General
Elizabeth Arden, Inc., is a global prestige beauty products company with an extensive portfolio of prestige fragrance, skin care and cosmetics brands. We market approximately 100 owned or licensed prestige brands, including the Elizabeth Arden fragrances: Red Door, Elizabeth Arden 5th Avenue, Elizabeth Arden Provocative Woman, Elizabeth Arden green tea, and Elizabeth Arden Mediterranean; 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 fragrance portfolio also includes the Elizabeth Taylor fragrance brands: White Diamonds and Elizabeth Taylor’s Passion; the Britney Spears fragrance brands: curious Britney Spears, fantasy Britney Spears and Britney Spears believe; the Hilary Duff fragrance with Love...Hilary Duff; the Danielle Steel fragrance Danielle by Danielle Steel; the Mariah Carey fragrance M by Mariah Carey; the fragrance brands White Shoulders, Giorgio Beverly Hills and Giorgio Red; the men’s fragrances: Daytona 500, HUMMERTM Fragrance for Men and PS Fine Cologne for Men; and the designer fragrance brands of Alfred Sung, Badgley Mischka, Bob Mackie, GANT, Lulu Guinness, Nanette Lepore, Geoffrey Beene and Halston. In addition to our owned and licensed fragrance brands, we distribute over 300 additional prestige fragrance brands, primarily in the United States through distribution agreements and other purchasing arrangements.
We sell our prestige beauty products to retailers and other outlets in the United States and internationally, including;
| • | department stores such as Macy’s, Dillard’s, Belk, JCPenney, Saks and Nordstroms; |
| • | mass retailers such as Wal-Mart, Target, Sears, Kohl’s, Walgreens, Rite-Aid and CVS; and |
| • | international retailers such as Boots, Debenhams, Sephora, Marionnaud, Hudson’s Bay, Shoppers Drug Mart, Myer, Douglas and various travel retail outlets such as Nuance, Heinemann and WDF. |
In the United States, we sell our Elizabeth Arden skin care and cosmetics products primarily in prestige department stores and our fragrances in prestige department stores and mass retailers. We also sell our Elizabeth Arden fragrances, skin care and cosmetics products and other fragrance lines in approximately 90 countries worldwide through perfumeries, boutiques, department stores and travel retail outlets, such as duty free shops and airport boutiques, and on the internet. Our international operations are subject to volatility because of foreign currency exchange rate changes, inflation and changes in political and economic conditions in the countries in which we operate. The value of international assets is affected by fluctuations in foreign currency exchange rates.
On August 11, 2006, we completed the acquisition of certain assets comprising the fragrance business of Sovereign Sales, LLC, including inventory and certain intangible assets. Sovereign Sales was a distributor of prestige fragrances to mass retail customers. This acquisition has allowed us to offer additional fragrance brands to our mass retail customers.
On June 29, 2006, we completed the acquisition of certain assets of Riviera Concepts Inc., including inventory, accounts receivable and brand licenses for a number of fragrance brands, including the fragrance brands of Alfred Sung, HUMMER™, Badgley Mischka, Nannette Lepore and Bob Mackie.
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Our net sales to customers in the United States and internationally in dollars and net sales as a percentage of consolidated net sales for the years ended June 30, 2007, 2006 and 2005, are listed in the following chart:
| Years Ended June 30, | ||||||||||||||||||
| 2007 | 2006 | 2005 | ||||||||||||||||
| (Amounts in millions) | Sales | % | Sales | % | Sales | % | ||||||||||||
| United States |
$ | 706.5 | 63 | % | $ | 576.7 | 60 | % | $ | 571.4 | 62 | % | ||||||
| International |
421.0 | 37 | % | 377.9 | 40 | % | 349.1 | 38 | % | |||||||||
| Total |
$ | 1,127.5 | 100 | % | $ | 954.6 | 100 | % | $ | 920.5 | 100 | % | ||||||
Our largest foreign countries in terms of net sales for the years ended June 30, 2007, 2006 and 2005, are listed in the following chart:
| Years Ended June 30, | |||||||||
| (Amounts in millions) | 2007 | 2006 | 2005 | ||||||
| United Kingdom |
$ | 45.9 | $ | 47.5 | $ | 45.6 | |||
| Canada |
38.8 | 32.1 | 30.7 | ||||||
| Australia |
31.6 | 20.4 | 17.9 | ||||||
| Spain |
23.9 | 23.0 | 25.4 | ||||||
For information on the breakdown of our long-lived assets in the United States and internationally and risks associated with our international operations, see Note 19 to the Notes to Consolidated Financial Statements.
Our principal executive offices are located at 2400 S.W. 145th Avenue, Miramar, Florida 33027, and our telephone number is (954) 364-6900. We maintain a website with the address www.elizabetharden.com. We are not including information contained on our website as part of nor incorporating it by reference into this Annual Report on Form 10-K. We make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with or furnish such material to the Securities and Exchange Commission.
Information relating to corporate governance at Elizabeth Arden, Inc., including our Corporate Governance Guidelines and Principles, Code of Ethics for Directors and Executive and Finance Officers, Code of Business Conduct and charters for the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee, is available on our website under the section “EA Corporate — Investor Relations — Corporate Governance.” We will provide the foregoing information without charge upon written request to Secretary, Elizabeth Arden, Inc., 2400 S.W. 145th Avenue, Miramar, FL 33027.
Business Strategy
Our business strategy is to grow our brand portfolio by investing behind our core brands and to acquire control of and develop additional prestige brands through brand development, acquisitions and new licensing and distribution agreements that will complement our existing brand portfolio and target additional demographics. We are also focused on improving our cash flow and operating margins, particularly through improving our extended supply chain and logistics functions, managing the advertising spend behind our new fragrance launches and leveraging our global overhead structure more efficiently. In fiscal 2008, we plan to launch a number of new brands and products, including our new Mariah Carey fragrance, M by Mariah Carey, a new Britney Spears fragrance, Britney Spears believe, and the night cream PREVAGETM Night, as well as introduce new distributed fragrance brands to mass retailers on behalf of other beauty companies.
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During the fiscal year ended June 30, 2007, we (i) acquired the exclusive worldwide license for the Giorgio Beverly Hills brand, (ii) launched a new Elizabeth Arden skin care line, Intervene, (iii) and launched a new Elizabeth Arden fragrance, Elizabeth Arden Mediterranean, and the with Love...Hilary Duff and Danielle by Danielle Steel fragrances. In addition, during fiscal 2007, we completed the acquisition of certain assets comprising the fragrance business of Sovereign Sales, LLC, a prestige fragrance distributor to U.S. mass retailers, and the prestige fragrance brand portfolio of Riviera Concepts Inc., including licenses to manufacture the Alfred Sung, HUMMER™, Badgley Mischka, Nannette Lepore and Bob Mackie fragrance brands. These acquisitions and licensing arrangements have enabled us to expand our market share with our mass retail customers and sell our products into new retailers and markets, and to broaden our fragrance portfolio.
We are also investing in certain developing markets around the world that we believe have significant opportunities for growth of our products. During the fiscal year ended June 30, 2007, we established a sales affiliate in Dubai to better serve the Middle East. During the fiscal year ended June 30, 2006, we acquired the assets of our distributors in Taiwan and China, established affiliates in those markets and integrated those affiliates with our Hong Kong business to create a Greater China market. We are also focusing on expanding sales of our products in other developing markets including Latin America and India.
We continue to pursue business efficiencies throughout the company, particularly in the supply chain, logistics and information technology areas. Improving our working capital efficiencies and our cost structure also continue to be a significant focus.
Products
Our net sales of products and net sales as a percentage of consolidated net sales for the years ended June 30, 2007, 2006 and 2005, are listed in the following chart.
| Years Ended June 30, | ||||||||||||||||||
| 2007 | 2006 | 2005 | ||||||||||||||||
| (Amounts in millions) | Sales | % | Sales | % | Sales | % | ||||||||||||
| Fragrance |
$ | 851.1 | 75 | % | $ | 716.6 | 75 | % | $ | 691.0 | 75 | % | ||||||
| Skin Care |
200.6 | 18 | % | 169.0 | 18 | % | 155.5 | 17 | % | |||||||||
| Cosmetics |
75.8 | 7 | % | 69.0 | 7 | % | 74.0 | 8 | % | |||||||||
| Total |
$ | 1,127.5 | 100 | % | $ | 954.6 | 100 | % | $ | 920.5 | 100 | % | ||||||
Fragrance. We offer a wide variety of fragrance products for both men and women, including perfume, cologne, eau de toilette, eau de parfum, body spray and gift sets. Our fragrances are classified into the Elizabeth Arden branded fragrances, such as Elizabeth Arden Red Door and Elizabeth Arden 5th Avenue; celebrity fragrances such as Elizabeth Taylor’s White Diamonds and the Britney Spears fragrances; designer fragrances such as the Badgley Mischka, Halston and GANT fragrance brands; and lifestyle fragrances such as Giorgio Beverly Hills, Paul Sebastian and the HUMMERTM fragrances. Each fragrance is sold in a variety of sizes and packaging arrangements. In addition, bath and body products that are based on the particular fragrance, such as soaps, deodorants, body lotions, gels, creams and dusting powder are sold to complement the fragrance lines. We tailor the size and packaging of the fragrance to suit the particular target customer. Our fragrance products generally retail at prices ranging from $5 to $225, depending on the size, type and packaging of the product.
Skin Care. Our skin care lines are sold under the Elizabeth Arden name and include products such as moisturizers, creams, lotions and cleansers. Our core product brands include Ceramide, PREVAGE™, Eight Hour Cream, and Intervene, a new skin care line targeted for the 30 to 50 year old customer. We sell skin care products internationally and in the United States, primarily in prestige department and specialty stores, perfumeries and travel retail outlets. Our skin care products generally retail at prices ranging from $16 to $335.
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Cosmetics. Under the Elizabeth Arden name, we offer a variety of cosmetics, including foundations, lipsticks, mascaras, eye shadows and powders. We offer these products in a wide array of shades and colors. Our strategy is to align our color offerings with our core skin care products. We use our cosmetic products to attract consumers to the beauty counters at department stores where the Elizabeth Arden fragrance and skin care products are also sold. We sell our cosmetics internationally and in the United States, primarily in prestige and specialty stores, perfumeries and travel retail outlets. Our cosmetic products generally retail at prices ranging from $14 to $49.
Trademarks, Licenses and Patents
We own or have rights to use the trademarks necessary for the manufacturing, marketing, distribution and sale of numerous fragrance, cosmetic and skin care brands, including Elizabeth Arden’s Red Door, Red Door Revealed, Elizabeth Arden 5th Avenue, Elizabeth Arden Provocative Woman, Elizabeth Arden Mediterranean, Visible Difference, Plump Perfect, Intervene, Millennium, White Shoulders, Halston, Z-14, PS Fine Cologne for Men, Design and Wings. We have registered these trademarks, or have applications pending, in the United States and in certain of the countries in which we sell these product lines. We consider the protection of our trademarks to be important to our business.
We are the exclusive worldwide trademark licensee for a number of fragrance brands including the Elizabeth Taylor fragrances White Diamonds and Elizabeth Taylor’s Passion; the Alfred Sung fragrance brands SUNG Alfred Sung, SHI Alfred Sung and JEWEL Alfred Sung; the HUMMER™ fragrances HUMMER™ and H2; the designer fragrance brands of Badgley Mischka, Nanette Lepore, Bob Mackie, Lulu Guinness, Geoffrey Beene and Halston, the Britney Spears fragrances curious Britney Spears and fantasy Britney Spears; the Hilary Duff fragrance with Love...Hilary Duff; the Danielle Steel fragrances Danielle by Danielle Steel; the Mariah Carey fragrance M by Mariah Carey, and the Giorgio fragrances Giorgio Beverly Hills and Giorgio Red. We are the exclusive worldwide licensee for the PREVAGE™ skin care line for retail outlets. The Taylor license agreement terminates in October 2022 and is renewable by us, at our sole option, for unlimited 20-year periods. The Britney Spears license terminates in December 2009 and is renewable by us, at our sole option, for a 5-year term. The PREVAGE™ license terminates in December 2010 and is renewable by us for unlimited 5-year terms if certain sales targets are achieved. The other license agreements have terms ranging from 2009 to 2045 and beyond and, typically, have renewal terms dependent on sales targets being achieved.
We also have the right under various exclusive distributor and license agreements to distribute other fragrances in various territories and to use the registered trademarks of third parties in connection with the sale of these products.
Certain of our skin care and cosmetic products and the PREVAGE™ skin care line incorporate patented or patent-pending formulations. In addition, several of our packaging methods, packages, components and products are covered by design patents, patent applications and copyrights. Substantially all of our trademarks and all of our patents are held by us or by one of our wholly-owned United States subsidiaries.
Sales and Distribution
We sell our prestige beauty products to retailers in the United States, including department stores such as Macy’s, Dillard’s, Saks, JCPenney, Belk and Nordstroms; mass retailers such as Wal-Mart, Target, Sears, Kohl’s, Walgreens, Rite-Aid and CVS; and international retailers such as Boots, Debenhams, Sephora, Marionnaud, Hudson’s Bay, Shoppers Drug Mart, Myer, Douglas and various travel retail outlets such as Nuance, Heinemann and WDF. We also sell products to independent fragrance, cosmetic, gift and other stores and through e-commerce. We currently sell our skin care and cosmetics products in the United States primarily in prestige department and
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specialty stores. We also sell our fragrances, skin care and cosmetic products in approximately 90 other countries worldwide through perfumeries, pharmacies, department stores, specialty retailers, “duty free” shops and other retail shops and travel retail locations. In certain countries, we maintain a dedicated sales force that solicits orders and provides customer service. In other countries and jurisdictions, we sell our products through local distributors under contractual arrangements. We manage our operations outside of North America from our offices in Geneva, Switzerland.
We also sell our Elizabeth Arden products in the Elizabeth Arden and Red Door beauty salons, which are owned and operated by an unrelated third party. In addition to the sales price of the products sold to the operator of these salons, we receive a licensing fee based on the net sales from each of the salons for the use of the “Elizabeth Arden” or “Red Door” trademarks.
Our sales and marketing support staff and personnel are organized by customer account. Our sales force routinely visits retailers to assist in the merchandising, layout and stocking of selling areas. In the U.S., we have a sales force for Elizabeth Arden branded products that are sold in prestige distribution. For many of our mass retailers in the United States and Canada, we sell basic products in special packaging that deter theft and permit the products to be sold in open displays. Our fulfillment capabilities enable us to reliably process, assemble and ship small orders on a timely basis. We use this ability to assist our customers in their retail distribution through “drop shipping” directly to their stores and by fulfilling their sales of beauty products over the Internet. In fiscal 2007, we also launched an e-commerce site to sell selected products directly to consumers.
As is customary in the beauty industry, we do not generally have long-term or exclusive contracts with any of our retail customers. Sales to customers are generally made pursuant to purchase orders. We believe that our continuing relationships with our customers are based upon our ability to provide a wide selection and reliable source of prestige beauty products, our expertise in marketing and new product introduction, and our ability to provide value-added services, including our category management services, to U.S. mass retailers.
Our ten largest customers accounted for approximately 39% of net sales for the year ended June 30, 2007. The only customer that accounted for more than 10% of our net sales during that period was Wal-Mart (including Sam’s Club), which, on a global basis, accounted for approximately 18% of our net sales. The loss of or a significant adverse change in our relationship with any of our largest customers could have a material adverse effect on our business, prospects, results of operations, financial condition and cash flows.
The industry practice for businesses that market beauty products has been to grant certain retailers, subject to our authorization and approval, the right to either return merchandise or to receive a markdown allowance for certain promotional products. We establish estimated return reserves and markdown allowances at the time of sale based upon historical and projected experience, economic trends and changes in customer demand. Our reserves and allowances are reviewed and updated as needed during the year, and additions to these reserves and allowances may be required. Additions to our reserves and allowances may have a negative impact on our financial results. We have a dedicated sales organization to sell returned products that are saleable.
Marketing
Our marketing approach emphasizes a consistent global image for our brands, and each of our fragrance, skin care and cosmetics products is distinctively positioned with specific advertising themes, logos and packaging tailored for that particular product. We utilize our spokesperson, Catherine Zeta-Jones, and our classic Red Door symbol, to reinforce the Elizabeth Arden brand heritage and contemporize the Elizabeth Arden brand globally. We use traditional print, television
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and radio advertising, and point-of-sale merchandising, including displays and sampling, as well as less traditional methods, such as the internet, mobile phones and instant messaging. We work with third party advertising agencies to assist us in our worldwide media planning which includes developing the media strategy for our brands and assisting us in developing the marketing campaigns for many of our products. We believe these agencies have the expertise to help us effectively market our products. During the last three fiscal years, we increased our advertising to promote our core product franchises.
New product introduction is an important element in attracting consumers to our brands and in creating brand excitement with our retail customers. Our marketing personnel work closely with customers to develop new products and promotions and extensions of our well-established brands. Our efforts are primarily focused on the identification of consumer needs and shifts in consumer preferences in order to develop new fragrance, skin care and cosmetic products, develop line extensions and promotions, and redesign or reformulate existing products.
Our marketing efforts also benefit from cooperative advertising programs with our retailers, often linked with particular promotions. In our department store and perfumerie accounts, we periodically promote our brands with “gift with purchase” and “purchase with purchase” programs. At in-store counters, sales representatives offer personal demonstrations to market individual products. We also engage in extensive sampling programs.
With many of our retail customers, our marketing personnel often design model schematic planograms for the customer’s fragrance department, identify trends in consumer preferences and adapt the product assortment to these trends, conduct training programs for the customer’s sales personnel and manage in-store “special events.” Our marketing personnel also work to design gift sets tailored to the customer’s needs. For certain customers, we provide comprehensive sales analysis and active management of the prestige fragrance category. We believe these services distinguish us from our competitors and contribute to customer loyalty.
Seasonality
Our operations have historically been seasonal, with higher sales occurring in the first half of our fiscal year as a result of increased demand by retailers in anticipation of and during the holiday season. In the year ended June 30, 2007, approximately 59% of our net sales were made during the first half of our fiscal year. Due to product innovations and the size and timing of certain orders from our customers, sales, results of operations, working capital requirements and cash flows can vary significantly between quarters of the same and different years. As a result, 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.
Manufacturing, Supply Chain and Logistics
We use third-party contract manufacturers in the United States and Europe to obtain substantially all raw materials, components and packaging products and to manufacture finished products relating to our owned and licensed brands. Our fragrance and skin care products are primarily manufactured by Cosmetic Essence, Inc., an unrelated third party, in plants located in New Jersey and Roanoke, Virginia, under a manufacturing agreement that expires on January 31, 2010. Pricing is based on fixed costs per item. Third parties in Europe manufacture certain of our fragrance and cosmetic products. We also have a small manufacturing facility in South Africa primarily to manufacture local requirements of our products.
Except for the Cosmetic Essence, Inc. manufacturing agreement, as is customary in our industry, we generally do not have long-term or exclusive agreements with contract manufacturers of our owned and licensed brands or with fragrance manufacturers or suppliers of our distributed
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brands. We generally make purchases through purchase orders. We believe that we have good relationships with manufacturers of our owned and licensed brands and that there are alternative sources should one or more of these manufacturers become unavailable. We receive our distributed brands in finished goods form directly from fragrance manufacturers, as well as from other sources. Our ten largest fragrance manufacturers or suppliers of brands that are distributed by us on a non-exclusive basis accounted for approximately 28% of our cost of sales for the year ended June 30, 2007. The loss of, or a significant adverse change in our relationship with, any of our key fragrance manufacturers for our owned and licensed brands, such as Cosmetic Essence, Inc., or suppliers of our distributed fragrance brands could have a material adverse effect on our business, prospects, results of operations or financial condition.
Our fulfillment operations for the United States and certain other areas of the world are conducted out of a leased distribution facility in Roanoke, Virginia. The 400,000 square-foot Roanoke facility accommodates our distribution activities and houses a large portion of our inventory. Our fulfillment operations for Europe are conducted under a logistics services agreement by CEPL, an unrelated third party, at CEPL’s facility in Beville, France. The CEPL agreement expires in June 2008. While we insure our inventory and the Roanoke facility, the loss of either of these distribution facilities, as well as the inventory stored in those facilities, would require us to find replacement facilities and inventory and could have a material adverse effect on our business, prospects, results of operations, cash flows and financial condition.
Government Regulation
We and our products are subject to regulation by the Food and Drug Administration and the Federal Trade Commission in the United States, as well as by various other federal, state, local and international regulatory authorities in the countries in which our products are produced or sold. Such regulations principally relate to the ingredients, manufacturing, labeling, packaging and marketing of our products. We believe that we are in substantial compliance with such regulations, as well as with applicable federal, state, local and international and other countries’ rules and regulations governing the discharge of materials hazardous to the environment.
Management Information Systems
Our primary information technology systems discussed below provide a complete portfolio of business systems, business intelligence systems, and information technology infrastructure services to support our global operations:
| • | Logistics and supply chain systems, including purchasing, materials management, manufacturing, inventory management, order management, customer service, pricing, demand planning, warehouse management and shipping; |
| • | Financial and administrative systems, including general ledger, payables, receivables, personnel, payroll, tax, treasury and asset management; |
| • | Electronic data interchange systems to enable electronic exchange of order, status, invoice, and financial information with our customers, financial service providers and our partners within the extended supply chain; |
| • | Business intelligence and business analysis systems to enable management’s informational needs as they conduct business operations and perform business decision making; and |
| • | Information technology infrastructure services to enable seamless integration of our global business operations through Wide Area Networks (WAN), personal computing technologies, electronic mail, and service agreements with outsourced computing operations. |
These management information systems and infrastructure provide on-line business process support for our global business operations. Further, many of these capabilities have been extended into the operations of our U.S. customers and third party service providers to enhance these
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arrangements, with examples such as vendor managed inventory, third party distribution, third party manufacturing, inventory replenishment, customer billing, retail sales analysis, product availability, pricing information and transportation management.
As part of our continuing efforts to enhance the effectiveness and strategic value of our operations and systems, during the year ended June 30, 2007, we launched an e-commerce web site to sell our selected products directly to consumers, we implemented an enterprise resource planning (ERP) system for our Greater China operations, we implemented business intelligence systems to enable global purchasing analysis and improved forecasting effectiveness, we integrated a large portion of our prior Canada-based distribution services into our Roanoke logistics center, and we implemented vendor performance management processes.
We have back-up facilities to enhance the reliability of our management information systems. These facilities will allow us to continue to operate if our main facilities should fail. We also have a disaster recovery plan, which is tested periodically, to protect our business operations and customer information. We also have business interruption insurance to cover a portion of any disruption in our management information systems resulting from certain hazards.
Competition
The beauty industry is highly competitive and, at times, subject to rapidly changing consumer preferences and industry trends. Competition is generally a function of brand strength, assortment and continuity of merchandise selection, reliable order fulfillment and delivery, and level of brand support and in-store customer support. We compete with a large number of manufacturers and marketers of beauty products, some of which have substantially more resources than we do.
We believe that we compete primarily on the basis of product recognition, quality, performance, price, and our emphasis on providing value-added customer services, including category management services, to certain retailers. There are products that are better-known and more popular than the products manufactured or supplied by us. Many of our competitors are substantially larger and more diversified, and have substantially greater financial and marketing resources than we do, as well as greater name recognition and the ability to develop and market products similar to and competitive with those manufactured by us.
Employees
As of September 4, 2007, we had approximately 2,250 full-time employees and approximately 600 part-time employees in the United States and 17 foreign countries. None of our employees are covered by a collective bargaining agreement. We believe that our relationship with our employees is satisfactory.
Executive Officers of the Company
The following sets forth the names and ages of each of our executive officers as of September 4, 2007 and the positions they hold:
| Name |
Age | Position with the Company | ||
| E. Scott Beattie |
48 | Chairman, President and Chief Executive Officer | ||
| Stephen J. Smith |
47 | Executive Vice President and Chief Financial Officer | ||
| L. Hoy Heise |
61 | Executive Vice President, Chief Information Officer and Operations Planning | ||
| Michael H. Lombardi |
64 | Executive Vice President, Operations | ||
| Oscar E. Marina |
48 | Executive Vice President, General Counsel and Secretary | ||
| Elizabeth Park |
44 | Executive Vice President, Skin Care & Color Marketing and General Manager—Arden U.S. | ||
| Ronald L. Rolleston |
51 | Executive Vice President, Global Fragrance Marketing | ||
| Joel B. Ronkin |
39 | Executive Vice President, General Manager—North America Fragrances | ||
| Jacobus A. J. Steffens |
46 | Executive Vice President, General Manager—International |
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Each of our executive officers holds office for such term as may be determined by our board of directors. Set forth below is a brief description of the business experience of each of our executive officers.
E. Scott Beattie has served as Chairman of the Board of Directors since April 2000, as our President and Chief Executive Officer since August 2006, as our Chief Executive Officer since March 1998 and as a director of the company since November 1995. Mr. Beattie also served as our President from April 1997 to March 2003, as our Chief Operating Officer from April 1997 to March 1998, and as our Vice Chairman of the Board of Directors and Assistant Secretary from November 1995 to April 1997. Mr. Beattie is a director of Object Video, Inc., an information technology company. Mr. Beattie is also a director and a member of the Executive Committee of The Cosmetic, Toiletry & Fragrance Association and a member of the advisory board of the Ivey Business School.
Stephen J. Smith has served as our Executive Vice President and Chief Financial Officer since May 2001. Previously, Mr. Smith was with PricewaterhouseCoopers LLP, an international professional services firm, as partner from October 1993 until May 2001, and as manager from July 1987 until October 1993.
L. Hoy Heise has served as our Executive Vice President, Chief Information Officer and Operations Planning since May 2006 and as our Senior Vice President and Chief Information Officer from May 2004 until May 2006. From February 2003 until May 2004, Mr. Heise was the founder and principal of his own technology consulting firm. From June 1999 until May 2001, Mr. Heise was Senior Vice President of Gartner, an information technology research firm. Prior to that time, Mr. Heise worked in various management and consulting capacities for Renaissance Worldwide, a global provider of business process improvement and information technology consulting services.
Michael H. Lombardi has served as our Executive Vice President, Operations since March 2004, as our Senior Vice President, Operations since January 2001 and as Senior Vice President, Marketing/Supply Chain Operations with the Elizabeth Arden Company, a division of Unilever N.V., since April 1999. Prior to joining the Elizabeth Arden Company, Mr. Lombardi worked in various management capacities for Chesebrough Ponds, Inc.
Oscar E. Marina has served as our Executive Vice President, General Counsel and Secretary since March 2004, as our Senior Vice President, General Counsel and Secretary from March 2000 through February 2004, and as our Vice President, General Counsel and Secretary from March 1996 through March 2000. From October 1988 until March 1996, Mr. Marina was an attorney with the law firm of Steel Hector & Davis L.L.P. in Miami, becoming a partner of the firm in January 1995.
Elizabeth Park has served as our Executive Vice President, Skin Care & Color Marketing and General Manager — Arden U.S., since May 2006 and as our Senior Vice President, Global Marketing from March 2005 until May 2006. Prior to joining our company, Ms. Park was Senior Vice President Marketing U.S.A. for Lancôme, a division of L’Oreal Products from March 2003 until March 2005. From July 1995 to July 2002, Ms. Park held several marketing management positions with the Estee Lauder Companies.
Ronald L. Rolleston has served as our Executive Vice President, Global Fragrance Marketing since May 2006, as our Executive Vice President, Global Marketing since April 2003, as our Executive Vice President, Global Marketing and Prestige Sales from February 2002 until April 2003, as our Senior Vice President, Global Marketing from February 2001 through January 2002, and as our Senior Vice President, Prestige Sales from March 1999 through January 2001. Mr. Rolleston served as President of Paul Sebastian, Inc., a fragrance manufacturer, from September 1997 until January 1999. Mr. Rolleston served as Executive Vice President of Global Marketing of the Elizabeth Arden Company from January 1995 to March 1997 and as the General Manager of Europe for the Calvin Klein Cosmetics Company from May 1990 to September 1994.
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Joel B. Ronkin has served as our Executive Vice President, General Manager — North America Fragrances since May 2006, as our Executive Vice President and Chief Administrative Officer from March 2004 until May 2006, as our Senior Vice President and Chief Administrative Officer from February 2001 through February 2004, and as our Vice President, Associate General Counsel and Assistant Secretary from March 1999 through January 2001. From June 1997 through March 1999, Mr. Ronkin served as the Vice President, Secretary and General Counsel of National Auto Finance Company, Inc., an automobile finance company. From May 1992 until June 1997, Mr. Ronkin was an attorney with the law firm of Steel Hector & Davis L.L.P. in Miami, Florida.
Jacobus A.J. Steffens has served as our Executive Vice President, General Manager — International since March 2004 and as our Senior Vice President, General Manager — International from January 2001 through February 2004. Before joining the company, Mr. Steffens worked in various management capacities for divisions of Unilever N.V., including as the Chief Information Officer of Unilever’s European Ice Cream & Frozen Foods division from January 1997 until December 2000, as the Controller Global Marketing & Creative at the Elizabeth Arden Company from January 1992 until December 1995 and in various financial roles for Unilever’s Quest International Flavours and Fragrances division from the end of 1986 until December 1991.
The risk factors in this section describe the major risks to our business, prospects, results of operations and financial condition and should be considered carefully. In addition, these factors constitute our cautionary statements under the Private Securities Litigation Reform Act of 1995 and could cause our actual results to differ materially from those projected in any forward-looking statements (as defined in such act) made in this Annual Report on Form 10-K. Investors should not place undue reliance on any such forward-looking statements. Any statements that are not historical facts and that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions or future events or performance (often, but not always, through the use of words or phrases such as “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “intends,” “plans,” “believes” and “projects”) may be forward-looking and may involve estimates and uncertainties which could cause actual results to differ materially from those expressed in the forward-looking statements.
Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time, and it is not possible for us to predict all of such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
We do not have contracts with customers or most of our suppliers, so if we cannot maintain and develop relationships with customers and suppliers our business, prospects, results of operations and financial condition may be materially adversely affected.
We do not have long-term or exclusive contracts with any of our customers and generally do not have long-term or exclusive contracts with our suppliers of distributed brands. Our ten largest customers accounted for approximately 39% of our net sales in the year ended June 30, 2007. Our only customer who accounted for more than 10% of our net sales in the year ended June 30, 2007 was Wal-Mart (including Sam’s Club), who, on a global basis, accounted for approximately 18% of our net sales. In addition, our suppliers of distributed brands, which represented approximately 41% of our cost of sales for fiscal 2007, generally can, at any time, elect to supply products to our customers directly or through another distributor. Our suppliers of distributed brands may also choose to reduce or eliminate the volume of their products distributed by us. The loss of any of our key suppliers or customers, or a change in our relationship with any one of them, could have a material adverse effect on our business, prospects, results of operations and financial condition.
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We rely on third-party manufacturers for substantially all of our owned and licensed products.
We do not own or operate any significant manufacturing facilities. We use third-party manufacturers and suppliers to manufacture substantially all of our owned and licensed products. We currently obtain these products from a limited number of manufacturers and other suppliers. Our business, prospects, results of operations and financial condition could be materially adversely affected if our manufacturers were to experience problems with product quality or delays in the delivery of the finished products or the raw materials or components used to make such product.
The loss of or disruption in our distribution facilities may have a material adverse effect on our business.
We currently have one distribution facility in the United States and use a third-party fulfillment center in France for European distribution. These facilities house a large portion of our inventory. Any loss of or damage to these facilities or the inventory stored in these facilities, could adversely affect our business, prospects, results of operations and financial condition.
We may be adversely affected by factors affecting our customers’ businesses.
Factors that adversely impact our customers’ businesses may have an adverse effect on our business and results of operations also. These factors may include:
| • | any credit risks presented by the financial condition of our customers; |
| • | the effect of consolidation in the retail industry, including the closure of customer doors, and the uncertainty resulting therefrom; and |
| • | inventory reduction initiatives and other factors affecting customer buying patterns, including retail space committment to fragrances and cosmetics. |
We may be adversely affected by domestic and international economic conditions and other events that impact consumer confidence and demand.
We believe that consumer spending on beauty products is influenced by general economic conditions and the availability of discretionary income. Domestic or international general economic downturns, including periods of inflation or high gasoline prices or declining consumer confidence, may affect consumer purchasing patterns and result in reduced net sales to our customers. In addition, any reductions in travel or increases in restrictions on travelers’ ability to transport our products on airplanes due to general economic downturns, diseases, acts of war or terrorism could result in a material decline in the net sales and profitability of our travel retail business.
The beauty industry is highly competitive and if we cannot effectively compete our business and results of operations will suffer.
The beauty industry is highly competitive and can change rapidly due to consumer preferences and industry trends. We compete primarily with global prestige beauty companies, some of whom have greater resources than we have and brands with greater name recognition and consumer loyalty than our brands. Our products also compete with new products that often are accompanied by substantial promotional campaigns. Our success depends on our products’ appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to change, and on our ability to develop new products through product innovations and product line extensions, which involve numerous risks. We may also incur increased expenses in connection with product development, marketing and advertising that are not subsequently supported by a sufficient level of sales, which could negatively affect our results of operations. These competitive factors, as well as new product risks, could have an adverse effect on our business prospects, results of operations and financial condition.
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Our business strategy depends upon our ability to acquire or license additional brands or secure additional distribution arrangements and obtain the required financing for these agreements and arrangements.
Our business strategy contemplates the continued growth of our portfolio of owned, licensed and distributed brands. Our future expansion through acquisitions, new product licenses or new product distribution arrangements, if any, will depend upon our ability to identify suitable brands to acquire, license or distribute and our ability to obtain the required financing for these acquisitions, licenses or distribution arrangements, and thus depends on the capital resources and working capital available to us. We may not be able to identify, negotiate, finance or consummate such acquisitions, licenses or arrangements, or the associated working capital requirements, on terms acceptable to us, or at all, which could hinder our ability to increase revenues and build our business.
The success of our business depends, in part, on the demand for celebrity beauty products.
We have license agreements to manufacture, market and distribute a number of celebrity beauty products, including those of Elizabeth Taylor, Britney Spears, Hilary Duff, Danielle Steel and Mariah Carey. In fiscal 2007, we derived approximately 20% of our net sales from these celebrity beauty products. The demand for these products is, to some extent, dependent on the appeal to consumers of the particular celebrity and the celebrity’s reputation. To the extent that the celebrity fragrance category or a particular celebrity ceases to be appealing to consumers or a celebrity’s reputation is adversely affected, sales of the related products and the value of the brands can decrease materially and the duration of the applicable license agreement may be shortened.
We may not be able to successfully and cost-effectively integrate acquired businesses or new brands.
Acquisitions entail numerous integration risks and impose costs on us that could materially adversely affect our business and financial results, including:
| • | difficulties in assimilating acquired operations or products, including disruptions to our operations or the loss of key employees from acquired businesses; |
| • | diversion of management’s attention from our core business; |
| • | adverse effects on existing business relationships with suppliers and customers; |
| • | incurrence or assumption of additional debt and liabilities; and |
| • | incurrence of significant amortization expenses related to intangible assets and the potential impairment of acquired assets. |
Our business could be adversely affected if we are unable to successfully protect our intellectual property rights.
The market for our products depends to a significant extent upon the value associated with our trademarks and trade names. We own, or have licenses or other rights to use, the material trademark and trade name rights used in connection with the packaging, marketing and distribution of our major owned and licensed products both in the U.S. and in other countries where such products are principally sold. We also cannot assure you that the owners of the trademarks that we license can or will successfully maintain their intellectual property rights or that we will be able to comply with the terms set forth in the applicable license agreements, including among other things payment of minimum royalties, minimum marketing expenses and maintenance of certain levels of sales. Although most of our brand names are registered in the U.S. and in certain foreign countries in which we operate, we may not be successful in asserting trademark or trade name protection. In addition, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as the laws of the U.S. The costs required to protect our trademarks and trade names may be substantial.
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If other parties infringe on our intellectual property rights or the intellectual property rights that we license, the value of our brands in the marketplace may be diluted. In addition, any infringement of our intellectual property rights would also likely result in a commitment of our time and resources to protect these rights through litigation or otherwise. We may infringe on others’ intellectual property rights. One or more adverse judgments with respect to these intellectual property rights could negatively impact our ability to compete and could materially adversely affect our business, prospects, results of operations and financial condition.
We are subject to risks related to our international operations.
We operate on a global basis, with sales in approximately 90 countries. Approximately 37% of our fiscal 2007 net sales were generated outside of the United States. Our international operations could be adversely affected by:
| • | import and export license requirements; |
| • | trade restrictions; |
| • | changes in tariffs and taxes; |
| • | restrictions on repatriating foreign profits back to the United States; |
| • | changes in, or our unfamiliarity with, foreign laws and regulations; |
| • | difficulties in staffing and managing international operations; and |
| • | changes in social, political, legal and other conditions. |
Fluctuations in foreign exchange rates could adversely affect our results of operations and cash flows.
Our functional currency is the U.S. dollar. Our results of operations, debt, interest expense and a significant portion of our overhead expenses are reported in U.S. dollars. Approximately 37% of our net sales for fiscal 2007 were from our international operations, with a substantial portion of this amount denominated in currencies other than the U.S. dollar. Outside the United States, our sales and costs are denominated in a variety of currencies including the Euro, British pound, Swiss franc and Canadian and Australian dollar. A significant weakening of the currencies in which we generate sales relative to the U.S. dollar may adversely affect our ability to meet our U.S. dollar obligations and could adversely affect our results of operations and cash flows used to fund working capital.
Our quarterly results of operations fluctuate due to seasonality and other factors, and we may not have sufficient liquidity to meet our seasonal working capital requirements.
We generate a significant portion of our net income in the first half of our fiscal year as a result of the seasonality of sales combined with fixed operating expenses, interest expense and quarterly depreciation and amortization charges. Similarly, our working capital needs are greater during the first half of the fiscal year. In addition, we may experience variability in net sales and net income on a quarterly basis as a result of a variety of factors, including new product launches, the timing of customer orders and additions or losses of brands or distribution rights. If we were to experience a significant shortfall in sales or internally generated funds, we may not have sufficient liquidity to fund our business.
Our level of debt and debt service obligations, and the restrictive covenants in our revolving credit facility and our indenture for our 7 3/4% senior subordinated notes, may reduce our operating and financial flexibility and could adversely affect our business and growth prospects.
At June 30, 2007, we had total debt of approximately $323 million, including $225 million in aggregate principal amount outstanding under our 7 3/4% senior subordinated notes and $98 million
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outstanding on our revolving credit facility. Our indebtedness could adversely impact our business, prospects, results of operations and financial condition by; increasing our vulnerability to general adverse economic and industry conditions; restricting our ability to consummate acquisitions; requiring us to use cash flow from operations to make payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate requirements; and imposing operating and financial restrictions that may limit our operating and financial flexibility.
Specifically, our revolving credit facility and our indenture for our 7 3/4% senior subordinated notes limit or otherwise affect our ability to, among other things:
| • | incur additional debt; |
| • | pay dividends or make other restricted payments; |
| • | create or permit certain liens, other than customary and ordinary liens; |
| • | sell assets other than in the ordinary course of our business; |
| • | invest in other entities or businesses; and |
| • | consolidate or merge with or into other companies or sell all or substantially all of our assets. |
These restrictions could limit our ability to finance our future operations or capital needs, make acquisitions or pursue available business opportunities. Our revolving credit facility also requires us to maintain specified amounts of borrowing availability or maintain a debt service coverage ratio. Our ability to meet these conditions and our ability to service our debt obligations will depend upon our future operating performance, which can be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond our control. If our actual results deviate significantly from our projections, we may not be able to service our debt or remain in compliance with the conditions contained in our revolving credit facility, and we would not be allowed to borrow under the revolving credit facility. If we were not able to borrow under our revolving credit facility, we would be required to develop an alternative source of liquidity. We cannot assure you that we could obtain replacement financing on favorable terms or at all.
A default under our revolving credit facility could also result in a default under our indenture for our 7 3/4% senior subordinated notes. Upon the occurrence of an event of default under our indenture, all amounts outstanding under our other indebtedness may be declared to be immediately due and payable. If we were unable to repay amounts due on our secured debt, the lenders would have the right to proceed against the collateral granted to them to secure that debt.
Our success depends, in part, on the quality, efficacy and safety of our products.
Our success depends, in part, on the quality, efficacy and safety of our products. If our products are found to be defective or unsafe, or if they otherwise fail to meet our customers’ standards, our relationships with customers or consumers could suffer, the appeal of one or more of our brands could be diminished, and we could lose sales and/or become subject to liability claims, any of which could have a material adverse effect on our business, prospects, results of operations or financial condition.
Our success depends upon the retention and availability of key personnel and the succession of senior management.
Our success largely depends on the performance of our management team and other key personnel. Our future operations could be harmed if we are unable to attract and retain talented, highly qualified senior executives and other key personnel. In addition, if we are unable to effectively provide for the succession of senior management, including our chief executive officer, our business, prospects, results of operations and financial condition may be materially adversely affected.
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Our business is subject to regulation in the United States and internationally.
The manufacturing, distribution, formulation, packaging and advertising of our products and those we distribute are subject to numerous and complicated federal, state and foreign governmental regulations. Compliance with these regulations is difficult and expensive. If we fail to adhere, or are alleged to hav