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Elizabeth Arden 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32
10-Q 2Qtr FY 2011 (Dec 31, 2010)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[x]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2010

 

[  ]

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 incorporation
or organization)

 

(I.R.S. Employer
Identification No.)

2400 S.W. 145 Avenue, Miramar, Florida

 

33027

(Address of principal executive offices)

 

(Zip Code)

(954) 364-6900

(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 by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  [  ]      No  [  ]

 

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

     Large accelerated filer

[  ]

Accelerated filer

[X]

     Non-accelerated filer

[  ]  (Do not check if a smaller reporting company)

Smaller reporting company

[   ]

 

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  [  ]      No  [X]

 

        Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

Class

     

Outstanding at
February 1, 2011

Common Stock, $.01 par value per share

 

28,761,989


ELIZABETH ARDEN, INC.

INDEX TO FORM 10-Q

 

PART I

 

FINANCIAL INFORMATION

   
         

Item 1.

 

Financial Statements

 

Page No.

 

 

Unaudited Consolidated Balance Sheets -- December 31, 2010 and June 30, 2010

 

3

 

 

 

   

 

 

Unaudited Consolidated Statements of Operations -- Three and six months ended
December 31, 2010 and December 31, 2009

 

4

 

 

 

   

 

 

Unaudited Consolidated Statement of Shareholders' Equity -- Six months ended
December 31, 2010

 

5

 

 

 

   

 

 

Unaudited Consolidated Statements of Cash Flow -- Six months ended December 31, 2010
and December 31, 2009

 

6

 

 

 

   

 

 

Notes to Unaudited Consolidated Financial Statements

 

7

 

 

 

   

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

24

 

 

 

   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

36

 

 

 

   

Item 4.

 

Controls and Procedures

 

36

 

 

 

   

PART II

 

OTHER INFORMATION

   
         

Item 1A.

 

Risk Factors

 

37

         

Item 6.

 

Exhibits

 

38

 

 

 

   

Signatures

 

41

         

Exhibit Index

 

42

- 2 -


PART I      FINANCIAL INFORMATION
ITEM 1.     FINANCIAL STATEMENTS

ELIZABETH ARDEN, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Amounts in thousands, except share and per share data)

   

As of

   

   

December 31,
2010

   

June 30,
2010

   

ASSETS

                 

Current Assets

                 
 

Cash and cash equivalents

 

$

38,314

   

$

26,881

   
 

Accounts receivable, net

   

214,453

     

170,067

   
 

Inventories

   

278,209

     

271,058

   
 

Deferred income taxes

   

25,744

     

33,496

   
 

Prepaid expenses and other assets

   

55,032

     

58,892

   

   

Total current assets

   

611,752

     

560,394

   

Property and equipment, net

75,948

76,583

Exclusive brand licenses, trademarks and intangibles, net

   

188,645

     

179,444

   

Goodwill

   

21,054

     

21,054

   

Debt financing costs, net

   

2,943

     

3,509

   

Deferred income taxes

   

1,324

     

1,301

   

Other

   

1,223

     

1,186

   

   

Total assets

 

$

902,889

   

$

843,471

   

                     

LIABILITIES AND SHAREHOLDERS' EQUITY

                 

Current Liabilities

                 
 

Short-term debt

 

$

37,000

   

$

59,000

   
 

Accounts payable - trade

   

95,904

     

98,441

   
 

Other payables and accrued expenses

   

136,163

     

96,429

   

   

Total current liabilities

   

269,067

     

253,870

   

Long-term Liabilities

                 
 

Long-term debt

   

218,854

     

218,699

   
 

Deferred income taxes and other liabilities

   

12,533

     

18,285

   

   

Total long-term liabilities

   

231,387

     

236,984

   

   

Total liabilities

   

500,454

     

490,854

   

Commitments and contingencies

                 

Shareholders' Equity

                 
 

Common stock, $.01 par value, 50,000,000 shares authorized; 32,818,106 and
   31,897,303 shares issued, respectively

   

328

     

319

   
 

Additional paid-in capital

   

312,445

     

297,137

   
 

Retained earnings

   

157,791

     

118,946

   
 

Treasury stock (4,231,292 and 3,632,589 shares at cost, respectively)

   

(71,448

)

   

(62,303

)

 
 

Accumulated other comprehensive income (loss)

   

3,319

     

(1,482

)

 

   

Total shareholders' equity

   

402,435

     

352,617

   

   

Total liabilities and shareholders' equity

 

$

902,889

   

$

843,471

   

The accompanying notes are an integral part of the unaudited consolidated financial statements.

- 3 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Amounts in thousands, except per share data)

Three Months Ended

Six Months Ended

December 31,
2010

December 31,
2009

December 31,
2010

December 31,
2009

Net sales

$

405,633

$

393,345

$

690,454

$

658,508

Cost of goods sold:

    Cost of sales

211,249

217,827

366,337

366,103

    Depreciation related to cost of goods sold

1,165

1,194

2,490

2,461

Total cost of goods sold

212,414

219,021

368,827

368,564

Gross profit

193,219

174,324

321,627

289,944

Operating expenses:

Selling, general and administrative

136,617

132,038

246,439

235,981

Depreciation and amortization

6,262

5,803

12,549

11,812

Total operating expenses

142,879

137,841

258,988

247,793

Income from operations

50,340

36,483

62,639

42,151

Interest expense, net

5,552

5,804

10,883

11,415

Income before income taxes

44,788

30,679

51,756

30,736

Provision for income taxes

10,830

9,623

12,911

9,640

Net income

$

33,958

$

21,056

$

38,845

$

21,096

Net income per common share:

Basic

$

1.24

$

0.75

$

1.42

$

0.75

Diluted

$

1.19

$

0.73

$

1.37

$

0.74

Weighted average number of common shares:

Basic

27,459

28,071

27,266

28,040

Diluted

28,568

28,707

28,297

28,591

The accompanying notes are an integral part of the unaudited consolidated financial statements.

- 4 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

(Unaudited)

(Amounts in thousands)

   

Common Stock

   

Additional
Paid-in

   

Retained

   

Treasury Stock

   

Accumulated
Other
Comprehensive

   

Total
Shareholders'

 
   

Shares

   

Amount

   

Capital

   

Earnings

   

Shares

   

Amount

   

(Loss) Income

   

Equity

 

Balance as of July 1, 2010

   

31,897

   

$

319

   

$

297,137

   

$

118,946

     

(3,633

)

 

$

(62,303

)

 

$

(1,482

)

 

$

352,617

 

Issuance of common stock upon exercise of options

750

7

9,855

9,862

Issuance of restricted stock, net of forfeitures

113

1

1

Issuance of common stock for employee stock purchase plan

   

58

     

1

     

792

                                     

793

 

Amortization of share-based awards

2,440

2,440

Repurchase of common stock

(598

)

(9,145

)

(9,145

)

Excess tax benefit from share-based awards

2,221

2,221

Comprehensive Income:

Net Income

38,845

38,845

Foreign currency translation adjustments

6,117

6,117

Disclosure of reclassification amounts, net of taxes

Unrealized hedging loss arising during the period

(2,084

)

(2,084

)

   

Less: reclassification adjustment for hedging losses
   included in net income

                                                   

768

     

768

 

   

Net unrealized cash flow hedging loss

                                                   

(1,316

)

   

(1,316

)

 

Total comprehensive income

                           

38,845

                     

4,801

     

43,646

 

Balance as of December 31, 2010

   

32,818

   

$

328

   

$

312,445

   

$

157,791

     

(4,231

)

 

$

(71,448

)

 

$

3,319

   

$

402,435

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

- 5 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

(Dollars in thousands)

   

Six Months Ended

 

   

December 31,
2010

   

December 31,
2009

 

Operating Activities:

               
 

Net income

 

$

38,845

   

$

21,096

 
 

Adjustments to reconcile net income to net cash used in operating
   activities:

               

Depreciation and amortization

15,039

14,273

 

Amortization of senior note offering and credit facility costs

   

722

     

733

 
 

Amortization of share-based awards

   

2,440

     

2,411

 
 

Deferred income taxes

   

9,814

     

5,348

 

   Changes in assets and liabilities, net of acquisitions:

               
 

Increase in accounts receivable

   

(40,961

)

   

(43,892

)

 

(Increase) decrease in inventories

   

(4,698

)

   

55,392

 
 

Decrease in prepaid expenses and other assets

   

4,072

     

1,573

 
 

Decrease in accounts payable

   

(1,202

)

   

(18,973

)

 

Increase in other payables, accrued expenses and other liabilities

   

30,292

     

40,883

 
 

Other

   

(46

)

   

(1,750

)

   

Net cash provided by operating activities

   

54,317

     

77,094

 

Investing Activities:

               
 

Additions to property and equipment

   

(11,443

)

   

(17,832

)

 

Acquisition of other assets

   

(13,864

)

   

(333

)

   

Net cash used in investing activities

   

(25,307

)

   

(18,165

)

                   

Financing Activities:

               
 

Payments on short-term debt

   

(22,000

)

   

(49,000

)

 

Payments on long-term debt

   

--

     

(545

)

 

Payments under capital lease obligations

   

--

     

(1,139

)

 

Proceeds from the exercise of stock options

   

9,862

     

512

 
 

Proceeds from the issuance of common stock under the employee stock
   purchase plan

   

793

     

551

 
 

Repurchase of common stock

   

(10,335

)

   

(374

)

 

Excess tax benefit from share-based awards

   

2,378

     

--

 

   

Net cash used in financing activities

   

(19,302

)

   

(49,995

)

Effect of exchange rate changes on cash and cash equivalents

   

1,725

     

669

 

Net increase in cash and cash equivalents

   

11,433

     

9,603

 

Cash and cash equivalents at beginning of period

   

26,881

     

23,102

 

Cash and cash equivalents at end of period

 

$

38,314

   

$

32,705

 

Supplemental Disclosure of Non-Cash Information:

               
 

Additions to property and equipment (not included above)

 

$

740

   

$

2,569

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

- 6 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.    BUSINESS AND BASIS OF PRESENTATION

          Elizabeth Arden, Inc. (the "Company" or "our") is a global prestige beauty products company that sells fragrances, skin care and cosmetic products to retailers in the United States and approximately 100 countries internationally.

          The unaudited consolidated financial statements include the accounts of the Company's wholly-owned domestic and international subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited consolidated financial statements 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 for complete financial statement presentation and should be read in conjunction with the audited consolidated financial statements and related footnotes included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2010 (the "2010 Annual Report"), filed with the Commission.

          The consolidated balance sheet of the Company as of June 30, 2010 is derived from the financial statements included in the 2010 Annual Report but does not include all disclosures required by accounting principles generally accepted in the United States. The other consolidated financial statements presented in this quarterly report are unaudited but include all adjustments that are of a normal recurring nature that management considers necessary for the fair statement of the results for the interim periods. Results for interim periods are not necessarily indicative of results for the full fiscal year.

          Commencing July 1, 2010, the Company's operations and management reporting structure were reorganized into two reportable segments, North America and International. The portion of the Company's business operations that previously sold Elizabeth Arden fragrance, cosmetic and skin care products in prestige department stores in the United States and through the Red Door beauty salons, which was previously reported as the Company's "Other" segment, has been consolidated with the North America Fragrance segment to create the North America segment. Effective July 1, 2010, (a) employee incentive costs are fully allocated to the North America and International segments, as applicable, and (b) restructuring costs that are not part of an announced plan are recorded in the Company's reportable segment that incurred the costs or in unallocated corporate expenses if related to corporate operations. Prior period amounts related to segment profit measures have been restated for comparison purposes. See Note 15 for a discussion of the Company's reportable segments.

          To conform to the presentation for the three and six months ended December 31, 2010, certain reclassifications, in addition to the above, were made to the prior year's unaudited consolidated financial statements and the accompanying footnotes.

 

NOTE 2.    ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)/COMPREHENSIVE INCOME (LOSS)

          Company's accumulated other comprehensive income (loss) shown on the accompanying consolidated balance sheets consists of foreign currency translation adjustments, which are not adjusted for income taxes since they relate to indefinite investments in non-U.S. subsidiaries, and the unrealized (losses) gains, net of taxes, related to the Company's foreign currency contracts.

          The components of accumulated other comprehensive income (loss) were as follows:

 

(Amounts in thousands)

December 31,
2010

June 30,
2010

Cumulative foreign currency translation adjustments

$

4,278

$

(1,839

)

Unrealized hedging (losses) gains, net of taxes

(959

)

357

Accumulated other comprehensive income (loss)

$

3,319

$

(1,482

)

          The Company's comprehensive income consists of net income, foreign currency translation adjustments, which are not adjusted for income taxes since they relate to indefinite investments in non-U.S. subsidiaries, and the unrealized gains (losses), net of taxes, related to the Company's foreign currency contracts.

- 7 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

          The components of other comprehensive income were as follows:

(Amounts in thousands)

Three Months Ended

 

Six Months Ended

 

December 31,
2010

   

December 31,
2009

   

December 31,
2010

   

December 31,
2009

 

Net income

$

33,958

   

$

21,056

   

$

38,845

   

$

21,096

 

Foreign currency translation adjustments

 

1,764

     

634

     

6,117

     

2,571

 

Net unrealized hedging gain (loss), net of taxes

 

496

     

(630

)

   

(1,316

)

   

(537

)

Total comprehensive income

$

36,218

   

$

21,060

   

$

43,646

   

$

23,130

 

NOTE 3.    INCOME PER SHARE

          Basic income per share is computed by dividing the net income by the weighted average number of shares of the Company's outstanding common stock, $.01 par value per share ("Common Stock"). The calculation of net income per diluted share is similar to basic net income per share except that the denominator includes potentially dilutive Common Stock such as stock options and non-vested restricted stock.

          The following table represents the computation of net income per share:

(Amounts in thousands, except per
share data)

 

Three Months Ended

   

Six Months Ended

 

   

December 31,
2010

   

December 31,
2009

   

December 31,
2010

   

December 31,
2009

 

Basic

                               
 

Net income

 

$

33,958

   

$

21,056

   

$

38,845

   

$

21,096

 

 

Weighted average shares outstanding

   

27,459

     

28,071

     

27,266

     

28,040

 

 

Net income per basic share

 

$

1.24

   

$

0.75

   

$

1.42

   

$

0.75

 

Diluted

                               
 

Net income

 

$

33,958

   

$

21,056

   

$

38,845

   

$

21,096

 

                                   
 

Weighted average shares outstanding

   

27,459

     

28,071

     

27,266

     

28,040

 

 

Potential common shares - treasury
   method

   

1,109

     

636

     

1,031

     

551

 

 

Weighted average shares and potential
   dilutive common shares

   

28,568

     

28,707

     

28,297

     

28,591

 

   

Net income per diluted share

 

$

1.19

   

$

0.73

   

$

1.37

   

$

0.74

 

          The following table shows the number of shares subject to option awards that were outstanding for the three and six months ended December 31, 2010 and 2009 that were not included in the diluted net income per share calculation because to do so would have been anti-dilutive:

   

Three Months Ended

   

Six Months Ended

 

   

December 31,
2010

   

December 31,
2009

   

December 31,
2010

   

December 31,
2009

 

Number of shares

   

935,501

     

1,866,594

     

1,045,101

     

2,859,012

 

 

- 8 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4.    RESTRUCTURING CHARGES

          In fiscal 2007, the Company commenced a comprehensive review of its global business processes to re-engineer its extended supply chain, distribution, logistics and transaction processing systems. In May 2008, the Company announced a decision to accelerate the re-engineering of its extended supply chain, distribution and logistics functions, as well as the realignment of other parts of its organization to better support its new business processes. This initiative also included a migration to a shared services model to simplify transaction processing by consolidating the Company's primary global transaction processing functions and the implementation of a new financial accounting and order processing system. The Company refers to this initiative as the Global Efficiency Re-engineering initiative, or sometimes simply as the Initiative. As a result, the Company implemented a restructuring plan that resulted in restructuring and one-time expenses, including severance, relocation, recruiting and temporary staffing expenditures.

          From inception through December 31, 2010, the Company has incurred restructuring and one-time expenses relating to the Initiative totaling approximately $14.0 million before taxes, including $0.6 million for one-time expenses in the six months ended December 31, 2010. The total expenses of $14.0 million from inception are composed of $7.6 million related to our Oracle system implementation and $6.4 million for Initiative--related restructuring. The Company does not expect to incur any additional material expenses related to the Initiative and the total amount from inception of $14.0 million is consistent with its original projection of $12.0 million to $14.0 million.

          The following table summarizes the restructuring costs incurred since commencement of the Initiative:

Six Months

Ended

December 31,

Year Ended June 30,

(Amounts in thousands)

2010

2010

2009

2008

Restructuring expenses under the Initiative

$

335

$

1,878

$

3,544

$

673

          Unrelated to the Initiative, for the three months ended December 31, 2010, the Company incurred $0.1 million of other restructuring expenses. For the six months ended December 31, 2010, the Company incurred approximately $0.8 million of other restructuring expenses. For the six months ended December 31, 2009, the Company incurred $0.4 million of other restructuring expenses, all of which were recorded in the first quarter of fiscal 2010.

          Aggregate amounts paid during the six months ended December 31, 2010 for restructuring were $1.4 million. All of the restructuring expenses discussed above are included in selling, general and administrative expenses in the Company's consolidated statements of operations and, as described in Note 15, amounts related to the Initiative have not been attributed to any of the Company's reportable segments and are included in unallocated corporate expenses. Restructuring amounts unrelated to the Initiative are recorded in either the Company's reportable segments or in unallocated corporate expenses if related to corporate operations. At December 31, 2010 and June 30, 2010, the Company had a restructuring liability of $0.3 million and $0.6 million, respectively.

 

- 9 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5.    INVENTORIES

          The components of inventory were as follows:

(Amounts in thousands)

December 31,
2010

 

June 30,
2010

Raw materials

$

56,915

 

$

58,144

Work in progress

22,522

 

30,004

Finished goods

198,772

 

182,910

      Total

$

278,209

 

$

271,058

NOTE 6.    EXCLUSIVE BRAND LICENSES, TRADEMARKS AND INTANGIBLES, NET AND GOODWILL

          The following summarizes the cost basis amortization and weighted average estimated life associated with the Company's intangible assets:

(Amounts in thousands)

December 31,
2010

 

June 30,
2010

 

June 30, 2010
Weighted Average
Estimated Life

Elizabeth Arden brand trademarks

$

122,415

   

$

122,415

     

Indefinite

 

Exclusive brand licenses and related trademarks (1)

 

86,684

     

84,793

     

18

 

Exclusive brand trademarks and patents (2)

 

55,697

     

43,535

     

11

 

Other intangibles (3)

 

20,330

     

20,330

     

17

 

Exclusive brand licenses, trademarks and intangibles, gross

 

285,126

     

271,073

         

Accumulated amortization:

                     

   Exclusive brand licenses and related trademarks

 

(48,405

)

   

(45,595

)

       

   Exclusive brand trademarks

 

(40,063

)

   

(38,768

)

       

   Other intangibles

 

(8,013

)

   

(7,266

)

       

Exclusive brand licenses, trademarks and intangibles, net

$

188,645

   

$

179,444

         

(1)

Increase from June 30, 2010 primarily due to license agreement with John Varvatos Apparel Corp.

(2)

Increase from June 30, 2010 primarily due to acquisition of the PREVAGE® trademarks and related patents.

(3)

Primarily consists of customer relationships, customer lists and non-compete agreements.

          At December 31, 2010 and June 30, 2010, the Company had goodwill of $21.1 million recorded on its consolidated balance sheets. The entire amount of the goodwill in all periods presented relates to the North America segment. The amount of goodwill recorded on the consolidated balance sheet at December 31, 2010 did not change from the prior year end balance as the Company did not record any additions or impairments during the three and six months ended December 31, 2010.

          Amortization expense was $2.4 million for each of the three months ended December 31, 2010 and 2009, and $4.9 million for each of the six months ended December 31, 2010 and 2009. At December 31, 2010, the Company estimated annual amortization expense for its intangible assets for each of the next five fiscal years to be as shown in the following table. Future acquisitions, renewals or impairment events could cause these amounts to change.

   

(Amounts in millions)

Remainder of fiscal 2011

 

$4.1

2012

 

$7.0

2013

 

$6.1

2014

 

$5.1

2015

 

$4.8

 

- 10 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7.    SHORT-TERM DEBT

          As of December 31, 2010, the Company had a $325 million revolving bank credit facility (the "Credit Facility") with a syndicate of banks, for which JPMorgan Chase Bank was the administrative agent, which generally provided for borrowings on a revolving basis, with a $25 million sub-limit for letters of credit. Under the terms of the Credit Facility, the Company could have, at any time, increased the size of the Credit Facility up to $375 million without entering into a formal amendment that required the consent of all of the banks, subject to the Company's satisfaction of certain conditions. The Credit Facility would have expired in December 2012.

          On January 21, 2011, the Company entered into an amendment and restatement of its existing credit facility with a syndicate of banks, for which JP Morgan Chase bank is the administrative agent (the "New Credit Facility").The New Credit Facility provides for borrowings on a revolving basis of up to $300 million and expires in January 2016. See Note 13 for further information.

          The Credit Facility was guaranteed by all of the Company's U.S. subsidiaries and was collateralized by a first priority lien on all of the Company's U.S., Canada and Puerto Rico accounts receivable and U.S. inventory. Borrowings under the Credit Facility were limited to 85% of eligible accounts receivable and 85% of the appraised net liquidation value of the Company's inventory, as determined pursuant to the terms of the Credit Facility; provided, however, that from August 15 to October 31 of each year the borrowing base could be temporarily increased by up to $25 million. The Company's obligations under the Credit Facility ranked senior to the Company's 7 3/4% Senior Subordinated Notes due 2014 (the "7 3/4% Senior Subordinated Notes").

          The Credit Facility had only one financial maintenance covenant, which was a debt service coverage ratio that must be maintained at not less than 1.1 to 1 if average borrowing base capacity declined to less than $25 million ($35 million from December 1 through May 31). The Company's average borrowing base capacity during the quarter ended December 31, 2010, did not fall below the applicable thresholds noted above. Accordingly, the debt service coverage ratio did not apply for the quarter ended December 31, 2010.

          Under the terms of the Credit Facility, the Company could have paid dividends or repurchased Common Stock if the Company maintained borrowing base capacity of at least $25 million from June 1 to November 30, and at least $35 million from December 1 to May 31, after making the applicable payment. The Credit Facility restricted the Company from incurring additional non-trade indebtedness (other than refinancings and certain small amounts of indebtedness).

          Borrowings under the credit portion of the Credit Facility bore interest at a floating rate based on the "Applicable Margin," which was determined by reference to debt service coverage ratio. At the Company's option, the Applicable Margin could have been applied to either the London Interbank Offered Rate ("LIBOR") or the prime rate. The Applicable Margin charged on LIBOR loans ranged from 1.00% to 1.75% and was 0% for prime rate loans, except that the Applicable Margin on the first $25.0 million of borrowings from August 15 to October 15 of each year, while the temporary increase in the Company's borrowing base was in effect, was 1.00% higher. At December 31, 2010, the Applicable Margin was 1.75% for LIBOR loans and 0% for prime rate loans. The commitment fee on the unused portion of the Credit Facility was 0.25%. For the six months ended December 31, 2010 and 2009, the weighted average annual interest rate on borrowings under the Credit Facility was 2.1% and 2.4% respectively.

          At December 31, 2010, the Company had $37.0 million in outstanding borrowings and approximately $4.9 million in letters of credit outstanding under the Credit Facility, compared with $59.0 million in outstanding borrowings under the Credit Facility at June 30, 2010. As of December 31, 2010, the Company had approximately $250.9 million of eligible accounts receivable and inventories available as collateral under the Credit Facility and remaining borrowing availability of $213.8 million. The Company classifies the Credit Facility as short-term debt on its balance sheet because it expects to reduce outstanding borrowings over the next twelve months.

 

- 11 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8.    LONG-TERM DEBT

          The Company's long-term debt consisted of the following:

(Amounts in thousands)

 

December 31,
2010

   

June 30,
2010

 

7 3/4% Senior Subordinated Notes due January 2014

 

$

220,000

   

$

220,000

 

Termination costs on interest rate swap, net

(1,146

)

(1,301

)

Total long-term debt

$

218,854

$

218,699

          On January 21, 2011, the Company issued $250 million aggregate principal amount of 7 3/8% Senior Notes due March 2021 (the "7 3/8% Senior Notes"). Concurrently with the offering of the 7 3/8% Senior Notes, the Company commenced a cash tender offer and consent solicitation for any and all of its $220 million of outstanding 7 3/4% Senior Subordinated Notes. The proceeds from the issuance of the 7 3/8% Senior Notes will be used to purchase or redeem the 7 3/4% Senior Subordinated Notes, as well as to pay the fees and expenses related to the offering. Remaining net proceeds from the offering were used to reduce borrowings under the Company's New Credit Facility. See Note 13 for further information.

          At December 31, 2010 and June 30, 2010, the estimated fair value of the Company's 7 3/4% Senior Subordinated Notes using available market information and interest rates was as follows:

(Amounts in thousands)

 

December 31,
2010

   

June 30,
2010

 

7 3/4% Senior Subordinated Notes due January 2014

 

$

222,200

   

$

216,150

 

          The Company determined the estimated fair value amounts by using available market information and commonly accepted valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value, primarily due to the illiquid nature of the capital markets in which the 7 3/4% Senior Subordinated Notes are traded. Accordingly, the fair value estimates presented herein are not necessarily indicative of the amount that the Company or the debt holders could realize in a current market exchange. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair value.

NOTE 9.    COMMITMENTS AND CONTINGENCIES

          The Company is a party to a number of legal actions, proceedings and claims. While any action, proceeding or claim contains an element of uncertainty and it is possible that the Company's cash flows and results of operations in a particular quarter or year could be materially affected by the impact of such actions, proceedings and claims, management of the Company believes that the outcome of such actions, proceedings or claims will not have a material adverse effect on the Company's business, prospects, results of operations, financial condition or cash flows.

NOTE 10.    FAIR VALUE MEASUREMENTS

          Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The accounting standards also have established a fair value hierarchy, which prioritizes the inputs to valuation techniques used in measuring fair value into three broad levels as follows:

Level 1 -

Quoted prices in active markets for identical assets or liabilities

Level 2 -

Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly

Level 3 -

Unobservable inputs based on the Company's own assumptions

 

- 12 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

          The Company's derivative assets and liabilities are currently composed of foreign currency contracts. Fair values are based on market prices or determined using valuation models that use as their basis readily observable market data that is actively quoted and can be validated through external sources, including independent pricing services, brokers and market transactions.

          The following table presents the fair value hierarchy for those of the Company's financial liabilities that were measured at fair value on a recurring basis as of December 31, 2010:

(Amounts in thousands)

 

Level 1

 

Level 2

 

Level 3

 

Total

Assets

$

--

$

280

$

--

$

280

Foreign currency contracts

Liabilities

Foreign currency contracts

$

--

$

1,731

$

--

$

1,731

          As of June 30, 2010, the Company's foreign currency contracts were measured at fair value under Level 2 as an asset of $0.5 million and as a liability of $0.1 million. See Note 11 for a discussion of the Company's foreign currency contracts.

          Accounting standards require non-financial assets and liabilities to be recognized at fair value subsequent to initial recognition when they are deemed to be other-than-temporarily impaired. As of December 31, 2010, the Company did not have any non-financial assets and liabilities measured at fair value.

NOTE 11.    DERIVATIVE FINANCIAL INSTRUMENTS

          The Company operates in several foreign countries, which exposes it to market risk associated with foreign currency exchange rate fluctuations. The Company's risk management policy is to enter into cash flow hedges to reduce a portion of the exposure of the Company's foreign subsidiaries' revenues to fluctuations in currency rates using foreign currency forward contracts. The Company also enters into cash flow hedges for a portion of its forecasted inventory purchases to reduce the exposure of its Canadian and Australian subsidiaries' cost of sales to such fluctuations. Additionally, when appropriate, the Company enters into and settles foreign currency contracts to reduce the exposure of the Company's foreign subsidiaries' balance sheets to fluctuations in currency rates. The principal currencies hedged are British pounds, Euros, Canadian dollars and Australian dollars. The Company does not enter into derivative financial contracts for speculative or trading purposes. The Company's derivative financial instruments are recorded in the consolidated balance sheets at fair value determined using pricing models based on market prices or determined using valuation models that use as their basis readily observable market data that is actively quoted and can be validated through external sources, including independent pricing services, brokers and market transactions. Cash flows from derivative financial instruments are classified as cash flows from operating activities in the consolidated statements of cash flows.

          Foreign currency contracts used to hedge forecasted revenues are designated as cash flow hedges. These contracts are used to hedge forecasted subsidiaries' revenues generally over approximately 12 to 24 months. Changes to fair value of the foreign currency contracts are recorded as a component of accumulated other comprehensive income (loss) within shareholders' equity to the extent such contracts are effective, and are recognized in net sales in the period in which the forecasted transaction affects earnings or the transactions are no longer probable of occurring. Changes to fair value of any contracts deemed to be ineffective would be recognized in earnings immediately. There were no amounts recorded in the three and six months ended December 31, 2010 or in fiscal 2010 relating to foreign currency contracts used to hedge forecasted revenues resulting from hedge ineffectiveness. As of December 31, 2010, the Company had notional amounts of 14.5 million British pounds under foreign currency contracts used to hedge forecasted revenues that expire between January 31, 2011 and May 31, 2012.

          Foreign currency contracts used to hedge forecasted cost of sales are designated as cash flow hedges. These contracts are used to hedge forecasted Canadian and Australian subsidiaries' cost of sales generally over approximately 12 to 24 months. Changes to fair value of the foreign currency contracts are recorded as a component of accumulated other comprehensive income (loss) within shareholders' equity, to the extent such contracts are effective, and are recognized in cost of sales in the period in which the forecasted transaction affects earnings or the transactions are no longer probable of occurring. Changes to fair value of any contracts deemed to be ineffective would be recognized in earnings immediately. There were no amounts recorded in the three and six months ended December 31, 2010 or in fiscal 2010 relating to foreign currency contracts used to hedge forecasted cost of sales resulting from hedge ineffectiveness. As of December 31, 2010, the Company had notional amounts of 19.1 million Canadian dollars and 14.9 million Australian dollars under foreign currency contracts used to hedge forecasted cost of sales that expire between January 31, 2011 and May 31, 2012.

- 13 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

          When appropriate, the Company also enters into and settles foreign currency contracts for Euros, British pounds and Canadian dollars to reduce exposure of the Company's foreign subsidiaries' balance sheets to fluctuations in foreign currency rates. These contracts are used to hedge balance sheet exposure generally over one month and are settled before the end of the month in which they are entered into. Changes to fair value of the forward contracts are recognized in selling, general and administrative expense in the period in which the contracts expire. For the three and six months ended December 31, 2010, the Company recorded gains of $63,000 and losses of $1.8 million, respectively, in selling, general and administrative expenses related to these contracts. For the three and six months ended December 31, 2009, the Company recorded losses of $53,000 and $212,000, respectively, in selling, general and administrative expenses related to these contracts. As of December 31, 2010, there were no such foreign currency contracts outstanding. There were no amounts recorded in the three and six months ended December 31, 2010 or in fiscal 2010 relating to foreign currency contracts to hedge subsidiary balance sheets resulting from hedge ineffectiveness.

          The following tables illustrate the fair value of outstanding foreign currency contracts and the gains (losses) associated with the settlement of these contracts:

 

Fair Value of Derivative Instruments

 

(Amounts in thousands)

Asset Derivatives
As of December 31,
2010

 

Liability Derivatives
As of December 31,
2010

 

 

Balance
Sheet
Location

 

Fair
Value

   

Balance
Sheet
Location

 

Fair
Value

 

Derivatives designated as effective hedges

                     

Foreign Exchange Contracts

Other assets

 

$

280

   

Other payables

 

$

1,731

 

Total

   

$

280

       

$

1,731

 

          As of June 30, 2010, the Company's foreign currency contracts were measured at fair value as an asset of $0.5 million and as a liability of $0.1 million.

Net Unrealized Gain (Loss) Recognized in Other Comprehensive Income on Derivatives, Net of Tax (Effective Portion)

(Amounts in thousands)

Three Months Ended

 

Six Months Ended

 

December 31,
2010

   

December 31,
2009

   

December 31,
2010

   

December 31,
2009

 

Currency Contracts-Sales

$

870

   

$

(414

)

 

$

(150

)

 

$

369

 

Currency Contracts - Cost of Sales

 

(374

)

   

(216

)

   

(1,166

)

   

(906

)

Total

$

496

   

$

(630

)

 

$

(1,316

)

 

$

(537

)

Loss Reclassified from Accumulated Other Comprehensive Income (Loss) into Income (Effective Portion)

(Amounts in thousands)

Three Months Ended

 

Six Months Ended

 

December 31,
2010

   

December 31,
2009

   

December 31,
2010

   

December 31,
2009

 

Currency Contracts-Sales (1)

$

(270

)

 

$

21

   

$

(305

)

 

$

15

 

Currency Contracts- Cost of Sales (2)

 

(576

)

   

(164

)

   

(696

)

   

(177

)

Total

$

(846

)

 

$

(143

)

 

$

(1,001

)

 

$

(162

)

(1)   Recorded in net sales on the consolidated statements of income.

(2)   Recorded in cost of sales on the consolidated statements of income.

 

- 14 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12.    REPURCHASE OF COMMON STOCK

          On November 2, 2010, the Company's board of directors authorized the repurchase of an additional $40 million of the Company's Common Stock under the terms of an existing $80 million common stock repurchase program and extended the term of the stock repurchase program from November 30, 2010 to November 30, 2012. As of December 31, 2010, the Company had repurchased 4,029,201 shares of Common Stock on the open market under the stock repurchase program, at an average price of $16.63 per share, at a cost of approximately $67.0 million, including sales commissions, leaving approximately $53.0 million available for additional repurchases under the program. During the six months ended December 31, 2010, the Company repurchased 598,703 shares of Common Stock on the open market under the share repurchase program, at an average price of $15.27 per share, at a cost of $9.2 million, including sales commission, all of which were repurchased during the first quarter of fiscal 2011.

NOTE 13.    SUBSEQUENT EVENT

          On January 21, 2011, the Company issued $250 million aggregate principal amount of 7 3/8% Senior Notes. Interest on the 7 3/8% Senior Notes will accrue at a rate of 7.375% per annum and will be payable semi-annually on March 15 and September 15 of every year, commencing on September 15, 2011. The indenture applicable to the 7 3/8% Senior Notes generally permits the Company (subject to the satisfaction of a fixed charge coverage ratio and, in certain cases, also a net income test) to incur additional indebtedness, pay dividends, purchase or redeem its common stock or redeem subordinated indebtedness. The indenture generally limits the Company's ability to create liens, merge or transfer or sell assets. The 7 3/8% Senior Notes initially will not be guaranteed by any of the Company's subsidiaries but could become guaranteed in the future by any domestic subsidiary of the Company that guarantees or incurs certain indebtedness in excess of $10 million.

          Concurrently with the offering of the 7 3/8% Senior Notes, the Company commenced a cash tender offer and consent solicitation for any and all of its $220 million of outstanding 7 3/4% Senior Subordinated Notes. Under the terms of the tender offer, holders of the 7 3/4% Senior Subordinated Notes who validly tendered their consents on or prior to the consent date of January 20, 2011, were entitled to receive the "total consideration" of $1,015.42 per $1,000 principal amount, which includes the consent payment of $20.00 per $1,000 principal amount, plus an amount equal to any accrued and unpaid interest up to, but not including, the payment date. A total of $195.9 million aggregate principal amount of 7 3/4% Senior Subordinated Notes were tendered on or prior to the consent date and on January 21, 2011, the Company paid approximately $205.5 million, including accrued interest, to purchase the 7 3/4% Senior Subordinated Notes tendered by the consent date. Holders of the 7 3/4% Senior Subordinated Notes who validly tender their 7 3/4% Senior Subordinated Notes after the consent date but on or before February 3, 2011, the expiration date of the tender offer, will receive only the "tender consideration" of $995.42 per $1,000 principal amount, plus an amount equal to any accrued and unpaid interest up to, but not including, the payment date. In connection with the consent solicitation, the Company received sufficient consents to amend the indenture relating to the 7 3/4% Senior Subordinated Notes to remove substantially all the restrictive covenants and events of default.

          The proceeds from the issuance of the 7 3/8% Senior Notes will be used to fund the purchase or redemption of the 7 3/4% Senior Subordinated Notes, as well as the fees and expenses related to the offering of the 7 3/8% Senior Notes, the tender offer and the New Credit Facility, and to repay certain borrowings under the New Credit Facility. On January 21, 2011, the Company issued a redemption notice under the applicable indenture of its intention to redeem any of the 7 3/4% Senior Subordinated Notes that remain outstanding after the closing of the tender offer at a price of $1,012.92 per $1,000 principal amount, plus accrued and unpaid interest, to the redemption date of February 22, 2011, to be funded with the remaining net proceeds from the issuance of the 7 3/8% Senior Notes. As of January 31, 2011, $24.1 million aggregate principal amount of the 7 3/4% Senior Subordinated Notes remained outstanding and will be redeemed by the Company on our about February 22, 2011.

          On January 21, 2011, the Company also entered into the New Credit Facility with a syndicate of banks, for which JP Morgan Chase bank is the administrative agent. Under the terms of the New Credit Facility, the Company may borrow on a revolving basis up to $300 million, with a $25 million sub-limit for letters of credit. Additionally, the Company may, at any time, increase the size of the New Credit Facility up to $375 million without entering in a formal amendment requiring the consent of all of the banks, subject to the Company's satisfaction of certain conditions. The New Credit Facility will mature in January 2016.

 

- 15 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

          The New Credit Facility is guaranteed by all of the Company's U.S. subsidiaries and is collateralized by a first priority lien on all of the Company's U.S., Canada and Puerto Rico accounts receivable and U.S. inventory. Borrowings under the New Credit Facility are limited to 85% of eligible accounts receivable and 85% of the appraised net liquidation value of the Company's inventory, as determined pursuant to the terms of the New Credit Facility; provided, however, that from August 15 to October 31 of each year the Company's borrowing base may be temporarily increased by up to $25 million.

          The New Credit Facility has only one financial maintenance covenant, which is a debt service coverage ratio that must be maintained at not less than 1.1 to 1 if average borrowing base capacity declines to less than $25 million ($35 million from September 1 through January 31).

          Under the terms of the New Credit Facility, the Company may pay dividends or repurchase common stock if it maintains borrowing base capacity of at least $25 million from February 1 to August 31, and at least $35 million from September 1 to January 31, after making the applicable payment. The New Credit Facility restricts the Company from incurring additional non-trade indebtedness (other than refinancings and certain small amounts of indebtedness).

          Borrowings under the credit portion of the New Credit Facility will bear interest at a floating rate based on an "Applicable Margin" which will be determined by reference to a debt service coverage ratio. At the Company's option, the Applicable Margin may be applied to either the London InterBank Offered Rate (LIBOR) or the base rate. The Applicable Margin charged on LIBOR loans ranges from 1.75% to 2.50% and ranges from 0.25% to 1.0% for base rate loans, except that the Applicable Margin on the first $25 million of borrowings from August 15 to October 31 of each year, while the temporary increase in the Company's borrowing base is in effect, is 1.00% higher. The Company is required to pay an unused commitment fee ranging from 0.375% to 0.50% based on the quarterly average unused portion of the New Credit Facility. See Note 7.

          In connection with the issuance of the 7 3/8% Senior Notes, the cash tender offer and consent solicitation and anticipated redemption of the $220 million of outstanding 7 3/4% Senior Subordinated Notes and the amendment and restatement of the New Credit Facility, the Company expects to incur and to write-off unamortized interest rate swap termination costs and unamortized bond acquisition fees and other tender premium costs of approximately $6.3 million during the three months ending March 31, 2011. These items will be recorded as debt extinguishment costs and will be included in income from operations on the Consolidated Statements of Income.

NOTE 14.    CONDENSED CONSOLIDATING FINANCIAL INFORMATION

          The following condensed financial statements as of December 31, 2010 and June 30, 2010, and for the three and six months ended December 31, 2010 and 2009, show the consolidated financial statements of the Company, and, in separate financial statements, the financial statements of those subsidiaries that are guarantors of the 7 3/4% Senior Subordinated Notes, plus, in each case, the financial statements of non-guarantor entities, elimination adjustments and the consolidated total. The Company's subsidiaries, DF Enterprises, Inc., FD Management, Inc., Elizabeth Arden International Holding, Inc., Elizabeth Arden (Financing), Inc., RDEN Management, Inc. and Elizabeth Arden Travel Retail, Inc., are guarantors of the 7 3/4% Senior Subordinated Notes. Equity income of the guarantor subsidiaries is included in other expense (income), net. All subsidiaries listed in this note are wholly-owned subsidiaries of the Company and their guarantees are joint and several, full and unconditional. All information presented is in thousands. The condensed financial statements of the Company's subsidiaries that are guarantors of the 7 3/4% Senior Subordinated Notes will not be presented by the Company in future periodic filings with the Commission unless a domestic subsidiary becomes a guarantor of the 7 3/8% Senior Notes.

 

[Remainder of Page Intentionally Left Blank]

- 16 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Balance Sheet

As of December 31, 2010

   

Company

 

Non-
Guarantors

 

7 3/4%
Senior
Subordinated
Notes
Guarantors

 

Eliminations

 

Total

 

ASSETS

                               

Current Assets:

                               
 

Cash and cash equivalents

 

$

11,091

 

$

27,206

 

$

17

 

$

--

 

$

38,314

 
 

Accounts receivable, net

   

106,207

   

108,246

   

--

   

--

   

214,453

 
 

Inventories

   

185,145

   

93,064

   

--

   

--

   

278,209

 
 

Intercompany receivable

   

59,116

   

6,617

   

224,033

   

(289,766

)

 

--

 
 

Deferred income taxes

   

23,721

   

2,023

   

--

   

--

   

25,744

 
 

Prepaid expenses and other assets

   

30,386

   

24,599

   

47

   

--

   

55,032

 

   

Total current assets

   

415,666

   

261,755

   

224,097

   

(289,766

)

 

611,752

 

Property and equipment, net

   

52,788

   

23,160

   

--

         

75,948

 

Other Assets:

                               
 

Investment in subsidiaries

   

338,806

   

--

   

9,136

   

(347,942

)

 

--

 
 

Exclusive brand licenses, trademarks and
   intangibles, net

   

32,508

   

9,537

   

146,600

   

--

   

188,645

 
 

Goodwill

   

21,054

   

--

   

--

   

--

   

21,054

 
 

Debt financing costs, net

   

2,943

   

--

   

--

   

--

   

2,943

 
 

Other

   

624

   

1,916

   

--

   

7

   

2,547

 

   

Total other assets

   

395,935

   

11,453

   

155,736

   

(347,935

)

 

215,189

 

   

Total assets

 

$

864,389

 

$

296,368

 

$

379,833

 

$

(637,701

)

$

902,889

 

                                 

LIABILITIES AND
SHAREHOLDERS' EQUITY

                               

Current Liabilities:

 

Short-term debt

 

$

37,000

 

$

--

 

$

--

 

$

--

 

$

37,000

 
 

Accounts payable - trade

   

78,619

   

17,285

   

--

   

--

   

95,904

 
 

Intercompany payable

   

40,324

   

47,279

   

211,282

   

(298,885

)

 

--

 
 

Other payables and accrued expenses

   

75,747

   

59,698

   

728

   

(10

)

 

136,163

 

   

Total current liabilities

   

231,690

   

124,262

   

212,010

   

(298,895

)

 

269,067

 

                                 
 

Long-term debt

   

218,854

   

--

   

--

   

--

   

218,854

 
 

Deferred income taxes and other liabilities

   

11,410

   

1,123

   

--

   

--

   

12,533

 

   

Total liabilities

   

461,954

   

125,385

   

212,010

   

(298,895

)

 

500,454

 

                                 

Shareholders' Equity

 

Common stock

   

328

   

--

   

--

   

--

   

328

 
 

Additional paid-in capital

   

312,445

   

9,137

   

177,908

   

(187,045

)

 

312,445

 
 

Retained earnings (accumulated deficit)

   

157,791

   

158,406

   

(10,085

)

 

(148,321

)

 

157,791

 
 

Treasury stock

   

(71,448

)

 

--

   

--

   

--

   

(71,448

)

 

Accumulated other comprehensive income

   

3,319

   

3,440

   

--

   

(3,440

)

 

3,319

 

   

Total shareholders' equity

   

402,435

   

170,983

   

167,823

   

(338,806

)

 

402,435

 

   

Total liabilities and shareholders' equity

 

$

864,389

 

$

296,368

   

379,833

 

$

(637,701

)

$

902,889

 

 

- 17 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Balance Sheet

As of June 30, 2010

           

7 3/4%

         
           

Senior

         
           

Subordinated

         
       

Non-

 

Notes

         
   

Company

 

Guarantors

 

Guarantors

 

Eliminations

 

Total

 

ASSETS

                               

Current Assets:

                               
 

Cash and cash equivalents

 

$

6,349

 

$

20,515

 

$

17

 

$

-

 

$

26,881

 
 

Accounts receivable, net

   

85,759

   

84,308

   

-

   

-

   

170,067

 
 

Inventories

   

189,287

   

81,771

   

-

   

-

   

271,058

 
 

Intercompany receivable

   

52,556

   

9,481

   

235,795

   

(297,832

)

 

-

 
 

Deferred income taxes

   

30,726

   

2,770

   

-

   

-

   

33,496

 
 

Prepaid expenses and other assets

   

31,411

   

27,034

   

447

   

-

   

58,892

 

   

Total current assets

   

396,088

   

225,879

   

236,259

   

(297,832

)

 

560,394

 

                                 

Property and equipment, net

   

53,017

   

23,566

   

-

   

-

   

76,583

 

Other Assets:

                               
 

Investment in subsidiaries

   

312,467

   

-

   

9,136

   

(321,603

)

 

-

 
 

Exclusive brand licenses, trademarks and
   intangibles, net

   

`25,752

   

5,735

   

147,957

   

-

   

179,444

 
 

Goodwill

   

21,054

   

-

   

-

   

-

   

21,054

 
 

Debt financing costs, net

   

3,509

   

-

   

-

   

-

   

3,509

 
 

Other

   

582

   

1,898

   

-

   

7

   

2,487

 

   

Total other assets

   

363,364

   

7,633

   

157,093

   

(321,596

)

 

206,494

 

Total assets

$

812,469

$

257,078

$

393,352

$

(619,428

)

$

843,471

                                 

LIABILITIES AND
SHAREHOLDERS' EQUITY

                               

Current Liabilities:

                               
 

Short-term debt

 

$

59,000

 

$

-

 

$

-

 

$

-

 

$

59,000

 
 

Accounts payable - trade

   

78,624

   

19,817

   

-

   

-

   

98,441

 
 

Intercompany payable

   

37,499

   

50,508

   

218,969

   

(306,976

)

 

-

 
 

Other payables and accrued expenses

   

49,259

   

47,155

   

-

   

15

   

96,429

 

   

Total current liabilities

   

224,382

   

117,480

   

218,969

   

(306,961

)

 

253,870

 

                                 
 

Long-term debt

   

218,699

   

-

   

-

   

-

   

218,699

 
 

Deferred income taxes and other liabilities

   

16,771

   

1,514

   

-

   

-

   

18,285

 

   

Total liabilities

   

459,852

   

118,994

   

218,969

   

(306,961

)

 

490,854

 

                                 

Shareholders' Equity

 

Common stock

   

319

   

-

   

-

   

-

   

319

 
 

Additional paid-in capital

   

297,137

   

9,136

   

187,161

   

(196,297

)

 

297,137

 
 

Retained earnings (accumulated deficit)

   

118,946

   

130,309

   

(12,778

)

 

(117,531

)

 

118,946

 
 

Treasury stock

   

(62,303

)

 

-

   

-

   

-

   

(62,303

)

 

Accumulated other comprehensive loss

   

(1,482

)

 

(1,361

)

 

-

   

1,361

   

(1,482

)

   

Total shareholders' equity

   

352,617

   

138,084

   

174,383

   

(312,467

)

 

352,617

 

   

Total liabilities and shareholders' equity

 

$

812,469

 

$

257,078

 

$

393,352

 

$

(619,428

)

$

843,471

 

 

- 18 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Statement of Income

Three Months Ended December 31, 2010

   

Company

 

Non-
Guarantors

 

7 3/4%
Senior
Subordinated
Notes
Guarantors

 

Eliminations

 

Total

 

Net sales

 

$

256,327

 

$

149,306

 

$

4,151

 

$

(4,151

)

$

405,633

 

Cost of goods sold:

                               

    Cost of sales

   

145,721

   

65,528

   

--

   

--

   

211,249

 

    Depreciation related to cost of goods sold

   

1,035

   

130

   

--

   

--

   

1,165

 

        Total cost of goods sold

   

146,756

   

65,658

   

--

   

--

   

212,414

 

Gross profit

   

109,571

   

83,648

   

4,151

   

(4,151

)

 

193,219

 

Selling, general and administrative costs

85,746

55,419

(397

)

(4,151

)

136,617

Depreciation and amortization

   

3,143

   

2,356

   

763

   

--

   

6,262

 

Income from operations

   

20,682

   

25,873

   

3,785

   

--

   

50,340

 

Other expense (income):

                               
 

Interest expense (income)

   

5,546

   

115

   

(109

)

 

--

   

5,552

 
 

Other

   

(24,638

)

 

920

   

1,561

   

22,157

   

--

 

Income before income taxes

   

39,774

   

24,838

   

2,333

   

(22,157

)

 

44,788

 

Provision for income taxes

   

5,816

   

4,145

   

869

   

--

   

10,830

 

Net income

 

$

33,958

 

$

20,693

 

$

1,464

 

$

(22,157

)

$

33,958

 

 

 

Statement of Income

Six Months Ended December 31, 2010

   

Company

 

Non-
Guarantors

 

7 3/4%
Senior
Subordinated
Notes
Guarantors

 

Eliminations

 

Total

 

Net sales

 

$

432,012

 

$

258,442

 

$

7,506

 

$

(7,506

)

$

690,454

 

Cost of goods sold:

                               

    Cost of sales

   

250,139

   

116,198

   

--

   

--

   

366,337

 

    Depreciation related to cost of goods sold

   

2,188

   

302

   

--

   

--

   

2,490

 

        Total cost of goods sold

   

252,327

   

116,500

   

--

   

--

   

368,827

 

Gross profit

   

179,685

   

141,942

   

7,506

   

(7,506

)

 

321,627

 

Selling, general and administrative costs

   

153,952

   

100,812

   

(819

)

 

(7,506

)

 

246,439

 

Depreciation and amortization

   

6,395

   

4,629

   

1,525

   

--

   

12,549

 

Income from operations

   

19,338

   

36,501

   

6,800

   

--

   

62,639

 

Other expense (income):

                               
 

Interest expense (income)

   

10,876

   

216

   

(209

)

 

--

   

10,883

 
 

Other

   

(35,815

)

 

2,307

   

2,718

   

30,790

   

--

 

Income before income taxes

   

44,277

   

33,978

   

4,291

   

(30,790

)

 

51,756

 

Provision for income taxes

   

5,432

   

5,881

   

1,598

   

--

   

12,911

 

Net income

 

$

38,845

 

$

28,097

 

$

2,693

 

$

(30,790

)

$

38,845

 

 

- 19 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Statement of Income

Three Months Ended December 31, 2009

   

Company

 

Non-
Guarantors

 

7 3/4%
Senior
Subordinated
Notes
Guarantors

 

Eliminations

 

Total

 

Net sales

 

$

258,616

 

$

134,729

 

$

4,158

 

$

(4,158

)

$

393,345

 

Cost of goods sold:

                               

    Cost of sales

   

156,407

   

61,420

   

--

   

--

   

217,827

 

    Depreciation related to cost of goods sold

   

1,021

   

173

   

--

   

--

   

1,194

 

        Total cost of goods sold

   

157,428

   

61,593

   

--

   

--

   

219,021

 

Gross profit

   

101,188

   

73,136

   

4,158

   

(4,158

)

 

174,324

 

Selling, general and administrative costs

77,295

59,305

(404

)

(4,158

)

132,038

Depreciation and amortization

   

2,858

   

2,177

   

768

   

--

   

5,803

 

Income from operations

   

21,035

   

11,654

   

3,794

   

--

   

36,483

 

Other expense (income):

                               
 

Interest expense (income)

   

5,777

   

221

   

(194

)

 

--

   

5,804

 
 

Other

   

(11,815

)

 

(349

)

 

1,455

   

10,709

   

--

 

Income before income taxes

   

27,073

   

11,782

   

2,533

   

(10,709

)

 

30,679

 

Provision for income taxes

   

6,017

   

2,664

   

942

   

--

   

9,623

 

Net income

 

$

21,056

 

$

9,118

 

$

1,591

 

$

(10,709

)

$

21,056

 

 

Statement of Income

Six Months Ended December 31, 2009

   

Company

 

Non-
Guarantors

 

7 3/4%
Senior
Subordinated
Notes
Guarantors

 

Eliminations

 

Total

 

Net sales

 

$

426,290

 

$

232,218

 

$

7,382

 

$

(7,382

)

$

658,508

 

Cost of goods sold:

                               

    Cost of sales

   

258,115

   

107,988

   

--

   

--

   

366,103

 

    Depreciation related to cost of goods sold

   

2,165

   

296

   

--

   

--

   

2,461

 

        Total cost of goods sold

   

260,280

   

108,284

   

--

   

--

   

368,564

 

Gross profit

   

166,010

   

123,934

   

7,382

   

(7,382

)

 

289,944

 

Selling, general and administrative costs

   

139,629

   

104,450

   

(716

)

 

(7,382

)

 

235,981

 

Depreciation and amortization

   

5,873

   

4,404

   

1,535

   

--

   

11,812

 

Income from operations

   

20,508

   

15,080

   

6,563

   

--

   

42,151

 

Other expense (income):

                               
 

Interest expense (income)

   

11,374

   

430

   

(389

)

 

--

   

11,415

 
 

Other

   

(16,283

)

 

(764

)

 

2,521

   

14,526

   

--

 

Income before income taxes

   

25,417

   

15,414

   

4,431

   

(14,526

)

 

30,736

 

Provision for income taxes

   

4,321

   

3,670

   

1,649

   

--

   

9,640

 

Net income

 

$

21,096

 

$

11,744

 

$

2,782

 

$

(14,526

)

$

21,096

 

 

- 20 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Condensed Statement of Cash Flows

 

Six Months Ended December 31, 2010

 

   

Company

 

Non-
Guarantors

 

7 3/4%
Senior
Subordinated
Notes
Guarantors

 

Eliminations

 

Total

 

Operating activities:

                               

Net cash provided by operating activities

 

$

48,777

 

$

9,893

 

$

(4,327

)

$

(26

)

$

54,317

 

Investing activities:

                               
 

Additions to property and equipment

   

(8,843

)

 

(2,600

)

 

--

   

--

   

(11,443

)

 

Acquisition of other assets

   

(13,864

)

 

--

   

--

   

--

   

(13,864

)

Net cash used in investing activities

   

(22,707

)

 

(2,600

)

 

--

   

--

   

(25,307

)

Financing activities:

                               
 

Payments on short-term debt

   

(22,000

)

 

--

   

--

   

--

   

(22,000

)

 

Proceeds from the exercise of stock options

   

9,862

   

--

   

--

   

--

   

9,862

 
 

Proceeds from the issuance of common stock under the
   employee stock purchase plan

   

793

   

--

   

--

   

--

   

793

 
 

Repurchase of common stock

   

(10,335

)

 

--

   

--

   

--

   

(10,335

)

 

Excess tax benefit from share-based awards

   

2,378

   

--

   

--

   

--

   

2,378

 
 

Net change in intercompany obligations

   

(3,751

)

 

(602

)

 

4,327

   

26

   

--

 

Net cash used in financing activities

   

(23,053

)

 

(602

)

 

4,327

   

26

   

(19,302

)

Effect of exchange rate changes on cash and cash equivalents

   

1,725

   

--

   

--

   

--

   

1,725

 

Net increase in cash and cash equivalents

   

4,742

   

6,691

   

--

   

--

   

11,433

 

Cash and cash equivalents at beginning of period

   

6,349

   

20,515

   

17

   

--

   

26,881

 

Cash and cash equivalents at end of period

 

$

11,091

 

$

27,206

 

$

17

 

$

--

 

$

38,314

 

       

Condensed Statement of Cash Flows

 

Six Months Ended December 31, 2009

 

   

Company

 

Non-
Guarantors

 

7 3/4%
Senior
Subordinated
Notes
Guarantors

 

Eliminations

 

Total

 

Operating activities:

                               

Net cash provided by operating activities

 

$

46,890

 

$

23,422

 

$

6,785

 

$

(3

)

$

77,094

 

Investing activities:

                               
 

Additions to property and equipment

   

(13,613

)

 

(4,219

)

 

--

   

--

   

(17,832

)

 

Acquisition of other assets

   

(333

)

 

--

   

--

   

--

   

(333

)

Net cash used in investing activities

   

(13,946

)

 

(4,219

)

 

--

   

--

   

(18,165

)

Financing activities:

                               
 

Payments on short-term debt

   

(49,000

)

 

--

   

--

   

--

   

(49,000

)

 

Payments on long-term debt

   

(545

)

 

--

   

--

   

--

   

(545

)

 

Payments under capital lease obligations

   

(1,139

)

 

--

   

--

   

--

   

(1,139

)

 

Proceeds from the exercise of stock options

   

512

   

--

   

--

   

--

   

512

 
 

Proceeds from the issuance of common stock under the
   employee stock purchase plan

   

551

   

--

   

--

   

--

   

551

 
 

Repurchase of common stock

   

(374

)

 

--

   

--

   

--

   

(374

)

 

Net change in intercompany obligations

   

22,445

   

(15,483

)

 

(6,965

)

 

3

   

--

 

Net cash used in financing activities

   

(27,550

)

 

(15,483

)

 

(6,965

)

 

3

   

(49,995

)

Effect of exchange rate changes on cash and cash equivalents

   

669

   

--

   

--

   

--

   

669

 

Net increase (decrease) in cash and cash equivalents

   

6,063

   

3,720

   

(180

)

 

--

   

9,603

 

Cash and cash equivalents at beginning of period

   

1,936

   

20,969

   

197

   

--

   

23,102

 

Cash and cash equivalents at end of period

 

$

7,999

 

$

24,689

 

$

17

 

$

--

 

$

32,705

 

- 21 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15.    Segment Data and Related Information

          Reportable operating segments include components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (the "Chief Executive") in deciding how to allocate resources and in assessing performance. As a result of the similarities in the procurement, marketing and distribution processes for all of the Company's products, much of the information provided in the consolidated financial statements is similar to, or the same as, that reviewed on a regular basis by the Chief Executive.

          The Company's operations are organized into the following reportable segments:

North America - The North America segment sells the Company's portfolio of owned, licensed and distributed brands, including the Elizabeth Arden products, to department stores, mass retailers and distributors in the United States, Canada and Puerto Rico, and also includes the Company's direct to consumer business, which is composed of the Elizabeth Arden branded retail stores and the Company's global e-commerce business. This segment also sells the Elizabeth Arden products through the Red Door beauty salons, which are owned and operated by an unrelated third party that licenses the Elizabeth Arden and Red Door trademarks from the Company for use in its salons.

International - The International segment sells the Company's portfolio of owned and licensed brands, including the Elizabeth Arden products, in approximately 100 countries outside of North America through perfumeries, boutiques, department stores and travel retail outlets worldwide.

          Commencing July 1, 2010, the Company's operations and management reporting structure were reorganized into two reportable segments, North America and International. The portion of the Company's business operations that previously sold Elizabeth Arden fragrance, cosmetic and skin care products in prestige department stores in the United States and through the Red Door beauty salons, which was previously reported as the Company's Other segment, has been consolidated with the North America Fragrance segment to create the North America segment.

          The Chief Executive evaluates segment profit based upon income from operations, which represents earnings before income taxes, interest expense and depreciation and amortization charges. The accounting policies for each of the reportable segments are the same as those described in the Company's 2010 Annual Report under Note 1 -- "General Information and Summary of Significant Accounting Policies." The assets and liabilities of the Company are managed centrally and are reported internally in the same manner as the consolidated financial statements; thus, no additional information regarding assets and liabilities of the Company's reportable segments is produced for the Chief Executive or included herein.

          Segment profit (loss) excludes depreciation and amortization, interest expense, debt extinguishment charges, consolidation and elimination adjustments and unallocated corporate expenses, which are shown in the table reconciling segment profit (loss) to consolidated income (loss) before income taxes. Included in unallocated corporate expenses are (i) restructuring charges that are related to an announced plan, (ii) costs related to the Initiative, and (iii) restructuring costs for corporate operations. These expenses are recorded in unallocated corporate expenses as these items are centrally directed and controlled and are not included in internal measures of segment operating performance. Effective July 1, 2010, (a) employee incentive costs are fully allocated to the North America and International segments, as applicable, and (b) restructuring costs that are not part of an announced plan are recorded in the Company's reportable segment that incurred the costs or in unallocated corporate expenses if related to corporate operations. Prior period amounts related to segment profit measures have been restated for comparison purposes. The Company does not have any intersegment sales.

 

- 22 -


ELIZABETH ARDEN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          The following table is a comparative summary of the Company's net sales and segment profit by reportable segment for the three and six months ended December 31, 2010 and 2009:

(Amounts in thousands)

Three Months Ended

 

Six Months Ended

 

December 31,
2010

   

December 31,
2009

   

December 31,
2010

   

December 31,
2009

 

Segment Net Sales:

                             

    North America

$

275,097

   

$

275,196

   

$

465,099

   

$

455,131

 

    International

 

130,536

     

118,149

     

225,355

     

203,377

 

Total

$

405,633

   

$

393,345

   

$

690,454

   

$

658,508

 

Segment Profit:

                             

    North America

$

44,156

   

$

43,608

   

$

65,047

   

$

67,525

 

    International

 

14,848

     

6,060

     

14,807

     

3,106

 

Total

$

59,004

   

$

49,668

   

$

79,854

   

$

70,631

 

Reconciliation:

                             

    Segment Profit

$

59,004

   

$

49,668

   

$

79,854

   

$

70,631

 

    Less:

                             

        Depreciation and Amortization

 

7,427

     

6,997

     

15,039

     

14,273

 

        Interest Expense, net

 

5,552

     

5,804

     

10,883

     

11,415

 

        Consolidation and Elimination
           Adjustments

 

802

     

4,163

(1)

   

1,007

     

10,551

(1)

        Unallocated Corporate Expenses

 

435

 

(2)

 

2,025

(3)

   

1,169

 

(4)

 

3,656

(5)

Income Before Income Taxes

$

44,788

$

30,679

$

51,756

$

30,736

(1)

Amounts for the three months and six months ended December 31, 2009 include $2.5 million and $5.5 million, respectively, related to a lower than normal price charged to the North America segment with respect to certain sales of inventory by that segment that were undertaken at the direction of corporate, rather than segment, management.

(2)

Amounts for the three months ended December 31, 2010, include (i) $0.3 million of restructuring expenses related to the Initiative, and (ii) $0.1 million of restructuring expenses for corporate operations, not related to the Initiative.

(3)

Amounts for the three months ended December 31, 2009, include (i) $1.1 million of restructuring charges related to the Initiative, and (ii) $0.9 million of expenses related to the implementation of an Oracle accounting and order processing system.

(4)

Amounts for the six months ended December 31, 2010, include (i) $0.3 million of restructuring expenses related to the Initiative, (ii) $0.5 million of restructuring expenses for corporate operations, not related to the Initiative, and (ii) $0.3 million of expenses related to the implementation of an Oracle accounting and order processing system.

(5)

Amounts for the six months ended December 31, 2009, include (i) $2.0 million of restructuring expenses related to the Initiative, and (ii) $1.6 million of expenses related to the implementation of an Oracle accounting and order processing system.

 

- 23 -


ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          This discussion should be read in conjunction with the Unaudited Consolidated Financial Statements and related notes contained in this quarterly report and the Consolidated Financial Statements and related notes and the 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 June 30, 2010. The results of operations for an interim period may not give a true indication of results for the year. In the following discussion, all comparisons are with the corresponding items in the prior year period.

Overview

          We are a global prestige beauty products company with an extensive portfolio of prestige fragrance, skin care and cosmetics brands. Our branded products include the Elizabeth Arden fragrances: Red Door, Elizabeth Arden 5th Avenue, Elizabeth Arden green tea and Pretty Elizabeth Arden; the Elizabeth Arden skin care brands: Ceramide, Eight Hour Cream, Intervene, and PREVAGE®; and the Elizabeth Arden branded lipstick, foundation and other color cosmetics products. Our prestige fragrance portfolio also includes the following celebrity, lifestyle and designer fragrances:

Celebrity Fragrances

The fragrance brands of Britney Spears, Elizabeth Taylor, Mariah Carey, Taylor Swift and Usher

Lifestyle Fragrances

Curve, Giorgio Beverly Hills, PS Fine Cologne and White Shoulders

Designer Fragrances

Juicy Couture, Kate Spade New York, John Varvatos, Rocawear, Alberta Ferretti, Halston, Geoffrey Beene, Badgley Mischka, Alfred Sung, Bob Mackie and Lucky

          In addition to our owned and licensed fragrance brands, we distribute approximately 300 additional prestige fragrance brands, primarily in the United States, through distribution agreements and other purchasing arrangements.

          Our business strategy is to increase net sales, operating margins and earnings by (a) increasing the sales of the Elizabeth Arden brand through leveraging the global awareness of the Elizabeth Arden brand name, targeting fast-growing geographical markets, and focusing on our skin care expertise and classic products, such as our Eight Hour cream, Ceramide skin care products and Red Door fragrance, (b) increasing the sales of our prestige fragrance portfolio internationally, particularly in the large European fragrance market, and through licensing opportunities and acquisitions, (c) expanding the prestige fragrance category at mass retail customers in North America, (d) continuing to expand operating margins, working capital efficiency and return on invested capital, and (e) capitalizing on the growth potential of our global brands by focusing on both organic growth opportunities as well as those achieved through new product innovation.

          We manage our business by evaluating net sales, gross margins, EBITDA (as defined later in this discussion), EBITDA margin, segment profit and working capital utilization (including monitoring our levels of inventory, accounts receivable, operating cash flow and return on invested capital). We encounter a variety of challenges that may affect our business and should be considered as described in Item 1A "Risk Factors" of our Annual Report on Form 10-K for the year ended June 30, 2010 and in the section of this quarterly report captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Forward-Looking Information and Factors That May Affect Future Results."

          In fiscal 2007, we commenced a comprehensive review of our global business processes to re-engineer our extended supply chain, distribution, logistics and transaction processing systems. We call this initiative our Global Efficiency Re-engineering initiative or often just the Initiative. In May 2008, we announced an acceleration of the re-engineering of our extended supply chain functions as well as the realignment of other parts of our organization to better support our new business processes.

          As a result of the acceleration of the re-engineering of our extended supply chain functions, our implementation of an Oracle financial accounting and order processing system and our migration to a shared services transaction processing model, we implemented a restructuring plan that resulted in restructuring and one-time expenses, including severance, relocation, recruiting and temporary staffing expenditures. Substantially all of these expenses were incurred in fiscal years 2009 and 2010. From inception through December 31, 2010, we have incurred a total of $14.0 million before taxes, which includes $7.6 million related to our Oracle system implementation, and $6.4 million for initiative-related restructuring. We do not expect to incur any additional material expenses related to the Initiative and the total amount from inception of $14.0 million is consistent with our original projection of $12.0 million to $14.0 million. See Note 4 to Notes to Unaudited Consolidated Financial Statements.

 

- 24 -


          As a result of the Initiative and other activities, we expect our fiscal 2011 gross margins to improve an additional 225 to 250 basis points over our fiscal 2010 gross margin. We expect to use a portion of this anticipated margin improvement to support organic growth of key brands and drive improved profitability.

Seasonality

          Our operations have historically been seasonal, with higher sales generally occurring in the first half of our fiscal year as a result of increased demand by retailers in anticipation of and during the holiday season. For the year ended June 30, 2010, approximately 60% of our net sales were made during the first half of our fiscal year. Due to product innovations and new product launches, the size and timing of certain orders from our customers and additions or losses of brand distribution rights, sales, results of operations, working capital requirements and cash flows can vary significantly between quarters of the same and different years. As a result, we expect to experience variability in net sales, operating margin, net income, working capital requirements and cash flows on a quarterly basis. Increased sales of skin care and cosmetic products relative to fragrances may reduce the seasonality of our business.

          We experience seasonality in our working capital, with peak inventory levels normally from July to October and peak receivable balances normally from September to December. Our working capital borrowings are also seasonal and are normally highest in the months of September, October and November. During the months of December, January and February of each year, cash is normally generated as customer payments on holiday season orders are received.

Critical Accounting Policies and Estimates

          As disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2010, the discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in those financial statements. We base our estimates on historical experience and other factors that we believe are most likely to occur. Changes in facts and circumstances may result in revised estimates, which are recorded in the period in which they become known. Our most critical accounting policies relate to revenue recognition, provisions for inventory obsolescence, allowances for sales returns, markdowns and doubtful accounts, intangible and long-lived assets, income taxes, hedging contracts and share-based compensation. Since June 30, 2010, there have been no significant changes to the assumptions and estimates related to those critical accounting policies.

Foreign Currency Contracts

          We operate in several foreign countries, which expose us to market risk associated with foreign currency exchange rate fluctuations. Our risk management policy is to enter into cash flow hedges to reduce a portion of the exposure of our foreign subsidiaries' revenues to fluctuations in currency rates using foreign currency forward contracts. We also enter into cash flow hedges for a portion of our forecasted inventory purchases to reduce the exposure of our Canadian and Australian subsidiaries' cost of sales to such fluctuations. Additionally, when appropriate, we enter into and settle foreign currency contracts to reduce the exposure of our foreign subsidiaries' balance sheets to fluctuations in currency rates. The principal currencies hedged are British pounds, Euros, Canadian dollars and Australian dollars. We do not enter into derivative financial contracts for speculative or trading purposes.

          Changes to fair value of the foreign currency contracts are recorded as a component of accumulated other comprehensive income (loss) within shareholders' equity, to the extent such contracts are effective, and are recognized in net sales or cost of sales in the period in which the forecasted transaction affects earnings or the transactions are no longer probable of occurring. Changes to fair value of any contracts deemed to be ineffective would be recognized in earnings immediately. There were no amounts recorded in the three and six months ended December 31, 2010 or in fiscal 2010 relating to foreign currency contracts used to hedge forecasted revenues or forecasted cost of sales resulting from hedge ineffectiveness.

          When appropriate, we also enter into and settle foreign currency contracts for Euros, British pounds and Canadian dollars to reduce exposure of our foreign subsidiaries' balance sheets to fluctuations in foreign currency rates. These contracts are used to hedge balance sheet exposure generally over one month and are settled before the end of the month in which they are entered into. Changes to fair value of the forward contracts are recognized in selling, general and administrative expense in the period in which the contracts expire.

          The table below summarizes the effect of the pre-tax loss from our settled foreign currency contracts on the specified line items in our consolidated statements of income for the three and six months ended December 31, 2010 and December 31, 2009.

 

- 25 -


(Amounts in thousands)

Three Months Ended

   

Six Months Ended

 

 

December 31,
2010

   

December 31,
2009

   

December 31,
2010

   

December 31,
2009

 

    Net Sales

$

(270

)

 

$

21

   

$

(305

)

 

$

15

 

    Cost of Sales

 

(576

)

   

(164

)

   

(696

)

   

(177

)

    Selling, general and administrative

 

63

     

(53

)

   

(1,806

)

   

(212

)

Total pre-tax loss

$

(783

)

 

$

(196

)

 

$

(2,807

)

 

$

(374

)

Results of Operations

          The following discussion compares the historical results of operations for the three and six months ended December 31, 2010 and December 31, 2009. Results of operations as a percentage of net sales were as follows (dollar amounts in thousands; percentages may not add due to rounding):

Three Months Ended

Six Months Ended

December 31,
2010

December 31,
2009

December 31,
2010

December 31,
2009

Net sales

$

405,633

100.0

%

$

393,345

100.0

%

$

690,454

100.0

%

$

658,508

100.0

%

Cost of sales

211,249

52.1

217,827

55.4

366,337

53.1

366,103

55.6

Depreciation in cost of sales

1,165

0.3

1,194

0.3

2,490

0.3

2,461

0.4

Gross profit

193,219

47.6

174,324

44.3

321,627

46.6

289,944

44.0

Selling, general and administrative
   expenses

136,617

33.7

132,038

33.6

246,439

35.7

235,981

35.8

Depreciation and amortization

6,262

1.5

5,803

1.5

12,549

1.8

11,812

1.8

Income from operations

50,340

12.4

36,483

9.3

62,639

9.1

42,151

6.4

Interest expense, net

5,552

1.4

5,804

1.5

10,883

1.6

11,415

1.7

Income before income taxes

44,788

11.0

30,679

7.8

51,756

7.5

30,736

4.7

Provision for income taxes

10,830

2.6

9,623

2.4

12,911

1.9

9,640

1.5

Net income

33,958

8.4

21,056

5.4

38,845

5.6

21,096

3.2

Other data

EBITDA and EBITDA margin (1)

$

57,767

14.3

%

$

43,480

11.1

%

$

77,678

11.3

%

$

56,424

8.6

%

(1)

For a definition of EBITDA and a reconciliation of net income to EBITDA, see "EBITDA" under Results of Operations -- Three Months Ended December 31, 2010 Compared to Three Months Ended December 31, 2009 and under Six Months Ended December 31, 2010 compared to Six Months Ended December 31, 2009. EBITDA margin represents EBITDA divided by net sales.

          Our operations are organized into the following reportable segments:

North America - Our North America segment sells our portfolio of owned, licensed and distributed brands, including our Elizabeth Arden products, to department stores, mass retailers and distributors in the United States, Canada and Puerto Rico, and also includes our direct to consumer business, which is composed of our Elizabeth Arden branded retail stores and global e-commerce business. This segment also sells our Elizabeth Arden products through the Red Door beauty salons, which are owned and operated by an unrelated third party that licenses the Elizabeth Arden and Red Door trademarks from us for use in its salons.

International - Our International segment sells our portfolio of owned and licensed brands, including our Elizabeth Arden products, in approximately 100 countries outside of North America through perfumeries, boutiques, department stores and travel retail outlets worldwide.

          Commencing July 1, 2010, our operations and management reporting structure were reorganized into two reportable segments, North America and International. The portion of our business operations that previously sold Elizabeth Arden fragrance, cosmetic and skin care products in prestige department stores in the United States and through the Red Door beauty salons, which was previously reported as our Other segment, has been consolidated with the North America Fragrance segment to create the North America segment.

 

- 26 -


          Segment profit excludes depreciation and amortization, interest expense, debt extinguishment charges, consolidation and elimination adjustments and unallocated corporate expenses, which are shown in the table reconciling segment profit to consolidated income (loss) before income taxes. Included in unallocated corporate expenses are (i) restructuring charges that are related to an announced plan, (ii) costs related to the Initiative, and (iii) restructuring costs for corporate operations. These expenses are recorded in unallocated corporate expenses as these items are centrally directed and controlled and are not included in internal measures of segment operating performance. Effective July 1, 2010, (a) employee incentive costs are fully allocated to the North America and International segments, as applicable, and (b) restructuring costs that are not part of an announced plan are recorded in our reportable segment that incurred the costs or in unallocated corporate expenses if related to corporate operations. Prior period amounts related to segment profit measures have been restated for comparison purposes. We do not have any intersegment sales.

          The following table is a comparative summary of our net sales and segment profit by reportable segment for the three and six months ended December 31, 2010 and 2009 and reflects the basis of presentation described in Note 15 -- "Segment Data and Related Information" to the Notes to Unaudited Consolidated Financial Statements for all periods presented.

(Amounts in thousands)

Three Months Ended

   

Six Months Ended

 

 

December 31,
2010

   

December 31,
2009

   

December 31,
2010

   

December 31,
2009

 

Segment Net Sales:

                             

    North America

$

275,097

   

$

275,196

   

$

465,099

   

$

455,131

 

    International

 

130,536

     

118,149

     

225,355

     

203,377

 

Total

$

405,633

   

$

393,345

   

$

690,454

   

$

658,508

 

Segment Profit:

                             

    North America

$

44,156

   

$

43,608

   

$

65,047

   

$

67,525

 

    International

 

14,848

     

6,060

     

14,807

     

3,106

 

    Less:

                             

        Depreciation and Amortization

 

7,427

     

6,997

     

15,039

     

14,273

 

        Interest Expense, net

 

5,552

     

5,804

     

10,883

     

11,415

 

        Consolidation and Elimination
           Adjustments

 

802

     

4,163

(1)

   

1,007

     

10,551

(1)

        Unallocated Corporate Expenses (1)

 

435

(2)

   

2,025

(3)

   

1,169

(4)

   

3,656

(5)

Income Before Income Taxes

$

44,788

   

$

30,679

   

$

51,756

   

$

30,736

 

(1)

Amounts for the three months and six months ended December 31, 2009 include $2.5 million and $5.5 million, respectively, related to a lower than normal price charged to the North America segment with respect to certain sales of inventory by that segment that were undertaken at the direction of corporate, rather than segment, management.

(2)

Amounts for the three months ended December 31, 2010, include (i) $0.3 million of restructuring expenses related to the Initiative, and (ii) $0.1 million of restructuring expenses for corporate operations, not related to the Initiative.

(3)

Amounts for the three months ended December 31, 2009, include (i) $1.1 million of restructuring charges related to the Initiative, and (ii) $0.9 million of expenses related to the implementation of an Oracle accounting and order processing system.

(4)

Amounts for the six months ended December 31, 2010, include (i) $0.3 million of restructuring expenses related to the Initiative, (ii) $0.5 million of restructuring expenses for corporate operations, not related to the Initiative, and (ii) $0.3 million of expenses related to the implementation of an Oracle accounting and order processing system.

(5)

Amounts for the six months ended December 31, 2009, include (i) $2.0 million of restructuring expenses related to the Initiative, and (ii) $1.6 million of expenses related to the implementation of an Oracle accounting and order processing system.

 

- 27 -


Three Months Ended December 31, 2010 Compared to Three Months Ended December 31, 2009

          Net Sales.    Net sales increased by 3.1% or $12.3 million for the three months ended December 31, 2010, compared to the three months ended December 31, 2009. Excluding the unfavorable impact of foreign currency translation, net sales increased by 3.5% or $13.9 million. Net sales for Elizabeth Arden branded products increased by $10.6 million, led by higher sales of skin care products and fragrances, partially offset by lower sales of color cosmetic products. Net sales of licensed and other owned products increased by $8.9 million, primarily due to higher sales of Mariah Carey and Britney Spears fragrances resulting from to the launches of Mariah Carey Lollipop Bling and Britney Spears Radiance, respectively. Partially offsetting these increases were reduced distributed brand sales of $7.2 million. Pricing changes had an immaterial effect on net sales.

North America

          Net sales were relatively flat compared to the prior year period. Excluding the favorable impact of foreign currency translation, net sales decreased by 0.3 % or $0.7 million. Net sales for Elizabeth Arden branded products increased by $6.5 million as higher sales of skin care products were slightly offset by lower sales of color cosmetic products and fragrances. Net sales of licensed and other owned products increased slightly while distributed brand sales were $7.1 million lower than the prior year. Higher sales to mass retail customers of $9.2 million were offset by lower sales to department store customers.

International

          Net sales increased by 10.5% or $12.4 million. Excluding the unfavorable impact of foreign currency translation, net sales increased by 12.4% or $14.6 million. Net sales for Elizabeth Arden branded products increased by $4.1 million, led by higher sales of fragrances and skin care products, partially offset by lower sales of color cosmetic products. Net sales of licensed and other owned products also increased by $9.3 million due to higher sales of Britney Spears fragrances and Juicy Couture fragrances, due primarily to the launch of Peace Love & Juicy Couture. Our results were led by higher net sales of $6.8 million in travel retail, distributor markets and in Europe.

          Gross Margin.    For the three months ended December 31, 2010 and 2009, gross margins were 47.6% and 44.3%, respectively. Gross margin in the current year period benefited from a higher proportion of basic sales of Elizabeth Arden and licensed brands which reflect higher gross margins as compared to distributed brands and promotional product sales as well as improved operating efficiencies due to the Initiative.

          SG&A.   Selling, general and administrative expenses increased 3.5% or $4.6 million, for the three months ended December 31, 2010, compared to the three months ended December 31, 2009. The increase was principally due to (i) higher general and administrative expenses of $5.0 million, (ii) higher media and creative advertising expenses of $2.1 million, and (iii) higher royalty expenses of $1.2 million due to higher sales of licensed brands, partially offset by lower trade advertising due to the weakness in department store sales. The increase in general and administrative expenses was principally due to higher payroll costs, including incentive compensation costs, and higher professional services costs, partially offset by lower restructuring expenses and Initiative-related one-time costs. For the three months ended December 31, 2010, total restructuring and Initiative-related one-time costs were $0.4 million as compared to $2.0 million for the three months ended December 31, 2009. For each of the three months ended December 31, 2010 and 2009 total share-based compensation cost charged against income for all stock plans was $1.2 million.

Segment Profit

North America

          Segment profit increased 1.3% or $0.5 million. The increase in segment profit was due to higher gross profit, offset by higher selling, general and administrative expenses as further discussed above.

International

          Segment profit increased 145.0% or $8.8 million. The increase in segment profit was due to higher sales and gross profit, partially offset by higher selling, general and administrative expenses as further discussed above.

 

- 28 -


          Interest Expense.    Interest expense, net of interest income, decreased 4.4%, or $0.2 million, for the three months ended December 31, 2010, compared to the three months ended December 31, 2009. The decrease was due to lower average interest rates under our revolving bank credit facility and lower average borrowings under such credit facility during the current year period.

          Provision for Income Taxes.   The pre-tax income from our domestic and international operations consisted of the following for the three months ended December 31, 2010 and 2009:

(Amounts in thousands)

Three Months Ended

 

December 31,
2010

   

December 31,
2009

 

Domestic pre-tax income

$

19,814

   

$

18,722

 

Foreign pre-tax income

 

24,974

     

11,957

 

Total income before income taxes

$

44,788

$

30,679

Effective tax rate

24.2

%

31.4

%

          The decrease in the effective tax rate in the current year period as compared to the prior year period was mainly due to (i) higher earnings contributions from our international operations in the current year period as compared to the prior year, and (ii) a shift in the ratio of earnings contributions between jurisdictions which have different tax rates. Our international operations are tax-effected at a lower rate than our domestic operations.

          Net Income.    Net income for the three months ended December 31, 2010, was $34.0 million compared to $21.1 million for the three months ended December 31, 2009. The increase in net income was primarily the result of higher net sales, improved gross margins and a lower effective tax rate in the current year period, partially offset by higher selling, general and administrative expenses.

          EBITDA.     EBITDA (net income plus the provision for income taxes (or net loss less the benefit from income taxes), plus interest expense, plus depreciation and amortization expense) increased by approximately $14.3 million to $57.8 million for the three months ended December 31, 2010, compared to $43.5 million for the three months ended December 31, 2009. The increase in EBITDA was primarily the result of higher net sales and improved gross margins, partially offset by higher selling, general and administrative expenses in the current year period.

          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 our operating performance or to net cash provided by operating, investing or financing activities (as determined in accordance with generally accepted accounting principles) or as a measure of our ability to meet cash needs. We believe that EBITDA is a measure commonly reported and widely used by investors and other interested parties as a measure of a company's operating performance and debt servicing ability because it assists in comparing performance on a consistent basis without regard to capital structure (particularly when acquisitions are involved), depreciation and amortization, or non-operating factors such as historical cost. Accordingly, as a result of our capital structure, we believe EBITDA is a relevant measure. 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. 

          In addition, EBITDA has limitations as an analytical tool, including the fact that:

it does not reflect our cash expenditures, future requirements for capital expenditures or contractual commitments;

it does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt;

it does not reflect any cash income taxes that we may be required to pay; and

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and these measures do not reflect any cash requirements for such replacements.

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

 

- 29 -


(Amounts in thousands)

Three Months Ended

 

 

December 31,
2010

   

December 31,
2009

 

Net income

$

33,958

   

$

21,056

 

Plus:

             
 

Provision for income taxes

 

10,830

     

9,623

 
 

Interest expense, net

 

5,552

     

5,804

 
 

Depreciation in cost of sales

 

1,165

     

1,194

 
 

Depreciation and amortization

 

6,262

     

5,803

 

   

EBITDA

$

57,767

   

$

43,480

 

Six Months Ended December 31, 2010 Compared to Six Months Ended December 31, 2009

          Net Sales.    Net sales increased by 4.9% or $31.9 million for the six months ended December 31, 2010, compared to the six months ended December 31, 2009. Excluding the unfavorable impact of foreign currency translation, net sales increased by 5.4% or $35.4 million. Net sales of Elizabeth Arden branded products increased by $14.9 million, led by higher sales of skin care products and fragrances, partially offset by lower sales of color cosmetic products. Net sales of licensed and other owned products increased by $22.6 million, primarily due to higher sales of (i) the Juicy Couture fragrances, (ii) Britney Spears fragrances, due primarily to the launch of Radiance, and (iii) the new fragrance brands of John Varvatos and Kate Spade. Partially offsetting these increases were reduced distributed brand sales of $5.6 million. Pricing changes had an immaterial effect on net sales.

North America

          Net sales increased by 2.2% or $9.9 million. Excluding the favorable impact of foreign currency translation, net sales increased by 1.9% or $8.8 million. Net sales of Elizabeth Arden branded products increased by $8.9 million as higher sales of skin care products were slightly offset by lower sales of fragrances and color cosmetic products. Net sales of licensed and other owned products increased by $6.2 million primarily due to sales of John Varvatos and Kate Spade fragrances. Partially offsetting these increases were reduced distributed brand sales of $5.4 million. Higher sales to mass retail customers of $18.8 million were partially offset by lower sales of $8.8 million to department store customers.

International

          Net sales increased by 10.8% or $22.0 million. Excluding the unfavorable impact of foreign currency translation, net sales increased by 13.1 % or $26.6 million. Net sales of Elizabeth Arden branded products increased by $6.0 million, led by higher sales of fragrances and skin care products, partially offset by lower sales of color cosmetic products. Net sales of licensed and other owned products also increased by $16.0 million, primarily due to higher sales of (i) Britney Spears fragrances, due primarily to the launch of Radiance, and (ii) the Juicy Couture fragrances, due primarily to the launch of Peace Love & Juicy Couture. Our results were led by higher net sales of $12.7 million for travel retail and distributor markets and $4.6 million in Europe, primarily in the United Kingdom.

          Gross Margin.    For the six months ended December 31, 2010 and 2009, gross margins were 46.6% and 44.0%, respectively. Gross margin in the current year period benefited from a higher proportion of basic sales of Elizabeth Arden products and licensed brands which reflect higher gross margins as compared to distributed brands and promotional product sales, as well as improved operating efficiencies due to the Initiative.

          SG&A.   Selling, general and administrative expenses increased 4.4% or $10.5 million, for the six months ended December 31, 2010, compared to the six months ended December 31, 2009. The increase was principally due to (i) higher general and administrative expenses of $9.1 million, (ii) higher media and creative advertising expenses of $3.6 million, and (iii) higher royalty expenses of $3.4 million due to higher sales of licensed brands, partially offset by lower selling and promotion expenses, including trade advertising, due to the weakness in department store sales. The increase in general and administrative expenses was principally due to higher payroll costs, including incentive compensation costs, and higher professional services costs, partially offset by lower restructuring expenses and Initiative-related one-time costs. For the six months ended December 31, 2010, total restructuring and Initiative-related one-time costs totaled $1.4 million as compared to $4.0 million for the six months ended December 31, 2009. For the six months ended December 31, 2010 and 2009, total share-based compensation cost charged against income for all stock plans was $2.4 million.

 

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Segment Profit

North America Fragrance

          Segment profit decreased 3.7% or $2.5 million. The decrease in segment profit was due to higher selling, general and administrative expenses, partially offset by higher sales and gross profit as further described above.

International

Segment profit increased by $11.7 million. The increase in segment profit was due to higher sales and gross profit, partially offset by higher selling, general and administrative expenses as further described above.

         Interest Expense.    Interest expense, net of interest income, decreased 4.7%, or $0.5 million, for the six months ended December 31, 2010, compared to the six months ended December 31, 2009. The decrease was due to lower average borrowings under our revolving bank credit facility and lower average interest rates under such credit facility during the current year period.

          Provision for Income Taxes.    The pre-tax income from our domestic and international operations consisted of the following for the six months ended December 31, 2010 and 2009:

(Amounts in thousands)

Six Months Ended

 

December 31,
2010

   

December 31,
2009

 

Domestic pre-tax income

$

17,449

   

$

14,990

 

Foreign pre-tax income

 

34,307

     

15,746

 

Total income before income taxes

$

51,756

$

30,736

Effective tax rate

24.9

%

31.4

%

         The decrease in the effective tax rate in the current year period as compared to the prior year period was mainly due to (i) higher earnings contributions from our international operations in the current year period as compared to the prior year, and (ii) a shift in the ratio of earnings contributions between jurisdictions which have different tax rates. Our international operations are tax-effected at a lower rate than our domestic operations.

          Net Income.    Net income for the six months ended December 31, 2010, was $38.8 million compared to $21.1 million for the six months ended December 31, 2009. The increase in net income was primarily the result of higher net sales, improved gross margins and a lower effective tax rate in the current year period, partially offset by higher selling, general and administrative expenses.

          EBITDA.     EBITDA (net income plus the provision for income taxes (or net loss less the benefit from income taxes), plus interest expense, plus depreciation and amortization expense) increased by approximately $21.3 million to $77.7 million for the six months ended December 31, 2010, compared to $56.4 million for the six months ended December 31, 2009. The increase in EBITDA was primarily the result of higher net sales and improved margins, partially offset by higher selling, general and administrative expenses in the current year period.

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

(Amounts in thousands)

Six Months Ended

 

 

December 31,
2010

   

December 31,
2009

 

Net income

$

38,845

   

$

21,096

 

Plus:

             
 

Provision for income taxes

 

12,911

     

9,640

 
 

Interest expense, net

 

10,883

     

11,415

 
 

Depreciation in cost of sales

 

2,490

     

2,461

 
 

Depreciation and amortization

 

12,549

     

11,812

 

   

EBITDA

$

77,678

   

$

56,424

 

 

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Liquidity and Capital Resources

(Amounts in thousands)

Six Months Ended

 

 

December 31,
2010

   

December 31,
2009

 

Net cash provided by operating activities

$

54,317

   

$

77,094

 

Net cash used in investing activities

 

(25,307

)

   

(18,165

)

Net cash used in financing activities

 

(19,302

)

   

(49,995

)

Net increase in cash and cash equivalents

 

11,433

     

9,603

 

          Cash Flows.     For the six months ended December 31, 2010, net cash provided by operating activities was $54.3 million, as compared to $77.1 million for the six months ended December 31, 2009. The decrease in cash provided by operating activities was principally due to (i) the significant reductions in inventory levels in the prior year period in part due to our Initiative, partially offset by (ii) higher net income in the current year period, and (iii) a decrease in accounts payable in the prior year, primarily due to the timing of payments to vendors.

          For the six months ended December 31, 2010, net cash used in investing activities of $25.3 million was composed of (i) $11.4 million of capital expenditures and (ii) approximately $13.9 million of payments related to the acquisition of the PREVAGE® trademarks and related patents and the global license agreement with John Varvatos Apparel Corp. for the manufacture, distribution and marketing of John Varvatos fragrances. For the six months ended December 31, 2009, net cash used in investing activities of $18.2 million was composed of approximately (i) $17.8 million of capital expenditures, and (ii) the $0.3 million payment of the remaining installment of contingent consideration associated with our acquisition of the fragrance business of Sovereign Sales, LLC in 2006. The decrease in capital expenditures for the six months ended December 31, 2010 is primarily due to expenditures incurred in the prior year period for the implementation of our new accounting and order processing system.

          For the six months ended December 31, 2010, net cash used in financing activities was $19.3 million, as compared to $50.0 million for the six months ended December 31, 2009. During the six months ended December 31, 2010, borrowings under our credit facility decreased by $22.0 million to $37.0 million at December 31, 2010. During the six months ended December 31, 2009, borrowings under our credit facility decreased by $49.0 million to $66.0 million at December 31, 2009. For the six months ended December 31, 2010, proceeds from the exercise of common stock and repurchases of common stock were $9.9 million and $10.3 million, respectively, as compared to $0.5 million and $0.4 million, respectively for the prior year period.

          Interest paid during the six months ended December 31, 2010, included $8.5 million of interest payments on the 7 3/4% senior subordinated notes due 2014 and $1.7 million of interest paid on the borrowings under our credit facility. Interest paid during the six months ended December 31, 2009, included $8.7 million of interest payments on the 7 3/4% senior subordinated notes and $2.1 million of interest paid on the borrowings under our credit facility.

          At December 31, 2010, we had approximately $38.3 million of cash, of which $27.2 million was held outside of the United States. Of the cash held outside of the U.S., $9.7 million was considered cash in excess of local operating requirements and could have been repatriated to the U.S. without restriction or tax effect. The balance of such cash held outside the U.S., approximately $17.5 million, was needed to meet local working capital requirements and therefore considered permanently reinvested in the applicable local subsidiary.

          Future Liquidity and Capital Needs.    Our principal future uses of funds are for working capital requirements, including brand development and marketing expenses, new product launches, additional brand acquisitions or product licensing and distribution arrangements, capital expenditures and debt service. In addition, we may use funds to repurchase material amounts of our common stock and senior notes through open market purchases, privately negotiated transactions or otherwise, depending upon prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. We have historically financed our working capital needs primarily through internally generated funds, our credit facility and external financing. We collect cash from our customers based on our sales to them and their respective payment terms.

          At December 31, 2010 we had a $325 million revolving credit facility with a syndicate of banks, for which JPMorgan Chase Bank was the administrative agent, which generally provided for borrowings on a revolving basis with a $25 million sub-limit for letters of credit. See Note 7 to the Notes to Unaudited Consolidated Financial Statements. At December 31, 2010, we had (i) $37.0 million in borrowings and $4.9 million in letters of credit outstanding under the credit facility, (ii) $250.9 million of eligible accounts receivable and inventories available as collateral under the credit facility, and (iii) remaining borrowing availability of $213.8 million. The borrowing availability under the credit facility typically declines in the second half of our fiscal year as our higher accounts receivable balances resulting from holiday season sales are likely to decline due to cash collections.

 

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          The credit facility had only one financial maintenance covenant, which was a debt service coverage ratio that had to be maintained at not less than 1.1 to 1 if average borrowing base capacity declined to less than $25 million ($35 million from December 1 through May 31). Our average borrowing base capacity during the quarter ended December 31, 2010, did not fall below the applicable thresholds noted above. Accordingly, the debt service coverage ratio did not apply for the quarter ended December 31, 2010. We were in compliance with all applicable covenants under the credit facility for the quarter ended December 31, 2010.

          On January 21, 2011, we entered into an amendment and restatement of our existing credit facility with a syndicate of banks, for which JP Morgan Chase bank is the administrative agent. Under the terms of the new revolving credit facility, we may borrow on a revolving basis up to $300 million, with a $25 million sub-limit for letters of credit. Additionally, we may, at any time, increase the size of the new revolving credit facility up to $375 million without entering in a formal amendment requiring the consent of all of the banks, subject to our satisfaction of certain conditions. The new revolving credit facility will mature in January 2016.

          The new credit facility is guaranteed by all of our U.S. subsidiaries and is collateralized by a first priority lien on all of our U.S., Canada and Puerto Rico accounts receivable and U.S. inventory. Borrowings under the new credit facility are limited to 85% of eligible accounts receivable and 85% of the appraised net liquidation value of our inventory, as determined pursuant to the terms of the credit facility; provided, however, that from August 15 to October 31 of each year our borrowing base may be temporarily increased by up to $25 million.

          The new credit facility has only one financial maintenance covenant, which is a debt service coverage ratio that must be maintained at not less than 1.1 to 1 if average borrowing base capacity declines to less than $25 million ($35 million from September 1through January 31).

          Under the terms of the new credit facility, we may pay dividends or repurchase common stock if we maintain borrowing base capacity of at least $25 million from February 1 to August 31, and at least $35 million from September 1 to January 31, after making the applicable payment. The new credit facility restricts us from incurring additional non-trade indebtedness (other than refinancings and certain small amounts of indebtedness).

          Borrowings under the credit portion of the new revolving credit facility will bear interest at a floating rate based on "Applicable Margin" which is determined by reference to a debt service coverage ratio. At our option, the Applicable Margin may be applied to either the London InterBank Offered Rate (LIBOR) or the base rate. The Applicable Margin charged on LIBOR loans ranges from 1.75% to 2.50% and ranges from 0.25% to 1.0% for base rate loans, except that the Applicable Margin on the first $25 million of borrowings from August 15 to October 31 of each year, while the temporary increase in our borrowing base is in effect, is 1.00% higher. We are required to pay an unused commitment fee ranging from 0.375% to 0.50% based on the quarterly average unused portion of the new credit facility.

          At December 31, 2010, we had outstanding $220.0 million aggregate principal amount of 7 3/4% senior subordinated notes due January 2014. On January 21, 2011, we issued $250.0 million aggregate principal amount of 7 3/8% senior notes due March 2021. Concurrently with the offering of the 7 3/8% senior notes, we commenced a cash tender offer and consent solicitation for any and all of our $220 million of outstanding 7 3/4% senior subordinated notes. On January 21, 2011, we purchased approximately $195.9 million of 7 3/4% senior subordinated notes that were tendered on or before the January 20, 2011 consent date for approximately $205.5 million, including the tender offer premium and accrued interest. On January 21, 2011, we issued a redemption notice under the applicable indenture to redeem any senior subordinated notes that remain outstanding after the tender office expires on February 3, 2011 at a redemption price of $1,012.92 per $1,000 aggregate principal amount. The proceeds from the issuance of the 7 3/8% senior notes will be used to fund the purchase or redemption of the 7 3/4% senior subordinated notes as well as the fees and expenses related to the offering and the tender offer and consent solicitation and the new credit facility, and to reduce amounts outstanding under the new credit facility. As of January 31, 2011, $24.1 million aggregate principal amount of our 7 3/4% senior subordinated notes remained outstanding and will be redeemed by us on our about February 22, 2011.

          The 7 3/8% senior notes are not guaranteed by any of our subsidiaries but may become guaranteed by one or more of our domestic subsidiaries under certain limited circumstances. The 7 3/8% senior notes rank pari passu in right of payment to indebtedness under our new credit facility and any other senior debt, and will rank senior to any future subordinated indebtedness; provided, however, that the 7 3/8% senior notes will be effectively subordinated to the new credit facility to the extent of the collateral securing the new credit facility. Interest on the 7 3/8% senior notes is payable semi-annually on March 15 and September 15 of each year. The indenture generally permits us (subject to the satisfaction of a fixed charge coverage ratio and, in certain cases, also a net income test) to incur additional indebtedness,

- 33 -


pay dividends, purchase or redeem our common stock or redeem subordinated indebtedness. The indenture generally limits our ability to create liens, merge or transfer or sell assets. The indenture also provides that the holders of the 7 3/8% senior notes have the option to require us to repurchase their notes in the event of a change of control involving us (as defined in the indenture).

          Based upon our internal projections, we believe that existing cash and cash equivalents, internally generated funds and borrowings under our credit facility will be sufficient to cover debt service, working capital requirements and capital expenditures for the next twelve months, other than additional working capital requirements that may result from further expansion of our operations through