UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended July 28, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _______ to _______
Commission File Number 1-6370
ELIZABETH ARDEN, INC.
(Exact name of registrant as specified in its charter)
Florida 59-0914138
(State of incorporation) (I.R.S. Employer Identification No.)
14100 N.W. 60th Avenue, Miami Lakes, Florida 33014
(Address of principal executive offices) (Zip Code)
(305) 818-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Outstanding at
Class September 11, 2001
----- ------------------
Common Stock, $.01 par value 17,616,496 shares
ELIZABETH ARDEN, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
--------
Consolidated Balance Sheets - January 31, 2001 and
July 28, 2001 (Unaudited). . . . . . . . . . . . . . . . . 3
Unaudited Consolidated Statements of Operations --
Three and Six Months Ended July 31, 2000 and
July 28, 2001. . . . . . . . . . . . . . . . . . . . . . . 4
Unaudited Consolidated Statement of Shareholders'
Equity -- Six Months Ended July 28, 2001 . . . . . . . . . 5
Unaudited Consolidated Statements of Cash Flow --
Six Months Ended July 31, 2000 and July 28, 2001 . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk. . . . . . . . . . . . . . . . . . . . . . . . 21
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 22
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share data)
January 31, 2001 July 28, 2001
---------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 17,695 $ 26,888
Accounts receivable, net 48,382 97,302
Inventories 209,504 267,608
Advances on inventory purchases 993 748
Prepaid expenses and other assets 13,087 36,724
-------- --------
Total current assets 289,661 429,270
-------- --------
Property and equipment, net 40,730 39,413
-------- --------
Other assets:
Exclusive brand licenses, trademarks
and intangibles, net 227,232 218,537
Debt financing costs 16,937 15,728
Deferred income taxes, net 5,126 5,126
Other assets 3,461 3,808
-------- --------
Total other assets 252,756 243,199
-------- --------
Total assets $583,147 $711,882
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 22,945 $ 93,615
Accounts payable - trade 40,251 103,508
Other payables and accrued expenses 44,231 77,729
Current portion of long-term debt 1,146 146
-------- --------
Total current liabilities 108,573 274,998
-------- --------
Long-term debt, net 331,145 328,531
-------- --------
Total liabilities 439,718 603,529
-------- --------
Commitments and contingencies (See Note 6)
Convertible, redeemable preferred stock,
Series D, $.01 par value (liquidation
preference of $120 per share); 1,000,000
shares authorized; 416,667 shares issued
and outstanding 35,000 36,667
-------- --------
Shareholders' equity:
Common stock, $.01 par value, 50,000,000
shares authorized; 16,779,186 and
18,401,793 shares issued and outstanding,
respectively 168 184
Additional paid-in-capital 46,408 58,087
Retained earnings 68,466 22,679
Treasury stock (995,400 and 1,014,309 shares
at cost, respectively) (6,613) (7,015)
Accumulated other comprehensive loss -- (2,249)
-------- --------
Total shareholders' equity 108,429 71,686
-------- --------
Total liabilities and
shareholders' equity $583,147 $711,882
======== ========
See Accompanying Notes to Consolidated Financial Statements.
3
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands except per share data)
Three Months Ended Six Months Ended
July 31, 2000 July 28, 2001 July 31, 2000 July 28, 2001
------------- ------------- ------------- -------------
Net sales $ 66,909 $ 127,049 $ 132,618 $ 269,084
Cost of sales 46,018 72,628 94,653 141,062
-------- --------- --------- ---------
Gross profit 20,891 54,421 37,965 128,022
Operating expenses:
Selling, general
and administrative 12,605 74,524 22,938 158,109
Depreciation and
amortization 2,972 7,703 5,907 15,136
-------- --------- --------- ---------
Total operating
expenses 15,577 82,227 28,845 173,245
-------- --------- --------- ---------
Income (loss) from
operations 5,314 (27,806) 9,120 (45,223)
-------- --------- --------- ---------
Other income (expense):
Interest expense, net (4,839) (11,549) (9,508) (22,681)
Other 572 9 905 28
-------- --------- --------- ---------
Other income
(expense), net (4,267) (11,540) (8,603) (22,653)
-------- --------- --------- ---------
Income (loss) before
income taxes 1,047 (39,346) 517 (67,876)
Provision (benefit)
from income taxes 410 (13,360) 204 (23,756)
-------- --------- --------- ---------
Net income (loss) 637 (25,986) 313 (44,120)
Accretion and dividend
on preferred stock -- 833 -- 1,667
-------- --------- --------- ---------
Net income (loss)
attributable to common
shareholders $ 637 $ (26,819) $ 313 $ (45,787)
======== ========= ========= =========
Earnings (loss) per
common share:
Basic $ 0.05 $ (1.53) $ 0.02 $ (2.70)
======== ========= ========= =========
Diluted $ 0.04 $ (1.53) $ 0.02 $ (2.70)
======== ========= ========= =========
Weighted average
number of
common shares:
Basic 13,216,942 17,496,810 13,259,398 16,969,124
========== ========== ========== ==========
Diluted 15,051,915 23,324,863 15,094,106 22,762,269
========== ========== ========== ==========
See Accompanying Notes to Consolidated Financial Statements.
4
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)
Accumulated Total
Common Stock Additional Treasury Other Share-
------------ Paid-In Retained Common Comprehensive holders'
Shares Amount Capital Earnings Stock Loss Equity
------------------------------------------------------------------------
Balance at
January 31, 2001 16,779 $ 168 $ 46,408 $ 68,466 $ (6,613) $ -- $108,429
Issuance of common
stock upon
conversion of 7.5%
subordinated
convertible
debenture 335 3 2,407 2,410
Issuance of common
stock upon exercise
of stock options 183 2 996 998
Issuance of common
stock upon exercise
of warrants 1,105 11 8,276 8,287
Accretion and
dividend on
convertible,
redeemable preferred
stock (1,667) (1,667)
Repurchase of
common stock (402) (402)
Comprehensive Loss:
Net Loss (44,120) (44,120)
Foreign currency
translation (2,249) (2,249)
------------------------------------------------------------------------
Total Comprehensive
Loss (44,120) (2,249) (46,369)
------------------------------------------------------------------------
Balance at
July 28, 2001 18,402 $ 184 $ 58,087 $ 22,679 $ (7,015) $ (2,249) $ 71,686
========================================================================
See Accompanying Notes to Consolidated Financial Statements.
5
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
(Dollars in thousands)
Six Months Ended
July 31, 2000 July 28, 2001
------------- -------------
Cash Flows from Operating Activities:
Net income (loss) $ 313 $ (44,120)
Adjustments to reconcile net income
(loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization 5,907 15,136
Amortization of senior note offering
costs and note premium 217 1,253
Provision for write down of inventory -- 10,300
Changes in assets and liabilities:
Increase in accounts receivable (3,838) (48,920)
Increase in inventories and advances
on inventory purchases (13,860) (68,158)
Decrease (increase) in prepaid expenses
and other assets 523 (24,147)
Increase in accounts payable 1,300 63,257
(Decrease) increase in other payables
and accrued expenses (15,784) 33,492
Other -- (2,386)
------------- -------------
Net cash used in operating
activities (25,222) (64,293)
------------- -------------
Cash Flows from Investing Activities:
Additions to property and equipment,
net of disposals (3,111) (4,976)
------------- -------------
Net cash used in investing
activities (3,111) (4,976)
------------- -------------
Cash Flows from Financing Activities:
Net proceeds from short-term debt 11,283 70,670
Payments on long-term debt (1,396) (1,091)
Payments to retire convertible
subordinated debentures (2,184) --
Proceeds from the exercise of
stock options 117 998
Proceeds from the exercise of stock
purchase warrants -- 8,287
Repurchase of common stock (896) (402)
------------- -------------
Net cash provided by financing
activities 6,924 78,462
------------- -------------
Net (decrease) increase in Cash and
Cash Equivalents (21,409) 9,193
Cash and Cash Equivalents at
Beginning of Period 22,144 17,695
------------- -------------
Cash and Cash Equivalents at
End of Period $ 735 $ 26,888
============= =============
Supplemental Disclosure of Cash Flow
Information:
Interest paid during the period $ 9,183 $ 11,550
============= =============
Income taxes paid during the period $ 11,123 $ 8,606
============= =============
See Accompanying Notes to Consolidated Financial Statements.
6
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND BASIS OF PRESENTATION
Elizabeth Arden, Inc. (the "Company") is a manufacturer and marketer of
prestige designer fragrances, skin treatment and cosmetic products to
retailers in the United States and over 90 countries internationally. The
Company was formerly known as French Fragrances, Inc. until the acquisition of
the Elizabeth Arden business on January 23, 2001.
Effective February 1, 2001, the Company changed its quarterly periods
from a calendar month end quarter to a 13-week quarter. Since the Company
will continue to have a January 31 fiscal year end, although the second and
third quarters of every fiscal year will have thirteen weeks each, the first
quarter will have less than thirteen weeks and the fourth quarter will have
more than thirteen weeks. The three months ended July 28, 2001 had 91 days
and the six months ended July 28, 2001 had 178 days.
The accompanying unaudited consolidated financial statements included
herein have been prepared by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission (the "Commission") for interim
financial information. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statement presentation
and should be read in conjunction with the financial statements and related
footnotes included in the Company's Annual Report on Form 10-K for the year
ended January 31, 2001, filed with the Commission.
The consolidated balance sheet of the Company as of January 31, 2001 is
audited. The other consolidated financial statements are unaudited, but in the
opinion of management contain all adjustments necessary to present fairly the
consolidated balance sheet of the Company as of July 28, 2001, the
consolidated statements of operations of the Company for the three and six
months ended July 31, 2000 and July 28, 2001, the consolidated statement of
shareholders' equity for the six months ended July 28, 2001, and the
consolidated statements of cash flow for the six months ended July 31, 2000
and July 28, 2001. Operating results for the three or six months ended July
28, 2001 are not necessarily indicative of the results for the full fiscal
year ended January 31, 2002.
The Company has reclassified its results to present warehouse and
shipping costs in cost of sales in order to conform its accounting practices
and policies with those of the Elizabeth Arden business. This
reclassification changes gross profit, as well as selling, general and
administrative expense, but has no effect on income from operations or net
income. Warehouse and shipping expenses reclassified as cost of sales were
$5.6 million and $9.7 million for the three months ended July 31, 2000 and six
months ended July 31, 2000, respectively. Additionally, certain other
reclassifications have been made to conform the prior period financial
statement presentation to the current period.
NOTE 2. ARDEN ACQUISITION
On January 23, 2001, the Company completed the acquisition of the assets
of the Elizabeth Arden business (the "Arden acquisition") from Unilever N.V.
and its affiliates ("Unilever"). The assets included certain trademarks and
patents for the Elizabeth Arden brands of prestige fragrances, cosmetics and
skin care lines including Red Door, 5th Avenue, Sunflowers, Visible
Difference, Millenium and Ceramides. The Company also acquired the license
for the Elizabeth Taylor fragrance brands including White Diamonds and
Passion, as well as the trademark for the White Shoulders fragrance brand. In
addition to the trademarks, patents and licenses, the Company acquired
inventory, returns, contract rights (including leases for distribution and
office facilities worldwide), fixed assets (including equipment, tools and
molds, furniture, and a manufacturing plant in South Africa), books and
records and goodwill. The Company also assumed certain liabilities for
product returns and demonstrator accruals. In addition to the assumed
liabilities, the Company paid $190 million in cash at the closing (exclusive
of fees and expenses of advisors), subject to final adjustment, and $50
million in aggregate liquidation preference of our Series D convertible
preferred stock issued to Unilever. See Note 7.
7
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. ARDEN ACQUISITION -- (Continued)
The Company funded the cash portion of the acquisition price for the
Arden acquisition and the related fees and expenses with $204.7 million in
cash from (1) the proceeds from the offering of $160 million of 11 3/4% Senior
Secured Notes due 2011, and (2) borrowings under a new $175 million revolving
credit facility with a bank syndicate of which Fleet National Bank ("Fleet")
is the administrative agent (the "Credit Facility"), which replaced a $60
million revolving credit facility with Fleet. See Notes 4 and 5. The Arden
acquisition was accounted for under the purchase method.
NOTE 3. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined using the weighted-average method. The components of inventory at
January 31, 2001 and July 28, 2001 were as follows:
January 31, July 28,
(Amounts in thousands) 2001 2001
----------- --------
Finished goods $151,491 $194,958
Work in progress 15,227 29,326
Raw materials 42,786 43,324
-------- --------
$209,504 $267,608
======== ========
NOTE 4. SHORT-TERM DEBT
In connection with the Arden acquisition in January 2001, the Company
entered into the Credit Facility with a syndicate of banks for which Fleet is
the administrative agent. The Credit Facility provides for borrowings on a
revolving basis of up to $175 million, with a $25 million sublimit for letters
of credit. In July 2001, the Credit Facility was amended to provide for a
seasonal increase for 2001 with respect to the eligible inventory from $87.5
to $114 million. The Credit Facility is guaranteed by certain of the Company's
direct subsidiaries and matures in January 2006. Loans under the revolving
credit portion of the Credit Facility bear interest, at the option of the
Company, at a floating rate ranging from either (i) 2.25% to 3.00% over the
London InterBank Offered Rate ("LIBOR") or (ii) 1.00% to 1.75% over the Prime
Rate as quoted by Fleet, in each case depending on the ratio of the Company's
funded total debt to EBITDA (earnings before interest, taxes, depreciation and
amortization). Borrowings under the Credit Facility are limited to eligible
accounts receivable and inventories and are collateralized by a first priority
lien on all of the Company's U.S. accounts receivable and inventory. The
Company's obligations under the Credit Facility rank pari passu in right of
payment with the Company's 10 3/8% Senior Notes due 2007 and the 11 3/4%
Senior Secured Notes due 2011. The Credit Facility contains several covenants,
the more significant of which are that the Company: (i) cannot exceed certain
levels of debt to EBITDA; (ii) must maintain certain levels of EBITDA to
consolidated net interest expense; and (iii) must maintain a minimum amount of
shareholders' equity. The Credit Facility also includes a prohibition on the
payment of dividends and other distributions to shareholders and restrictions
on the incurrence of additional non-trade indebtedness; provided, however,
that the Company is permitted to repurchase up to $4 million of its common
stock, $.01 par value per share ("Common Stock"), and to incur certain
acquisition indebtedness. At July 28, 2001, the Company had an outstanding
balance of approximately $93.6 million under the Credit Facility, together
with $1.3 million in outstanding letters of credit issued under the
Credit Facility. At July 28, 2001, the remaining availability under the
Credit Facility, based upon eligible receivables and inventories as of that
date, was approximately $32.6 million, together with $1.3 million of
outstanding letters of credit issued. At January 31, 2001, the Company had an
outstanding balance under the Credit Facility of approximately $22.9 million
together with $1.3 million in outstanding letters of credit issued.
8
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LONG-TERM DEBT
The Company's long-term debt at January 31, 2001 and July 28, 2001
consisted of the following:
(Amounts in thousands)
Description January 31, 2001 July 28, 2001
- ----------- ---------------- -------------
10 3/8% Senior Notes due May 2007 $157,030 $156,917
11 3/4% Senior Secured Notes due May 2011 160,000 160,000
8.5% Subordinated Debenture due May 2004, net 6,480 6,480
7.5% Convertible Subordinated Debentures
due June 2006 2,410 --
J.P. Fragrances Debenture due May 2001 1,000 --
8.84% Miami Lakes Facility Mortgage Note
due July 2004 5,371 5,280
-------- --------
Total Debt 332,291 328,677
Less Current Portion of Long-term Debt 1,146 146
-------- --------
Total Long-term Debt, net $331,145 $328,531
======== ========
On April 6, 2001, the Company called for redemption the outstanding 7.5%
Convertible Subordinated Debentures due June 2006. All debenture holders
converted their debentures into Common Stock prior to the redemption date.
NOTE 6. COMMITMENTS AND CONTINGENCIES
In connection with the Arden acquisition, the Company assumed lease
obligations for a distribution facility in Roanoke, Virginia; office
facilities in Stamford, Connecticut and Geneva, Switzerland; sales offices in
the United States located in California, Connecticut, Georgia, Massachusetts,
Minnesota, Missouri, North Carolina and Texas; a distribution facility in
Puerto Rico; and sales offices in Australia, Austria, Canada, Denmark, Italy,
Korea, New Zealand, Puerto Rico, Singapore, Spain, South Africa and the
United Kingdom. During the six months ended July 28, 2001, the Company
entered into 1-3 year leases for additional warehouse facilities in Miami and
Roanoke and a 15-year lease for offices in New York City. In addition, the
Company entered into a 10-year extension for its Stamford offices. As a
result of entering into the New York lease and the extension of the Stamford
lease, the Company's lease commitments for these locations will average
approximately $3.1 million annually for the next ten years.
In connection with the Arden acquisition, the Company entered into a
number of ancillary agreements with Unilever to facilitate the integration of
the Elizabeth Arden business with the Company's business existing prior to the
acquisition. The Company entered into an information technology services
agreement, under which Unilever and its affiliates provide the Company with
information technology services, software, infrastructure, equipment and other
services for a fixed monthly fee of approximately $1 million. The information
technology services agreement terminates on December 31, 2001 and is
automatically renewable for one-year terms unless either party elects to
terminate. The Company also entered into a manufacturing agreement under which
Unilever manufactures fragrance and cosmetic products for the Company in a
plant located in Las Piedras (Puerto Rico) through December 31, 2002. Pricing
is based on a cost per piece. In addition, the Company entered into a
distribution agreement with Unilever's distribution facility in Lille, France,
to obtain order fulfillment services, for the Company's products in Europe.
Under the distribution agreement, the Company pays a fixed fee per product
shipped. The agreement terminates on December 31, 2001, and is automatically
renewable for additional one-year terms unless either party elects to
terminate.
9
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. COMMITMENTS AND CONTINGENCIES - (Continued)
In July 2001, Unilever sold the Roanoke manufacturing plant to a third
party where many of the Company's skin care and cosmetic products were
manufactured. The Company entered into an agreement with the purchaser of the
plant for it to continue to manufacture the Company's products at the plant
through January 31, 2007. Pricing is based on specific fixed and variable
cost standards that are to be established annually. For the twelve fiscal
months following July 28, 2001, the Company anticipates incurring
manufacturing costs of approximately $26.3 million (of which $10 million is a
commitment of the Company with respect to fixed costs associated with the
operation of the plant and the balance represents variable costs which are
dependent on the volumes manufactured for the Company at the plant) under the
new agreement with the purchaser of the plant.
In December 2000, the Company was named in a lawsuit by a Canadian
customer of Unilever who alleges that Unilever breached obligations owed to
the plaintiff and that the Company interfered with the contractual
relationship. The plaintiff currently seeks damages of Canadian $55 million
(approximately US$36 million at July 28, 2001) against each of the Company and
Unilever. Management believes that the Company would be entitled to
indemnification from Unilever to the extent the Company incurs losses as
a result of actions by Unilever. Management believes that the claims as to
the Company lack merit, and the Company is vigorously defending the action.
The Company is also a party to a number of legal actions, proceedings or
claims. While any action, proceeding or claim contains an element of
uncertainty, management of the Company believes that the outcome of such
actions, proceedings or claims likely will not have a material adverse effect
on the Company's business, consolidated financial position or results of
operations.
NOTE 7. CONVERTIBLE PREFERRED STOCK
At July 28, 2001, the Company had outstanding 416,667 shares, $120 per
share liquidation preference, of Series D Convertible Preferred Stock, $.01
par value (the "Series D Convertible Preferred Stock"), issued to an affiliate
of Unilever in connection with the Arden acquisition. Each share of Series D
Convertible Preferred Stock is convertible into 10 shares of the Company's
Common Stock, subject to certain restrictions, at a conversion price of $12
per share of Common Stock. The holder of the Series D Convertible Preferred
Stock will be entitled to convert up to 33.33% of its shares after January 23,
2002, up to 66.66% after January 23, 2003, and all of its shares after January
23, 2004. In addition, cumulative dividends of 5% of the outstanding
liquidation preference of the Series D Convertible Preferred Stock will begin
to accrue on January 23, 2003 and will be payable in cash or in additional
shares of Series D Convertible Preferred Stock. The Company is required to
redeem the Series D Convertible Preferred Stock on January 23, 2013 at the
aggregate liquidation value of all of the then outstanding shares plus accrued
and unpaid dividends. In addition, the Company may redeem all or part of the
Series D Convertible Preferred Stock at any time after February 2, 2002,
subject to the waiver of certain restrictions under the Credit Facility and
compliance with certain limitations under the indentures governing its senior
notes, at a redemption price of $25.00 multiplied by the number of shares of
Common Stock into which the shares of Series D Convertible Preferred Stock can
be converted plus accrued and unpaid dividends. The Series D Convertible
Preferred Stock was recorded at its fair market value of $35 million, and the
difference between the fair market value and the liquidation value of $50
million is being accreted over the life of the Series D Convertible Preferred
Stock. For the three and six months ended July 28, 2001, the aggregate
accretion and dividend on the Series D Convertible Preferred Stock was
approximately $833,000 and $1,667,000, respectively.
10
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. EARNINGS (LOSS) PER SHARE
Basic earnings per share is computed by dividing the net income available
to common shareholders by the weighted average shares of outstanding Common
Stock. The calculation of diluted earnings per share is similar to basic
earnings per share except that the denominator includes dilutive potential
Common Stock such as stock options, warrants and convertible securities. In
addition, for the dilutive earnings per share calculation, the interest
incurred on the convertible securities, net of tax, and the imputed preferred
dividend accretion is added back to net income. Diluted loss per share
equals basic loss per share for the three and six months ended July 31, 2000
and July 28, 2001, as the assumed conversion of convertible securities and the
assumed exercise of outstanding options and warrants would have an
anti-dilutive effect.
The following table represents the computation of earnings per share for
the three and six months ended July 31, 2000 and July 28, 2001(in thousands
except per share data):
Three Months Ended Six Months Ended
July 31, 2000 July 28, 2001 July 31, 2000 July 28, 2001
------------- ------------- ------------- -------------
Basic
Net income (loss) attributable to
common shareholders $ 637 $ (26,819) $ 313 $ (45,787)
======== ========= ======== =========
Weighted average shares outstanding 13,217 17,497 13,259 16,969
======== ========= ======== =========
Net income (loss) per basic share $ 0.05 $ (1.53) $ 0.02 $ (2.70)
======== ========= ======== =========
Diluted
Net income (loss) attributable to
common shareholders $ 637 $ (26,819) $ 313 $ (45,787)
Add: 7.5% Convertible Subordinated
Debentures interest,
net of tax 22 -- 51 22
Add: Dividend on Series D
Convertible Preferred Stock -- 625 -- 1,250
Add: Accretion on Series D
Convertible Preferred Stock -- 208 -- 417
-------- --------- -------- ---------
Net income (loss) as adjusted $ 659 $ (25,986) $ 364 $ (44,098)
======== ========= ======== =========
Weighted average shares outstanding 13,217 17,497 13,259 16,969
Potential common shares -
treasury method 1,475 1,661 1,459 1,484
Assumed conversion of 7.5% Convertible
Subordinated Debentures 360 -- 376 143
Series D Convertible Preferred Stock -- 4,167 -- 4,167
-------- --------- -------- ---------
Weighted average shares and potential
dilutive shares 15,052 23,325 15,094 22,763
======== ========= ======== =========
Net income (loss) per
diluted share $ 0.04 $ (1.53) $ 0.02 $ (2.70)
======== ========= ======== =========
11
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following unaudited financial statements of the Company show in
separate columns those subsidiaries that are guarantors of the 11 3/4% Senior
Secured Notes due 2011 which were issued to finance a portion of the purchase
price for the Arden acquisition, elimination adjustments and the consolidated
total. The Company's direct subsidiaries DF Enterprises, Inc., FD Management,
Inc. and Elizabeth Arden International Holding, Inc., are guarantors of the 11
3/4% Senior Secured Notes. All information presented is in thousands.
Balance Sheet January 31, 2001
Company Guarantors Eliminations Consolidated
------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 4,004 $ 13,691 $ -- $ 17,695
Accounts receivable, net 50,212 (1,830) -- 48,382
Inventories and advances on
inventories 188,536 21,961 -- 210,497
Intercompany receivable 211,216 -- (211,216) --
Prepaid expenses and other
assets 8,543 4,544 -- 13,087
-------- -------- --------- --------
Total current assets 462,511 38,366 (211,216) 289,661
-------- -------- --------- --------
Property and equipment, net 34,147 6,583 -- 40,730
Other assets:
Exclusive brand licenses and
trademarks, net 47,162 180,070 -- 227,232
Other assets 25,523 1 -- 25,524
-------- -------- --------- --------
Total other assets 72,685 180,071 -- 252,756
-------- -------- --------- --------
Total assets $569,343 $225,020 $(211,216) $583,147
======== ======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 22,945 $ -- $ -- $ 22,945
Accounts payable trade 39,223 1,028 -- 40,251
Intercompany payable -- 211,216 (211,216) --
Other payables and accrued
expenses 33,197 11,034 -- 44,231
Current portion of long-term debt 1,146 -- -- 1,146
-------- -------- --------- --------
Total current liabilities 96,511 223,278 (211,216) 108,573
-------- -------- --------- --------
Long-term debt, net 331,145 -- -- 331,145
-------- -------- --------- --------
Total liabilities 427,656 223,278 (211,216) 439,718
-------- -------- --------- --------
Convertible, redeemable preferred
stock 35,000 -- -- 35,000
-------- -------- --------- --------
Shareholders' equity 106,686 1,742 -- 108,429
-------- -------- --------- --------
Total liabilities and shareholders'
equity $569,343 $225,020 $(211,216) $583,147
========= ========= ========== =========
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
BALANCE SHEET July 28, 2001
Company Guarantors Eliminations Consolidated
------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 6,334 $ 20,554 $ -- $ 26,888
Accounts receivable, net 59,570 37,732 -- 97,302
Inventories and advances on
inventories 229,844 38,512 -- 268,356
Intercompany receivable 266,744 -- (266,744) --
Prepaid expenses and other assets 27,370 9,354 -- 36,724
--------- --------- ---------- ---------
Total current assets 589,862 106,152 (266,744) 429,270
--------- --------- ---------- ---------
Property and equipment, net 31,066 8,347 -- 39,413
--------- --------- ---------- ---------
Other assets:
Exclusive brand licenses and
trademarks, net 42,831 175,706 -- 218,537
Other assets 24,178 484 -- 24,662
--------- --------- ---------- ---------
Total other assets 67,009 176,190 -- 243,199
--------- --------- ---------- ---------
Total assets $ 687,937 $ 290,689 $ (266,744) $ 711,882
========= ========= ========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 93,615 $ -- $ -- $ 93,615
Accounts payable trade 99,032 4,476 -- 103,508
Intercompany payable -- 266,744 (266,744) --
Other payables and accrued
expenses 55,242 22,487 -- 77,729
Current portion of long-term debt 146 -- -- 146
--------- --------- ---------- ---------
Total current liabilities 248,035 293,707 (266,744) 274,998
--------- --------- ---------- ---------
Long-term debt, net 328,531 -- -- 328,531
--------- --------- ---------- ---------
Total liabilities 576,566 293,707 (266,744) 603,529
--------- --------- ---------- ---------
Convertible, redeemable preferred
stock 36,667 -- -- 36,667
--------- --------- ---------- ---------
Shareholders' equity 74,704 (3,018) -- 71,686
--------- --------- ---------- ---------
Total liabilities and shareholders'
equity $ 687,937 $ 290,689 $ (266,744) $ 711,882
========= ========= ========== =========
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED
July 28, 2001
Company Guarantors Eliminations Consolidated
--------------------------------------------------
Net sales $ 79,809 $53,684 $(6,444) $127,049
Cost of sales 55,239 17,389 -- 72,628
-------- ------- ------- --------
Gross profit 24,570 36,295 (6,444) 54,421
-------- ------- ------- --------
Selling, general and
administrative expenses 46,399 34,569 (6,444) 74,524
Depreciation and amortization 4,383 3,320 -- 7,703
Loss from operations (26,212) (1,594) -- (27,806)
Interest and other income
(expense) (5,259) (6,281) -- (11,540)
-------- ------- ------- --------
Loss before income taxes (31,471) (7,875) -- (39,346)
Benefit from income taxes (11,018) (2,342) -- (13,360)
-------- ------- ------- --------
Net loss $(20,453) $(5,533) $ -- $(25,986)
======== ======= ======= ========
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED
July 28, 2001
Company Guarantors Eliminations Consolidated
--------------------------------------------------
Net sales $168,130 $114,277 $(13,323) $269,084
Cost of sales 109,088 31,974 -- 141,062
-------- ------- ------- --------
Gross profit 59,042 82,303 (13,323) 128,022
-------- ------- ------- --------
Selling, general and
administrative 98,614 72,818 (13,323) 158,109
Depreciation and amortization 10,847 4,289 -- 15,136
Loss from operations (50,419) 5,196 -- (45,223)
Interest and other income
(expense) (10,024) (12,629) -- (22,653)
-------- ------- ------- --------
Loss before income taxes (60,443) (7,433) -- (67,876)
Benefit from income taxes (21,083) (2,673) -- (23,756)
-------- ------- ------- --------
Net loss $(39,360) $(4,760) $ -- $(44,120)
======== ======= ======= ========
STATEMENT OF CASH FLOWS For the Six Months Ended
July 28, 2001
Company Guarantors Eliminations Consolidated
--------------------------------------------------
Cash flows from operating
activities:
Net cash provided by
(used in) operating
activities $(73,328) $ 9,035 $ - $(64,293)
======== ======= ======= ========
Cash flows from investing
activities:
Additions to property and
equipment, net of disposals (2,804) (2,172) -- (4,976)
-------- ------- ------- --------
Net cash used in investing
activities (2,804) (2,174) -- (4,976)
-------- ------- ------- --------
Cash flows from financing a
activities:
Net proceeds from short-term debt 70,670 -- -- 70,670
Payments on long-term debt (1,091) -- -- (1,091)
Proceeds from the exercise of
stock options 998 -- -- 998
Proceeds from the exercise of
stock purchase warrants 8,287 -- -- 8,287
Repurchase of common stock (402) -- -- (402)
-------- ------- ------- --------
Net cash provided by financing
activities 78,462 - -- 78,462
Net increase in cash and
cash equivalents 2,330 6,863 -- 9,193
Cash and cash equivalents at
beginning of period 4,004 13,691 -- 17,695
-------- ------- ------- --------
Cash and cash equivalents at
end of period $6,334 $20,554 $ -- $ 26,888
======== ======= ======= ========
14
ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING ACTIVITIES
The Company incurred the following non-cash financing and investing
activities during the six months ended July 28, 2001:
Six Months Ended
(Amounts in thousands) July 28, 2001
----------------
Conversion of 7.5% Convertible
Subordinated Debentures (including
accrued interest) into Common Stock $ 2,410
========
Accretion and dividend on Series D
Convertible Preferred Stock $ 1,667
========
There were no non-cash financing and investing activities during the six
months ended July 31, 2000.
NOTE 11. RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2000, the Emerging Issues Task Force ("EITF") reached a consensus
on EITF 00-14, "Accounting for Certain Sales Incentives," which provides
guidance on accounting for discounts, coupons, rebates and free products, as
well as the income statement classification of these discounts, coupons,
rebates and free products. EITF 00-14 is effective February 1, 2002 for the
Company. The Company is currently evaluating the impact of this new guidance.
In April 2001, the EITF reached a consensus on EITF 00-25, "Accounting
for Consideration from a Vendor to a Retailer in Connection with the Purchase
or Promotion of the Vendor's Products," which provides guidance on the income
statement classification of consideration from a vendor to a retailer in
connection with the retailer's purchase of the vendor's products or to promote
sales of the vendor's products. EITF 00-25 is effective February 1, 2002 for
the Company. The Company is currently evaluating the impact of this new
guidance.
In July 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141 (FAS 141), "Business Combinations"
and No. 142 (FAS 142), "Goodwill and Other Intangible Assets." FAS 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, establishes specific criteria for
the recognition of intangible assets separately from goodwill, and requires
that unallocated negative goodwill be written off immediately as an
extraordinary gain instead of being deferred and amortized. Provisions of FAS
141 will be effective for the Company's business acquisitions that are
consummated after July 1, 2001. FAS 142 supersedes Accounting Principles
Board Opinion No. 17, "Intangible Assets," and addresses the accounting for
goodwill and intangible assets subsequent to their acquisition. Under SFAS
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 general provisions of FAS 142 will be effective
for the Company as of the beginning of fiscal 2003. However, certain
provisions will be effective for all business acquisitions consummated after
June 30, 2001. The Company is currently in the process of assessing the
potential impact of these new standards on its financial statements.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
In connection with the Safe Harbor Provisions of the Private Securities
Litigation Reform Act of 1995, Elizabeth Arden, Inc., is hereby providing
cautionary statements identifying important factors that could cause our
actual results to differ materially from those projected in forward-looking
statements (as defined in such act) made in this Quarterly Report on
Form 10-Q. Any statements that 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;
our absence of contracts with 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 herein could cause actual results to differ
materially from those expressed in any forward-looking statements we make and
that investors should not place undue reliance on any such forward-looking
statements. Further, any forward-looking statement speaks only as of the date
on which such statement is made, and we undertake no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of anticipated or
unanticipated events or circumstances. New factors emerge from time to time,
and it is not possible for us to predict all of such factors. Further, we
cannot assess the impact of each such factor on our results of operations or
the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements.
GENERAL
This discussion should be read in conjunction with the Notes to Unaudited
Consolidated Financial Statements contained herein and Management's Discussion
and Analysis of Financial Condition and Results of Operations appearing in our
Annual Report on Form 10-K for the year ended January 31, 2001. The results
of operations for an interim period may not give a true indication of results
for the year. In the following discussions, all comparisons are with the
corresponding items in the prior year.
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 three and
six months ended July 28, 2001 include the results of the Elizabeth Arden
business. See Note 2 to Notes to Unaudited Consolidated Financial Statements.
Our business is seasonal with higher sales occurring in the second half of
the fiscal year as a result of increased demand by retailers in anticipation
of and during the holiday season. Our working capital borrowings are also
seasonal and have historically been highest in the third quarter of our fiscal
year, with cash collected on seasonal orders in our fourth quarter.
16
Effective February 1, 2001, we changed our quarterly periods from a
calendar month end quarter to a 13-week quarter. Since we will continue to
have a January 31 fiscal year end, although the second and third quarters of
every fiscal year will have thirteen weeks each, the first quarter will have
less than thirteen weeks and the fourth quarter will have more than thirteen
weeks. The three months ended July 28, 2001 had 91 days and the six months
ended July 28, 2001 had 178 days.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 28, 2001 COMPARED TO THE THREE MONTHS ENDED JULY 31,
2000
- ----------------------------------------------------------------------------
NET SALES. Net sales increased 89.9% from $66.9 million for the three
months ended July 31, 2000, to $127.0 million for the three months ended July
28, 2001 as a result of increased sales from the acquisition of the Elizabeth
Arden business, somewhat 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 in the U.S. prestige department store
channel and internationally.
GROSS PROFIT. Gross profit increased 160.5% from $20.9 million for the
three months ended July 31, 2000, to $54.4 million for the three months ended
July 28, 2001, and gross margins expanded from 31.2% to 42.8% for the
corresponding periods 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. During the quarter ended July
28, 2001, we recorded a non-cash inventory provision of $10.3 million to write
down certain distributed brands and non-core product offerings that the
Company does 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. Also included in the gross margin for the
three months ended July 28, 2001 are sales of Elizabeth Arden products we
purchased prior to the acquisition, which are carried at a higher cost and
result 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 three months ended July 28,
2001, the effect on gross profit of selling Arden product purchased prior to
the Arden acquisition was a reduction of gross profit of approximately $3.2
million. Excluding the inventory provision and the effect of the high cost
products purchased prior to the acquisition, gross profit would have totaled
$67.9 million with a gross margin of 53.5%.
SG&A. Selling, general and administrative expenses increased $61.9
million, or 491.3%, from $12.6 million for the three months ended July 31,
2000, to $74.5 million for the three months ended July 28, 2001, reflecting
additional selling and administrative costs associated with the acquisition of
the Elizabeth Arden business. The products acquired as part of the Arden
acquisition are supported by a higher level of promotional expenses, including
advertising and demonstration expenses. As a result of the acquisition of the
Elizabeth Arden business, we added approximately 1,600 employees worldwide and
numerous offices and facilities.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
159.1% from $3.0 million for the three months ended July 31, 2000, to $7.7
million for the three months ended July 28, 2001 as a result of the
depreciation and amortization associated with the assets acquired as part of
the Arden acquisition. Approximately $4.4 million of the increase in
depreciation and amortization represents depreciation and amortization of the
assets acquired as part of the Elizabeth Arden business.
INTEREST EXPENSE, NET. Interest expense, net of interest income,
increased by $6.7 million or 138.6% from $4.8 million for the three months
ended July 31, 2000, to $11.5 million for the three months ended July 28,
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 new $175 million revolving credit facility.
See Notes 4 and 5 to Notes to Unaudited Consolidated Financial Statements.
17
BENEFIT FROM INCOME TAXES. We recorded a provision for income taxes of
$408,000 for the three months ended July 31, 2000, as compared to a benefit
from income taxes of $13.4 million for the three months ended July 28, 2001.
The effective tax rate calculated as a percentage of loss before income taxes
declined from 39.0% to 34.0% for the respective periods. The change in
percentage reflects the inclusion of a number of foreign affiliates
established following the acquisition of the Elizabeth Arden business.
Generally, our foreign affiliates are taxed at a lower tax rate than our
United States operations.
NET LOSS. Net loss increased $26.6 million from a net income of $637,000
for the three months ended July 31, 2000, to a net loss of $26.0 million for
the three months ended July 28, 2001. The increase in net loss was a result
of higher selling, general and administrative expenses, interest expenses and
depreciation and amortization, resulting from the Arden acquisition and
the non-cash inventory provision, which more than offset increases in sales
and gross profit.
ACCRETION AND DIVIDEND ON PREFERRED STOCK. As part of the purchase price
for 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 a $35 million fair value, has a
$50 million liquidation preference, and carries a 5% annual dividend yield,
which begins accruing in January 2003. The accretion and dividend on
preferred stock of $833,000 for the three months ended July 28, 2001, is a
non-cash charge to net loss attributable to common shareholders and represents
accretion on the fair value of the preferred stock and the imputed dividends
on the preferred stock. See Note 7 to Notes to Unaudited Consolidated
Financial Statements.
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS. Net loss attributable to
common shareholders increased by $27.5 million from net income of $637,000 for
the three months ended July 31, 2000, to a net loss of $26.8 million for
the three months ended July 28, 2001. The net loss attributable to common
shareholders includes the net loss plus the accretion and dividends associated
with the series D convertible preferred stock.
EBITDA. EBITDA (operating income, plus depreciation and amortization)
decreased $28.4 million from positive $8.3 million for the three months ended
July 31, 2000, to negative $20.1 million for the three months ended July 28,
2001. The decrease in EBITDA was the result of higher selling, general and
administrative expenses related to the acquisition of the Elizabeth Arden
business and the non-cash inventory provision, which more than offset the
increase in gross profit.
SIX MONTHS ENDED JULY 28, 2001 COMPARED TO THE SIX MONTHS ENDED JULY 31, 2000
- -----------------------------------------------------------------------------
NET SALES. Net sales increased 102.9% from $132.6 million for the six
months ended July 31, 2000, to $269.1 million for the six months ended July
28, 2001 as a result of increased sales from the acquisition of the Elizabeth
Arden business somewhat offset by a weaker 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 in the prestige department store
channel and internationally.
GROSS PROFIT. Gross profit increased 237.2% from $38.0 million for the
six months ended July 31, 2000, to $128.0 million for the six months ended
July 28, 2001, and gross margins expanded from 28.6% to 47.6% for the
corresponding periods 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. During 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 the
Company does 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. Included in the gross margin for the six months
ended July 28, 2001 are sales of Elizabeth Arden products we purchased prior
to the acquisition, which are carried at a higher cost and result 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 six months ended July 28, 2001, the effect on gross profit
of selling Arden product purchased prior to the Arden acquisition was a
reduction of gross
18
profit of approximately $8.2 million. Excluding the inventory provision
and the effect of the high cost products purchased prior to the acquisition,
gross profit would have totaled $146.5 million with a gross margin of 54.4%.
SG&A. Selling, general and administrative expenses increased $135.2
million, or 589.3%, from $22.9 million for the six months ended July 31, 2000,
to $158.1 million for the six months ended July 28, 2001, reflecting
additional selling and administrative costs associated with the acquisition of
the Elizabeth Arden business. The products acquired as part of the Arden
acquisition are supported by a higher level of advertising and promotional
expenses. As a result of the acquisition of the Elizabeth Arden business, we
added approximately 1,600 employees worldwide and numerous offices and
facilities.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
156.2% from $5.9 million for the six months ended July 31, 2000, to $15.1
million for the six months ended July 28, 2001, as a result of the
depreciation and amortization associated with the assets acquired as part of
the Arden acquisition. Approximately $8.8 million of the increase in
depreciation and amortization represents depreciation and amortization of the
assets acquired as part of the Elizabeth Arden business.
INTEREST EXPENSE, NET. Interest expense, net of interest income,
increased by $13.2 million or 138.6% from $9.5 million for the six months
ended July 31, 2000, to $22.7 million for the six months ended July 28, 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 new $175 million revolving credit facility.
See Notes 4 and 5 to Notes to Unaudited Consolidated Financial Statements.
BENEFIT FROM INCOME TAXES. We recorded a provision for income taxes of
$203,000 for the six months ended July 31, 2000, as compared to a benefit from
income taxes of $23.8 million for the six months ended July 28, 2001. The
effective tax rate calculated as a percentage of loss before income taxes
declined from 39.3% to 35.0% for the respective periods. The change in
percentage reflects the inclusion of a number of foreign affiliates
established following the Arden acquisition, which are taxed at a lower tax
rate than our United States operations.
NET LOSS. Net loss increased $44.4 million from net income of $313,000
for the six months ended July 31, 2000, to net loss of $44.1 million for the
six months ended July 28, 2001. The increase in net loss was a result of
higher selling, general and administrative expenses, interest expenses,
depreciation and amortization resulting from the Arden acquisition and the
non-cash inventory provision, which more than offset increases in sales and
gross profit.
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 a $35 million fair value, has a
$50 million liquidation preference, and carries a 5% annual dividend yield,
which begins accruing in January 2003. The accretion and dividend on
preferred stock of $1.7 million for the six months ended July 28, 2001 is a
non-cash charge to net loss attributable to common shareholders and represents
accretion on the fair value of the preferred stock and the imputed dividends
on the preferred stock. See Note 7 to Notes to Unaudited Consolidated
Financial Statements.
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS. Net loss attributable to
common shareholders increased by $46.1 million from net income of $313,000 for
the six months ended July 31, 2000, to a net loss of $45.8 million for the six
months ended July 28, 2001. The net loss attributable to common shareholders
includes the net loss plus the accretion and dividends associated with the
series D convertible preferred stock.
EBITDA. EBITDA (operating income, plus depreciation and amortization)
decreased $45.1 million from positive $15.0 million for the six months ended
July 31, 2000, to negative $30.1 million for the six months ended July 28,
2001. The decrease in EBITDA was the result of higher selling, general and
administrative expenses related to the acquisition of the Elizabeth Arden
business and the non-cash inventory provision, which more than offset the
increase in gross profit.
19
FINANCIAL CONDITION
We used $64.3 million of cash in operating activities for the six months
ended July 28, 2001, as compared with $25.2 million of cash used in operating
activities for the six months ended July 31, 2000. The increase in cash used
in operating activities following the acquisition of the Elizabeth Arden
business was a result of increases in accounts receivable, inventories, and
net losses, offset somewhat by increases in accounts payable and other
payables and accrued expenses. Accounts receivable increased due to the
increase in net sales. We did not acquire accounts receivable as part of the
acquisition of the Elizabeth Arden business. In addition to inventories
acquired as part of the acquisition of the Elizabeth Arden business,
inventories also increased due to our seasonal build-up of finished goods and
certain raw materials to be used in holiday season promotional sets.
Net cash provided by financing activities increased from $6.9 million for
the six months ended July 31, 2000, to $78.5 million for the three months
ended July 28, 2001, as a result of increased borrowings required to fund our
working capital needs. Cash and cash equivalents increased from $735,000 as
of July 31, 2000, to $26.9 million as of July 28, 2001. As a result of the
acquisition of the Elizabeth Arden business, we now have a number of foreign
affiliates, which increases the amount of cash and cash equivalents we are
required to have on hand.
We have a credit facility with a syndicate of banks for which Fleet is
the administrative agent, which provides borrowings of up to $175 million on a
revolving basis with a $25 million sublimit for letters of credit. Borrowings
under the credit facility are limited to eligible accounts receivable and
inventories and are collateralized by a first priority lien on all of our U.S.
accounts receivable and inventory. In July 2001, the credit facility was
amended to provide for a seasonal increase in 2001 with respect to the
eligible inventory from $87.5 to $114 million. See Note 4 to the Notes to
Unaudited Consolidated Financial Statements. At July 28, 2001, we had
borrowings of $93.6 million under the credit facility and approximately $1.3
million of outstanding letters of credit. At July 28, 2001, the remaining
availability under the credit facility, based upon eligible receivables and
inventories as of that date, was approximately $32.6 million. We believe that
cash from operations, the availability under our credit facility and other
available financing alternatives should be adequate to support currently
planned business operations and capital expenditures.
In fiscal 2000, our board of directors authorized a share repurchase
program that allows us to purchase up to an aggregate of $10 million of our
common stock. As of July 28, 2001, we had repurchased an aggregate of
1,014,309 shares of common stock under the share repurchase program at an
average price of $6.92.
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.
We are currently evaluating the impact of this new guidance.
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. We are currently evaluating the impact of this new guidance.
In July 2001, the Financial Accounting Standards Board 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 business acquisitions that are consummated after
July 1, 2001. FAS 142 supersedes Accounting Principles Board Opinion No. 17,
"Intangible Assets," and addresses the
20
accounting for goodwill and intangible assets subsequent to their acquisition.
Under SFAS 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 general provisions of FAS 142 will be effective
for us as of the beginning of fiscal 2003. However, certain provisions will
be effective for all business acquisitions consummated after June 30, 2001.
We are currently in the process of assessing the potential impact of these new
standards on its financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. As of July 28, 2001, we had approximately $93.6
million outstanding under our credit facility subject to variable interest
rates. Our borrowings under our credit facility are seasonal with peak
borrowings in the third quarter of our fiscal year. To date, we have not
engaged in derivative transactions to mitigate interest rate risk, as most of
our debt bears a fixed rate.
Foreign Currency Risk. We conduct our business in various regions of the
world and export and import products to and from several countries.
Approximately 25% of our annual sales are denominated in currencies other than
the U.S. dollar, principally the Euro, British pound, and Australian dollar.
Our costs are denominated in a variety of currencies including the U.S.
dollar, Swiss franc and Euro. Changes in exchange rates measured against the
average exchange rates for the year 2000 did not have a material impact on
reported results in the first six months. Our results of operations for the
six months ended July 28, 2001 do not include any foreign exchange hedging
activities. Foreign exchange hedging activities intended to reduce the
exposure of our cash flows to fluctuations in currency rates commenced in the
third quarter of fiscal 2002. We do not engage in hedging for speculative
investment reasons. There can be no assurance that our hedging operations
will eliminate or substantially reduce risks associated with fluctuating
exchange rates. Our results of operations are reported in U.S. dollars. A
weakening of the currencies in which we generate sales relative to the
currencies in which our costs are denominated may decrease our operating cash
flow.
21
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
- ------- -------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation of the Company dated
January 24, 2001 (incorporated herein by reference to Exhibit 3.1
filed as part of the Company's Form 8-K dated February 7, 2001
(Commission File No. 1-6370)).
3.2 Amended and Restated By-laws of the Company (incorporated herein by
reference to Exhibit 3.3 filed as part of the Company's Form 10-Q
for the quarter ended October 31, 2000 (Commission File No.
1-6370)).
4.1 Indenture, dated as of May 13, 1997, between the Company and HSBC
Bank USA (formerly Marine Midland Bank), as trustee (incorporated
herein by reference to Exhibit 4.1 filed as part of the Company's
Form 8-K dated May 13, 1997 (Commission File No. 1-6370)).
4.2 Second Supplemental Indenture, dated as of January 23, 2001, to
Indenture dated as of May 13, 1997, by and among the Company, the
guarantors signatory thereto and HSBC Bank USA, as trustee
(incorporated herein by reference to Exhibit 4.2 filed as part of
the Company's Registration Statement on Form S-4 on February 21,
2001 (Registration No. 333-55310)).
4.3 Indenture, dated as of April 27, 1998, between the Company and HSBC
Bank USA, as trustee (incorporated herein by reference to Exhibit
4.1 filed as part of the Company's Form 8-K dated April 27, 1998
(Commission File No. 1-6370)).
4.4 Second Supplemental Indenture, dated as of January 23, 2001, to
Indenture dated as of April 27, 1998, by and among the Company, the
guarantors signatory thereto and HSBC Bank USA, as trustee
(incorporated herein by reference to Exhibit 4.4 filed as part of
the Company's Registration Statement on Form S-4 on February 21,
2001 (Registration No. 333-55310)).
4.5 Indenture, dated as of January 23, 2001, among the Company, FD
Management, Inc., DF Enterprises, Inc., FFI International, Inc.,
Elizabeth Arden GmbH, as guarantors, and HSBC Bank USA, as trustee
(incorporated herein by reference to Exhibit 4.1 filed as part of
the Company's Form 8-K dated February 7, 2001 ((Commission File No.
1-6370)).
4.6 Amended and Restated Credit Agreement dated as of January 29, 2001
among the Company, the banks listed on the signature pages thereto,
Fleet National Bank, as administrative agent, issuing bank and
swingline lender, Credit Suisse First Boston, as syndication agent,
and Fleet Securities, Inc. and Credit Suisse First Boston, as joint
lead arrangers and joint book managers (incorporated herein by
reference to Exhibit 4.3 filed as part of the Company's Form 8-K
dated February 7, 2001 (Commission File No. 1-6370)).
4.7 First Amendment to Amended and Restated Credit Agreement dated as of
July 20, 2001, between Fleet National Bank, as administrative agent,
the banks listed on the signature pages thereto and the Company.
22
Exhibit
Number Description
- ------- -------------------------------------------------------------------
4.8 Amended and Restated Security Agreement dated as of January 29,
2001, made by the Company and certain of its subsidiaries in favor
of Fleet National Bank, as administrative agent (incorporated herein
by reference to Exhibit 4.5 filed as part of the Company's Form 8-K
dated February 7, 2001 (Commission File No. 1-6370)).
4.9 Warrant Agreement, dated as of January 23, 2001, between the Company
and Mellon Investor Services, Inc. (incorporated herein by reference
to Exhibit 4.8 filed as part of Amendment No. 1 to the Company's
Registration Statement on Form S-4 on February 21, 2001
(Registration No. 333-55310)).
4.10 Warrant Registration Rights Agreement, dated as of January 23, 2001,
among the Company, Credit Suisse First Boston, Cayman Islands
Branch, and Fleet Corporate Finance, Inc. (incorporated herein by
reference to Exhibit 4.9 filed as part of Amendment No. 1 to the
Company's Registration Statement on Form S-4 on February 21, 2001
(Registration No. 333-55310)).
4.11 Security Agreement, dated as of January 23, 2001, made by the
Company and certain of its subsidiaries in favor of HSBC Bank USA,
as collateral agent (incorporated herein by reference to Exhibit 4.4
of the Company's Form 8-K on February 7, 2001 (Commission File No.
1-6370)).
10.1 Registration Rights Agreement dated as of November 30, 1995, among
the Company, Bedford Capital Corporation, Fred Berens, Rafael Kravec
and Eugene Ramos (incorporated herein by reference to Exhibit 10.1
filed as a part of the Company's Form 10-K for the fiscal year ended
September 30, 1995 (Commission File No. 1-6370)).
10.2 Amendment dated as of March 20, 1996 to Registration Rights
Agreement dated as of November 30, 1995, among the Company, Bedford
Capital Corporation, Fred Berens, Rafael Kravec and Eugene Ramos
(incorporated herein by reference to Exhibit 10.2 filed as a part of
the Company's Form 10-K for the year ended January 31, 1996
(Commission File No. 1-6370)).
10.3 Second Amendment dated as of July 22, 1996 to Registration Rights
Agreement dated as of November 30, 1995, among the Company, Bedford
Capital Corporation, Fred Berens, Rafael Kravec and the Estate of
Eugene Ramos (incorporated by reference to Exhibit 10.3 filed as
part of the Company's Form 10-Q for the quarter ended July 31, 1996
(Commission File No. 1-6370)).
10.4 2000 Stock Incentive Plan (incorporated herein by reference to
Exhibit E filed as a part of the Company's Proxy Statement on
December 12, 2000 (Commission File No. 1-6370)).
10.5 Amended Non-Employee Director Stock Option Plan (incorporated herein
by reference to Exhibit F filed as a part of the Company's Proxy
Statement on December 12, 2000 (Commission File No. 1-6370)).
23
Exhibit
Number Description
- ------- -------------------------------------------------------------------
10.6 Amended 1995 Stock Option Plan (incorporated herein by reference to
Exhibit 4.12 filed as a part of the Company's Registration Statement
on Form S-8 dated July 7, 1999 (Commission File No. 1-6370)).
10.7 Asset Purchase Agreement, dated as of October 30, 2000, between the
Company and Conopco, Inc. (incorporated herein by reference to
Exhibit 10.6 of the Company's Form 10-Q for the quarter ended
October 31, 2000 (Commission File No. 1-6370)).
10.8 Amendment dated as of December 11, 2000 to the Asset Purchase
Agreement dated as of October 30, 2000, between the Company and
Conopco, Inc. (incorporated herein by reference to Exhibit 2.2 filed
as part of the Company's Form 8-K dated February 7, 2001 (Commission
File No. 1-6370)).
10.9 Second Amendment dated as of January 23, 2001 to the Asset Purchase
Agreement dated as of October 30, 2000, between the Company and
Conopco, Inc. (incorporated herein by reference to Exhibit 2.3 filed
as part of the Company's Form 8-K dated February 7, 2001 (Commission
File No. 1-6370)).
10.10 Third Amendment dated as of February 7, 2001, to the Asset Purchase
Agreement dated as of October 30, 2000, between the Company and
Conopco, Inc. (incorporated herein by reference to Exhibit 10.11
filed as part of Amendment No. 1 to the Company's Registration
Statement on Form S-4 on February 21, 2001 (Registration No.
333-55310)).
10.11 Fourth Amendment dated as of February 21, 2001, to the Asset
Purchase Agreement dated as of October 30, 2000, between the Company
and Conopco, Inc. (incorporated herein by reference to Exhibit 10.12
filed as part of Amendment No. 1 to the Company's Registration
Statement on Form S-4 on February 21, 2001 (Registration No.
333-55310)).
10.12 Fifth Amendment dated as of April 19, 2001, to the Asset Purchase
Agreement dated as of October 30, 2000, between the Company and
Conopco, Inc. (incorporated herein by reference to Exhibit 10.12 of
the Company's Form 10-K for the year ended January 31, 2001
(Commission File No. 1-6370)).
10.13 Sixth Amendment dated as of July 13, 2001, to the Asset Purchase
Agreement dated as of October 30, 2000, between the Company and
Conopco, Inc.
- -----------------------
The foregoing list omits instruments defining the rights of holders of
our long-term debt where the total amount of securities authorized thereunder
does not exceed 10% of our total assets. We hereby agree to furnish a copy of
each such instrument or agreement to the Commission upon request.
(b) Reports on Form 8-K.
A Current Report on Form 8-K and Form 8-K/A dated July 13, 2001, was
filed on July 20, 2001, reporting a change in our independent accountants
under Item 4. Changes in Registrant's Certifying Accountant.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ELIZABETH ARDEN, INC.
Date: September 11, 2001 By: /s/ E. Scott Beattie
------------------------------
E. Scott Beattie
Chairman, President, Chief
Executive Officer and Director
(Principal Executive Officer)
Date: September 11, 2001 By: /s/ Stephen J. Smith
------------------------------
Stephen J. Smith
Executive Vice President, Chief
Financial Officer
(Principal Financial and
Accounting Officer)
25