Exhibit D
ELIZABETH ARDEN FINANCIAL STATEMENTS
ELIZABETH ARDEN SKIN, COLOR AND FRAGRANCE,
ELIZABETH TAYLOR FRAGRANCE AND
WHITE SHOULDERS FRAGRANCE BUSINESS
STATEMENTS OF NET ASSETS TO BE SOLD
AS OF SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(DOLLARS IN MILLIONS)
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
ASSETS
Inventories ...................... $ 90.9 $ 71.4
Prepaid expenses ................. 0.6 0.6
Property, plant and equipment, net 21.5 23.5
-------- -------
Total assets ........... 113.0 95.5
-------- -------
LIABILITIES
Accrued sales returns ............ 11.7 15.5
Demonstration accrual ............ 7.4 9.6
-------- -------
Total liabilities ...... 19.1 25.1
-------- -------
Commitments and contingencies
Net assets to be sold ............ $ 93.9 $ 70.4
-------- -------
The accompanying notes are an integral part of these financial statements.
90
<PAGE>
ELIZABETH ARDEN SKIN, COLOR AND FRAGRANCE,
ELIZABETH TAYLOR FRAGRANCE AND
WHITE SHOULDERS FRAGRANCE BUSINESS
STATEMENTS OF NET SALES, COST OF SALES
AND DIRECT OPERATING EXPENSES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
SEPTEMBER 30,
-------------
2000 1999
---- ----
(UNAUDITED)
<S> <C> <C>
Net sales .......................................................... $ 402.0 $ 377.0
Cost of sales ...................................................... 129.7 120.4
-------- --------
272.3 256.6
Direct operating expenses:
Sales and marketing ...................................... 38.4 40.8
Advertising .............................................. 27.3 34.1
Promotions ............................................... 123.1 130.1
Other development ........................................ 9.6 10.6
Rent ..................................................... . 1.7 1.7
Impairment charge ........................................ 1.1 --
-------- --------
Total direct operating expenses ................... 201.2 217.3
-------- --------
Excess of net sales over cost of sales and direct operating expenses $ 71.1 $ 39.3
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
91
<PAGE>
ELIZABETH ARDEN SKIN, COLOR AND FRAGRANCE,
ELIZABETH TAYLOR FRAGRANCE AND
WHITE SHOULDERS FRAGRANCE BUSINESS
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
1. BACKGROUND AND DESCRIPTION OF THE BUSINESS
The accompanying financial statements have been prepared to present the net
assets to be sold and the net sales, cost of sales and direct operating expenses
of the Elizabeth Arden Skin, Color and Fragrance, Elizabeth Taylor Fragrance and
White Shoulders Fragrance Business (the "Arden business"), pursuant to a
purchase agreement (the "Agreement") dated October 30, 2000 between Conopco,
Inc, an indirect wholly owned subsidiary of Unilever PLC and Unilever N.V. (the
"Unilever Group") and French Fragrances, Inc. (the "Buyer"). Pursuant to the
Agreement, the Buyer will be acquiring certain assets, including inventories,
property, plant and equipment, and certain prepaid expenses, and assuming
certain liabilities, including the accrual for sales returns and demonstration
accrual, of the Arden business for approximately $300, subject to purchase price
adjustments.
The Arden business is an integrated operation of Elizabeth Arden ("Arden").
Arden is a worldwide business which is directly or indirectly wholly owned by
the Unilever Group. As such, the Arden business is a fully integrated operation
of Arden and the Unilever Group. Accordingly, the accompanying financial
statements of the Arden business present an aggregation of the Elizabeth Arden
Skin, Color and Fragrance, Elizabeth Taylor Fragrance and White Shoulders
Fragrance net assets and operations of Arden and the Unilever Group to be sold.
The remaining Arden business which is not part of the Agreement referred to
above includes the European Designer fragrance operations. As such, the
accompanying financial statements do not include any of the European Designer
fragrance operations.
Arden engages in the development, manufacturing and marketing of skin,
color and prestige fragrance (which include American and European Designer
fragrances) products. The American fragrances include the Elizabeth Taylor and
White Shoulders fragrance products. Arden's primary markets are North America,
Europe, and the Asia Pacific region. Arden sells its products through
international distributors and Unilever Group affiliates outside the U.S.
market.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited statement of net assets to be sold as of
September 30, 2000 and the statements of net sales, cost of sales and direct
operating expenses for the nine months ended September 30, 2000 and 1999 of the
Arden business have been prepared in accordance with generally accepted
accounting principles for interim financial information and the instructions to
92
<PAGE>
ELIZABETH ARDEN SKIN, COLOR AND FRAGRANCE,
ELIZABETH TAYLOR FRAGRANCE AND
WHITE SHOULDERS FRAGRANCE BUSINESS
NOTES TO UNAUDITED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS)
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
to be included in full year financial statements.
In the opinion of management, all adjustments considered necessary for a
fair presentation have been made. Such adjustments consist of those of a normal
recurring nature, with the exception of the restructuring and impairment charges
described in Note 5 and 6, respectively. The excess of net sales over cost of
sales and direct operating expenses for the nine months ended September 30, 2000
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000.
The unaudited nine-month financial statements contained herein should be
read in conjunction with the statement of net assets to be sold and statements
of net sales, cost of sales and direct operating expenses and related notes
thereto for the year ended December 31, 1999.
As an integrated operation of Arden and the Unilever Group, Arden did not
maintain the Arden business as a separate business unit and historically, the
Arden business did not, in the normal course of operations, prepare separate
financial statements. The accompanying financial statements are derived from the
historical accounting records of Arden and the Unilever Group and include all
net sales, cost of sales and direct operating expenses directly attributable to
the Arden business. Accordingly, the accompanying financial statements have been
prepared to present the net assets to be sold as of September 30, 2000 and
December 31, 1999 and the statement of net sales, cost of sales and direct
operating expenses for the nine months ended September 30, 2000 and 1999, for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission and are not intended to be a complete presentation of the
Arden business' financial position, results of operations and cash flows. A
statement of cash flows is not presented as the Arden business did not maintain
a cash balance, all cash flow activities were funded by Arden and the Unilever
Group, and a complete statement of cash flows is not prepared at this reporting
level.
The operations of the Arden business rely on Arden and the Unilever Group
for activities, including but not limited to, selling, marketing, sales order
processing, billing, collections, warehousing, distribution, information
technology, insurance, human resources, accounting, premises, regulatory,
research and development, treasury, tax and legal support. The cost of sales of
the Arden business presented in these statements include material costs, direct
labor, factory overhead and an allocation of freight, warehousing and
distribution costs. The direct operating expenses of the Arden business
presented in these statements include sales, marketing, advertising, promotion,
other development and rent costs. The sales and marketing costs include
allocations. Other development costs include market research, package design and
research and
93
<PAGE>
ELIZABETH ARDEN SKIN, COLOR AND FRAGRANCE,
ELIZABETH TAYLOR FRAGRANCE AND
WHITE SHOULDERS FRAGRANCE BUSINESS
NOTES TO UNAUDITED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS)
development expenses. The research and development expenses included in other
developments costs include allocations. Management believes that these
allocations are based on assumptions that are reasonable under the
circumstances. Allocations of general and administrative expenses, Unilever
Group corporate overhead, interest, amortization of intangibles and income taxes
have been excluded from these statements. Since the Arden business was not a
separate business unit, Arden had never segregated complete and reasonable
indirect operating cost information relating to the Arden business for financial
reporting purposes. Accordingly, it is not practical to isolate or allocate such
indirect costs to the Arden business. Due to the reliance of the Arden business
on Arden and the Unilever Group, and potential changes in the business by the
Buyer and the omission of various indirect operating expenses, the historical
operating results may not be indicative of future results.
All significant intercompany accounts and transactions within the Arden
business have been eliminated.
FOREIGN CURRENCY
The local currencies of the Arden business international operations
represent their respective functional currencies. Assets and liabilities of
foreign operations of the Arden business are translated from their respective
local currencies to U.S. dollars using exchange rates in effect at the end of
the reporting period. Net sales, cost of sales and direct operating expense
amounts are translated using the average exchange rates in effect during the
period.
Arden participates in the Unilever Group's hedging policies and activities
which are coordinated by a centralized Unilever treasury function. Gains and
losses arising from the Unilever Group's hedging activities have not been
allocated to these financial statements as the activities are performed by a
centralized treasury function for all Unilever businesses and the Arden business
does not specifically enter into any financial instruments. In addition, the
Buyer is not assuming any financial instrument contracts.
NET SALES
Net sales to third parties are recognized when title and risk of loss pass
to the customer. Sales are recorded net of returns and the accrued sales returns
liability represents management's estimate of future returns based on historical
experience and considering current external factors and market conditions.
94
<PAGE>
ELIZABETH ARDEN SKIN, COLOR AND FRAGRANCE,
ELIZABETH TAYLOR FRAGRANCE AND
WHITE SHOULDERS FRAGRANCE BUSINESS
NOTES TO UNAUDITED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS)
FREIGHT, WAREHOUSING AND DISTRIBUTION
Freight, warehousing and distribution included within cost of sales have
been allocated to the Arden business based on the volume of product shipments of
the Arden business in relation to the volume of product shipments of Arden.
Management believes these allocations are reasonable. The freight, warehousing
and distribution costs allocated to the Arden business for the nine months ended
September 30, 2000 and 1999 were $13.4 and $13.0, respectively.
SALES AND MARKETING EXPENSES
Arden maintains two separate sales and marketing forces in the U.S. These
are an Elizabeth Arden Skin, Color and Fragrance sales and marketing force and
an American and European Designer fragrance sales and marketing force. One sales
and marketing force is used for all markets outside of the U.S. As such, the
sales and marketing expense line includes the direct costs associated with the
U.S. Elizabeth Arden Skin, Color and Fragrance sales and marketing force, an
allocation of the U.S. American and European Designer fragrance sales and
marketing force and an allocation of such expenses for all markets outside the
U.S. The U.S. American and European Designer fragrance sales and marketing costs
have been allocated based on the net sales of the U.S. Elizabeth Taylor and
White Shoulders fragrance products in relation to the total net sales of the
U.S. American and European Designer fragrance products. The sales and marketing
costs for all markets outside of the U.S. have been allocated on a
country-by-country basis based on the net sales of the Arden business in
relation to total Arden net sales within each country. Management believes these
allocations are reasonable. The total sales and marketing expenses allocated to
the Arden business for the nine months ended September 30, 2000 and 1999,
excluding allocated restructuring charges (see Note 5), were $27.3 for each
period.
ADVERTISING AND PROMOTION
Costs associated with advertising and promotion are expensed in the year
incurred. Advertising expenses are principally comprised of print media,
television and radio advertising. Promotion expenses are principally comprised
of cooperative advertising, trade promotions and consumer promotions.
Advertising and promotion expenses represent costs directly relating to the
Arden business.
95
<PAGE>
ELIZABETH ARDEN SKIN, COLOR AND FRAGRANCE,
ELIZABETH TAYLOR FRAGRANCE AND
WHITE SHOULDERS FRAGRANCE BUSINESS
NOTES TO UNAUDITED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS)
RESEARCH AND DEVELOPMENT
Research and development costs included within the other development expense
line have been allocated to the Arden business based on the net sales of the
Arden business in relation to total Arden net sales. Management believes these
allocations are reasonable. The research and development costs allocated to the
Arden business for the nine months ended September 30, 2000 and 1999, excluding
allocated restructuring charges (see Note 5), were $4.6 and $5.7, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of net sales and expenses during the
reporting period. Actual results may differ from those estimates.
3. INVENTORIES
At September 30, 2000, inventories consist of the following:
Raw materials...................... $24.7
Work-in-process.................... 10.0
Finished goods..................... 56.2
-----
Total inventories........... $90.9
=====
4. PROPERTY, PLANT AND EQUIPMENT
At September 30, 2000, property, plant and equipment consist of the
following:
Store counters and display units................. $31.5
Molds, tools and dyes............................ 13.8
Furniture and fixtures........................... 5.1
Leasehold improvements........................... 5.1
Computers........................................ 4.5
Machinery and equipment.......................... 5.4
Other............................................ 2.1
-----
67.5
Less--Accumulated depreciation.................... (46.0)
-----
$21.5
=====
96
<PAGE>
ELIZABETH ARDEN SKIN, COLOR AND FRAGRANCE,
ELIZABETH TAYLOR FRAGRANCE AND
WHITE SHOULDERS FRAGRANCE BUSINESS
NOTES TO UNAUDITED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS)
5. RESTRUCTURING CHARGES
In June 2000, a restructuring was announced to reduce employee headcount. A
total restructuring charge of approximately $14 million was recorded by Arden of
which approximately $1.1 has been allocated to the Arden business for the
nine-month period ended September 30, 2000 based on the net sales of the Arden
business in relation to total Arden net sales. Substantially all of the $1.1
allocated expense relates to employee termination benefits for research,
development, and sales force personnel and $0.9 has been classified as other
development expenses and $0.2 has been classified as sales and marketing
expenses.
6. IMPAIRMENT CHARGE
In June 2000, a decision was made by Arden to dispose of its manufacturing
facility in Acton, England. A $1.1 asset impairment charge has been allocated to
the Arden business in 2000 based on the volume of production of the Arden
business in relation to the total Arden production at the Acton facility.
7. CONCENTRATION OF CREDIT RISK
While there is a concentration of risk in the retail industry, management
believes concentration of credit risk is limited due to the large number of
customers comprising the Arden business customer base and their dispersion
across geographic areas. No one customer represents more than 10% of net sales
in either period presented.
97
<PAGE>
ELIZABETH ARDEN SKIN, COLOR AND FRAGRANCE,
ELIZABETH TAYLOR FRAGRANCE AND
WHITE SHOULDERS FRAGRANCE BUSINESS
NOTES TO UNAUDITED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS)
8. GEOGRAPHIC AREAS
Information about the Arden business operations by geographic area for the
nine-month periods ended September 30, 2000 and 1999 are shown below:
<TABLE>
<CAPTION>
EXCESS OF NET
SALES OVER
COST OF SALES
AND DIRECT NET
NET OPERATING ASSETS
SALES EXPENSES TO BE SOLD
----- ------------- ----------
<S> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 2000
North America.............................................. $232.0 $ 30.7 $ 56.7
Europe . 139.0 36.6 28.0
Asia Pacific............................................... 26.3 0.7 7.3
Rest of the world.......................................... 4.7 3.1 1.9
------ ------- ------
Total............................................ $402.0 $ 71.1 $ 93.9
====== ======= ======
NINE MONTHS ENDED SEPTEMBER 30, 1999
North America.............................................. $209.3 $ 7.6
Europe . 141.0 30.5
Asia Pacific............................................... 22.1 (0.3)
Rest of the world.......................................... 4.6 1.5
------ -------
Total............................................ $377.0 $ 39.3
====== =======
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
In February 2000, Unilever United States (the parent of Conopco, Inc.) was
served with a consolidated complaint in a proceeding entitled Cosmetics Cases
pending in the Superior Court of California for Marin County. The complaint
alleges that the large department stores in California have engaged in a
conspiracy to fix the prices of "high-end" cosmetics in violation of the
California state antitrust law and the provisions of the California Unfair
Business Practices statute. The action is brought as a purported class action on
behalf of all residents of the State of California who purchased cosmetics from
the defendant's department stores in California in the four years prior to the
filing of the original complaint (which was filed in the fall of 1998).
98
<PAGE>
ELIZABETH ARDEN SKIN, COLOR AND FRAGRANCE,
ELIZABETH TAYLOR FRAGRANCE AND
WHITE SHOULDERS FRAGRANCE BUSINESS
NOTES TO UNAUDITED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS)
While Unilever United States, Inc. was served with the complaint, the plaintiff
has agreed to substitute Conopco, Inc. for Unilever United States, Inc. as a
defendant.
In June 2000, the plaintiffs served Conopco, Inc. with an amended
complaint, alleging that the operating divisions of Conopco, which includes
Elizabeth Arden, (together with other manufacturers who have also now been
served with the complaint) conspired with each other and with the department
stores in the alleged conspiracy to fix retail prices for "high-end" cosmetics.
The plaintiffs allege that the class has been damaged in an unknown amount.
Arden believes that the claim is without merit and is defending the litigation
vigorously. Should the plaintiffs prevail on this matter, it could have a
material and adverse impact on the net sales of the Arden business.
In the normal course of business, Arden may be a party to claims, disputes,
and legal and regulatory proceedings. Arden provides for these legal matters
where it is probable that a liability has been incurred and the amount of cost
could be reasonably estimated. While the ultimate outcome of these claims and
lawsuits cannot be readily determined, it is the opinion of management that such
claims and lawsuits, individually or in the aggregate, will not have a material
adverse effect on the net assets or results of operations of the business to be
sold.
10. TRANSITION SERVICES AGREEMENT
Pursuant to the Agreement, Conopco and the Buyer will enter into Transition
Services Agreements (the "TSA") whereby each party will be a provider of certain
business services to the other, and a receiver of certain business services from
the other for an agreed pricing. The principal business services include general
business continuity, manufacturing and distribution. The TSA will remain in
effect until such time that both parties mutually agree that the services are no
longer required.
99
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Unilever PLC and Unilever N.V.
We have audited the accompanying statement of net assets to be sold of the
Elizabeth Arden Skin, Color and Fragrance, Elizabeth Taylor Fragrance and White
Shoulders Fragrance Business (the "Arden business"), an integrated operation of
Elizabeth Arden, which is a business owned by Unilever PLC and Unilever N.V., as
of December 31, 1999, and the statements of net sales, cost of sales and direct
operating expenses for each of the three years in the period ended December 31,
1999. These financial statements are the responsibility of Elizabeth Arden's
management. Our responsibility is to express an opinion on these financial
statements based upon our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying financial statements were prepared to present the net
assets to be sold and the net sales, cost of sales and direct operating expenses
of the Arden business pursuant to a purchase agreement as described in Note 1
and for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission as described in Note 2 and are not intended
to be a complete presentation of the Arden business' financial position, results
of operations and cash flows.
The Arden business is a fully integrated operation of Elizabeth Arden,
which is a business owned by Unilever PLC and Unilever N.V. Consequently, as
indicated in Note 2, these financial statements have been derived from the
consolidated financial statements and accounting records of Elizabeth Arden,
Unilever PLC and Unilever N.V. Moreover, as indicated in Note 2, the Arden
business relies on Elizabeth Arden, Unilever PLC and Unilever N.V. for
administrative, management and other services. The financial position, results
of operations, and cash flows of the Arden business could differ from those that
would have resulted had the Arden business operated autonomously or as an entity
independent of Elizabeth Arden, Unilever PLC and Unilever N.V.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the net assets to be sold of the Arden business as of
December 31, 1999, and the net sales, cost of sales and direct operating
expenses for each of the three years in the period ended
101
<PAGE>
December 31, 1999, in conformity with accounting principles generally accepted
in the United States of America.
PricewaterhouseCoopers LLP
October 30, 2000
102
<PAGE>
ELIZABETH ARDEN SKIN, COLOR AND FRAGRANCE,
ELIZABETH TAYLOR FRAGRANCE AND
WHITE SHOULDERS FRAGRANCE BUSINESS
STATEMENT OF NET ASSETS TO BE SOLD
AS OF DECEMBER 31, 1999
(DOLLARS IN MILLIONS)
ASSETS
Inventories......................................... $71.4
Prepaid expenses.................................... 0.6
Property, plant and equipment, net.................. 23.5
-----
Total assets.............................. 95.5
-----
LIABILITIES
Accrued sales returns............................... 15.5
Demonstration accrual............................... 9.6
-----
Total liabilities......................... 25.1
-----
Commitments and contingencies.......................
Net assets to be sold............................... $70.4
-----
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
103
<PAGE>
ELIZABETH ARDEN SKIN, COLOR AND FRAGRANCE,
ELIZABETH TAYLOR FRAGRANCE AND
WHITE SHOULDERS FRAGRANCE BUSINESS
STATEMENTS OF NET SALES, COST OF SALES AND DIRECT OPERATING EXPENSES
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1999
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales ................................................................. $ 551.5 $ 526.1 $ 590.6
Cost of sales ............................................................. 174.6 163.0 182.7
-------- --------- ---------
376.9 363.1 407.9
-------- --------- ---------
Direct operating expenses:
Sales and marketing ............................................. 55.8 56.9 55.8
Advertising ..................................................... 48.1 55.4 59.9
Promotions ...................................................... 174.0 170.4 195.9
Other development ............................................... 14.4 14.9 18.0
Rent ............................................................ . 2.2 2.2 2.2
Total direct operating expenses .......................... 294.5 299.8 331.8
Excess of net sales over cost of sales and direct operating expenses ...... $ 82.4 $ 63.3 $ 76.1
-------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
104
<PAGE>
ELIZABETH ARDEN SKIN, COLOR AND FRAGRANCE,
ELIZABETH TAYLOR FRAGRANCE AND
WHITE SHOULDERS FRAGRANCE BUSINESS
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
1. BACKGROUND AND DESCRIPTION OF THE BUSINESS
The accompanying financial statements have been prepared to present the net
assets to be sold and the net sales, cost of sales and direct operating expenses
of the Elizabeth Arden Skin, Color and Fragrance, Elizabeth Taylor Fragrance and
White Shoulders Fragrance Business (the "Arden business"), pursuant to a
purchase agreement (the "Agreement") dated October 30, 2000 between Conopco,
Inc, an indirect wholly owned subsidiary of Unilever PLC and Unilever N.V. (the
"Unilever Group") and French Fragrances, Inc. (the "Buyer"). Pursuant to the
Agreement, the Buyer will be acquiring certain assets, including inventories,
property, plant and equipment, and certain prepaid expenses, and assuming
certain liabilities, including the accrual for sales returns and demonstration
accrual, of the Arden business for approximately $300, subject to purchase price
adjustments.
The Arden business is an integrated operation of Elizabeth Arden ("Arden").
Arden is a worldwide business which is directly or indirectly wholly owned by
the Unilever Group. As such, the Arden business is a fully integrated operation
of Arden and the Unilever Group. Accordingly, the accompanying financial
statements of the Arden business present an aggregation of the Elizabeth Arden
Skin, Color and Fragrance, Elizabeth Taylor Fragrance and White Shoulders
Fragrance net assets and operations of Arden and the Unilever Group to be sold.
The remaining Arden business which is not part of the Agreement referred to
above includes the European Designer fragrance operations. As such, the
accompanying financial statements do not include any financial information
relating to the European Designer fragrance operations.
Arden engages in the development, manufacturing and marketing of skin,
color and prestige fragrance (which include American and European Designer
fragrances) products. The American fragrances include the Elizabeth Taylor and
White Shoulders fragrance products. Arden's primary markets are North America,
Europe, and the Asia Pacific region. Arden sells its products through
international distributors and Unilever Group affiliates outside the U.S.
market.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
As an integrated operation of Arden and the Unilever Group, Arden did not
maintain the Arden business as a separate business unit and historically, the
Arden business did not, in the normal course of operations, prepare separate
financial statements. The accompanying financial statements are derived from the
historical accounting records of Arden and the Unilever Group
105
<PAGE>
ELIZABETH ARDEN SKIN, COLOR AND FRAGRANCE,
ELIZABETH TAYLOR FRAGRANCE AND
WHITE SHOULDERS FRAGRANCE BUSINESS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS)
and include all net sales, cost of sales and direct operating expenses directly
attributable to the Arden business. Accordingly, the accompanying financial
statements have been prepared to present the net assets to be sold as of
December 31, 1999 and the statement of net sales, cost of sales and direct
operating expenses for each of the three years in the period ended December 31,
1999, for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission and are not intended to be a complete
presentation of the Arden business' financial position, results of operations
and cash flows. A statement of cash flows is not presented as the Arden business
did not maintain a cash balance, all cash flow activities were funded by Arden
and the Unilever Group, and a complete statement of cash flows is not prepared
at this reporting level.
The operations of the Arden business rely on Arden and the Unilever Group
for activities, including but not limited to, selling, marketing, sales order
processing, billing, collections, warehousing
106
<PAGE>
ELIZABETH ARDEN SKIN, COLOR AND FRAGRANCE,
ELIZABETH TAYLOR FRAGRANCE AND
WHITE SHOULDERS FRAGRANCE BUSINESS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS)
distribution, information technology, insurance, human resources, accounting,
premises, regulatory, research and development, treasury, tax and legal support.
The cost of sales of the Arden business presented in these statements include
material costs, direct labor, factory overhead and an allocation of freight,
warehousing and distribution costs. The direct operating expenses of the Arden
business presented in these statements include sales, marketing, advertising,
promotion, other development and rent costs. The sales and marketing costs
include allocations. Other development costs include market research, package
design and research and development expenses. The research and development
expenses included in other development costs include allocations. Management
believes that these allocations are based on assumptions that are reasonable
under the circumstances. Allocations of general and administrative expenses,
Unilever Group corporate overhead, interest, amortization of intangibles and
income taxes have been excluded from these statements. Since the Arden business
was not a separate business unit, Arden had never segregated complete and
reasonable indirect operating cost information relating to the Arden business
for financial reporting purposes. Accordingly, it is not practical to isolate or
allocate such indirect costs to the Arden business. Due to the reliance of the
Arden business on Arden and the Unilever Group, and potential changes in the
business by the Buyer and the omission of various indirect operating expenses,
the historical operating results may not be indicative of future results.
All significant intercompany accounts and transactions within the Arden
business have been eliminated.
LONG-LIVED ASSETS
Arden continually evaluates the carrying value of its long-lived
assets for impairment. Any impairments would be recognized when the
expected future operating cash flows derived from such assets is less than
their carrying value.
FOREIGN CURRENCY
The local currencies of the Arden business international operations
represent their respective functional currencies. Assets and liabilities of
foreign operations of the Arden business are translated from their
respective local currencies to U.S. dollars using exchange rates in effect
at the end of the reporting period. Net sales, cost of sales and direct
operating expense amounts are translated using the average exchange rates
in effect during the period.
107
<PAGE>
ELIZABETH ARDEN SKIN, COLOR AND FRAGRANCE,
ELIZABETH TAYLOR FRAGRANCE AND
WHITE SHOULDERS FRAGRANCE BUSINESS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS)
Arden participates in the Unilever Group's hedging policies and activities
which are coordinated by a centralized Unilever treasury function. Gains and
losses arising from the Unilever Group's hedging activities have not been
allocated to these financial statements as the activities are performed by a
centralized treasury function for all Unilever businesses and the Arden business
does not specifically enter into any financial instruments. In addition, the
Buyer is not assuming any financial instrument contracts.
NET SALES
Net sales to third parties are recognized when title and risk of loss pass
to the customer. Sales are recorded net of returns and the accrued sales returns
liability represents management's estimate of future returns based on historical
experience and considering current external factors and market conditions.
FREIGHT, WAREHOUSING AND DISTRIBUTION
Freight, warehousing and distribution included within cost of sales have
been allocated to the Arden business based on the volume of product shipments of
the Arden business in relation to the volume of product shipments of Arden.
Management believes these allocations are reasonable. The freight, warehousing
and distribution costs allocated to the Arden business for the years ended
December 31, 1999, 1998 and 1997 were $17.7, $18.2 and $20.5, respectively.
SALES AND MARKETING EXPENSES
Arden maintains two separate sales and marketing forces in the U.S. These
are an Elizabeth Arden Skin, Color and Fragrance sales and marketing force and
an American and European Designer fragrance sales and marketing force. One sales
and marketing force is used for all markets outside of the U.S. As such, the
sales and marketing expense line includes the direct costs associated with the
U.S. Elizabeth Arden Skin, Color and Fragrance sales and marketing force, an
allocation of the U.S. American and European Designer fragrance sales and
marketing force and an allocation of such expenses for all markets outside the
U.S. The U.S. American and European Designer fragrance sales and marketing costs
have been allocated based on the net sales of the U.S. Elizabeth Taylor and
White Shoulders fragrance products in relation to the total net sales of the
U.S. American and European Designer fragrance products. The sales and marketing
costs for all markets outside of the U.S. have been allocated on a
country-by-country basis based on the net sales of the Arden business in
relation to total Arden net sales within each country. Management believes these
allocations are reasonable. The total sales and marketing expenses allocated to
the Arden business for the years ended December 31, 1999, 1998 and
108
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ELIZABETH ARDEN SKIN, COLOR AND FRAGRANCE,
ELIZABETH TAYLOR FRAGRANCE AND
WHITE SHOULDERS FRAGRANCE BUSINESS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS)
1997, excluding allocated restructuring charges (see Note 5), were $33.5, $36.7
and $40.9, respectively.
ADVERTISING AND PROMOTION
Costs associated with advertising and promotion are expensed in the year
incurred. Advertising expenses are principally comprised of print media,
television and radio advertising. Promotion expenses are principally comprised
of cooperative advertising, trade promotions and consumer promotions.
Advertising and promotion expenses represent costs directly relating to the
Arden business.
RESEARCH AND DEVELOPMENT
Research and development costs included within the other development
expense line have been allocated to the Arden business based on the net sales of
the Arden business in relation to total net Arden sales. Management believes
these allocations are reasonable. The research and development costs allocated
to the Arden business for the years ended December 31, 1999, 1998 and 1997 were
$7.6, $8.0 and $9.6, respectively.
INVENTORIES
Inventories are stated at the lower of cost (determined principally on a
first-in, first-out basis) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Depreciation is
determined using primarily the straight-line method over the estimated useful
lives of the assets.
109
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ELIZABETH ARDEN SKIN, COLOR AND FRAGRANCE,
ELIZABETH TAYLOR FRAGRANCE AND
WHITE SHOULDERS FRAGRANCE BUSINESS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS)
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of net sales and expenses
during the reporting period. Actual results may differ from those estimates.
3. INVENTORIES
At December 31, 1999, inventories consist of the following:
Raw materials...................... $20.1
Work-in-process.................... 13.7
Finished goods..................... 37.6
Total inventories........... $71.4
4. PROPERTY, PLANT AND EQUIPMENT
At December 31, 1999, property, plant and equipment consist of the
following:
ESTIMATED
USEFUL LIFE
Store counters and display units.......... $28.5 3 years
Molds, tools and dyes..................... 13.0 3 years
Furniture and fixtures.................... 5.7 14 years
Leasehold improvements.................... 5.1 Life of lease
Computers ................................ 4.9 3 years
Machinery and equipment................... 4.5 14 years
Other ................................... 2.0 Various
-----
63.7
Less--Accumulated depreciation...... (40.2)
=====
$23.5
=====
110
<PAGE>
ELIZABETH ARDEN SKIN, COLOR AND FRAGRANCE,
ELIZABETH TAYLOR FRAGRANCE AND
WHITE SHOULDERS FRAGRANCE BUSINESS
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
5. RESTRUCTURING CHARGES
In May 1998, an announcement was made regarding a worldwide restructuring
of the Arden business. Arden incurred approximately $18 million of restructuring
charges in total and the costs included in this charge which directly relate to
the Arden business have been allocated to the statement of net sales, cost of
sales and direct operating expenses. Expenses of $3.6 million and $5.7 million
have been allocated for the years ended December 31, 1999 and 1998,
respectively, based on the net sales of the Arden business in relation to the
total net sales of Arden. Substantially all of the allocated expenses relate to
employee termination benefits for the Arden sales force and such costs have been
classified as sales and marketing expenses.
6. RENT EXPENSE AND LEASE COMMITMENTS
Rent expense principally relating to Arden's Roanoke, Virginia distribution
center, its Stamford, Connecticut and Geneva, Switzerland office building
locations under operating leases amounted to approximately $3.2 for each of the
years ended December 31, 1999, 1998 and 1997, respectively. These operating
leases are being assumed by the Buyer.
The approximate minimum rental payments required under the Roanoke,
Virginia, Stamford, Connecticut and Geneva, Switzerland operating leases that
have initial or remaining noncancelable lease terms in excess of one year at
December 31, 1999 are:
2000............... $3.3
2001............... 3.8
2002............... 1.8
2003............... 1.1
2004............... 1.2
Thereafter......... 1.6
-----
$12.8
=====
7. CONCENTRATION OF CREDIT RISK
While there is a concentration of risk in the retail industry, management
believes concentration of credit risk is limited due to the large number of
customers comprising the Arden business customer base and their dispersion
across geographic areas. For the year ended December 31, 1999, one customer,
French Fragrances Inc., represented approximately 10% of net sales. No other one
customer represents more than 10% of net sales in any year presented.
111
<PAGE>
ELIZABETH ARDEN SKIN, COLOR AND FRAGRANCE,
ELIZABETH TAYLOR FRAGRANCE AND
WHITE SHOULDERS FRAGRANCE BUSINESS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS)
8. GEOGRAPHIC AREAS
Information about the Arden business operations by geographic area for the
three-year periods ended December 31 are shown below:
EXCESS OF NET
SALES OVER
COST OF SALES
AND DIRECT NET
NET OPERATING ASSETS
SALES EXPENSES TO BE SOLD
----- ------------- ----------
YEAR ENDED DECEMBER 31, 1999
North America ..................... $ 310.1 $ 25.6 $ 42.7
Europe ............................ 199.6 53.1 21.1
Asia Pacific ...................... 34.7 1.1 5.4
Rest of the world ................. 7.1 2.6 1.2
-------- -------- --------
Total ................... $ 551.5 $ 82.4 $ 70.4
======== ======== ========
YEAR ENDED DECEMBER 31, 1998
North America ..................... $ 288.0 $ 10.7
Europe ............................ 199.2 49.3
Asia Pacific ...................... 31.9 0.7
Rest of the world ................. 7.0 2.6
-------- ---------
Total ................... $ 526.1 $ 63.3
======== =========
YEAR ENDED DECEMBER 31, 1997
North America ..................... $ 313.2 $ 24.9
Europe ............................ 227.4 50.6
Asia Pacific ...................... 42.5 (2.0)
Rest of the world ................. 7.5 2.6
-------- ---------
Total ................... $ 590.6 $ 76.1
======== =========
9. COMMITMENTS AND CONTINGENCIES
In February 2000, Unilever United States (the parent of Conopco, Inc.) was
served with a consolidated complaint in a proceeding entitled Cosmetics Cases
pending in the Superior Court of California for Marin County. The complaint
alleges that the large department stores in California have engaged in a
conspiracy to fix the prices of "high-end" cosmetics in violation of
112
<PAGE>
ELIZABETH ARDEN SKIN, COLOR AND FRAGRANCE,
ELIZABETH TAYLOR FRAGRANCE AND
WHITE SHOULDERS FRAGRANCE BUSINESS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS)
the California state antitrust law and the provisions of the California Unfair
Business Practices statute. The action is brought as a purported class action on
behalf of all residents of the State of California who purchased cosmetics from
the defendant's department stores in California in the four years prior to the
filing of the original complaint (which was filed in the fall of 1998). While
Unilever United States, Inc. was served with the complaint, the plaintiff has
agreed to substitute Conopco, Inc. for Unilever United States, Inc. as a
defendant.
In June 2000, plaintiffs served Conopco, Inc. with an amended complaint,
alleging that the operating divisions of Conopco, which includes Elizabeth
Arden, (together with other manufacturers who have also now been served with the
complaint) conspired with each other and with the department stores in the
alleged conspiracy to fix retail prices for "high-end" cosmetics. The plaintiffs
allege that the class has been damaged in an unknown amount. Arden believes that
the claim is without merit and is defending the litigation vigorously. Should
the plaintiffs prevail on this matter, it could have a material and adverse
impact on the net sales of the Arden business.
In the normal course of business, Arden may be a party to claims, disputes,
and legal and regulatory proceedings. Arden provides for these legal matters
where it is probable that a liability has been incurred and the amount of cost
could be reasonably estimated. While the ultimate outcome of these claims and
lawsuits cannot be readily determined, it is the opinion of management that such
claims and lawsuits, individually or in the aggregate, will not have a material
adverse effect on the net assets or results of operations of the business to be
sold.
10. TRANSITION SERVICES AGREEMENT
Pursuant to the Agreement, Conopco and the Buyer will enter into Transition
Services Agreements (the "TSA") whereby each party will be a provider of certain
business services to the other, and a receiver of certain business services from
the other for an agreed pricing. The principal business services include general
business continuity, manufacturing and distribution. The TSA will remain in
effect until such time that both parties mutually agree that the services are no
longer required.
113
<PAGE>
ELIZABETH ARDEN SKIN, COLOR AND FRAGRANCE,
ELIZABETH TAYLOR FRAGRANCE AND
WHITE SHOULDERS FRAGRANCE BUSINESS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS)
11. SUBSEQUENT EVENT
In June 2000, a restructuring was announced to reduce employee headcount. A
total restructuring charge of approximately $14 million was recorded by Arden of
which approximately $1.1 has been allocated to the Arden business in 2000.
Substantially all of the $1.1 allocated expense relates to employee termination
benefits.
In June 2000, a decision was made by Arden to dispose of its manufacturing
facility in Acton, England. A $1.1 asset impairment charge has been allocated to
the Arden business in 2000 based on the volume of production of the Arden
business in relation to the total Arden production at the Acton facility.
114
