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CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 13
CONFORMED PERIOD OF REPORT: 20020630
FILED AS OF DATE: 20020917
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ESTEE LAUDER COMPANIES INC
CENTRAL INDEX KEY: 0001001250
STANDARD INDUSTRIAL CLASSIFICATION: PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS [2844]
IRS NUMBER: 112408943
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-14064
FILM NUMBER: 02766351
BUSINESS ADDRESS:
STREET 1: 767 FIFTH AVE
CITY: NEW YORK
STATE: NY
ZIP: 10153
BUSINESS PHONE: 2125724200
MAIL ADDRESS:
STREET 1: 767 FIFTH AVE
CITY: NEW YORK
STATE: NY
ZIP: 10153
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================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-K
(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, 2002 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 Identification No.)
incorporation or organization)
767 FIFTH AVENUE, NEW YORK, NEW YORK 10153
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 212-572-4200
----------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Class A Common Stock, $.01 par value New York Stock Exchange
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
non-affiliates of the registrant was approximately $3.34 billion at September
12, 2002. *
At September 12, 2002, 124,797,295 shares of the registrant's Class A Common
Stock, $.01 par value, and 108,412,533 shares of the registrant's Class B Common
Stock, $.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT WHERE INCORPORATED
Proxy Statement for Annual Meeting of Part III
Stockholders to be held October 30, 2002
* 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.
================================================================================
<PAGE>
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 130
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 market for
beauty products.
We are a pioneer in the cosmetics industry and believe we are a leader in the
industry due to the global recognition of our brand names, our leadership in
product innovation, our strong market position in key geographic markets and the
consistently high quality of our products. We sell our prestige products
principally through limited distribution channels to complement the images
associated with our brands. These channels, encompassing over 13,500 points of
sale, consist primarily of upscale department stores, specialty retailers,
upscale perfumeries and pharmacies and, to a lesser extent, freestanding
company-owned stores and spas, our own and authorized retailer web sites, stores
on cruise ships 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.
We also sell products at self-select outlets jane and prestige salons (Aveda
and Bumble and bumble).
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 12,
2002, shares of Class A Common Stock and Class B Common Stock having
approximately 91.2% 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 2002.
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 38% of our net sales in
fiscal 2002.
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 21% of our
net sales in fiscal 2002.
-1-
<PAGE>
HAIR CARE - Hair care products are offered mainly in salons and in
freestanding retail stores and include styling products, shampoos, conditioners
and finishing sprays. In fiscal 2002, hair care products accounted for
approximately 5% 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.
CLINIQUE - First introduced in 1968, Clinique skin care and makeup products
are all allergy tested and 100% fragrance free and have been designed to address
individual skin types and needs. The products are based on the research and
related expertise of leading dermatologists. Clinique skin care products are
generally marketed as part of the 3-Step System: Cleanse, Exfoliate, Moisturize.
Clinique also offers fragrances for men and women and a line of hair care
products.
ARAMIS - We pioneered the marketing of prestige men's grooming and skin
care products and fragrances with the introduction of Aramis products in 1964.
Aramis continues to offer one of the broadest lines of prestige men's products
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, in perfumeries 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 and ancillary products for men and
women.
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. jane products are
currently distributed only in the United States in the self-select distribution
channel.
-2-
<PAGE>
DONNA KARAN COSMETICS - In November 1997, we obtained the exclusive global
license to develop, market and distribute a line of fragrances and other
cosmetics under the Donna Karan New York and DKNY trademarks, including certain
products that were originally sold by The Donna Karan Company. We launched the
first DKNY women's fragrance in fiscal 2000 and the first DKNY men's fragrance
in fiscal 2001. Under this license, fragrances have been expanded to include
extensive lines of companion bath and body products.
AVEDA - We acquired the Aveda business in December 1997 and have since
acquired selected Aveda distributors and retail stores. Aveda, a prestige hair
care leader, is a manufacturer and marketer of plant-based hair care, skin care,
makeup and fragrance products. We sell Aveda products to third-party
distributors and prestige salons and spas, specialty retailers, 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.
KATE SPADE BEAUTY - In November 1999, we obtained exclusive worldwide
rights to the kate spade trademark and related trademarks for the manufacture,
marketing, distribution and sale of beauty products. During fiscal 2002, we
launched the first products, a distinctive and personal signature fragrance and
companion products.
In addition to the foregoing brands, we manufacture and sell Kiton and Toni Gard
products as a licensee.
DISTRIBUTION
We sell our products principally through limited distribution channels to
complement the images associated with our core brands. These channels include
more than 13,500 points of sale in over 130 countries and territories and
consist primarily of upscale department stores, specialty retailers, upscale
perfumeries and pharmacies and, to a lesser extent, freestanding company-owned
stores and spas, our own and authorized retailer web sites, stores on cruise
ships 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, and joint ventures in two
others, 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.
-3-
<PAGE>
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
12,600 points of sale, including mass merchandise stores, drug stores and
specialty stores. We principally sell Aveda products to third-party distributors
and prestige salons and spas, specialty retailers, and directly to consumers at
our own freestanding Aveda Environmental Lifestyle Stores and Aveda Institutes.
There are currently about 7,800 points of sale, primarily in the United States,
that sell Aveda products. Bumble and bumble products are principally sold to
approximately 1,400 independent salons, primarily in the United States.
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 387
single-brand, freestanding stores worldwide and expect that number to increase
moderately over the next several years.
We sell some of our products directly to consumers over the Internet through our
own web sites (Estee Lauder, Clinique, Origins, Bobbi Brown and M.A.C), and
through Gloss.com (Estee Lauder, Clinique, Prescriptives, Origins, M.A.C,
Bobbi Brown and Stila). Gloss.com is currently a joint venture in which we own a
controlling majority interest. Chanel, Inc. and Clarins (U.S.A.) Inc. became
partners in the venture in August 2000 and Chanel and Clarins products are also
available on the web site.
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 2002, 4.9% in fiscal 2001 and 4.3% in
fiscal 2000.
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.
For the fiscal year ended June 30, 2002, our three largest customers accounted
for 25% of our net sales. Individually no customer accounted for more than 10%
of our net sales during fiscal 2002. 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 fiscal 2001 and 2000,
respectively. 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.
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 purchase with purchase and gift 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 thirteen single-brand marketing sites, five of which have e-commerce
capabilities, and Gloss.com, the Company's majority-owned, multi-brand marketing
and e-commerce site.
-4-
<PAGE>
Most 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 $1,326.2 million, $1,255.3 million and $1,195.8 million for
fiscal 2002, 2001 and 2000, respectively. These amounts include expenses
relating to purchase with purchase and gift with purchase promotions that are
now reflected in net sales and cost of sales due to a change in generally
accepted accounting principles. 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 products of
consistent quality.
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 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 started installing in fiscal 2001 in
some European markets and are continuing to roll 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, data warehousing, promotional planning systems and the
inventory management system, 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
contracted with a third party to implement its fulfillment application software
for supply chain planning and execution. This software will replace our
internally developed systems on an enterprise basis. We expect that the new
software systems will lead to greater efficiency and consistency in the global
supply chain by the end of fiscal 2003. We are also evaluating expanding the use
of a third party's enterprise resource planning application software to replace
the current transaction application software for financial, production, and
order management in North America.
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<PAGE>
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.
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 consistent global standards 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, 2002, we had approximately 400 employees engaged in
research and development. Research and development expenditures totaled $61.3
million, $57.3 million and $53.8 million for fiscal 2002, 2001 and 2000,
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 our 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 are continually benchmarking the
performance of the supply chain and will add or delete suppliers based upon the
changing needs of the business. 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 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 consumers' 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.
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<PAGE>
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, Matrix, 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, Clairol, Aussi 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, Zirh, Nars, Decleor and other products), Avon Products Inc., Wella
Group (which markets Wella, Graham Webb, Gucci, Alfred Dunhill, Sebastian, Anna
Sui and other products), Gucci N.V. (which markets Yves St. Laurent Beaute
products), Revlon, Inc. (which markets Revlon, Almay and Ultima II products),
Joh. A. Benckiser GmbH (which markets Coty, Lancaster, Davidoff, Pierre Cardin,
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 Keri and other products), Elizabeth Arden, Inc.,
Chanel, Inc. and Clarins S.A. (which markets Clarins and Thierry Mugler
products). 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 principal countries where such products are 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, Bumble and bumble and Kate
Spade 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, 2002, we had approximately 20,400 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 syndicate arrangements. 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.
-7-
<PAGE>
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. 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.
Additionally, gross margins and operating expenses are impacted on a
quarter-by-quarter basis by variations in our launch calendar and the timing of
promotions, including purchase with purchase and gift with purchase promotions.
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to our executive
officers.
NAME AGE POSITION(S) HELD
- ---- --- ----------------
Leonard A. Lauder 69 Chairman of the Board of Directors
Ronald S. Lauder 58 Chairman of Clinique Laboratories, Inc.
and a Director
Fred H. Langhammer 58 President and Chief Executive Officer
and a Director
Patrick Bousquet-Chavanne 44 Group President
Daniel J. Brestle 57 Group President
Andrew J. Cavanaugh 55 Senior Vice President - Global Human Resources
Paul E. Konney 58 Senior Vice President, General Counsel
and Secretary
Richard W. Kunes 49 Senior Vice President and Chief Financial
Officer
Evelyn H. Lauder 66 Senior Corporate Vice President
William P. Lauder 42 Group President and a Director
Philip Shearer 49 Group President, International
Edward M. Straw 63 President, Global Operations
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.
since returning from government service in 1987. He was Chairman of Estee Lauder
International, Inc. from 1987 through 2002. 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
Chairman of the American Institute for Contemporary German Studies at Johns
Hopkins University. He is also a Senior Fellow of the Foreign Policy Association
and a Director of the Japan Society.
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.
-8-
<PAGE>
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, corporate sales, security, environmental affairs
and safety, and corporate security and trademark protection. 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.
-9-
<PAGE>
ITEM 2. PROPERTIES.
The following table sets forth the principal owned and leased manufacturing and
research and development facilities as of September 12, 2002. 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
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 12, 2002, we operated 461
freestanding retail stores, including 14 for the Estee Lauder brand, 12 for
Clinique, 141 for Origins, 95 for M.A.C, 114 for Aveda, 2 for Bobbi Brown, 6
for Jo Malone, 1 for Bumble and bumble, 2 for Stila and 74 multi-brand stores.
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 and in the aggregate, will not have a material adverse
effect on our business or consolidated financial condition.
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 alleges 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
filed counterclaims, which, among other things, challenge the validity of the
patent. Mediation directed by the Court took place in August 2001 and in January
2002, but did not result in resolution of the litigation. In January 2002, the
Court indefinitely postponed the trial date (then set for February 2002) and
established a schedule for pretrial motions. Both parties have filed summary
judgment motions, and the Court is expected to schedule oral argument on the
motions. The Company intends to defend the lawsuit vigorously. Although the
final outcome cannot be predicted with certainty, based on legal analysis and
the discovery proceedings in the litigation, management believes that the case
will not have a material adverse effect on the Company's consolidated financial
condition.
-10-
<PAGE>
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 have commenced.
Court-directed mediation and related settlement discussions are continuing. The
Company intends to defend the lawsuit vigorously. While no assurance can be
given as to the ultimate outcome, based on preliminary investigation, management
believes that the case will not have a material adverse effect on the Company's
consolidated financial condition.
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 (including Hickey's
Carting, Inc., Dennis C. Hickey and Maria Hickey, collectively the "Hickey
Parties"), the State has not sued the Company. The Company and certain other
PRPs are in discussions with the State regarding possible settlement of the
matter. On September 9, 2002, the Hickey Parties brought contribution actions
against the Company and other Blydenburgh PRPs in the State's lawsuit against
the Hickey Parties in the U.S. District Court for the Eastern District of New
York. These actions seek to recover, among other things, any damages for which
the Hickey Parties are found liable in the State's lawsuit against them, and
related costs and expenses, including attorneys' fees. The Company intends to
defend the contribution claim vigorously. While no assurance can be given as to
the ultimate outcome, management believes that the Blydenburgh matters will not
have a material adverse effect on the Company's consolidated financial
condition.
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. The Company and other
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 condition.
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, 2002.
-11-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
EQUITY COMPENSATION PLAN INFORMATION.
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 2002 and fiscal 2001.
FISCAL 2002 FISCAL 2001
---------------------------- ---------------------------
CASH CASH
HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
---- --- --------- ---- --- ---------
First Quarter $43.55 $30.30 $.05 $49.75 $34.25 $.05
Second Quarter 34.90 29.25 .05 47.25 33.75 .05
Third Quarter 35.75 29.25 .05 44.00 33.18 .05
Fourth Quarter 38.80 33.50 .05 44.35 35.85 .05
---- ----
Year 43.55 29.25 $.20 49.75 33.18 $.20
==== ====
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.
In May 2002, after declaring the $.05 per share dividend that was paid in July
2002, the Board of Directors determined that it would pay future cash dividends
on its common stock annually rather than quarterly. We expect that the Board of
Directors will declare the first annual dividend of $.20 per share in the second
quarter of fiscal 2003, and that it will be payable in January 2003.
As of September 12, 2002, there were approximately 4,177 record holders of Class
A Common Stock and 17 record holders of Class B Common Stock.
-12-
<PAGE>
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes the equity compensation plans under which our
securities may be issued as of June 30, 2002. The securities that may be issued
consist solely of shares of our Class A Common Stock and, except as disclosed in
note b to the table, all plans were approved by stockholders of the Company.
EQUITY COMPENSATION PLAN INFORMATION AS OF JUNE 30, 2002
Weighted- Number of securities
Number of average remaining available
securities to exercise for future issuance
be issued upon price of under equity
exercise of outstanding compensation plans
outstanding options, (excluding securities
options, warrants warrants reflected in the
Plan Category and rights and rights first column)
- ----------------------- ----------------- ----------- --------------------
Equity compensation
plans approved by
security holders(a).... 24,843,499(b)(c) $35.10 12,974,443(d)
(a) Includes the Fiscal 1996 Share Incentive Plan (the "1996 Plan"), Fiscal
1999 Share Incentive Plan (the "1999 Plan"), Fiscal 2002 Share Incentive
Plan (the "2002 Plan"), Non-Employee Director Share Incentive Plan (the
"Director Plan"), two Sassaby stock option plans (see note b) and five
employment agreements entered into in 1995 prior to the initial public
offering.
(b) Includes outstanding options in respect of 15,104 shares of Class A Common
Stock that were granted under two stock option plans assumed by the Company
when it acquired Sassaby, Inc. in 1997. The Company never granted any
additional options under the plans.
(c) Excludes stock units in respect of 248,463 shares of Class A Common Stock.
(d) The 1996 Plan, the 1999 Plan and the 2002 Plan are similar omnibus plans.
Each provides the Stock Plan Subcommittee of the Board of Directors
authority to grant shares and benefits other than stock options. As of June
30, 2002, there were 247,752, 14,870 and 11,811,680 shares of Class A
Common Stock available for issuance under each plan, respectively. Shares
underlying benefits cancelled or forfeited under the 1996 Plan and the 1995
employment agreements may be used for grants under the 1999 Plan or the
2002 Plan. Shares underlying benefits cancelled or forfeited under the 1999
Plan may be used for grants under the 2002 Plan. The Director Plan provides
for an annual grant of options and a grant of either options or stock units
to non-employee directors. As of June 30, 2002, there were 237,184 shares
available pursuant to the Director Plan. Additionally, there were 662,957
shares available for issuance pursuant to one employment agreement at June
30, 2002. However, under the terms of that employment agreement no
additional grants may be made, other than dividend equivalent stock units.
In fiscal 2002, the dividend equivalent units granted under that employment
agreement were in respect of 875 shares.
If all of the outstanding options, warrants and rights and stock units, as well
as the securities available for future issuance, included in the table above
were converted to shares of Class A Common Stock as of June 30, 2002, the total
shares of Common Stock outstanding (i.e. Class A plus Class B) would increase
16% to 275,669,064. Of the outstanding options to purchase 24,843,499 shares of
Class A Common Stock, options in respect of 12,594,732 shares are exercisable at
a price less than $35.20, the closing price on June 28, 2002 (the last trading
day of fiscal 2002). Assuming the exercise of in-the-money options, the total
shares outstanding would increase by 5% to 250,197,391.
Subsequent to June 30, 2002, we (i) made additional stock option and unit grants
as discussed in Note 14 to the Notes to Consolidated Financial Statements, and
(ii) purchased additional shares of Class A Common Stock as discussed in Note 20
to the Notes to Consolidated Financial Statements.
-13-
<PAGE>
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.
<TABLE>
<CAPTION>
YEAR ENDED OR AT JUNE 30
--------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Net sales (a) ..................................... $4,743.7 $4,667.7 $4,440.3 $4,040.3 $3,688.7
Gross profit (a) .................................. 3,470.3 3,441.3 3,202.3 2,877.5 2,609.6
Operating income .................................. 341.4 495.6 515.8 456.9 409.1
Earnings before income taxes, minority
interest and accounting change .................. 331.6 483.3 498.7 440.2 402.8
Net earnings ...................................... 191.9(b) 305.2(c) 314.1 272.9 236.8
Preferred stock dividends ......................... 23.4 23.4 23.4 23.4 23.4
Net earnings attributable to common stock ......... 168.5(b) 281.8(c) 290.7 249.5 213.4
CASH FLOW DATA:
Net cash flows provided by operating activities ... $ 518.0 $ 305.4 $ 442.5 $ 352.3 $ 258.2
Net cash flows used for investing activities ...... (217.0) (206.3) (374.3) (200.3) (577.2)
Net cash flows (used for) provided by
financing activities ............................ (121.8) (63.5) (87.9) (73.2) 345.2
PER SHARE DATA:
Net earnings per common share (d):
Basic ........................................... $ .71(b) $ 1.18(c) $ 1.22 $ 1.05 $ .90
Diluted ......................................... $ .70(b) $ 1.16(c) $ 1.20 $ 1.03 $ .89
Weighted average common shares outstanding (d):
Basic ........................................... 238.2 238.4 237.7 237.0 236.8
Diluted ......................................... 241.1 242.2 242.5 241.2 239.5
Cash dividends declared per common share (d) ...... $ .20 $ .20 $ .20 $ .1775 $ .17
BALANCE SHEET DATA:
Working capital ................................... $ 968.0 $ 882.2 $ 716.7 $ 708.0 $ 617.2
Total assets ...................................... 3,416.5 3,218.8 3,043.3 2,746.7 2,512.8
Total debt ........................................ 410.5 416.7 425.4 429.1 436.5
Redeemable preferred stock ........................ 360.0 360.0 360.0 360.0 360.0
Stockholders' equity .............................. 1,461.9 1,352.1 1,160.3 924.5 696.4
</TABLE>
- ----------
(a) Effective January 1, 2002, we adopted Emerging Issues Task Force ("EITF")
Issue No. 01-9, "Accounting for Consideration Given by a Vendor to a
Customer". Upon adoption of this Issue, we reclassified revenues generated
from our purchase with purchase activities as sales and the costs of our
purchase with purchase and gift with purchase activities as cost of sales,
which were previously reported net as operating expenses. Operating income
has remained unchanged by this adoption. For purposes of comparability,
these reclassifications have been reflected retroactively for all periods
presented.
(b) Net earnings, net earnings attributable to common stock and net earnings
per common share for the year ended June 30, 2002 included a restructuring
charge of $76.9 million, after tax, or $.32 per common share, and a
one-time charge of $20.6 million, or $.08 per common share, attributable to
the cumulative effect of adopting Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets".
(c) Net earnings, net earnings attributable to common stock and net earnings
per common share for the year ended June 30, 2001 included restructuring
and other non-recurring charges of $40.3 million, after tax, or $.17 per
common share, and 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".
(d) 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.
-14-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- ------------------------------------------
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in conformity with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses reported in those financial statements. These
judgements can be subjective and complex, and consequently actual results could
differ from those estimates. Our most critical accounting policies relate to
revenue recognition; concentration of credit risk; inventory; pension and other
postretirement benefit costs; goodwill and other intangible assets; income
taxes; and derivatives.
REVENUE RECOGNITION
Generally, revenues from merchandise sales are recorded at the time the product
is shipped to the customer. We report our sales levels on a net sales basis,
which is computed by deducting from gross sales the amount of actual returns
received and an amount established for anticipated returns.
As is customary in the cosmetics industry, our practice is to accept returns of
our products from retailers if properly requested, authorized and approved. In
accepting returns, we typically provide a credit to the retailer against sales
and accounts receivable from that retailer on a dollar-for-dollar basis.
Our sales return accrual is a subjective critical estimate that has a direct
impact on reported net sales. This accrual is calculated based on a history of
gross sales and actual returns by region and product category. In addition, as
necessary, specific accruals may be established for future known or anticipated
events. As a percentage of gross sales, sales returns were 4.9%, 4.9% and 4.3%
in fiscal 2002, 2001 and 2000, respectively.
CONCENTRATION OF CREDIT RISK
An entity is more vulnerable to concentrations of credit risk if it is exposed
to risk of loss greater than it would have had it mitigated its risk through
diversification of customers. Such risks of loss manifest themselves
differently, depending on the nature of the concentration, and vary in
significance.
We have three major customers that owned and operated retail stores that in the
aggregate accounted for approximately $1.20 billion, or 25%, of our consolidated
net sales in fiscal 2002 and $177.8 million, or 28%, of our accounts receivable
at June 30, 2002. These groups sell products primarily within North America.
Although management believes that these customers are sound and creditworthy, a
severe adverse impact on their business operations could have a corresponding
material adverse effect on our net sales, cash flows, and/or financial
condition.
In the ordinary course of business, we have established an allowance for
doubtful accounts and customer deductions in the amount of $30.6 million and
$26.8 million as of June 30, 2002 and 2001, respectively. Our allowance for
doubtful accounts is a subjective critical estimate that has a direct impact on
reported net earnings. This reserve is based upon the evaluation of accounts
receivable aging, specific exposures and historical trends.
INVENTORY
We state our inventory at the lower of cost or fair market value, with cost
being determined on the first-in, first-out (FIFO) method. We believe FIFO most
closely matches the flow of our products from manufacture through sale. The
reported net value of our inventory includes saleable products, promotional
products, raw materials and componentry that will be sold or used in future
periods. Inventory cost includes raw materials, direct labor and overhead.
We also record an inventory obsolescence reserve, which represents the
difference between the cost of the inventory and its estimated market value,
based on various product sales projections. This reserve is calculated using an
estimated obsolescence percentage applied to the inventory based on age,
historical trends and requirements to support forecasted sales. In addition, and
as necessary, we may establish specific reserves for future known or anticipated
events.
PENSION AND OTHER POSTRETIREMENT BENEFIT COSTS
We offer the following benefits to some or all of our employees: a
noncontributory defined benefit pension plan; an unfunded, nonqualified domestic
benefit pension plan to provide benefits in excess of statutory limitations; a
contributory defined contribution plan; international pension plans, which vary
by country, the most significant of which are defined benefit pension plans;
deferred compensation; and certain other postretirement benefits.
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<PAGE>
The amounts necessary to fund future payouts under these plans are subject to
numerous assumptions and variables. Certain significant variables require us to
make assumptions that are within our control such as an anticipated discount
rate, expected rate of return on plan assets and future compensation levels. We
evaluate these assumptions with our actuarial advisors and we believe they are
within accepted industry ranges, although an increase or decrease in the
assumptions or economic events outside our control could have a direct impact on
reported net earnings.
For fiscal 2003, we will use a pre-retirement discount rate of 7.0% and
anticipate using an expected return on plan assets of 8.75%, both of which will
result in a higher calculated pension expense.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is calculated as the excess of the cost of purchased businesses over
the value of their underlying net assets. Other intangible assets principally
consist of purchased royalty rights and trademarks. Goodwill and other
intangible assets that have an indefinite life are not amortized.
On an annual basis, we test goodwill and other intangible assets for impairment.
To determine the fair value of these intangible assets, there are many
assumptions and estimates used that directly impact the results of the testing.
We have the ability to influence the outcome and ultimate results based on the
assumptions and estimates we choose. To mitigate undue influence, we use
industry accepted valuation models and set criteria that are reviewed and
approved by various levels of management. Additionally, we evaluated our
recorded goodwill with the assistance of a third-party valuation firm.
INCOME TAXES
We have accounted for, and currently account for, income taxes in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes." This Statement establishes financial accounting and reporting
standards for the effects of income taxes that result from an enterprise's
activities during the current and preceding years. It requires an asset and
liability approach for financial accounting and reporting of income taxes.
As of June 30, 2002, we have current net deferred tax assets of $112.4 million
and non-current net deferred tax assets of $72.7 million. These net deferred tax
assets assume sufficient future earnings for their realization, as well as the
continued application of current tax rates. Included in net deferred tax assets
is a valuation allowance of approximately $1.5 million for deferred tax assets,
which relates to foreign tax loss carryforwards not utilized to date, where
management believes it is more likely than not that the deferred tax assets will
not be realized in the relevant jurisdiction. Based on our assessments, no
additional valuation allowance is required. If we determine that a deferred tax
asset will not be realizable, an adjustment to the deferred tax asset will
result in a reduction of earnings at that time.
Furthermore, the Company provides tax reserves for Federal, state and
international exposures relating to audit results, planning initiatives and
compliance responsibilities. The development of these reserves requires
judgements about tax issues, potential outcomes and timing, and is a subjective
critical estimate.
DERIVATIVES
We currently account for derivative financial instruments in accordance with
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as
amended, which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. This Statement also requires the
recognition of all derivative instruments as either assets or liabilities on the
balance sheet and that they be measured at fair value.
We currently use derivative financial instruments to hedge certain anticipated
transactions as well as receivables and payables denominated in foreign
currencies. We do not utilize derivatives for trading or speculative purposes.
Hedge effectiveness is documented, assessed and monitored by our employees who
are qualified to make such assessments and monitor the instruments. Variables
that are external to the Company such as social, political and economic risks
may have an impact on our hedging program and the results thereon.
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RESULTS OF OPERATIONS
- ---------------------
We manufacture, market and sell skin care, makeup, fragrance and hair care
products which are distributed in over 130 countries and territories. The
following is a comparative summary of operating results for fiscal 2002, 2001
and 2000 and reflects the basis of presentation described in Note 2 to the Notes
to 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
--------------------------------
2002 2001 2000
-------- -------- --------
(IN MILLIONS)
NET SALES
BY REGION:
The Americas .......................... $2,878.2 $2,857.8 $2,714.0
Europe, the Middle East & Africa ...... 1,261.1 1,221.8 1,142.2
Asia/Pacific .......................... 610.6 596.1 584.1
-------- -------- --------
4,749.9 4,675.7 4,440.3
Restructuring * ....................... (6.2) (8.0) --
-------- -------- --------
$4,743.7 $4,667.7 $4,440.3
======== ======== ========
BY PRODUCT CATEGORY:
Skin Care ............................. $1,703.3 $1,660.7 $1,577.0
Makeup ................................ 1,790.5 1,721.6 1,603.5
Fragrance ............................. 1,017.3 1,085.1 1,117.2
Hair Care ............................. 215.8 180.7 113.9
Other ................................. 23.0 27.6 28.7
-------- -------- --------
4,749.9 4,675.7 4,440.3
Restructuring * ....................... (6.2) (8.0) --
-------- -------- --------
$4,743.7 $4,667.7 $4,440.3
======== ======== ========
OPERATING INCOME
BY REGION:
The Americas .......................... $ 222.9 $ 299.9 $ 287.9
Europe, the Middle East & Africa ...... 179.9 201.8 168.9
Asia/Pacific .......................... 56.0 56.9 59.0
-------- -------- --------
458.8 558.6 515.8
Restructuring and other
non-recurring expenses * ............ (117.4) (63.0) --
-------- -------- --------
$ 341.4 $ 495.6 $ 515.8
======== ======== ========
BY PRODUCT CATEGORY:
Skin Care ............................. $ 248.4 $ 266.9 $ 240.5
Makeup ................................ 183.2 212.5 181.8
Fragrance ............................. 13.4 63.6 80.6
Hair Care ............................. 13.7 13.1 12.4
Other ................................. 0.1 2.5 0.5
-------- -------- --------
458.8 558.6 515.8
Restructuring and other
non-recurring expenses * ............ (117.4) (63.0) --
-------- -------- --------
$ 341.4 $ 495.6 $ 515.8
======== ======== ========
* Refer to the two "Restructuring and Other Non-Recurring Expenses" sections of
this Management's Discussion and Analysis of Financial Condition and Results
of Operations for further information about these charges.
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The following table presents certain consolidated earnings data as a percentage
of net sales:
YEAR ENDED JUNE 30
-------------------------------
2002 2001 2000
------- ------- -------
Net sales ................................... 100.0% 100.0% 100.0%
Cost of sales ............................... 26.8 26.3 27.9
------- ------- -------
Gross profit ................................ 73.2 73.7 72.1
------- ------- -------
Operating expenses:
Selling, general and administrative ..... 63.3 61.5 59.8
Restructuring ........................... 2.3 0.8 --
Other non-recurring ..................... -- 0.3 --
Related party royalties ................. 0.4 0.5 0.7
------- ------- -------
66.0 63.1 60.5
------- ------- -------
Operating income ............................ 7.2 10.6 11.6
Interest expense, net ....................... 0.2 0.2 0.4
------- ------- -------
Earnings before income taxes, minority
interest and accounting change ............ 7.0 10.4 11.2
Provision for income taxes .................. 2.4 3.7 4.1
Minority interest, net of tax ............... (0.1) (0.1) --
------- ------- -------
Net earnings before accounting change ....... 4.5 6.6 7.1
Cumulative effect of a change in
accounting principle, net of tax .......... (0.4) (0.1) --
------- ------- -------
Net earnings ................................ 4.1% 6.5% 7.1%
======= ======= =======
FISCAL 2002 AS COMPARED WITH FISCAL 2001
NET SALES
Net sales increased 2% or $76.0 million to $4.74 billion reflecting continued
growth in the makeup, skin care and hair care categories, partially offset by a
decline in fragrance net sales. Excluding the impact of foreign currency
translation, net sales increased 3%. The unusual events that occurred during the
current fiscal year and their effect on the economy, particularly in the United
States, have adversely impacted our business. In addition, the decline in
worldwide travel during most of fiscal 2002 led to a 13% reduction in our travel
retail sales. Sales growth from certain newer brands and recently launched
products partially offset these decreases.
The following discussions of Net Sales by Product Categories and Geographic
Regions exclude the impact of the restructurings in fiscal 2002 and fiscal 2001.
Neither restructuring was material to our net sales, and the discussions
represent the manner in which we conduct and view our business. For a discussion
of the restructurings, see "Operating Expenses - Restructuring and Other
Non-Recurring Expenses" in this section and under the same heading under "Fiscal
2001 as compared with Fiscal 2000".
PRODUCT CATEGORIES
SKIN CARE
Net sales of skin care products increased 3% or $42.6 million to $1.70 billion.
The net sales increase is primarily attributable to recently launched products
such as Total Turnaround Visible Skin Renewer, Advanced Night Repair Eye
Recovery Complex, Moisture Surge Extra and Moisture Surge Eye Gel, A Perfect
World, LightSource Transforming Moisture Lotion and Cream, and Re-Nutriv
Ultimate Lifting Creme. Partially offsetting these increases were lower net
sales of certain existing products such as Turnaround Cream and Resilience Lift,
as well as products in Clinique's 3-Step Skin Care System.
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<PAGE>
MAKEUP
Makeup net sales increased 4% or $68.9 million to $1.79 billion. Newer brands
such as M.A.C, Bobbi Brown and Stila, which are primarily makeup products,
contributed through growth at existing doors and increased distribution. In
addition, strong sales of the Pure Color Line of products, the worldwide launch
of Gentle Light Makeup and Illusionist Mascara contributed positively to net
sales growth. Partially offsetting the increase in net sales were lower sales of
Two-in-One Eye Shadow, Lucidity Makeup, and Long Last Soft Shine Lipstick.
FRAGRANCE
Net sales of fragrance products decreased 6% or $67.8 million to $1.02 billion.
This category continued to be impacted by the softness of the fragrance business
in the United States and the decline in our travel retail business, which
depends substantially on fragrance products. Lower net sales of Beautiful, Estee
Lauder pleasures, DKNY for Women and certain existing Tommy Hilfiger licensed
products were partially offset by the recent launch of T, a new fragrance in the
Tommy Hilfiger line, and Intuition for Men, as well as strong sales of Donna
Karan Cashmere Mist.
HAIR CARE
Hair care net sales increased 19% or $35.1 million to $215.8 million. This
increase was primarily the result of growth from Aveda, which benefited from
recently launched texture lotion products and Color Conserve Shampoo and an
increase in the number of Company-owned Aveda Environmental Lifestyle Stores.
Sales of Bumble and bumble products increased due to an expanded product line
and an increase in the number of points of sale. The results were partially
offset by lower sales from Clinique's Simple Hair Care System when compared with
the prior-year launch.
The introduction of new products may have some cannibalizing effect on sales of
existing products, which we take into account in our business planning.
GEOGRAPHIC REGIONS
Net sales in the Americas increased 1% or $20.4 million to $2.88 billion. The
increase is primarily due to the success of most newer brands, partially offset
by economic weakness and uncertainty in the United States during most of the
fiscal year. We expect uncertain economic conditions to persist into fiscal 2003
and we are planning accordingly. In Europe, the Middle East & Africa, net sales
increased 3% or $39.3 million to $1.26 billion. This increase was primarily the
result of higher net sales in the United Kingdom, Spain and Greece, where in
fiscal 2002 we formed a joint venture in which we own a controlling majority
interest with our former distributor. The increase was partially offset by lower
net sales in our travel retail business, which has been adversely affected by a
decrease in worldwide travel. Excluding the impact of our travel retail
business, net sales in Europe, the Middle East & Africa increased 8% or $77.8
million. Net sales in Asia/Pacific increased 2% or $14.5 million to $610.6
million primarily due to higher net sales in Korea and Thailand, as well as in
Australia where we benefited from a change in retailer arrangements. The
increased sales were partially offset by lower net sales in Japan. Japan
continues to remain a difficult market due to local economic conditions and
increasing competition. The challenges were made more difficult by the weakness
of the Japanese yen during fiscal 2002 as compared with the U.S. dollar.
Excluding the impact of foreign currency translation, Asia/Pacific net sales
increased 9%.
We strategically stagger our new product launches by geographic market, which
may account for differences in regional sales growth.
COST OF SALES
Cost of sales as a percentage of total net sales was 26.8% as compared with
26.3% in the prior year. The lower margin can be attributed in part to
production volume decreases resulting in under-absorption of overhead, as well
as lower than planned raw material purchases that reduced anticipated savings
from sourcing initiatives. Partially offsetting these negative factors were
lower sales volumes of products with a higher cost of goods, particularly in
travel retail and fragrance. 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 period-by-period basis.
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<PAGE>
OPERATING EXPENSES
OPERATING EXPENSES
Operating expenses increased to 66.0% of net sales as compared with 63.1% of net
sales in the prior year. The increase in operating expenses primarily related to
restructuring expenses, continued advertising and promotional spending and the
cost to expand and operate our retail stores. The increase in operating expenses
as a percentage of net sales reflects a slower growth rate in sales than
operating expenses, primarily due to economic conditions in the United States as
discussed above. As part of our long-term strategies, we continued to emphasize
the building of "brand equities" through advertising and promotional spending
and retail store expansion despite difficult economic times. Changes in
advertising and promotional spending result from the type, timing and level of
advertising and promotional activities related to product launches and rollouts,
as well as the markets being emphasized. Excluding the impact of restructuring
and other non-recurring expenses, operating expenses were 63.5% and 61.9% of net
sales for the fiscal years ended 2002 and 2001, respectively.
RESTRUCTURING AND OTHER NON-RECURRING EXPENSES
During the fourth quarter of fiscal 2002, we recorded special charges for a
restructuring related to repositioning certain businesses as part of our ongoing
efforts to drive long-term growth and increase profitability. The restructuring
focused on cost reduction opportunities related to the Internet, our supply
chain, globalization of the organization and distribution channel refinements.
We have committed to a defined plan of action, which resulted in an aggregate
pre-tax charge of $117.4 million, of which $59.4 million is cash related. On an
after-tax basis, the aggregate charge was $76.9 million, equal to $.32 per
diluted share. As these initiatives are fully implemented, we expect to generate
annual ongoing savings of about $46 million, of which a portion will be
reinvested.
Specifically, the charge included the following:
o INTERNET. In an effort to achieve strategic objectives, reduce costs and
improve profitability, we outsourced Gloss.com platform development and
maintenance efforts to a third-party provider. Additionally, Gloss.com closed
its San Francisco facility and consolidated its operations in New York. As a
result, included in the charge was a $23.9 million provision for
restructuring the Gloss.com operations, including benefits and severance
packages for 36 employees as well as asset write-offs. We also took a $20.1
million charge to write-off the related Gloss.com acquisition goodwill.
o SUPPLY CHAIN. Building on previously announced supply chain initiatives, we
have restructured certain manufacturing, distribution, research and
development, information systems and quality assurance operations in the
United States, Canada and Europe, which included benefits and severance
packages for 110 employees. A charge of $23.7 million was recorded related to
this effort.
o GLOBALIZATION OF ORGANIZATION. We continue to implement our previously
announced transition to a global brand structure designed to streamline the
decision-making process and increase innovation and speed-to-market. The next
phase of this transition entailed eliminating duplicate functions and
responsibilities, which resulted in charges for benefits and severance for
122 employees. We recorded a charge of $27.1 million associated with these
efforts.
o DISTRIBUTION. We evaluated areas of distribution relative to our financial
targets and will focus our resources on the most productive sales channels
and markets. As a result, we closed our operations in Argentina and the
remaining customers will be serviced by our Chilean affiliate. We are also
closing all remaining in-store "tommy's shops" and we are closing other
select points of distribution. We recorded a $22.6 million provision related
to these actions, which included benefits and severance for 85 employees.
Following is a summary of the charges as recorded in the consolidated statement
of earnings for fiscal 2002:
RESTRUCTURING
-------------------------------
(IN MILLIONS) NET COST OF OPERATING
SALES SALES EXPENSES TOTAL
----- ------- --------- ------
Internet ......................... $ -- $ -- $ 44.0 $ 44.0
Supply Chain ..................... -- -- 23.7 23.7
Globalization of Organization .... -- -- 27.1 27.1
Distribution ..................... 6.2 0.8 15.6 22.6
----- ------ ------ ------
TOTAL CHARGE ..................... $ 6.2 $ 0.8 $110.4 117.4
===== ====== ======
Tax effect ....................... (40.5)
------
NET CHARGE ....................... $ 76.9
======
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<PAGE>
The restructuring charge was recorded in other accrued liabilities or, where
applicable, as a reduction of the related asset. During fiscal 2002, $9.3
million related to this restructuring was paid and approximately $5.6 million of
additional payments were made through August 31, 2002. We expect to settle a
majority of the remaining obligations by the end of fiscal 2003 with certain
additional payments made ratably through fiscal 2006.
OPERATING RESULTS
Operating income decreased 31% or $154.2 million to $341.4 million as compared
with the prior year. Operating margins were 7.2% of net sales in the current
period as compared with 10.6% in the prior year. The decrease in operating
margin was primarily due to restructuring expenses, lower than expected sales
levels, increased support spending and new distribution channel costs. This was
partially offset by the exclusion of amortization expense due to the adoption of
SFAS No. 142, "Goodwill and Other Intangible Assets", in fiscal 2002 and the
November 2000 expiration of amortization related to purchased royalty rights.
Operating income reflected the inclusion of restructuring and other
non-recurring expenses of $117.4 million and $63.0 million in fiscal 2002 and
2001, respectively. Before consideration of the restructuring and other
non-recurring expenses, operating income decreased 18% to $458.8 million and
operating margins were 9.7% in fiscal 2002 as compared with 11.9% in fiscal
2001.
Net earnings and net earnings per diluted share decreased approximately 37% and
39%, respectively. Net earnings declined $113.3 million to $191.9 million and
net earnings per diluted share was lower by $.46 per diluted share from $1.16 to
$.70. On a comparable basis, before restructuring and other non-recurring
expenses, before the cumulative effect of adopting a new accounting principle,
and excluding goodwill amortization in fiscal 2001, net earnings were $289.4
million, representing a decrease of 20% over the prior year, and diluted
earnings per common share decreased 21% to $1.10 from $1.39 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 represent the manner in which we conduct and view our business.
PRODUCT CATEGORIES
Operating income decreased 79% to $13.4 million in fragrance, 14% to $183.2
million in makeup and 7% to $248.4 million in skin care, primarily due to lower
than anticipated sales levels, coupled with continued advertising and
promotional spending to promote new and recently launched products. Hair care
operating income increased 5%, from a smaller base, to $13.7 million, primarily
due to sales growth from Aveda and Bumble and bumble.
GEOGRAPHIC REGIONS
Operating income in the Americas decreased 26% or $77.0 million to $222.9
million, primarily due to lower sales attributable to weakness in the U.S.
economy and continued advertising and promotional spending. In Europe, the
Middle East & Africa, operating income decreased 11% or $21.9 million to $179.9
million, primarily due to the significant decrease in our travel retail
business. Partially offsetting the decrease were improved operating results in
Italy, the United Kingdom, Spain and Germany. We also benefited from the
inclusion of operating results from our majority-owned joint venture in Greece.
In Asia/Pacific, operating income decreased slightly to $56.0 million due to
lower income in China and Hong Kong offset by higher results in Korea, in
Australia, where we benefited from a change in retailer arrangements, and in
Japan, where we were able to reduce operating expenses.
INTEREST EXPENSE, NET
Net interest expense was $9.8 million as compared with $12.3 million in the
prior year. The decrease in net interest expense resulted from a lower effective
interest rate compared with the prior year. This was primarily due to our
interest rate risk management strategy that relied on commercial paper and
variable-rate term loans. In January 2002, we took advantage of prevailing
market rates and issued fixed rate long-term notes to replace our variable-rate
debt. We believe this will mitigate future interest rate volatility, but we
expect it will result in a higher level of interest expense in the near term.
PROVISION FOR INCOME TAXES
The Company's effective tax rate will change from year to year based on
non-recurring and recurring factors including, but not limited to, the
geographical mix of earnings, the timing and amount of foreign dividends, state
and local taxes, tax audit settlements and interaction of various global tax
strategies.
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<PAGE>
The provision for income taxes represents Federal, foreign, state and local
income taxes. The effective rate for income taxes for fiscal 2002 was 34.5%
compared with 36% in the prior year. These rates reflect the effect of state and
local taxes, changes in tax rates in foreign jurisdictions, tax credits and
certain non-deductible expenses. The decrease in the effective income tax rate
was attributable to ongoing tax planning initiatives, as well as a decrease in
non-deductible domestic royalty expense and the elimination of certain
non-deductible goodwill amortization resulting from the implementation of SFAS
No. 142, "Goodwill and Other Intangible Assets".
FISCAL 2001 AS COMPARED WITH FISCAL 2000
NET SALES
Net sales increased 5% or $227.4 million to $4.67 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 demonstrated
continued softness particularly in the fragrance category. Growth on a reported
basis reflected the impact of a stronger U.S. dollar relative to other
currencies in virtually all markets in which we do business. Net sales growth
was 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 5% or $83.7 million to $1.66 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 Re-Nutriv, the Origins
Ginger Bath and Body Collection and Acne Solutions, we continued to attract
consumers to the lines and maintain sales momentum. White Light Brightening
System and Active White continued 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
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 7% or $118.1 million to $1.72 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 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 $32.1 million to $1.09 billion,
but increased 1% on a comparable currency basis. The decrease in net sales was
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 in fiscal 2001 and difficult comparisons to the prior 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.
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<PAGE>
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 5% or $143.8 million to $2.86 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 $79.6
million to $1.22 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 $12.0
million to $596.1 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 26.3% from 27.9%,
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 63.1% of net sales as compared with 60.5% of net
sales in the prior year. Excluding the impact of restructuring and other
non-recurring expenses, operating expenses were 61.9% of net sales. This change
primarily related 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
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 from 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
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:
o jane. To bring product innovation rapidly to the market and drive growth,
jane switched from its traditional wall displays to a carded program. We
believed this change would lead to increased sales and improvements in
profitability. The positive effects on sales and improved profitability of
this initiative were offset by the reduction in the number of points of sale
during fiscal 2002. 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.
o "tommy's shops". We also restructured the in-store "tommy's shops" to focus
on our most productive locations and decided to close certain shops that
underperformed relative to expectations. As a result, we 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.
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<PAGE>
o 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.
o 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. As of June 30, 2002, none of the 75 management
employees identified in the reorganization was still an employee. We believe
that the global brand structure is improving 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
NON-
(IN MILLIONS) NET COST OF OPERATING 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
June 30, 2002, an additional $26.7 million was paid. As of June 30, 2002, the
remaining obligation was $7.1 million, the majority of which we expect to settle
by the end of fiscal 2003 with remaining 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 10.6% of net sales in fiscal 2001 as
compared with 11.6% 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 11.9%. 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 represent 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.
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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 operating 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 non-deductible
expenses. The decrease in the effective income tax rate was principally
attributable to ongoing tax planning initiatives.
FINANCIAL CONDITION
- -------------------
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. In February 2002, we repaid
$200.0 million principal amount of bank borrowings with proceeds of a public
offering of 6% Senior Notes due 2012 ("6% Senior Notes"). At June 30, 2002, we
had cash and cash equivalents of $546.9 million compared with $346.7 million at
June 30, 2001.
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, 2002,
our outstanding borrowings consisted of $130.0 million of commercial paper;
$248.9 million, net of $1.1 million unamortized debt discount, of 6% Senior
Notes due January 2012; a 700.0 million yen loan payable (approximately $5.8
million at current exchange rates), which is due in April 2003; and a 3.0
billion yen term loan (approximately $25.0 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, 2002, 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 $150.0 million
in debt securities.
In January 2002, we issued and sold $250.0 million of 6% Senior Notes due 2012
in a public offering. The 6% Senior Notes were priced at 99.538% with a yield of
6.062%. Interest payments are required to be made semi-annually on January 15
and July 15 of each year. We made the first payment on July 15, 2002. The
primary portion of the net proceeds of the offering was used to repay a $200.0
million term loan. The remainder was used to repay a portion of the outstanding
commercial paper. We issued these fixed-rate notes in an attempt to mitigate
future interest rate volatility and capitalize on the prevailing market interest
rates then available for such long-term instruments. However, we do expect the
refinancing to result in a higher level of interest expense in the near term.
Our business is seasonal in nature and, accordingly, our working capital needs
vary. To meet these needs, we could issue up to an additional $620.0 million of
commercial paper under our program, issue long-term debt securities or borrow
under the revolving credit facility. As of June 30, 2002, we also had $22.9
million in unused uncommitted facilities.
Total debt as a percent of total capitalization was 18% at June 30, 2002 as
compared with 20% at June 30, 2001, primarily as a result of higher total
capital.
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<PAGE>
Net cash provided by operating activities was $518.0 million in fiscal 2002 as
compared with $305.4 million in fiscal 2001 and $442.5 million in fiscal 2000.
This improvement in net cash flows was generated primarily by a reduction of
inventory. Inventory levels were unseasonably high at the end of fiscal 2001 and
were lowered during the current fiscal year as part of our ongoing effort to
keep inventory levels in line with forecasted sales. Operating cash flows were
generally not impacted by the fiscal 2002 restructuring as lower net earnings
were offset by the non-cash portion of the charge and the increase in other
accrued liabilities. We expect the settlement of these accrued charges to result
in a lower level of cash flow provided by operating activities in fiscal 2003.
The decrease in cash provided by operating activities in fiscal 2001 as compared
to fiscal 2000 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 in fiscal 2001 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.
Net cash used for investing activities was $217.0 million in fiscal 2002,
compared with $206.3 million in fiscal 2001 and $374.3 million in fiscal 2000.
Net cash used in investing activities during fiscal 2002 is comparable to fiscal
2001 and relates primarily to capital expenditures in both periods. 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.
Capital expenditures amounted to $203.2 million, $192.2 million and $180.9
million in fiscal 2002, 2001 and 2000, 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.
Cash used for financing activities was $121.8 million, $63.5 million and $87.9
million in fiscal 2002, 2001 and 2000, respectively. Cash used for financing
during fiscal 2002 and 2000 primarily relates to dividend payments and common
stock repurchases. The cash used in fiscal 2001 was primarily related to
dividend payments.
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. During fiscal 2002, we purchased 1.5 million shares for $49.7
million. As of June 30, 2002, we have purchased approximately 2.6 million shares
under this program. Subsequent to year-end, we purchased an additional 4.4
million shares for $138.1 million bringing the cumulative total of acquired
shares to 7.0 million.
The Board of Directors declared, and we paid, quarterly dividends on our Class A
Common Stock and Class B Common Stock at the rate of $.05 per share in each
quarter of fiscal 2002, 2001 and 2000. In fiscal 2002, 2001 and 2000, dividends
declared on our common stock totaled $47.5 million, $47.7 million and $47.5
million, respectively. In May 2002, we announced that, after declaring the $.05
per share quarterly dividend paid on July 2, 2002, the Board of Directors
determined that it would pay future cash dividends on its common stock annually
rather than quarterly. We expect that the Board of Directors will declare the
first annual dividend of $.20 per share in the second quarter of fiscal 2003, so
it will be payable in January 2003. Accordingly, we expect total dividends paid
on the Common Stock in fiscal 2003 to amount to $.25 per share. Total dividends
declared, including dividends on the $6.50 Cumulative Redeemable Preferred
Stock, were $70.9 million, $71.1 million and $70.9 million in fiscal 2002, 2001
and 2000, respectively.
We will be required to redeem the outstanding $6.50 Cumulative Redeemable
Preferred Stock on June 30, 2005. However, in the event that Mrs. Estee Lauder
were to pass away before such date, then we would have the right to redeem the
shares from the current holders, and the holders of such shares would have the
right to put the shares to us, at $100 per share (or an aggregate of $360.0
million). If shares of $6.50 Cumulative Redeemable Preferred Stock are put to
us, we would have up to 120 days after notice to purchase such shares.
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.
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<PAGE>
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 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 anticipated transactions as
well as receivables and payables denominated in foreign currencies for periods
consistent with our identified exposures. The purpose of the hedging activities
is to minimize the effect of foreign exchange rate movements on our costs and on
the cash flows that we receive from foreign subsidiaries. Almost all foreign
currency contracts are denominated in currencies of major industrial countries
and are with large financial institutions rated as strong investment grade by a
major rating agency. We also enter into foreign currency options to hedge
anticipated transactions where there is a high probability that anticipated
exposures will materialize. The forward exchange contracts and foreign currency
options have been designated as cash-flow hedges. As of June 30, 2002, 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 July 2003. 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, 2002, we had foreign currency contracts in the form of
forward exchange contracts in the amount of $227.2 million. The foreign
currencies included in these contracts (notional value stated in U.S. dollars)
are principally the Japanese yen ($70.7 million), Euro ($31.7 million), British
pound ($26.2 million), Australian dollar ($16.0 million), Swiss franc ($11.8
million), Danish krone ($11.6 million) and Canadian dollar ($10.5 million).
INTEREST RATE RISK MANAGEMENT
In February 2002, we paid off our outstanding term loan, which had a floating
interest rate, with the proceeds from our January 2002 public debt offering of
6% Senior Notes. As a result, we terminated the interest rate swaps and options
that were previously outstanding to mitigate interest rate volatility. No
material gain or loss resulted from the termination of those contracts.
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,
2002, related to our foreign exchange contracts, using a variance/co-variance
model with a 95 percent confidence level and assuming normal market conditions,
was $10.0 million.
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.
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<PAGE>
ACCOUNTING STANDARDS
Effective July 1, 2001, we adopted SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets". These statements
established 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.
In accordance with SFAS No. 142, intangible assets, including purchased
goodwill, must be evaluated for impairment. Those intangible assets that will
continue to be classified as goodwill or as other intangibles with indefinite
lives are no longer amortized.
In accordance with SFAS No. 142, we completed our transitional impairment
testing of intangible assets during the first quarter of fiscal 2002. That
effort, and preliminary assessments of our identifiable intangible assets,
indicated that little or no adjustment would be required upon adoption of this
pronouncement. The impairment testing is performed in two steps: (i) we
determine impairment by comparing the fair value of a reporting unit with its
carrying value, and (ii) if there is an impairment, we measure the amount of
impairment loss by comparing the implied fair value of goodwill with the
carrying amount of that goodwill. Subsequent to the first quarter of fiscal
2002, with the assistance of a third-party valuation firm, we finalized the
testing of goodwill. Using conservative, but realistic assumptions to model our
jane business, we determined that the carrying value of this unit was slightly
greater than the derived fair value, indicating an impairment in the recorded
goodwill. To determine fair value, we relied on three valuation models:
guideline public companies, acquisition analysis and discounted cash flow. For
goodwill valuation purposes only, the revised fair value of this unit was
allocated to the assets and liabilities of the business unit to arrive at an
implied fair value of goodwill, based upon known facts and circumstances, as if
the acquisition occurred currently. This allocation resulted in a write-down of
recorded goodwill in the amount of $20.6 million, which has been reported as the
cumulative effect of a change in accounting principle, as of July 1, 2001, in
the accompanying consolidated statements of earnings. On a product category
basis, this write-down would have primarily impacted our makeup category.
The following table presents adjusted net earnings and earnings per share data
restated to include the retroactive impact of the adoption of SFAS No. 142.
YEAR ENDED JUNE 30
------------------------
2002 2001 2000
------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Reported Net Earnings before Accounting Change ....... $212.5 $307.4 $314.1
Cumulative effect of a change in
accounting principle, net of tax ................. (20.6) (2.2) --
------ ------ ------
Net Earnings ....................................... 191.9 305.2 314.1
Preferred stock dividends .......................... 23.4 23.4 23.4
------ ------ ------
Reported Net Earnings Attributable to Common Stock ... 168.5 281.8 290.7
Add back:
Goodwill amortization, net of tax .................. -- 13.4 11.1
------ ------ ------
Adjusted Net Earnings ................................ $168.5 $295.2 $301.8
====== ====== ======
BASIC NET EARNINGS PER COMMON SHARE:
Reported net earnings attributable to
common stock before accounting change ............ $ .79 $ 1.19 $ 1.22
Cumulative effect of a change in accounting
principle, net of tax ............................ (.08) (.01) --
------ ------ ------
Net earnings attributable to common stock .......... .71 1.18 1.22
Goodwill amortization, net of tax .................. -- .06 .05
------ ------ ------
Adjusted net earnings attributable
to common stock .................................. $ .71 $ 1.24 $ 1.27
====== ====== ======
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YEAR ENDED JUNE 30
-----------------------------
2002 2001 2000
------- ------- -------
DILUTED NET EARNINGS PER COMMON SHARE:
Reported net earnings attributable to
common stock before accounting change .... $ .78 $ 1.17 $ 1.20
Cumulative effect of a change in
accounting principle, net of tax ......... (.08) (.01) --
------- ------- -------
Net earnings attributable to common stock ... .70 1.16 1.20
Goodwill amortization, net of tax ........... -- .06 .04
------- ------- -------
Adjusted net earnings attributable
to common stock .......................... $ .70 $ 1.22 $ 1.24
======= ======= =======
Weighted average common shares outstanding:
Basic ....................................... 238.2 238.4 237.7
Diluted ..................................... 241.1 242.2 242.5
Effective January 1, 2002, we adopted the Emerging Issues Task Force ("EITF")
Issue No. 01-9, "Accounting for Consideration Given by a Vendor to a Customer",
which codified and reconciled the following EITF Issues: Issue No. 00-14,
"Accounting for Certain Sales Incentives", Issue No. 00-22, "Accounting for
Points and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and
Offers for Free Products or Services to be Delivered in the Future" and Issue
No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor's Products". Issue No. 00-14 addressed when sales
incentives and discounts should be recognized, as well as where the related
revenues and expenses should be classified in the financial statements. Upon
adoption of this Issue, we reclassified revenues generated from our purchase
with purchase activities as sales and the costs of our purchase with purchase
and gift with purchase activities as cost of sales, which were previously
reported net as operating expenses. Operating income has remained unchanged by
this adoption. These reclassifications have been reported in the accompanying
consolidated statements of earnings retroactively for all periods reported.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". This statement
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 will be effective for financial statements
relating to fiscal years beginning after December 15, 2001. We will adopt this
statement for our fiscal year ending June 30, 2003 and do not anticipate that it
will have a material impact on our consolidated financial results.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities". This
statement covers restructuring type activities beginning with plans initiated
after December 31, 2002. Should we enter into activities covered by this
standard after that date, the provisions of SFAS No. 146 would be applied. As a
result of this standard, there is no impact on our consolidated financial
position or results of operations for the periods presented.
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<PAGE>
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,
actual results may 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, restructurings, bankruptcies and reorganizations in
the retail industry causing a decrease in the number of stores that sell
our products, an increase in the ownership concentration within the retail
industry, ownership of retailers by our competitors and ownership of
competitors by our customers that are retailers;
(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 or domestic
manufacturing, distribution and retail operations, including changes in
foreign investment and trade policies and regulations of the host countries
and of the United States;
(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, our business;
(vii) foreign currency fluctuations affecting our results of operations and
the value of our foreign assets, the relative prices at which we and our
foreign competitors sell products in the same markets and our operating and
manufacturing costs outside of the United States;
(viii) changes in global or local economic conditions that could affect
consumer purchasing, the financial strength of our customers, the cost and
availability of capital, which we may need for new equipment, facilities or
acquisitions, and the assumptions underlying our critical accounting
estimates;
(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 acquire or develop e-commerce capabilities, and other
new information and distribution technologies, on a timely basis and within
our cost estimates;
(xiii) our ability to capitalize on opportunities for improved efficiency,
such as globalization, and 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, including further attacks,
retaliation and the threat of further attacks or retaliation.
We assume no responsibility to update forward-looking statements made herein or
otherwise.
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<PAGE>
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.
On April 12, 2002, the Board of Directors of the Company, upon recommendation of
the Audit Committee, decided to end the engagement of Arthur Andersen LLP
("Arthur Andersen") as the Company's independent public accountants, effective
April 30, 2002, and authorized the engagement of KPMG LLP ("KPMG") to serve as
the Company's independent public accountants for the fiscal year ending June 30,
2002. None of Arthur Andersen's reports on the Company's consolidated financial
statements for the fiscal years ended June 30, 2001 and 2000 contained an
adverse opinion or disclaimer of opinion, nor was any such report qualified or
modified as to uncertainty, audit scope or accounting principles.
During the fiscal years ended June 30, 2002, 2001 and 2000, there were no
disagreements between the Company and Arthur Andersen on any matter of
accounting principle or practice, financial statement disclosure, or auditing
scope or procedure which, if not resolved to Arthur Andersen's satisfaction,
would have caused them to make reference to the subject matter in connection
with their report on the Company's consolidated financial statements for such
years; and there were no reportable events as defined in Item 304(a)(1)(v) of
Regulation S-K.
During the fiscal years ended June 30, 2001 and 2000 and prior to their
appointment as the Company's independent public accountants, the Company did not
consult KPMG LLP with respect to the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Company's consolidated financial
statements, or any other matters or reportable events as set forth in Items
304(a)(2)(i) and (ii) of Regulation S-K.
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 2002 Annual Meeting of Stockholders, which will be filed within 120 days
after the close of the fiscal year ended June 30, 2002, and such information is
incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES.
There were no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the last date that
they were evaluated by our Chief Executive Officer and Chief Financial Officer.
-31-
<PAGE>
PART IV
ITEM 15. 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).*
4.1 Indenture, dated as of November 5, 1999, between the Company and
State Street Bank and Trust Company, N.A. (filed as Exhibit 4 to
Amendment No. 1 to our Registration Statement on Form S-3 (No.
333-85947) on November 5, 1999).*
4.2 Officers' Certificate, dated January 10, 2002, defining certain
terms of the 6% Senior Notes due 2012 (filed as Exhibit 4.2 to our
Quarterly Report on Form 10-Q for the quarter ended December 31,
2001(the "FY 2002 Q2 10-Q")).*
4.3 Global Note for the 6% Senior Notes due 2012 (filed as Exhibit 4.3
to the FY 2002 Q2 10-Q).*
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 Stockholders' 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
(the "FY 2000 10-K")).*
10.1e Amendment No. 5 to Stockholders' Agreement.
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 (filed as Exhibit
10.2c to our Annual Report on Form 10-K for the year ended June 30,
2001 (the "FY 2001 10-K")).*
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. +
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 (filed as Exhibit 10.8
to the FY 2001 10-K).* +
10.8a Amendment to 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).* +
10.9a Amendment to Employment Agreement with Ronald S. Lauder. +
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 (filed as
Exhibit 10.10a to the FY 2001 10-K).* +
10.10b Amendment to Employment Agreement with Fred H. Langhammer. +
-32-
<PAGE>
10.11 Employment Agreement with Daniel J. Brestle (filed as Exhibit 10.11
to the FY 2001 10-K).* +
10.11a Amendment to 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).* +
10.12a Amendment to Employment Agreement with William P. Lauder. +
10.13 Employment Agreement with Patrick Bousquet-Chavanne (filed as
Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter
ended September 30, 2001).* +
10.13a Amendment to Employment Agreement with Patrick Bousquet-Chavanne. +
10.14 Form of Deferred Compensation Agreement (interest-based) with
Outside Directors (filed as Exhibit 10.14 to the FY 2001 10-K).* +
10.15 Form of Deferred Compensation Agreement (stock-based) with Outside
Directors (filed as Exhibit 10.15 to the FY 2001 10-K).* +
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).* +
10.17 Fiscal 2002 Share Incentive Plan (filed as Exhibit 4(d) to our
Registration Statement on Form S-8 (No. 333-72684) on November 1,
2001).* +
21.1 List of significant subsidiaries.
23.1 Consent of KPMG LLP.
23.2 Notice regarding consent of Arthur Andersen LLP.
24.1 Power of Attorney.
(b) Reports on Form 8-K.
On April 16, 2002, we filed a Current Report on Form 8-K. Pursuant to Item 5 of
Form 8-K, we reported reclassified results of consolidated statements of
earnings to conform to accounting rule EITF Issue No. 01-9 (formally Issue No.
00-14).
On April 17, 2002, we filed a Current Report on Form 8-K. Pursuant to Item 4 of
Form 8-K, we announced that we were ending our engagement of Arthur Andersen LLP
as our independent public accountants and authorized the engagement of KPMG LLP
to serve as our independent public accountant for the fiscal year ended June 30,
2002.
- ----------
* Incorporated herein by reference.
+ Exhibit is a management contract or compensatory plan or arrangement.
-33-
<PAGE>
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, 2002
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
--------- ------- ----
/s/ FRED H. LANGHAMMER President, Chief September 17, 2002
- --------------------------------- Executive Officer and
Fred H. Langhammer a Director
(Principal Executive
Officer)
LEONARD A. LAUDER* Chairman of the Board September 17, 2002
- --------------------------------- of Directors
Leonard A. Lauder
CHARLENE BARSHEFSKY * Director September 17, 2002
- ---------------------------------
Charlene Barshefsky
LYNN FORESTER DE ROTHSCHILD* Director September 17, 2002
- ---------------------------------
Lynn Forester de Rothschild
IRVINE O. HOCKADAY, JR.* Director September 17, 2002
- ---------------------------------
Irvine O. Hockaday, Jr.
RONALD S. LAUDER* Director September 17, 2002
- ---------------------------------
Ronald S. Lauder
WILLIAM P. LAUDER* Director September 17, 2002
- ---------------------------------
William P. Lauder
RICHARD D. PARSONS* Director September 17, 2002
- ---------------------------------
Richard D. Parsons
MARSHALL ROSE* Director September 17, 2002
- ---------------------------------
Marshall Rose
/s/ RICHARD W. KUNES Senior Vice President September 17, 2002
- --------------------------------- and Chief Financial
Richard W. Kunes Officer
(Principal Financial
and Accounting Officer)
- ----------
* By signing his name hereto, Richard W. Kunes signs this document in the
capacities indicated above and on behalf of the persons indicated above
pursuant to powers of attorney duly executed by such persons and filed
herewith.
By /s/ RICHARD W. KUNES
------------------------
Richard W. Kunes
(Attorney-in-Fact)
-34-
<PAGE>
CERTIFICATIONS
I, Fred H. Langhammer, certify that:
1. I have reviewed this annual report on Form 10-K of The Estee Lauder
Companies Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
Date: September 17, 2002
/s/ FRED H. LANGHAMMER
----------------------
Fred H. Langhammer
President and Chief Executive Officer
I, Richard W. Kunes, certify that:
1. I have reviewed this annual report on Form 10-K of The Estee Lauder
Companies Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
Date: September 17, 2002
/s/ RICHARD W. KUNES
--------------------
Richard W. Kunes
Senior Vice President and
Chief Financial Officer
-35-
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
PAGE
FINANCIAL STATEMENTS:
Independent Auditors' Report ............................................... F-2
Copy of Report of Independent Public Accountants (Arthur Andersen LLP) ..... F-3
Consolidated Statements of Earnings ........................................ F-4
Consolidated Balance Sheets ................................................ F-5
Consolidated Statements of Stockholders' Equity and Comprehensive Income ... F-6
Consolidated Statements of Cash Flows ...................................... F-7
Notes to Consolidated Financial Statements ................................. F-8
FINANCIAL STATEMENT SCHEDULE:
Independent Auditors' Report on Schedule ................................... S-1
Copy of Report of Independent Public Accountants
(Arthur Andersen LLP) on Schedule ..................................... S-2
Schedule II - Valuation and Qualifying Accounts ............................ S-3
All other schedules are omitted because they are not applicable or the required
information is included in the consolidated financial statements or notes
thereto.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Stockholders
The Estee Lauder Companies Inc.:
We have audited the accompanying consolidated balance sheet of The Estee Lauder
Companies Inc. and subsidiaries as of June 30, 2002, and the related
consolidated statements of earnings, stockholders' equity and comprehensive
income and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated 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, 2002, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 2, the Company adopted Statement of Financial Accounting
Standards ("Statement") No. 141, "Business Combinations", and Statement No. 142,
"Goodwill and Other Intangible Assets", in the year ended June 30, 2002.
The consolidated balance sheet of The Estee Lauder Companies Inc. and
subsidiaries as of June 30, 2001, and the related consolidated statements of
earnings, stockholders' equity and comprehensive income, and cash flows for the
years ended June 30, 2001 and 2000, were audited by other auditors who have
ceased operations. As described in Note 2, these consolidated financial
statements have been revised to include the transitional disclosures required by
Statement No. 142, "Goodwill and Other Intangible Assets", which was adopted by
the Company as of July 1, 2001. We performed the following audit procedures with
respect to the disclosures in Note 2 with respect to 2001 and 2000. We (i)
agreed the net income as previously reported and the adjustments to reported net
income representing amortization expense (including any related tax effects)
recognized in those periods related to goodwill that is no longer being
amortized as a result of initially applying Statement No. 142 to the Company's
underlying records obtained from management, and (ii) tested the mathematical
accuracy of the reconciliation of adjusted net income to reported net income,
and the related earnings per share amounts. In our opinion, the disclosures for
2001 and 2000 in Note 2 are appropriate. However, we were not engaged to audit,
review, or apply any procedures to the 2001 and 2000 financial statements of the
Company other than with respect to such disclosures and, accordingly, we do not
express an opinion or any other form of assurance on the 2001 and 2000
consolidated financial statements taken as a whole.
KPMG LLP
New York, New York
August 9, 2002
F-2
<PAGE>
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
This is a copy of the audit report previously issued by Arthur Andersen LLP in
connection with our filing on Form 10-K for the fiscal year ended June 30, 2001.
This audit report has not been reissued by Arthur Andersen LLP in connection
with this filing on Form 10-K. See Exhibit 23.2 for further discussion.
F-3
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED JUNE 30
------------------------------
2002 2001 2000
-------- -------- --------
(IN MILLIONS,
EXCEPT PER SHARE DATA)
NET SALES ...................................... $4,743.7 $4,667.7 $4,440.3
Cost of sales .................................. 1,273.4 1,226.4 1,238.0
-------- -------- --------
GROSS PROFIT ................................... 3,470.3 3,441.3 3,202.3
-------- -------- --------
Operating expenses:
Selling, general and administrative ........ 3,002.0 2,869.2 2,653.3
Restructuring .............................. 110.4 37.6 --
Other non-recurring ........................ -- 16.3 --
Related party royalties .................... 16.5 22.6 33.2
-------- -------- --------
3,128.9 2,945.7 2,686.5
-------- -------- --------
OPERATING INCOME ............................... 341.4 495.6 515.8
Interest expense, net .......................... 9.8 12.3 17.1
-------- -------- --------
EARNINGS BEFORE INCOME TAXES, MINORITY
INTEREST AND ACCOUNTING CHANGE ............... 331.6 483.3 498.7
Provision for income taxes ..................... 114.4 174.0 184.6
Minority interest, net of tax .................. (4.7) (1.9) --
-------- -------- --------
NET EARNINGS BEFORE ACCOUNTING CHANGE .......... 212.5 307.4 314.1
Cumulative effect of a change in
accounting principle, net of tax ............. (20.6) (2.2) --
-------- -------- --------
NET EARNINGS ................................... 191.9 305.2 314.1
Preferred stock dividends ...................... 23.4 23.4 23.4
-------- -------- --------
NET EARNINGS ATTRIBUTABLE TO COMMON STOCK ...... $ 168.5 $ 281.8 $ 290.7
======== ======== ========
Basic net earnings per common share:
Net earnings attributable to
common stock before accounting change ...... $ .79 $ 1.19 $ 1.22
Cumulative effect of a change in
accounting principle, net of tax ........... (.08) (.01) --
-------- -------- --------
Net earnings attributable to common stock .... $ .71 $ 1.18 $ 1.22
======== ======== ========
Diluted net earnings per common share:
Net earnings attributable to common
stock before accounting change ............. $ .78 $ 1.17 $ 1.20
Cumulative effect of a change in
accounting principle, net of tax ........... (.08) (.01) --
-------- -------- --------
Net earnings attributable to common stock .... $ .70 $ 1.16 $ 1.20
======== ======== ========
Weighted average common shares outstanding:
Basic ........................................ 238.2 238.4 237.7
Diluted ...................................... 241.1 242.2 242.5
See notes to consolidated financial statements.
F-4
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30
--------------------
2002 2001
-------- --------
(IN MILLIONS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents .............................. $ 546.9 $ 346.7
Accounts receivable, net ............................... 624.8 580.6
Inventory and promotional merchandise, net ............. 544.5 630.3
Prepaid expenses and other current assets .............. 211.4 181.3
-------- --------
TOTAL CURRENT ASSETS ................................. 1,927.6 1,738.9
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET ..................... 580.7 528.7
-------- --------
OTHER ASSETS
Investments, at cost or market value ................... 30.3 41.0
Deferred income taxes .................................. 72.7 70.1
Goodwill, net .......................................... 675.6 699.7
Other intangible assets, net ........................... 18.4 21.0
Other assets, net ...................................... 111.2 119.4
-------- --------
TOTAL OTHER ASSETS ................................... 908.2 951.2
-------- --------
TOTAL ASSETS ....................................... $3,416.5 $3,218.8
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt ........................................ $ 6.6 $ 5.8
Accounts payable ....................................... 216.4 239.8
Accrued income taxes ................................... 110.0 79.0
Other accrued liabilities .............................. 626.6 532.1
-------- --------
TOTAL CURRENT LIABILITIES ............................ 959.6 856.7
-------- --------
NONCURRENT LIABILITIES
Long-term debt ......................................... 403.9 410.9
Other noncurrent liabilities ........................... 231.1 239.1
-------- --------
TOTAL NONCURRENT LIABILITIES ......................... 635.0 650.0
-------- --------
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: 131,567,986 in
2002 and 126,053,825 in 2001; 240,000,000 shares
Class B authorized; shares issued and outstanding:
108,412,533 in 2002 and 113,490,293 in 2001 .......... 2.4 2.4
Paid-in capital ........................................ 268.8 258.3
Retained earnings ...................................... 1,363.7 1,242.7
Accumulated other comprehensive income (loss) .......... (92.5) (120.5)
-------- --------
1,542.4 1,382.9
Less: Treasury stock, at cost; 2,377,860 Class A
shares at June 30, 2002 and 877,860 Class A shares
at June 30, 2001 ..................................... (80.5) (30.8)
-------- --------
TOTAL STOCKHOLDERS' EQUITY ........................... 1,461.9 1,352.1
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......... $3,416.5 $3,218.8
======== ========
See notes to consolidated financial statements.
F-5
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
YEAR ENDED JUNE 30
------------------------------
2002 2001 2000
-------- -------- --------
(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 ............ 258.3 237.1 211.6
Stock compensation programs ................... 10.5 21.2 25.5
-------- -------- --------
Paid-in capital, end of year .................. 268.8 258.3 237.1
-------- -------- --------
Retained earnings, beginning of year .......... 1,242.7 1,008.6 766.2
Preferred stock dividends ..................... (23.4) (23.4) (23.4)
Common stock dividends ........................ (47.5) (47.7) (47.5)
Issuance of treasury stock .................... -- -- (0.8)
Net earnings for the year ..................... 191.9 305.2 314.1
-------- -------- --------
Retained earnings, end of year ................ 1,363.7 1,242.7 1,008.6
-------- -------- --------
Accumulated other comprehensive
income (loss), beginning of year ............ (120.5) (57.1) (44.3)
Other comprehensive income (loss) ............. 28.0 (63.4) (12.8)
-------- -------- --------
Accumulated other comprehensive
income (loss), end of year .................. (92.5) (120.5) (57.1)
-------- -------- --------
Treasury stock, beginning of year ............. (30.8) (30.7) (11.4)
Acquisition of treasury stock ................. (49.7) (0.1) (23.6)
Issuance of treasury stock .................... -- -- 4.3
-------- -------- --------
Treasury stock, end of year ................... (80.5) (30.8) (30.7)
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY .............. $1,461.9 $1,352.1 $1,160.3
======== ======== ========
COMPREHENSIVE INCOME
Net earnings .................................. $ 191.9 $ 305.2 $ 314.1
-------- -------- --------
Other comprehensive income (loss):
Net unrealized investment gains (losses) .... (3.0) (11.0) 7.8
Net derivative instrument losses ............ (7.1) (2.0) --
Net minimum pension liability adjustments ... (7.9) (12.4) --
Translation adjustments ..................... 46.0 (38.0) (20.6)
-------- -------- --------
Other comprehensive income (loss) ........... 28.0 (63.4) (12.8)
-------- -------- --------
TOTAL COMPREHENSIVE INCOME .............. $ 219.9 $ 241.8 $ 301.3
======== ======== ========
See notes to consolidated financial statements.
F-6
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30
------------------------
2002 2001 2000
------ ------ ------
(IN MILLIONS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings ...................................... $191.9 $305.2 $314.1
Adjustments to reconcile net earnings to net
cash flows provided by operating activities:
Depreciation and amortization ................... 162.0 156.3 129.1
Amortization of purchased royalty rights ........ -- 6.6 17.7
Deferred income taxes ........................... (22.6) 4.7 (5.5)
Minority interest ............................... 4.7 1.9 --
Non-cash stock compensation ..................... (0.1) 0.7 1.7
Cumulative effect of a change in
accounting principle .......................... 20.6 2.2 --
Non-cash portion of restructuring and
other non-recurring expenses .................. 58.0 27.1 --
Other non-cash items ............................ 0.9 -- --
Changes in operating assets and liabilities:
Increase in accounts receivable, net ............ (15.4) (57.3) (24.4)
Decrease (increase) in inventory and
promotional merchandise, net .................. 102.2 (102.1) (31.3)
Increase in other assets ........................ (11.7) (53.6) (39.8)
Increase (decrease) in accounts payable ......... (32.6) 14.2 12.2
Increase in accrued income taxes ................ 28.8 5.9 10.9
Increase (decrease) in other accrued
liabilities ................................... 59.6 (23.4) 35.1
Increase (decrease) in other noncurrent
liabilities ................................... (28.3) 17.0 22.7
------ ------ ------
NET CASH FLOWS PROVIDED BY
OPERATING ACTIVITIES ........................ 518.0 305.4 442.5
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures .............................. (203.2) (192.2) (180.9)
Acquisition of businesses, net of
acquired cash ................................... (18.5) (16.0) (180.5)
Purchases of long-term investments ................ -- -- (15.9)
Proceeds from disposition of long-term
investments ..................................... 4.7 1.9 3.0
------ ------ ------
NET CASH FLOWS USED FOR
INVESTING ACTIVITIES ........................ (217.0) (206.3) (374.3)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term debt, net ....... 0.6 (0.1) (0.6)
Proceeds from issuance of long-term debt, net ..... 247.2 24.5 --
Repayments of long-term debt ...................... (256.6) (30.1) (6.8)
Net proceeds from employee stock
transactions .................................... 7.7 13.3 14.0
Payments to acquire treasury stock ................ (49.7) (0.1) (23.6)
Dividends paid .................................... (71.0) (71.0) (70.9)
------ ------ ------
NET CASH FLOWS USED FOR
FINANCING ACTIVITIES ........................ (121.8) (63.5) (87.9)
------ ------ ------
Effect of Exchange Rate Changes on Cash
and Cash Equivalents .............................. 21.0 (9.2) (7.5)
------ ------ ------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ................................ 200.2 26.4 (27.2)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR ......................................... 346.7 320.3 347.5
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR .......... $546.9 $346.7 $320.3
====== ====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION (SEE ALSO NOTE 17)
Cash paid during the year for:
Interest ........................................ $ 17.6 $ 26.7 $ 29.2
====== ====== ======
Income Taxes .................................... $120.5 $176.6 $163.8
====== ====== ======
See notes to consolidated financial statements.
F-7
<PAGE>
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.
Certain amounts in the consolidated financial statements of prior years have
been reclassified to conform to current year presentation for comparative
purposes.
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
------------------------------
2002 2001 2000
-------- -------- --------
(IN MILLIONS,
EXCEPT PER SHARE DATA)
NUMERATOR:
Net earnings before accounting change ......... $ 212.5 $ 307.4 $ 314.1
Preferred stock dividends ..................... (23.4) (23.4) (23.4)
-------- -------- --------
Net earnings attributable to common stock
before accounting change .................... 189.1 284.0 290.7
Cumulative effect of a change in
accounting principle, net of tax ............ (20.6) (2.2) --
-------- -------- --------
Net earnings attributable to common stock ..... $ 168.5 $ 281.8 $ 290.7
======== ======== ========
DENOMINATOR:
Weighted average common shares
outstanding - Basic ......................... 238.2 238.4 237.7
Effect of dilutive securities: Stock options .. 2.9 3.8 4.8
-------- -------- --------
Weighted average common shares
outstanding - Diluted ....................... 241.1 242.2 242.5
======== ======== ========
BASIC NET EARNINGS PER COMMON SHARE:
Net earnings before accounting change ......... $ .79 $ 1.19 $ 1.22
Cumulative effect of a change in
accounting principle, net of tax ............ (.08) (.01) --
-------- -------- --------
Net earnings .................................. $ .71 $ 1.18 $ 1.22
======== ======== ========
DILUTED NET EARNINGS PER COMMON SHARE:
Net earnings before accounting change ......... $ .78 $ 1.17 $ 1.20
Cumulative effect of a change in
accounting principle, net of tax ............ (.08) (.01) --
-------- -------- --------
Net earnings .................................. $ .70 $ 1.16 $ 1.20
======== ======== ========
F-8
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2002, 2001 and 2000, options to purchase 12.1 million, 10.5
million and 7.2 million shares, respectively, of Class A Common Stock were not
included in the computation of diluted EPS because the exercise prices of those
options were greater than the average market price of the common stock and their
inclusion would be anti-dilutive. The options were still outstanding at the end
of the applicable periods.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include $426.2 million and $232.2 million of
short-term time deposits at June 30, 2002 and 2001, 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 $30.6 million and $26.8 million as of June 30, 2002 and
2001, 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 $46.0 million of unrealized
translation gains and $38.0 million of unrealized translation losses in fiscal
2002 and 2001, 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 losses
of $6.8 million, net exchange gains of $9.2 million and net exchange losses of
$4.3 million in fiscal 2002, 2001 and 2000, respectively.
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
fair-market value, 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
--------------
2002 2001
------ ------
(IN MILLIONS)
Inventory and promotional merchandise consists of:
Raw materials ..................................... $117.5 $172.9
Work in process ................................... 27.0 24.4
Finished goods .................................... 272.2 308.0
Promotional merchandise ........................... 127.8 125.0
------ ------
$544.5 $630.3
====== ======
F-9
<PAGE>
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
------------------
2002 2001
-------- --------
(IN MILLIONS)
Land ............................................. $ 13.0 $ 12.7
Buildings and improvements ....................... 144.0 135.7
Machinery and equipment .......................... 611.7 563.2
Furniture and fixtures ........................... 86.1 77.5
Leasehold improvements ........................... 447.2 311.2
-------- --------
1,302.0 1,100.3
Less accumulated depreciation and amortization ... 721.3 571.6
-------- --------
$ 580.7 $ 528.7
======== ========
Depreciation and amortization of property, plant and equipment was $140.5
million, $112.1 million and $90.3 million in fiscal 2002, 2001 and 2000,
respectively.
GOODWILL AND OTHER INTANGIBLE ASSETS
Effective July 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations", and SFAS No. 142, "Goodwill
and Other Intangible Assets". These statements established 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. In accordance with SFAS
No. 142, intangible assets, including purchased goodwill, must be evaluated for
impairment. Those intangible assets that will continue to be classified as
goodwill or as other intangibles with indefinite lives are no longer amortized.
In accordance with SFAS No. 142, the Company completed its transitional
impairment testing of intangible assets during the first quarter of fiscal 2002.
That effort, and preliminary assessments of the Company's identifiable
intangible assets, indicated that little or no adjustment would be required upon
adoption of this pronouncement. The impairment testing is performed in two
steps: (i) the Company determines impairment by comparing the fair value of a
reporting unit with its carrying value, and (ii) if there is an impairment, the
Company measures the amount of impairment loss by comparing the implied fair
value of goodwill with the carrying amount of that goodwill. Subsequent to the
first quarter of fiscal 2002, with the assistance of a third-party valuation
firm, the Company finalized the testing of goodwill. Using conservative, but
realistic, assumptions to model the Company's jane business, the Company
determined that the carrying value of this unit was slightly greater than the
derived fair value, indicating an impairment in the recorded goodwill. To
determine fair value, the Company relied on three valuation models: guideline
public companies, acquisition analysis and discounted cash flow. For goodwill
valuation purposes only, the revised fair value of this unit was allocated to
the assets and liabilities of the business unit to arrive at an implied fair
value of goodwill, based upon known facts and circumstances, as if the
acquisition occurred currently. This allocation resulted in a write-down of
recorded goodwill in the amount of $20.6 million, which has been reported as the
cumulative effect of a change in accounting principle, as of July 1, 2001, in
the accompanying consolidated statements of earnings. On a product category
basis, this write-down would have primarily impacted the Company's makeup
category.
During fiscal 2002, the Company recorded a goodwill impairment charge related to
its Gloss.com business as a component of its restructuring expense. See Note 5
"Restructuring and Other Non-Recurring Expenses".
F-10
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents adjusted net earnings and earnings per share data
restated to include the retroactive impact of the adoption of SFAS No. 142.
YEAR ENDED JUNE 30
---------------------------
2002 2001 2000
------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Reported Net Earnings before Accounting Change .... $ 212.5 $ 307.4 $ 314.1
Cumulative effect of a change in
accounting principle, net of tax .............. (20.6) (2.2) --
------- ------- -------
Net Earnings .................................... 191.9 305.2 314.1
Preferred stock dividends ....................... 23.4 23.4 23.4
------- ------- -------
Reported Net Earnings Attributable to
Common Stock .................................... 168.5 281.8 290.7
Add back:
Goodwill amortization, net of tax ............... -- 13.4 11.1
------- ------- -------
Adjusted Net Earnings ............................. $ 168.5 $ 295.2 $ 301.8
======= ======= =======
BASIC NET EARNINGS PER COMMON SHARE:
Reported net earnings attributable to
common stock before accounting change ......... $ .79 $ 1.19 $ 1.22
Cumulative effect of a change in
accounting principle, net of tax .............. (.08) (.01) --
------- ------- -------
Net earnings attributable to common stock ....... .71 1.18 1.22
Goodwill amortization, net of tax ............... -- .06 .05
------- ------- -------
Adjusted net earnings attributable to
common stock .................................. $ .71 $ 1.24 $ 1.27
======= ======= =======
DILUTED NET EARNINGS PER COMMON SHARE:
Reported net earnings attributable to
common stock before accounting change ......... $ .78 $ 1.17 $ 1.20
Cumulative effect of a change in
accounting principle, net of tax .............. (.08) (.01) --
------- ------- -------
Net earnings attributable to common stock ....... .70 1.16 1.20
Goodwill amortization, net of tax ............... -- .06 .04
------- ------- -------
Adjusted net earnings attributable to
common stock .................................. $ .70 $ 1.22 $ 1.24
======= ======= =======
Weighted average common shares outstanding:
Basic ........................................... 238.2 238.4 237.7
Diluted ......................................... 241.1 242.2 242.5
F-11
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOODWILL
The change in the carrying amount of goodwill is as follows:
YEAR ENDED
JUNE 30, 2002
-------------
(IN MILLIONS)
Net balance as of June 30, 2001 ..................................... $699.7
Goodwill impairment loss upon adoption of new
accounting principle ........................................... (20.6)
Restructuring write-off of Gloss.com acquisition goodwill ........ (20.1)
Goodwill acquired during the period .............................. 16.6
------
Net balance as of June 30, 2002 ..................................... $675.6
======
OTHER INTANGIBLE ASSETS
Other intangible assets consist of the following:
JUNE 30, 2002
--------------------------------------------
(IN MILLIONS)
GROSS CARRYING ACCUMULATED TOTAL NET
VALUE AMORTIZATION BOOK VALUE
-------------- ------------ ----------
Licensing agreements ..... $ 15.0 $ 6.2 $ 8.8
Trademarks and other ..... 15.2 6.7 8.5
Patents .................. 1.6 0.5 1.1
------ ------ ------
Total ....................... $ 31.8 $ 13.4 $ 18.4
====== ====== ======
Pursuant to the adoption of SFAS No. 142 and effective July 1, 2001, trademarks
have been classified as indefinite lived assets and are no longer amortized. The
cost of other intangible assets is amortized on a straight-line basis over their
estimated useful lives. The aggregate amortization expense related to
amortizable intangible assets for the year ended June 30, 2002 was $1.5 million.
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.
F-12
<PAGE>
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
----------------------------
2002 2001 2000
------ ------ ------
(IN MILLIONS)
Net unrealized investment gains, beginning
of year ....................................... $ 2.9 $ 13.9 $ 6.1
Unrealized investment gains (losses) ............ (5.0) (18.3) 13.0
Provision for deferred income taxes ............. 2.0 7.3 (5.2)
------ ------ -----
Net unrealized investment gains (losses),
end of year ................................... (0.1) 2.9 13.9
------ ------ -----
Net derivative instruments, beginning of year ... (2.0) -- --
Gain (loss) on derivative instruments ........... (16.1) 8.8 --
Provision for deferred income taxes on
gain (loss) ................................... 5.5 (3.1) --
Reclassification to earnings during the year .... 5.3 (12.0) --
Provision for deferred income taxes
on reclassification ........................... (1.8) 4.3 --
------ ------ -----
Net derivative instruments, end of year ......... (9.1) (2.0) --
------ ------ -----
Net minimum pension liability adjustments,
beginning of year ............................. (12.4) -- --
Minimum pension liability adjustments ........... (11.6) (19.4) --
Provision for deferred income taxes ............. 3.7 7.0 --
------ ------ -----
Net minimum pension liability adjustments,
end of year ................................... (20.3) (12.4) --
------ ------ -----
Cumulative translation adjustments,
beginning of year ............................. (109.0) (71.0) (50.4)
Translation adjustments ......................... 46.0 (38.0) (20.6)
------ ------ -----
Cumulative translation adjustments,
end of year ................................... (63.0) (109.0) (71.0)
------ ------ -----
Accumulated other comprehensive income (loss) ... ($ 92.5) ($120.5) ($57.1)
====== ====== =====
The $9.1 million, net of tax, derivative instruments loss recorded in OCI at
June 30, 2002 related to forward contracts that the Company estimates will be
classified to earnings as losses during the next twelve months assuming exchange
rates at the time of settlement are equal to the forward rates as of June 30,
2002. The Company believes these losses would be offset by the effects of
exchange rate movements on the respective underlying transactions for which the
hedges are intended. With regard to interest rate contracts, upon repayment of
the term loan in February 2002 and the termination of interest rate swaps and
options, losses deferred in OCI were reclassified to earnings. Those losses were
substantially offset by deferred gains from previously terminated interest rate
swaps.
REVENUE RECOGNITION
Generally, 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 2002, 4.9% in fiscal 2001 and 4.3%
in fiscal 2000.
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
$1,326.2 million, $1,255.3 million and $1,195.8 million in fiscal 2002, 2001 and
2000, respectively. These amounts include expenses relating to purchase with
purchase and gift with purchase promotions that are now reflected in net sales
and cost of sales due to a change in generally accepted accounting principles.
Advertising and promotional expenses included in operating expenses were
$1,122.0 million, $1,060.8 million and $1,003.4 million in fiscal 2002, 2001 and
2000, respectively.
F-13
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESEARCH AND DEVELOPMENT
Research and development costs, which amounted to $61.3 million, $57.3 million
and $53.8 million in fiscal 2002, 2001 and 2000, 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 $16.5 million, $16.0 million and
$15.5 million in fiscal 2002, 2001 and 2000, 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 and 2000, $6.6 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 "Stock Programs".
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.
For the fiscal year ended June 30, 2002, the Company's three largest customers
accounted for 25% of net sales. No customer accounted for more than 10% of the
Company's net sales during 2002. One department store group accounted for 11% of
the Company's net sales in fiscal years ended 2001 and 2000. In the same years,
another department store group accounted for 10% of the Company's net sales.
Additionally, as of June 30, 2002, the Company's three largest customers
accounted for 28% of its outstanding accounts receivable.
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 fiscal 2001 in the
accompanying consolidated statements of earnings.
F-14
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 2002, the Company adopted the Emerging Issues Task Force
("EITF") Issue No. 01-9, "Accounting for Consideration Given by a Vendor to a
Customer", which codified and reconciled the following EITF Issues: Issue No.
00-14, "Accounting for Certain Sales Incentives", Issue No. 00-22, "Accounting
for Points and Certain Other Time-Based or Volume-Based Sales Incentive Offers,
and Offers for Free Products or Services to be Delivered in the Future" and
Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid
to a Reseller of the Vendor's Products". Issue No. 00-14 addressed when sales
incentives and discounts should be recognized, as well as where the related
revenues and expenses should be classified in the financial statements. Upon
adoption of this Issue, the Company reclassified revenues generated from
purchase with purchase activities as sales and costs of purchase with purchase
and gift with purchase activities as cost of sales, which were previously
reported net as operating expenses. Operating income has remained unchanged by
this adoption. These reclassifications have been reported in the accompanying
consolidated statements of earnings retroactively for all periods reported.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". This statement
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 will be effective for financial statements of
fiscal years beginning after December 15, 2001. The Company will adopt this
statement for the fiscal year ending June 30, 2003 and does not anticipate that
it will have a material impact on the Company's consolidated financial results.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities". This
statement covers restructuring type activities beginning with plans initiated
after December 31, 2002. Should the Company enter into activities covered by
this standard after that date, the provisions of SFAS No. 146 would be applied.
As a result of this standard, there is no impact on the Company's consolidated
financial position or results of operations for the periods presented.
NOTE 3 -- PUBLIC OFFERINGS
During October 2001, a member of the Lauder family sold 5,000,000 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 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.
NOTE 4 -- ACQUISITION OF BUSINESSES
At various times during fiscal 2002, 2001 and 2000, the Company acquired
businesses engaged in the wholesale distribution and retail sale of Aveda
products, as well as other products, in the United States and other countries.
In fiscal 2002, the Company purchased an Aveda wholesale distributor business in
Korea and bought out the minority interest of its Aveda joint venture in the
United Kingdom. The Company also bought out the minority interest of its joint
venture in Chile.
In fiscal 2001, the Company purchased a wholesale distributor business in
Israel, a majority interest of the wholesale distributor business in Chile and
created a joint venture in Greece in which the Company owns a controlling
majority interest.
In June 2000, the Company acquired, for cash, a controlling 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.
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.
F-15
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The aggregate purchase price for these transactions, which includes acquisition
costs, was approximately $18.5 million, $16.0 million, and $186.6 million in
fiscal 2002, 2001 and 2000, respectively, 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 2002, the Company recorded a restructuring
related to repositioning certain businesses as part of its ongoing efforts to
drive long-term growth and increase profitability. The restructuring focused on
cost reduction opportunities related to the Internet, supply chain,
globalization of the organization and distribution channel refinements. The
Company has committed to a defined plan of action, which resulted in an
aggregate pre-tax charge of $117.4 million, of which $59.4 million is cash
related. On an after-tax basis, the aggregate charge was $76.9 million, equal to
$.32 per diluted share.
Specifically, the charge includes the following:
o INTERNET. In an effort to achieve strategic objectives, reduce costs and
improve profitability, the Company outsourced Gloss.com platform development
and maintenance efforts to a third-party provider. Additionally, Gloss.com
closed its San Francisco facility and consolidated its operations in New
York. As a result, included in the charge is a $23.9 million provision for
restructuring the Gloss.com operations, including benefits and severance
packages for 36 employees as well as asset write-offs. The Company also took
a $20.1 million charge to write-off the related Gloss.com acquisition
goodwill.
o SUPPLY CHAIN. Building on previously announced supply chain initiatives, the
Company restructured certain manufacturing, distribution, research and
development, information systems and quality assurance operations in the
United States, Canada and Europe, which included benefits and severance
packages for 110 employees. A charge of $23.7 million was recorded related to
this effort.
o GLOBALIZATION OF ORGANIZATION. The Company continued to implement its
previously announced transition to a global brand structure designed to
streamline the decision making process and increase innovation and
speed-to-market. The next phase of this transition entailed eliminating
duplicate functions and responsibilities, which resulted in charges for
benefits and severance for 122 employees. The Company recorded a charge of
$27.1 million associated with these efforts.
o DISTRIBUTION. The Company evaluated areas of distribution relative to its
financial targets and will focus its resources on the most productive sales
channels and markets. As a result, the Company closed its operations in
Argentina and the remaining customers will be serviced by the Company's
Chilean affiliate. The Company is also closing all remaining in-store
"tommy's shops" and other select points of distribution. The Company recorded
a $22.6 million provision related to these actions, which included benefits
and severance for 85 employees.
F-16
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Following is a summary of the charges as recorded in the consolidated statement
of earnings for fiscal 2002:
RESTRUCTURING
--------------------------
(IN MILLIONS) NET COST OF OPERATING
SALES SALES EXPENSES TOTAL
----- ------- --------- ------
Internet .................................. $ -- $ -- $ 44.0 $ 44.0
Supply Chain .............................. -- -- 23.7 23.7
Globalization of Organization ............. -- -- 27.1 27.1
Distribution .............................. 6.2 0.8 15.6 22.6
----- ---- ------ ------
TOTAL CHARGE .............................. $ 6.2 $0.8 $110.4 117.4
==== ======
Tax effect ................................ (40.5)
------
NET CHARGE ................................ $ 76.9
======
The restructuring charge was recorded in other accrued liabilities or, where
applicable, as a reduction of the related asset. During fiscal 2002, $9.3
million related to this restructuring was paid. As of June 30, 2002, the
restructuring accrual balance was $54.1 million and the Company expects to
settle a majority of the remaining obligations by the end of fiscal 2003 with
certain additional payments made ratably through fiscal 2006.
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 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:
o jane. jane switched 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.
o "tommy's shops". The Company restructured the in-store "tommy's shops" to
focus on the most productive locations and decided to close certain shops
that underperformed relative to expectations. As a result, the Company
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.
o 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 no longer utilized and with the elimination of unproductive
assets related to the change to standard financial systems.
o 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.
F-17
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Following is a summary of the charges as recorded in the consolidated statement
of earnings for fiscal 2001:
RESTRUCTURING
--------------------------
OTHER
NON-
(IN MILLIONS) NET COST OF OPERATING 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
June 30, 2002 an additional $26.7 million was paid. As of June 30, 2002, the
remaining obligation was $7.1 million, the majority of which the Company expects
to settle through the end of fiscal 2003 with remaining payments made ratably
through fiscal 2004.
NOTE 6 -- INCOME TAXES
The provision for income taxes is comprised of the following:
YEAR ENDED JUNE 30
------------------------------
2002 2001 2000
------ ------ ------
(IN MILLIONS)
Current:
Federal .......................... $ 40.7 $ 74.0 $ 93.9
Foreign .......................... 89.8 87.6 82.4
State and local .................. 6.5 7.7 13.8
------ ------ ------
137.0 169.3 190.1
------ ------ ------
Deferred:
Federal .......................... (13.2) 3.7 (0.2)
Foreign .......................... (8.9) 0.5 (4.1)
State and local .................. (0.5) 0.5 (1.2)
------ ------ ------
(22.6) 4.7 (5.5)
------ ------ ------
$114.4 $174.0 $184.6
====== ====== ======
F-18
<PAGE>
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
--------------------------
2002 2001 2000
------ ------ ------
(IN MILLIONS)
Provision for income taxes at statutory rate ..... $116.1 $169.2 $174.5
Increase (decrease) due to:
State and local income taxes, net of
Federal tax benefit .......................... 3.9 5.3 8.2
Effect of foreign operations ................... (0.9) (2.9) (11.7)
Domestic royalty expense not
deductible for U.S. tax purposes ............. -- 1.6 4.0
Other nondeductible expenses ................... 3.2 3.8 3.8
Tax credits .................................... (2.1) -- --
Other, net ..................................... (5.8) (3.0) 5.8
------ ------ ------
Provision for income taxes ....................... $114.4 $174.0 $184.6
====== ====== ======
Effective tax rate ............................... 34.5% 36.0% 37.0%
====== ====== ======
Significant components of the Company's deferred income tax assets and
liabilities as of June 30, 2002 and 2001 were as follows:
2002 2001
------ ------
(IN MILLIONS)
Deferred tax assets:
Deferred compensation and other payroll related expenses ... $ 53.3 $ 47.7
Inventory obsolescence and other inventory
related reserves ......................................... 58.5 54.1
Pension plan reserves ...................................... 26.2 22.5
Postretirement benefit obligations ......................... 25.9 21.7
Various accruals not currently deductible .................. 72.0 57.6
Net operating loss carryforwards ........................... 1.5 3.8
Other differences between tax and financial
statement values ......................................... 9.4 5.7
------ ------
246.8 213.1
Valuation allowance for deferred tax assets .............. (1.5) (3.8)
------ ------
Total deferred tax assets .............................. 245.3 209.3
------ ------
Deferred tax liabilities:
Depreciation and amortization .............................. (60.2) (54.1)
Other differences between tax and financial
statement values ......................................... -- (2.0)
------ ------
Total deferred tax liabilities ........................... (60.2) (56.1)
------ ------
Total net deferred tax assets ............................ $185.1 $153.2
====== ======
As of June 30, 2002 and 2001, the Company had current net deferred tax assets of
$112.4 million and $83.1 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 $72.7 million and $70.1
million, respectively.
Federal income and foreign withholding taxes have not been provided on $473.5
million, $476.4 million and $442.2 million of undistributed earnings of
international subsidiaries at June 30, 2002, 2001 and 2000, 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.
F-19
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2002 and 2001, certain international subsidiaries had tax loss
carryforwards for local tax purposes of approximately $10.2 million and $21.4
million, respectively. With the exception of $3.9 million of losses with an
indefinite carryforward period as of June 30, 2002, these losses expire at
various dates through fiscal 2008. Deferred tax assets in the amount of $1.5
million and $3.8 million as of June 30, 2002 and 2001, 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 $283.4 million, $307.2 million and
$281.2 million for fiscal 2002, 2001 and 2000, respectively.
NOTE 7 -- OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
JUNE 30
----------------
2002 2001
------ ------
(IN MILLIONS)
Advertising and promotional accruals ............... $213.5 $157.0
Employee compensation .............................. 169.9 182.6
Restructuring ...................................... 61.2 35.2
Other .............................................. 182.0 157.3
------ ------
$626.6 $532.1
====== ======
NOTE 8 -- DEBT
The Company's short-term and long-term debt and available financing consist of
the following:
<TABLE>
<CAPTION>
DEBT AT AVAILABLE FINANCING AT
JUNE 30 JUNE 30
---------------- ------------------------------------
COMMITTED UNCOMMITTED
---------------- ----------------
2002 2001 2002 2001 2002 2001
------ ------ ------ ------ ------ ------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Commercial paper with an average
interest rate of 1.81% and 3.96%,
respectively ................................ $130.0 $181.0 $ -- $ -- $620.0 $569.0
6% Senior Notes, due January 15, 2012,
with an effective yield of 6.062% ........... 248.9 -- -- -- -- --
Unsecured notes payable, due
February 1, 2005, with an effective
interest rate of 5.13% ...................... -- 200.0 -- -- -- --
2% Japan loan payable, due in installments
through April 2003 .......................... 5.8 11.3 -- -- -- --
1.45% Japan loan payable, due on
March 28, 2006 .............................. 25.0 24.2 -- -- -- --
Other short-term borrowings ................... 0.8 0.2 -- -- 22.9 30.4
Revolving credit facility ..................... -- -- 400.0 400.0 -- --
Shelf registration for debt securities ........ -- -- -- -- 150.0 400.0
------ ------ ------ ------ ------ ------
410.5 416.7 $400.0 $400.0 $792.9 $999.4
====== ====== ====== ======
Less current maturities ....................... 6.6 5.8
------ ------
$403.9 $410.9
====== ======
</TABLE>
F-20
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In January 2002, the Company issued and sold $250.0 million of 6% Senior Notes
due 2012 ("6% Senior Notes") in a public offering. The 6% Senior Notes were
priced at 99.538% with a yield of 6.062%. Interest payments are required to be
made semi-annually on January 15 and July 15 of each year. The first payment was
made on July 15, 2002. The primary portion of the net proceeds of the offering
was used to repay a $200.0 million term loan. The remainder was used to repay a
portion of the outstanding commercial paper.
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 2002 and 2001, the monthly average amount outstanding was
approximately $12.9 million and $18.6 million, respectively, and the annualized
monthly weighted average interest rate incurred was approximately 4.1% and 6.5%,
respectively.
During fiscal 1998, the Company entered into a 2% loan payable in Japan.
Principal repayments of 350.0 million yen, approximately $2.9 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, 2002 and
2001, 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 maturing commercial paper on a long-term basis. It is
the Company's policy to maintain backup facilities to support the commercial
paper program and its classification as long-term debt.
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, if necessary, 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.
F-21
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 anticipated
transactions as well as 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, 2002, 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 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 July 2003. 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, 2002, we had foreign currency contracts in the form of forward exchange
contracts in the amount of $227.2 million. The foreign currencies included in
these contracts (notional value stated in U.S. dollars) are principally the
Japanese yen ($70.7 million), Euro ($31.7 million), British pound ($26.2
million), Australian dollar ($16.0 million), Swiss franc ($11.8 million), Danish
krone ($11.6 million) and Canadian dollar ($10.5 million). 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
In February 2002, the Company repaid its outstanding term loan, which had a
floating interest rate, with the proceeds from the January 2002 public debt
offering of 6% Senior Notes. As a result, the Company terminated the interest
rate swaps and options that were previously outstanding to mitigate interest
rate volatility. No material gain or loss resulted from the termination of those
contracts. Prior to repayment of the term loan, the Company had 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
had purchased interest rate options that offer similar interest rate protection.
The interest rate swap and options were designated as cash-flow hedges and were
highly effective through the date of termination.
Information regarding the interest rate swap and options is presented in the
following table:
YEAR ENDED OR AT JUNE 30
------------------------------------------
2001
------------------------------------------
WEIGHTED AVERAGE
NOTIONAL -------------------------
(IN MILLIONS) AMOUNTS PAY RATE RECEIVE RATE
- --------------------------------------------------------------------------------
Interest rate swap $ 67.0 6.14% 6.32%
Interest rate options 133.0 6.14 6.62
- --------------------------------------------------------------------------------
F-22
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
Foreign exchange and interest rate contracts:
The fair value of forwards, swaps and options is the estimated amount
the Company would receive or pay to terminate the agreements.
The estimated fair values of the Company's financial instruments are as follows:
JUNE 30
-------------------------------------
2002 2001
----------------- -----------------
CARRYING FAIR CARRYING FAIR
(IN MILLIONS) AMOUNT VALUE AMOUNT VALUE
- ----------------------------------------- -------- ------ -------- ------
NONDERIVATIVES
Cash and cash equivalents ............... $546.9 $546.9 $346.7 $346.7
Long-term debt, including
current portion ....................... 410.5 415.6 416.5 418.1
Cumulative redeemable preferred stock ... 360.0 374.9 360.0 362.6
DERIVATIVES
Foreign exchange and interest
rate contracts ........................ (14.8) (14.8) (2.5) (2.5)
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. Several plans provide pension benefits based primarily on years of
service and employees' earnings. In certain instances, the Company adjusts
benefits in connection with international employee transfers.
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 provides for future plan benefits and maintains
appropriate funded percentages. Such contribution is not less than the minimum
required by the Employee Retirement Income Security Act of 1974, as amended,
("ERISA") and subsequent pension legislation and is not more than the maximum
amount deductible for income tax purposes.
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.
F-23
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 laws and regulations.
POSTRETIREMENT BENEFITS
The Company maintains a domestic contributory postretirement benefit plan which
provides certain medical and dental benefits to eligible employees. Employees
hired after January 1, 2002 will not be eligible for retiree medical benefits
when they retire. 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. The
cost of the Company-sponsored programs is not significant.
Certain of the Company's international subsidiaries and affiliates have
postretirement plans, although most participants are covered by
government-sponsored or administered programs.
The significant components of the above mentioned plans as of and for the year
ended June 30 are summarized as follows:
<TABLE>
<CAPTION>
OTHER THAN
PENSION PLANS PENSION PLANS
---------------------------------------------- --------------------
U.S. INTERNATIONAL POSTRETIREMENT
-------------------- -------------------- --------------------
(IN MILLIONS) 2002 2001 2002 2001 2002 2001
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year ................ $ 280.4 $ 256.2 $ 131.5 $ 132.6 $ 43.2 $ 41.2
Service cost ......................................... 13.5 12.3 7.9 8.0 1.8 1.9
Interest cost ........................................ 20.6 19.7 7.2 6.7 2.9 3.0
Plan participant contributions ....................... -- -- 0.9 0.9 0.1 0.1
Actuarial loss (gain) ................................ 10.8 5.0 3.6 4.8 (1.9) (1.0)
Foreign currency exchange rate impact ................ -- -- 13.8 (14.5) -- --
Benefits paid ........................................ (14.9) (12.9) (10.2) (7.0) (1.9) (2.0)
Plan amendments ...................................... (0.1) 0.1 -- -- (0.5) --
Other ................................................ -- -- -- -- -- --
------- ------- ------- ------- ------ ------
Benefit obligation at end of year ...................... 310.3 280.4 154.7 131.5 43.7 43.2
------- ------- ------- ------- ------ ------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year ......... 179.7 192.1 104.6 117.7 -- --
Actual return on plan assets ......................... (9.5) (17.3) (0.9) (6.5) -- --
Foreign currency exchange rate impact ................ -- -- 10.5 (11.6) -- --
Employer contributions ............................... 46.5 17.8 11.4 10.6 1.8 1.9
Plan participant contributions ....................... -- -- 0.9 0.9 0.1 0.1
Benefits paid from plan assets ....................... (14.9) (12.9) (10.2) (6.5) (1.9) (2.0)
------- ------- ------- ------- ------ ------
Fair value of plan assets at end of year ............... 201.8 179.7 116.3 104.6 -- --
------- ------- ------- ------- ------ ------
Funded status .......................................... (108.5) (100.7) (38.4) (26.9) (43.7) (43.2)
Unrecognized net actuarial loss (gain) ................. 104.4 69.6 37.2 24.3 (8.1) (6.6)
Unrecognized prior service cost ........................ 4.0 4.3 2.5 2.4 (0.2) 0.2
Unrecognized net transition (asset) obligation ......... (1.5) (3.0) 0.6 0.8 -- --
------- ------- ------- ------- ------ ------
Accrued benefit cost ...................................($ 1.6) ($ 29.8) $ 1.9 $ 0.6 ($ 52.0) ($ 49.6)
======= ======= ======= ======= ====== ======
AMOUNTS RECOGNIZED IN THE BALANCE SHEETS CONSIST OF:
Prepaid benefit cost ................................. $ 39.5 $ 6.2 $ 10.1 $ 8.1 -- --
Accrued benefit liability ............................ (47.3) (46.1) (40.1) (28.0) ($ 52.0) ($ 49.6)
Intangible asset ..................................... 0.2 3.7 1.0 1.1 -- --
Other ................................................ 6.0 6.4 30.9 19.4 -- --
------- ------- ------- ------- ------ ------
Net amount recognized ................................($ 1.6) ($ 29.8) $ 1.9 $ 0.6 ($ 52.0) ($ 49.6)
======= ======= ======= ======= ====== ======
</TABLE>
F-24
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
OTHER THAN
PENSION PLANS PENSION PLANS
------------------------------------------------------------- ----------------------------
U.S. INTERNATIONAL POSTRETIREMENT
---------------------------- ---------------------------- ----------------------------
2002 2001 2000 2002 2001 2000 2002 2001 2000
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS
Pre-retirement discount rate 7.00% 7.50% 7.85% 2.75- 3.0- 3.0- 7.00% 7.50% 7.85%
7.00% 7.25% 7.50%
Postretirement discount rate 5.75% 6.00% 6.25% -- -- -- -- -- --
Expected return on assets 9.00% 9.00% 9.00% 4.50- 5.00- 5.00- N/A N/A N/A
8.25% 8.50% 8.25%
Rate of compensation 4.50- 5.00- 5.50- 1.75- 2.0- 2.0- N/A N/A N/A
increase 11.00% 11.50% 12.00% 4.00% 5.50% 6.50%
COMPONENTS OF NET PERIODIC
BENEFIT COST (IN MILLIONS)
Service cost, net ................. $ 13.5 $ 12.3 $ 10.8 $ 8.0 $ 8.0 $ 8.6 $ 1.8 $ 1.9 $ 1.9
Interest cost ..................... 20.6 19.7 16.9 7.2 6.7 6.3 2.9 3.0 2.8
Expected return on assets ......... (17.3) (16.2) (13.5) (8.3) (7.4) (6.6) -- -- --
Amortization of:
Transition (asset) obligation ... (1.5) (1.4) (1.4) 0.2 0.2 0.3 -- -- --
Prior service cost .............. 0.4 0.4 0.4 0.2 0.2 0.3 -- -- --
Actuarial loss (gain) ........... 2.6 1.1 1.3 1.0 0.9 1.2 (0.4) (0.2) --
Other ........................... -- -- 0.8 -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Net periodic benefit cost ......... $ 18.3 $ 15.9 $ 15.3 $ 8.3 $ 8.6 $ 10.1 $ 4.3 $ 4.7 $ 4.7
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
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 2002 would have had the following
effects:
ONE-PERCENTAGE-POINT ONE-PERCENTAGE-POINT
(IN MILLIONS) INCREASE DECREASE
-------------------- --------------------
Effect on total service
and interest costs $0.6 ($0.5)
---- -----
Effect on postretirement
benefit obligations $4.8 ($4.6)
---- -----
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the Company's pension plans at June 30 are as follows:
<TABLE>
<CAPTION>
PENSION PLANS
-------------------------------------------------------------
RETIREMENT GROWTH
ACCOUNT RESTORATION INTERNATIONAL
----------------- ----------------- -----------------
(IN MILLIONS) 2002 2001 2002 2001 2002 2001
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Projected Benefit Obligation ....... $244.7 $216.6 $ 65.6 $ 63.8 $154.7 $131.5
Accumulated Benefit Obligation ..... 191.5 165.1 47.3 46.0 127.9 107.8
Fair Value of Plan Assets .......... 201.8 179.7 -- -- 116.3 104.6
</TABLE>
F-25
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International pension plans with accumulated benefit obligations in excess of
the plans' assets had aggregate projected benefit obligations of $113.3 million
and $92.9 million, aggregate accumulated benefit obligations of $97.2 million
and $79.0 million and aggregate fair value of plan assets of $66.3 million and
$58.0 million at June 30, 2002 and 2001, respectively.
401(K) SAVINGS PLAN (U.S.)
The Company's 401(k) Savings Plan ("Savings Plan") is a contributory defined
contribution plan covering substantially all regular U.S. employees who have
completed the hours and service requirements, as defined by the plan document.
Effective January 1, 2002, regular full-time employees are eligible to
participate in the Plan on the first day of the second month following their
date of hire. The Savings Plan is subject to the applicable provisions of ERISA.
The Company matches a portion of the participant's contributions after one year
of service 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 years ended June 30, 2002 and 2001, and $5.8 million in
fiscal 2000. Shares of the Company's Class A Common Stock are not an investment
option in the Savings Plan and the Company does not use such shares to match
participants' contributions.
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 $95.7 million and $87.3
million as of June 30, 2002 and 2001, respectively. The expense for fiscal 2002,
2001 and 2000 was $11.6 million, $11.6 million and $12.3 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 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, 2002, 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 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.
F-26
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 -- COMMON STOCK
As of June 30, 2002, 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.
Information about the Company's common stock outstanding is as follows:
CLASS A CLASS B
--------- ---------
(SHARES IN THOUSANDS)
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
Acquisition of treasury stock .......... (1,500.0) --
Conversion of Class B to Class A ....... 5,077.8 (5,077.8)
Stock option programs .................. 436.3 --
--------- ---------
BALANCE AT JUNE 30, 2002 ............... 129,190.1 108,412.5
========= =========
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 2002 Share Incentive Plan, 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.
Total net compensation income attributable to the granting of share units and
the related decrease in value of existing share units was $0.2 million in fiscal
2002. Total net compensation expense attributable to the granting of share units
and the increase in value of existing share units was $0.7 million and $1.6
million in fiscal 2001 and 2000, respectively.
F-27
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SHARE INCENTIVE PLANS
The Plans provide for the issuance of 30,750,000 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, 2002, 12,311,500 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 2,175,300, 2,709,500 and 6,252,300 shares were granted in fiscal
2002, 2001 and 2000, respectively, and share units in respect of 50,000 and
43,100 shares were granted in fiscal 2002 and 2001, respectively. During fiscal
2002, 40,700 share units were cancelled without the issuance of any shares, but
the value of such units was transferred to a deferred compensation account.
Generally, the stock option awards become exercisable at various times through
January 2006, while the share units will be paid out in shares of Class A Common
Stock at a time to be determined by the Company.
In addition to awards made by the Company, certain outstanding stock options
were assumed as part of the October 1997 acquisition of Sassaby. Of the 221,200
originally issued options to acquire shares of the Company's Class A Common
Stock, 15,104 were outstanding as of June 30, 2002, all of which were
exercisable and will expire through May 2007.
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 663,000 shares of its Class A
Common Stock pursuant to such agreements as of June 30, 2002. In accordance with
such employment agreements, stock option awards in respect of 1,650,000 shares
were granted in fiscal 2000, and approximately 900 share units were granted in
fiscal 2002 and 2001, and 33,700 share units were granted in fiscal 2000. The
reserve is solely for dividend equivalents on units granted pursuant to one of
the agreements. Most of the stock options granted pursuant to the agreements are
exercisable and expire at various times from November 2005 through July 2009.
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, 2002, 2001 and
2000, and changes during the years then ended, is presented below:
<TABLE>
<CAPTION>
2002 2001 2000
--------------------------- ------------------------ -------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
(SHARES IN THOUSANDS) SHARES PRICE SHARES PRICE SHARES PRICE
- ---------------------------------------- ------------ -------------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year....... 23,393.2 $34.55 21,914.1 $33.14 15,439.1 $22.80
Granted at fair value............... 2,175.3 39.07 2,709.5 42.80 7,902.2 50.88
Exercised........................... (435.4) 17.85 (806.0) 16.50 (1,188.5) 15.28
Cancelled or Expired................ (289.6) 46.38 (424.4) 48.19 (238.7) 41.06
--------- --------- ---------
Outstanding at end of year............. 24,843.5 35.10 23,393.2 34.55 21,914.1 33.14
========= ========= =========
Options exercisable at year-end........ 13,149.5 27.59 8,497.6 21.69 4,252.4 18.86
========= ========= =========
Weighted-average fair value of
options granted during the year..... $ 16.02 $ 17.01 $ 20.14
========= ======== =========
</TABLE>
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.
F-28
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-----------------------------------------
2002(i) 2001(ii) 2000(ii)
----------- ---------- -----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net earnings..................................... As reported $191.9 $305.2 $314.1
Pro forma 189.2 280.8 216.5
Net earnings per common share - Basic............ As reported $ .71 $ 1.18 $ 1.22
Pro forma .70 1.08 .81
Net earnings per common share - Diluted.......... As reported $ .70 $ 1.16 $ 1.20
Pro forma .68 1.06 .79
</TABLE>
(i) Beginning in fiscal 2002, the pro forma charge for compensation cost related
to stock options granted will be recognized over the service period. The service
period represents the period of time between the date of grant and the date each
option becomes exercisable without consideration of acceleration provisions
(E.G. retirement, change of control, ETC.).
(ii) In fiscal 2001 and 2000, the Company determined the pro forma charge for
compensation cost assuming all options were immediately vested upon the date of
grant.
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
--------------------------------------
2002 2001 2000
------- ------- -------
Expected volatility.................... 31% 31% 30%
Average expected option life........... 7 years 7 years 7 years
Average risk-free interest rate........ 4.9% 5.9% 6.1%
Dividend yield......................... .50% .50% .50%
Summarized information about the Company's stock options outstanding and
exercisable at June 30, 2002 is as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------- ----------------------------
EXERCISE AVERAGE AVERAGE AVERAGE
PRICE RANGE OPTIONS(a) LIFE(b) PRICE(c) OPTIONS(a) PRICE(c)
- ------------------------------------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
$2.065 to $3.10 15.1 5.3 $ 3.08 15.1 $ 3.08
$13.00 to $20.813 3,531.6 3.4 13.06 3,531.6 13.06
$21.313 to $30.52 5,960.0 4.8 23.67 5,053.1 23.18
$31.875 to $47.625 8,788.6 7.6 39.33 2,660.1 37.63
$48.125 to $53.50 6,548.2 7.1 51.81 1,889.6 52.58
-------- --------
$2.065 to $53.50 24,843.5 35.10 13,149.5 27.59
======== ========
</TABLE>
- ----------
(a) Shares in thousands.
(b) Weighted average contractual life remaining in years.
(c) Weighted average exercise price.
Subsequent to June 30, 2002, the Company granted options under the terms of the
Plans described above to purchase an additional 6,410,700 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, 2002 the Company granted
approximately 55,100 share units to a key executive pursuant to the terms of the
Fiscal 2002 Share Incentive Plan.
F-29
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 -- COMMITMENTS AND CONTINGENCIES
Total rental expense included in the accompanying consolidated statements of
earnings was $142.8 million in fiscal 2002, $120.9 million in fiscal 2001 and
$100.7 million in fiscal 2000. At June 30, 2002, the future minimum rental
commitments under long-term operating leases are as follows:
YEAR ENDING JUNE 30 (IN MILLIONS)
-------------------
2003........................................ $ 98.7
2004........................................ 91.6
2005........................................ 79.3
2006........................................ 53.6
2007........................................ 46.9
Thereafter.................................. 173.4
--------
$ 543.5
========
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 alleges 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
filed counterclaims, which, among other things, challenge the validity of the
patent. Mediation directed by the Court took place in August 2001 and in January
2002, but did not result in resolution of the litigation. In January 2002, the
Court indefinitely postponed the trial date (then set for February 2002) and
established a schedule for pretrial motions. Both parties have filed summary
judgment motions, and the Court is expected to schedule oral argument on the
motions. The Company intends to defend the lawsuit vigorously. Although the
final outcome cannot be predicted with certainty, based on legal analysis and
the discovery proceedings in the litigation, management believes that the case
will not have a material adverse effect on the Company's consolidated financial
condition.
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 have commenced.
Court-directed mediation and related settlement discussions are continuing. The
Company intends to defend the lawsuit vigorously. While no assurance can be
given as to the ultimate outcome, based on preliminary investigation, management
believes that the case will not have a material adverse effect on the Company's
consolidated financial condition.
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 certain other 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
condition.
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. The Company and other
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 condition.
F-30
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and 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. Included in accumulated other
comprehensive income was an unrealized investment loss (net of deferred taxes)
of $0.1 million at June 30, 2002 and an unrealized investment gain (net of
deferred taxes) of $2.9 million at June 30, 2001.
NOTE 17 -- STATEMENT OF CASH FLOWS
SUPPLEMENTAL DISCLOSURE OF SIGNIFICANT NON-CASH TRANSACTIONS
As a result of stock option exercises, the Company recorded tax benefits of $2.9
million, $7.2 million and $13.4 million during fiscal 2002, 2001 and 2000,
respectively, which are included in additional paid-in capital in the
accompanying consolidated financial statements.
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. Although the Company
operates in one business segment, beauty products, management also evaluates
performance on a product category basis.
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 Financial Accounting Standards Board'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.
F-31
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30
--------------------------------
2002 2001 2000
-------- -------- --------
(IN MILLIONS)
SEGMENT DATA
NET SALES:
Skin Care ................................ $1,703.3 $1,660.7 $1,577.0
Makeup ................................... 1,790.5 1,721.6 1,603.5
Fragrance ................................ 1,017.3 1,085.1 1,117.2
Hair Care ................................ 215.8 180.7 113.9
Other .................................... 23.0 27.6 28.7
-------- -------- --------
4,749.9 4,675.7 4,440.3
Restructuring ............................ (6.2) (8.0) --
-------- -------- --------
$4,743.7 $4,667.7 $4,440.3
======== ======== ========
DEPRECIATION AND AMORTIZATION:
Skin Care ................................ $ 58.3 $ 48.6 $ 39.4
Makeup ................................... 60.0 64.1 52.7
Fragrance ................................ 36.0 32.6 28.8
Hair Care ................................ 6.5 9.6 6.9
Other .................................... 1.2 1.4 1.3
-------- -------- --------
$ 162.0 $ 156.3 $ 129.1
======== ======== ========
OPERATING INCOME:
Skin Care ................................ $ 248.4 $ 266.9 $ 240.5
Makeup ................................... 183.2 212.5 181.8
Fragrance ................................ 13.4 63.6 80.6
Hair Care ................................ 13.7 13.1 12.4
Other .................................... 0.1 2.5 0.5
-------- -------- --------
458.8 558.6 515.8
Reconciliation:
Restructuring and other
non-recurring expenses ................. (117.4) (63.0) --
Interest expense, net .................... (9.8) (12.3) (17.1)
-------- -------- --------
Earnings before Income Taxes, Minority
Interest and Accounting Change ......... $ 331.6 $ 483.3 $ 498.7
======== ======== ========
GEOGRAPHIC DATA
NET SALES:
The Americas ............................. $2,878.2 $2,857.8 $2,714.0
Europe, the Middle East & Africa ......... 1,261.1 1,221.8 1,142.2
Asia/Pacific ............................. 610.6 596.1 584.1
-------- -------- --------
4,749.9 4,675.7 4,440.3
Restructuring ............................ (6.2) (8.0) --
-------- -------- --------
$4,743.7 $4,667.7 $4,440.3
======== ======== ========
OPERATING INCOME:
The Americas ............................. $ 222.9 $ 299.9 $ 287.9
Europe, the Middle East & Africa ......... 179.9 201.8 168.9
Asia/Pacific ............................. 56.0 56.9 59.0
-------- -------- --------
458.8 558.6 515.8
Restructuring and other
non-recurring expenses ................. (117.4) (63.0) --
-------- -------- --------
$ 341.4 $ 495.6 $ 515.8
======== ======== ========
F-32
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
JUNE 30
----------------------------------
2002 2001 2000
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
TOTAL ASSETS:
The Americas ..................................... $2,467.1 $2,379.9 $2,187.8
Europe, the Middle East & Africa ................. 703.3 610.3 606.8
Asia/Pacific ..................................... 246.1 228.6 248.7
-------- -------- --------
$3,416.5 $3,218.8 $3,043.3
======== ======== ========
LONG-LIVED ASSETS (property, plant and equipment):
The Americas ..................................... $ 458.4 $ 445.2 $ 393.6
Europe, the Middle East & Africa ................. 99.6 70.5 72.6
Asia/Pacific ..................................... 22.7 13.0 14.1
-------- -------- --------
$ 580.7 $ 528.7 $ 480.3
======== ======== ========
</TABLE>
NOTE 19 -- UNAUDITED QUARTERLY FINANCIAL DATA
The following summarizes the unaudited quarterly operating results of the
Company for the years ended June 30, 2002 and 2001:
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 TOTAL YEAR
------------ ----------- -------- ------- ----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
FISCAL 2002
Net sales...................... $1,194.8 $1,298.2 $1,121.7 $1,129.0 $ 4,743.7
Gross profit................... 849.5 954.9 803.4 862.5 3,470.3
Operating income (loss)........ 152.9 143.5 81.1 (36.1) 341.4
Net earnings (loss)............ 97.1(a) 90.1 50.7 (25.4) 212.5(a)
Basic EPS...................... .30(a) .35 .19 (.13) .71(a)
Diluted EPS.................... .30(a) .35 .19 (.13) .70(a)
FISCAL 2001
Net sales...................... $1,185.0 $1,332.0 $1,103.5 $1,047.2 $ 4,667.7
Gross profit................... 835.4 993.0 805.8 807.1 3,441.3
Operating income............... 153.3 203.5 105.3 33.5 495.6
Net earnings................... 92.4(b) 127.3 65.1 20.4 305.2(b)
Basic EPS...................... .36(b) .51 .25 .06 1.18(b)
Diluted EPS.................... .36(b) .50 .24 .06 1.16(b)
</TABLE>
(a) Net earnings for the Quarter ended September 30, 2001 include a one-time
charge of $20.6 million or $.08 per common share, attributable to the
cumulative effect of adopting SFAS No. 142, "Goodwill and Other Intangible
Assets".
(b) 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".
NOTE 20 -- UNAUDITED SUBSEQUENT EVENT
Pursuant to the Company's authorized share repurchase program, subsequent to
June 30, 2002, the Company purchased an additional 4.4 million shares of Class A
Common Stock for $138.1 million bringing the cumulative total of acquired shares
to 7.0 million under this program.
F-33
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
----------------------------------------
The Board of Directors and Stockholders
The Estee Lauder Companies Inc.:
Under date of August 9, 2002, we reported on the consolidated balance sheet of
The Estee Lauder Companies Inc. and subsidiaries as of June 30, 2002, and the
related consolidated statements of earnings, stockholders' equity and
comprehensive income, and cash flows for the year then ended, which are included
in this filing on Form 10-K. In connection with our audit of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedule (Schedule II - Valuation and Qualifying Accounts)
in this filing on Form 10-K. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audit.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
New York, New York
August 9, 2002
S-1
<PAGE>
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 audit was 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.
New York, New York Arthur Andersen LLP
August 10, 2001
This is a copy of the audit report previously issued by Arthur Andersen LLP in
connection with our filing on Form 10-K for the fiscal year ended June 30, 2001.
This audit report has not been reissued by Arthur Andersen LLP in connection
with this filing on Form 10-K. See Exhibit 23.2 for further discussion.
S-2
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED JUNE 30, 2002
(IN MILLIONS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------- -------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Reserves deducted in the balance sheet
from the assets to which they apply:
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended June 30, 2002 $ 26.8 $ 28.6 --- $ 24.8(a) $ 30.6
======= ====== ====== =======
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
======= ====== ====== =======
ACCRUED RESTRUCTURING AND OTHER NON-RECURRING CHARGES:
Year ended June 30, 2002 (b) $ 35.2 $ 62.3 --- $ 36.3 $ 61.2
======= ======= ====== =======
Year ended June 30, 2001 (b) $ --- $ 35.9 --- $ 0.7 $ 35.2
======= ====== ====== =======
</TABLE>
- ----------
(a) Includes amounts written-off, net of recoveries.
(b) Included in other accrued liabilities.
S-3
<PAGE>
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).*
4.1 Indenture, dated as of November 5, 1999, between the Company and
State Street Bank and Trust Company, N.A. (filed as Exhibit 4 to
Amendment No. 1 to our Registration Statement on Form S-3 (No.
333-85947) on November 5, 1999).*
4.2 Officers' Certificate, dated January 10, 2002, defining certain
terms of the 6% Senior Notes due 2012 (filed as Exhibit 4.2 to our
Quarterly Report on Form 10-Q for the quarter ended December 31,
2001(the "FY 2002 Q2 10-Q")).*
4.3 Global Note for the 6% Senior Notes due 2012 (filed as Exhibit 4.3
to the FY 2002 Q2 10-Q).*
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 Stockholders' 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
(the "FY 2000 10-K")).*
10.1e Amendment No. 5 to Stockholders' Agreement.
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 (filed as Exhibit
10.2c to our Annual Report on Form 10-K for the year ended
June 30, 2001 (the "FY 2001 10-K")).*
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. +
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 (filed as Exhibit 10.8
to the FY 2001 10-K).* +
10.8a Amendment to 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).* +
10.9a Amendment to Employment Agreement with Ronald S. Lauder. +
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 (filed as
Exhibit 10.10a to the FY 2001 10-K).* +
10.10b Amendment to Employment Agreement with Fred H. Langhammer. +
10.11 Employment Agreement with Daniel J. Brestle (filed as Exhibit 10.11
to the FY 2001 10-K).* +
10.11a Amendment to Employment Agreement with Daniel J. Brestle. +
<PAGE>
THE ESTEE LAUDER COMPANIES INC.
INDEX TO EXHIBITS
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).* +
10.12a Amendment to Employment Agreement with William P. Lauder. +
10.13 Employment Agreement with Patrick Bousquet-Chavanne (filed as
Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter
ended September 30, 2001).* +
10.13a Amendment to Employment Agreement with Patrick Bousquet-Chavanne. +
10.14 Form of Deferred Compensation Agreement (interest-based) with
Outside Directors (filed as Exhibit 10.14 to the FY 2001 10-K).* +
10.15 Form of Deferred Compensation Agreement (stock-based) with Outside
Directors (filed as Exhibit 10.15 to the FY 2001 10-K).* +
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).* +
10.17 Fiscal 2002 Share Incentive Plan (filed as Exhibit 4(d) to our
Registration Statement on Form S-8 (No. 333-72684) on November 1,
2001).* +
21.1 List of significant subsidiaries.
23.1 Consent of KPMG LLP.
23.2 Notice regarding consent of Arthur Andersen LLP.
24.1 Power of Attorney.
- ----------
* Incorporated herein by reference.
+ Exhibit is a management contract or compensatory plan or arrangement.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1(E)
<SEQUENCE>3
<FILENAME>c25612_ex10-1e.txt
<TEXT>
EXHIBIT 10.1 (e)
AMENDMENT NO. 5 TO STOCKHOLDERS' AGREEMENT
AMENDMENT NO. 5 (this "Amendment"), effective as of April 5, 2002,
to that certain STOCKHOLDERS' AGREEMENT (the "Stockholders' Agreement"), dated
November 22, 1995, as amended by that Amendment No. 1, effective September 11,
1996, and as amended by that Amendment No. 2, effective as of December 10, 1996,
and as amended by that Amendment No. 3, effective as of February 4, 1997, and as
amended by that Amendment No. 4, effective as of June 30, 2000, by and among
Leonard A. Lauder, Ronald S. Lauder, William P. Lauder, Gary M. Lauder, LAL
Family Partners L.P., Lauder & Sons L.P., the Ronald S. Lauder Foundation, Gary
M. Lauder as Custodian under the New York Uniform Transfers to Minors Act f/b/o
Rachel Lauder, Gary M. Lauder as Custodian under the New York Uniform Transfers
to Minors Act f/b/o Danielle Lauder and the trustees of the various trusts set
forth on the signature pages hereof (hereinafter collectively referred to as the
"Stockholders"), and THE ESTEE LAUDER COMPANIES INC., a corporation organized
under the laws of the State of Delaware (the "Corporation"). Capitalized terms
defined in the Stockholders' Agreement and not otherwise defined herein being
used herein as therein defined.
W I T N E S S E T H :
WHEREAS, the Stockholders and the Corporation desire to amend the
Stockholders' Agreement to delete certain Stockholders as parties thereto.
NOW THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the parties hereto agree as follows:
Article 1. AMENDMENT. The Stockholders' Agreement is hereby
amended to delete The Estee Lauder 1994 Trust and the trustees thereof, solely
in their capacities as trustees of such trust, as parties to the Stockholders'
Agreement.
Article 2. MISCELLANEOUS. (a) Upon the effectiveness of this
Amendment, each reference in the Stockholders' Agreement to "this agreement,"
"hereunder," "hereof," "herein," or words of like import, shall mean and be a
reference to the Stockholders' Agreement as amended hereby.
(b) This Amendment shall be governed by, and construed and
enforced in accordance with, the laws of the State of New York, without giving
effect to the provisions, policies or principles thereof respecting conflict or
choice of laws.
(c) This Amendment shall be binding upon and inure to the
benefit of the Corporation, its successors and assigns and to the Stockholders
and their respective heirs, personal representatives, successors and assigns.
1
<PAGE>
(d) This Amendment may not be changed orally, but only by an
agreement in writing as signed by the party against whom enforcement of any
waiver, change, modification or discharge is sought.
(e) With respect to obligations of trustees who are parties
hereto in their capacity as trustees of one or more trusts, this Amendment shall
be binding upon such trustees only in their capacities as trustees, not
individually and not with respect to any Shares, other than Shares held by them
in their capacity as trustees of such trusts.
(f) This Amendment may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one instrument. Each counterpart may consist of a
number of copies each signed by less than all, but together signed by all, the
parties hereto.
[The remainder of this page intentionally left blank.]
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed and
delivered this Amendment as of the date first above written.
THE ESTEE LAUDER COMPANIES INC.
By: /s/ Leonard A. Lauder
-------------------------------------
Name: Leonard A. Lauder
Title: Chairman
/s/ Leonard A. Lauder
----------------------------------------
Leonard A. Lauder, (a) individually, (b)
as President of LAL Family Corporation,
the sole general 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.,
(e) as Trustee of The 1995 Estee Lauder
LAL Trust (a Class B General Partner of
Lauder & Sons L.P.) and (f) as Trustee
of The Estee Lauder 2002 Trust
/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.), (f) as Chairman of
the Ronald S. Lauder Foundation and (g)
as Trustee of The Estee Lauder 2002
Trust
3
<PAGE>
/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/ 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 Aerin Lauder
Zinterhofer 2000 Revocable Trust u/a/d
April 24, 2000, Aerin Lauder
Zinterhofer, as Grantor
4
<PAGE>
/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
/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.), (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 Estee Lauder 2002
Trust
5
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.5
<SEQUENCE>4
<FILENAME>c25612_ex10-5.txt
<TEXT>
EXHIBIT 10.5
THE ESTEE LAUDER COMPANIES
RETIREMENT GROWTH ACCOUNT PLAN
AS AMENDED AND RESTATED
GENERALLY EFFECTIVE AS OF JANUARY 1, 2002
<PAGE>
AMENDMENT AND RESTATEMENT OF
THE ESTEE LAUDER COMPANIES
RETIREMENT GROWTH ACCOUNT PLAN
------------------------------
SECTION 1
NAME AND CONSTRUCTION
1.1 NAME OF PLAN. This Plan shall be known as the "The Estee
Lauder Companies Retirement Growth Account Plan."
1.2 CONSTRUCTION. It is the intention of Estee Lauder that the
amended and restated Plan, and its attendant trust fund, will continue to meet
the requirements of ERISA and be qualified and exempt from taxes under Sections
401 and 501 of the Code. Effective January 1, 1996, the Plan also is intended to
be a "multiple employer plan" within the meaning of Section 413(c) of the Code.
The Plan is intended to be a defined benefit plan for purposes of ERISA and the
Code.
1.3 EFFECTIVE DATE.
(a) This Amendment and Restatement of the Plan shall
generally be effective as of January 1, 2002; PROVIDED, HOWEVER, that:
(i) The provisions of Sections 2.12, 2.16, 5.2,
7.1(a), 7.3, 8.4(b), 8.4(c) and 15 (other than Section 15.5) shall be
effective January 1, 1991.
(ii) The provisions of Section 14.10 shall be
effective December 12, 1994.
(iii) The provisions of Sections 2.6, 2.10, 2.15,
2.19, 2.21, 15.5 and 16 shall be effective January 1, 1996.
(iv) The provisions of Section 7.1(b) shall be
effective October 1, 1996, and prior to such date the terms and
conditions of such Section are governed by Section 6.1(b) of the Plan in
effect on January 1, 1993.
(v) The provisions of Sections 2.11 and 5.4 shall
be effective January 1, 1997.
(vi) The provisions of the last paragraph of
Section 5.5 and Section 8.4(a) shall be effective January 1, 1998.
(vii) The provisions of Appendix A shall be
effective January 1, 1999 (except that those provisions thereof which, by
their terms, are not limited to periods on and after that date, shall be
effective January 1, 1991).
2
<PAGE>
(viii) The changes to such other provisions of the
Plan shall be effective as of such dates as are set forth in such
provisions.
(ix) Other provisions of the Plan shall be
effective as of such other earlier or later dates as shall be necessary
to comply with those changes in applicable law which were effective prior
to January 1, 2002.
(b) The rights of any person who terminated employment
or retired on or before the effective date of any of the relevant provisions of
this amendment and restatement of the Plan, including his or her eligibility for
benefits, shall be determined solely under the terms of the Plan as in effect on
the date of his termination or retirement, unless such person is thereafter
reemployed (and, to the extent relevant, again becomes an Active Participant) on
or after the effective date of any such provision of amendment and restatement,
in which case such provision shall apply to such person.
3
<PAGE>
SECTION 2
DEFINITIONS
2.1 "Accrued Benefit" means a monthly amount of retirement
income determined for a Participant as of a specified date, commencing on a
Participant's Normal Retirement Date, and payable as a single life annuity. The
Accrued Benefit as of a specified date equals the Participant's Retirement
Account divided by the applicable factor from Appendix A. For those who were
participants in the Prior Plans as of December 31, 1990 and satisfy the
applicable requirements set forth in Appendix B, the Accrued Benefit is the
greater of the accrued benefit described above or the accrued benefit determined
under the Prior Plans, as described in Section 5.5 hereof.
2.2 "Actuarial Equivalent" means, with respect to a
Participant's Accrued Benefit, another annuity or benefit that commences at a
different date and/or is payable in a different form than the Accrued Benefit,
but which has the same present value as the Accrued Benefit, when measured on
the basis of the interest rate, mortality table and other factors specified in
Appendix A as of the date of commencement of payment of such annuity or benefit,
as calculated by or under the supervision of an actuary appointed by Estee
Lauder or the Fiduciary Committee, which actuary has been enrolled under
Subtitle C of Title III of ERISA.
2.3 "Approved Absence" means (a) any period of absence from
work (other than any such absence on account of a period of Disability), with
the approval or direction of the Employer, for up to 12 months and, provided
said Employee returns to work for the Employer at such time as the Employer may
reasonably require, the Approved Absence may exceed such 12-month period but
will not be in excess of 24 months, (b) any period of absence during which the
Employee was in military service with the armed forces (including Coast Guard
and Merchant Marine Service) if the Employee has reemployment rights under
applicable laws and complies with the requirements of the law as to reemployment
and is reemployed, and (c) any period of Disability, but (except as provided in
the last paragraph of Section 5.5) not to exceed twelve months. An Approved
Absence will be disregarded for the purpose of the Plan, and the Employee will
be regarded as in the service of the Employer during any period of an Approved
Absence.
The Hours of Service credited during an Approved Absence shall be
those which would normally have been credited but for such absence, or in any
case in which the Employer is unable to determine such hours normally credited,
eight (8) Hours of Service per day.
2.4 "Average Final Compensation" means the highest average
annual "compensation" which is produced by averaging an Employee's compensation
for any Five (5) consecutive calendar years within the Employee's Years of
Credited Service. For purposes of this Section only, "compensation" means the
straight time basic salary or wages paid to an Employee by the Employer for his
services during each calendar year, inclusive of salary reduction contributions
made by an Employer on behalf of the Employee under a "cash or deferred
arrangement" described in Section 401(k) of the Code and pre-tax contributions
made by the Employee under a "cafeteria plan" described in Section 125 of the
Code and (effective
4
<PAGE>
January 1, 2001) under an arrangement described in Section 132(f)(4) of the
Code, in each case maintained by an Employer, but excluding bonuses, payments
for overtime, other Employer contributions for pension, insurance or other
welfare benefits, or any other special payments. Notwithstanding the foregoing
provisions of this Section 2.4, except to the extent otherwise provided in
Section 5.5, "compensation" for each calendar year shall not exceed $200,000
($150,000 for Plan Years beginning on or after January 1, 1994 and prior to
January 1, 2002), subject to any adjustment, for Plan Years beginning on or
after January 1, 1994, to reflect increases in the cost of living determined by
the Secretary of the Treasury pursuant to Section 401(a)(17) of the Code. In
determining Average Final Compensation for Participants whose retirement or
termination of employment is on or after January 1, 2002, the Participant's
"compensation" for 2001 and prior years shall be subject to the annual
compensation limit in effect under Section 401(a)(17) of the Code on January 1,
2002 ($200,000).
2.5 "Beneficiary" means any individual, trust, estate or other
recipient entitled pursuant to Section 7.3 of this Plan to receive benefits, on
either a primary or contingent basis, because of the death of a Participant.
2.6 "Board of Directors" or "Board" means the Board of
Directors of Estee Lauder.
2.7 "Break in Service" means, with respect to any person, a
Plan Year during which such person does not perform more than 500 Hours of
Service; provided, however, that for purposes of Years of Eligibility Service,
such term shall mean the 12-month period commencing on a person's Employment
Commencement Date or a Plan Year, as the case may be (a "computation period"),
during which such person does not perform more than 500 Hours of Service. A
person who is absent from work for maternity or paternity reasons shall be
credited with the lesser of the number of Hours of Service necessary to prevent
a Break in Service or the number of hours which otherwise would normally have
been credited to such person but for such absence (i) in the computation period
in which the absence begins, if necessary to prevent a Break in Service, and
(ii) in all other cases, in the following computation period. For purposes of
this Section, an absence from work for maternity or paternity reasons means an
absence (i) by reason of the pregnancy of the person, (ii) by reason of the
birth of a child of the person, (iii) by reason of the placement of a child with
the person in connection with the adoption of such child by such person or (iv)
for purposes of caring for such child for a period beginning immediately
following such birth or placement. No person shall incur a Break in Service
solely on account of an absence which qualifies under the Family Medical Leave
Act of 1993, to the extent required under the provisions of such Act.
2.8 "Code" means the Internal Revenue Code of 1986, as amended.
2.9 "Committee" means The Estee Lauder Inc. Employee Benefits
Committee appointed pursuant to Section 11 hereof.
2.10 "Compensation" means, for a particular Plan Year, the
straight time basic salary or wages paid to an Employee by the Employer on and
after the Entry Date on which the Employee first becomes eligible to participate
in the Plan pursuant to Section 3, inclusive of salary reduction contributions
made by an Employer on behalf of the Employee under a "cash or
5
<PAGE>
deferred arrangement" described in Section 401(k) of the Code and pre-tax
contributions made by the Employee under a "cafeteria plan" described in Section
125 of the Code or (effective January 1, 2001) under an arrangement described in
Section 132(f)(4) of the Code, in each case maintained by the Employer, and
including bonuses, shift differential, back-up pay, overtime pay, paid time off,
training and travel time pay, but excluding (i) commissions, (ii) payments in
lieu of unused vacation time, sick time, holidays, seniority days or other
unused paid time off, (iii) referral fees, (iv) gratuities, (v) relocation
payments, (vi) special allowance payments, (vii) sign-on payments; (viii)
on-call compensation, (ix) any other amounts which are not currently included in
the Employee's income for Federal income tax purposes and (x) amounts paid under
Estee Lauder's Short-Term Disability Plan or Long-Term Disability Plan. In
addition to other applicable limitations that may be set forth in the Plan and
notwithstanding any other contrary provision of the Plan, Compensation taken
into account under the Plan for the purpose of calculating a Plan Participant's
Accrued Benefit shall not exceed $200,000 ($150,000 for Plan Years beginning on
or after January 1, 1994 and prior to January 1, 2002), subject to any
adjustment to reflect increases in the cost of living determined by the
Secretary of the Treasury pursuant to Section 401(a)(17) of the Code.
Notwithstanding the foregoing, for Participants who terminate employment on or
after December 1, 2002, the annual amounts credited to their Retirement Account
pursuant to Section 5 for Plan Years prior to 2002 shall be retroactively
adjusted as though the $200,000 dollar limitation in effect under Section
401(a)(17) of the Code for 2002 had been in effect for such prior Plan Years
(subject to the Plan's compliance with Sections 401(a)(4) and 415 of the Code
and the Treasury Regulations thereunder).
2.11 "Disability" means, with respect to any Employee, a
condition which constitutes a disability under the terms of the Employer's
Long-Term Disability Plan or under Title II of the Federal Social Security Act,
regardless of whether such Employee is otherwise in fact entitled to receive
benefits under the Employer's Long-Term Disability Plan and/or Title II of the
Federal Social Security Act.
2.12 "Early Retirement Date" means the first day of the month
which next follows a Participant's termination of employment on or after
attainment of at least age 55 and completion of at least ten (10) Years of
Service, but prior to the Participant's Normal Retirement Date.
2.13 "Effective Date," with respect to the Plan as amended and
restated and set forth herein, means January 1, 2002; PROVIDED, HOWEVER, that
certain provisions of the Plan shall be effective as of the dates set forth in
Section 1.3.
2.14 "Employee" means any person who is classified as an
employee on the payroll records of an Employer, in accordance with the
Employer's standard personnel practices. Individuals not classified as employees
on the payroll records of the Employer for a particular period shall not be
considered "Employees" for such period even if a court or administrative agency
subsequently determines that such individuals were common law employees of the
Employer during such period. Anything herein to the contrary notwithstanding,
the term "Employee" shall not include:
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(a) a person who is represented by or included in a
collective bargaining unit recognized by the Employer unless the Employer and
the collective bargaining agent have agreed that the Plan shall apply to such
unit;
(b) with respect to periods prior to July 1, 1998, an
In-Store Employee;
(c) a person who would be an In-Store Employee, but for
the fact that such person is classified as an international military sales
person;
(d) a person who is a nonresident alien who receives no
compensation from an Employer which constitutes income from sources within the
United States (other than a person employed by Clinique Laboratories, Inc.
(Puerto Rico Branch));
(e) any person who is performing services for the
Employer pursuant to an agreement between the Employer and a third party leasing
organization, staffing firm, professional employer organization or other similar
third party organization; or
(f) a person who is classified as an "on-call employee"
in accordance with the Employer's standard personnel practices.
Notwithstanding the foregoing, and solely for purposes of
determining a person's non-forfeitable benefit and eligibility to become a
Participant, if a person who had been a Leased Employee becomes an Employee,
such person shall be treated as an Employee from the first date that such person
would have first been treated as a Leased Employee, determined without regard to
the one-year requirement of Section 414(n)(2)(B) of the Code; provided, however,
that such person shall not become a Participant prior to the first Entry Date
coincident with or next following becoming an Employee.
2.15 "Employer" means Estee Lauder, and any other company
included within the Group that includes Estee Lauder (or any other corporation
or unincorporated trade or business not included within the Group that includes
Estee Lauder) that adopts the Plan with the approval of Estee Lauder, as
provided in Section 15 hereof, and any successor to any such company that
participated in this Plan.
2.16 "Employment Commencement Date" means, with respect to any
person, the date coincident with or next following the date on which such person
first performs an Hour of Service; provided, however, that with respect to a
person who incurs a Break in Service and is thereafter reemployed, such term
shall mean the date subsequent to such Break in Service on which he first
performs an Hour of Service.
2.17 "Entry Date" means each January 1 and July 1; PROVIDED,
HOWEVER, that prior to January 1, 1993, with respect to any person who was a
regular and non-contingent Employee of the Employer, "Entry Date" means the
first date coincident with or next following such person's Employment
Commencement Date.
2.18 "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
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2.19 "Estee Lauder" means Estee Lauder Inc., a corporation duly
organized under the laws of the State of Delaware, and any successor thereto.
2.20 "Fiduciary Committee" means the Estee Lauder Inc. Fiduciary
Investment Committee, the members of which shall be appointed by the Board.
2.21 "Group" means Estee Lauder and any other unit or
organization that is related to Estee Lauder as a member of a "controlled group
of corporations," a group under "common control" or an "affiliated service
group," all as determined pursuant to Sections 414(b), (c), and (m) of the Code.
With respect to a participating Employer which is not in the same Group as Estee
Lauder, "Group" means such Employer and any other unit or organization that is
related to such employer as a member of a "controlled group of corporations," a
group under "common control" or an "affiliated service group," all as determined
pursuant to Sections 414(b), (c) and (m) of the Code. For purposes of
determining whether or not a person is an Employee and the period of employment
of such person, each such unit or organization shall be included in the Group
only for such period or periods during which it is a "member" of the Group.
2.22 "Hour of Service" means:
(a) Each hour for which an Employee is directly or
indirectly compensated, or entitled to be compensated, by the Employer for the
performance of duties.
(b) Each hour for which an Employee is credited by the
Employer during an Approved Absence.
(c) Except as provided in (b) above, each hour, to a
maximum of 501 hours for any single continuous period, for which an Employee is
directly or indirectly compensated, or entitled to be compensated, by the
Employer for reasons other than the performance of duties (irrespective of
whether the employment relationship has terminated) due to vacation, holidays,
incapacity, layoff, jury duty or military duty. Hours shall not be credited for
payment to an Employee from a plan required by workers' compensation,
unemployment compensation or disability insurance laws, nor shall hours be
credited for reimbursement of such an Employee for his medical or
medically-related expenses.
(d) Each hour for which back pay, irrespective of
mitigation of damages, has been awarded or agreed to by the Employer provided
that if such award or agreement of back pay is for reasons other than the
performance of duties, such hours shall be subject to the restrictions of
paragraph (c).
The same Hours of Service shall not be credited under more than
one of the paragraphs above. All Hours of Service shall be computed and credited
to computation periods in accordance with Sections 2530.200b-2(b) and (c) of the
Department of Labor regulations; PROVIDED, HOWEVER, that Hours of Service under
paragraph (a) above, with respect to any payroll period, shall be credited for
the Plan Year in which such payroll period ends. In determining an Employee's
Hours of Service, he shall receive credit for all Hours of Service performed for
any corporation or other entity which is a member of the Group; provided that
(a) he shall not be credited with any Hours of Service performed for any such
corporation or other entity prior to
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the time that such entity becomes a member of the Group and (b) the number of
Hours of Service so credited with respect to his employment with such entity
shall cease at the time such entity is no longer a member of the Group.
Notwithstanding any of the foregoing requirements of this
definition, an individual employed by the Employer (or by any other member of
the Group which includes the Employer) as a common law employee, but who is not
then classified as an Employee (including, but not limited to, an individual who
was an Employee and thereafter becomes an Inactive Participant on account of a
transfer of employment to a non-Employer member of the Group) shall, except for
purposes of determining Years of Credited Service, nevertheless be credited with
Hours of Service for all periods with respect to which such person is in fact so
employed as a common law employee, to the same extent as if he had been an
Employee.
When an Employee's total actual Hours of Service are not
specifically tracked during a payroll period, the following equivalencies shall
be used in accordance with Section 2530.200b-3(e) of the Department of Labor
regulations: Employees shall be credited with the following Hours of Service for
each payroll period for which they are required to be credited with at least one
Hour of Service:
Payroll Period
Applicable
To Employee Hours of Service
--------------- ----------------
Monthly 190
Semi-monthly 95
Biweekly 90
Weekly 45
Per diem 10
2.23 "In-Store Employee" means any person who:
(a) is classified as an employee on the payroll records
of the Employer, in accordance with the Employer's standard personnel practices;
and
(b) performs services primarily in department stores, or
in free-standing stores owned or leased by Estee Lauder or by another member of
the Group that make sales to the general public (including stores providing
sales of discounted merchandise to the general public).
2.24 "Initial Effective Date" means January 1, 1991.
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2.25 "Leased Employee" means an individual who performs services
for the Employer, other than as a common law employee, if (a) such services are
provided pursuant to a written or oral agreement between the Employer and any
other person; (b) the individual has performed during any consecutive 12-month
period (i) at least 1,500 Hours of Service for the Employer or (ii) a number of
Hours of Service which is at least 501 and which is at least equal to 75% of the
median Hours of Service that are customarily performed by an employee of the
Employer in the particular position; and (c) such services are performed under
the primary direction or control of the Employer.
2.26 "Normal Retirement Date" means the first day of the month
which next follows a Participant's attainment of at least age 65 and completion
of at least Five (5) Years of Service.
2.27 "Normal Retirement Income" means a Participant's Accrued
Benefit payable hereunder at his Normal Retirement Date in the form provided in
Section 9.1 hereof.
2.28 "Participant" means any person who has become eligible to
participate in the Plan in accordance with Section 3, and who has neither been
paid in full any benefit to which he may be entitled under the Plan nor
completely forfeited such benefit. An "Active Participant" means a Participant
who is an Employee. An "Inactive Participant" means a Participant who is not an
Active Participant.
2.29 "Periodic Adjustment Percentage" means the greater of (i)
the arithmetic daily average of one-year Treasury Constant Maturities for each
calendar year immediately preceding the applicable Plan Year for which it is
applied, as published in the FEDERAL RESERVE STATISTICAL RELEASE H.15 (519) of
the Board of Governors of the Federal Reserve System, or (ii) 4%.
2.30 "Plan" means The Estee Lauder Companies Retirement Growth
Account Plan as effective January 1, 1991, and as it hereafter may be further
amended from time to time.
2.31 "Plan Year" means the calendar year.
2.32 "Prior Plan" means the Estee Lauder Inc. Employee
Retirement Plan, As Amended Effective July 1, 1975 (incorporating all amendments
adopted through December 31, 1990), or the Estee Lauder Hemisphere Corporation
Pension Plan, As Amended and Restated Effective January 1, 1986 (incorporating
all amendments adopted through December 31, 1990), as such plans were in effect
immediately prior to January 1, 1991, whichever plan (if any) is applicable to a
Participant. The terms and provisions of the applicable Prior Plan fix and
determine the rights and obligations under the Plan with respect to any Employee
whose employment terminated prior to January 1, 1991.
2.33 "Retirement Account" means the bookkeeping account
maintained with respect to a Participant as described in Section 5.1 hereof.
2.34 "Retirement Income Commencement Date" means the first day
of the first period for which a benefit under the Plan is paid as an annuity or
any other form.
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2.35 "Social Security Covered Compensation" means the
thirty-five year average of the maximum annual wages covered by the Federal
Social Security Act as in effect, ending in the year Social Security retirement
age (as defined in Section 415(b)(8) of the Code) is attained.
2.36 "Surviving Spouse" means a wife or husband of a Participant
who has been married to such Participant by legal contract throughout the
one-year period ending on the earlier of the death of the Participant or the
Participant's Retirement Income Commencement Date; PROVIDED, HOWEVER, that such
term shall also include a wife or husband who married the Participant during the
one-year period prior to such date and, at the date of the Participant's death,
has been married to the Participant for at least one (1) year.
2.37 "Trustee" means the trustee or trustees which may at any
time be acting as trustee of the Trust Fund, as provided in Section 12 hereof.
2.38 "Trust Fund" or "Fund" means all funds at any time held by
the Trustee and/or insurance company for the purposes of the Plan, as provided
in Section 12 hereof.
2.39 "Year of Credited Service" means, with respect to any
Participant, a Plan Year during which the Participant completes at least 1,000
Hours of Service as an Employee, commencing on such Participant's Entry Date,
or, if later, January 1, 1993. In the case of a Participant who participated in
the Plan prior to January 1, 1993, Years of Credited Service shall also include
all Years of Credited Service accrued under the Plan as of December 31, 1992;
fractional Years of Credited Service accrued under the Plan as of December 31,
1992 shall be converted to Hours of Service by crediting such Participant, for
the Plan Year commencing on January 1, 1993, with 190 Hours of Service for each
calendar month during which the Participant performed an Hour of Service. In the
case of a Participant who was a participant in a Prior Plan, Years of Credited
Service shall, in addition, include all Credited Service (as defined in the
Prior Plan) recognized under such Prior Plan for benefit accrual purposes as of
December 31, 1990.
2.40 "Year of Eligibility Service" means, with respect to any
person, a consecutive 12-month period beginning on such person's Employment
Commencement Date during which he completes at least 1,000 Hours of Service. If
such person fails to complete at least 1,000 Hours of Service during such
12-month period, then a "Year of Eligibility Service" shall be determined based
on the completion of at least 1,000 Hours of Service in the Plan Year beginning
with or within the 12-month period beginning on such person's Employment
Commencement Date, and then each Plan Year thereafter.
In the case of a Participant who terminates employment and does
not have any nonforfeitable right to his Accrued Benefit, Years of Eligibility
Service before a period of consecutive one-year Breaks in Service shall not be
taken into account if the number of consecutive one-year Breaks in Service in
such period equals or exceeds Five (5). A Participant whose Years of Eligibility
Service are disregarded pursuant to the preceding sentence shall, upon his
reemployment, be treated as newly employed for eligibility purposes. If a
Participant's Years of Service may not thus be disregarded, such Participant
shall again become an Active Participant immediately upon the date he first
performs an Hour of Service as an Employee.
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2.41 "Year of Service" means, with respect to any person, a Plan
Year during which the person completes at least 1,000 Hours of Service (except
as set forth in Section 8.4 hereof (relating to the "rule of parity"))
commencing on the later of January 1, 1993, or
(i) for purposes of Section 5.2 hereof, in the case of
any In-Store Employee who becomes a Participant on July 1, 1998 or in the
case of employment by a non-Employer member of the Group, the Employment
Commencement Date,
(ii) for purposes of Section 5.2, in the case of any
Participant not described in the foregoing clause (i), the first day of
the Plan Year in which such person's Entry Date occurs, and
(iii) for purposes of Section 8 hereof, the Employment
Commencement Date.
In the case of a person who was in the employ of an Employer or other member of
the Group prior to January 1, 1993, Years of Service shall also include all
Years of Service accrued under the Plan as of December 31, 1992; fractional
Years of Service accrued under the Plan as of December 31, 1992 shall be
converted to Hours of Service by crediting such person, for the Plan Year
commencing on January 1, 1993, with 95 Hours of Service for each semi-monthly
period during which the person performed an Hour of Service.
In the case of a person who was a participant in a Prior Plan,
Years of Service shall, in addition, include (i) for purposes of Section 8
hereof, all Service (as defined in the Prior Plan) recognized for purposes of
vesting under such Prior Plan as of December 31, 1990 and (ii) for purposes of
Section 5.2, all Credited Service (as defined in the Prior Plan) recognized
under such Prior Plan for benefit accrual purposes as of December 31, 1990.
The masculine pronoun wherever used herein shall include the
feminine pronoun, and the singular shall include the plural.
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SECTION 3
PARTICIPATION
3.1 Each Employee who was a participant in a Prior Plan
immediately prior to the Initial Effective Date shall become a Participant
herein as of the Initial Effective Date.
3.2 Each person who becomes an Employee on or after the Initial
Effective Date, or who became an Employee prior to that date but was not a
participant in a Prior Plan immediately prior to the Initial Effective Date,
shall become a Participant on the first Entry Date on which such person is an
Employee coincident with or next following his completion of a Year of
Eligibility Service; PROVIDED, HOWEVER, that any person who was an In-Store
Employee on June 30, 1998 and completed at least a Year of Eligibility Service
at any time on or prior to such date shall become a Participant on July 1, 1998
if such person remains an Employee on such date; and FURTHER, PROVIDED, that, in
the case of any Employee whose Entry Date, determined without regard to any Year
of Eligibility Service requirement, would otherwise have occurred prior to
January 1, 1993, such Employee shall become a Participant as of such Entry Date,
without the need to also complete a Year of Eligibility Service.
3.3 If a person who has been in the employ of an Employer or
another member of the Group as a non-Employee subsequently becomes an Employee,
such Employee shall become a Participant in accordance with Section 3.2 hereof.
3.4 A Participant who has become an Inactive Participant on
account of his ceasing to be an Employee, while remaining employed by a member
of the Group, shall once again become an Active Participant upon the date on
which he first performs an Hour of Service as an Employee following the date he
becomes an Inactive Participant.
3.5 Except as otherwise provided in this Section, benefits
commencing after Normal Retirement Age shall not be less than the Actuarial
Equivalent of the benefits to which the Participant would have been entitled if
such benefits had commenced at Normal Retirement Age. Upon written notification
to a Participant who elects to remain in service pursuant to Section 4.3 hereof,
or to a former retired Participant who returns to the service of an Employer as
a Participant herein, the retirement income payments to which the Participant is
entitled on and after Normal Retirement Age but before he retires (or, in the
case of a former retired Participant, again retires) shall be permanently
forfeited so long as such Participant remains in "section 203(a)(3)(B) service,"
as described in Department of Labor Regulation Section 2530.203-3(c). For this
purpose, a Participant's service shall be deemed "section 203(a)(3)(B) service"
for any month in which he is credited with at least 40 Hours of Service or such
other standard as may be applicable under Section 203(a)(3)(B) of ERISA. In the
case of a Participant whose retirement income commenced to be paid before his
Normal Retirement Date, upon his subsequent retirement, his retirement income
shall be recomputed, based on the amount credited to his Retirement Account
pursuant to Section 5 hereof and reduced on an actuarial basis to take account
of retirement income payments previously received by him.
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SECTION 4
RETIREMENT DATES
4.1 Except as otherwise provided in this Section 4, each
Participant may retire on his Normal Retirement Date and shall receive the
Normal Retirement Income.
4.2 A Participant may retire on or after his Early Retirement
Date and shall be entitled to receive his Accrued Benefit on or after his
termination of employment in accordance with the provisions of Sections 9 and 10
hereof.
4.3 Any Participant whose employment is continued by the
Employer after the Participant has reached his Normal Retirement Date shall
receive retirement income payments commencing on the first day of the month
following the date of his actual retirement, based on the amount credited to his
Retirement Account at such date.
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SECTION 5
PARTICIPANTS' RETIREMENT ACCOUNTS
5.1 A Retirement Account shall be established and maintained
for each Participant pursuant to this Section 5 (and for certain individuals who
were participants in a Prior Plan) to which credits shall be made in accordance
with the provisions of this Section 5. Except as otherwise provided in Section 5
hereof, an Inactive Participant who was a participant in a Prior Plan before
January 1, 1991 but is not an Active Participant at any time on or after January
1, 1991 shall be credited with an amount equal to his "Accrued Benefit under the
Prior Plan," determined in accordance with Appendix A, but a Retirement Account
shall not be established for such Inactive Participant. Except as otherwise
provided in Section 5.5 and 5.6 hereof, a Participant's Accrued Benefit under
this Plan shall be based on the amount credited to his Retirement Account. The
Retirement Account established and maintained pursuant to this Section 5 is
intended to be a bookkeeping account. Neither the establishment of such
Retirement Account nor the making of credits to such Retirement Account shall be
construed as an allocation of assets of the Plan to, or a segregation of such
assets in, such account, or otherwise as creating a right of the Participant to
receive specific assets of the Plan. Benefits provided under the Plan shall be
paid from the general assets of the Plan in the amounts, in the forms and at the
times provided in Sections 4, 8, 9 and 10 hereof.
5.2 The annual amount credited to a Participant's Retirement
Account pursuant to this Section shall be based upon the Participant's Years of
Service and the Participant's Compensation for the applicable Plan Year or
portion thereof. Credits pursuant to this Section shall be made to a
Participant's Retirement Account as of the last day of each Plan Year beginning
with 1991 and ending with the last day of the month in which occurs the
Participant's termination of employment.
(a) For each Participant who has fewer than Five (5)
Years of Service as of the last day of the Plan Year, credits shall be made to
the Participant's Retirement Account in an amount equal to three percent (3%) of
the Participant's Compensation earned while an Active Participant for such Plan
Year.
(b) For each Participant who has Five (5) Years of
Service as of the last day of the Plan Year, credits shall be made to the
Participant's Retirement Account in an amount equal to the sum of (i) three
percent (3%) of the Participant's Compensation earned while an Active
Participant for such Plan Year multiplied by a fraction, the numerator of which
is the number of whole calendar months in such Plan Year while an Active
Participant preceding the anniversary of his Entry Date ("Anniversary Date") and
the denominator of which is the number of whole months in such Plan Year while
an Active Participant, and (ii) four percent (4%) of the Participant's
Compensation earned while an Active Participant for such Plan Year multiplied by
a fraction, the numerator of which is the number of whole calendar months in
such Plan Year while an Active Participant following the Anniversary Date
(including the calendar month in which the Anniversary Date occurs) and the
denominator of which is the number of whole months in such Plan Year while an
Active Participant.
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(c) For each Participant who has more than Five (5) but
fewer than ten (10) Years of Service as of the last day of the Plan Year,
credits shall be made to the Participant's Retirement Account in an amount equal
to four percent (4%) of the Participant's Compensation earned while an Active
Participant for such Plan Year.
(d) For each Participant who has ten (10) Years of
Service as of the last day of the Plan Year, credits shall be made to the
Participant's Retirement Account in an amount equal to the sum of (i) four
percent (4%) of the Participant's Compensation earned while an Active
Participant for such Plan Year multiplied by a fraction, the numerator of which
is the number of whole calendar months in such Plan Year while an Active
Participant preceding the Anniversary Date and the denominator of which is the
number of whole months in such Plan Year while an Active Participant, and (ii)
five percent (5%) of the Participant's Compensation earned while an Active
Participant for such Plan Year multiplied by a fraction, the numerator of which
is the number of whole calendar months in such Plan Year while an Active
Participant following the Anniversary Date (including the calendar month in
which the Anniversary Date occurs) and the denominator of which is the number of
whole months in such Plan Year while an Active Participant.
(e) For each Participant who has more than ten (10)
Years of Service as of the last day of the Plan Year, credits shall be made to
the Participant's Retirement Account in an amount equal to five percent (5%) of
the Participant's Compensation earned while an Active Participant for such Plan
Year.
No credits shall be made pursuant to this Section with respect to
any period during which a Participant is an Inactive Participant. In the event
that a Participant becomes an Inactive Participant by reason of his transfer of
employment to a non-Employer member of the Group, no credits shall be made to
his Retirement Account pursuant to this Section after the end of the month in
which the transfer occurs, and for purposes of this Section his Compensation
shall be considered to be $0 after the end of the Plan Year in which the
transfer occurs until such time that he again performs an Hour of Service as an
Employee (I.E., again becomes an Active Participant); PROVIDED, HOWEVER, that
such Participant's Retirement Account balance shall continue to be increased in
accordance with Section 5.4 hereof following such transfer.
5.3 In the case of an Active Participant in the Plan who as of
the Initial Effective Date had an accrued benefit under a Prior Plan as of
December 31, 1990, there shall be credited to the Retirement Account of such
Participant as of January 1, 1991, an amount that is the single sum value of his
"Accrued Benefit under the Prior Plan," determined in accordance with Appendix
A.
5.4 For Plan Years beginning on or after the Initial
Effective Date, each Participant's Retirement Account balance on the first day
of the Plan Year shall be automatically increased as of the last day of the Plan
Year by an amount equal to the Retirement Account balance on the first day of
the Plan Year multiplied by the Periodic Adjustment Percentage; PROVIDED,
HOWEVER, in the case of a Participant who terminates employment, for any reason,
such increase shall continue to be made until the last date as of which a
Retirement Account balance is maintained for such Participant; FURTHER PROVIDED,
HOWEVER, if such increase is for less than a full Plan Year, the Periodic
Adjustment Percentage shall be proportionately reduced.
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5.5 In the case of any Participant on or after the Initial
Effective Date who was a Participant under a Prior Plan on December 31, 1990 and
satisfies the applicable requirements set forth in Appendix B, such
Participant's Accrued Benefit shall be the greater of (i) the amount credited to
his Retirement Account or (ii) the accrued benefit which would have been
determined for him under the terms and provisions of the Prior Plan as in effect
immediately prior to the Initial Effective Date, had such Prior Plan continued
in effect until the date of his termination of employment. For this purpose, in
the case of the Prior Plan which is the Estee Lauder Inc. Employee Retirement
Plan, the annual amount of the Participant's Normal Retirement Income is equal
to the greater of (a), (b) or (c) below:
(a) One percent (1%) of that portion of his Average
Final Compensation which is not in excess of his Social Security Covered
Compensation plus one and one-half percent (1-1/2%) of that portion of such
Average Final Compensation which is in excess of such Social Security Covered
Compensation, multiplied by the number of his Years of Credited Service.
(b) $2,500 with 25 or more Years of Credited Service and
reduced proportionately for Years of Credited Service less than 25.
(c) The sum of (i) the amount that would otherwise have
been determined under (a) above had such Participant terminated employment on
December 31, 1993 (or, if earlier, his actual date of termination of employment)
and had such Participant's "compensation" (as used in Section 1.4) for each Plan
Year during the period ending on such applicable date been limited to $200,000
(or such greater amount as may have been permitted after taking into account
increases for cost of living for such Plan Year, as determined by the Secretary
of the Treasury) and with such dollar limit further applied by taking into
account the family aggregation rules of Section 414(q)(6) of the Code pursuant
to Section 401(a)(17) of the Code (as in effect on such applicable date), and
(ii) the benefit that would otherwise have been determined under (a) above
counting only Years of Credited Service performed after December 31, 1993.
In the case of the Estee Lauder Hemisphere Corporation Pension
Plan, the annual amount of the Participant's Normal Retirement Income would be
equal to the greater of (a), (b) or (c) below:
(a) One percent (1%) of that portion of his Average
Final Compensation which is not in excess of his Social Security Covered
Compensation plus one and one-half percent (1-1/2%) of that portion of such
Average Final Compensation which is in excess of such Social Security Covered
Compensation, multiplied by the number of his Years of Credited Service.
(b) $1,620 with 25 or more Years of Credited Service and
reduced proportionately for Years of Credited Service less than 25.
(c) The sum of (i) the amount that would otherwise have
been determined under (a) above had such Participant terminated employment on
December 31, 1993 (or, if earlier, his actual date of termination of employment)
and had such Participant's
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"compensation" (as used in Section 1.4) for each Plan Year during the period
ending on such applicable date been limited to $200,000 (or such greater amount
as may have been permitted after taking into account increases for cost of
living for such Plan Year, as determined by the Secretary of the Treasury) and
with such dollar limit further applied by taking into account the family
aggregation rules of Section 414(q)(6) of the Code pursuant to Section
401(a)(17) of the Code (as in effect on such applicable date), and (ii) the
benefit that would otherwise have been determined under (a) above counting only
Years of Credited Service after December 31, 1993.
In the case of a Participant whose Accrued Benefit is determined
under the terms of a Prior Plan under this Section, a Participant may, subject
to consent as provided in Sections 9.4 and 9.5 hereof, elect a reduced
retirement income to commence on the first day of any month which is between the
date of his Early Retirement Date and his Normal Retirement Date.
In the case of the Estee Lauder Inc. Employee Retirement Plan, the
amount of the percentage of such reduction shall be equal to the sum of (a) the
product derived by multiplying 7/12ths of one percent (1%) times the number of
whole calendar months by which the pension commencement date precedes the
Participant's attainment of age 57 and (b) the product derived by multiplying
5/12ths of one percent (1%) by the excess of (i) the number of whole calendar
months by which the pension commencement date precedes the Participant's
attainment of age 62 over (ii) the number of whole calendar months specified in
(a). No reduction shall be applied to such early retirement income amount if the
pension commencement date occurs on or after the Participant's attainment of age
6 2.
In the case of the Estee Lauder Inc. Hemisphere Corporation
Pension Plan, the amount of the percentage of such reduction shall be equal to
the sum of (a) the product derived by multiplying 1/4 of one percent (1%) times
the number of whole calendar months (up to and including the first 60 thereof)
by which the pension commencement date precedes the Normal Retirement Date and
(b) the product derived by multiplying 1/2 of one percent (1%) by the number of
calendar months, if any, by which the pension commencement date precedes by more
than 60 calendar months the Normal Retirement Date.
Notwithstanding any other provision of the Plan to the contrary:
in the case of any Participant who is eligible for a benefit set forth in this
Section 5.5 and incurs a Disability prior to January 1, 1998, such
Participant (i) shall continue to be credited with Hours of Service
during the period of such Disability, to the same extent as if such
person had not become so disabled, for purposes of determining such
person's Years of Credited Service used in calculating such person's
benefit pursuant to this Section 5.5, and (ii) shall, during the portion
of such Participant's period of such Disability beginning on January 1st
of the year following the year in which such period of Disability first
commenced, be considered to continue to receive "compensation" for
purposes of determining such person's Average Final Compensation, based
upon such person's level of "base pay" as in effect immediately prior to
the incurring of such Disability, and
in the case of any Participant who is eligible for a benefit set forth in this
Section 5.5 and incurs a Disability on or after January 1, 1998, such
Participant (i) shall continue to be credited with Hours of Service
during a period not exceeding the first twelve months of such
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Disability, to the same extent as if such person had not become so
disabled, for purposes of determining such person's Years of Credited
Service used in calculating such person's benefit pursuant to this
Section 5.5, and (ii) shall, during that portion (if any) of such
Participant's period of such Disability beginning on January 1st of the
year following the year in which such period of Disability first
commenced during which such Participant continues to be so credited with
Hours of Service pursuant to the immediately preceding clause (i), be
considered to continue to receive "compensation" for purposes of
determining such person's Average Final Compensation, based upon such
person's level of "base pay" as in effect immediately prior to the
incurring of such Disability;
PROVIDED, HOWEVER, that in no event shall such person continue to be so credited
with Hours of Service or be imputed with "compensation" for periods after such
person's Normal Retirement Date.
5.6 Notwithstanding anything to the contrary provided herein or
elsewhere in the Plan, any Participant who retires on or after his Normal
Retirement Date with at least Five (5) Years of Credited Service but less than
ten (10) Years of Credited Service shall be entitled to a Normal Retirement
Income of not less than $100 per month for life, and any Participant who retires
on or after his Normal Retirement Date with at least ten (10) Years of Credited
Service shall be entitled to a Normal Retirement Income of not less than $200
per month for life.
5.7 The benefits otherwise payable to a Participant or a
Beneficiary under this Plan and, where relevant, the Accrued Benefit of a
Participant, shall be limited to the extent required, and only to the extent
required, by the provisions of Section 415 of the Code and rulings, notices and
regulations issued thereunder. To the extent applicable, Section 415 of the Code
and rulings, notices and regulations issued thereunder are hereby incorporated
by reference into this Plan. In calculating these limits, the following rules
shall apply:
(a) Except where otherwise specifically set forth in
rulings, notices and regulations incorporated into this Plan by reference, the
limitations applicable to alternative forms of benefits (other than a "qualified
joint and survivor annuity," as defined in Section 417(b) of the Code) shall be
determined using the factors set forth in Appendix A.
(b) If the applicable limits of Section 415 of the Code
are increased after a benefit is in pay status by virtue of an adjustment to
those limits reflecting a change in the cost of living index or an amendment to
the Code, benefit payments to a Participant or his Beneficiary shall be
increased automatically to the maximum extent permitted under the revised
limits. This increase shall occur only to the extent it would not cause the
benefit to exceed the benefit to which the Participant or Beneficiary would have
been entitled in the absence of the limits under Section 415 of the Code.
(c) If, upon the death of a Participant whose benefits
were limited under this Section, the Surviving Spouse shall be entitled to a
benefit payment smaller than that which was payable while the Participant was
alive, the benefit payments to the Surviving Spouse shall equal the lesser of:
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(i) the benefit payment which would be payable to
the Surviving Spouse if benefits under this Plan had not been limited by
this Section, and
(ii) the benefit payment which would be payable to
the Surviving Spouse if the benefit provided under this Plan had been a
"qualified joint and survivor annuity," as defined in Section 417(b) of
the Code, with survivor benefits equal to 100% of the amount payable
while the Participant was alive, in an amount equal to the maximum
limitations provided under this Section.
(d) If the Participant is, or ever has been, covered
under one or more qualified defined contribution plans maintained by the
Employer or another member of the Group, the combined plan limits of Section
415(e) of the Code shall be calculated by reducing the limits applicable to this
Plan first, prior to restricting annual additions to any such defined
contribution plan; PROVIDED, HOWEVER, that this paragraph (d) shall apply only
with respect to Plan Years commencing prior to January 1, 2000. Notwithstanding
the foregoing, or any other provision of this Plan to the contrary, the benefits
otherwise payable to (or on account of) any Participant on or after January 1,
2,000 (including any Participant who is already receiving an annuity under the
Plan prior to that date) shall, to the maximum extent permitted by the Code, be
determined by disregarding any limit which may have been previously imposed on
such person's benefits under this Plan pursuant to the provisions of the
preceding sentence; PROVIDED, HOWEVER, that there shall be no adjustment in the
benefits otherwise paid to such person with respect to periods prior to January
1, 2000; and, FURTHER PROVIDED, that this sentence shall not apply with respect
to any person who has, prior to January 1, 2000, received a lump sum
distribution under the Plan.
(e) If the Participant is entitled to a benefit under
any defined benefit plan which is, or ever has been, maintained by the Employer
or another member of the Group, the limits under this Section shall be applied
to the combined benefits payable and the benefit payable hereunder shall be
reduced to the extent necessary to make the combined benefits meet the limits
under this Section.
(f) To calculate average compensation for a
Participant's high-three years of service, compensation shall be the Employee's
Compensation, and the three-year average shall be calculated using consecutive
limitation years. A limitation year shall be a Plan Year for purposes of this
Section.
(g) The amendments to Section 415(b) of the Code made by
Public Law 103-465 (as modified by Public Law 104-188) shall first be effective
January 1, 1999. The amendments to Section 415(b) of the Code made by Public Law
107-16 shall first be effective January 1, 2002.
5.8 Notwithstanding any other provision of the Plan to the
contrary, the Accrued Benefit of an Inactive Participant who (i) was a
participant in a Prior Plan and (ii) had a condition of Disability as of
December 30, 1990, shall continue to be determined under the benefit formula of
such Prior Plan, unless such Inactive Participant is eligible for the benefit
set forth in Section 5.5 hereof. A Participant who first has a condition of
Disability on or after January 1, 1991 shall be covered under the benefit
formula of this Plan as of the Initial Effective
20
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Date unless such Participant is eligible for the benefit set forth in Section
5.5 hereof. For purposes of determining the opening Retirement Account balance
under this Plan, Average Final Compensation shall be used, except that with
respect to any year in which there were no earnings or earnings were reduced
because of Disability, such Participant's last year of actual base pay shall be
used on an annualized basis.
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SECTION 6
CONTRIBUTIONS
6.1 No contributions are to be made by Participants
under this Plan.
6.2 Subject to the provisions of Section 13 hereof, the
Employer intends to contribute over a period of time such amounts as may be
determined by actuarial calculations to be required of the Employer to provide
benefits in accordance with the Plan. Any forfeitures arising under the Plan
shall not be applied to increase the benefits any Participant would otherwise
receive under the Plan but shall be applied to reduce the Employer contributions
under the Plan.
6.3 Subject to the provisions of Section 13 hereof, the
administrative expenses of the Plan, except to the extent paid by the Employer,
shall be paid out of the funds of the Plan.
6.4 Except as provided in paragraphs (a) and (b) below, and
except as provided in Section 16 hereof, Employer contributions made under the
Plan will be held for the exclusive benefit of Participants, and their joint
annuitants or Beneficiaries and may not revert to the Employer.
(a) A contribution made by the Employer under a mistake
of fact may be returned to the Employer within one (1) year after it is
contributed to the Plan.
(b) A contribution conditioned upon its deductibility
under Section 404 of the Code may be returned, to the extent the deduction is
disallowed, to the Employer within one (1) year after the disallowance. All
contributions to the Plan are hereby conditioned upon their deductibility.
The maximum contribution that may be returned to the Employer will not exceed
the amount actually contributed to the Plan, or the value of such contribution
on the date it is returned to the Employer, if less.
6.5 In recognition of the fact that the Plan is, effective
January 1, 1996, subject to the requirements of Section 413(c) of the Code, the
provisions of Section 413(c)(4) of the Code shall, with respect to periods on
and after that date, be applied consistent with such rules and procedures as
shall be adopted by the actuary appointed under the Plan.
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SECTION 7
DEATH BENEFIT
7.1 Death Before Retirement Date.
(a) If a Participant with a nonforfeitable right to the
amount credited to his Retirement Account pursuant to Section 8 hereof dies
prior to commencement of benefits, then his Surviving Spouse, or if (i) the
Participant elects a Beneficiary other than his Surviving Spouse and such
Surviving Spouse consents to such designation pursuant to Section 7.3 of the
Plan or (ii) the Participant is unmarried, the Participant's designated
Beneficiary, shall receive the amount credited to the Retirement Account,
payable in a single life annuity. The Surviving Spouse (or designated
Beneficiary, if applicable) may elect to receive such benefit in a cash lump sum
payment; provided, however, that if the Actuarial Equivalent value of such
amount does not exceed $3,500 (with respect to Plan Years beginning prior to
January 1, 1998) or $5,000 (with respect to Plan Years beginning on or after
January 1, 1998), such value shall automatically be paid in a cash lump sum in
accordance with the last sentence of Section 10.1 hereof.
(b) Notwithstanding the foregoing subsection (a), if (i)
a Participant described in such subsection (a) was subject to the provisions of
Section 5.5 and (ii) at the time of his death there is a Surviving Spouse and
the Participant has not designated a Beneficiary other than his Surviving Spouse
with such Surviving Spouse's consent pursuant to Section 7.3, the single life
annuity otherwise payable to such Surviving Spouse pursuant to this Section 7.1
shall not be less than the single life annuity otherwise payable to such person
determined in accordance with the provisions of Section 6.1 or 6.2, as the case
may be, of the appropriate Prior Plan and based solely on such Participant's
Normal Retirement Income determined in accordance with Section 5.5; provided,
however, that if the Actuarial Equivalent value of the single life annuity
otherwise so determined pursuant to this subsection (b) does not exceed $3,500
(with respect to Plan Years beginning prior to January 1, 1998) or $5,000 (with
respect to Plan Years beginning on or after January 1, 1998), such value shall
automatically be paid in a cash lump sum in accordance with the last sentence of
Section 10.1 hereof.
7.2 DEATH AFTER DATE OF COMMENCEMENT OF BENEFITS. In the event
of a Participant's death after commencement of benefits, and if an optional form
of benefit under Section 9.3 hereof is applicable, then the death benefit
payable hereunder, if any, shall be determined in accordance with such optional
election. Otherwise, no death benefit shall be payable.
7.3 BENEFICIARY DESIGNATION. If a Participant has a Surviving
Spouse, his Surviving Spouse shall be his Beneficiary, unless the Participant
designates someone other than his Surviving Spouse as his Beneficiary (other
than as a contingent Beneficiary) and the Surviving Spouse consents to such
designation. If the Participant does not have a Surviving Spouse or if his
Surviving Spouse consents, the Participant shall have the right to designate any
person as a Beneficiary, to receive the amount, if any, payable pursuant to this
Plan upon his death and may from time to time change any such designation in
accordance with procedures established by the Committee. Each such designation
shall be submitted to the Committee or its
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<PAGE>
designee in such form and manner as may be required by the Committee or its
designee. In the event that a Participant designates someone other than his
Surviving Spouse as his Beneficiary (other than as a contingent Beneficiary),
such Beneficiary designation shall not be effective unless (i) the Surviving
Spouse consents to such Beneficiary designation in writing, in a form acceptable
to the Committee or its designee, and such consent is witnessed by a Plan
representative or a notary public or (ii) the Participant provides the Committee
or its designee with sufficient evidence to show that the Participant does not
have a Surviving Spouse or that his Surviving Spouse cannot be located. The
Committee shall decide which Beneficiary, if any, shall have been validly
designated. If a Participant does not have a Surviving Spouse and no Beneficiary
has been designated, or if a Participant does not have a Surviving Spouse and
the Committee determines that a designation made by the Participant is not
effective for any reason, the Committee shall designate as Beneficiary the
estate of the deceased Participant.
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<PAGE>
SECTION 8
TERMINATION OF EMPLOYMENT
8.1 A Participant shall be 100% vested in the amount credited
to his Retirement Account after having completed at least Five (5) Years of
Service. If a Participant terminates employment other than by early or normal
retirement or death after having completed at least Five (5) Years of Service,
he shall be entitled to elect payment of the amount credited to his Retirement
Account as of such date of termination in a cash lump sum or, (i) if the
Participant has a Surviving Spouse at the time of such termination of
employment, as an annuity of the form described in Section 9.2 hereof or (ii) if
the Participant has no Surviving Spouse at the time of such termination of
employment, as an annuity of the form of benefit described in Section 9.1
hereof. Such payment shall be made (or in the case of an annuity, shall
commence) in accordance with the last sentence of Section 10.1 hereof, and such
election to be subject to consent as provided in Sections 9.4 and 9.5 hereof;
PROVIDED, HOWEVER, that if the Actuarial Equivalent value of such amount does
not exceed $3,500 (with respect to Plan Years beginning prior to January 1,
1998) or $5,000 (with respect to Plan Years beginning on or after January 1,
1998), such value shall automatically be paid in a cash lump sum in accordance
with the last sentence of Section 10.1 hereof. If such Participant does not
elect such lump sum or annuity, he shall be entitled to receive his Accrued
Benefit commencing on the first day of any month after his termination of
employment (but not later than his Normal Retirement Date), payable in a lump
sum or as an annuity, in accordance with Sections 9.1 or 9.2 hereof, to the
extent applicable. For purposes of this Section 8, a Participant who is
terminated for Disability after a one-year absence because of Disability shall
be deemed to have completed at least Five (5) Years of Service.
8.2 In no event shall the retirement income of a terminated
Employee who was a participant under a Prior Plan immediately prior to the
Initial Effective Date be less than the Actuarial Equivalent of the benefit that
would have been payable under the Prior Plan had the Participant's employment
terminated immediately prior to the Initial Effective Date.
8.3 Notwithstanding any other provision of this Plan, each
Participant shall be 100% vested in his Retirement Account on his Normal
Retirement Date.
8.4 (a) If a Participant's service terminates prior to
having completed Five (5) Years of Service, and at a time when he is 0% vested
in the amount credited to his Retirement Account, he shall, notwithstanding any
other provision of the Plan to the contrary, be deemed to automatically receive,
as of such person's date of termination of employment, a single lump sum
distribution which is the Actuarial Equivalent of his entire vested Accrued
Benefit under the Plan, and he shall thereupon forfeit his Retirement Account as
of such same date. Any forfeiture resulting from the operation of this Section,
or any other provisions of the Plan, shall be used to reduce future Employer
contributions.
(b) If a Participant's Retirement Account is forfeited
pursuant to the preceding paragraph (a) above and such Participant is
subsequently reemployed as an Employee of an Employer (i) after the number of
consecutive one-year Breaks in Service equals or exceeds
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<PAGE>
Five (5), the Years of Service completed prior to the Breaks in Service shall
not be aggregated with Years of Service completed after the reemployment date,
or (ii) prior to incurring Five (5) or more consecutive one-year Breaks in
Service, the amounts previously credited to his Retirement Account will be
restored, the Years of Service completed prior to the Breaks in Service will be
aggregated with the Years of Service after his reemployment date and the
Participant shall become a Participant of the Plan upon his reemployment.
(c) If a Participant's vested percentage is 100% at the
time of his termination of employment, and such Participant is subsequently
reemployed as an Employee of an Employer, Years of Service completed prior to
any number of one-year Breaks in Service shall be aggregated with Years of
Service after the reemployment. If such Participant received a complete
distribution of his benefits under the Plan prior to his reemployment, then the
amounts credited to his Retirement Account as of his date of termination shall
be restored on his reemployment date, but any subsequent distribution paid to
the Participant after his reemployment shall be offset by the present value of
any distributions previously paid to him at any time in accordance with the
requirements of Section 411(a)(7) of the Code and the regulations promulgated
thereunder.
(d) For purposes of determining the amount credited to
the Retirement Account of a reemployed Participant described in Section 8.4(c)
above, (i) if such Participant received a complete distribution of his benefits
under the Plan prior to his reemployment, the amount credited to his Retirement
Account upon reemployment shall be $0, and (ii) if such Participant received
distributions of only a portion of his benefits under the Plan prior to his
reemployment, the amount credited to his Retirement Account upon reemployment
shall be the amount credited to his Retirement Account at the time of his prior
termination of employment less the amount of such distributions, and his
Retirement Account shall be increased in accordance with Section 5.4 by applying
the Periodic Adjustment Percentage to the undistributed amounts credited to his
Retirement Account during the period between his termination of employment and
his reemployment. Notwithstanding the foregoing, if the reemployed Participant
repays in full his prior distributions plus interest in accordance with Section
411(a)(7) of the Code, the Participant's Retirement Account shall be credited
with the full amount credited to such Retirement Account at the time of his
prior termination of employment, increased in accordance with Section 5.4 by
applying the Periodic Adjustment Percentage to such amount for the period
between his termination of employment and his reemployment.
8.5 Notwithstanding the foregoing provisions of this Section 8
and solely in the case of a Participant subject to the provisions of Section
5.5:
(a) if such Participant's Accrued Benefit is in fact
determined pursuant to Section 5.5, rather than with reference to the amount
credited to his Retirement Account, then the provisions of Section 8.1 shall
instead be applied with reference to such Accrued Benefit so determined pursuant
to Section 5.5, and in connection therewith, the amount of any cash lump sum
shall be the Actuarial Equivalent of such Accrued Benefit; and
(b) regardless of whether such Participant's Accrued
Benefit is in fact so determined pursuant to Section 5.5, the provisions of
Section 8.4 shall be applied with
26
<PAGE>
reference to both such person's Retirement Account and the amount otherwise
calculated pursuant to Section 5.5.
27
<PAGE>
SECTION 9
OPTIONAL FORMS OF BENEFIT
9.1 Normal Form of Benefit.
(a) The normal form of benefit shall be an income
payable monthly for life, commencing on the Normal Retirement Date and
terminating with the payment preceding death; PROVIDED, HOWEVER, that a
Participant may, with spousal consent under the terms of Section 9.4 hereof, if
applicable, elect to receive the amount credited to his Retirement Account in a
single cash lump sum; FURTHER PROVIDED, HOWEVER, that if the Actuarial
Equivalent value of such amount does not exceed $3,500 (with respect to Plan
Years beginning prior to January 1, 1998) or $5,000 (with respect to Plan Years
beginning on or after January 1, 1998), such value shall automatically be paid
to the Participant in a cash lump sum in accordance with the last sentence of
Section 10.1 hereof.
(b) Notwithstanding the foregoing subsection (a) and in
the case of a Participant subject to the provisions of Section 5.5 or Section
5.6, if such Participant's Accrued Benefit is in fact determined pursuant to
Section 5.5 or Section 5.6, rather than with reference to the amount credited to
his Retirement Account, then the provisions of the foregoing subsection (a)
shall instead be applied with reference to such Accrued Benefit so determined
pursuant to Section 5.5 or Section 5.6, and in connection therewith, the amount
of any cash lump sum shall be the Actuarial Equivalent of such Accrued Benefit.
9.2 AUTOMATIC POST-RETIREMENT SURVIVING SPOUSE OPTION. Subject
to the conditions hereinafter set forth in this Section, if a Participant has a
Surviving Spouse at his Retirement Income Commencement Date, the amount of
retirement income payment to which he would otherwise be entitled under the
normal form of benefit described in Section 9.1 shall be reduced on an Actuarial
Equivalent basis to reflect the fact that, if such spouse shall survive him, a
retirement income shall be payable under the Plan to his Surviving Spouse during
such spouse's remaining lifetime after his death in an amount equal to 50% of
the reduced amount of retirement income payments. A married Participant may
elect (and may revoke such election and thereafter reelect) that his retirement
income not be paid in the 50% joint and survivor form described in the preceding
sentence, subject to the provisions of Section 9.4 hereof.
9.3 Notwithstanding the foregoing provisions of this Section 9,
a Participant who retires on or after his Early Retirement Date may, subject to
consent as provided in Sections 9.4 and 9.5 hereof, elect to receive the value
of (i) his entire Accrued Benefit in accordance with one of the following
optional forms, except that Option 1 or 2 may not be elected with respect to an
Accrued Benefit accrued prior to January 1, 1991; (ii) his Accrued Benefit as of
his Retirement Income Commencement Date less the value of his Accrued Benefit as
of December 31, 1990 separately in accordance with Option 1 or 2; and (iii) his
Accrued Benefit as of December 31, 1990, under a Prior Plan separately in
accordance with Option 3, 4 or 5; PROVIDED, HOWEVER, that the Prior Plan benefit
may be received separately only if a Participant elects Option 1 or 2 under
clause (ii) hereof.
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OPTION 1. An Actuarial Equivalent retirement income to be paid to
the retired Participant for the rest of his life, and after his death either 50%
or 100% (in accordance with his election) of such Actuarial Equivalent
retirement income to be paid to his contingent annuitant for the rest of the
contingent annuitant's life.
OPTION 2. An Actuarial Equivalent retirement income to be paid to
the retired Participant payable for the greater of his lifetime or a period of
ten (10) years. If the retired Participant dies before the expiration of ten
(10) years, the remaining installments of his Actuarial Equivalent retirement
income shall be paid to his Beneficiary.
OPTION 3. An Actuarial Equivalent retirement income to be paid to
the retired Participant for the rest of his life, and after his death either
25%, 66.67%, 75% or 100% (in accordance with his election) of such Actuarial
Equivalent retirement income to be paid to his contingent annuitant for the rest
of the contingent annuitant's life.
OPTION 4. An Actuarial Equivalent retirement income to be paid to
the retired Participant for the rest of his life, and if he dies before
receiving 120 monthly payments, such Actuarial Equivalent retirement income to
be paid to his Beneficiary for the remainder of the 120 months.
OPTION 5. A Participant who retires early in accordance with
Section 4.2 hereof may elect to receive an Actuarial Equivalent retirement
income providing larger monthly payments, in lieu of the retirement income
otherwise payable upon early retirement, until the earliest date on which his
Social Security benefit could commence; thereafter his monthly retirement income
payments shall be reduced by the estimated monthly amount of his Social Security
benefit computed to commence on such date. This optional form provides, insofar
as practical, a level total retirement income (from this Plan and Social
Security) for the Participant. In the event of the election of this Social
Security adjustment option, the monthly payment of the adjusted retirement
income shall commence at the date of retirement and shall cease with the earlier
of the last payment prior to the death of the Participant or the last payment
payable as calculated under this option.
9.4 The following rules and requirements must be met in order
for any optional form of retirement income to be applicable.
(a) The election must be made pursuant to a qualified
election (as described in paragraphs (b) and (g) of this Section) and filed with
the Committee or its designee within the 90-day period ending on the Retirement
Income Commencement Date.
(b) The consent of a contingent annuitant or Beneficiary
shall not be required for a qualified election of an option; except that, if a
married Participant elects to receive a form of benefit other than the Automatic
Post-Retirement Survivor Spouse Option described in Section 9.2 hereof, a
qualified election requires that the Surviving Spouse waive such spouse's right
to the Automatic Post-Retirement Surviving Spouse Option. Such waiver shall not
be effective unless (i) the consent is in writing; (ii) the election designates
a specific alternate Beneficiary, including any class of Beneficiaries or any
contingent Beneficiaries, which may not be changed without spousal consent (or
the Surviving Spouse expressly permits
29
<PAGE>
designations by the Participant without any further spousal consent); (ii) the
Surviving Spouse's consent acknowledges the effect of the election; (iv) the
Surviving Spouse's consent is witnessed by a Plan representative or notary
public; and (v) the election designates a form of benefit payment that may not
be changed without spousal consent (or the Surviving Spouse expressly permits
designations by the Participant without any further spousal consent). In the
absence of a waiver by such spouse, other than for the reason that such spouse
cannot be located, the election of a form of payment other than as provided in
Section 9.2 hereof shall be null and void. Any consent by a Surviving Spouse
obtained under this provision (or establishment that the consent of a Surviving
Spouse may not be obtained) shall be effective only with respect to such
Surviving Spouse. A consent that permits designations by the Participant without
any requirement of further consent by the Surviving Spouse must acknowledge that
such spouse has the right to limit consent to a specific Beneficiary, and a
specific form of benefit where applicable, and that such spouse voluntarily
elects to relinquish either or both of such rights. A revocation of a prior
waiver may be made by a Participant without the consent of the Surviving Spouse
at any time prior to the commencement of benefits. The number of revocations
shall not be limited. No consent obtained under this provision shall be valid
unless the Participant has received notice as provided in paragraph (g) of this
Section.
(c) An election may not be made nor will it be accepted
by the Committee or its designee, or if accepted it shall become null and void,
if the Actuarial Equivalent value of the Participant's entire Accrued Benefit as
of his Retirement Income Commencement Date would be $3,500 or less (with respect
to Plan Years beginning prior to January 1, 1998) or $5,000 or less (with
respect to Plan Years beginning on or after January 1, 1998), and such value
shall automatically be paid to the Participant in a cash lump sum.
(d) If the stated effective date of the option is prior
to the Participant's Normal Retirement Date and the Participant continues in
service after such stated effective date, the election shall become null and
void but, subject to the rules and requirements contained in this Section, the
Participant may thereafter make another election. If the stated effective date
is the Participant's Normal Retirement Date or any later date and he continues
in service after such stated effective date, the option shall take effect upon
his subsequent death or retirement.
(e) If a Participant who has elected Option 4 under
Section 9.3 hereof dies while the option is in effect, and his Beneficiary is a
natural person who survives the Participant but dies before the 120 monthly
payments have been paid to the Participant and the Beneficiary, the lump sum
discounted value of the unpaid balance of such 120 monthly payments shall be
paid to the Beneficiary's estate.
(f) If the contingent annuitant is other than the
Surviving Spouse, and if the actuarial present value of the payments to be made
to the Participant under an option will be less than 51% of the Actuarial
Equivalent value of the normal form of retirement benefit provided in Section
9.1 hereof, the optional benefit shall be adjusted so that the value of the
Participant's benefit will be equal to 51% of the Actuarial Equivalent value of
the Participant's normal form of retirement benefit.
(g) No election shall be a qualified election unless, at
least 30 days (or such a shorter period permitted by the Code and the
regulations promulgated thereunder) and no
30
<PAGE>
more than 90 days prior to the Participant's Retirement Income Commencement
Date, the Committee shall furnish him (by mail or personal delivery) a statement
generally describing the 50% joint and survivor form and explaining the relative
financial effects of making an election under Section 9.2 hereof, or an election
of an optional form of payment under Section 9.3 hereof. The statement shall
also describe the right of the Participant and his Surviving Spouse to waive the
50% joint and survivor form, the effect of such a waiver, and the right to
revoke such waiver.
9.5 If the Actuarial Equivalent value of a Participant's vested
Accrued Benefit exceeds or, for distributions prior to October 17, 2000, at the
time of any prior distribution exceeded $3,500 (with respect to Plan Years
beginning prior to January 1, 1998) or $5,000 (with respect to Plan Years
beginning on or after January 1, 1998), and the Accrued Benefit is "immediately
distributable" (as defined below), the Participant and any Surviving Spouse (or
where either the Participant or the spouse has died, the survivor) must consent
to any distribution of such Accrued Benefit. An Accrued Benefit is "immediately
distributable" if any part of the Accrued Benefit could be distributed to the
Participant (or Surviving Spouse) before the Participant attains (or would have
attained if not deceased) Normal Retirement Age. The consent of the Participant
and any Surviving Spouse shall be obtained in writing within the 90-day period
ending on the Retirement Income Commencement Date. The Participant and any
Surviving Spouse shall be notified of the right to defer any distribution until
the Participant's Accrued Benefit is no longer immediately distributable. Such
notification shall include a general description of the material features, and
an explanation of the relative values of, the optional forms of benefit
available under the Plan in a manner that would satisfy the notice requirements
of Section 417(a)(3) of the Code, and shall be provided no less than 30 days (or
such shorter period permitted by the Code and the regulations promulgated
thereunder) and no more than 90 days prior to the Retirement Income Commencement
Date. Notwithstanding the foregoing, only the Participant need consent to the
commencement of a distribution in the 50% or 100% joint and survivor form while
the Accrued Benefit is immediately distributable. Neither the consent of the
Participant nor the Surviving Spouse shall be required to the extent that a
distribution is required to satisfy Section 401(a)(9) or 415 of the Code.
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SECTION 10
PAYMENT OF RETIREMENT INCOME
10.1 Subject to the provisions of Sections 9 and 11 hereof,
retirement income payable in other than a lump sum shall be payable in monthly
installments, as of the first day of each month with the first payment to be
made as of the appropriate retirement date or earlier date of termination of
employment, but in no event later than the 60th day after the later of the close
of the Plan Year in which the Participant attains age 65 or terminates
employment or in which occurs his tenth (10th) Year of Credited Service, and
with final payment to be made as of the first day of the month in which death
occurs, or, if earlier, the first day of the month payments cease under the
option elected. Subject to the foregoing sentence, retirement income payable in
a single cash lump sum shall be paid on or as soon as administratively possible
following the date he becomes entitled thereto.
10.2 Anything elsewhere in the Plan to the contrary
notwithstanding, the entire nonforfeitable interest of each Participant shall be
either:
(a) distributed to the Participant not later than the
Participant's "Required Beginning Date" (as defined in Section 10.2(b)), or
(b) distributed to, or for the benefit of, the
Participant and the Participant's contingent annuitant in installments beginning
not later than the Participant's Required Beginning Date and continuing, in
accordance with such regulations as the Secretary of the Treasury may prescribe,
(i) over the life of the Participant or over the lives of the Participant and
the Participant's contingent annuitant or (ii) over a period certain not
extending beyond the life expectancy of the Participant and the Participant's
Beneficiary. For purposes of this Section, the "Required Beginning Date" shall
mean the later of April 1 of the calendar year which follows the calendar year
in which the Participant attains age 70 1/2, or the calendar year in which the
Participant retires; PROVIDED, HOWEVER, that a distribution to a Participant who
is a five percent owner (as defined in Section 416 of the Code) shall begin no
later than April 1 of the calendar year which follows the calendar year in which
such Participant attains age 70-1/ 2. Notwithstanding the foregoing, any
Participant who attains age 70-1/2 after December 31, 1995 but on or before
December 31, 1997 may elect to nevertheless commence his distribution on April 1
of the calendar year following the calendar year in which the Participant
attains age 70-1/2 even if the Participant is still employed by the Employer. In
addition to the foregoing, in applying the rules of this Section 10.2, the
regulations promulgated under Section 401(a)(9) of the Code are incorporated
herein by reference, as are the rules promulgated by the Department of the
Treasury and the Internal Revenue Service with respect to compliance with
Section 401(a)(9) of the Code without violating Section 411(d)(6) of the Code.
If distribution of a Participant's nonforfeitable interest has
begun in accordance with Section 10.2(b) hereof and the Participant dies before
his entire nonforfeitable interest has been distributed to him, the remaining
portion of such interest shall be distributed at least as rapidly as under the
method of distribution being used under Section 10.2(b) hereof as of the date of
the Participant's death.
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If a Participant dies before distribution of the Participant's
nonforfeitable interest has begun in accordance with Section 10.2(b) hereof, the
entire nonforfeitable interest shall be distributed within five years after the
death of the Participant, except such portion thereof as shall be payable in
installments to, or for the benefit of, the Participant's contingent annuitant,
beginning not later than one (1) year after the date of the Participant's death
and continuing, in accordance with such regulations as the Secretary of the
Treasury may prescribe, over the life of the contingent annuitant (or over a
period certain not extending beyond the life expectancy of the contingent
annuitant); provided, however, that if the Surviving Spouse is the Participant's
contingent annuitant, the date on which the distributions are required to begin
shall not be later than the Participant's Required Beginning Date and, if the
Surviving Spouse dies before the distributions to the Surviving Spouse begin,
this paragraph shall be applied as if the Surviving Spouse was the Participant.
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SECTION 11
ADMINISTRATION OF THE PLAN
11.1 Except with respect to those responsibilities delegated to
the Fiduciary Committee hereunder, the Plan shall be administered by the
Committee, which shall be responsible for carrying out the provisions of the
Plan. The Committee shall be a "named fiduciary" under Section 402(a)(2) of
ERISA. The Committee shall consist of at least three (3) members who shall be
appointed in the manner authorized by the Board. Vacancies therein shall be
filled in the same manner as appointments. Any member of the Committee may be
removed by action of the Board or may resign of his own accord by delivering his
written resignation to the Board and to the secretary of the Committee.
11.2 The members of the Committee shall elect from their number
a chairman. The chairman shall appoint a secretary, who need not be a member of
the Committee. The members of the Committee may appoint from their number
subcommittees with such powers as they shall determine, may authorize one or
more of their number or any agent to execute or deliver any instrument or make
any payment in their behalf, and may employ clerks and may employ such counsel,
accountants, and actuaries as may be required in carrying out the provisions of
the Plan.
11.3 The Committee shall hold meetings upon such notice, at such
time, and at such place as they may determine.
11.4 A majority of the members of the Committee at the time in
office shall constitute a quorum for the transaction of business. All
resolutions or other actions taken by the Committee shall be by the affirmative
vote of a majority of those present at the meeting, or the written consent of a
majority of members at the time in office, if they act without a meeting.
11.5 No member of the Committee who is also an Employee shall
receive any compensation for his services as such, but the Employer may
reimburse any member for any necessary expenses incurred.
11.6 The Committee shall from time to time establish rules for
the administration of the Plan and the transaction of its business. Except as
herein otherwise expressly provided, the Committee shall have the exclusive
right to interpret the Plan and to decide any matters arising thereunder in
connection with the administration of the Plan, the eligibility of any person to
benefits thereunder and the amounts of such benefits. It shall endeavor to act
by general rules so as not to discriminate in favor of any person. Its decisions
and the records of the Committee shall be conclusive and binding upon the
Employer, the Participants, and all other persons having any interest under the
Plan.
The Committee shall have the power to amend the Plan, provided
that such amendment does not increase the total cost of providing benefits under
the Plan by an amount in excess of $1,000,000 in any Plan Year computed in
accordance with generally accepted accounting or actuarial principles; and
provided, further, that such amendment does not affect the duties delegated
hereunder to the Fiduciary Committee.
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The Committee may appoint a Plan administrator for the Plan and shall delegate
to the Plan administrator the duty to maintain all records and accounts
necessary for the effective administration of the Plan, and to take any actions
necessary to comply with the reporting and disclosure requirements imposed by
the Code, ERISA and any other applicable federal or state statute or regulation,
including any law or regulation promulgated by any foreign governing body which
applies to the Plan. The Committee may delegate to any Plan administrator such
other duties as it may deem necessary and appropriate. The Committee shall
receive reports from each such Plan administrator as the Committee may request.
11.7 The Committee shall cause to be maintained accounts showing
the fiscal transactions of the Plan, and in connection therewith shall require
the Trustee to submit any necessary reports, and shall keep in convenient form
such data as may be necessary for actuarial valuations of the assets and
liabilities of the Plan. The Committee may retain counsel, accountants,
actuaries and/or other persons to assist in the discharge of its duties.
11.8 The members of the Committee, the Fiduciary Committee, the
Board, and the officers and directors of the Employer shall be entitled to rely
upon all tables, valuations, certificates, and reports furnished by any duly
appointed actuary, upon all certificates and reports made by any duly appointed
accountant, and upon all opinions given by any duly appointed legal counsel. The
members of the Committee, the Fiduciary Committee, the Board, and the officers
and directors of the Employer shall not be held liable for any action taken in
good faith in reliance upon any such tables, valuations, certificates, reports,
or opinions. All actions so taken shall be conclusive upon each of them and upon
all persons having any interest under the Plan. No member of the Committee shall
be personally liable by virtue of any instrument executed by him or on his
behalf as a member of the Committee, or for any mistake of judgment made by
himself or any other member or by anyone employed by the Employer, or for any
loss unless resulting from his own actions, including gross negligence or
willful misconduct. Each member of the Committee shall be indemnified by the
Employer against losses reasonably incurred by him in connection with any claim,
proceeding or action to which he may be a party by reason of his membership in
the Committee (including amounts paid in a settlement approved by the Employer
and reasonable attorney's fees and expenses incurred in connection with such
claim, proceeding or action); PROVIDED, HOWEVER, that such indemnification shall
not apply to matters as to which he shall be finally adjudged, by a court of
competent jurisdiction in a decision from which no appeal may be taken or with
respect to which the time to appeal has expired without an appeal having been
made, to have engaged in gross negligence or willful misconduct. The foregoing
right of indemnification shall be in addition to any other rights to which any
such member may be entitled as a matter of law or pursuant to the bylaws of
Estee Lauder or any other Employer.
11.9 In the event that any Participant, contingent annuitant or
Beneficiary claims to be entitled to a benefit under the Plan, and the Committee
determines that such claim should be denied in whole or in part, the Committee
shall, in writing, notify such claimant within 90 days of receipt of such claim
that his claim has been denied, setting forth the specific reasons for such
denial. Such notification shall be written in a manner reasonably expected to be
understood by such Participant or other payee and shall set forth the pertinent
sections of the Plan relied on and, where appropriate, an explanation of how the
claimant can obtain review of such denial. Within 60 days after the mailing or
delivery by the Committee of such notice, such
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claimant may request, by mailing or delivery of written notice to the Committee,
a review by the Committee of the decision denying the claim. If the claimant
fails to request such a hearing within such 60-day period, it shall be
conclusively determined for all purposes of this Plan that the denial of such
claim by the Committee is correct. If such claimant requests a review within
such 60-day period, he shall have the opportunity to review pertinent documents
and to submit a written statement to the Committee. After such review, the
Committee shall determine whether such denial of the claim was correct and shall
notify such claimant in writing of its determination within 60 days from receipt
of his request and no further review shall thereafter be required by the
Committee.
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SECTION 12
INVESTMENT OF PLAN ASSETS;
DUTIES OF FIDUCIARY COMMITTEE
12.1 All assets for providing the benefits of the Plan shall be
held in trust for the exclusive benefit of Participants, contingent annuitants
and Beneficiaries under the Plan, and no part of the corpus or income shall be
used for, or diverted to, purposes other than for the exclusive benefit of
Participants, contingent annuitants, and Beneficiaries under the Plan except as
provided in Sections 6.3 and 16.4 hereof. No Participant, contingent annuitant,
or Beneficiary under the Plan, nor any other person, shall have any interest in
or right to any part of the earnings of the Trust Fund, or any rights in, to, or
under the Trust Fund or any part of its assets, except to the extent expressly
provided in the Plan.
12.2 All contributions to the Plan by the Employer shall be
committed in trust to the Trustee and/or to an insurance company as provided for
in Section 404 of ERISA. The Trustee shall be appointed from time to time by the
Fiduciary Committee by the appropriate instrument, with such powers in the
Trustee as to investment, reinvestment, control, and disbursement of the funds
as the Fiduciary Committee shall approve and as shall be in accordance with the
Plan. The Fiduciary Committee may remove, replace, or add a Trustee at any time.
Upon the removal, replacement, or resignation of any Trustee, the Fiduciary
Committee may designate a successor Trustee.
12.3 In the discretion of the Fiduciary Committee all
contributions to the Plan by the Employer committed to the Trustee and/or
insurance company may be commingled from time to time in whole or in part with
any other fund or funds held by the Trustee and/or insurance company for use in
connection with the payment of pensions of any Employee of the Employer or with
any other fund or funds held by the Trustee and/or insurance company pursuant to
any other retirement plan which is a qualified pension plan under Section 401(a)
of the Code. For purposes of this Plan, the word "fund" or "funds" as used in
this Section 12 and hereafter in this Plan shall mean the allocable portion of
the fund or funds held by the Trustee and/or insurance company in respect of the
contributions made pursuant to this Plan.
12.4 The Fiduciary Committee shall determine the manner in which
the funds of the Plan shall be disbursed in accordance with the Plan and the
provisions of the trust instrument, including the form of voucher or warrant to
be used in making disbursements and the qualifications of persons authorized to
approve and sign the same and any other matters incident to the disbursement of
such funds.
12.5 The Fiduciary Committee shall adopt from time to time
actuarial tables to be used as the basis for all actuarial calculations and
shall recommend the rates of contribution payable by the Employer to the Plan as
provided in Section 6 hereof. The Fiduciary Committee shall determine from time
to time the per centum rate of interest to be used as the basis for all
calculations. As an aid to the Fiduciary Committee in adopting tables and in
recommending the rates of contribution payable by the Employer to the Plan, the
actuary appointed by the Fiduciary Committee shall make annual actuarial
valuations of the assets and liabilities of the Plan and
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shall certify to the Fiduciary Committee the tables and rates of contribution
which he would recommend for use by the Fiduciary Committee.
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SECTION 13
OBLIGATIONS OF THE EMPLOYER
13.1 All contributions by the Employer for benefits under the
Plan shall be voluntary, and the Employer shall be under no legal obligation to
make and/or continue to make them. The Employer shall have no liability in
respect to payments or benefits or otherwise under the Plan, and the Employer
shall have no liability in respect to the administration of the Trust Fund or of
the funds, securities, or other assets paid over to the Trustee, and each
Participant, each contingent annuitant, and each Beneficiary shall look solely
to such Trust Fund for any payments or benefits under the Plan.
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SECTION 14
MISCELLANEOUS PROVISIONS
14.1 Except as otherwise provided by law (which shall include a
"qualified domestic relations order" pursuant to Section 414(p) of the Code and
any other circumstance described in Section 401(a)(13) of the Code and the
Treasury regulations promulgated thereunder), no benefit payable under the Plan
shall be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, or charge; nor shall any such benefit be in any
manner liable for or subject to the debts, contracts, liabilities, engagements,
or torts of the person entitled to such benefit.
14.2 If any Participant, contingent annuitant, or Beneficiary
under the Plan shall become bankrupt or attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber or charge any benefit in a manner not allowed
pursuant to Section 14.1, then such benefit shall, in the discretion of the
Committee, cease and terminate. In that event the Committee shall hold or apply
the benefit or any part thereof to or for such Participant, contingent annuitant
or Beneficiary, his spouse, children, or other dependents, or any of them, in
such manner and in such proportions as the Committee shall in its sole
discretion determine.
14.3 The establishment and/or maintenance of the Plan shall not
be construed as conferring any rights upon any Employee or any person for a
continuation of employment, and shall not be construed as limiting in any way
the right of the Employer to discharge any Employee or to treat him without
regard to the effect which such treatment might have upon him as a Participant
of the Plan.
14.4 If any person entitled to receive any benefits from the
Trust Fund is a minor or, in the judgment of the Committee, legally, physically
or mentally incapable of personally receiving any distributions, the Committee
may instruct the Trustee to make distribution to such other person, persons, or
institutions that, in the judgment of the Committee, are then maintaining or
have custody of such distributee.
14.5 The determination of the Committee as to the identity of
the proper payee of any benefit under the Plan and the amount of such benefit
properly payable shall be conclusive, and payment in accordance with such
determination shall constitute a complete discharge of all obligations on
account of such benefit.
14.6 In the event any amount shall become payable from the Trust
Fund to a Beneficiary or the estate of any deceased person and if, after written
notice from the Trustee mailed to the last known address of such Beneficiary, or
of the executor or administrator of such estate (as certified to the Trustee by
the Committee), such person or such executor or administrator shall not have
presented himself to the Trustee within two years after the mailing of such
notice, the Trustee shall notify the Committee, and the Committee shall instruct
the Trustee to distribute such amount due to such Beneficiary or such estate
among one or more of the spouse and blood relatives of such deceased person, as
designated by the Committee.
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14.7 This Plan may be adopted, by action of the Board of
Directors, with respect to Employees who are United States citizens employed by
a foreign subsidiary (as defined in Section 3121(1)(8) of the Code) of the
Employer, with such Employees being treated as Employees of an Employer for the
purpose described in Section 406 of the Code if the following conditions are
met:
(a) the Employer has entered into an agreement under
Section 3121(1) of the Code which applies to the foreign subsidiary by which
such Employees are employed; and
(b) no contributions under another funded plan of
deferred compensation (whether or not a plan described in Section 401(a),
403(a), or 405(a) of the Code) are provided by any other Employer with respect
to the remuneration paid to such Employees by such subsidiary.
14.8 In the case of any merger or consolidation with, or
transfer of assets or liabilities to, any other plan each Participant in the
Plan will (if the Plan then terminated) receive a benefit immediately after the
merger, consolidation or transfer which is equal to or greater than the benefit
he would have been entitled to receive immediately before the merger,
consolidation or transfer (if the Plan had then terminated). Such merger,
consolidation or transfer shall comply with Section 414(l) of the Code and the
regulations promulgated thereunder.
14.9 The rights of any person who terminated employment or
retired on or before the effective date of any of the relevant provisions of
this restatement, including his eligibility for benefits, shall be determined
solely under the terms of the Plan as in effect on the date of his termination
of employment or retirement, unless such person is thereafter reemployed and
again becomes a Participant.
14.10 Notwithstanding any provision of the Plan to the contrary,
contributions, benefits and service credit with respect to qualified military
service will be provided in accordance with Section 414(u) of the Code.
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SECTION 15
ADOPTION OF PLAN BY MEMBERS OF THE GROUP
15.1 Any member of the Group, other than Estee Lauder, or any
other corporation or unincorporated trade or business which is not a member of
the Group may, with the consent of the Board of Directors, adopt this Plan,
thereby bringing such Group member or other corporation or unincorporated trade
or business within the definition of Employer. With respect to such member of
the Group or other corporation or unincorporated trade or business, the term
"Original Effective Date" of the Plan shall refer to the date as to which such
member adopts the Plan or the date as of which the Plan is extended to such
member as the case may be.
15.2 The Board of Directors shall, subject to the requirements
of ERISA and the Code, determine the extent to which, if at all, the period of
employment prior to the extension of the Plan to a member of the Group or other
corporation or unincorporated trade or business shall be recognized for purposes
of the Plan.
15.3 In the event that a retirement plan or pension plan
maintained by a member of the Group, or other corporation or unincorporated
trade or business, for any other division, plant, or location is added to this
Plan, the rights and benefits of Employees who were covered under such other
plan shall, from and after the Original Effective Date of the Plan with respect
to said Employer, be determined under such terms and conditions with respect to
such Employees as shall be specified by the Board of Directors in the resolution
approving the adoption or extension of the Plan as to the said Employees.
The assets under such other plans maintained by a member of the
group applicable to Employees to be covered by this Plan shall, to the extent
practicable and subject to the provisions of Section 14.8 hereof, be transferred
to the Fund under this Plan, and such transferred assets shall be merged with
the Fund held under this Plan.
15.4 If any Employer which has come within the definition of
Employer pursuant to this Section 15 subsequently withdraws or is withdrawn from
the Plan, or discontinues the Plan with respect to all or part of its Employees,
the Committee shall determine the share of the Fund which shall be allocated to
the Employees of such Employer who are thereby affected. If a separate defined
benefit pension plan is being continued for such Employees, such Employer shall,
subject to the provisions of Section 14.8 hereof, designate a successor Trustee
under a separate instrument to whom such allocable funds shall be transferred
with respect to all or the specified classifications of its Employees, as the
case may be, unless the Board of Directors shall determine that such Employer
and its affected Employees may upon proper action of such Employer continue to
participate in the Trust Fund maintained in connection with this Plan. If the
Plan is discontinued with respect to all or part of such Employer's Employees,
such allocable funds shall be allocated with respect to each Employee affected,
and shall be applied pursuant to Section 16.4 hereof.
15.5 If any Employer which is not a member of the Group which
includes Estee Lauder adopts the Plan in accordance with Section 15.1, the Plan
shall be treated as a "multiple
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employer plan" within the meaning of Section 413(c) of the Code, and it shall
comply with all the requirements of the Code and ERISA applicable to such plans.
43
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SECTION 16
AMENDMENT AND TERMINATION
16.1 Estee Lauder reserves the right at any time, and from time
to time, by action of the Committee to amend, in whole or in part, retroactively
or prospectively or both, any or all of the provisions of the Plan; provided,
however, that no part of the assets of the Plan shall, by reason of any
amendment, be used for or diverted to purposes other than for the exclusive
benefit of Participants, contingent annuitants, and Beneficiaries; and further
provided that any amendment adopted by the Committee which would cause the Plan
and the trust established under the Plan to cease to meet the requirements of
Section 401(a) or 501(a) of the Code respectively, shall be null and void; and
any actions taken under the Plan pursuant to such amendment, any benefit
increases (or decreases) accruing under the Plan as a result of such amendment,
and any increases (or decreases) in benefit payments under the Plan made as a
result of such amendment, during the period from the date of adoption of such
amendment to the date it is determined that such amendment should so cause the
Plan and the trust under the Plan to cease to meet such requirements, shall be,
respectively, rectified, nullified, and restored as soon as possible to the
extent necessary to permit the Plan and the trust under the Plan to continue to
meet the requirements of Section 401(a) and 501(a) of the Code, respectively.
Notwithstanding the previous paragraph herein, no amendment to the Plan shall:
(a) reduce the Participant's accrued normal retirement
income as of the date on which the amendment is adopted,
(b) eliminate or reduce any early retirement benefit or
retirement-type subsidy (to be determined by regulation), or an optional form of
retirement income under the Plan, with respect to the accrued normal retirement
income, or
(c) reduce a retired Participant's retirement income as
of the beginning of the Plan Year in which the amendment is effective.
The Board of Directors' approval shall be required for any
amendment to the Plan which is anticipated by the Committee to increase the cost
to Estee Lauder of maintaining the Plan by an amount in excess of $1,000,000 in
any Plan Year, computed in accordance with generally accepted accounting or
actuarial principles.
16.2 The Board of Directors may terminate the Plan at any time
as to all or any particular group or groups of Participants and such other
persons, if any, who have or may become entitled to benefits under the Plan on
account of such Participants as to whom the Plan shall have been terminated,
which Participants and other persons shall be referred to collectively as the
terminated group in this Section 16. After the Plan termination date which is
applicable to the terminated group, benefits shall be provided to the terminated
group in accordance with Section 16.4 hereof. In the event of such termination,
each member of the terminated group will be fully (100%) vested in his accrued
benefit.
16.3 The terminated group's portion of the Fund shall equal the
sum of that part of the fair market value on the Plan termination date of the
entire Fund that would have been
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allocated to each person in the terminated group in accordance with Section 16.4
hereof if the Plan had been terminated on such date as to all Participants in
the Plan and no expenses were incurred in connection with such termination of
the Plan.
16.4 A terminated group's share of the Fund shall be allocated
as follows:
(a) first, to provide benefits to each person in the
terminated group in accordance with Section 4044(a) of ERISA, and the
regulations issued pursuant thereto;
(b) then, to the extent that after the making of the
allocation described in (a) above, there remain in the Fund any assets which are
applicable to the terminated group, the said assets shall be applied to pay for
any unpaid administrative expenses for the administration of the Plan as to the
terminated group; and
(c) lastly, to the extent that after making the
allocations described in (a) and (b) above, there remain in the Fund any assets
which are applicable to the terminated group, then such remaining assets shall
be paid to the Employer for its own use and benefit provided that such payment
to the Employer does not contravene any provision of law.
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SECTION 17
LIMITATION ACCORDING TO
TREASURY DEPARTMENT REQUIREMENTS
The purpose of this Section is to conform the Plan to the
requirements of Section 1.401(a)(4)-5(b) of the Income Tax Regulations.
17.1 If a benefit becomes or is payable for a Plan Year to a
Participant who is among the 25 highest paid "highly compensated employees" or
"highly compensated former employees" (each as defined in Section 414(q) of the
Code and regulations and rulings issued thereunder) for a Plan Year, such
benefit cannot exceed an amount equal to the payments that would be made during
the Plan Year on behalf of the Participant under a single life annuity that is
the Actuarial Equivalent of the sum of the Participant's Accrued Benefit and any
other benefits under the Plan; PROVIDED, HOWEVER, that this Section shall not
apply if (i) benefits that would be payable to such a Participant are less than
one percent (1%) of the total value of current liabilities under the Plan, or
(ii) the assets of the Trust Fund exceed, immediately after payment of a benefit
to such a Participant, 110% of the value of current liabilities under the Plan.
(For purposes of this Section, the value of current liabilities shall be as
defined in Section 412(l)(7) of the Code.)
17.2 In the event of a termination of the Plan, the benefit of
any highly compensated employee or highly compensated former employee shall be
limited to a benefit that is nondiscriminatory under Section 401(a)(4) of the
Code.
17.3 In the event Congress should provide by statute, or the
Internal Revenue Service or Department of the Treasury should provide by
regulation or ruling, that such limitations are no longer necessary for the Plan
to meet the requirements of Section 401(a) or other applicable provisions of the
Code then in effect, such limitations shall become void and shall no longer
apply, without the necessity of further amendment to the Plan.
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SECTION 18
TOP-HEAVY PLAN PROVISIONS
18.1 Anything elsewhere in this Plan to the contrary
notwithstanding, the provisions of this Section 18 shall apply to the Plan for
any Plan Year if, on the last day of the preceding Plan Year, either (i) the
present equivalent actuarial value of the cumulative accrued normal retirement
income of Key Employees exceeds 60% of the present equivalent actuarial value of
the cumulative accrued normal retirement income of all Participants, or (ii) the
sum of (A) the present equivalent actuarial value of the cumulative accrued
normal retirement income of Key Employees under the Plan, (B) the present
equivalent actuarial value of the accumulated accrued benefits of Key Employees
under all other qualified defined benefit plans included in the Aggregation
Group, and (C) the cumulative accrued benefits of Key Employees under all
qualified defined contribution plans included in the Aggregation Group exceeds
60% of the sum of (D) the present equivalent actuarial value of the cumulative
accrued normal retirement income of all Participants under the Plan, (E) the
present equivalent actuarial value of the accumulated accrued benefits of all
Participants under all other qualified defined benefit plans included in the
Aggregation Group, and (F) the cumulative accrued benefits of all Participants
under all qualified defined contribution plans included in the Aggregation
Group. For the purpose of the foregoing sentence, the "equivalent actuarial
value" of the cumulative accrued normal retirement income of each Participant
under the Plan shall be calculated utilizing a five percent (5%) interest rate
assumption and is increased by the amount of the aggregate distributions, if
any, made with respect to the Participant under the Plan during the five-year
period ending on the last day of the preceding Plan Year (except that for Plan
Years beginning on or after January 1, 2002, distributions on account of
severance from employment, death or disability shall be taken into account only
if made during the one-year period ending on the last day of the preceding Plan
Year); and the present equivalent actuarial value of the accumulated accrued
benefit of each Participant under all other qualified defined benefit plans and
the cumulative accrued benefit of each Participant under any qualified defined
contribution plan shall be increased by the amount of the aggregate
distributions, if any, made with respect to the Participant under such other
plan during that five-year period (or one-year period, as applicable). The term
"Aggregation Group" shall mean all plans to which the Employer contributes in
which a Key Employee is a Participant and all other plans to which the Employer
contributes that enable any such plan to meet the requirements of Section
401(a)(4) or Section 410 of the Code. If a Participant is not a Key Employee for
any Plan Year, but was a Key Employee in a prior Plan Year, the accrued normal
retirement income for such Participant shall not be taken into account. The
accrued normal retirement income of any Participant or former Participant who
has not during the five-year period ending on the last day of the preceding Plan
Year received from the Employer any compensation other than benefits under the
Plan (or for determinations on or after January 1, 2002, who has not during the
one-year period ending on the last day of the preceding Plan Year performed any
services for the Employer) shall not be taken into account. In any Plan Year for
which the provisions of this Section 18 apply and thereafter, each Employee who
is a Participant during that Plan Year and has completed at least three (3)
Years of Service shall have a nonforfeitable right, in the event he ceases to be
an Employee prior to his Normal Retirement Date, otherwise than by death or
early retirement, to receive for the remainder of his life (beginning at his
Normal Retirement Date if he is still living) a deferred vested retirement
47
<PAGE>
income in an amount per month equal to his accrued normal retirement income
computed as of the date he ceases to be an Employee (including benefits accrued
before the provisions of this Section 18 apply).
Notwithstanding the foregoing, each such Employee who has
completed not less than three (3) Years of Service shall be permitted to elect,
within 90 days after the first day of the Plan Year for which the provisions of
this Section 18 apply, to have his nonforfeitable percentage computed in
accordance with the provisions of Section 8 hereof without regard to this
paragraph.
18.2 In any Plan Year for which the provisions of this Section
18 apply, if the accrued normal retirement income of any Participant who is not
a Key Employee, when expressed as an equivalent actuarial value of a benefit
payable annually in the form of a single life annuity (with no ancillary
benefits) beginning when the Participant attains age 65 (without taking into
account contributions or benefits under Chapter 2 of Chapter 21 of Title II of
the Social Security Act, or any other Federal or State law), is less than the
Compensation from Estee Lauder not in excess of $150,000 ($200,000 for Plan
Years beginning on or after January 1, 2002), for years in the Participant's
Testing Period, then the accrued normal retirement income of that Participant
shall be increased to an amount equal at the last day of that Plan Year to such
Applicable Percentage of the Participant's average Compensation from the
Employer for years in the Participant's Testing Period.
18.3 In any Plan Year for which the provisions of this Section
18 apply, the Compensation from the Employer of each Participant taken into
account under the Plan shall not exceed the first $150,000 ($200,000 for Plan
Years beginning on or after January 1, 2002) (or such other figure as shall
result from such annual cost-of-living adjustments as the Secretary of the
Treasury or his delegate shall make pursuant to Section 401(a)(17)(B) of the
Code).
18.4 In any Plan Year commencing prior to January 1, 2000 for
which the provisions of this Section 18 apply, the figure "1.0" shall be
substituted for the figure "1.25" as required by Section 416 of the Code for the
purpose of determining an Employee's "defined contribution plan fraction" and
"defined benefit plan fraction" under Section 415(e) of the Code.
18.5 For purposes of this Section, the following definitions
shall apply:
(a) "Applicable Percentage" means, in respect of any
Participant, the lesser of (i) 2 percent multiplied by the number of the
Participant's Years of Service (disregarding any Year of Service in which ended
a Plan Year for which the provisions of this Section 18 were not applicable and
any Year of Service completed in a Plan Year beginning before January 1, 1984)
or (ii) 20 percent.
(b) "Compensation" means, for purposes of this Section
only, Compensation as defined in Section 2.10 hereof but including any special
pay or remuneration reportable to the Internal Revenue Service on Form W-2 for
Federal income tax purposes, but with respect to Plan Years commencing prior to
January 1, 1998, "Compensation" excludes contributions made by an Employer on
behalf of an Employee under a "cash or deferred arrangement" described in
Section 401(k) of the Code.
48
<PAGE>
(c) "Key Employee" means a Participant, former
Participant or the contingent annuitant of any Participant who, at any time
during the Plan Year or, for determinations prior to January 1, 2002, any of the
four preceding Plan Years, is or was
(i) an officer of an Employer whose compensation
from the Employer for the Plan Year exceeds (A) for determinations prior
to January 1, 2002, 50% of the dollar limitation in effect under Section
415(b)(1)(A) of the Code for the calendar year in which such Plan Year
ends, or (B) for determinations on or after January 1, 2002, $130,000;
(ii) solely for determinations prior to January 1,
2002, one of the ten employees having annual compensation from the
Employer in excess of the limitation in effect under Section 415(c)(1)(A)
of the Code and owning (or considered as owning within the meaning of
Section 318 of the Code) the largest interests in the Employer;
(iii) the owner of five percent (5%) or more of the
outstanding stock of the Employer (or stock possessing more than five
percent (5%) of the total combined voting power of all stock of the
Employer); or
(iv) an owner of one percent (1%) or more of the
outstanding stock of the Employer (or stock possessing more than one
percent (1%) of the total combined voting power of all stock of the
Employer) whose Compensation from the Employer for the Plan Year is more
than $150,000. Any Employee who is not a Key Employee shall be deemed a
Non-Key Employee.
(d) "Testing Period" means, in respect of any
Participant, the period of consecutive years (not exceeding Five (5)), and
disregarding any Year of Service in which ended a Plan Year for which the
provisions of this Section 18 were not applicable, any Year of Service completed
in a Plan Year beginning before January 1, 1984, and any year that begins after
the close of the last Plan Year for which the provisions of this Section 18 were
applicable), during which the Participant had the greatest aggregate
Compensation from the Employer.
49
<PAGE>
APPENDIX A
1. Except as otherwise noted below, the assumptions to be used
to convert a single life annuity into any other form of benefit, other than a
lump sum distribution, are as follows:
Interest Rate: 6%
Mortality Table: 1971 TPF&C Mortality Table for
male lives, set back four years
2. To the extent that (A) any Participant's Retirement Account
is to be converted into an equivalent, immediately payable, annual amount of
single life annuity and (B) the distribution of such single life annuity is to
begin as of date prior to January 1, 1999, such conversion shall be done by
applying an immediate conversion factor to such Participant's Retirement
Account, with such factor based upon the above specified mortality table and the
Pension Benefit Guaranty Corporation ("PBGC") immediate interest rate applicable
to the month as of which the distribution of the single life annuity is
otherwise to begin.
To the extent that (A) any Participant's Retirement Account is to
be converted into an equivalent, immediately payable, annual amount of single
life annuity and (B) the distribution of such single life annuity is to begin as
of date during calendar year 1999, such conversion shall be done by applying an
immediate conversion factor to such Participant's Retirement Account, with such
factor based upon the "applicable mortality table" (as defined under Section
417(e)(3)(A) of the Code, as amended by Public Law 103-465) and whichever of the
following two interest rates results in the larger single life annuity:
(i) the "applicable interest rate" (as defined under Section 417(e)(3)(A) of
the Code, as amended by Public Law 103-465) as in effect for the second
calendar month immediately prior to the first day of the calendar quarter
in which falls the date as of which the distribution of the single life
annuity is otherwise to begin, and
(ii) such same "applicable interest rate" as in effect for the second calendar
month immediately prior to the month in which falls the date as of which
such distribution of the single life annuity is otherwise to begin.
To the extent that (A) any Participant's Retirement Account is to
be converted into an equivalent, immediately payable, annual amount of single
life annuity and (B) the distribution of such single life annuity is to begin as
of date on or after January 1, 2000, such conversion shall be done by applying
an immediate conversion factor to such Participant's Retirement Account, with
such factor based upon the "applicable mortality table" (as defined under
Section 417(e)(3)(A) of the Code, as amended by Public Law 103-465) and the
"applicable interest rate" (as defined under Section 417(e)(3)(A) of the Code,
as similarly so amended) as in effect for the second calendar month immediately
prior to the first day of the calendar quarter in which falls the date as of
which the distribution of the single life annuity is otherwise to begin.
A-1
<PAGE>
For purposes of this Appendix A, the "applicable mortality table"
(as defined under Section 401(a)(17) of the Code, as amended by Public Law
103-465) shall be the table prescribed by Revenue Ruling 95-6 for distributions
on or after January 1, 1999 and prior to December 31, 2002, and the table
prescribed by Revenue Ruling 2001-62 for distributions on or after December 31,
2002.
3. To the extent that (A) any immediately payable, lump sum
distribution under the Plan is the equivalent of a single life annuity otherwise
deferred to a Participant's Normal Retirement Date and (B) such distribution is
to occur as of a date prior to January 1, 1999, such Participant's Retirement
Account is converted into an annual amount of such a deferred single life
annuity using a deferred conversion factor, with such factor based upon the
above specified mortality table and the PBGC immediate/deferred blended interest
rate (under Section 417(e)(3) of the Code, as in effect immediately prior to the
enactment of Public Law 103-465) applicable to the month as of which the
distribution of such lump sum benefit is otherwise to occur.
To the extent that (A) any immediately payable, lump sum
distribution under the Plan is the equivalent of a single life annuity otherwise
deferred to a Participant's Normal Retirement Date and (B) such distribution is
to occur as of a date during calendar year 1999, such Participant's Retirement
Account is converted into an annual amount of such a deferred single life
annuity using a deferred conversion factor, with such factor based upon the
"applicable mortality table" (as defined under Section 417(e)(3)(A) of the Code,
as amended by Public Law 103-465) and whichever of the following two interest
rates results in the larger single life annuity:
(i) the "applicable interest rate" (as defined under Section 417(e)(3)(A) of
the Code, as amended by Public Law 103-465) as in effect for the second
calendar month immediately prior to the first day of the calendar quarter
in which falls the date as of which such distribution is otherwise to
occur, and
(ii) such same "applicable interest rate" as in effect for the second calendar
month immediately prior to the month in which falls the date as of which
such distribution is otherwise to occur.
To the extent that (A) any immediately payable, lump sum
distribution under the Plan is the equivalent of a single life annuity otherwise
deferred to a Participant's Normal Retirement Date and (B) such distribution is
to occur as of a date on or after January 1, 2000, such Participant's Retirement
Account is converted into an annual amount of such a deferred single life
annuity using a deferred conversion factor, with such factor based upon the
"applicable mortality table" (as defined under Section 417(e)(3)(A) of the Code,
as amended by Public Law 103-465) and the applicable interest rate" (as defined
under Section 417(e)(3)(A) of the Code, as similarly so amended) as in effect
for the second calendar month immediately prior to the first day of the calendar
quarter in which falls the date as of which such distribution is otherwise to
occur.
4. To the extent that (A) any Participant's single life
annuity otherwise payable immediately is converted into an equivalent,
immediately payable lump sum distribution
A-2
<PAGE>
and (B) the distribution of such lump sum benefit is to occur as of a date prior
to January 1, 1999, such conversion shall be done by applying an immediate
conversion factor to the annual amount of such single life annuity, with such
factor based upon the above specified mortality table and the PBGC immediate
interest rate applicable to the month as of which the distribution of such lump
sum benefit is otherwise to occur.
To the extent that (A) any Participant's single life annuity
otherwise payable immediately is converted into an equivalent, immediately
payable lump sum distribution and (B) the distribution of such lump sum benefit
is to occur as of a date during calendar year 1999, such conversion shall be
done by applying an immediate conversion factor to the annual amount of such
single life annuity, with such factor based upon the "applicable mortality
table" (as defined under Section 417(e)(3)(A) of the Code, as amended by Public
Law 103-465) and whichever of the following two interest rates results in the
larger single life annuity:
(i) the "applicable interest rate" (as defined under Section 417(e)(3)(A) of
the Code, as amended by Public Law 103-465) as in effect for the second
calendar month immediately prior to the first day of the calendar quarter
in which falls the date as of which such distribution is otherwise to
occur, and
(ii) such same "applicable interest rate" as in effect for the second calendar
month immediately prior to the month in which falls the date as of which
such distribution is otherwise to occur.
To the extent that (A) any Participant's single life annuity
otherwise payable immediately is converted into an equivalent, immediately
payable lump sum distribution and (B) the distribution of such lump sum benefit
is to occur as of a date on or after January 1, 2000, such conversion shall be
done by applying an immediate conversion factor to the annual amount of such
single life annuity, with such factor based upon the "applicable mortality
table" (as defined under Section 417(e)(3)(A) of the Code, as amended by Public
Law 103-465) and the "applicable interest rate" (as defined under Section
417(e)(3)(A) of the Code, as also so amended) as in effect for the second
calendar month immediately prior to the first day of the calendar quarter in
which falls the date as of which such distribution is otherwise to occur.
5. Each Participant's single life annuity otherwise deferred
to such Participant's Normal Retirement Date is, if the distribution of a lump
sum benefit is otherwise to occur as of a date prior to January 1, 1999,
converted into an equivalent, immediately payable lump sum distribution by using
a deferred conversion factor, with such factor based upon the above specified
mortality table and the PBGC immediate/deferred blended interest rate (under
Section 417(e)(3) of the Code, as in effect immediately prior to the enactment
of Public Law 103-465) applicable to the month as of which the distribution of
such lump sum benefit is otherwise to occur.
Each Participant's single life annuity otherwise deferred to such
Participant's Normal Retirement Date is, if the distribution of a lump sum
benefit is otherwise to occur as of a date during calendar year 1999, converted
into an equivalent, immediately payable lump sum
A-3
<PAGE>
distribution by using a deferred conversion factor, with such factor based upon
the "applicable mortality table" (as defined under Section 417(e)(3)(A) of the
Code, as amended by Public Law 103-465) and whichever of the following two
interest rates results in the larger single life annuity:
(i) the "applicable interest rate" (as defined under Section 417(e)(3)(A) of
the Code, as amended by Public Law 103-465) as in effect for the second
calendar month immediately prior to the first day of the calendar quarter
in which falls the date as of which such distribution is otherwise to
occur, and
(ii) such same "applicable interest rate" as in effect for the second calendar
month immediately prior to the month in which falls the date as of which
such distribution is otherwise to occur.
Each Participant's single life annuity otherwise deferred to such
Participant's Normal Retirement Date is, if the distribution of a lump sum
benefit is otherwise to occur as of a date on or after January 1, 2000,
converted into an equivalent, immediately payable lump sum distribution by using
a deferred conversion factor, with such factor based upon the "applicable
mortality table" (as defined under Section 417(e)(3)(A) of the Code, as amended
by Public Law 103-465) and the "applicable interest rate" (as defined under
Section 417(e)(3)(A) of the Code, as similarly so amended) as in effect for the
second calendar month immediately prior to the first day of the calendar quarter
in which falls the date as of which such distribution is otherwise to occur.
A-4
<PAGE>
APPENDIX B
In order to receive the benefits described in Section 5.5 of the
Plan, a Participant must have been a participant under a Prior Plan on December
31, 1990 and must satisfy the requirements set forth below that correspond to
his termination of employment date.
TERMINATION OF EMPLOYMENT DATE REQUIREMENTS
1. After December 31, 1990 and prior 1. Age 50 with 10 Years of Service on
to July 1, 1991 December 31, 1990; age 55 with 10
Years of Service on his
termination of employment date
2. After June 30, 1991 and prior to 2. Age 55 with 10 Years of Service on
January 1, 1993 his termination of employment date
3. After December 31, 1992 3. Age 50 with 5 Years of Service, or
any age and 10 Years of Service,
as of January 1, 1993
B-1
<PAGE>
APPENDIX C
ADDITIONAL EARLY RETIREMENT BENEFITS
------------------------------------
1.1 Eligibility for Additional Benefits
A. Any Participant employed in the United States by an
Employer, or on sick leave or long-term disability under the Employer's
Long-Term Disability Plan, may elect to retire on August 1, 1991 (such
designated date of retirement hereinafter referred to in this Appendix C as the
"Retirement Day") and be eligible to receive the additional benefits
("Additional Benefits") set forth under this Appendix C, provided that () on or
before July 31, 1991 such Participant shall have attained at least age 55 and
completed at least ten Years of Service under the Plan (including periods of
disability in which no Years of Service were credited), () the document entitled
"Special Retirement Option Agreement," which includes a General Release in favor
of the Employer, is signed, witnessed and dated no earlier than July 8, 1991 but
no later than July 18, 1991 in strict accordance with the instructions contained
therein, and () such Participant shall have made an election to retire on such
other forms as the Employer may require during the period commencing forty-five
days after such Participant receives the "Special Retirement Option Agreement"
from the Employer but ending no later than July 31, 1991. Participants who
previously retired on or after January 1, 1991 and before August 1, 1991 and who
were employed in the United States by the Employer shall also be eligible for
the Additional Benefits under this Appendix C, provided the preceding
requirements in clauses (i)-(iii) hereof are satisfied.
B. Notwithstanding the provisions of paragraph A
hereof, any individual whose active employment with an Employer ceased by mutual
agreement on or before May 17, 1991 shall not be eligible for any benefits under
this Appendix C.
C. Notwithstanding the provisions of paragraph A above,
any individual who is classified by an Employer as a Corporate Department Head
or President of a division shall not be eligible for the Additional Benefits
under this Appendix C.
1.2 Additional Benefits
Each Participant eligible for Additional Benefits under this
Appendix C to the Plan who elects to retire on the Retirement Day shall be
entitled to the following:
A. The Additional Benefits shall be equal to the
benefit determined, under Section 5.5 of the Plan, by increasing the
Participant's age as of August 1, 1991, by Five (5) years and Years of Service
as of August 1, 1991, by Five (5) years. The Additional Benefits shall be added
to the regular pension benefit determined under Section 5.5 of the Plan.
B. The reduction contained in Section 5.5 of the Plan,
which applies to the early commencement of a Participant's benefits prior to age
62, shall be applied after increasing the Participant's age by Five (5) years as
provided under paragraph A above.
C-1
<PAGE>
C. The Additional Benefits provided under this Appendix
C to the Plan shall be payable in the form applicable to the Participant in
accordance with the provisions of Section 9 of the Plan.
D. Participants who (i) retired on or after January 1,
1991 and prior to August 1, 1991, (ii) are receiving retirement benefits under
the Plan prior to August 1, 1991, and (iii) are eligible under Section 1.01 A
hereof, shall have the amount of their retirement benefits recomputed under this
Appendix C from the date of their previous retirement and paid in accordance
with the form of benefit previously elected under Section 9 of the Plan. No
changes to the form of benefit previously elected shall be permitted; however,
the Additional Benefits payable for the period of time from the date of the
previous retirement to July 31, 1991 shall be paid in the form of a lump sum
distribution at the time prescribed under paragraph E hereof. In no event shall
Additional Benefits be paid to Participants who retired before January 1, 1991.
E. If a Participant elects the Additional Benefits
provided under this Appendix C to the Plan, such Participant's retirement
benefits shall be payable commencing in the first month following the month in
which the Retirement Day occurs.
C-2
<PAGE>
APPENDIX D
ADDITIONAL EARLY RETIREMENT BENEFITS
1.1 Eligibility for Additional Benefits
A. Any Participant employed in the Commonwealth of
Puerto Rico by the Estee Lauder Hemisphere Division of Clinique (the
"Employer"), or on sick leave or long-term disability under the Employer's
Long-Term Disability Plan, may elect to retire on December 1, 1991 (such
designated date of retirement hereinafter referred to in this Appendix D as the
"Retirement Day") and be eligible to receive the additional benefits
("Additional Benefits") set forth under this Appendix D, provided that (i) on or
before November 30, 1991 such Participant shall have attained at least age 55
and completed at least ten Years of Service under the Plan (including periods of
disability in which no Years of Service were credited), (ii) the document
entitled "Special Retirement Option Agreement and General Release," which
includes a General Release in favor of the Employer, is signed, witnessed and
dated no earlier than November 4, 1991 but no later than November 14, 1991 in
strict accordance with the instructions contained therein, and (iii) such
Participant shall have made an election to retire on such other forms as the
Employer may require during the period commencing forty-five days after such
Participant receives the "Special Retirement Option Agreement" from the Employer
but ending no later than November 30, 1991. Participants who previously retired
on or after January 1, 1991 and before December 1, 1991 and who were employed in
the Commonwealth of Puerto Rico by the Employer shall also be eligible for the
Additional Benefits under this Appendix D, provided the preceding requirements
in clauses (i)-(iii) hereof are satisfied.
B. Notwithstanding the provisions of paragraph A
hereof, any individual whose active employment with the Employer ceased by
mutual agreement on or before September 19, 1991 shall not be eligible for any
benefits under this Appendix D.
C. Notwithstanding the provisions of paragraph A above,
any individual who is classified by the Employer as a Corporate Department Head
or President of a division shall not be eligible for the Additional Benefits
under this Appendix D.
1.2 Additional Benefits
Each Participant eligible for Additional Benefits under this
Appendix D to the Plan who elects to retire on the Retirement Day shall be
entitled to the following:
A. The Additional Benefits shall be equal to the
benefit determined, under Section 5.5 of the Plan, by increasing the
Participant's age as of December 1, 1991, by Five (5) years and Years of Service
as of December 1, 1991, by Five (5) years. The Additional Benefits shall be
added to the regular pension benefit determined under Section 5.5 of the Plan.
B. The reduction contained in Section 5.5 of the Plan,
which applies to the early commencement of a Participant's benefits, shall be
applied after increasing the Participant's age by Five (5) years as provided
under paragraph A above.
D-1
<PAGE>
C. The Additional Benefits provided under this Appendix
D to the Plan shall be payable in the form applicable to the Participant in
accordance with the provisions of Section 9 of the Plan.
D. Participants who (i) retired on or after January 1,
1991 and prior to December 1, 1991, (ii) are receiving retirement benefits under
the Plan prior to December 1, 1991, and (iii) are eligible under Section 1.01 A
hereof, shall have the amount of their retirement benefits recomputed under this
Appendix D from the date of their previous retirement and paid in accordance
with the form of benefit previously elected under Section 8 of the Plan. No
changes to the form of benefit previously elected shall be permitted; however,
the Additional Benefits payable for the period of time from the date of the
previous retirement to November 30, 1991 shall be paid in the form of a lump sum
distribution at the time prescribed under paragraph E hereof. In no event shall
Additional Benefits be paid to Participants who retired before January 1, 1991.
E. If a Participant elects the Additional Benefits
provided under this Appendix D to the Plan, such Participant's retirement
benefits shall be payable commencing in the first month following the month in
which the Retirement Day occurs.
D-2
<PAGE>
APPENDIX E
SPECIAL PROVISIONS GOVERNING
EMPLOYEES OF WHITMAN PACKAGING CORPORATION
WHO DID NOT OTHERWISE BECOME ELIGIBLE EMPLOYEES
PRIOR TO JANUARY 1, 1992
-----------------------------------------------
SECTION 1.1 SCOPE.
The provisions of this Appendix E shall apply with respect to each person
who first became an employee of Whitman Packaging Corporation prior to January
1, 1992; other than any such person who, prior to that date, terminated such
employment and immediately thereupon transferred to, and became an employee of,
an entity which was then an Employer under the Plan as then in effect (a
"Whitman Employee"). The provisions of this Appendix E shall apply
notwithstanding any contrary provisions of the Plan, of which this Appendix is a
part.
Except to the extent expressly provided to the contrary herein, all
defined terms shall have the same meanings as provided under the Plan. Each
reference to the Plan shall (except with reference to the first sentence of the
preceding paragraph) be to the Plan as in effect at the time such provision is
applied to a Whitman Employee, as the context shall require.
The provisions of this Appendix E shall not apply with respect to (a) any
person described in Appendix F or (b) any person who first becomes an employee
of Whitman Packaging Corporation ("Whitman") on or after January 1, 1992.
SECTION 1.2 COMMENCEMENT OF STATUS AS A
PARTICIPATING EMPLOYER
----------------------------------
Whitman shall become an Employer under the Plan on January 1, 1992.
SECTION 1.3 COMMENCEMENT OF PLAN PARTICIPATION
BY WHITMAN EMPLOYEES
----------------------------------
No Whitman Employee shall be permitted to become a Participant prior to
January 1, 1992. The first date on or after January 1, 1992 on which any such
person may become a Participant shall be governed by the otherwise applicable
provisions of Section 3 of the Plan. In applying the terms of such participation
eligibility provision, there shall be taken into account all of such Whitman
Employee's period of employment with Whitman on or after January 1, 1984, but
only to the extent that any such period of employment would have been taken into
account had Whitman otherwise been an Employer throughout such person's entire
such period of employment.
E-1
<PAGE>
SECTION 1.4 CREDITS TO RETIREMENT ACCOUNTS
In determining the amount to be credited to the Retirement Account of a
Whitman Employee who becomes a Participant pursuant to the provisions of Section
5 of the Plan, there shall be taken into account all periods of such person's
employment with Whitman on or after January 1, 1984 which would otherwise have
been taken into account for such purpose had Whitman otherwise been an Employer
throughout such person's entire such period of employment; PROVIDED, HOWEVER,
that there shall be taken into account for this purpose with respect to any
Whitman Employee who becomes a Participant (i) who transferred from a non-exempt
position to an exempt position prior to January 1, 1992, all periods of
employment beginning with the date on which such Whitman Employee first became a
regular, full-time employee of Whitman; (ii) who is in a non-exempt position,
all periods of employment beginning on the later of (A) January 1, 1984, or (B)
such Whitman Employee's Plan Entry Date for purposes of the Whitman Packaging
Corporation Money Purchase Plan.
SECTION 1.5 VESTING
In determining the extent to which any Whitman Employee is vested in his
Retirement Account pursuant to the provisions of Section 8 of the Plan, there
shall be taken into account all periods of such person's employment with Whitman
which are otherwise taken into account with respect to such employee pursuant to
the provisions of Section 1.4 of this Appendix E.
E-2
<PAGE>
APPENDIX F
SPECIAL PROVISIONS GOVERNING
EMPLOYEES OF WHITMAN PACKAGING CORPORATION
WHO OTHERWISE BECOME ELIGIBLE EMPLOYEES
PRIOR TO JANUARY 1, 1992
- --------------------------------------------------------------------------------
SECTION 1.1 SCOPE
The provisions of this Appendix F shall apply with respect to each person
who, prior to January 1, 1992, (a) became an employee of Whitman Packaging
Corporation and (b) thereafter terminated such employment and immediately
thereupon transferred to, and became an employee of an entity which was then an
Employer under the Plan as then in effect (a "Transferred Whitman Employee").
The provisions of this Appendix F shall apply notwithstanding any contrary
provisions of the Plan, of which this Appendix is a part.
Except to the extent expressly provided to the contrary herein, all
defined terms shall have the same meanings as provided under the Plan. Each
reference to the Plan shall (except with reference to the first sentence of the
preceding paragraph) be to the Plan as in effect at the time such provision is
applied to a Transferred Whitman Employee, as the context shall require.
The provisions of this Appendix F shall not apply with respect to (a) any
person subject to the provisions of Appendix E or (b) any person who first
becomes an employee of Whitman Packaging Corporation ("Whitman") on or after
January 1, 1992.
SECTION 1.2 CREDITS TO RETIREMENT ACCOUNTS
In determining the amount to be credited to the Retirement Account of a
Transferred Whitman Employee for the Plan Year commencing January 1, 1992 and
for each subsequent Plan Year (but not for any prior Plan Year) pursuant to the
provisions of Section 5 of the Plan, but only in the case of such a person who
is otherwise entitled to have an amount so credited for such Plan Year, there
shall be taken into account all periods of such person's employment with Whitman
on or after January 1, 1984 which would otherwise have been taken into account
for such purpose had Whitman otherwise been an Employer throughout such person's
entire such period of employment; PROVIDED, HOWEVER, that there shall be taken
into account for this purpose with respect to any Transferred Whitman Employee
(i) who transferred from a non-exempt position to an exempt position with
Whitman prior to becoming a Transferred Whitman Employee, all periods of
employment beginning with the date on which such Transferred Whitman Employee
first became a regular, full-time employee of Whitman; (ii) who was in a
non-exempt position with Whitman prior to becoming a Transferred Whitman
Employee, all periods of employment beginning on the later of (iii) January 1,
1984, or (iv) such Transferred Whitman Employee's Plan Entry Date for purposes
of the Whitman Packaging Corporation Money Purchase Plan.
F-1
<PAGE>
SECTION 1.3 VESTING
In determining the extent to which any Transferred Whitman Employee is,
for the Plan Year commencing January 1, 1992 and each subsequent Plan Year,
vested in his Retirement Account pursuant to the provisions of Section 8 of the
Plan, there shall be taken into account all periods of such person's employment
with Whitman which are otherwise taken into account with respect to such
employee pursuant to the provisions of Section 1.2 of this Appendix F.
In determining the extent to which any Transferred Whitman Employee is,
for any Plan Year beginning prior to January 1, 1992, vested in such
aforementioned Account, such person's prior employment with Whitman shall be
taken into account only to the extent required under the provisions of Section
411 of the Code.
F-2
<PAGE>
APPENDIX G
SPECIAL PROVISIONS GOVERNING
EMPLOYEES OF NORTHTEC INC. WHO DID NOT OTHERWISE
BECOME ELIGIBLE EMPLOYEES PRIOR TO JANUARY 1, 1992
- --------------------------------------------------------------------------------
SECTION 1.1 SCOPE
The provisions of this Appendix G shall apply with respect to each person
who first became an employee of Northtec Inc. prior to January 1, 1992 at either
its Trevose, Pa. or Bristol, Pa. locations; other than any such person who,
prior to that date, terminated such employment and immediately thereupon
transferred to, and became an employee of, an entity which was then an Employer
under the Plan as then in effect (a "Northtec Employee"). The provisions of this
Appendix G shall apply notwithstanding any contrary provisions of the Plan, of
which this Appendix is a part.
Except to the extent expressly provided to the contrary herein, all
defined terms shall have the same meanings as provided under the Plan. Each
reference to the Plan shall (except with reference to the first sentence of the
preceding paragraph) be to the Plan as in effect at the time such provision is
applied to a Northtec Employee, as the context shall require.
The provisions of this Appendix G shall not apply with respect to (a) any
person described in Appendix H or (b) any person who first becomes an employee
of Northtec Inc. ("Northtec") on or after January 1, 1992.
SECTION 1.2 COMMENCEMENT OF STATUS AS A
PARTICIPATING EMPLOYER
-------------------------------------
Northtec shall become an Employer under the Plan on January 1, 1992.
SECTION 1.3 COMMENCEMENT OF PLAN PARTICIPATION BY
NORTHTEC EMPLOYEES
-------------------------------------
A. No Northtec Employee shall be permitted to become a
Participant prior to January 1, 1992. The first date on or after January 1, 1992
on which any such person may become a Participant shall be governed by the
otherwise applicable provisions of Section 2 of the 1992 Plan.
B. In applying the terms of the participation eligibility
provision referred to in subsection (a) of this Section 1.3 in the case of any
Northtec Employee employed at the Trevose, Pa. location prior to January 1,
1992, there shall be taken into account all of such employee's period of
employment with Northtec on or after July 17, 1989, but only to the extent that
any such period of employment would have been taken into account had Northtec
otherwise been an Employer throughout such person's entire such period of
employment.
G-1
<PAGE>
C. In applying the terms of the participation eligibility
provision referred to in Section 1.3 in the case of any Northtec Employee
employed at the Bristol, Pa. location prior to January 1, 1992, there shall be
taken into account all of such employee's period of employment with Northtec
(including, for such purpose, all periods of employment on and after November 1,
1987, with Powder Masters, which formerly operated such location), but only to
the extent that any such period of employment would have been taken into account
had Northtec (or Powder Masters, as the case may be) otherwise been an Employer
throughout such person's entire such period of employment.
SECTION 1.4 CREDITS TO RETIREMENT ACCOUNTS
A. In determining the amount to be credited to the Retirement
Account of a Northtec Employee who becomes a Participant pursuant to the
provisions of Section 5 of the Plan, on behalf of any Northtec Employee employed
at the Trevose, Pa. location prior to January 1, 1992, who otherwise becomes a
Participant, there shall be taken into account all periods of such person's
employment with Northtec on or after July 17, 1989 which would otherwise have
been taken into account for such purpose had Northtec otherwise been an Employer
throughout such person's entire such period of employment.
B. In determining the amount to be credited to the Retirement
Account of a Northtec Employee who becomes a Participant pursuant to the
provisions of Section 5 of the Plan, on behalf of any Northtec Employee employed
at the Bristol, Pa. location prior to January 1, 1992, who otherwise becomes a
Participant, there shall be taken into account all periods of such person's
employment with Northtec (including, for such purpose, all periods of employment
on and after November 1, 1987, with Powder Masters) which would otherwise have
been taken into account for such purpose had Northtec (or Powder Masters, as the
case may be) otherwise been an Employer throughout such person's entire such
period of employment.
C. In addition to the credits referred to in subsections (b)
and (c) of this Section 1.4, each Northtec Employee who becomes a Participant on
January 1, 1992 shall, as of such date, be credited with $400 for each full
calendar year of employment prior to January 1, 1992, but with such calendar
years being limited to the period otherwise taken into account under the
foregoing provisions of this Section 1.4.
SECTION 1.5 VESTING
In determining the extent to which any Northtec Employee is vested in his
Account pursuant to the provisions of Section 8 of the Plan, there shall be
taken into account all periods of such person's employment with Northtec which
are otherwise taken into account with respect to such employee pursuant to the
provisions of Section 1.4 of this Appendix G.
G-2
<PAGE>
SECTION 1.6 TRANSFER BETWEEN LOCATIONS
In the case of any Northtec Employee who, prior to January 1, 1992 had
been employed at both the Trevose, Pa. location and the Bristol, Pa. location,
the provisions of this Appendix G shall, notwithstanding any other provision of
this Appendix G to the contrary, be applied as if such person had, throughout
the entire period prior to January 1, 1992, remained employed at whichever of
such two locations such Northtec Employee was first employed.
G-3
<PAGE>
APPENDIX H
SPECIAL PROVISIONS GOVERNING
EMPLOYEES OF NORTHTEC INC. WHO OTHERWISE BECOME
ELIGIBLE EMPLOYEES PRIOR TO JANUARY 1, 1992
- --------------------------------------------------------------------------------
SECTION 1.1 SCOPE
The provisions of this Appendix H shall apply with respect to each person
who, prior to January 1, 1992, (a) became an employee of Northtec Inc. at either
its Trevose, Pa. or Bristol, Pa. locations and (b) thereafter terminated such
employment and immediately thereupon transferred to, and became an employee of
an entity which was then an Employer under the Plan as then in effect (a
"Transferred Northtec Employee"). The provisions of this Appendix H shall apply
notwithstanding any contrary provisions of the Plan, of which this Appendix is a
part.
Except to the extent expressly provided to the contrary herein, all
defined terms shall have the same meanings as provided under the Plan. Each
reference to the Plan shall (except with reference to the first sentence of the
preceding paragraph) be to the Plan as in effect at the time such provision is
applied to a Transferred Northtec Employee, as the context shall require.
The provisions of this Appendix H shall not apply with respect to (a) any
person subject to the provisions of Appendix G or (b) any person who first
becomes an employee of Northtec Inc. ("Northtec") on or after January 1, 1992.
SECTION 1.2 CREDITS TO RETIREMENT ACCOUNTS
A. In determining the amount to be credited to the Retirement
Account of a Transferred Northtec Employee, who was employed at the Trevose, Pa.
location prior to becoming a Transferred Northtec Employee, for the Plan Year
commencing January 1, 1992 and for each subsequent Plan Year (but not for any
prior Plan Year) pursuant to the provisions of Section 5 of the Plan, but only
in the case of such a person who is otherwise entitled to have an amount so
credited for such Plan Year, there shall be taken into account all periods of
such person's employment with Northtec on or after July 17, 1989 which would
otherwise have been taken into account for such purpose had Northtec otherwise
been an Employer throughout such person's entire such period of employment.
B. In determining the amount to be credited to the Retirement
Account of a Transferred Northtec Employee, who was employed at the Bristol, Pa.
location prior to becoming a Transferred Northtec Employee, for the Plan Year
commencing January 1, 1992 and for each subsequent Plan Year (but not for any
prior Plan Year) pursuant to the provisions of Section 5 of the Plan, but only
in the case of such a person who is otherwise entitled to have an amount so
credited for such Plan Year, there shall be taken into account all periods of
such person's employment with Northtec (including, for such purpose, all periods
of employment on and after November 1, 1987, with Powder Masters) which would
otherwise have been taken into account
H-1
<PAGE>
for such purpose had Northtec (or Powder Masters, as the case may be) otherwise
been an Employer throughout such person's entire such period of employment.
C. In addition to the credits referred to in subsections (b)
and (c) of this Section 1.2, each Transferred Northtec Employee who was
otherwise a Participant in the Plan on January 1, 1992, shall, as of such date,
be credited with the greater of (a) the balance otherwise determined under the
Plan as of that date, without regard to this Appendix H or (b) an amount equal
to the sum of $400 multiplied by the number of such person's full calendar years
of employment prior to January 1, 1992. For this purpose, such calendar years of
employment for any Transferred Northtec Employee shall be determined by taking
into account all periods of employment otherwise taken into account with respect
to such person under the foregoing provisions of this Section 1.2 as well as all
periods otherwise recognized under the Plan without regard to this Appendix H.
SECTION 1.3 VESTING
In determining the extent to which any Transferred Northtec Employee is,
for the Plan Year commencing January 1, 1992 and each subsequent Plan Year,
vested in his Retirement Account pursuant to the provisions of Section 8 of the
Plan, there shall be taken into account all periods of such person's employment
with Northtec which are otherwise taken into account with respect to such
employee pursuant to the provisions of Section 1.2 of this Appendix H.
In determining the extent to which any Transferred Northtec Employee is,
for any Plan Year beginning prior to January 1, 1992, vested in such
aforementioned Account, such person's prior employment with Northtec shall be
taken into account only to the extent required under the provisions of Section
411 of the Code.
SECTION 1.4 TRANSFER BETWEEN LOCATIONS
In the case of any Transferred Northtec Employee who, prior to so
becoming a Transferred Northtec Employee, had been employed at both the Trevose,
Pa. location and the Bristol, Pa. location, the provisions of this Appendix H
shall, notwithstanding any other provisions of this Appendix H to the contrary,
be applied as if such person had, throughout the entire period prior to becoming
a Transferred Northtec Employee, remained employed at whichever of such two
locations such person was first employed.
H-2
<PAGE>
APPENDIX I
ADDITIONAL RETIREMENT BENEFITS
- --------------------------------------------------------------------------------
SECTION 1.1 Eligibility for Additional Benefits
The following Participants shall receive the additional benefits provided
pursuant to this Appendix I:
NAME SOCIAL SECURITY NO.
---- -------------------
Acevedo, Muthmet Juarbe 582-82-5265
Agosto Pagan, Francisco 582-36-3267
DeJesus Moreira, Lydia 133-28-4613
Del Valle, Maria T. 113-28-4815
Iglesia Anglero, Josephina 583-28-8815
Morales Borrero, Alicia 582-96-0486
Suris Mallo, Julieta 267-80-6680
SECTION 1.2 Additional Benefits
Each Participant described in the foregoing Section 1.1 of this Appendix
I shall be entitled to the following:
A. The Additional Benefits shall be equal to the benefit
determined, under Section 5.5 of the Plan, by increasing the Participant's age
by Five (5) years and Years of Credited Service by Five (5) years. The
Additional Benefits shall be added to the regular pension benefit determined
under Section 5.5 of the Plan.
B. The reduction contained in Section 5.5 of the Plan, which
applies to the early commencement of a Participant's benefits, shall be applied
after increasing the Participant's age by Five (5) years as provided under
paragraph A above.
C. The Additional Benefits provided under this Appendix I
shall be payable in the form otherwise applicable to the Participant in
accordance with the generally applicable provisions of the Plan.
I-1
<PAGE>
APPENDIX J
ADDITIONAL EARLY RETIREMENT BENEFITS - II
- --------------------------------------------------------------------------------
1.1 Eligibility for Additional Benefits.
(1) Any Participant who is (i) employed by the Employer, (ii)
on an Approved Absence (paid or unpaid) from the Employer, (iii) on sick leave
or long-term disability under the Employer's Long-Term Disability Plan with
disability payments continuing on and after January 1, 1997 or (iv) receiving
severance payments from the Employer that are being paid on or after January 1,
1997 (such persons being hereinafter referred to as a "Covered Employee"), may
elect to retire on the first day of any month commencing on January 1, 1997 and
ending on July 1, 1998 as designated by the Employer and Covered Employee in the
"General Release" (such designated date of retirement hereinafter referred to in
this Appendix J as the "Retirement Date").
Such Covered Employee shall be eligible to receive the benefit
described in Paragraph 1.2 of this Appendix J, provided that (i) on or before
December 31, 1996, such Covered Employee shall have attained at least age 50 and
completed at least ten Years of Service or Years of Credited Service under the
Plan, (ii) on or before December 31, 1996, any such Covered Employee who was
employed by Whitman Packaging Corporation has completed at least four Years of
Eligibility Service under the Plan, (iii) the document entitled "Special
Retirement Opportunity" is signed, witnessed and dated no earlier than November
8, 1996 in strict accordance with the instructions contained therein, and (iv)
such Covered Employee shall have made an election to retire on such other forms
as the Employer may require during the period commencing at least forty-five
days after such Covered Employee receives the "General Release" from the
Employer but ending no later than June 4, 1998. Participants who previously
retired on or after January 1, 1996 and before January 1, 1997 and who were
employed in the United States by the Employer shall also be eligible for the
benefits described in Paragraph 1.2 of this Appendix J, provided the preceding
requirements in clauses (i)-(iv) hereof are satisfied (such persons are
hereinafter referred to as "Retired Covered Employees").
(2) Notwithstanding the provisions of paragraph 1 above, any
individual who is classified by an Employer as a Corporate Department Head or
President of a division shall not be eligible for the benefit described in
Paragraph 1.2 of this Appendix J.
1.2 Additional Benefits.
(1) Each Covered Employee who elects to retire on the
Retirement Date shall be entitled to his Accrued Benefit which will be
calculated as if such Covered Employee was five years older than his actual age
as of December 31, 1996, and by increasing his Years of Service and Years of
Credited Service as of December 31, 1996 (the difference between the Covered
Employee's benefit determined under this Appendix J and his benefit determined
without regard to the enhancement provided under this Appendix J shall
hereinafter be referred to as the "Additional Benefit").
J-1
<PAGE>
(2) The reduction contained in Section 5.5 of the Plan, which
applies to the early commencement of a Covered Employee's Accrued Benefit
determined under the terms of the Prior Plan, shall be applied after increasing
the Covered Employee's age by Five (5) years as provided under Paragraph 1.2(1)
above.
(3) If the Covered Employee elects to retire pursuant to the
provisions of this Appendix J, such Covered Employee may elect at any time prior
to the date of commencement of his benefit to receive his benefit, calculated in
accordance with the provisions of the Plan and this Appendix J, in the forms of
payment applicable to the Covered Employee in accordance with the provisions of
Section 9 of the Plan.
(4) All Retired Covered Employees who (i) retired on or after
January 1, 1996 and prior to January 1, 1997 and (ii) are receiving retirement
benefits under the Plan prior to January 1, 1997 shall have the amount of their
retirement benefits recomputed under this Appendix J (taking into the account
the provisions of paragraphs (1) and (2) hereof) from the date of their previous
retirement and paid in accordance with the form of benefit previously elected
under Section 9 of the Plan. No changes to the form of benefit previously
elected shall be permitted. In no event shall Additional Benefits be paid to
Participants who retired before January 1, 1996.
(5) If a Covered Employee or Retired Covered Employee elects to
receive the Additional Benefits provided under this Appendix J to the Plan, such
Covered Employee's or Retired Covered Employee's retirement benefits shall be
payable with respect to or commencing on the first month following the month in
which the Retirement Date occurs.
1.3 Defined Terms.
Except to the extent set forth above, the provisions of this Appendix J
are subject to the terms and conditions of the Plan and defined terms used in
this Appendix J shall have the same meaning as used in the Plan.
J-2
<PAGE>
APPENDIX K
SPECIAL PROVISIONS GOVERNING
EMPLOYEES OF BOBBI BROWN PROFESSIONAL
COSMETICS, INC. WHO DID NOT OTHERWISE
BECOME ELIGIBLE EMPLOYEES
- --------------------------------------------------------------------------------
SECTION 1.1 SCOPE
The provisions of this Appendix K shall apply notwithstanding any
contrary provisions of the Plan, of which this Appendix is a part.
Except to the extent expressly provided to the contrary herein, all
defined terms shall have the same meanings as provided under the Plan. Each
reference to the Plan shall (except with reference to the first sentence of the
preceding paragraph) be to the Plan as in effect at the time such provision is
applied to a Bobbi Brown Employee (as defined below), as the context shall
require.
SECTION 1.2 COMMENCEMENT OF STATUS AS A
PARTICIPATING EMPLOYER
Bobbi Brown Professional Cosmetics, Inc. ("Bobbi Brown") shall become an
Employer under the Plan on January 1, 1996.
SECTION 1.3 COMMENCEMENT OF PLAN PARTICIPATION
BY BOBBI BROWN EMPLOYEES
No Bobbi Brown employee shall be permitted to become a Participant prior
to January 1, 1996. Each person who (i) is employed by Bobbi Brown on January 1,
1996 and (ii) is otherwise an Employee on that date shall become a Participant
on January 1, 1996. (Each person who so becomes a Participant on that date is
hereafter referred to as a "Bobbi Brown Employee".)
SECTION 1.4 CREDITS TO RETIREMENT ACCOUNTS
In determining the amount to be credited to the Retirement Account of a
Bobbi Brown Employee who becomes a Participant, pursuant to the provisions of
Section 5 of the Plan, such person's Years of Service, for such purpose, shall
be determined based upon the date that such person would otherwise have, without
regard to this Appendix K, first become a Participant had Bobbi Brown been an
Employer throughout such person's entire period of employment with Bobbi Brown.
K-1
<PAGE>
SECTION 1.5 VESTING
In determining the extent to which any Bobbi Brown Employee is vested in
his Retirement Account pursuant to the provisions of Section 8 of the Plan, such
person's Years of Service, for such purpose, shall be determined by taking into
account all periods of such person's employment with Bobbi Brown which would
otherwise have been taken into account for such purpose had Bobbi Brown
otherwise been an Employer throughout such person's entire period of employment
with Bobbi Brown.
K-2
<PAGE>
APPENDIX L
SPECIAL PROVISIONS GOVERNING
ESTEE LAUDER EMPLOYEES WHO WERE PREVIOUSLY
EMPLOYED BY THE DONNA KARAN COMPANY
WHO DID NOT OTHERWISE
BECOME ELIGIBLE EMPLOYEES
- --------------------------------------------------------------------------------
SECTION 1.1 SCOPE
The provisions of this Appendix L shall apply with respect to each person
who was an employee of The Donna Karan Company ("DK") immediately prior to
November 10, 1997 and becomes an Employee prior to December 31, 1998 (a "DK
Employee"). The provisions of this Appendix L shall apply notwithstanding any
contrary provisions of the Plan, of which this Appendix is a part.
Except to the extent expressly provided to the contrary herein, all
defined terms shall have the same meanings as provided under the Plan. Each
reference to the Plan shall be to the Plan as in effect at the time such
provision is applied to a DK Employee, as the context shall require.
SECTION 1.2 COMMENCEMENT OF PLAN PARTICIPATION
BY DK EMPLOYEES
No DK Employee shall be permitted to become a Participant prior to
November 10, 1997. The first date on or after November 10, 1997 on which any
such person may become a Participant shall be governed by the otherwise
applicable provisions of Section 3 of the Plan. In applying the terms of such
participation eligibility provision, there shall be taken into account all of
such DK Employee's period of employment with DK, but only to the extent that any
such period of employment would have been taken into account had DK otherwise
been an Employer throughout such person's entire period of employment with DK.
SECTION 1.3 CREDITS TO RETIREMENT ACCOUNTS
In determining the amount to be credited to the Retirement Account of a
DK Employee who becomes a Participant pursuant to the provisions of Section 5 of
the Plan, there shall be taken into account all periods of such person's
employment with DK which would otherwise have been taken into account for such
purpose had DK otherwise been an Employer throughout such person's entire such
period of employment.
SECTION 1.4 VESTING
In determining the extent to which any DK Employee is vested in his
Retirement Account pursuant to the provisions of Section 8 of the Plan, there
shall be taken into account all periods of such person's employment with DK
which are otherwise taken into account with respect to such employee pursuant to
the provisions of Section 1.4 of this Appendix L.
L-1
<PAGE>
APPENDIX M
SPECIAL PROVISIONS GOVERNING
CERTAIN TRANSFERRED EMPLOYEES