Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended January 31, 2004

OR

For the transition period from              to             

Commission File Number: 1-6370

Elizabeth Arden, Inc.

(Exact name of registrant as specified in its charter)

(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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

The aggregate market value of voting Common Stock held by non-affiliates of the registrant was approximately $169 million based on the closing price of the Common Stock on the NASDAQ National Market of $15.04 per share on July 25, 2003, the last business day of the registrant’s most recently completed second fiscal quarter 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 March 31, 2004, the registrant had 25,291,443 shares of Common Stock outstanding.

Documents Incorporated by Reference

Part III—Portions of the Registrant’s Proxy Statement relating to the 2004 Annual Meeting of Shareholders to be held on June 22, 2004.

Table of Contents

Elizabeth Arden, Inc.

TABLE OF CONTENTS

2

Table of Contents

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, WITH THE EXCEPTION OF ITEM 8. ANY STATEMENTS THAT ARE NOT HISTORICAL FACTS AND THAT EXPRESS, OR INVOLVE DISCUSSIONS AS TO, EXPECTATIONS, BELIEFS, PLANS, OBJECTIVES, ASSUMPTIONS OR FUTURE EVENTS OR PERFORMANCE (OFTEN, BUT NOT ALWAYS, THROUGH THE USE OF WORDS OR PHRASES SUCH AS “WILL LIKELY RESULT,” “ARE EXPECTED TO,” “WILL CONTINUE,” “IS ANTICIPATED,” “ESTIMATED,” “INTENDS,” “PLANS” AND “PROJECTION”) ARE NOT HISTORICAL FACTS AND MAY BE FORWARD-LOOKING AND MAY INVOLVE ESTIMATES AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING STATEMENTS. ACCORDINGLY, ANY SUCH STATEMENTS ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO, AND ARE ACCOMPANIED BY, THE FOLLOWING KEY FACTORS THAT HAVE A DIRECT BEARING ON OUR RESULTS OF OPERATIONS: OUR ABSENCE OF CONTRACTS WITH CUSTOMERS OR SUPPLIERS AND OUR ABILITY TO MAINTAIN AND DEVELOP RELATIONSHIPS WITH CUSTOMERS AND SUPPLIERS; INTERNATIONAL AND DOMESTIC ECONOMIC AND BUSINESS CHANGES THAT COULD IMPACT CONSUMER CONFIDENCE; THE IMPACT OF COMPETITIVE PRODUCTS AND PRICING; RISKS OF INTERNATIONAL OPERATIONS, INCLUDING FOREIGN CURRENCY FLUCTUATIONS, ECONOMIC AND POLITICAL CONSEQUENCES OF TERRORIST ATTACKS, POLITICAL INSTABILITY IN CERTAIN REGIONS OF THE WORLD, AND DISEASES AFFECTING CUSTOMER PURCHASING PATTERNS; OUR ABILITY TO LAUNCH NEW PRODUCTS AND IMPLEMENT OUR GROWTH STRATEGY; OUR ABILITY TO SUCCESSFULLY AND COST-EFFECTIVELY INTEGRATE ACQUIRED BUSINESSES OR NEW BRANDS; OUR SUBSTANTIAL INDEBTEDNESS, DEBT SERVICE OBLIGATIONS AND RESTRICTIVE COVENANTS IN OUR REVOLVING CREDIT FACILITY AND OUR INDENTURE FOR OUR 7 ³/4% SENIOR SUBORDINATED NOTES; OUR CUSTOMERS’ FINANCIAL CONDITION; OUR ABILITY TO ACCESS CAPITAL FOR ACQUISITIONS; CHANGES IN PRODUCT MIX TO LESS PROFITABLE PRODUCTS; THE RETENTION AND AVAILABILITY OF KEY PERSONNEL; THE ASSUMPTIONS UNDERLYING OUR CRITICAL ACCOUNTING ESTIMATES; DELAYS IN SHIPMENTS, INVENTORY SHORTAGES AND HIGHER COSTS OF PRODUCTION DUE TO INTERRUPTION OF OPERATIONS AT KEY THIRD PARTY MANUFACTURING OR FULFILLMENT FACILITIES THAT MANUFACTURE OR PROVIDE LOGISTIC SERVICES FOR THE MAJORITY OF OUR SUPPLY OF CERTAIN PRODUCTS; CHANGES IN THE RETAIL, FRAGRANCE AND COSMETIC INDUSTRIES; OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS; CHANGES IN THE LEGAL, REGULATORY AND POLITICAL ENVIRONMENT THAT IMPACT, OR WILL IMPACT, OUR BUSINESS, INCLUDING CHANGES TO CUSTOMS OR TRADE REGULATIONS OR ACCOUNTING STANDARDS; AND OTHER RISKS AND UNCERTAINTIES. WE CAUTION THAT THE FACTORS DESCRIBED HEREIN COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS WE MAKE AND THAT INVESTORS SHOULD NOT PLACE UNDUE RELIANCE ON ANY SUCH FORWARD-LOOKING STATEMENTS. FURTHER, ANY FORWARD-LOOKING STATEMENT SPEAKS ONLY AS OF THE DATE ON WHICH SUCH STATEMENT IS MADE, AND WE UNDERTAKE NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENT TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE ON WHICH SUCH STATEMENT IS MADE OR TO REFLECT THE OCCURRENCE OF ANTICIPATED OR UNANTICIPATED EVENTS OR CIRCUMSTANCES. NEW FACTORS EMERGE FROM TIME TO TIME, AND IT IS NOT POSSIBLE FOR US TO PREDICT ALL OF SUCH FACTORS. FURTHER, WE CANNOT ASSESS THE IMPACT OF EACH SUCH FACTOR ON OUR RESULTS OF OPERATIONS OR THE EXTENT TO WHICH ANY FACTOR, OR COMBINATION OF FACTORS, MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN ANY FORWARD-LOOKING STATEMENTS.

3

Table of Contents

PART I

ITEM 1.    BUSINESS

General

Elizabeth Arden, Inc., a corporation established in Florida in 1960, is a global prestige fragrance and beauty products company with an extensive portfolio of prestige fragrance, skin care and cosmetics brands. We market approximately 50 owned or licensed prestige fragrance brands, including Elizabeth Arden’s Red Door, Red Door Revealed, 5th Avenue, Elizabeth Arden green tea, ardenbeauty, Sunflowers and Elizabeth Arden Provocative Woman; Elizabeth Taylor’s White Diamonds, Passion, Forever Elizabeth and Gardenia; White Shoulders; Halston and Z-14; Geoffrey Beene’s Grey Flannel; PS Fine Cologne for Men; Design; and Wings. Our skin care brands include Ceramide, Eight Hour Cream and Overnight Success, and our cosmetics products include Elizabeth Arden brand lipstick, foundation and other color cosmetics products. In addition to our owned or licensed fragrance brands, we distribute over 250 additional prestige fragrance brands, primarily in the United States through distribution and other purchasing agreements.

We sell our prestige beauty products in more than 65,000 separate retail locations in the United States and internationally, including;

In the United States, we sell our Elizabeth Arden skin care and cosmetics products primarily in prestige department stores and our fragrances in prestige department stores and mass retailers. We also sell our Elizabeth Arden fragrances, skin care and cosmetics products in approximately 90 countries worldwide through perfumeries, boutiques, department stores and travel retail outlets such as duty free shops and airport boutiques.

Our net sales to customers in the United States and internationally in dollars and as a percentage of net sales for the past three fiscal years are listed in the following chart.

Our three largest foreign countries in terms of net sales during fiscal 2004 were the United Kingdom, with approximately $38 million, Canada, with approximately $22 million, and Spain, with approximately $19 million. Our three largest foreign countries in terms of net sales during fiscal 2003 were the United Kingdom, with approximately $35 million, Canada, with approximately $19 million and Spain, with approximately $16 million. Our three largest foreign countries in terms of net sales during fiscal 2002 were the United Kingdom, with approximately $35 million, Italy, with approximately $15 million and Canada, with approximately $14 million.

We offer our retail customers in the United States a broad portfolio of prestige beauty brands coupled with marketing and merchandising services that significantly enhance our customers’ sell-through of the products we sell them. We distinguish ourselves by tailoring the marketing, promotion, size and packaging of our prestige fragrances to appeal to a wide range of consumers.

4

Table of Contents

This tailoring uniquely allows us to sell the same brand in prestige department stores and mass retailers while maintaining its prestige image. We also provide many of our mass retailers in the United States additional valuable services, including category and inventory management and fulfillment services that our competitors do not typically offer. We believe that our breadth of products and level of services have enabled us to gain a leading share of the growing prestige fragrance category at mass retailers and to become an important and valued supplier for our customers. For example, we have been named by JCPenney as Supplier of the Year for the past five consecutive years and were awarded the “Supplier Award of Excellence” by Wal-Mart for the fourth quarter of calendar year 2002 in the cosmetic, fragrance, skincare and bath and body category.

On January 23, 2001, we acquired the Elizabeth Arden business, including the Elizabeth Arden line of fragrance, skin care and cosmetic brands, the license for the Elizabeth Taylor fragrance brands and the White Shoulders fragrance brand, from affiliates of Unilever N.V. Following the acquisition, we changed our name from French Fragrances, Inc. to Elizabeth Arden, Inc. As a result of this acquisition, our sales almost doubled from approximately $373 million in fiscal 2001 to approximately $668 million in fiscal 2002, our international sales also increased significantly from approximately $4 million in fiscal 2001 to approximately $203 million in fiscal 2002. Prior to this acquisition, we were involved primarily in the marketing and sales of prestige fragrance products in the United States, and international sales were not material.

Our principal executive offices are located at 14100 N.W. 60th Avenue, Miami Lakes, Florida 33014 and our telephone number is (305) 818-8000. We maintain a website with the address of www.elizabetharden.com. We are not including information contained on our website as part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission.

Business Strategy

Enhance Brand Performance.    We believe significant opportunities exist to increase the sales and profitability of our brands by reinvesting in the highly recognized Elizabeth Arden and Elizabeth Taylor brand names. In fiscal 2003, we launched the “Open for Beauty” brand image campaign for Elizabeth Arden, featuring our global spokesperson, Catherine Zeta-Jones, and our classic Red Door symbol. We believe this campaign reinforced the Elizabeth Arden brand heritage and contemporized the Elizabeth Arden brand globally. To capitalize on our brand recognition, we increased our advertising and the utilization of our spokesperson to promote our core product lines, such as Elizabeth Arden Red Door, Elizabeth Arden green tea and ardenbeauty fragrances, as well as our skin care and color lines. We also introduced a new Elizabeth Taylor fragrance, Forever Elizabeth, to capitalize on the strength of the Elizabeth Taylor brand name. During fiscal 2004, we launched a new Elizabeth Arden fragrance, Red Door Revealed, relaunched Elizabeth Arden green tea, and introduced several new skin care and color products, including Ceramide Plump Perfect, Overnight Success and Color Intrigue, a line of lipstick, and a new Elizabeth Taylor fragrance, Gardenia. During fiscal 2005, we are launching a new Elizabeth Arden fragrance, Elizabeth Arden Provocative Woman, and plan to launch several new skin care and color products and a new Britney Spears fragrance.

Grow the Prestige Fragrance Category with our Retail Partners.    We intend to increase the sales volume of our products and strengthen our relationships with our retail customers by continuing to develop innovative programs to help our customers maximize sales of our products. For example, in 2001, we introduced our innovative “open sell” packaging system to certain of our United States. and Canadian mass retail partners. We designed this system to allow retailers to display fragrances on open counters and shelves rather than in locked cases, thereby giving consumers easier access to our products, which has significantly increased sales of our products at

5

Table of Contents

these retailers. We believe that the “open sell” program and other merchandising innovations, such as our designer collectibles program, in which we sell small and travel sizes of prestige fragrances to certain U.S. mass retail accounts, will continue to drive sales growth for our retail customers. Additionally, we expect to capitalize on the growth of our largest mass retail customers both in the United States and, over time, internationally.

Improve Profitability and Working Capital Efficiencies.    We continue to pursue business efficiencies throughout the company, particularly in finance, logistics, supply chain and information technology areas. In addition, the acquisition of the Elizabeth Arden business significantly increased the scale of our international operations and continues to provide opportunities to improve operating efficiency by leveraging a larger sales and distribution platform. As we acquire additional prestige brands to sell in our international markets, we expect to further leverage that infrastructure and increase our profitability. Cash flow from operations should increase as we improve our working capital efficiencies, allowing us to reinvest those savings to support our brands through product innovation and increased advertising to stimulate growth and repay debt. Through February 2004, we reduced our long-term indebtedness by approximately $79.5 million from our ending fiscal 2003 balance, which is expected to lower our interest expense and provide us with greater financial flexibility.

Expand Selection of Distributed Fragrance Brands.    We intend to continue to develop our distribution business by increasing the number of prestige fragrance brands that we distribute. Our extensive distribution platform, our strong reputation with our retail customers and our relationships with leading fragrance houses provide us with opportunities to expand our line of distributed brands. We believe that increasing our line of distributed brands also further leverages our existing infrastructure and makes us a more attractive source of supply for our customers.

Acquire Control of Additional Prestige Fragrance Brands.    We intend to continue to opportunistically acquire control of additional prestige brands that enjoy established consumer loyalty and will complement our brand portfolio. We previously served as a distributor for several of the brands that we have acquired, including the brands acquired with the Elizabeth Arden business. We believe that our familiarity with our many distributed brands, along with our strong market presence, positions us to acquire and/or license these and other brands and integrate them seamlessly into our operations. The acquisition of brands enables us to leverage our logistics and sales infrastructure globally, generate higher gross margins and increase overall profitability. In January 2003, for example, we acquired the trademarks for the Wings prestige brand from The Procter & Gamble Company, which we were previously marketing in the United States under a license from Giorgio Beverly Hills, Inc., a subsidiary of Procter & Gamble. In June 2003, we entered into a licensing agreement to market a line of men’s fragrance for GANT AB, primarily in our international markets. In March 2004, we entered into an exclusive worldwide licensing agreement with Britney Brands, Inc. to develop and distribute a line of fragrance, cosmetics and skin care products under the Britney Spears name allowing us to target a younger global consumer. While we continuously review acquisition opportunities for prestige fragrance brands, we have no commitments or agreements for any acquisitions at this time.

Products

Fragrance.    We offer a wide variety of fragrance products for both men and women, including perfume, cologne, eau de toilette, body spray and gift sets. Each fragrance is sold in a variety of sizes and packaging arrangements. In addition, bath and body products, such as soaps, deodorants, body lotions, gels, creams and dusting powder that are based on the particular fragrance, may complement each fragrance line. We tailor the size and packaging of the fragrance to suit the particular target customer. Our fragrance products generally retail at prices ranging from $8 to $105, depending on the size and type of the product.

6

Table of Contents

Our owned and licensed fragrance brands include the Elizabeth Arden brands, such as Elizabeth Arden’s Red Door, Red Door Revealed, 5th Avenue, Elizabeth Arden green tea, ardenbeauty, Elizabeth Arden Provocative Woman and Sunflowers; Elizabeth Taylor’s White Diamonds, Passion, Forever Elizabeth and Gardenia; White Shoulders; the Halston brands, such as Halston and Z-14; Geoffrey Beene’s Grey Flannel; PS Fine Cologne for Men; Design; and Wings. In addition to the approximately 50 brands we own and license, we also distribute over 250 fragrances under brands manufactured by others, principally to mass retailers. For fiscal 2004, net sales of fragrance and ancillary products amounted to $622.5 million, or approximately 76% of our net sales. For fiscal 2003, net sales of fragrance and ancillary products amounted to $579.0 million, or approximately 77% of our net sales. For fiscal 2002, net sales of fragrance and ancillary products amounted to $505.3 million, or approximately 76% of our net sales.

Skin care.    Our skin care lines include a broad range of products for both men and women, such as moisturizers, creams, lotions, and cleansers. Our skin care products under the Elizabeth Arden brand name include the product lines Ceramide, and Eight Hour Cream, and products such as First Defense and Overnight Success. We sell skin care products internationally and in the United States primarily in prestige department stores and, to a lesser extent, through independently owned and operated Elizabeth Arden Red Door salons and stores. Our skin care products generally retail at prices ranging from $13 to $84. We frequently market skin care products with samples or gifts. Skin care products accounted for $122.4 million, or approximately 15%, of our net sales for fiscal 2004. Skin care products accounted for $110.8 million, or approximately 15%, of our net sales for fiscal 2003. Skin care products accounted for $104.3 million, or approximately 16%, of our net sales for fiscal 2002.

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 primarily in department stores and, to a lesser extent, through independently owned and operated Elizabeth Arden salons and stores. Our cosmetic products generally retail at prices ranging from $10 to $30. Cosmetics accounted for $69.6 million, or approximately 9%, of our net sales for fiscal 2004. Cosmetics accounted for $62.2 million, or approximately 8%, of our net sales for fiscal 2003. Cosmetics accounted for approximately $58.5 million, or approximately 8%, of our net sales for fiscal 2002.

Trademarks, Licenses and Patents

We own or have rights to use the trademarks necessary for the manufacturing, marketing, distribution and sale of numerous fragrance, cosmetic and skin care brands, including Elizabeth Arden’s Red Door, Red Door Revealed, ardenbeauty, 5th Avenue, Visible Difference, First Defense and Millenium, White Shoulders, Halston, Z-14, PS Fine Cologne for Men, Design and Wings. 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, Elizabeth Taylor’s Passion, Forever Elizabeth and Gardenia), the Geoffrey Beene fragrance brands (including Grey Flannel) and a new line of fragrances under the GANT and Britney Spears names. The Taylor license agreement terminates in October 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. The GANT license terminates four years after notice from either party. The Spears license terminates in December 2009, and is renewable by us, at our sole option, for a 5-year term.

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.

7

Table of Contents

A number of our skin care and cosmetic 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 acquisition of the Elizabeth Arden business, 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 two of our United States subsidiaries.

Sales and Distribution

We sell our prestige beauty products to more than 65,000 separate retail locations, including department stores such as The May Company, Federated Department Stores, Dillard’s, JCPenney, Belk and Nordstrom; mass retailers such as Wal-Mart, Target, Sears, Kohl’s, Walgreens, Rite-Aid and CVS; and international retailers such as Boots, Debenhams, Marionnaud and Sephora. 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 department stores. We also sell our Elizabeth Arden fragrances, skin care and cosmetic products in approximately 90 other countries worldwide through perfumeries, pharmacies, department stores, 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 offices in Geneva, Switzerland.

We also sell our Elizabeth Arden products in the Elizabeth Arden and Red Door beauty salons, which are owned and operated by an unrelated third party. In addition to the sales price of the products sold to the operator of these salons, we receive a licensing fee based on the net sales from each of the salons for the use of the “Elizabeth Arden” or “Red Door” name.

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. For many of our mass retailers in the United States and Canada, we sell basic products in hard plastic clam packs that deter theft and permit the products to be sold in open displays. This “open sell” program has been rolled out to more than 5,000 retail doors. In addition, 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 shipping” directly to their stores and by fulfilling their sales of beauty products over the Internet. We maintain sufficient quantities of inventory of our owned, licensed and distributed brands to meet customers’ rapid delivery requirements. We also ship our products directly to consumers for several of our customers’ web-based operations, including Walmart.com and JCPenney.com. Sales over the Internet are not material to our results of operations.

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, and our ability to provide value-added services, including our category management services, to U.S. mass retailers.

Our ten largest customers accounted for approximately 40% of net sales for fiscal 2004. The only customer that accounted for more than 10% of our net sales during that period was Wal-Mart, which, on a global basis, accounted for approximately 15% of our net sales. The loss of, or a significant adverse change in, our relationship with any of our largest customers could have a material adverse effect on our business, prospects, results of operations or financial condition.

The industry practice for businesses that market beauty products has been to grant certain department stores, subject to the seller’s authorization and approval, the right to either return

8

Table of Contents

merchandise or to receive a markdown allowance for certain promotional products. We establish estimated return reserves and markdown allowances at the time of sale based upon historical and projected experience, economic trends and changes in customer demand. Our reserves and allowances are reviewed and updated as needed during the year, and additions to these reserves and allowances may be required. Additions to our reserves and allowances may have a negative impact on our financial results. We have a dedicated sales organization to sell returned products.

Marketing

Our marketing approach emphasizes a consistent global image for our brands, and each of our fragrance, skin care and cosmetics products is distinctively positioned and is marketed with consistent logos and packaging. We use print, television and radio advertising, as well as point-of-sale merchandising, including displays and sampling.

In fiscal 2003, we launched a brand image campaign for Elizabeth Arden, “Open for Beauty,” featuring our global spokesperson, Catherine Zeta-Jones, and our classic Red Door symbol. This campaign was intended to reinforce the Elizabeth Arden brand heritage and contemporize the Elizabeth Arden brand globally. To capitalize on this brand repositioning, we increased our advertising and the utilization of our spokesperson to promote our core product franchises. In fiscal 2004, we launched several new skin care products, including Ceramide Plump Perfect, Overnight Success and First Defense, a new line of lipstick, Color Intrigue, a new Elizabeth Arden fragrance, Red Door Revealed, and a new Elizabeth Taylor fragrance, Gardenia. We have plans for several launches in fiscal 2005, including an Elizabeth Arden fragrance, Elizabeth Arden Provocative Woman, several skin care and color products and a new Britney Spears fragrance. In fiscal 2003, we introduced a new Elizabeth Taylor fragrance, Forever Elizabeth, to capitalize on the strength of the Elizabeth Taylor brand name. In addition, we introduced several new skin care and color items, including two new Ceramide products, Peel and Reveal Revitalization Treatment and Eight Hour Cream Lip Tints, and updated our cosmetics line internationally. New product introduction is an important element in attracting consumers to our brands and in creating brand excitement with our retail customers. Our marketing personnel work closely with customers to develop new products and extensions of our well-established brands. Product development costs have not been material during the last three fiscal years.

Our marketing efforts also benefit from cooperative advertising programs with our retailers, often linked with particular promotions. In our department store accounts, 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 also 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 the 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.

Seasonality

Our operations have historically been seasonal, with higher sales occurring in the second half of the fiscal year as a result of increased demand by retailers in anticipation of and during the holiday season. In fiscal 2004, approximately 66% of our net sales were made during the second half of the fiscal year. Due to the size and timing of certain orders from our customers, sales, results of operations, working capital requirements and cash flows can vary significantly between quarters of

9

Table of Contents

the same and different years. As a result, we expect to experience variability in net sales, net income, working capital requirements and cash flows on a quarterly basis.

Manufacturing, Supply Chain and Logistics

We use third-party contract manufacturers in the United States and Europe to obtain substantially all raw materials, components and packaging products and to manufacture finished products relating to our owned and licensed brands. The Elizabeth Arden and Elizabeth Taylor fragrance and skin care products are manufactured in a manufacturing plant in Roanoke, Virginia, primarily by Cosmetic Essence, Inc., an unrelated third party, under a manufacturing agreement that expires on January 31, 2007. Pricing is based on fixed and variable costs that are established annually. We also have a small manufacturing facility in South Africa primarily to manufacture local requirements of our products.

Except for the Cosmetic Essence, Inc. manufacturing agreements, as is customary in our industry, we generally do not have long-term or exclusive agreements with contract 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 36% of our cost of sales for fiscal 2004. The loss of, or a significant adverse change in our relationship with any of our key fragrance manufacturers for our owned and licensed brands such as Cosmetic Essence, Inc. or suppliers of distributed fragrance brands could have a material adverse effect on our business, prospects, results of operations or financial condition.

Our United States fulfillment operations and fulfillment operations for certain other areas of the world are conducted out of, and a large portion of our inventory is located in, our Roanoke, Virginia distribution facility that we lease. Distribution operations out of our Miami Lakes facility were consolidated into the Roanoke facility by March 2004. The Roanoke facility was expanded in fiscal 2004 to approximately 400,000 square feet in order to accommodate the consolidated distribution activities. Our fulfillment operations for Europe are conducted by CEPL, an unrelated third party, through a logistics services agreement at CEPL’s facility in Beville, France. The agreement expires in May 2005, but is automatically renewable for an additional one-year period unless either party gives nine months notice of termination prior to the end of the term. Our Canadian fulfillment operations are conducted by McKesson Outsource Logistics, an unrelated third party, from their facility in Toronto, Canada. The agreement expires in May 2006 and may be terminated by either party upon nine months notice prior to the end of the term. The loss of any of these distribution facilities, as well as the inventory stored in those facilities, would require us to find replacement facilities and inventory and could have a material adverse effect on our business, prospects, results of operations or financial condition.

Government Regulation

We and our products are subject to regulation by the Food and Drug Administration and the Federal Trade Commission in the United States, as well as by various other Federal, state, local and international regulatory authorities in the countries in which our products are produced or sold. Such regulations principally relate to the ingredients, labeling, packaging and marketing of our products. We believe that we are in substantial compliance with such regulations, as well as with applicable Federal, state, local and international and other countries’ rules and regulations governing the discharge of materials hazardous to the environment. There are no significant capital expenditures for environmental control matters either planned in the current year or expected in the near future. Regulations that are designed to protect consumers or the environment have an influence on our products.

10

Table of Contents

Management Information Systems

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. We completed the conversion of all primary order processing systems to a common platform in March 2004 as part of the consolidation of our United States distribution and warehouse operations in Roanoke, Virginia. Our information systems also support our customers’ retail sales over the Internet. We manage our information technology infrastructure under various outsourcing agreements with unrelated third-party providers.

We have back-up facilities to enhance the reliability of our management information systems. These facilities will allow us to continue to operate if our main facilities should fail. We also have a data recovery plan, which has been successfully tested, to protect our operations and customer information. We also have business interruption insurance to cover a portion of any disruption in or destruction of our management information systems.

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 brand support and in-store customer support. We compete with a large 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 that 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 1, 2004, we had approximately 1,600 full-time employees and approximately 550 part-time employees in the United States and 14 foreign countries. None of our employees are covered by a collective bargaining agreement. We believe that our relationship with our employees is satisfactory.

11

Table of Contents

Executive Officers of the Company

The following sets forth the names and ages of each of our executive officers as of April 1, 2004 and the positions they hold:

Each of our executive officers holds office for such terms as may be determined by our board of directors.

Set forth below is a brief description of the business experience of each of our executive officers.

E. Scott Beattie has served as Chairman of the Board of Directors since April 2000, as our 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 from April 1997 to March 2003, as our Chief Operating Officer from April 1997 to March 1998, and as our Vice Chairman of the Board of Directors and Assistant Secretary 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 and a member of the advisory board of the Ivey Business School.

Paul F. West has served as our President and Chief Operating Officer since March 2003, as our Executive Vice President and Chief Operating Officer from November 2000 until March 2003, 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. Prior to joining the company, Mr. West worked in various management capacities for divisions of Unilever N.V., including Chesebrough Ponds, Inc. and the Elizabeth Arden Company, where he served as Chief Financial Officer from September 1989 to May 1996.

Stephen J. Smith 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.

Michael H. Lombardi has served as our Executive Vice President, Operations since March 2004, as our Senior Vice President, Operations since February 2002 and as Senior Vice President, Marketing/Supply Chain Operations with the Elizabeth Arden Company, a division of Unilever N.V., since April 1999. Prior to joining the Elizabeth Arden Company, Mr. Lombardi worked in various management capacities for Chesebrough Ponds, Inc., a division of Unilever N.V..

Oscar E. Marina has served as our Executive Vice President, General Counsel and Secretary since March 2004, as our Senior Vice President, General Counsel and Secretary from March 2000 through February 2004, and as our Vice President, General Counsel and Secretary from March 1996 through March 2000. From October 1988 until March 1996, Mr. Marina was an attorney with the law firm of Steel Hector & Davis L.L.P. in Miami, becoming a partner of the firm in January 1995.

12

Table of Contents

Ronald L. Rolleston has served as our Executive Vice President, Global Marketing since April 2003, as our Executive Vice President, Global Marketing and Prestige Sales from February 2002 until April 2003, as our Senior Vice President, Global Marketing from February 2001 through January 2002, and as our Senior Vice President, Prestige Sales from March 1999 through 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 has served as our Executive Vice President and Chief Administrative Officer since March 2004, as our Senior Vice President and Chief Administrative Officer from February 2001 through February 2004 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.

Jacobus A.J. Steffens has served as our Executive Vice President, General Manager— International since March 2004 and as our Senior Vice President, General Manager—International since joining us in January of 2001 through February 2004. Before joining the company, Mr. Steffens worked in various management capacities for divisions of Unilever N.V., including as the Chief Information Officer of Unilever’s European Ice Cream & Frozen Foods division from January 1997 until December 2000, as the Controller Global Marketing & Creative at the Elizabeth Arden Company from January 1992 until December 1995 and in various financial roles for Unilever’s Quest International Flavours and Fragrances division from the end of 1986 until December 1991.

ITEM 2.    PROPERTIES

United States.    Our corporate headquarters are located in Miami Lakes, Florida, in a building we own on a 13-acre tract of land. The Miami Lakes facility contains approximately 200,000 square feet of distribution and warehouse space and approximately 30,000 square feet of office space. We stopped customer shipments out of our Miami Lakes facility in January 2004 and consolidated our fulfillment operations in our Roanoke, Virginia distribution facility by March 2004. We are planning to sell our Miami Lakes facility. If and when we sell the Miami Lakes facility, we intend to lease offices in the South Florida area to house the employees that are not affected by the consolidation.

Our Roanoke, Virginia distribution facility consists of approximately 400,000 square feet and is leased through September 2013. We lease a 76,000 square foot warehouse in Roanoke to coordinate returns processing whose term expires in February 2005 and a 64,000 square foot warehouse in Roanoke under a lease that expires in June 2005.

We lease 62,000 square feet of general office space in Stamford, Connecticut under a lease that expires October 2011. We lease general offices for our Elizabeth Arden marketing operations in New York City under a lease that expires in April 2016

International.    Our international operations are headquartered in offices in Geneva, Switzerland under a lease that expires in December 2007. 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 small distribution facility in Puerto Rico. We also own a small manufacturing facility in South Africa primarily to manufacture local requirements of our products.

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

13

Table of Contents

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 $41 million at January 31, 2004) against each of Unilever and us, plus punitive damages of Canadian $35 million (approximately US $26 million at January 31, 2004). 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

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended January 31, 2004.

PART II

ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

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. 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, 2002 through January 31, 2004.

Holders.    As of March 26, 2004, there were 438 record holders of our common stock. The number of record holders does not include beneficial owners of common stock whose shares are held in the names of banks, brokers, nominees or other fiduciaries.

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 bank credit facility prohibits the payment of cash dividends, and the indentures relating to our 7 ³/4% Senior Subordinated Notes Due 2014 restrict our ability to pay cash dividends based upon our ability to satisfy certain financial covenants, including a fixed charge coverage ratio and a net income test, and certain other covenants. See Notes 8 and 9 to Notes to Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

14

Table of Contents

Series D Convertible Preferred Stock.    As part of the consideration for the Elizabeth Arden business 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 was entitled to convert up to 33.3% of its shares after January 23, 2002, up to 66.6% after January 23, 2003 and up to 100% after January 23, 2004. In addition, cumulative dividends of 5% of the outstanding liquidation value of Series D convertible preferred stock began to accrue on January 23, 2003 and will be payable, at our option and subject to restrictions on the payment of dividends under our bank credit facility and senior subordinated note indenture, in cash or in additional shares of Series D convertible preferred stock, quarterly in arrears, commencing March 15, 2003. During fiscal 2004, we issued to the holder of the Series D convertible preferred stock an additional 18,621 shares of Series D convertible preferred stock as a dividend. 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 14 to the Notes to Consolidated Financial Statements.

Conversion of Preferred Stock.    On October 22, 2003, an affiliate of Unilever converted 208,340 shares (representing $25 million of aggregate liquidation preference) of Series D convertible preferred stock into 2,083,340 shares of our common stock, 2,083,333 shares of which were sold in a public offering on that date. As a result of the conversion of the Series D convertible preferred stock and sale of the common stock by the Unilever affiliate, our shareholders’ equity increased by approximately $8.3 million and the balance recorded in the convertible, redeemable preferred stock Series D account on our consolidated balance sheet was reduced by the same amount. In addition, the accretion of the Series D convertible preferred stock converted was accelerated in the amount of $18.6 million, resulting in a non-cash charge to net loss attributable to common shareholders on our consolidated statements of operations for fiscal 2004.

Equity Compensation Plan Information

The following table sets forth information concerning common stock of the company authorized for issuance under our compensation plans at January 31, 2004:

Issuer Purchases of Equity Securities

We did not purchase any of our common stock during the fourth quarter of fiscal 2004.

15

Table of Contents

ITEM 6.    SELECTED FINANCIAL 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.

16

Table of Contents

The following is a reconciliation of net income (loss), as determined in accordance with generally accepted accounting principles, to EBITDA:

17

Table of Contents

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the consolidated financial statements and the accompanying notes which appear elsewhere in this document.

Overview

We are a global prestige fragrances and beauty products company. We sell our products to over 65,000 separate locations worldwide, including in the United States in department stores and mass retailers, as well as internationally in prestige department stores, perfumeries, boutiques and travel retail locations. We have established ourselves as a source of over 300 fragrance brands through brand ownership, brand licensing and distribution arrangements. In addition to the approximately 50 prestige fragrance brands we own and license, we also distribute over 250 prestige fragrance brands principally to mass retailers in the United States. Our portfolio of owned and licensed fragrance brands includes Elizabeth Arden’s Red Door, Red Door Revealed, ardenbeauty, 5th Avenue, Elizabeth Arden green tea, Sunflowers and Elizabeth Arden Provocative Woman, Elizabeth Taylor’s White Diamonds, Passion, Forever Elizabeth and Gardenia; White Shoulders; Halston and Z-14; Geoffrey Beene’s Grey Flannel; PS Fine Cologne for Men; Design; and Wings. Our skin care brands include Ceramide, Eight Hour Cream and First Defense, and our cosmetics products include lipstick, foundation and other color cosmetics products under the Elizabeth Arden brand.

We offer our retail customers in the United States a broad portfolio of prestige beauty brands coupled with marketing and merchandising services to enhance sell-through of the products we sell to our customers. We distinguish ourselves by tailoring the marketing, promotion, size and packaging of our prestige fragrances to appeal to a wide range of consumers. This tailoring allows us to sell the same brand in prestige department stores and mass retailers while maintaining its prestige image. We also provide many of our mass retailers in the United States additional valuable services, including category and inventory management and fulfillment services that our competitors do not typically offer. We believe that our breadth of products and level of services have enabled us to gain a leading share of the growing prestige fragrance category at mass retailers and to become an important and valued supplier for our customers.

Our business strategy to increase sales and profitability is based on increasing the sales of our core brands through new product launches and increased advertising and marketing activities, growing the prestige fragrance category with our retail customers through innovative programs, expanding the offering of prestige fragrance products to these retailers through new owned or licensed products as well as through expanding the selection of prestige fragrances that we distribute on behalf of other beauty companies, acquiring control of additional prestige fragrance brands through licensing opportunities and acquisitions, and pursuing opportunities to improve profitability and working capital efficiencies.

We manage our business by evaluating net sales, EBITDA (as defined in Note 4 under Item 6 “Selected Financial Data”) and working capital utilization (including through the levels of inventory and accounts receivable) and borrowings under our credit facility. We encounter a variety of challenges that may affect our business and should be considered along with the information presented in the section “Forward-Looking Information and Factors That May Affect Future Results.” These factors include the absence of contracts with our key customers and suppliers, changes in customer demands and preferences for prestige beauty products, in general, and for prestige fragrances, in particular, as approximately 76% of our net sales are of prestige fragrances, the risks of international operations including the impact of foreign currency rates, the retail performance of our retail customers, their commitment to the prestige fragrance and beauty category and their execution of that category, competition, the efficient operation of our worldwide organization and our level of indebtedness.

18

Table of Contents

In fiscal 2004, we successfully recapitalized our balance sheet through a public offering of our common stock and the refinancing of our long term debt. We completed a public offering of common stock in October 2003 and used the proceeds to redeem a portion of our 11 ³/4% senior notes due 2011. By February 2004, we redeemed substantially all of the remaining 11 ³/4% senior notes and all of the 10 ³/8% senior notes due 2007 with the net proceeds of a new issue of 7 ³/4% senior subordinated notes due 2014, borrowings from our revolving credit facility and free cash flow. The refinancing of our high cost senior notes with our new 7 ³/4% senior subordinated notes allowed us to: (i) lock in long-term interest rates at historically low levels; (ii) remove restrictive covenants in the indenture for our 11 ³/4% senior notes; (iii) remove the collateral securing our 11 ³/4% senior notes; (iv) extend the maturity of our long-term debt; and (v) and is expected to result in a $13 million reduction in interest expense in fiscal 2005. As a result of our improved operating performance in fiscal 2004 and 2003 and the equity financing which improved our balance sheet, our corporate credit rating was upgraded to B1 and B+ from B2 and B by the credit agencies Moody’s Investors Service in May 2003 and Standard & Poor’s in October 2003, respectively.

In fiscal 2004, we also consolidated all of our U.S. distribution and warehouse operations to our newly-expanded facility in Roanoke, Virginia and we completed the conversion of all primary order processing systems to a common platform in March 2004. This consolidation is expected to lower freight, labor, insurance and other overhead expenses, as well as improve working capital efficiencies through a reduction of duplicate inventory and enhanced order processing. We expect to realize estimated savings of approximately $2 to $4 million in fiscal 2005 and approximately $4 to $6 million on an annual basis for the fiscal years thereafter compared to fiscal 2004. Finally, we had several new product introductions, including the skin care product Ceramide Plump Perfect and a color product, Color Intrigue, and the fragrances Red Door Revealed and Gardenia, all of which contributed to our net sales growth in fiscal 2004.

In fiscal 2004, we also implemented a number of initiatives to improve our cash collection efforts, including focusing our cash collection activities on certain key accounts and improving the accuracy of our order processing and transmission orders to reduce customer deductions and charge-backs. In addition, we were also able to reduce our inventory balances at the end of fiscal 2004 as compared to the end of fiscal 2003 by implementing key inventory reduction initiatives, including tightening purchasing activities and identifying methods of reducing inventory lead times.

In fiscal 2004, net sales increased 8.3% compared to fiscal 2003 as a result of the favorable impact of foreign currency rates, which represents 4% of the increase, increased sales to U.S. mass retail accounts and new product launches. Selling, general and administrative expenses increased 12.1% during fiscal 2004 compared to fiscal 2003 as a result of additional advertising to support new product launches and higher development costs, increased selling costs, the impact of foreign currency rates and the restructuring charge associated with the consolidation of our U.S. distribution facilities. In fiscal 2005, we anticipate increasing our expenditures for advertising and promotional activities by utilizing a portion of the anticipated savings in interest expense associated with the debt refinancing activities. Debt extinguishment charges of $34.8 million associated with the redemption of senior notes resulted in a net loss for fiscal 2004 compared to net income in fiscal 2003. In addition, net loss attributable to common shareholders in fiscal 2004 increased due to an $18.6 million charge related to the accelerated accretion on the Series D convertible preferred stock which was converted into common stock sold by an affiliate of Unilever in our equity offering in October 2003. If the Unilever affiliate converts the remaining Series D convertible preferred stock into common stock and sells the stock in fiscal 2005, we would incur an additional charge for accelerated accretion on the Series D convertible preferred stock relating to the amounts converted.

Critical Accounting Policies and Estimates

We consider the following accounting policies important in understanding our operating results and financial condition. For additional accounting policies, see Note 1 to the Notes to Consolidated Financial Statements—“General Information and Summary of Significant Accounting Policies” for the application of these and other accounting policies.

19

Table of Contents

Accounting for Acquisitions.    We have accounted for our acquisitions, including the acquisition of the Elizabeth Arden business, under the purchase method of accounting for business combinations. Under the purchase method of accounting, the cost, including transaction costs, are allocated to the underlying net assets, based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.

The judgments made in determining the estimated fair value and expected useful lives assigned to each class of assets and liabilities acquired can significantly affect net income. For example, different classes of assets will have useful lives that differ—the useful life of property, plant, and equipment acquired will differ substantially from the useful life of brand licenses and trademarks. Consequently, to the extent a longer-lived asset is ascribed greater value under the purchase method than a shorter-lived asset, net income in a given period may be higher.

Determining the fair value of certain assets and liabilities acquired is judgmental in nature and often involves the use of significant estimates and assumptions. One of the areas that require more judgment is determining the fair values and useful lives of intangible assets. To assist in this process, we often obtain appraisals from independent valuation firms for certain intangible assets.

Our intangible assets generally consist of exclusive brand licenses and trademarks. We do not carry any goodwill. The value of our intangible assets, including brand licenses, trademarks and intangibles, is exposed to future adverse changes if we experience declines in operating results or experience significant negative industry or economic trends. We periodically review intangible assets, at least annually or more often as circumstances dictate, for impairment and the useful life assigned using the guidance of applicable accounting literature.

In fiscal 2003, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets.” In accordance with SFAS No. 142, we have determined that the Elizabeth Arden trademarks have indefinite useful lives as cash flows from the use of the trademarks are expected to be generated indefinitely. During fiscal 2004, we completed our annual impairment testing of these assets with the assistance of a third party valuation firm. The analysis and assessments of these assets indicated that no impairment adjustment was required.

Revenue Recognition.    Sales are recognized when title and risk of loss transfers to the customer and collectibility of the resulting receivable is probable. Sales are recorded net of estimated returns and other allowances. The provision for sales returns represents management’s estimate of future returns based on historical experience and considering current external factors and market conditions.

Allowances for Sales Returns and Markdowns.    As is customary in the prestige beauty business, we grant certain of our customers, subject to our authorization and approval, the right to either return product or to receive a markdown allowance for certain promotional product. Upon sale, we record a provision for product returns and markdowns estimated based on our historical and projected experience, economic trends and changes in customer demand. There is considerable judgment used in evaluating the factors influencing the allowance for returns and markdowns, and additional allowances in any particular period may be needed.

Allowances for Doubtful Accounts Receivable.    We maintain allowances for doubtful accounts to cover uncollectible accounts receivable, and we evaluate our accounts receivable to determine if they will ultimately be collected. This evaluation includes significant judgments and estimates, including an analysis of receivables aging and a customer-by-customer review for large accounts. If, for example, the financial condition of our customers deteriorates resulting in an impairment of their ability to pay, additional allowances may be required.

Provisions for Inventory Obsolescence.    We record a provision for estimated obsolescence and shrinkage of inventory. Our estimates consider the cost of inventory, forecasted demand, the

20

Table of Contents

estimated market value, the shelf life of the inventory and our historical experience. If there are changes to these estimates, additional provisions for inventory obsolescence may be necessary.

Stock-Based Compensation.    We account for our stock-based compensation under the recognition and measurement principles prescribed by Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No stock-based compensation cost is reflected in net income for employee and director option grants, as such grants had an exercise price equal to the market value of the underlying common stock on the date of grant. The pro forma effect on net income (loss) and diluted earnings (loss) per common share for fiscal 2004, 2003 and 2002 is set forth in Note 1 to the Notes to Consolidated Financial Statements “General Information and Summary of Significant Accounting Policies—Stock-Based Compensation.”

Income Taxes and Valuation Reserves.    A valuation allowance may be required to reduce deferred tax assets to the amount that is more likely than not to be realized. We consider projected future taxable income and ongoing tax planning strategies in assessing a potential valuation allowance. In the event we determine that we may not be able to realize all or part of our deferred tax asset in the future, or that new estimates indicate that a previously recorded valuation allowance is no longer required, an adjustment to the deferred tax asset would be charged or credited to net income in the period of such determination.

RESULTS OF OPERATIONS

The following discussion compares the historical results of operations for fiscal 2004, 2003 and 2002. Results of operations are in thousands and as a percentage of net sales were as follows (percentages may not add due to rounding):

21

Table of Contents

Fiscal Year Ended January 31, 2004 Compared to Fiscal Year Ended January 31, 2003

Net Sales.    Net sales increased approximately 8.3% for fiscal 2004 over fiscal 2003. The sales increase was driven by the favorable impact of foreign currency rates, increased fragrance sales to our mass retail customers, new product launches and strength in certain international markets. These increases were partially offset by lower sales to certain U.S. department store accounts, including a planned reduction in promotional sales to department store accounts to reduce related promotional costs, and lower international sales due to the severe acute respiratory syndrome “SARS” epidemic and the Iraqi war, which impacted Asia and the travel retail business in the first half of the fiscal year, and economic weakness in most continental European markets.

Gross Profit.    Gross profit increased 9.2% for fiscal 2004 over fiscal 2003. The increase in gross profit was principally due to higher net sales, favorable impact of foreign currency rates, lower supply chain and distribution costs and lower “gift with purchase” costs, partially offset by a greater proportion of sales of distributed brands, which have lower gross margins than owned and licensed brands. Gross margins increased to 41.2% in fiscal 2004 from 40.9% in fiscal 2003.

SG&A.    Selling, general and administrative expenses increased 12.0% for fiscal 2004 over fiscal 2003. The increase was due principally to additional advertising to support product launches and higher product development costs, increased selling costs, the adverse impact of foreign currency rates and a $2.3 million restructuring charge related to the consolidation of our U.S. distribution facilities, which was announced in November 2003 and was substantially completed in March 2004. The unfavorable impact of foreign currency transaction gains contributed approximately $3.0 million to the increase in selling, general and administrative expenses versus the prior year. These increases were partially offset by reduced overhead expenses from management initiatives and lower information technology costs. The increase in selling, general and administrative expenses as a percentage of net sales reflects the increased advertising and product development costs, unfavorable foreign currency exchange rates and the restructuring charge. We intend to increase our advertising and product development costs in fiscal 2005 to support our existing brands and new product launches. We also expect to incur approximately $1.5 million of restructuring charges in the first half of fiscal 2005 related to the final stages of the consolidation of our U.S. distribution facilities.

In the second quarter of fiscal 2004, we recorded additional rent expense of approximately $0.7 million, which is a cumulative correction to previously recorded amounts and is related to scheduled rent increases and lease incentives in certain of our operating leases. The allocated additional expense was not material to our results of operations during the periods to which the adjustment related or in the period recorded and, as such, prior periods were not adjusted.

Depreciation and Amortization.    Depreciation and amortization decreased 8.1% for fiscal 2004, compared to fiscal 2003, principally as a result of certain intangibles that were fully

22

Table of Contents

amortized at the end of fiscal 2003, partially offset by the acceleration of depreciation of certain fixed assets at our Miami Lakes facility due to the closing of the distribution operations at this facility.

Interest Expense.    Interest expense, net of interest income, decreased by 8.1% in fiscal 2004 from fiscal 2003. The decrease resulted from the redemptions of the 11 ³/4% senior notes due 2011 and the 10 ³/8% senior notes due 2007 during the year and reduced borrowings and lower interest rates paid on our bank credit facility. See Notes 8 and 9 to the Notes to the Consolidated Financial Statements. As a result of the refinancing of our senior notes, we anticipate saving approximately $13 million in interest expense in fiscal 2005.

Debt Extinguishment Costs.    During fiscal 2004, we recorded $34.8 million of debt extinguishment charges relating to the redemption of $151.2 million aggregate principal amount of the 11 ³/4% senior notes and $65.3 million aggregate principal amount of the 10 ³/8% senior notes. See Note 9 to the Notes to the Consolidated Financial Statements.

(Benefit from) Provision for Income Taxes.    We had a benefit from income taxes for fiscal 2004, as compared to a provision for income taxes for fiscal 2003, reflecting higher losses due to the debt extinguishment and restructuring charges related to the consolidation of the U.S. distribution facilities partially offset by higher operating earnings. The effective tax rate calculated as a percentage of (loss) income before income taxes for fiscal 2004 was 198.1% compared to 28.0% in fiscal 2003. The change in the effective tax rate as compared to the prior year primarily reflects adjustments for foreign earnings taxed in jurisdictions at rates different in the United States and state tax liabilities. See Note 11 to the Notes to Consolidated Financial Statements.

Net Income.    Net income for fiscal 2004 decreased approximately $16.1 million as compared to fiscal 2003. The decrease was a result of the debt extinguishment and restructuring charges partially offset by higher operating earnings.

Accretion and Dividend on Preferred Stock.    The accretion and dividend on preferred stock, which is a non-cash charge to net loss attributable to common shareholders, represents the accretion of the original carrying value of $8.5 million of the Series D convertible preferred stock to its liquidation preference, and the imputed dividends on such preferred stock. See Note 14 to the Notes to Consolidated Financial Statements.

Accelerated Accretion on Converted Preferred Stock.    In October 2003, we recorded accelerated accretion on the Series D convertible preferred stock of $18.6 million for the preferred stock converted into common stock by an affiliate of Unilever that was sold in a public offering in October 2003. See Note 14 to the Notes to Consolidated Financial Statements.

Net (Loss) Income Attributable to Common Shareholders.    In fiscal 2004, there was a net loss attributable to common shareholders compared with net income attributable to common shareholders for fiscal 2003, principally due to $18.6 million of accelerated accretion on the Series D convertible preferred stock converted into common stock in October 2003 and the $37.1 million of debt extinguishment and restructuring charges. As a result of the accelerated accretion on the conversion of our Series D convertible preferred stock into common stock in October 2003 and the debt extinguishment and restructuring charges, our fully diluted net income per share for fiscal 2004 was reduced by $1.99 per share compared to fiscal 2003.

EBITDA.    EBITDA (net income plus the provision for income taxes (or net loss less the benefit from income taxes), plus interest expense, plus depreciation and amortization expense) decreased by 36% for fiscal 2004, as compared to fiscal 2003. The decrease in EBITDA and EBITDA margin was primarily the result of the debt extinguishment and restructuring charges partially offset by higher operating income. During fiscal 2004, EBITDA was reduced by $37.1 million as a result of the early extinguishment of debt and the restructuring of the U.S. distribution facilities. For a reconciliation of net income to EBITDA, see Note 4 under Item 6 “Selected Financial Data.”

23

Table of Contents

Fiscal Year Ended January 31, 2003 Compared to Fiscal Year Ended January 31, 2002

Net Sales.    Net sales increased 12.5% for fiscal 2003 compared to fiscal 2002. The sales increase was driven by the growth of our business with our mass retail customers, due in large part to our “open-sell” program and the addition of certain distributor brands (both of which have increased the volume of products sold), new product launches (including the fragrances ardenbeauty and Forever Elizabeth), and a rebound in travel retail sales. The “open-sell” program allows retailers to display fragrances on open counters and shelves rather than in locked cases, giving consumers easier access to our products. These increases were partially offset by continued weakness in U.S. department store sales and fewer U.S. prestige department store doors serviced as a result of previously announced closings.

Gross Profit.    Gross profit increased 25.0% for fiscal 2003 compared to fiscal 2002. Gross margin increased 4.20 percentage points during fiscal 2003 from fiscal 2002. The increase in gross profit and gross margin was principally due to higher sales, a reduction in the effect of the “high cost” Elizabeth Arden inventory purchased prior to the acquisition of the Elizabeth Arden business, a $10.3 million inventory write-down recorded in fiscal 2002 and reduced cost structure in distribution operations, partially offset by continued weakness in U.S. department stores and a greater proportion of sales of distributed brands, which have lower gross margins than owned and licensed brands. For fiscal 2002, our gross profit was reduced by approximately $20.5 million and gross margin was reduced by 3.10 percentage points due to the effect of “high cost” inventory purchased prior to the Elizabeth Arden acquisition.

SG&A.    Selling, general and administrative expenses increased 3.6% for fiscal 2003 compared to fiscal 2002. The increase was due principally to additional advertising to support new product launches and higher incentive compensation costs. These increases were partially offset by reduced expenses from management initiatives, including the restructuring of certain international operations, and reduction in selling overhead expenses, as well as benefits from favorable foreign currency rates. The effect of foreign currency transaction gains contributed approximately $6.7 million to the reduction in selling, general and administrative expenses during fiscal 2003 as compared to fiscal 2002. The decline in selling, general and administrative expenses as a percentage of net sales reflects the leveraging of our cost structure and favorable foreign currency exchange rates.

Depreciation and Amortization.    Depreciation and amortization decreased 25.8% for fiscal 2003, compared to fiscal 2002, principally as a result of the adoption of SFAS No. 142. In adopting SFAS No. 142, we concluded that the Elizabeth Arden trademarks are considered indefinite-lived assets and after January 31, 2002 are no longer being amortized. Amortization relating to these trademarks amounted to $6.8 million for fiscal 2002.

Interest Expense.    Interest expense, net of interest income, decreased by 3.8% for fiscal 2003 compared to fiscal 2002. The decrease resulted primarily from reduced borrowings under our bank credit facility and lower interest rates paid on that debt.

Provision for (Benefit from) Income Taxes.    There was a provision for income taxes for fiscal 2003, as compared to a benefit from income taxes for fiscal 2002, reflecting higher operating earnings. The effective tax rate calculated as a percentage of income (loss) before income taxes for fiscal 2003, was 28.0% versus 23.2% in fiscal 2002. The increase over fiscal 2002 primarily reflects adjustments for foreign and state tax liabilities.

Net Income (Loss).    Net income for fiscal 2003 increased $48.0 million as compared to a net loss in fiscal 2002. The increase was a result of higher net sales and associated gross profit and lower depreciation and amortization, partially offset by higher selling, general and administrative expenses and a higher effective tax rate.

24

Table of Contents

Accretion and Dividend on Preferred Stock.    The accretion and dividend on preferred stock was a non-cash charge to net income attributable to common shareholders for fiscal 2003 and a non-cash charge to net loss attributable to common shareholders for fiscal 2002. These amounts represent accretion on the fair value of, and the imputed dividends on, the Series D convertible preferred stock issued to an affiliate of Unilever as part of the purchase price for the acquisition of the Elizabeth Arden business.

Net Income (Loss) Attributable to Common Shareholders.    Net income attributable to common shareholders increased $47.8 million for fiscal 2003, compared to a net loss in fiscal 2002. The net income or net loss attributable to common shareholders includes the net income or net loss plus accretion and dividends associated with the Series D convertible preferred stock.

EBITDA.    EBITDA increased by 149% and EBITDA margin increased 660 basis points for fiscal 2003 as compared with fiscal 2002. The increase in EBITDA and EBITDA margin was the result of higher net sales and gross profit, partially offset by higher selling, general and administrative expenses. For a reconciliation of net income to EBITDA, see Note 4 under Item 6 “Selected Financial Data.”

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 2004, approximately 66% of our net sales were made during the second half of the fiscal year. Due to the size and timing of certain orders from our customers, sales, results of operations, working capital requirements and cash flows can vary between quarters of the same and different years. As a result, we expect to experience variability in net sales, net income, working capital requirements and cash flows on a quarterly basis.

We experience seasonality in our working capital, with peak inventory and receivable balances in the third quarter of our fiscal year. Our working capital borrowings are also seasonal and are normally highest in the months of September, October and November. During the fourth fiscal quarter ending January 31 of each year, significant cash is normally generated as customer payments on holiday season orders are received.

Liquidity and Capital Resources

Cash Flows.    Net cash provided by operating activities increased 60.0% in fiscal 2004 and 230.7% in fiscal 2003. The increase in fiscal 2004 was primarily due to inventory reduction initiatives, higher operating income before restructuring charges and lower interest expense. Accounts receivable at January 31, 2004 were above prior year levels primarily due to higher sales and the timing of those sales versus the prior year partially offset by improved cash collection efforts. Inventory levels at January 31, 2004 were lower than the prior year, as we focused on reducing our inventory levels, partially offset by incremental investment in additional distributed brands. The increase in operating cash flow in fiscal 2003 was due to higher operating income and improved working capital utilization.

Net cash used in investing activities decreased $1.6 million in fiscal 2004 and increased $9.6 million in fiscal 2003. The increase in capital expenditures in fiscal 2004 was primarily related to

25

Table of Contents

in-store counters and testing units, and computer hardware and software. We expect to incur approximately $16 million in fiscal 2005 primarily for in-store counters and testing units, tools, dies and molds and computer hardware and software. The following chart illustrates our net cash used in investing activities during fiscal 2004, 2003 and 2002:

Net cash provided by financing activities increased by $40.9 million in fiscal 2004 and net cash used by financing activities increased by $3.4 million in fiscal 2003. The increase in cash provided by financing activities in fiscal 2004 was derived from the sale of 3,666,667 shares of our common stock in October 2003 resulting in net proceeds of $62.7 million and $225 million of 7 ³/4% senior subordinated notes in January 2004, partially offset by the redemption of the 10 ³/8% senior notes and the 11 ³/4% senior notes during fiscal 2004.

Cash and cash equivalents increased to $89.1 million in fiscal 2004 from $22.7 million during fiscal 2003. The increase in cash and cash equivalents is due to our sale of the $225 million of 7 ³/4% senior subordinated notes reduced by amounts paid to redeem $95.2 million of the 11 ³/4% senior notes and $20.0 million of the 10 ³/8% senior notes. We called for redemption the remaining $84.3 million of 10 ³/8% senior notes in January 2004 and redeemed those notes in February 2004. Pending the redemption of those notes, we used a portion of the proceeds from the 7 ³/4% senior subordinated notes offering to temporarily invest in short-term securities. See Note 9 to Notes to Consolidated Financial Statements.

Debt and Contractual Financial Obligations and Commitments.    At January 31, 2004, our long-term debt and financial obligations and commitments by due date were as follows:

Long-term debt, including the current portion, was $325.1 million at January 31, 2004 (including $84.3 million of 10 ³/8% senior notes that were redeemed on February 12, 2004) and $320.3 million at January 31, 2003. In fiscal 2004, we redeemed $151.2 million aggregate principal amount of our 11 ³/4% senior notes, $56.0 million of which were redeemed in November 2003 with the net proceeds from the equity offering of our common stock in October 2003 and $95.2 million of which were redeemed with the net proceeds from the sale in January 2004 of $225.0 million of

26

Table of Contents

7 ³/4% senior subordinated notes. The net proceeds of the issuance of the 7 ³/4% senior subordinated notes were also used to redeem $104.3 million aggregate principal amount of the 10 ³/8% senior notes, of which $20.0 million were redeemed in January 2004. We called for redemption the remaining $84.3 million of 10 ³/8% senior notes on January 13, 2004 and redeemed those notes on February 12, 2004. As a result of this redemption, we will incur a charge in the first quarter of fiscal 2005 of approximately $3.8 million due to the early extinguishment of these notes. For more information on our long-term debt, debt refinancing activities and contractual commitments, see Notes 9, 10 and 14 to the Notes to Consolidated Financial Statements.

In February 2004 we entered into interest rate swap agreements that effectively convert the fixed interest rate on $50.0 million or approximately 22% of our outstanding 7 ³/4% senior subordinated notes to a variable interest rate based on LIBOR. The swap agreement matures in February 2014. We can terminate the swap at our option at any time and the counter party can call the swap any time after January 2009. We designated the swap as a fair value hedge.

Future Liquidity and Capital Needs.    Our principal future uses of funds are for debt service, working capital requirements, capital expenditures 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 collect cash from our customers based on our sales to them and their respective payment terms.

We have a revolving bank credit facility with a syndicate of banks that matures in January 2006. Our borrowings under this facility are limited to a “borrowing base,” calculated based on 85% of eligible accounts receivable and 75% of eligible inventories (65% from November to April). The borrowings are collateralized by a first priority lien on all of our U.S. accounts receivable and inventory. The credit facility prohibits the payment of cash dividends and the incurrence of debt (other than refinancing and certain small amounts of indebtedness). The credit facility also has a requirement that we maintain a fixed charge coverage ratio of 1.1:1 if availability under the facility declines to less than $50 million. In addition, the indenture pursuant to which our 7 ³/4% senior subordinated notes are issued restricts the incurrence of debt (other than refinancing indebtedness and certain other indebtedness) and the payment of dividends subject to satisfaction of a fixed charge coverage ratio and net income tests.

On February 25, 2004, we executed an amendment to our credit facility. This amendment included a reduction in the range of interest rates included in the applicable margin, which is added to either LIBOR-based rates or prime rates, at our option and based upon the amount of our outstanding loan balance that we have placed in LIBOR and prime rate-based loans. The interest rates included in the applicable margin were reduced by 0.25% to a range of 2.00% to 2.75% for LIBOR loans and to a range of 0.25% to 1.00% for prime rate loans and are now based on a fixed charge coverage ratio instead of a ratio of consolidated debt to EBITDA. As of January 31, 2004, the applicable margin was 2.75% for LIBOR loans and 1.00% for prime rate loans. At February 29, 2004, the applicable margin was 2.25% for LIBOR loans and 0.50% for prime rate loans. The amendment also included a 0.125% reduction in the lower end of the range of the commitment fee on the unused portion of the credit facility to a range of 0.25% to 0.5% per year based on a debt service ratio. At March 31, 2004, the commitment fee was 0.375%. See Note 8 to Notes to Consolidated Financial Statements.

Based upon our internal projections, we believe that the credit facility, as currently amended and restated, provides sufficient flexibility so that we will remain in compliance with its terms. If our actual results deviate significantly from our projections, however, we may not remain in compliance with the fixed charge covenant and would not be allowed to borrow under the revolving credit facility. In addition, a default under our revolving credit facility that causes acceleration of the debt under this facility could trigger a default on our 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, 2004, we had no borrowings outstanding under our credit facility and $129.5 million of availability, as well as $89.1 million in cash and cash equivalents.

27

Table of Contents

We believe that existing cash and cash equivalents, internally generated funds and borrowings under our revolving credit facility will be sufficient to cover debt service, working capital requirements and capital expenditures for the next twelve months other than additional working capital requirements that may result from further expansion of our operations through acquisitions of additional brands or new product distribution arrangements.

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.

Recently Adopted Accounting Standards

See Note 3 of the Notes to Consolidated Financial Statements for a discussion regarding the recently adopted accounting standards, which include the following:

Forward-Looking Information and Factors That May Affect Future Results

The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This annual report and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management’s plans, assumptions and future events or performance. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will” and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective products, future performance or results of current and anticipated products, sales efforts, expenses, interest rates, foreign exchange rates, the outcome of contingencies, such as legal proceedings, and financial results. Among the factors that could cause actual results to differ materially are the following:

28

Table of Contents

We caution that the factors described herein and other factors could cause actual results to differ materially from those expressed in any forward-looking statements we make and that investors should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time, and it is not possible for us to predict all of such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

As of January 31, 2004, we had no borrowings outstanding under our credit facility. The average of our month-end borrowings during fiscal 2004 was $81.3 million. Borrowings under our credit facility are seasonal, with peak borrowings in the third quarter of our fiscal year. Borrowings under the credit facility are subject to variable rates and, accordingly, our earnings and cash flow

29

Table of Contents

will be affected by changes in interest rates. Based upon our fiscal 2004 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 fiscal 2004 would have increased or decreased by approximately $1.6 million. In February 2004, we entered into an interest rate swap transaction to swap $50.0 million of our fixed rate 7 ³/4% senior subordinated notes to a floating rate of interest based on LIBOR to better balance our mix of fixed and floating rate debt. In the short term, this will provide us with a lower level of interest expense related to a portion of the 7 ³/4% senior subordinated notes based on current LIBOR rates; however, over the life of the notes, interest expense may be greater than 7 ³/4% based upon fluctuations in LIBOR. In the event of an adverse change in interest rates, our results could be negatively affected. We can terminate the swap at our option at any time and the counter party can call the swap any time after January 2009. We designated the swap as a fair value hedge.

Foreign Currency Risk

We sell our products in approximately 90 countries around the world. For fiscal 2004, we derived approximately 33% of our net sales from our international operations. We conduct our international operations in a variety of different countries and derive our sales in currencies including the Euro, British pound, Swiss franc, Canadian dollar and Australian dollar, as well as the U.S. dollar. Our operations may be subject to volatility because of currency changes, inflation changes and changes in political and economic conditions in the countries in which we operate. With respect to international operations, our sales and expenses are typically denominated in local currency, while costs of goods sold are denominated in a combination of local currency and the U.S. dollar. Our results of operations are reported in U.S. dollars. Fluctuations in currency rates can affect our reported sales, margins, operating costs and the anticipated settlement of our foreign denominated receivables and payables. Most of our skincare and cosmetic products are produced in a manufacturing facility located in Roanoke, Virginia. A weakening of the foreign currencies in which we generate sales relative to the currencies in which our costs are denominated, which is primarily the U.S. dollar, may decrease our reported cash flow and operating profits. Our competitors may or may not be subject to the same fluctuations in currency rates, and our competitive position could be affected by these changes. As a result of favorable foreign currency rates relative to the U.S. dollar during fiscal 2004, we recorded foreign currency transaction gains of $3.8 million compared to $7.6 million in fiscal 2003. As a result of adverse foreign currency rates during fiscal 2002, we recorded foreign currency transaction losses of $0.7 million.

While we have engaged in a limited number of foreign currency hedging transactions for small amounts in fiscal 2005, primarily option contracts to reduce the exposure of our earnings to fluctuations in currency rates, we did not engage in foreign currency hedging activities in fiscal 2004. We enter into foreign currency contracts to protect against the adverse effect that exchange rate fluctuations may have on the earnings of our foreign subsidiaries. Any foreign currency contracts that we may enter into will likely qualify for hedge accounting and, therefore, the gains and losses will only be recognized in earnings in the period in which the contracts expire. We do not utilize foreign exchange contracts for trading or speculative purposes. There can be no assurance that our hedging operations, if any, will eliminate or substantially reduce risks associated with fluctuating exchange rates.

As of January 31, 2004, our subsidiaries outside the United States held approximately 24% of our total assets. The functional currency of our foreign operations is either the U.S. dollar or the local currency. The cumulative effect of translating balance sheet accounts from the functional currency into the U.S. dollar at current exchange rates is included in “Accumulated and other comprehensive income (loss)” on our consolidated balance sheets.

30

Table of Contents

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

31

Table of Contents

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of

    Elizabeth Arden, Inc. and Subsidiaries:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Elizabeth Arden, Inc. and its subsidiaries (the “Company”) at January 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2004 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 audits. We conducted our audits 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 audits provide a reasonable basis for our opinion.

As discussed in Note 3 to the notes to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” on February 1, 2002.

PricewaterhouseCoopers LLP

New York, New York

March 4, 2004, except as to the second paragraph

of Note 12, as to which the date is March 30, 2004

32

Table of Contents

ELIZABETH ARDEN, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)