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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 1-6370
Elizabeth Arden, Inc.
(Exact name of registrant as specified in its charter)
Florida 59-0914138
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
14100 N.W. 60th Avenue
Miami Lakes, Florida 33014
(Address of principal executive offices)
(305) 818-8000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
Par Value
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of
the registrant as of April 25, 2002 was approximately $181 million based on the
$12.55 per share average of the bid and ask prices for the Common Stock on the
Nasdaq National Market on such date and determined by subtracting from the
number of shares outstanding on that date the number of shares held by the
registrant's directors, executive officers and holders of at least 10% of the
outstanding shares of Common Stock.
As of April 25, 2002, the registrant had 17,568,749 shares of Common
Stock outstanding.
Documents Incorporated by Reference
Part III - Portions of the Registrant's Proxy Statement relating to the 2002
Annual Meeting of Shareholders to be held on June 25, 2002.
Elizabeth Arden, Inc.
FORM 10-K
TABLE OF CONTENTS
Part I Page
----
Item 1. Business................................................................. 3
Item 2. Properties............................................................... 10
Item 3. Legal Proceedings........................................................ 10
Item 4. Submission of Matters to a Vote of Security Holders...................... 10
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters...................................................... 11
Item 6. Selected Financial Data.................................................. 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................... 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............... 20
Item 8. Financial Statements and Supplementary Data.............................. 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................................... 48
Part III
Item 10. Directors and Executive Officers of the Company.......................... 49
Item 11. Executive Compensation................................................... 49
Item 12. Security Ownership of Certain Beneficial Owners
and Management........................................................... 49
Item 13. Certain Relationships and Related Transactions........................... 49
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K...................................................... 50
Signatures ......................................................................... 53
2
IN CONNECTION WITH THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995, ELIZABETH ARDEN, INC. IS HEREBY PROVIDING
CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS THAT COULD CAUSE OUR ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN FORWARD-LOOKING STATEMENTS
(AS DEFINED IN SUCH ACT) MADE IN THIS ANNUAL REPORT ON FORM 10-K. ANY STATEMENTS
THAT EXPRESS, OR INVOLVE DISCUSSIONS AS TO EXPECTATIONS, BELIEFS, PLANS,
OBJECTIVES, ASSUMPTIONS OR FUTURE EVENTS OR PERFORMANCE (OFTEN, BUT NOT ALWAYS,
THROUGH THE USE OF WORDS OR PHRASES SUCH AS "WILL LIKELY RESULT," "ARE EXPECTED
TO," "WILL CONTINUE," "IS ANTICIPATED," "ESTIMATED," "INTENDS," "PLANS" AND
"PROJECTION") ARE NOT HISTORICAL FACTS AND MAY BE FORWARD-LOOKING AND MAY
INVOLVE ESTIMATES AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING STATEMENTS. ACCORDINGLY,
ANY SUCH STATEMENTS ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO, AND ARE
ACCOMPANIED BY, THE FOLLOWING KEY FACTORS THAT HAVE A DIRECT BEARING ON OUR
RESULTS OF OPERATIONS: OUR SUBSTANTIAL INDEBTEDNESS AND DEBT SERVICE
OBLIGATIONS; OUR ABILITY TO SUCCESSFULLY AND COST-EFFECTIVELY INTEGRATE ACQUIRED
BUSINESSES OR NEW BRANDS; THE ABSENCE OF CONTRACTS WITH OUR CUSTOMERS OR
SUPPLIERS AND OUR ABILITY TO MAINTAIN AND DEVELOP RELATIONSHIPS WITH CUSTOMERS
AND SUPPLIERS; THE RETENTION AND AVAILABILITY OF KEY PERSONNEL; CHANGES IN THE
RETAIL, FRAGRANCE AND COSMETIC INDUSTRIES; OUR ABILITY TO LAUNCH NEW PRODUCTS
AND IMPLEMENT OUR GROWTH STRATEGY; GENERAL ECONOMIC AND BUSINESS CONDITIONS; THE
IMPACT OF COMPETITIVE PRODUCTS AND PRICING; RISKS OF INTERNATIONAL OPERATIONS;
SUPPLY CONSTRAINTS OR DIFFICULTIES; AND OTHER RISKS AND UNCERTAINTIES. WE
CAUTION THAT THE FACTORS DESCRIBED HERE COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS WE MAKE AND
THAT INVESTORS SHOULD NOT PLACE UNDUE RELIANCE ON ANY SUCH FORWARD-LOOKING
STATEMENTS. FURTHER, ANY FORWARD-LOOKING STATEMENT SPEAKS ONLY AS OF THE DATE ON
WHICH SUCH STATEMENT IS MADE, AND WE UNDERTAKE NO OBLIGATION TO UPDATE ANY
FORWARD-LOOKING STATEMENT TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE ON
WHICH SUCH STATEMENT IS MADE OR TO REFLECT THE OCCURRENCE OF ANTICIPATED OR
UNANTICIPATED EVENTS OR CIRCUMSTANCES. NEW FACTORS EMERGE FROM TIME TO TIME, AND
IT IS NOT POSSIBLE FOR US TO PREDICT SUCH FACTORS. FURTHER, WE CANNOT ASSESS THE
IMPACT OF EACH SUCH FACTOR ON OUR RESULTS OF OPERATIONS OR THE EXTENT TO WHICH
ANY FACTOR, OR COMBINATION OF FACTORS, MAY CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE CONTAINED IN ANY FORWARD-LOOKING STATEMENTS.
PART I
ITEM 1. BUSINESS
General
Elizabeth Arden, Inc., a corporation established in Florida in 1960, is
a leading global marketer and manufacturer of prestige beauty products. Our
portfolio of leading fragrance brands includes Elizabeth Arden's Red Door, 5th
Avenue, Elizabeth Arden green tea and Sunflowers, Elizabeth Taylor's White
Diamonds and Passion, White Shoulders, Geoffrey Beene's Grey Flannel, Halston,
Halston Z-14, PS Fine Cologne for Men, Design and Wings by Giorgio Beverly
Hills. Our skin care brands include Elizabeth Arden's Visible Difference,
Ceramides, and Millenium. Our cosmetics products include lipstick, foundation
and other color cosmetics products under the Elizabeth Arden brand name. In
addition to the brands we own and license, we also distribute more than 125
prestige fragrance brands to many retailers in the United States, providing us
with a broader portfolio of brands. Internationally we also distribute select
fragrances, in addition to our owned and licensed brands.
We sell our prestige beauty products in more than 40,000 separate
retail locations in the United States and internationally, including mass
retailers such as Wal-Mart, Target, Walgreens, and CVS, mid-tier retailers such
as JCPenney, Sears and Kohl's, prestige department stores such as Dillard's, The
May Company, Federated Department Stores, Belk's and Nordstrom and international
retailers such as Boots, Debenhams and Sephora. In the United States, we
currently sell our skin care and cosmetic products primarily in prestige
department stores and our fragrances in prestige department stores, mass and
mid-tier retailers. We also sell our Elizabeth Arden brands of fragrances, skin
care and cosmetics products in over 90 other countries
3
worldwide through perfumeries, boutiques and department stores, and through
travel retail outlets such as duty free shops and airport boutiques. In fiscal
2002, net sales in the United States were $512.4 million (comprising
approximately 70% of total net sales), while net sales outside the United States
were $219.1 million (comprising approximately 30% of total sales). Our most
important foreign countries in terms of net sales during fiscal 2002 were the
United Kingdom with approximately $37 million, Canada with approximately $18
million, and Italy with approximately $16 million.
We provide a portfolio of products and value-added services to our
customers in the United States. We distinguish ourselves from other prestige
beauty companies by offering a large selection of brands and tailoring the
marketing, promotion, size and packaging of our products to suit our customers.
We also provide our customers with value-added services, including category and
inventory management and fulfillment services that our competitors do not
typically provide. We believe that the breadth of products and level of services
we provide have enabled us to gain a leading share of the mass and mid-tier
retail prestige beauty products markets in the United States in particular, and
to become an important and valued supplier for many of our customers. For
example, JCPenney designated us as their Supplier of the Year in our category in
each of the past three years and Wal-Mart designated us as their Supplier of the
Year in our category in 1999.
On January 23, 2001, we acquired the Elizabeth Arden business,
including the Elizabeth Arden line of fragrance skin care and cosmetic brands,
the Elizabeth Taylor fragrance brands and the White Shoulders fragrance brand
from affiliates of Unilever N.V. Following the acquisition, we changed our name
to Elizabeth Arden, Inc. As a result of this acquisition, our sales almost
doubled from approximately $382 million in fiscal 2001 to $732 million in fiscal
2002 and our international sales also increased significantly from $4.1 million
in fiscal 2001 to $219.1 million in fiscal 2002. Prior to this acquisition, we
were involved primarily in the marketing and sales of fragrance products in the
United States and international sales were not material. Net sales grew from
$215 million in fiscal 1998 to $382 million in fiscal 2001, largely as a result
of the increased selection of products offered from brand acquisitions and new
supplier relationships and increased services provided to our retailers.
Business Strategy
We seek to continue our growth as a leading marketer and manufacturer
of prestige beauty products worldwide by implementing the following strategies:
Enhance Brand Performance. We intend to increase the sales and
profitability of our brands through our marketing expertise coupled with our
direct distribution capability. Our brands are promoted through consistent use
of logos, packaging and advertising designed to enhance their images and
differentiate them from other brands. We recently announced that actress
Catherine Zeta-Jones will serve as our global spokesperson to market our
Elizabeth Arden lines. In addition, we reinvigorate our brand portfolio with new
brand introductions and extensions. For example, during fiscal 2002 we
introduced Brilliant White Diamonds, an extension of the popular Elizabeth
Taylor White Diamonds brand and Spiced Green Tea, an extension of our Elizabeth
Arden green tea line and Unbound for Women, a new product for the Halston brand.
During the current fiscal year, we are planning launches of a new Elizabeth
Arden and a new Elizabeth Taylor fragrance.
Strengthen and Expand Relationships with Retailers. We intend to
increase the sales volume of our products by expanding our customer base and by
continuing to develop innovative services that help our customers to maximize
their sales of prestige beauty products. For example, we recently developed an
open sell program for selected retailers in the United States in which we
package individual pieces in a security-coded plastic envelope so that retailers
can place the products on open display counters and shelves rather than in
locked cases. Three of our largest customers have recently implemented open sell
programs and we believe that the open sell format will contribute to increases
in units sold by these retailers.
Pursue Business Efficiencies. The combination of the Elizabeth Arden
business with our existing business significantly increased the scale of our
operations and provides opportunities to improve our operating efficiency.
During fiscal 2002, we integrated the personnel from both businesses,
consolidated warehouse locations, implemented cost reduction programs,
transitioned the Elizabeth Arden businesses in France, Germany and Japan to a
distribution model and realigned our prestige department store business to
reduce expenses. We continue to pursue additional business efficiencies
including reducing our overhead expenses, integrating our information technology
platforms, and realizing volume purchasing benefits.
4
Acquire Control of Additional Prestige Brands. We intend to continue to
opportunistically acquire control of additional brands that enjoy established
consumer loyalty but can be more profitably managed. We previously served as a
distributor for several of the brands that we acquired and we believe that our
familiarity with these brands prior to their acquisition, along with our strong
market position, contributed significantly to our ability to integrate them into
our operations. We believe that our acquisition of ownership or control of
brands enables us to generate higher gross margins and greater overall profits.
While we continually review acquisition opportunities for prestige fragrance
brands, we have no commitments or agreements for any acquisitions at the current
time.
Further Expand Selection of Distributed Fragrance Brands. We intend to
continue to develop our distribution business by increasing the number of
prestige fragrance brands we distribute. Our market position as an established
distributor, our broad selection of fragrances and our relationships with
leading fragrance houses provides us with opportunities to expand our line of
distributed brands. We believe that increasing our line of distributed brands
also makes us a more attractive source of supply for our customers.
Products
Fragrance. We offer a wide variety of fragrance products for both men
and women, including perfume, cologne, eau de toilette, body spray, men's
cologne and gift sets. Each fragrance is sold in a variety of sizes and
packaging arrangements. In addition, each fragrance line may be complemented by
ancillary bath and body products, such as soaps, deodorants, body lotions, gels,
creams and dusting powder, that are based on the particular fragrance. We tailor
the size and packaging of the fragrance to suit the particular target customer.
Our fragrance products generally retail at prices ranging from $20 to $100,
depending on the size of the product.
Our owned and licensed brands include Elizabeth Arden brands such as
Red Door, 5/th/ Avenue, Splendor, Sunflowers and Elizabeth Arden green tea, the
Elizabeth Taylor brands such as White Diamonds and Passion, the Halston brands
Halston and Halston Z-14, Geoffrey Beene's Grey Flannel, Wings by Giorgio
Beverly Hills, White Shoulders, PS Fine Cologne for Men, Design and Casual. In
addition to the brands we own and license, we also distribute fragrances under
brands manufactured by others, principally to mass and mid-tier retailers. For
the year ended January 31, 2002, net sales of fragrance and ancillary products
amounted to $542.5 million, or approximately 74% of our net sales. Net sales of
fragrance and ancillary products accounted for substantially all of our net
sales during prior fiscal year periods.
Skin care. Under the Elizabeth Arden name, our skin care line includes
a broad range of products for both men and women such as moisturizers, creams,
lotions, cleansers and sunscreens. Many of the products are designed for use on
a particular part of the body such as the face, or address a particular problem
such as aging or dry skin. We sell skin care products internationally and in the
United States in prestige department stores and, to a lesser extent, through
independently operated Elizabeth Arden salons and stores. Our skin care products
generally retail at prices ranging from $15 to $60. We frequently market skin
care products with samples or gifts. We market our skin care products under the
Elizabeth Arden brand including products such as Visible Difference, Ceramides
and Millenium. For the year ended January 31, 2002, net sales of skin care
products totaled $119.0 million or approximately 16% of our net sales.
Cosmetics. Under the Elizabeth Arden name, we offer a variety of
cosmetics including foundations, lipsticks, mascaras, eye shadows and powders.
We offer these products in a wide array of shades and colors. We sell our
cosmetics internationally and in the United States in prestige department
stores, and, to a lesser extent, through independently operated Elizabeth Arden
salons and stores. Our cosmetics products generally retail at prices ranging
from $10 to $28. For the year ended January 31, 2002, net sales of cosmetics
amounted to $70.0 million, or approximately 10% of our net sales.
We use third-party contract manufacturers in the United States and
Europe to obtain substantially all raw materials, components and packaging
products and for the manufacture of finished products relating to our owned and
licensed brands. In order to transition the manufacture of the brands acquired
as part of the Elizabeth Arden business, we entered into manufacturing
agreements with affiliates of Unilever to manufacture certain of our products
for a limited period of time. Under a manufacturing agreement for Unilever's Las
Piedras, Puerto Rico plant, Unilever will manufacture for us the Elizabeth Arden
and Elizabeth Taylor fragrance products until December 31, 2002. Pricing is
based on a cost per piece. Our Elizabeth Arden skin care and cosmetic products
are manufactured largely out of a manufacturing plant in Roanoke,
5
Virginia, which until July 2001 was owned by Unilever. In July 2001, Cosmetic
Essence Inc. acquired this plant and we entered into a contract expiring on
January 31, 2007 to continue such manufacturing. Pricing is based on fixed and
variable costs to be established annually.
Except for the Roanoke and Las Piedras agreements, as is customary in
our industry, we generally do not have long-term or exclusive contracts with
manufacturers of our owned and licensed brands or with fragrance manufacturers
or suppliers of our distributed brands. We generally make purchases through
purchase orders. We believe that we have good relationships with manufacturers
of our owned and licensed brands and that there are alternative sources should
one or more of these manufacturers become unavailable. We receive our
distributed brands in finished goods form directly from fragrance manufacturers,
as well as from other sources. Our ten largest fragrance manufacturers or
suppliers of brands that are distributed by us on a non-exclusive basis
accounted for approximately 21% of our cost of sales for the fiscal year ended
January 31, 2002. The loss of, or a significant adverse change in, the
relationship between us and any of our major fragrance manufacturers or
suppliers of distributed brands could have an adverse effect on our business,
financial condition and results of operations.
Trademarks, Licenses and Patents
We own or have rights to use the trademarks necessary for the
manufacturing, marketing, distribution and sale of numerous fragrance and skin
care brands including Elizabeth Arden's Red Door, 5/th/ Avenue, Visible
Difference, Millenium and Sunflowers, Halston Z-14, Halston, PS Fine Cologne for
Men and Design. We have registered these trademarks, or have applications
pending, in the United States and in certain of the countries in which we sell
these product lines. We consider the protection of our trademarks to be
important to our business.
We also are the exclusive worldwide trademark licensee for both the
Elizabeth Taylor fragrance brands (including White Diamonds and Passion) and the
Geoffrey Beene fragrance brands (including Grey Flannel and Bowling Green). The
Taylor license agreement terminates on October 1, 2022 and is renewable by us,
at our sole option, for unlimited 20-year periods. The Beene license terminates
in March 2025 and is automatically renewable for additional 10-year terms.
We also have the right, under various exclusive distributor and license
agreements to distribute other fragrances in various territories and to use the
registered trademarks of third parties in connection with the sale of these
products.
A number of our products incorporate patented or patent-pending
formulations. In addition, several of our packaging methods, components and
products are covered by design patents, patent applications and copyrights. As
part of the Arden acquisition, we entered into non-exclusive cross-license
agreements regarding certain of these patents with Unilever. Substantially all
of our trademarks and all of our patents are held by us or by our United States
subsidiaries.
Sales and Distribution
In the United States, we sell our fragrance products primarily to mass
retailers including Wal-Mart, Target, Walgreens and CVS; mid-tier retailers,
including department stores such as JCPenney, Sears and Kohl's; and to the
prestige department stores, including traditional department stores such as
Dillard's, The May Company, Macy's and Nordstrom. We also sell products to
independent fragrance, cosmetic, gift and other stores. We currently sell our
skin care and cosmetics products in the United States primarily in prestige
department stores. Our sales staff and marketing support personnel are organized
by customer account based upon type and location of the customers. Our sales
force routinely visits retailers to assist in the merchandising, layout and
stocking of selling areas. Our fulfillment capabilities enable us to reliably
process, assemble and ship small orders on a timely basis. We use this ability
to assist our customers in their retail distribution through "drop ship"
programs direct to stores and by supporting their sales of beauty products over
the Internet. We serve as a source of products for a number of internet-based
retailers, as well as for traditional retailers' web-based operations including
Wal-mart.com and JCPenney.com. Sales to Internet retailers are not material to
our results of operations.
We also sell our prestige products in the Elizabeth Arden beauty
salons, which are owned and operated by an unrelated third party. We receive a
licensing fee of between 1% and 2% of the total net sales from each of the
salons for the use of the "Elizabeth Arden" name.
6
In addition to our United States distribution, our products are sold in
approximately 90 other countries worldwide through department stores,
perfumeries, pharmacies, specialty retailers, "duty free" shops and other retail
shops and travel retail locations. In certain countries, we maintain a dedicated
sales force that solicits orders and provides customer service. In other
countries and jurisdictions, we sell our products through selected local
distributors under contractual arrangements. We manage our international
operations from our offices in Geneva, Switzerland.
As is customary in the beauty industry, we do not generally have long-
term or exclusive contracts with any of our retail customers. Sales to customers
are generally made pursuant to purchase orders. We believe that our continuing
relationships with our customers are based upon our ability to provide a wide
selection and reliable source of prestige beauty products, our expertise in
marketing and new product introduction, as well as our ability to provide value-
added services, including our category management services, to United States
mass-market and mid-tier retailers.
Our ten largest customers accounted for approximately 43.4% of net
sales for the fiscal year ended January 31, 2002. The only customer who
accounted for more than 10% of our net sales during that period was Wal-Mart on
a global basis accounting for 10.2% of our net sales. The loss of, or a
significant adverse change in the relationship between any of our key customers
and us could have a material adverse effect on our business, financial condition
and results of operations.
The industry practice for businesses that market beauty products has
been to grant department stores the right to return merchandise. We typically
limit return rights to department stores and to certain promotional items
offered under our owned and licensed brands. We establish reserves and provide
allowances for returns of such products at the time of sale. Our reserves and
allowances are reviewed and updated as needed during the year, and additions to
these reserves and allowances may be required, typically resulting from poor
retail sales of our products. Additions to return reserves or returns in excess
of reserves and allowances may have a negative impact on our financial results.
We have a sales organization which sells returned products.
Marketing
Our marketing approach emphasizes a consistent global image for our
brands. We use print, television and radio advertising, as well as point-of-sale
merchandising including displays and sampling. Our marketing efforts also
benefit from cooperative advertising programs with our retailers, often linked
with particular promotions. In our department store channel, we periodically
promote our brands with "gift with purchase" and "purchase with purchase"
programs. At in-store counters, sales representatives offer personal
demonstrations to market individual products. We also engage in extensive
sampling programs.
With many of our retail customers we provide very extensive marketing
services. Our marketing personnel often design model schematic planograms for
the customer's fragrance department, identify trends in consumer preferences and
adapt the product assortment to these trends, conduct training programs for the
customer's sales personnel and manage in store "special events". Our marketing
personnel also work to design gift sets tailored to customer's needs. For
certain customers we provide comprehensive sales analysis and active management
of the prestige fragrance category. We believe these services distinguish us
from our competitors and contribute to customer loyalty.
Each of our fragrance, skin care and cosmetics products is
distinctively positioned and is marketed with consistent logos and packaging.
Our marketing personnel work closely with customers to develop new products and
extensions of our well-established brands. New product introduction is an
important element in attracting consumers to our brands and in creating brand
excitement with our retail customers. During fiscal 2002, we introduced a number
of brand extensions such as Brilliant White Diamonds, Spiced Green Tea and Iced
Green Tea, as well as successfully launching Unbound for Women, a new Halston
fragrance, in select department stores. During the current fiscal year, we
intend to launch a new Elizabeth Arden and a new Elizabeth Taylor fragrance and
to relaunch the Elizabeth Arden cosmetic line internationally. Product
development costs have not been material during the last three fiscal years.
7
Seasonality
Our operations have historically been seasonal, with higher sales
generally occurring in the second half of the fiscal year as a result of
increased demand by retailers in anticipation of and during the holiday season.
In fiscal 2002, approximately 63% of the Company's net sales were made during
the second half of the fiscal year. Due to the size and timing of certain orders
from our customers, sales, results of operations, working capital requirements,
and cash flows can vary significantly between quarters of the same and different
years. As a result, the Company expects to experience variability in net sales
and net income on a quarterly basis.
Management Information Systems
Our key management information systems consist of:
. accounting, forecasting, purchasing and order-entry software
systems;
. electronic data interchange systems, which allow our customers to
order products electronically from us and to be invoiced
electronically for those orders; and
. warehouse management systems, which assist us in facilitating and
managing the receipt and shipment of products.
As a whole, these management information systems provide on-line, real-
time information for our sales, purchasing, warehouse and financial departments.
Our information systems form the basis of a number of the value-added services
that we provide to our customers, including vendor managed inventory, inventory
replenishment, customer billing, sales analysis, products' availability and
pricing information, and expedited order processing. Our information systems
also support our customers' retail sales over the Internet.
In order to transition the use of information systems relating to the
Elizabeth Arden business, we entered into an information technology services
agreement with affiliates of Unilever for information technology, software,
infrastructure, equipment and other services as part of the Arden acquisition.
The agreement terminates on December 31, 2002 and will be automatically renewed
for additional one-year terms, provided that upon termination and at our
request, Unilever will use reasonable efforts to provide these services for up
to two years after termination.
Competition
The beauty industry is highly competitive and, at times, subject to
rapidly changing consumer preferences and industry trends. Competition is
generally a function of brand strength, assortment and continuity of merchandise
selection, reliable order fulfillment and delivery, and level of in-store
customer support. We compete with a number of manufacturers and marketers of
beauty products, some of which have substantially more resources than we do.
We believe that we compete primarily on the basis of product
recognition, quality, performance, price, and our emphasis on providing
value-added customer services, including category management services, to
certain retailers. There are products which are better-known and more popular
than the products manufactured or supplied by us. Many of our competitors are
substantially larger and more diversified, and have substantially greater
financial and marketing resources than we do, as well as have greater name
recognition and the ability to develop and market products similar to and
competitive with those manufactured by us.
Employees
As of April 15, 2002, we had approximately 2,000 full and part-time
employees in the United States and approximately 18 foreign countries. None of
our employees are covered by a collective bargaining agreement. We believe that
our relationship with our employees is satisfactory. We also use the services of
independent contractors in various sales capacities.
8
Executive Officers of the Company
The following sets forth, as of April 25, 2002, the names and ages of
each person who is an executive officer of our company, the positions they hold
and business experience:
Name Age Position with the Company
- ---- --- -------------------------
E. Scott Beattie 43 Chairman, President and Chief Executive Officer
Paul F. West 52 Executive Vice President and Chief Operating Officer
Stephen J. Smith 42 Executive Vice President and Chief Financial Officer
Ronald L. Rolleston 46 Executive Vice President, Global Marketing and
Prestige Sales
Joel B. Ronkin 34 Senior Vice President and Chief Administrative
Officer
Each of our executive officers holds office for such terms as may be
determined by our board of directors.
E. Scott Beattie, age 43, has served as Chairman of the Board of
Directors since April 2000, as our President and Chief Executive Officer since
March 1998 and as a Director of the company (including the predecessor fragrance
company) since November 1995. Mr. Beattie served as our President and Chief
Operating Officer from April 1997 to March 1998 and as Vice Chairman of the
Board of Directors and Assistant Secretary of the company from November 1995 to
April 1997. Mr. Beattie served as Executive Vice President of Bedford Capital
Corporation, a Toronto, Canada-based merchant banking firm, from March 1995 to
March 1998. Mr. Beattie is a director of Bedford Capital Corporation. Mr.
Beattie is also a director of The Cosmetic, Toiletry & Fragrance Association.
Paul F. West, age 52, has served as our Executive Vice President and
Chief Operating Officer since November 2000, as our Executive Vice President,
Sales Management and Planning from March 2000 through November 2000 and as our
Senior Vice President, Sales Management and Planning from April 1998 through
March 2000. Mr. West served as the President of J.P. Fragrances, Inc. from
August 1997 until April 1998. From January 1997 through June 1997, Mr. West
served as a Vice President of Renaissance Solutions, Inc., a consulting company.
Mr. West served as the Project Director of Unilever N.V. from May 1996 through
December 1996. From September 1989 through May 1996, Mr. West served as the
Chief Financial Officer of the Elizabeth Arden Company.
Stephen J. Smith, age 42, has served as our Executive Vice President
and Chief Financial Officer since May 2001. Previously, Mr. Smith was with
PricewaterhouseCoopers LLP, an international professional services firm, as
partner from October 1993 until May 2001, and as manager from July 1987 until
October 1993.
Ronald L. Rolleston, age 46, has served as our Executive Vice
President, Global Marketing and Prestige Sales since February 2002, as our
Senior Vice President, Global Marketing from February 2001 through January 2002
and as our Senior Vice President, Prestige Sales from the time he joined us in
March 1999 until January 2001. Mr. Rolleston served as President of Paul
Sebastian, Inc., a fragrance manufacturer, from September 1997 until January
1999. Mr. Rolleston served as the General Manager of Europe for the Calvin Klein
Cosmetics Company from May 1990 to September 1994, and as Executive Vice
President of Global Marketing of the Elizabeth Arden Company from January 1995
to March 1997.
Joel B. Ronkin, age 34, has served as our Senior Vice President and
Chief Administrative Officer since February 2001 and as our Vice President,
Associate General Counsel and Assistant Secretary from the time he joined us in
March 1999 through January 2001. From June 1997 through March 1999, Mr. Ronkin
served as the Vice President, Secretary and General Counsel of National Auto
Finance Company, Inc., an automobile finance company. From May 1992 until June
1997, Mr. Ronkin was an attorney with the law firm of Steel Hector & Davis
L.L.P. in Miami, Florida.
9
ITEM 2. PROPERTIES
United States. Our corporate headquarters and one of our principal
distribution facilities in the United States is located in Miami Lakes, Florida
in a building we own on a tract of land comprising approximately 13 acres. The
Miami Lakes facility contains approximately 200,000 square feet of distribution
and warehouse space and approximately 30,000 square feet of office space. In
1996, we issued a mortgage on the Miami Lakes facility in the amount of $6
million.
In connection with the Arden acquisition, we assumed a lease for a 265,000
square foot distribution facility located in Roanoke, Virginia whose term
expires April 2006 and for 62,000 square feet of general offices in Stamford,
Connecticut. In May 2001, we extended the lease on the Stamford offices through
October 2011. We also assumed leases for sales offices in California, Georgia,
Massachusetts, Minnesota, Missouri, North Carolina and Texas.
In March 2001, we entered into a lease for general offices for our
Elizabeth Arden marketing operations in New York City whose term expires April
2016. We also entered into leases in 2001 for auxiliary warehouse space in Miami
Lakes and Roanoke aggregating 157,000 square feet whose terms expire in July
2003 and December 2002, respectively. In addition, in 2002, we entered into
leases aggregating 131,000 square feet commencing July 2002 for warehouse space
in Roanoke to coordinate returns processing and promotional set activities.
These leases expire in February and June 2003.
International. Our International operations are headquartered in a leased
building in Geneva, Switzerland whose term expires October 2002. We also lease
sales offices in Australia, Austria, Canada, Denmark, Italy, Korea, New Zealand,
Puerto Rico, Singapore, South Africa, Spain and the United Kingdom and a
distribution facility in Puerto Rico. We also have a small manufacturing
facility in South Africa. Our European fulfillment operations are conducted by
Unilever under a distribution agreement which ends on June 30, 2002. We are
currently negotiating an agreement with another third party for a European
fulfillment center which will be effective following the termination of our
agreement with Unilever.
ITEM 3. LEGAL PROCEEDINGS
In December 2000, we were named in a breach of contract action filed in the
Ontario, Canada Superior Court of Justice by Adenat, Inc., a Canadian customer
of Unilever. The action was filed against a number of Unilever affiliates, our
company and several individuals, including officers of Unilever and our Company.
In August 2001, the plaintiff filed an amended complaint, which removed the
individual defendants. The plaintiff claims that Unilever breached contractual
obligations owed to the plaintiff and further alleges that we interfered in that
relationship. The plaintiff seeks to enjoin the termination of the alleged
distribution agreement by Unilever and seeks compensatory damages of Canadian
$55 million (approximately US $35 million at January 31, 2002) against each of
Unilever and us, plus punitive damages of Canadian $35 million (approximately US
$22 million at January 31, 2002). We believe we would be entitled to
indemnification from Unilever under our agreement to acquire the Elizabeth Arden
business to the extent we incur losses or expenses as a result of actions taken
by Unilever or its affiliates. We believe the claims lack merit as to our
company and we are vigorously contesting the matter.
We are also a party to a number of other legal actions, proceedings or
claims. While any action, proceeding or claim contains an element of
uncertainty, management believes that the outcome of such actions, proceedings
or claims will not have a material adverse effect on our business, financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information. Our common stock, $.01 par value per share, has been
traded on The Nasdaq Stock Market under the symbol "RDEN" since January 25,
2001. From December 21, 1995, to January 25, 2001, our common stock traded on
The Nasdaq Stock Market under the symbol "FRAG". The following table sets forth
the high and low closing prices for our common stock, as reported on The Nasdaq
Stock Market for each of our fiscal quarters from February 1, 2000 through
January 31, 2002.
High Low
---- ---
Quarter Ended 04/30/00 $ 9.56 $ 6.63
Quarter Ended 07/31/00 $ 8.75 $ 7.25
Quarter Ended 10/31/00 $11.50 $ 7.13
Quarter Ended 01/31/01 $15.50 $10.13
Quarter Ended 04/28/01 $18.25 $12.88
Quarter Ended 07/28/01 $26.37 $17.66
Quarter Ended 10/27/01 $22.58 $ 9.50
Quarter Ended 01/31/02 $16.63 $ 9.78
Holders. As of April 19, 2002, there were 473 record holders of our common
stock.
Dividends. We have not declared any cash dividends on our common stock
since we became a beauty products company in 1995 and we currently have no plans
to declare dividends on our common stock in the foreseeable future. Any future
determination by our board of directors to pay dividends on our common stock
will be made only after considering our financial condition, results of
operations, capital requirements and other relevant factors. Additionally, our
credit facility prohibits the payment of cash dividends by the Company and the
indentures relating to our 10 3/8% Senior Notes Due 2007 and our 11 3/4% Senior
Secured Notes Due 2011 restrict our ability to pay cash dividends based upon our
ability to satisfy certain financial and other covenants. See Notes 7 and 8 to
Notes to Consolidated Financial Statements.
Series D Convertible Preferred Stock. As part of the consideration for the
Arden business we acquired on January 23, 2001, we issued to an affiliate of
Unilever 416,667 shares of Series D convertible preferred stock with an
aggregate liquidation value of $50 million. Each share of Series D convertible
preferred stock is convertible into 10 shares of our common stock at an initial
conversion price of $12.00 per share of common stock. The holder of the Series D
convertible preferred stock will be entitled to convert up to 33.3% of its
shares after January 23, 2002, up to 66.6% after January 23, 2003 and all of its
shares after January 23, 2004. In addition, cumulative dividends of 5% of the
outstanding liquidation value of Series D Convertible Preferred Stock will begin
to accrue on January 23, 2003 and will be payable in cash or in additional
shares of Series D convertible preferred stock, quarterly in arrears, commencing
March 15, 2003. We are required to redeem the Series D Convertible Preferred
Stock on January 23, 2013 at the aggregate liquidation value of all of the
outstanding shares plus accrued and unpaid dividends. See Note 13 to Notes to
Consolidated Financial Statements.
11
ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share data)
We derived the following selected financial data from our audited
consolidated financial statements. The following data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
related notes included elsewhere in this Annual Report.
Years Ended January 31,
2002 2001/(1)/ 2000 1999 1998
-----------------------------------------------------------------------------
Selected Income Statement Data:
Net sales $731,508 $ 382,254 $361,243 $309,615 $215,487
Gross profit/(2)/ 346,368 110,929 107,683 78,360 63,210
Income from operations 5,863 40,794 44,947 38,684 31,457
Net (loss) income (29,837) 13,436 15,329 12,006 12,341
Accretion and dividend on preferred stock 3,438 -- -- -- --
Net (loss) income attributable to
common shareholders (33,275) 13,436 15,329 12,006 12,341
Selected Per Share Data:
(Loss) earnings per common share:
Basic: $ (1.92) $ 0.99 $ 1.11 $ 0.87 $ 0.92
Diluted: $ (1.92) $ 0.87 $ 0.99 $ 0.73 $ 0.76
Weighted average number of Common shares:
Basic: 17,309 13,555 13,801 13,775 13,394
Diluted: 22,975 15,620 15,577 16,729 16,492
Other Data:
EBITDA/(3)/ $ 36,448/(4)/ $ 52,918 $ 56,113 $ 46,179 $ 36,195
Net cash provided by (used in)
operating activities 8,653 17,501 31,971 (36,948) (40,729)
Net cash used in
investing activities (3,443) (209,883) (3,700) (11,142) (7,392)
Net cash (used in) provided by
financing activities (6,361) 187,933 (12,239) 46,534 54,932
Years Ended January 31,
2002 2001 2000 1999 1998
----------------------------------------------------------------------------
Selected Balance Sheet Data:
Inventories $192,736 $ 210,497 $129,808 $140,859 $ 97,404
Working capital 190,290 183,494 173,005 157,457 122,177
Total assets 596,765 583,147 309,632 294,708 232,653
Short-term debt 7,700 22,945 -- 5,639 --
Long-term debt 326,121 331,145 175,030 176,159 133,785
Convertible, redeemable preferred stock 11,980 8,542 -- -- --
Shareholders' equity 111,934 134,887 82,287 71,480 58,626
(1) The Arden acquisition was consummated on January 23, 2001. Income statement
data for the fiscal year ended January 31, 2001 includes eight days of results
from the Elizabeth Arden business.
(2) Following the Arden acquisition, we reclassified warehouse and shipping
expenses in cost of goods sold to conform to the presentation of the Arden
business. This reclassification changes gross profit and selling, general and
administrative expenses but has no effect on income from operations, EBITDA or
net income.
(3) EBITDA is defined as income from operations, plus depreciation and
amortization. EBITDA should not be considered as an alternative to operating
income (loss) or net income (loss) (as determined in accordance with generally
accepted accounting principles) as a measure of the Company's operating
performance or to net cash provided by operating, investing and financing
activities (as determined in accordance with generally accepted accounting
principles) as a measure of its ability to meet cash needs. We believe that
EBITDA is a measure commonly reported and widely used by investors and other
interested parties as a measure of a company's operating performance and debt
servicing
12
ability because it assists in comparing performance on a consistent basis
without regard to depreciation and amortization, which can vary significantly
depending upon accounting methods (particularly when acquisitions are involved)
or non operating factors (such as historical cost). Accordingly, this
information has been disclosed here to permit a more complete comparative
analysis of our operating performance relative to other companies and of our
debt servicing ability. EBITDA, may not, however, be comparable in all instances
to other similar types of measures.
(4) Excluding the $500,000 charge incurred in the fourth quarter restructuring,
the $20.5 million of lower gross profits due to Elizabeth Arden inventory owned
prior to the acquisition and sold during the fiscal year, and the $10.3 million
inventory charge incurred in the second quarter, EBITDA for fiscal 2002 would
have been approximately $68 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Background
We are a global marketer and manufacturer of prestige beauty products. We
sell our products to retailers and department stores in the United States, as
well as internationally in prestige department stores, perfumeries, boutiques
and travel retail locations. We have established ourselves as a source of over
200 fragrance brands through brand ownership, brand licensing and distribution
arrangements. Our portfolio of owned and licensed fragrance brands includes
Elizabeth Arden's Red Door, 5th Avenue, Elizabeth Arden green tea and
Sunflowers, Elizabeth Taylor's White Diamonds and Passion, White Shoulders,
Geoffrey Beene's Grey Flannel, Halston, Halston Z-14, PS Fine Cologne for Men,
Design and Wings by Giorgio Beverly Hills. Our skin care brands include
Elizabeth Arden's Visible Difference, Ceramides, and Millenium. Our cosmetics
products include lipstick, foundation and other color cosmetics products under
the Elizabeth Arden brand name. In addition to the brands we own and license, we
also distribute more than 125 prestige fragrance brands to many retailers in the
United States.
On January 23, 2001, we acquired the Elizabeth Arden business including the
Elizabeth Arden lines of fragrance, skin care and cosmetics; the Elizabeth
Taylor brands of fragrances and the White Shoulders fragrance brand, and related
assets and liabilities. Our results of operations for the year ended January 31,
2002 (fiscal 2002) include the results of the Elizabeth Arden business, while
our results for the year ended January 31, 2001 (fiscal 2001) include eight days
of financial results from the Elizabeth Arden business.
The following table sets forth, for the years indicated, certain
information relating to the Company's operations expressed as percentages of net
sales for the year (percentages may not add due to rounding):
Years Ended January 31,
2002 2001 2000
--------------------------------------------
Income Statement Data:
Net sales 100.0% 100.0% 100.0%
Cost of sales 52.6 71.1 70.2
------ ------ ------
Gross profit 47.4 28.9 29.8
Selling, general and administrative expenses 42.4 15.0 14.3
Depreciation and amortization 4.2 3.2 3.1
------ ------ ------
Income from operations 0.8 10.7 12.4
Interest expense, net 6.1 5.3 5.4
Other income -- 0.2 --
------- ------ ------
(Loss) income before income taxes (5.3) 5.6 7.0
(Benefit from) provision for income taxes (1.2) 2.1 2.8
------ ------ ------
Net (loss) income (4.1) 3.5 4.2
------ ------ ------
Accretion and dividend on preferred stock 0.5 -- --
------ ------ ------
Net (loss) income attributable to
common shareholders (4.6)% 3.5% 4.2%
====== ====== ======
Other Data:
EBITDA margin (1) 5.0% 13.8% 15.5%
(1) EBITDA margin represents EBITDA (as defined in Note 3 under item 6.
"Selected Financial Data") divided by net sales.
13
Critical Accounting Policies and Estimates
The SEC has recently issued Financial Reporting Release No. 60,
"Cautionary Advice Regarding Disclosure About Critical Accounting Policies"
("FRR 60"), suggesting companies provide additional disclosure and commentary on
those accounting policies considered most critical. FRR 60 considers an
accounting policy to be critical if it is important to the Company's financial
condition and results, and requires significant judgment and estimates on the
part of management in its application. Elizabeth Arden believes the accounting
policies below represent its critical accounting policies as contemplated by FRR
60. See Note 1 of the Notes to Consolidated Financial Statements for a detailed
discussion on the application of these and other accounting policies.
Accounting for Acquisitions. We have accounted for our acquisitions,
including the acquisition of the Elizabeth Arden business, under the purchase
method of accounting for business combinations. Under the purchase method of
accounting, the cost, including transaction costs, are allocated to the
underlying net assets, based on their respective estimated fair values. The
excess of the purchase price over the estimated fair values of the net assets
acquired is recorded as goodwill.
The judgments made in determining the estimated fair value and expected
useful lives assigned to each class of assets and liabilities acquired can
significantly affect net income. For example, different classes of assets will
have useful lives that differ--the useful life of property, plant, and equipment
acquired will differ substantially from the useful life of brand licenses and
trademarks. Consequently, to the extent a longer-lived asset is ascribed greater
value under the purchase method than a shorter-lived asset, net income in a
given period may be higher.
Determining the fair value of certain assets and liabilities acquired
is judgmental in nature and often involves the use of significant estimates and
assumptions. One of the areas that requires more judgment in determining fair
values and useful lives is intangible assets. To assist in this process, we
often obtain appraisals from independent valuation firms for certain intangible
assets.
The value of our intangible assets, including brand licenses,
trademarks and intangibles, is exposed to future adverse changes if we
experience declines in operating results or experience significant negative
industry or economic trends. We periodically review intangible assets for
impairment using the guidance of applicable accounting literature.
In fiscal 2003, we will adopt Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets" (FAS 142), new rules
for measuring the impairment of brand licenses, trademarks and intangibles. We
are currently in the process of assessing the potential impact of this new
statement on our financial statements and determining whether the adoption of
FAS 142 will result in a noncash charge to net income.
Allowances for Sales Returns and Markdowns. As is customary in the
prestige beauty business, we grant certain of our customers the right to either
return product or to receive a markdown allowance for product which does not
"sell-through" to consumers. Upon sale, we record a provision for product
returns and markdowns estimated based on our historical experience,
"sell-through" levels, economic trends and changes in customer demand. Based
upon this information, we provide an allowance for sales returns and markdown
allowances. There is considerable judgment used in evaluating the factors
influencing the allowance for returns and markdowns and additional allowances in
any particular period may be needed, reducing net income or increasing net loss.
Allowances for Doubtful Accounts Receivable. We maintain allowances for
doubtful accounts to cover uncollectible accounts receivable, and we evaluate
our accounts receivable to determine if they will ultimately be collected. This
evaluation includes significant judgments and estimates, including an analysis
of receivables aging and a customer-by-customer review for large accounts. If,
for example, the financial condition of our customers deteriorates resulting in
an impairment of their ability to pay, additional allowances may be required.
Provisions for Inventory Obsolescence. We record a provision for
estimated obsolescence and shrinkage of inventory. Our estimates consider the
cost of inventory, the estimated market value, the shelf life of the inventory
and our historical experience. If there are changes to these estimates,
additional provisions for inventory obsolescence may be necessary.
14
Income Taxes and Valuation Reserves. We record a valuation allowance to
reduce deferred tax assets to the amount that is more likely than not to be
realized. We consider projected future taxable income and ongoing tax planning
strategies in assessing the valuation allowance. In the event we determine that
we may not be able to realize all or part of our deferred tax asset in the
future, an adjustment to the deferred tax asset would be charged to earnings in
the period of such determination.
Fiscal Year Ended January 31, 2002 Compared to the Fiscal Year Ended January 31,
- --------------------------------------------------------------------------------
2001
- ----
Net Sales. Net sales increased 91% to $731.5 million for the fiscal
year ended January 31, 2002, from $382.3 million for the fiscal year ended
January 31, 2001. In fiscal 2002, we generated $512.4 million, or approximately
70%, of our sales in the U.S. and $219.1 million, or approximately 30% of our
sales, internationally. The increase in net sales is primarily as a result of
increased sales from the acquisition of the Elizabeth Arden business, partially
offset by weakness in the retail environment. The increase in sales includes an
increase in the number of products sold by us, particularly Elizabeth Arden skin
care and cosmetics products, as well as an increase in our customer base,
primarily internationally and with U.S. prestige department stores. The weak
retail environment, exacerbated by the events of September 11, had a
particularly negative effect on sales to U.S. prestige department stores,
international travel retail outlets, and to certain international distributors.
Gross Profit. Gross profit increased by 212% to $346.4 million in
fiscal 2002 as compared with $110.9 million for fiscal 2001, and gross margins
expanded from 29% in fiscal 2001 to 47% in fiscal 2002 as a result of the
acquisition of the Elizabeth Arden business. Following the acquisition, the mix
of our sales has changed, with significantly increased sales of higher margin
owned and licensed brands relative to lower margin distributed brands. Included
in the gross margin for fiscal 2002, are sales of Elizabeth Arden products we
purchased prior to the acquisition, which are carried at a higher cost and
resulted in a lower gross margin than sales of Elizabeth Arden products we
manufactured after the acquisition. Once these lower margin products are sold,
gross margins should increase. For the year ended January 31, 2002, the effect
on gross profit of selling Arden product purchased prior to the acquisition was
a reduction of gross profit of approximately $20.5 million. In addition, in the
second quarter of fiscal 2002, we recorded a non-cash inventory provision of
$10.3 million to write down certain distributed brands and non-core product
offerings that we do not intend to continue to carry due to retailer planogram
updates and to expedite the sales of excess inventory, particularly gift sets
and other promotional merchandise. Excluding the effect of the high cost
products purchased prior to the acquisition, and the inventory provision, gross
profit would have totaled $377.2 million for a gross margin of 52%.
SG&A. Selling, general and administrative expenses increased 434% to
$309.9 million in fiscal 2002 as compared with $57.7 million in the prior year,
reflecting additional selling and administrative costs associated with the
Elizabeth Arden business acquired. As a result of the acquisition of the
Elizabeth Arden business, there has been an increase in sales of owned and
licensed brands, which require higher costs to support, including higher
demonstration, advertising and product development expenses. We added
approximately 1,600 employees to our company in connection with the acquisition
of the Elizabeth Arden business, significantly increasing our international
employee base, our U.S. department store sales force and our administrative
personnel. The number of offices and facilities also increased as a result of
the acquisition. In fiscal 2002, we commenced a restructuring of our operations
in the United States, eliminating approximately 100 positions, representing 10%
of our U.S. headcount. In conjunction with this restructuring we recorded a
$500,000 charge included in selling, general and administrative expenses. In
addition to this charge, we also incurred $2.6 million of restructuring costs,
primarily severance costs resulting from a realignment of our workforce and door
closures, which has been recorded as an adjustment to the allocation of the
purchase price in the acquisition of the Elizabeth Arden business. Of this $2.6
million of restructuring costs, most of the cash was paid out between February
and April 2002. For a discussion of the Elizabeth Arden acquisition, see Note 2
to the Consolidated Financial Statements.
Depreciation and Amortization. Depreciation and amortization increased
153% from $12.1 million in fiscal 2001 to $30.6 million in fiscal 2002,
primarily as a result of depreciation and amortization associated with the
assets acquired as part of the Arden acquisition. Approximately $17.5 million of
the increase in depreciation and amortization is associated with the assets
acquired.
15
Interest Expense, Net. Interest expense, net of interest income,
increased approximately 122% to $44.8 million in fiscal 2002 as compared with
$20.2 million in fiscal 2001, as a result of increased debt incurred to finance
the acquisition of the Elizabeth Arden business and associated working capital
requirements. The increased debt includes $160 million of 11 3/4% senior secured
notes due 2011, as well as borrowings under our $175 million revolving credit
facility. See Notes 7 and 8 to Notes to Consolidated Financial Statements.
Benefit from Income Taxes. We recorded a net benefit from income taxes
of $9.0 million for fiscal 2002, as compared with a net provision of $8.1
million for fiscal 2001. The effective tax rate calculated as a percentage of
income before income taxes declined from 37.6% of income in fiscal 2001 to 23.2%
of net loss in fiscal 2002. The decrease in the effective tax rate is associated
with the increase in our international operations, as we now operate in multiple
foreign jurisdictions. Our international affiliates and subsidiaries have
varying levels of profitability and tax rates. In addition, we recorded an
increase in the income tax valuation allowance associated with certain foreign
losses and deferred tax assets. See Note 10 to Notes to Consolidated Financial
Statements.
Net Loss. For fiscal 2002, we recorded a net loss of $29.8 million as
compared with net income of $13.4 million in fiscal 2001. The increase in net
loss was due to increases in selling, general and administrative expenses,
interest expense and depreciation and amortization, which more than offset the
increase in sales and gross profit and the benefit from income taxes.
Accretion and Dividend on Preferred Stock. As part of the purchase
price for the acquisition of the Elizabeth Arden business, we issued to an
affiliate of Unilever 416,667 shares of series D convertible preferred stock.
The series D convertible preferred stock was recorded at its fair market value
of $35 million, with an allocation of $26.5 million made for the beneficial
conversion feature and reclassified to additional paid-in capital. The
difference between the liquidation value of $50 million and the balance recorded
in the Convertible, redeemable preferred stock account on the Company's
Consolidated Balance Sheet is being accreted over the life of the Series D
Convertible Preferred Stock. For the year ended January 31, 2002, the Company
recorded $1.4 million of accretion and $2.1 million of dividends relating to the
Series D Preferred Stock. The preferred stock carries a 5% annual dividend
yield, which is payable in January 2003. The accretion on preferred stock of
$3.4 million for fiscal 2002 is a non-cash charge to net loss attributable to
common shareholders.
Net Loss Attributable to Common Shareholders. Net loss attributable to
common shareholders totaled $33.3 million in fiscal 2002 as compared with net
income of $13.4 million in fiscal 2001. The net loss attributable to common
shareholders includes net loss plus the accretion and dividends associated with
the series D convertible preferred stock.
EBITDA. EBITDA (operating income plus depreciation and amortization)
decreased by 31% to $36.4 million in fiscal 2002 from $52.9 million in fiscal
2001. The decrease was a result of increases in selling, general and
administrative expenses which offset increases in gross profit. Excluding the
effects of high cost products purchased prior to the acquisition, the inventory
provision, and the restructuring costs, EBITDA would have totaled $67.8 million.
Fiscal Year Ended January 31, 2001 Compared to the Fiscal Year Ended January 31,
- --------------------------------------------------------------------------------
2000
- ----
Net Sales. Net sales increased $21.1 million, or 6%, to $382.3 million
for the fiscal year ended January 31, 2001, from $361.2 million for the fiscal
year ended January 31, 2000. In fiscal 2001, we generated $378.2 million, or
approximately 99%, of our sales in the U.S. and $4.1 million, or approximately
1% of our sales internationally. The increase in net sales is primarily due to
an increase in the volume of products sold to existing customers. Sales to the
Company's top 20 retail accounts increased by 15.8% over the prior year.
Management believes that increased sales during the fiscal year ended January
31, 2001, have resulted from our ability to provide our customers with a larger
selection of products and a continuous, direct supply of products, and growth in
sales of customized gift sets.
Gross Profit. Gross profit increased $3.0 million, or 3%, to $110.9
million for the fiscal year ended January 31, 2001, from $107.7 million for the
fiscal year ended January 31, 2000. The gross margin declined from 29.8% in
fiscal 2000 to 28.9% for fiscal 2001, as a result of higher warehouse and
shipping expenses, which were partially offset by an increase in product sales
of higher margin owned and licensed brands (including brands acquired in
connection with the Arden acquisition). The increase in warehouse and shipping
expenses resulted from costs associated with the operation of our promotional
set fulfillment center in Edison, New Jersey, the closing of a promotional set
fulfillment center in Pennsylvania in May 2000, as well as a $2.8 million
integration charge to increase reserves related to inventory. Excluding this
integration charge, gross profit would have totaled $113.5 million with a gross
margin of 29.7%.
16
SG&A. Selling, general and administrative expenses increased $6.2
million, or 12% to $57.7 million for the fiscal year ended January 31, 2001,
from $51.6 million for the fiscal year ended January 31, 2000. As a percentage
of net sales, SG&A expenses increased from 14.3% for the fiscal year ended
January 31, 2000 to 15.0% for the fiscal year ended January 31, 2001. The
increase in SG&A expenses is primarily a result of $2.8 million in integration
charges for increases in reserves related to receivables as well as expenses
related to the increase in sales. Excluding the effect of the integration
charges, SG&A expenses for the fiscal year ended January 31, 2001, as a
percentage of net sales is 14.4%, approximately the same percentage of expenses
to net sales as recorded in the fiscal year ended January 31, 2000.
Depreciation and Amortization. Depreciation and amortization increased
$1.0 million, or 9% to $12.1 million for the fiscal year ended January 31, 2001,
from $11.2 million for the fiscal year ended January 31, 2000. The increase was
primarily attributable to the depreciation and amortization related to (i)
additional investments in tools and molds developed for our manufactured
products; and (ii) intangibles and fixed assets acquired as part of the Arden
acquisition.
Interest Expense, Net. Interest expense, net of interest income,
increased approximately $755,000, or 4%, to $20.2 million for the fiscal year
ended January 31, 2001, from $19.4 million for the fiscal year ended January 31,
2000. This increase was primarily due to an increase in average debt outstanding
under our credit facility to support working capital needs. In addition, we
incurred additional interest expense in conjunction with the Arden acquisition
from the closing date of January 23, 2001, including interest expense on our 11
3/4% Senior Secured Notes due 2011 and borrowings under our credit facility. See
Notes 7 and 8 to Notes to Consolidated Financial Statements.
Net Income. Net income decreased $1.9 million to $13.4 million for the
fiscal year ended January 31, 2001 from $15.3 million for the fiscal year ended
January 31, 2000, including the effects of the integration charges. Excluding
the effects of the integration charges, net income increased $1.5 million or 10%
to $16.8 million for the fiscal year ended January 31, 2001, from $15.3 million
for the fiscal year ended January 31, 2000, primarily as a result of the
increase in net sales and gross margin.
EBITDA. EBITDA (operating income, plus depreciation and amortization)
decreased $3.2 million or 6% to $52.9 million for the fiscal year ending January
31, 2001, from $56.1 million for the fiscal year ended January 31, 2000,
including the integration charges discussed above. The EBITDA margin declined to
13.8% for the fiscal year ended January 31, 2001, from 15.5% for the fiscal year
ended January 31, 2000, including the integration charges. Excluding the
integration charges, EBITDA increased 4% to $58.5 million for the fiscal year
ended January 31, 2001, from $56.1 million for the fiscal year ended January 31,
2000, primarily as a result of the increase in sales. Excluding the integration
charges, the EBITDA margin was relatively flat at 15.3% for the fiscal year
ended January 31, 2001, as compared to 15.5% for the fiscal year ended January
31, 2000.
Seasonality
Our operations have historically been seasonal, with higher sales
generally occurring in the second half of the fiscal year as a result of
increased demand by retailers in anticipation of and during the holiday season.
In fiscal 2002, 63% of our net sales were made during the second half of the
fiscal year. Due to the size and timing of certain orders from our customers,
sales and results of operations can vary widely between quarters of the same and
different years. As a result we expect to experience variability in net sales
and net income on a quarterly basis.
We experienced seasonality in our working capital, with peak inventory
and receivable balances in the third quarter of our fiscal year. Our working
capital borrowings are also seasonal and are normally highest in the months of
September, October and November. During the fourth fiscal quarter ending January
31 of each year, significant cash is normally generated as customer payments on
holiday season orders are received.
17
Liquidity and Capital Resources
Cash Flows. During fiscal 2002, we generated $8.7 million of cash from
operating activities. Of that amount, $9.5 million was generated from operating
cash flows, offset by a net working capital use of $851,000. The net working
capital use reflects increases in accounts receivable, prepaid and other assets,
somewhat offset by a decline in inventories, and increases in accounts payable,
other payables and accrued expenses. The increase in accounts receivable
resulted from increased sales due to the acquisition of the Elizabeth Arden
business coupled with the fact that no trade receivables were acquired with the
business in January 2001. We used $3.4 million of net cash in investing
activities, comprised of $10.0 million for capital expenditures partially offset
by $6.5 million received for the sale of certain trademarks and intangibles. Net
cash used in financing activities totaled $6.4 million, with payments on short-
term and long-term debt being partially offset by proceeds from the exercise of
stock options and stock purchase warrants. Cash and cash equivalents declined
$1.8 million to $15.9 million.
During the fiscal year ended January 31, 2001, we generated $17.5
million of cash from operating activities. Of that amount, $24.0 million was
generated from operating cash flows, offset by a $6.5 million increase in
working capital, including increases in accounts receivable and inventories and
decreases in accounts payable, partially offset by an increase in other payables
and accrued expenses. Net cash used in investing activities totaled $209.9
million. We used $5.2 million of the cash generated for capital expenditures. We
also used $204.7 million in cash for the acquisition of the Elizabeth Arden
business, including the cash portion of the purchase price plus cash expenses
due at the closing on January 23, 2001. Cash provided from financing activities
totaled $187.9 million and included $160 million from the issuance of new senior
secured notes and $22.9 million borrowed under our $175 million revolving credit
facility. Proceeds from conversion of our convertible preferred stock, exercise
of warrants and exercise of stock options provided an additional $10.0 million,
and share repurchases and repayment of long-term debt used $5.1 million. Cash
and cash equivalents declined by $4.4 million to $17.7 million.
Debt and Contractual Financial Obligations and Commitments. At January
31, 2002, our long-term debt and financial obligations and commitments by due
date were as follows:
(Amounts in thousands) Payments Due by
Less than Period Greater than
Contractual Obligations Total 1 year 1-3 years 4 years
----------------------------------------------------------
Long-term debt $328,433 $2,312 $ 9,354 $316,767
Operating leases 44,271 7,137 16,427 20,707
-------- ------ ------- --------
Total contractual cash obligations $372,704 $9,449 $25,781 $337,474
======== ====== ======= ========
See Notes 8 and 9 of the Notes to the Consolidated Financial Statements
for further information on our long-term debt and contractual financial
commitments.
Future Liquidity and Capital Needs. Our principal future uses of funds
are for debt service, working capital requirements and additional brand
acquisitions or product distribution arrangements. We have historically
financed, and we expect to continue to finance our needs primarily through
internally generated funds, our credit facility and external financing.
We have a $175.0 million revolving credit facility, which expires in
January 2006. Our borrowings under this facility are limited to a "borrowing
base", calculated based on eligible accounts receivable and inventories, and our
borrowings are secured by a first priority lien on all of our U.S. accounts
receivable and inventory. As a result of weaker than expected performance in
fiscal 2002, we entered into an amendment to our Credit Facility which included
the bank group's waiver of non-compliance with certain financial ratios for the
fourth quarter of fiscal 2002, in particular the debt to EBITDA ratio and the
EBITDA to net interest expense ratio, and an amendment of the related covenant
levels for each quarter of fiscal 2003 and the first three quarters of fiscal
2004. The amendment with the bank group also amends selected additional sections
of the bank agreement and was signed on March 13, 2002. The revolving credit
facility, as amended, provides for borrowings on a revolving basis, bearing
interest, at our option, at either (i) 3.5% over the London InterBank Offered
Rate or (ii) 2.25% over the Prime Rate as quoted by Fleet Bank. Under the
amended credit facility, we are required to meet certain covenants each quarter
including (i) a limitation on debt to EBITDA; (ii) a minimum level of EBITDA to
net interest expense; (iii) a minimum amount of shareholders' equity; (iv) a
minimum amount of EBITDA each quarter of fiscal 2003; (v) a minimum amount of
availability under the credit line in the first and second quarters of fiscal
2003; and (vi) a limitation of $18 million on capital expenditures during fiscal
2003 and $25 million (plus up to $5 million of unused capital expenditures from
the prior year) annually thereafter. The revolving credit facility also requires
periodic
18
calculation of the borrowing base. Based upon our internal projections, we
believe that the amended covenants provide sufficient flexibility so that we can
maintain compliance with the covenants. If our actual results deviate
significantly from our projections, however, we may not remain in compliance
with the covenants and would not be allowed to borrow under the revolving credit
facility. In addition, a default under our revolving credit facility which
causes acceleration of the debt under this facility could trigger a default on
our senior notes. In the event we are not able to borrow under our credit
facility, we would be required to develop an alternative source of liquidity.
There is no assurance that we could obtain replacement financing or what the
terms of such financing, if available, would be. As of January 31, 2002, we had
$7.7 million of borrowings under the credit facility and approximately $90
million of availability under the borrowing base formula in our revolving credit
facility.
We believe that internally generated funds and borrowings under our
revolving credit facility will be sufficient to cover debt service and working
capital requirements for the next twelve months other than additional working
capital requirements which may result from further expansion of our operations
through acquisitions of additional brands or new product distribution
arrangements.
We have discussions from time to time with manufacturers of prestige
fragrance brands and with distributors that hold exclusive distribution rights
regarding our possible acquisition of additional exclusive manufacturing and/or
distribution rights. We currently have no agreements or commitments with respect
to any such acquisition, although we periodically execute routine agreements to
maintain the confidentiality of information obtained during the course of
discussions with manufacturers and distributors. There is no assurance that we
will be able to negotiate successfully for any such future acquisitions or that
we will be able to obtain acquisition financing or additional working capital
financing on satisfactory terms for further expansion of our operations. As a
result of weaker than expected financial performance in fiscal 2002, the rating
on our senior notes was lowered by the rating agencies. This could affect our
ability to obtain acquisition or other financing on satisfactory terms.
The characteristics of our business do not generally require us to make
significant ongoing capital expenditures. During the fiscal year ended January
31, 2002, we incurred approximately $10.0 million in capital expenditures,
primarily related to in-store counters and testing units, tools, dies and molds
and computer hardware and software. We expect to have approximately $16 million
in capital expenditures in fiscal 2003.
Recently Issued Accounting Standards
In May 2000, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF 00-14, "Accounting for Certain Sales Incentives," which
provides guidance on accounting for discounts, coupons, rebates and free
products, as well as the income statement classification of these discounts,
coupons, rebates and free products. EITF 00-14 is effective February 1, 2002 for
us. While we are currently evaluating the impact of this new guidance, EITF 00-
14 will result in a reclassification of certain advertising and promotional
costs from selling, general and administrative expense. As a result it is
expected that reported net revenues will decrease, cost of sales will increase,
and there will be offsetting decrease in selling, general and administrative
expenses.
In April 2001, the EITF reached a consensus on EITF 00-25, "Accounting
for Consideration from a Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendor's Products," which provides guidance on the income
statement classification of consideration from a vendor to a retailer in
connection with the retailer's purchase of the vendor's products or to promote
sales of the vendor's products. EITF 00-25 is effective February 1, 2002 for us.
While we are currently evaluating the impact of this new guidance, EITF 00-25
will result in a reclassification of certain advertising and promotional costs
from selling, general and administrative expense. As a result it is expected
that reported net revenues will decrease, cost of sales will increase, and there
will be offsetting decreases in selling, general and administrative expenses.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141 (FAS 141), "Business
Combinations" and No. 142 (FAS 142), "Goodwill and Other Intangible Assets." FAS
141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, establishes specific criteria for
the recognition of intangible assets separately from goodwill, and requires that
unallocated negative goodwill be written off immediately as an extraordinary
gain instead of being deferred and amortized. Provisions of FAS 141 will be
effective for our
19
business acquisitions that are consummated after July 1, 2001. FAS 142
supersedes Accounting Principles Board Opinion No. 17, "Intangible Assets," and
addresses the accounting for goodwill and intangible assets subsequent to their
acquisition. Under FAS 142, goodwill and indefinite-lived intangibles need to be
reviewed for impairment at least annually at the reporting unit level. In
addition, the amortization period of intangible assets with finite lives will no
longer be limited to forty years. The provisions of FAS 142 will be effective
February 1, 2002 for us. We are currently in the process of assessing
the potential impact of these new statements on our financial statements.
In October 2001, the FASB issued Statement of Financial Accounting
Standard No. 144 (FAS 144), "Accounting for the Impairment or Disposal of
Long-Lived Assets." The objectives of FAS 144 are to address significant issues
relating to the implementation of FASB Statement No. 121 (FAS 121), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," and to develop a single accounting model, based on the framework
established in FAS 121, for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired. The provisions of FAS 144 will be
effective for us as of February 1, 2002. We do not expect that the adoption of
this will have a material effect on our financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
As of January 31, 2002, we had $7.7 million outstanding under our
credit facility subject to variable rates. Furthermore, our borrowings under our
credit facility are seasonal with peak borrowings in the third quarter of our
fiscal year. The average of our month-end borrowings during fiscal 2002 was
$86.5 million. Accordingly, our earnings and cash flow will be affected by
changes in interest rates. With these average borrowings under our credit
facility, and assuming there had been a two-percentage point change in the
average interest rate for these borrowings, it is estimated that our interest
expense for the year ended January 31, 2002, would increase by approximately
$1.7 million. To date, we have not engaged in derivative transactions to
mitigate interest rate risk, as most of our debt which is in the form of senior
notes and bears a fixed rate. In the event of an adverse change in interest
rate, management may take actions that would mitigate our exposure to interest
rate risk; however, due to the uncertainty of the actions that would be taken
and their possible effect, this analysis assumes no such action. Further, this
analysis does not consider the effects of the change in the level of the overall
economic activity that could exist in such an environment.
Foreign Currency Risk
We sell our products in over 90 countries around the world. For fiscal
2002, the first full year after the acquisition of the Elizabeth Arden business,
we derived approximately 30% of our net sales and 40% of our gross margin from
subsidiaries outside of the U.S. We conduct our international operations in a
variety of different countries and derive our sales in currencies including the
euro, British pound, Swiss franc and Australian dollar as well as the U.S.
dollar. Our operations may be subject to volatility because of currency changes,
inflation changes and changes in political and economic conditions in the
countries in which we operate. In these countries our sales and expenses are
typically denominated in local currency, while costs of goods sold are
denominated in a combination of local currency and U.S. dollar. Our results of
operations are reported in U.S. dollars. Fluctuations in currency rates can
adversely affect our product prices, margins and operating costs as well as our
reported results. Most of our skincare and cosmetic products are produced in a
manufacturing facility located in Roanoke, Virginia. A weakening of the
currencies in which we generate sales relative to the currencies in which our
costs are denominated, particularly the U.S. dollar, may decrease our cash flow
and operating profits. Our competitors may or may not be subject to the same
fluctuations in currency rates and our competitive position can be affected by
such changes.
While we periodically engage in currency hedging operations, primarily
forward exchange contracts, to reduce the exposure of our cash flows to
fluctuations in currency rates, we did not have any open contracts as of January
31, 2002. The impact of our foreign currency hedging activities was not material
to our results in fiscal 2002. There can be no assurance that our hedging
operations, if any, will eliminate or substantially reduce risks associated with
fluctuating exchange rates.
20
As of January 31, 2002, our subsidiaries outside the United States
held approximately 16% of our total assets. The functional currency of our
foreign operations is either the U.S. dollar or the local currency. The
cumulative effects of translating balance sheet accounts from the functional
currency into the U.S. dollar at current exchange rates is included in
"Accumulated and other comprehensive income" on the balance sheet.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants...................................................................... 23
Independent Auditors' Report .......................................................................... 24
Consolidated Balance Sheets as of January 31, 2002 and 2001............................................ 25
Consolidated Statements of Operations for the Years Ended January 31, 2002, 2001 and 2000 ............. 26
Consolidated Statements of Shareholders' Equity for the Years Ended January 31,
2002, 2001 and 2000.................................................................................... 27
Consolidated Statements of Cash Flow for the Years Ended January 31, 2002, 2001 and 2000............... 28
Notes to Consolidated Financial Statements............................................................. 29
22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Elizabeth Arden, Inc. and Subsidiaries:
In our opinion, the accompanying consolidated balance sheet at January 31, 2002
and the related consolidated statements of operations, shareholders' equity and
cash flows present fairly, in all material respects, the financial position of
Elizabeth Arden, Inc. and its subsidiaries at January 31, 2002, and the results
of their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
April 5, 2002
23
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Elizabeth Arden, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Elizabeth Arden,
Inc. (formerly French Fragrances, Inc.) and subsidiaries (the "Company") as of
January 31, 2001, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the two years in the period
ended January 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of January 31, 2001,
and the results of its operations and its cash flows for each of the two years
in the period ended January 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
April 6, 2001
24
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS January 31, 2002 January 31, 2001
---------------- ----------------
Current assets:
Cash and cash equivalents $ 15,913 $ 17,695
Accounts receivable, net 79,720 48,382
Inventories 192,736 210,497
Deferred income taxes 15,970 2,406
Prepaid expenses and other assets 24,372 13,087
---------- ----------
Total current assets 328,711 292,067
---------- ----------
Property and equipment, net 38,268 40,730
---------- ----------
Other assets:
Exclusive brand licenses, trademarks and intangibles, net 212,011 227,232
Debt financing costs 14,518 16,937
Deferred income taxes -- 2,720
Other assets 3,257 3,461
---------- ----------
Total other assets 229,786 250,350
---------- ----------
Total assets $ 596,765 $ 583,147
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 7,700 $ 22,945
Accounts payable - trade 69,150 40,251
Other payables and accrued expenses 59,259 44,231
Current portion of long-term debt 2,312 1,146
---------- ----------
Total current liabilities 138,421 108,573
---------- ----------
Long-term debt 326,121 331,145
Deferred income taxes and other 8,309 --
---------- ----------
Total long-term liabilities 334,430 331,145
---------- ----------
Total liabilities 472,851 439,718
---------- ----------
Commitments and contingencies (See Note 9)
Convertible, redeemable preferred stock, Series D, $.01 par value (liquidation
preference of $50,000); 1,000,000 shares
authorized; 416,667 shares issued and outstanding 11,980 8,542
---------- ----------
Shareholders' equity:
Common stock, $.01 par value, 50,000,000 shares authorized;
18,575,708 and 16,779,186 shares issued 186 168
Additional paid-in capital 85,919 72,866
Retained earnings 35,191 68,466
Treasury stock (950,128 and 995,400 shares at cost, respectively) (6,541) (6,613)
Accumulated other comprehensive loss (2,348) --
Unearned deferred compensation (473) --
---------- ----------
Total shareholders' equity 111,934 134,887
---------- ----------
Total liabilities and shareholders' equity $ 596,765 $ 583,147
========== ==========
See Accompanying Notes to Consolidated Financial Statements.
25
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
Years Ended January 31,
2002 2001 2000
---------------------------------------------------------------
Net sales $ 731,508 $ 382,254 $ 361,243
Cost of sales 385,140 271,325 253,560
------------ ------------ ------------
Gross profit 346,368 110,929 107,683
Operating expenses:
Selling, general and administrative 309,920 58,011 51,570
Depreciation and amortization 30,585 12,124 11,166
------------ ------------ ------------
Total operating expenses 340,505 70,135 62,736
------------ ------------ ------------
Income from operations 5,863 40,794 44,947
------------ ------------ ------------
Other income (expense):
Interest expense, net (44,763) (20,167) (19,412)
Income from sale of intangible rights -- 425 --
Other 49 475 (204)
------------ ------------ ------------
Other income (expense), net (44,714) (19,267) (19,616)
------------ ------------ ------------
(Loss) income before income taxes (38,851) 21,527 25,331
(Benefit from) provision for income taxes (9,014) 8,091 10,002
------------ ------------ ------------
Net (loss) income (29,837) 13,436 15,329
Accretion and dividend on preferred stock 3,438 -- --
------------ ------------ ------------
Net (loss) income attributable to common shareholders $ (33,275) $ 13,436 $ 15,329
============ ============ ============
(Loss) earnings per common share:
Basic $ (1.92) $ 0.99 $ 1.11
============ ============ ============
Diluted $ (1.92) $ 0.87 $ 0.99
============ ============ ============
Weighted average number of common shares:
Basic 17,308,501 13,555,419 13,801,196
============ ============ ============
Diluted 22,975,192 15,620,369 15,577,422
============ ============ ============
See Accompanying Notes to Consolidated Financial Statements.
26
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands)
Preferred Stock
-----------------------------------------
Series B Series C Common Stock Additional
--------------------- ----------------- ----------------- Paid-in Retained Treasury
Shares Amount Shares Amount Shares Amount Capital Earnings Stock
--------------------------------------------------------------------------------------------------
Balance at January 31, 1999 272 $ 3 511 $ 5 13,813 $ 138 $ 31,633 $ 39,701 $ --
Issuance of Common Stock
upon conversion of Series B
convertible preferred stock (6) -- -- -- 41 -- 136 -- --
Issuance of Common Stock
upon conversion of Series C
convertible preferred stock -- -- (9) -- 9 -- 46 -- --
Issuance of Common Stock
upon exercise of stock options -- -- -- -- 318 4 662 -- --
Issuance of Common Stock
upon exercise of warrants -- -- -- -- 5 -- -- -- --
Repurchase of Common Stock -- -- -- -- -- -- -- -- (5,674)
Tax benefit from exercise of
stock options -- -- -- -- -- -- 304 -- --
Net income for the year -- -- -- -- -- -- -- 15,329 --
------------------------------------------------------------------------------------------------
Balance at January 31, 2000 266 3 502 5 14,186 142 32,781 55,030 (5,674)
Issuance of Common Stock
upon conversion of Series B
convertible preferred stock (266) (3) -- -- 1,893 19 6,229 -- --
Issuance of Common Stock
upon conversion of Series C
convertible preferred stock -- -- (502) (5) 502 5 2,638 -- --
Issuance of Common Stock
upon conversion of 7.5%
convertible subordinated
debentures -- -- -- -- 26 -- 184 -- --
Issuance of Common Stock
upon exercise of stock options -- -- -- -- 82 1 486 -- --
Issuance of Common Stock
upon exercise of warrants -- -- -- -- 90 1 674 -- --
Issuance of warrants -- -- -- -- -- -- 3,043 -- --
Repurchase of Common Stock -- -- -- -- -- -- -- -- (939)
Beneficial Conversion Feature
on preferred stock -- -- -- -- -- -- 26,458 -- --
Tax benefit from exercise of
stock options -- -- -- -- -- -- 373 -- --
Net income for the year -- -- -- -- -- -- -- 13,436 --
------------------------------------------------------------------------------------------------
Balance at January 31, 2001 0 0 0 0 16,779 168 72,866 68,466 (6,613)
Issuance of Common Stock
upon conversion of 7.5%
convertible subordinated
debentures -- -- -- -- 335 3 2,407 -- --
Issuance of Common Stock
upon exercise of stock options -- -- -- -- 254 3 2,180 -- --
Issuance of Common Stock
upon exercise of warrants -- -- -- -- 1,208 12 8,276 -- --
Accretion and Dividend on
Series D preferred stock -- -- -- -- -- -- -- (3,438) --
Repurchase of Common Stock -- -- -- -- -- -- -- -- (401)
Issuance of restricted stock,
net -- -- -- -- -- -- -- -- 473
Tax benefit from exercise
of stock options -- -- -- -- -- -- 190 -- --
Comprehensive Loss:
Net loss for the year -- -- -- -- -- -- -- (29,837) --
Foreign currency translation -- -- -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------
Total comprehensive loss -- -- -- -- -- -- -- (29,837) --
Balance at January 31, 2002 0 $ 0 0 $ 0 18,576 $ 186 $ 85,919 $ 35,191 $ (6,541)
================================================================================================
Accumulated
Other Total
Compre- Unearned Share-
hensive Deferred holders'
Loss Compensation Equity
- ------------------------------------------------------------------------
Balance at January 31, 1999 $ -- $ -- $ 71,480
Issuance of Common Stock
upon conversion of Series B
convertible preferred stock -- -- 136
Issuance of Common Stock
upon conversion of Series C
convertible preferred stock -- -- 46
Issuance of Common Stock
upon exercise of stock options -- -- 666
Issuance of Common Stock
upon exercise of warrants -- --
Repurchase of Common Stock -- -- (5,674)
Tax benefit from exercise of
stock options -- -- 304
Net income for the year -- -- 15,329
-------------------------------------
Balance at January 31, 2000 -- -- 82,287
Issuance of Common Stock
upon conversion of Series B
convertible preferred stock -- -- 6,245
Issuance of Common Stock
upon conversion of Series C
convertible preferred stock -- -- 2,638
Issuance of Common Stock
upon conversion of 7.5%
convertible subordinated
debentures -- -- 184
Issuance of Common Stock
upon exercise of stock options -- -- 487
Issuance of Common Stock
upon exercise of warrants -- -- 675
Issuance of warrants -- -- 3,043
Repurchase of Common Stock -- -- (939)
Beneficial Conversion Feature
on preferred stock -- -- 26,458
Tax benefit from exercise of
stock options -- -- 373
Net income for the year -- -- 13,436
-------------------------------------
Balance at January 31, 2001 -- -- 134,887
Issuance of Common Stockck
upon conversion of 7.5%
convertible subordinated
debentures -- -- 2,410
Issuance of Common Stock
upon exercise of stock options -- -- 2,183
Issuance of Common Stock
upon exercise of warrants -- -- 8,288
Accretion and Dividend on
Series D preferred stock -- -- (3,438)
Repurchase of Common Stock -- -- (401)
Issuance of restricted stock, net -- (473) --
Tax benefit from exercise of
stock options -- -- 190
Comprehensive Loss:
Net loss for the year -- -- (29,837)
Foreign currency translation (2,348) -- (2,348)
-------------------------------------
Total comprehensive loss (2,348) -- (32,185)
Balance at January 31, 2002 $(2,348) $ (473) $111,934
=====================================
27
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended January 31,
2002 2001 2000
-------------------------------------------------------
Cash Flows from Operating Activities:
Net (loss) income $(29,837) $ 13,436 $ 15,329
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 30,585 12,124 11,166
Amortization of senior note offering costs warrants and
note premium 2,462 237 570
Deferred tax benefit, net (4,006) (1,789) (2,129)
Provision for write down of inventory 10,300 -- --
Change in assets and liabilities, net of effects from
acquisitions:
Increase in accounts receivable (36,627) (3,878) (12,444)
Decrease (increase) in inventories 7,461 (3,259) 10,079
Increase in prepaid expenses and other assets (11,386) (71) (2,004)
Increase (decrease) in accounts payable 28,898 (3,742) 9,738
Increase in other payables a