SECURITIES AND EXCHANGE COMMISSION
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended June 30, 2001 Commission file number 1-14064
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
The Estee Lauder Companies Inc.
(Exact name of registrant as specified in its charter)
Delaware 11-2408943
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
767 Fifth Avenue, New York, New York 10153
(Address of principal executive offices) (Zip Code)
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Class A Common Stock, $.01 par value New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the registrant's voting common equity held by nonaffiliates of the registrant was approximately $4.20 billion at September 10, 2001. *
At September 10, 2001, 125,249,725 shares of the registrant's Class A Common Stock, $.01 par value, and 113,490,293 shares of the registrant's Class B Common Stock, $.01 par value, were outstanding.
Documents Incorporated by Reference
Document Where Incorporated
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Proxy Statement for Annual Meeting of Part III
Stockholders to be held October 31, 2001
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* Calculated by excluding all shares held by executive officers and directors of registrant and certain trusts without conceding that all such persons are "affiliates" of registrant for purposes of the Federal securities laws.
Forward-Looking Statements
This Annual Report on Form 10-K includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such 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, we cannot assure that actual results will not differ materially from our expectations. Factors that could cause actual results to differ from expectations are described herein; in particular, see "Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations -- Forward-Looking Information".
PART I
Item 1. Business.
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 120 countries and territories under the following well-recognized brand names: Estee Lauder, Clinique, Aramis, Prescriptives, Origins, M.A.C, Bobbi Brown, La Mer, jane, Aveda, Stila, Jo Malone and Bumble and bumble. We are also the global licensee for fragrances and cosmetics sold under the Tommy Hilfiger, Donna Karan and Kate Spade brands. Each brand is distinctly positioned within the cosmetics market.
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 products principally through limited distribution channels to complement the images associated with our brands. These channels, encompassing over 12,500 points of sale, consist primarily of upscale department stores, specialty retailers, upscale perfumeries and pharmacies and, to a lesser extent, freestanding company stores, stores on cruise ships and 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. With the acquisitions of jane and Aveda in fiscal 1998, we broadened our distribution to include new channels, namely self-select outlets and salons. In November 1998, we began selling products directly to consumers over the Internet. We now offer Clinique, Origins, Bobbi Brown, Estee Lauder and M.A.C products on-line and we are developing e-commerce capabilities for several of our other brands.
In fiscal 2000, we acquired Stila, principally a line of prestige makeup products, Jo Malone Limited, a London-based skin care and fragrance company, and a controlling majority equity interest in Bumble and bumble, a salon and hair care products business. In addition, we obtained an exclusive worldwide license to manufacture, market and sell Kate Spade beauty products. We also acquired Gloss.com, an Internet beauty site, as part of our strategy to use the Internet to benefit our overall business. In August 2000, we formed a joint venture with Chanel, Inc. and Clarins (U.S.A.) Inc. to re-launch the Gloss.com website as a multi-brand site. Upon re-launch, Gloss.com will feature select brands from each of the participating companies.
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 September 10, 2001, shares of Class A Common Stock and Class B Common Stock having approximately 91.6% of the outstanding voting power of the Common Stock.
Unless the context requires otherwise, references to "we", "us", "our" and the "Company" refer to The Estee Lauder Companies Inc. and its subsidiaries.
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% of our net sales in fiscal 2001.
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% of our net sales in fiscal 2001.
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 23% of our net sales in fiscal 2001.
Hair Care - We increased the range and depth of our hair care product offerings with the acquisition of the Aveda business in December 1997 and a majority equity interest in Bumble and bumble in June 2000. Hair care products are offered mainly in salons and in freestanding retail stores and include styling products, shampoos, conditioners and finishing sprays. In fiscal 2001, hair care products accounted for approximately 4% of our net sales.
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 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. Since September 2000, Estee Lauder products have also been available through the brand's website, esteelauder.com.
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. Since autumn 1997, we have been broadening Clinique's product offerings by adding new fragrances and hair care products. Since November 1998, we have been selling Clinique products directly to consumers over the Internet.
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 and has extended the line to include fragrances for women.
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, our most recent internally developed brand, was introduced in 1990. It is positioned as a plant-based cosmetics 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 and directly to consumers over the Internet.
Tommy Hilfiger - We have an exclusive global license arrangement to develop and market 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 for men and women, as well as skin care, makeup and hair care products under the license. These fragrances, together with our complementary line of face, body and hair products, are available at traditional department store counters as well as "tommy's shops", separate areas within department stores dedicated to promoting all of our Tommy Hilfiger licensed products.
M-A-C - M-A-C 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 M.A.C stores and directly to consumers over the Internet. We acquired Make-Up Art Cosmetics Limited, the manufacturer of M.A.C products, 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.
jane - In October 1997, we acquired Sassaby, Inc., the owner of the jane brand of color cosmetics targeted to young consumers. Since the acquisition, we have added skin care products to jane. jane products are currently distributed only in the United States in the self-select distribution channel.
Donna Karan Cosmetics - In November 1997, we obtained the exclusive global license to develop and market a line of fragrances and other cosmetics under the Donna Karan New York and DKNY trademarks. We are continuing to market and sell certain products that were originally sold by The Donna Karan Company. Under the license, we launched the first DKNY women's fragrance in fiscal 2000 and the first DKNY men's fragrance in fiscal 2001.
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, and directly to consumers at our own freestanding Aveda Environmental Lifestyle Stores and 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 a very limited group of specialty stores in the United States and Canada and at a freestanding store in New York City.
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.
In addition to the foregoing brands, we manufacture and sell Kiton fragrances as a licensee. We are also the global licensee for Kate Spade beauty products, and we expect the first fragrance products in the Kate Spade line to be launched in fiscal 2002. These products will be marketed separately from our other brands.
Distribution
We sell our products principally through limited distribution channels to complement the images associated with our core brands. These channels include more than 12,500 points of sale in over 120 countries and territories and consist primarily of upscale department stores, specialty retailers, upscale perfumeries and pharmacies and, to a lesser extent, freestanding company stores and spas, stores on cruise ships and in-flight and duty-free shops.
We maintain a dedicated sales force which sells to our retail accounts in North America and in the major overseas markets, such as Western Europe and Japan. We have wholly-owned operations in over 30 countries through which we market, sell and distribute our products. In certain markets, we sell our products through selected local distributors under contractual arrangements designed to protect the image and position of the brands. In addition, we sell certain products in select domestic and international military locations and over the Internet.
There are risks inherent in foreign operations, including changes in social, political and economic conditions. We are also exposed to risks associated with changes in the laws and policies that govern foreign investment in countries where we have operations as well as, to a lesser extent, changes in United States laws and regulations relating to foreign trade and investment. In addition, our results of operations and the value of our foreign assets are affected by fluctuations in foreign currency exchange rates. Changes in such rates also may affect the relative prices at which we and foreign competitors sell products in the same markets. Similarly, the cost of certain items required in our operations may be affected by changes in the value of the relevant currencies.
With the acquisitions of jane and Aveda in fiscal 1998 and a controlling majority equity interest in Bumble and bumble in fiscal 2000, we broadened our distribution to include new channels, namely self-select outlets and salons. jane products are currently sold only in the United States in approximately 13,000 points of sale, including mass merchandise stores, drug stores and specialty stores. We principally sell Aveda products to independent salons and Aveda Environmental Lifestyle stores and to third-party distributors, which resell such products mainly to independent salons. There are currently about 8,700 salons, primarily in the United States, that sell Aveda products. Bumble and bumble products are principally sold to independent salons. There are approximately 1,200 salons, primarily in the United States, that sell Bumble and bumble products.
As part of our strategy to diversify our distribution, primarily in the United States, we have been expanding the number of single-brand, freestanding stores that we own and operate. The Origins, Aveda and M.A.C brands are the primary focus for this method of distribution. To date, we operate approximately 347 single-brand, freestanding stores worldwide and expect that number to increase to 400 to 500 over the next several years.
Beginning with the introduction of e-commerce capabilities to clinique.com in November 1998, we have been selling products directly to consumers over the Internet. As of September 1, 2001, Clinique, M.A.C, Origins, Estee Lauder and Bobbi Brown products are being sold directly to consumers in the United States and Canada over the Internet. For a summary of our Internet strategy, see the "Internet" section in "Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations".
As is customary in the cosmetics industry, our practice is to accept returns of our products from retailers. 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. In recognition of this practice, and in accordance with generally accepted accounting principles, we report sales levels on a net basis, which is computed by deducting the amount of actual returns received and an amount established for anticipated returns from gross sales. As a percent of gross sales, returns were 4.9% in fiscal 2001, 4.4% in fiscal 2000 and 5.0% in fiscal 1999.
Customers
Our strategy has been to build strong strategic relationships with selected retailers globally. Senior management works with executives of our major retail accounts on a regular basis, and we believe we are viewed as an important supplier to these customers.
Customers affiliated with Federated Department Stores, Inc. (e.g., Bloomingdale's, Burdines, Macy's and Rich's/Lazarus) accounted for 11% of our net sales in each of the fiscal years ended June 30, 2001, 2000 and 1999. The May Department Stores Company (e.g., Foley's, Lord & Taylor and Robinsons-May) accounted for 10% of our net sales in fiscal 2001 and 2000 and 11% of our net sales in fiscal 1999.
Marketing
Our marketing strategy is built around our vision statement: "Bringing the Best to Everyone We Touch". Mrs. Estee Lauder formulated this marketing philosophy to provide high-quality service and products as the foundation for a solid and loyal consumer base.
Our marketing efforts focus principally on promoting the quality and benefits of our products. Each of our brands is distinctively positioned, has a single global image, and is promoted with consistent logos, packaging and advertising designed to enhance its image and differentiate it from other brands. We regularly advertise our products on television and radio, in upscale magazines and prestigious newspapers and through direct mail and photo displays at international airports. Promotional activities and in-store displays are designed to introduce existing consumers to different products in the line and to attract new consumers. Our marketing efforts also benefit from cooperative advertising programs with retailers, some of which are supported by coordinated promotions, such as "gift with purchase" and "purchase with purchase". At in-store counters, sales representatives offer personal demonstrations to market individual products as well as to provide education on basic skin care and makeup application. We conduct extensive sampling programs and we pioneered "gift with purchase" as a sampling program. We believe that the quality and perceived benefits of sample products have been effective inducements to purchases by new and existing consumers.
Starting with the launch of the Clinique website in 1996, we have used the Internet to educate and inform consumers about certain of our brands. Currently, there are ten single-brand-marketing sites, five of which have e-commerce capabilities. Gloss.com, the Company's majority-owned, multi-brand marketing and e-commerce site, is expected to be re-launched in the first half of fiscal 2002, see the "Internet" section in "Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations".
The majority of our creative marketing work is done by in-house creative teams. The creative staff designs and produces the sales materials, advertisements and packaging for all products in each brand. Total advertising and promotional expenditures were $1,255.3 million, $1,195.8 million and $1,100.8 million for fiscal 2001, 2000 and 1999, respectively. In addition, our products receive extensive editorial coverage in prestige publications and other media worldwide.
Our marketing and sales executives spend considerable time in the field meeting with consumers and key retailers, checking activities of competitors and consulting with sales representatives at the points of sale. These include Estee Lauder Beauty Advisors, Clinique Consultants, Aramis Selling Specialists, Prescriptives Analysts and Origins Guides.
Management Information Systems
Management information systems support automation of our business processes including product development, marketing, sales, order processing, production, distribution and finance.
We have deployed a product definition system that establishes and maintains a centralized data repository of essential attributes for each of the products we offer or plan to offer in the marketplace. Coupled with our product research and development systems, we are able to globally manufacture and market consistent quality products.
Our sales analysis system tracks weekly sales at the stock keeping unit (SKU) level at most retail sales locations (i.e., sell-through data). This system is currently tracking sell-through data for almost all accounts of Estee Lauder, Clinique, Aramis, Prescriptives, Origins, M.A.C, Bobbi Brown, Donna Karan, Tommy Hilfiger, La Mer and Stila in the United States and Canada. The increased understanding of consumer preferences gained from sell-through data enables us to coordinate more effectively our product development, manufacturing and marketing strategies. We have implemented similar systems in other countries.
We have negotiated automated replenishment arrangements with many of our key domestic customers. These arrangements enable us to replenish inventories for individual points of sale automatically, with minimal paperwork. Customer orders for a substantial majority of sales of Estee Lauder, Clinique, Prescriptives, Origins, M.A.C and Bobbi Brown products in the United States are generated by automated replenishment systems.
Our data warehouse captures shipping, sell-through and inventory data for our domestic business. This system has resulted in streamlined and standardized reporting as well as timely and accurate retail sales and marketing information.
We have a system that provides tools to plan, monitor, and analyze our promotional business and its processes on both an individual brand as well as a corporate basis. Marketing and sales professionals currently utilize this system to promote Estee Lauder, Clinique, M.A.C, Origins, and Bobbi Brown products in the United States and Canada. This system helps us to
reduce costs, maintain accountability, improve return on investment and maximize the impact of our promotional activities. This system was the model for an international promotional management system, which we installed in fiscal 2001 in some European markets. In fiscal 2002, we expect to roll this system out to additional international markets.
At practically all of our international sales affiliates, we have installed a proprietary inventory management system, which provides us with a global view of finished goods availability relative to actual requirements. This system has resulted in improved inventory control and disposition for both existing product lines and new product launches.
The use of sell-through data, combined with the implementation of automated replenishment systems, promotional planning systems, and data warehousing, has resulted in increased sales, fewer out-of-stocks and reduced retail inventories. We expect that these systems will continue to provide inventory and sales efficiencies.
We have refined the strategic direction of our supply chain systems and have decided to evaluate "best in class" supply chain planning and execution software to replace our internally-developed systems on an enterprise basis. We expect that the new systems we identify and install will lead to greater efficiency and consistency in the global supply chain in the future.
We continue to enhance our corporate Extranet, which is designed to provide retailers with real-time order status throughout the procurement cycle. Customers use this system to track their orders as they move through the fulfillment process. As a result, we experience fewer billing discrepancies and fewer customer deductions.
For a discussion of our development of websites designed to market and sell our products, in addition to a venture to develop a multi-brand site, refer to the "Internet" section in "Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations".
Research and Development
We believe that we are an industry leader in the development of new products. Marketing, product development and packaging groups work with our research and development group to identify shifts in consumer preferences, develop new products and redesign or reformulate existing products. In addition, research and development personnel work closely with quality assurance and manufacturing personnel on a worldwide basis to ensure a consistent global standard for our products and to deliver products with attributes that fulfill consumer expectations.
We maintain ongoing research and development programs at our facilities in Melville, New York; Oevel, Belgium; Tokyo, Japan; Markham, Ontario; and Blaine, Minnesota. As of June 30, 2001, we had approximately 395 employees engaged in research and development. Research and development expenditures totaled $62.2 million, $53.8 million and $48.0 million for fiscal 2001, 2000 and 1999, respectively. Our research and development group makes significant contributions toward improving existing products and developing new products and provides ongoing technical assistance and know-how to our manufacturing activities. The research and development group has had long-standing working relationships with several U.S. and international medical and educational facilities, which supplement internal capabilities. We do not conduct animal testing of our products.
Manufacturing and Raw Materials
We manufacture skin care, makeup, fragrance and hair care products in the United States, Belgium, Switzerland, the United Kingdom and Canada. We continue to streamline our manufacturing processes and identify sourcing opportunities to improve innovation, increase efficiencies and reduce costs. Our major manufacturing facilities operate as "focus" plants that primarily manufacture one type of product (e.g., lipsticks) for all of the principal brands. Our plants are modern and our manufacturing processes are substantially automated. While we believe that our manufacturing facilities are sufficient to meet current and reasonably anticipated manufacturing requirements, we continue to identify opportunities to make significant improvements in capacity and productivity. Some of our finished products are manufactured to our specifications by third parties.
The principal raw materials used in the manufacture of our products are essential oils, alcohol and specialty chemicals. We also purchase packaging components, which are manufactured to design specifications. Procurement of materials for all manufacturing facilities is generally made on a global basis through our centralized supplier relations department. A concentrated effort in supplier rationalization has been made with the specific objective of reducing costs, increasing innovation and improving quality. As a result of sourcing initiatives, there is increased dependency on certain suppliers, but we believe that these suppliers have adequate resources and facilities to overcome any unforeseen interruption of supply. We have, in the past, been able to obtain an adequate supply of essential raw materials and currently believe we have adequate sources of supply for virtually all components of our products. As we integrate acquired brands, we continually seek new ways to leverage our production and sourcing capabilities to improve their manufacturing performance.
Competition
The skin care, makeup, fragrance and hair care businesses are characterized by vigorous competition throughout the world. Brand recognition, quality, performance and price have a significant influence on consumers' choices among competing products and brands. Advertising, promotion, merchandising, the pace and timing of new product introductions, line extensions and the quality of in-store sales staff also have a significant impact on consumer buying decisions. We compete against a number of manufacturers and marketers of skin care, makeup, fragrance and hair care products, some of which have substantially greater resources than we do.
Our principal competitors among manufacturers and marketers of skin care, makeup, fragrance and hair care products include L'Oreal S.A. (which markets Lancome, Ralph Lauren, Giorgio Armani, Garnier, L'Oreal, Maybelline, Biotherm, Helena Rubinstein, Redken, Kiehl's Since 1851, Shu Umuera and other products), Unilever N.V. (which markets Calvin Klein, Valentino, Cerruti, Pond's, Thermasilk, Vaseline Intensive Care and other products), The Procter & Gamble Company (which markets Cover Girl, Olay, Giorgio Beverly Hills and Hugo Boss fragrances, Max Factor, Vidal Sassoon, Pantene and other products), LVMH Moet Hennessey Louis Vuitton ("LVMH") (which markets Christian Dior, Kenzo, Givenchy, Guerlain, Hard Candy, Bliss, Benefit, Make Up For Ever, Urban Decay, Fresh and other products), Shiseido Company, Ltd. (which markets Shiseido, 5S and other products), Avon Products Inc., Wella Group (which markets Wella, Gucci fragrance, Alfred Dunhill, Sebastian, Anna Sui and other products), Gucci N.V. (which markets Yves St. Laurent Beaute), Revlon, Inc. (which markets Revlon, Almay and Ultima II products), Joh. A. Benckiser GmbH (which markets Coty, Lancaster, Davidoff, Issabella Rosselini Manifesto, Jil Sander, Rimmel, Jovan, Yue-Sai Kan, Margaret Astor, Adidas, Calgon, The Healing Garden, Esprit, Chopard and other products), Bristol-Myers Squibb Co. (which markets Clairol, Keri, Aussi and other products), Elizabeth Arden, Inc., Chanel, Inc. and Clarins S.A. (which markets Clarins products and Thierry Mugler fragrances). We also face competition from retailers that have developed their own brands, such as Gap Inc. (which markets The Gap and Banana Republic products), Intimate Brands (which markets Victoria's Secret Beauty and Bath and Body Works products) and Sephora, or have acquired brands, such as Neiman Marcus Group (which acquired Laura Mercier). Some of our competitors also have ownership interests in retailers that are customers of ours. For example, LVMH has interests in Duty Free Shoppers and Sephora.
Trademarks, Patents and Copyrights
We own all of the material trademark rights used in connection with the manufacturing, marketing and distribution of our major products both in the United States and in the other countries where such products are principally sold, except for the trademark rights relating to Tommy Hilfiger (including tommy and tommy girl), Donna Karan New York, DKNY and Kate Spade, as to which we are the exclusive worldwide licensee for fragrances, cosmetics and related products. Trademarks for our principal products are registered in the United States and in each of the countries in which such products are sold. The major trademarks used in our business include the brand names Estee Lauder, Clinique, Aramis, Prescriptives, Origins, Tommy Hilfiger, Donna Karan New York, DKNY, M.A.C, Bobbi Brown, La Mer, jane, Aveda, Stila, Jo Malone and Bumble and bumble and the names of many of the products sold under each of these brands. We consider the protection of our trademarks to be important to our business.
A number of our products incorporate patented or patent-pending formulations. In addition, several products are covered by design patents, patent applications or copyrights. While we consider these patents and copyrights, and the protection thereof, to be important, no single patent or copyright is considered material to the conduct of our business.
Employees
At June 30, 2001, we had approximately 19,900 full-time employees worldwide (including sales representatives at points of sale who are employed by the Company), of whom approximately 10,200 are employed in the United States and Canada. None of our employees in the United States is covered by a collective bargaining agreement. In certain other countries a limited number of employees are covered by a Works Council agreement or other labor contract. We believe that relations with our employees are good. We have never encountered a material strike or work stoppage in the United States or in any other country where we have a significant number of employees.
Government Regulation
We and our products are subject to regulation by the Food and Drug Administration and the Federal Trade Commission in the United States, as well as various other Federal, state, local and international regulatory authorities. Such regulations relate principally to the ingredients, labeling, packaging and marketing of our products. We believe that we are in substantial compliance with such regulations, as well as with applicable Federal, state, local and international rules and regulations governing the discharge of materials hazardous to the environment. There are no significant capital expenditures for environmental control matters either planned in the current year or expected in the near future.
Seasonality
Our results of operations in total, by region, and by product category are subject to seasonal fluctuations, with net sales in the first and second fiscal quarters typically being slightly higher than in the third and fourth fiscal quarters. The higher net sales in the first two fiscal quarters are attributable to the increased levels of purchasing by retailers for the Christmas selling season and for fall fashion makeup introductions. Greater variation exists in quarterly operating income and margin, which typically are lower in the second half of the fiscal year than in the first half. In addition to the effect of lower net sales on operating income in the third and fourth fiscal quarters, as compared with the first and second fiscal quarters, operating income and operating margin in the third and fourth fiscal quarters are negatively affected by the relatively consistent dollar amount of advertising and promotional spending in each fiscal quarter. In addition, fluctuations in net sales, operating income and product category results in any fiscal quarter may be attributable to the level and scope of new product introductions.
Executive Officers
The following table sets forth certain information with respect to our executive
officers.
Name Age Position(s) Held
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Leonard A. Lauder 68 Chairman of the Board of Directors
Ronald S. Lauder 57 Chairman of Clinique Laboratories, Inc. and
Estee Lauder International, Inc. and a Director
Fred H. Langhammer 57 President and Chief Executive Officer and a Director
Patrick Bousquet-Chavanne 43 Group President
Daniel J. Brestle 56 Group President
Andrew J. Cavanaugh 54 Senior Vice President - Global Human Resources
Paul E. Konney 57 Senior Vice President, General Counsel and Secretary
Richard W. Kunes 48 Senior Vice President and Chief Financial Officer
Evelyn H. Lauder 65 Senior Corporate Vice President
William P. Lauder 41 Group President
Philip Shearer 49 Group President, International
Edward M. Straw 62 President, Global Operations
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Leonard A. Lauder has been Chairman of the Board of Directors since 1995. He served as Chief Executive Officer of the Company from 1982 through 1999 and President from 1972 until 1995. Mr. Lauder formally joined the Company in 1958 after serving as an officer in the United States Navy. Since joining the Company, he has held various positions, including executive officer positions other than those described above. He is Chairman of the Board of Trustees of the Whitney Museum of American Art, a Charter Trustee of the University of Pennsylvania and a Trustee of The Aspen Institute. He also served as a member of the White House Advisory Committee on Trade Policy and Negotiations under President Reagan.
Ronald S. Lauder has served as Chairman of Clinique Laboratories, Inc. and Chairman of Estee Lauder International, Inc. since returning from government service in 1987. Mr. Lauder joined the Company in 1964 and has held various positions, including those described above, since then. From 1983 to 1986, Mr. Lauder was Deputy Assistant Secretary of Defense for European and NATO Affairs. From 1986 to 1987, he served as U.S. Ambassador to Austria. He is non-executive Chairman of the Board of Directors of Central European Media Enterprises Ltd. He is also Chairman of the Board of Trustees of the Museum of Modern Art.
Fred H. Langhammer has been Chief Executive Officer since 2000 and President of the Company since 1995. He was Chief Operating Officer from 1985 through 1999. Mr. Langhammer joined the Company in 1975 as President of its operations in Japan. In 1982, he was appointed Managing Director of the Company's operations in Germany. He is a member of the Board of Directors of Inditex, S.A. (an apparel manufacturer and retailer), the Cosmetics, Toiletries and
Fragrance Association, the German American Chamber of Commerce, Inc., and the American Institute for Contemporary German Studies at Johns Hopkins University. He is also a Senior Fellow of the Foreign Policy Association.
Patrick Bousquet-Chavanne became Group President responsible for Estee Lauder, M.A.C and our fragrance brands (principally Aramis, Tommy Hilfiger and Donna Karan) on a worldwide basis in July 2001. From 1998 to 2001, he was the President of Estee Lauder International, Inc. ("ELII"). From 1992 to 1996, Mr. Bousquet-Chavanne was Senior Vice President - General Manager/Travel Retailing of ELII. From 1989 to 1992, he was Vice President and General Manager of Aramis International, a division of ELII. From 1996 to 1998, he was Executive Vice President/General Manager International Operations of Parfums Christian Dior S.A., based in Paris.
Daniel J. Brestle became Group President responsible for Aveda, Bobbi Brown, Bumble and bumble, La Mer, Prescriptives, jane, Jo Malone, Kate Spade and Stila on a worldwide basis in July 2001. From July 1998 through June 2001, he was President of Estee Lauder (USA & Canada). Prior to July 1998, he was President of Clinique Laboratories, Inc. and the senior officer of that division since 1992. From 1988 through 1992, he was President of Prescriptives U.S.A. Mr. Brestle joined the Company in 1978.
Andrew J. Cavanaugh has been Senior Vice President - Global Human Resources since 1999. He was Senior Vice President - Corporate Human Resources from 1994 through 1999. Mr. Cavanaugh joined the Company in 1988 as Executive Director - Human Resources.
Paul E. Konney is Senior Vice President, General Counsel and Secretary. Prior to joining the Company in August 1999, Mr. Konney was Senior Vice President, General Counsel and Secretary of Quaker State Corporation from 1994. Prior to that, he was Senior Vice President, General Counsel and Secretary of Tambrands Inc.
Richard W. Kunes became Senior Vice President and Chief Financial Officer
in October 2000. He joined the Company in 1986 and served in various
finance-related positions until November 1993, when he was named Vice President
- Operations Finance Worldwide. From January 1998 through September 2000, Mr.
Kunes was Vice President - Financial Administration and Corporate Controller.
Prior to joining the Company, he held finance and controller positions at the
Colgate-Palmolive Company.
Evelyn H. Lauder has been Senior Corporate Vice President of the Company since 1989, and previously served as Vice President and in other executive capacities since first joining the Company in 1959 as Education Director. She is a member of the Board of Overseers, Memorial Sloan-Kettering Cancer Center, a member of the Boards of Trustees of Central Park Conservancy, Inc. and The Trinity School in New York City, a member of the Board of Directors of The Parks Council and the Founder and Chairman of The Breast Cancer Research Foundation.
William P. Lauder became Group President in July 2001. He leads the worldwide businesses of Clinique and Origins and our retail store and on-line operations. From 1998 to 2001, he was President of Clinique Laboratories, Inc. Prior to 1998, he was President of Origins Natural Resources Inc., and he had been the senior officer of that division since its inception in 1990. Prior thereto, he served in various positions since joining the Company in 1986. He is a member of the Board of Trustees of The Trinity School in New York City and the Boards of Directors of The Fragrance Foundation, The Fresh Air Fund and the 92nd Street Y.
Philip Shearer joined the Company as Group President, International in September 2001. Prior thereto, from 1998 to 2001, he was President of the Luxury Products Division of L'Oreal U.S.A., which included Lancome, Helena Rubinstein, Ralph Lauren fragrances, Giorgio Armani and Kiehl's Since 1851. He served in various positions at L'Oreal from 1987, including management positions in the United Kingdom and in Japan.
Edward M. Straw is President, Global Operations responsible for research and development, procurement, manufacturing, packaging, distribution, quality assurance, information systems and corporate sales. Prior to joining the Company in 2000, Mr. Straw was Senior Vice President, Global Supply Chain and Manufacturing for the Compaq Computer Corporation. From 1997 to 1998, he was President of Ryder Global Logistics, Inc., and prior to joining Ryder, he served for 35 years in the United States Navy, retiring in 1996 as a Vice Admiral and Director of the Defense Logistics Agency.
Each executive officer serves for a one-year term ending at the next annual meeting of the Board of Directors, subject to his or her applicable employment agreement and his or her earlier death, resignation or removal.
Item 2. Properties.
The following table sets forth the principal owned and leased manufacturing and research and development facilities as of September 10, 2001. The leases expire at various times through 2015, subject to certain renewal options.
Approximate
Location Use Square Footage
-------- --- --------------
The Americas
Melville, New York (owned) Manufacturing 300,000
Melville, New York (owned) R&D 78,000
Blaine, Minnesota (owned) Manufacturing and R&D 275,000
Oakland, New Jersey (leased) Manufacturing 148,000
Bristol, Pennsylvania (leased) Manufacturing 67,000
Agincourt, Ontario, Canada (owned) Manufacturing 96,000
Markham, Ontario, Canada (leased) Manufacturing 58,000
Markham, Ontario, Canada (leased) R&D 26,000
Europe, the Middle East & Africa
Oevel, Belgium (owned) Manufacturing 113,000
Oevel, Belgium (owned) R&D 2,000
Petersfield, England (owned) Manufacturing 225,000
Lachen, Switzerland (owned) Manufacturing 53,000
Asia/Pacific
Tokyo, Japan (leased) R&D 4,000
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We occupy numerous offices, assembly and distribution facilities and warehouses in the United States and abroad. We consider our properties to be generally in good condition and believe that our facilities are adequate for our operations and provide sufficient capacity to meet anticipated requirements. We lease approximately 300,000 square feet of rentable space for our principal offices in New York, New York and own an office building of approximately 57,000 square feet in Melville, New York. As of September 10, 2001, we operated 347 freestanding retail stores, including 13 for the Estee Lauder brand, 10 for Clinique, 132 for Origins, 86 for M.A.C, 96 for Aveda, 2 for Bobbi Brown, 5 for Jo Malone, 1 for Bumble and bumble and 2 for Stila.
Item 3. Legal Proceedings.
We are involved in various routine legal proceedings incident to the ordinary course of business. In management's opinion, the outcome of pending legal proceedings, separately or in the aggregate, will not have a material adverse effect on our business or consolidated financial results.
In August 2000, an affiliate of Revlon, Inc. sued the Company and its subsidiaries in the U.S. District Court, Southern District of New York, for alleged patent infringement and related claims. Revlon currently claims that five Estee Lauder products, two Origins foundations, a La Mer concealer and a jane foundation infringe its patent. Revlon is seeking, among other things, treble damages, punitive damages, equitable relief and attorneys' fees. The Company has filed counterclaims which, among other things, challenge the validity of the patent and allege violations of Federal antitrust laws. Pre-trial proceedings and discovery are underway. Court-directed mediation took place in August 2001. The Company intends to defend itself vigorously. Although the final outcome of the lawsuit cannot be predicted with certainty, based on preliminary investigation, management believes that the case will not have a material adverse effect on the Company's consolidated financial results.
In February 2000, the Company and eight other manufacturers of cosmetics (the "Manufacturer Defendants") were added as defendants in a consolidated class action lawsuit that had been pending in the Superior Court of the State of California in Marin County. The plaintiffs purport to represent a class of all California residents who purchased prestige cosmetic products at retail for personal use from a number of department stores that sold such products in California (the "Department Store Defendants"). Plaintiffs filed their initial actions against the Department Store Defendants in May 1998. In May 2000, plaintiffs filed an amended complaint alleging that the Department Store Defendants and the Manufacturer Defendants conspired to fix and maintain retail prices and to limit the supply of prestige cosmetic products sold by the Department Store Defendants in violation of California state law. The plaintiffs are seeking, among other things, treble damages, equitable relief, attorneys' fees, interest and costs. Pre-trial proceedings and discovery are underway. Court-directed mediation started in May 2001 and is continuing. The Company intends to defend itself vigorously. While no assurance can be given as to the
ultimate outcome of this lawsuit, based on preliminary investigation, management believes that the case will not have a material adverse effect on the Company's consolidated financial results.
In 1998, the Office of the Attorney General of the State of New York (the "State") notified the Company and ten other entities that they are potentially responsible parties ("PRPs") with respect to the Blydenburgh landfill in Islip, New York. Each PRP may be jointly and severally liable for the costs of investigation and cleanup, which the State estimates to be $16 million. While the State has sued other PRPs in connection with the site, the State has not sued the Company. The Company and some PRPs are in discussions with the State regarding possible settlement of the matter. While no assurance can be given as to the ultimate outcome, management believes that the matter will not have a material adverse effect on the Company's consolidated financial results.
In 1998, the State notified the Company and fifteen other entities that they are PRPs with respect to the Huntington/East Northport landfill. The cleanup costs are estimated at $20 million. No litigation has commenced, and the Company, along with other PRPs, is in discussions with the State regarding possible settlement of the matter. While no assurance can be given as to the ultimate outcome, management believes that the matter will not have a material adverse effect on the Company's consolidated financial results.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the quarter ended June 30, 2001.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Our Class A Common Stock is publicly traded on the New York Stock Exchange under the symbol "EL". The following table shows the high and low sales prices as reported on the New York Stock Exchange Composite Tape and the cash dividends per share declared in fiscal 2001 and fiscal 2000.
Fiscal 2001 Fiscal 2000
-------------------------------- --------------------------------
Cash Cash
High Low Dividends High Low Dividends
--------- --------- --------- --------- --------- ---------
First Quarter $ 49.75 $ 34.25 $ .05 $ 56.50 $ 38.25 $ .05
Second Quarter 47.25 33.75 .05 51.44 37.25 .05
Third Quarter 44.00 33.18 .05 55.88 38.13 .05
Fourth Quarter 44.35 35.85 .05 54.31 41.13 .05
------- -------
Year 49.75 33.18 $ .20 56.50 37.25 $ .20
======= =======
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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 September 10, 2001, there were approximately 4,087 record holders of Class A Common Stock and 15 record holders of Class B Common Stock.
Item 6. Selected Financial Data.
The table below summarizes selected financial information. For further information, refer to the audited consolidated financial statements and the notes thereto beginning on page F-1 of this report.
Year Ended or at June 30
----------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(In millions, except per share data)
Statement of Earnings Data:
Net sales ......................................... $ 4,608.1 $ 4,366.8 $ 3,961.5 $ 3,618.0 $ 3,381.6
Gross profit ...................................... 3,635.8 3,394.7 3,061.6 2,798.5 2,616.5
Operating income .................................. 495.6 515.8 456.9 409.1 359.1
Earnings before income taxes, minority interest and
accounting change ............................... 483.3 498.7 440.2 402.8 362.9
Net earnings ...................................... 305.2(a) 314.1 272.9 236.8 197.6
Preferred stock dividends ......................... 23.4 23.4 23.4 23.4 23.4
Net earnings attributable to common stock ......... 281.8(a) 290.7 249.5 213.4 174.2
Cash Flow Data:
Net cash flows provided by operating activities ... $ 305.4 $ 442.5 $ 352.3 $ 258.2 $ 253.1
Net cash flows used for investing activities ...... (206.3) (374.3) (200.3) (577.2) (130.7)
Net cash flows (used for) provided by financing
activities ...................................... (63.5) (87.9) (73.2) 345.2 (116.8)
Other Data:
Earnings before interest, taxes, depreciation
and amortization (EBITDA) (b) .................. $ 658.5 $ 662.6 $ 574.2 $ 506.6 $ 435.1
Per Share Data:
Net earnings per common share (c):
Basic ........................................... $ 1.18(a) $ 1.22 $ 1.05 $ .90 $ .74
Diluted ......................................... $ 1.16(a) $ 1.20 $ 1.03 $ .89 $ .73
Weighted average common shares outstanding (c):
Basic ........................................... 238.4 237.7 237.0 236.8 235.4
Diluted ......................................... 242.2 242.5 241.2 239.5 237.1
Cash dividends declared per common share (c) ...... $ .20 $ .20 $ .1775 $ .17 $ .17
Balance Sheet Data:
Working capital ................................... $ 882.2 $ 716.7 $ 708.0 $ 617.2 $ 551.6
Total assets ...................................... 3,218.8 3,043.3 2,746.7 2,512.8 1,873.1
Total debt ........................................ 416.7 425.4 429.1 436.5 31.1
Redeemable preferred stock ........................ 360.0 360.0 360.0 360.0 360.0
Stockholders' equity .............................. 1,352.1 1,160.3 924.5 696.4 547.7
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(b) EBITDA is an additional measure of operating performance used by management. While the components of EBITDA may vary from company to company, we exclude minority interest adjustments, all depreciation charges related to property, plant and equipment and all amortization charges, including amortization of goodwill, purchased royalty rights (fully amortized in November 2000), leasehold improvements and other intangible assets. While we consider EBITDA useful in analyzing our operating 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 generally accepted accounting principles. Excluding restructuring and other non-recurring expenses, EBITDA was $721.5 million for the year ended June 30, 2001.
(c) On April 26, 1999, the Board of Directors approved a two-for-one stock split in the form of a 100% stock dividend on all of our outstanding Class A and Class B Common Stock. The stock dividend was paid on June 2, 1999 to all holders of record of shares of our Common Stock at the close of business on May 10, 1999. All share and per share data prior thereto have been restated to reflect the stock split.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
We manufacture, market and sell skin care, makeup, fragrance and hair care products which are distributed in over 120 countries and territories. The following is a comparative summary of operating results for fiscal 2001, 2000 and 1999 and reflects the basis of presentation described in Note 2 to the consolidated financial statements for all periods presented. Sales of products and services that do not meet our definition of skin care, makeup, fragrance and hair care have been included in the "other" category.
Year Ended June 30
-------------------------------------
2001 2000 1999
---------- ---------- ----------
(In millions)
NET SALES
By Region:
The Americas ................................... $ 2,815.3 $ 2,658.8 $ 2,397.9
Europe, the Middle East & Africa ............... 1,210.2 1,131.0 1,082.4
Asia/Pacific ................................... 590.6 577.0 481.2
---------- ---------- ----------
4,616.1 4,366.8 3,961.5
Restructuring * ................................ (8.0) - -
---------- ---------- ----------
$ 4,608.1 $ 4,366.8 $ 3,961.5
========== ========== ==========
By Product Category:
Skin Care ...................................... $ 1,641.5 $ 1,552.4 $ 1,398.8
Makeup ......................................... 1,704.4 1,579.5 1,412.8
Fragrance ...................................... 1,061.9 1,092.3 1,048.6
Hair Care ...................................... 180.7 113.9 82.4
Other .......................................... 27.6 28.7 18.9
---------- ---------- ----------
4,616.1 4,366.8 3,961.5
Restructuring * ................................ (8.0) - -
---------- ---------- ----------
$ 4,608.1 $ 4,366.8 $ 3,961.5
========== ========== ==========
OPERATING INCOME
By Region:
The Americas ................................... $ 299.9 $ 287.9 $ 265.0
Europe, the Middle East & Africa ............... 201.8 168.9 145.5
Asia/Pacific ................................... 56.9 59.0 46.4
---------- ---------- ----------
558.6 515.8 456.9
Restructuring and other non-recurring expenses * (63.0) - -
---------- ---------- ----------
$ 495.6 $ 515.8 $ 456.9
========== ========== ==========
By Product Category:
Skin Care ...................................... $ 266.9 $ 240.5 $ 205.9
Makeup ......................................... 212.5 181.8 158.2
Fragrance ...................................... 63.6 80.6 79.7
Hair Care ...................................... 13.1 12.4 11.4
Other .......................................... 2.5 0.5 1.7
---------- ---------- ----------
558.6 515.8 456.9
Restructuring and other non-recurring expenses * (63.0) - -
---------- ---------- ----------
$ 495.6 $ 515.8 $ 456.9
========== ========== ==========
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* For a discussion of the fiscal 2001 restructuring and other non-recurring expenses, see "Fiscal 2001 as Compared with Fiscal 2000 - Operating Expense - Restructuring and Other Non-Recurring Expenses" in this section.
The following table presents certain consolidated earnings data as a percentage of net sales:
Year Ended June 30
--------------------------------
2001 2000 1999
----- ----- -----
Net sales ....................................................... 100.0% 100.0% 100.0%
Cost of sales ................................................... 21.1 22.3 22.7
----- ----- -----
Gross profit .................................................... 78.9 77.7 77.3
----- ----- -----
Operating expenses:
Selling, general and administrative ......................... 66.4 65.1 65.0
Restructuring ............................................... 0.8 - -
Other non-recurring ......................................... 0.4 - -
Related party royalties ..................................... 0.5 0.8 0.8
----- ----- -----
68.1 65.9 65.8
----- ----- -----
Operating income ................................................ 10.8 11.8 11.5
Interest expense, net ........................................... 0.3 0.4 0.4
----- ----- -----
Earnings before income taxes, minority interest and accounting
change ........................................................ 10.5 11.4 11.1
Provision for income taxes ...................................... 3.8 4.2 4.2
Minority interest, net of tax ................................... - - -
----- ----- -----
Net earnings before accounting change ........................... 6.7 7.2 6.9
Cumulative effect of a change in accounting principle, net of tax (0.1) - -
----- ----- -----
Net earnings .................................................... 6.6% 7.2% 6.9%
===== ===== =====
Earnings before interest, taxes, depreciation
and amortization ("EBITDA") ................................. 14.3% 15.2% 14.5%
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Fiscal 2001 as Compared with Fiscal 2000
NET SALES
Net sales increased 6% or $241.3 million to $4.61 billion reflecting continued growth in the makeup, skin care and hair care categories, partially offset by a decline in fragrance net sales. The United States retail business has demonstrated continued softness particularly in the fragrance category. Growth on a reported basis reflects the impact of a stronger U.S. dollar relative to other currencies in virtually all markets in which we do business. Net sales growth is primarily attributable to a combination of new and recently launched products, the inclusion of newer brands such as Bumble and bumble and changes in distribution, including additional retail locations. Excluding the impact of foreign currency translation, net sales increased 9%, with double-digit contributions from each of Europe, the Middle East & Africa and Asia/Pacific.
The following discussions of Net Sales by "Product Categories" and "Geographic Regions" exclude the impact of the fiscal 2001 restructuring and other non-recurring expenses, which were not material to our net sales, and represent the manner in which we conduct and view our business. For a discussion of the restructuring and other non-recurring expenses, see "Operating Expenses - Restructuring and Other Non-Recurring Expenses" in this section.
Product Categories
Skin Care Net sales of skin care products increased 6% or $89.1 million to $1.64 billion. This increase was primarily attributable to newer products such as Idealist Skin Refinisher, Anti-Gravity Firming Lift Cream, Anti-Gravity Firming Eye Lift Cream and Pro-Preferred Skincare products, the first skin care line for our M.A.C brand. By introducing new products into lines such as Renutriv, the Origins Ginger Bath and Body Collection and Acne Solutions, we have continued to attract consumers to the lines and maintain sales momentum. White Light Brightening System and Active White continue to be popular whitening products particularly in the Asia/Pacific region. Newly launched products such as Private Spa Collection, Origins' facial skin products and initial shipments of LightSource have contributed to increased sales. Partially offsetting these increases were lower sales of certain existing products such as Fruition Extra and Diminish.
Makeup
Makeup net sales increased 8% or $124.9 million to $1.70 billion. Significant
contributors were recently launched products such as High Impact Eye Shadow,
Moisture Surge Lipstick, Equalizer Smart Makeup, Lash Doubling Mascara,
Glossware, Pure Color Lip Gloss, Luxe Makeup and Automatic Pencil Duo. In
addition, established products such as Pure Color Lipstick, Quickliner For Lips,
Quickliner For Eyes and Sheer Powder Blusher added to increased sales. M.A.C
products have also contributed to increased sales with the Eden Rocks, M.A.C
Paints and Heat product lines.
Fragrance
Net sales of fragrance products decreased 3% or $30.4 million to $1.06 billion,
but increased 1% on a comparable currency basis. The decrease in net sales is
attributable to a continued decline in sales of Tommy Hilfiger licensed
products, as well as to lower sales of Estee Lauder pleasures, Clinique Happy
and Clinique Happy for Men. The continued softness of the fragrance business in
the United States and difficult comparisons to last year contributed to the
decline in this category. Contributing positively to the category were new
products, such as Intuition, Ginger Essence and DKNY for Men, as well as the
international rollout of DKNY for women.
Hair Care
Hair care net sales increased 59% or $66.8 million to $180.7 million. The
increase in sales is attributable to the inclusion of Bumble and bumble, in
which we acquired a controlling majority equity interest in June 2000, and the
launch of Clinique's Simple Hair Care System. In addition, sales growth was
generated by Aveda shampoo and conditioner products, such as the Sap Moss and
Brilliant product groups, and an increase in the number of Company-owned Aveda
Environmental Lifestyle Stores.
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
Sales in the Americas increased 6% or $156.5 million to $2.82 billion. This
increase was driven by sales growth in the makeup, skin care, and hair care
categories, particularly with the success of new and recently launched products
and the growth of our newer brands. The increase was partially offset by a
decline in fragrance sales due to the softness in this category in the United
States. In Europe, the Middle East & Africa, net sales increased 7% or $79.2
million to $1.21 billion. The increase was primarily the result of higher net
sales in the United Kingdom, Spain and France and in our distributor and travel
retail businesses. This increase was partially offset by decreased sales in
Germany and South Africa. Net sales in Asia/Pacific increased 2% or $13.6
million to $590.6 million primarily due to higher net sales in Korea, Hong Kong,
Malaysia and Thailand, partially offset by lower sales in Japan and Australia.
Excluding the impact of foreign currency translation, sales grew in each country
in Europe, the Middle East & Africa and in Asia/Pacific, accounting for growth
of 17% and 10%, respectively.
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 21.1% from 22.3%, reflecting the impact of our manufacturing and sourcing initiatives as well as changes in distribution and product mix. Changes in distribution include the rollout of our own retail stores and the acquisition of certain distributor operations, both of which contributed to higher gross margins. In addition, the synergies achieved by incorporating recently acquired businesses into our existing manufacturing and sourcing infrastructures had a favorable impact on gross margins.
OPERATING EXPENSES
Operating Expenses
Operating expenses increased to 68.1% of net sales as compared with 65.9% of net
sales in the prior year. Excluding the impact of restructuring and other
non-recurring expenses, operating expenses were 66.9% of net sales. This change
primarily relates to the increased cost of our retail store and Internet
operations, which have higher operating cost structures than our traditional
distribution channels. Additionally, depreciation and amortization charges have
increased compared with the prior year, reflecting increased goodwill
amortization from acquisitions and depreciation related to capital investments
partially offset by the November 2000 expiration of amortization related to
purchased royalty rights. 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.
Restructuring and Other Non-Recurring Expenses During the fourth quarter of fiscal 2001, we recorded one-time charges for restructuring and other non-recurring expenses related to repositioning certain businesses as part of our ongoing efforts to drive long-term growth and increase profitability. The restructuring and other non-recurring expenses 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 have 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.
Specifically, the charge included the following:
1. jane. To bring product innovation rapidly to the market and drive growth, jane is switching from its traditional wall displays to a carded program. We believe this change will lead to increases in sales and improvements in profitability. The charge included a $16.1 million write-down of existing jane product fixtures and the return of uncarded product from virtually all of the 13,000 distribution outlets in the United States.
2. "tommy's shops". We are also restructuring the in-store "tommy's shops" to focus on our most productive locations and have decided to close certain shops that have underperformed relative to expectations. As a result, we have recorded a $6.3 million provision for the closing of 86 under-performing in-store "tommy's shops", located in the United States, and for related product returns.
3. Information systems and other assets. In response to changing technology and our new strategic direction, the charge included a $16.2 million provision for costs associated with the reevaluation of supply chain systems that we will no longer utilize and with the elimination of unproductive assets related to the change to standard financial systems. We expect that these changes will enhance efficiency and consistency throughout our global operations.
4. Global brand reorganization. We recorded $20.8 million related to benefits and severance packages for 75 management employees who were affected by the reconfiguration to a global brand structure and another $3.6 million related to infrastructure costs. We expect that the global brand structure will improve decision-making processes, thereby increasing innovation and speed to market.
Following is a summary of the charges as recorded in the consolidated statement of earnings for fiscal 2001:
Restructuring
-----------------------------
Other
(In millions) Net Cost of Operating Non-Recurring
Sales Sales Expenses Expenses Total
------- ------ -------- -------- -------
jane ............................... $ 5.7 $ 1.5 $ 4.8 $ 4.1 $ 16.1
tommy's shops ...................... 2.3 (0.4) 4.4 - 6.3
Information systems and other assets - - 4.6 11.6 16.2
Global brand reorganization ........ - - 23.8 0.6 24.4
------- ------ ------- ------- -------
Total charge ....................... $ 8.0 $ 1.1 $ 37.6 $ 16.3 63.0
======= ====== ======= =======
Tax effect ......................... (22.7)
-------
Net charge ......................... $ 40.3
=======
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The restructuring charge was recorded in other accrued liabilities or as a reduction of fixed assets. During fiscal 2001, $0.7 million was paid and through August 31, 2001 an additional $3.0 million was paid. We expect to settle a majority of the remaining obligations by the end of fiscal 2002 with certain additional payments made ratably through fiscal 2004.
OPERATING RESULTS
Operating income decreased 4% or $20.2 million to $495.6 million as compared with the prior year. Operating margins were 10.8% of net sales in fiscal 2001 as compared with 11.8% in the prior year. Operating income reflected the inclusion of restructuring and other non-recurring expenses of $46.7 million and $16.3 million, respectively. Before consideration of
these one-time charges, operating income increased 8% to $558.6 million and operating margins were 12.1%. The increase in operating income was primarily due to higher net sales and an improved gross margin percentage, partially offset by increased operating expenses reflecting increased sales support spending and new distribution channel costs.
Net earnings and net earnings per diluted share decreased approximately 3%. Net earnings declined $8.9 million to $305.2 million and net earnings per diluted share was lower by $.04 per diluted share from $1.20 to $1.16. Net earnings before restructuring and other non-recurring expenses and before the cumulative effect of adopting a new accounting principle was $347.7 million, representing an increase of 11% over the prior year; diluted earnings per common share increased 12% to $1.34 from $1.20 in the prior year.
The following discussions of Operating Income by "Product Categories" and "Geographic Regions" exclude the impact of restructuring and other non-recurring expenses and represents the manner in which we conduct and view our business.
Product Categories
Operating income increased 17% to $212.5 million and 11% to $266.9 million in
makeup and skin care, respectively, due primarily to the strength of recently
launched products. The strong growth of our M.A.C business, which includes
retail store expansion, also contributed to the increase in makeup operating
income. Operating income from our fragrance business declined by $17.0 million
reflecting lower sales and increased support spending versus the prior year. The
nominal increase in hair care operating income was a result of the inclusion of
Bumble and bumble and sales from recent launches, partially offset by costs
associated with refining Aveda's salon distribution, opening new Aveda
Environmental Lifestyle Stores and investing in new product introductions.
Geographic Regions
Operating income in the Americas increased 4% or $12.0 million to $299.9 million
as compared with the prior year, primarily due to net sales increases related to
new and recently launched products, strong growth in our M.A.C business and
the inclusion of Bumble and bumble, partially offset by a decline in fragrance
net sales. In Europe, the Middle East & Africa, operating income increased 19%
or $32.9 million to $201.8 million primarily due to improved operating results
in the United Kingdom and Spain and in the travel retail business, partially
offset by lower operating income in South Africa. In Asia/Pacific, operating
income decreased slightly to $56.9 million due to higher results in Korea and
Hong Kong offset by lower income in Japan and Australia.
INTEREST EXPENSE, NET
Net interest expense was $12.3 million as compared with $17.1 million in the prior year. As a result of an increase in average available cash during the period, we had higher interest income on invested funds and lower interest expense due to reduced short-term borrowings. Additionally, we benefited from a lower effective interest rate on our long-term borrowings resulting from our interest rate risk management strategy.
PROVISION FOR INCOME TAXES
The provision for income taxes represents Federal, foreign, state and local income taxes. The effective rate for income taxes for fiscal 2001 was 36% compared with 37% in the prior year. These rates reflect the effect of state and local taxes, tax rates in foreign jurisdictions and certain nondeductible expenses. The decrease in the effective income tax rate was principally attributable to ongoing tax planning initiatives.
EBITDA
Earnings before interest, taxes, depreciation and amortization ("EBITDA") is an additional measure of operating performance used by management. EBITDA, like operating income, does not include the effects of interest and taxes and additionally excludes the "non-cash" effects of depreciation and amortization on current earnings. While the components of EBITDA may vary from company to company, we exclude minority interest adjustments, all depreciation charges related to property, plant and equipment and all amortization charges, including amortization of goodwill, purchased royalty rights (fully amortized in November 2000), leasehold improvements and other intangible assets. These components of operating income do not necessarily result in a capital requirement in the current period, and, in the opinion of management, many of the underlying assets, both tangible and intangible, create value by supporting the global recognition of brand names and product innovation and by consistently producing quality products for our customers and consumers. While we consider EBITDA 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 generally accepted accounting principles.
EBITDA decreased slightly to $658.5 million or 14.3% of net sales in fiscal 2001 as compared with $662.6 million or 15.2% of net sales in fiscal 2000. Excluding restructuring and other non-recurring expenses, EBITDA increased 8.9% to $721.5 million or 15.6% of net sales in fiscal 2001 as compared with fiscal 2000. The improvement in EBITDA was primarily attributable to improvements in gross profit related to sales growth and production efficiencies.
Fiscal 2000 as Compared with Fiscal 1999
NET SALES
Net sales increased 10% or $405.3 million to $4.37 billion, reflecting improvements in each product category and each geographic region. We achieved double-digit growth in net sales of our makeup products, both domestically and abroad, on the strength of new and existing products, expanded distribution of M.A.C products and the addition of Stila. Improvements in sales of skin care products primarily related to new products targeting diverse groups of consumers. Growth of hair care sales was fueled by new product introductions and changes in our lines of distribution. Excluding the impact of foreign currency translation, total net sales grew 11%, with double-digit contributions from each region.
Product Categories
Skin Care
Skin care product sales increased 11% or $153.6 million to $1.55 billion,
partially reflecting our ability to capitalize on the success of Resilience Lift
by rolling it out internationally and our introduction of a complementary
product, Resilience Lift Eye Creme. Initial shipments of Idealist Skin
Refinisher as well as sales of other new products, such as Body Clinique,
Clinique Acne Solutions and Spotlight Skin Tone Perfector, contributed to
improvements in the category, as did a line of Origins brand ginger-based
products, including Ginger Souffle and Ginger Body Wash. Sales of certain
existing products, such as those in the Clinique 3-Step Skin Care System, were
consistently strong, while others such as Diminish and Turnaround Cream were
lower.
Makeup
Our net sales of makeup products increased 12% or $166.7 million to $1.58
billion supported by new and existing products, the addition of Stila and
increased sales of M.A.C products. Sales growth of our M.A.C lines was achieved
through growth in existing business and expansion of both traditional and retail
distribution. New products launched in fiscal 2000, such as *magic by
Prescriptives, City Stick and Longstemmed Lashes, contributed to improvements in
the category, as did existing products such as Long Last Lipstick and Liquid
Lipstick. Our makeup business also benefited from the domestic launch of Go Pout
Lipstick and the rollout of Superfit Makeup and Pure Color Lipstick
internationally. Improvements were partially offset by lower sales of Indelible
Lipstick and Smudgesicles.
Fragrance
Net sales of fragrance products increased 4% or $43.7 million to $1.09 billion.
For the year, sales of Tommy Hilfiger licensed products improved. Sales of
Freedom for him and Freedom for her, which were launched in fiscal 2000,
outpaced decreased sales of existing Tommy Hilfiger fragrances. DKNY for women
was launched domestically and Donna Karan Cashmere Mist was rolled out
internationally. Both of these products added to growth in the category. In its
second full fiscal year, sales of Clinique Happy continued to improve and during
fiscal 2000 we completed the master brand with the launch of Clinique Happy for
Men. Dazzling Gold and Dazzling Silver, which were rolled out in the prior year,
caused difficult comparisons for the fragrance category in fiscal 2000.
Hair Care
Sales of hair care products increased 38% or $31.5 million to $113.9 million
primarily due to Aveda, driven by an increase in the number of company-owned
retail stores, the successful introduction of new products and the effect of the
acquisitions of third-party distributors. In June 2000, we acquired a majority
interest in Bumble and bumble.
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
Sales in the Americas increased 11% or $260.9 million to $2.66 billion. This increase was driven by sales of new and existing products across all categories and growth in our newer brands. In Europe, the Middle East & Africa, net sales increased 4% or $48.6 million to $1.13 billion. The increase was primarily the result of higher net sales in Spain, Italy and France and in the travel retail business, partially offset by lower sales in Germany. Also contributing to regional sales growth
were sales by Jo Malone, which was acquired in October 1999. Excluding the impact of foreign currency translation, sales in Europe, the Middle East & Africa increased 12%. Net sales in Asia/Pacific increased 20% or $95.8 million to $577.0 million, reflecting increases in all regions, particularly Japan, Korea, Taiwan and Australia. Excluding the impact of foreign currency translation, Asia/Pacific sales grew 10% over the prior-year period.
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 increased $72.2 million or 8% to $972.1 million from $899.9 million last year. Cost of sales as a percentage of total net sales decreased to 22.3% from 22.7%, reflecting changes in product distribution, as well as the impact of our production and sourcing initiatives. Changes in product distribution include the rollout of our own retail stores and the acquisition of certain distributor operations, both of which contributed to higher gross margins. In addition, our cost of sales reduction program had a favorable impact on gross margins of products offered by our newer acquisitions.
OPERATING EXPENSES
Total operating expenses increased to 65.9% of net sales as compared with 65.8% of net sales in the prior year. This change primarily relates to increased costs of new/modified channels of distribution, which have higher operating cost structures than our traditional channels, as well as higher depreciation and amortization. Operating expenses are subject to the timing of advertising and promotional spending due to product launches and rollouts as well as incremental advertising in select markets.
OPERATING INCOME
Operating income increased 13% or $58.9 million to $515.8 million as compared with 12% growth to $456.9 million in the prior year. Operating margins were 11.8% of net sales in fiscal 2000 as compared with 11.5% in fiscal 1999. The increase in operating income and margins was due to higher net sales coupled with production efficiencies and changes in distribution, partially offset by planned increases in selling, general and administrative spending related to businesses acquired and new/modified channels of distribution.
Product Categories
Operating income increased in the skin care, makeup and hair care categories by
17%, 15% and 9%, respectively, primarily due to sales growth. Fragrance
operating income increased 1% as strong sales increases in the early portion of
fiscal 2000 gave way to softer sales in the latter half, while planned
advertising and promotional spending was relatively constant throughout the
year. The advertising and promotion for fragrance indirectly supported other
categories by generating increased traffic at points of sale.
Geographic Regions
Operating income in the Americas increased 9% or $22.9 million to $287.9 million
primarily due to increases in skin care product sales, as well as the inclusion
of operating results from recent acquisitions. In Europe, the Middle East &
Africa, operating income increased 16% or $23.4 million to $168.9 million
reflecting improved operating results in Spain and Italy and in the travel
retail business. In Asia/Pacific, operating income increased 27% or $12.6
million to $59.0 million due to improved results in Taiwan, Japan, Korea and
Australia.
INTEREST EXPENSE, NET
Net interest expense was $17.1 million and $16.7 million for the years ended June 30, 2000 and 1999, respectively. This net increase reflected lower interest income from investments, related to lower average cash balances, partially offset by lower interest expense resulting from our management of interest rates and short-term borrowings.
PROVISION FOR INCOME TAXES
The provision for income taxes represents Federal, foreign, state and local income taxes. The effective rate for income taxes for fiscal 2000 was 37% compared with 38% in the prior year. These rates were higher than the statutory Federal tax rate due to the effect of state and local taxes, higher tax rates in certain foreign jurisdictions and certain nondeductible expenses. The decrease in the effective income tax rate was principally attributable to tax planning initiatives and reduction of certain local statutory tax rates.
EBITDA
EBITDA increased 15% to $662.6 million or 15.2% of net sales in fiscal 2000 as compared with $574.2 million or 14.5% of net sales in fiscal 1999. The improvement in EBITDA was primarily attributable to improvements in gross profit related to sales growth and production efficiencies.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of funds historically have been cash flows from operations and borrowings under commercial paper and committed and uncommitted credit lines provided by banks in the United States and abroad. At June 30, 2001, we had cash and cash equivalents of $346.7 million compared with $320.3 million at June 30, 2000.
We have a $750.0 million commercial paper program, under which we have issued, and intend to 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+ by Standard & Poor's and A1 by Moody's. At June 30, 2001, our outstanding long-term borrowings consisted of $181.0 million of commercial paper; a $200.0 million term loan, which is due in February 2005; a 700.0 million yen loan payable (approximately $5.7 million at current exchange rates), which is due in April 2003; and a 3.0 billion yen term loan (approximately $24.2 million at current exchange rates), which is due in March 2006. Commercial paper is classified as long-term debt on our balance sheet based upon our intent and ability to refinance maturing commercial paper on a long-term basis. It is our policy to maintain backup facilities to support our commercial paper program and its classification as long-term debt. As of June 30, 2001, we had an unused $400.0 million revolving credit facility, expiring on June 28, 2006. We also have an effective shelf registration statement covering the potential issuance of up to $400.0 million in debt securities.
Our business is seasonal in nature and, accordingly, our working capital needs vary. To meet these needs, we could issue up to an additional $569.0 million of commercial paper under our program, issue long-term debt securities or borrow under the revolving credit facility. As of June 30, 2001, we also had $30.4 million in uncommitted facilities, $0.2 million of which was used.
Total debt as a percent of total capitalization was 20% at June 30, 2001 as compared with 22% at June 30, 2000, primarily as a result of higher total capital.
Net cash provided by operating activities was $305.4 million in fiscal 2001 as compared with $442.5 million in fiscal 2000 and $352.3 million in fiscal 1999. The decrease in fiscal 2001 cash provided by operating activities reflected an increase in inventory primarily due to: accelerated growth both in new distribution channels and in the rollout of new brands; a shift in the timing of Christmas production at the end of fiscal 2001 as compared with the prior year; reconfiguration of some of our distribution to improve service levels; and softer retail sales than projected in the Americas. Accounts receivable increased due to sales growth, particularly outside the United States, and the timing of shipments as compared with fiscal 2000. The decrease in other accrued liabilities reflected the type and timing of various expenditures and the tightening of spending, particularly in the Americas, due to the difficult retail environment, partially offset by a $35.2 million accrual for restructuring and other non-recurring expenses. The fiscal 2000 and 1999 increases in cash provided by operating activities were primarily related to increased earnings, particularly before depreciation and amortization, as well as to higher accrual balances related to acquired businesses.
Net cash used for investing activities was $206.3 million in fiscal 2001, compared with $374.3 million in fiscal 2000 and $200.3 million in fiscal 1999. During fiscal 2001, investment spending related primarily to capital expenditures and the acquisition of a number of third-party distributors. Investment spending in fiscal 2000 reflected capital expenditures and the acquisitions of Stila, Jo Malone, Gloss.com and Bumble and bumble, as well as certain Aveda distributors in the United States and United Kingdom, and certain Aveda retail stores.
Cash used for financing activities was $63.5 million, $87.9 million and $73.2 million in fiscal 2001, 2000 and 1999, respectively. The cash used in fiscal 2001 was primarily related to dividend payments. The increase in cash used in fiscal 2000 related to common stock repurchases.
In September 1998, our Board of Directors authorized a share repurchase program. We have purchased, and may continue to purchase, over an unspecified period of time, a total of up to eight million shares of Class A Common Stock in the open market or in privately negotiated transactions, depending on market conditions and other factors. To date, we have purchased approximately 1.1 million shares under this program.
Capital expenditures amounted to $192.2 million, $180.9 million and $117.9 million in fiscal 2001, 2000 and 1999, 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, as well as incremental capital spending by acquired companies.
Dividends declared were $71.1 million, $70.9 million and $65.4 million in fiscal 2001, 2000 and 1999, respectively. In the first three quarters of fiscal 1999, the Board of Directors declared, and we paid, quarterly dividends on our Class A and Class B Common Stock at the rate of $.0425 per share. The Board of Directors increased the common stock dividend to $.05 per share in the fourth quarter of fiscal 1999 and declared a $.05 per share dividend in each quarter of fiscal 2000 and 2001. In fiscal 2001, 2000 and 1999, dividends declared on our common stock totaled $47.7 million, $47.5 million and $42.0 million, respectively.
The effects of inflation have not been significant to our overall operating results in recent years. Generally, we have been able to 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.
Derivative Financial Instruments
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 enter into interest rate swaps and options to manage the effects of
interest rate movements on our aggregate liability portfolio. We categorize
these instruments as entered into for purposes other than trading.
For each derivative contract we enter into, 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.
Foreign Exchange Risk Management
We enter into forward exchange contracts to hedge purchases, 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 and foreign currency options have
been designated as cash-flow hedges. As of June 30, 2001, 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 August 2002. 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 June 30, 2001, we had foreign currency contracts in the form of forward exchange contracts in the amount of $148.2 million. The foreign currencies included in these contracts (notional value stated in U.S. dollars) are principally the Japanese yen ($53.9 million), Swiss franc ($28.8 million), Korean won ($18.5 million), Taiwan dollar ($13.7 million), British pound ($13.2 million), Euro ($8.5 million) and Mexican peso ($6.8 million).
Interest Rate Risk Management
We have entered into an interest rate swap agreement to exchange floating rate
for fixed rate interest payments periodically over the life of the agreement. In
addition, we have purchased interest rate options that offer similar interest
rate protection. The interest rate swap and options have been designated as
cash-flow hedges and were highly effective as of June 30, 2001.
At June 30, 2001, we had an interest rate swap and option agreements outstanding with notional principal amounts of $67.0 million and $133.0 million, respectively. For the twelve month period ended June 30, 2001, our interest rate swap carried a weighted average pay rate of 6.14% and a receive rate of 6.32%. The interest rate option agreements carried a weighted average pay rate of 6.14% and a receive rate of 6.62%.
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,
2001 related to our foreign exchange contracts and interest rate contracts,
using a variance/co-variance model with a 95 percent confidence level and
assuming normal market conditions, was $2.9 million and $3.0 million,
respectively.
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 nor 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 the 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.
Accounting Standards
Effective July 1, 2000, we adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities". These Statements established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133, as amended, requires the recognition of all derivative instruments as either assets or liabilities in the statement of financial position measured at fair value.
In accordance with the provisions of SFAS No. 133, as amended, we recorded a non-cash charge to earnings of $2.2 million, after tax, to reflect the change in time-value from the dates of the derivative instruments' inception through the date of transition (July 1, 2000). This charge is reflected as the cumulative effect of a change in accounting principle in the accompanying consolidated statements of earnings.
The Emerging Issues Task Force ("EITF") has reached consensus on Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs". This consensus addresses how shipping and handling costs that are billed to a customer in a sales transaction should be recognized. This guidance became effective for our fiscal 2001 fourth quarter. Generally, we do not charge for shipping to our customers that are retailers and, accordingly, the adoption of this rule did not have a material impact on our consolidated financial results.
The EITF has reached consensus on Issue No. 00-14, "Accounting for Certain Sales Incentives". This consensus addresses when sales incentives and discounts should be recognized, as well as where the related revenues and expenses should be classified in a registrant's financial statements. Currently, the cost of merchandise used in our gift-with-purchase and purchase-with-purchase activities, as well as any related revenues, are reported net, as operating expenses, in the accompanying consolidated statements of earnings. Upon adoption, we will classify revenues generated by these promotional activities as sales resulting in an increase of approximately 1.0% to 2.0% in net sales. The cost of promotional merchandise will be reclassified as a cost of sales. Although operating income will remain unchanged, gross margins will decrease by approximately 5.0% to 6.0% of sales, offset by a corresponding decrease in operating expenses. Due to variations in our launch calendar and the timing of promotions, we anticipate greater fluctuations in our gross margins and operating expenses on a quarter-by-quarter basis. Issue No. 00-14 will become effective in our fiscal 2002 third quarter and will be applied retroactively for purposes of comparability.
The EITF has reached a consensus on Issue No. 00-25, "Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products". The consensus provides guidance on the income statement classification of consideration from a vendor to a retailer in connection with the retailer's purchase of the vendor's products or to promote sales of the vendor's products. Issue No. 00-25 becomes effective for quarters beginning after
December 15, 2001. We currently account for transactions (e.g., certain of our promotional allowances to retailers) in accordance with Issue No. 00-25 and, thus, this consensus will not have an impact on our consolidated financial results.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". These Statements establish financial accounting and reporting standards for acquired goodwill and other intangible assets. Specifically, the standards address how acquired intangible assets should be accounted for both at the time of acquisition and after they have been recognized in the financial statements. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001; however, early application is permitted for entities with fiscal years beginning after March 15, 2001. We have adopted this standard effective July 1, 2001 and, accordingly, those intangible assets that will continue to be classified as goodwill or as other intangibles with indefinite lives will no longer be amortized. This could result in the exclusion of approximately $21 million in amortization expense for the fiscal year ending June 30, 2002. In accordance with SFAS No. 142, intangible assets, including purchased goodwill, will be evaluated periodically for impairment. Our initial evaluations are expected to be completed by September 30, 2001.
INTERNET
Our strategic goals for the Internet are to enhance our brand equities, to reach new consumers, to forge deeper relationships with existing consumers and to strengthen our business with our traditional retailers. The strategy includes individual sites for our brands, a planned launch of a multi-brand website offering products from our portfolio and specially designed sites which will be available through the e-commerce sites of retailers who meet specific requirements. We currently have ten individual brand websites that educate and inform consumers about specific brands, with more in development. Five of the existing sites - esteelauder.com, clinique.com, origins.com, bobbibrown.com and maccosmetics.com - have e-commerce capabilities. Our Internet sales are currently limited to consumers in the United States and Canada. We are currently re-developing the Gloss.com multi-brand site we acquired in May 2000 and expect to re-launch it in the first half of fiscal 2002. Initially, the site will feature Estee Lauder, Clinique, Prescriptives, Origins, Bobbi Brown, M.A.C and Stila products. The site also will feature products from Chanel, Inc. and Clarins (U.S.A.) Inc. which became co-venturers in Gloss.com in August 2000. The impact of our overall Internet strategy on earnings is expected to be initially dilutive, particularly as we re-develop the multi-brand site.
EURO CONVERSION
Under the direction of the European Economic and Monetary Union (EMU), a single currency (the "Euro") will replace the national currencies of most of the European countries in which we conduct business. The conversion rates between the Euro and the participating nations' currencies were fixed irrevocably as of January 1, 1999, with the participating national currencies to be removed from circulation between January 1 and June 30, 2002 and replaced by Euro notes and coinage. During the "transition period" from January 1, 1999 through December 31, 2001, public and private entities, as well as individuals, may pay for goods and services using either checks, drafts, or wire transfers denominated in Euros or a participating country's national currency.
Under the regulations governing the transition to a single currency, there is a "no compulsion, no prohibition" rule which states that no one is obliged to use the Euro until the notes and coinage have been introduced on January 1, 2002. In keeping with this rule, we were Euro "compliant" (able to receive Euro-denominated payments and able to invoice in Euros as requested) as of January 1, 1999 in the affected countries. Full conversion of all affected country operations to the Euro is expected to be completed by the time national currencies are removed from circulation. Phased conversion to the Euro is currently underway and the effects on revenues, costs and various business strategies continue to be assessed. The cost of software and business process conversion is not expected to be material.
FORWARD-LOOKING INFORMATION
We and our representatives from time to time make written or oral forward-looking statements, including statements contained in this and other filings with the Securities and Exchange Commission, in our press releases and in our reports to stockholders. The words and phrases "will likely result," "expect," "believe," "planned," "will," "will continue," "is anticipated," "estimates," "projects" 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, we cannot assure that actual results will not differ materially from our expectations. Factors that could cause actual results to differ from expectations include, without limitation:
(i) increased competitive activity from companies in the skin care, makeup, fragrance and hair care businesses, some of which have greater resources than we do;
(ii) our ability to develop, produce and market new products on which future operating results may depend;
(iii) consolidations and restructurings 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;
(iv) shifts in the preferences of consumers as to where and how they shop for the types of products and services we sell;
(v) social, political and economic risks to our foreign manufacturing, distribution and retail operations, including changes in foreign investment and trade policies and regulations of the host countries and of the United States;
(vi) changes in the laws, regulations and policies, including changes in accounting standards and trade rules, and legal or regulatory proceedings, that affect, or will affect, us in the United States and abroad;
(vii) foreign currency fluctuations affecting our results of operations and the value of our foreign assets, the relative prices at which we sell our products and our foreign competitors sell their products in the same markets and our operating and manufacturing costs outside of the United States;
(viii) changes in global or local economic conditions that could affect consumer purchasing and the cost and availability of capital, which we may need for new equipment, facilities or acquisitions;
(ix) 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);
(x) real estate rates and availability, which may affect our ability to increase the number of retail locations at which we sell our products;
(xi) changes in product mix to products which are less profitable;
(xii) our ability to develop e-commerce capabilities, and other new information and distribution technologies, on a timely basis and within our cost estimates;
(xiii) our ability to integrate acquired businesses and realize value therefrom; and
(xiv) consequences attributable to the events that took place in New York City and Washington, D.C. on September 11, 2001.
We assume no responsibility to update forward-looking statements made herein or otherwise.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information required by this item is set forth in Item 7 of this Annual Report on Form 10-K under the captions "Liquidity and Capital Resources - Market Risk" and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
The information required by this item appears beginning on page F-1 of this Annual Report on Form 10-K and is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
PART III
The information required by Item 10 (Directors and Executive Officers of the
Registrant), Item 11 (Executive Compensation), Item 12 (Security Ownership of
Certain Beneficial Owners and Management) and Item 13 (Certain Relationships and
Related Transactions) of Form 10-K, and not already provided herein under "Item
1. Business - Executive Officers", will be included in our Proxy Statement for
the 2001 Annual Meeting of Stockholders, which will be filed within 120 days
after the close of the fiscal year ended June 30, 2001, and such information is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1, 2. Financial Statements and Schedules - See index on Page F-1.
3. Exhibits -
Exhibit Description
Number -----------
------
3.1 Form of Restated Certificate of Incorporation (filed as
Exhibit 3.1 to Amendment No. 3 to our Registration Statement
on Form S-1 (No. 33-97180) on November 13, 1995 (the "S-1")).*
3.2 Certificate of Amendment to Restated Certificate of
Incorporation (filed as Exhibit 3.1 to our Quarterly Report on
Form 10-Q for the quarter ended December 31, 1999).*
3.3 Amended and Restated By-laws (filed as Exhibit 3.2 to our
Quarterly Report on Form 10-Q for the quarter ended December
31, 1999).*
10.1 Form of Stockholders' Agreement (filed as Exhibit 10.1 to the
S-1).*
10.1a Amendment No. 1 to Stockholders' Agreement (filed as Exhibit
10.1 to our Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996).*
10.1b Amendment No. 2 to Stockholders' Agreement (filed as Exhibit
10.2 to our Quarterly Report on Form 10-Q for the quarter
ended December 31, 1996 (the "FY 1997 Q2 10-Q")).*
10.1c Amendment No. 3 to Stockholder's Agreement (filed as Exhibit
10.2 to our Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997 (the "FY 1997 Q3 10-Q")).*
10.1d Amendment No. 4 to Stockholders' Agreement (filed as Exhibit
10.1d to our Annual Report on Form 10-K for the year ended
June 30, 2000 ("FY 2000 10-K)).*
10.2 Form of Registration Rights Agreement (filed as Exhibit 10.2
to the S-1).*
10.2a First Amendment to Registration Rights Agreement (filed as
Exhibit 10.3 to our Annual Report on Form 10-K for the fiscal
year ended June 30, 1996).*
10.2b Second Amendment to Registration Rights Agreement (filed as
Exhibit 10.1 to the FY 1997 Q3 10-Q).*
10.2c Third Amendment to Registration Rights Agreement.
10.3 Fiscal 1996 Share Incentive Plan (filed as Exhibit 10.3 to the
S-1).* +
10.4 Fiscal 1999 Share Incentive Plan (filed as Exhibit 4(c) to our
Registration Statement on Form S-8 (No. 333-66851) on November
5, 1998).* +
10.5 The Estee Lauder Inc. Retirement Growth Account Plan (filed as
Exhibit 10.5 to our Annual Report on Form 10-K for the fiscal
year ended June 30, 1999 (the "FY 1999 10-K")).* +
10.6 The Estee Lauder Inc. Retirement Benefits Restoration Plan
(filed as Exhibit 10.6 to the FY 1999 10-K).* +
10.7 Executive Annual Incentive Plan (filed as Exhibit 10.2 to our
Quarterly Report on Form 10-Q for the quarter ended December
31, 1998).* +
10.8 Employment Agreement with Leonard A. Lauder. +
10.9 Employment Agreement with Ronald S. Lauder (filed as Exhibit
10.1 to our Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000).* +
10.10 Employment Agreement with Fred H. Langhammer (filed as Exhibit
10.10 to the FY 2000 10-K)."+
10.10a Amendment to Employment Agreement with Fred H. Langhammer. +
10.11 Employment Agreement with Daniel J. Brestle. +
10.12 Employment Agreement with William P. Lauder (filed as Exhibit
10.1 to Amendment No. 2 to our Registration Statement on Form
S-3 (No. 333-77977) on May 19, 1999).* +
10.13 Employment Agreement with Patrick Bousquet-Chavanne (filed as
Exhibit 10.13 to the FY 1999 10-K).* +
10.14 Form of Deferred Compensation Agreement (interest-based) with
Outside Directors. +
10.15 Form of Deferred Compensation Agreement (stock-based) with
Outside Directors. +
|
10.16 Non-Employee Director Share Incentive Plan (filed as Exhibit
4(d) to our Registration Statement on Form S-8 (No. 333-49606)
filed on November 9, 2000).* +
21.1 List of significant subsidiaries.
23.1 Consent of Arthur Andersen LLP.
24.1 Power of Attorney.
|
(b) Reports on Form 8-K.
On April 24, 2001, we filed a Current Report on Form 8-K. Pursuant to Item 5 of Form 8-K, we reported the results of the quarter ended March 31, 2001 and we updated our then existing estimates of anticipated sales growth and earnings per share for fiscal 2001.
On June 28, 2001, we filed a Current Report on Form 8-K. Pursuant to Item 5 of Form 8-K, we reported our then anticipated full year earnings per share range for fiscal 2001, restructuring and other non-recurring expenses related to certain operations and our then existing estimate of anticipated net sales and earnings per share for fiscal 2002.
-27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE ESTEE LAUDER COMPANIES INC.
By /s/ RICHARD W. KUNES
-------------------------------
Richard W. Kunes
Senior Vice President
and Chief Financial Officer
Date: September 17, 2001
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature Title(s) Date
--------- -------- ----
FRED H. LANGHAMMER* Chief Executive Officer September 17, 2001
------------------------------------ and a Director
Fred H. Langhammer (Principal Executive Officer)
LEONARD A. LAUDER* Chairman of the Board of September 17, 2001
------------------------------------ Directors
Leonard A. Lauder
CHARLENE BARSHEFSKY * Director September 17, 2001
------------------------------------
Charlene Barshefsky
LYNN FORESTER* Director September 17, 2001
------------------------------------
Lynn Forester
IRVINE O. HOCKADAY, JR.* Director September 17, 2001
------------------------------------
Irvine O. Hockaday, Jr.
RONALD S. LAUDER* Director September 17, 2001
------------------------------------
Ronald S. Lauder
WILLIAM P. LAUDER* Director September 17, 2001
------------------------------------
William P. Lauder
RICHARD D. PARSONS* Director September 17, 2001
------------------------------------
Richard D. Parsons
MARSHALL ROSE* Director September 17, 2001
------------------------------------
Marshall Rose
FAYE WATTLETON* Director September 17, 2001
------------------------------------
Faye Wattleton
/s/ RICHARD W. KUNES Senior Vice President and September 17, 2001
------------------------------------ Chief Financial Officer
Richard W. Kunes (Principal Financial and
Accounting Officer)
|
By /s/ RICHARD W. KUNES
--------------------------
Richard W. Kunes
(Attorney-in-Fact)
|
THE ESTEE LAUDER COMPANIES INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
----
Financial Statements:
Report of Independent Public Accountants................................. F-2
Consolidated Statements of Earnings...................................... F-3
Consolidated Balance Sheets.............................................. F-4
Consolidated Statements of Stockholders' Equity and Comprehensive
Income................................................................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
Financial Statement Schedule:
Report of Independent Public Accountants on Schedule..................... S-1
Schedule II - Valuation and Qualifying Accounts.......................... S-2
|
All other schedules are omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Estee Lauder Companies Inc.:
We have audited the accompanying consolidated balance sheets of The Estee Lauder Companies Inc. (a Delaware corporation) and subsidiaries as of June 30, 2001 and 2000, and the related consolidated statements of earnings, stockholders' equity and comprehensive income and cash flows for each of the three years in the period ended June 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Estee Lauder Companies Inc. and subsidiaries as of June 30, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2001 in conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
New York, New York
August 10, 2001
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended June 30
-------------------------------------
2001 2000 1999
----------- ----------- -----------
(In millions, except per share data)
Net Sales ............................................... $ 4,608.1 $ 4,366.8 $ 3,961.5
Cost of sales ........................................... 972.3 972.1 899.9
----------- ----------- -----------
Gross Profit ............................................ 3,635.8 3,394.7 3,061.6
----------- ----------- -----------
Operating expenses:
Selling, general and administrative .................. 3,063.7 2,845.7 2,572.1
Restructuring ........................................ 37.6 - -
Other non-recurring .................................. 16.3 - -
Related party royalties .............................. 22.6 33.2 32.6
----------- ----------- -----------
3,140.2 2,878.9 2,604.7
----------- ----------- -----------
Operating Income ........................................ 495.6 515.8 456.9
Interest expense, net ................................... 12.3 17.1 16.7
----------- ----------- -----------
Earnings before Income Taxes, Minority Interest
and Accounting Change .................................. 483.3 498.7 440.2
Provision for income taxes .............................. 174.0 184.6 167.3
Minority interest, net of tax ........................... (1.9) - -
----------- ----------- -----------
Net Earnings before Accounting Change ................... 307.4 314.1 272.9
Cumulative effect of a change in accounting principle,
net of tax ............................................. (2.2) - -
----------- ----------- -----------
Net Earnings ............................................ 305.2 314.1 272.9
Preferred stock dividends ............................... 23.4 23.4 23.4
----------- ----------- -----------
Net Earnings Attributable to Common Stock ............... $ 281.8 $ 290.7 $ 249.5
=========== =========== ===========
Basic net earnings per common share:
Net earnings attributable to common stock before
accounting change ................................... $ 1.19 $ 1.22 $ 1.05
Cumulative effect of a change in accounting principle,
net of tax .......................................... (.01) - -
----------- ----------- -----------
Net earnings attributable to common stock ............ $ 1.18 $ 1.22 $ 1.05
=========== =========== ===========
Diluted net earnings per common share:
Net earnings attributable to common stock before
accounting change ................................... $ 1.17 $ 1.20 $ 1.03
Cumulative effect of a change in accounting principle,
net of tax .......................................... (.01) - -
----------- ----------- -----------
Net earnings attributable to common stock ............ $ 1.16 $ 1.20 $ 1.03
=========== =========== ===========
Weighted average common shares outstanding:
Basic ................................................ 238.4 237.7 237.0
Diluted .............................................. 242.2 242.5 241.2
|
See notes to consolidated financial statements.
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED BALANCE SHEETS
June 30
-----------------------
2001 2000
---------- ----------
(In millions)
ASSETS
Current Assets
Cash and cash equivalents ...................................................... $ 346.7 $ 320.3
Accounts receivable, net ....................................................... 580.6 550.2
Inventory and promotional merchandise, net ..................................... 630.3 546.3
Prepaid expenses and other current assets ...................................... 181.3 201.7
---------- ----------
Total current assets ...................................................... 1,738.9 1,618.5
---------- ----------
Property, Plant and Equipment, net ............................................. 528.7 480.3
---------- ----------
Other Assets
Investments, at cost or market value ........................................... 41.0 61.4
Deferred income taxes .......................................................... 70.1 48.9
Goodwill, net .................................................................. 699.7 708.1
Other intangible assets, net ................................................... 21.0 31.1
Other assets, net .............................................................. 119.4 95.0
---------- ----------
Total other assets ........................................................ 951.2 944.5
---------- ----------
Total assets .......................................................... $ 3,218.8 $ 3,043.3
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt ................................................................ $ 5.8 $ 7.0
Accounts payable ............................................................... 239.8 236.5
Accrued income taxes ........................................................... 79.0 84.2
Other accrued liabilities ...................................................... 532.1 574.1
---------- ----------
Total current liabilities ................................................. 856.7 901.8
---------- ----------
Noncurrent Liabilities
Long-term debt ................................................................. 410.9 418.4
Other noncurrent liabilities ................................................... 239.1 202.8
---------- ----------
Total noncurrent liabilities .............................................. 650.0 621.2
---------- ----------
Commitments and Contingencies (Note 15)
$6.50 Cumulative Redeemable Preferred Stock, at redemption value ............... 360.0 360.0
---------- ----------
Stockholders' Equity
Common stock, $.01 par value; 650,000,000 shares Class A authorized; shares
issued: 126,053,825 in 2001 and 125,058,658 in 2000; 240,000,000 shares
Class B authorized; shares issued and outstanding: 113,490,293 in 2001
and 113,679,334 in 2000 ................................................... 2.4 2.4
Paid-in capital ................................................................ 258.3 237.1
Retained earnings .............................................................. 1,242.7 1,008.6
Accumulated other comprehensive income (loss) .................................. (120.5) (57.1)
---------- ----------
1,382.9 1,191.0
Less: Treasury stock, at cost; 877,860 Class A shares at June 30, 2001 and
876,980 Class A shares at June 30, 2000 ................................... (30.8) (30.7)
---------- ----------
Total stockholders' equity ................................................ 1,352.1 1,160.3
---------- ----------
Total liabilities and stockholders' equity ............................ $ 3,218.8 $ 3,043.3
========== ==========
|
See notes to consolidated financial statements.
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
Year Ended June 30
--------------------------------
2001 2000 1999
-------- -------- --------
(In millions)
STOCKHOLDERS' EQUITY
Common stock, beginning of year ................................ $ 2.4 $ 2.4 $ 2.4
-------- -------- --------
Common stock, end of year ...................................... 2.4 2.4 2.4
-------- -------- --------
Paid-in capital, beginning of year ............................. 237.1 211.6 168.6
Stock compensation programs .................................... 21.2 25.5 43.0
-------- -------- --------
Paid-in capital, end of year ................................... 258.3 237.1 211.6
-------- -------- --------
Retained earnings, beginning of year ........................... 1,008.6 766.2 559.6
Preferred stock dividends ...................................... (23.4) (23.4) (23.4)
Common stock dividends ......................................... (47.7) (47.5) (42.0)
Issuance of treasury stock ..................................... - (0.8) (0.9)
Net earnings for the year ...................................... 305.2 314.1 272.9
-------- -------- --------
Retained earnings, end of year ................................. 1,242.7 1,008.6 766.2
-------- -------- --------
Accumulated other comprehensive income (loss), beginning of year (57.1) (44.3) (34.2)
Other comprehensive income (loss) .............................. (63.4) (12.8) (10.1)
-------- -------- --------
Accumulated other comprehensive income (loss), end of year ..... (120.5) (57.1) (44.3)
-------- -------- --------
Treasury stock, beginning of year .............................. (30.7) (11.4) -
Acquisition of treasury stock .................................. (0.1) (23.6) (12.7)
Issuance of treasury stock ..................................... - 4.3 1.3
-------- -------- --------
Treasury stock, end of year .................................... (30.8) (30.7) (11.4)
-------- -------- --------
Total stockholders' equity ............................ $1,352.1 $1,160.3 $ 924.5
======== ======== ========
COMPREHENSIVE INCOME
Net earnings ................................................... $ 305.2 $ 314.1 $ 272.9
-------- -------- --------
Other comprehensive income:
Net unrealized investment gains (losses) .................. (11.0) 7.8 0.3
Net derivative instrument losses .......................... (2.0) - -
Net minimum pension liability adjustments ................. (12.4) - -
Translation adjustments ................................... (38.0) (20.6) (10.4)
-------- -------- --------
Other comprehensive income (loss) ......................... (63.4) (12.8) (10.1)
-------- -------- --------
Total comprehensive income ............................ $ 241.8 $ 301.3 $ 262.8
======== ======== ========
|
See notes to consolidated financial statements.
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30
----------------------------
2001 2000 1999
-------- -------- --------
(In millions)
Cash Flows from Operating Activities
Net earnings .......................................................... $ 305.2 $ 314.1 $ 272.9
Adjustments to reconcile net earnings to net cash flows provided by
operating activities:
Depreciation and amortization ..................................... 156.3 129.1 99.6
Amortization of purchased royalty rights .......................... 6.6 17.7 17.7
Deferred income taxes ............................................. 4.7 (5.5) (4.2)
Minority interest ................................................. 1.9 - -
Non-cash stock compensation ....................................... 0.7 1.7 8.3
Cumulative effect of a change in accounting principle ............. 2.2 - -
Non-cash portion of restructuring and other non-recurring expenses. 27.1 - -
Changes in operating assets and liabilities:
Increase in accounts receivable, net .............................. (57.3) (24.4) (38.0)
Increase in inventory and promotional merchandise, net ............ (102.1) (31.3) -
Increase in other assets .......................................... (53.6) (39.8) (39.9)
Increase in accounts payable ...................................... 14.2 12.2 14.0
Increase in accrued income taxes .................................. 5.9 10.9 21.2
Increase (decrease) in other accrued liabilities .................. (23.4) 35.1 7.8
Increase (decrease) in other noncurrent liabilities ............... 17.0 22.7 (7.1)
-------- -------- --------
Net cash flows provided by operating activities ................ 305.4 442.5 352.3
-------- -------- --------
Cash Flows from Investing Activities
Capital expenditures .................................................. (192.2) (180.9) (117.9)
Acquisition of businesses, net of acquired cash ....................... (16.0) (180.5) (75.0)
Purchases of long-term investments .................................... - (15.9) (8.4)
Proceeds from disposition of long-term investments .................... 1.9 3.0 1.0
-------- -------- --------
Net cash flows used for investing activities ................... (206.3) (374.3) (200.3)
-------- -------- --------
Cash Flows from Financing Activities
Decrease in short-term debt, net ...................................... (0.1) (0.6) (5.8)
Proceeds from long-term debt .......................................... 24.5 - 205.2
Repayments of long-term debt .......................................... (30.1) (6.8) (210.9)
Net proceeds from employee stock transactions ......................... 13.3 14.0 14.6
Payments to acquire treasury stock .................................... (0.1) (23.6) (12.7)
Dividends paid ........................................................ (71.0) (70.9) (63.6)
-------- -------- --------
Net cash flows used for financing activities ................... (63.5) (87.9) (73.2)
-------- -------- --------
Effect of Exchange Rate Changes on Cash and Cash Equivalents ............... (9.2) (7.5) (8.8)
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents .................. 26.4 (27.2) 70.0
Cash and Cash Equivalents at Beginning of Year ........................ 320.3 347.5 277.5
-------- -------- --------
Cash and Cash Equivalents at End of Year .............................. $ 346.7 $ 320.3 $ 347.5
======== ======== ========
Supplemental disclosures of cash flow information (see also Note 17)
Cash paid during the year for:
Interest .......................................................... $ 26.7 $ 29.2 $ 31.2
======== ======== ========
Income Taxes ...................................................... $ 176.6 $ 163.8 $ 157.3
======== ======== ========
|
See notes to consolidated financial statements.
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS
The Estee Lauder Companies Inc. manufactures, markets and sells skin care, makeup, fragrance and hair care products around the world. Products are marketed under the following brand names: Estee Lauder, Clinique, Aramis, Prescriptives, Origins, M.A.C, Bobbi Brown, La Mer, jane, Aveda, Stila, Jo Malone and Bumble and bumble. The Estee Lauder Companies Inc. is also the global licensee of the Tommy Hilfiger, Donna Karan and Kate Spade brands for fragrances and cosmetics.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of The Estee Lauder Companies Inc. and its subsidiaries (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated.
Net Earnings Per Common Share
Net earnings per common share ("basic EPS") is computed by dividing net earnings, after deducting preferred stock dividends on the Company's $6.50 Cumulative Redeemable Preferred Stock, by the weighted average number of common shares outstanding and contingently issuable shares (which satisfy certain conditions). Net earnings per common share assuming dilution ("diluted EPS") is computed by reflecting potential dilution from the exercise of stock options.
A reconciliation between the numerators and denominators of the basic and diluted EPS computations is as follows:
Year Ended June 30
-------------------------------
2001 2000 1999
--------- --------- ---------
(In millions, except per share data)
Numerator:
Net earnings before accounting change ............................... $ 307.4 $ 314.1 $ 272.9
Preferred stock dividends ........................................... (23.4) (23.4) (23.4)
--------- --------- ---------
Net earnings attributable to common stock before accounting change .. 284.0 290.7 249.5
Cumulative effect of a change in accounting principle, net of tax ... (2.2) - -
--------- --------- ---------
Net earnings attributable to common stock ........................... $ 281.8 $ 290.7 $ 249.5
========= ========= =========
Denominator:
Weighted average common shares outstanding - Basic .................. 238.4 237.7 237.0
Effect of dilutive securities: Stock options ........................ 3.8 4.8 4.2
--------- --------- ---------
Weighted average common shares outstanding - Diluted ................ 242.2 242.5 241.2
========= ========= =========
Basic net earnings per common share:
Net earnings before accounting change ............................... $ 1.19 $ 1.22 $ 1.05
Cumulative effect of a change in accounting principle, net of tax ... (.01) - -
--------- --------- ---------
Net earnings ........................................................ $ 1.18 $ 1.22 $ 1.05
========= ========= =========
Diluted net earnings per common share:
Net earnings before accounting change ............................... $ 1.17 $ 1.20 $ 1.03
Cumulative effect of a change in accounting principle, net of tax ... (.01) - -
--------- --------- ---------
Net earnings ........................................................ $ 1.16 $ 1.20 $ 1.03
========= ========= =========
|
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents
Cash and cash equivalents include $232.2 million and $169.8 million of short-term time deposits at June 30, 2001 and 2000, respectively. The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable is stated net of the allowance for doubtful accounts and customer deductions of $26.8 million and $31.7 million as of June 30, 2001 and 2000, respectively.
Currency Translation and Transactions
All assets and liabilities of foreign subsidiaries and affiliates are translated at year-end rates of exchange, while revenue and expenses are translated at weighted average rates of exchange for the year. Unrealized translation gains or losses are reported as cumulative translation adjustments through other comprehensive income. Such adjustments amounted to $38.0 million and $20.6 million of unrealized translation losses in fiscal 2001 and 2000, respectively.
The Company enters into forward foreign exchange contracts and foreign currency options to hedge foreign currency transactions for periods consistent with its identified exposures. Accordingly, the Company categorizes these instruments as entered into for purposes other than trading. Premiums on foreign currency options are amortized based on changes in the time-value of the options for the reporting period.
The accompanying consolidated statements of earnings include net exchange gains of $9.2 million and net exchange losses of $4.3 million and $1.8 million in fiscal 2001, 2000 and 1999, respectively. See Note 9.
Inventory and Promotional Merchandise
Inventory and promotional merchandise only includes inventory considered saleable or usable in future periods, and is stated at the lower of cost or market, with cost being determined on the first-in, first-out method. Promotional merchandise is charged to expense at the time the merchandise is shipped to the Company's customers.
June 30
--------------------
2001 2000
-------- --------
(In millions)
Inventory and promotional merchandise consists of:
Raw materials ................................... $ 172.9 $ 140.9
Work in process ................................. 24.4 21.5
Finished goods .................................. 308.0 271.2
Promotional merchandise ......................... 125.0 112.7
-------- --------
$ 630.3 $ 546.3
======== ========
|
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property, Plant and Equipment
Property, plant and equipment is carried at cost less accumulated depreciation and amortization. For financial statement purposes, depreciation is provided principally on the straight-line method over the estimated useful lives of the assets ranging from 3 to 40 years. Leasehold improvements are amortized on a straight-line basis over the shorter of the lives of the respective leases or the expected useful lives of those improvements.
June 30
----------------------
2001 2000
-------- --------
(In millions)
Land ............................................. $ 12.7 $ 13.0
Buildings and improvements ....................... 135.7 134.9
Machinery and equipment .......................... 563.2 490.1
Furniture and fixtures ........................... 77.5 95.8
Leasehold improvements ........................... 311.2 240.4
-------- --------
1,100.3 974.2
Less accumulated depreciation and amortization ... 571.6 493.9
-------- --------
$ 528.7 $ 480.3
======== ========
|
Depreciation and amortization of property, plant and equipment was $112.1 million, $90.3 million and $68.5 million in fiscal 2001, 2000 and 1999, respectively.
Goodwill
Goodwill is calculated as the excess of the cost of purchased businesses over the value of their underlying net assets and is amortized on a straight-line basis over the estimated period of benefit, currently between 20 and 40 years. Goodwill is reported net of accumulated amortization of $63.7 million and $42.8 million at June 30, 2001 and 2000, respectively. See the "Recently Issued Accounting Standards" section for a discussion of Statement of Financial Accounting Standards ("SFAS") Nos. 141 and 142.
Other Intangible Assets
Other intangible assets principally consist of purchased royalty rights and trademarks. The cost of other intangible assets is amortized on a straight-line basis over their estimated useful lives. Other intangible assets are reported net of accumulated amortization of $100.4 million and $90.8 million at June 30, 2001 and 2000, respectively. See the "Recently Issued Accounting Standards" section for a discussion of SFAS Nos. 141 and 142.
Long-Lived Assets
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets in question may not be recoverable. An impairment would be recorded in circumstances where undiscounted cash flows expected to be generated by an asset are less than the carrying value of that asset.
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income (loss) ("OCI") included in the accompanying consolidated balance sheets consist of the following:
Year Ended June 30
------------------------------
2001 2000 1999
-------- -------- --------
(In millions)
Net unrealized investment gains, beginning of year ............ $ 13.9 $ 6.1 $ 5.8
Unrealized investment gains (losses) .......................... (18.3) 13.0 0.5
Provision for deferred income taxes ........................... 7.3 (5.2) (0.2)
-------- -------- --------
Net unrealized investment gains, end of year .................. 2.9 13.9 6.1
-------- -------- --------
Net derivative instruments, beginning of year ................. - - -
Gain on derivative instruments ................................ 8.8 - -
Provision for deferred income taxes on gain ................... (3.1) - -
Reclassification to earnings of net gains during the year ..... (12.0) - -
Provision for deferred income taxes on reclassification ....... 4.3 - -
-------- -------- --------
Net derivative instruments, end of year ....................... (2.0) - -
-------- -------- --------
Net minimum pension liability adjustments, beginning of year .. - - -
Minimum pension liability adjustments ......................... (19.4) - -
Provision for deferred income taxes ........................... 7.0 - -
-------- -------- --------
Net minimum pension liability adjustments, end of year ........ (12.4) - -
-------- -------- --------
Cumulative translation adjustments, beginning of year ......... (71.0) (50.4) (40.0)
Translation adjustments ....................................... (38.0) (20.6) (10.4)
-------- -------- --------
Cumulative translation adjustments, end of year ............... (109.0) (71.0) (50.4)
-------- -------- --------
Accumulated other comprehensive income (loss) ................. ($ 120.5) ($ 57.1) ($ 44.3)
======== ======== ========
|
Of the $2.0 million net derivative instruments loss recorded in OCI at June 30, 2001, $0.7 million, net of tax, relates to forward contracts that the Company estimates will be reclassified to earnings as losses during the next twelve months. The remaining $1.3 million, net of tax, relates to interest rate swaps and options. OCI gains or losses relating to interest rate swaps or options will be charged to earnings over the remaining life of the debt instruments (through February 2005).
Revenue Recognition
Revenues from merchandise sales are recorded at the time the product is shipped to the customer. The Company reports its 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 a percent of gross sales, returns were 4.9% in fiscal 2001, 4.4% in fiscal 2000 and 5.0% in fiscal 1999.
Advertising and Promotion
Costs associated with advertising are expensed during the year as incurred. Global advertising expenses, which primarily include television, radio and print media, and promotional expenses, such as products used as sales incentives, were $1,255.3 million, $1,195.8 million and $1,100.8 million in fiscal 2001, 2000 and 1999, respectively.
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Research and Development
Research and development costs, which amounted to $62.2 million, $53.8 million and $48.0 million in fiscal 2001, 2000 and 1999, respectively, are expensed as incurred.
Related Party Royalties and Trademarks
Under agreements covering the Company's purchase of trademarks for a percentage of related sales, royalty payments totaling $16.0 million, $15.5 million and $14.9 million in fiscal 2001, 2000 and 1999, respectively, have been charged to income. Such payments were made to Mrs. Estee Lauder. During fiscal 1996, the Company purchased a stockholder's rights to receive certain U.S. royalty payments for $88.5 million, which was fully amortized in November 2000. In fiscal 2001, 2000 and 1999, $6.6 million, $17.7 million and $17.7 million, respectively, were amortized as charges against income.
Stock Compensation
The Company observes the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", by continuing to apply the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", while providing the required pro forma disclosures as if the fair value method had been applied. See Note 14.
Concentration of Credit Risk
The Company is a worldwide manufacturer, marketer and distributor of skin care, makeup, fragrance and hair care products. Domestic and international sales are made primarily to department stores, specialty retailers, perfumeries and pharmacies. The Company grants credit to all qualified customers, and does not believe it is exposed significantly to any undue concentration of credit risk.
In each of fiscal 2001, 2000 and 1999, one department store group accounted for 11% of the Company's net sales. In those same years, another department store group accounted for 10%, 10% and 11%, respectively, of the Company's net sales.
Management Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in those financial statements. Actual results could differ from those estimates and assumptions.
Derivative Financial Instruments
Effective July 1, 2000, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities". These Statements established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133, as amended, requires the recognition of all derivative instruments as either assets or liabilities in the statement of financial position measured at fair value.
In accordance with the provisions of SFAS No. 133, as amended, the Company recorded a non-cash charge to earnings of $2.2 million, after tax, to reflect the change in time-value from the dates of the derivative instruments' inception through the date of transition (July 1, 2000). This charge is reflected as the cumulative effect of a change in accounting principle in the accompanying consolidated statements of earnings.
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recently Issued Accounting Standards
The Emerging Issues Task Force ("EITF") has reached consensus on Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs". This consensus addresses how shipping and handling costs that are billed to a customer in a sales transaction should be recognized. This guidance became effective for the Company's fiscal 2001 fourth quarter. Generally, the Company does not charge for shipping to its customers that are retailers and, accordingly, the adoption of this rule did not have a material impact on the Company's consolidated financial results.
The EITF has reached consensus on Issue No. 00-14, "Accounting for Certain Sales Incentives". This consensus addresses when sales incentives and discounts should be recognized, as well as where the related revenues and expenses should be classified in the financial statements. Currently, the cost of merchandise used in the Company's gift-with-purchase and purchase-with-purchase activities, as well as any related revenues, are reported net, as operating expenses, in the accompanying consolidated statements of earnings. Upon adoption, the Company will classify revenues generated by these promotional activities as sales resulting in an increase of approximately 1.0% to 2.0% in net sales. The cost of promotional merchandise will be reclassified as a cost of sales. Although operating income will remain unchanged, gross margins will decrease by approximately 5.0% to 6.0% of sales, offset by a corresponding decrease in operating expenses. Due to variations in the Company's launch calendar and the timing of promotions, the Company anticipates greater fluctuations in its gross margins and operating expenses on a quarter-by-quarter basis. Issue No. 00-14 will become effective in the Company's fiscal 2002 third quarter and will be applied retroactively for purposes of comparability.
The EITF has reached a consensus on Issue No. 00-25, "Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products". The consensus provides guidance on the income statement classification of consideration from a vendor to a retailer in connection with the retailer's purchase of the vendor's products or to promote sales of the vendor's products. Issue No. 00-25 becomes effective for quarters beginning after December 15, 2001. The Company currently accounts for transactions (e.g., certain promotional allowances to retailers) in accordance with Issue No. 00-25 and, thus, this consensus will not have an impact on the Company's consolidated financial results.
In June 2001, SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets" were issued. These Statements establish financial accounting and reporting standards for acquired goodwill and other intangible assets. Specifically, the standards address how acquired intangible assets should be accounted for both at the time of acquisition and after they have been recognized in the financial statements. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001; however, early application is permitted for entities with fiscal years beginning after March 15, 2001. The Company has adopted this standard effective July 1, 2001 and, accordingly, those intangible assets that will continue to be classified as goodwill or as other intangibles with indefinite lives will no longer be amortized. This could result in the exclusion of approximately $21 million in amortization expense for the fiscal year ending June 30, 2002. In accordance with SFAS No. 142, intangible assets, including purchased goodwill, will be evaluated periodically for impairment. The Company's initial evaluations are expected to be completed by September 30, 2001.
NOTE 3 -- PUBLIC OFFERINGS
During May and June 2000, members of the Lauder family sold 8,482,000 shares of Class A Common Stock in a registered public offering. The Company did not receive any proceeds from the sale of these shares.
During May and June 1999, members of the Lauder family sold 7,386,000 shares of Class A Common Stock in a registered public offering. The Company did not receive any proceeds from the sale of these shares.
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 -- ACQUISITION OF BUSINESSES
At various times during fiscal 2001, the Company acquired businesses engaged in the wholesale distribution and retail sale of Aveda and Stila products, as well as other products, in the United States and other countries. Additionally, the Company entered into purchase transactions to acquire wholesale distributor businesses in Chile and Israel.
At various times during fiscal 2000, the Company acquired businesses engaged in the wholesale distribution and retail sale of Aveda products in the United States and the United Kingdom.
In June 2000, the Company acquired, for cash, a majority equity interest in Bumble and Bumble Products, LLC, a marketer and distributor of hair care products, and Bumble and Bumble, LLC, which operates a salon in New York City.
In April 2000, the Company acquired, for cash, the business of Gloss.com, Inc. a multi-brand Internet beauty site. The Gloss.com website has been taken down, and will be re-launched as a multi-brand e-commerce site carrying several of the Company's brands and two brands of other companies.
In October 1999, the Company acquired Jo Malone Limited, a London-based marketer of prestige skin care and fragrance products, for cash.
In August 1999, the Company acquired the business of Stila Cosmetics, Inc., a manufacturer and marketer of makeup products, for cash.
The aggregate purchase price for these transactions, which includes acquisition costs, was approximately $16.0 million in fiscal 2001 and $186.6 million in fiscal 2000 and each transaction was accounted for using the purchase method of accounting. Accordingly, the results of operations for each of the acquired businesses are included in the accompanying consolidated financial statements commencing with its date of original acquisition. Pro forma results of operations, as if each of such businesses had been acquired as of the beginning of the year of acquisition, have not been presented, as the impact on the Company's consolidated financial results would not have been material.
NOTE 5 -- RESTRUCTURING AND OTHER NON-RECURRING EXPENSES
During the fourth quarter of fiscal 2001, the Company recorded one-time charges for restructuring and other non-recurring expenses related to repositioning certain businesses as part of the Company's ongoing efforts to drive long-term growth and increase profitability. The restructuring and other non-recurring expenses focused on four areas: product fixtures for the jane brand; in-store "tommy's shops"; information systems and other assets; and global brand reorganization. The Company has 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.
Specifically, the charge included the following:
1. jane. jane is switching from its traditional wall displays to a carded program. The charge included a $16.1 million write-down of existing jane product fixtures and the return of uncarded product from virtually all of the 13,000 distribution outlets in the United States.
2. "tommy's shops". The Company is also restructuring the in-store "tommy's shops" to focus on the most productive locations and has decided to close certain shops that have underperformed relative to expectations. As a result, the Company has recorded a $6.3 million provision for the closing of 86 under-performing in-store "tommy's shops", located in the United States, and for related product returns.
3. Information systems and other assets. In response to changing technology and the Company's new strategic direction, the charge included a $16.2 million provision for costs associated with the reevaluation of supply chain systems that the Company will no longer utilize and with the elimination of unproductive assets related to the change to standard financial systems.
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Global brand reorganization. The Company recorded $20.8 million related to benefits and severance packages for 75 management employees who were affected by the reconfiguration to a global brand structure and another $3.6 million related to infrastructure costs.
Following is a summary of the charges as recorded in the consolidated statement of earnings for fiscal 2001:
Restructuring
----------------------------
Other
(In millions) Net Cost of Operating Non-Recurring
Sales Sales Expenses Expenses Total
------ ------- --------- ------------- ------
jane ................................... $ 5.7 $ 1.5 $ 4.8 $ 4.1 $ 16.1
tommy's shops .......................... 2.3 (0.4) 4.4 - 6.3
Information systems and other assets ... - - 4.6 11.6 16.2
Global brand reorganization ............ - - 23.8 0.6 24.4
------ ------ ------- ------- ------
Total charge ........................... $ 8.0 $ 1.1 $ 37.6 $ 16.3 63.0
====== ====== ======= =======
Tax effect ............................. (22.7)
------
Net charge ............................. $ 40.3
======
|
The restructuring charge was recorded in other accrued liabilities or as a reduction of fixed assets. During fiscal 2001, $0.7 million was paid and through August 31, 2001 an additional $3.0 million was paid. The Company expects to settle a majority of the remaining obligations by the end of fiscal 2002 with certain severance payments made ratably through fiscal 2004.
NOTE 6 -- INCOME TAXES
The provision for income taxes is comprised of the following:
Year Ended June 30
----------------------------------
2001 2000 1999
-------- -------- --------
(In millions)
Current:
Federal .................. $ 74.0 $ 93.9 $ 88.6
Foreign .................. 87.6 82.4 68.8
State and local .......... 7.7 13.8 14.1
-------- -------- --------
169.3 190.1 171.5
-------- -------- --------
Deferred:
Federal .................. 3.7 (0.2) (4.3)
Foreign .................. 0.5 (4.1) 0.9
State and local .......... 0.5 (1.2) (0.8)
-------- -------- --------
4.7 (5.5) (4.2)
-------- -------- --------
$ 174.0 $ 184.6 $ 167.3
======== ======== ========
|
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation between the provision for income taxes computed by applying the statutory Federal income tax rate to earnings before income taxes and minority interest and the actual provision for income taxes is as follows:
Year Ended June 30
------------------------------
2001 2000 1999
-------- -------- --------
(In millions)
Provision for income taxes at statutory rate ... $ 169.2 $ 174.5 $ 154.1
Increase (decrease) due to:
State and local income taxes, net of
Federal tax benefit ..................... 5.3 8.2 8.6
Effect of foreign operations .............. (2.9) (11.7) (4.1)
Domestic royalty expense not
deductible for U.S. tax purposes ........ 1.6 4.0 4.0
Other nondeductible expenses .............. 3.8 3.8 2.0
Other, net ................................ (3.0) 5.8 2.7
-------- -------- --------
Provision for income taxes ..................... $ 174.0 $ 184.6 $ 167.3
======== ======== ========
Effective tax rate ............................. 36.0% 37.0% 38.0%
======== ======== ========
|
Significant components of the Company's deferred income tax assets and liabilities as of June 30, 2001 and 2000 were as follows:
2001 2000
-------- --------
(In millions)
Deferred tax assets:
Deferred compensation and other payroll related expenses ...... $ 47.7 $ 44.2
Inventory obsolescence and other inventory related reserves ... 54.1 54.8
Pension plan reserves ......................................... 22.5 13.1
Postretirement benefit obligations ............................ 21.7 19.7
Various accruals not currently deductible ..................... 57.6 50.1
Net operating loss carryforwards .............................. 3.8 5.6
Other differences between tax and financial statement values .. 5.7 7.2
-------- --------
213.1 194.7
Valuation allowance for deferred tax assets ................... (3.8) (5.6)
-------- --------
Total deferred tax assets ................................. 209.3 189.1
-------- --------
Deferred tax liabilities:
Depreciation .................................................. (54.1) (36.4)
Domestic royalty expense ...................................... - (1.1)
Other differences between tax and financial statement values .. (2.0) (9.2)
-------- --------
Total deferred tax liabilities ............................ (56.1) (46.7)
-------- --------
Total net deferred tax assets .......................... $ 153.2 $ 142.4
======== ========
|
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2001 and 2000, the Company had current net deferred tax assets of $83.1 million and $93.5 million, respectively, which are included in prepaid expenses and other current assets in the accompanying consolidated balance sheets, and noncurrent net deferred tax assets of $70.1 million and $48.9 million, respectively.
Federal income and foreign withholding taxes have not been provided on $476.4 million, $442.2 million and $412.0 million of undistributed earnings of international subsidiaries at June 30, 2001, 2000 and 1999, respectively. The Company intends to permanently reinvest these earnings in its foreign operations, except where it is able to repatriate these earnings to the United States without any material incremental tax provision.
As of June 30, 2001 and 2000, certain international subsidiaries had tax loss carryforwards for local tax purposes of approximately $21.4 million and $26.4 million, respectively. With the exception of $10.6 million of losses with an indefinite carryforward period as of June 30, 2001, these losses expire at various dates through fiscal 2005. Deferred tax assets in the amount of $3.8 million and $5.6 million as of June 30, 2001 and 2000, respectively, have been recorded to reflect the tax benefits of the losses not utilized to date. A full valuation allowance has been provided since, in the opinion of management, it is more likely than not that the deferred tax assets will not be realized.
Earnings before income taxes and minority interest include amounts contributed by the Company's international operations of $307.2 million, $281.2 million and $277.2 million for fiscal 2001, 2000 and 1999, respectively.
NOTE 7 -- OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
June 30
--------------------
2001 2000
-------- --------
(In millions)
Advertising and promotional accruals ......... $ 157.0 $ 190.5
Employee compensation ........................ 182.6 178.4
Other ........................................ 192.5 205.2
-------- --------
$ 532.1 $ 574.1
======== ========
|
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 -- DEBT
The Company's short-term and long-term debt and available financing consist of the following:
Debt at Available financing at
June 30 June 30
------------------ --------------------------------------
Committed Uncommitted
--------- -----------
2001 2000 2001 2000 2001 2000
-------- -------- -------- -------- -------- --------
(In millions) (In millions)
Commercial paper with an average
interest rate of 3.96% and 6.68%,
respectively ............................ $ 181.0 $ 205.0 $ - $ - $ 569.0 $ 545.0
Unsecured notes payable, due
February 1, 2005, with an effective
interest rate of 5.13% and 6.28%,
respectively ............................ 200.0 200.0 - - - -
2% Japan loan payable, due in
installments through 2003 ............... 11.3 20.1 - - - -
1.45% Japan loan payable, due on
March 28, 2006 .......................... 24.2 - - - - -
Other short-term borrowings .............. 0.2 0.3 - - 30.4 58.7
Revolving credit facility ................ - - 400.0 400.0 - -
Shelf registration for debt securities ... - - - - 400.0 400.0
-------- -------- -------- -------- -------- --------
416.7 425.4 $ 400.0 $ 400.0 $ 999.4 $1,003.7
======== ======== ======== ========
Less current maturities................... 5.8 7.0
-------- --------
$ 410.9 $ 418.4
======== ========
|
The Company maintains uncommitted credit facilities in various regions throughout the world. Interest rate terms for these facilities vary by region and reflect prevailing market rates for companies with strong credit ratings. During fiscal 2001 and 2000, the monthly average amount outstanding was approximately $18.6 million and $32.3 million, respectively, and the annualized monthly weighted average interest rate incurred was approximately 6.5% and 5.4%, respectively.
During fiscal 1998, the Company entered into a 2% loan payable in Japan. Principal repayments of 350.0 million yen, approximately $2.8 million at current rates, will be made semi-annually through 2003.
Effective June 28, 2001, the Company entered into a new five-year $400.0 million revolving credit facility, expiring on June 28, 2006, which includes an annual fee of .07% on the total commitment. The new facility replaced a five-year $400.0 million revolving credit facility entered into in July 1996. The 1996 facility had an annual fee of .06% on the total commitment. At June 30, 2001 and 2000, the Company was in compliance with all related financial and other restrictive covenants, including limitations on indebtedness and liens.
Commercial paper is classified as long-term debt based upon the Company's intent and ability to refinance on a long-term basis.
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 -- FINANCIAL INSTRUMENTS
Derivative Financial Instruments
The Company addresses certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. The Company primarily enters into foreign currency forward exchange contracts and foreign currency options to reduce the effects of fluctuating foreign currency exchange rates. The Company enters into interest rate swaps and options to manage the effects of interest rate movements on the Company's aggregate liability portfolio. The Company categorizes these instruments as entered into for purposes other than trading.
All derivatives are recognized on the balance sheet at their fair value. On the date the derivative contract is entered into, the Company designates the derivative as (i) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment ("fair value" hedge), (ii) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow" hedge), (iii) a foreign-currency fair-value or cash-flow hedge ("foreign currency" hedge), (iv) a hedge of a net investment in a foreign operation, or (v) "held for trading" ("trading" instruments). Changes in the fair value of a derivative that is highly effective as (and that is designated and qualifies as) a fair-value hedge, along with the loss or gain on the hedged asset or liability that is attributable to the hedged risk (including losses or gains on firm commitments), are recorded in current-period earnings. Changes in the fair value of a derivative that is highly effective as (and that is designated and qualifies as) a cash-flow hedge are recorded in other comprehensive income, until earnings are affected by the variability of cash flows (e.g., when periodic settlements on a variable-rate asset or liability are recorded in earnings). Changes in the fair value of derivatives that are highly effective as (and that are designated and qualify as) foreign-currency hedges are recorded in either current-period earnings or other comprehensive income, depending on whether the hedge transaction is a fair-value hedge (e.g., a hedge of a firm commitment that is to be settled in a foreign currency) or a cash-flow hedge (e.g., a foreign-currency-denominated forecasted transaction). If, however, a derivative is used as a hedge of a net investment in a foreign operation, its changes in fair value, to the extent effective as a hedge, are recorded in accumulated other comprehensive income within equity. Furthermore, changes in the fair value of derivative trading instruments are reported in current-period earnings.
The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. 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. The Company also formally assesses, 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, or that it has ceased to be a highly effective hedge, the Company will be required to discontinue hedge accounting with respect to that derivative prospectively.
Foreign Exchange Risk Management
The Company enters into forward exchange contracts to hedge purchases, receivables and payables denominated in foreign currencies for periods consistent with the Company's identified exposures. The purpose of the hedging activities is to minimize the effect of foreign exchange rate movements on costs and on the cash flows that the Company receives 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. The Company also enters into foreign currency options to hedge anticipated transactions where there is a high probability that anticipated exposures will materialize. The forward exchange contracts and foreign currency options have been designated as cash-flow hedges. As of June 30, 2001, these cash-flow hedges were highly effective, in all material respects.
As a matter of policy, the Company only enters into contracts with counterparties that have at least an "A" (or equivalent) credit rating. The counterparties to these contracts are major financial institutions. The Company does not have significant exposure to any one counterparty. Exposure to credit loss in the event of nonperformance by any of the counterparties is
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Company's consolidated financial results. The contracts have varying maturities through the end of August 2002. Costs associated with entering into such contracts have not been material to the Company's consolidated financial results. The Company does not utilize derivative financial instruments for trading or speculative purposes. At June 30, 2001, we had foreign currency contracts in the form of forward exchange contracts in the amount of $148.2 million. The foreign currencies included in these contracts (notional value stated in U.S. dollars) are principally the Japanese yen ($53.9 million), Swiss franc ($28.8 million), Korean won ($18.5 million), Taiwan dollar ($13.7 million), British pound ($13.2 million), Euro ($8.5 million) and Mexican peso ($6.8 million). At June 30, 2000, the Company had foreign currency contracts in the form of forward exchange contracts in the amount of $219.6 million and deferred unrealized gains and losses of $1.3 million and $1.4 million, respectively. The foreign currencies included in these contracts (notional value stated in U.S. dollars) are principally the Japanese yen ($80.2 million), Swiss franc ($65.9 million), British pound ($17.1 million), Euro ($9.5 million), Danish krone ($8.0 million) and Mexican peso ($7.1 million).
Interest Rate Risk Management
The Company has entered into an interest rate swap agreement to exchange floating rate for fixed rate interest payments periodically over the life of the agreement. In addition, the Company has purchased interest rate options that offer similar interest rate protection. The interest rate swap and options have been designated as cash-flow hedges and were highly effective as of June 30, 2001. At June 30, 2000, deferred unrealized gains from the interest rate swap and options were $2.4 million and $2.6 million, respectively.
Information regarding the interest rate swap and options is presented in the following table:
Year Ended or at June 30
-----------------------------------------------------------------------------
2001 2000
------------------------------------- -------------------------------------
Weighted Average Weighted Average
Notional ----------------------- Notional -----------------------
(In millions) Amounts Pay Rate Receive Rate Amounts Pay Rate Receive Rate
---------------------------------------------------------------------- -------------------------------------
Interest rate swap $ 67.0 6.14% 6.32% $ 67.0 6.14% 5.64%
Interest rate options 133.0 6.14 6.62 133.0 6.14 -
--------------------------------------------------------------------------------------------------------------
|
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and cash equivalents:
The carrying amount approximates fair value, primarily because of the
short maturity of cash equivalent instruments.
Long-term debt:
The fair value of the Company's long-term debt was estimated based on
the current rates offered to the Company for debt with the same
remaining maturities. Included in such amount is the fair value of
the Company's commercial paper and interest rate swap and option
agreements. Such fair value has been determined based upon estimated
termination costs.
Cumulative redeemable preferred stock:
The fair value of the cumulative redeemable preferred stock is
estimated utilizing a cash flow analysis at a discount rate equal to
rates available for debt with terms similar to the preferred stock.
Forward exchange contracts:
The fair value of forward exchange contracts is the estimated amount
the Company would receive or pay to terminate the agreements.
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair values of the Company's financial instruments are as follows:
June 30
--------------------------------------------
2001 2000
--------------------- ---------------------
Carrying Fair Carrying Fair
(In millions) Amount Value Amount Value
----------------------------------------------------------------- ---------------------
Nonderivatives
Cash and cash equivalents .................. $ 346.7 $ 346.7 $ 320.3 $ 320.3
Long-term debt, including current portion .. 416.5 418.1 425.1 421.0
Cumulative redeemable preferred stock ...... 360.0 362.6 360.0 345.0
Derivatives
Forward exchange contracts ................. (1.2) (1.2) - (0.1)
|
NOTE 10 -- PENSION, DEFERRED COMPENSATION AND POSTRETIREMENT BENEFIT PLANS
The Company maintains pension plans covering substantially all of its full-time employees for its U.S. operations and a majority of its international operations. Most plans provide pension benefits based primarily on years of service and employees' earnings.
Retirement Growth Account Plan (U.S.)
The Retirement Growth Account Plan is a trust-based, noncontributory defined benefit pension plan. The Company's funding policy consists of an annual contribution at a rate that matches pension costs accrued, if any. 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.
Restoration Plan (U.S.)
The Company also has an unfunded, nonqualified domestic benefit Restoration Plan to provide benefits in excess of Internal Revenue Code limitations.
International Pension Plans
The Company maintains International Pension Plans, the most significant of which are defined benefit pension plans. The Company's funding policies for these plans are determined by local tax laws and regulations.
Postretirement Benefits
The Company maintains a contributory postretirement benefit plan which provides certain medical and dental benefits to eligible employees. Retired employees who are receiving monthly pension benefits are eligible for participation in the plan. Contributions required and benefits received by retirees and eligible family members are dependent on the age of the retiree. It is the Company's practice to fund these benefits as incurred. Certain of the Company's international subsidiaries and affiliates have postretirement plans, although most participants are covered by government-sponsored or administered programs. The cost of the Company-sponsored programs is not significant.
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The significant components of the above mentioned plans as of and for the year ended June 30 are summarized as follows:
Other than
Pension Plans Pension Plans
-------------------------------------- ------------------
U.S. International Postretirement
------------------ ------------------ ------------------
(In millions) 2001 2000 2001 2000 2001 2000
-------- -------- -------- -------- -------- --------
Change in benefit obligation:
Benefit obligation at beginning of year ......... $ 256.2 $ 229.6 $ 132.6 $ 125.3 $ 41.2 $ 36.9
Service cost ............................... 12.3 10.8 8.0 8.6 1.9 1.9
Interest cost .............................. 19.7 16.9 6.7 6.3 3.0 2.8
Plan participant contributions ............. - - 0.9 1.0 0.1 0.1
Actuarial loss (gain) ...................... 5.0 10.5 4.8 (0.8) (1.0) -
Foreign currency exchange rate impact ...... - - (14.5) (1.8) - -
Benefits paid .............................. (12.9) (12.4) (7.0) (6.0) (2.0) (1.3)
Plan amendments ............................ 0.1 - - - - 0.5
Other ...................................... - 0.8 - - - 0.3
-------- -------- -------- -------- -------- --------
Benefit obligation at end of year ............... 280.4 256.2 131.5 132.6 43.2 41.2
-------- -------- -------- -------- -------- --------
Change in plan assets:
Fair value of plan assets at beginning of year .. 192.1 153.7 117.7 102.0 - -
Actual return on plan assets ............... (17.3) 35.1 (6.5) 12.9 - -
Foreign currency exchange rate impact ...... - - (11.6) (1.2) - -
Employer contributions ..................... 17.8 15.7 10.6 9.0 1.9 1.3
Plan participant contributions ............. - - 0.9 1.0 0.1 0.1
Benefits paid from plan assets ............. (12.9) (12.4) (6.5) (6.0) (2.0) (1.4)
-------- -------- -------- -------- -------- --------
Fair value of plan assets at end of year ........ 179.7 192.1 104.6 117.7 - -
-------- -------- -------- -------- -------- --------
Funded status ................................... (100.7) (64.1) (26.9) (14.9) (43.2) (41.2)
Unrecognized net actuarial loss (gain) .......... 69.6 32.2 24.3 9.0 (6.6) (5.9)
Unrecognized prior service cost ................. 4.3 4.6 2.4 3.0 0.2 0.3
Unrecognized net transition (asset) obligation .. (3.0) (4.4) 0.8 1.2 - -
-------- -------- -------- -------- -------- --------
Accrued benefit cost ............................ ($29.8) ($31.7) $ 0.6 ($ 1.7) ($49.6) ($46.8)
======== ======== ======== ======== ======== ========
Amounts recognized in the Balance
Sheets consist of:
Prepaid benefit cost ....................... $ 6.2 - $ 8.1 $ 21.1 - -
Accrued benefit liability .................. (46.1) ($43.0) (28.0) (23.1) ($49.6) ($46.8)
Intangible asset ........................... 3.7 4.2 1.1 0.3 - -
Other ...................................... 6.4 7.1 19.4 - - -
-------- -------- -------- -------- -------- --------
Net amount recognized ...................... ($29.8) ($31.7) $ 0.6 ($ 1.7) ($49.6) ($46.8)
======== ======== ======== ======== ======== ========
|
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other than
Pension Plans Pension Plans
--------------------------------------------------------------- ------------------------------
U.S. International Postretirement
------------------------------ ------------------------------ ------------------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
-------- -------- -------- -------- -------- -------- -------- -------- --------
Weighted-average assumptions
Pre-retirement discount rate .... 7.50% 7.85% 7.50% 3.0- 3.0- 3.0- 7.50% 7.85% 7.50%
7.25% 7.50% 7.50%
Postretirement discount rate .... 6.00% 6.25% 6.50% - - - - - -
Expected return on assets ....... 9.00% 9.00% 9.00% 5.00- 5.00- 3.75- N/A N/A N/A
8.50% 8.25% 8.25%
Rate of compensation ............ 5.00- 5.50- 5.50- 2.0- 2.0- 2.0- N/A N/A N/A
increase ....................... 11.50% 12.00% 11.50% 5.50% 6.50% 6.50%
Components of net periodic
benefit cost (In millions)
Service cost, net ............... $ 12.3 $ 10.8 $ 9.4 $ 8.0 $ 8.6 $ 7.0 $ 1.9 $ 1.9 $ 1.8
Interest cost ................... 19.7 16.9 14.6 6.7 6.3 5.5 3.0 2.8 2.3
Expected return on assets ....... (16.2) (13.5) (11.6) (7.4) (6.6) (6.1) - - -
Amortization of:
Transition (asset) obligation .. (1.4) (1.4) (1.4) 0.2 0.3 0.3 - - -
Prior service cost ............. 0.4 0.4 0.3 0.2 0.3 0.1 - - -
Actuarial loss ................. 1.1 1.3 1.0 0.9 1.2 0.5 (0.2) - -
Other .......................... - 0.8 - - - - - - -
-------- -------- -------- -------- -------- -------- -------- -------- -------
Net periodic benefit cost ....... $ 15.9 $ 15.3 $ 12.3 $ 8.6 $ 10.1 $ 7.3 $ 4.7 $ 4.7 $ 4.1
======== ======== ======== ======== ======== ======== ======== ======== =======
|
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates for fiscal 2001 would have had the following effects:
One-Percentage-Point One-Percentage-Point
(In millions) Increase Decrease
-------------------- --------------------
Effect on total service and interest costs $0.5 ($0.5)
---- ----
Effect on postretirement benefit obligations $4.2 ($4.2)
---- ----
|
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for certain U.S. and international pension plans with accumulated benefit obligations in excess of the plans' assets at June 30 are as follows:
Pension Plans
-----------------------------------
U.S. International
--------------- -----------------
(In millions) 2001 2000 2001 2000
---- ---- ---- ----
Projected benefit obligation ........... $ 63.8 $ 58.3 $ 92.9 $ 20.0
Accumulated benefit obligation ......... 46.0 42.2 79.0 16.0
Fair value of plan assets .............. - - - -
|
Incentive Thrift Plan (U.S.)
The Company's Incentive Thrift Plan ("Thrift Plan") is a contributory defined contribution plan covering substantially all regular full-time U.S. employees who have completed one year of service, as defined by the plan document. The Thrift Plan is subject to the applicable provisions of ERISA. The Company matches a portion of the participant's contributions under a predetermined formula based on the participant's contribution level and years of service. The Company's contributions were approximately $6.7 million for the fiscal year ended June 30, 2001 and $5.8 million and $4.8 million in fiscal 2000 and 1999, respectively.
Deferred Compensation
The Company accrues for deferred compensation and interest thereon and for the increase in the value of share units pursuant to agreements with certain key executives and outside directors. The amounts included in the accompanying consolidated balance sheets under these plans were $87.3 million and $79.4 million as of June 30, 2001 and 2000, respectively. The expense for fiscal 2001, 2000 and 1999 was $11.6 million, $12.3 million and $15.3 million, respectively.
NOTE 11 -- POSTEMPLOYMENT BENEFITS OTHER THAN TO RETIREES
The Company provides certain postemployment benefits to eligible former or inactive employees and their dependents during the period subsequent to employment but prior to retirement. These benefits include certain disability and health care coverage and severance benefits. Generally, the cost of providing these benefits is accrued and any incremental benefits were not material to the Company's consolidated financial results.
NOTE 12 -- $6.50 CUMULATIVE REDEEMABLE PREFERRED STOCK, AT REDEMPTION VALUE
As of June 30, 2001, the Company's authorized capital stock included 23.6 million shares of preferred stock, par value $.01 per share, of which 3.6 million shares are outstanding and designated as $6.50 Cumulative Redeemable Preferred Stock. The outstanding preferred stock was issued in June 1995 in exchange for nonvoting common stock of the Company owned by The Estee Lauder 1994 Trust.
Holders of the $6.50 Cumulative Redeemable Preferred Stock are entitled to receive cumulative cash dividends at a rate of $6.50 per annum per share payable in quarterly installments. Such dividends have preference over all other dividends of stock issued by the Company. Shares 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
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
declared upon the Class A or Class B Common Stock, or on any other capital stock ranking junior to or in parity with such $6.50 Cumulative Redeemable Preferred Stock and no shares of Class A or Class B Common Stock or such junior or parity stock may be redeemed or acquired for any consideration by the Company. Under certain circumstances, the Company may redeem the stock, in whole or in part, prior to the mandatory redemption date. Holders of such stock may put such shares to the Company at a price of $100 per share upon the occurrence of certain events.
The Company recorded the $6.50 Cumulative Redeemable Preferred Stock at its redemption value of $360.0 million and charged this amount, net of the par value of the shares of nonvoting common stock exchanged, to stockholders' equity in fiscal 1995.
NOTE 13 -- COMMON STOCK
As of June 30, 2001, the Company's authorized common stock consists of 650 million shares of Class A Common Stock, par value $.01 per share, and 240 million shares of Class B Common Stock, par value $.01 per share. 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. Holders of the Company's Class A Common Stock are entitled to one vote per share and holders of the Company's Class B Common Stock are entitled to ten votes per share. On April 26, 1999, the Company's Board of Directors approved a two-for-one stock split in the form of a 100% stock dividend on all of the Company's outstanding Class A and Class B Common Stock. All share data prior thereto has been restated to reflect the stock split.
Information about the Company's common stock outstanding is as follows:
Class A Class B
--------- ---------
(Shares in thousands)
Balance at June 30, 1998 ........... 122,935.9 113,679.3
Acquisition of treasury stock ...... (504.8) -
Share grants ....................... 1.0 -
Stock option programs .............. 1,049.1 -
--------- ---------
Balance at June 30, 1999 ........... 123,481.2 113,679.3
Acquisition of treasury stock ...... (589.5) -
Share grants ....................... 2.9 -
Share units converted .............. 100.0 -
Stock option programs .............. 1,187.1 -
--------- ---------
Balance at June 30, 2000 ........... 124,181.7 113,679.3
Acquisition of treasury stock ...... (0.9) -
Conversion of Class B to Class A ... 189.0 (189.0)
Stock option programs .............. 806.2 -
--------- ---------
Balance at June 30, 2001 ........... 125,176.0 113,490.3
========= =========
|
On September 18, 1998, the Company's Board of Directors authorized a share repurchase program. The Company has purchased, and may continue to purchase, over an unspecified period of time, a total of up to eight million shares of Class A Common Stock in the open market or in privately negotiated transactions, depending on market conditions and other factors.
NOTE 14 -- STOCK PROGRAMS
The Company has established the Fiscal 1999 Share Incentive Plan, the Fiscal 1996 Share Incentive Plan and the Non-Employee Director Share Incentive Plan (collectively, the "Plans") and, additionally, has made available stock options and share units that were, or will be, granted pursuant to these Plans and certain employment agreements. These stock-based compensation programs are described below.
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total net compensation expense attributable to the granting of share units and the increase in value of existing share units was $0.7 million, $1.6 million and $8.9 million in fiscal 2001, 2000 and 1999, respectively.
Share Incentive Plans
The Plans provide for the issuance of 18,750,000 shares to be awarded in the form of stock options, stock appreciation rights and other stock awards to key employees and stock options, stock awards and stock units to non-employee directors of the Company. As of June 30, 2001, 2,146,400 shares of Class A Common Stock were reserved and were available to be granted pursuant to the Plans. The exercise period for all stock options generally may not exceed ten years from the date of grant. Pursuant to the Plans, stock option awards in respect of 2,709,500, 6,252,300 and 2,303,000 shares were granted in fiscal 2001, 2000 and 1999, respectively, and share units in respect of 43,100 and 40,000 shares were granted in fiscal 2001 and 1999, respectively. Generally, the stock option awards become exercisable at various times through January 2005, while the share units will be paid out in shares of Class A Common Stock at a time to be determined by the Company.
Executive Employment Agreements
The executive employment agreements provide for the issuance of 11,400,000 shares to be awarded in the form of stock options and other stock awards to certain key executives. The Company has reserved 664,200 shares of its Class A Common Stock pursuant to such agreements as of June 30, 2001. In accordance with such employment agreements, stock option awards in respect of 1,650,000 shares were granted in each of fiscal 2000 and 1999, and approximately 900, 33,700 and 48,000 share units were granted in fiscal 2001, 2000 and 1999, respectively. The stock options may be exercised in installments at various times through July 2009, while the share units will be paid out in shares of Class A Common Stock at a time to be determined by the Company, but no later than 90 days subsequent to the termination of employment of the executive.
A summary of the Company's stock option programs as of June 30, 2001, 2000 and 1999, and changes during the years then ended, is presented below:
2001 2000 1999
--------------------- --------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
(Shares in thousands) Shares Price Shares Price Shares Price
---------------------------------------------------------------- --------------------- ---------------------
Outstanding at beginning of year ....... 21,914.1 $ 33.14 15,439.1 $ 22.80 12,977.0 $ 18.20
Granted at fair value ............. 2,709.5 42.80 7,902.2 50.88 3,953.0 35.34
Exercised ......................... (806.0) 16.50 (1,188.5) 15.28 (1,049.1) 13.94
Cancelled or Expired .............. (424.4) 48.19 (238.7) 41.06 (441.8) 20.83
--------- --------- ---------
Outstanding at end of year ............. 23,393.2 34.55 21,914.1 33.14 15,439.1 22.80
========= ========= =========
Options exercisable at year-end ........ 8,497.6 21.69 4,252.4 18.86 1,191.8 13.24
--------- --------- ---------
Weighted-average fair value of
options granted during the year ... $ 17.01 $ 20.14 $ 12.21
========= ========= =========
|
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations in accounting for stock options and share units granted under these programs. Under APB Opinion No. 25, no compensation expense is recognized if the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of the grant. Accordingly, no compensation cost has been recognized. SFAS No. 123, "Accounting for Stock-Based Compensation", requires the Company to provide pro forma information regarding net earnings and net earnings per common share as if compensation cost for the Company's stock option programs had been determined in accordance with the fair value method prescribed therein.
Had compensation cost for these programs been determined based upon the fair value at the grant dates consistent with SFAS No. 123, the Company's pro forma net earnings and net earnings per common share would have been as follows:
Year Ended June 30
-------------------------------
2001 2000 1999
------- ------- -------
(In millions, except per share data)
Net earnings.................................. As reported $ 305.2 $ 314.1 $ 272.9
Pro forma 280.8 216.5 246.2
Net earnings per common share - Basic......... As reported $ 1.18 $ 1.22 $ 1.05
Pro forma 1.08 .81 .94
Net earnings per common share - Diluted....... As reported $ 1.16 $ 1.20 $ 1.03
Pro forma 1.06 .79 .92
|
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
Year Ended June 30
-------------------------------
2001 2000 1999
------- ------- -------
Expected volatility......................... 31% 30% 27%
Average expected option life................ 7 years 7 years 7 years
Average risk-free interest rate............. 5.9% 6.1% 5.3%
Dividend yield.............................. .50% .50% .75%
|
Summarized information about the Company's stock options outstanding and exercisable at June 30, 2001 is as follows:
Outstanding Exercisable
-------------------------------- -----------------------
Exercise Average Average Average
Price Range Options (a) Life (b) Price (c) Options (a) Price (c)
------------------------------------------------------ -----------------------
$2.065 to $ 3.10 16.1 5.9 $ 3.02 16.1 $ 3.02
$13.00 to $20.813 3,772.4 4.4 13.07 3,761.1 13.05
$21.313 to $29.813 5,918.7 5.5 23.39 3,270.4 23.10
$31.875 to $47.625 7,025.5 8.2 39.18 1,129.5 37.61
$48.125 to $53.50 6,660.5 8.1 51.84 320.5 53.47
-------- -------
$2.065 to $53.50 23,393.2 34.55 8,497.6 21.69
======== =======
---------------
|
(a) Shares in thousands.
(b) Weighted average contractual life remaining in years.
(c) Weighted average exercise price.
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Subsequent to June 30, 2001, the Company granted options under the terms of the Plans described above to purchase an additional 1,893,500 of the Company's Class A Common Stock with an exercise price equal to fair market value on the date of grant. In addition, subsequent to June 30, 2001 the Company granted approximately 48,200 share units to a key executive pursuant to the terms of the Fiscal 1999 Share Incentive Plan. In July 2001, the Company's Board of Directors adopted the Fiscal 2002 Share Incentive Plan which provides for the issuance of 12 million shares to be awarded in the form of stock options, stock appreciation rights and other stock awards to key employees of the Company.
NOTE 15 -- COMMITMENTS AND CONTINGENCIES
Total rental expense included in the accompanying consolidated statements of earnings was $120.9 million in fiscal 2001, $100.7 million in fiscal 2000 and $86.4 million in fiscal 1999. At June 30, 2001, the future minimum rental commitments under long-term operating leases are as follows:
Year Ending June 30 (In millions)
-------------------
2002 ..................... $ 84.6
2003 ..................... 77.0
2004 ..................... 69.8
2005 ..................... 58.5
2006 ..................... 39.0
Thereafter ............... 150.4
--------
$ 479.3
========
|
In August 2000, an affiliate of Revlon, Inc. sued the Company and its subsidiaries in the U.S. District Court, Southern District of New York, for alleged patent infringement and related claims. Revlon currently claims that five Estee Lauder products, two Origins foundations, a La Mer concealer and a jane foundation infringe its patent. Revlon is seeking, among other things, treble damages, punitive damages, equitable relief and attorneys' fees. The Company has filed counterclaims which, among other things, challenge the validity of the patent and allege violations of Federal antitrust laws. Pre-trial proceedings and discovery are underway. Court-directed mediation took place in August 2001. The Company intends to defend itself vigorously. Although the final outcome of the lawsuit cannot be predicted with certainty, based on preliminary investigation, management believes that the case will not have a material adverse effect on the Company's consolidated financial results.
In February 2000, the Company and eight other manufacturers of cosmetics (the "Manufacturer Defendants") were added as defendants in a consolidated class action lawsuit that had been pending in the Superior Court of the State of California in Marin County. The plaintiffs purport to represent a class of all California residents who purchased prestige cosmetic products at retail for personal use from a number of department stores that sold such products in California (the "Department Store Defendants"). Plaintiffs filed their initial actions against the Department Store Defendants in May 1998. In May 2000, plaintiffs filed an amended complaint alleging that the Department Store Defendants and the Manufacturer Defendants conspired to fix and maintain retail prices and to limit the supply of prestige cosmetic products sold by the Department Store Defendants in violation of California state law. The plaintiffs are seeking, among other things, treble damages, equitable relief, attorneys' fees, interest and costs. Pre-trial proceedings and discovery are underway. Court-directed mediation started in May 2001 and is continuing. The Company intends to defend itself vigorously. While no assurance can be given as to the ultimate outcome of this lawsuit, based on preliminary investigation, management believes that the case will not have a material adverse effect on the Company's consolidated financial results.
In 1998, the Office of the Attorney General of the State of New York (the "State") notified the Company and ten other entities that they are potentially responsible parties ("PRPs") with respect to the Blydenburgh landfill in Islip, New York. Each PRP may be jointly and severally liable for the costs of investigation and cleanup, which the State estimates to be $16 million. While the State has sued other PRPs in connection with the site, the State has not sued the Company. The Company and some PRPs are in discussions with the State regarding possible settlement of the matter. While no assurance can be given as to the ultimate outcome, management believes that the matter will not have a material adverse effect on the Company's consolidated financial results.
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1998, the State notified the Company and fifteen other entities that they are PRPs with respect to the Huntington/East Northport landfill. The cleanup costs are estimated at $20 million. No litigation has commenced, and the Company, along with other PRPs, is in discussions with the State regarding possible settlement of the matter. While no assurance can be given as to the ultimate outcome, management believes that the matter will not have a material adverse effect on the Company's consolidated financial results.
The Company is involved in various routine legal proceedings incident to the ordinary course of its business. In management's opinion, the outcome of pending legal proceedings, separately or in the aggregate, will not have a material adverse effect on the Company's business or consolidated financial results.
NOTE 16 -- NET UNREALIZED INVESTMENT GAINS
Under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities", available-for-sale securities are recorded at market value. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a component of stockholders' equity until realized. The Company's investments subject to the provisions of SFAS No. 115 are treated as available-for-sale and, accordingly, the applicable investments have been adjusted to market value with a corresponding adjustment, net of tax, to net unrealized investment gains in accumulated other comprehensive income. Unrealized investment gains (net of deferred taxes) included in accumulated other comprehensive income amounted to $2.9 million and $13.9 million at June 30, 2001 and 2000, respectively.
NOTE 17 -- STATEMENT OF CASH FLOWS
Supplemental disclosure of significant non-cash transactions
As a result of stock option exercises, the Company recorded a tax benefit of $7.2 million, $13.4 million and $11.8 million during fiscal 2001, 2000 and 1999, respectively.
NOTE 18 -- SEGMENT DATA AND RELATED INFORMATION
Reportable operating segments, as defined by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", include components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (the "Chief Executive") in deciding how to allocate resources and in assessing performance. As a result of the similarities in the manufacturing, marketing and distribution processes for all of the Company's products, much of the information provided in the consolidated financial statements is similar to, or the same as, that reviewed on a regular basis by the Chief Executive.
While the Company's results of operations are also reviewed on a consolidated basis, the Chief Executive reviews data segmented on a basis that facilitates comparison to industry statistics. Accordingly, net sales, depreciation and amortization, and operating income are available with respect to the manufacture and distribution of skin care, makeup, fragrance, hair care and other products. These product categories meet the FASB's definition of operating segments and therefore, additional financial data are provided below. The "other" segment includes the sales and related results of ancillary products and services that do not fit the definition of skin care, makeup, fragrance and hair care.
The Company evaluates segment performance based upon operating income, which represents earnings before income taxes, minority interest and net interest income or expense. The accounting policies for each of the reportable segments are the same as those described in the summary of significant accounting policies, except for depreciation and amortization charges, which are allocated, primarily, based upon net sales. The assets and liabilities of the Company are managed centrally and are reported internally in the same manner as the consolidated financial statements, thus no additional information is produced for the Chief Executive or included herein.
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended June 30
----------------------------------
2001 2000 1999
---------- ---------- ----------
(In millions)
SEGMENT DATA
Net Sales:
Skin Care ....................................... $ 1,641.5 $ 1,552.4 $ 1,398.8
Makeup .......................................... 1,704.4 1,579.5 1,412.8
Fragrance ....................................... 1,061.9 1,092.3 1,048.6
Hair Care ....................................... 180.7 113.9 82.4
Other ........................................... 27.6 28.7 18.9
---------- ---------- ----------
4,616.1 4,366.8 3,961.5
Restructuring ................................... (8.0) - -
---------- ---------- ----------
$ 4,608.1 $ 4,366.8 $ 3,961.5
========== ========== ==========
Depreciation and Amortization:
Skin Care ....................................... $ 48.6 $ 39.4 $ 29.9
Makeup .......................................... 64.1 52.7 39.2
Fragrance ....................................... 32.6 28.8 23.9
Hair Care ....................................... 9.6 6.9 5.6
Other ........................................... 1.4 1.3 1.0
---------- ---------- ----------
$ 156.3 $ 129.1 $ 99.6
========== ========== ==========
Operating Income:
Skin Care ....................................... $ 266.9 $ 240.5 $ 205.9
Makeup .......................................... 212.5 181.8 158.2
Fragrance ....................................... 63.6 80.6 79.7
Hair Care ....................................... 13.1 12.4 11.4
Other ........................................... 2.5 0.5 1.7
---------- ---------- ----------
558.6 515.8 456.9
Reconciliation:
Restructuring and other non-recurring expenses .. (63.0) - -
Interest expense, net ........................... (12.3) (17.1) (16.7)
---------- ---------- ----------
Earnings before Income Taxes, Minority Interest
and Accounting Change ........................ $ 483.3 $ 498.7 $ 440.2
========== ========== ==========
GEOGRAPHIC DATA
Net Sales:
The Americas .................................... $ 2,815.3 $ 2,658.8 $ 2,397.9
Europe, the Middle East & Africa ................ 1,210.2 1,131.0 1,082.4
Asia/Pacific .................................... 590.6 577.0 481.2
---------- ---------- ----------
4,616.1 4,366.8 3,961.5
Restructuring ................................... (8.0) - -
---------- ---------- ----------
$ 4,608.1 $ 4,366.8 $ 3,961.5
========== ========== ==========
Operating Income:
The Americas .................................... $ 299.9 $ 287.9 $ 265.0
Europe, the Middle East & Africa ................ 201.8 168.9 145.5
Asia/Pacific .................................... 56.9 59.0 46.4
---------- ---------- ----------
558.6 515.8 456.9
Restructuring and other non-recurring expenses .. (63.0) - -
---------- ---------- ----------
$ 495.6 $ 515.8 $ 456.9
========== ========== ==========
|
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30
----------------------------------
2001 2000 1999
---------- ---------- ----------
(In millions)
Total Assets:
The Americas .................................. $ 2,379.9 $ 2,187.8 $ 1,954.1
Europe, the Middle East & Africa .............. 610.3 606.8 587.9
Asia/Pacific .................................. 228.6 248.7 204.7
---------- ---------- ----------
$ 3,218.8 $ 3,043.3 $ 2,746.7
========== ========== ==========
Long-Lived Assets (property, plant and equipment):
The Americas .................................. $ 445.2 $ 393.6 $ 304.4
Europe, the Middle East & Africa .............. 70.5 72.6 69.5
Asia/Pacific .................................. 13.0 14.1 9.7
---------- ---------- ----------
$ 528.7 $ 480.3 $ 383.6
========== ========== ==========
|
NOTE 19 -- UNAUDITED QUARTERLY FINANCIAL DATA
The following summarizes the unaudited quarterly operating results of the Company for the years ended June 30, 2001 and 2000:
Quarter Ended
-------------------------------------------------------
September 30 December 31 March 31 June 30 Total Year
------------ ----------- -------- ------- ----------
(In millions, except per share data)
Fiscal 2001
Net sales ......... $ 1,177.7 $ 1,291.6 $ 1,101.7 $ 1,037.1 $ 4,608.1
Gross profit ...... 914.4 1,013.6 875.6 832.2 3,635.8
Operating income .. 153.3 203.5 105.3 33.5 495.6
Net earnings ...... 92.4(a) 127.3 65.1 20.4 305.2(a)
Basic EPS ......... .36(a) .51 .25 .06 1.18(a)
Diluted EPS ....... .36(a) .50 .24 .06 1.16(a)
Fiscal 2000
Net sales ......... $ 1,093.7 $ 1,235.1 $ 1,039.1 $ 998.9 $ 4,366.8
Gross profit ...... 841.9 952.0 808.4 792.4 3,394.7
Operating income .. 136.5 186.1 99.4 93.8 515.8
Net earnings ...... 82.6 113.9 60.4 57.2 314.1
Basic EPS ......... .32 .46 .23 .22 1.22
Diluted EPS ....... .32 .45 .22 .21 1.20
|
(a) Net earnings for the Quarter ended September 30, 2000 include a one-time charge of $2.2 million, after tax, or $.01 per common share, attributable to the cumulative effect of adopting SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities".
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To The Estee Lauder Companies Inc.:
We have audited, in accordance with auditing standards generally accepted in the United States, the financial statements of The Estee Lauder Companies Inc. and subsidiaries included in this Annual Report on Form 10-K and have issued our report thereon dated August 10, 2001. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. This schedule (Schedule II - Valuation and Qualifying Accounts) is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
New York, New York
August 10, 2001
THE ESTEE LAUDER COMPANIES INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Three Years Ended June 30, 2001
(In millions)
---------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
---------------------------------------------------------------------------------------------------------------------
Additions
-----------------------
(1) (2)
Balance Charged to Charged to Balance
at Beginning Costs and Other at End of
Description of Period Expenses Accounts Deductions Period
---------------------------------------------------------------------------------------------------------------------
Reserves deducted in the balance sheet
from the assets to which they apply:
Allowance for doubtful accounts:
Year ended June 30, 2001 $ 31.7 $ 20.7 - $ 25.6(a) $ 26.8
======= ======= ======= =======
Year ended June 30, 2000 $ 36.0 $ 31.0 - $ 35.3(a) $ 31.7
======= ======= ======= =======
Year ended June 30, 1999 $ 43.6 $ 27.8 - $ 35.4(a) $ 36.0
======= ======= ======= =======
Accrued restructuring and other non-recurring charges:
Year ended June 30, 2001 (b) - $ 35.9 - $ 0.7 $ 35.2
======= ======= ======= =======
|
THE ESTEE LAUDER COMPANIES INC.
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
3.1 Form of Restated Certificate of Incorporation (filed as Exhibit 3.1
to Amendment No. 3 to our Registration Statement on Form S-1 (No.
33-97180) on November 13, 1995 (the "S-1")).*
3.2 Certificate of Amendment to Restated Certificate of Incorporation
(filed as Exhibit 3.1 to our Quarterly Report on Form 10-Q for the
quarter ended December 31, 1999).*
3.3 Amended and Restated By-laws (filed as Exhibit 3.2 to our Quarterly
Report on Form 10-Q for the quarter ended December 31, 1999).*
10.1 Form of Stockholders' Agreement (filed as Exhibit 10.1 to the S-1).*
10.1a Amendment No. 1 to Stockholders' Agreement (filed as Exhibit 10.1 to
our Quarterly Report on Form 10-Q for the quarter ended September
30, 1996).*
10.1b Amendment No. 2 to Stockholders' Agreement (filed as Exhibit 10.2 to
our Quarterly Report on Form 10-Q for the quarter ended December 31,
1996 (the "FY 1997 Q2 10-Q")).*
10.1c Amendment No. 3 to Stockholder's Agreement (filed as Exhibit 10.2 to
our Quarterly Report on Form 10-Q for the quarter ended March 31,
1997 (the "FY 1997 Q3 10-Q")).*
10.1d Amendment No. 4 to Stockholders' Agreement (filed as Exhibit 10.1d
to our Annual Report on Form 10-K for the year ended June 30, 2000
("FY 2000 10-K)).*
10.2 Form of Registration Rights Agreement (filed as Exhibit 10.2 to the
S-1).*
10.2a First Amendment to Registration Rights Agreement (filed as Exhibit
10.3 to our Annual Report on Form 10-K for the fiscal year ended
June 30, 1996).*
10.2b Second Amendment to Registration Rights Agreement (filed as Exhibit
10.1 to the FY 1997 Q3 10-Q).*
10.2c Third Amendment to Registration Rights Agreement.
10.3 Fiscal 1996 Share Incentive Plan (filed as Exhibit 10.3 to the
S-1).* +
10.4 Fiscal 1999 Share Incentive Plan (filed as Exhibit 4(c) to our
Registration Statement on Form S-8 (No. 333-66851) on November 5,
1998).* +
10.5 The Estee Lauder Inc. Retirement Growth Account Plan (filed as
Exhibit 10.5 to our Annual Report on Form 10-K for the fiscal year
ended June 30, 1999 (the "FY 1999 10-K")).* +
10.6 The Estee Lauder Inc. Retirement Benefits Restoration Plan (filed as
Exhibit 10.6 to the FY 1999 10-K).* +
10.7 Executive Annual Incentive Plan (filed as Exhibit 10.2 to our
Quarterly Report on Form 10-Q for the quarter ended December 31,
1998).* +
10.8 Employment Agreement with Leonard A. Lauder. +
10.9 Employment Agreement with Ronald S. Lauder (filed as Exhibit 10.1 to
our Quarterly Report on Form 10-Q for the quarter ended September
30, 2000).* +
10.10 Employment Agreement with Fred H. Langhammer (filed as Exhibit 10.10
to the FY 2000 10-K).* +
10.10a Amendment to Employment Agreement with Fred H. Langhammer. +
10.11 Employment Agreement with Daniel J. Brestle. +
10.12 Employment Agreement with William P. Lauder (filed as Exhibit 10.1
to Amendment No. 2 to our Registration Statement on Form S-3 (No.
333-77977) on May 19, 1999).* +
10.13 Employment Agreement with Patrick Bousquet-Chavanne (filed as
Exhibit 10.13 to the FY 1999 10-K).* +
10.14 Form of Deferred Compensation Agreement (interest-based) with
Outside Directors. +
10.15 Form of Deferred Compensation Agreement (stock-based) with Outside
Directors. +
10.16 Non-Employee Director Share Incentive Plan (filed as Exhibit 4(d) to
our Registration Statement on Form S-8 (No. 333-49606) filed on
November 9, 2000).* +
21.1 List of significant subsidiaries.
|
23.1 Consent of Arthur Andersen LLP. 24.1 Power of Attorney. --------------- |
* Incorporated herein by reference.
+ Exhibit is a management contract or compensatory plan or arrangement.
THIRD AMENDMENT
TO
REGISTRATION RIGHTS AGREEMENT
AMENDMENT NO. 3 dated as of June 29, 2001 to the Registration Rights Agreement dated November 22, 1995, as amended by the First Amendment to Registration Rights Agreement dated as of May 17, 1996, and by the Second Amendment to Registration Rights Agreement dated as of February 7, 1997 (as so amended, the "REGISTRATION RIGHTS AGREEMENT"), by and between The Estee Lauder Companies Inc. (the "COMPANY"), Leonard A. Lauder ("LAL"), Ronald S. Lauder ("RSL"), William P. Lauder, Gary M. Lauder, Aerin Lauder Zinterhofer, Jane Lauder, LAL Family Partners L.P., Lauder & Sons L.P., LAL, RSL and Ira T. Wender, as trustees (the "EL TRUSTEES"), u/a/d as of June 2, 1994, as amended, between Estee Lauder ("EL"), as settlor, and the EL Trustees, and known as "The Estee Lauder 1994 Trust Agreement", LAL and Joel S. Ehrenkranz, as trustees (the "LAL TRUSTEES"), u/a/d as of November 16, 1995, between EL, as settlor, and the LAL Trustees, and known as "The LAL 1995 Preferred Stock Trust", the trustees of the various other trusts set forth on the signature pages thereof and Morgan Guaranty Trust Company of New York in its capacity as pledgee of RSL. Capitalized terms used and not otherwise defined herein have the respective meanings ascribed to such terms in the Registration Rights Agreement.
WHEREAS, Aerin Lauder Zinterhofer and Richard D. Parsons, as Trustee of (a) the Trust f/b/o Aerin Lauder u/a/d December 15, 1976 created by Estee Lauder and Joseph H. Lauder, as Grantors (the "ACCUMULATION TRUST"), and (b) the Trust f/b/o Aerin Lauder u/a/d December 15, 1976 created by Ronald S. Lauder, as Grantor (the "DISTRIBUTION TRUST" and, together with the Accumulation Trust, the "TRUSTS") are parties to the Registration Rights Agreement;
WHEREAS, the Trusts are distributing shares of Registrable Class A Common Stock (in the form of 5,152,545 shares of Class B Common Stock of the Company) to the Trust f/b/o Aerin Lauder Zinterhofer u/a/d April 24, 2000 created by Aerin Lauder Zinterhofer, as Grantor (the "ALZ TRUST"), instead of distributing them to Aerin Lauder Zinterhofer; and
WHEREAS, in order to clarify any ambiguity in respect of shares of Registrable Class A Common Stock to be held by the ALZ Trust, the parties hereto desire to amend the Registration Rights Agreement as provided herein.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, the parties hereto agree as follows:
1. AMENDMENT. SCHEDULE A to the Registration Rights Agreement is hereby amended by adding thereto as a Holder the ALZ Trust. The ALZ Trust shall be bound by all of the terms of the Registration Rights Agreement, as amended through the date hereof, to the same extent as the other parties party thereto, and the ALZ Trust shall
hereafter be a Holder under the Registration Rights Agreement as if it were an original signatory thereto. Set forth on EXHIBIT A hereto are the names and addresses for notices and copies which are hereby added to SCHEDULE A to the Registration Rights Agreement.
2. MISCELLANEOUS.
2.1 CONFIRMATION OF OTHER PROVISIONS. All other provisions of the Registration Rights Agreement are hereby confirmed. From and after the date hereof, each reference in the Registration Rights Agreement to "this Agreement", "hereunder", "hereof", "herein", or words of like import, shall mean and refer to the Registration Rights Agreement as amended hereby.
2.2 BINDING EFFECT. This Amendment No. 3 will be binding upon and inure to the benefit of and be enforceable by, the parties and their permitted successors (which shall include in the case of an individual, such individual's estate, guardian, conservator or committee) and assigns.
2.3 AMENDMENTS. This Amendment No. 3 may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought.
2.4 GOVERNING LAW. This Amendment No. 3 shall be governed by and construed in accordance with the internal laws of the State of New York (other than its rules of conflicts of laws to the extent the application of the laws of another jurisdiction would be required thereby).
2.5 COUNTERPARTS. This Amendment No. 3 may be executed in any number of counterparts, each of which shall be deemed to be an original, and all of which, when taken together, shall constitute one and the same agreement.
2.6 TRUSTEE'S CAPACITY. With respect to obligations of trustees who are parties hereto in their capacity as trustees of one or more trusts, this Amendment No. 3 shall be binding upon such trustees only in their capacities as trustees, not individually and not with respect to any Registrable Securities other than Registrable Securities held by them in their capacity as trustees of such trusts.
[The remainder of this page intentionally left blank.]
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Amendment No. 3 as of the date first above written.
THE ESTEE LAUDER COMPANIES INC.
By: /s/ FRED H. LANGHAMMER
------------------------------------------------
Name: Fred H. Langhammer
Title: President and Chief Executive Officer
/s/ LEONARD A. LAUDER
------------------------------------------------
Leonard A. Lauder, (a) individually, (b) as
Managing Partner of LAL Family Partners L.P.,
(c) as Trustee of The Estee Lauder 1994 Trust,
(d) as a Class B General Partner of Lauder &
Sons L.P., and (e) as Trustee of The 1995 Estee
Lauder LAL Trust (a Class B General Partner of
Lauder & Sons L.P.)
/s/ RONALD S. LAUDER
------------------------------------------------
Ronald S. Lauder, (a) individually, (b) as
Trustee of The Descendents of RSL 1966 Trust,
(c) as Trustee of The Estee Lauder 1994 Trust,
(d) as a Class B General Partner of Lauder &
Sons L.P., (e) as Trustee of The 1995 Estee
Lauder RSL Trust (a Class B General Partner of
Lauder & Sons L.P.) and (f) as Chairman of the
Ronald S. Lauder Foundation
/s/ WILLIAM P. LAUDER
------------------------------------------------
William P. Lauder, (a) individually and (b) as
Trustee of The 1992 Leonard A. Lauder Grantor
Retained Annuity Trust
|
/s/ GARY M. LAUDER
------------------------------------------------
Gary M. Lauder, (a) individually, (b) as Trustee
of The 1992 Leonard A. Lauder Grantor
Retained Annuity Trust, (c) as custodian under
the New York Uniform Transfers to Minors Act for
the benefit of Danielle Lauder and (d) as
custodian under the New York Uniform Transfers
to Minors Act for the benefit of Rachel Lauder
/s/ AERIN LAUDER ZINTERHOFER
------------------------------------------------
Aerin Lauder Zinterhofer
/s/ JANE LAUDER
------------------------------------------------
Jane Lauder
/s/ JOEL S. EHRENKRANZ
------------------------------------------------
Joel S. Ehrenkranz, (a) as Trustee of the 1992
Leonard A. Lauder Grantor Retained Annuity
Trust, and (b) as Trustee of The 1995 Estee
Lauder LAL Trust (a Class B General Partner of
Lauder & Sons L.P.)
/s/ RICHARD D. PARSONS
------------------------------------------------
Richard D. Parsons, (a) as Trustee of the Trust
f/b/o Aerin Lauder and Jane Lauder u/a/d
December 15, 1976, created by Estee Lauder and
Joseph H. Lauder, as Grantors, (b) as Trustee of
the Trust f/b/o Aerin Lauder and Jane Lauder
u/a/d December 15, 1976, created by Ronald S.
Lauder, as Grantor, (c) as Trustee of The 1995
Estee Lauder RSL Trust (a Class B General
Partner of Lauder & Sons L.P.) and (d) as
Trustee of the Trust f/b/o Aerin Lauder
Zinterhofer u/a/d April 24, 2000, created by
Aerin Lauder Zinterhofer, as Grantor
|
/s/ IRA T. WENDER
------------------------------------------------
Ira T. Wender, (a) as Trustee of The Estee
Lauder 1994 Trust, (b) as Trustee of The 1995
Estee Lauder LAL Trust (a Class B General
Partner of Lauder & Sons L.P.) and (c) as
Trustee of The 1995 Estee Lauder RSL Trust (a
Class B General Partner of Lauder & Sons L.P.)
/s/ DANIEL J. AARON
------------------------------------------------
Daniel J. Aaron, as Trustee of the Separate
Share Trust f/b/o Gary M. Lauder u/a/d December
15, 1976, created by Leonard A. Lauder, as
Grantor
|
Morgan Guaranty Trust Company of New York, in its capacity as pledgee of Ronald S. Lauder
By: /s/ JEFFREY B. WESTCOTT
------------------------------------------------
Name: Jeffrey B. Westcott
Title: Vice President
|
EXHIBIT A
---------------------------------------------------------------------------------------------
NAME OF HOLDER NOTICE ADDRESS COPIES TO
---------------------------------------------------------------------------------------------
Trustee of the Trust f/b/o Richard D. Parsons Patterson, Belknap, Webb & Tyler
Aerin Lauder Zinterhofer 75 Rockefeller Plaza 1133 Avenue of the Americas
u/a/d April 24, 2000, 29th Floor New York, New York 10036
created by Aerin Lauder New York, New York 10019 Attn: Christopher Angell, Esq.
Zinterhofer, as Grantor Telecopy: (212) 275-3085 Telecopy: (212) 336-2222
---------------------------------------------------------------------------------------------
|
THIS AGREEMENT ("Agreement"), dated as of July 1, 2000, between THE ESTEE LAUDER COMPANIES INC., a Delaware corporation (the "Company"), and LEONARD A. LAUDER, a resident of New York, New York (the "Executive").
WHEREAS, the Company and its subsidiaries are principally engaged in the business of manufacturing, marketing and selling prestige skin care, makeup, hair care and fragrance products and related services (the "Business"); and
WHEREAS, the Company desires to continue to retain the services of the Executive in the capacities of Director and Chairman of the Board of Directors, and the Executive desires to provide such services in such capacities to the Company, upon the terms and subject to the conditions hereinafter set forth; and
WHEREAS, the Compensation Committee of the Board of Directors of the Company (the Compensation Committee") has approved the terms of this Agreement;
NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and obligations hereinafter set forth, the parties hereto, intending to be legally bound, hereby agree as follows:
1. EMPLOYMENT TERM.
The Company hereby agrees to employ the Executive as a senior executive, and the Executive hereby agrees to enter into such employment as a senior executive of the Company, and the Company shall use its best efforts and powers to sustain and continue the Executive's election as a Director and Chairman of the Board of Directors of the Company, for the period commencing on July 1, 2000 and ending when terminated pursuant to Section 5 hereof (the "Term of Employment"). The twelve-month period commencing July 1, 2000 shall be the "First Contract Year" hereunder, and subsequent twelve-month periods shall be subsequent Contract Years.
2. DUTIES AND EXTENT OF SERVICES.
(a) During the Term of Employment, the Executive shall serve as a senior executive of the Corporation and, if elected, as a Director and the Chairman of the Board of Directors and, in such capacities, shall render such, executive, managerial, administrative and other services as customarily are associated with and incident to such positions, and as the Company may, from time to time, reasonably require of him consistent with such positions. The Executive shall be obligated to report only to the Board of Directors in connection with the performance of his duties and responsibilities hereunder.
(b) The Executive shall serve as a Director of the Company if elected to such position in accordance with law and hold such other positions and executive offices of the Company and/or of any of the Company's subsidiaries or affiliates as may from time to time be authorized by the Board of Directors of the Company, provided that each such position shall be commensurate with the Executive's standing in the business community as Chairman of the Board of Directors of the Company. The Executive shall not be entitled to any compensation other than the compensation provided for herein for serving during the Term of Employment as a Director of the Company or in any other office or position of the Company, or any of its subsidiaries or affiliates, unless the Board of Directors of the Company shall have specifically approved such additional compensation.
(c) The Executive shall be an employee of the company and diligently perform to the best of his ability all of the duties required of him as Chairman of the Board of Directors, and in the other positions or offices of the Company or its subsidiaries or affiliates required of him hereunder. Notwithstanding the foregoing provisions of this section, the Executive may participate in charitable, civic, political, social, trade, or other non-profit organizations to the extent such participation does not materially interfere with the performance of his duties hereunder, and may serve as a non-management director of business corporations (or in a like capacity in other for-profit organizations) so long as it does not materially interfere with the Executive's obligations hereunder.
(d) In connection with his employment hereunder, the Executive shall continue to be accorded such benefits and secretarial administrative support as heretofore have been and currently are being accorded to the Executive, including, but not limited to, the use at all times of office space and the furnishings currently contained therein. Upon his retirement, the Executive shall be entitled for the remainder of his life to continue to use his then existing office space and conference rooms as well as to have continued secretarial administrative support. If the Company's executive offices should relocate to new corporate headquarters, the Executive shall be entitled to receive comparable support services and office facilities, in terms of size and location, to those he then possesses.
3. COMPENSATION.
(a) BASE SALARY. As compensation for all services to be rendered pursuant to this Agreement and as payment for the rights and interests granted by the Executive hereunder, the Company shall pay or cause any of its subsidiaries to pay the Executive a base salary (the "Base Salary") of $ 1,800,000 which shall be payable in accordance with the regular payroll policies of the Company in effect from time to time.
(b) INCENTIVE BONUS COMPENSATION. During the Term of Employment, the Executive shall participate in the Company's Annual Incentive Plan (the "Bonus Plan") or in any successor incentive bonus plans or programs hereinafter adopted which provide for the payment of incentive compensation to the Company's senior officers. Any awards thereunder shall be at the discretion of the Compensation Committee.
(c) SHARE INCENTIVE PLAN. The Executive shall be entitled to participate in the Company's Fiscal 1999 Share Incentive Plan and any successor plan in which senior executive officers of the Company are eligible to participate (the "Share Incentive Plan"); provided that any such participation shall be at the discretion of the Compensation Committee.
(d) DEFERRAL. The Executive may elect to defer payment of all or any part of the incentive bonus compensation amount payable in accordance with Section 3(b) hereof with respect to any Contract Year during the Term of Employment, by giving the Company written notice thereof not later than March 31 of such Contract Year. Additionally, in the event that in respect of any fiscal year of the Company any amount of Base Salary, any amount of incentive bonus compensation or any other amount payable to the Executive hereunder or otherwise shall, either alone or in combination with other amounts payable hereunder or otherwise, result in a payment by the Company that shall not be currently deductible by it pursuant to the provisions of Section 162 (m) of the Internal Revenue Code, as amended (the "Code"), or like or successor provisions (a "Non-Deductible Amount"), the Company may elect to defer the payment of the Non-Deductible Amount. Any amounts, so deferred, either by election of the Executive or by election of the Company, shall be credited to a bookkeeping account in the name of the Executive as of the date scheduled for payment hereunder. Such amounts shall be credited with interest as of each June 30 during the term of deferral, compounded annually, at a rate per annum equal to the annual rate of interest announced by Citibank, N.A. in New York, New York as its base rate in effect on such June 30, but in no event shall such rate exceed 9% (the "Base Rate"). The entire amount credited to such bookkeeping account shall be paid to the Executive on a date to be chosen by the Company, but in no event later than January 1 following the termination of the Executive from employment with the Company.
(e) PRIOR DEFERRED ARRANGEMENT. In connection with the Executive's prior employment agreement, dated as of July 1, 1995 (the "Prior Agreement"):
(i) amounts that accrued under the agreement, dated as of July 1, 1971, between the Executive and Estee Lauder Inc. ("ELI"), amended as of December 23, 1993 (the "Deferred Compensation Agreement"), were fixed at $9,201,200 (the "Balance");
(ii) the Executive relinquished any and all of his rights under the Deferred Compensation Agreement; and
(iii) the Company agreed to cause ELI to pay to the Executive in the form of a 10-year certain annuity the Balance increased from July 1, 1995 by a rate per annum equal to the Base Rate compounded annually (the "Payout").
The Company hereby reconfirms the obligation of ELI in respect of the annuity as follows:
(A) to continue to increase the Balance ($13,707,713 at July 1, 2000)
by a rate per annum equal to the Base Rate compounded annually; and
(B) to begin to make the annuity payments related to the Payout on the earliest to occur of the Executive's retirement, death and March 19, 2003 and monthly thereafter.
In connection with the Payout, (x) the annuity payments shall be made to the Executive, and if he is not living, then to his wife, Evelyn Lauder, and if she is not living, to the Executive's estate and (y) ELI shall be entitled to apply any amounts then due and owing to the Executive (or the Executive's wife or estate, as the case may be) under Section 3(e) hereof to the repayment of any debts the Executive has to the Company or ELI; provided, however, that such amounts shall be so applied only to the extent of such amounts then due and owing to the Executive in accordance with Section 3(e) hereof.
4. BENEFITS.
(a) STANDARD BENEFITS. During the Term of Employment the Executive shall be entitled to (i) participate in any and all benefit programs and arrangements now in effect and hereinafter adopted and made generally available by the Company to its senior officers, including but not limited to The Estee Lauder Inc Incentive Thrift Plan (the "Thrift Plan"), the Estee Lauder Retirement Growth Account Plan (the "Qualified Plan"), the related Estee Lauder Inc. Benefit Restoration Plan (the "Non-Qualified Plan"), contributory and noncontributory Company welfare and benefit plans, disability plans, and medical, death benefit and life insurance plans for which the Executive shall be eligible, or may become eligible during the Term of Employment; (ii) participate in the Company's automobile program now in effect and hereinafter adopted and generally made available by the Company to its executive officers; and (iii) paid vacation during each year of the Term of Employment in accordance with the policies and procedures of the Company as in effect from time to time for its senior officers. Reference to the Company's benefit programs and arrangements or plans shall include applicable programs, arrangements or plans of the Company or its subsidiaries.
(b) EXPENSES. The Company agrees to reimburse the Executive for all reasonable and necessary travel (including first class air fare), business entertainment and other business out-of-pocket expenses incurred or expended by him in connection with the performance of his duties hereunder upon presentation of proper expense statements or vouchers or such other supporting information as the Company may reasonably require of the Executive.
5. TERMINATION.
(a) PERMANENT DISABILITY. In the event of the "permanent disability" (as hereinafter defined) of the Executive during the Term of Employment, the Company shall have the right, upon written notice to the Executive, to terminate the Executive's employment hereunder, effective upon the giving of such notice (or such later date as shall be specified in such notice). In the event of such termination, the Company shall have no further obligations hereunder, except that the Executive shall be entitled (i) to receive any amounts or benefits to which the Executive may otherwise have been entitled to
hereunder prior to the effective date of termination; (ii) to be paid his Base
Salary under Section 3(a) hereof for a period of two (2) years from the
effective date of termination; PROVIDED, HOWEVER, that the Company shall only be
required to pay that amount of the Executive's Base Salary which shall exceed
payments, if any, to the Executive under pension or long-term disability plans
of the Company; and (iii) to receive bonus compensation for the period during
which Base Salary shall continue to be paid at an annual rate equal to the
average of actual bonuses paid or payable to Executive during the Term of
Employment in accordance with Section 3(b) hereof, or, if no such bonus has been
paid or is payable as of the date of such termination, at an annual rate equal
to his Base Salary under Section 3(a) hereof (the "Calculated Bonus Rate"). In
addition, upon termination for permanent disability, the Executive shall
continue to participate in any and all pension, insurance and other benefit
plans and programs of the Company during the period the Executive is continuing
to receive his Base Salary. Thereafter, the Executive's rights to participate in
such programs and plans, or to receive similar coverage, if any, shall be as
determined under such programs. For purposes of this paragraph, "permanent
disability" means any disability as defined under the Company's applicable
disability insurance policy or, if no such policy is available, any physical or
mental disability or incapacity that renders the Executive incapable of
performing the services required of him in accordance with his obligations under
Section 2 hereof for a period of six (6) consecutive months or for shorter
periods aggregating six (6) months during any twelve-month period.
(B) DEATH. In the event of the death of the Executive during the Term of Employment, the Company shall have no further obligations hereunder, except to pay, for a period of one (1) year from the date on which the death occurs, the Executive's beneficiary or legal representative (i) the Executive's Base Salary under Section 3(a) hereof; (ii) bonus compensation at the Calculated Bonus Rate; and (iii) any other amounts to which the Executive otherwise would have been entitled hereunder prior to the date of his death or which become payable by reason of his death. Any payments to be made pursuant to the Payout referred to in Section 3(e) shall be made in accordance with that Section.
(C) CAUSE. The Company shall have the right, upon written notice to the Executive, to terminate the Executive's employment under this Agreement for "Cause" (as hereinafter defined), effective upon the giving of such notice (or such later date as shall be specified in such notice), and the Company shall have no further obligations hereunder, except to pay the Executive any amounts otherwise payable pursuant to Section 3 hereof and provide the Executive any benefits to which the Executive may otherwise have been entitled, in each case, prior to the effective date of termination. The Executive's right to participate in any of the Company's retirement, insurance and other benefit plans and programs shall be as determined under such programs and plans.
For purposes of this Agreement, "Cause" means:
(i) fraud, embezzlement or gross insubordination on the part of the Executive or material breach by the Executive of his obligations under Section 6 or 7 hereof;
(ii) conviction of or the entry of a plea of NOLO CONTENDERE by the Executive for any felony;
(iii) a material breach of, or the willful failure or refusal by the Executive to perform and discharge, his duties, responsibilities or obligations under this Agreement (other than under Sections 6 and 7 hereof, which shall be governed by clause (i) above, and other than by reason of disability or death) that is not corrected within thirty (30) days following written notice thereof to the Executive by the Company, such notice to state with specificity the nature of the breach, failure or refusal; PROVIDED that if such breach, failure or refusal cannot reasonably be corrected within thirty (30) days of written notice thereof, correction shall be commenced by the Executive within such period and may be corrected within a reasonable period thereafter; or
(iv) any act of moral turpitude or willful misconduct by the Executive which (A) is intended to result in substantial personal enrichment of the Executive at the expense of the Company or any of its subsidiaries or affiliates or (B) has a material adverse impact on the business or reputation of the Company, or any of its subsidiaries or affiliates (such determination to be made by the Company's Board of Directors in its reasonable judgment).
(D) TERMINATION WITHOUT CAUSE. The Company shall have the right, upon sixty
(60) days' written notice given to the Executive, to terminate Executive's
employment for any reason whatsoever. In the event of such termination, for a
period of three (3) years from the effective date of termination, the Executive
shall be entitled as damages to (i) receive his Base Salary as established under
Section 3(a) hereof; (ii) receive bonus compensation at the Calculated Bonus
Rate; and (iii) participate in all pension, insurance and other benefit plan
programs or arrangements on terms identical to those applicable to other senior
officers of the Company. In the event of termination pursuant to this Section
5(d), the Executive shall have no obligation to mitigate his damages.
(E) TERMINATION BY EXECUTIVE. The Executive shall have the right, exercisable
at any time, to terminate his employment for any reason whatsoever, upon six (6)
months written notice to the Company. In the event of such termination, for a
period of six (6) months from the effective date of such termination, the
Executive shall be entitled to receive his (i) Base Salary as established under
Section 3(a) hereof; and (ii) bonus compensation at the Calculated Bonus Rate.
(F) CHANGE OF CONTROL.
(i) DEFINITIONS. For purposes of this Agreement,
(A) a "CHANGE OF CONTROL" shall be deemed to have occurred upon any of the following events:
(1) a change in control of the direction and administration of the Company's business of a nature that would be required to be reported in response to
Item 6(e) of Schedule 14A of Regulation 14(A) promulgated under the Securities
Exchange Act of 1934, as amended; or
(2) during any period of two (2) consecutive years, the individuals who at the beginning of such period constitute the Company's Board of Directors or any individuals who would be "Continuing Directors" (as defined below) cease for any reason to constitute a majority thereof; or
(3) the Company's Class A Common Stock shall cease to be publicly traded; or
(4) the Company's Board of Directors shall approve a sale of all or substantially all of the assets of the Company, and such transaction shall have been consummated; or
(5) the Company's Board of Directors shall approve any merger, consolidation, or like business combination or reorganization of the Company, the consummation of which would result in the occurrence of any event described in Section 5(f)(i)(A)(2) or (3) above, and such transaction shall have been consummated.
Notwithstanding the foregoing, (X) changes in the relative beneficial ownership among members of the Lauder family and family-controlled entities shall not, without other changes that would constitute a Change in Control, constitute a Change of Control of the Company, (Y) any spin-off of a division or subsidiary of the Company to its stockholders shall not constitute a Change of Control of the Company.
(B) "Continuing Directors" shall mean (1) the directors in office on January 1, 2000 and (2) any successor to such directors and any additional director who after January 1, 2000 was nominated or elected by a majority of the Continuing Directors in office at the time of his or her nomination or election.
(C) "Good Reason" means the occurrence of any of the following, without the express written consent of the Executive, after the occurrence of a Change in Control:
(1) (a) the assignment to the Executive of any duties inconsistent in any material adverse effect with the Executive's position, authority or responsibilities as contemplated by Section 2 hereof, or (b) any other material adverse change in such position, including title, authority or responsibilities;
(2) any failure by the Company to comply with any provisions of Sections 3 or 4 hereof, other than an insubstantial or inadvertent failure remedied by the Company promptly after receipt of notice thereof given by the Executive;
(3) the Company's requiring the Executive to be based at any office or location more than 50 miles from that location at which he performed his
services specified under the provisions of Section 2 immediately prior to the Change in Control, except for travel reasonably required in the performance of the Executive's responsibilities; or
(4) any failure by the Company to obtain the assumption
and agreement to perform this Agreement by a successor as contemplated by
Section 13.
(ii) TERMINATION FOR GOOD REASON. Following the occurrence of a Change of Control, the Executive may terminate his employment for Good Reason. Such termination shall be deemed to be a termination without cause and shall be controlled by the provisions of Section 5(d) hereof.
(G) CERTAIN PAYMENTS BY THE COMPANY.
(i) In the event that any amount or benefit paid or distributed to the Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to the Executive by the Company or any affiliated company (collectively, the "Covered Payments"), are or become subject to the tax (the "Excise Tax") imposed under Section 4999 of the Code, or any similar tax that may hereafter be imposed, the Company shall pay to the Executive at the time specified in Section 5(g)(v) below an additional amount (the "Tax Reimbursement Payment") such that the net amount retained by the Executive with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any Federal, state and local income or employment tax and Excise Tax on the Tax Reimbursement Payment provided for by this Section 5(g), but before deduction for any Federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of the Covered Payments.
(ii) For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax,
(A) such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 28OG(b) (3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the date of the Change in Control or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for personal services actually rendered (within the meaning of Section 28OG(b)(4)(B) of the Code) in excess of the allocable "base amount," or such "parachute payments" are otherwise not subject to such Excise Tax, and
(B) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code.
(iii) For purposes of determining the amount of the Tax Reimbursement Payment, the Executive shall be deemed to pay:
(A) Federal income, social security, Medicare and other employment taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the Tax Reimbursement Payment is to be made, and
(B) any applicable state and local income or other employment taxes at the highest applicable marginal rate of taxation for the calendar year in which the Tax Reimbursement Payment is to be made, net of the maximum reduction in Federal income taxes which could be obtained by Executive from the deduction of such state or local taxes if paid in such year.
(iv) In the event that the Excise Tax is subsequently determined by the
Accountants or pursuant to any proceeding or negotiations with the Internal
Revenue Service to be less than the amount taken into account hereunder in
calculating the Tax Reimbursement Payment made, the Executive shall repay to the
Company, at the time of such determination, the portion of such prior Tax
Reimbursement Payment that would not have been paid if such reduced Excise Tax
had been taken into account in initially calculating such Tax Reimbursement
Payment, plus interest on the amount of such repayment at the rate provided in
Section 1274(b)(2)(b) of the Code. Notwithstanding the foregoing, in the event
any portion of the Tax Reimbursement Payment to be refunded to the Company has
been paid to any Federal, state or local tax authority, repayment thereof shall
not be required until actual refund or credit of such portion has been made to
the Executive, and interest payable to the Company shall not exceed interest
received or credited to the Executive by such tax authority for the period it
held such portion. The Executive and the Company shall mutually agree upon the
course of action to be pursued (and the method of allocating the expenses
thereof) if the Executive's good faith claim for refund or credit is denied.
In the event that the Excise Tax is later determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined.
(v) The Tax Reimbursement Payment (or portion thereof) provided for in
Section 5(g)(i) above shall be paid to the Executive not later than 10 business
days following the payment of the Covered Payments; PROVIDED, HOWEVER, that if
the amount
of such Tax Reimbursement Payment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to the Executive by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Reimbursement Payment and shall pay the remainder of such Tax Reimbursement Payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Cover Payment. In the event that the amount of the estimated Tax Reimbursement Payment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after written demand by the Company for payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code).
(vi) The Company shall pay directly or reimburse Executive for the cost
of hiring his own accounting and/or legal experts in connection with any
determinations to be made as to the amounts of the Covered Payments and/or the
Tax Reimbursement Payment; PROVIDED, HOWEVER, that the Company shall not be
required to make any such payments in excess of $20,000. The provisions of this
Section 5(g) shall survive Executive's termination of employment hereunder.
(H) EFFECT OF TERMINATION. Upon the termination of the Executive's employment hereunder for any reason, the Company shall have no further obligations hereunder, except as otherwise provided herein. The Executive, however, shall continue to have the obligations provided for in Sections 6 and 7 hereof. Furthermore, upon such termination, the Executive shall be deemed to have resigned immediately as a senior executive of the Company (but not as Chairman of the Board of Directors of the Company or as a director) and from all offices and directorships held by him in any subsidiaries of the Company; PROVIDED, HOWEVER, that the Executive's directorship of the Company shall be controlled by that certain Stockholders' Agreement, dated as of November 22, 1995, as amended, by and among the Company, the Executive, Ronald S. Lauder and the other persons or entities party thereto, as it may be amended from time to time (the "Stockholders' Agreement").
6. CONFIDENTIALITY; OWNERSHIP.
(a) The Executive agrees that he shall forever keep secret and retain in strictest confidence and not divulge, disclose, discuss, copy or otherwise use or suffer to be used in any manner, except in connection with the Business of the Company and the businesses of any of its subsidiaries or affiliates, any "Protected Information" in any "Unauthorized" manner or for any Unauthorized purpose (as such terms are hereinafter defined). Furthermore, the Executive acknowledges that he has no right to use the "Lauder" name, or any variation, combination or derivation thereof, in the fragrance, make-up, skin care or other personal care products businesses, or in any such way that would likely cause confusion with the Company's or any of its subsidiaries' products.
(i) "Protected Information" means trade secrets, confidential or proprietary information and all other knowledge, know-how, information, documents or materials owned, developed or possessed by the Company or any of its subsidiaries or affiliates, whether in tangible or intangible form, pertaining to the Business of the Company or the businesses of any of its subsidiaries or affiliates, including, but not limited to, research and development operations, systems, data bases, computer programs and software, designs, models, operating procedures, knowledge of the organization, products (including prices, costs, sales or content), processes, formulas, techniques, machinery, contracts, financial information or measures, business methods, business plans, details of consultant contracts, new personnel acquisition plans, business acquisition plans, customer lists, business relationships and other information owned, developed or possessed by the Company or its other subsidiaries or affiliates, except as required in the course of performing duties hereunder; PROVIDED that Protected Information shall not include information that becomes generally known to the public or the trade without violation of this Section 6.
(ii) "Unauthorized" means: (A) in contravention of the policies or procedures of the Company or any of its subsidiaries or affiliates; (B) otherwise inconsistent with the measures taken by the Company or any of its subsidiaries or affiliates to protect their interests in any Protected Information; or (C) in contravention of any duty existing under law or contract. Notwithstanding anything to the contrary contained in this Section 6, the Executive may disclose any Protected Information to the extent required by court order or decree or by the rules and regulations of a governmental agency or as otherwise required by law; PROVIDED that the Executive shall provide the Company with prompt notice of such required disclosure in advance thereof so that the Company may seek an appropriate protective order in respect of such required disclosure.
(b) The Executive acknowledges that all developments, including, without limitation, inventions (patentable or otherwise), discoveries, formulas, improvements, patents, trade secrets, designs, reports, computer software, flow charts and diagrams, procedures, data, documentation, ideas and writings and applications thereof relating to the Business or planned business of the Company or any of its subsidiaries or affiliates that, alone or jointly with others, the Executive may conceive, create, make, develop, reduce to practice or acquire during the Term of Employment (collectively, the "Developments") are works made for hire and shall remain the sole and exclusive property of the Company and the Executive hereby assigns to the Company, in consideration of the payments set forth in Section 3(a) hereof, all of his right, title and interest in and to all such Developments. The Executive shall promptly and fully disclose all future material Developments to the Board of Directors of the Company and, at any time upon request and at the expense of the Company, shall execute, acknowledge and deliver to the Company all instruments that the Company shall prepare, give evidence and take all other actions that are necessary or desirable in the reasonable opinion of the Company to enable the Company to file and prosecute applications for and to acquire, maintain and enforce all letters, patent and trademark registrations or copyrights covering the Developments in all countries in which the same are deemed necessary by the Company. All memoranda, notes, lists, drawings, records, files,
computer tapes, programs, software, source and programming narratives and other documentation (and all copies thereof) made or compiled by the Executive or made available to the Executive concerning the Developments or otherwise concerning the Business or planned business of the Company or any of its subsidiaries or affiliates shall be the property of the Company or such subsidiaries or affiliates and shall be delivered to the Company or such subsidiaries or affiliates promptly upon the expiration or termination of the Term of Employment.
(c) The provisions of this Section 6 shall, without any limitation as to time, survive the expiration or termination of the Executive's employment hereunder, irrespective of the reason for any termination.
7. COVENANT NOT TO COMPETE. Subject to the last sentence of this Section 7, the Executive agrees that during the Term of Employment and, for his lifetime thereafter, the Executive shall not, directly or indirectly, without the prior written consent of the Company:
(a) solicit, entice, persuade or induce any employee, consultant, agent or independent contractor of the Company or of any of its subsidiaries or affiliates to terminate his or her employment with the Company or such subsidiary or affiliate, to become employed by any person, firm or corporation other than the Company or such subsidiary or affiliate or approach any such employee, consultant, agent or independent contractor for any of the foregoing purposes, or authorize or assist in the taking of any such actions by any third party (for purposes of this Section 7(a), the terms "employee," "consultant," "agent" and "independent contractor" shall include any persons with such status at any time during the six (6) months preceding any solicitation in question); or
(b) participate, or make any financial investment in, or become employed by
or render consulting, advisory or other services to or for any person, firm,
corporation or other business enterprise, wherever located, which is engaged,
directly or indirectly, in competition with the Company's Business or the
businesses of the Company's subsidiaries or affiliates as conducted or any
business proposed to be conducted at the time of the expiration or termination
of the Executive's employment hereunder; PROVIDED, HOWEVER, that nothing in this
Section 7(b) shall be construed to preclude the Executive from making any
investments in the securities of any business enterprise whether or not engaged
in competition with the Company or any of its subsidiaries or affiliates, to the
extent that such securities are actively traded on a national securities
exchange or in the over-the-counter market in the United States or on any
foreign securities exchange and represent, at the time of acquisition, not more
than 30% of the aggregate voting power of such business enterprise.
Notwithstanding the foregoing, the Executive shall not be subject to the terms and provisions of paragraph (b) of this Section 7 if the Term of Employment is terminated pursuant to Section 5(d) hereof.
8. SPECIFIC PERFORMANCE. The Executive acknowledges that the services to be rendered by the Executive are of a special, unique and extraordinary character and, in connection with such services, the Executive will have access to confidential information vital to the Company's Business and the businesses of the Company's subsidiaries and affiliates. By reason of this, the Executive consents and agrees that if the Executive violates any of the provisions of Sections 6 or 7 hereof, the Company and its subsidiaries and affiliates would sustain irreparable injury and that monetary damages would not provide adequate remedy to the Company and that the Company shall be entitled to have Section 6 or 7 hereof specifically enforced by any court having equity jurisdiction. Nothing contained herein shall be construed as prohibiting the Company or any of its other subsidiaries or affiliates from pursuing any other remedies available to it for such breach or threatened breach, including the recovery of damages from the Executive.
9. DEDUCTIONS AND WITHHOLDING. The Executive agrees that the Company or its subsidiaries or affiliates, as applicable, shall withhold from any and all compensation paid to and required to be paid to the Executive pursuant to this Agreement, all Federal, state, local and/or other taxes which the Company determines are required to be withheld in accordance with applicable statutes or regulations from time to time in effect and all amounts required to be deducted in respect of the Executive's coverage under applicable employee benefit plans. For purposes of this Agreement and calculations hereunder, all such deductions and withholdings shall be deemed to have been paid to and received by the Executive.
10. ENTIRE AGREEMENT. Except for the Stockholders' Agreement, the Bonus Plan, the Share Incentive Plan, outstanding stock option agreements, existing split dollar life insurance and deferred compensation arrangements, existing arrangements with Estee Lauder AG Lachen and the Thrift Plan, Qualified Plan, Non-Qualified Plan and the other benefit plans referred to in Section 4 hereof, this Agreement embodies the entire agreement of the parties with respect to the Executive's employment, compensation, perquisites and related items and supersedes any other prior oral or written agreements, arrangements or understandings between the Executive and the Company or any of its subsidiaries or affiliates, and any such prior agreements, arrangements or understandings are hereby terminated and of no further effect. This Agreement may not be changed or terminated orally but only by an agreement in writing signed by the parties hereto.
11. WAIVER. The waiver by the Company of a breach of any provision of this Agreement by the Executive shall not operate or be construed as a waiver of any subsequent breach by him. The waiver by the Executive of a breach of any provision of this Agreement by the Company shall not operate or be construed as a waiver of any subsequent breach by the Company.
12. GOVERNING LAW; JURISDICTION.
(a) This Agreement shall be subject to, and governed by, the laws of the State of New York applicable to contracts made and to be performed therein.
(b) Any action to enforce any of the provisions of this Agreement shall be brought in a court of the State of New York located in the Borough of Manhattan of the City of New York or in a Federal court located within the Southern District of New York. The parties consent to the jurisdiction of such courts and to the service of process in any manner provided by New York law. Each party irrevocably waives any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in such court and any claim that such suit, action or proceeding brought in such court has been brought in an inconvenient forum and agrees that service of process in accordance with the foregoing sentences shall be deemed in every respect effective and valid personal service of process upon such party.
13. ASSIGNABILITY. The obligations of the Executive may not be delegated and, except with respect to the designation of beneficiaries in connection with any of the benefits payable to the Executive hereunder, the Executive may not, without the Company's written consent thereto, assign, transfer, convey, pledge, encumber, hypothecate or otherwise dispose of this Agreement or any interest herein. Any such attempted delegation or disposition shall be null and void and without effect. The Company and the Executive agree that this Agreement and all of the Company's rights and obligations hereunder may be assigned or transferred by the Company to and shall be assumed by and be binding upon any successor to the Company. The Company shall require any successor by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place. The term "successor" means, with respect to the Company or any of its subsidiaries, any corporation or other business entity which, by merger, consolidation, purchase of the assets or otherwise acquires all or a majority of the operating assets or business of the Company.
14. SEVERABILITY. If any provision of this Agreement or any part thereof, including, without limitation, Sections 6 and 7 hereof, as applied to either party or to any circumstances shall be adjudged by a court of competent jurisdiction to be void or unenforceable, the same shall in no way affect any other provision of this Agreement or remaining part thereof, which shall be given full effect without regard to the invalid or unenforceable part thereof, or the validity or enforceability of this Agreement.
If any court construes any of the provisions of Section 6 or 7 hereof, or any part thereof, to be unreasonable because of the duration of such provision or the geographic scope thereof, such court may reduce the duration or restrict or redefine the geographic scope of such provision and enforce such provision as so reduced, restricted or redefined.
15. NOTICES. All notices to the Company or the Executive permitted or required hereunder shall be in writing and shall be delivered personally, by telecopier or by courier service providing for next-day delivery or sent by registered or certified mail, return receipt requested, to the following addresses:
The Company:
The Estee Lauder Companies Inc.
767 Fifth Avenue
New York, New York 10153
Attn: Paul E. Konney
Tel: (212) 572-4200
Fax: (212) 572-3989
The Executive:
Leonard A. Lauder
The Estee Lauder Companies Inc.
767 Fifth Avenue
New York, NY 10153
Tel: (212) 572-2406
Fax: (212) 572-6745
Either party may change the address to which notices shall be sent by sending written notice of such change of address to the other party. Any such notice shall be deemed given, if delivered personally, upon receipt; if telecopied, when telecopied; if sent by courier service providing for next day delivery, the next business day following deposit with such courier service; and if sent by certified or registered mail, three days after deposit (postage prepaid) with the U.S. mail service.
16. NO CONFLICTS. The Executive hereby represents and warrants to the Company that his execution, delivery and performance of this Agreement and any other agreement to be delivered pursuant to this Agreement will not (i) require the consent, approval or action of any other person or (ii) violate, conflict with or result in the breach of any of the terms of, or constitute (or with notice or lapse of time or both, constitute) a default under, any agreement, arrangement or understanding with respect to the Executive's employment to which the Executive is a party or by which the Executive is bound or subject. The Executive hereby agrees to indemnify and hold harmless the Company and its directors, officers, employees, agents, representatives and affiliates (and such affiliates' directors, officers, employees, agents and representatives) from and against any and all losses, liabilities or claims (including, interest, penalties and reasonable attorneys' fees, disbursements and related charges) based upon or arising out of the Executive's breach of any of the foregoing representations and warranties.
17. EFFECTIVE DATE. This Agreement shall be effective as of July 1, 2000.
18. PARAGRAPH HEADINGS. The paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.
19. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first written above
THE ESTEE LAUDER COMPANIES INC
By: /s/ ANDREW J. CAVANAUGH
---------------------------------------
Name: Andrew J. Cavanaugh
Title: Senior Vice President - Global Human
Resources
/s/ LEONARD A. LAUDER
---------------------------------------
LEONARD A. LAUDER
|
THIS AMENDMENT ("Amendment"), dated as of July 26, 2001 to the Employment Agreement (the "Agreement"), dated as of January 1, 2000, between THE ESTEE LAUDER COMPANIES INC., a Delaware corporation (the "Company"), and FRED H. LANGHAMMER, a resident of Scarsdale, New York (the "Executive")
WHEREAS, the Executive and the Company are parties to the Agreement; and
WHEREAS, section 5 (c) of the Agreement provides for the Company to make five annual premium payments which in the aggregate shall total approximately $26,634,000 to a policy of the life of the Executive and to enter into a split dollar life insurance agreement with the owner of such policy;
WHEREAS, Frank Theummler and Alaska Trust Company, as Trustees of the Langhammer 2000 Insurance Trust, u/a/d December 19, 2000 (the "Trust") acquired from American General Life Insurance Company a life insurance policy on the life of the Executive and his spouse, Policy Number VL1005095L, dated December 26, 2000 (the "Policy");
WHEREAS, the Trust, and the Company entered into a Split Dollar Life Insurance Agreement, dated as of December 26th, 2000 (the "Split Dollar Agreement");
WHEREAS the Split Dollar Agreement provides, inter alia, for certain borrowings by the Trust and recovery by the Company of its actual premium payments;
WHEREAS, the arrangement was premised on the understanding of the parties as to the federal income tax consequences of the Split Dollar Agreement;
WHEREAS, subsequent to the purchase of the Policy the Internal Revenue Service issues Notice 2000-10, which may provide for different tax consequences to the Split Dollar Agreement, but the application of which to the Policy in not now certain.
WHEREAS, the Executive and the Company wish to define their rights in the event that the tax treatment of the Split Dollar Agreement is not as originally anticipated; and
WHEREAS, THE Compensation Committee of the Board of Directors of the Company has approved the terms of this Amendment;
NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and obligations hereinafter set forth, the parties hereto, intending to be legally bound, hereby agree to amend the Agreement as follows:
Subsection ( c) of Section 5 of the Agreement is hereby amended by adding at the end thereof the following:
"(iii) In the event that the Executive notifies the Company that, in the opinion of the Executive's legal counsel, which counsel is reasonably acceptable to the Company, it is likely as a result of the arrangements under the Split Dollar Agreement that either (A) the Executive or the Trust will be treated as receiving an interest-free loan from the Company, or (B) the Executive or the Trust will be deemed to be taxable on accretions in the cash value of the Policy, either at the time such accretions occur or upon the repayment to the Company of its premium payments, then the Company and the Executive shall negotiate in good faith to provide the Executive, in a form reasonably acceptable to the Executive, an economic benefit substantially equivalent to that which would have been provided by operation of the Split Dollar Agreement under the tax principles set forth in the letter dated September 6, 2000 from George G. Daggett of Arthur Andersen, LLP to Susan M. Mosoff of the Company."
Except as provided above, all other terms and conditions of the Agreement shall remain the same.
This Amendment may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment as of the date first above written.
THE ESTEE LAUDER COMPANIES INC.
By: /s/ ANDREW J. CAVANAUGH
----------------------------------------
Name: Andrew J. Cavanaugh
Title: Senior Vice President -
Global Human Resources
/s/ FRED H. LANGHAMMER
--------------------------------------------
Fred H. Langhammer
|
THIS AGREEMENT ("Agreement"), dated as of July 1, 2001, between THE ESTEE LAUDER COMPANIES INC., a Delaware corporation (the "Company"), and DANIEL J. BRESTLE, a resident of Wycoff, New Jersey (the "Executive" or "you"),
WHEREAS, the Company and its subsidiaries are principally engaged in the business of manufacturing, marketing and selling skin care, makeup, fragrance and hair care products and related services (the "Business"); and
WHEREAS, the Company desires to continue to retain the services of the Executive, and to appoint him as Group President; and
WHEREAS, the Compensation Committee of the Board of Directors of the Company (the "Compensation Committee") and the Stock Plan Subcommittee of the Compensation Committee have approved the terms of this Agreement;
NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and obligations hereinafter set forth, the parties hereto, intending to be legally bound, hereby agree as follows:
1. EMPLOYMENT TERM.
The Company hereby agrees to employ the Executive, and the Executive hereby agrees to enter into employment, as Group President of the Company for the period commencing on July 1, 2001 and ending June 30, 2004 unless terminated sooner pursuant to Section 6 hereof (the "Term of Employment"). The twelve-month period commencing on July 1, 2001 shall be the "First Contract Year" hereunder, and subsequent twelve-month periods shall be subsequent Contract Years.
2. DUTIES AND EXTENT OF SERVICES.
(a) During the Term of Employment, the Executive shall serve as Group President of the Company, and, in such capacity, he shall serve as the senior-most executive responsible for one or more of the Company's brands and/or business units as he may be assigned from time to time. In such capacity, he shall render such executive, managerial, administrative and other services as customarily are associated with and incident to such positions, and as the Company may, from time to time, reasonably require of him consistent with such positions.
(b) The Executive shall also hold such other positions and executive offices of the Company and/or of any of the Company's subsidiaries or affiliates as may from time to time
be agreed by the Executive or assigned by the Chief Executive Officer of the Company, the Chairman of the Board of Directors of the Company or the Board of Directors of the Company, provided that each such position shall be commensurate with the Executive's standing in the business community as Group President. The Executive shall not be entitled to any compensation other than the compensation provided for herein for serving during the Term of Employment in any other office or position of the Company or any of its subsidiaries or affiliates, unless the Board of Directors of the Company or the appropriate committee thereof shall specifically approve such additional compensation.
(c) The Executive shall be a full-time employee of the Company and shall exclusively devote all his business time and efforts faithfully and competently to the Company and shall diligently perform to the best of his ability all of the duties required of him as Group President, and in the other positions or offices of the Company or its subsidiaries or affiliates assigned to him hereunder. Notwithstanding the foregoing provisions of this section, the Executive may serve as a non-management director of such business corporations (or in a like capacity in other for-profit or not-for-profit organizations) as the Board of Directors, Chairman of the Board or Chief Executive Officer of the Company may approve, such approval not to be unreasonably withheld.
3. (a) BASE SALARY. As compensation for all services to be rendered pursuant to this Agreement and as payment for the rights and interests granted by Executive hereunder, the Company shall pay or cause any of its subsidiaries to pay the Executive a base salary of $83,333.33 per month (which equates to $1,000,000 per annum) (the "Base Salary"). All amounts of Base Salary provided for hereunder shall be payable in accordance with the regular payroll policies of the Company in effect from time to time.
(b) INCENTIVE BONUS COMPENSATION. The Compensation Committee has established for the Executive annual opportunities (I.E., the maximum bonus that may be awarded in respect of each fiscal year of the Company) under the Company's Executive Annual Incentive Plan or any subsequent Bonus Plan for executives that is approved by the stockholders of the Company (the "Bonus Plan") equal to $1,300,000 in respect of the First Contract Year, $1,400,000 in respect of the Second Contract Year and $1,500,000 in respect of the Third Contract Year, subject to the terms and conditions of the Bonus Plan, which are incorporated herein by reference.
(c) DEFERRAL. The Executive may elect to defer payment of all
or any part of his incentive bonus compensation payable in accordance with
Section 3(b) hereof in respect of any Contract Year during the Term of
Employment, by giving to the Company written notice thereof, on or before March
31 of such Contract Year. Additionally, in the event that in respect of any
fiscal year of the Company any amount of Base Salary, any amount payable under
the Bonus Plan or any other amount payable to the Executive hereunder or
otherwise shall, either alone or in combination with other amounts payable
hereunder or otherwise, result in the payment by the Company of any amount that
shall not be currently deductible by it pursuant to the provisions of Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), or like or
successor provisions (a "Non-Deductible Amount"), the Company may elect
to defer the payment of the Non-Deductible Amount. Any amounts, so deferred, either by election of the Executive or by election of the Company shall be credited to a bookkeeping account in the name of the Executive as of the date scheduled for payment hereunder. Such amounts shall be credited with interest as of each June 30 during the term of deferral, compounded annually, at a rate per annum, equal to the annual rate of interest announced by Citibank, N.A. in New York, New York as its base rate in effect on such June 30, but in no event shall such rate exceed 9%. The entire amount credited to such bookkeeping account shall be paid to the Executive on a date to be chosen by the Company, but in no event later than 90 days after the termination of the Executive's employment with the Company, unless the Executive requests prior to termination of his employment from the Company to continue the deferral of such payments until a later date or dates and the Company agrees to such request. The Company, in its sole discretion, may provide an investment facility for all or a portion of such deferred amounts, but shall not be required to do so.
4 (a) STOCK OPTIONS. Beginning with the First Contract Year, the Compensation Committee approved the grant to the Executive of options to purchase 100,000 shares of the Company's Class A Common Stock under the Fiscal 1999 Share Incentive Plan or successor plan (the "Share Incentive Plan") in respect of each Contract Year, subject to the terms and conditions of the Share Incentive Plan (or applicable successor plan), which are incorporated herein by reference. The terms of the options shall be set forth in a separate grant letter approved by the Compensation Committee or the Stock Plan Subcommittee.
(b) CERTAIN CONDITIONS. Executive acknowledges and agrees that any grant of Stock Options otherwise provided for in this Section 4 shall be effective as provided herein only to the extent permitted by the Share Incentive Plan, and this Agreement shall not obligate the Company to adopt any successor plan providing for the grant of Stock Units or Stock Options (or substantially similar benefits).
5. BENEFITS.
(a) STANDARD BENEFITS. During the Term of Employment, the Executive shall be entitled to (i) participate in any and all benefit programs and arrangements now in effect and hereinafter adopted and made generally available by the Company to its senior officers, including but not limited to the Estee Lauder Companies 401(k) Plan (the "401(k) Plan"), the Estee Lauder Inc. Retirement Growth Account Plan (the "Qualified Plan"), the related Estee Lauder Inc. Benefit Restoration Plan (the "Non-Qualified Plan"), contributory and non-contributory Company welfare and benefit plans, disability plans, and medical, death benefit and life insurance plans for which the Executive shall be eligible, or may become eligible during the Term of Employment; (ii) participate in the Company's automobile program now in effect and hereinafter adopted and generally made available by the Company to its senior officers; and (iii) paid vacations during each year of the Term of Employment in accordance with the policies and procedures of the Company as in effect from time to time for its senior officers.
(b) PERQUISITE REIMBURSEMENT. The Company shall reimburse the Executive the actual expense incurred by him in connection with his professional standing, in accordance with the guidelines set out in the Company's executive perquisite program. In no event shall the gross amount of such reimbursements be greater than $15,000 in respect of any fiscal year during the Term of Employment.
(c) EXPENSES. The Company agrees to reimburse the Executive for all reasonable and necessary travel (including first class air fare), business entertainment and other business out-of-pocket expenses incurred or expended by him in connection with the performance of his duties hereunder upon presentation of proper expense statements or vouchers or such other supporting information as the Company may reasonably require of the Executive.
6. TERMINATION.
(a) PERMANENT DISABILITY. In the event of the "permanent disability" (as hereinafter defined) of the Executive during the Term of Employment, the Company shall have the right, upon written notice to the Executive, to terminate the Executive's employment hereunder, effective upon the giving of such notice (or such later date as shall be specified in such notice). In the event of such termination, the Company shall have no further obligations hereunder, except that the Executive shall be entitled (i) to receive any amounts or benefits to which the Executive may otherwise have been entitled prior to the effective date of termination; (ii) to be paid his Base Salary under Section 3(a) hereof for a period of one (1) year from the effective date of termination; PROVIDED, HOWEVER, that the Company shall only be required to pay that amount of the Executive's Base Salary which shall not be covered by pension benefits or long-term disability payments, if any, to the Executive under any Company plan or arrangement and (iii) to receive a pro-rata portion of the annual bonus that the Executive would have been entitled to receive had he remained in employment through the end of the Contract Year during which the termination due to permanent disability occurred. In addition, upon termination for permanent disability, the Executive shall continue to participate in any and all pension, insurance and other benefit plans and programs of the Company during the period the Executive is continuing to receive his Base Salary in accordance with this Section 6(a). Thereafter, the Executive's rights to participate in such programs and plans, or to receive similar coverage, if any, shall be as determined under such programs; PROVIDED, HOWEVER, that, except as otherwise provided in this Section 6(a), the Company will have no further obligations under Sections 3(b) and 4 hereof. For purposes of this Section 6(a), "permanent disability" means any disability as defined under the Company's applicable disability insurance policy or, if no such policy is available, any physical or mental disability or incapacity that renders the Executive incapable of performing the services required of him in accordance with his obligations under Section 2 hereof for a period of six (6) consecutive months or for shorter periods aggregating six (6) months during any twelve-month period.
(b) DEATH. In the event of the death of the Executive during
the Term of Employment, this Agreement shall automatically terminate. In the
event of such termination the Company shall have no further obligations
hereunder, except to pay the Executive's beneficiary or legal representative
(i) for a period of one (1) year from the date of his death, the Executive's
Base Salary as established under Section 3(a) hereof as of the date of his death; (ii) bonus compensation earned under Section 3(b) hereof that relates to any Contract Year ending prior to the date of his death; and (iii) any other amounts to which the Executive otherwise would have been entitled to hereunder prior to the date of his death; PROVIDED, HOWEVER, that, except as otherwise provided in this Section 6(b), the Company will have no further obligations under Sections 3(b) and 4 hereof.
(c) TERMINATION WITHOUT CAUSE. The Company shall have the
right, upon sixty (60) days' prior written notice given to the Executive, to
terminate the Executive's employment for any reason whatsoever. In the event of
such termination, for a period ending on the latest to occur of (x) a date one
(1) year from the effective date of termination, (y) June 30, 2004, or (z) the
conclusion of a severance period consistent with Company policy (which in no
event will exceed two years), the Executive shall be entitled as damages to (i)
receive his Base Salary as established under Section 3(a) hereof; and (ii)
participate in all pension, insurance and other benefit plans, programs or
arrangements, on terms identical to those applicable to full-term senior
officers of the Company. In addition, he shall receive a one-time payment equal
to fifty percent (50%) of the average of actual annual bonuses paid or payable
to the Executive during the Term of Employment in accordance with Section
3(b)(ii) hereof, or, if such termination occurs prior to the payment of any
bonus hereunder, the sum of $650,000. Except as otherwise provided in this
Section 6(c), the Company will have no further obligations under Sections 3(b)
and 4 hereof. In the event of termination pursuant to this Section 6(c), the
Executive shall not be required to mitigate his damages hereunder.
(d) CAUSE. The Company shall have the right, upon written notice to the Executive, to terminate the Executive's employment under this Agreement for "Cause" (as hereinafter defined), effective upon the giving of such notice (or such later date as shall be specified in such notice), and the Company shall have no further obligations hereunder, except to pay the Executive any amounts otherwise payable pursuant to Section 3 hereof and provide the Executive any benefits to which the Executive may have been otherwise entitled prorated to the effective date of termination. The Executive's right to participate in any of the Company's retirement, insurance and other benefit plans and programs shall be as determined under such programs and plans; PROVIDED, HOWEVER, that, except as otherwise provided in this Section 6(d), the Company will have no further obligations under Sections 3(b) and 4 hereof.
For purposes of this Agreement, "Cause" means:
(i) fraud, embezzlement or gross insubordination on the part of the Executive or material breach by the Executive of his obligations under Section 7 or 8 hereof;
(ii) conviction of, or the entry of a plea of NOLO CONTENDERE by the Executive for, any felony;
(iii) a material breach of, or the willful failure or refusal by the Executive to perform and discharge, his duties, responsibilities or obligations under this Agreement (other than under Sections 7 and 8 hereof, which shall be governed by clause (i)
above, and other than by reason of disability or death) that is not corrected within thirty (30) days following written notice thereof to the Executive by the Company, such notice to state with specificity the nature of the breach, failure or refusal; PROVIDED that if such breach, failure or refusal is capable of correction but cannot reasonably be corrected within thirty (30) days of written notice thereof, correction shall be commenced by the Executive within such period and may be completed within a reasonable period thereafter; or
(iv) any act of moral turpitude or willful misconduct by the Executive which (A) is intended to result in substantial personal enrichment of the Executive at the expense of the Company or any of its subsidiaries or affiliates or (B) has a material adverse impact on the business or reputation of the Company or any of its subsidiaries or affiliates (such determination to be made by the Company's Board of Directors in its reasonable judgment).
(d) TERMINATION BY EXECUTIVE. The Executive shall have the right, exercisable at any time during the Term of Employment, to terminate his employment for any reason whatsoever, upon six (6) months' prior written notice to the Company. Upon such termination, the Company shall have no further obligations hereunder other than to pay the executive his accrued benefits through the date of such termination.
(e) NON-RENEWAL. In the event the Company does not offer the Executive the renewal of the Term of Employment on the basis of terms no less favorable than those pending at the time of the conclusion of the Term, the Executive shall be entitled to a severance arrangement providing Base Salary and contribution of certain benefits for a period consistent with Company policy at that time (which in no event will exceed two years).
(f) EFFECT OF TERMINATION. Upon the termination of the Executive's employment hereunder for any reason, the Company shall have no further obligations hereunder, except as otherwise provided herein. The Executive, however, shall continue to have the obligations provided for in Sections 7 and 8 hereof. Furthermore, upon such termination, the Executive shall be deemed to have resigned immediately from all offices and directorships held by him in the Company or any of its subsidiaries.
7. CONFIDENTIALITY; OWNERSHIP.
(a) The Executive agrees that he shall forever keep secret and retain in strictest confidence and not divulge, disclose, discuss, copy or otherwise use or suffer to be used in any manner, except in connection with the Business of the Company, its subsidiaries or affiliates and any other business or proposed business of the Company or any of its subsidiaries or affiliates, any "Protected Information" in any "Unauthorized" manner or for any "Unauthorized" purpose (as such terms are hereinafter defined).
(i) "Protected Information" means trade secrets, confidential or proprietary information and all other knowledge, know-how, information, documents or materials owned, developed or possessed by the Company or any of its subsidiaries or affiliates, whether in tangible or intangible form, pertaining to the Business or any other business or
proposed business of the Company or any of its subsidiaries or affiliates, including, but not limited to, research and development, operations, systems, data bases, computer programs and software, designs, models, operating procedures, knowledge of the organization, products (including prices, costs, sales or content), processes, formulas, techniques, machinery, contracts, financial information or measures, business methods, business plans, details of consultant contracts, new personnel hiring plans, business acquisition plans, customer lists, business relationships and other information owned, developed or possessed by the Company or its subsidiaries or affiliates; PROVIDED that Protected Information shall not include information that becomes generally known to the public or the trade without violation of this Section 7.
(ii) "Unauthorized" means: (A) in contravention of the
policies or procedures of the Company or any of its subsidiaries or affiliates;
(B) otherwise inconsistent with the measures taken by the Company or any of its
subsidiaries or affiliates to protect their interests in any Protected
Information; (C) in contravention of any lawful instruction or directive, either
written or oral, of an employee of the Company or any of its subsidiaries or
affiliates empowered to issue such instruction or directive; or (D) in
contravention of any duty existing under law or contract. Notwithstanding
anything to the contrary contained in this Section 7, the Executive may disclose
any Protected Information to the extent required by court order or decree or by
the rules and regulations of a governmental agency or as otherwise required by
law or to his legal counsel and, in connection with a determination under
Section 6(h), to accounting experts; PROVIDED that the Executive shall provide
the Company with prompt notice of such required disclosure in advance thereof so
that the Company may seek an appropriate protective order in respect of such
required disclosure.
(b) The Executive acknowledges that all developments, including, without limitation, inventions (patentable or otherwise), discoveries, formulas, improvements, patents, trade secrets, designs, reports, computer software, flow charts and diagrams, procedures, data, documentation, ideas and writings and applications thereof relating to the Business or any business or planned business of the Company or any of its subsidiaries or affiliates that, alone or jointly with others, the Executive may conceive, create, make, develop, reduce to practice or acquire during the Term of Employment (collectively, the "Developments") are works made for hire and shall remain the sole and exclusive property of the Company. The Executive hereby assigns to the Company, in consideration of the payments set forth in Section 3(a) hereof, all of his right, title and interest in and to all such Developments. The Executive shall promptly and fully disclose all future material Developments to the Board of Directors of the Company and, at any time upon request and at the expense of the Company, shall execute, acknowledge and deliver to the Company all instruments that the Company shall prepare, give evidence and take all other actions that are necessary or desirable in the reasonable opinion of the Company to enable the Company to file and prosecute applications for and to acquire, maintain and enforce all letters patent and trademark registrations or copyrights covering the Developments in all countries in which the same are deemed necessary by the Company. All memoranda, notes, lists, drawings, records, files, computer tapes, programs, software, source and programming narratives and other documentation (and all copies thereof) made or compiled by the Executive or made available to the Executive concerning the Developments or otherwise concerning the Business or planned business of the Company or any of its subsidiaries or affiliates shall be the property of
the Company or such subsidiaries or affiliates and shall be delivered to the Company or such subsidiaries or affiliates promptly upon the expiration or termination of the Term of Employment.
(c) The provisions of this Section 7 shall, without any limitation as to time, survive the expiration or termination of the Executive's employment hereunder, irrespective of the reason for any termination.
8. COVENANT NOT TO COMPETE. Subject to the last sentence of this Section 8, the Executive agrees that during the Term of Employment and for a period of two (2) years commencing upon the expiration or termination of the Executive's employment hereunder (the "Non-Compete Period"), the Executive shall not, directly or indirectly, without the prior written consent of the Company:
(a) solicit, entice, persuade or induce any employee, consultant, agent or independent contractor of the Company or of any of its subsidiaries or affiliates to terminate his, her or its employment with the Company or such subsidiary or affiliate, to become employed by any person, firm or corporation other than the Company or such subsidiary or affiliate or approach any such employee, consultant, agent or independent contractor for any of the foregoing purposes, or authorize or assist in the taking of any such actions by any third party (for purposes of this Section 8 (a), the terms "employee," "consultant," "agent" and "independent contractor" shall include any persons with such status at any time during the six (6) months preceding any solicitation in question); or
(b) directly or indirectly engage, participate, or make any financial investment in, or become employed by or render consulting, advisory or other services to or for any person, firm, corporation or other business enterprise, wherever located, which is engaged, directly or indirectly, in competition with the Business or any business of the Company or any of its subsidiaries or affiliates as conducted or any business proposed to be conducted at the time of the expiration or termination of the Executive's employment hereunder; PROVIDED, however, that nothing in this Section 8(b) shall be construed to preclude the Executive from making any investments in the securities of any business enterprise whether or not engaged in competition with the Company or any of its subsidiaries or affiliates, to the extent that such securities are actively traded on a national securities exchange or in the over-the-counter market in the United States or on any foreign securities exchange and represent, at the time of acquisition, not more than 3% of the aggregate voting power of such business enterprise.
Notwithstanding the foregoing, the Executive shall not be subject to the terms and provisions of paragraph (b) of this Section 8 if the Term of Employment is terminated pursuant to Section 6(c) or 6(f) hereof.
9. SPECIFIC PERFORMANCE. The Executive acknowledges that the services to be rendered by the Executive are of a special, unique and extraordinary character and, in connection with such services, the Executive will have access to confidential information vital to the Company's Business and the other current or planned businesses of it and its subsidiaries and
affiliates. By reason of this, the Executive consents and agrees that if the Executive violates any of the provisions of Sections 7 or 8 hereof, the Company and its subsidiaries and affiliates would sustain irreparable injury and that monetary damages would not provide adequate remedy to the Company and that the Company shall be entitled to have Section 7 or 8 hereof specifically enforced by any court having equity jurisdiction. Nothing contained herein shall be construed as prohibiting the Company or any of its subsidiaries or affiliates from pursuing any other remedies available to it or them for such breach or threatened breach, including the recovery of damages from the Executive.
10. DEDUCTIONS AND WITHHOLDING. The Executive agrees that the Company or its subsidiaries or affiliates, as applicable, shall withhold from any and all compensation paid to and required to be paid to the Executive pursuant to this Agreement, all Federal, state, local and/or other taxes which the Company determines are required to be withheld in accordance with applicable statutes or regulations from time to time in effect and all amounts required to be deducted in respect of the Executive's coverage under applicable employee benefit plans. For purposes of this Agreement and calculations hereunder, all such deductions and withholdings shall be deemed to have been paid to and received by the Executive.
11. ENTIRE AGREEMENT. Except for the Fiscal 1999 Share Incentive Plan, the Executive's outstanding stock option agreements, the Executive Annual Incentive Plan, the Thrift Plan, [the split-dollar life insurance arrangement between the Company and the Executive], the Qualified Plan and the Non-Qualified Plan and applicable successor plans or agreements, this Agreement embodies the entire agreement of the parties with respect to the Executive's employment, compensation, perquisites and related items and supersedes any other prior oral or written agreements, arrangements or understandings between the Executive and the Company or any of its subsidiaries or affiliates, and any such prior agreements, arrangements or understandings are hereby terminated and of no further effect. This Agreement may not be changed or terminated orally but only by an agreement in writing signed by the parties hereto.
12. WAIVER. The waiver by the Company of a breach of any provision of this Agreement by the Executive shall not operate or be construed as a waiver of any subsequent breach by him. The waiver by the Executive of a breach of any provision of this Agreement by the Company shall not operate or be construed as a waiver of any subsequent breach by the Company.
13. GOVERNING LAW; JURISDICTION.
(a) This Agreement shall be subject to, and governed by, the laws of the State of New York applicable to contracts made and to be performed therein.
(b) Any action to enforce any of the provisions of this Agreement shall be brought in a court of the State of New York located in the Borough of Manhattan of the City of New York or in a Federal court located within the Southern District of New York. The parties consent to the jurisdiction of such courts and to the service of process in any manner provided by New York law. Each party irrevocably waives any objection which it may now or hereafter have
to the laying of the venue of any such suit, action or proceeding brought in such court and any claim that such suit, action or proceeding brought in such court has been brought in an inconvenient forum and agrees that service of process in accordance with the foregoing sentences shall be deemed in every respect effective and valid personal service of process upon such party.
14. ASSIGNABILITY. The obligations of the Executive may not be delegated and, except with respect to the designation of beneficiaries in connection with any of the benefits payable to the Executive hereunder, the Executive may not, without the Company's written consent thereto, assign, transfer, convey, pledge, encumber, hypothecate or otherwise dispose of this Agreement or any interest herein. Any such attempted delegation or disposition shall be null and void and without effect. The Company and the Executive agree that this Agreement and all of the Company's rights and obligations hereunder may be assigned or transferred by the Company to and shall be assumed by and be binding upon any successor to the Company. The Company shall require any successor by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place. The term "successor" means, with respect to the Company or any of its subsidiaries, any corporation or other business entity which, by merger, consolidation, purchase of the assets or otherwise acquires all or a majority of the operating assets or business of the Company.
15. SEVERABILITY. If any provision of this Agreement or any part thereof, including, without limitation, Sections 7 and 8 hereof, as applied to either party or to any circumstances shall be adjudged by a court of competent jurisdiction to be void or unenforceable, the same shall in no way affect any other provision of this Agreement or remaining part thereof, or the validity or enforceability of this Agreement, which shall be given full effect without regard to the invalid or unenforceable part thereof.
If any court construes any of the provisions of Section 7 or 8 hereof, or any part thereof, to be unreasonable because of the duration of such provision or the geographic scope thereof, such court may reduce the duration or restrict or redefine the geographic scope of such provision and enforce such provision as so reduced, restricted or redefined.
16. NOTICES. All notices to the Company or the Executive permitted or required hereunder shall be in writing and shall be delivered personally, by telecopier or by courier service providing for next-day delivery or sent by registered or certified mail, return receipt requested, to the following addresses:
The Company:
The Estee Lauder Companies Inc.
767 Fifth Avenue
New York, New York 10153
Attn: General Counsel
Tel: (212) 572-3980
Fax: (212) 572-3989
The Executive:
Daniel J. Brestle
[Address]
Either party may change the address to which notices shall be sent by sending written notice of such change of address to the other party. Any such notice shall be deemed given, if delivered personally, upon receipt; if telecopied, when telecopied; if sent by courier service providing for next-day delivery, the next business day following deposit with such courier service; and if sent by certified or registered mail, three days after deposit (postage prepaid) with the U.S. mail service.
17. NO CONFLICTS. The Executive hereby represents and warrants to the Company that his execution, delivery and performance of this Agreement and any other agreement to be delivered pursuant to this Agreement will not (i) require the consent, approval or action of any other person or (ii) violate, conflict with or result in the breach of any of the terms of, or constitute (or with notice or lapse of time or both, constitute) a default under, any agreement, arrangement or understanding with respect to the Executive's employment to which the Executive is a party or by which the Executive is bound or subject. The Executive hereby agrees to indemnify and hold harmless the Company and its directors, officers, employees, agents, representatives and affiliates (and such affiliates' directors, officers, employees, agents and representatives) from and against any and all losses, liabilities or claims (including interest, penalties and reasonable attorneys' fees, disbursements and related charges) based upon or arising out of the Executive's breach of any of the foregoing representations and warranties.
18. PARAGRAPH HEADINGS. The paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.
19. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first written above.
THE ESTEE LAUDER COMPANIES INC.
By: /s/ Andrew J. Cavanaugh
------------------------------------------
Name: Andrew J. Cavanaugh
Title: Senior Vice President - Global
Human Resources
/s/ Daniel J. Brestle
----------------------------------------------
Daniel J. Brestle
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[Form of Deferred Compensation Agreement (interest-based)]
[Date]
[Name of Director]
[Address]
Dear [Director]:
You have elected to defer receipt of certain amounts which will otherwise become payable to you by The Estee Lauder Companies Inc. (the "Company") in the future in connection with your service on the Board of Directors of the Company and certain Committees of that Board. This letter sets forth the terms of the deferral facility.
1. This agreement shall cover all amounts otherwise payable to you in cash by the Company in connection with your service as a member of the Board of Directors of the Company, and meeting and chairmanship fees otherwise payable in connection with your service on certain Committees of that Board during the period covered by this agreement (the "Deferred Payments"). Deferred Payments shall not include stock-based compensation paid or payable to you (plus the reimbursement for taxes related to the grant of 2,000 shares to you) or reimbursement for expenses incurred in connection with your Company activities.
2. The Company shall establish a Deferred Payment Account in your name, and shall credit to such Account the amounts otherwise payable to you in cash on the date such cash payment would have been made had it not been deferred.
3. (a) Amounts accrued from time to time in the Deferred Payment Account shall additionally be credited with interest, compounded annually, as of December 31, [year] and each December 31 thereafter until all Deferred Payments and accrued interest credited to the Deferred Payment Account shall have been paid in accordance with the terms of this letter agreement. Appropriate pro-ration shall be made for part year interest credits.
(b) The rate of interest credited from time to time pursuant to this paragraph 3 shall be the Citibank base rate in effect as of the date of such credit.
4. Subject to the terms of paragraph 5, below, the amounts credited to the Deferred Payment Account shall be paid in a lump sum, as of the earlier to occur of the first January 1st after the last date of your service as a member of the Board of Directors of the Company.
5. In the event of your death prior to the payment to you of all amounts then credited to the Deferred Payment Account, amounts then unpaid, including interest as set out at paragraph 3, above, from the preceding December 31 to the date of payment, shall be paid to your executor or administrator within ninety days of the date of your death.
6. This agreement shall continue in full force and effect unless it shall be terminated, by you or by the Company, by either party giving written notice of such termination. If such notice is given, termination shall be effective as of the first January 1 that occurs more than ninety (90) days after the date of such notice. Notwithstanding the giving of such notice, amounts deferred prior to the effective date of termination shall be paid at the time and in the manner set forth in paragraph 3 above.
7. Nothing in this letter agreement shall be deemed to create a trust or segregated asset account of any nature, and no money or other thing of value shall be separately held by the Company in connection with its obligation to make Deferred Payments hereunder. The attempt by any person to anticipate, hypothecate or otherwise receive value in respect of such obligation prior to the date scheduled for the payment of Deferred Payments under the terms of this letter agreement shall be null and void and of no force or effect.
Please indicate your acknowledgment of and agreement to all of the foregoing by signing the enclosed copy of this letter and returning it to [Paul E. Konney, Senior Vice President, General Counsel and Secretary] of the Company at the address above.
Very truly yours,
THE ESTEE LAUDER COMPANIES INC.
Title:
ACKNOWLEDGED AND AGREED TO:
[Form of Deferred Compensation Agreement (stock-based)]
[DATE]
[Name of Director]
[Address]
Dear [Director]:
You have elected to defer receipt of certain amounts which will otherwise become payable to you by The Estee Lauder Companies Inc. (the "Company") in connection with your service on the Board of Directors of the Company and one or more Committees of that Board and requested that such deferrals be measured by reference to the Company's Class A Common Stock. This letter sets forth the terms of the deferral facility.
1. This agreement shall cover all amounts otherwise payable to you in cash by the Company in connection with your service as a member of the Board of Directors of the Company, and meeting and chairmanship fees otherwise payable in connection with your service on the Company's Board and any Committees of that Board (the "Deferred Payments"). Deferred Payments shall not include stock-based compensation paid or payable to you (plus the reimbursement for taxes related to the grant of 2,000 shares to you) or reimbursement for expenses incurred in connection with your Company activities.
2. The Company shall establish a Stock Unit Account in your name, and shall credit to such Account that number of units equal to (a) the amount of a Deferred Payment otherwise payable to you in cash divided by (b) the closing price per share of the Class A Common Stock on the New York Stock Exchange the date such payment would have been made had it not been deferred. Until full payment has been made to you in accordance with paragraph 3, on each date that a dividend is paid on the Class A Common Stock, the Company shall credit to the Stock Unit Account a number of units equal to (x) the aggregate dividend payable on a number of shares equal to the number of units credited to the Stock Unit Account as of such payment date divided by (y) the closing price per share of the Class A Common Stock on the New York Stock Exchange on such payment date.
3. Subject to the terms of paragraph 4, below, the amounts credited to the Stock Unit Account shall be paid in a lump sum in cash, as of the first January 1st after the last date of your service as a member of the Board of Directors of the Company. The value of each unit shall be equal to the average closing price of the Class A Common Stock on the New York Stock Exchange for the 20 trading days next preceding the payment date. If payout of the Stock Unit Account shall
be made after a record date for dividends on the Class A Common Stock but before the payment date for such dividend, then the dividend equivalent amount that would have been credited to the Stock Unit Account shall be paid to you in cash.
4. In the event of your death prior to the payment to you of all amounts then credited to the Stock Unit Account, all such remaining amounts shall be paid to your executor or administrator within ninety days after the date that such person shall be duly qualified in such capacity. For purposes of this paragraph, the units shall be valued and dividend equivalents shall be handled, as provided in paragraph 3 above.
5. This agreement shall continue in full force and effect unless it shall be terminated, by you or by the Company, by either party giving written notice of such termination. If such notice is given, termination shall be effective as of the first January 1 that occurs more than ninety (90) days after the date of such notice. Notwithstanding the giving of such notice, amounts deferred prior to the effective date of termination shall be paid at the time and in the manner set forth in paragraph 3 or 4, above.
6. If any changes or adjustments are made to the outstanding Class A Common Stock then corresponding adjustments shall be made to units in the Stock Unit Account as if the units were governed by the Company's Fiscal 1999 Share Incentive Plan or as authorized by the Board of Directors of the Corporation.
7. Nothing in this letter agreement shall be deemed to create a trust or segregated asset account of any nature, and no money or other thing of value shall be separately held by the Company in connection with its obligation to make Deferred Payments hereunder. The attempt by any person to anticipate, hypothecate or otherwise receive value in respect of such obligation prior to the date scheduled for the payment of Deferred Payments under the terms of this letter agreement shall be null and void and of no force or effect.
[remainder of page intentionally left blank]
Please indicate your acknowledgment of and agreement to all of the foregoing by signing the enclosed copy of this letter and returning it to [Paul E. Konney, Senior Vice President, General Counsel and Secretary] of the Company at the address above.
Very truly yours,
THE ESTEE LAUDER COMPANIES INC.
Title:
ACKNOWLEDGED AND AGREED TO:
THE ESTEE LAUDER COMPANIES INC.
SIGNIFICANT SUBSIDIARIES
All significant subsidiaries are wholly-owned by The Estee Lauder Companies Inc. and/or one or more of its wholly-owned subsidiaries.
Jurisdiction
Name in which Organized
---------------------------------- -----------------------------
Aramis Inc. Delaware
Clinique Laboratories, Inc. Delaware
Estee Lauder Europe, Inc. Delaware
Estee Lauder Inc. Delaware
Estee Lauder International, Inc. Delaware
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CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statements File Nos. 33-99554, 333-39237, 333-66851, 333-85947 and 333-57520.
ARTHUR ANDERSEN LLP
New York, New York
September 17, 2001
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Leonard A. Lauder, Fred H. Langhammer, Richard W. Kunes and Paul E. Konney, and each of them, such person's true and lawful attorneys-in-fact and agents, with full power of substitution and revocation, for such person and in such person's name, place and stead, in any and all capacities to sign the Annual Report on Form 10-K for the fiscal year ended June 30, 2001 of The Estee Lauder Companies Inc. and any and all amendments thereto, and to file the same with all exhibits thereto, and the other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Signature Title Date
--------- ----- ----
/s/ FRED H. LANGHAMMER Chief Executive Officer September 17, 2001
--------------------------------- and Director
Fred H. Langhammer (Principal Executive Officer)
/s/ LEONARD A. LAUDER Chairman of the Board September 17, 2001
---------------------------------
Leonard A. Lauder
/s/ CHARLENE BARSHEFSKY Director September 17, 2001
---------------------------------
Charlene Barshefsky
/s/ LYNN FORESTER Director September 17, 2001
---------------------------------
Lynn Forester
/s/ IRVINE O. HOCKADAY, JR. Director September 17, 2001
---------------------------------
Irvine O. Hockaday, Jr.
/s/ RONALD S. LAUDER Director September 17, 2001
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Ronald S. Lauder
/s/ WILLIAM P. LAUDER Director September 17, 2001
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William P. Lauder
/s/ RICHARD D. PARSONS Director September 17, 2001
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Richard D. Parsons
/s/ MARSHALL ROSE Director September 17, 2001
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Marshall Rose
/s/ FAYE WATTLETON Director September 17, 2001
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Faye Wattleton
/s/ RICHARD W. KUNES Senior Vice President September 17, 2001
--------------------------------- and Chief Financial
Richard W. Kunes Officer (Principal Financial and
Accounting Officer)
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