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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 1-6370
Elizabeth Arden, Inc.
(Exact name of registrant as specified in its charter)
Florida 59-0914138
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
14100 N.W. 60th Avenue
Miami Lakes, Florida 33014
(Address of principal executive offices)
(305) 818-8000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
Par Value
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of
the registrant as of April 25, 2002 was approximately $181 million based on the
$12.55 per share average of the bid and ask prices for the Common Stock on the
Nasdaq National Market on such date and determined by subtracting from the
number of shares outstanding on that date the number of shares held by the
registrant's directors, executive officers and holders of at least 10% of the
outstanding shares of Common Stock.
As of April 25, 2002, the registrant had 17,568,749 shares of Common
Stock outstanding.
Documents Incorporated by Reference
Part III - Portions of the Registrant's Proxy Statement relating to the 2002
Annual Meeting of Shareholders to be held on June 25, 2002.
Elizabeth Arden, Inc.
FORM 10-K
TABLE OF CONTENTS
Part I Page
----
Item 1. Business................................................................. 3
Item 2. Properties............................................................... 10
Item 3. Legal Proceedings........................................................ 10
Item 4. Submission of Matters to a Vote of Security Holders...................... 10
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters...................................................... 11
Item 6. Selected Financial Data.................................................. 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................... 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............... 20
Item 8. Financial Statements and Supplementary Data.............................. 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................................... 48
Part III
Item 10. Directors and Executive Officers of the Company.......................... 49
Item 11. Executive Compensation................................................... 49
Item 12. Security Ownership of Certain Beneficial Owners
and Management........................................................... 49
Item 13. Certain Relationships and Related Transactions........................... 49
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K...................................................... 50
Signatures ......................................................................... 53
2
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 ANNUAL REPORT ON FORM 10-K. ANY STATEMENTS
THAT EXPRESS, OR INVOLVE DISCUSSIONS AS TO EXPECTATIONS, BELIEFS, PLANS,
OBJECTIVES, ASSUMPTIONS OR FUTURE EVENTS OR PERFORMANCE (OFTEN, BUT NOT ALWAYS,
THROUGH THE USE OF WORDS OR PHRASES SUCH AS "WILL LIKELY RESULT," "ARE EXPECTED
TO," "WILL CONTINUE," "IS ANTICIPATED," "ESTIMATED," "INTENDS," "PLANS" AND
"PROJECTION") ARE NOT HISTORICAL FACTS AND MAY BE FORWARD-LOOKING AND MAY
INVOLVE ESTIMATES AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING STATEMENTS. ACCORDINGLY,
ANY SUCH STATEMENTS ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO, AND ARE
ACCOMPANIED BY, THE FOLLOWING KEY FACTORS THAT HAVE A DIRECT BEARING ON OUR
RESULTS OF OPERATIONS: OUR SUBSTANTIAL INDEBTEDNESS AND DEBT SERVICE
OBLIGATIONS; OUR ABILITY TO SUCCESSFULLY AND COST-EFFECTIVELY INTEGRATE ACQUIRED
BUSINESSES OR NEW BRANDS; THE ABSENCE OF CONTRACTS WITH OUR CUSTOMERS OR
SUPPLIERS AND OUR ABILITY TO MAINTAIN AND DEVELOP RELATIONSHIPS WITH CUSTOMERS
AND SUPPLIERS; THE RETENTION AND AVAILABILITY OF KEY PERSONNEL; CHANGES IN THE
RETAIL, FRAGRANCE AND COSMETIC INDUSTRIES; OUR ABILITY TO LAUNCH NEW PRODUCTS
AND IMPLEMENT OUR GROWTH STRATEGY; GENERAL ECONOMIC AND BUSINESS CONDITIONS; THE
IMPACT OF COMPETITIVE PRODUCTS AND PRICING; RISKS OF INTERNATIONAL OPERATIONS;
SUPPLY CONSTRAINTS OR DIFFICULTIES; AND OTHER RISKS AND UNCERTAINTIES. WE
CAUTION THAT THE FACTORS DESCRIBED HERE 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 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.
PART I
ITEM 1. BUSINESS
General
Elizabeth Arden, Inc., a corporation established in Florida in 1960, is
a leading global marketer and manufacturer of prestige beauty products. Our
portfolio of leading fragrance brands includes Elizabeth Arden's Red Door, 5th
Avenue, Elizabeth Arden green tea and Sunflowers, Elizabeth Taylor's White
Diamonds and Passion, White Shoulders, Geoffrey Beene's Grey Flannel, Halston,
Halston Z-14, PS Fine Cologne for Men, Design and Wings by Giorgio Beverly
Hills. Our skin care brands include Elizabeth Arden's Visible Difference,
Ceramides, and Millenium. Our cosmetics products include lipstick, foundation
and other color cosmetics products under the Elizabeth Arden brand name. In
addition to the brands we own and license, we also distribute more than 125
prestige fragrance brands to many retailers in the United States, providing us
with a broader portfolio of brands. Internationally we also distribute select
fragrances, in addition to our owned and licensed brands.
We sell our prestige beauty products in more than 40,000 separate
retail locations in the United States and internationally, including mass
retailers such as Wal-Mart, Target, Walgreens, and CVS, mid-tier retailers such
as JCPenney, Sears and Kohl's, prestige department stores such as Dillard's, The
May Company, Federated Department Stores, Belk's and Nordstrom and international
retailers such as Boots, Debenhams and Sephora. In the United States, we
currently sell our skin care and cosmetic products primarily in prestige
department stores and our fragrances in prestige department stores, mass and
mid-tier retailers. We also sell our Elizabeth Arden brands of fragrances, skin
care and cosmetics products in over 90 other countries
3
worldwide through perfumeries, boutiques and department stores, and through
travel retail outlets such as duty free shops and airport boutiques. In fiscal
2002, net sales in the United States were $512.4 million (comprising
approximately 70% of total net sales), while net sales outside the United States
were $219.1 million (comprising approximately 30% of total sales). Our most
important foreign countries in terms of net sales during fiscal 2002 were the
United Kingdom with approximately $37 million, Canada with approximately $18
million, and Italy with approximately $16 million.
We provide a portfolio of products and value-added services to our
customers in the United States. We distinguish ourselves from other prestige
beauty companies by offering a large selection of brands and tailoring the
marketing, promotion, size and packaging of our products to suit our customers.
We also provide our customers with value-added services, including category and
inventory management and fulfillment services that our competitors do not
typically provide. We believe that the breadth of products and level of services
we provide have enabled us to gain a leading share of the mass and mid-tier
retail prestige beauty products markets in the United States in particular, and
to become an important and valued supplier for many of our customers. For
example, JCPenney designated us as their Supplier of the Year in our category in
each of the past three years and Wal-Mart designated us as their Supplier of the
Year in our category in 1999.
On January 23, 2001, we acquired the Elizabeth Arden business,
including the Elizabeth Arden line of fragrance skin care and cosmetic brands,
the Elizabeth Taylor fragrance brands and the White Shoulders fragrance brand
from affiliates of Unilever N.V. Following the acquisition, we changed our name
to Elizabeth Arden, Inc. As a result of this acquisition, our sales almost
doubled from approximately $382 million in fiscal 2001 to $732 million in fiscal
2002 and our international sales also increased significantly from $4.1 million
in fiscal 2001 to $219.1 million in fiscal 2002. Prior to this acquisition, we
were involved primarily in the marketing and sales of fragrance products in the
United States and international sales were not material. Net sales grew from
$215 million in fiscal 1998 to $382 million in fiscal 2001, largely as a result
of the increased selection of products offered from brand acquisitions and new
supplier relationships and increased services provided to our retailers.
Business Strategy
We seek to continue our growth as a leading marketer and manufacturer
of prestige beauty products worldwide by implementing the following strategies:
Enhance Brand Performance. We intend to increase the sales and
profitability of our brands through our marketing expertise coupled with our
direct distribution capability. Our brands are promoted through consistent use
of logos, packaging and advertising designed to enhance their images and
differentiate them from other brands. We recently announced that actress
Catherine Zeta-Jones will serve as our global spokesperson to market our
Elizabeth Arden lines. In addition, we reinvigorate our brand portfolio with new
brand introductions and extensions. For example, during fiscal 2002 we
introduced Brilliant White Diamonds, an extension of the popular Elizabeth
Taylor White Diamonds brand and Spiced Green Tea, an extension of our Elizabeth
Arden green tea line and Unbound for Women, a new product for the Halston brand.
During the current fiscal year, we are planning launches of a new Elizabeth
Arden and a new Elizabeth Taylor fragrance.
Strengthen and Expand Relationships with Retailers. We intend to
increase the sales volume of our products by expanding our customer base and by
continuing to develop innovative services that help our customers to maximize
their sales of prestige beauty products. For example, we recently developed an
open sell program for selected retailers in the United States in which we
package individual pieces in a security-coded plastic envelope so that retailers
can place the products on open display counters and shelves rather than in
locked cases. Three of our largest customers have recently implemented open sell
programs and we believe that the open sell format will contribute to increases
in units sold by these retailers.
Pursue Business Efficiencies. The combination of the Elizabeth Arden
business with our existing business significantly increased the scale of our
operations and provides opportunities to improve our operating efficiency.
During fiscal 2002, we integrated the personnel from both businesses,
consolidated warehouse locations, implemented cost reduction programs,
transitioned the Elizabeth Arden businesses in France, Germany and Japan to a
distribution model and realigned our prestige department store business to
reduce expenses. We continue to pursue additional business efficiencies
including reducing our overhead expenses, integrating our information technology
platforms, and realizing volume purchasing benefits.
4
Acquire Control of Additional Prestige Brands. We intend to continue to
opportunistically acquire control of additional brands that enjoy established
consumer loyalty but can be more profitably managed. We previously served as a
distributor for several of the brands that we acquired and we believe that our
familiarity with these brands prior to their acquisition, along with our strong
market position, contributed significantly to our ability to integrate them into
our operations. We believe that our acquisition of ownership or control of
brands enables us to generate higher gross margins and greater overall profits.
While we continually review acquisition opportunities for prestige fragrance
brands, we have no commitments or agreements for any acquisitions at the current
time.
Further Expand Selection of Distributed Fragrance Brands. We intend to
continue to develop our distribution business by increasing the number of
prestige fragrance brands we distribute. Our market position as an established
distributor, our broad selection of fragrances and our relationships with
leading fragrance houses provides us with opportunities to expand our line of
distributed brands. We believe that increasing our line of distributed brands
also makes us a more attractive source of supply for our customers.
Products
Fragrance. We offer a wide variety of fragrance products for both men
and women, including perfume, cologne, eau de toilette, body spray, men's
cologne and gift sets. Each fragrance is sold in a variety of sizes and
packaging arrangements. In addition, each fragrance line may be complemented by
ancillary bath and body products, such as soaps, deodorants, body lotions, gels,
creams and dusting powder, that are based on the particular fragrance. We tailor
the size and packaging of the fragrance to suit the particular target customer.
Our fragrance products generally retail at prices ranging from $20 to $100,
depending on the size of the product.
Our owned and licensed brands include Elizabeth Arden brands such as
Red Door, 5/th/ Avenue, Splendor, Sunflowers and Elizabeth Arden green tea, the
Elizabeth Taylor brands such as White Diamonds and Passion, the Halston brands
Halston and Halston Z-14, Geoffrey Beene's Grey Flannel, Wings by Giorgio
Beverly Hills, White Shoulders, PS Fine Cologne for Men, Design and Casual. In
addition to the brands we own and license, we also distribute fragrances under
brands manufactured by others, principally to mass and mid-tier retailers. For
the year ended January 31, 2002, net sales of fragrance and ancillary products
amounted to $542.5 million, or approximately 74% of our net sales. Net sales of
fragrance and ancillary products accounted for substantially all of our net
sales during prior fiscal year periods.
Skin care. Under the Elizabeth Arden name, our skin care line includes
a broad range of products for both men and women such as moisturizers, creams,
lotions, cleansers and sunscreens. Many of the products are designed for use on
a particular part of the body such as the face, or address a particular problem
such as aging or dry skin. We sell skin care products internationally and in the
United States in prestige department stores and, to a lesser extent, through
independently operated Elizabeth Arden salons and stores. Our skin care products
generally retail at prices ranging from $15 to $60. We frequently market skin
care products with samples or gifts. We market our skin care products under the
Elizabeth Arden brand including products such as Visible Difference, Ceramides
and Millenium. For the year ended January 31, 2002, net sales of skin care
products totaled $119.0 million or approximately 16% of our net sales.
Cosmetics. Under the Elizabeth Arden name, we offer a variety of
cosmetics including foundations, lipsticks, mascaras, eye shadows and powders.
We offer these products in a wide array of shades and colors. We sell our
cosmetics internationally and in the United States in prestige department
stores, and, to a lesser extent, through independently operated Elizabeth Arden
salons and stores. Our cosmetics products generally retail at prices ranging
from $10 to $28. For the year ended January 31, 2002, net sales of cosmetics
amounted to $70.0 million, or approximately 10% of our net sales.
We use third-party contract manufacturers in the United States and
Europe to obtain substantially all raw materials, components and packaging
products and for the manufacture of finished products relating to our owned and
licensed brands. In order to transition the manufacture of the brands acquired
as part of the Elizabeth Arden business, we entered into manufacturing
agreements with affiliates of Unilever to manufacture certain of our products
for a limited period of time. Under a manufacturing agreement for Unilever's Las
Piedras, Puerto Rico plant, Unilever will manufacture for us the Elizabeth Arden
and Elizabeth Taylor fragrance products until December 31, 2002. Pricing is
based on a cost per piece. Our Elizabeth Arden skin care and cosmetic products
are manufactured largely out of a manufacturing plant in Roanoke,
5
Virginia, which until July 2001 was owned by Unilever. In July 2001, Cosmetic
Essence Inc. acquired this plant and we entered into a contract expiring on
January 31, 2007 to continue such manufacturing. Pricing is based on fixed and
variable costs to be established annually.
Except for the Roanoke and Las Piedras agreements, as is customary in
our industry, we generally do not have long-term or exclusive contracts with
manufacturers of our owned and licensed brands or with fragrance manufacturers
or suppliers of our distributed brands. We generally make purchases through
purchase orders. We believe that we have good relationships with manufacturers
of our owned and licensed brands and that there are alternative sources should
one or more of these manufacturers become unavailable. We receive our
distributed brands in finished goods form directly from fragrance manufacturers,
as well as from other sources. Our ten largest fragrance manufacturers or
suppliers of brands that are distributed by us on a non-exclusive basis
accounted for approximately 21% of our cost of sales for the fiscal year ended
January 31, 2002. The loss of, or a significant adverse change in, the
relationship between us and any of our major fragrance manufacturers or
suppliers of distributed brands could have an adverse effect on our business,
financial condition and results of operations.
Trademarks, Licenses and Patents
We own or have rights to use the trademarks necessary for the
manufacturing, marketing, distribution and sale of numerous fragrance and skin
care brands including Elizabeth Arden's Red Door, 5/th/ Avenue, Visible
Difference, Millenium and Sunflowers, Halston Z-14, Halston, PS Fine Cologne for
Men and Design. We have registered these trademarks, or have applications
pending, in the United States and in certain of the countries in which we sell
these product lines. We consider the protection of our trademarks to be
important to our business.
We also are the exclusive worldwide trademark licensee for both the
Elizabeth Taylor fragrance brands (including White Diamonds and Passion) and the
Geoffrey Beene fragrance brands (including Grey Flannel and Bowling Green). The
Taylor license agreement terminates on October 1, 2022 and is renewable by us,
at our sole option, for unlimited 20-year periods. The Beene license terminates
in March 2025 and is automatically renewable for additional 10-year terms.
We also have the right, under various exclusive distributor and license
agreements to distribute other fragrances in various territories and to use the
registered trademarks of third parties in connection with the sale of these
products.
A number of our products incorporate patented or patent-pending
formulations. In addition, several of our packaging methods, components and
products are covered by design patents, patent applications and copyrights. As
part of the Arden acquisition, we entered into non-exclusive cross-license
agreements regarding certain of these patents with Unilever. Substantially all
of our trademarks and all of our patents are held by us or by our United States
subsidiaries.
Sales and Distribution
In the United States, we sell our fragrance products primarily to mass
retailers including Wal-Mart, Target, Walgreens and CVS; mid-tier retailers,
including department stores such as JCPenney, Sears and Kohl's; and to the
prestige department stores, including traditional department stores such as
Dillard's, The May Company, Macy's and Nordstrom. We also sell products to
independent fragrance, cosmetic, gift and other stores. We currently sell our
skin care and cosmetics products in the United States primarily in prestige
department stores. Our sales staff and marketing support personnel are organized
by customer account based upon type and location of the customers. Our sales
force routinely visits retailers to assist in the merchandising, layout and
stocking of selling areas. Our fulfillment capabilities enable us to reliably
process, assemble and ship small orders on a timely basis. We use this ability
to assist our customers in their retail distribution through "drop ship"
programs direct to stores and by supporting their sales of beauty products over
the Internet. We serve as a source of products for a number of internet-based
retailers, as well as for traditional retailers' web-based operations including
Wal-mart.com and JCPenney.com. Sales to Internet retailers are not material to
our results of operations.
We also sell our prestige products in the Elizabeth Arden beauty
salons, which are owned and operated by an unrelated third party. We receive a
licensing fee of between 1% and 2% of the total net sales from each of the
salons for the use of the "Elizabeth Arden" name.
6
In addition to our United States distribution, our products are sold in
approximately 90 other countries worldwide through department stores,
perfumeries, pharmacies, specialty retailers, "duty free" shops and other retail
shops and travel retail locations. In certain countries, we maintain a dedicated
sales force that solicits orders and provides customer service. In other
countries and jurisdictions, we sell our products through selected local
distributors under contractual arrangements. We manage our international
operations from our offices in Geneva, Switzerland.
As is customary in the beauty industry, we do not generally have long-
term or exclusive contracts with any of our retail customers. Sales to customers
are generally made pursuant to purchase orders. We believe that our continuing
relationships with our customers are based upon our ability to provide a wide
selection and reliable source of prestige beauty products, our expertise in
marketing and new product introduction, as well as our ability to provide value-
added services, including our category management services, to United States
mass-market and mid-tier retailers.
Our ten largest customers accounted for approximately 43.4% of net
sales for the fiscal year ended January 31, 2002. The only customer who
accounted for more than 10% of our net sales during that period was Wal-Mart on
a global basis accounting for 10.2% of our net sales. The loss of, or a
significant adverse change in the relationship between any of our key customers
and us could have a material adverse effect on our business, financial condition
and results of operations.
The industry practice for businesses that market beauty products has
been to grant department stores the right to return merchandise. We typically
limit return rights to department stores and to certain promotional items
offered under our owned and licensed brands. We establish reserves and provide
allowances for returns of such products at the time of sale. Our reserves and
allowances are reviewed and updated as needed during the year, and additions to
these reserves and allowances may be required, typically resulting from poor
retail sales of our products. Additions to return reserves or returns in excess
of reserves and allowances may have a negative impact on our financial results.
We have a sales organization which sells returned products.
Marketing
Our marketing approach emphasizes a consistent global image for our
brands. We use print, television and radio advertising, as well as point-of-sale
merchandising including displays and sampling. Our marketing efforts also
benefit from cooperative advertising programs with our retailers, often linked
with particular promotions. In our department store channel, we periodically
promote our brands with "gift with purchase" and "purchase with purchase"
programs. At in-store counters, sales representatives offer personal
demonstrations to market individual products. We also engage in extensive
sampling programs.
With many of our retail customers we provide very extensive marketing
services. Our marketing personnel often design model schematic planograms for
the customer's fragrance department, identify trends in consumer preferences and
adapt the product assortment to these trends, conduct training programs for the
customer's sales personnel and manage in store "special events". Our marketing
personnel also work to design gift sets tailored to customer's needs. For
certain customers we provide comprehensive sales analysis and active management
of the prestige fragrance category. We believe these services distinguish us
from our competitors and contribute to customer loyalty.
Each of our fragrance, skin care and cosmetics products is
distinctively positioned and is marketed with consistent logos and packaging.
Our marketing personnel work closely with customers to develop new products and
extensions of our well-established brands. New product introduction is an
important element in attracting consumers to our brands and in creating brand
excitement with our retail customers. During fiscal 2002, we introduced a number
of brand extensions such as Brilliant White Diamonds, Spiced Green Tea and Iced
Green Tea, as well as successfully launching Unbound for Women, a new Halston
fragrance, in select department stores. During the current fiscal year, we
intend to launch a new Elizabeth Arden and a new Elizabeth Taylor fragrance and
to relaunch the Elizabeth Arden cosmetic line internationally. Product
development costs have not been material during the last three fiscal years.
7
Seasonality
Our operations have historically been seasonal, with higher sales
generally occurring in the second half of the fiscal year as a result of
increased demand by retailers in anticipation of and during the holiday season.
In fiscal 2002, approximately 63% of the Company's 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 significantly between quarters of the same and different
years. As a result, the Company expects to experience variability in net sales
and net income on a quarterly basis.
Management Information Systems
Our key management information systems consist of:
. accounting, forecasting, purchasing and order-entry software
systems;
. electronic data interchange systems, which allow our customers to
order products electronically from us and to be invoiced
electronically for those orders; and
. warehouse management systems, which assist us in facilitating and
managing the receipt and shipment of products.
As a whole, these management information systems provide on-line, real-
time information for our sales, purchasing, warehouse and financial departments.
Our information systems form the basis of a number of the value-added services
that we provide to our customers, including vendor managed inventory, inventory
replenishment, customer billing, sales analysis, products' availability and
pricing information, and expedited order processing. Our information systems
also support our customers' retail sales over the Internet.
In order to transition the use of information systems relating to the
Elizabeth Arden business, we entered into an information technology services
agreement with affiliates of Unilever for information technology, software,
infrastructure, equipment and other services as part of the Arden acquisition.
The agreement terminates on December 31, 2002 and will be automatically renewed
for additional one-year terms, provided that upon termination and at our
request, Unilever will use reasonable efforts to provide these services for up
to two years after termination.
Competition
The beauty industry is highly competitive and, at times, subject to
rapidly changing consumer preferences and industry trends. Competition is
generally a function of brand strength, assortment and continuity of merchandise
selection, reliable order fulfillment and delivery, and level of in-store
customer support. We compete with a number of manufacturers and marketers of
beauty products, some of which have substantially more resources than we do.
We believe that we compete primarily on the basis of product
recognition, quality, performance, price, and our emphasis on providing
value-added customer services, including category management services, to
certain retailers. There are products which are better-known and more popular
than the products manufactured or supplied by us. Many of our competitors are
substantially larger and more diversified, and have substantially greater
financial and marketing resources than we do, as well as have greater name
recognition and the ability to develop and market products similar to and
competitive with those manufactured by us.
Employees
As of April 15, 2002, we had approximately 2,000 full and part-time
employees in the United States and approximately 18 foreign countries. None of
our employees are covered by a collective bargaining agreement. We believe that
our relationship with our employees is satisfactory. We also use the services of
independent contractors in various sales capacities.
8
Executive Officers of the Company
The following sets forth, as of April 25, 2002, the names and ages of
each person who is an executive officer of our company, the positions they hold
and business experience:
Name Age Position with the Company
- ---- --- -------------------------
E. Scott Beattie 43 Chairman, President and Chief Executive Officer
Paul F. West 52 Executive Vice President and Chief Operating Officer
Stephen J. Smith 42 Executive Vice President and Chief Financial Officer
Ronald L. Rolleston 46 Executive Vice President, Global Marketing and
Prestige Sales
Joel B. Ronkin 34 Senior Vice President and Chief Administrative
Officer
Each of our executive officers holds office for such terms as may be
determined by our board of directors.
E. Scott Beattie, age 43, has served as Chairman of the Board of
Directors since April 2000, as our President and Chief Executive Officer since
March 1998 and as a Director of the company (including the predecessor fragrance
company) since November 1995. Mr. Beattie served as our President and Chief
Operating Officer from April 1997 to March 1998 and as Vice Chairman of the
Board of Directors and Assistant Secretary of the company from November 1995 to
April 1997. Mr. Beattie served as Executive Vice President of Bedford Capital
Corporation, a Toronto, Canada-based merchant banking firm, from March 1995 to
March 1998. Mr. Beattie is a director of Bedford Capital Corporation. Mr.
Beattie is also a director of The Cosmetic, Toiletry & Fragrance Association.
Paul F. West, age 52, has served as our Executive Vice President and
Chief Operating Officer since November 2000, as our Executive Vice President,
Sales Management and Planning from March 2000 through November 2000 and as our
Senior Vice President, Sales Management and Planning from April 1998 through
March 2000. Mr. West served as the President of J.P. Fragrances, Inc. from
August 1997 until April 1998. From January 1997 through June 1997, Mr. West
served as a Vice President of Renaissance Solutions, Inc., a consulting company.
Mr. West served as the Project Director of Unilever N.V. from May 1996 through
December 1996. From September 1989 through May 1996, Mr. West served as the
Chief Financial Officer of the Elizabeth Arden Company.
Stephen J. Smith, age 42, has served as our Executive Vice President
and Chief Financial Officer since May 2001. Previously, Mr. Smith was with
PricewaterhouseCoopers LLP, an international professional services firm, as
partner from October 1993 until May 2001, and as manager from July 1987 until
October 1993.
Ronald L. Rolleston, age 46, has served as our Executive Vice
President, Global Marketing and Prestige Sales since February 2002, as our
Senior Vice President, Global Marketing from February 2001 through January 2002
and as our Senior Vice President, Prestige Sales from the time he joined us in
March 1999 until January 2001. Mr. Rolleston served as President of Paul
Sebastian, Inc., a fragrance manufacturer, from September 1997 until January
1999. Mr. Rolleston served as the General Manager of Europe for the Calvin Klein
Cosmetics Company from May 1990 to September 1994, and as Executive Vice
President of Global Marketing of the Elizabeth Arden Company from January 1995
to March 1997.
Joel B. Ronkin, age 34, has served as our Senior Vice President and
Chief Administrative Officer since February 2001 and as our Vice President,
Associate General Counsel and Assistant Secretary from the time he joined us in
March 1999 through January 2001. From June 1997 through March 1999, Mr. Ronkin
served as the Vice President, Secretary and General Counsel of National Auto
Finance Company, Inc., an automobile finance company. From May 1992 until June
1997, Mr. Ronkin was an attorney with the law firm of Steel Hector & Davis
L.L.P. in Miami, Florida.
9
ITEM 2. PROPERTIES
United States. Our corporate headquarters and one of our principal
distribution facilities in the United States is located in Miami Lakes, Florida
in a building we own on a tract of land comprising approximately 13 acres. The
Miami Lakes facility contains approximately 200,000 square feet of distribution
and warehouse space and approximately 30,000 square feet of office space. In
1996, we issued a mortgage on the Miami Lakes facility in the amount of $6
million.
In connection with the Arden acquisition, we assumed a lease for a 265,000
square foot distribution facility located in Roanoke, Virginia whose term
expires April 2006 and for 62,000 square feet of general offices in Stamford,
Connecticut. In May 2001, we extended the lease on the Stamford offices through
October 2011. We also assumed leases for sales offices in California, Georgia,
Massachusetts, Minnesota, Missouri, North Carolina and Texas.
In March 2001, we entered into a lease for general offices for our
Elizabeth Arden marketing operations in New York City whose term expires April
2016. We also entered into leases in 2001 for auxiliary warehouse space in Miami
Lakes and Roanoke aggregating 157,000 square feet whose terms expire in July
2003 and December 2002, respectively. In addition, in 2002, we entered into
leases aggregating 131,000 square feet commencing July 2002 for warehouse space
in Roanoke to coordinate returns processing and promotional set activities.
These leases expire in February and June 2003.
International. Our International operations are headquartered in a leased
building in Geneva, Switzerland whose term expires October 2002. We also lease
sales offices in Australia, Austria, Canada, Denmark, Italy, Korea, New Zealand,
Puerto Rico, Singapore, South Africa, Spain and the United Kingdom and a
distribution facility in Puerto Rico. We also have a small manufacturing
facility in South Africa. Our European fulfillment operations are conducted by
Unilever under a distribution agreement which ends on June 30, 2002. We are
currently negotiating an agreement with another third party for a European
fulfillment center which will be effective following the termination of our
agreement with Unilever.
ITEM 3. LEGAL PROCEEDINGS
In December 2000, we were named in a breach of contract action filed in the
Ontario, Canada Superior Court of Justice by Adenat, Inc., a Canadian customer
of Unilever. The action was filed against a number of Unilever affiliates, our
company and several individuals, including officers of Unilever and our Company.
In August 2001, the plaintiff filed an amended complaint, which removed the
individual defendants. The plaintiff claims that Unilever breached contractual
obligations owed to the plaintiff and further alleges that we interfered in that
relationship. The plaintiff seeks to enjoin the termination of the alleged
distribution agreement by Unilever and seeks compensatory damages of Canadian
$55 million (approximately US $35 million at January 31, 2002) against each of
Unilever and us, plus punitive damages of Canadian $35 million (approximately US
$22 million at January 31, 2002). We believe we would be entitled to
indemnification from Unilever under our agreement to acquire the Elizabeth Arden
business to the extent we incur losses or expenses as a result of actions taken
by Unilever or its affiliates. We believe the claims lack merit as to our
company and we are vigorously contesting the matter.
We are 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 believes that the outcome of such actions, proceedings
or claims will not have a material adverse effect on our business, financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information. Our common stock, $.01 par value per share, has been
traded on The Nasdaq Stock Market under the symbol "RDEN" since January 25,
2001. From December 21, 1995, to January 25, 2001, our common stock traded on
The Nasdaq Stock Market under the symbol "FRAG". The following table sets forth
the high and low closing prices for our common stock, as reported on The Nasdaq
Stock Market for each of our fiscal quarters from February 1, 2000 through
January 31, 2002.
High Low
---- ---
Quarter Ended 04/30/00 $ 9.56 $ 6.63
Quarter Ended 07/31/00 $ 8.75 $ 7.25
Quarter Ended 10/31/00 $11.50 $ 7.13
Quarter Ended 01/31/01 $15.50 $10.13
Quarter Ended 04/28/01 $18.25 $12.88
Quarter Ended 07/28/01 $26.37 $17.66
Quarter Ended 10/27/01 $22.58 $ 9.50
Quarter Ended 01/31/02 $16.63 $ 9.78
Holders. As of April 19, 2002, there were 473 record holders of our common
stock.
Dividends. We have not declared any cash dividends on our common stock
since we became a beauty products company in 1995 and we currently have no plans
to declare dividends on our common stock in the foreseeable future. Any future
determination by our board of directors to pay dividends on our common stock
will be made only after considering our financial condition, results of
operations, capital requirements and other relevant factors. Additionally, our
credit facility prohibits the payment of cash dividends by the Company and the
indentures relating to our 10 3/8% Senior Notes Due 2007 and our 11 3/4% Senior
Secured Notes Due 2011 restrict our ability to pay cash dividends based upon our
ability to satisfy certain financial and other covenants. See Notes 7 and 8 to
Notes to Consolidated Financial Statements.
Series D Convertible Preferred Stock. As part of the consideration for the
Arden business we acquired on January 23, 2001, we issued to an affiliate of
Unilever 416,667 shares of Series D convertible preferred stock with an
aggregate liquidation value of $50 million. Each share of Series D convertible
preferred stock is convertible into 10 shares of our common stock at an initial
conversion price of $12.00 per share of common stock. The holder of the Series D
convertible preferred stock will be entitled to convert up to 33.3% of its
shares after January 23, 2002, up to 66.6% after January 23, 2003 and all of its
shares after January 23, 2004. In addition, cumulative dividends of 5% of the
outstanding liquidation value of Series D Convertible Preferred Stock will begin
to accrue on January 23, 2003 and will be payable in cash or in additional
shares of Series D convertible preferred stock, quarterly in arrears, commencing
March 15, 2003. We are required to redeem the Series D Convertible Preferred
Stock on January 23, 2013 at the aggregate liquidation value of all of the
outstanding shares plus accrued and unpaid dividends. See Note 13 to Notes to
Consolidated Financial Statements.
11
ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share data)
We derived the following selected financial data from our audited
consolidated financial statements. The following data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
related notes included elsewhere in this Annual Report.
Years Ended January 31,
2002 2001/(1)/ 2000 1999 1998
-----------------------------------------------------------------------------
Selected Income Statement Data:
Net sales $731,508 $ 382,254 $361,243 $309,615 $215,487
Gross profit/(2)/ 346,368 110,929 107,683 78,360 63,210
Income from operations 5,863 40,794 44,947 38,684 31,457
Net (loss) income (29,837) 13,436 15,329 12,006 12,341
Accretion and dividend on preferred stock 3,438 -- -- -- --
Net (loss) income attributable to
common shareholders (33,275) 13,436 15,329 12,006 12,341
Selected Per Share Data:
(Loss) earnings per common share:
Basic: $ (1.92) $ 0.99 $ 1.11 $ 0.87 $ 0.92
Diluted: $ (1.92) $ 0.87 $ 0.99 $ 0.73 $ 0.76
Weighted average number of Common shares:
Basic: 17,309 13,555 13,801 13,775 13,394
Diluted: 22,975 15,620 15,577 16,729 16,492
Other Data:
EBITDA/(3)/ $ 36,448/(4)/ $ 52,918 $ 56,113 $ 46,179 $ 36,195
Net cash provided by (used in)
operating activities 8,653 17,501 31,971 (36,948) (40,729)
Net cash used in
investing activities (3,443) (209,883) (3,700) (11,142) (7,392)
Net cash (used in) provided by
financing activities (6,361) 187,933 (12,239) 46,534 54,932
Years Ended January 31,
2002 2001 2000 1999 1998
----------------------------------------------------------------------------
Selected Balance Sheet Data:
Inventories $192,736 $ 210,497 $129,808 $140,859 $ 97,404
Working capital 190,290 183,494 173,005 157,457 122,177
Total assets 596,765 583,147 309,632 294,708 232,653
Short-term debt 7,700 22,945 -- 5,639 --
Long-term debt 326,121 331,145 175,030 176,159 133,785
Convertible, redeemable preferred stock 11,980 8,542 -- -- --
Shareholders' equity 111,934 134,887 82,287 71,480 58,626
(1) The Arden acquisition was consummated on January 23, 2001. Income statement
data for the fiscal year ended January 31, 2001 includes eight days of results
from the Elizabeth Arden business.
(2) Following the Arden acquisition, we reclassified warehouse and shipping
expenses in cost of goods sold to conform to the presentation of the Arden
business. This reclassification changes gross profit and selling, general and
administrative expenses but has no effect on income from operations, EBITDA or
net income.
(3) EBITDA is defined as income from operations, plus depreciation and
amortization. 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 the Company's operating
performance or to net cash provided by operating, investing and financing
activities (as determined in accordance with generally accepted accounting
principles) as a measure of its 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
12
ability because it assists in comparing performance on a consistent basis
without regard to 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, 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.
(4) Excluding the $500,000 charge incurred in the fourth quarter restructuring,
the $20.5 million of lower gross profits due to Elizabeth Arden inventory owned
prior to the acquisition and sold during the fiscal year, and the $10.3 million
inventory charge incurred in the second quarter, EBITDA for fiscal 2002 would
have been approximately $68 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Background
We are a global marketer and manufacturer of prestige beauty products. We
sell our products to retailers and department stores in the United States, as
well as internationally in prestige department stores, perfumeries, boutiques
and travel retail locations. We have established ourselves as a source of over
200 fragrance brands through brand ownership, brand licensing and distribution
arrangements. Our portfolio of owned and licensed fragrance brands includes
Elizabeth Arden's Red Door, 5th Avenue, Elizabeth Arden green tea and
Sunflowers, Elizabeth Taylor's White Diamonds and Passion, White Shoulders,
Geoffrey Beene's Grey Flannel, Halston, Halston Z-14, PS Fine Cologne for Men,
Design and Wings by Giorgio Beverly Hills. Our skin care brands include
Elizabeth Arden's Visible Difference, Ceramides, and Millenium. Our cosmetics
products include lipstick, foundation and other color cosmetics products under
the Elizabeth Arden brand name. In addition to the brands we own and license, we
also distribute more than 125 prestige fragrance brands to many retailers in the
United States.
On January 23, 2001, we acquired the Elizabeth Arden business including the
Elizabeth Arden lines of fragrance, skin care and cosmetics; the Elizabeth
Taylor brands of fragrances and the White Shoulders fragrance brand, and related
assets and liabilities. Our results of operations for the year ended January 31,
2002 (fiscal 2002) include the results of the Elizabeth Arden business, while
our results for the year ended January 31, 2001 (fiscal 2001) include eight days
of financial results from the Elizabeth Arden business.
The following table sets forth, for the years indicated, certain
information relating to the Company's operations expressed as percentages of net
sales for the year (percentages may not add due to rounding):
Years Ended January 31,
2002 2001 2000
--------------------------------------------
Income Statement Data:
Net sales 100.0% 100.0% 100.0%
Cost of sales 52.6 71.1 70.2
------ ------ ------
Gross profit 47.4 28.9 29.8
Selling, general and administrative expenses 42.4 15.0 14.3
Depreciation and amortization 4.2 3.2 3.1
------ ------ ------
Income from operations 0.8 10.7 12.4
Interest expense, net 6.1 5.3 5.4
Other income -- 0.2 --
------- ------ ------
(Loss) income before income taxes (5.3) 5.6 7.0
(Benefit from) provision for income taxes (1.2) 2.1 2.8
------ ------ ------
Net (loss) income (4.1) 3.5 4.2
------ ------ ------
Accretion and dividend on preferred stock 0.5 -- --
------ ------ ------
Net (loss) income attributable to
common shareholders (4.6)% 3.5% 4.2%
====== ====== ======
Other Data:
EBITDA margin (1) 5.0% 13.8% 15.5%
(1) EBITDA margin represents EBITDA (as defined in Note 3 under item 6.
"Selected Financial Data") divided by net sales.
13
Critical Accounting Policies and Estimates
The SEC has recently issued Financial Reporting Release No. 60,
"Cautionary Advice Regarding Disclosure About Critical Accounting Policies"
("FRR 60"), suggesting companies provide additional disclosure and commentary on
those accounting policies considered most critical. FRR 60 considers an
accounting policy to be critical if it is important to the Company's financial
condition and results, and requires significant judgment and estimates on the
part of management in its application. Elizabeth Arden believes the accounting
policies below represent its critical accounting policies as contemplated by FRR
60. See Note 1 of the Notes to Consolidated Financial Statements for a detailed
discussion on the application of these and other accounting policies.
Accounting for Acquisitions. We have accounted for our acquisitions,
including the acquisition of the Elizabeth Arden business, under the purchase
method of accounting for business combinations. Under the purchase method of
accounting, the cost, including transaction costs, are allocated to the
underlying net assets, based on their respective estimated fair values. The
excess of the purchase price over the estimated fair values of the net assets
acquired is recorded as goodwill.
The judgments made in determining the estimated fair value and expected
useful lives assigned to each class of assets and liabilities acquired can
significantly affect net income. For example, different classes of assets will
have useful lives that differ--the useful life of property, plant, and equipment
acquired will differ substantially from the useful life of brand licenses and
trademarks. Consequently, to the extent a longer-lived asset is ascribed greater
value under the purchase method than a shorter-lived asset, net income in a
given period may be higher.
Determining the fair value of certain assets and liabilities acquired
is judgmental in nature and often involves the use of significant estimates and
assumptions. One of the areas that requires more judgment in determining fair
values and useful lives is intangible assets. To assist in this process, we
often obtain appraisals from independent valuation firms for certain intangible
assets.
The value of our intangible assets, including brand licenses,
trademarks and intangibles, is exposed to future adverse changes if we
experience declines in operating results or experience significant negative
industry or economic trends. We periodically review intangible assets for
impairment using the guidance of applicable accounting literature.
In fiscal 2003, we will adopt Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets" (FAS 142), new rules
for measuring the impairment of brand licenses, trademarks and intangibles. We
are currently in the process of assessing the potential impact of this new
statement on our financial statements and determining whether the adoption of
FAS 142 will result in a noncash charge to net income.
Allowances for Sales Returns and Markdowns. As is customary in the
prestige beauty business, we grant certain of our customers the right to either
return product or to receive a markdown allowance for product which does not
"sell-through" to consumers. Upon sale, we record a provision for product
returns and markdowns estimated based on our historical experience,
"sell-through" levels, economic trends and changes in customer demand. Based
upon this information, we provide an allowance for sales returns and markdown
allowances. There is considerable judgment used in evaluating the factors
influencing the allowance for returns and markdowns and additional allowances in
any particular period may be needed, reducing net income or increasing net loss.
Allowances for Doubtful Accounts Receivable. We maintain allowances for
doubtful accounts to cover uncollectible accounts receivable, and we evaluate
our accounts receivable to determine if they will ultimately be collected. This
evaluation includes significant judgments and estimates, including an analysis
of receivables aging and a customer-by-customer review for large accounts. If,
for example, the financial condition of our customers deteriorates resulting in
an impairment of their ability to pay, additional allowances may be required.
Provisions for Inventory Obsolescence. We record a provision for
estimated obsolescence and shrinkage of inventory. Our estimates consider the
cost of inventory, the estimated market value, the shelf life of the inventory
and our historical experience. If there are changes to these estimates,
additional provisions for inventory obsolescence may be necessary.
14
Income Taxes and Valuation Reserves. We record a valuation allowance 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 the valuation allowance. In the event we determine that
we may not be able to realize all or part of our deferred tax asset in the
future, an adjustment to the deferred tax asset would be charged to earnings in
the period of such determination.
Fiscal Year Ended January 31, 2002 Compared to the Fiscal Year Ended January 31,
- --------------------------------------------------------------------------------
2001
- ----
Net Sales. Net sales increased 91% to $731.5 million for the fiscal
year ended January 31, 2002, from $382.3 million for the fiscal year ended
January 31, 2001. In fiscal 2002, we generated $512.4 million, or approximately
70%, of our sales in the U.S. and $219.1 million, or approximately 30% of our
sales, internationally. The increase in net sales is primarily as a result of
increased sales from the acquisition of the Elizabeth Arden business, partially
offset by weakness in the retail environment. The increase in sales includes an
increase in the number of products sold by us, particularly Elizabeth Arden skin
care and cosmetics products, as well as an increase in our customer base,
primarily internationally and with U.S. prestige department stores. The weak
retail environment, exacerbated by the events of September 11, had a
particularly negative effect on sales to U.S. prestige department stores,
international travel retail outlets, and to certain international distributors.
Gross Profit. Gross profit increased by 212% to $346.4 million in
fiscal 2002 as compared with $110.9 million for fiscal 2001, and gross margins
expanded from 29% in fiscal 2001 to 47% in fiscal 2002 as a result of the
acquisition of the Elizabeth Arden business. Following the acquisition, the mix
of our sales has changed, with significantly increased sales of higher margin
owned and licensed brands relative to lower margin distributed brands. Included
in the gross margin for fiscal 2002, are sales of Elizabeth Arden products we
purchased prior to the acquisition, which are carried at a higher cost and
resulted in a lower gross margin than sales of Elizabeth Arden products we
manufactured after the acquisition. Once these lower margin products are sold,
gross margins should increase. For the year ended January 31, 2002, the effect
on gross profit of selling Arden product purchased prior to the acquisition was
a reduction of gross profit of approximately $20.5 million. In addition, in the
second quarter of fiscal 2002, we recorded a non-cash inventory provision of
$10.3 million to write down certain distributed brands and non-core product
offerings that we do not intend to continue to carry due to retailer planogram
updates and to expedite the sales of excess inventory, particularly gift sets
and other promotional merchandise. Excluding the effect of the high cost
products purchased prior to the acquisition, and the inventory provision, gross
profit would have totaled $377.2 million for a gross margin of 52%.
SG&A. Selling, general and administrative expenses increased 434% to
$309.9 million in fiscal 2002 as compared with $57.7 million in the prior year,
reflecting additional selling and administrative costs associated with the
Elizabeth Arden business acquired. As a result of the acquisition of the
Elizabeth Arden business, there has been an increase in sales of owned and
licensed brands, which require higher costs to support, including higher
demonstration, advertising and product development expenses. We added
approximately 1,600 employees to our company in connection with the acquisition
of the Elizabeth Arden business, significantly increasing our international
employee base, our U.S. department store sales force and our administrative
personnel. The number of offices and facilities also increased as a result of
the acquisition. In fiscal 2002, we commenced a restructuring of our operations
in the United States, eliminating approximately 100 positions, representing 10%
of our U.S. headcount. In conjunction with this restructuring we recorded a
$500,000 charge included in selling, general and administrative expenses. In
addition to this charge, we also incurred $2.6 million of restructuring costs,
primarily severance costs resulting from a realignment of our workforce and door
closures, which has been recorded as an adjustment to the allocation of the
purchase price in the acquisition of the Elizabeth Arden business. Of this $2.6
million of restructuring costs, most of the cash was paid out between February
and April 2002. For a discussion of the Elizabeth Arden acquisition, see Note 2
to the Consolidated Financial Statements.
Depreciation and Amortization. Depreciation and amortization increased
153% from $12.1 million in fiscal 2001 to $30.6 million in fiscal 2002,
primarily as a result of depreciation and amortization associated with the
assets acquired as part of the Arden acquisition. Approximately $17.5 million of
the increase in depreciation and amortization is associated with the assets
acquired.
15
Interest Expense, Net. Interest expense, net of interest income,
increased approximately 122% to $44.8 million in fiscal 2002 as compared with
$20.2 million in fiscal 2001, as a result of increased debt incurred to finance
the acquisition of the Elizabeth Arden business and associated working capital
requirements. The increased debt includes $160 million of 11 3/4% senior secured
notes due 2011, as well as borrowings under our $175 million revolving credit
facility. See Notes 7 and 8 to Notes to Consolidated Financial Statements.
Benefit from Income Taxes. We recorded a net benefit from income taxes
of $9.0 million for fiscal 2002, as compared with a net provision of $8.1
million for fiscal 2001. The effective tax rate calculated as a percentage of
income before income taxes declined from 37.6% of income in fiscal 2001 to 23.2%
of net loss in fiscal 2002. The decrease in the effective tax rate is associated
with the increase in our international operations, as we now operate in multiple
foreign jurisdictions. Our international affiliates and subsidiaries have
varying levels of profitability and tax rates. In addition, we recorded an
increase in the income tax valuation allowance associated with certain foreign
losses and deferred tax assets. See Note 10 to Notes to Consolidated Financial
Statements.
Net Loss. For fiscal 2002, we recorded a net loss of $29.8 million as
compared with net income of $13.4 million in fiscal 2001. The increase in net
loss was due to increases in selling, general and administrative expenses,
interest expense and depreciation and amortization, which more than offset the
increase in sales and gross profit and the benefit from income taxes.
Accretion and Dividend on Preferred Stock. As part of the purchase
price for the acquisition of the Elizabeth Arden business, we issued to an
affiliate of Unilever 416,667 shares of series D convertible preferred stock.
The series D convertible preferred stock was recorded at its fair market value
of $35 million, with an allocation of $26.5 million made for the beneficial
conversion feature and reclassified to additional paid-in capital. The
difference between the liquidation value of $50 million and the balance recorded
in the Convertible, redeemable preferred stock account on the Company's
Consolidated Balance Sheet is being accreted over the life of the Series D
Convertible Preferred Stock. For the year ended January 31, 2002, the Company
recorded $1.4 million of accretion and $2.1 million of dividends relating to the
Series D Preferred Stock. The preferred stock carries a 5% annual dividend
yield, which is payable in January 2003. The accretion on preferred stock of
$3.4 million for fiscal 2002 is a non-cash charge to net loss attributable to
common shareholders.
Net Loss Attributable to Common Shareholders. Net loss attributable to
common shareholders totaled $33.3 million in fiscal 2002 as compared with net
income of $13.4 million in fiscal 2001. The net loss attributable to common
shareholders includes net loss plus the accretion and dividends associated with
the series D convertible preferred stock.
EBITDA. EBITDA (operating income plus depreciation and amortization)
decreased by 31% to $36.4 million in fiscal 2002 from $52.9 million in fiscal
2001. The decrease was a result of increases in selling, general and
administrative expenses which offset increases in gross profit. Excluding the
effects of high cost products purchased prior to the acquisition, the inventory
provision, and the restructuring costs, EBITDA would have totaled $67.8 million.
Fiscal Year Ended January 31, 2001 Compared to the Fiscal Year Ended January 31,
- --------------------------------------------------------------------------------
2000
- ----
Net Sales. Net sales increased $21.1 million, or 6%, to $382.3 million
for the fiscal year ended January 31, 2001, from $361.2 million for the fiscal
year ended January 31, 2000. In fiscal 2001, we generated $378.2 million, or
approximately 99%, of our sales in the U.S. and $4.1 million, or approximately
1% of our sales internationally. The increase in net sales is primarily due to
an increase in the volume of products sold to existing customers. Sales to the
Company's top 20 retail accounts increased by 15.8% over the prior year.
Management believes that increased sales during the fiscal year ended January
31, 2001, have resulted from our ability to provide our customers with a larger
selection of products and a continuous, direct supply of products, and growth in
sales of customized gift sets.
Gross Profit. Gross profit increased $3.0 million, or 3%, to $110.9
million for the fiscal year ended January 31, 2001, from $107.7 million for the
fiscal year ended January 31, 2000. The gross margin declined from 29.8% in
fiscal 2000 to 28.9% for fiscal 2001, as a result of higher warehouse and
shipping expenses, which were partially offset by an increase in product sales
of higher margin owned and licensed brands (including brands acquired in
connection with the Arden acquisition). The increase in warehouse and shipping
expenses resulted from costs associated with the operation of our promotional
set fulfillment center in Edison, New Jersey, the closing of a promotional set
fulfillment center in Pennsylvania in May 2000, as well as a $2.8 million
integration charge to increase reserves related to inventory. Excluding this
integration charge, gross profit would have totaled $113.5 million with a gross
margin of 29.7%.
16
SG&A. Selling, general and administrative expenses increased $6.2
million, or 12% to $57.7 million for the fiscal year ended January 31, 2001,
from $51.6 million for the fiscal year ended January 31, 2000. As a percentage
of net sales, SG&A expenses increased from 14.3% for the fiscal year ended
January 31, 2000 to 15.0% for the fiscal year ended January 31, 2001. The
increase in SG&A expenses is primarily a result of $2.8 million in integration
charges for increases in reserves related to receivables as well as expenses
related to the increase in sales. Excluding the effect of the integration
charges, SG&A expenses for the fiscal year ended January 31, 2001, as a
percentage of net sales is 14.4%, approximately the same percentage of expenses
to net sales as recorded in the fiscal year ended January 31, 2000.
Depreciation and Amortization. Depreciation and amortization increased
$1.0 million, or 9% to $12.1 million for the fiscal year ended January 31, 2001,
from $11.2 million for the fiscal year ended January 31, 2000. The increase was
primarily attributable to the depreciation and amortization related to (i)
additional investments in tools and molds developed for our manufactured
products; and (ii) intangibles and fixed assets acquired as part of the Arden
acquisition.
Interest Expense, Net. Interest expense, net of interest income,
increased approximately $755,000, or 4%, to $20.2 million for the fiscal year
ended January 31, 2001, from $19.4 million for the fiscal year ended January 31,
2000. This increase was primarily due to an increase in average debt outstanding
under our credit facility to support working capital needs. In addition, we
incurred additional interest expense in conjunction with the Arden acquisition
from the closing date of January 23, 2001, including interest expense on our 11
3/4% Senior Secured Notes due 2011 and borrowings under our credit facility. See
Notes 7 and 8 to Notes to Consolidated Financial Statements.
Net Income. Net income decreased $1.9 million to $13.4 million for the
fiscal year ended January 31, 2001 from $15.3 million for the fiscal year ended
January 31, 2000, including the effects of the integration charges. Excluding
the effects of the integration charges, net income increased $1.5 million or 10%
to $16.8 million for the fiscal year ended January 31, 2001, from $15.3 million
for the fiscal year ended January 31, 2000, primarily as a result of the
increase in net sales and gross margin.
EBITDA. EBITDA (operating income, plus depreciation and amortization)
decreased $3.2 million or 6% to $52.9 million for the fiscal year ending January
31, 2001, from $56.1 million for the fiscal year ended January 31, 2000,
including the integration charges discussed above. The EBITDA margin declined to
13.8% for the fiscal year ended January 31, 2001, from 15.5% for the fiscal year
ended January 31, 2000, including the integration charges. Excluding the
integration charges, EBITDA increased 4% to $58.5 million for the fiscal year
ended January 31, 2001, from $56.1 million for the fiscal year ended January 31,
2000, primarily as a result of the increase in sales. Excluding the integration
charges, the EBITDA margin was relatively flat at 15.3% for the fiscal year
ended January 31, 2001, as compared to 15.5% for the fiscal year ended January
31, 2000.
Seasonality
Our operations have historically been seasonal, with higher sales
generally occurring in the second half of the fiscal year as a result of
increased demand by retailers in anticipation of and during the holiday season.
In fiscal 2002, 63% of our net sales were made during the second half of the
fiscal year. Due to the size and timing of certain orders from our customers,
sales and results of operations can vary widely between quarters of the same and
different years. As a result we expect to experience variability in net sales
and net income on a quarterly basis.
We experienced 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.
17
Liquidity and Capital Resources
Cash Flows. During fiscal 2002, we generated $8.7 million of cash from
operating activities. Of that amount, $9.5 million was generated from operating
cash flows, offset by a net working capital use of $851,000. The net working
capital use reflects increases in accounts receivable, prepaid and other assets,
somewhat offset by a decline in inventories, and increases in accounts payable,
other payables and accrued expenses. The increase in accounts receivable
resulted from increased sales due to the acquisition of the Elizabeth Arden
business coupled with the fact that no trade receivables were acquired with the
business in January 2001. We used $3.4 million of net cash in investing
activities, comprised of $10.0 million for capital expenditures partially offset
by $6.5 million received for the sale of certain trademarks and intangibles. Net
cash used in financing activities totaled $6.4 million, with payments on short-
term and long-term debt being partially offset by proceeds from the exercise of
stock options and stock purchase warrants. Cash and cash equivalents declined
$1.8 million to $15.9 million.
During the fiscal year ended January 31, 2001, we generated $17.5
million of cash from operating activities. Of that amount, $24.0 million was
generated from operating cash flows, offset by a $6.5 million increase in
working capital, including increases in accounts receivable and inventories and
decreases in accounts payable, partially offset by an increase in other payables
and accrued expenses. Net cash used in investing activities totaled $209.9
million. We used $5.2 million of the cash generated for capital expenditures. We
also used $204.7 million in cash for the acquisition of the Elizabeth Arden
business, including the cash portion of the purchase price plus cash expenses
due at the closing on January 23, 2001. Cash provided from financing activities
totaled $187.9 million and included $160 million from the issuance of new senior
secured notes and $22.9 million borrowed under our $175 million revolving credit
facility. Proceeds from conversion of our convertible preferred stock, exercise
of warrants and exercise of stock options provided an additional $10.0 million,
and share repurchases and repayment of long-term debt used $5.1 million. Cash
and cash equivalents declined by $4.4 million to $17.7 million.
Debt and Contractual Financial Obligations and Commitments. At January
31, 2002, our long-term debt and financial obligations and commitments by due
date were as follows:
(Amounts in thousands) Payments Due by
Less than Period Greater than
Contractual Obligations Total 1 year 1-3 years 4 years
----------------------------------------------------------
Long-term debt $328,433 $2,312 $ 9,354 $316,767
Operating leases 44,271 7,137 16,427 20,707
-------- ------ ------- --------
Total contractual cash obligations $372,704 $9,449 $25,781 $337,474
======== ====== ======= ========
See Notes 8 and 9 of the Notes to the Consolidated Financial Statements
for further information on our long-term debt and contractual financial
commitments.
Future Liquidity and Capital Needs. Our principal future uses of funds
are for debt service, working capital requirements and additional brand
acquisitions or product distribution arrangements. 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 have a $175.0 million revolving credit facility, which expires in
January 2006. Our borrowings under this facility are limited to a "borrowing
base", calculated based on eligible accounts receivable and inventories, and our
borrowings are secured by a first priority lien on all of our U.S. accounts
receivable and inventory. As a result of weaker than expected performance in
fiscal 2002, we entered into an amendment to our Credit Facility which included
the bank group's waiver of non-compliance with certain financial ratios for the
fourth quarter of fiscal 2002, in particular the debt to EBITDA ratio and the
EBITDA to net interest expense ratio, and an amendment of the related covenant
levels for each quarter of fiscal 2003 and the first three quarters of fiscal
2004. The amendment with the bank group also amends selected additional sections
of the bank agreement and was signed on March 13, 2002. The revolving credit
facility, as amended, provides for borrowings on a revolving basis, bearing
interest, at our option, at either (i) 3.5% over the London InterBank Offered
Rate or (ii) 2.25% over the Prime Rate as quoted by Fleet Bank. Under the
amended credit facility, we are required to meet certain covenants each quarter
including (i) a limitation on debt to EBITDA; (ii) a minimum level of EBITDA to
net interest expense; (iii) a minimum amount of shareholders' equity; (iv) a
minimum amount of EBITDA each quarter of fiscal 2003; (v) a minimum amount of
availability under the credit line in the first and second quarters of fiscal
2003; and (vi) a limitation of $18 million on capital expenditures during fiscal
2003 and $25 million (plus up to $5 million of unused capital expenditures from
the prior year) annually thereafter. The revolving credit facility also requires
periodic
18
calculation of the borrowing base. Based upon our internal projections, we
believe that the amended covenants provide sufficient flexibility so that we can
maintain compliance with the covenants. If our actual results deviate
significantly from our projections, however, we may not remain in compliance
with the covenants and would not be allowed to borrow under the revolving credit
facility. In addition, a default under our revolving credit facility which
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 January 31, 2002, we had
$7.7 million of borrowings under the credit facility and approximately $90
million of availability under the borrowing base formula in our revolving credit
facility.
We believe that internally generated funds and borrowings under our
revolving credit facility will be sufficient to cover debt service and working
capital requirements for the next twelve months other than additional working
capital requirements which may result from further expansion of our operations
through acquisitions of additional brands or new product distribution
arrangements.
We have discussions from time to time with manufacturers of prestige
fragrance brands and with distributors that hold exclusive distribution rights
regarding our possible acquisition of additional exclusive manufacturing and/or
distribution rights. We currently have no agreements or commitments with respect
to any such acquisition, although we periodically execute routine agreements to
maintain the confidentiality of information obtained during the course of
discussions with manufacturers and distributors. There is no assurance that we
will be able to negotiate successfully for any such future acquisitions or that
we will be able to obtain acquisition financing or additional working capital
financing on satisfactory terms for further expansion of our operations. As a
result of weaker than expected financial performance in fiscal 2002, the rating
on our senior notes was lowered by the rating agencies. This could affect our
ability to obtain acquisition or other financing on satisfactory terms.
The characteristics of our business do not generally require us to make
significant ongoing capital expenditures. During the fiscal year ended January
31, 2002, we incurred approximately $10.0 million in capital expenditures,
primarily related to in-store counters and testing units, tools, dies and molds
and computer hardware and software. We expect to have approximately $16 million
in capital expenditures in fiscal 2003.
Recently Issued Accounting Standards
In May 2000, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF 00-14, "Accounting for Certain Sales Incentives," which
provides guidance on accounting for discounts, coupons, rebates and free
products, as well as the income statement classification of these discounts,
coupons, rebates and free products. EITF 00-14 is effective February 1, 2002 for
us. While we are currently evaluating the impact of this new guidance, EITF 00-
14 will result in a reclassification of certain advertising and promotional
costs from selling, general and administrative expense. As a result it is
expected that reported net revenues will decrease, cost of sales will increase,
and there will be offsetting decrease in selling, general and administrative
expenses.
In April 2001, the EITF reached a consensus on EITF 00-25, "Accounting
for Consideration from a Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendor's Products," which provides guidance on the income
statement classification of consideration from a vendor to a retailer in
connection with the retailer's purchase of the vendor's products or to promote
sales of the vendor's products. EITF 00-25 is effective February 1, 2002 for us.
While we are currently evaluating the impact of this new guidance, EITF 00-25
will result in a reclassification of certain advertising and promotional costs
from selling, general and administrative expense. As a result it is expected
that reported net revenues will decrease, cost of sales will increase, and there
will be offsetting decreases in selling, general and administrative expenses.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141 (FAS 141), "Business
Combinations" and No. 142 (FAS 142), "Goodwill and Other Intangible Assets." FAS
141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, establishes specific criteria for
the recognition of intangible assets separately from goodwill, and requires that
unallocated negative goodwill be written off immediately as an extraordinary
gain instead of being deferred and amortized. Provisions of FAS 141 will be
effective for our
19
business acquisitions that are consummated after July 1, 2001. FAS 142
supersedes Accounting Principles Board Opinion No. 17, "Intangible Assets," and
addresses the accounting for goodwill and intangible assets subsequent to their
acquisition. Under FAS 142, goodwill and indefinite-lived intangibles need to be
reviewed for impairment at least annually at the reporting unit level. In
addition, the amortization period of intangible assets with finite lives will no
longer be limited to forty years. The provisions of FAS 142 will be effective
February 1, 2002 for us. We are currently in the process of assessing
the potential impact of these new statements on our financial statements.
In October 2001, the FASB issued Statement of Financial Accounting
Standard No. 144 (FAS 144), "Accounting for the Impairment or Disposal of
Long-Lived Assets." The objectives of FAS 144 are to address significant issues
relating to the implementation of FASB Statement No. 121 (FAS 121), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," and to develop a single accounting model, based on the framework
established in FAS 121, for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired. The provisions of FAS 144 will be
effective for us as of February 1, 2002. We do not expect that the adoption of
this will have a material effect on our financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
As of January 31, 2002, we had $7.7 million outstanding under our
credit facility subject to variable rates. Furthermore, our borrowings under our
credit facility are seasonal with peak borrowings in the third quarter of our
fiscal year. The average of our month-end borrowings during fiscal 2002 was
$86.5 million. Accordingly, our earnings and cash flow will be affected by
changes in interest rates. With these average borrowings under our credit
facility, and assuming there had been a two-percentage point change in the
average interest rate for these borrowings, it is estimated that our interest
expense for the year ended January 31, 2002, would increase by approximately
$1.7 million. To date, we have not engaged in derivative transactions to
mitigate interest rate risk, as most of our debt which is in the form of senior
notes and bears a fixed rate. In the event of an adverse change in interest
rate, management may take actions that would mitigate our exposure to interest
rate risk; however, due to the uncertainty of the actions that would be taken
and their possible effect, this analysis assumes no such action. Further, this
analysis does not consider the effects of the change in the level of the overall
economic activity that could exist in such an environment.
Foreign Currency Risk
We sell our products in over 90 countries around the world. For fiscal
2002, the first full year after the acquisition of the Elizabeth Arden business,
we derived approximately 30% of our net sales and 40% of our gross margin from
subsidiaries outside of the U.S. We conduct our international operations in a
variety of different countries and derive our sales in currencies including the
euro, British pound, Swiss franc 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. In these countries our sales and expenses are
typically denominated in local currency, while costs of goods sold are
denominated in a combination of local currency and U.S. dollar. Our results of
operations are reported in U.S. dollars. Fluctuations in currency rates can
adversely affect our product prices, margins and operating costs as well as our
reported results. Most of our skincare and cosmetic products are produced in a
manufacturing facility located in Roanoke, Virginia. A weakening of the
currencies in which we generate sales relative to the currencies in which our
costs are denominated, particularly the U.S. dollar, may decrease our cash flow
and operating profits. Our competitors may or may not be subject to the same
fluctuations in currency rates and our competitive position can be affected by
such changes.
While we periodically engage in currency hedging operations, primarily
forward exchange contracts, to reduce the exposure of our cash flows to
fluctuations in currency rates, we did not have any open contracts as of January
31, 2002. The impact of our foreign currency hedging activities was not material
to our results in fiscal 2002. There can be no assurance that our hedging
operations, if any, will eliminate or substantially reduce risks associated with
fluctuating exchange rates.
20
As of January 31, 2002, our subsidiaries outside the United States
held approximately 16% of our total assets. The functional currency of our
foreign operations is either the U.S. dollar or the local currency. The
cumulative effects 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" on the balance sheet.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants...................................................................... 23
Independent Auditors' Report .......................................................................... 24
Consolidated Balance Sheets as of January 31, 2002 and 2001............................................ 25
Consolidated Statements of Operations for the Years Ended January 31, 2002, 2001 and 2000 ............. 26
Consolidated Statements of Shareholders' Equity for the Years Ended January 31,
2002, 2001 and 2000.................................................................................... 27
Consolidated Statements of Cash Flow for the Years Ended January 31, 2002, 2001 and 2000............... 28
Notes to Consolidated Financial Statements............................................................. 29
22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Elizabeth Arden, Inc. and Subsidiaries:
In our opinion, the accompanying consolidated balance sheet at January 31, 2002
and the related consolidated statements of operations, shareholders' equity and
cash flows present fairly, in all material respects, the financial position of
Elizabeth Arden, Inc. and its subsidiaries at January 31, 2002, and the results
of their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
April 5, 2002
23
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Elizabeth Arden, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Elizabeth Arden,
Inc. (formerly French Fragrances, Inc.) and subsidiaries (the "Company") as of
January 31, 2001, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the two years in the period
ended January 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of January 31, 2001,
and the results of its operations and its cash flows for each of the two years
in the period ended January 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
April 6, 2001
24
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS January 31, 2002 January 31, 2001
---------------- ----------------
Current assets:
Cash and cash equivalents $ 15,913 $ 17,695
Accounts receivable, net 79,720 48,382
Inventories 192,736 210,497
Deferred income taxes 15,970 2,406
Prepaid expenses and other assets 24,372 13,087
---------- ----------
Total current assets 328,711 292,067
---------- ----------
Property and equipment, net 38,268 40,730
---------- ----------
Other assets:
Exclusive brand licenses, trademarks and intangibles, net 212,011 227,232
Debt financing costs 14,518 16,937
Deferred income taxes -- 2,720
Other assets 3,257 3,461
---------- ----------
Total other assets 229,786 250,350
---------- ----------
Total assets $ 596,765 $ 583,147
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 7,700 $ 22,945
Accounts payable - trade 69,150 40,251
Other payables and accrued expenses 59,259 44,231
Current portion of long-term debt 2,312 1,146
---------- ----------
Total current liabilities 138,421 108,573
---------- ----------
Long-term debt 326,121 331,145
Deferred income taxes and other 8,309 --
---------- ----------
Total long-term liabilities 334,430 331,145
---------- ----------
Total liabilities 472,851 439,718
---------- ----------
Commitments and contingencies (See Note 9)
Convertible, redeemable preferred stock, Series D, $.01 par value (liquidation
preference of $50,000); 1,000,000 shares
authorized; 416,667 shares issued and outstanding 11,980 8,542
---------- ----------
Shareholders' equity:
Common stock, $.01 par value, 50,000,000 shares authorized;
18,575,708 and 16,779,186 shares issued 186 168
Additional paid-in capital 85,919 72,866
Retained earnings 35,191 68,466
Treasury stock (950,128 and 995,400 shares at cost, respectively) (6,541) (6,613)
Accumulated other comprehensive loss (2,348) --
Unearned deferred compensation (473) --
---------- ----------
Total shareholders' equity 111,934 134,887
---------- ----------
Total liabilities and shareholders' equity $ 596,765 $ 583,147
========== ==========
See Accompanying Notes to Consolidated Financial Statements.
25
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
Years Ended January 31,
2002 2001 2000
---------------------------------------------------------------
Net sales $ 731,508 $ 382,254 $ 361,243
Cost of sales 385,140 271,325 253,560
------------ ------------ ------------
Gross profit 346,368 110,929 107,683
Operating expenses:
Selling, general and administrative 309,920 58,011 51,570
Depreciation and amortization 30,585 12,124 11,166
------------ ------------ ------------
Total operating expenses 340,505 70,135 62,736
------------ ------------ ------------
Income from operations 5,863 40,794 44,947
------------ ------------ ------------
Other income (expense):
Interest expense, net (44,763) (20,167) (19,412)
Income from sale of intangible rights -- 425 --
Other 49 475 (204)
------------ ------------ ------------
Other income (expense), net (44,714) (19,267) (19,616)
------------ ------------ ------------
(Loss) income before income taxes (38,851) 21,527 25,331
(Benefit from) provision for income taxes (9,014) 8,091 10,002
------------ ------------ ------------
Net (loss) income (29,837) 13,436 15,329
Accretion and dividend on preferred stock 3,438 -- --
------------ ------------ ------------
Net (loss) income attributable to common shareholders $ (33,275) $ 13,436 $ 15,329
============ ============ ============
(Loss) earnings per common share:
Basic $ (1.92) $ 0.99 $ 1.11
============ ============ ============
Diluted $ (1.92) $ 0.87 $ 0.99
============ ============ ============
Weighted average number of common shares:
Basic 17,308,501 13,555,419 13,801,196
============ ============ ============
Diluted 22,975,192 15,620,369 15,577,422
============ ============ ============
See Accompanying Notes to Consolidated Financial Statements.
26
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands)
Preferred Stock
-----------------------------------------
Series B Series C Common Stock Additional
--------------------- ----------------- ----------------- Paid-in Retained Treasury
Shares Amount Shares Amount Shares Amount Capital Earnings Stock
--------------------------------------------------------------------------------------------------
Balance at January 31, 1999 272 $ 3 511 $ 5 13,813 $ 138 $ 31,633 $ 39,701 $ --
Issuance of Common Stock
upon conversion of Series B
convertible preferred stock (6) -- -- -- 41 -- 136 -- --
Issuance of Common Stock
upon conversion of Series C
convertible preferred stock -- -- (9) -- 9 -- 46 -- --
Issuance of Common Stock
upon exercise of stock options -- -- -- -- 318 4 662 -- --
Issuance of Common Stock
upon exercise of warrants -- -- -- -- 5 -- -- -- --
Repurchase of Common Stock -- -- -- -- -- -- -- -- (5,674)
Tax benefit from exercise of
stock options -- -- -- -- -- -- 304 -- --
Net income for the year -- -- -- -- -- -- -- 15,329 --
------------------------------------------------------------------------------------------------
Balance at January 31, 2000 266 3 502 5 14,186 142 32,781 55,030 (5,674)
Issuance of Common Stock
upon conversion of Series B
convertible preferred stock (266) (3) -- -- 1,893 19 6,229 -- --
Issuance of Common Stock
upon conversion of Series C
convertible preferred stock -- -- (502) (5) 502 5 2,638 -- --
Issuance of Common Stock
upon conversion of 7.5%
convertible subordinated
debentures -- -- -- -- 26 -- 184 -- --
Issuance of Common Stock
upon exercise of stock options -- -- -- -- 82 1 486 -- --
Issuance of Common Stock
upon exercise of warrants -- -- -- -- 90 1 674 -- --
Issuance of warrants -- -- -- -- -- -- 3,043 -- --
Repurchase of Common Stock -- -- -- -- -- -- -- -- (939)
Beneficial Conversion Feature
on preferred stock -- -- -- -- -- -- 26,458 -- --
Tax benefit from exercise of
stock options -- -- -- -- -- -- 373 -- --
Net income for the year -- -- -- -- -- -- -- 13,436 --
------------------------------------------------------------------------------------------------
Balance at January 31, 2001 0 0 0 0 16,779 168 72,866 68,466 (6,613)
Issuance of Common Stock
upon conversion of 7.5%
convertible subordinated
debentures -- -- -- -- 335 3 2,407 -- --
Issuance of Common Stock
upon exercise of stock options -- -- -- -- 254 3 2,180 -- --
Issuance of Common Stock
upon exercise of warrants -- -- -- -- 1,208 12 8,276 -- --
Accretion and Dividend on
Series D preferred stock -- -- -- -- -- -- -- (3,438) --
Repurchase of Common Stock -- -- -- -- -- -- -- -- (401)
Issuance of restricted stock,
net -- -- -- -- -- -- -- -- 473
Tax benefit from exercise
of stock options -- -- -- -- -- -- 190 -- --
Comprehensive Loss:
Net loss for the year -- -- -- -- -- -- -- (29,837) --
Foreign currency translation -- -- -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------
Total comprehensive loss -- -- -- -- -- -- -- (29,837) --
Balance at January 31, 2002 0 $ 0 0 $ 0 18,576 $ 186 $ 85,919 $ 35,191 $ (6,541)
================================================================================================
Accumulated
Other Total
Compre- Unearned Share-
hensive Deferred holders'
Loss Compensation Equity
- ------------------------------------------------------------------------
Balance at January 31, 1999 $ -- $ -- $ 71,480
Issuance of Common Stock
upon conversion of Series B
convertible preferred stock -- -- 136
Issuance of Common Stock
upon conversion of Series C
convertible preferred stock -- -- 46
Issuance of Common Stock
upon exercise of stock options -- -- 666
Issuance of Common Stock
upon exercise of warrants -- --
Repurchase of Common Stock -- -- (5,674)
Tax benefit from exercise of
stock options -- -- 304
Net income for the year -- -- 15,329
-------------------------------------
Balance at January 31, 2000 -- -- 82,287
Issuance of Common Stock
upon conversion of Series B
convertible preferred stock -- -- 6,245
Issuance of Common Stock
upon conversion of Series C
convertible preferred stock -- -- 2,638
Issuance of Common Stock
upon conversion of 7.5%
convertible subordinated
debentures -- -- 184
Issuance of Common Stock
upon exercise of stock options -- -- 487
Issuance of Common Stock
upon exercise of warrants -- -- 675
Issuance of warrants -- -- 3,043
Repurchase of Common Stock -- -- (939)
Beneficial Conversion Feature
on preferred stock -- -- 26,458
Tax benefit from exercise of
stock options -- -- 373
Net income for the year -- -- 13,436
-------------------------------------
Balance at January 31, 2001 -- -- 134,887
Issuance of Common Stockck
upon conversion of 7.5%
convertible subordinated
debentures -- -- 2,410
Issuance of Common Stock
upon exercise of stock options -- -- 2,183
Issuance of Common Stock
upon exercise of warrants -- -- 8,288
Accretion and Dividend on
Series D preferred stock -- -- (3,438)
Repurchase of Common Stock -- -- (401)
Issuance of restricted stock, net -- (473) --
Tax benefit from exercise of
stock options -- -- 190
Comprehensive Loss:
Net loss for the year -- -- (29,837)
Foreign currency translation (2,348) -- (2,348)
-------------------------------------
Total comprehensive loss (2,348) -- (32,185)
Balance at January 31, 2002 $(2,348) $ (473) $111,934
=====================================
27
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended January 31,
2002 2001 2000
-------------------------------------------------------
Cash Flows from Operating Activities:
Net (loss) income $(29,837) $ 13,436 $ 15,329
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 30,585 12,124 11,166
Amortization of senior note offering costs warrants and
note premium 2,462 237 570
Deferred tax benefit, net (4,006) (1,789) (2,129)
Provision for write down of inventory 10,300 -- --
Change in assets and liabilities, net of effects from
acquisitions:
Increase in accounts receivable (36,627) (3,878) (12,444)
Decrease (increase) in inventories 7,461 (3,259) 10,079
Increase in prepaid expenses and other assets (11,386) (71) (2,004)
Increase (decrease) in accounts payable 28,898 (3,742) 9,738
Increase in other payables and accrued expenses 12,330 4,443 1,666
Other (1,527) -- --
-------- --------- ----------
Net cash provided by operating activities 8,653 17,501 31,971
-------- --------- ----------
Cash Flows from Investing Activities:
Additions to property and equipment, net of disposals (9,972) (5,207) (3,700)
Sale of trademarks and intangibles 6,529 -- --
Acquisition of Elizabeth Arden business -- (204,676) --
-------- --------- ----------
Net cash used in investing activities (3,443) (209,883) (3,700)
-------- --------- ----------
Cash Flows from Financing Activities:
(Payments on) proceeds from short-term debt (15,245) 22,945 (5,639)
Payments on long-term debt (1,186) (4,118) (1,772)
Proceeds from the issuance of senior notes -- 160,000 --
Proceeds from the exercise of stock options 2,184 486 664
Proceeds from the exercise of stock purchase warrants 8,288 675 --
Proceeds from the conversion of preferred stock -- 8,884 182
Repurchase of common stock (402) (939) (5,674)
-------- --------- ----------
Net cash (used in) provided by financing activities (6,361) 187,933 (12,239)
-------- --------- ----------
Effect of exchange rate changes on cash and cash equivalents (631) -- --
Net (decrease) increase in Cash and Cash Equivalents (1,782) (4,449) 16,032
Cash and Cash Equivalents at Beginning of Year 17,695 22,144 6,112
-------- --------- ----------
Cash and Cash Equivalents at End of Year $ 15,913 $ 17,695 $ 22,144
======== ========= ==========
Supplemental Disclosure of Cash Flow Information:
Interest paid during the year $ 33,395 $ 19,347 $ 19,019
======== ========= ==========
Income taxes paid during the year $ 8,853 $ 13,604 $ 1,446
======== ========= ==========
See Accompanying Notes to Consolidated Financial Statements.
28
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Activity. Elizabeth Arden, Inc. (the
"Company") is a manufacturer and marketer of prestige designer fragrances, skin
treatment and cosmetic products, to retailers in the United States and over 90
countries internationally. The Company was formerly known as French Fragrances,
Inc. until the Arden acquisition on January 23, 2001. See Note 2.
Basis of Consolidation. The consolidated financial statements include
the accounts of the Company's majority-owned domestic and international
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates. The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Significant estimates include expected useful lives of brand licenses
and trademarks and property plant and equipment, allowances for sales returns
and markdowns, allowances for doubtful accounts receivable, provisions for
inventory obsolescence, and income taxes and valuation reserves. Changes in
facts and circumstances may result in revised estimates, which are recorded in
the period in which they become known.
Revenue Recognition. Sales are recognized when title and the risk of
loss transfers to the customer and collectibility of the resulting receivable is
reasonably assured. Sales are recorded net of returns and other allowances, and
the accrued sales returns liability which represents management's estimate of
future returns based on historical experience and considering current external
factors and market conditions. During the fiscal years ended January 31, 2002,
2001 and 2000, two customers accounted for an aggregate of 19%, 30% and 29%,
respectively, of the Company's net sales.
Market Risk. The Company is subject to fluctuations in interest rates
and foreign currency rates, as well as changes in worldwide economic and
political conditions. As a result of the Arden acquisition, approximately 30% of
net sales is generated outside the United States in a number of countries
primarily located in Europe and Asia. The Company's financial performance may be
affected by changes in currency exchange rates and regulations, duties and price
controls, and developments in political, economic, and taxation policies of the
countries in which it operates. At times, the Company engages in currency
hedging operations to reduce the exposure of cash flow to fluctuations in
currency rates. These hedging operations have not been material to the Company's
consolidated financial statements. As a significant amount of the Company's debt
bears a fixed rate, the Company does not engage in derivative transactions to
hedge interest rate risk. The adoption of Statement of Financial Accounting
Standard No. 133, Accounting for Derivative Instruments and Hedging Activities
as of February 1, 2001, did not have an impact on the Company's consolidated
financial statements.
Foreign Currency Translation. The financial statements of the Company's
non-U.S. subsidiaries are translated in accordance with SFAS No. 52 Foreign
Currency Translation. The Company established non-U.S. subsidiaries to hold the
assets acquired as part of the Arden acquisition on January 23, 2001. All assets
and liabilities of foreign subsidiaries and affiliates are translated at
year-end rates of exchange, while sales and expenses are translated at weighted
average rates of exchange for the year. Unrealized translation losses or gains
are reported as foreign currency translation adjustments through other
comprehensive loss or income. Such adjustments totaled a loss of $2.3 million in
fiscal 2002 and were not material in fiscal 2001.
29
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (Continued)
Cash and Cash Equivalents. Cash and cash equivalents include cash and
interest-bearing deposits at banks with an original maturity date of three
months or less.
Inventories. Inventories are stated at the lower of cost or market.
Cost is principally determined using the weighted average method. See Note 4.
Property and Equipment, and Depreciation. Property and equipment are
stated at cost. Expenditures for major improvements and additions are recorded
to the asset accounts while replacements, maintenance and repairs which do not
improve or extend the lives of the respective assets are charged to expense.
Depreciation is provided over the estimated useful lives of the assets using the
straight-line method. See Note 5.
Exclusive Brand Licenses and Trademarks, and Amortization. These
intangible assets are being amortized using the straight-line method over their
estimated useful lives. See Note 6.
Long-Lived Assets. Long-lived assets are reviewed on an ongoing basis
for impairment based on comparison of carrying value against undiscounted future
cash flows. If an impairment is identified the asset's carrying value is
adjusted to estimated fair value. No such adjustments were recorded for the
fiscal years ended January 31, 2002, 2001 and 2000.
Senior Note Offering Costs. Debt issuance costs and transaction fees
which are associated with the issuance of senior notes, are being amortized (and
charged to interest expense) over the term of the related notes using a method
which approximates the level yield method. See Note 8.
Advertising and Promotional Costs. Advertising and promotional costs
are expensed as incurred. Advertising and promotional costs totaled
approximately $197.2 million, $8.2 million and $10.2 million during the fiscal
years ended January 31, 2002, 2001 and 2000, respectively. As a result of the
acquisition of the Elizabeth Arden business, there has been an increase in sales
of owned and licensed brands which require higher costs to support. Advertising
and promotional costs includes promotions, direct selling, advertising co-op and
media placement.
Income Taxes. The provision for income taxes is the tax payable or
refundable for the period plus or minus the change during the period in deferred
tax assets and liabilities. The Company provides for deferred taxes under the
liability method. Under such method, deferred taxes are adjusted for tax rate
changes as they occur. Deferred income tax assets and liabilities are computed
annually for differences between the financial statements and tax bases of
assets and liabilities that will result in taxable or deductible amounts in the
future based on enacted tax laws and rates applicable to the periods in which
the differences are expected to affect taxable income. A valuation allowance is
provided for deferred tax assets if it is more likely than not these items will
either expire before the Company is able to realize their benefit, or that
future deductibility is uncertain. The Company intends to reinvest its
undistributed international earnings to expand its international operations.
Therefore, no tax has been provided to cover the repatriation of such
undistributed earnings.
Other Comprehensive Income. Comprehensive loss includes, in addition to
net loss, unrealized gains and losses excluded from the consolidated statements
of operations and recorded directly into a separate section of invested equity
on the consolidated balance sheet. These unrealized gains and losses are
referred to as other comprehensive income items. The Company's accumulated other
comprehensive loss shown on the Consolidated Balance Sheet consists solely of
foreign currency translation adjustments which are not adjusted for income taxes
since they relate to indefinite investments in non-U.S. subsidiaries.
Fair Value of Financial Instruments. The Company's financial
instruments include accounts receivable, accounts payable, short-term debt,
long-term debt and convertible redeemable preferred stock. See Note 8 for the
fair value of the Company's debentures and notes. The fair value of all other
financial instruments was not materially different than their carrying value as
of January 31, 2002 and 2001. See Note 8.
30
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
(Continued)
Earnings per Share. Basic earnings per share is computed by dividing
the net income attributable to common shareholders by the weighted average
shares of outstanding common stock. The calculation of diluted earnings per
share is similar to basic earnings per share except the numerator excludes
accretion and dividend on preferred stock as well as interest incurred on
convertible securities, net of tax, and the denominator includes dilutive
potential common stock such as stock options, warrants and convertible
securities. See Note 13.
Stock-Based Compensation. The Company has chosen to continue to account
for stock-based compensation to employees and non-employee members of the Board
using the intrinsic value method as prescribed by Accounting Principles Board
Opinion ("APB") No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, compensation cost for stock options issued to
employees and non-employee members of the Board are measured as the excess, if
any, of the fair value of the Company's stock at the date of grant over the
amount an employee or non-employee member of the Board must pay for the stock.
See Note 14.
Reclassifications. To conform to the 2002 presentation, certain
reclassifications were made to the prior years' Consolidated Financial
Statements and the accompanying footnotes.
2. ACQUISITIONS
Elizabeth Arden Acquisition. On January 23, 2001, the Company completed
the acquisition of the assets of the Elizabeth Arden business (the "Arden
acquisition") from Unilever N.V. and its affiliates ("Unilever"). The assets
included certain trademarks and patents for the Elizabeth Arden brands of
prestige fragrances, cosmetics and skin care lines including Red Door, 5/th/
Avenue, Sunflowers, Visible Difference, and Millenium. The Company also acquired
the license for the Elizabeth Taylor fragrance brands including White Diamonds
and Passion, as well as the trademark for the White Shoulders fragrance brand.
In addition to the trademarks, patents and licenses, the Company acquired
inventory, contract rights (including leases for distribution and office
facilities worldwide), fixed assets (including equipment, tools and molds,
furniture, and a manufacturing plant in South Africa), books and records and
goodwill. The Company also assumed certain liabilities for product returns and
demonstrator accruals. In addition to the assumed liabilities, the Company paid
$190 million in cash at the closing (exclusive of fees and expenses of
advisors), subject to final adjustment, and $50 million in aggregate liquidation
preference of our Series D convertible preferred stock issued to Unilever. See
Note 13.
The Company funded the cash portion of the acquisition price for the
Arden acquisition and the related fees and expenses with $204.7 million in cash
from (1) the proceeds from the offering of $160 million of 11 3/4% Senior
Secured Notes due 2011 (the "2001 Note Offering") and (2) borrowings under a
$175 million revolving credit facility with a bank syndicate of which Fleet
National Bank ("Fleet") is the administrative agent (the "Credit Facility"),
which replaced the Company's existing $60 million revolving credit facility with
Fleet. See Notes 7 and 8. The Arden acquisition was accounted for under the
purchase method.
During fiscal 2002, the Company finalized the allocation of the
purchase price for the Arden acquisition. As a result, the Company recorded,
among other things, the final valuation of exclusive brand licenses, trademarks
and intangibles, inventory, and fixed assets, and adjustments to reserves for
returns and other liabilities. In fiscal 2002, the Company eliminated
approximately 100 positions, representing 10% of its U.S. headcount, and $2.6
million of severance cost was included as an adjustment for the allocation of
the purchase price. Most of the cash severance related to the $2.6 million was
paid out between February and April 2002 and is expected to be completely paid
out by October 31, 2002. The adjustments to the allocation of the purchase price
were not material in amount.
31
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. ACQUISITIONS - (Continued)
The following unaudited information presents the Company's pro forma
operating data for the year ended January 31, 2001 and 2000, as if the Elizabeth
Arden acquisition and the January 2001 offering of $160 million of 11 3/4%
Senior Secured Notes due 2011 had been consummated at the beginning of each of
the periods presented and includes certain adjustments to the historical
consolidated statements of operations of the Company to give effect to the
acquisition of the net assets of the Elizabeth Arden business, the payment of
the purchase price and the increased amortization of intangible assets as a
result of the Arden acquisition and the related issuance of additional
indebtedness. The unaudited pro forma financial data is not necessarily
indicative of the results of operations that would have been achieved had the
Arden acquisition and the 2001 Note Offering been consummated prior to the
period in which they were completed, or that might be attained in the future.
Note that the fiscal year end of the Elizabeth Arden business prior to
acquisition was December 31, preceding the January 31 year-end presented below.
(Unaudited)
(Amounts in thousands, except share data) Years Ended January 31,
2001 2000
----------------- ----------------
Net sales $869,829 $856,868
Income from operations $104,687 $ 86,587
Net income attributable to common shareholders $ 35,379 $ 31,313
Earnings per common share:
Basic $ 2.43 $ 1.78
===== =====
Diluted $ 1.79 $ 1.48
===== =====
3. ACCOUNTS RECEIVABLE, NET
The following table details the provisions and allowances established
for potential losses from receivables and estimated sales returns in the normal
course of business. Liabilities for product returns assumed in the Arden
acquisition are excluded from the balance at January 31, 2001. For the year
ended January 31, 2002, the increase in the allowance for sales returns relates
to increased revenues recorded during the year principally from the acquisition
of the Arden business.
(Amounts in thousands) Years Ended January 31,
2002 2001 2000
-----------------------------------------------------
Allowance for Bad Debt:
Beginning balance $ 989 $ 1,166 $ 534
Provision 3,086 1,200 1,139
Write offs, net of recoveries (1,682) (1,377) (507)
--------- --------- ---------
Ending balance $ 2,393 $ 989 $ 1,166
========= ========= =========
Allowance for Sales Returns:
Beginning balance $ 2,032 $ 817 $ 555
Provision 44,948 18,215 13,290
Actual returns (30,405) (17,000) (13,028)
--------- --------- ---------
Ending balance $ 16,575 $ 2,032 $ 817
========= ========= =========
4. INVENTORIES
Inventory balances at January 31, 2002 and 2001 were as follows:
(Amounts in thousands) January 31,
2002 2001
-------- --------
Finished $137,478 $152,484
Work in progress 20,067 15,227
Raw materials 35,191 42,786
-------- --------
$192,736 $210,497
======== ========
32
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
(Amounts in thousands) January 31, Estimated
2002 2001 Life
-----------------------------------------------------
Land $ 2,915 $ 2,936 --
Building 5,593 5,579 40
Building improvements 7,834 6,818 20 -- 40
Furniture and fixtures 2,407 1,431 8 -- 14
Machinery, equipment and vehicles 8,775 10,891 3 -- 14
Computer equipment and software 8,336 7,996 3 -- 5
Counters and trade fixtures 13,894 8,393 3
Tools and molds 5,585 3,852 1 -- 3
--------- --------
55,339 47,896
Less accumulated depreciation (18,576) (8,948)
--------- --------
36,763 38,948
Projects in progress 1,505 1,782
--------- --------
Property and equipment, net $ 38,268 $ 40,730
========= ========
6. EXCLUSIVE BRAND LICENSES, TRADEMARKS, AND INTANGIBLES, NET
The following summarizes the cost basis and amortization associated
with the Company's intangible assets:
(Amounts in thousands) January 31,
2002 2001 Estimated Life
---------------------------------------------------------
Exclusive brand licenses and trademarks $ 248,715 $ 246,643 5 -- 22
Contract rights and other intangibles 10,884 10,791 3 -- 5
--------- ---------
259,599 257,434
Accumulated amortization (47,588) (30,202)
--------- ---------
$ 212,011 $ 227,232
========= =========
During the year ended January 31, 2002, the Company sold certain
trademarks and intangibles for $6.5 million. There was no gain or loss on the
transaction.
7. SHORT-TERM DEBT
In January 2001, the Company entered into the Credit Facility with a
syndicate of banks for which Fleet is the administrative agent and which
provides for borrowings on a revolving basis of up to $175 million, with a $25
million sublimit for letters of credit. The Credit Facility is guaranteed by
certain of the Company's U.S. subsidiaries and matures in January 2006. As a
result of weaker than expected financial performance in fiscal 2002, the Company
negotiated an amendment of certain terms in the Credit Facility. Under the
amendment, the Company received a waiver of non-compliance with certain
financial covenants for the fourth quarter of fiscal 2002, in particular, the
debt to EBITDA ratio and EBITDA to net interest expense ratio, and an amendment
of the related covenant levels for each of fiscal 2003 and the first three
quarters of fiscal 2004. The amendment with the bank group also amends selected
additional sections of the Credit Facility and was signed on March 13, 2002.
Loans under the revolving credit portion of the Credit Facility, as amended,
bear interest, at the option of the Company, at a floating rate of (i) 3.50%
over the London InterBank Offered Rate ("LIBOR") or (ii) 2.25% over the Prime
Rate as quoted by Fleet. Borrowings under the Credit Facility are limited to
eligible accounts receivable and inventories and are collateralized by a first
priority lien on all of the Company's U.S. accounts receivable and inventory.
The Company's obligations under the Credit Facility rank pari passu in right of
payment with the Company's 10 3/8% Senior Notes due 2007 and the 11 3/4% Senior
Secured Notes due 2011. The Credit Facility contains several covenants, the more
significant of which are that the Company: (i) cannot exceed certain levels of
debt to EBITDA; (ii) must maintain certain levels of EBITDA to consolidated net
interest expense; and (iii) must maintain a minimum amount of shareholders'
equity; (iv)
33
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. SHORT-TERM DEBT - (Continued)
must maintain a minimum amount of EBITDA in each quarter of fiscal 2003; and (v)
must maintain a minimum amount of availability under the Credit Facility in the
first and second quarters of fiscal 2003; and (vi) cannot exceed certain limits
on capital expenditures. Based upon the Company's internal projections, the
Company believes that the amended covenants provide sufficient flexibility so
that the Company can maintain compliance with the covenants. If the actual
results deviate significantly from projections, however, the Company may not
remain in compliance with the covenants and would not be allowed to borrow under
the revolving credit facility. In addition, a default under the revolving credit
facility which causes acceleration of the debt under this facility could trigger
a default on the senior notes. In the event the Company is not able to borrow
under its credit facility, the Company would be required to develop an
alternative source of liquidity. There is no assurance that the Company could
obtain replacement financing or what the terms of such financing, if available,
would be. The Credit Facility also includes a prohibition on the payment of
dividends and other distributions to shareholders and restrictions on the
incurrence of additional non-trade indebtedness; provided, however, that the
Company is permitted to repurchase up to $4 million of its common stock, $.01
par value per share ("Common Stock"). At January 31, 2002, the Company had a
balance of $7.7 million and letters of credit of $286,000 outstanding under the
Credit Facility, as compared with a balance of $22.9 million and letters of
credit of $1.3 million outstanding under the Credit Facility as of January
31,2001. As of January 31, 2002, the remaining availability under the Credit
Facility, based upon eligible receivables and inventories as of that date, was
approximately $90 million.
8. LONG-TERM DEBT
The Company's long-term debt consisted of the following:
(Amounts in thousands)
January 31,
Description 2002 2001
- ----------- ---------------------------
10 3/8% Senior Notes due May 2007 $156,769 $157,030
11 3/4% Senior Secured Notes due May 2011 160,000 160,000
8.5% Subordinated Debenture due in equal installments in May 2002, 2003 and 2004, net 6,480 6,480
7.5% Convertible Subordinated Debentures due June 2006 -- 2,410
J.P. Fragrances Debenture due May 2001(*) -- 1,000
8.84% Miami Lakes Facility Mortgage Note due July 2004 5,184 5,371
-------- --------
Total long-term debt 328,433 332,291
Less current portion of long-term debt 2,312 1,146
-------- --------
Total long-term debt, net $326,121 $331,145
======== ========
*Issued in March 1998 as part of the consideration for the purchase price for
certain assets of J.P. Fragrances, Inc., a distributor of prestige fragrance
products.
At January 31, 2002 and 2001, the estimated fair value of the Company's
subordinated debentures and senior notes using available market information and
interest rates was as follows:
(Amounts in thousands) January 31,
2002 2001
--------------------------------
8.5% Subordinated debentures $ 6,480 $ 6,480
7.5% Convertible subordinated debentures $ -- $ 4,459
10 3/8% Senior Notes $135,200 $151,125
11 3/4% Senior Secured Notes $150,400 $166,400
34
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
8. LONG-TERM DEBT - (Continued)
The scheduled maturities of long-term debt at January 31, 2002 were as
follows:
(Amounts in thousands)
Fiscal Year Amount
---------------------- -----------
2003 $ 2,312
2004 2,370
2005 6,984
2006 --
2007 and thereafter 316,767
--------
Total $328,433
========
7.5% Subordinated Convertible Debentures. The 7.5% Subordinated Convertible
Debentures due 2006 (the "7.5% Convertible Debentures") were issued in July 1996
and were convertible into shares of Common Stock of the Company at $7.20 per
share. The Company could redeem the 7.5% Convertible Debentures when the Common
Stock traded above $14.40 for 20 consecutive trading days. In April 2001, the
Company called for redemption the outstanding 7.5% Convertible Debentures. All
debenture holders converted their debentures into Common Stock prior to the
redemption date.
Senior Notes. In connection with the financing of the Arden acquisition in
January 2001, the Company completed the private placement under Rule 144A of the
Securities Act of 1933, as amended (the "Act") of $160 million principal amount
of 11 3/4% Series A Senior Secured Notes due 2011. In March 2001, the 11 3/4%
Series A Senior Secured Notes were exchanged for an equivalent principal amount
of 11 3/4% Series B Senior Secured Notes due 2011 (the "11 3/4% Senior Secured
Notes") containing identical terms to the 11 3/4% Series A Senior Secured Notes
but which have been registered under the Act. The 11 3/4% Senior Secured Notes
are collateralized by a first priority lien on certain intangible assets,
consisting primarily of trademarks and patents, of the Elizabeth Arden
fragrance, skin care and cosmetics lines.
In May 1997, the Company consummated the private placement under Rule 144A
of the Act of $115.0 million principal amount of 10 3/8% Series A Senior Notes
due 2007. In July 1997, the Series A Senior Notes were exchanged for an
equivalent principal amount of 10 3/8% Series B Senior Note (the "10 3/8% Series
B Senior Notes") containing identical terms to the 10 3/8% Series A Senior Notes
but which have been registered under the Act.
In April 1998, the Company consummated the private placement under Rule
144A of $40.0 million principal amount of 10 3/8% Series C Senior Notes due
2007. The Series C Senior Notes were sold at 106.5% of their principal amount
and had substantially similar terms to the Company's existing 10 3/8% Series B
Senior Notes. The 10 3/8% Series C Senior Notes were recorded net of a premium
of $2.6 million. The premium is being amortized over the life of the notes using
the effective interest method. For the fiscal years ended 2002, 2001 and 2000,
the Company has amortized approximately $261,000, $216,000 and $208,000,
respectively. In August 1998, the 10 3/8% Series C Senior Notes were exchanged
for an equivalent principal amount of 10 3/8% Series D Senior Notes due 2007
(the "Series D Senior Notes") containing identical terms to the 10 3/8% Series C
Senior Notes, but which have been registered under the Act.
The Indentures pursuant to which the 11 3/4% Senior Secured Notes and the
10 3/8% Series B and Series D Senior Notes were issued (the "Indentures")
provide that such notes will be senior obligations of the Company and will rank
senior in payment to all existing and future subordinated indebtedness of the
Company and pari passu in right of payment with all existing and future senior
indebtedness of the Company, including indebtedness under the Credit Facility.
The Indentures generally permit the Company (subject to the satisfaction of a
fixed charge covenant ratio and, in certain cases, also a net income test) to
incur additional indebtedness, pay dividends, purchase or redeem capital stock
of the Company, or redeem subordinated indebtedness. The Indentures generally
limit the ability of the Company to create liens, merge or transfer or sell
assets. The Indentures also provide that the holders of the 11 3/4% Senior
Secured Notes and the 10 3/8% Series B and Series D Senior Notes have the option
to require the Company to repurchase their notes in the event of a change of
control in the Company (as defined in the Indentures).
35
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. COMMITMENTS AND CONTINGENCIES
In connection with the Arden acquisition, the Company assumed lease
obligations for a distribution facility in Roanoke, Virginia; office facilities
in Stamford, Connecticut and Geneva, Switzerland; sales offices in the United
States located in California, Georgia, Massachusetts, Missouri, North Carolina
and Texas; a distribution facility in Puerto Rico; and sales offices in
Australia, Austria, Canada, Denmark, Italy, Korea, New Zealand, Puerto Rico,
Singapore, South Africa, Spain and the United Kingdom. During the fiscal year
ended January 31, 2002, the Company entered into 1-3 year leases for additional
warehouse facilities in Miami and Roanoke and a 15-year lease for offices in New
York City. In addition, the Company entered into a 10-year lease extension for
its Stamford offices.
The Company's rent expense for the fiscal years ended January 31, 2002,
2001 and 2000 was approximately $7.4 million, $1.3 million, and $535,000,
respectively. The Company's aggregate minimum lease payments under its operating
leases at January 31, 2002, are as follows:
(Amounts in thousands)
Fiscal Year Amount
---------------------- ----------
2003 $ 7,137
2004 $ 6,258
2005 $ 5,443
2006 $ 4,726
2007 and thereafter $20,707
-------
Total $44,271
=======
In connection with the Arden acquisition, the Company entered into a number
of ancillary agreements with Unilever to facilitate the integration of the
Elizabeth Arden business with the Company's business existing prior to the
acquisition. The Company entered into an information technology services
agreement, under which Unilever and its affiliates provide the Company with
information technology services, software, infrastructure, equipment and other
services for a fixed monthly fee of approximately $1 million. The information
technology services agreement terminates on December 31, 2002 and is
automatically renewable for one-year terms unless either party elects to
terminate. The Company also entered into a manufacturing agreement under which
Unilever manufactures fragrance and cosmetic products for the Company in a plant
located in Las Piedras (Puerto Rico) through December 31, 2002. Pricing is based
on a cost per piece. In addition, the Company entered into a distribution
agreement with Unilever's distribution facility in Lille, France, to obtain
order fulfillment services, for the Company's products in Europe. Under the
distribution agreement, the Company pays a fixed fee per product shipped. The
agreement terminates on June 30, 2002. The Company is currently negotiating an
agreement with another third party for a European fulfillment center which will
be effective following the termination of its agreement with Unilever.
In July 2001, Unilever sold the Roanoke manufacturing plant, where many of
the Company's skin care and cosmetic products were manufactured, to a third
party. The Company entered into an agreement with the purchaser of the plant for
it to continue to manufacture the Company's products at the plant through
January 31, 2007. Pricing is based on specific fixed and variable cost standards
that are to be established annually. For the twelve fiscal months following July
28, 2001, the Company anticipates incurring manufacturing costs of approximately
$26.3 million (of which $10 million is a commitment of the Company with respect
to fixed costs associated with the operation of the plant and the balance
represents variable costs which are dependent on the volumes manufactured for
the Company at the plant) under the new agreement with the purchaser of the
plant. The manufacturing costs are subject to adjustment for the period from
July 29, 2002 to January 31, 2003 pursuant to changes in the consumer price
index. After January 31, 2003, pricing is subject to negotiation.
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$35million at January 31, 2002), against each of Unilever and the Company plus
punitive damages of Canadian $35 million (approximately US$22 million at January
31, 2002). Management believes
36
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. COMMITMENTS AND CONTINGENCIES - (Continued)
that the Company would be entitled to indemnification from Unilever under our
agreement to acquire the Elizabeth Arden business to the extent the Company
incurs losses as a result of actions by Unilever. Management believes the claims
as to the Company lack merit and the Company is vigorously contesting the
matter.
The Company is also a party to a number of other legal actions, proceedings
or claims. While any action, proceeding or claim contains an element of
uncertainty, management of the Company believes that the outcome of such
actions, proceedings or claims will not have a material adverse effect on the
Company's business, financial position or results of operations.
10. INCOME TAXES
(Loss) income before income taxes consisted of the following for the years
ended January 31, 2002, 2001 and 2000.
(Amounts in thousands) Years Ended January 31,
2002 2001 2000
--------------------------------------------------
(Loss) income before income taxes
Domestic $(29,485) $19,745 $ 25,331
Foreign (9,366) 1,782 --
-------- ------- --------
Total (loss) income before income taxes $(38,851) $21,527 $ 25,331
======== ======= ========
The components of the (benefit from) provision for income taxes for the
years ended January 31, 2002, 2001 and 2000 are as follows:
(Amounts in thousands) Years Ended January 31,
2002 2001 2000
-----------------------------------------------
Current income taxes:
Federal $ (6,432) $ 7,496 $ 10,777
State -- 1,902 1,354
Foreign 1,424 482 --
-------- ------- --------
Total current (5,008) 9,880 12,131
-------- ------- --------
Deferred income taxes:
Federal (2,732) (1,470) (1,955)
State (1,015) (337) (174)
Foreign (259) 18 --
-------- ------- --------
Total deferred (4,006) (1,789) (2,129)
-------- ------- --------
Total $ (9,014) $ 8,091 $ 10,002
======== ======= ========
At January 31, 2002, applicable United States federal income taxes and
foreign withholding taxes have not been provided on approximately $2.4 million
of accumulated earnings of foreign subsidiaries that are expected to be
permanently reinvested. If these earnings were not considered to be permanently
reinvested, the US taxes would be substantially offset by credits for foreign
taxes already paid.
37
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
10. INCOME TAXES - (Continued)
The total income tax (benefit) provision differs from the amount
obtained by applying the statutory federal income tax to (loss) income before
income taxes as follows:
Years Ended January 31,
(Amounts in thousands, except
percentages) 2002 2001 2000
------------------------- ------------------------- ------------------------
Amount Rate Amount Rate Amount Rate
(Loss) income at statutory rates $ (13,598) 35.0% $ 7,534 35.0% $ 8,866 35.0%
State taxes, net of federal benefit (660) 1.7 1,016 4.8 768 3.0
Varying tax rates in foreign jurisdictions 4,443 (11.4) (364) (1.7) -- --
Other 801 (2.1) (95) (0.5) 368 1.5
--------- ------ -------- ------ --------- ----
Total $ (9,014) 23.2% $ 8,091 37.6% $10,002 39.5%
========= ====== ======== ====== ========= ====
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for tax purposes and operating loss
carryforwards. The tax effects of significant items comprising the Company's net
deferred tax assets are as follows:
(Amounts in thousands) January 31,
2002 2001
-----------------------------------
Deferred tax liabilities:
Property and equipment $ (1,856) $ (3,489)
Intangible assets (11,581) --
--------- --------
Gross deferred tax liabilities (13,437) (3,489)
--------- --------
Deferred tax assets:
Accounts receivables 810 538
Intangibles -- 3,148
Accrued expenses 12,694 195
Net operating loss carryforwards 5,849 3,021
Inventory 4,430 1,673
Other 830 830
--------- --------
Gross deferred tax assets 24,613 9,405
--------- --------
Valuation allowances (2,044) (790)
--------- --------
Total net deferred tax assets $ 9,132 $ 5,126
========= ========
The following table represents the classification of the Company's net
deferred tax assets:
(Amounts in thousands) January 31,
2002 2001
---------------------------------
Current deferred tax assets $15,970 $2,406
Non-current deferred tax (liabilities) assets (6,838) 2,720
--------- --------
Total net deferred tax assets $ 9,132 $5,126
========= ========
At January 31, 2002, the Company had foreign net operating loss
carryforwards of approximately $18 million that expire, if unused, on or before
January 31, 2009. The ability to use these foreign net operating loss
carryforwards is dependent on generating sufficient future taxable income prior
to their expiration. Due to the Company's limited operating history in foreign
jurisdictions and the uncertainty of achieving sufficient profits to utilize
these foreign net operating loss carryforwards, a valuation allowance has been
established on certain foreign net operating loss carryforwards. During the year
ended January 31, 2002, the Company also wrote off certain acquired United
States federal net operating loss carryforwards that had previously been
38
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
10. INCOME TAXES - (Continued)
subject to a valuation allowance of $790,000. Pursuant to Section 382 of the
Internal Revenue Code and the regulations promulgated thereunder, these acquired
net operating loss carryforwards cannot be realized. In addition, the Company
has acquired United States federal net operating loss carryforwards of
approximately $5 million that will expire, if unused, on or before January 31,
2008, and the Company generated state and local net operating loss carryforwards
of approximately $21 million that expire, if unused, between January 31, 2009
and January 31, 2022. The Company believes that it will generate sufficient
taxable income to realize the United States net operating loss carryforwards
before they expire.
11. RELATED PARTY TRANSACTIONS
In August 1998, National Trading Manufacturing, Inc. ("National
Trading"), a company controlled by the former chairman and director of the
Company (until July 2001), sold a warehouse and office facility (the "National
Trading Facility"), which had housed the Company's executive offices prior to
May 1997 and which the Company had an option to purchase. As part of the
consideration for relinquishing our option to purchase the facility, National
Trading issued to the Company a promissory note payable upon demand in the
principal amount of $300,000 and bearing interest at 8.5% per annum. At January
31, 2001, the principal amount and accrued interest on the demand note due to
the Company was $124,500 and is reflected in the Company's Consolidated Balance
Sheet in Prepaid expenses and other assets. The demand note plus accrued
interest was repaid in April 2001.
During the fiscal year ended January 31, 1999, the Company provided
loans to its president and chief executive officer in the aggregate principal
amount of $500,000 for payment of certain Canadian tax liabilities resulting
from his relocation to Florida. At January 31, 2002 and 2001, the principal
amount and accrued interest on loans outstanding was approximately $640,000 and
$600,000, respectively and is reflected in the Company's Consolidated Balance
Sheet in Prepaid expenses and other assets. The loans accrued interest at 8.5%
per annum and matured in March 2002. In March 2002, Mr. Beattie paid off the
accrued interest on the loans in the amount of $147,758, and the loans were
replaced by a promissory note bearing quarterly interest at 5% (representing the
then current interest charged to the Company by its bank lenders) and maturing
on March 31, 2004.
In February 2000, the Company repurchased the 7.5% Debenture held by
its former chairman and National Trading. The Company paid $2.65 million to
acquire $2.18 million principal amount of 7.5% Convertible Debentures. The
purchase price was based on the estimated fair market value of the 7.5%
Convertible Debentures on the date of the transaction, which includes
consideration for the value of unrealized gain that the chairman could have
recognized upon a conversion and sale of the 7.5% Convertible Debentures into
Common Stock. As a result of the repurchase, the Company recognized a loss of
$468,000 in February 2000.
12. SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING ACTIVITIES
January 31,
(Amounts in thousands) 2002 2001
-------- --------
Conversion of 7.5% Convertible Debentures
into Common Stock $ 2,410 $ 184
Transactions in connection with the Elizabeth
Arden acquisition (See Notes 2 and 13):
Inventories acquired 77,430
Other assets acquired 21,329
Accounts payable to Unilever 12,578
Other liabilities assumed 13,592
Provisions for returns and door closures 26,724
Warrants issued 3,043
Issuance of convertible preferred stock 8,542
(net of $26.5 million in a beneficial
conversion feature)
Accretion and dividend on Series D
Preferred Stock 3,438
There is no non-cash financing and investing activities for fiscal year ended
January 31, 2000.
39
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Convertible Preferred Stock. At January 31, 2002 and 2001, the Company
had outstanding 416,667 shares, $120 per share liquidation preference, of Series
D Convertible Preferred Stock, $.01 par value (the "Series D Convertible
Preferred Stock") issued to an affiliate of Unilever in connection with the
Arden acquisition. Each share of Series D Convertible Preferred Stock is
convertible into 10 shares of Common Stock, subject to certain restrictions, at
a conversion price of $12 per share of Common Stock. The holder of the Series D
Convertible Preferred Stock will be entitled to convert up to 33.33% of its
shares after January 23, 2002, up to 66.66% after January 23, 2003 and all of
its shares after January 23, 2004. In addition, cumulative dividends of 5% of
the outstanding liquidation preference of the Series D Convertible Preferred
Stock will begin to accrue on January 23, 2003 and will be payable, at the
Company's option, in cash or in additional shares of Series D Convertible
Preferred Stock. The Company is required to redeem the Series D Convertible
Preferred Stock on January 23, 2013 at the aggregate liquidation value of all of
the then outstanding shares plus accrued and unpaid dividends. In addition, the
Company may redeem all or part of the Series D Convertible Preferred Stock plus
accrued and unpaid dividends at any time after February 2, 2002, subject to the
waiver of certain restrictions under its bank credit facility and compliance
with certain limitations under the Indentures governing its senior notes, at a
redemption price of $25.00 multiplied by the number of shares of Common Stock
into which the shares of Series D Convertible Preferred Stock can be converted
plus accrued and unpaid dividends. Upon issuance, the Series D Convertible
Preferred Stock was recorded at its fair market value of $35 million, with an
allocation of $26.5 million made for the beneficial conversion feature and
reclassified to additional paid-in capital. The difference between the
liquidation value of $50 million and the balance recorded in the Convertible,
redeemable preferred stock account on the Company's Consolidated Balance Sheet
is being accreted over the life of the Series D Convertible Preferred Stock. For
the year ended January 31, 2002, the Company recorded $1.4 million of accretion
and $2.1 million of dividends relating to the Series D Preferred Stock.
At January 31, 2000, the Company had outstanding 265,801 shares of
Series B Convertible Preferred Stock, $.01 par value per share ("Series B
Convertible Preferred"), and 502,520 shares of Series C Convertible Preferred
Stock, $.01 par value per share ("Series C Convertible Preferred"). Each share
of Series B Convertible Preferred was convertible, at the option of the holder,
into 7.12 shares of Common Stock upon payment of $3.30 per share of Common
Stock. Each share of Series C Convertible Preferred was convertible, at the
option of the holder, into one share of Common Stock upon payment of $5.25 per
share of Common Stock. The Series B Convertible Preferred and the Series C
Convertible Preferred could be redeemed by January 31, 2005. In connection with
the Arden Acquisition, an irrevocable notice of redemption was sent to holders
of the Series B and Series C Convertible Preferred. Substantially all of the
holders of Series B and Series C Convertible Preferred converted their shares
into Common Stock. As a result of this conversion, the outstanding Common Stock
increased by approximately 2.4 million shares and the Company received $8.8
million in cash during the fiscal year ended January 31, 2001.
Warrants. In conjunction with the issuance of the 11 3/4% Senior
Secured Notes and the placement of the Credit Facility related to the cash
financing for the Arden acquisition, the Company issued warrants for 209,653
shares of Common Stock. The warrants can be exercised into Common Stock at an
exercise price of $.01 per common share and were recorded at fair market value
of approximately $3 million. During the fiscal year ended January 31, 2002,
warrants for 62,956 shares of Common Stock were exercised.
40
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY - (Continued)
(Loss) Earnings Per Share. The following table represents the computation
of (loss) earnings per share:
(Amounts in thousands, except per share data) Years Ended January 31,
2002 2001 2000
-------- -------- --------
Basic
Net (loss) income attributable to common shareholders $ (33,275) $ 13,436 $ 15,329
========= ========= =========
Weighted average shares outstanding 17,309 13,555 13,801
========= ========= =========
Net (loss) income per basic share $ (1.92) $ 0.99 $ 1.11
========= ========= =========
Diluted
Net (loss) income attributable to common shareholders $ (33,275) $ 13,436 $ 15,329
Add: 7.5% Convertible Subordinated Debentures
interest, net of tax 23 110 110
Add: Dividend on Series D Convertible
Preferred Stock 2,083 -- --
Add: Accretion on Series D Convertible
Preferred Stock 1,355 -- --
--------- -------- --------
Net (loss) income as adjusted $ (29,814) $ 13,546 $ 15,439
========= ======== ========
Weighted average shares outstanding 17,309 13,555 13,801
--------- -------- --------
Effect of diluted securities:
Potential common shares - treasury method 1,430 1,598 1,444
Assumed conversion of 7.5% Convertible
Subordinated Debentures 69 366 332
Series D Convertible Preferred Stock 4,167 101 --
--------- -------- --------
Dilutive potential common shares 5,666 2,065 1,776
--------- -------- --------
Weighted average shares and potential dilutive shares 22,975 15,620 15,577
========= ======== ========
--------- -------- --------
Net (loss) income per diluted share $ (1.92) $ 0.87 $ 0.99
========= ======== ========
The following table shows the options and warrants to purchase shares
of common stock that were outstanding during the fiscal years ended 2002, 2001
and 2000 but were not included in the computation of (loss) earnings per diluted
share because the option exercise price was greater than the average market
price of the common shares:
Years Ended January 31,
2002 2001 2000
--------------- -------------- ---------------
Number of shares under option 117,000 497,543 1,892,500
=============== ============== ===============
Range of exercise price $18.16 - $20.64 $12.50 - 16.38 $7.00 - 16.38
=============== ============== ===============
41
ELIZABETH ARDEN, INC. AND SUBSIDIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
14. STOCK PLANS
At January 31, 2002, the Company had three stock option plans, one for the
benefit of non-employee directors (the "Non-Employee Director Plan") and two for
the benefit of directors, officers and employees: (i) the 1995 Stock Option
Plan, and (ii) the 2000 Stock Incentive Plan. The 2000 Stock Incentive Plan was
adopted by the Board and approved by the Company's shareholders in January 2001.
The stock options under the Non-Employee Director Plan are generally
exercisable within a year after grant provided the grantee remains a director of
the Company. The options granted under the Non-Employee Director Plan are non-
qualified under the Internal Revenue Code. The option exercise price cannot be
less than the fair value of the underlying Common Stock as of the date of the
option grant, and the maximum option term cannot exceed ten years. The number of
shares of Common Stock authorized under the Non-Employee Director Plan is
500,000.
The stock options awarded under the 1995 Stock Option Plan and the 2000
Stock Incentive Plan are exercisable at any time or in any installments as
determined by the Compensation Committee of the Board at the time of grant. The
options granted under the 1995 Stock Option Plan and the 2000 Stock Incentive
Plan may be either incentive and/or non-qualified stock options under the
Internal Revenue Code as determined by the Compensation Committee. For incentive
stock options, the aggregate fair market value (determined at the grant date) of
Common Stock with respect to which such options first become exercisable by a
participant of the plan during any calendar year may not exceed $100,000. The
number of shares of Common Stock authorized under the 1995 Stock Option Plan is
2,200,000. Stock options for all such shares have been granted. The maximum
number of shares of common stock authorized under the 2000 Stock Incentive Plan
is 3,000,000.
The option activities of all plans are as follows:
Years Ended January 31,
2002 2001 2000
-------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------------- ---------------------- -----------------------
Beginning outstanding 3,150,541 $ 10.75 1,093,000 $ 9.42 1,300,940 $ 8.06
Granted 192,000 17.05 2,174,376 11.21 265,000 6.11
Exercised (256,034) 6.88 (82,169) 5.92 (441,440) 3.38
Canceled (18,000) 13.31 (34,666) 9.10 (31,500) 10.32
--------- -------- --------- ------- --------- -------
Ending outstanding 3,068,507 $ 11.45 3,150,541 $ 10.75 1,093,000 $ 9.42
========= ======== ========= ======= ========= =======
Exercisable as of
January 31 1,381,763 924,841 885,682
========= ========= =========
Weighted average fair
value of options granted
during the year 192,000 $ 10.98 2,174,376 $ 7.03 265,000 $ 3.54
======= ======== ========= ====== ======= ========
Options Outstanding Options Exercisable
-------------------------------------------------------- ------------------------
Number Weighted Number
Outstanding Average Weighted Exercisable Weighted
Range of as of Remaining Average as of Average
Exercise January 31, Contractual Exercise January 31, Exercise
Price 2002 Life Price 2002 Price
--------------- ----------- ------------ --------- ------------ ---------
$ 6.00 - 9.38 1,132,257 4.64 $ 7.88 480,624 $ 7.37
12.50 - 16.38 1,819,250 8.12 13.22 901,139 13.01
18.16 - 20.64 117,000 8.85 18.50 -- --
--------------- ---------- ---- ------- --------- -------
$ 6.00 - 20.64 3,068,507 6.87 $ 11.45 1,381,763 $ 11.05
=============== ========= ==== ======= ========= =======
42
ELIZABETH ARDEN, INC. AND SUBSIDIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
14. STOCK PLANS - (Continued)
The Company applies APB No. 25 and related interpretations in accounting
for its stock options to employees and non-employee members of the Board as
described in Note 1. Accordingly, no compensation expense has been recognized
during the years ended January 31, 2002, 2001 and 2000 related to the stock
options. Net (loss) income and net (loss) income per common share would have
been as follows had the fair value of stock options granted during 2002, 2001
and 2000 been recognized as compensation expense as prescribed by SFAS No. 123:
(Amounts in thousands, except share data) Years Ended January 31,
2002 2001 2000
-----------------------------
Pro forma net (loss) income $ (37,664) $ 12,139 $ 14,747
========= ======== ========
Pro forma net (loss) income per common share:
Basic $ (2.18) $ 0.90 $ 1.07
========= ========= ========
Diluted $ (2.18) $ 0.78 $ 0.95
========= ========= ========
The fair value of each option granted is estimated on the grant date using
the Black-Scholes option pricing model with the following assumptions:
Years Ended January 31,
2002 2001 2000
----------------------------
Expected dividend yield 0.00% 0.00% 0.00%
Expected price volatility 60.00% 66.00% 67.46%
Risk-free interest rate 4.78% 5.50% 6.00%
Expected life of options in years 4 - 8 4 - 8 4 - 8
During the fiscal year ended January 31, 2002, the Company issued to
employees and independent contractors of the Company 90,848 shares of Common
Stock from the treasury under the Company's 2000 Stock Incentive Plan (the
"Plan"). The shares issued do not vest until one year from issuance assuming the
employees and independent contractors are still employed, or the independent
contractors are still engaged, by the Company. During the one-year restriction
period, plan participants are entitled to vote and receive dividends on such
shares.
Upon issuance of 64,181 shares issued pursuant to the Plan, an unamortized
compensation expense equivalent to the market value of the shares on the date of
grant in the amount of approximately $641,000 was charged to shareholders'
equity and will be amortized over the one-year restriction period.
15. QUARTERLY DATA (Unaudited)
Condensed consolidated quarterly information as follows:
(Amounts in thousands, except share data)
January 31, 2002/(1)/ October 27, 2001 July 28, 2001/(2)/ April 28, 2001
---------------- ---------------- ------------- --------------
Net sales $159,463 $ 302,962 $ 127,049 $142,034
Gross profit 69,314 149,033 54,421 73,600
(Loss) income from operations (11,370) 62,457 (27,806) (17,418)
Net (loss) income (19,162) 33,445 (25,986) (18,134)
(Loss) earnings per common share:
Basic $ (1.14) $ 1.85 $ (1.53) $ (1.15)
======== ========== ========= ========
Diluted $ (1.14) $ 1.48 $ (1.53) $ (1.15)
======== ========== ========== ========
January 31, 2001/(3)/ October 31, 2000 July 31, 2000 April 30, 2000
---------------- ---------------- ------------- --------------
Net sales $ 86,208 $ 163,428 $ 66,909 $ 65,709
Gross profit 26,169 46,834 20,852 17,074
Income from operations 5,892 25,782 5,313 3,807
Net income (loss) 601 12,522 637 (324)
Earnings (loss) per common share:
Basic $ 0.04 $ 0.95 $ 0.05 $ (0.02)
======== ========= ======== =========
Diluted $ 0.04 $ 0.83 $ 0.04 $ (0.02)
======== ========= ======== =========
(1) Includes $500,000 restructuring charge
(2) Includes $10.3 million inventory charge
(3) Includes $2.8 million integration charge
43
ELIZABETH ARDEN, INC. AND SUBSIDIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
16. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following condensed financial statements of the Company show in
separate columns those subsidiaries that are guarantors of the 11 3/4% Senior
Secured Notes, elimination adjustments and the consolidated total. The Company's
direct subsidiaries, DF Enterprises, Inc., FD Management, Inc. and Elizabeth
Arden International Holding Co., are guarantors of the 11 3/4% Senior Secured
Notes. All amounts presented are in thousands.
Balance Sheet January 31, 2002
Company Guarantors Eliminations Consolidated
-----------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,616 $ 12,297 $ -- $ 15,913
Accounts receivable, net 47,543 32,177 -- 79,720
Inventories 152,883 39,853 -- 192,736
Intercompany receivable 615,368 (388,272) (227,096) --
Deferred income taxes 15,970 -- -- 15,970
Prepaid expenses and other assets 16,133 8,239 -- 24,372
-------- ----------- -------------- --------
Total current assets 851,513 (295,706) (227,096) 328,711
-------- ----------- -------------- --------
Property and equipment, net 29,403 8,865 -- 38,268
-------- ----------- -------------- --------
Other assets:
Exclusive brand licenses and trademarks, net 38,624 173,387 -- 212,011
Other assets 22,771 (4,996) -- 17,775
-------- ----------- -------------- --------
Total other assets 61,395 168,391 -- 229,786
-------- ----------- -------------- --------
Total assets $942,311 $ (118,450) $ (227,096) $596,765
-------- ----------- -------------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 7,700 $ -- $ -- $ 7,700
Accounts payable - trade 60,228 8,922 -- 69,150
Intercompany payable 357,972 (130,876) (227,096) --
Other payables and accrued expenses 52,271 6,988 -- 59,259
Current portion of long-term debt 2,312 -- -- 2,312
-------- ----------- -------------- --------
Total current liabilities 480,483 (114,966) (227,096) 138,421
-------- ----------- -------------- --------
Long-term debt 326,121 -- -- 326,121
Deferred income taxes and other 7,296 1,013 -- 8,309
-------- ----------- -------------- --------
Total liabilities 813,900 (113,953) (227,096) 472,851
-------- ----------- -------------- --------
Convertible, redeemable preferred stock 11,980 -- -- 11,980
-------- ----------- -------------- --------
Shareholders' equity 116,431 (4,497) -- 111,934
-------- ----------- -------------- --------
Total liabilities and shareholders' equity $942,311 $ (118,450) $ (227,096) $596,765
-------- ----------- -------------- --------
44
ELIZABETH ARDEN, INC. AND SUBSIDIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
16. CONDENSED CONSOLIDATING FINANCIAL INFORMATION - (Continued)
Balance Sheet January 31, 2001
Company Guarantors Eliminations Consolidated
--------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,004 $ 13,691 $ -- $ 17,695
Accounts receivable, net 50,212 (1,830) -- 48,382
Inventories 188,536 21,961 -- 210,497
Intercompany receivable 211,216 -- (211,216) --
Deferred income taxes 2,406 -- -- 2,406
Prepaid expenses and other assets 8,543 4,544 -- 13,087
-------- --------- --------- --------
Total current assets 464,917 38,366 (211,216) 292,067
-------- --------- --------- --------
Property and equipment, net 34,147 6,583 -- 40,730
-------- --------- --------- --------
Other assets:
Exclusive brand licenses and trademarks, net 47,162 180,070 -- 227,232
Other assets 23,117 1 23,118
-------- --------- --------- --------
Total other assets 70,279 180,071 -- 250,350
-------- --------- --------- --------
Total assets $569,343 $225,020 $(211,216) $583,147
======== ========= ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 22,945 $ -- $ -- $ 22,945
Accounts payable - trade 39,223 1,028 -- 40,251
Intercompany payable -- 211,216 (211,216) --
Other payables and accrued expenses 33,197 11,034 -- 44,231
Current portion of long-term debt 1,146 -- -- 1,146
-------- --------- --------- --------
Total current liabilities 96,511 223,278 (211,216) 108,573
-------- --------- --------- --------
Long-term debt, net 331,145 -- -- 331,145
-------- --------- --------- --------
Total liabilities 427,656 223,278 (211,216) 439,718
-------- --------- --------- --------
Convertible, redeemable preferred stock 8,542 -- -- 8,542
-------- --------- --------- --------
Shareholders' equity 133,145 1,742 -- 134,887
-------- --------- --------- --------
Total liabilities and shareholders' equity $569,343 $225,020 $(211,216) $583,147
======== ========= ========= ========
For the Year Ended
Statement of Operations January 31, 2002
Company Guarantors Eliminations Consolidated
--------------------------------------------------------------
Net sales $512,408 $250,193 $ (31,093) $731,508
Cost of sales 304,640 80,500 -- 385,140
-------- --------- --------- --------
Gross profit 207,768 169,693 (31,093) 346,368
Selling, general and administrative 199,705 141,308 (31,093) 309,920
Depreciation and amortization 18,099 12,486 -- 30,585
-------- --------- --------- --------
(Loss) income from operations (10,036) 15,899 -- 5,863
Interest and other income (expense) (23,765) (20,949) -- (44,714)
-------- --------- --------- --------
Loss before income taxes (33,801) (5,050) -- (38,851)
Benefit from income taxes (7,856) (1,158) -- (9,014)
-------- --------- --------- --------
Net loss $(25,945) $ (3,892) $ -- $(29,837)
======== ========= ========= ========
45
ELIZABETH ARDEN, INC. AND SUBSIDIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
16. CONDENSED CONSOLIDATING FINANCIAL INFORMATION - (Continued)
For the Year Ended
Statement of Income January 31, 2001
Company Guarantors Eliminations Consolidated
-----------------------------------------------------------------
Net sales $ 378,229 $ 4,025 $ -- $ 382,254
Cost of sales 270,363 962 -- 271,325
--------- -------- ------ ---------
Gross profit 107,866 3,063 -- 110,929
--------- -------- ------ ---------
Operating expenses 57,261 750 -- 58,011
Depreciation and amortization 11,950 174 -- 12,124
--------- -------- ------ ---------
Income from operations 38,655 2,139 -- 40,794
Interest and other income (expense) (19,371) 104 -- (19,267)
--------- -------- ------ ---------
Income before income taxes 19,284 2,243 -- 21,527
Income taxes 7,590 501 -- 8,091
--------- -------- ------ ---------
Net income $ 11,694 $ 1,742 $ -- $ 13,436
========= ======== ====== =========
For the Year Ended
Statement of Cash Flow January 31, 2002
Company Guarantors Eliminations Consolidated
-------------------------------------------------------------
Cash Flow from Operating Activities:
Net cash provided by (used in) operating
Activities $ 9,834 $ (1,181) $ -- $ 8,653
------- --------- ----- ----------
Cash Flow from Investing Activities:
Additions to property and equipment, net of disposals (3,230) (6,742) -- (9,972)
Sale of trademarks and intangibles -- 6,529 -- 6,529
------- --------- ----- ----------
Net cash used in investing activities (3,230) (213) -- (3,443)
------- --------- ----- ----------
Cash Flow from Financing Activities:
Net proceeds from short-term debt (15,245) -- -- (15,245)
Payments on long-term debt (1,186) -- -- (1,186)
Proceeds from the exercise of stock options 2,184 -- -- 2,184
Proceeds from the exercise of stock purchase
warrants 8,288 -- -- 8,288
Repurchase of common stock (402) -- -- (402)
------- --------- ----- ----------
Net cash provided by financing activities (6,361) -- -- (6,361)
Effect of exchange rate changes on cash and cash
equivalents (631) -- -- (631)
Net decrease in cash and cash equivalents (388) (1,394) -- (1,782)
Cash and cash equivalents at beginning of year 4,004 13,691 -- 17,695
------- --------- ----- ----------
Cash and cash equivalents at end of year $ 3,616 $ 12,297 $ -- $ 15,913
======= ========= ===== ==========
46
ELIZABETH ARDEN, INC. AND SUBSIDIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
16. CONDENSED CONSOLIDATING FINANCIAL INFORMATION - (Continued)
For the Year Ended
Statement of Cash Flow January 31, 2001
Company Guarantors Eliminations Consolidated
------------------------------------------------------
Cash Flow from Operating Activities:
Net cash provided by (used in) operating
Activities $ 3,810 $ 13,691 $ -- $ 17,501
--------- --------- ------- ----------
Cash Flow from Investing Activities:
Additions to property and equipment, net of
disposals (5,207) -- -- (5,207)
Acquisition of Elizabeth Arden (204,676) -- -- (204,676)
--------- --------- ------- ----------
Net cash used in investing activities (209,883) -- -- (209,883)
--------- --------- ------- ----------
Cash Flow from Financing Activities:
Net proceeds from short-term debt 22,945 -- -- 22,945
Payments on long-term debt (4,118) -- -- (4,118)
Proceeds from the issuance of senior notes 160,000 160,000
Proceeds from the exercise of stock options 486 -- -- 486
Proceeds from the exercise of stock purchase
warrants 675 -- -- 675
Proceeds from the conversion of preferred stock 8,884 8,884
Repurchase of common stock (939) -- -- (939)
--------- --------- ------- ----------
Net cash provided by financing activities 187,933 -- -- 187,933
Net decrease in cash and cash equivalents (18,140) 13,691 -- (4,449)
Cash and cash equivalents at beginning of year 22,144 -- -- 22,144
--------- --------- ------- ----------
Cash and cash equivalents at end of year $ 4,004 $ 13,691 $ -- $ 17,695
========= ========= ======= ==========
17. RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2000, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF 00-14, "Accounting for Certain Sales Incentives", which
provides guidance on accounting for discounts, coupons, rebates and free
products, as well as the income statement classification of these discounts,
coupons, rebates and free products. EITF 00-14 is effective February 1, 2002 for
the Company. While the Company is currently evaluating the impact of this new
guidance, EITF 00-14 will result in a reclassification of certain advertising
and promotional costs from selling, general and administrative expense. As a
result it is expected that reported net revenues will decrease, cost of sales
will increase, and there will be offsetting decreases in selling, general and
administrative expenses.
In April 2001, the EITF reached a consensus on EITF 00-25, "Accounting
for Consideration from a Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendor's Products", which provides guidance on the income
statement classification of consideration from a vendor to a retailer in
connection with the retailer's purchase of the vendor's products or to promote
sales of the vendor's products. EITF 00-25 is effective February 1, 2002 for the
Company. While the Company is currently evaluating the impact of this new
guidance, EITF 00-25 will result in a reclassification of certain advertising
and promotional costs from selling, general and administrative expense. As a
result it is expected that reported net revenues will decrease, cost of sales
will increase, and there will be offsetting decreases in selling, general and
administrative expenses.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141 (FAS 141), "Business
Combinations" and No. 142 (FAS 142), "Goodwill and Other Intangible Assets". FAS
141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, establishes specific criteria for
the recognition of intangible assets separately from goodwill, and requires that
unallocated negative goodwill be written off immediately as an extraordinary
gain instead of being deferred and amortized. Provisions of FAS 141 will be
effective for the Company's business acquisitions that are consummated after
July 1, 2001. FAS 142 supersedes Accounting Principles Board Opinion No. 17,
"Intangible Assets", and addresses the accounting for goodwill and intangible
47
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
17. RECENTLY ISSUED ACCOUNTING STANDARDS - (Continued)
assets subsequent to their acquisition. Under FAS 142, goodwill and
indefinite-lived intangibles need to be reviewed for impairment at least
annually at the reporting unit level. In addition, the amortization period of
intangible assets with finite lives will no longer be limited to forty years.
The provisions of FAS 142 will be effective for the Company as of the beginning
of fiscal 2003. The Company is currently in the process of assessing the
potential impact of these new statements on its financial statements.
In October 2001, the FASB issued Statement of Financial Accounting
Standard No. 144 (FAS 144), "Accounting for the Impairment or Disposal of
Long-Lived Assets". The objectives of FAS 144 are to address significant issues
relating to the implementation of FASB Statement No. 121 (FAS 121), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of", and to develop a single accounting model, based on the framework
established in FAS 121, for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired. The provisions of FAS 144 will be
effective for the Company as of February 1, 2002. The Company does not expect
that the adoption of this will have a material affect on its financial
statements.
18. GEOGRAPHIC INFORMATION
The Company manages its business on the basis of one reportable
operating segment. The Company established non-U.S. subsidiaries to hold the
assets acquired as part of the Arden acquisition on January 23, 2001. Prior to
the Arden acquisition, the Company's international net sales were not material.
During the year ended January 31, 2002, the Company sold its products in over 90
countries outside the United States through its international affiliates and
subsidiaries with operations headquartered in Geneva, Switzerland. The Company's
international operations are exposed to volatility because of currency changes,
inflation changes and changes in political and economic conditions in the
countries in which it operates, and the value of international assets are
affected by fluctuations in foreign currency exchange rates. For a discussion of
foreign currency translation, see Note 1.
(Amounts in millions) Years Ended January 31,
2002 2001 2000
------------------------------------------------------
Net sales:
United States $512.4 $378.2 $358.2
International 219.1 4.1 3.0
------ ------ ------
Total $731.5 $382.3 $361.2
====== ====== ======
January 31,
2002 2001
--------------------------------
Long-lived assets:
United States $258.9 $280.5
International 9.1 7.8
------ ------
Total $268.0 $288.3
====== ======
Years Ended January 31,
2002 2001 2000
------------------------------------------------------
Classes of similar products (net sales):
Fragrance $542.5 $382.2 $361.2
Skin care 119.0 -- --
Cosmetics 70.0 -- --
------ ------ ------
Total $731.5 $382.3 $361.2
====== ====== ======
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required by this item has been previously reported in the
Company's Current Report on Form 8-K dated July 13, 2001, which was filed on
July 20, 2001, and will also be contained in the Company's Proxy Statement
relating to the 2002 Annual Meeting of Shareholders to be held on June 25, 2002.
48
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be contained in the Proxy
Statement and is incorporated herein by this reference or is included in Part I
under "Executive Officers of the Company".
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in the Proxy
Statement and is incorporated herein by this reference, provided that the
Compensation Committee Report and Performance Graph which is contained in the
Proxy Statement shall not be deemed to be incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in the Proxy
Statement and is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in the Proxy
Statement and is incorporated herein by this reference.
49
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements - The consolidated financial statements
and independent auditors' report are listed in the "Index to
Financial Statements and Schedules" on page 22 and included on
pages 23 through 48.
2. Financial Statement Schedules - All schedules for which provision
is made in the applicable accounting regulations of the
Securities and Exchange Commission (the "Commission") are either
not required under the related instructions, are not applicable
(and therefore have been omitted), or the required disclosures
are contained in the financial statements included herein.
3. Exhibits including those incorporated by reference.
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 May 13, 1997, between the Company and
HSBC Bank USA (formerly Marine Midland Bank), as trustee
(incorporated herein by reference to Exhibit 4.1 filed as part
of the Company's Form 8-K dated May 13, 1997 (Commission File
No. 1-6370)).
4.2 Second Supplemental Indenture, dated as of January 23, 2001, to
Indenture dated as of May 13, 1997, by and among the Company,
the guarantors signatory thereto and HSBC Bank USA, as trustee
(incorporated herein by reference to Exhibit 4.2 filed as part
of the Company's Registration Statement on Form S-4 on February
21, 2001 (Registration No. 333-55310)).
4.3 Indenture, dated as of April 27, 1998, between the Company and
HSBC Bank USA, as trustee (incorporated herein by reference to
Exhibit 4.1 filed as part of the Company's Form 8-K dated April
27, 1998 (Commission File No. 1-6370)).
4.4 Second Supplemental Indenture, dated as of January 23, 2001, to
Indenture dated as of April 27, 1998, by and among the Company,
the guarantors signatory thereto and HSBC Bank USA, as trustee
(incorporated herein by reference to Exhibit 4.4 filed as part
of the Company's Registration Statement on Form S-4 on February
21, 2001 (Registration No. 333-55310)).
4.5 Indenture, dated as of January 23, 2001, among the Company, FD
Management, Inc., DF Enterprises, Inc., FFI International,
Inc., Elizabeth Arden GmbH, as guarantors, and HSBC Bank USA,
as trustee (incorporated herein by reference to Exhibit 4.1
filed as part of the Company's Form 8-K dated February 7, 2001
(Commission File No. 1-6370)).
4.6 Amended and Restated Credit Agreement dated as of January 29,
2001 among the Company, the banks listed on the signature pages
thereto, Fleet National Bank, as administrative agent, issuing
bank and swingline lender, Credit Suisse First Boston, as
syndication agent, and Fleet Securities, Inc. and Credit Suisse
First Boston, as joint lead arrangers and joint book managers
(incorporated herein by reference to Exhibit 4.3 filed as part
of the Company's Form 8-K dated February 7, 2001 (Commission
File No. 1-6370)).
50
Exhibit
Number Description
------ ---------------------------------------------------------------
4.7 First Amendment to Amended and Restated Credit Agreement dated
as of July 20, 2001, between Fleet National Bank, as
administrative agent, the banks listed on the signature pages
thereto and the Company (incorporated herein by reference to
Exhibit 4.7 filed as part of the Company's Form 10-Q for the
quarter ended July 28, 2001 (Commission File No. 1-6370)).
4.8 Second Amendment to Amended and Restated Credit Agreement dated
as of March 13, 2002, between Fleet National Bank, as
administrative agent, the banks listed on the signature pages
thereto and the Company (incorporated herein by reference to
Exhibit 4.1 filed as part of the Company's Form 8-K dated March
13, 2002 (Commission File No. 1-6370)).
4.9 Amended and Restated Security Agreement dated as of January 29,
2001, made by the Company and certain of its subsidiaries in
favor of Fleet National Bank, as administrative agent
(incorporated herein by reference to Exhibit 4.5 filed as part
of the Company's Form 8-K dated February 7, 2001 (Commission
File No. 1-6370)).
4.10 Warrant Agreement, dated as of January 23, 2001, between the
Company and Mellon Investor Services, Inc. (incorporated herein
by reference to Exhibit 4.8 filed as part of Amendment No. 1 to
the Company's Registration Statement on Form S-4 on February
21, 2001 (Registration No. 333-55310)).
4.11 Security Agreement, dated as of January 23, 2001, made by the
Company and certain of its subsidiaries in favor of HSBC Bank
USA, as collateral agent (incorporated herein by reference to
Exhibit 4.4 of the Company's Form 8-K on February 7, 2001
(Commission File No. 1-6370)).
10.1 Registration Rights Agreement dated as of November 30, 1995,
among the Company, Bedford Capital Corporation, Fred Berens,
Rafael Kravec and Eugene Ramos (incorporated herein by
reference to Exhibit 10.1 filed as a part of the Company's Form
10-K for the fiscal year ended September 30, 1995 (Commission
File No. 1-6370)).
10.2 Amendment dated as of March 20, 1996 to Registration Rights
Agreement dated as of November 30, 1995, among the Company,
Bedford Capital Corporation, Fred Berens, Rafael Kravec and
Eugene Ramos (incorporated herein by reference to Exhibit 10.2
filed as a part of the Company's Form 10-K for the year ended
January 31, 1996 (Commission File No. 1-6370)).
10.3 Second Amendment dated as of July 22, 1996 to Registration
Rights Agreement dated as of November 30, 1995, among the
Company, Bedford Capital Corporation, Fred Berens, Rafael
Kravec and the Estate of Eugene Ramos (incorporated by
reference to Exhibit 10.3 filed as part of the Company's Form
10-Q for the quarter ended July 31, 1996 (Commission File No.
1-6370)).
10.4 2000 Stock Incentive Plan (incorporated herein by reference to
Exhibit E filed as a part of the Company's Proxy Statement on
December 12, 2000 (Commission File No. 1-6370)).
10.5 Amended Non-Employee Director Stock Option Plan (incorporated
herein by reference to Exhibit F filed as a part of the
Company's Proxy Statement on December 12, 2000 (Commission File
No. 1-6370)).
10.6 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)).
10.7 Asset Purchase Agreement, dated as of October 30, 2000, between
the Company and Conopco, Inc. (incorporated herein by reference
to Exhibit 10.6 of the Company's Form 10-Q for the quarter
ended October 31, 2000 (Commission File No. 1-6370)).
51
Exhibit
Number Description
------- ---------------------------------------------------------------
10.8 Amendment dated as of December 11, 2000 to the Asset Purchase
Agreement dated as of October 30, 2000, between the Company and
Conopco, Inc. (incorporated herein by reference to Exhibit 2.2
filed as part of the Company's Form 8-K dated February 7, 2001
(Commission File No. 1-6370)).
10.9 Second Amendment dated as of January 23, 2001 to the Asset
Purchase Agreement dated as of October 30, 2000, between the
Company and Conopco, Inc. (incorporated herein by reference to
Exhibit 2.3 filed as part of the Company's Form 8-K dated
February 7, 2001 (Commission File No. 1-6370)).
10.10 Third Amendment dated as of February 7, 2001, to the Asset
Purchase Agreement dated as of October 30, 2000, between the
Company and Conopco, Inc. (incorporated herein by reference to
Exhibit 10.11 filed as part of Amendment No. 1 to the Company's
Registration Statement on Form S-4 on February 21, 2001
(Registration No. 333-55310)).
10.11 Fourth Amendment dated as of February 21, 2001, to the Asset
Purchase Agreement dated as of October 30, 2000, between the
Company and Conopco, Inc. (incorporated herein by reference to
Exhibit 10.12 filed as part of Amendment No. 1 to the Company's
Registration Statement on Form S-4 on February 21, 2001
(Registration No. 333-55310)).
10.12 Fifth Amendment dated as of April 19, 2001, to the Asset
Purchase Agreement dated as of October 30, 2000, between the
Company and Conopco, Inc. (incorporated herein by reference to
Exhibit 10.12 of the Company's Form 10-K for the year ended
January 31, 2001 (Commission File No. 1-6370)).
10.13 Sixth Amendment dated as of July 13, 2001, to the Asset
Purchase Agreement dated as of October 30, 2000, between the
Company and Conopco, Inc. (incorporated herein by reference to
Exhibit 10.13 of the Company's Form 10-Q for the quarter ended
July 28, 2001 (Commission File No. 1-6370)).
12.1 Ratio of earnings to fixed charges.
16.1 Letter from Deloitte & Touche LLP regarding change in
Certifying Accountant (incorporated herein by reference to
Exhibit 16 of the Company's Form 8-K dated July 13, 2001
(Commission File No. 1-6370)).
21.1 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Deloitte & Touche LLP
_______________________
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.
None.
(c) Exhibits to Form 10-K.
See Item 14(a)3.
(d) Financial Statement Schedules.
See Item 14(a)2.
52
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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, as of the 26/th/ day
of April 2002.
ELIZABETH ARDEN, INC.
/s/ E. Scott Beattie
By: --------------------------------------
E. Scott Beattie
Chairman, President, Chief Executive
Officer and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ E. Scott Beattie
- ----------------------------- Chairman, President, Chief Executive April 26, 2002
E. Scott Beattie Officer and Director
(Principal Executive Officer)
/s/ Stephen J. Smith
- ----------------------------- Executive Vice President and Chief Financial Officer April 26, 2002
Stephen J. Smith (Principal Financial and Accounting Officer)
/s/ Fred Berens
- ----------------------------- Director April 27, 2002
Fred Berens
/s/ George Dooley
- ----------------------------- Director April 26, 2002
George Dooley
/s/ William M. Tatham May 1, 2002
- ----------------------------- Director
William M. Tatham
/s/ Richard C.W. Mauran
- ----------------------------- Director April 28, 2002
Richard C.W. Mauran
/s/ J.W. Nevil Thomas
- ----------------------------- Director April 29, 2002
J.W. Nevil Thomas
53
Exhibit Index
Exhibit No. Description
12.1 Ratio of earnings to fixed charges.
21.1 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Deloitte & Touche LLP