| ELIZABETH ARDEN INC ITEM 1A RISK FACTORS The risk factors in this section describe the major risks to our business and should be considered carefully |
| In addition, these factors constitute our cautionary statements under the Private Securities Litigation Reform Act of 1995 and important factors that could cause our actual results to differ materially from those projected in forward-looking statements (as defined in such act) made in this Annual Report on Form 10-K Any statements that 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” 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 |
| Accordingly, any such statements are qualified in their entirety by reference to, and are accompanied by, the key factors discussed in this section that have a direct bearing on our business, prospects, results of operation and financial condition |
| We caution that the factors described in this section could cause our actual results to differ materially from those expressed in any forward-looking statements we make and that investors should not place undue reliance on any such forward-looking statements |
| Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances |
| New factors emerge from time to time, and it is not possible for us to predict all of such factors |
| Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements |
| Our absence of contracts with customers or suppliers and our ability to maintain and develop relationships with customers and suppliers |
| 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 |
| 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 |
| Our ten largest customers accounted for approximately 35prca of our net sales in the year ended June 30, LOGO 12 ______________________________________________________________________ [38]Table of Contents 2006 |
| Our only customer who accounted for more than 10prca of our net sales in the year ended June 30, 2006 was Wal-Mart, who, on a global basis, accounted for approximately 13prca of our net sales |
| In addition, our suppliers of distributed brands, which represented approximately 29prca of our cost of sales for fiscal 2006, 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 |
| Additional risks related to our customers include the customers’ buying patterns, including their purchase and retail floor space commitments for fragrance and cosmetics in general (compared with other product categories they sell) and their inventory reduction initiatives; the customers’ requirements for vendor margin support; any credit risks presented by the customers; the effect, including the closure of customer doors, of consolidation, and the uncertainty resulting there from |
| International and domestic economic and business changes that could impact consumer confidence or operations |
| We believe that consumer spending on beauty products is influenced by general economic conditions and the availability of discretionary income |
| Accordingly, we may experience sustained periods of declines in sales during economic downturns, including during periods of inflation or high gasoline prices, or in the event of terrorism or diseases affecting customers purchasing patterns |
| In addition, a general economic downturn may result in reduced traffic in our customers’ stores that may, in turn, result in reduced net sales to our customers |
| Impact of competitive products and pricing |
| The beauty industry is highly competitive and at times changes rapidly due to consumer preferences and industry trends |
| We compete primarily with global prestige beauty companies, some of who have significantly greater resources than we have |
| Our products compete for consumer recognition and shelf space with products that have achieved significant international, national and regional brand name recognition and consumer loyalty |
| Our products also compete with new products that often are accompanied by substantial promotional campaigns |
| We cannot guarantee that any new product will generate sufficient consumer interest and sales to support our expected cash flow and profitability |
| These factors, as well as changes in product mix to lower margin products, demographic trends, economic conditions, discount pricing strategies by competitors, direct sales by manufacturers to our customers could result in increased competition |
| We are subject to risks related to our international operations |
| Our international operations could be affected by foreign exchange rate fluctuations, import and export license requirements, trade restrictions, changes in tariffs and taxes, restrictions on repatriating foreign profits back to the United States, foreign investment, our unfamiliarity with foreign laws and regulations, difficulties in staffing and managing international operations, diseases affecting customer purchasing patterns, geopolitical conditions, such as terrorist attacks, war or other military action and changes in social, political, legal and other conditions affecting foreign operations |
| Fluctuations in foreign exchange rates could adversely affect our results of operations |
| Our functional currency is the US dollar |
| Our debt, interest expense and a significant portion of our overhead expenses are denominated in US dollars |
| However, approximately 40prca of our net sales for fiscal 2006 were denominated in currencies other than the US dollar |
| A significant weakening of the currencies in which we generate sales relative to the US dollar may adversely affect our ability to meet our US dollar obligations |
| In addition, our results of operations are reported in US dollars |
| Outside the United States, our sales and costs are denominated in a variety of currencies including the euro, British pound, Swiss franc and Australian dollar |
| Declines in these LOGO 13 ______________________________________________________________________ [39]Table of Contents currencies relative to the US dollar could adversely affect our results of operations and cash flows used to fund working capital when translated according to US generally accepted accounting principles |
| Our ability to acquire or license additional brands, secure additional distribution arrangements or obtain the required financing for these agreements and arrangements |
| Our business strategy contemplates the continued increase 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 the capital resources and working capital available to us |
| We may be unsuccessful in identifying, negotiating, financing and consummating such acquisitions, licenses or arrangements on terms acceptable to us, or at all, which could hinder our ability to increase revenues and build our business |
| Our ability to successfully and cost-effectively integrate acquired businesses or new brands |
| Acquisitions may entail numerous integration risks and impose costs on us that could affect our business and financial results, including: • difficulties in assimilating acquired operations or products, including 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 substantial debt and liabilities; and • incurrence of significant amortization expenses related to intangible assets and the potential impairment of acquired assets |
| Our level of indebtedness |
| At June 30, 2006, we had total debt of approximately dlra265 million, including dlra225 million in aggregate principal amount under our 7^ 3/4prca senior subordinated notes and dlra40 million outstanding on our revolving credit facility |
| In addition, we used approximately dlra88 million of borrowings under our revolving credit facility to fund the cash portion of the purchase price for the acquisition of certain assets of Sovereign Sales, LLC Subject to the restrictions in our revolving credit facility and the indenture governing our outstanding 7^ 3/4prca senior subordinated notes, we may incur significant additional indebtedness, which may be secured |
| Our indebtedness could have important consequences including making it more difficult for us to satisfy our obligations under our indebtedness, increase our vulnerability to general adverse economic and industry conditions, restrict our ability to consummate acquisitions, require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate requirements, limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate placing us at a competitive disadvantage compared to our competitors that have less debt; and limiting, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to borrow additional funds and pay dividends |
| Our future cash flow may be insufficient to meet the payment obligations of our indebtedness |
| Our ability to pay or to refinance our indebtedness will depend upon our future operating performance, which will be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond our control |
| LOGO 14 ______________________________________________________________________ [40]Table of Contents Debt service obligations and restrictive covenants in our revolving credit facility and our indenture for our 7^ 3/4prca senior subordinated notes may reduce our operating flexibility |
| Our revolving credit facility requires us to maintain specified amounts of borrowing capacity and to maintain a debt service coverage ratio |
| Our ability to meet those conditions can be affected by events beyond our control, and therefore we may be unable to meet those conditions |
| If our actual results deviate significantly from our projections, we may not remain in compliance with the conditions and 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 |
| Our default under our revolving credit facility could also result in a default under our indenture for our 7^ 3/4prca 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 |
| The indenture contains various covenants that limit our operating flexibility and our ability to engage in certain transactions |
| The retention and availability of key personnel and 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, including our chief executive officer, E Scott Beattie |
| In addition, there are risks associated with our ability to provide for the succession of senior management including our chief executive officer |
| We do not own or operate any significant manufacturing facilities |
| We use third-party manufacturers and suppliers to manufacture substantially all of our products |
| We currently obtain these products from a limited number of manufacturers and other suppliers |
| There are risks to our business if we were to experience delays in the delivery of the finished products or the raw materials or components used to make such products or if these suppliers were unable to supply product |
| The loss of or disruption in our distribution facilities |
| We currently have one distribution facility in the United States and are using the distribution facilities of Sovereign Sales, LLC and Riviera Concepts Inc |
| on a transition basis |
| The loss of these facilities, as well as the inventory stored in these facilities, would require us to find replacement facilities and assets |
| Our ability to 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 products both in the US and in other countries where such products are principally sold |
| Therefore, trademark and trade name protection is important to our business |
| Although most of our brand names are registered in the US 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 US The costs required to protect our trademarks and trade names may be substantial |
| LOGO 15 ______________________________________________________________________ [41]Table of Contents We currently hold exclusive license rights to use the trademarks of certain of our beauty and fragrance products pursuant to license agreements |
| We are required to comply with the terms set forth in the applicable license agreements, including among other things compliance with the payment of minimum royalties, minimum marketing expenses and maintenance of certain levels of sales or risk losing the manufacturing and distribution rights to the relevant products |
| Other parties may infringe on our intellectual property rights or intellectual property rights that we are licensed to use and may thereby dilute our brands in the marketplace |
| Any such 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 |
| Reductions in travel and restrictions on travelers could affect our travel retail business |
| We depend on travel for our travel retail business |
| Any reductions in travel and increases in restrictions on travelers’ ability to transport our products on airplanes, including as a result of general economic downturns, diseases, acts of war or terrorism could result in a material decline in sales and profitability of our travel retail business |
| We may not have sufficient working capital availability under our revolving credit facility to meet our seasonal working capital requirements |
| Our working capital requirements have been and will continue to be significant |
| To date, we have financed and expect to continue to finance our working capital requirements primarily through internally generated funds and our revolving credit facility |
| 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 quarterly results of operations fluctuate due to seasonality and other factors |
| We generate a significant portion of our net income and cash flow in the first half of the 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 timing of customer orders and additions or losses of brands or distribution rights |
| Changes in laws and accounting standards |
| Our future results could be adversely affected by changes in laws and regulations, including changes in accounting standards, taxation requirements (including tax-rate changes, new tax laws and revised tax law interpretations), consumer and privacy laws and product regulation laws in the US and other countries |
| Demand for celebrity beauty products We have signed license agreements to manufacture, market and distribute a number of celebrity beauty products, including for Elizabeth Taylor, Britney Spears, Hilary Duff, Danielle Steel and Mariah Carey |
| 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 a celebrity ceases to be appealing to consumers or the 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 license agreements may be shortened |
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