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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 1-6370
ELIZABETH ARDEN, INC.
(Exact name of registrant as specified in its charter)
Florida 59-0914138
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
14100 N.W. 60th Avenue
Miami Lakes, Florida 33014
(Address of principal executive offices)
(305) 818-8000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of April 25, 2001 was approximately $212.1 million based on the
$17.72 per share average of the bid and ask prices for the Common Stock on the
Nasdaq National Market on such date and determined by subtracting from the
number of shares outstanding on that date the number of shares held by the
registrant's directors, executive officers and holders of at least 10% of the
outstanding shares of Common Stock.
As of April 25, 2001, the registrant had 16,902,060 shares of Common Stock
outstanding.
Documents incorporated by reference: None
Elizabeth Arden, Inc.
FORM 10-K
TABLE OF CONTENTS
Part I Page
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 10
Item 4. Submission of Matters to a Vote of Security Holders . . . . 10
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . 11
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 17
Item 8. Financial Statements and Supplementary Data . . . . . . . . 18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . 41
Part III
Item 10. Directors and Executive Officers of the Registrant. . . . . 41
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . 43
Item 12. Security Ownership of Certain Beneficial Owners
and Management. . . . . . . . . . . . . . . . . . . . . . . 46
Item 13. Certain Relationships and Related Transactions. . . . . . . 48
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . 49
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
2
IN CONNECTION WITH THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 (THE "REFORM ACT"), THE COMPANY (AS DEFINED
BELOW) IS HEREBY PROVIDING CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS
THAT COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
PROJECTED IN FORWARD-LOOKING STATEMENTS (AS SUCH TERM IS DEFINED IN THE REFORM
ACT) MADE IN THIS ANNUAL REPORT ON FORM 10-K. ANY STATEMENTS THAT EXPRESS, OR
INVOLVE DISCUSSIONS AS TO EXPECTATIONS, BELIEFS, PLANS, OBJECTIVES,
ASSUMPTIONS OR FUTURE EVENTS OR PERFORMANCE (OFTEN, BUT NOT ALWAYS, THROUGH
THE USE OF WORDS OR PHRASES SUCH AS "WILL LIKELY RESULT," "ARE EXPECTED TO,"
"WILL CONTINUE," "IS ANTICIPATED," "ESTIMATED," "INTENDS," "PLANS" AND
"PROJECTION") ARE NOT HISTORICAL FACTS AND MAY BE FORWARD-LOOKING AND MAY
INVOLVE ESTIMATES AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING STATEMENTS.
ACCORDINGLY, ANY SUCH STATEMENTS ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE
TO, AND ARE ACCOMPANIED BY, THE FOLLOWING KEY FACTORS THAT HAVE A DIRECT
BEARING ON THE COMPANY'S RESULTS OF OPERATIONS: THE SUBSTANTIAL INDEBTEDNESS
AND DEBT SERVICE OBLIGATIONS OF THE COMPANY; THE COMPANY'S ABILITY TO
SUCCESSFULLY AND COST-EFFECTIVELY INTEGRATE ACQUIRED BUSINESSES OR NEW BRANDS
INTO THE COMPANY; THE ABSENCE OF CONTRACTS WITH CUSTOMERS OR SUPPLIERS AND THE
COMPANY'S ABILITY TO MAINTAIN AND DEVELOP RELATIONSHIPS WITH CUSTOMERS AND
SUPPLIERS; THE RETENTION AND AVAILABILITY OF KEY PERSONNEL; CHANGES IN THE
RETAIL AND FRAGRANCE INDUSTRIES; THE COMPANY'S ABILITY TO LAUNCH NEW PRODUCTS
AND IMPLEMENT ITS GROWTH STRATEGY; GENERAL ECONOMIC AND BUSINESS CONDITIONS;
THE IMPACT OF COMPETITIVE PRODUCTS AND PRICING; RISKS OF INTERNATIONAL
OPERATIONS; SUPPLY CONSTRAINTS OR DIFFICULTIES; AND OTHER RISKS AND
UNCERTAINTIES. THE COMPANY CAUTIONS THAT THE FACTORS DESCRIBED HEREIN COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-
LOOKING STATEMENTS OF THE COMPANY 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 THE
COMPANY UNDERTAKES 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 THE COMPANY TO PREDICT ALL OF SUCH FACTORS. FURTHER, THE COMPANY CANNOT
ASSESS THE IMPACT OF EACH SUCH FACTOR ON THE COMPANY'S RESULTS OF OPERATIONS
OR THE EXTENT TO WHICH ANY FACTOR, OR COMBINATION OF FACTORS, MAY CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN ANY FORWARD-LOOKING
STATEMENTS.
PART I
ITEM 1. BUSINESS
General
Elizabeth Arden, Inc., a corporation established in Florida in 1960, is a
leading global marketer and manufacturer of prestige beauty products. Our
portfolio of leading fragrance brands includes Elizabeth Arden's Red Door, 5th
Avenue, Elizabeth Arden green tea and Sunflowers, Elizabeth Taylor's White
Diamonds and Passion, White Shoulders, Geoffrey Beene's Grey Flannel, Halston,
Halston Z-14, PS Fine Cologne for Men, Design and Wings by Giorgio Beverly
Hills. Our skin care brands include Elizabeth Arden's Visible Difference,
Ceramides, and Millenium. Our cosmetics products include lipstick, foundation
and other color cosmetics products under the Elizabeth Arden brand name. In
addition to the brands we own and license, we also distribute more than 150
prestige fragrance brands to mass and mid-tier retailers in the United States,
providing us with a broader portfolio of brands.
3
We sell our fragrance products in more than 36,000 separate retail
locations in the United States, including mass retailers such as Wal-Mart,
Target, Walgreens, and CVS, mid-tier retailers such as JCPenney, Sears and
Kohl's and prestige department stores such as Dillard's, The May Company,
Federated Department Stores, Belk's and Nordstrom. In the United States, we
currently sell our skin care and cosmetic products primarily in prestige
department stores. We also sell our Elizabeth Arden brands of fragrances,
skin care and cosmetics products in over 90 other countries worldwide through
perfumeries, boutiques and department stores, and through travel retail
outlets such as duty free shops and airport boutiques. In fiscal 2001 sales to
United States mass retailers, drug stores independent fragrance, cosmetic,
gift and other stores constituted approximately 68% of the Company's net
sales, sales to traditional and mid-tier department stores in the United
States constituted approximately 30% of net sales and the balance of the
Company's sales was comprised of international sales. As a result of the
Arden acquisition described below, we anticipate that international sales will
approximate 25% of total sales during fiscal 2002.
We provide a portfolio of products and value-added services to our
customers among all distribution channels in the United States. We
distinguish ourselves from other prestige beauty companies by offering a large
selection of brands and tailoring the marketing, promotion, size and packaging
of our products to suit each of our targeted channels. We also provide our
customers with value-added services, including category and inventory
management and fulfillment services that our competitors do not typically
provide. We believe that the breadth of products and level of services we
provide has enabled us to gain a leading share of the mass and mid-tier retail
prestige beauty products markets in particular, and to become an important and
valued supplier for many of our customers. For example, each of JCPenney and
Wal-Mart designated us as their supplier of the year in our category for 1999.
The breadth of products and level of services has also contributed to strong
growth. For fiscal 2001, net sales totaled approximately $382.3 million as
compared to approximately $140.5 million in fiscal 1997. Similarly, EBITDA
(as defined in Item 6. "Selected Financial Data") and net income have grown at
compound annual growth rates of 46.9% and 47.2%, respectively, over the same
periods.
On January 23, 2001, we acquired the Elizabeth Arden business including,
the Elizabeth Arden line of fragrance skin care and cosmetic brands, the
Elizabeth Taylor fragrance brands and the White Shoulders fragrance brand from
affiliates of Unilever N.V. At the closing, we paid Unilever approximately
$190 million in cash and issued to Unilever $50 million face value of our
Series D Convertible Preferred Stock. As a result of receiving the preferred
stock, Unilever has become our largest shareholder with an approximate 18%
ownership stake on a fully diluted basis. We financed the Arden acquisition
in part by issuing $160 million of 11.75% Senior Secured Notes Due 2011. In
connection with the financing of the acquisition and for future working
capital purposes, we also obtained a new $175 million revolving credit
facility agented by Fleet National Bank, as administrative agent, and we
terminated our existing $60 million revolving credit facility. Following the
acquisition, we changed our name to Elizabeth Arden, Inc.
Business Strategy
We seek to continue our growth as a leading marketer and manufacturer of
prestige beauty products worldwide by implementing the following strategies:
ENHANCE BRAND PERFORMANCE. We intend to maximize the profitability of our
brands while building brand equity by utilizing our direct multi-channel
distribution capability and marketing expertise. Our brands are positioned in
multiple distribution channels and are promoted with consistent logos,
packaging and advertising designed to enhance their images and differentiate
them from other brands.
STRENGTHEN AND EXPAND RELATIONSHIPS WITH RETAILERS BY PROVIDING VALUE-
ADDED SERVICES. We intend to increase the sales volume of our products by
continuing to develop innovative services that help our customers to maximize
their sales of prestige beauty products. For example, we recently developed
an open sell program for selected mass retailers in which we package
individual pieces in a security-coded plastic envelope so that retailers can
place the products on open display counters and shelves rather than in locked
cases. Two of our largest customers have recently implemented open sell
programs and we believe that the open sell format will contribute to increases
in units sold by these retailers.
4
ACQUIRE CONTROL OF ADDITIONAL PRESTIGE BRANDS. We intend to continue to
opportunistically acquire control of additional brands that enjoy established
consumer loyalty but can be more profitably managed. We have previously
served as a distributor for several of the brands that we acquired and we
believe that our familiarity with these brands prior to their acquisition,
along with our strong market position, contributed significantly to our
ability to integrate them into our operations. We believe that our
acquisition of ownership or control of brands enables us to generate higher
gross margins and greater overall profits. While we continually review
acquisition opportunities for prestige fragrance brands, we have no
commitments or agreements for any acquisitions at the current time.
FURTHER EXPAND SELECTION OF DISTRIBUTED FRAGRANCE BRANDS. We intend to
continue to develop our distribution business by increasing the number of
prestige fragrance brands we distribute. Our market position as an established
distributor, our broad selection of fragrances and our relationships with
leading fragrance houses provides us with opportunities to expand our line of
distributed brands. We believe that increasing our line of distributed brands
also makes us a more attractive source of supply for our customers.
CAPITALIZE ON OPPORTUNITIES CREATED BY THE ARDEN ACQUISITION. We believe
that the Arden acquisition presents numerous opportunities for us, including:
* Improving brand performance. We have developed a strong knowledge of
the Elizabeth Arden and Elizabeth Taylor brands for which we served
as the primary fragrance distributor in the mid-tier and mass
channels in the United States prior to the Arden acquisition. We
believe we will be able to improve the performance of the acquired
brands by selectively investing in point of sale promotions, national
advertising and improved promotional gift sets.
* Leveraging international distribution capability. We intend to
leverage the international infrastructure of the Elizabeth Arden
business by expanding sales of our other brands abroad and by
supporting the international expansion of certain of our U.S.
customers.
* Improving business efficiencies. The combination of the Elizabeth
Arden business with our existing business significantly increases the
scale of our operations and provides us with opportunities to
increase our operating efficiency. We intend to rationalize our
distribution facilities and optimize capacity utilization. We will
also be able to eliminate duplicative shipping and handling charges
and generate incremental profit with respect to the Elizabeth Arden
products we previously purchased from the Elizabeth Arden business.
For the fiscal year ended January 31, 2001, we purchased $77.8
million of these products. In addition, we intend to outsource the
manufacturing of Elizabeth Arden products, reducing manufacturing
overhead as well as capital needs. We will also combine and optimize
our sales forces to meet the needs of our customers. As a result of
these actions, we believe that we will operate the Elizabeth Arden
business with fewer personnel than have historically been employed in
the business and that our distribution and fulfillment capacity will
be enhanced.
Products
FRAGRANCE. We offer a wide variety of fragrance products for both men and
women, including perfume, cologne, eau de toilette, body spray, men's cologne
and gift sets. Each fragrance is sold in a variety of sizes and packaging
arrangements. In addition, each fragrance line may be complemented by bath
and body products, such as soaps, deodorants, body lotions, gels, creams and
dusting powder, that are based on the particular fragrance. We tailor the
size and packaging of the fragrance to suit the particular target channel. Our
fragrance products generally retail at prices ranging from $20 to $100,
depending on the size of the product.
Our owned and licensed brands include Elizabeth Arden brands such as Red
Door, Splendor, 5th Avenue, Sunflowers and Elizabeth Arden green tea, the
Elizabeth Taylor brands such as White Diamonds and Passion, White Shoulders,
the Paul Sebastian brands such as PS Fine Cologne for Men, Design and Casual,
the Halston brands Halston and Halston Z-14, Geoffrey Beene's Grey Flannel,
and Wings by Giorgio Beverly Hills. In addition to the brands we own and
license, we also distribute fragrances under brands manufactured by others,
principally into the mass retail and mid-tier retail channels.
5
SKIN CARE. Our skin care line includes a broad range of products for both
men and women such as moisturizers, creams, lotions, cleansers and sunscreens.
Many of the products are designed for use on a particular part of the body
such as the face, or address a particular problem such as aging or dry skin.
We sell skin care products internationally and in the United States in
prestige department stores and, to a lesser extent, through Elizabeth Arden
salons and stores. Our skin care products generally retail at prices ranging
from $15 to $60. We frequently package skin care products with samples or
gifts. We market our skin care products under the Elizabeth Arden brand
including products such as Visible Difference, Ceramides and Millenium.
COSMETICS. Under the Elizabeth Arden name, we offer a variety of cosmetics
including foundations, lipsticks, mascaras, eye shadows and powders. We offer
these products in a wide array of shades and colors. We sell our cosmetics
internationally and in the United States in prestige department stores, and,
to a lesser extent, through independently operated Elizabeth Arden beauty
salons. Our cosmetics products generally retail at prices ranging from $10 to
$28.
We use third-party contract manufacturers in the United States and Europe
to obtain substantially all raw materials, components and packaging products
and for the manufacture of finished products relating to our owned and
licensed brands. In order to transition the manufacture of the brands acquired
as part of the Elizabeth Arden business, we entered into manufacturing
agreements with affiliates of Unilever to manufacture certain of our products
for a limited period of time. Under a manufacturing agreement for Unilever's
Roanoke plant, Unilever will manufacture certain skin care and cosmetic
products for us until May 31, 2001, subject to additional one-month
extensions. Pricing is based on a cost-sharing basis. Under a manufacturing
agreement for Unilever's Las Piedras plant, Unilever will manufacture
fragrance products for us until December 31, 2002. Pricing is based on a cost
per piece.
Except as to products for which we have exclusive marketing and
distribution rights, as is customary in our industry, we generally do not have
long-term or exclusive contracts with manufacturers of our owned brands or
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 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 68% of our cost of
sales for the fiscal year ending January 31, 2001. With the acquisition of
Elizabeth Arden, we expect this percentage to decrease to approximately 40% in
the next fiscal year. The loss of, or a significant adverse change in, the
relationship between us and any of our major fragrance manufacturers or
suppliers of distributed brands could have a material adverse effect on our
business, financial condition and results of operations.
Patents and Trademarks
We own or have rights to use all of the trademarks necessary for the
manufacturing, marketing, distribution and sale of numerous fragrance and skin
care brands including Elizabeth Arden's Red Door, 5th Avenue, Visible
Difference, Millenium and Sunflowers, Halston Z-14, Halston, PS Fine Cologne
for Men and Design. We have registered these trademarks, or have applications
pending, in the United States and in certain of the countries in which we sell
these product lines. We consider the protection of our trademarks to be
important to our business.
We also are the exclusive worldwide trademark licensee for both the
Elizabeth Taylor fragrance brands (including White Diamonds and Passion) and
the Geoffrey Beene fragrance brands (including Grey Flannel and Bowling
Green). The Taylor license agreement terminates on October 1, 2022 and is
renewable by us, at our sole option, for unlimited 20-year periods. The Beene
license terminates in March 2025 and is automatically renewable for additional
10-year terms.
We also have the right, under various exclusive distributor and license
agreements to distribute other fragrances in various territories and to use
the registered trademarks in connection with the sale of these products.
6
A number of our products incorporate patented or patent-pending
formulations. In addition, several of our packaging methods, components and
products are covered by design patents, patent applications and copyrights. As
part of the Arden acquisition, we entered into non-exclusive cross-license
agreements regarding certain of these patents with Unilever.
Sales and Distribution
In the United States, we sell our fragrance products to more than 36,000
separate retail locations primarily through three distribution channels:
* the mass retail channel, including retailers such as Wal-Mart,
Target, Walgreens and CVS;
* the mid-tier retail channel, including department stores such as
JCPenney, Sears and Kohl's; and
* the prestige department store channel, including traditional
department stores such as Dillard's, The May Company, Macy's and
Nordstrom.
We also sell products to independent fragrance, cosmetic, gift and other
stores. We currently sell our skin care and cosmetics products in the United
States primarily in prestige department stores. Our sales staff and marketing
support personnel are organized by customer account based upon channel of
distribution, with marketing resources tailored to the needs of each channel.
Our sales force routinely visits retailers to assist in the merchandising,
layout and stocking of selling areas. Our fulfillment capabilities enable us
to reliably process, assemble and ship small orders on a timely basis. We use
this ability to assist our customers in their retail distribution through
"drop ship" programs direct to stores and by supporting their sales of beauty
products over the Internet. We serve as a source of products for a number of
internet-based retailers, as well as for traditional retailers' web-based
operations. For example, in October of this year, we became the partner for
the internet fragrance department for JCPenny.com. Sales to Internet
retailers are not material to our results of operations.
We also sell our prestige products in the Elizabeth Arden beauty salons,
which are owned and operated by an unrelated third party. We receive a
licensing fee of between 1% and 2% of the total net sales from each of the
salons for the use of the "Elizabeth Arden" name.
In addition to our United States distribution, our products are sold 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 worldwide
operations from our offices in Geneva, Switzerland.
As is customary in the beauty industry, we do not generally have long-term
or exclusive contracts with any of our retail customers. Sales to customers
are generally made pursuant to purchase orders. We believe that our
continuing relationships with our customers are based upon our ability to
provide a wide selection and reliable source of prestige beauty products, as
well as our ability to provide value-added services, including our category
management services, to mass-market and mid-tier retailers.
Our ten largest customers accounted for approximately 60% of net sales for
the fiscal year ended January 31, 2001. The only customers who accounted for
more than 10% of our net sales for that period were Wal-Mart and JCPenney
(including Eckerd which is owned by JCPenney). The loss of, or a significant
adverse change in the relationship between any of our key customers and us
could have a material adverse effect on our business, financial condition and
results of operation. As a result of the Arden acquisition, we do not
anticipate that any customer will account for more than 10% of our net sales
during fiscal 2002.
The industry practice for businesses that market beauty products has been
to grant department stores the right to return merchandise. We typically
limit return rights to department stores and to certain promotional items
offered under our owned and licensed brands. We establish reserves and
provide allowances for returns of such products at the time of sale. To date,
our returns have not exceeded our returns reserves and allowances, although we
cannot assure you that such reserves and allowances will be adequate in the
future. We have, however, a sales organization to resell returned products.
7
Marketing
Our senior marketing personnel support the efforts of our sales
organizations worldwide by working with the merchandise managers, lead buyers
and marketing department of our major retailers to develop marketing and
merchandising plans tailored to these customers' retail needs. Our marketing
personnel frequently work with customers to:
* develop new products;
* develop new merchandising and promotional programs;
* design model schematic planograms for the customer's fragrance and
cosmetics departments;
* identify trends in consumer preferences and adapt products assortment
and promotion to reflect changing patterns;
* conduct training programs for the customer's sales personnel; and
* in certain cases, provide comprehensive sales analysis and active
management of the prestige fragrance category.
We advertise our products through cooperative advertising in association
with major retailers. We also utilize direct media such as TV and print
advertising, gift-with purchase programs, sales personnel incentive
commissions and value-added programs.
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 2001, 65% of the Company's net sales were made during the
second half of the fiscal year. Due to the size and timing of certain orders
from its customers, sales and results of operations can vary significantly
between quarters of the same and different years. As a result, the Company
expects to experience variability in net sales and net income on a quarterly
basis.
Management Information Systems
Our key management information systems consist of:
* fully-integrated accounting, forecasting, purchasing and order-entry
software systems;
* electronic data interchange systems, which allow our customers to
order products electronically from us and to be invoiced
electronically for those orders; and
* warehouse management systems, which assist us in facilitating and
managing the receipt and shipment of products.
As a whole, these management information systems provide on-line, real-
time, fully integrated 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,
product availability and pricing information, and expedited order processing.
Our information systems also support our customers' retail sales over the
Internet.
In order to transition the use of information systems relating to the
Arden business, we entered into an information technology services agreement
with affiliates of Unilever for information technology, software,
infrastructure, equipment and other services as part of the Arden acquisition.
The agreement terminates on December 31, 2001 and will be automatically
renewed for additional one-year terms, provided that, at our request, Unilever
will use reasonable efforts to provide these services for up to two years
after termination.
Competition The beauty industry is highly competitive and, at times,
subject to rapidly changing consumer preferences and industry trends.
Competition is generally a function of brand strength, assortment and
continuity of merchandise selection, reliable order fulfillment and delivery,
and level of in-store customer support.
8
We compete with a number of manufacturers and marketers of beauty products,
some of which have substantially more resources than we do.
We believe that we compete primarily on the basis of product recognition,
quality, performance, price, and our emphasis on providing value-added
customer services, including category management services, to our mass-market
retailers. There are products which are better-known and more popular than the
products manufactured or supplied by us. Many of our competitors are
substantially larger and more diversified, and have substantially greater
financial and marketing resources than we do, as well as have greater name
recognition and the ability to develop and market products similar to and
competitive with those manufactured by us.
Employees
As of April 15, 2001, Elizabeth Arden had approximately 2,250 full and
part-time employees in the United States and approximately 18 foreign
countries. None of our employees are covered by a collective bargaining
agreement. We believe that our relationship with our employees is
satisfactory. We also use the services of independent contractors in various
sales capacities. In connection with the Arden acquisition, we entered into
employee lease agreements to lease certain employees of Unilever through June
30, 2001.
ITEM 2. PROPERTIES
UNITED STATES. Our corporate headquarters and one of our principal
distribution facilities in the United States is located in Miami Lakes,
Florida in a building we own on a tract of land comprising approximately 13
acres. The Miami Lakes facility contains approximately 200,000 square feet of
distribution and warehouse space and approximately 30,000 square feet of
office space. In 1996, we issued a mortgage on the Miami Lakes facility in
the amount of $6 million.
In connection with the Arden acquisition, we assumed a lease for a 265,000
square foot distribution facility located in Roanoke, Virginia whose term
expires April 2006 and for 62,000 square feet of general offices in Stamford,
Connecticut whose term expires October 2001. We are presently negotiating a
10-year extension of the Stamford lease. We also assumed leases for sales
offices in California, Georgia, Massachusetts, Minnesota, Missouri, North
Carolina and Texas.
In February 2000, we entered into a lease for a 295,000 square foot
distribution facility in Edison, New Jersey, which has been used as a
fulfillment center for our promotional set business and to process product
returns. The lease on the Edison facility expires March 2002. We anticipate
consolidating our United States fulfillment operations out of Miami Lakes and
Roanoke. Accordingly, we do not intend to extend the Edison lease.
In March 2001, we entered into a lease for 15,000 square feet of general
offices in New York City whose term expires April 2016.
INTERNATIONAL. Our European operations are headquartered in a leased
building in Geneva, Switzerland. We also lease sales offices in Australia,
Austria, Canada, Denmark, Italy, Korea, New Zealand, Puerto Rico, Singapore,
South Africa, Spain and the United Kingdom and a distribution facility in
Puerto Rico. We also have a small manufacturing facility in South Africa.
Our European fulfillment operations are conducted by Unilever under a
distribution agreement which ends on December 31, 2001, but is automatically
renewable for additional one-year terms unless either party elects to
terminate.
9
ITEM 3. LEGAL PROCEEDINGS In December 2000, we were named in a breach of
contract action filed in the Ontario, Canada Superior Court of Justice by
Adenat, Inc., a Canadian customer of Unilever. The action was filed against a
number of Unilever affiliates, our company and several individuals, including
officers of Unilever and our Company. 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
compensation and punitive damages of Canadian $90 million (approximately US
$60 million at January 31, 2001). We believe we would be entitled to
indemnification from Unilever 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 defending the claims.
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
A special meeting of shareholders was held on January 3, 2001, in Miami
Lakes, Florida to vote on the following matters:
* Approval of the issuance of our common stock in an amount greater
than 20% of the number of our outstanding common stock in connection
with the Arden acquisition.
* Approval of an amendment to our Amended and Restated Articles of
Incorporation to change our corporate name from "French Fragrances,
Inc." to "Elizabeth Arden, Inc.," following the Arden acquisition.
* Approval of our 2000 Stock Incentive Plan.
* Approval of an amendment to our Non-Employee Director Stock Option
Plan to increase (i) the number of shares of common stock which may
be issued pursuant to stock options granted under such plan from
200,000 to 500,000, and (ii) the number of shares of common stock
exercisable in connection with an eligible director being re-elected
to our board of directors at a subsequent annual meeting of
shareholders from 7,500 to 15,000.
The vote on the issuance of common stock in excess of 20% of our
outstanding common stock in connection with the Arden acquisition was
8,347,454 for and 4,646 against. The vote on the amendment to our Amended and
Restated Articles of Incorporation to change our name to Elizabeth Arden,
Inc., was 8,348,117 for and 3,983 against. The vote on the 2000 Incentive
Stock Option Plan was 7,260,834 for and 1,091,266 against. The vote on the
amendment to the Non-Employee Director Stock Option Plan was 7,685,796 for and
666,304 against. There were no broker non-votes.
10
PART III
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION. Our common stock, $.01 par value per share, has been
traded on The Nasdaq Stock Market under the symbol "RDEN" since January 25,
2001. From December 21, 1995, to January 25, 2001, our common stock traded on
The Nasdaq Stock Market under the symbol "FRAG". The following table sets
forth the high and low closing prices for the common stock, as reported on The
Nasdaq Stock Market for each of our fiscal quarters from February 1, 1999
through January 31, 2001.
High Low
---- ---
Quarter Ended 04/30/99 $9 1/16 $5 5/8
Quarter Ended 07/31/99 $8 23/32 $6 9/16
Quarter Ended 10/31/99 $8 $6 1/16
Quarter Ended 01/31/00 $7 13/16 $6 1/8
Quarter Ended 04/30/00 $9 9/16 $6 5/8
Quarter Ended 07/31/00 $8 3/4 $7 1/4
Quarter Ended 10/31/00 $11 1/2 $7 1/8
Quarter Ended 01/31/01 $15 1/2 $10 1/8
HOLDERS. As of April 17, 2001, there were 503 record holders of our
common stock.
DIVIDENDS. We have not declared any cash dividends on our common stock
since we became a fragrance 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 new credit facility prohibits the payment of cash dividends by the
Company and the indentures relating to our 10 3/8% Senior Notes Due 2007 and
our 11 3/4% Senior Secured Notes Due 2011 restrict our ability to pay cash
dividends based upon our ability to satisfy certain financial and other
covenants. See Notes 7 and 8 to Notes to Consolidated Financial Statements.
SERIES D CONVERTIBLE PREFERRED STOCK. As part of the consideration for
the Arden business we acquired on January 23, 2001, we issued to an affiliate
of Unilever 416,667 shares of Series D convertible preferred stock with an
aggregate liquidation value of $50 million. Each share of Series D
convertible preferred stock is convertible into 10 shares of our common stock
at an initial conversion price of $12.00 per share of common stock. The
holder of the Series D convertible preferred stock will be entitled to
convert up to 33.3% of its shares after January 23, 2002, up to 66.6% after
January 23, 2003 and all of its shares after January 23, 2004. In addition,
cumulative dividends of 5% of the outstanding liquidation value of Series D
Convertible Preferred Stock will begin to accrue on January 23, 2003 and will
be payable in cash or in additional shares of Series D convertible preferred
stock. See Note 13 to Notes to Consolidated Financial Statements.
11
ITEM 6. SELECTED FINANCIAL DATA (in thousands, except earnings per share
data)
We derived the following selected financial data from our audited
consolidated financial statements. The following data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
related notes included elsewhere in this Annual Report.
Years Ended January 31,
1997 1998 1999 2000 2001
------------------------------------------------
SELECTED INCOME STATEMENT DATA:
Net sales $140,482 $215,487 $309,615 $361,243 $382,254
Gross profit 42,552 63,210 78,360 107,683 110,651
Income from operations 18,222 31,457 38,684 44,947 40,794
-------- -------- -------- -------- --------
Net income $ 8,248 $ 12,341 $ 12,006 $ 15,329 $ 13,436
======== ======== ======== ======== ========
SELECTED PER SHARE DATA:
Earnings per common share:
Basic: $0.71 $0.92 $0.87 $1.11 $0.99
===== ===== ===== ===== =====
Diluted: $0.60 $0.76 $0.73 $0.99 $0.87
===== ===== ===== ===== =====
Weighted average number of
Common share:
Basic: 11,647 13,394 13,775 13,801 13,555
Diluted: 13,831 16,492 16,729 15,577 15,620
OTHER DATA:
EBITDA $ 21,885 $ 36,195 $ 46,179 $ 56,113 $ 52,918
Net cash (used in) provided by
operating activities (23,221) (40,729) (36,948) 31,971 17,501
Net cash used in
investing activities (21,117) (7,392) (11,142) (3,699) (209,883)
Net cash provided by (used in)
financing activities 45,070 54,932 46,534 (12,239) 187,933
Years Ended January 31,
1997 1998 1999 2000 2001
------------------------------------------------
SELECTED BALANCE SHEET DATA:
Inventories $ 67,989 $ 90,426 $133,306 $127,022 $209,504
Working capital 17,734 122,177 157,457 173,005 180,588
Total assets 172,378 232,653 294,708 309,632 583,147
Short-term debt 37,631 -- 5,639 -- 22,945
Long-term debt, net 37,215 133,785 176,159 175,030 331,145
Convertible, redeemable preferred
stock -- -- -- -- 35,000
Shareholders' equity 44,680 58,626 71,480 82,287 108,429
Following the Arden acquisition, we reclassified warehouse and shipping expenses
in cost of goods sold to conform to the presentation of the Arden business. This
reclassification changes gross profit and selling general and administrative
expenses but has no effect on income from operations, EBITDA or net income.
EBITDA is defined as income from operations, plus depreciation and amortization.
EBITDA should not be considered as an alternative to operating income (loss) or
net income (loss) (as determined in accordance with generally accepted accounting
principles) as a measure of the Company's operating performance or to net cash
provided by operating, investing and financing activities (as determined in
accordance with generally accepted accounting principles) as a measure of its
ability to meet cash needs. We believe that EBITDA is a measure commonly reported
and widely used by investors and other interested parties as a measure of a
company's operating performance and debt servicing ability because it assists
in comparing performance on a consistent basis without regard to depreciation and
amortization, which can vary significantly depending upon accounting methods
(particularly when acquisitions are involved) or non operating factors (such as
historical cost). Accordingly, this information has been disclosed here to permit
a more complete comparative analysis of our operating performance relative to other
companies and of our debt servicing ability. EBITDA, may not, however, be
comparable in all instances to other similar types of measures.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We are a leading global marketer and manufacturer of prestige beauty
products. We have significant direct penetration in the mass retail, mid-tier
retail and prestige department store channels in the United States, as well as
a significant international presence in prestige department stores,
perfumeries, boutiques and travel retail locations. We have established
ourselves as a source of over 225 fragrance brands through brand ownership,
brand licensing and distribution arrangements. Our portfolio of leading owned
and licensed fragrance brands includes Elizabeth Arden's Red Door, 5th Avenue,
Elizabeth Arden green tea and Sunflowers, Elizabeth Taylor's White Diamonds
and Passion, White Shoulders, Geoffrey Beene's Grey Flannel, Halston, Halston
Z-14, PS Fine Cologne for Men, Design and Wings by Giorgio Beverly Hills. Our
skin care brands include Elizabeth Arden's Visible Difference, Ceramides, and
Millenium. Our cosmetics products include lipstick, foundation and other
color cosmetics products under the Elizabeth Arden brand name. In addition to
the brands we own and license, we also distribute more than 150 prestige
fragrance brands to mass and mid-tier retailers in the United States.
On January 23, 2001, we acquired the Elizabeth Arden business including
the Elizabeth Arden lines of fragrance, skin care and cosmetics; the Elizabeth
Taylor brands of fragrances and the White Shoulders fragrance brand, and
related assets and liabilities. Our results of operations include eight days
of financial results from the Elizabeth Arden business.
During the fourth quarter, the Company recorded integration charges of
approximately $5.6 million pre-tax and $3.4 million after-tax. These charges
represent costs related to the integration of the Arden business, including
the effect of conforming accounting policies related to accounting estimates
for accounts receivable and inventory reserves. In addition, the Company has
reclassified the results of the business owned prior to the Arden acquisition
to present warehouse and shipping costs in costs of goods sold. This
reclassification changes gross profit and selling, general and administrative
expenses, but has no effect on income from operations, EBITDA or net income.
Both of these changes were implemented to better conform the accounting
practices and estimates of the Company's business prior to the Arden
acquisition with the Elizabeth Arden business acquired and to present our
results in a comparable manner to those of other global beauty companies.
The following table sets forth, for the periods indicated, certain
information relating to the Company's operations expressed as percentages of
net sales for the period (percentages may not add due to rounding):
Years Ended January 31,
1999 2000 2001
-------------------------
Income Statement Data:
Net sales 100.0% 100.0% 100.0%
Cost of sales 74.7 70.2 71.1
----- ----- -----
Gross profit 25.3 29.8 28.9
Selling, general and administrative expenses 10.4 14.3 15.0
Depreciation and amortization 2.4 3.1 3.2
----- ----- -----
Income from operations 12.5 12.4 10.7
Interest expense, net of interest income 6.0 5.4 5.3
Litigation settlement expense 0.5 -- --
Other income 0.4 -- 0.2
----- ----- -----
Income before income taxes 6.4 7.0 5.6
Provision for income taxes 2.5 2.8 2.1
----- ----- -----
Net income 3.9% 4.2% 3.5%
===== ===== =====
Other Data:
EBITDA margin 14.9% 15.5% 13.8%
EBITDA margin represents EBITDA (as defined in Note 2 under item 6.
"Selected
Financial Data") divided by net sales.
13
Fiscal Year Ended January 31, 2001 Compared to the Fiscal Year Ended January
31, 2000
- ----------------------------------------------------------------------------
Net Sales. Net sales increased $21.0 million, or 5.8%, to $382.3 million
for the fiscal year ended January 31, 2001, from $361.2 million for the fiscal
year ended January 31, 2000. The increase in net sales is primarily due to an
increase in the volume of products sold to existing customers. Sales to the
Company's top 20 retail accounts increased by 15.8% over the prior year.
Management believes that increased sales during the fiscal year ended January
31, 2001, have resulted from our ability to provide our customers with a
larger selection of products and a continuous, direct supply of products, and
growth in sales of customized gift sets.
Gross Profit. Gross profit increased $3.0 million, or 2.8%, to $110.7
million for the fiscal year ended January 31, 2001, from $107.7 million for
the fiscal year ended January 31, 2000. The gross profit margin declined from
29.8% in fiscal 2000 to 28.9% for fiscal 2001, as a result of higher warehouse
and shipping expenses, which were partially offset by an increase in product
sales of higher margin owned and licensed brands (including brands acquired in
connection with the Arden acquisition). The increase in warehouse and shipping
expenses resulted from costs associated with the operation of our promotional
set fulfillment center in Edison, New Jersey, the closing of a promotional set
fulfillment center in Pennsylvania in May 2000, as well as a $2.8 million
integration charge to increase reserves related to inventory to conform
accounting policies of the Company's business prior to the Arden acquisition
with the Elizabeth Arden business acquired. Excluding this integration
charge, gross profit would have totaled $113.5 million with a gross profit
margin of 29.7%.
SG&A. Selling, general and administrative expenses increased $6.2 million,
or 12.0% to $57.7 million for the fiscal year ended January 31, 2001, from
$51.6 million for the fiscal year ended January 31, 2000. As a percentage of
net sales, SG&A expenses increased from 14.3% for the fiscal year ended
January 31, 2000 to 15.0% for the fiscal year ended January 31, 2001. The
increase in SG&A expenses is primarily a result of $2.8 million in integration
charges for increases in reserves related to receivables to conform accounting
policies, as well as expenses related to the increase in sales. Excluding the
effect of the integration charges, SG&A expenses for the fiscal year ended
January 31, 2001, as a percentage of net sales is 14.4%, approximately the
same percentage of expenses to net sales as recorded in the fiscal year ended
January 31, 2000.
Depreciation and Amortization. Depreciation and amortization increased
$1.0 million, or 8.6% to $12.1 million for the fiscal year ended January 31,
2001, from $11.2 million for the fiscal year ended January 31, 2000. The
increase was primarily attributable to the depreciation and amortization
related to (i) additional investments in tools and molds developed for our
manufactured products; and (ii) intangibles and fixed assets acquired as part
of the Arden acquisition.
Interest Expense, Net. Interest expense, net of interest income,
increased approximately $755,000, or 3.9%, to $20.2 million for the fiscal
year ended January 31, 2001, from $19.4 million for the fiscal year ended
January 31, 2000. This increase was primarily due to an increase in average
debt outstanding under our credit facility to support working capital needs.
In addition, we incurred additional interest expense in conjunction with the
Arden acquisition from the closing date of January 23, 2001, including
interest expense on our 11 3/4% Senior Secured Notes due 2011 and borrowings
under our new credit facility. See Notes 7 and 8 to Notes to Consolidated
Financial Statements.
EBITDA. EBITDA (operating income, plus depreciation and amortization)
decreased $3.2 million or 5.7% to $52.9 million for the fiscal year ending
January 31, 2001, from $56.1 million for the fiscal year ended January 31,
2000, including the integration charges discussed above. The EBITDA margin
declined to 13.8% for the fiscal year ended January 31, 2001, from 15.5% for
the fiscal year ended January 31, 2000, including the integration charges.
Excluding the integration charges, EBITDA increased 4.3% to $58.5 million for
the fiscal year ended January 31, 2001, from $56.1 million for the fiscal year
ended January 31, 2000, primarily as a result of the increase in sales.
Excluding the integration charges, the EBITDA margin was relatively flat at
15.3% for the fiscal year ended January 31, 2001, as compared to 15.5% for the
fiscal year ended January 31, 2000.
Net Income. Net income decreased $1.9 million to $13.4 million for the
fiscal year ended January 31, 2001 from $15.3 million for the fiscal year
ended January 31, 2000, including the effects of the integration charges.
Excluding the effects of the integration charges, net income increased $1.5
million or 9.8% to $16.8
14
million for the fiscal year ended January 31, 2001, from $15.3 million for the
fiscal year ended January 31, 2000, primarily as a result of the increase in
net sales and gross margin.
Fiscal Year Ended January 31, 2000 Compared to the Fiscal Year Ended January
31, 1999
- ----------------------------------------------------------------------------
Net Sales. Net sales increased $51.6 million, or 16.7%, to $361.2 million
for the fiscal year ended January 31, 2000, from $309.6 million for the fiscal
year ended January 31, 1999. The increase in net sales was primarily
attributable to an increase in net sales of the brands acquired in connection
with the Paul Sebastian acquisition in January 1999. The increase in net
sales represents both an increase in the volume of products sold to existing
customers (including through increased sell through of existing products and
sales of new products), as well as sales to new customers. Management
believes that increased sales during the fiscal year ended January 31, 2000
have resulted from our Company's ability to provide our customers with a
larger selection of products and a continuous, direct supply of products, and
the growth in sales of customized gift sets.
Gross Profit. Gross profit increased $29.3 million, or 37.4%, to $107.7
million for the fiscal year ended January 31, 2000, from $78.4 million for the
fiscal year ended January 31, 1999. The gross margin increased from 25.3% in
fiscal 1999 to 29.8% in fiscal 2000. The increase in gross profit and gross
margin was primarily attributable to the increase in product sales of the
higher margin brands acquired in connection with the Paul Sebastian
acquisition partially offset by increased labor and facility expenses
associated with the opening of a promotional set fulfillment center in
Pennsylvania in July 1999, the increased sales volume and an increase in
inventory reserves.
SG&A. Selling, general and administrative expenses increased $19.4
million, or 60.2%, to $51.6 million for the fiscal year ended January 31,
2000, from $32.2 million for the fiscal year ended January 31, 1999. As a
percentage of net sales, SG&A expenses increased from 10.4% for the fiscal
year ended January 31, 1999 to 14.3% for the fiscal year ended January 31,
2000. Of the increase in SG&A expenses, $15.9 million represented an increase
in selling and marketing expenses (including advertising co-op, gifts-with-
purchase and salary support programs), primarily as a result of the additional
sales force and promotional and marketing expenses related to the prestige
fragrance lines added in connection with the Paul Sebastian acquisition.
General and administrative expenses for the fiscal year ended January 31, 2000
increased $3.4 million primarily as a result of the addition of information
systems and financial personnel and an increase in the accounts receivable
reserves.
Depreciation and Amortization. Depreciation and amortization increased
$3.7 million, or 49.0%, to $11.2 million for the fiscal year ended January 31,
2000, from $7.5 million for the fiscal year ended January 31, 1999. The
increase was primarily attributable to the amortization of intangibles
acquired in connection with the Paul Sebastian acquisition and the Company's
acquisition of the license for Wings by Giorgio Beverly Hills in November
1998. These intangibles are being amortized over a five-year period.
Interest Expense, Net. Interest expense, net of interest income,
increased approximately $723,000, or 3.9%, to $19.4 million for the fiscal
year ended January 31, 2000, from $18.7 million for the fiscal year ended
January 31, 1999. This increase was primarily due to an increase in average
debt outstanding resulting from the April 1998 offering of $40 million
principal amount of 10 3/8% Series C Senior Notes. See Note 8 to the Notes to
the Consolidated Financial Statements.
EBITDA. EBITDA (operating income, plus depreciation and amortization)
increased $9.9 million, or 21.5%, to $56.1 million for the fiscal year ended
January 31, 2000, from $46.2 million for the fiscal year ended January 31,
1999. EBITDA margin increased to 15.5% for the fiscal year ended January 31,
2000, from 14.9% for the fiscal year ended January 31, 1999. The increase in
EBITDA and EBITDA margin was primarily attributable to the increase in product
sales of the higher margin brands acquired in connection with the Paul
Sebastian acquisition.
Net Income. Net income increased $3.3 million, or 27.7%, to $15.3 million
for the fiscal year ended January 31, 2000, from $12.0 million for the fiscal
year ended January 31, 1999, primarily as a result of the
15
increase in net sales and gross profit, which was partially offset by the
increase in operating expenses associated with the addition of the Paul
Sebastian business.
Seasonality
Our fragrance 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 2001, 65% our net sales were made during the second half of
the fiscal year. Due to the size and timing of certain orders from its
customers, sales and results of operations can vary significantly between
quarters of the same and different years. As a result, we expect to
experience variability in net sales and net income on a quarterly basis.
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, significant cash is normally generated as customer
payments on holiday season orders are received.
Liquidity and Capital Resources
Cash Flows. During the fiscal year ended January 31, 2001, we generated
$17.7 million of cash from operating activities. Of that amount, $24.0
million was generated from operating cash flows, offset by a $6.5 million
increase in working capital including increases in accounts receivable and
inventories and decreases in accounts payable partially offset by an increase
in other payables and accrued expenses. Net cash used in investing activities
totaled $209.9 million. We used $5.2 million of the cash generated to
purchase property and equipment. We also used $204.7 million in cash for the
Arden acquisition, including the cash portion of the purchase price plus cash
expenses due at the closing on January 23, 2001. Cash provided from financing
activities totaled $187.7 million and included $160 million from the senior
secured notes issued concurrent with the Arden acquisition and $22.9 million
borrowed under our new $175 million revolving credit facility with Fleet
National Bank, as administrative agent. Proceeds from conversion of our
convertible preferred stock, exercise of warrants and exercise of stock
options provided an additional $10.0 million, and share repurchases and
repayment of long-term debt used $5.2 million. Cash and cash equivalents
declined by $4.4 million to $17.7 million.
During the fiscal year ended January 31, 2000, we generated $32.0 million
in net cash from operating activities. Of that amount, $7.0 million was
generated from working capital, primarily from a reduction in inventory and an
increase in accounts payable, and the remaining $25.0 million from operating
cash flows. We used $3.7 million of the cash generated to purchase property
and equipment. We also used $12.2 million we generated from financing
activities, including for the repayment of $5.6 million outstanding under our
credit facility, for the retirement of $1.8 million of long-term debt, and for
the repurchase of $5.7 million of our common stock under our share repurchase
program. The remaining $16.0 million was held in short-term investments and
increased the cash and cash equivalents on hand to $22.1 million at the end of
the fiscal year ended January 31, 2000.
Share Repurchases. In fiscal 2000, our board of directors authorized a
share repurchase program that allows us to purchase up to an aggregate of $10
million of our common stock. Under the terms of the program, which has no
expiration date, we may buy stock, from time to time, in the open market or in
privately negotiated transactions, depending on market conditions and other
factors. As of January 31, 2001, we had repurchased an aggregate of 995,400
shares of our common stock under the share repurchase program at an average
price of $6.64. Our new credit facility restricts future share repurchases
under the share repurchase program to $4 million. In connection with our
repurchase in February 2000 of the 7.5% Subordinated Convertible Debenture due
2006 owned by our former chairman and a company he controls, the right to
convert those debentures into 303,333 shares of common stock was extinguished.
Future Liquidity and Capital Needs. We have historically financed, and we
expect to continue to finance, our internal growth and acquisitions primarily
through internally generated funds, our credit facility and external
financing. Our principal future uses of funds are for working capital
requirements, debt service and, additional brand acquisitions or product
distribution arrangements. As a result of the Arden acquisition, our working
capital needs have increased significantly. As a result of the Arden
acquisition, net sales are
16
expected to more than double from fiscal 2001 to fiscal 2002. In addition, we
did not acquire accounts receivable in the Arden acquisition. Future
liquidity needs will be dependent upon the growth of current assets
(principally accounts receivable and inventory) and current liabilities
(principally accrued expenses and accounts payable). Additional inventory
requirements and accounts receivable may have a significant impact on our
liquidity. Our credit facility is secured by a first priority perfected lien
on all of our U.S. inventory and accounts receivable, and borrowing
availability under the credit facility is limited to eligible accounts
receivable and inventory. We believe that internally generated funds and
available financing under our credit facility will be sufficient to cover our
working capital and debt service requirements for the next twelve months other
than additional working capital requirements which may result from further
expansion of our operations through acquisitions of additional brands or new
product distribution arrangements.
We have discussions from time to time with manufacturers of prestige
fragrance brands and with distributors that hold exclusive distribution rights
regarding our possible acquisition of additional exclusive manufacturing
and/or distribution rights. We currently have no agreements or commitments
with respect to any such acquisition, although we periodically execute routine
agreements to maintain the confidentiality of information obtained during the
course of discussions with manufacturers and distributors. There is no
assurance that we will be able to negotiate successfully for any such future
acquisitions or that we will be able to obtain acquisition financing or
additional working capital financing on satisfactory terms for further
expansion of our operations.
The characteristics of our business do not generally require us to make
significant ongoing capital expenditures. During the fiscal year ended January
31, 2001, we incurred approximately $5.2 million in capital expenditures,
primarily relating to computer software and hardware costs and the purchase of
tools and molds and warehouse equipment. We anticipate that our capital
expenditures for the fiscal year ended January 31, 2002 will be approximately
$15.0 million.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK.
As of January 31, 2001, we had approximately $22.9 million outstanding
under our credit facility subject to variable rates. As a result of the Arden
acquisition, we replaced our $60 million credit facility with a $175 million
credit facility for working capital needs. Furthermore, our borrowings under
our credit facility are seasonal with peak borrowings in the third quarter of
our fiscal year. Accordingly, our January 31, 2001 earnings and cash flow
will be affected by changes in interest rates. Assuming the level of
borrowings at variable rates and assuming a two-percentage point change in the
average interest rate under these borrowings, it is estimated that our
interest expense for the year ended January 31, 2001, would increase by
approximately $440,000. To date, we have not engaged in derivative
transactions to mitigate interest rate risk as most of our debt bears a fixed
rate. In the event of an adverse change in interest rates, management may
take actions that would mitigate our exposure to interest rate risk; however,
due to the uncertainty of the actions that would be taken and their possible
effect, this analysis assumes no such action. Further, this analysis does not
consider the effects of the change in the level of the overall economic
activity that could exist in such an environment.
FOREIGN CURRENCY RISK. We conduct our business in various regions of the
world, and export and import products to and from several companies. As a
result of the Arden acquisition, we estimate that approximately 25% of our net
sales will be generated outside the United States in fiscal 2002, in a variety
of currencies including the euro, British pound, Swiss franc and Australian
dollar. Our operations may, therefore, be subject to volatility because of
currency fluctuations, inflation changes and changes in political and economic
conditions in these countries. Sales and expenses are frequently denominated
in local currencies, and results of operations may be affected adversely as
currency fluctuations affect our product prices and operating costs or those
of our competitors. We intend to engage in hedging operations, including
forward foreign exchange contracts, to reduce the exposure of our cash flows
to fluctuations in foreign currency rates. We will not engage in hedging for
speculative investment reasons. Our historical results do not reflect any
foreign exchange hedging activity. There can be no assurance that our hedging
operations will eliminate or substantially reduce risks associated with
fluctuating currencies. Our results of operations are reported in U.S.
dollars. A weakening of the currencies in which we generate sales relative to
the currencies in which our costs are denominated may decrease our operating
profits or cash flow. In all jurisdictions in which we operate, we are also
subject to laws and regulations that govern foreign investment, foreign trade
and currency exchange transactions. These laws and regulations may limit our
ability to repatriate cash as dividends or otherwise to the United States and
may limit our ability to convert foreign currency cash flows into U.S.
dollars.
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . 19
Consolidated Balance Sheets as of January 31, 2000 and 2001 . . . . . 20
Consolidated Statements of Income for the Years Ended
January 31, 1999, 2000 and 2001 . . . . . . . . . . . . . . . . . . . 21
Consolidated Statements of Shareholders' Equity for the Years Ended
January 31, 1999, 2000 and 2001 . . . . . . . . . . . . . . . . . . . 22
Consolidated Statements of Cash Flow for the Years Ended
January 31, 1999, 2000 and 2001 . . . . . . . . . . . . . . . . . . . 23
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . 24
18
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Elizabeth Arden, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Elizabeth
Arden, Inc. (formerly French Fragrances, Inc.) and subsidiaries (the
"Company") as of January 31, 2000 and 2001, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the
three years in the period ended January 31, 2001. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of January 31,
2000 and 2001, and the results of its operations and its cash flows for each
of the three years in the period ended January 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
April 6, 2001
19
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31, 2000 January 31, 2001
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 22,144,314 $ 17,695,306
Accounts receivable, net 63,485,136 48,381,654
Inventories 127,022,405 209,503,786
Advances on inventory purchases 2,785,475 992,917
Prepaid expenses and other assets 9,882,321 12,587,406
------------ ------------
Total current assets 225,319,651 289,161,069
------------ ------------
Property and equipment, net 20,232,312 40,729,679
------------ ------------
Other assets:
Exclusive brand licenses, trademarks and
intangibles, net 55,827,865 227,216,144
Debt financing costs 3,949,009 16,936,880
Deferred income taxes, net 3,337,409 5,126,180
Other assets 965,409 3,976,607
------------ ------------
Total other assets 64,079,692 253,255,811
------------ ------------
Total assets $309,631,655 $583,146,559
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ -- $ 22,945,472
Accounts payable - trade 31,436,903 40,251,481
Other payables and accrued expenses 19,102,919 44,230,217
Current portion of long-term debt 1,775,027 1,145,545
------------ ------------
Total current liabilities 52,314,849 108,572,715
------------ ------------
Long-term debt, net 175,030,227 331,144,936
------------ ------------
Total liabilities 227,345,076 439,717,651
------------ ------------
Commitments and contingencies (See Note 9)
Convertible, redeemable preferred stock, Series D,
$.01 par value (liquidation preference of $120
per share); 1,000,000 shares authorized; no shares
and 416,667 shares issued and outstanding,
respectively -- 35,000,000
------------ ------------
Shareholders' equity:
Convertible, redeemable preferred stock, Series B,
$.01 par value (liquidation preference of $.01
per share); 350,000 shares authorized; 265,801
and no shares issued and outstanding, respectively 2,658 --
Convertible, redeemable preferred stock, Series C,
$.01 par value (liquidation preference of $.01
per share); 571,429 shares authorized; 502,520
and no shares issued and outstanding, respectively 5,025 --
Common stock, $.01 par value, 50,000,000 shares
authorized; 14,186,399 and 16,779,186 shares
issued and outstanding, respectively 141,864 167,792
Additional paid-in capital 32,780,530 46,407,971
Retained earnings 55,030,442 68,466,185
Treasury stock (870,500 and 995,400 shares at cost) (5,673,940) (6,613,040)
------------ ------------
Total shareholders' equity 82,286,579 108,428,908
------------ ------------
Total liabilities and shareholders' equity $309,631,655 $583,146,559
============ ============
See Notes to Consolidated Financial Statements.
20
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended January 31,
1999 2000 2001
------------------------------------------
Net sales $309,614,611 $361,243,106 $382,254,230
Cost of sales 231,254,892 253,560,177 271,603,098
------------ ------------ ------------
Gross profit 78,359,719 107,682,929 110,651,132
------------ ------------ ------------
Operating expenses:
Selling, general and administrative 32,181,044 51,569,777 57,732,901
Depreciation and amortization 7,494,607 11,166,409 12,124,152
------------ ------------ ------------
Total operating expenses 39,675,651 62,736,186 69,857,053
------------ ------------ ------------
Income from operations 38,684,068 44,946,743 40,794,079
------------ ------------ ------------
Other income (expense):
Interest expense, net (18,689,595) (19,412,229) (20,166,804)
Litigation settlement expense (1,500,000) -- --
Income from sale of contract and
intangible rights 932,763 -- 425,000
Other 265,655 (203,923) 474,368
------------ ------------ ------------
Other income (expense), net (18,991,177) (19,616,152) (19,267,436)
------------ ------------ ------------
Income before income taxes 19,692,891 25,330,591 21,526,643
Provision for income taxes 7,686,871 10,001,155 8,090,900
------------ ------------ ------------
Net income $ 12,006,020 $ 15,329,436 $ 13,435,743
============ ============ ============
Earnings per common share:
Basic $0.87 $1.11 $0.99
===== ===== =====
Diluted $0.73 $0.99 $0.87
===== ===== =====
Weighted average number of common shares:
Basic 13,774,993 13,801,196 13,555,419
========== ========== ==========
Diluted 16,728,798 15,577,422 15,620,369
========== ========== ==========
See Notes to Consolidated Financial Statements.
21
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Preferred Stock Additional
Series B Series C Common Stock Paid-in
Shares Amount Shares Amount Shares Amount Capital
--------------------------------------------------------------------------------
Balance at January 31, 1998 279,877 2,799 525,490 5,255 13,623,734 136,238 30,786,503
Issuance of Common Stock
upon conversion of Series B
convertible preferred stock (8,281) (83) -- -- 58,961 589 194,065
Issuance of Common Stock
upon conversion of Series C
convertible preferred stock -- -- (14,135) (141) 14,135 141 74,209
Issuance of Common Stock
upon conversion of 7.5%
subordinated convertible
debentures -- -- -- -- 26,016 260 187,055
Issuance of Common Stock
upon exercise of stock
options -- -- -- -- 35,600 356 117,124
Issuance of Common Stock
upon exercise of warrants -- -- -- -- 54,258 543 274,457
Net income for the year -- -- -- -- -- -- --
------------------------------------------------------------------------------
Balance at January 31, 1999 271,596 2,716 511,355 5,114 13,812,704 138,127 31,633,413
Issuance of Common Stock
upon conversion of Series B
convertible preferred stock (5,795) (58) -- -- 41,259 412 135,800
Issuance of Common Stock
upon conversion of Series C
convertible preferred stock -- -- (8,835) (89) 8,835 89 46,384
Issuance of Common Stock
upon exercise of stock
options -- -- -- -- 318,491 3,185 660,574
Issuance of Common Stock
upon exercise of warrants -- -- -- -- 5,110 51 (51)
Repurchase of Common Stock -- -- -- -- -- -- --
Tax benefit from exercise of
stock options -- -- -- -- -- -- 304,410
Net income for the year -- -- -- -- -- -- --
-------------------------------------------------------------------------------
Balance at January 31, 2000 265,801 2,658 502,520 5,025 14,186,399 141,864 32,780,530
Issuance of Common Stock
upon conversion of Series B
convertible preferred stock (265,801) (2,658) -- -- 1,892,503 18,925 6,228,993
Issuance of Common Stock
upon conversion of Series C
convertible preferred stock -- -- (502,520) (5,025) 502,520 5,025 2,638,230
Issuance of Common Stock
upon conversion of 7.5%
subordinated convertible
debentures -- -- -- -- 25,595 256 184,028
Issuance of Common Stock
upon exercise of stock
options -- -- -- -- 82,169 822 485,817
Issuance of Common Stock
upon exercise of warrants -- -- -- -- 90,000 900 674,100
Issuance of warrants -- -- -- -- -- -- 3,043,000
Repurchase of Common Stock -- -- -- -- -- -- --
Tax benefit from exercise of
stock options -- -- -- -- -- -- 373,273
Net income for the year -- -- -- -- -- -- --
-------------------------------------------------------------------------------
Balance at January 31, 2001 0 $0 0 $0 16,779,186 $167,792 $46,407,971
=============================================================================
(RESTUBBED TABLE FROM ABOVE)
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Total
Retained Treasury Shareholders'
Earnings Stock Equity
------------------------------------------------------------
Balance at January 31, 1998 27,694,986 -- 58,625,781
Issuance of Common Stock
upon conversion of Series B
convertible preferred stock -- -- 194,571
Issuance of Common Stock
upon conversion of Series C
convertible preferred stock -- -- 74,209
Issuance of Common Stock
upon conversion of 7.5%
subordinated convertible
debentures -- -- 187,315
Issuance of Common Stock
upon exercise of stock
options -- -- 117,480
Issuance of Common Stock
upon exercise of warrants -- -- 275,000
Net income for the year 12,006,020 -- 12,006,020
-----------------------------------------------------------
Balance at January 31, 1999 39,701,006 -- 71,480,376
Issuance of Common Stock
upon conversion of Series B
convertible preferred -- -- 136,154
Issuance of Common Stock
upon conversion of Series C
convertible preferred stock -- -- 46,384
Issuance of Common Stock
upon exercise of stock
options -- -- 663,759
Issuance of Common Stock
upon exercise of warrants -- -- --
Repurchase of Common Stock -- (5,673,940) (5,673,940)
Tax benefit from exercise of
stock options -- -- 304,410
Net income for the year 15,329,436 -- 15,329,436
-----------------------------------------------------------
Balance at January 31, 2000 55,030,442 (5,673,940) 82,286,579
Issuance of Common Stock
upon conversion of Series B
convertible preferred stock -- -- 6,245,260
Issuance of Common Stock
upon conversion of Series C
convertible preferred -- -- 2,638,230
Issuance of Common Stock
upon conversion of 7.5%
subordinated convertible
debentures -- -- 184,284
Issuance of Common Stock
upon exercise of stock
options -- -- 486,639
Issuance of Common Stock
upon exercise of warrants -- -- 675,000
Issuance of warrants -- -- 3,043,000
Repurchase of Common Stock -- (939,100) (939,100)
Tax benefit from exercise of
stock options -- -- 373,273
Net income for the year 13,435,743 -- 13,435,743
-----------------------------------------------------------
Balance at January 31, 2001 $68,466,185 $(6,613,040) $108,428,908
See Notes to Consolidated Financial Statements
22
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
Years Ended January 31,
1999 2000 2001
----------------------------------------
Cash Flows from Operating Activities:
Net income $ 12,006,020 $ 15,329,436 $ 13,435,743
Adjustments to reconcile net income to cash
(used in) provided by operating activities:
Depreciation and amortization 7,494,607 11,166,409 12,124,152
Amortization of senior note offering
Costs and note premium 556,084 569,487 237,269
Deferred tax benefit (369,520) (2,129,256) (1,788,771)
Change in assets and liabilities, net of
effects from acquisitions:
Increase in accounts receivable (249,999) (12,444,389) (3,877,670)
(Increase) decrease in inventories and
advances on inventory purchases (32,894,592) 10,078,532 (3,258,823)
Increase in prepaid expenses and
other assets (2,288,307) (2,003,967) (70,915)
(Decrease) increase in accounts payable (16,171,948) 9,738,399 (3,742,115)
(Decrease) increase in other payables
and accrued expenses (5,030,105) 1,666,189 4,441,685
------------ ------------ ------------
Net cash (used in) provided by
operating activities (36,947,760) 31,970,840 17,500,555
------------ ------------ ------------
Cash Flows from Investing Activities:
Purchase of licenses, trademarks and
intangibles (7,882,381) -- --
Additions to property and equipment,
net of disposals (3,259,481) (3,699,353) (5,206,921)
Acquisition of Elizabeth Arden business -- -- (204,676,000)
------------ ------------ ------------
Net cash used in investing activities (11,141,862) (3,699,353) (209,882,921)
------------ ------------ ------------
Cash Flows from Financing Activities:
Net proceeds from (payments on) short-term
debt 5,639,369 (5,639,369) 22,945,472
Payments on long-term debt (1,266,523) (1,771,764) (4,118,143)
Proceeds from the issuance of senior notes 41,500,000 -- 160,000,000
Proceeds from the exercise of stock options 117,480 663,759 486,639
Proceeds from the exercise of stock purchase
warrants 275,000 -- 675,000
Proceeds from the conversion of preferred
stock 268,780 182,538 8,883,490
Repurchase of common stock -- (5,673,940) (939,100)
------------ ------------ ------------
Net cash provided by (used in)
financing activities 46,534,106 (12,238,776) 187,933,358
------------ ------------ ------------
Net (Decrease) increase in Cash and
Cash Equivalents (1,555,516) 16,032,711 (4,449,008)
Cash and Cash Equivalents at Beginning of Year 7,667,119 6,111,603 22,144,314
------------ ------------ ------------
Cash and Cash Equivalents at End of Year $ 6,111,603 $ 22,144,314 $ 17,695,306
============ ============ ============
Supplemental Disclosure of Cash Flow Information:
Interest paid during the year $ 16,766,085 $ 19,019,248 $ 19,347,114
============ ============ ============
Income taxes paid during the year $ 12,430,731 $ 1,445,481 $ 13,604,276
============ ============ ============
See Notes to Consolidated Financial Statements.
23
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY.
Elizabeth Arden, Inc. (the "Company") is a manufacturer and marketer of
prestige designer fragrances, skin treatment and cosmetic products, to
retailers in the United States and over 90 countries internationally. The
Company was formerly known as French Fragrances, Inc. until the Arden
acquisition on January 23, 2001. See Note 2.
BASIS OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company's majority-owned domestic and international
subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
USE OF ESTIMATES. The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REVENUE RECOGNITION. Sales are recognized when title and the risk of
loss transfers to the customer, generally upon shipment. Sales are recorded
net of returns and the accrued sales returns liability which represents
management's estimate of future returns based on historical experience and
considering current external factors and market conditions. During the
fiscal years ended January 31, 1999, 2000 and 2001, two customers accounted
for an aggregate of 28%, 29% and 30%, respectively, of the Company's net
sales. The Securities and Exchange Commission (the "SEC") issued Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements. SAB No. 101 summarizes the SEC's views on the application of
generally accepted accounting principles to revenue recognition. The Company
has reviewed SAB No. 101 and believes that it is in compliance with the SEC's
interpretation of revenue recognition.
COST OF SALES. The Company has reclassified its results to present
warehouse and shipping costs in cost of sales in order to conform its
accounting practices and policies with those of the Elizabeth Arden business.
This reclassification changes gross profit, as well as selling general and
administrative expense, but has no effect on income from operations or net
income. Warehouse and shipping expenses reclassified as cost of sales were
$10,133,310, $17,431,187 and $27,040,106 in the fiscal years ended January
31, 1999, 2000 and 2001, respectively.
MARKET RISK. The Company is subject to fluctuations in interest rates
and foreign currency rates, as well as changes in worldwide economic and
political conditions. As a result of the Arden acquisition, the Company
expects that approximately 25% of net sales will be generated outside the
United States in a number of countries primarily located in Europe and Asia.
The Company's financial performance may be affected by changes in currency
exchange rates and regulations, duties and price controls, developments in
political, economic, and taxation policies of the countries in which it
operates. As the Arden acquisition was consummated on January 23, 2001, the
Company had not engaged in foreign currency hedging transactions.
Furthermore, as a significant amount of the Company's debt bears a fixed
rate, the Company does not engage in derivative transactions to hedge
interest rate risk. The adoption of Statement of Financial Accounting
Standard No. 133, Accounting for Derivative Instruments and hedging
Activities as of February 1, 2001, did not have a material impact on the
Company's consolidated financial statements.
FOREIGN CURRENCY TRANSLATION. The financial statements of the Company's
non-U.S. subsidiaries are translated in accordance with SFAS No. 52 Foreign
Currency Translation. The Company acquired the assets of its non-U.S.
subsidiaries on January 23, 2001, as part of the Arden acquisition.
Consequently, transaction and translation gains and losses were not material
to the Company's consolidated financial statements for the fiscal year ended
January 31, 2001.
24
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (Continued)
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include cash and
interest-bearing deposits at banks with an original maturity date of three
months or less.
INVENTORIES. Inventories are stated at the lower of cost or market.
Cost is principally determined on the weighted-average method. See Note 4.
ACCOUNTS RECEIVABLE. A provision has been made and an allowance
established for potential losses from receivables and estimated sales returns
in the normal course of business. Because these allowances are based on
estimates, there is no assurance that such reserves and allowances will be
sufficient to cover losses or returns. See Note 3.
PROPERTY AND EQUIPMENT, AND DEPRECIATION. Property and equipment are
stated at cost. Expenditures for major improvements and additions are
recorded to the asset accounts while replacements, maintenance and repairs
which do not improve or extend the lives of the respective assets are charged
to expense. Depreciation is provided over the estimated useful lives of the
assets using the straight-line method. See Note 5.
EXCLUSIVE BRAND LICENSES AND TRADEMARKS, AND AMORTIZATION. These
intangible assets are being amortized using the straight-line method over
their estimated useful lives. See Note 6.
LONG-LIVED ASSETS. Long-lived assets are reviewed on an ongoing basis
for impairment based on comparison of carrying value against undiscounted
future cash flows. If an impairment is identified the asset's carrying value
is adjusted to estimated fair value. No such adjustments were recorded for
the fiscal years ended January 31, 1999, 2000 and 2001.
SENIOR NOTE OFFERING COSTS. Debt issuance costs and transaction fees
which are associated with the issuance of senior notes, are being amortized
(and charged to interest expense) over the term of the related notes using a
method which approximates the level yield method. See Note 8.
ADVERTISING AND PROMOTIONAL COSTS. Advertising and promotional costs
are expensed as incurred. Advertising and promotional costs totaled
approximately $4.8 million, $10.2 million and $8.2 million during the fiscal
years ended January 31, 1999, 2000 and 2001, respectively.
INCOME TAXES. The provision for income taxes is the tax payable or
refundable for the period plus or minus the change during the period in
deferred tax assets and liabilities. The Company provides for deferred taxes
under the liability method. Under such method, deferred taxes are adjusted
for tax rate changes as they occur. Deferred income tax assets and
liabilities are computed annually for differences between the financial
statements and tax bases of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws and
rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are recorded when necessary to
reduce deferred tax assets to the amount expected to be realized. The
Company intends to reinvest its undistributed international earnings to
expand its international operations; therefore, no tax has been provided to
cover the repatriation of such undistributed earnings.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company's financial
instruments include accounts receivable, accounts payable, short-term debt,
long-term debt and convertible redeemable preferred stock. See Note 8 for
the fair value of the Company's debentures and notes. The fair value of all
other financial instruments was not materially different than their carrying
value as of January 31, 2000 and 2001. See Note 8.
25
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (Continued)
SEGMENT INFORMATION. In June 1997, the FASB issued SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. As of
January 31, 2001, the Company operates solely in one segment, the marketing
and manufacture of prestige beauty products. Revenues from customers outside
the United States totaled $2.6 million, $3.0 million and $4.1 million, in
fiscal 1999, 2000 and 2001, respectively.
EARNINGS PER SHARE. Basic earnings per share is computed by dividing
the net income available to common shareholders by the weighted average
shares of outstanding common stock. The calculation of diluted earnings per
share is similar to basic earnings per share except that the denominator
includes dilutive potential common stock such as stock options, warrants and
convertible securities. In addition, for the dilutive earnings per share
calculation, the interest incurred on the convertible securities, net of tax,
is added back to net income. See Note 13.
STOCK-BASED COMPENSATION. Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation, encourages, but
does not require, companies to record compensation cost for stock-based
employee and non-employee members of the Board of Directors of the Company
(the "Board") compensation plans at fair value. The Company has chosen to
continue to account for stock-based compensation to employees and non-
employee members of the Board using the intrinsic value method as prescribed
by Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock
Issued to Employees, and related interpretations. Accordingly, compensation
cost for stock options issued to employees and non-employee members of the
Board are measured as the excess, if any, of the fair value of the Company's
stock at the date of grant over the amount an employee or non-employee member
of the Board must pay for the stock. See Note 14.
RECLASSIFICATIONS. Certain amounts in the prior period consolidated
financial statements have been reclassified to conform with fiscal 2001
presentations.
2. ACQUISITIONS
JPF ACQUISITION. In March 1998, the Company acquired (the "JPF
Acquisition") certain assets of J.P. Fragrances, Inc. ("JPF"), a distributor
of prestige fragrance products, including inventory, returns, contract
rights, accounts receivable, books and records, fixed assets (including
furniture and warehouse materials and equipment), claims, intangible rights
(including non-compete agreements) and goodwill (collectively, the "JPF
Acquired Assets"). The Company also assumed approximately $10.6 million of
certain trade and other payables of JPF. In addition to the assumption of
payables, the purchase price for the JPF Acquired Assets consisted of
approximately $37.3 million in cash and a subordinated debenture of $3
million (the "JPF Debenture"). The cash portion of the purchase price was
financed from available cash from operations and the Company's current
revolving credit facility, which financing was replaced by the offering of 10
3/8% Series C Senior Notes due 2007. See Note 8. The JPF Debenture is non-
interest bearing, with the principal amount being payable in three equal
installments on May 1999, 2000 and 2001 if, and only if, certain conditions
relating to the fragrance business of JPF (the "JPF Business") are achieved
by the Company, including achieving certain gross profit thresholds from the
JPF Business. To date, the Company has made two payments on the JPF
Debenture. The JPF Debenture has been recorded net of its discount of
$485,528 and calculated using an effective rate of 9.38%. The discount will
be amortized using the effective rate over the life of the JPF Debenture. As
a result of the JPF Acquisition, the Company acquired approximately $30.4
million of inventory, $12.1 million of accounts receivable, $263,000 of fixed
assets (consisting primarily of office and warehouse furniture and
equipment), and approximately $7.7 million of contract rights, intangible
rights (including non-compete agreements) and goodwill. The JPF Acquisition
was accounted for under the purchase method.
26
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. ACQUISITIONS - (Continued)
PSI ACQUISITION. In January 1999, the Company acquired certain assets
(the "PSI Acquisition") of Paul Sebastian, Inc. ("PSI"), a manufacturer,
marketer and distributor of prestige fragrance products, including trademarks
or licenses to manufacture and distribute the fragrance brands PS Fine
Cologne for Men, Design for Women, Design for Men, Casual for Women and
Casual for Men, inventory, returns, accounts receivable, books and records,
fixed assets (consisting of manufacturing tools, dyes and molds), claims and
goodwill (collectively, the "PSI Acquired Assets"). The purchase price for
the PSI Acquired Assets consisted of approximately $9.7 million in cash and a
subordinated debenture of $500,000 (the "PSI Debenture"). The cash portion
of the purchase price was financed from available cash from operations. The
PSI Debenture was non-interest bearing and was paid in July 2000. The PSI
Acquisition was accounted for under the purchase method.
ELIZABETH ARDEN ACQUISITION. On January 23, 2001, the Company
completed the acquisition of the assets of the Elizabeth Arden business (the
"Arden acquisition") from Unilever N.V. and its affiliates ("Unilever"). The
assets included certain trademarks and patents for the Elizabeth Arden brands
of prestige fragrances, cosmetics and skin care lines including Red Door, 5th
Avenue, Sunflowers, Visible Difference, Millenium and Ceramides. The Company
also acquired the license for the Elizabeth Taylor fragrance brands including
White Diamonds and Passion, as well as the trademark for the White Shoulders
fragrance brand. In addition to the trademarks, patents and licenses, the
Company acquired inventory, returns, contract rights (including leases for
distribution and office facilities worldwide), fixed assets (including
equipment, tools and molds, furniture, and a manufacturing plant in South
Africa), books and records and goodwill. The Company also assumed certain
liabilities for product returns and demonstrator accruals. In addition to
the assumed liabilities, the Company paid $190 million in cash at the closing
(exclusive of fees and expenses of advisors), subject to final adjustment,
and $50 million in aggregate liquidation preference of our Series D
convertible preferred stock issued to Unilever. See Note 13.
The Company funded the cash portion of the acquisition price for the
Arden acquisition and the related fees and expenses with $204.7 million in
cash from (1) the proceeds from the offering of $160 million of 11 3/4%
Senior Secured Notes due 2011 (the "2001 Note Offering") and (2) borrowings
under a new $175 million revolving credit facility with a bank syndicate of
which Fleet National Bank ("Fleet") is the administrative agent (the "New
Credit Facility"), which replaced the Company's existing $60 million
revolving credit facility with Fleet. See Notes 7 and 8. The Arden
acquisition was accounted for under the purchase method.
The following unaudited information presents the Company's pro forma
operating data for the year ended January 31, 1999, 2000, and 2001, as if the
Elizabeth Arden acquisition and the January 2001 offering of $160 million of
11 3/4% Senior Secured Notes due 2011 had been consummated at the beginning
of each of the periods presented and includes certain adjustments to the
historical consolidated statements of income of the Company to give effect to
the acquisition of the net assets of the Elizabeth Arden business, the
payment of the purchase price and the increased amortization of intangible
assets as a result of the Arden acquisition and the related issuance of
additional indebtedness. The unaudited pro forma financial data is not
necessarily indicative of the results of operations that would have been
achieved had the Arden acquisition and the 2001 Note Offering been
consummated prior to the period in which they were completed, or that might
be attained in the future. Note that the fiscal year end of the Elizabeth
Arden business is each December 31, preceding the January 31 year-end
presented below.
27
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. ACQUISITIONS - (Continued)
(Unaudited)
Years Ended January 31,
1999 2000 2001
-----------------------------------------
Net sales $794,968,000 $856,868,000 $869,829,000
Income from operations $54,967,000 $86,587,000 $104,687,000
Net income attributable to common
shareholders $9,149,000 $31,313,000 $35,379,000
Earnings per common share:
Basic $0.48 $1.78 $2.43
===== ===== =====
Diluted $0.41 $1.48 $1.79
===== ===== =====
3. ACCOUNTS RECEIVABLE, NET
The following table details the provisions and allowances established
for potential losses from receivables and estimated sales returns in the
normal course of business. Liabilities for product returns assumed in the
Arden acquisition are excluded.
Years Ended January 31,
1999 2000 2001
------------------------------------------
Allowance for Bad Debt:
Beginning balance $ 676,387 $ 533,696 $ 1,165,670
Provision 401,626 1,138,800 1,200,000
Write offs, net of recoveries (544,317) (506,826) (1,376,978)
----------- ------------ ------------
Ending balance $ 533,696 $ 1,165,670 $ 988,692
=========== ============ ============
Allowance for Sales Returns:
Beginning balance $ 558,651 $ 555,245 $ 816,445
Provision 7,630,810 13,289,613 18,214,837
Actual returns (7,634,216) (13,028,413) (16,999,837)
----------- ------------ ------------
Ending balance $ 555,245 $ 816,445 $ 2,031,445
=========== ============ ============
4. INVENTORIES
Inventory balances at January 31, 2000 and 2001 were as follows:
January 31,
2000 2001
-----------------------------
Finished $103,548,955 $151,490,901
Work in progress 6,727,835 15,226,977
Raw materials 16,745,615 42,785,908
------------ ------------
$127,022,405 $209,503,786
============ ============
28
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
January 31, Estimated
2000 2001 Useful Life
--------------------------------------
Land $ 2,871,000 $ 2,936,000 --
Building 5,519,452 5,578,452 40
Building improvements 5,240,713 6,817,945 20 - 40
Furniture and fixtures 1,172,620 1,431,173 8 - 14
Machinery, equipment and vehicles 3,989,700 10,891,312 3 - 14
Computer equipment and software 5,567,043 7,995,636 3 - 5
Counters and trade fixtures -- 8,393,000 3
Tools and molds 2,282,659 3,852,012 1 - 3
----------- -----------
26,643,187 47,895,530
Less accumulated depreciation (6,965,700) (8,947,817)
----------- -----------
19,677,487 38,947,713
Projects in progress 554,825 1,781,966
----------- -----------
Property and