As filed with the Securities and Exchange Commission on May 17, 2004
Registration No. 333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
THE ESTEE LAUDER COMPANIES INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2408943
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
767 Fifth Avenue
New York, New York 10153
(212) 572-4200
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive office)
Sara E. Moss, Esq.
Senior Vice President,
General Counsel and Secretary
The Estee Lauder Companies Inc.
767 Fifth Avenue
New York, New York 10153
(212) 572-4200
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
With a copy to:
Jeffrey J. Weinberg, Esq. Jean E. Hanson, Esq.
Matthew Bloch, Esq. Fried, Frank, Harris, Shriver & Jacobson LLP
Weil, Gotshal & Manges LLP One New York Plaza
767 Fifth Avenue New York, New York 10004
New York, New York 10153 (212) 859-8000
(212) 310-8000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being
offered pursuant to dividend or interest reinvestment plans, please check the
following box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended (the "Securities Act"), other than securities
offered only in connection with dividend or interest reinvestment plans, please
check the following box: [ ]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
---------------------------------------------- ----------------------- ----------------------- ------------------- ---------------
Proposed
Proposed Maximum Amount of
Title of Each Class of Securities Amount To Be Maximum Offering Aggregate Registration
to be Registered Registered (1) Price Per Share (2) Offering Price (2) Fee
---------------------------------------------- ----------------------- ----------------------- ------------------- ---------------
Class A Common Stock, par value $.01 per share 13,000,000 shares $44.81 $582,530,000 $73,807
---------------------------------------------- ----------------------- ----------------------- ------------------- ---------------
(1) Includes 1,695,000 shares that the underwriters have the option to
purchase to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of the Securities Act, based on the average
of the high and low prices of the shares reported on the New York
Stock Exchange on May 14, 2004.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
--------------------------------------------------------------------------------
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
--------------------------------------------------------------------------------
Subject to completion, dated May 17, 2004
PRELIMINARY PROSPECTUS
11,305,000 Shares
ESTEE
LAUDER
COMPANIES
THE ESTEE LAUDER COMPANIES INC.
Class A Common Stock
----------------------------
This is an offering of 11,305,000 shares of Class A Common Stock of The Estee
Lauder Companies Inc. The selling stockholders identified in this prospectus
under the caption "Selling Stockholders" are offering all of the shares to be
sold in the offering. We will not receive any of the proceeds from the offering.
The Class A Common Stock and Class B Common Stock vote as a single class on all
matters, except as otherwise required by law, with each share of Class A Common
Stock entitling its holder to one vote and each share of Class B Common Stock
entitling its holder to ten votes. As of May 14, 2004, members of the Lauder
family owned shares of Class A Common Stock and Class B Common Stock having
90.9% of the outstanding voting power of our common stock.
The Class A Common Stock is listed on the New York Stock Exchange under the
symbol "EL". The last reported sale price of the Class A Common Stock on May 14,
2004 was $45.15 per share.
----------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
----------------------------
Per Share Total
-------------------- --------------------
Initial price to public.......................................... $____ $_____
Underwriting discount............................................ $____ $_____
Proceeds, before expenses, to the selling stockholders........... $____ $_____
To the extent that the underwriters sell more than 11,305,000 shares of common
stock, the underwriters have the option to purchase up to an additional
1,695,000 shares from the selling stockholders at the initial price less the
underwriting discount.
It is expected that delivery of the shares of Class A Common Stock offered
hereby will be made against payment therefor on or about ______ __, 2004.
GOLDMAN, SACHS & CO. JPMORGAN
----------------------------
Prospectus dated May __, 2004.
TABLE OF CONTENTS
PAGE
----
WHERE YOU CAN FIND MORE INFORMATION..............................................................2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..................................................2
FORWARD-LOOKING INFORMATION......................................................................4
THE COMPANY......................................................................................6
USE OF PROCEEDS.................................................................................10
PRICE RANGE OF CLASS A COMMON STOCK AND DIVIDENDS...............................................10
SELECTED CONSOLIDATED FINANCIAL INFORMATION.....................................................11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........14
SELLING STOCKHOLDERS............................................................................42
DESCRIPTION OF CAPITAL STOCK....................................................................44
UNDERWRITING....................................................................................48
LEGAL MATTERS...................................................................................51
EXPERTS.........................................................................................51
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"). As a result, we file reports and
other information with the Commission. You may read and copy the reports and
other information we file with the Commission at the Commission's public
reference facilities at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549. You may obtain information on the operation of the
public reference facilities by calling the Commission at 1-800-SEC-0330. Copies
of these materials can be obtained at prescribed rates. Our filings with the
Commission are also available on the Commission's home page on the Internet at
http://www.sec.gov, as well as in the "Investor Information" section of our
website on the Internet at http://www.elcompanies.com. Except for our filings
with the Commission that are incorporated by reference into this prospectus, the
information on our Internet web site is not a part of this prospectus.
We have filed with the Commission a registration statement on Form
S-3. This prospectus, which is a part of the registration statement, omits
certain information contained in the registration statement. Statements made in
this prospectus as to the contents of any contract, agreement or other document
are not necessarily complete. With respect to each contract, agreement or other
document filed as an exhibit to the registration statement, we refer you to that
exhibit for a more complete description of the matter involved, and each
statement is deemed qualified in its entirety by that reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Commission allows us to "incorporate by reference" the
information we file with the Commission. This permits us to disclose important
information to you by referencing these filed documents. We incorporate by
reference in this prospectus the following documents which have been filed with
the Commission:
(i) our Annual Report on Form 10-K for the fiscal year ended
June 30, 2003, excluding items 6, 7 and 8. The information
set forth in items 6 and 7 has been revised for the
discontinued operations of our former reporting unit that
sold jane brand products, and the revised information is
included in this prospectus. The information set forth in
item 8 has also been revised for such discontinued
operations and is included in our Current Report on Form
8-K dated May 17, 2004, which is incorporated by reference
in this prospectus;
(ii) our Quarterly Reports on Form 10-Q for the fiscal quarters
ended September 30, 2003, December 31, 2003, and March 31,
2004;
(iii) our Current Reports on Form 8-K dated July 16, 2003,
September 23, 2003, September 24, 2003, December 19, 2003,
January 6, 2004, May 11, 2004 and May 17, 2004; and
(iv) the description of our Class A Common Stock contained in
our Registration Statement on Form 8-A, dated November 8,
1995.
We also incorporate by reference all documents filed pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
prospectus and prior to the termination of this offering.
We will promptly provide without charge to you, upon written or oral
request, a copy of any or all of the documents incorporated by reference in this
prospectus, other than exhibits to those documents, unless the exhibits are
specifically incorporated by reference in those documents. Requests should be
directed to Investor Relations Department, The Estee Lauder Companies Inc., 767
Fifth Avenue, New York, New York 10153, telephone number (212) 572-4184.
You should consider any statement contained in a document
incorporated by reference into this prospectus to be modified or superceded to
the extent that a statement contained in this prospectus or in any subsequently
filed document that is also incorporated by reference into this prospectus,
modifies or conflicts with the earlier statement. You should not consider any
2
statement modified or superceded, except as modified or superceded, to
constitute a part of this prospectus.
----------------
Unless we otherwise indicate, (1) references to "we," "us," "our" and
"the Company" are to The Estee Lauder Companies Inc., a Delaware corporation,
and its subsidiaries and (2) references to a fiscal year refer to our fiscal
year which ends on June 30 of each year (and so, for example, "fiscal 2003"
refers to our fiscal year ended June 30, 2003). We sometimes refer in this
prospectus to our Class A Common Stock, par value $.01 per share, and our Class
B Common Stock, par value $.01 per share, collectively as our "common stock."
3
FORWARD-LOOKING INFORMATION
We and our representatives from time to time make written or oral
forward looking statements, including statements contained in this prospectus,
in our filings with the Commission, in our press releases and in our reports to
stockholders. The words and phrases "will likely result", "expect", "believe",
"planned", "will", "will continue", "may", "could", "should", "anticipated",
"estimate", "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements include, without limitation, our
expectations regarding sales, earnings or other future financial performance and
liquidity, product introductions, entry into new geographic regions, information
systems initiatives, new methods of sale and future operations or operating
results. Although we believe that our expectations are based on reasonable
assumptions within the bounds of our knowledge of our business and operations,
actual results may differ materially from our expectations. Factors that could
cause actual results to differ from expectations include, without limitation:
(1) increased competitive activity from companies in the
skin care, makeup, fragrance and hair care businesses, some of which
have greater resources than we do;
(2) our ability to develop, produce and market new products
on which future operating results may depend;
(3) consolidations, restructurings, bankruptcies and
reorganizations in the retail industry causing a decrease in the
number of stores that sell our products, an increase in the ownership
concentration within the retail industry, ownership of retailers by
our competitors and ownership of competitors by our customers that
are retailers;
(4) shifts in the preferences of consumers as to where and
how they shop for the types of products and services we sell;
(5) social, political and economic risks to our foreign or
domestic manufacturing, distribution and retail operations, including
changes in foreign investment and trade policies and regulations of
the host countries and of the United States;
(6) changes in the laws, regulations and policies that
affect, or will affect, our business, including changes in accounting
standards, tax laws and regulations, trade rules and customs
regulations, and the outcome and expense of legal or regulatory
proceedings;
(7) foreign currency fluctuations affecting our results of
operations and the value of our foreign assets, the relative prices
at which we and our foreign competitors sell products in the same
markets and our operating and manufacturing costs outside of the
United States;
(8) changes in global or local economic conditions that
could affect consumer purchasing, the willingness of consumers to
travel, the financial strength of our customers, the cost and
availability of capital, which we may need for new equipment,
facilities or acquisitions, and the assumptions underlying our
critical accounting estimates;
(9) shipment delays, depletion of inventory and increased
production costs resulting from disruptions of operations at any of
the facilities which, due to consolidations in our manufacturing
operations, now manufacture nearly all of our supply of a particular
type of product (i.e., focus factories);
(10) real estate rates and availability, which may affect
our ability to increase the number of retail locations at which we
sell our products and the costs associated with our other facilities;
(11) changes in product mix to products which are less
profitable;
4
(12) our ability to acquire or develop new information and
distribution technologies, on a timely basis and within our cost
estimates;
(13) our ability to capitalize on opportunities for
improved efficiency, such as globalization, and to integrate acquired
businesses and realize value therefrom; and
(14) consequences attributable to the events that are
currently taking place in the Middle East, including further attacks,
retaliation and the threat of further attacks or retaliation.
We assume no responsibility to update forward-looking statements made
herein or otherwise, except to the extent required by law.
5
THE COMPANY
The Estee Lauder Companies Inc., founded in 1946 by Estee and Joseph
Lauder, is one of the world's leading manufacturers and marketers of quality
skin care, makeup, fragrance and hair care products. Our products are sold in
over 130 countries and territories under the following well-recognized brand
names: Estee Lauder, Clinique, Aramis, Prescriptives, Origins, MoAoC, Bobbi
Brown, La Mer, Aveda, Stila, Jo Malone, Bumble and bumble, Darphin and Rodan &
Fields. We are also the global licensee for fragrances and cosmetics sold under
the Tommy Hilfiger, Donna Karan, kate spade and Michael Kors brands. Each brand
is distinctly positioned within the market for beauty products.
We are a pioneer in the cosmetics industry and believe we are a
leader in the industry due to the global recognition of our brand names, our
leadership in product innovation, our strong market position in key geographic
markets and the consistently high quality of our products. We sell our prestige
products principally through limited distribution channels to complement the
images associated with our brands. These channels, encompassing over 16,900
points of sale, consist primarily of upscale department stores, specialty
retailers, upscale perfumeries and pharmacies and, to a lesser extent,
freestanding company-owned stores and spas, our own and authorized retailer web
sites, stores on cruise ships, in-flight and duty- free shops. We believe that
our strategy of pursuing limited distribution strengthens our relationships with
retailers, enables our brands to be among the best selling product lines at the
stores and heightens the aspirational quality of our brands. We also sell
products at prestige salons (Aveda and Bumble and bumble) and plan to begin
selling newly developed brands at Kohl's Department Stores in fiscal 2005.
We have been controlled by the Lauder family since the founding of
our company. Members of the Lauder family, some of whom are directors, executive
officers and/or employees, beneficially own, directly or indirectly, as of May
14, 2004, shares of Class A Common Stock and Class B Common Stock having
approximately 90.9% of the outstanding voting power of the common stock.
PRODUCTS
SKIN CARE--Our broad range of skin care products addresses various
skin care needs for women and men. These products include moisturizers, creams,
lotions, cleansers, sun screens and self-tanning products, a number of which are
developed for use on particular areas of the body, such as the face or the hands
or around the eyes. Skin care products accounted for approximately 36% and 37%
of our net sales for the nine months ended March 31, 2004 and fiscal 2003,
respectively.
MAKEUP--We manufacture, market and sell a full array of makeup
products, including lipsticks, mascaras, foundations, eyeshadows, nail polishes
and powders. Many of the products are offered in an extensive array of shades
and colors. We also sell related items such as compacts, brushes and other
makeup tools. Makeup products accounted for approximately 37% and 37% of our net
sales for the nine months ended March 31, 2004 and fiscal 2003, respectively.
FRAGRANCE--We offer a variety of fragrance products for women and
men. The fragrances are sold in various forms, including eau de parfum sprays
and colognes, as well as lotions, powders, creams and soaps that are based on a
particular fragrance. Fragrance products accounted for approximately 22% and 21%
of our net sales for the nine months ended March 31, 2004 and fiscal 2003,
respectively.
HAIR CARE--Hair care products are offered mainly in salons and in
freestanding retail stores and include styling products, shampoos, conditioners,
and finishing sprays. Hair care products accounted for approximately 4% and 4%
of our net sales for the nine months ended March 31, 2004 and in fiscal 2003,
respectively.
Given the personal nature of our products and the wide array of
consumer preferences and tastes, as well as competition for the attention of
consumers, our strategy has been to market and promote our products through
distinctive brands seeking to address broad preferences and tastes. Each brand
6
has a single global image that is promoted with consistent logos, packaging and
advertising designed to enhance its image and differentiate it from other
brands.
ESTEE LAUDER--Estee Lauder brand products, which have been sold since
1946, are positioned as luxurious, classic and aspirational. We believe that
Estee Lauder brand products are technologically advanced and innovative and have
a worldwide reputation for excellence. The broad product line principally
consists of skin care, makeup and fragrance products that are presented in high
quality packaging.
CLINIQUE--First introduced in 1968, Clinique skin care and makeup
products are all allergy tested and 100% fragrance free and have been designed
to address individual skin types and needs. The products are based on the
research and related expertise of leading dermatologists. Clinique skin care
products are generally marketed as part of the 3-Step System: Cleanse,
Exfoliate, Moisturize. Clinique also offers fragrances for men and women and a
line of hair care products.
ARAMIS--We pioneered the marketing of prestige men's grooming and
skin care products and fragrances with the introduction of Aramis products in
1964. Aramis continues to offer one of the broadest lines of prestige men's
products.
PRESCRIPTIVES--We developed and introduced Prescriptives in 1979.
Prescriptives is positioned as a color authority with an advanced collection of
highly individualized products primarily addressing the makeup and skin care
needs of contemporary women with active lifestyles. The products are
characterized by simple concepts, minimalist design and an innovative image and,
through a system of color application and extensive range of makeup shades,
accommodate a diverse group of consumers.
ORIGINS--Origins was introduced in 1990. It is positioned as a
plant-based line of skin care, makeup and aromatherapy products that combine
time-tested botanical ingredients with modern science to promote total
well-being. Origins sells its products at our freestanding Origins stores and
through stores-within-stores (which are designed to replicate the Origins store
environment within a department store), at traditional retail counters, in
perfumeries and directly to consumers over the Internet.
TOMMY HILFIGER--We have an exclusive global license arrangement to
develop and market a line of men's and women's fragrances and cosmetics under
the Tommy Hilfiger brand. We launched the line in 1995 with a men's fragrance,
"tommy." Today, we manufacture and sell a variety of fragrances and ancillary
products for men and women.
MOAOC--MoAoC products comprise a broad line of color-oriented,
professional cosmetics and professional makeup tools targeting makeup artists
and fashion-conscious consumers. The products are sold through a limited number
of department and specialty stores, at freestanding MoAoC stores and directly to
consumers over the Internet. We acquired the companies behind MoAoC in three
stages: in December 1994, March 1997 and February 1998.
BOBBI BROWN--In October 1995, we acquired the Bobbi Brown line of
color cosmetics, professional makeup brushes and skin care products. Bobbi Brown
products are manufactured to our specifications, primarily by third parties, and
sold through a limited number of department and specialty stores and directly to
consumers over the Internet.
LA MER--La Mer products primarily consist of moisturizing creams,
lotions, cleansers, toners and other skin care products. The line, which is
available in very limited distribution in the United States and certain other
countries, is an extension of the initial Creme de la Mer product that we
acquired in 1995.
DONNA KARAN COSMETICS--In November 1997, we obtained the exclusive
global license to develop, market, and distribute a line of fragrances and other
cosmetics under the Donna Karan New York and DKNY trademarks, including certain
products that were originally sold by The Donna Karan Company. We launched the
7
first DKNY women's fragrance in fiscal 2000 and the first DKNY men's fragrance
in fiscal 2001. Under this license, fragrances have been expanded to include
extensive lines of companion bath and body products.
AVEDA--We acquired the Aveda business in December 1997 and have since
acquired selected Aveda distributors and retail stores. Aveda, a prestige hair
care leader, is a manufacturer and marketer of plant-based hair care, skin care,
makeup and fragrance products. We sell Aveda products to third-party
distributors and prestige salons and spas, cosmetology schools and specialty
retailers, and directly to consumers at our own freestanding Aveda Experience
Centers and certain Aveda Institutes.
STILA--In August 1999, we acquired the business of Los-Angeles-based
Stila Cosmetics, Inc. Stila is known for its stylish, wearable makeup products
and eco-friendly packaging and has developed a following among young,
fashion-forward consumers. Stila products are currently available at the brand's
flagship store in Los Angeles, California, and also in limited distribution in
the United States and certain other countries.
JO MALONE--We acquired London-based Jo Malone Limited in October
1999. Jo Malone is known for its prestige skin care, fragrance and hair care
products showcased at its flagship store in London. Products are also available
through a company catalogue, at freestanding stores and at a very limited group
of specialty stores principally in the United States, Canada and the United
Kingdom.
BUMBLE AND BUMBLE--In June 2000, we acquired a controlling majority
equity interest in Bumble and Bumble Products, LLC, a marketer and distributor
of quality hair care products, and Bumble and Bumble, LLC, the operator of a
premier hair salon in New York City. Bumble and bumble styling and other hair
care products are distributed to top-tier salons and select specialty stores.
The founder and two of his partners own the remaining equity interests and have
continued to manage the domestic operations.
KATE SPADE BEAUTY--In November 1999, we obtained exclusive worldwide
rights to use the kate spade trademark and related trademarks for the
manufacture, marketing, distribution and sale of beauty products. During fiscal
2002, we launched the first products, a distinctive and personal signature
fragrance and companion products.
DARPHIN--In April 2003, we acquired Laboratoires Darphin, the
Paris-based company dedicated to the development, manufacture and marketing of
prestige skin care and makeup products which are distributed through high-end
independent pharmacies and specialty stores.
MICHAEL KORS--In May 2003, we entered into a license agreement for
fragrances and beauty products under the "Michael Kors" trademarks and purchased
certain related rights and inventory from another party. All fragrances
including MICHAEL and MICHAEL for Men, as well as ancillary bath and body
products, are sold in departments stores, specialty stores, at freestanding
Michael Kors boutiques and over the Internet.
RODAN & FIELDS--In July 2003, we acquired the Rodan & Fields skin
care line launched in 2002 by Stanford University-trained dermatologists Katie
Rodan, M.D. and Kathy Fields, M.D. The line offers solutions for specific skin
problems, targeting them with individually packaged, dedicated regimens with the
mission of maximizing the health and well-being of the skin. The line is
currently sold in select U.S. specialty stores and over the Internet at
rodanandfields.com.
In addition to the foregoing brands, we manufacture and sell Kiton
and Toni Gard products as a licensee.
8
RECENT DEVELOPMENTS
On April 24, 2004, our Founding Chairman, Mrs. Estee Lauder, passed
away. As a result, the royalty payments made to her since 1969 in connection
with our purchase of the "Estee Lauder" trademark outside the United States, and
which is reported on our consolidated statements of earnings as "Related Party
Royalties", ceased to accrue. Accordingly, we estimate that we will save about
$3.8 million, or $2.3 million after tax, in operating expenses for the remainder
of fiscal 2004.
In addition, as a result of Mrs. Lauder's death, the put right of the
holders of all $360.0 million aggregate principal amount of Series A Cumulative
Redeemable Preferred Stock due 2015 ("2015 Preferred Stock") and our right to
call $291.6 million aggregate principal amount of the 2015 Preferred Stock
became exercisable.
REDEMPTION OF SERIES A CUMULATIVE REDEEMABLE PREFERRED STOCK DUE 2015
On May 11, 2004, we called for redemption all $291.6 million
aggregate principal amount of 2015 Preferred Stock that could be redeemed at
that time. The redemption date has been set for June 10, 2004. We will use cash
on hand to fund the redemption.
Upon redemption, the dividend rate on the remaining $68.4 million
principal amount of 2015 Preferred Stock will be reduced, for the period from
April 25, 2004 through June 30, 2004, to 0.62% per annum, which is a rate based
on the after-tax yield on six-month U.S. Treasuries. So long as the remaining
shares of 2015 Preferred Stock are outstanding, the dividend rate will be reset
semi-annually in January and July at the then existing after-tax yield on
six-month U.S. Treasuries. The remaining $68.4 million principal amount of 2015
Preferred Stock may be put to us at any time, but may not be called for
redemption by us until May 24, 2005.
As a result of the redemption of the $291.6 million principal amount
of 2015 Preferred Stock and the reduction of the dividend on the remaining 2015
Preferred Stock, we expect to save, net of financing costs, approximately $14.9
million in fiscal 2005.
COMMON STOCK REPURCHASE PLAN
On May 11, 2004, our Board of Directors authorized the repurchase of
up to another 10.0 million shares of Class A Common Stock or about 4% of the
total outstanding common stock. This increases the total authorization to 28.0
million shares, of which 16.3 million have been repurchased to date. As of May
14, 2004, we had a total of approximately 227.6 million shares of common stock
outstanding.
Repurchases will be made from time to time in the open market or in
private transactions, and there will be no specific time frame. The repurchased
shares will be held as treasury shares and may be used for general corporate
purposes including employee stock option programs. Internally generated cash
flow will be used to fund the purchases.
---------------
Our principal executive offices are located at 767 Fifth Avenue, New
York, New York 10153. The telephone number at that location is (212) 572-4200.
9
USE OF PROCEEDS
We will not receive any proceeds from the sales of the shares of
Class A Common Stock. All of the shares of Class A Common Stock being offered
are beneficially owned by the selling stockholders named in this prospectus.
PRICE RANGE OF CLASS A COMMON STOCK AND DIVIDENDS
Our Class A Common Stock is publicly traded on the NYSE under the
symbol "EL". The following table sets forth for the fiscal quarters indicated
the high and low sales prices for the Class A Common Stock, as reported on the
NYSE Composite Tape, and the dividends per share declared in respect of those
quarters. The last reported sale price of the Class A Common Stock on May 14,
2004 was $45.15 per share.
MARKET PRICE OF
CLASS A
COMMON STOCK
------------
CASH
HIGH LOW DIVIDENDS
---- --- ---------
FISCAL 2002
First Quarter.................................................. $43.55 $30.30 $0.05
Second Quarter................................................. 34.90 29.25 0.05
Third Quarter.................................................. 35.75 29.25 0.05
Fourth Quarter ................................................ 38.80 33.50 0.05
FISCAL 2003
First Quarter.................................................. $35.99 $25.80 $ --
Second Quarter................................................. 30.10 25.20 0.20
Third Quarter.................................................. 31.04 25.73 --
Fourth Quarter................................................. 35.99 28.91 --
FISCAL 2004
First Quarter.................................................. $37.99 $32.60 $ --
Second Quarter................................................. 40.20 34.21 0.30
Third Quarter ................................................. 44.58 37.55 --
Fourth Quarter (through May 14, 2004).......................... 47.09 43.00 --
We expect to continue the payment of cash dividends in the future,
but there can be no assurance that the Board of Directors will continue to
declare dividends.
As of May 14, 2004, there were approximately 4,202 record holders of
Class A Common Stock and 20 record holders of Class B Common Stock.
10
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following income statement and balance sheet information has been
derived from our consolidated financial statements as of and for the nine-month
periods ended March 31, 2004 and March 31, 2003 and as of and for each of the
years in the five-year period ended June 30, 2003. You should read this
information along with our consolidated financial statements and the related
notes incorporated in this prospectus by reference. See "Incorporation of
Certain Documents by Reference." The results of interim periods are not
necessarily indicative of results that may be expected for the full year.
NINE MONTHS ENDED MARCH 31, YEAR ENDED JUNE 30,
---------------------------------- ------------------------------------------------------
2004 2003 2003 2002 2001 2000 1999
---- ---- ---- ---- ---- ---- ----
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
STATEMENT OF EARNINGS DATA:
Net sales (a)..................... $4,387.3 $3,876.7 $5,096.0 $4,711.5 $4,667.7 $4,440.3 $4,040.3
Gross profit (a).................. 3,251.9 2,839.6 3,771.6 3,451.0 3,441.3 3,202.3 2,877.5
Operating income.................. 518.3 416.1 503.7 342.1 495.6 515.8 456.9
Interest expense, net (g)......... 21.8 7.0 8.1 9.8 12.3 17.1 16.7
Earnings before income taxes,
minority interest, discontinued
operations and accounting
change (b)..................... 496.5 409.1 495.6 332.3 483.3 498.7 440.2
Provision for income taxes........ 185.7 136.0 163.3 114.7 174.0 184.6 167.3
Minority interest, net of tax..... (6.7) (3.9) (6.7) (4.7) (1.9) -- --
Discontinued operations, net
of tax (c)..................... (33.1) (2.4) (5.8) (21.0) -- -- --
Cumulative effect of a change
in accounting principle, net
of tax......................... -- -- -- -- (2.2) -- --
Net earnings (b).................. 271.0 266.8 319.8(d) 191.9(e) 305.2(f) 314.1 272.9
Preferred stock dividends (g)..... -- 17.6 23.4 23.4 23.4 23.4 23.4
Net earnings attributable to
common stock (b)............... 271.0 249.2 296.4(d) 168.5(e) 281.8(f) 290.7 249.5
PER SHARE DATA:
Net earnings per common
share from continuing
operations (b):
Basic.......................... $1.33 $1.08 $1.30(d) $0.80(e) $1.19(f) $1.22 $1.05
Diluted........................ $1.31 $1.07 $1.29(d) $0.79(e) $1.17(f) $1.20 $1.03
Net earnings per common share (b):
Basic.......................... $1.19 $1.07 $1.27(d) $0.71(e) $1.18(f) $1.22 $1.05
Diluted........................ $1.17 $1.06 $1.26(d) $0.70(e) $1.16(f) $1.20 $1.03
Weighted average common shares
outstanding:
Basic.......................... 228.3 233.5 232.6 238.2 238.4 237.7 237.0
Diluted........................ 231.4 235.5 234.7 241.1 242.2 242.5 241.2
Cash dividends declared per
common share:.................. $.30 $.20 $.20 $.20 $.20 $.20 $.1775
11
AT
MARCH 31, AT JUNE 30,
---------- ---------------------------------------------------------------------
2004 2003 2002 2001 2000 1999
---- ---- ---- ---- ---- ----
(UNAUDITED)
(IN MILLIONS)
BALANCE SHEET DATA:
Working capital...................... $1,189.9 $ 791.3 $ 968.0 $ 882.2 $ 716.7 $ 708.0
Total assets......................... 3,942.1 3,349.9 3,416.5 3,218.8 3,043.3 2,746.7
Total debt (g)....................... 841.6 291.4 410.5 416.7 425.4 429.1
Redeemable preferred stock (g)....... -- 360.0 360.0 360.0 360.0 360.0
Stockholders' equity................. 1,641.0 1,423.6 1,461.9 1,352.1 1,160.3 924.5
------------------------
(a) Effective January 1, 2002, we adopted Emerging Issues Task Force ("EITF")
Issue No. 01-9, "Accounting for Consideration Given by a Vendor to a
Customer." Upon adoption of this Issue, we reclassified revenues
generated from our purchase with purchase activities as sales and the
costs of our purchase with purchase and gift with purchase activities as
cost of sales, which were previously reported net as operating expenses.
Operating income has remained unchanged by this adoption. For purposes of
comparability, these reclassifications have been reflected retroactively
for all periods presented.
(b) Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 142
"Goodwill and Other Intangible Assets," financial results for periods
subsequent to July 1, 2001 exclude goodwill amortization. Goodwill
amortization included in fiscal 2001, 2000 and 1999 was $20.9 million
($13.4 million after tax), $17.6 million ($11.1 million after tax) and
$13.3 million ($8.2 million after tax), respectively. Excluding the
effect of goodwill amortization in these same periods, diluted earnings
per share would have been higher by $.06, $.05 and $.03, respectively.
(c) In December 2003, we committed to a plan to sell the assets and
operations of our former reporting unit that sold jane brand products and
we sold them in February 2004. As a result, all consolidated statements
of earnings information in the consolidated financial statements and
footnotes for fiscal 2004, 2003 and 2002 has been restated for
comparative purposes to reflect that reporting unit as discontinued
operations. Earnings data of the discontinued operation for fiscal 2001,
2000 and 1999 is not material to the consolidated results of operations
and has not been restated in the consolidated financial statements, nor
in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained in this prospectus.
(d) Net earnings, net earnings attributable to common stock, net earnings per
common share from continuing operations and net earnings per common share
for the year ended June 30, 2003 included a special charge related to the
proposed settlement of a legal action of $13.5 million, after-tax, or
$.06 per diluted common share.
(e) Net earnings, net earnings attributable to common stock, net earnings per
common share from continuing operations and net earnings per common share
for the year ended June 30, 2002 included a restructuring charge of $76.9
million (of which $0.5 million was included in discontinued operations),
after tax, or $.32 per diluted common share, and a one-time charge of
$20.6 million, or $.08 per common share, attributable to the cumulative
effect of adopting SFAS No. 142, "Goodwill and Other Intangible Assets,"
which is attributable to our former reporting unit that sold jane brand
products and is included in discontinued operations.
(f) Net earnings, net earnings attributable to common stock, net earnings per
common share from continuing operations and net earnings per common share
for the year ended June 30, 2001 included restructuring and other
12
non-recurring charges of $40.3 million, after tax, or $.17 per diluted
common share, and a one-time charge of $2.2 million, after tax, or $.01
per diluted common share, attributable to the cumulative effect of
adopting SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities".
(g) For the nine months ended March 31, 2004, there was an increase of
approximately $14.4 million in interest expense, net and a corresponding
decrease in preferred stock dividends as a result of the adoption of SFAS
No. 150 (see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Recently Issued Accounting Standards").
Additionally, in connection with this pronouncement, redeemable preferred
stock has been reclassified as a component of total debt subsequent to
June 30, 2003.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
------------------------------------------
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in conformity with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses reported in those financial statements. These
judgments can be subjective and complex, and consequently actual results could
differ from those estimates. Our most critical accounting policies relate to
revenue recognition; concentration of credit risk; inventory; pension and other
postretirement benefit costs; goodwill and other intangible assets; income
taxes; and derivatives.
REVENUE RECOGNITION
Generally, revenues from merchandise sales are recorded at the time
the product is shipped to the customer. We report our sales levels on a net
sales basis, which is computed by deducting from gross sales the amount of
actual returns received and an amount established for anticipated returns.
As is customary in the cosmetics industry, our practice is to accept
returns of our products from retailers if properly requested, authorized and
approved. In accepting returns, we typically provide a credit to the retailer
against sales and accounts receivable from that retailer on a dollar-for-dollar
basis.
Our sales return accrual is a subjective critical estimate that has a
direct impact on reported net sales. This accrual is calculated based on a
history of gross sales and actual returns by region and product category. In
addition, as necessary, specific accruals may be established for future known or
anticipated events. As a percentage of gross sales, sales returns were 5.1%,
4.8% and 4.9% in fiscal 2003, 2002 and 2001, respectively.
CONCENTRATION OF CREDIT RISK
An entity is more vulnerable to concentrations of credit risk if it
is exposed to risk of loss greater than it would have had it mitigated its risk
through diversification of customers. Such risks of loss manifest themselves
differently, depending on the nature of the concentration, and vary in
significance.
We have three major customers that owned and operated retail stores
that in the aggregate accounted for approximately $1.24 billion, or 24%, of our
consolidated net sales in fiscal 2003 and $179.8 million, or 28%, of our
accounts receivable at June 30, 2003. These customers sell products primarily
within North America. Although management believes that these customers are
sound and creditworthy, a severe adverse impact on their business operations
could have a corresponding material adverse effect on our net sales, cash flows,
and/or financial condition.
In the ordinary course of business, we have established an allowance
for doubtful accounts and customer deductions in the amount of $31.8 million and
$30.6 million as of June 30, 2003 and 2002, respectively. Our allowance for
doubtful accounts is a subjective critical estimate that has a direct impact on
reported net earnings. This reserve is based upon the evaluation of accounts
receivable aging, specific exposures and historical trends.
INVENTORY
We state our inventory at the lower of cost or fair market value,
with cost being determined on the first-in, first-out (FIFO) method. We believe
FIFO most closely matches the flow of our products from manufacture through
sale. The reported net value of our inventory includes saleable products,
promotional products, raw materials and componentry that will be sold or used in
future periods. Inventory cost includes raw materials, direct labor and
overhead.
We also record an inventory obsolescence reserve, which represents
the difference between the cost of the inventory and its estimated market value,
based on various product sales projections. This reserve is calculated using an
14
estimated obsolescence percentage applied to the inventory based on age,
historical trends and requirements to support forecasted sales. In addition, and
as necessary, we may establish specific reserves for future known or anticipated
events.
PENSION AND OTHER POSTRETIREMENT BENEFIT COSTS
We offer the following benefits to some or all of our employees: a
domestic trust-based noncontributory defined benefit pension plan ("U.S. Plan");
an unfunded, nonqualified domestic noncontributory pension plan to provide
benefits in excess of statutory limitations; a contributory defined contribution
plan; international pension plans, which vary by country, consisting of both
defined benefit and defined contribution pension plans; deferred compensation;
and certain other postretirement benefits.
The amounts necessary to fund future payouts under these plans are
subject to numerous assumptions and variables. Certain significant variables
require us to make assumptions that are within our control such as an
anticipated discount rate, expected rate of return on plan assets and future
compensation levels. We evaluate these assumptions with our actuarial advisors
and we believe they are within accepted industry ranges, although an increase or
decrease in the assumptions or economic events outside our control could have a
direct impact on reported net earnings.
The pre-retirement discount rate for each plan used for determining
future pension obligations is based on a review of highly rated long-term bonds.
At June 30, 2003, we used a pre-retirement discount rate for our U.S. Plan of
5.75% and varying rates on our international plans of between 2.75% and 7.0%.
For fiscal 2003, we used an expected return on plan assets of 8.5% for our U.S.
Plan and varying rates of between 4.5% and 8.25% for our international plans. In
determining the long-term rate of return for a plan, we consider the historical
rates of return, the nature of the plan's investments and an expectation for the
plan's investment strategies. The U.S. Plan asset allocation as of June 30, 2003
was approximately 58% equity investments, 23% fixed income investments, 13% cash
and 6% other investments.
For fiscal 2004, we are using a pre-retirement discount rate for the
U.S. Plan of 5.75% and an expected return on plan assets of 8.00%. The change in
expected return on plan assets from that used in fiscal 2003 has caused an
increase in pension expense in fiscal 2004. We will continue to monitor the
market conditions relative to these assumptions and adjust them accordingly.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is calculated as the excess of the cost of purchased
businesses over the value of their underlying net assets. Other intangible
assets principally consist of purchased royalty rights and trademarks. Goodwill
and other intangible assets that have an indefinite life are not amortized.
On an annual basis, we test goodwill and other intangible assets for
impairment. To determine the fair value of these intangible assets, there are
many assumptions and estimates used that directly impact the results of the
testing. We have the ability to influence the outcome and ultimate results based
on the assumptions and estimates we choose. To mitigate undue influence, we use
industry accepted valuation models and set criteria that are reviewed and
approved by various levels of management. Additionally, we evaluate our recorded
goodwill with the assistance of a third-party valuation firm.
INCOME TAXES
We have accounted for, and currently account for, income taxes in
accordance with SFAS No. 109, "Accounting for Income Taxes." This Statement
establishes financial accounting and reporting standards for the effects of
income taxes that result from an enterprise's activities during the current and
preceding years. It requires an asset and liability approach for financial
accounting and reporting of income taxes.
As of June 30, 2003, we had current net deferred tax assets of $116.0
million and non-current net deferred tax assets of $38.7 million. These net
deferred tax assets assume sufficient future earnings for their realization, as
well as the continued application of current tax rates. Included in net deferred
tax assets is a valuation allowance of approximately $2.9 million for deferred
tax assets, which relates to foreign tax loss carryforwards not utilized to
date, where management believes it is more likely than not that the deferred tax
15
assets will not be realized in the relevant jurisdiction. Based on our
assessments, no additional valuation allowance is required. If we determine that
a deferred tax asset will not be realizable, an adjustment to the deferred tax
asset will result in a reduction of earnings at that time.
Furthermore, we provide tax reserves for Federal, state and
international exposures relating to audit results, planning initiatives and
compliance responsibilities. The development of these reserves requires
judgments about tax issues, potential outcomes and timing, and is a subjective
critical estimate.
DERIVATIVES
We currently account for derivative financial instruments in
accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, which establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. This Statement also requires the
recognition of all derivative instruments as either assets or liabilities on the
balance sheet and that they be measured at fair value.
We currently use derivative financial instruments to hedge certain
anticipated transactions and interest rates, as well as receivables and payables
denominated in foreign currencies. We do not utilize derivatives for trading or
speculative purposes. Hedge effectiveness is documented, assessed and monitored
by our employees who are qualified to make such assessments and monitor the
instruments. Variables that are external to us such as social, political and
economic risks may have an impact on our hedging program and the results
thereof.
RESULTS OF OPERATIONS
---------------------
We manufacture, market and sell beauty products, including those in
the skin care, makeup, fragrance and hair care categories which are distributed
in over 130 countries and territories. The following is a comparative summary of
our operating results for the nine months ended March 31, 2004 and 2003 and the
fiscal years ended June 30, 2003, 2002 and 2001. Sales of products and services
that do not meet our definition of skin care, makeup, fragrance or hair care
have been included in the "other" category.
16
NINE MONTHS ENDED
MARCH 31, YEAR ENDED JUNE 30,
--------------------------- ------------------------------------------
2004 2003 2003 2002 2001
---- ---- ---- ---- ----
(UNAUDITED)
(IN MILLIONS)
NET SALES
BY REGION:
The Americas............................... $2,439.3 $2,274.8 $2,931.8 $2,846.0 $2,857.8
Europe, the Middle East & Africa........... 1,367.6 1,104.0 1,506.4 1,261.1 1,221.8
Asia/Pacific............................... 580.4 497.9 657.8 610.6 596.1
--------- --------- --------- --------- ---------
4,387.3 3,876.7 5,096.0 4,717.7 4,675.7
Restructuring.............................. -- -- -- (6.2) (8.0)
--------- --------- --------- --------- ---------
$4,387.3 $3,876.7 $5,096.0 $4,711.5 $4,667.7
========= ========= ========= ========= =========
BY PRODUCT CATEGORY:
Skin Care.................................. $1,594.1 $1,408.6 $1,893.7 $1,703.3 $1,660.7
Makeup..................................... 1,607.1 1,418.3 1,887.8 1,758.3 1,721.6
Fragrance.................................. 980.9 864.4 1,059.6 1,017.3 1,085.1
Hair Care.................................. 179.1 163.8 228.9 215.8 180.7
Other...................................... 26.1 21.6 26.0 23.0 27.6
--------- --------- --------- --------- ---------
4,387.3 3,876.7 5,096.0 4,717.7 4,675.7
Restructuring.............................. -- -- -- (6.2) (8.0)
--------- --------- --------- --------- ---------
$4,387.3 $3,876.7 $5,096.0 $4,711.5 $4,667.7
========= ========= ========= ========= =========
OPERATING INCOME
BY REGION:
The Americas............................... $281.3 $216.8 $255.3 $222.8 $299.9
Europe, the Middle East & Africa........... 193.7 162.7 227.7 179.9 201.8
Asia/Pacific............................... 43.3 36.6 42.7 56.0 56.9
--------- --------- --------- --------- ---------
518.3 416.1 525.7 458.7 558.6
Restructuring.............................. -- -- (22.0) (116.6) (63.0)
--------- --------- --------- --------- ---------
$518.3 $416.1 $503.7 $342.1 $495.6
========= ========= ========= ========= =========
BY PRODUCT CATEGORY:
Skin Care.................................. $253.8 $204.8 $273.2 $248.4 $266.9
Makeup..................................... 206.1 158.5 206.6 183.1 212.5
Fragrance.................................. 38.7 42.4 32.1 13.4 63.6
Hair Care.................................. 16.8 10.4 14.8 13.7 13.1
Other...................................... 2.9 -- (1.0) 0.1 2.5
--------- --------- --------- --------- ---------
518.3 416.1 525.7 458.7 558.6
Restructuring.............................. -- -- (22.0) (116.6) (63.0)
--------- --------- --------- --------- ---------
$518.3 $416.1 $503.7 $342.1 $495.6
========= ========= ========= ========= =========
17
The following table presents certain consolidated earnings data as a
percentage of net sales:
NINE MONTHS ENDED
MARCH 31, YEAR ENDED JUNE 30,
--------------------- ------------------------------------
2004 2003 2003 2002 2001
---- ---- ---- ---- ----
Net sales................................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................. 25.9 26.8 26.0 26.8 26.3
------ ------ ------ ------ ------
Gross profit.............................................. 74.1 73.2 74.0 73.2 73.7
------ ------ ------ ------ ------
Operating expenses:
Selling, general and administrative.................... 61.9 62.1 63.3 63.3 61.5
Restructuring.......................................... -- -- -- 2.3 0.8
Special charges........................................ -- -- 0.4 -- 0.3
Related party royalties................................ 0.4 0.4 0.4 0.4 0.5
------ ------ ------ ------ ------
62.3 62.5 64.1 66.0 63.1
------ ------ ------ ------ ------
Operating income.......................................... 11.8 10.7 9.9 7.2 10.6
Interest expense, net..................................... 0.5 0.2 0.2 0.2 0.2
------ ------ ------ ------ ------
Earnings before income taxes, minority interest,
discontinued operations and accounting
change................................................. 11.3 10.5 9.7 7.0 10.4
Provision for income taxes................................ 4.2 3.5 3.2 2.4 3.7
Minority interest, net of tax............................. (0.2) (0.1) (0.1) (0.1) (0.1)
------ ------ ------ ------ ------
Net earnings before discontinued operations and
accounting change...................................... 6.9 6.9 6.4 4.5 6.6
Discontinued operations, net of tax....................... (0.7) (0.1) (0.1) (0.4) --
Cumulative effect of a change in accounting principle, net
of tax................................................. -- -- -- -- (0.1)
------ ------ ------ ------ ------
Net earnings.............................................. 6.2% 6.8% 6.3% 4.1% 6.5%
====== ====== ====== ====== ======
NINE MONTHS FISCAL 2004 AS COMPARED WITH NINE MONTHS FISCAL 2003
NET SALES
Net sales increased 13% or $510.6 million to $4,387.3 million
reflecting growth in all product categories and all geographic regions led by
double digit growth in Europe, the Middle East & Africa and the addition of the
Darphin line of products, which was acquired during the fourth quarter of fiscal
2003. Net sales results in Europe, the Middle East & Africa and Asia/Pacific in
the current period benefited from the weakening of the U.S. dollar. Excluding
the impact of foreign currency translation, net sales increased 8%.
PRODUCT CATEGORIES
SKIN CARE. Net sales of skin care products increased 13% or $185.5
million to $1,594.1 million. This increase in net sales was primarily
attributable to new and recently launched products such as Idealist Micro-D Deep
Thermal Refinisher and Hydra Complete Multi-Level Moisture products by Estee
Lauder and Pore Minimizer products by Clinique. The increase was supported by
strong sales of Re-Nutriv Intensive Lifting products by Estee Lauder, and the
Repairwear line of products from Clinique and products in Clinique's 3-Step Skin
Care System, as well as the addition of the Darphin line of products. Partially
18
offsetting these increases were lower net sales of certain existing products
such as Advanced Stop Signs by Clinique and Idealist Skin Refinisher,
Lightsource Age-Resisting Moisture Lotion and Resilience Lift products by Estee
Lauder. Excluding the impact of foreign currency translation, skin care net
sales increased 8%.
MAKEUP. Makeup net sales increased 13% or $188.8 million to $1,607.1
million. In addition to strong sales of our MoAoC and Bobbi Brown makeup artist
lines, the increase in net sales reflected the current year launch of Perfectly
Real Makeup by Clinique and Ideal Matte Refinishing Makeup SPF 8 and Electric
Intense LipCreme by Estee Lauder. The increase in net sales also reflected the
recent launches of High Impact Mascara by Clinique and Artist's Lip and Eye
Pencils, Pure Color Lip Vinyl and Pure Color Eye Shadow Duo by Estee Lauder.
Offsetting these increases were lower net sales of certain existing products
such as So Ingenious Multi-Dimension Liquid Makeup and Loose Powder, Pure Color
Lipstick and Pure Color Velvet Lipstick and Nail Lacquer from Estee Lauder.
Excluding the impact of foreign currency translation, makeup net sales increased
9%.
FRAGRANCE. Net sales of fragrance products increased 13% or $116.5
million to $980.9 million. The increase in net sales was primarily attributable
to the current year launches of Estee Lauder Beyond Paradise, Aramis Life,
Clinique Simply and the Tommy Jeans collection. The increase in net sales also
benefited from improved results from our travel retail business. These net sales
increases were partially offset by lower net sales of Estee Lauder pleasures,
Beautiful and Intuition by Estee Lauder, Clinique Happy and certain Tommy
Hilfiger products. Excluding the impact of foreign currency translation,
fragrance net sales increased 8%.
HAIR CARE. Hair care net sales increased 9% or $15.3 million to
$179.1 million primarily attributable to Aveda and Bumble and bumble. The
increase from Aveda was due to increased distribution and successful recent
product launches. Bumble and bumble experienced growth from existing and new
points of distribution. Partially offsetting these increases were lower net
sales from Clinique's Simple Hair Care System. Excluding the impact of foreign
currency translation, hair care net sales increased 7%.
The introduction of new products may have some cannibalizing effect
on sales of existing products, which we take into account in our business
planning.
GEOGRAPHIC REGIONS
Net sales in the Americas increased 7% or $164.5 million to $2,439.3
million primarily reflecting growth from our newer brands as well as the success
of new and recently launched products and an improving retail environment.
In Europe, the Middle East & Africa, net sales increased 24% or
$263.6 million to $1,367.6 million primarily reflecting higher net sales from
our travel retail business, the United Kingdom, Spain, South Africa, Germany and
Greece as well as from the addition of Darphin. We also benefited from the
effect of favorable foreign currency exchange rates to the U.S. dollar.
Excluding the impact of foreign currency translation, net sales in Europe, the
Middle East & Africa increased 12%.
Net sales in Asia/Pacific increased 17% or $82.5 million to $580.4
million. This increase reflected higher net sales in Australia, Japan, Taiwan,
Korea, and China. Excluding the impact of foreign currency translation, net
sales in Asia/ Pacific increased 9%.
We strategically stagger our new product launches by geographic
market, which may contribute to differences in regional sales growth.
19
COST OF SALES
Cost of sales as a percentage of total net sales improved to 25.9%
from 26.8% reflecting production and supply chain efficiencies and lower costs
from promotional activities of approximately 70 basis points each. Partially
offsetting these improvements were changes in exchange rates and the mix of
products being sold as well as by increased travel retail sales, which carry a
higher cost of goods sold percentage. Travel retail has a higher cost of goods
sold percentage because of its heavy fragrance mix coupled with its margin
structure.
Since the cost of promotional activities is a component of cost of
sales and the timing and level of promotions vary with our promotional calendar,
we have experienced, and expect to continue to experience, fluctuations in the
cost of sales percentage.
OPERATING EXPENSES
Operating expenses decreased to 62.3% of net sales as compared with
62.5% of net sales in the prior-year period. The decrease in operating expenses
as a percentage of net sales reflects the higher growth rate in net sales,
particularly the newer brands and in the travel retail business. Partially
offsetting the favorability in the current period were higher levels of
advertising, sampling and merchandising to support new and recently launched
products, operating expenses related to spending behind BeautyBank, the higher
operating costs associated with newly acquired brands and expenses related to
compliance with new regulatory requirements (such as those arising under the
Sarbanes-Oxley Act of 2002).
Changes in advertising, sampling and merchandising spending result
from the type, timing and level of advertising, sampling and merchandising
activities related to product launches and rollouts, as well as the markets
being emphasized.
On April 24, 2004, Mrs. Estee Lauder passed away. As a result, the
royalty payments made to her since 1969 in connection with our purchase of the
"Estee Lauder" trademark outside the United States ceased to accrue. The
estimated impact for the remainder of fiscal 2004 will be a reduction of
operating expenses of approximately $3.8 million, or $2.3 million after tax.
OPERATING INCOME
Operating income increased 25% or $102.2 million to $518.3 million as
compared with the prior-year period. Operating margins were 11.8% of net sales
in the current period as compared with 10.7% in the prior-year period. The
increase in operating margin reflects sales growth coupled with the improvement
in the components of cost of sales as well as our continued control of
non-business building expenses.
PRODUCT CATEGORIES
Operating income increased 30% to $206.1 million in makeup, 24% to
$253.8 million in skin care and 62% to $16.8 million in hair care reflecting
overall sales growth and new product introductions. Operating income decreased
9% to $38.7 million in fragrance reflecting increased support spending related
to new product launch activities.
GEOGRAPHIC REGIONS
Operating income in the Americas increased 30% or $64.5 million to
$281.3 million. Contributing to the increase were an improved retail
environment, strong product launches and growth from newer brands. In Europe,
the Middle East & Africa, operating income increased 19% or $31.0 million to
$193.7 million primarily due to the significantly increased results generated
from our travel retail business as well as improvements in the United Kingdom
and Spain. In Asia /Pacific, operating income increased 18% or $6.7 million to
20
$43.3 million. This increase reflects improved results in Taiwan, Japan and
Australia.
INTEREST EXPENSE, NET
Net interest expense was $21.8 million as compared with $7.0 million
in the prior-year period. The increase in net interest expense was due to the
inclusion of the preferred stock dividends of $14.4 million as interest expense
in the current period. This change in reporting resulted from a change in
accounting standards which prohibits us from restating the prior period results
(see "Recently Issued Accounting Standards"). To a lesser extent, interest
expense was also affected by higher average net borrowings offset by a lower
effective interest rate provided by the interest rate swap on the 6% Senior
Notes. As described in "Financial Condition - Liquidity and Capital Resources,"
we have called for redemption $291.6 million aggregate principal amount of 2015
Preferred Stock, and, as a result, we expect to save, net of financing costs,
approximately $14.9 million in fiscal 2005.
PROVISION FOR INCOME TAXES
The provision for income taxes represents Federal, foreign, state and
local income taxes. The effective rate for income taxes for the nine months
ended March 2004 was 37.4% as compared with 33.2% in the prior-year period.
These rates differ from statutory rates due to the effect of state and local
taxes, tax rates in foreign jurisdictions and certain nondeductible expenses.
The increase in the effective income tax rate was attributable to the inclusion
of the preferred stock dividends as interest expense which are not deductible
for income tax purposes, the anticipated full-year mix of global earnings and to
a lesser extent the timing of tax planning initiatives. The prior-period rate
included benefits derived from certain favorable tax negotiations.
DISCONTINUED OPERATIONS
In February 2004, we sold the assets and operations of our reporting
unit that sold jane brand products. Prior to the sale of the business, in
December 2003, we committed to a plan to sell such assets and operations. At the
time such decision was made, circumstances warranted that we conduct an
assessment of the tangible and intangible assets of the jane business. Based on
this assessment, we determined that the carrying amount of these assets as
reflected on our consolidated balance sheets exceeded their estimated fair
value. In accordance with the assessment and the closing of the sale, we
recorded an after-tax charge to discontinued operations of $33.1 million for the
nine months ended March 31, 2004. The charge represents the impairment of
goodwill in the amount of $26.4 million; the reduction in value of other
tangible assets in the amount of $1.3 million, net of taxes; and the operating
loss of $5.4 million, net of tax. Included in the operating loss of the
nine-month period were additional costs associated with the sale and
discontinuation of the business.
RECONCILIATIONS OF FINANCIAL RESULTS
The following tables present reconciliations of our financial results
for the fiscal years ended June 30, 2003, 2002 and 2001 as reported in
conformity with generally accepted accounting principles in the United States
("GAAP") and those results adjusted to exclude certain charges described above
each table. We have presented these reconciliations because of the special
nature of the charges or the fact that they are not necessarily comparable from
period to period. We believe that such measures provide investors with a view of
our ongoing business trends and results of operations. This is consistent with
the approach used by management in its evaluation and monitoring of such trends
and results and provides investors with a base for evaluating future periods.
While we consider the non-GAAP financial measures useful in analyzing
our results, it is not intended to replace, or act as a substitute for, any
presentation included in the consolidated financial statements prepared in
conformity with GAAP.
21
The table below reconciles the fiscal 2003 results as reported and
results prior to adjustment for a special pre-tax charge of $22.0 million, or
$13.5 million after-tax, equal to $.06 per diluted common share, in connection
with the proposed settlement of a class action lawsuit brought against us and a
number of other defendants (see our Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2004, Part II, Item 1. Legal Proceedings,
incorporated herein by reference). The amount of the charge in this case is
significantly larger than similar charges we have incurred individually or in
the aggregate for legal proceedings in any prior year and we do not expect to
take a charge of a similar magnitude for a single matter like it in the near
future.
YEAR ENDED JUNE 30, 2003
----------------------------------------------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
RESULTS RECONCILING NON-GAAP
AS REPORTED ITEMS RESULTS
----------- ----- -------
Net sales......................................................... $ 5,096.0 $ -- $ 5,096.0
Cost of sales..................................................... 1,324.4 -- 1,324.4
----------- ----------- -----------
Gross profit...................................................... 3,771.6 -- 3,771.6
----------- ----------- -----------
Gross margin.................................................. 74.0% 74.0%
Operating expenses................................................ 3,267.9 22.0 3,245.9
----------- ----------- -----------
Operating expense margin...................................... 64.1% 63.7%
Operating income.................................................. 503.7 22.0 525.7
----------- ----------- -----------
Operating income margin....................................... 9.9% 10.3%
Provision (benefit) for income taxes.............................. 163.3 (8.5) 171.8
----------- ----------- -----------
Net earnings from continuing operations........................... 325.6 13.5 339.1
Discontinued operations, net of tax............................... (5.8) -- (5.8)
----------- ----------- -----------
Net earnings...................................................... $ 319.8 $ 13.5 $ 333.3
=========== =========== ===========
Net earnings attributable to common stock......................... $ 296.4 $ 13.5 $ 309.9
=========== =========== ===========
Diluted net earnings per common share:
Net earnings attributable to common stock from continuing
operations.................................................... $ 1.29 $ 0.06 $ 1.35
=========== =========== ===========
Net earnings attributable to common stock......................... $ 1.26 $ 0.06 $ 1.32
=========== =========== ===========
22
The table below reconciles the fiscal 2002 results as reported and
results prior to adjustment for pre-tax restructuring charges of $117.4 million
(of which $0.8 million was included in discontinued operations), or $76.9
million after-tax (of which $0.5 million was included in discontinued
operations), equal to $.32 per diluted common share (see "Results of Operations
- Fiscal 2002 as Compared with Fiscal 2001"). The restructuring charges were
related to repositioning certain businesses as part of a globalization and
reorganization initiative and are described in greater detail in Note 5 to Notes
to Consolidated Financial Statements contained in our Current Report on Form
8-K, dated May 17, 2004. The restructuring was not considered part of our core
continuing business in fiscal 2002. Management also excludes the related charge
in evaluating its performance when comparing fiscal 2002 to future periods.
YEAR ENDED JUNE 30, 2002
---------------------------------------------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
RESULTS RECONCILING NON-GAAP
AS REPORTED ITEMS RESULTS
----------- ----- -------
Net sales......................................................... $ 4,711.5 $ 6.2 $ 4,717.7
Cost of sales..................................................... 1,260.5 0.8 1,259.7
----------- ----------- -----------
Gross profit...................................................... 3,451.0 7.0 3,458.0
----------- ----------- -----------
Gross margin.................................................. 73.2% 73.3%
Operating expenses................................................ 3,108.9 109.6 2,999.3
----------- ----------- -----------
Operating expense margin...................................... 66.0% 63.6%
Operating income.................................................. 342.1 116.6 458.7
----------- ----------- -----------
Operating income margin....................................... 7.2% 9.7%
Provision (benefit) for income taxes.............................. 114.7 (40.2) 154.9
----------- ----------- -----------
Net earnings from continuing operations........................... 212.9 76.4 289.3
Discontinued operations, net of tax............................... (21.0) 0.5 (20.5)
----------- ----------- -----------
Net earnings...................................................... $ 191.9 $ 76.9 $ 268.8
=========== =========== ===========
Net earnings attributable to common stock......................... $ 168.5 $ 76.9 $ 245.4
=========== =========== ===========
Diluted net earnings per common share:
Net earnings attributable to common stock from continuing
operations.................................................... $ .79 $ .31 $ 1.10
=========== =========== ===========
Net earnings attributable to common stock......................... $ .70 $ .32 $ 1.02
=========== =========== ===========
23
The table below reconciles the fiscal 2001 results as reported and
results prior to adjustment for (i) pre-tax restructuring and special charges of
$63.0 million, or $40.3 million after-tax, equal to $.17 per diluted common
share (see "Results of Operations - Fiscal 2002 as Compared with Fiscal 2001");
(ii) $13.4 million after-tax adjustment, equal to $.06 per diluted common share,
to reflect the retroactive impact of the adoption of SFAS No. 142, "Goodwill and
Other Intangible Assets" (see Note 2 "Summary of Significant Accounting
Policies" in the Consolidated Financial Statements contained in our Current
Report on Form 8-K, dated May 17, 2004); and (iii) a one-time charge of $2.2
million after-tax, or $.01 per diluted common share, attributable to the
cumulative effect of adopting SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." We adopted a restructuring plan in the
fourth quarter of fiscal 2001, our first since the initial public offering in
1995. The particular restructuring and special charges relating to the plan are
described in Note 5 to Notes to Consolidated Financial Statements contained in
our Current Report on Form 8-K, dated May 17, 2004. These costs, as well as
those resulting from the adoption of new accounting standards, were not
considered part of our core business in fiscal 2001. Management also excludes
the related charges in evaluating its performance when comparing fiscal 2001 to
future periods.
YEAR ENDED JUNE 30, 2001
---------------------------------------------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
RESULTS RECONCILING NON-GAAP
AS REPORTED ITEMS RESULTS
----------- ----- -------
Net sales......................................................... $ 4,667.7 $ 8.0 $ 4,675.7
Cost of sales..................................................... 1,226.4 1.1 1,225.3
----------- ----------- -----------
Gross profit...................................................... 3,441.3 9.1 3,450.4
----------- ----------- -----------
Gross margin.................................................. 73.7% 73.8%
Operating expenses................................................ 2,945.7 53.9 2,891.8
----------- ----------- -----------
Operating expense margin...................................... 63.1% 61.9%
Operating income.................................................. 495.6 63.0 558.6
----------- ----------- -----------
Operating income margin....................................... 10.6% 11.9%
Provision (benefit) for income taxes.............................. 174.0 (22.7) 196.7
----------- ----------- -----------
Net earnings before accounting change............................. 307.4 40.3 347.7
2001 amortization of goodwill, net of tax......................... -- 13.4 13.4
Cumulative effect of a change in accounting principle, net of tax. (2.2) 2.2 --
=========== =========== ===========
Net earnings...................................................... $ 305.2 $ 55.9 $ 361.1
=========== =========== ===========
Diluted net earnings per common share:............................ $ 1.16 $ 0.23 $ 1.39
=========== =========== ===========
FISCAL 2003 AS COMPARED WITH FISCAL 2002
NET SALES
Net sales increased 8% or $384.5 million to $5,096.0 million,
reflecting growth in all product categories and each of our geographic regions.
Product category results were led by skin care, and our regions were led by
Europe, the Middle East & Africa, where results benefited from favorable foreign
exchange rates to the U.S. dollar and improvements in the travel retail
business. Travel retail improved during the middle of fiscal 2003 compared with
lower results during the middle of fiscal 2002 but was adversely affected during
the last quarter of fiscal 2003 by certain world events, including the lingering
effects of the war in Iraq and concerns relating to SARS. Such events may affect
our future sales and earnings. Excluding the impact of foreign currency
translation, net sales increased 4%.
24
PRODUCT CATEGORIES
SKIN CARE. Net sales of skin care products increased 11% or $190.4
million to $1,893.7 million, which was primarily attributable to the recent
launches of Perfectionist Correcting Serum for Lines/Wrinkles and Resilience
Lift OverNight Face and Throat Creme by Estee Lauder, and the Repairwear line of
products and Advanced Stop Signs from Clinique. Additionally, the increase was
supported by strong sales of Comforting Cream Cleanser, Moisture Surge Extra
Thirsty Skin Relief and Moisture Surge Eye Gel, and products in the 3-Step Skin
Care System by Clinique, as well as by Re-Nutriv Ultimate Lifting Creme from
Estee Lauder, and A Perfect World line of products by Origins. Partially
offsetting this increase were lower net sales of certain existing products such
as Stop Signs, Total Turnaround Cream and Turnaround Cream by Clinique and
Idealist Skin Refinisher by Estee Lauder. Excluding the impact of foreign
currency translation, skin care net sales increased 7%.
MAKEUP. Makeup net sales increased 7% or $129.5 million to $1,887.8
million due to strong sales of our makeup artist lines and current year launches
of Dewy Smooth Anti-Aging Makeup and Colour Surge Lipstick by Clinique, and
MagnaScopic Maximum Volume Mascara and Artist's Lip and Eye Pencils from Estee
Lauder. Also contributing to growth were strong sales from Estee Lauder brand
products including So Ingenious Multi-Dimension Liquid Makeup and Loose Powder,
as well as from new and existing products in the Pure Color line. Offsetting
this increase were lower net sales of certain existing products such as
Sumptuous Lipstick from Estee Lauder, and Gentle Light Makeup and Powder and
High Impact Eye Shadow Duos by Clinique. Excluding the impact of foreign
currency translation, makeup net sales increased 4%.
FRAGRANCE. Net sales of fragrance products increased 4% or $42.3
million to $1,059.6 million, primarily reflecting the effects of favorable
foreign currency exchange rates to the U.S. dollar. The fragrance industry
continues to experience a difficult environment. The travel retail business,
which depends substantially on fragrance products, began to improve in the
middle of the fiscal year relative to the prior year, however the latter part of
fiscal 2003 was adversely affected by international uncertainties stemming from
events in Iraq and concerns relating to SARS. In fiscal 2003, we successfully
launched Estee Lauder pleasures intense, T girl by Tommy Hilfiger, Clinique
Happy Heart, Lauder Intuition for Men and Donna Karan Black Cashmere. Net sales
also benefited from strong sales of Beautiful by Estee Lauder and Aromatics
Elixir from Clinique. Offsetting these increases and sales from new product
launches were lower net sales of certain Tommy Hilfiger products, Intuition by
Estee Lauder and Estee Lauder pleasures. Excluding the impact of foreign
currency translation, fragrance net sales were relatively unchanged from the
prior year.
HAIR CARE. Hair care net sales increased 6% or $13.1 million to
$228.9 million. This increase was primarily the result of sales growth from
Aveda and Bumble and bumble products. We also increased the number of
Company-owned Aveda Experience Centers and strategically decreased the number of
salons that offer Aveda products. Partially offsetting the increase were lower
net sales of Clinique's Simple Hair Care System.
The introduction of new products may have some cannibalizing effect
on sales of existing products, which we take into account in our business
planning.
GEOGRAPHIC REGIONS
Net sales in the Americas increased 3% or $85.8 million to $2,931.8
million primarily reflecting growth from our newer brands as well as the success
of new and recently launched products. Despite the increase, we continue to
experience a soft retail environment in the United States.
In Europe, the Middle East & Africa, net sales increased 19% or
$245.3 million to $1,506.4 million. Net sales in the United Kingdom, Spain,
Italy, France, Switzerland and Greece experienced double-digit growth. Also
contributing to the increase with double-digit growth was our worldwide travel
25
retail business, as sales recovered from the levels experienced after September
11, 2001. However, our travel retail business was adversely affected at the end
of fiscal 2003 by certain world events including the lingering effects of the
war in Iraq and concerns associated with SARS. Excluding the impact of foreign
currency translation, Europe, the Middle East & Africa net sales increased 8%.
Net sales in Asia/Pacific increased 8% or $47.2 million to $657.8
million primarily due to higher net sales in Korea, Japan, Australia and
Thailand. Despite increased net sales in Japan, the country remains a difficult
market due to local economic conditions and competition. Excluding the impact of
foreign currency translation, Asia/Pacific net sales increased 3%.
We strategically stagger our new product launches by geographic
market, which may account for differences in regional sales growth.
COST OF SALES
Cost of sales as a percentage of total net sales improved to 26.0%
from 26.8%, reflecting production and supply chain efficiencies and lower costs
from promotional activities.
We continued to emphasize sourcing initiatives and overall supply
chain management which resulted in lower manufacturing costs, whereas in the
prior year we experienced under-absorption of overhead as a result of the impact
of the events of September 11, 2001.
The inclusion of promotional merchandise as a component of cost of
sales results in lower margins. A strategic shift to reduce these activities has
contributed to the improvement in our gross profit margin for the year. The
inclusion of the cost of purchase with purchase and gift with purchase
merchandise as a component of cost of sales resulted from our adoption of EITF
Issue No. 01-9. Since the cost of these promotional activities is a component of
cost of sales and the timing and level of promotions vary with our promotional
calendar, we have experienced, and expect to continue to experience,
fluctuations in the cost of sales percentage.
OPERATING EXPENSES
Operating expenses decreased to 64.1% of net sales as compared with
66.0% of net sales in the prior-year period. The current year results were
impacted by a charge related to the pending settlement of a legal proceeding of
$22.0 million or 0.4% of net sales. Prior-year operating expenses included a
restructuring charge of $109.6 million or 2.3% of net sales. Before considering
the effect of these two charges, operating expenses increased slightly to 63.7%
of net sales compared with 63.6% of net sales in the prior year. The increase in
spending primarily related to advertising, sampling and merchandising activities
particularly during the early portion of fiscal 2003 (excluding purchase with
purchase and gift with purchase activities, discussed as a component of cost of
sales) which supported our sales growth and built momentum going into the second
half of fiscal 2003. Changes in advertising, sampling and merchandising spending
result from the type, timing and level of activities related to product launches
and rollouts, as well as the markets being emphasized.
OPERATING RESULTS
Operating income increased 47% or $161.6 million to $503.7 million as
compared with the prior-year period. Operating margins were 9.9% of net sales in
the current period as compared with 7.2% in the prior-year period. These results
include a charge related to the pending settlement of a legal proceeding of
$22.0 million in the current year and a prior year restructuring charge of
$116.6 million. Absent these items, operating income increased 15% or $67.0
million to $525.7 million and operating margins increased to 10.3% as compared
with 9.7% in fiscal 2002. These increases in operating income and operating
margin reflect sales growth, including the benefits from favorable foreign
currency exchange rates to the U.S. dollar and gross margin improvement, as well
26
as benefits from our prior restructurings and our continued cost containment
efforts.
Net earnings and net earnings per diluted share increased
approximately 67% and 80%, respectively. Net earnings improved $127.9 million to
$319.8 million and net earnings per diluted share increased by $.56 from $.70 to
$1.26. Net earnings from continuing operations increased by $112.7 million or
53% and diluted earnings per common share from continuing operations increased
63% to $1.29 from $.79 in the prior year. Before the fiscal 2003 charge related
to the pending settlement of a legal proceeding and the fiscal 2002
restructuring, net earnings from continuing operations increased 17% to $339.1
million and diluted earnings per common share from continuing operations
increased 23% to $1.35 from $1.10 in the prior year.
The following discussions of Operating Results by Product Categories
and Geographic Regions exclude the impact of the fiscal 2003 charge related to
the pending settlement of a legal proceeding and the fiscal 2002 restructuring.
We believe the following analysis of operating income better reflects the manner
in which we conduct and view our business. The tables on pages 22 and 23
reconcile these results to operating income as reported in the consolidated
statement of earnings.
PRODUCT CATEGORIES
Operating income more than doubled to $32.1 million in fragrance due
primarily to improved results from our travel retail business. Operating income
increased 10% to $273.2 million in skin care and 13% to $206.6 million in makeup
reflecting higher net sales, partially offset by strategic spending on
advertising, sampling and merchandising, particularly in the earlier portion of
the current year. Operating income increased $1.1 million or 8% to $14.8 million
in hair care, reflecting improvements in Aveda and Bumble and bumble, as well as
higher profits in the latter portion of the year outside the United States.
GEOGRAPHIC REGIONS
Operating income in the Americas increased 15% or $32.5 million to
$255.3 million due to sales growth, the benefits of our prior restructurings and
continued cost containment efforts. Operating income also benefited from the
results of strategic efforts related to product support spending in the earlier
part of the year that led to increased net sales during the year. In Europe, the
Middle East & Africa, operating income increased 27% or $47.8 million to $227.7
million primarily due to the improved operating results in the United Kingdom as
well as increased results generated from our travel retail business. As
described elsewhere, profitability in the region has been and will continue to
be affected by current international uncertainties. In Asia/Pacific, operating
income decreased 24% or $13.3 million to $42.7 million. This decrease reflects
improved results in Korea and Thailand, which were more than offset by a
decrease in Australia, which derived a benefit in the prior-year period from a
change in our retailer arrangements.
INTEREST EXPENSE, NET
Net interest expense was $8.1 million as compared with $9.8 million
in the prior year. The decrease in net interest expense was primarily due to
lower outstanding net borrowings and higher interest income generated by higher
invested cash balances. This improvement was partially offset by a higher
effective interest rate, which resulted from the increased proportion of fixed
rate debt as compared with variable rate debt in the same period last year. In
May 2003, we executed a fixed-to floating interest rate swap on our $250.0
million 6% Senior Notes due 2012. See "Liquidity and Capital Resources" for
further details.
PROVISION FOR INCOME TAXES
The provision for income taxes represents Federal, foreign, state and
local income taxes. The effective rate for income taxes for the fiscal year was
32.9% as compared with 34.5% in the prior-year period. These rates differ from
27
statutory rates, reflecting the effect of state and local taxes, tax rates in
foreign jurisdictions and certain nondeductible expenses. The decrease in the
effective tax rate was principally attributable to ongoing tax planning
initiatives, including the favorable settlement of certain tax negotiations and
the reduction of the overall tax rate relating to the Company's foreign
operations. In addition, the tax effect of the charge related to the pending
settlement of a legal proceeding in late fiscal 2003 contributed to an effective
tax rate slightly lower than previously expected.
FISCAL 2002 AS COMPARED WITH FISCAL 2001
NET SALES
Net sales increased 1% or $43.8 million to $4,711.5 million
reflecting growth in the makeup, skin care and hair care categories, partially
offset by a decline in fragrance net sales. Excluding the impact of foreign
currency translation, net sales increased 2%. The unusual events that occurred
during fiscal 2002 and their effect on the economy, particularly in the United
States, adversely impacted our business. In addition, the decline in worldwide
travel during most of fiscal 2002 led to a 13% reduction in our travel retail
sales. Sales growth from certain newer brands and recently launched products
partially offset these decreases.
The following discussions of Net Sales by Product Categories and
Geographic Regions exclude the impact of the restructurings in fiscal 2002 and
fiscal 2001. Neither restructuring was material to our net sales, and we believe
the following analysis of net sales better reflects the manner in which we
conduct and view our business. For a discussion of the restructurings, see
"Operating Expenses - Restructuring and Special Charges" in this section. The
tables on pages 23 and 24 reconcile these results to operating income as
reporting in the consolidated statement of earnings.
PRODUCT CATEGORIES
SKIN CARE. Net sales of skin care products increased 3% or $42.6
million to $1,703.3 million. The net sales increase was primarily attributable
to recently launched products such as Total Turnaround Visible Skin Renewer,
Advanced Night Repair Eye Recovery Complex, Moisture Surge Extra Thirsty Skin
Relief and Moisture Surge Eye Gel, A Perfect World line of products, LightSource
Transforming Moisture Lotion and Cream, and Re-Nutriv Ultimate Lifting Creme.
Partially offsetting these increases were lower net sales of certain existing
products such as Turnaround Cream and Resilience Lift, as well as products in
Clinique's 3-Step Skin Care System.
MAKEUP. Makeup net sales increased 2% or $36.7 million to $1,758.3
million. Newer brands such as MoAoC, Bobbi Brown and Stila, which are primarily
makeup products, contributed through growth at existing doors and increased
distribution. In addition, strong sales of the Pure Color Line of products, the
worldwide launch of Gentle Light Makeup and Illusionist Mascara contributed
positively to net sales growth. Partially offsetting the increase in net sales
were lower sales of Two-in-One Eye Shadow, Lucidity Makeup, and Long Last Soft
Shine Lipstick.
FRAGRANCE. Net sales of fragrance products decreased 6% or $67.8
million to $1,017.3 million. This category was impacted by the softness of the
fragrance business in the United States and the decline in our travel retail
business, which depends substantially on fragrance products. Lower net sales of
Beautiful, Estee Lauder pleasures, DKNY for Women and certain existing Tommy
Hilfiger products were partially offset by the launch of T, a fragrance in the
Tommy Hilfiger line, and Intuition for Men, as well as strong sales of Donna
Karan Cashmere Mist.
HAIR CARE. Hair care net sales increased 19% or $35.1 million to
$215.8 million. This increase was primarily the result of growth from Aveda,
which benefited from the launch of texture lotion products and Color Conserve
Shampoo and an increase in the number of Company-owned Aveda Experience Centers.
Sales of Bumble and bumble products increased due to an expanded product line
and an increase in the number of points of sale. The results were partially
28
offset by lower sales from Clinique's Simple Hair Care System when compared with
the prior-year launch.
The introduction of new products may have some cannibalizing effect
on sales of existing products, which we take into account in our business
planning.
GEOGRAPHIC REGIONS
Net sales in the Americas decreased slightly by $11.8 million to
$2,846.0 million. The decrease was primarily due to economic weakness and
uncertainty in the United States during most of the fiscal year as well as the
exclusion of net sales from our discontinued operation in the fiscal 2002
results. These decreases were partially offset by the success of most newer
brands. In Europe, the Middle East & Africa, net sales increased 3% or $39.3
million to $1,261.1 million. This increase was primarily the result of higher
net sales in the United Kingdom, Spain and Greece, where in fiscal 2002 we
formed a joint venture, in which we own a controlling majority interest, with
our former distributor. The increase was partially offset by lower net sales in
our travel retail business, which has been adversely affected by a decrease in
worldwide travel. Excluding the impact of our travel retail business, net sales
in Europe, the Middle East & Africa increased 8% or $77.8 million. Net sales in
Asia/Pacific increased 2% or $14.5 million to $610.6 million primarily due to
higher net sales in Korea and Thailand, as well as in Australia where we
benefited from a change in retailer arrangements. The increased sales were
partially offset by lower net sales in Japan. Japan continued to be a difficult
market due to local economic conditions and increasing competition. The
challenges were made more difficult by the weakness of the Japanese yen during
fiscal 2002 as compared with the U.S. dollar. Excluding the impact of foreign
currency translation, Asia/Pacific net sales increased 9%.
We strategically stagger our new product launches by geographic
market, which may account for differences in regional sales growth.
COST OF SALES
Cost of sales as a percentage of total net sales was 26.8% as
compared with 26.3% in the prior year. The lower margin can be attributed in
part to production volume decreases resulting in under-absorption of overhead,
as well as lower than planned raw material purchases that reduced anticipated
savings from sourcing initiatives. Partially offsetting these negative factors
were lower sales volumes of products with a higher cost of goods, particularly
in travel retail and fragrance.
OPERATING EXPENSES
Operating expenses increased to 66.0% of net sales as compared with
63.1% of net sales in the prior year. The increase in operating expenses
primarily related to restructuring expenses, continued advertising and
promotional spending and the cost to expand and operate our retail stores. The
increase in operating expenses as a percentage of net sales reflects a slower
growth rate in sales than operating expenses, primarily due to economic
conditions in the United States as discussed above. As part of our long-term
strategies, we continued to emphasize the building of "brand equities" through
advertising and promotional spending and retail store expansion despite
difficult economic times. Changes in advertising and promotional spending result
from the type, timing and level of advertising and promotional activities
related to product launches and rollouts, as well as the markets being
emphasized. Excluding the impact of restructuring and special charges, operating
expenses were 63.6% and 61.9% of net sales for the fiscal years ended 2002 and
2001, respectively.
RESTRUCTURING AND SPECIAL CHARGES
During the fourth quarter of fiscal 2002, we recorded charges for a
restructuring related to repositioning certain businesses as part of our ongoing
efforts to drive long-term growth and increase profitability. The restructuring
29
focused on cost reduction opportunities related to the Internet, our supply
chain, globalization of the organization and distribution channel refinements.
We committed to a defined plan of action, which resulted in an aggregate pre-tax
charge of $117.4 million, of which $0.8 million was included in discontinued
operations, and $59.4 million was cash related. On an after-tax basis, the
aggregate charge was $76.9 million, equal to $.32 per diluted share.
Specifically, the charge included the following:
o Internet. In an effort to achieve strategic objectives,
reduce costs and improve profitability, we outsourced
Gloss.com platform development and maintenance efforts to
a third-party provider. Additionally, Gloss.com closed its
San Francisco facility and consolidated its operations in
New York. As a result, included in the charge was a $23.9
million provision for restructuring the Gloss.com
operations, including benefits and severance packages for
36 employees as well as asset write-offs. We also took a
$20.1 million charge to write off the related Gloss.com
acquisition goodwill.
o Supply Chain. Building on previously announced supply
chain initiatives, we restructured certain manufacturing,
distribution, research and development, information
systems and quality assurance operations in the United
States, Canada and Europe, which included benefits and
severance for 110 employees. A charge of $23.7 million was
recorded related to this effort.
o Globalization of Organization. We continued to implement
our transition, announced in fiscal 2001, to a global
brand structure designed to streamline the decision-making
process and increase innovation and speed-to-market. The
next phase of this transition entailed eliminating
duplicate functions and responsibilities, which resulted
in charges for benefits and severance for 122 employees.
We recorded a charge of $27.1 million associated with
these efforts.
o Distribution. We evaluated areas of distribution relative
to our financial targets and decided to focus our
resources on the most productive sales channels and
markets. As a result, we closed our operations in
Argentina and the remaining customers are being serviced
by our Chilean affiliate. We began to close all remaining
in-store "tommy's shops" and we identified for closing
other select points of distribution. We recorded a $22.6
million provision related to these actions, which included
benefits and severance for 85 employees.
30
Following is a summary of the charges as recorded in the consolidated
statement of earnings for fiscal 2002:
RESTRUCTURING
------------------------------------------------------------------------
OPERATING
NET SALES COST OF SALES EXPENSES TOTAL
--------- ------------- -------- -----
(IN MILLIONS)
Internet..................................... $ -- $ -- $ 44.0 $ 44.0
Supply Chain................................. -- -- 23.7 23.7
Globalization of Organization................ -- -- 27.1 27.1
Distribution................................. 6.2 0.8 15.6 22.6
----------- ----------- ----------- -----------
TOTAL CHARGE................................. $ 6.2 $ 0.8 $ 110.4 117.4
=========== =========== ===========
Tax effect................................... (40.5)
-----------
NET CHARGE................................... $ 76.9
===========
The restructuring charge was recorded in other accrued liabilities
or, where applicable, as a reduction of the related asset. During fiscal 2002,
$9.3 million related to this restructuring was paid. We expected to, and did,
settle a majority of the remaining obligations by the end of fiscal 2003 with
certain additional payments to be made ratably through fiscal 2006.
During the fourth quarter of fiscal 2001, we recorded charges for
restructuring and special charges related to repositioning certain businesses as
part of our ongoing efforts to drive long-term growth and increase
profitability. The restructuring and special charges focused on four areas:
product fixtures for the jane brand; in-store "tommy's shops"; information
systems and other assets; and global brand reorganization. We committed to a
defined plan of action, which resulted in an aggregate pre-tax charge of $63.0
million, of which $35.9 million is cash related. On an after-tax basis, the
aggregate charge was $40.3 million, equal to $.17 per diluted share. As of June
30, 2003, the remaining obligation was $2.6 million with payments expected to be
made ratably through fiscal 2004.
OPERATING RESULTS
Operating income decreased 31% or $153.5 million to $342.1 million as
compared with the prior year. Operating margins were 7.2% of net sales in fiscal
2002 as compared with 10.6% in the prior year. The decrease in operating margin
was primarily due to restructuring expenses, lower than expected sales levels,
increased support spending and new distribution channel costs. This was
partially offset by the exclusion of amortization expense due to the adoption of
SFAS No. 142, "Goodwill and Other Intangible Assets," in fiscal 2002 and the
November 2000 expiration of amortization related to purchased royalty rights.
Operating income reflected the inclusion of restructuring and special charges of
$116.6 million and $63.0 million in fiscal 2002 and 2001, respectively. Before
consideration of the restructuring and special charges, operating income
decreased 18% to $458.7 million and operating margins were 9.7% in fiscal 2002
as compared with 11.9% in fiscal 2001.
Net earnings and net earnings per diluted share decreased
approximately 37% and 39%, respectively. Net earnings declined $113.3 million to
$191.9 million and net earnings per diluted share was lower by $.46 per diluted
share from $1.16 to $.70. Net earnings from continuing operations before
restructuring were $289.3 million, representing a decrease of 20% over the prior
year net earnings before restructuring and special charges, before the
cumulative effect of adopting a new accounting principle, and excluding goodwill
amortization. On a comparable basis, diluted earnings per common share from
continuing operations decreased 21% to $1.10 from $1.39.
31
The following discussions of Operating Results by Product Categories
and Geographic Regions exclude the impact of restructuring and special charges.
We believe the following analysis of operating income better reflects the manner
in which we conduct and view our business. The tables on pages 23 and 24
reconcile these results to operating income as reported in the consolidated
statement of earnings.
PRODUCT CATEGORIES
Operating income decreased 79% to $13.4 million in fragrance, 14% to
$183.1 million in makeup and 7% to $248.4 million in skin care, primarily due to
lower than anticipated sales levels, coupled with continued advertising and
promotional spending to promote new and recently launched products. Hair care
operating income increased 5%, from a smaller base, to $13.7 million, primarily
due to sales growth from Aveda and Bumble and bumble.
GEOGRAPHIC REGIONS
Operating income in the Americas decreased 26% or $77.1 million to
$222.8 million, primarily due to lower sales attributable to weakness in the
U.S. economy and continued advertising and promotional spending. In Europe, the
Middle East & Africa, operating income decreased 11% or $21.9 million to $179.9
million, primarily due to the significant decrease in our travel retail
business. Partially offsetting the decrease were improved operating results in
Italy, the United Kingdom, Spain and Germany. We also benefited from the
inclusion of operating results from our majority-owned joint venture in Greece.
In Asia/Pacific, operating income decreased slightly to $56.0 million due to
lower income in China and Hong Kong offset by higher results in Korea, in
Australia, where we benefited from a change in retailer arrangements, and in
Japan, where we were able to reduce operating expenses.
INTEREST EXPENSE, NET
Net interest expense was $9.8 million as compared with $12.3 million
in the prior year. The decrease in net interest expense resulted from a lower
effective interest rate compared with the prior year. This was primarily due to
our interest rate risk management strategy that relied on commercial paper and
variable-rate term loans. In January 2002, we took advantage of prevailing
market rates and issued fixed rate long-term notes to replace our variable-rate
debt.
PROVISION FOR INCOME TAXES
The Company's effective tax rate will change from year to year based
on non-recurring and recurring factors including, but not limited to, the
geographical mix of earnings, the timing and amount of foreign dividends, state
and local taxes, tax audit settlements and the interaction of various global tax
strategies.
The provision for income taxes represents Federal, foreign, state and
local income taxes. The effective rate for income taxes for fiscal 2002 was
34.5% compared with 36% in the prior year. These rates reflect the effect of
state and local taxes, changes in tax rates in foreign jurisdictions, tax
credits and certain non-deductible expenses. The decrease in the effective
income tax rate was attributable to ongoing tax planning initiatives, as well as
a decrease in non-deductible domestic royalty expense and the elimination of
certain non-deductible goodwill amortization resulting from the implementation
of SFAS No. 142, "Goodwill and Other Intangible Assets."
FINANCIAL CONDITION
-------------------
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of funds historically have been cash flows from
operations and borrowings under our commercial paper program, proceeds from the
issuance of long-term debt and committed and uncommitted credit lines provided
by banks in the United States and abroad. At March 31, 2004, we had cash and
cash equivalents of $867.8 million compared with $364.1 million at June 30,
2003.
32
At March 31, 2004, our outstanding borrowings of $841.6 million
included: (i) $360.0 million of Cumulative Redeemable Preferred Stock, which
shares have a mandatory redemption date of June 30, 2015 (see "Recently Issued
Accounting Standards"), (ii) $251.5 million of 6% Senior Notes due January 2012
consisting of $250.0 million principal, unamortized debt discount of $0.9
million and a $2.4 million adjustment to reflect the fair value of an
outstanding interest rate swap; (iii) $197.3 million of 5.75% Senior Notes due
October 2033 consisting of $200.0 million principal and unamortized debt
discount of $2.7 million; (iv) a 3.0 billion yen term loan (approximately $27.5
million at exchange rates as of March 31, 2004), which is due in March 2006; and
(v) $5.3 million of other short-term borrowings.
On December 31, 2003, we and the holders of the Cumulative Redeemable
Preferred Stock exchanged all of their outstanding shares of $6.50 Cumulative
Redeemable Preferred Stock due June 30, 2005 for a newly issued series of
Cumulative Redeemable Preferred Stock with a mandatory redemption date of June
30, 2015 ("2015 Preferred Stock"). Beginning with the quarter ended December 31,
2003, the dividend rate on the 2015 Preferred Stock was 4.75% per annum, payable
quarterly.
On April 24, 2004, Mrs. Estee Lauder passed away. As a result, our
right to call for redemption $291.6 million of the 2015 Preferred Stock became
exercisable and the holders' right to put to us all $360.0 million aggregate
principal amount of the 2015 Preferred Stock became exercisable.
On May 11, 2004, we called for redemption all $291.6 million
aggregate principal amount of 2015 Preferred Stock that could be redeemed at
that time. The redemption date has been set for June 10, 2004. We will use cash
on hand to fund the redemption. Upon redemption, the dividend rate on the
remaining $68.4 million principal amount of 2015 Preferred Stock will be
reduced, for the period from April 25, 2004 through June 30, 2004, from 4.75%
per annum to 0.62% per annum, which is a rate based on the after-tax yield on
six-month U.S. Treasuries. So long as the remaining shares of 2015 Preferred
Stock are outstanding, the dividend rate will be reset semi-annually in January
and July at the then existing after-tax yield on six-month U.S. Treasuries. As a
result of the redemption of the $291.6 million principal amount of 2015
Preferred Stock and the reduction of the dividend on the remaining 2015
Preferred Stock, we expect to save, net of financing costs, approximately $14.9
million in fiscal 2005.
The remaining $68.4 million principal amount of 2015 Preferred Stock
may be put to us at any time, but may not be called for redemption by us until
May 24, 2005. If put to us on or before June 30, 2005, we would have up to 120
days after the exercise date of the put to pay for the shares. If the remaining
shares of 2015 Preferred Stock are put to us or if we call those shares for
redemption, we expect to use cash on hand to fund the redemption.
In May 2003, we entered into an interest rate swap agreement with a
notional amount of $250.0 million to effectively convert the fixed rate interest
on our outstanding $250.0 million 6% Senior Notes to variable interest rates
based on LIBOR. In the short-term, this will provide us with a lower level of
interest expense related to the 6% Senior Notes based on current variable
interest rates, however, over the life of the notes, interest expense may be
greater than 6% based upon the fluctuations of LIBOR.
In September 2003, we issued and sold $200.0 million of 5.75% Senior
Notes due October 2033 ("5.75% Senior Notes") in a public offering. The 5.75%
Senior Notes were priced at 98.645% with a yield of 5.846%. Interest payments,
which commenced April 15, 2004, will be made semi-annually on April 15 and
October 15 of each year. In May 2003, in anticipation of the issuance of the
5.75% Senior Notes, we entered into a series of treasury lock agreements on a
notional amount totaling $195.0 million at a weighted average all-in rate of
4.53%. The treasury lock agreements were settled upon the issuance of the new
debt and we received a payment of $15.0 million that will be amortized against
interest expense over the life of the 5.75% Senior Notes. As a result of the
treasury lock agreements, the debt discount and debt issuance costs, our
effective interest rate on the 5.75% Senior Notes will be 5.395% over the life
of the debt. The net proceeds from the sale of the 5.75% Senior Notes will be
used for general corporate purposes, including but not limited to the redemption
of our outstanding 2015 Preferred Stock. We issued these fixed-rate notes to
lock in long-term liquidity at historically low prevailing market rates and to
mitigate future interest rate volatility.
33
We have a $750.0 million commercial paper program under which we may
issue commercial paper in the United States. Our commercial paper is currently
rated A-1 by Standard & Poor's and P-1 by Moody's. Our long-term credit ratings
are A+ with a negative outlook by Standard & Poor's and A1 with a stable outlook
by Moody's. At March 31, 2004, we had no commercial paper outstanding. We also
have an effective shelf registration statement covering the potential issuance
of up to an additional $300.0 million in debt securities. As of March 31, 2004,
we had an unused $400.0 million revolving credit facility, expiring on June 28,
2006, and $172.8 million in additional uncommitted credit facilities.
Our business is seasonal in nature and, accordingly, our working
capital needs vary. From time to time, we may enter into investing and financing
transactions that require additional funding. To the extent that these needs
exceed cash from operations, we could, subject to market conditions, issue
commercial paper, issue long-term debt securities or borrow under the revolving
credit facility.
Total debt as a percent of total capitalization was 34% at March 31,
2004 as compared with 14% at June 30, 2003. This increase primarily reflects the
reclassification of the redeemable preferred stock to long-term debt as well as
the issuance of the 5.75% Senior Notes.
The effects of inflation have not been significant to our overall
operating results in recent years. Generally, we have been able to introduce new
products at higher selling prices or increase selling prices sufficiently to
offset cost increases, which have been moderate.
We believe that cash on hand, cash generated from operations,
available credit lines and access to credit markets will be adequate to support
currently planned business operations and capital expenditures on both a
near-term and long-term basis.
CASH FLOWS
Net cash provided by operating activities was $550.7 million during
the nine months ended March 31, 2004 as compared with net cash provided by
operating activities of $419.3 million in the prior-year period, reflecting less
of a decline in accounts payable than in the prior-year period, higher levels of
accrued income taxes resulting from the anticipated full-year mix of global
earnings, decreased levels of inventory which were partially offset by increased
levels of accounts receivable. The decrease in inventory reflects our continued
efforts to reduce such levels and improve working capital. The increase in
accounts receivable levels reflects strong sales growth. Net cash used for
investing activities was $131.9 million during the nine months ended March 31,
2004, which primarily reflects capital expenditures. Net cash provided by
financing activities of $80.5 million primarily related to the issuance of the
5.75% Senior Notes partially offset by the acquisition of treasury stock and the
payment of the common stock dividends.
Net cash provided by operating activities was $548.5 million in
fiscal 2003 as compared with $518.0 million in fiscal 2002 and $305.4 million in
fiscal 2001. The improved operating cash flow primarily reflects increased
earnings and seasonal levels of operating assets and liabilities. Operating
assets and liabilities reflect an improvement in accounts receivable
collections, and a higher level of accounts payable, partially offset by
increased inventories in anticipation of product launches in the first half of
fiscal 2004 and the impact of acquisitions on required inventory levels. The
improvement in net cash flows for fiscal 2002 compared to fiscal 2001 was
generated primarily by a reduction of inventory. Inventory levels were
unseasonably high at the end of fiscal 2001 and were lowered during fiscal 2002
as part of our effort to keep inventory levels in line with forecasted sales.
Operating cash flows were generally not impacted by the fiscal 2002
restructuring as lower net earnings were offset by the non-cash portion of the
charge and the increase in other accrued liabilities.
34
Net cash used for investing activities was $192.5 million in fiscal
2003, compared with $217.0 million in fiscal 2002 and $206.3 million in fiscal
2001. Net cash used in investing activities in fiscal 2003 primarily relates to
capital expenditures and the acquisition of Darphin and certain Aveda
distributors. Net cash used in investing activities during fiscal 2002 and
fiscal 2001 relates primarily to capital expenditures.
Capital expenditures amounted to $163.1 million, $203.2 million and
$192.2 million in fiscal 2003, 2002 and 2001, respectively. Spending in all
three years primarily reflected the continued upgrade of manufacturing
equipment, dies and molds, new store openings, store improvements, counter
construction and information technology enhancements. The reduced level of
capital expenditures in fiscal 2003 reflects tight control on our spending in
light of economic conditions, fewer retail store openings and reduced spending
related to leasehold improvements.
Cash used for financing activities was $550.4 million, $121.8 million
and $63.5 million in fiscal 2003, 2002 and 2001, respectively. The net cash used
for financing activities in 2003 primarily relates to common stock repurchases,
the repayment of long-term debt and dividend payments. Net cash used for
financing during fiscal 2002 primarily relates to dividend payments and common
stock repurchases. The net cash used in fiscal 2001 was primarily related to
dividend payments.
DIVIDENDS
On November 5, 2003, the Board of Directors declared an annual
dividend of $.30 per share on our Class A and Class B Common Stock, payable on
January 6, 2004 to stockholders of record at the close of business on December
16, 2003. Common stock dividends paid during the fiscal years 2004 and 2003 were
$68.5 million and $46.5 million, respectively. Dividends declared on the
Cumulative Redeemable Preferred Stock for the nine months ended March 2004 and
2003 were $14.4 million and $17.6 million, respectively. The decrease reflects
an agreement to reduce the dividend of the preferred stock made in connection
with the exchange of the preferred shares on December 31, 2003. As noted above
under "The Company - Recent Developments," the dividend rate on the remaining
$68.4 million principal amount of 2015 Preferred Stock has been reduced, for the
period from April 25, 2004 through June 30, 2004, from 4.75% per annum to 0.62%
per annum, which is a rate based on the after-tax yield on six-month U.S.
Treasuries. So long as the remaining shares of 2015 Preferred Stock are
outstanding, the dividend rate will be reset semi-annually in January and July
at the then existing after-tax yield on six-month U.S. Treasuries. The
Cumulative Redeemable Preferred Stock dividends declared for the nine months
ended March 31, 2004 have been characterized as interest expense (see "Recently
Issued Accounting Standards").
The Board of Directors declared, and we paid on our Class A Common
Stock and Class B Common Stock, an annual dividend of $.20 per share in fiscal
2003 and quarterly dividends at the rate of $.05 per share in each quarter of
fiscal 2002 and 2001. The last quarterly dividend of $.05 per share was paid in
the first quarter of fiscal 2003. As previously disclosed, the Board of
Directors determined that, at its discretion, it would declare and the Company
would pay dividends on its common stock annually rather than quarterly
commencing in fiscal 2003. In fiscal 2003, 2002 and 2001, dividends declared on
our common stock totaled $46.5 million, $47.5 million and $47.7 million,
respectively. Total dividends declared, including dividends on the Cumulative
Redeemable Preferred Stock, were $69.9 million, $70.9 million and $71.1 million
in fiscal 2003, 2002 and 2001, respectively.
SHARE REPURCHASE PROGRAM
As noted above under "The Company - Recent Developments," we are
presently authorized by the Board of Directors to repurchase up to 28.0 million
shares of Class A Common Stock in the open market or in privately negotiated
transactions, depending on market conditions and other factors. As of May 14,
2004, the cumulative total of acquired shares pursuant to the authorization was
16.3 million, reducing the remaining authorized share repurchase balance to 11.7
million. During fiscal 2004, we purchased approximately 2.5 million shares for
$98.3 million as outlined in the following table:
35
TOTAL NUMBER OF MAXIMUM
SHARES PURCHASED NUMBER OF SHARES
AS PART OF THAT MAY YET BE
TOTAL NUMBER OF AVERAGE PRICE PUBLICLY PURCHASED
PERIOD SHARES PURCHASED PAID PER SHARE ANNOUNCED PROGRAM UNDER THE PROGRAM
------------------------------------------------------------------------------------------------------------------------------------
July 2003 0 0 0 4,160,500
August 2003 350,000 $33.60 350,000 3,810,500
September 2003 15,000 34.00 15,000 3,795,500
October 2003 0 0 0 3,795,500
November 2003 202,300 36.25 202,300 3,593,200
December 2003 0 0 0 3,593,200
January 2004 0 0 0 3,593,200
February 2004 1,378,300 41.20 1,378,300 2,214,900
March 2004 514,900 42.59 514,900 1,700,000
April 2004 0 0 0 1,700,000
May 2004 (through
May 14, 2004) 0 0 0 11,700,000
--------- ---------
Year-to-Date 2,460,500 $39.96 2,460,500
========= =========
PENSION PLAN FUNDING AND EXPENSE
We maintain pension plans covering substantially all of our full-time
employees for our U.S. operations and a majority of our international
operations. Several plans provide pension benefits based primarily on years of
service and employees' earnings. In the United States, we maintain a
trust-based, noncontributory defined benefit pension plan ("U.S. Plan").
Additionally, we have an unfunded, nonqualified domestic benefit plan to provide
benefits in excess of Internal Revenue Code limitations. Our international
pension plans are comprised of defined benefit and defined contribution plans.
Several factors influence our annual funding requirements. For the
U.S. Plan, our funding policy consists of an annual contribution at a rate that
provides for future plan benefits and maintains appropriate funded percentages.
Such contribution is not less than the minimum required by the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and subsequent
pension legislation and is not more than the maximum amount deductible for
income tax purposes. For each international plan, our funding policies are
determined by local laws and regulations. In addition, amounts necessary to fund
future obligations under these plans could vary depending on estimated
assumptions (as detailed in "Critical Accounting Polices and Estimates"). The
effect on operating results in the future of pension plan funding will depend on
economic conditions, employee demographics, mortality rates, the number of
participants electing to take lump-sum distributions, investment performance and
funding decisions.
During fiscal 2003, we changed certain of the underlying assumptions
associated with our pension plans based upon the recent past performance and
outlook of the securities markets, resulting in a larger funding requirement. In
addition, the assets associated with the pension plans experienced negative
investment returns, which also affected our funding requirements. Even after
considering the impact of these factors, there was no minimum contribution to
the U.S. Plan required by ERISA for fiscal 2003 and 2002. However, at
management's discretion, we made cash contributions to the U.S. Plan of $76.0
million and $43.0 million during fiscal 2003 and 2002, respectively.
36
In addition, at June 30, 2003, we recognized a liability on our
balance sheet for each pension plan if the fair market value of the assets of
that plan was less than the accumulated benefit obligation and, accordingly, a
charge is recorded in accumulated other comprehensive income (loss) in
shareholders' equity. During fiscal 2003 and 2002, we recorded a charge to
accumulated other comprehensive income (loss) of $20.3 million and $7.9 million,
respectively. This charge had no impact on our consolidated net earnings or
liquidity.
COMMITMENTS AND CONTINGENCIES
On May 11, 2004, we called for redemption all $291.6 million
aggregate principal amount of 2015 Preferred Stock that could be redeemed at
that time. The redemption date has been set for June 10, 2004. The remaining
$68.4 million principal amount of 2015 Preferred Stock may be put to us at any
time, but may not be called for redemption by us until May 24, 2005. If shares
of the 2015 Preferred Stock are put to us on or before June 30, 2005, we would
have up to 120 days after notice to purchase such shares.
Certain of our business acquisition agreements include "earn-out"
provisions. These provisions generally require that we pay to the seller or
sellers of the business additional amounts based on the performance of the
acquired business. The payments typically are made after a certain period of
time and our next "earn-out" payment is expected to be made after the end of
fiscal 2005. Since the size of each payment depends upon performance of the
acquired business, we do not expect that such payments will have a material
adverse impact on our future results of operations or financial condition.
Under agreements covering our purchase of trademarks for a percentage
of related sales, royalty payments totaling $20.3 million, $16.5 million and
$16.0 million in fiscal 2003, 2002 and 2001, respectively, have been charged to
expense. Such payments were made to Mrs. Estee Lauder and ceased to accrue upon
her death on April 24, 2004. While the obligation was accruing, it was not fixed
and determinable, and therefore has been excluded from the following contractual
obligation table.
CONTRACTUAL OBLIGATIONS
The following table summarizes scheduled maturities of our
contractual obligations for which cash flows were fixed and determinable as of
June 30, 2003.
PAYMENTS DUE IN FISCAL
----------------------
TOTAL 2004 2005 2006 2007 2008 THEREAFTER
----- ---- ---- ---- ---- ---- ----------
(IN MILLIONS)
Long-term debt including current
portion (1).................. $ 291.4 $ 7.8 $ 1.3 $ 25.2 $ -- $ -- $ 257.1
Redeemable preferred stock (2).. 360.0 -- 360.0 -- -- -- --
Lease commitments (3)........... 605.6 120.1 104.6 74.4 61.9 54.8 189.8
Unconditional purchase
obligations (4).............. 698.7 346.9 37.8 42.6 27.3 25.5 218.6
-------- -------- -------- -------- -------- -------- --------
Total contractual obligations... $1,955.7 $ 474.8 $ 503.7 $ 142.2 $ 89.2 $80.3 $ 665.5
======== ======== ======== ======== ======== ======== ========
(1) Refer to Note 8 of Notes to Consolidated Financial Statements in our
Current Report on Form 8-K, dated May 17, 2004, incorporated by reference
herein.
(2) Refer to Note 12 of Notes to Consolidated Financial Statements in our
Current Report on Form 8-K, dated May 17, 2004, incorporated by reference
herein. On May 11, 2004, we called for redemption all $291.6 million
aggregate principal amount of 2015 Preferred Stock that could be redeemed
at that time. The redemption date has been set for June 10, 2004. The
remaining $68.4 million principal amount of 2015 Preferred Stock may be put
to us at any time, but may not be called for redemption by us until May 24,
2005.
37
(3) Includes operating lease commitments, and to a lesser extent, minimal
capital lease commitments. Refer to Note 15 of Notes to Consolidated
Financial Statements in our Current Report on Form 8-K, dated May 17, 2004,
incorporated by reference herein. In July 2003, we signed a new lease for
our principal offices at the same location. Our rental obligations under
the new lease will commence in fiscal 2005 and expire in fiscal 2020.
Obligations pursuant to the lease in fiscal 2005, 2006, 2007, 2008 and
thereafter are $5.9 million, $23.6 million, $23.6 million, $24.1 million
and $324.2 million, respectively.
(4) Unconditional purchase obligations primarily include inventory commitments,
estimated future earn-out payments, estimated royalty payments pursuant to
license agreements, advertising commitments and capital improvement
commitments.
Except as disclosed in the footnotes above, there have been no other
significant changes to our contractual obligations since June 30, 2003.
BUSINESS ACQUISITIONS AND LICENSE AGREEMENTS
In April 2003, we acquired the Paris-based Darphin group of companies
that develops, manufactures and markets the "Darphin" brand of skin care
products. The initial purchase price, paid at closing, was funded by cash
provided by operations, and did not have a material effect on our results of
operations or financial condition. An additional payment is expected to be made
in fiscal 2009, the amount of which will depend on future net sales and earnings
of the Darphin business.
In May 2003, we entered into a license agreement to manufacture and
sell fragrances and beauty products under the "Michael Kors" trademarks with
Michael Kors L.L.C. At the same time, we purchased certain related rights and
inventory from American Designer Fragrances, a division of LVMH.
During the first quarter of fiscal 2004, we acquired the Rodan &
Fields skin care line. The initial purchase price, paid at closing, was funded
by cash provided by operations, the payment of which did not have a material
effect on our results of operations or consolidated financial condition. We may
make additional payments between fiscal 2007 and 2011 based on certain
conditions.
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
We address certain financial exposures through a controlled program
of risk management that includes the use of derivative financial instruments. We
primarily enter into foreign currency forward exchange contracts and foreign
currency options to reduce the effects of fluctuating foreign currency exchange
rates. We also enter into interest rate derivative contracts to manage the
effects of fluctuating interest rates. We categorize these instruments as
entered into for purposes other than trading.
For each derivative contract we enter into where we look to obtain
special hedge accounting treatment, we formally document the relationship
between the hedging instrument and hedged item, as well as its risk-management
objective and strategy for undertaking the hedge. This process includes linking
all derivatives that are designated as fair-value, cash-flow, or
foreign-currency hedges to specific assets and liabilities on the balance sheet
or to specific firm commitments or forecasted transactions. We also formally
assess, both at the hedge's inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flows of hedged items. If it is
determined that a derivative is not highly effective, then we will be required
to discontinue hedge accounting with respect to that derivative prospectively.
38
FOREIGN EXCHANGE RISK MANAGEMENT
We enter into forward exchange contracts to hedge anticipated
transactions as well as receivables and payables denominated in foreign
currencies for periods consistent with our identified exposures. The purpose of
the hedging activities is to minimize the effect of foreign exchange rate
movements on our costs and on the cash flows that we receive from foreign
subsidiaries. Almost all foreign currency contracts are denominated in
currencies of major industrial countries and are with large financial
institutions rated as strong investment grade by a major rating agency. We also
enter into foreign currency options to hedge anticipated transactions where
there is a high probability that anticipated exposures will materialize. The
forward exchange contracts have been designated as cash-flow hedges. As of March
31, 2004, these cash-flow hedges were highly effective, in all material
respects.
As a matter of policy, we only enter into contracts with
counterparties that have at least an "A" (or equivalent) credit rating. The
counterparties to these contracts are major financial institutions. We do not
have significant exposure to any one counterparty. Our exposure to credit loss
in the event of nonperformance by any of the counterparties is limited to only
the recognized, but not realized, gains attributable to the contracts.
Management believes risk of loss under these hedging contracts is remote and in
any event would not be material to the consolidated financial results. The
contracts have varying maturities through the end of June 2005. Costs associated
with entering into such contracts have not been material to our consolidated
financial results. We do not utilize derivative financial instruments for
trading or speculative purposes. At March 31, 2004, we had foreign currency
contracts in the form of forward exchange contracts and option contracts in the
amount of $606.6 million and $98.9 million, respectively. The foreign currencies
included in forward exchange contracts (notional value stated in U.S. dollars)
are principally the Euro ($143.8 million), Swiss franc ($110.2 million), British
pound ($77.2 million), Canadian dollar ($68.5 million), Japanese yen ($64.1
million) and Australian dollar ($36.5 million). The foreign currencies included
in the option contracts (notional value stated in U.S. dollars) are principally
the Euro ($34.1 million), British pound ($28.6 million) and Swiss franc ($19.0
million).
INTEREST RATE RISK MANAGEMENT
We enter into interest rate derivative contracts to manage the
exposure to fluctuations of interest rates on our funded indebtedness and
anticipated issuance of debt, as well as cash investments, for periods
consistent with the identified exposures. All interest rate derivative contracts
are with large financial institutions rated as strong investment grade by a
major rating agency.
We have an interest rate swap agreement with a notional amount of
$250.0 million to effectively convert fixed interest on the existing $250.0
million 6% Senior Notes to variable interest rates based on LIBOR. We designated
the swap as a fair-value hedge. As of March 31, 2004, the fair-value hedge was
highly effective, in all material respects.
Additionally, in May 2003, in connection with the anticipated
issuance of debt, we entered into a series of treasury lock agreements on a
notional amount totaling $195.0 million at a weighted average all-in rate of
4.53%. These treasury lock agreements were used to hedge the exposure to the
rise in interest rates prior to the September 2003 issuance of debt. The
agreements were settled upon the issuance of the $200.0 million of 5.75% Senior
Notes and we realized a gain in other comprehensive income of $15.0 million that
will be amortized against interest expense over the life of the 5.75% Senior
Notes.
MARKET RISK
We use a value-at-risk model to assess the market risk of our
derivative financial instruments. Value-at-risk represents the potential losses
for an instrument or portfolio from adverse changes in market factors for a
specified time period and confidence level. We estimate value-at-risk across all
of our derivative financial instruments using a model with historical
volatilities and correlations calculated over the past 250-day period. The
measured value-at-risk, calculated as an average, for the twelve months ended
June 30, 2003 related to our foreign exchange contracts was $7.6 million. As of
June 30, 2003, the measured value-at-risk related to our interest rate contracts
was $10.3 million. The model estimates were made assuming normal market
conditions and a 95 percent confidence level. We used a statistical simulation
model that valued our derivative financial instruments against one thousand
randomly generated market price paths.
39
Our calculated value-at-risk exposure represents an estimate of
reasonably possible net losses that would be recognized on our portfolio of
derivative financial instruments assuming hypothetical movements in future
market rates and is not necessarily indicative of actual results, which may or
may not occur. It does not represent the maximum possible loss or any expected
loss that may occur, since actual future gains and losses will differ from those
estimated, based upon actual fluctuations in market rates, operating exposures,
and the timing thereof, and changes in our portfolio of derivative financial
instruments during the year.
We believe, however, that any loss incurred would be offset by the
effects of market rate movements on the respective underlying transactions for
which the hedge is intended.
OFF-BALANCE SHEET ARRANGEMENTS
We do not maintain any off-balance sheet arrangements, transactions,
obligations or other relationships with unconsolidated entities that would be
expected to have a material current or future effect upon our financial
condition or results of operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
------------------------------------
On January 12, 2004, the Financial Accounting Standards Board
("FASB") issued FASB Staff Position No. FAS 106-1, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003," ("FSP No. 106-1") in response to a new law regarding
prescription drug benefits under Medicare ("Medicare Part D") as well as a
federal subsidy to sponsors of retiree health care benefit plans that provide a
benefit that is at least actuarially equivalent to Medicare Part D. Currently,
Statement of Financial Accounting Standard No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions,"("SFAS No. 106") requires that
changes in relevant law be considered in current measurement of postretirement
benefit costs. However, certain accounting issues related to the federal subsidy
remain unclear and significant uncertainties may exist which impair a plan
sponsor's ability to evaluate the direct effects of the new law and the
ancillary effects on plan participants' behavior and healthcare costs. Due to
these uncertainties, FSP No. 106-1 provides plan sponsors with an opportunity to
elect to defer recognizing the effects of the new law in the accounting for its
retiree health care benefit plans under SFAS No. 106 and to provide related
disclosures until authoritative guidance on the accounting for the federal
subsidy is issued and clarification regarding other uncertainties is resolved.
We have elected to defer recognition while evaluating the new law and the
pending issuance of authoritative guidance and their effect, if any, on our
results of operations, financial position and financial statement disclosure.
Therefore, any measures of the accumulated postretirement benefit obligation or
the net periodic postretirement benefit cost do not reflect the effects of the
new law and issued guidance could require us to change previously reported
information.
In December 2003, the FASB issued FASB Interpretation Number 46-R
("FIN 46-R"), "Consolidation of Variable Interest Entities." FIN 46-R, which
modifies certain provisions and effective dates of FIN 46, sets forth criteria
to be used in determining whether an investment in a variable interest entity
should be consolidated. These provisions are based on the general premise that
if a company controls another entity through interests other than voting
interests, that company should consolidate the controlled entity. We have
evaluated whether the provisions of FIN 46-R are applicable to our investments,
certain of which are currently accounted for by the equity method, as well as
other arrangements, which may meet the criteria of the interpretation, and
believe that there are currently no material arrangements that meet the
definition of a variable interest entity which would require consolidation.
40
In December 2003, the FASB revised Statement of Financial Accounting
Standard No. 132, "Employers' Disclosures about Pensions and other
Postretirement Benefits," ("SFAS No. 132") establishing additional annual
disclosures about plan assets, investment strategy, measurement date, plan
obligations and cash flows. In addition, the revised standard established
interim disclosure requirements related to the net periodic benefit cost
recognized and contributions paid or expected to be paid during the current
fiscal year. The new annual disclosures are effective for financial statements
of companies with fiscal years ending after December 15, 2003 and the
interim-period disclosures are effective for interim periods beginning after
December 15, 2003. We will adopt the annual disclosures for our fiscal year
ending June 30, 2004 and have adopted the interim disclosures for our fiscal
quarter ended March 31, 2004. The adoption of the revised SFAS No. 132 will have
no impact on our results of operation or financial condition.
We have adopted Statement of Financial Accounting Standard No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("SFAS No. 150"). SFAS No. 150 established standards for
classifying and measuring certain financial instruments with characteristics of
both liabilities and equity. Among other things, it specifically requires that
mandatorily redeemable instruments, such as redeemable preferred stock, be
classified as a liability. Initial and subsequent measurements of the
instruments differ based on the characteristics of each instrument and as
provided for in the statement. Based on the provisions of this statement, we
have classified the Cumulative Redeemable Preferred Stock as a liability and the
related dividends thereon have been characterized as interest expense.
Restatement of financial statements for earlier years presented was not
permitted. The adoption of this statement has resulted in the inclusion of the
dividends on the preferred stock (equal to $4.3 million and $14.4 million,
respectively, for the three and nine months ended March 31, 2004) as interest
expense. While the inclusion has impacted net earnings, net earnings
attributable to common stock and earnings per common share were unaffected.
Given that the dividends are not deductible for income tax purposes, the
inclusion of the preferred stock dividends as an interest expense has caused an
increase in our effective tax rate. The adoption of SFAS No. 150 had no impact
on our financial condition.
41
SELLING STOCKHOLDERS
The following table sets forth certain information, as of May 14,
2004, for the selling stockholders identified below with respect to that selling
stockholder's beneficial ownership of Class A Common Stock and Class B Common
Stock before the offering and the percentage of total voting power represented
by those shares, as well as the number of shares to be beneficially owned after
the offering and the percentage of total voting power represent by those shares.
COMMON STOCK BENEFICIALLY OWNED BEFORE COMMON STOCK BENEFICIALLY OWNED AFTER
THE OFFERING THE OFFERING
--------------------------------------- ---------------------------------------
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
VOTING VOTING
NAME OF SELLING STOCKHOLDER CLASS A CLASS B(1) POWER CLASS A CLASS B POWER
--------------------------- ------- ---------- ----- ------- ------- -----
The Estee Lauder 1994 Trust(2)... 4,498,951 2,001,049 2.1%
The Estee Lauder 2002 Trust(3)... 0 9,510,803 8.1%
The Estee Lauder 2001 Charitable
Trust(4)...................... 1,019,260 0 0.1%
___________________
(1) The holders of Class B Common Stock will, to the extent required, convert
the necessary shares into Class A Common Stock in order to sell them
pursuant to this offering.
(2) The Estee Lauder 1994 Trust (the "1994 Trust") was organized in the State
of New York. Its business address is c/o George E.B. Maguire, Debevoise &
Plimpton, 919 Third Avenue, New York, NY 10022. As sole trustee of the 1994
Trust, Ronald Weintraub has sole voting and dispositive power with respect
to the shares of Class A Common Stock and the shares of Class B Common
Stock owned by the 1994 Trust. The Estee Lauder 2002 Trust (the "2002
Trust") is the beneficiary of the 1994 Trust. Leonard A. Lauder and Ronald
S. Lauder, as co-trustees and beneficiaries of the 2002 Trust, and Ira T.
Wender, as a co-trustee of the 2002 Trust, have the right to receive or the
power to direct the receipt of dividends from, or the proceeds from the
sale of the shares of Class A Common Stock and the shares of Class B Common
Stock owned by the 1994 Trust to the extent such dividends or proceeds have
been distributed by the 1994 Trust to the 2002 Trust. JPMorgan Chase Bank
("Morgan") has the right to receive or the power to direct the receipt of
dividends from, or the proceeds from the sale of, the shares of Class A
Common Stock owned by the 1994 Trust and pledged to Morgan to secure the
1994 Trust's obligations under the Forward Purchase Contract described
below.
The 1994 Trust is obligated under two separate forward purchase agreements
(the "Forward Purchase Contracts") with Morgan, which is not affiliated
with the 1994 Trust or the Company, to deliver not more than 4,498,951
shares of Class A Common Stock held by the 1994 Trust (or cash in lieu of
such shares) to an affiliate of Morgan to be designated by Morgan. The
Forward Purchase Contracts provide for the delivery of such shares (or
cash) based on a formula in four approximately equal tranches (each, a
"Tranche") over a series of specified dates between July and October of
2004, with respect to two Tranches, and between January and March of 2006,
with respect to the remaining two Tranches (each, an "Exchange Date").
Subject to the right of the 1994 Trust described in the next sentence, the
precise number of shares to be delivered by the 1994 Trust on any Exchange
Date will be determined in accordance with the Forward Purchase Contract as
of the relevant Exchange Date. The 1994 Trust has the right, with respect
to any Tranche, to pay cash to settle its delivery obligation with respect
to that Tranche. The 1994 Trust may seek to unwind early one or more of the
Tranches prior to the specified maturity date and include in this offering
42
any shares not required to be delivered to Morgan's designated affiliate
upon such unwinding. Until there is delivery of the shares to Morgan's
designated affiliate (or any other disposition thereof), all 4,498,951
shares of Class A Common Stock continue to be included in the total share
ownership for the 1994 Trust. The 4,498,951 shares of Class A Common Stock
held by the 1994 Trust are pledged as collateral to Morgan to secure the
1994 Trust's obligations under the Forward Purchase Contracts.
(3) The 2002 Trust was organized in the State of New York. Its business address
is 767 Fifth Avenue, New York, New York 10153. As co-trustees of the 2002
Trust, Leonard A. Lauder, who is also Chairman of the Board of the Company,
and Ronald S. Lauder, who is also a Director of the Company, share voting
power, and Leonard A. Lauder, Ronald S. Lauder and Ira T. Wender share
dispositive power with respect to the shares of Class B Common Stock owned
by the 2002 Trust. Leonard A. Lauder and Ronald S. Lauder, as co-trustees
and beneficiaries of the 2002 Trust, and Ira T. Wender, as a co-trustee of
the 2002 Trust, have the right to receive or the power to direct the
receipt of dividends from, or the proceeds from the sale of, the shares of
Class B Common Stock owned by the 2002 Trust.
The 2002 Trust is a party to a Stockholders' Agreement, dated November 22,
1995, as amended, among certain Lauder Family Members and us. The
stockholders who are parties to the Stockholders' Agreement have agreed to
vote in favor of the election of Leonard A. Lauder and Ronald S. Lauder and
one designee of each as directors of the Company. The Stockholders'
Agreement also contains certain limitations on the transfer of shares of
Class A Common Stock. Each stockholder who is a party to the Stockholders'
Agreement has agreed to grant to the other parties a right of first offer
to purchase shares of Class A Common Stock of the stockholder in the event
the stockholder intends to sell to a person (or group of persons) who is
not a Lauder Family Member, as defined therein, except in certain
circumstances, such as sales in a widely distributed underwritten public
offering or sales made in compliance with Rule 144.
(4) The Estee Lauder 2001 Charitable Trust (the "2001 Trust") was organized in
the State of New York. Its business address is 767 Fifth Avenue, New York,
New York 10153. As co-trustees of the 2001 Trust, Leonard A. Lauder, who is
also Chairman of the Board of the Company, and Ronald S. Lauder, who is
also a Director of the Company, share voting power, and Leonard A. Lauder,
Ronald S. Lauder and Ira T. Wender share dispositive power with respect to
the shares of Class A Common Stock owned by the 2001 Trust. Leonard A.
Lauder and Ronald S. Lauder, as co-trustees and beneficiaries of the 2001
Trust, and Ira T. Wender, as a co-trustee of the 2001 Trust, have the right
to receive or the power to direct the receipt of dividends from, or the
proceeds from the sale of, the shares of Class A Common Stock owned by the
2001 Trust.
43
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 650,000,000 shares of Class
A Common Stock, 240,000,000 shares of Class B Common Stock, and 23,600,000
shares of Preferred Stock, par value $.01 per share. As of May 14, 2004, there
were 122,114,850 shares of Class A Common Stock and 105,484,533 shares of Class
B Common Stock outstanding. All of the shares of Class B Common Stock are
beneficially owned by members of the Lauder family. Of the authorized shares of
Preferred Stock, 359,998 shares of 2015 Preferred Stock are outstanding and, as
of the date of this prospectus, are beneficially owned by members of the Lauder
family. On May 11, 2004, we called for redemption 291,600 shares of 2015
Preferred Stock. The redemption date has been set for June 10, 2004. The
following description is a summary and is subject to and qualified in its
entirety by reference to the provisions of our Restated Certificate of
Incorporation previously filed with the Commission.
COMMON STOCK
The shares of Class A Common Stock and Class B Common Stock are
identical in all respects, except for voting rights, certain conversion rights
and transfer restrictions in respect of the shares of the Class B Common Stock,
as described below.
VOTING RIGHTS. Each share of Class A Common Stock entitles the holder
to one vote on each matter submitted to a vote of our stockholders and each
share of Class B Common Stock entitles the holder to ten votes on each such
matter, including the election of directors. There is no cumulative voting.
Except as required by applicable law, holders of the Class A Common Stock and
Class B Common Stock vote together on all matters submitted to a vote of the
stockholders. With respect to certain corporate changes, such as liquidations,
reorganizations, recapitalizations, mergers, consolidations and sales of all or
substantially all of our assets, holders of the Class A Common Stock and Class B
Common Stock vote together as a single class and the approval of 75% of the
outstanding voting power is required to authorize or approve such transactions.
Any action that can be taken at a meeting of the stockholders may be
taken by written consent in lieu of the meeting if we receive consents signed by
stockholders having the minimum number of votes that would be necessary to
approve the action at a meeting at which all shares entitled to vote on the
matter were present. This could permit the holders of Class B Common Stock to
take all actions required to be taken by the stockholders without providing the
other stockholders the opportunity to make nominations or raise other matters at
a meeting. The right to take action by less than unanimous written consent
expires at such time as there are no shares of Class B Common Stock outstanding.
DIVIDENDS. Holders of Class A Common Stock and Class B Common Stock
are entitled to receive dividends at the same rate if, as and when such
dividends are declared by our Board of Directors out of assets legally available
therefor after payment of dividends required to be paid on shares of preferred
stock, if any.
If a dividend or distribution payable in shares of Class A Common
Stock is made on the Class A Common Stock, we must also make a pro rata and
simultaneous dividend or distribution on the Class B Common Stock payable in
shares of Class B Common Stock. Conversely, if a dividend or distribution
payable in shares of Class B Common Stock is made on the Class B Common Stock,
we must also make a pro rata and simultaneous dividend or distribution on the
Class A Common Stock payable in shares of Class A Common Stock.
RESTRICTIONS ON TRANSFER. If a holder of Class B Common Stock
transfers such shares, whether by sale, assignment, gift, bequest, appointment
or otherwise, to a person other than a Lauder Family Member (as defined below),
such shares will be converted automatically into shares of Class A Common Stock.
In the case of a pledge of shares of Class B Common Stock to a financial
institution, such shares will not be deemed to be transferred unless and until a
foreclosure occurs.
44
As used in this prospectus, the term "Lauder Family Members" includes
only the following persons: (i) the estate of Mrs. Estee Lauder; (ii) each
descendant of Mrs. Lauder (a "Lauder Descendant") and their respective estates,
guardians, conservators or committees; (iii) each "Family Controlled Entity" (as
defined below); and (iv) the trustees, in their respective capacities as such,
of each "Family Controlled Trust" (as defined below). The term "Family
Controlled Entity" means (i) any not-for-profit corporation if at least 80% of
its board of directors is composed of Lauder Descendants; (ii) any other
corporation if at least 80% of the value of its outstanding equity is owned by
Lauder Family Members; (iii) any partnership if at least 80% of the value of its
partnership interests is owned by Lauder Family Members; and (iv) any limited
liability or similar company if at least 80% of the value of the company is
owned by Lauder Family Members. The term "Family Controlled Trust" includes
certain trusts existing on November 16, 1995 and trusts the primary
beneficiaries of which are Lauder Descendants, spouses of Lauder Descendants
and/or charitable organizations, provided that if the trust is a wholly
charitable trust, at least 80% of the trustees of such trust consist of Lauder
Descendants.
CONVERSION. Class A Common Stock has no conversion rights. Class B
Common Stock is convertible into Class A Common Stock, in whole or in part, at
any time and from time to time at the option of the holder, on the basis of one
share of Class A Common Stock for each share of Class B Common Stock converted.
In the event of a transfer of shares of Class B Common Stock to any person other
than a Lauder Family Member, each share of Class B Common Stock so transferred
automatically will be converted into one share of Class A Common Stock. Each
share of Class B Common Stock will also automatically convert into one share of
Class A Common Stock if, on the record date for any meeting of the stockholders,
the number of shares of Class B Common Stock then outstanding is less than 10%
of the aggregate number of shares of Class A Common Stock and Class B Common
Stock then outstanding.
LIQUIDATION. In the event of liquidation, after payment of our debts
and other liabilities and after making provision for the holders of Preferred
Stock, if any, our remaining assets will be distributable ratably among the
holders of the Class A Common Stock and Class B Common Stock treated as a single
class.
MERGERS AND OTHER BUSINESS COMBINATIONS. Upon a merger or
consolidation, holders of each class of common stock are entitled to receive
equal per share payments or distributions, except that in any transaction in
which shares of capital stock are distributed, such shares may differ as to
voting rights to the extent and only to the extent that the voting rights of the
Class A Common Stock and Class B Common Stock differ at that time. We may not
dispose of all or any substantial part of our assets to, or merge or consolidate
with, any person, entity or "group" (as defined in Rule 13d-5 of the Exchange
Act), which beneficially owns in the aggregate ten percent or more of our
outstanding common stock (a "Related Person") without the affirmative vote of
the holders, other than such Related Person, of not less than 75% of the voting
power of outstanding Class A Common Stock and Class B Common Stock voting as a
single class. For the sole purpose of determining the 75% vote, a Related Person
will also include the seller or sellers from whom the Related Person acquired,
during the preceding six months, at least five percent of the outstanding shares
of Class A Common Stock in a single transaction or series of related
transactions pursuant to one or more agreements or other arrangements (and not
through a brokers' transaction) but only if such seller or sellers have
beneficial ownership of shares of common stock having a fair market value in
excess of $10 million in the aggregate following such disposition to such
Related Person. This 75% voting requirement is not applicable, however, if (i)
the proposed transaction is approved by a vote of not less than a majority of
our board of directors who are neither affiliated nor associated with the
Related Person (or the seller of shares to the Related Person as described
above) or (ii) in the case of a transaction pursuant to which the holders of
common stock are entitled to receive cash, property, securities or other
consideration, the cash or fair market value of the property, securities or
other consideration to be received per share in such transaction is not less
than the higher of (A) the highest price per share paid by the Related Person
for any of its holdings of common stock within the two-year period immediately
prior to the announcement of the proposed transaction or (B) the highest closing
sale price during the 30-day period immediately preceding such date or during
the 30-day period immediately preceding the date on which the Related Person
became a Related Person, whichever is higher.
45
OTHER PROVISIONS. The holders of the Class A Common Stock and Class B
Common Stock are not entitled to preemptive rights. Neither the Class A Common
Stock nor the Class B Common Stock may be subdivided or combined in any manner
unless the other class is subdivided or combined in the same proportion.
TRANSFER AGENT AND REGISTRAR. The Transfer Agent and Registrar for
the Class A Common Stock is Mellon Investor Services.
PREFERRED STOCK
2015 PREFERRED STOCK. On May 11, 2004, we called for redemption all
$291.6 million aggregate principal amount of 2015 Preferred Stock that could be
redeemed at that time. The redemption date has been set for June 10, 2004. The
remaining $68.4 million principal amount of 2015 Preferred Stock may be put to
us at any time, but may not be called for redemption by us until May 24, 2005.
If put to us on or before June 30, 2005, we would have up to 120 days after the
exercise date of the put to pay for the shares.
Holders of the 2015 Preferred Stock are entitled to receive
cumulative cash dividends at a rate of 4.75% per annum per share until April 24,
2004, 0.62% per annum per share from April 25, 2004 until June 30, 2004, and
thereafter at a rate that will be reset semi-annually in January and July at the
then existing after-tax yield on six-month U.S. Treasuries, payable in quarterly
installments. If such dividends are not paid in full, or declared in full and
sums set apart for full payment thereof, then no dividends may be paid or
declared upon the common stock or any other capital stock ranking junior to or
on parity with such 2015 Preferred Stock. If, at the time of an annual meeting
of stockholders, the equivalent of six quarterly dividends are in arrears, then
the number of directors on our board of directors will be increased by two and
the holders of the outstanding 2015 Preferred Stock voting separately as a class
will be entitled at the meeting to vote for the election of two directors. The
right to elect two directors and such directors' terms on the board of directors
will continue until such arrearage in the payment of dividends ceases to exist.
Shares of 2015 Preferred Stock are subject to mandatory redemption on June 30,
2005 at a redemption price of $100 per share. Following such date and so long as
such mandatory redemption obligations have not been discharged in full, no
dividends may be paid or declared upon the common stock, or on any other capital
stock ranking junior to or on a parity with such 2015 Preferred Stock and no
shares of common stock or such junior or parity stock may be redeemed or
acquired by us for any consideration.
OTHER PREFERRED STOCK. Our board of directors is authorized, subject
to any limitations prescribed by Delaware law or the rules of the NYSE or other
organizations on whose systems our stock may be quoted or listed, to provide for
the issuance of additional shares of Preferred Stock in one or more series, to
establish from time to time the number of shares to be included in each such
series, or fix the rights, powers, preferences and privileges of the shares of
each wholly unissued series and any qualifications, limitations or restrictions
thereon, and to increase or decrease the number of shares of such series,
without any further vote or action by the stockholders. The approval of the
holders of at least 75% of the outstanding shares of Class B Common Stock,
however, is required for the issuance of shares of Preferred Stock that have the
right to vote for the election of directors under ordinary circumstances or to
elect 50% or more of the directors under any circumstances. Depending upon the
terms of the Preferred Stock established by the board of directors, any or all
series of Preferred Stock could have preference over the common stock with
respect to dividends and other distributions and upon liquidation or could have
voting or conversion rights that could adversely affect the holders of the
outstanding common stock. In addition, the Preferred Stock could delay, defer or
prevent a change of control. We have no present plans to issue any additional
shares of Preferred Stock.
STOCKHOLDERS' AGREEMENT
All Lauder Family Members (other than The Lauder Foundation, a tax
exempt, private foundation, Aerin Lauder, Jane Lauder, The 4202 Corporation, The
Estee Lauder 1994 Trust and the Estee Lauder 2001 Charitable Trust) who
beneficially own shares of common stock have agreed pursuant to a stockholders'
agreement with us (the "Stockholders' Agreement") to vote all shares
beneficially owned by them for Leonard A. Lauder, Ronald S. Lauder and one
person (if any) designated by each as directors of our company. As of May 14,
2004, these stockholders beneficially owned, in the aggregate, shares of common
stock having approximately 86.2% of our voting power.
46
REGISTRATION RIGHTS AGREEMENT
We and certain members of the Lauder family, certain trusts and other
entities controlled by members of the Lauder family and Morgan Guaranty Trust
Company of New York ("Morgan Guaranty") are parties to a Registration Rights
Agreement (the "Registration Rights Agreement"), pursuant to which each of
Leonard A. Lauder, Ronald S. Lauder and Morgan Guaranty have three demand
registration rights and The Estee Lauder 1994 Trust has six demand registration
rights in respect of shares of Class A Common Stock (including Class A Common
Stock issued upon conversion of Class B Common Stock) held by them. All the
parties to the Registration Rights Agreement (other than us) also have an
unlimited number of piggyback registration rights in respect of their shares.
The rights of Morgan Guaranty and any pledgee of The Estee Lauder 1994 Trust
under the Registration Rights Agreement will be exercisable only in the event of
a default under certain loan arrangements.
47
UNDERWRITING
Goldman, Sachs & Co. and J.P. Morgan Securities Inc. have severally
agreed, subject to the terms and conditions set forth in the underwriting
agreement among us, the selling stockholders and Goldman, Sachs & Co. and J.P.
Morgan Securities Inc., as underwriters, to purchase from the selling
stockholders, and the selling stockholders have agreed to sell to the
underwriters, 11,305,000 shares of our Class A Common Stock as indicated in the
following table.
Underwriters Number of Shares
------------ ----------------
Goldman, Sachs & Co............................
J.P. Morgan Securities Inc..................... ------------
Total............................... ============
The nature of the underwriters' obligation under the underwriting
agreement is such that all of the shares being offered must be purchased if any
are purchased, other than the shares covered by the option described below
unless and until this option is exercised.
If the underwriters sell more shares than the total number set forth
in the table above, the underwriters have an option to buy up to an additional
1,695,000 shares from the selling stockholders to cover such sales. They may
exercise that option for 30 days. If any shares are purchased pursuant to this
option, the underwriters will severally purchase shares in approximately the
same proportion as set forth in the table above.
The underwriters propose initially to offer the shares directly to
the public at the initial price to public set forth on the cover of this
prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. After the
shares are released for sale to the public, the price to public and such
concessions may be changed.
We, the selling stockholders and the other Lauder Family Members have
agreed that we will not, directly or indirectly, offer to sell, contract to
sell, sell or otherwise dispose of any Class A Common Stock or securities
convertible into or exchangeable for shares of Class A Common Stock for a period
of six months after the date of this prospectus, except with the prior written
consent of Goldman, Sachs & Co. and J.P. Morgan Securities Inc. or as otherwise
provided in the underwriting agreement. This agreement does not apply to any
existing share incentive plans.
The following table shows the per share and total underwriting
discounts and commissions to be paid to the underwriters by the selling
stockholders. Such amounts are shown assuming both no exercise and full exercise
of the underwriters' option to purchase 1,695,000 additional shares.
Paid by the Selling Stockholders
--------------------------------
No Exercise Full Exercise
----------- -------------
Per Share...................................... $ $
Total.......................................... $ $
The selling stockholders, who are paying the expenses of this
offering, estimate that their total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $564,300.
We and the selling stockholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the
underwriters may be required to make for those liabilities.
48
In connection with the offering, the underwriters may purchase and
sell shares of common stock in the open market. These transactions may include
short sales, stabilizing transactions and purchases to cover positions created
by short sales. Shorts sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. "Covered"
short sales are sales made in an amount not greater than the underwriters'
option to purchase additional shares from the selling stockholders in the
offering. The underwriters may close out any covered short position by either
exercising their option to purchase additional shares or purchasing shares in
the open market. In determining the source of shares to close out the covered
short position, the underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to the price at
which they may purchase additional shares pursuant to the option granted to
them. "Naked" short sales are any sales in excess of such option. The
underwriters must close out any naked short position by purchasing shares in the
open market. A naked short position is more likely to be created if the
underwriters are concerned that there may be downward pressure on the price of
the common stock in the open market after pricing that could adversely affect
investors who purchase in the offering. Stabilizing transactions consist of
various bids for or purchases of common stock made by the underwriters in the
open market prior to the completion of the offering.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
Purchases to cover a short position and stabilizing transactions may
have the effect of preventing or retarding a decline in the market price of the
company's stock, and together with the imposition of the penalty bid, may
stabilize, maintain or otherwise affect the market price of the common stock. As
a result, the price of the common stock may be higher than the price that
otherwise might exist in the open market. If these activities are commenced,
they may be discontinued at any time. These transactions may be effected on
NYSE, in the over-the-counter market or otherwise.
Each underwriter has represented, warranted and agreed that: (i) it
has not offered or sold and, prior to the expiry of a period of six months from
the closing date, will not offer or sell any shares to persons in the United
Kingdom except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which have not
resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995; (ii) it
has only communicated or caused to be communicated and will only communicate or
cause to be communicated any invitation or inducement to engage in investment
activity (within the meaning of section 21 of the Financial Services and Markets
Act 2000 ("FSMA")) received by it in connection with the issue or sale of any
shares in circumstances in which section 21(1) of the FSMA does not apply to the
Issuer; and (iii) it has complied and will comply with all applicable provisions
of the FSMA with respect to anything done by it in relation to the shares in,
from or otherwise involving the United Kingdom.
The shares may not be offered or sold, transferred or delivered, as
part of their initial distribution or at any time thereafter, directly or
indirectly, to any individual or legal entity in the Netherlands other than to
individuals or legal entities who or which trade or invest in securities in the
conduct of their profession or trade, which includes banks, securities
intermediaries, insurance companies, pension funds, other institutional
investors and commercial enterprises which, as an ancillary activity, regularly
trade or invest in securities.
The shares may not be offered or sold by means of any document other
than to persons whose ordinary business is to buy or sell shares or debentures,
whether as principal or agent, or in circumstances which do not constitute an
offer to the public within the meaning of the Companies Ordinance (Cap. 32) of
Hong Kong, and no advertisement, invitation or document relating to the shares
may be issued, whether in Hong Kong or elsewhere, which is directed at, or the
contents of which are likely to be accessed or read by, the public in Hong Kong
(except if permitted to do so under the securities laws of Hong Kong) other than
with respect to shares which are or are intended to be disposed of only to
persons outside Hong Kong or only to "professional investors" within the meaning
of the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules
made thereunder.
49
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, this prospectus and any other
document or material in connection with the offer or sale, or invitation or
subscription or purchase, of the securities may not be circulated or
distributed, nor may the securities be offered or sold, or be made the subject
of an invitation for subscription or purchase, whether directly or indirectly,
to persons in Singapore other than under circumstances in which such offer, sale
or invitation does not constitute an offer or sale, or invitation for
subscription or purchase, of the securities to the public in Singapore.
Each underwriter has acknowledged and agreed that the securities have
not been registered under the Securities and Exchange Law of Japan and are not
being offered or sold and may not be offered or sold, directly or indirectly, in
Japan or to or for the account of any resident of Japan, except (1) pursuant to
an exemption from the registration requirements of the Securities and Exchange
Law of Japan and (ii) in compliance with any other applicable requirements of
Japanese law. As part of the offering, the underwriters may offer securities in
Japan to a list of 49 offerees in accordance with the above provisions.
Goldman, Sachs & Co. and J.P. Morgan Securities Inc. and their
affiliates have provided, are currently providing, and expect to provide in the
future, commercial and investment banking services to us, the selling
stockholders and certain other Lauder Family Members for which Goldman, Sachs &
Co. and J.P. Morgan Securities Inc. and their affiliates have received and will
receive fees and commissions.
JP Morgan Chase Bank, an affiliate of J.P. Morgan Securities Inc., is
a lender to the 1994 Trust and certain other Lauder Family Members. A portion of
the net proceeds of this offering may be used by the 1994 Trust to repay
outstanding amounts under the loan facility. Because more than 10% of the net
proceeds of this offering may be received by NASD members participating in the
offering or affiliates or associated persons of such NASD members, this offering
will be conducted in accordance with NASD Rule 2710(h).
50
LEGAL MATTERS
The validity of the shares of Class A Common Stock being offered in
this prospectus has been passed upon for us by Weil, Gotshal & Manges LLP, New
York, New York (members of which own approximately 60,000 shares of Class A
Common Stock) and for Goldman, Sachs & Co. and J.P. Morgan Securities Inc. by
Fried, Frank, Harris, Shriver & Jacobson LLP, New York, New York.
EXPERTS
The consolidated financial statements as of and for the years ended
June 30, 2003 and 2002 that are contained in our Current Report on Form 8-K
dated May 17, 2004 have been incorporated by reference herein in reliance upon
the report of KPMG LLP, independent accountants, incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing. The audit report covering the fiscal 2003 financial statements refers
to a change in accounting for goodwill and other intangible assets, and the
disclosures related thereto which were added to the notes to the financial
statements for fiscal 2001.
On April 17, 2002, we filed a current report on Form 8-K indicating
that we had terminated Arthur Andersen LLP as our independent auditor and
engaged KPMG LLP as our independent auditor. After reasonable efforts, we have
been unable to obtain Arthur Andersen's consent to the incorporation by
reference of their audit report on the financial statements and schedule from
our Annual Report on Form 10-K for the year ended June 30, 2001. Accordingly,
Arthur Andersen LLP has not consented to the inclusion of their report in this
prospectus, and we have dispensed with the requirement to file their consent in
reliance on Rule 437a under the Securities Act. Because Arthur Andersen LLP has
not consented to the inclusion of their report in this prospectus, you will not
be able to recover against Arthur Andersen LLP under Section 11 of the
Securities Act for any untrue statements of a material fact contained in the
financial statements audited by Arthur Andersen LLP incorporated by reference in
this prospectus or any omissions to state a material fact required to be stated
therein.
51
================================================================================
11,305,000 Shares
THE ESTEE LAUDER
COMPANIES INC.
Class A Common Stock
____________________
ESTEE
LAUDER
COMPANIES
____________________
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the securities offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The information
contained in this prospectus is current only as of its date.
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses expected to be incurred
in connection with the issuance and distribution of the securities described in
this Registration Statement, other than the underwriting discount. All amounts,
except the Commission registration fee and the National Association of
Securities Dealers, Inc. ("NASD") filing fee, are estimated. All amounts will be
paid for or reimbursed by the selling stockholders identified in the Prospectus
and not by the Registrant.
Registration fee........................................ $ 73,807
NASD filing fee......................................... 30,500
Printing, engraving and postage fees.................... 100,000
Accounting fees and expenses............................ 135,000
Legal fees and expenses................................. 125,000
Miscellaneous........................................... 100,000
-----------
Total......................................... $ 564,307
===========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Generally, Section 145 of the General Corporation Law of the State of
Delaware (the "GCL") permits a corporation to indemnify any person made a party
to an action, by reason of the fact that such person is or was a director,
officer, employee or agent of the corporation or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation or enterprise. To the extent that person has been successful in any
such matter, that person shall be indemnified against expenses actually and
reasonably incurred by him. In the case of an action by or in the right of the
corporation, no indemnification may be made in respect of any matter as to which
that person was adjudged liable unless and only to the extent that the Delaware
Court of Chancery or the court in which the action was brought determines that
despite the adjudication of liability that person is fairly and reasonably
entitled to indemnity for proper expenses.
Our By-Laws provide for indemnification of our directors and officers
to the fullest extent permitted by law.
Section 102(b)(7) of the GCL enables a Delaware corporation to
include a provision in its certificate of incorporation limiting a director's
liability to the corporation or its stockholders for monetary damages for
breaches of fiduciary duty as a director. Our Certificate of Incorporation
provides for such limitation to the full extent permitted under Delaware law.
Our directors and officers are covered by insurance policies
indemnifying against certain liabilities, including certain liabilities arising
under the Securities Act which might be incurred by them in such capacities and
against which we may not indemnify them.
II-1
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Exhibit Number Exhibit Description
-------------- -------------------
**1 Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation, dated November
16, 1995 (incorporated herein by reference to Exhibit
3.1 to the Registrant's Annual Report on Form 10-K for
the year ended June 30, 2003, as filed with the
Commission on September 12, 2003).
3.2 Certificate of Amendment to Restated Certificate of
Incorporation (incorporated herein by reference to
Exhibit 3.1 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended December 31, 1999, as filed
with the Commission on January 27, 2000).
3.3 Amended and Restated By-Laws (incorporated herein by
reference to Exhibit 3.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended December 31,
1999, as filed with the Commission on January 27, 2000).
*5 Opinion of Weil, Gotshal & Manges LLP.
*23.1 Consent of KPMG LLP.
*23.2 Notice regarding consent of Arthur Andersen LLP.
*23.3 Consent of Weil, Gotshal & Manges LLP (included in the
Opinion filed as Exhibit 5).
*24 Power of Attorney (included on signature page to
Registration Statement).
________________________
* Filed herewith.
** To be filed by amendment.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933, each filing of
the Registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of ay action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-2
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424 (b)(1) or (4), or 497(h) under the
Securities Act of 1933, shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-3
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in New York, New York, on this 17th day of May, 2004.
THE ESTEE LAUDER COMPANIES INC.
By: /s/ Richard W. Kunes
----------------------------------
Name: Richard W. Kunes
Title: Senior Vice President and
Chief Financial Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose name appears below
hereby constitutes Richard W. Kunes, Fred H. Langhammer and Sara E. Moss such
person's true and lawful attorney, with full power of substitution to sign for
such person and in such person's name and capacity indicated below, any and all
amendments to this Registration Statement, including Post-Effective Amendments,
and to file the same with the Securities and Exchange Commission, hereby
ratifying and confirming such person's signature as it may be signed by said
attorney to any and all amendments.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Fred H. Langhammer President, Chief Executive Officer and May 17, 2004
------------------------------------------ Director (Principal Executive Officer)
Fred H. Langhammer
/s/ Leonard A. Lauder Chairman of the Board May 17, 2004
------------------------------------------
Leonard A. Lauder
/s/ Ronald S. Lauder Director May 17, 2004
------------------------------------------
Ronald S. Lauder
/s/ William P. Lauder Director May 17, 2004
------------------------------------------
William P. Lauder
/s/ Charlene Barshefsky Director May 17, 2004
------------------------------------------
Charlene Barshefsky
/s/ Rose Marie Bravo Director May 17, 2004
------------------------------------------
Rose Marie Bravo
/s/ Lynn Forester de Rothschild Director May 17, 2004
------------------------------------------
Lynn Forester de Rothschild
S-1
/s/ Irvine O. Hockaday, Jr. Director May 17, 2004
------------------------------------------
Irvine O. Hockaday, Jr.
/s/ Richard D. Parsons Director May 17, 2004
------------------------------------------
Richard D. Parsons
/s/ Marshall Rose Director May 17, 2004
------------------------------------------
Marshall Rose
/s/ Richard W. Kunes Senior Vice President and Chief May 17, 2004
------------------------------------------ Financial Officer (Principal Financial
Richard W. Kunes and Accounting Officer)
S-2
EXHIBIT INDEX
Exhibit Number Exhibit Description
-------------- -------------------
**1 Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation, dated November
16, 1995 (incorporated herein by reference to Exhibit
3.1 to the Registrant's Annual Report on Form 10-K for
the year ended June 30, 2003, as filed with the
Commission on September 12, 2003).
3.2 Certificate of Amendment to Restated Certificate of
Incorporation (incorporated herein by reference to
Exhibit 3.1 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended December 31, 1999, as filed
with the Commission on January 27, 2000).
3.3 Amended and Restated By-Laws (incorporated herein by
reference to Exhibit 3.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended December 31,
1999, as filed with the Commission on January 27, 2000).
*5 Opinion of Weil, Gotshal & Manges LLP.
*23.1 Consent of KPMG LLP.
*23.2 Notice regarding consent of Arthur Andersen LLP.
*23.3 Consent of Weil, Gotshal & Manges LLP (included in the
Opinion filed as Exhibit 5).
*24 Power of Attorney (included on signature page to
Registration Statement).
________________________
* Filed herewith.
** To be filed by amendment.