiscal year end from January 31 to June 30, effective as of
June 30, 2004. The change was implemented to better reflect the Company's
business cycle and to enhance business planning relative to its customers'
retail calendars.
- 21 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
In connection with the safe harbor provisions of the private securities
litigation reform act of 1995, Elizabeth Arden, Inc., is hereby providing
cautionary statements identifying important factors that could cause our
actual results to differ materially from those projected in forward-looking
statements (as defined in such Act) made in this quarterly report on Form
10-Q. Any statements that are not historical facts and that express, or
involve discussions as to, expectations, beliefs, plans, objectives,
assumptions or future events or performance (often, but not always, through
the use of words or phrases such as "will likely result," "are expected to,"
"will continue," "is anticipated," "estimated," "intends," "plans" and
"projection") 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 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; the impact of competitive products and
pricing; risks of international operations, including foreign currency
fluctuations, economic and political consequences of terrorist attacks,
political instability in certain regions of the world, and diseases affecting
customer purchasing patterns; our ability to launch new products and
implement our growth strategy; our ability to successfully and
cost-effectively integrate acquired businesses or new brands; our substantial
indebtedness, debt service obligations and restrictive covenants in our
revolving credit facility and our indenture for our 7 3/4% senior
subordinated notes; our customers' financial condition; our ability to access
capital for acquisitions; changes in product mix to less profitable products;
the retention and availability of key personnel; the assumptions underlying
our critical accounting estimates; delays in shipments, inventory shortages
and higher costs of production due to interruption of operations at key third
party manufacturing or fulfillment facilities that manufacture or provide
logistic services for the majority of our supply of certain products; changes
in the retail, fragrance and cosmetic industries; our ability to protect our
intellectual property rights; 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; 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,
2004. 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 2004, approximately 66% 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.
- 22 -
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.
Overview
For the three months ended May 1, 2004, net sales increased 4.5%
compared to the three months ended April 26, 2003 as a result of the
favorable impact of foreign currency rates, increased sales to U.S. mass
retail accounts and new product launches, including a new Elizabeth Arden
fragrance, Elizabeth Arden Provocative Woman. Net sales were reduced by
increased in-store promotional costs and lower sales to a U.S. department
store account due largely to a change in that account's merchandising
strategy in the fragrance category. Selling, general and administrative
expenses increased 19.4% during the three months ended May 1, 2004 compared
to the three months ended April 26, 2003 as a result of additional
advertising to support new product launches, including the use of television
and print advertising for the Elizabeth Arden Provocative Woman launch and
the skinsimple launch, higher brand development costs, including costs
related to the development of a Britney Spears fragrance which is scheduled
to launch in U.S. department stores in the fall of 2004, and the adverse
impact of foreign currency rates. During the three months ended May 1, 2004,
interest expense decreased by $4.1 million as a result of our debt
refinancing activities. The increase in advertising and promotional
activities was funded with a portion of the savings in interest expense. We
anticipate continuing to use savings in interest expense to increase our
advertising and promotional activities during the current fiscal year. In
February 2004, we incurred debt extinguishment charges of $3.9 million
associated with the redemption of $84.3 million aggregate principal amount 10
3/8% senior notes due 2007. In addition, net loss attributable to common
shareholders increased due to a $6.0 million non-cash charge related to the
accelerated accretion of certain shares of the Series D convertible preferred
stock, which were converted into common stock by an affiliate of Unilever in
April 2004. If the Unilever affiliate converts the remaining Series D
convertible preferred stock into common stock in the current fiscal year, we
would incur an additional non-cash charge for accelerated accretion on the
Series D convertible preferred stock relating to the amounts converted.
On June 2, 2004, our board of directors approved a change in our fiscal
year end from January 31 to June 30, effective as of June 30, 2004. The
change was implemented to better reflect our business cycle and to enhance
business planning relative to our customers' retail calendars.
Critical Accounting Policies and Estimates
We believe the accounting policies below represent our critical
accounting policies. See our Annual Report on Form 10-K for the year ended
January 31, 2004 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 require more judgment is determining
the fair values and useful lives of intangible assets. To assist in this
process, we often obtain appraisals from independent valuation firms for
certain intangible assets.
- 23 -
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 and the useful life assigned 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 is
expected to be generated indefinitely. During the current fiscal year, 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.
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. We account for our stock-based
compensation 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. The pro forma effect on net
loss and loss per diluted share for the three months ended May 1, 2004 and
April 26, 2003 is set forth in Note 3 to the Notes to Unaudited Consolidated
Financial Statements.
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.
- 24 -
Results of Operations
The following discussion compares the historical results of operations
for three months ended May 1, 2004 and April 26, 2003. Results of operations
are in thousands and as a percentage of net sales, were as follows
(percentages may not add due to rounding):
May 1, April 26,
2004 2003
--------------- -----------------
Net sales $140,780 100.0% $134,754 100.0%
Cost of sales 83,926 59.6 86,022 63.8
Gross profit 56,854 40.4 48,732 36.2
Selling, general and
administrative expenses 66,374 47.1 55,609 41.3
Depreciation and
amortization 5,029 3.6 5,129 3.8
Loss from operations (14,549) (10.3) (12,006) (8.9)
Interest expense, net (5,989) (4.3) (10,134) (7.5)
Debt extinguishment charges (3,874) (2.8) 123 0.0
Other (expense) income (12) (0.0) 29 0.0
Loss before income taxes (24,424) (17.3) (21,988) (16.3)
Benefit from income taxes (7,828) (5.6) (6,313) (4.7)
Net loss (16,596) (11.8) (15,675) (11.6)
Accretion and dividend on
preferred stock 620 0.4 976 0.7
Accelerated accretion on
converted preferred stock 6,009 4.3 -- 0.0
Net loss attributable to
common shareholders (23,225) (16.5)% (16,651) (12.4)%
Other data:
EBITDA and EBITDA
margin (1) $(13,406) (9.5)% $ (6,725) (5.0)%
(1) For a definition of EBITDA and a reconciliation of net loss to EBITDA,
see "EBITDA" under Results of Operations - Three Months Ended May 1, 2004
Compared to Three Months Ended April 26, 2003. EBITDA margin represents
EBITDA divided by net sales.
THREE MONTHS ENDED MAY 1, 2004 COMPARED TO THREE MONTHS ENDED APRIL 26, 2003
Net Sales. Net sales increased approximately 4.5% for the three
months ended May 1, 2004 over the three months ended April 26, 2003. The
sales increase was driven by the favorable impact of foreign currency rates,
increased fragrance sales to our mass retail customers, new product launches,
including the launch of the Elizabeth Arden Provocative Woman fragrance and
improvement in the travel retail business, which was adversely affected by
the SARS epidemic in the prior year. These increases were partially offset
by lower sales to a U.S. department store account due to a change in that
account's merchandising strategy in the fragrance category. The increase in
net sales was also partially offset by an increase in in-store support costs
at U.S. department stores associated with the new fragrance launch.
Gross Profit. Gross profit increased 16.7% for the three months
ended May 1, 2004 over the three months ended April 26, 2003. The increase in
gross profit was principally due to higher net sales, the favorable impact of
foreign currency rates, a greater proportion of sales of owned and licensed
brands, which have higher gross margins than distributed brands, and lower
supply chain and distribution costs. Gross margin increased to 40.4% for the
three months ended May 1, 2004 from 36.2% for the three months ended April
26, 2003.
SG&A. Selling, general and administrative expenses increased 19.4%
for the three months ended May 1, 2004 over the three months ended April 26,
2003. The increase was due principally to additional advertising to support
new product launches and higher product development costs, the adverse impact
of foreign currency rates and a $1.1 million restructuring charge related to
the consolidation of our U.S.
- 25 -
distribution facilities, which was announced in November 2003 and was
substantially completed by March 2004.
Depreciation and Amortization. Depreciation and amortization
decreased 1.9% for the three months ended May 1, 2004, compared to the three
months ended April 26, 2003, principally as a result of certain intangibles
that were fully amortized at the end of fiscal 2004, partially offset by the
acceleration of depreciation of certain fixed assets at our Miami Lakes
facility due to the closing of the distribution operations at this facility.
Interest Expense. Interest expense, net of interest income,
decreased by 40.9% for the three months ended May 1, 2004 in comparison to
the three months ended April 26, 2003. The decrease resulted from lower
interest rates on our long-term debt due to refinancing activities in fiscal
2004 and February 2004, reduced borrowings, and lower interest rates paid
under our credit facility.
Debt Extinguishment Costs. During the three months ended May 1,
2004, we recorded $3.9 million of debt extinguishment charges relating to the
February 2004 redemption of $84.3 million aggregate principal amount of the
10 3/8% senior notes. See Note 7 to the Notes to Unaudited Consolidated
Financial Statements.
Benefit from Income Taxes. The benefit from income taxes increased
by $1.5 million for the three months ended May 1, 2004, as compared to the
three months ended April 26, 2003, reflecting higher operating losses, debt
extinguishment charges, restructuring charges related to the consolidation of
the U.S. distribution facilities and a higher tax rate, partially offset by
lower interest expense. The effective tax rate calculated as a percentage of
loss before income taxes for the three months ended May 1, 2004 was 32.0%
compared to 28.7% for the three months ended April 26, 2003. The change in
the effective tax rate as compared to the prior year primarily reflects an
expected increase in U.S. taxable income relative to consolidated income,
primarily due to lower interest expense.
Net Loss. Net loss for the three months ended May 1, 2004 increased
by approximately $0.9 million as compared to the three months ended April 26,
2003. The increase was a result of the debt extinguishment and restructuring
charges, and a higher loss from operations, partially offset by lower
interest expense and a higher income tax rate benefit.
Accretion and Dividend on Preferred Stock. Accretion and dividend on
preferred stock decreased by 36.5% as a result of the conversion of Series D
convertible preferred stock that occurred in October 2003. 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. See Note 9 to the Notes to Unaudited Consolidated Financial
Statements.
Accelerated Accretion on Converted Preferred Stock. We recorded
accelerated accretion on the Series D convertible preferred stock of $6.0
million as a result of the April 2004 conversion of the preferred stock into
common stock by an affiliate of Unilever. See Note 9 to the Notes to
Unaudited Consolidated Financial Statements.
Loss Attributable to Common Shareholders. In the three months ended
May 1, 2004, the net loss attributable to common shareholders increased by
$6.6 million compared to the three months ended April 26, 2003, principally
due to $6.0 million of accelerated accretion on the Series D convertible
preferred stock converted into common stock in April 2004 and $5.0 million of
debt extinguishment and restructuring charges, partially offset by a decrease
in interest expense of $4.1 million and an increase in gross profit. The
impact of the accelerated accretion on the April 2004 conversion of our
Series D convertible preferred stock into common stock and the debt
extinguishment and restructuring charges caused our diluted net loss per
share for the three months ended May 1, 2004 to increase by $0.39.
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 by 99.5% for the three
months ended May 1, 2004, as compared to the three months ended April 26,
2003. The decrease in EBITDA was primarily the result of the debt
extinguishment and restructuring charges, and higher selling, general and
administrative expenses.
- 26 -
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) or as
a measure of our ability to meet cash needs. We believe that EBITDA is a
measure commonly reported and widely used by investors and other interested
parties as a measure of a company's operating performance and debt servicing
ability because it assists in comparing performance on a consistent basis
without regard to capital structure (particularly when acquisitions are
involved), depreciation and amortization, which can vary significantly
depending upon accounting methods (particularly when acquisitions are
involved) or non-operating factors (such as historical cost). Accordingly,
as a result of our capital structure and the accounting method used for our
acquisitions, we believe EBITDA is a relevant measure. This information has
been disclosed here to permit a more complete comparative analysis of our
operating performance relative to other companies and of our debt servicing
ability. EBITDA, may not, however, be comparable in all instances to other
similar types of measures.
The following is a reconciliation of net loss, as determined in
accordance with generally accepted accounting principles, to EBITDA:
(Dollars in thousands) Three Months Ended
-----------------------
May 1, April 26,
2004 2003
-------- ---------
Net loss $(16,596) $(15,675)
Plus:
Benefit from income taxes (7,828) (6,313)
Interest expense, net 5,989 10,134
Depreciation and
amortization 5,029 5,129
EBITDA (13,406)(1) (6,725)(2)
======== ========
(1) During the three months ended May 1, 2004, EBITDA
includes debt extinguishment and restructuring charges
of approximately $3.9 million and $1.1 million,
respectively.
(2) For the three months ended April 26, 2003, EBITDA
includes debt extinguishment gain of $0.1 million.
Financial Condition
(Dollars in thousands) Three Months Ended
-----------------------
May 1, April 26,
2004 2003
-------- ---------
Net cash used in
operating activities $(40,072) $(46,547)
Net cash used in
investing activities (1,588) (1,501)
Net cash (used in) provided
by financing activities (27,794) 46,579
Net decrease in cash and
cash equivalents (69,752) (1,730)
Cash Flows. Net cash used in operating activities decreased 13.9%
for the three months ended May 1, 2004 as compared to the three months ended
April 26, 2003. The decrease for the three months ended May 1, 2004 was
primarily due to a decrease in accounts receivable resulting from improved
collection efforts and lower interest expense, partially offset by an
increase in inventories resulting from the timing of inventory purchases of
distributed brands and new product launches and a higher operating loss.
Net cash used in financing activities increased by $74.4 million for
the three months ended May 1, 2004 as compared to three months ended April
26, 2003. The increase in net cash used in financing activities for the
three months ended May 1, 2004 was due to the February 2004 redemption of
$84.3 million principal amount of the 10 3/8% senior notes due 2007 from the
net proceeds derived from the sale of $225 million of 7 3/4% senior
subordinated notes in January 2004. Pending the redemption of the 10 3/8%
senior notes, we used a portion of the proceeds from the 7 3/4% senior
subordinated notes due 2014 offering to pay down borrowings under our credit
facility and temporarily invest in short-term securities.
- 27 -
Future Liquidity and Capital Needs. Our principal future uses of funds
are for working capital requirements, additional brand acquisitions or
product distribution arrangements, capital expenditures and debt service. We
have historically financed, and we expect to continue to finance, our needs
primarily through internally generated funds, our credit facility and
external financing. We collect cash from our customers based on our sales to
them and their respective payment terms.
We have a revolving bank credit facility with a syndicate of banks that
matures in January 2006. Our borrowings under this facility are limited to a
"borrowing base," calculated based on 85% of eligible accounts receivable and
75% of eligible inventories (65% from November 16 to April 15). The
borrowings are collateralized by a first priority lien on all of our U.S.
accounts receivable and inventory. The credit facility prohibits the payment
of cash dividends and the incurrence of debt (other than refinancing and
certain small amounts of indebtedness). The credit facility also has a
requirement that we maintain a fixed charge coverage ratio of 1.1:1 if
availability under the facility declines to less than $50 million. In
addition, the indenture pursuant to which our 7 3/4% senior subordinated
notes are issued restricts the incurrence of debt (other than refinancing
indebtedness and certain other indebtedness) and the payment of dividends
subject to satisfaction of a fixed charge coverage ratio and net income
tests.
On February 25, 2004, we executed an amendment to our credit facility.
This amendment included a reduction in the range of interest rates included
in the applicable margin, which is added to either LIBOR- based rates or
prime rates, at our option and based upon the amount of our outstanding loan
balance that we have placed in LIBOR and prime rate-based loans. The interest
rates included in the applicable margin were reduced by 0.25% to a range of
2.00% to 2.75% for LIBOR loans and to a range of 0.25% to 1.00% for prime
rate loans and are now based on a fixed charge coverage ratio instead of a
ratio of consolidated debt to EBITDA. As of January 31, 2004, the applicable
margin was 2.75% for LIBOR loans and 1.00% for prime rate loans. As of May 1,
2004, the applicable margin was 2.25% for LIBOR loans and 0.50% for prime
rate loans. The amendment also included a 0.125% reduction in the lower end
of the range of the commitment fee on the unused portion of the credit
facility to a range of 0.25% to 0.5% per year based on a debt service ratio.
At May 1, 2004, the commitment fee was 0.375%. On June 2, 2004, we entered
into an amendment to our credit facility to adjust certain covenants for the
change in fiscal year end. See Note 6 to Notes to Unaudited Consolidated
Financial Statements.
Based upon our internal projections, we believe that the credit
facility, as currently amended and restated, provides sufficient flexibility
so that we will remain in compliance with its terms. If our actual results
deviate significantly from our projections, however, we may not remain in
compliance with the fixed charge covenant and would not be allowed to borrow
under the revolving credit facility. In addition, a default under our
revolving credit facility that causes acceleration of the debt under this
facility could trigger a default on our senior notes. In the event we are not
able to borrow under our credit facility, we would be required to develop an
alternative source of liquidity. There is no assurance that we could obtain
replacement financing or what the terms of such financing, if available,
would be. As of May 1, 2004, we had $58 million outstanding under our credit
facility and $77.4 million of availability, as well as $19.3 million in cash
and cash equivalents.
We believe that existing cash and cash equivalents, internally
generated funds and borrowings under our credit facility will be sufficient
to cover debt service, working capital requirements and capital expenditures
for the next twelve months other than additional working capital requirements
that may result from further expansion of our operations through acquisitions
of additional brands or new product distribution arrangements.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In January 2003, FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities" ("FIN 46") was issued. FIN 46 provides guidance on
consolidating variable interest entities and applies immediately to variable
interests created after January 31, 2003. In December 2003, the FASB revised
and superseded FIN 46 with the issuance of FIN 46R in order to address
certain implementation issues that will be adopted the first reporting period
ending after March 15, 2004. The interpretation requires variable interest
entities to be consolidated if the equity investment at risk is not
sufficient to permit an entity to finance its activities without support from
other parties or the equity investors lack certain specified characteristics.
We do not anticipate the adoption will materially impact our consolidated
results of operations and financial position. The effect of the adoption of
FIN 46 was immaterial to our consolidated financial statements.
- 28 -
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
As of May 1, 2004, we had $58 million in borrowings outstanding under
our credit facility. Borrowings under our credit facility are seasonal, with
peak borrowings in the third quarter of our fiscal year. Borrowings under
the credit facility are subject to variable rates and, accordingly, our
earnings and cash flow will be affected by changes in interest rates. In
February 2004, we entered into two interest rate swap transactions to swap
$50.0 million of our fixed rate 7 3/4% senior subordinated notes due 2014 to
a floating rate of interest based on LIBOR to better balance our mix of fixed
and floating rate debt. In the short term, this will provide us with a lower
level of interest expense related to a portion of the 7 3/4% senior
subordinated notes based on current LIBOR rates; however, over the life of
the notes, interest expense may be greater than 7 3/4% based upon
fluctuations in LIBOR. In the event of an adverse change in interest rates,
our results could be negatively affected. We can terminate the swap at our
option at any time and the counter party can call the swap any time after
January 2009. We designated the swap as a fair value hedge.
Foreign Currency Risk
We sell our products in approximately 90 countries around the world.
During the three months ended May 1, 2004 and the three months ended April
26, 2003, we derived approximately 35% and 38%, respectively of our net sales
from our international operations. We conduct our international operations
in a variety of different countries and derive our sales in 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 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 skincare and
cosmetic products are produced in a third-party 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. The cumulative effect of translating
balance sheet accounts from the functional currency into the U.S. dollar at
current exchange rates is included in "Accumulated and other comprehensive
income (loss)" on our consolidated balance sheets.
In March 2004, we entered into foreign currency option contracts of one
to five months duration for 9.6 million Euros and 5.6 million British pounds
to reduce the exposure of our foreign subsidiary revenues to fluctuations in
currency rates. We have designated each foreign currency option contract as
a cash flow hedge. Any foreign currency contracts that we may enter into
will qualify for hedge accounting and, therefore, the gains and losses will
only be recognized in earnings in the period in which the contracts expire.
We do not utilize foreign exchange contracts for trading or speculative
purposes. There can be no assurance that our hedging operations, if any,
will eliminate or substantially reduce risks associated with fluctuating
exchange rates.
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.
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Change in Internal Control over Financial Reporting. In March 2004, we
completed the consolidation and modification of the primary United States
order processing and fulfillment systems as part of the consolidation of our
United States distribution and warehouse operations into our newly-expanded
facility in Roanoke, Virginia. This consolidation and modification required
a change in our internal control over financial reporting. Based on our
recent evaluation of these changes, there are no significant deficiencies or
material weaknesses in the design or operation which are reasonably likely to
adversely affect our ability to record, process, summarize and report
financial information.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
This table provides information with respect to purchases by the
Company of shares of its Common Stock during the three months ended May 1,
2004:
Issuer Purchases of Equity Securities
(a) (b) (c) (d)
------------- --------- ---------------- --------------
Approximate
Total Number Dollar Value
of Shares of Shares
Purchased as that May Yet
Total Part of Publicly Be Purchased
Number Average Announced Under the
of Shares Price Plans Plans or
Period Purchased (1) per Share or Programs Programs (2)
- ----------------- ------------- --------- ---------------- --------------
February 1, 2004
through March 6,
2004 0 $ 0 0 $ 2,179,389
March 7, 2004
through April 3,
2004 0 $ 0 0 $ 2,179,389
April 4, 2004
through
May 1, 2004 20,226 $ 21.50 0 $ 1,744,530
------------- --------- ---------------- --------------
Total 20,226 0 $ 1,744,530
============= ========= ================ ==============
(1) Reflects deemed surrender to the Company of shares of Common Stock to
satisfy tax withholding obligations in connection with the vesting of
restricted stock issued to employees under the Elizabeth Arden, Inc. 2000
Stock Incentive Plan (the "2000 Stock Incentive Plan").
(2) In January 2000, the Company's board of directors approved and publicly
announced a common stock repurchase program to purchase up to $10 million of
the Company's common stock (the "2000 Stock Purchase Program"). Amounts
reflect the remaining maximum dollar value of shares that may be purchased
under the 2000 Stock Purchase Program or the 2000 Stock Incentive Plan.
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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 quarter ended October 31, 2000 (Commission File No.
1-6370)).
4.1 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)).
4.2 Supplemental Indenture, dated as of January 8, 2004, among the
Company and FD Management, Inc., DF Enterprises, Inc., Elizabeth
Arden International Holding, Inc., and Elizabeth Arden (Zug) GmbH,
as guarantors and HSBC Bank USA, as trustee (incorporated herein
by reference to Exhibit 4.2 filed as part of the Company's Form
10-K for the year ended January 31, 2004 (Commission File No. 1-
6370)).
4.3 Indenture, dated as of January 13, 2004, among the Company and FD
Management, Inc., DF Enterprises, Inc., Elizabeth Arden
International Holding, Inc., RDEN Management, Inc., Elizabeth
Arden (Financing), Inc., and Elizabeth Arden Travel Retail, Inc.,
as guarantors, and HSBC Bank USA, as trustee (incorporated herein
by reference to Exhibit 4.3 to the Company's Form 10-K for the
year ended January 31, 2004 (Commission File No. 1-6370)).
4.4 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)).
4.5 First Amendment to Second Amended and Restated Credit Agreement
dated as of February 25, 2004, 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 herein by reference to Exhibit 4.5 to the Company's
Form 10-K for the year ended January 31, 2004 (Commission File No.
1-6370)).
4.6 Second Amendment to Second Amended and Restated Credit Agreement
dated as of June 2, 2004, 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.
4.7 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 Amended 2000 Stock Incentive Plan (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 (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 Section 302 Certification of Chief Executive Officer.
31.2 Section 302 Certification of Chief Financial Officer.
32 Section 906 Certifications of the Chief Executive Officer and the
Chief Financial Officer.
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 February 3, 2004, we filed a current report on Form 8-K dated
February 2, 2004, that furnished under Item 9, the press release announcing
(i) the filing of a new registration statement for the sale of up
to $150 million of our common stock to replace the then existing and
effective shelf registration statement of which approximately $20 million of
common stock remained unsold, and (ii) the registration of the remaining
common stock to be issued upon the conversion of our Series D Convertible
Preferred Stock owned by an affiliate of Unilever as part of the new
registration statement.
On March 11, 2004, we filed a current report on Form 8-K dated
March 11, 2004, that furnished under Item 12, the press release announcing
the financial results for our fourth quarter and fiscal year ended January
31, 2004 and provided net sales and diluted earnings per share guidance for
fiscal 2005.
On March 18, 2004, we filed a current report on Form 8-K dated
March 16, 2004, that furnished under Item 9, the press release announcing (i)
our board of directors' approval of the adoption of 10b5-1 trading plans in
accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, that will
permit corporate insiders to establish pre-arranged plans to sell a specified
number of shares of common stock over a pre-determined period of time, and
(ii) that certain executives were implementing these plans.
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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: June 3, 2004 /s/ E. Scott Beattie
------------ --------------------
E. Scott Beattie
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: June 3, 2004 /s/ Stephen J. Smith
------------ --------------------
Stephen J. Smith
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------------------------------------------------------------
4.6 Second Amendment to Second Amended and Restated Credit Agreement
dated as of June 2, 2004, 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.
31.1 Section 302 Certification of Chief Executive Officer.
31.2 Section 302 Certification of Chief Financial Officer.
32 Section 906 Certifications of the Chief Executive Officer and the
Chief Financial Officer.
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