<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 12, 1999
REGISTRATION NO. 333-71681
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
THE ESTEE LAUDER COMPANIES INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 2844 11-2408943
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER)
</TABLE>
------------------------
767 FIFTH AVENUE
NEW YORK, NEW YORK 10153
(212) 572-4200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
SAUL H. MAGRAM, ESQ.
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
THE ESTEE LAUDER COMPANIES INC.
767 FIFTH AVENUE
NEW YORK, NEW YORK 10153
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Please send copies of communications to:
<TABLE>
<S> <C>
JEFFREY J. WEINBERG, ESQ. JEAN E. HANSON, ESQ.
WEIL, GOTSHAL & MANGES LLP FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
767 FIFTH AVENUE ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10153 NEW YORK, NEW YORK 10004
(212) 310-8000 (212) 859-8000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check
the following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. / / _____________
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier registration
statement for the same offering. / / _____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
TITLE OF EACH CLASS MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE(2)
<S> <C> <C>
Class A Common Stock, par value
$.01 per share(3)....................... $172,500,000 $ 47,955
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Previously paid.
(3) All of the shares of Class A Common Stock registered hereby may be delivered
upon the exchange of $ Trust Automatic Common Exchange Securities
registered on a separate registration statement on Form N-2 (Registration
Nos. 333-57125 and 811-8827). The number of shares that may be delivered
upon such exchange is subject to adjustment in accordance with Rule 416.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement relates to up to shares (or
shares if the underwriter's over-allotment option is exercised in full) of
Class A Common Stock, par value $.01 per share, of The Estee Lauder Companies
Inc. that may be delivered by the Estee Lauder Automatic Common Exchange
Security Trust II (the "Trust"), a non-diversified closed-end management
investment company, to holders of Automatic Common Exchange Securities of the
Trust upon exchange of the Automatic Common Exchange Securities. The Automatic
Common Exchange Securities are being offered pursuant to a separate prospectus
of the Trust included in a registration statement on Form N-2 (Registration Nos.
333-57125 and 811-8827).
<PAGE>
SUBJECT TO COMPLETION DATED FEBRUARY 12, 1999.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION
WHERE THE OFFER OR SALE IS NOT PERMITTED.
[LOGO]
Shares
THE ESTEE LAUDER COMPANIES INC.
Class A Common Stock
----------------------
This prospectus relates to up to shares (or up to shares
if the underwriter's over-allotment option is exercised in full) of Class A
Common Stock of The Estee Lauder Companies Inc. beneficially owned by one of our
stockholders that may be delivered by the Estee Lauder Automatic Common Exchange
Security Trust II (the "TRACES Trust") to holders of Automatic Common Exchange
Securities of the TRACES Trust upon exchange of such securities on the Exchange
Date as defined in the attached prospectus of the TRACES Trust (the "Trust
Prospectus"). The Automatic Common Exchange Securities are being sold by the
TRACES Trust in an offering described in the attached Trust Prospectus.
We will not receive any proceeds from the sales of the Automatic Common
Exchange Securities.
Our Class A Common Stock and Class B Common Stock vote as a single class on
all matters, except as otherwise required by law, with each share of Class A
Common Stock entitling its holder to one vote and each share of Class B Common
Stock entitling its holder to ten votes. Members of the Lauder family presently
own shares of Class A Common Stock and Class B Common Stock having 94.2% of the
outstanding voting power of our Common Stock.
The last reported sale price of the Class A Common Stock, which is listed
under the symbol "EL", on the New York Stock Exchange on February 11, 1999, was
$84 9/16 per share.
----------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
----------------------
Goldman, Sachs & Co.
----------------------
Prospectus dated February , 1999.
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934 (the "Exchange Act"), and, accordingly, file reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and copy the reports, proxy statements and other information we
file with the Commission at its public reference facilities at Room 1024,
450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. You may also
obtain information about us from the following regional offices of the
Commission: 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and
7 World Trade Center, 13th Floor, New York, New York 10048. Copies of these
materials can be obtained at prescribed rates. Our filings with the Commission
are also available on the Commission's home page on the Internet at
http://www.sec.gov. Our Class A Common Stock is listed on the New York Stock
Exchange, and reports, proxy statements and other information can be inspected
at the offices of the NYSE at 20 Broad Street, New York, New York 10005.
We have filed with the Commission a Registration Statement on Form S-3.
This prospectus, which is a part of the Registration Statement, omits certain
information contained in the Registration Statement. Statements made in this
prospectus as to the contents of any contract, agreement or other document are
not necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, we refer you to such
exhibit for a more complete description of the matter involved, and each such
statement is deemed qualified in its entirety to such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Commission allows us to "incorporate by reference" the information we
file with the Commission. This permits us to disclose important information to
you by referencing these filed documents. We incorporate by reference in this
prospectus the following documents which have been filed with the Commission:
(i) our Annual Report on Form 10-K for the fiscal year ended June 30,
1998;
(ii) our Quarterly Reports on Form 10-Q for the fiscal quarters ended
September 30, 1998 and December 31, 1998; and
(iii) the description of the Class A Common Stock contained in our
registration statement, dated November 8, 1995, on Form 8-A.
We incorporate by reference all documents filed pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this prospectus and
prior to the termination of this offering.
We will promptly provide without charge to you, upon written or oral
request, a copy of any or all of the documents incorporated by reference in this
prospectus, other than exhibits to such documents, unless such exhibits are
specifically incorporated by reference in such documents. Requests should be
directed to Investor Relations Department, The Estee Lauder Companies Inc.,
767 Fifth Avenue, New York, NY 10153, telephone number (212) 572-4184.
------------------------
Unless otherwise indicated, (i) references to "we," "us" and "our" refer to
The Estee Lauder Companies Inc., a Delaware corporation, and its subsidiaries
and (ii) references to a fiscal year refer to our fiscal year which ends on June
30 of each year (and so, for example, our "fiscal 1998" refers to the year ended
June 30, 1998). Our Class A Common Stock, par value $.01 per share, and Class B
Common Stock, par value $.01 per share, are sometimes collectively referred to
in this prospectus as the "Common Stock."
A-2
<PAGE>
THE COMPANY
The Estee Lauder Companies Inc., founded in 1946 by Estee and Joseph
Lauder, is one of the world's leading manufacturers and marketers of quality
skin care, makeup, fragrance and hair care products. Our products are sold in
over 100 countries and territories under the following well-recognized brand
names: Estee Lauder, Clinique, Aramis, Prescriptives, Origins, MoAoC, Bobbi
Brown essentials, jane and Aveda. We are also the global licensee for fragrances
and cosmetics for the Tommy Hilfiger, Donna Karan New York and DKNY brands. Each
brand is distinctly positioned within the cosmetics market.
We are a pioneer in the cosmetics industry and believe we are a leader in
the industry due to the global recognition of our brand names, our leadership in
product innovation, our strong market position in key geographic markets and the
consistently high quality of our products. We sell our products principally
through limited distribution channels to complement the images associated with
our brands. These channels, encompassing over 9,000 points of sale, consist
primarily of upscale department stores, specialty retailers, upscale perfumeries
and pharmacies and, to a lesser extent, free-standing company stores, stores on
cruise ships, in-flight and duty free shops in airports and cities. We believe
that our strategy of pursuing limited distribution strengthens our relationships
with retailers, enables our brands to be among the best selling product lines at
the stores and heightens the aspirational quality of our brands. With the
acquisitions of jane and Aveda in fiscal 1998, we have broadened our
distribution to include new channels, namely self-select outlets and salons.
PRODUCTS
SKIN CARE--Our broad range of skin care products address 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, the hands
or areas around the eyes. Skin care products accounted for approximately 31% and
35% of our net sales in the six months ended December 31, 1998 and our fiscal
1998, respectively.
MAKEUP--We manufacture, market and sell a full array of makeup products
including lipsticks, mascaras, foundations, eyeshadows, nail polishes and
powders. Many of these 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 35% and 36% of our net sales
in the six months ended December 31, 1998 and our fiscal 1998, respectively.
FRAGRANCE--We offer a variety of fragrance products for women and men. The
fragrances are sold in various forms, including eau de parfum sprays and
colognes. Fragrance also includes lotions, powders, creams and soaps that are
based on a particular fragrance. They also include bath and aromatherapy
products. Fragrance products accounted for approximately 32% and 27% of our net
sales in the six months ended December 31, 1998 and our fiscal 1998,
respectively.
HAIR CARE--We increased the range and depth of our hair care product
offerings with the acquisition of the Aveda business in December 1997. Hair care
products include shampoo, conditioner, styling gel and hairspray. Hair care
products accounted for approximately 2% of our net sales in each of the six
months ended December 31, 1998 and our fiscal 1998.
Given the generally personal nature of our products and the wide array of
consumer preferences and tastes, as well as the competition for the attention of
the end consumer, 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. This broad
A-3
<PAGE>
product line principally consists of skin care, makeup and fragrance products
which 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
marketed as part of the Three-Step System: Cleanse, Exfoliate, Moisturize.
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 through stand-alone Origins stores, stores-within-stores (which are
designed to replicate the Origins store environment within a department store)
and at traditional retail counters.
TOMMY HILFIGER--We have an exclusive global license arrangement to develop
and market a line of men's and women's fragrances and cosmetics under the Tommy
Hilfiger brand. In 1995, we launched a men's fragrance, tommy, with cologne and
aftershave products, and in the fall of 1996, launched a women's fragrance,
tommy girl. In March 1998, we introduced the Hilfiger Athletics men's fragrance.
MoAoC--MoAoC products comprise a broad line of color-oriented, professional
cosmetics and professional makeup tools targeting makeup artists and
fashion-conscious consumers. The products are sold through a limited number of
department and specialty stores and stand-alone MoAoC stores. We acquired
Make-Up Art Cosmetics Limited, the manufacturer of MoAoC products, in three
stages in December 1994, March 1997 and February 1998.
BOBBI BROWN ESSENTIALS--In October 1995, we acquired the Bobbi Brown
essentials line of color cosmetics, professional makeup brushes and skin care
products. Bobbi Brown products are manufactured to our specifications by third
parties and sold through a limited number of department and specialty stores. In
March 1998, the brand introduced its first fragrance, bobbi.
JANE--In October 1997, we acquired Sassaby, Inc., the owner of the jane
brand of color cosmetics targeted to the young consumer market. jane products
are currently distributed only in the United States through the self-select
distribution channel.
DONNA KARAN COSMETICS--In November 1997, we obtained the exclusive global
license to develop and market a line of fragrances and other cosmetics under the
Donna Karan New York and DKNY trademarks. We are continuing to market and sell
certain products that were originally sold by The Donna Karan Company and are
developing concepts for future introductions.
AVEDA--We acquired the Aveda business in December 1997. Aveda, a prestige
hair care leader, is a manufacturer and marketer of plant-based hair, skin,
makeup and body care products that use the science of flower and plant
aromatherapy. The products are principally sold by us through third-party
distributors and are available in salons and stand-alone Aveda Environmental
Lifestyle stores.
A-4
<PAGE>
In addition to the foregoing brands, we also manufacture and sell Creme de
la Mer, a skin care product, and fragrances under the Kiton name. These products
are marketed separately from our other brands.
We have been controlled by the Lauder family since our founding. Members of
the Lauder family, some of whom are our directors, executive officers and/or
employees, beneficially own, directly or indirectly, as of February 9, 1999,
shares of Class A Common Stock and Class B Common Stock having approximately
94.2% of the outstanding voting power of our Common Stock.
Our principal executive offices are located at 767 Fifth Avenue, New York,
New York 10153. The telephone number at that location is (212) 572-4200.
USE OF PROCEEDS
We will not receive any proceeds from the sales of the Automatic Common
Exchange Securities. All of the shares of Class A Common Stock deliverable upon
exchange of the Automatic Common Exchange Securities are beneficially owned by
The Estee Lauder 1994 Trust.
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Class A Common Stock is traded on the NYSE under the symbol "EL". The
following table sets forth for the fiscal quarters indicated the high and low
sales prices for the Class A Common Stock, as reported on the NYSE Composite
Tape, and the dividends per share declared in respect of such quarters. The last
reported sale price of the Class A Common Stock on February 11, 1999 was
$84 9/16 per share.
<TABLE>
<CAPTION>
MARKET PRICE
OF CLASS A
COMMON STOCK
-------------- CASH
HIGH LOW DIVIDENDS
---- --- ---------
<S> <C> <C> <C>
FISCAL 1998
First Quarter................................................................. $50 15/16 $44 3/4 $.085
Second Quarter................................................................ 56 3/8 39 .085
Third Quarter................................................................. 69 48 1/2 .085
Fourth Quarter................................................................ 73 15/16 60 7/8 .085
FISCAL 1999
First Quarter................................................................. $70 1/4 $49 1/2 $.085
Second Quarter................................................................ 86 1/2 46 11/16 .085
Third Quarter (through February 11, 1999)..................................... 85 3/4 76 3/4 .085(1)
</TABLE>
- ------------------
(1) The dividend on the Class A Common Stock is payable April 6, 1999 to holders
of record on March 16, 1999.
We expect to continue the payment of cash dividends in the future, but we
cannot assure you that such payment of cash dividends will continue.
As of February 9, 1999, there were 2,566 record holders of Class A Common
Stock and 12 record holders of Class B Common Stock.
A-5
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following income statement and balance sheet information has been
derived from our consolidated financial statements as of and for each of the
years in the five-year period ended June 30, 1998 and as of and for the
six-month periods ended December 31, 1998 and December 31, 1997. You should read
this information along with our consolidated financial statements and the
related notes incorporated in this prospectus by reference and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." See
"Incorporation of Certain Documents by Reference." The results of interim
periods are not necessarily indicative of results that may be expected for the
full year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
-------------------- ---------------------------------------------------------
1998 1997 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED) (IN MILLIONS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Net sales...................... $2,088.0 $1,901.5 $3,618.0 $3,381.6 $3,194.5 $2,899.1 $2,576.4
Gross profit................... 1,608.6 1,467.8 2,798.5 2,616.5 2,463.5 2,224.3 1,956.1
Operating income............... 283.4 250.9 409.1 359.1 310.3 230.9 175.8
Earnings before income taxes
and minority interest........ 272.5 251.8 402.8 362.9 313.0 233.0 173.2
Net earnings................... 168.9 147.1 236.8 197.6 160.4 121.2 93.0
Preferred stock dividends...... 11.7 11.7 23.4 23.4 57.5 25.3 23.0
Net earnings attributable to
common stock................. 157.2 135.4 213.4 174.2 102.9 95.9 70.0
OTHER DATA:
Earnings before interest, taxes
depreciation and amortization
(EBITDA)..................... 342.1 294.4 506.6 435.1 369.1 272.9 215.9
PER SHARE DATA:
Net earnings per common
share(a):
Basic........................ 1.33 1.14 1.80 1.48 1.18(b) -- --
Diluted...................... 1.31 1.13 1.78 1.47 1.17(b) -- --
Weighted average common shares
outstanding(a):
Basic........................ 118.4 118.4 118.4 117.7 116.3(b) -- --
Diluted...................... 120.1 119.4 119.7 118.6 116.6(b) -- --
Cash dividends declared per
common share................. $ .17 $ .17 $ .34 $ .34 $ .17 -- --
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30,
AT --------------------------------------------------------
DECEMBER 31,
1998 1998 1997 1996 1995 1994
------------ -------- -------- -------- -------- --------
(UNAUDITED) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................... $ 778.4 $ 617.2 $ 551.6 $ 467.5 $ 469.6 $ 422.7
Total assets....................... 2,751.3 2,512.8 1,873.1 1,779.4 1,701.4 1,453.2
Total debt......................... 432.2 436.5 31.1 127.5 194.0 170.4
Redeemable preferred stock......... 360.0 360.0 360.0 360.0 360.0 --
Stockholders' equity............... 847.1 696.4 547.7 394.2 335.1 577.7
</TABLE>
- ------------------
(a) In December 1997, we adopted the provisions of SFAS No. 128, "Earnings Per
Share," which requires the presentation of both Basic and Diluted earnings
per common share. Consistent with the requirements of SFAS No. 128, net
earnings per common share and weighted average common shares outstanding
have been restated for purposes of comparability. See note (b) below.
(b) Due to the change in the capital structure effected by our recapitalization
in connection with our initial public offering in fiscal 1996, historical
share and per share data for periods prior to the fiscal year ended
June 30, 1996 are not presented. Net earnings per common share and weighted
average common shares outstanding for the year ended June 30, 1996 are
reflected on a pro forma basis as if the recapitalization was effected at
the beginning of fiscal 1996.
A-6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
We manufacture skin care, makeup, fragrance and hair care products which
are distributed in over 100 countries and territories. The following tables set
forth net sales by region and product category and operating income by region
for the six-month periods ended December 31, 1998 and 1997 and the fiscal years
ended June 30, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
-------------------- --------------------------------
1998 1997 1998 1997 1996
-------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
NET SALES
BY REGION:
The Americas............................. $1,279.3 $1,147.0 $2,204.7 $1,939.4 $1,799.4
Europe, the Middle East & Africa......... 573.0 507.1 960.8 909.3 855.9
Asia/Pacific............................. 235.7 247.4 452.5 532.9 539.2
-------- -------- -------- -------- --------
$2,088.0 $1,901.5 $3,618.0 $3,381.6 $3,194.5
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
BY PRODUCT CATEGORY:
Skin Care................................ $ 650.2 $ 607.4 $1,252.9 $1,293.6 $1,274.0
Makeup................................... 724.8 657.1 1,320.2 1,253.4 1,131.6
Fragrance................................ 666.1 622.3 988.4 817.9 769.7
Hair Care................................ 46.9 14.7 56.5 16.7 19.2
-------- -------- -------- -------- --------
$2,088.0 $1,901.5 $3,618.0 $3,381.6 $3,194.5
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
OPERATING INCOME
The Americas............................. $ 183.1 $ 165.0 $ 248.0 $ 189.9 $ 133.0
Europe, the Middle East & Africa......... 75.5 67.6 131.3 122.7 115.5
Asia/Pacific............................. 24.8 18.3 29.8 46.5 61.8
-------- -------- -------- -------- --------
$ 283.4 $ 250.9 $ 409.1 $ 359.1 $ 310.3
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
The following table sets forth certain consolidated earnings and other data
as a percentage of net sales:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
-------------- -----------------------------
1998 1997 1998 1997 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales............................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................................... 23.0 22.8 22.7 22.6 22.9
----- ----- ----- ----- -----
Gross profit............................................ 77.0 77.2 77.3 77.4 77.1
----- ----- ----- ----- -----
Operating expenses:
Selling, general and administrative................... 59.8 60.8 62.4 63.5 64.4
Related party royalties............................... 0.8 0.9 0.9 1.0 1.2
----- ----- ----- ----- -----
60.6 61.7 63.3 64.5 65.6
----- ----- ----- ----- -----
Earnings before interest, taxes,
depreciation and amortization (EBITDA)................ 16.4 15.5 14.0 12.9 11.5
Depreciation and amortization........................... 2.8 2.3 2.7 2.3 1.8
----- ----- ----- ----- -----
Operating income........................................ 13.6 13.2 11.3 10.6 9.7
Interest (expense) income, net.......................... (0.5) -- (0.2) 0.1 0.1
----- ----- ----- ----- -----
Earnings before income taxes, and
minority interest..................................... 13.1 13.2 11.1 10.7 9.8
Provision for income taxes.............................. 5.0 5.3 4.5 4.5 4.3
Minority interest....................................... -- (0.2) (0.1) (0.4) (0.5)
----- ----- ----- ----- -----
Net earnings............................................ 8.1% 7.7% 6.5% 5.8% 5.0%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
A-7
<PAGE>
SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED WITH SIX MONTHS ENDED
DECEMBER 31, 1997
NET SALES. Our net sales increased 10% or $186.5 million to
$2,088.0 million for the six months ended December 31, 1998 as compared with the
same prior-year period. This increase in net sales was partially due to the
domestic strength of makeup product sales, which included sales by Sassaby,
acquired in October 1997, and Aveda, acquired in December 1997. Further, we have
achieved double digit gains on a percentage basis in each of the skin care,
makeup and fragrance categories in the European region. Foreign currency
translation did not significantly impact net sales in the current-year period as
compared with the same prior-year period.
PRODUCT CATEGORIES
SKIN CARE. Our net sales of skin care products increased 7% or
$42.8 million to $650.2 million for the six months ended December 31, 1998 as
compared with the same prior-year period. The comparison of the year-to-date
period to the same prior-year period reflects the initial shipments of Stop
Signs and Resilience Lift in the most recent quarter, as well as the continued
success of new and existing products such as All About Eyes and Diminish. These
increases were partially offset by lower sales of Fruition Extra. Sales of our
skin care products are affected more significantly by changes in Asian currency
exchange rates than many of our other products due to a higher concentration of
these products sold in Asia. Excluding the effects of foreign currency
translation, skin care product sales increased 8%.
MAKEUP. Our net sales of makeup products increased 10% or $67.7 million to
$724.8 million for the six months ended December 31, 1998 as compared with the
same prior-year period. Higher makeup product sales were primarily due to the
recent introductions of Two-In-One Eyeshadow, Quickliner For Eyes and
Smudgesicles as well as increased contributions from existing products such as
Golden Angels Compacts and Double Wear. The category's net sales also benefited
from the inclusion of six months' sales by Sassaby and Aveda. These increases
were partially offset by lower sales of Virtual Skin and Estee Lauder Indelible
Lipstick. In addition, the current period comparison was unfavorably affected by
the launch of Superbalanced Makeup in the prior year.
FRAGRANCE. Our net sales of fragrance products increased 7% or
$43.8 million to $666.1 million for the six months ended December 31, 1998 as
compared with the same prior-year period. The increase is primarily attributable
to the worldwide success of Clinique Happy and the successful current year
introduction of Dazzling Gold and Dazzling Silver. Also, Hilfiger Athletics and
tommy girl, which are marketed under a licensing agreement, contributed
significantly to the net sales increases, offset in part by lower sales of
tommy. Due to the success of these products and the fragrance market overall
being less buoyant than last year, certain other fragrances were lower than the
comparable prior-year period.
HAIR CARE. Our net sales of hair care products more than doubled as
compared with the same prior-year period. The increase reflects sales from the
inclusion of Aveda product lines beginning in December 1997.
GEOGRAPHIC. Our sales in the Americas increased 12% or $132.3 million to
$1,279.3 million for the six months ended December 31, 1998 as compared with the
same prior-year period. This increase was driven by sales of new and existing
products across all categories and the inclusion of Aveda and Sassaby which were
acquired in the second quarter of fiscal 1998. In Europe, the Middle East &
Africa, net sales increased 13% or $65.9 million to $573.0 million compared with
the same prior-year period. The increase was primarily the result of higher net
sales in the United Kingdom, the distributor and travel retail businesses,
Spain, Italy and France. Excluding the impact of foreign currency translation,
sales in Europe, the Middle East & Africa increased 10%. Net sales in
Asia/Pacific decreased 5% or $11.7 million to $235.7 million for the six months
ended December 31, 1998 as compared with the same prior-year period. Lower sales
in Australia, Korea and Hong Kong were partially offset by higher net sales in
Japan and Thailand. Excluding the impact of foreign currency translation,
Asia/Pacific sales grew 3% over the prior-year period.
A-8
<PAGE>
COST OF SALES. Our cost of sales for the six months ended December 31,
1998 were 23.0% of net sales compared with 22.8% of net sales in the prior-year
period. The increase principally reflects the integration of Sassaby and Aveda,
both of which have product cost structures that are higher than our other
brands. This increase has been substantially offset by a shift in product mix as
well as production efficiencies.
OPERATING EXPENSES. Our total operating expenses decreased to 63.4% of net
sales for the six months ended December 31, 1998, compared with 64.0% of net
sales in the same prior-year period. The change in operating expenses primarily
relates to operating improvements and the favorable integration of the Aveda and
Sassaby cost structures. Our quarterly operating expenses are subject to the
timing of advertising and promotional spending due to product launches and
rollouts as well as incremental advertising in select markets.
OPERATING INCOME. Operating income increased 13% or $32.5 million to
$283.4 million for the six months ended December 31, 1998 as compared with the
same prior-year period. Operating margins were 13.6% in the current period as
compared to 13.2% in the corresponding prior-year period. The increase in
operating income and margins was due to higher net sales coupled with
operational efficiencies and the timing of advertising and promotional spending.
Operating income in the Americas increased 11% or $18.1 million to
$183.1 million for the six months ended December 31, 1998 as compared with the
same prior-year period, primarily due to net sales increases in the United
States and the inclusion of operating results from recent acquisitions. In
Europe, the Middle East & Africa, operating income increased 12% or
$7.9 million to $75.5 million for the six months ended December 31, 1998. These
increases were primarily due to improved operating results in Spain, Germany and
the travel retail business. In Asia/Pacific, operating income increased 36% or
$6.5 million to $24.8 million due to higher results in Japan, Taiwan and
Thailand, partially offset by lower results in Hong Kong.
EBITDA. Earnings before interest, taxes, depreciation and amortization
("EBITDA") is an additional measure of operating performance used by management.
EBITDA, like operating income, does not include the effects of interest and
taxes and additionally excludes the "non-cash" effects of depreciation and
amortization on current earnings. While the components of EBITDA may vary from
company to company, we exclude our minority interest adjustment, all
depreciation charges related to property, plant and equipment and all
amortization charges including amortization of goodwill, purchased royalty
rights, leasehold improvements and other intangible assets. These components of
operating income do not necessarily result in a capital requirement in the
current period, and, in the opinion of management, many of the underlying
assets, both tangible and intangible, create value by supporting the global
recognition of brand names and product innovation and by consistently producing
quality products for our customers and consumers. We consider this measure
useful in analyzing our results; however, it is not intended to replace, or act
as a substitute for, any presentation included in the consolidated financial
statements prepared in conformity with generally accepted accounting principles.
EBITDA increased 16% to $342.1 million or 16.4% of net sales as compared to
$294.4 million or 15.5% of net sales in the same prior-year period. The
improvement in EBITDA is primarily attributable to sales growth and operating
expense efficiencies achieved.
INTEREST (EXPENSE) INCOME, NET. Our net interest expense was
$10.9 million and net interest income was $0.9 million for the six months ended
December 31, 1998 and 1997, respectively. The increase in net interest expense
for the six months ended December 31, 1998 is primarily attributable to a higher
level of borrowings during the current six month period, as compared to the
corresponding prior-year period. Increased borrowings relate to business
acquisitions consummated in the prior-year period.
PROVISION FOR INCOME TAXES. The provision for income taxes represents
federal, foreign, state and local income taxes. The effective rate for income
taxes for the six months ended December 31, 1998 was 38.0% compared with 40.0%
in the same prior-year period. These rates are higher than the statutory Federal
tax rate due to the effect of state and local taxes, higher tax rates
A-9
<PAGE>
in certain foreign jurisdictions and certain nondeductible expenses. The
decrease in the effective income tax rate as compared to the same prior-year
period was principally attributable to tax planning initiatives and a relative
change in the mix of earnings from higher tax countries to lower tax countries.
FISCAL 1998 COMPARED WITH FISCAL 1997 AND FISCAL 1997 COMPARED WITH FISCAL
1996
NET SALES. Our net sales in fiscal 1998 increased 7% to $3,618.0 million
as compared to fiscal 1997 and 6% to $3,381.6 million for fiscal 1997 as
compared to fiscal 1996. Fiscal 1998 net sales increased as a result of new
product introductions, the continued success of our core products, and the
international rollout of recent product launches. Additionally, net sales in
fiscal 1998 benefitted from the inclusion of Aveda and Sassaby, from the date of
acquisition in December and October 1997, respectively, through the fiscal year
end. In fiscal 1997, our net sales increased as a result of new product
introductions across all categories, the global rollout of certain fragrance
introductions, and the continued solid performance of existing products. Fiscal
1997 included a full year of sales of Bobbi Brown essentials as compared to
eight months of sales in fiscal 1996. The strengthening of the U.S. dollar
negatively impacted net sales by approximately $135 million and $87 million for
fiscal 1998 and fiscal 1997, respectively. Excluding the impact of foreign
currency translation, our net sales increased 11% and 9% for fiscal 1998 and
fiscal 1997, respectively. The introduction of new products may have some
cannibalization effect on existing products in all categories, which is taken
into account by us in our business planning.
PRODUCT CATEGORIES
SKIN CARE. Our net sales of skin care products in fiscal 1998 decreased 3%
to $1,252.9 million as compared to fiscal 1997 and, in fiscal 1997, increased 2%
to $1,293.6 million as compared to fiscal 1996. The decrease is primarily due to
reduced sales in the Asia/Pacific region and the strengthening of the U.S.
dollar against foreign currencies. Accordingly, our net sales of skin care
products increased 2% on a constant exchange rate basis. Additionally, fiscal
1998 decreases were due in part to the successful fiscal 1997 launch of Fruition
Extra and lower year to year sales of Advanced Night Repair. Partially
offsetting these decreases were sales related to the introduction of Diminish,
Uncircle and All About Eyes, the international introduction of Nutritious and
the continued success of DayWear. In fiscal 1997, the increase was attributable
to the introduction of Fruition Extra, Advanced Suncare products, Moisture
On-Line, and Nutritious, along with the continued growth of existing products
such as LipZone, All About Lips and Dramatically Different Moisturizing Lotion.
Fiscal 1997 increases were partially offset by lower sales of Turnaround Cream
and ThighZone.
MAKEUP. Our net sales of makeup products increased 5% to $1,320.2 million
in fiscal 1998 and 11% to $1,253.4 million in fiscal 1997. Fiscal 1998 increases
are attributable to the introduction of new products such as Superbalanced
Makeup, Superlast Cream Lipstick, Two-In-One Eyeshadow and Blush All Day. In
addition to new product introductions, existing products such as Doublewear and
Futurist recorded a full year's sales and were introduced internationally, while
sales of True Lipstick improved for the third straight year. Our net sales of
makeup also reflect sales generated by Sassaby and Aveda subsequent to the dates
of acquisition and the continued success of Bobbi Brown essentials. The
foregoing increases were partially offset by the successful fiscal 1997
introduction and full year's sales of City Base, and the decline in net sales of
Long Last Lipstick. In fiscal 1997, the sales growth was primarily due to the
introduction of City Base, Long Last Soft Shine Lipstick, Virtual Skin,
Futurist, and Estee Lauder Indelible Lipstick, as well as increased sales of
existing MoAoC and Bobbi Brown essentials products. These increases were
partially offset by lower sales of Long Last Lipstick and More Than Mascara.
FRAGRANCE. Our net sales of fragrance products increased 21% to
$988.4 million in fiscal 1998 and 6% to $817.9 million in fiscal 1997. The
fiscal 1998 increase is primarily attributable to the introduction of Clinique
Happy and Lauder Pleasures for Men, the domestic introduction of Hilfiger
Athletics, and the on-going success of tommy and tommy girl. Sales of Estee
Lauder pleasures and
A-10
<PAGE>
Beautiful, were relatively consistent with prior years, although they continue
to generate significant sales. Offsetting these improvements were declines in
existing products such as White Linen Breeze, Aramis Classic, and Havana Pour
Elle. In fiscal 1997, the sales growth was led by the successful United States
introduction of tommy girl, and the European/Asian launch of tommy, along with
the European introduction of Kiton. The fiscal 1997 domestic success of tommy
and Estee Lauder pleasures also contributed to the increased net sales. New
fragrance introductions cannibalized some existing fragrance sales.
HAIR CARE. Our net sales of hair care products increased significantly in
fiscal 1998 as compared with the prior year due to the inclusion of sales from
the Aveda hair care product lines beginning in December 1997.
GEOGRAPHIC. Our net sales in the Americas rose 14% to $2,204.7 million in
fiscal 1998, as compared to an 8% increase to $1,939.4 million in fiscal 1997.
Increases in fiscal 1998 were recognized across all product categories, with the
most significant increases being attributable to fragrances as a result of new
product introductions and hair care as a result of the integration of Aveda.
Growth in all product categories is supported by the continued success of
existing products. In fiscal 1997, the increase was attributable to the sales of
new products across all categories, particularly those in the fragrance
category. Solid double digit increases were also achieved in MoAoC and Bobbi
Brown essentials. A generally lackluster retail environment for most of fiscal
1997 impacted core product sales.
In Europe, the Middle East & Africa, our net sales increased 6% to
$960.8 million in fiscal 1998, as compared to a 6% increase to $909.3 million in
fiscal 1997. Net sales increased 13% and 11% for fiscal 1998 and fiscal 1997,
respectively, excluding the impact of foreign currency translation. In fiscal
1998, higher net sales were recorded in the United Kingdom and Spain.
Significant sales improvements in the United Kingdom were favorably impacted as
the dollar weakened against the British pound. Excluding the effect of a
strengthening U.S. dollar against local currencies, double digit increases were
achieved in Spain, Italy and Germany. In fiscal 1997, higher net sales were
achieved in the United Kingdom, the distributor and travel retail businesses,
Italy, and from the introduction of Kiton. These increases were partially offset
by lower sales in Germany and France resulting from the impact of foreign
currency translation and the difficult retail environments.
In Asia/Pacific, our net sales decreased 15% to $452.5 million in fiscal
1998, as compared to a 1% decrease to $532.9 million in fiscal 1997. On a local
currency basis, Asia/Pacific sales decreased 3% for fiscal 1998 and increased 6%
in fiscal 1997. The volatile economic climate in Japan and the surrounding Asian
marketplace has contributed to a difficult retail environment. Sales in Japan,
Hong Kong and Taiwan have decreased on both a local currency and a translated
basis. Although not significant enough to offset those decreases, net sales
increased in all other Asia/Pacific markets on a local currency basis,
particularly Thailand and Malaysia. In fiscal 1997, all markets reported local
currency sales increases with strong performances in Thailand, Korea, Taiwan,
Singapore, New Zealand, and Malaysia. Continued strengthening of the dollar
against the yen and continued economic uncertainty will most likely have an
adverse effect on our future financial performance in this region.
We strategically stagger our new product launches by geographic markets,
which may account for differences in regional sales growth.
COST OF SALES. Our cost of sales in fiscal 1998 was 22.7% of our net sales
compared with 22.6% of our net sales in fiscal 1997 and 22.9% of our net sales
in fiscal 1996. Increased cost of sales in fiscal 1998 related to the inclusion
of Aveda and Sassaby, both of which have product cost structures higher than our
other brands, as well as a shift in product mix. This increase was partially
offset by continued improvements in operating efficiency. The fiscal 1997
decrease primarily reflects the efficiencies achieved as a result of our global
sourcing and manufacturing activities, as well as shifts in product mix.
A-11
<PAGE>
OPERATING EXPENSES. Our operating expenses decreased to 66.0% of our net
sales in fiscal 1998, compared with 66.8% and 67.4% of our net sales in fiscal
1997 and fiscal 1996, respectively. Fiscal 1998 decreases reflect operating
expenses growing at a slower rate than net sales primarily due to efficiencies
achieved in the selling area and lower advertising and promotional spending (as
a percent of sales) and the effect of integrating the Aveda and Sassaby cost
structures. The fiscal 1997 decrease reflected operating expenses growing slower
than net sales primarily as a result of efficiencies in the selling, general and
administrative areas.
OPERATING INCOME. Our operating income rose 14% to $409.1 million in
fiscal 1998 and 16% to $359.1 million in fiscal 1997. Operating margins were
11.3% in 1998, compared with 10.6% and 9.7% in fiscal 1997 and fiscal 1996,
respectively. These increases were due to higher net sales and total operating
expenses growing at a slower rate than net sales.
Our operating income in the Americas increased by 31% to $248.0 million in
fiscal 1998, as compared to a 43% increase to $189.9 million in fiscal 1997. In
fiscal 1998, the increase related to continued net sales improvements in the
United States due to strong performances from the core brands and the inclusion
of Aveda and Sassaby. In fiscal 1997, the increase was primarily due to net
sales increases in the United States, Canada, and the inclusion of twelve months
of operating results for Bobbi Brown, as compared to eight months in fiscal
1996.
In Europe, the Middle East and Africa, our operating income increased 7% to
$131.3 million in fiscal 1998, as compared to a 6% increase to $122.7 million in
fiscal 1997. In fiscal 1998, increased net sales in the United Kingdom resulted
in the most significant improvement in operating income for the region. On a
constant exchange rate basis, Spain, France and Italy would have made greater
operating income contributions. These increases were partially offset by lower
operating income in the travel retail business. In fiscal 1997, the increase was
primarily due to increased operating income in the United Kingdom, Italy, South
Africa, Eastern Europe, the distributor and travel retail businesses, and the
inclusion of twelve months of operating results from Bobbi Brown as compared to
eight months in fiscal 1996, offset by lower results in Belgium, Austria,
Germany and France.
In Asia/Pacific, our operating income decreased 36% to $29.8 million in
fiscal 1998, as compared to a decrease of 25% to $46.5 million in fiscal 1997.
The fiscal 1998 decrease was principally due to operating income declines in
Japan due to lower net sales, compounded by the strengthening of the U.S. dollar
against the yen. A difficult retail market adversely affected Japan and the
surrounding areas. As a result, operating expenses grew at a faster rate than
net sales for most of the Asian markets, partially offset by strong results in
Korea. In fiscal 1997, the decrease was due to the continuing unfavorable
translation impact of the strength of the U.S. dollar versus the yen, lower
operating income in Japan reflecting the difficult retail environment, and
incremental promotional spending, partially offset by strong results in
Australia, Thailand, Korea, Singapore and Malaysia.
EBITDA. EBITDA increased to 14.0% of net sales in fiscal 1998 as compared
to 12.9% and 11.5% in fiscal 1997 and 1996, respectively. The improvements in
EBITDA in fiscal 1998 are attributable primarily to operating expense
efficiencies. In fiscal 1997, the improvement was attributable to both cost of
goods and operating expense efficiencies.
INTEREST INCOME (EXPENSE), NET. Net interest expense was $6.3 million in
fiscal 1998 as compared to net interest income of $3.8 million in fiscal 1997
and $2.7 million in fiscal 1996. Net interest expense in fiscal 1998 was
primarily due to higher borrowings associated with our acquisitions. The
increase in net interest income from fiscal 1996 to fiscal 1997 was principally
due to higher average domestic and overseas net cash positions and lower
interest expense as a result of lower debt levels which were partially offset by
the elimination of interest income from stockholders.
PROVISION FOR INCOME TAXES. The provision for income taxes represents
federal, foreign, state and local taxes. The effective rate for income taxes in
fiscal 1998 was 40.0% as compared to 42.0% in fiscal 1997 and 44.2% in fiscal
1996. These rates principally reflect the effect of state and
A-12
<PAGE>
local taxes, tax rates in foreign jurisdictions and certain nondeductible
expenses. The decrease in the effective tax rate for fiscal 1998 was
attributable to tax planning initiatives, a relative change in the mix of
earnings from higher tax countries such as Japan to lower tax countries, the
effect of a reduction in the statutory rate in the United Kingdom and the effect
of United States federal tax regulations. The decrease in the effective income
tax rate in fiscal 1997 and fiscal 1996 was principally attributable to an
increase in profits in lower taxed countries, the lessened impact of a
relatively higher Japanese rate and the reduced relative negative impact of a
stockholder's rights to receive certain U.S. royalty payments by reason of our
purchase of those rights in November 1995.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of funds historically have been, and are expected to
continue to be, cash flow from operations and borrowings under uncommitted and
committed credit lines provided by banks in the United States and abroad. At
December 31, 1998, we had cash and cash equivalents of $402.7 million compared
with $277.5 million at June 30, 1998.
Uncommitted lines of credit amounted to $251.1 million at December 31,
1998, of which none were used. Unused committed lines of credit available to us
at December 31, 1998 amounted to $400.0 million. Total debt as a percentage of
total capitalization (including short-term debt) was 26% at December 31, 1998
and 29% at June 30, 1998. This decrease was primarily due to higher total
capital.
Net cash provided by operating activities increased to $219.1 million in
the six months ended December 31, 1998 from $181.9 million in the prior-year
six-month period. This increase primarily reflects our increased profitability
and decreased inventories partially offset by higher accounts receivable related
to higher net sales. Net cash used for investing activities decreased to
$48.3 million in the six months ended December 31, 1998 from $400.0 million in
the prior six-month period due to our prior-year business acquisitions.
Financing activities reflect dividends paid, purchases of treasury stock and
repayment of debt. Dividend payments were $31.8 million and $21.7 million for
the six months ended December 31, 1998 and 1997, respectively.
On September 18, 1998, our board of directors authorized a share repurchase
program. We have purchased and may continue to purchase, over an undefined
period of time, a total of up to four million shares of Class A Common Stock in
the open market or in privately negotiated transactions, depending on market
conditions and other factors.
We expect to make a contingent earn-out payment in March 1999 relating to
the acquisition of Bobbi Brown, the amount of which will be dependent upon the
audited results of operations of Bobbi Brown for the 1998 and 1997 calendar
years.
We conduct business in many foreign currencies. As a result, we are subject
to foreign currency exchange rate risk due to the effects that foreign exchange
rate movements of these currencies have on our costs and on the cash flows which
we receive from our foreign subsidiaries. We address our risks through a
controlled program of risk management, the principal objective of which is to
minimize the risks and/or costs associated with financial and global operating
activities. We use derivative financial instruments for the purpose of managing
our exposure to adverse fluctuations in foreign currency exchange rates and
interest rates. We do not utilize derivative financial instruments for trading
or other speculative purposes.
We enter into forward exchange contracts to hedge purchases, receivables
and payables denominated in foreign currencies for periods consistent with our
identified exposures. Gains and losses related to qualifying hedges of these
exposures are deferred and recognized in operating income when the underlying
hedged transaction occurs. We also enter into purchased foreign currency options
to hedge anticipated transactions where there is a high probability that
anticipated exposures will materialize. Any gains realized on such options that
qualify as hedges are deferred and recognized in operating income when the
underlying hedged transaction occurs. Premiums on foreign currency options are
amortized over the period being hedged. Foreign currency transactions
A-13
<PAGE>
which do not qualify as hedges are marked-to-market on a current basis with
gains and losses recognized through income and reflected in operating expenses.
In addition, any previously deferred gains and losses on hedges which are
terminated prior to the transaction date are recognized in current income when
the hedge is terminated. The contracts have varying maturities with none
exceeding 24 months.
We enter into interest rate swaps to convert floating interest rate debt to
fixed rate debt. These swap agreements are contracts to exchange floating rate
for fixed rate interest payments periodically over the life of the agreements.
Amounts currently due to or from interest rate swap counterparties are recorded
in interest expense in the period in which they accrue.
As a matter of policy, we only enter into contracts with parties that have
at least an "A" (or equivalent) credit rating. The counterparties to these
contracts are major financial institutions and 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. We believe risk of loss
is remote and in any event would be immaterial. Costs associated with entering
into such contracts have not been material to our financial results. At
December 31, 1998, we had contracts to exchange foreign currencies in the form
of purchased currency options in the amount of $25.6 million and forward
exchange contracts in the amount of $156.3 million. Foreign currencies exchanged
under these contracts are principally the Belgian franc, Japanese yen, German
mark, Swiss franc, U.K. pound, Spanish peseta and Italian lira. In addition, we
had interest rate swap agreements outstanding with a notional principal amount
of $405.0 million. There have been no significant changes in market risk since
June 30, 1998 that would have a material effect on our calculated value-at-risk
exposure, as disclosed in our annual report on Form 10-K for the year ended
June 30, 1998.
We believe that cash on hand, internally generated cash flow, available
credit lines and access to capital markets will be adequate to support currently
planned business operations, acquisitions and capital expenditures both on a
near-term and long-term basis.
YEAR 2000
We have developed a comprehensive plan to address Year 2000 issues. The
plan addresses three main areas: (a) information systems; (b) embedded chips;
and (c) supply chain readiness. To oversee the process, we have established a
Steering Committee comprised of senior executives from our various business
units around the world, which reports regularly to our Board of Directors and
our Audit Committee.
We have identified potential deficiencies related to Year 2000 in our
information systems and are in the process of addressing them through upgrades
and other remediation. Completion of the remediation and testing is expected in
the summer of 1999. We have identified other equipment with date sensitive
operating controls and are in the process of assessing whether they are Year
2000 compliant. We anticipate completion of critical embedded chip remediation
by the summer of 1999. To mitigate the risk of Year 2000 non-compliance by third
parties, we have identified, contacted and met with critical inventory
suppliers. We are also in the process of communicating with our larger customers
about their Year 2000 readiness. Further, we have been identifying and
contacting other suppliers and customers. These meetings and communications are
ongoing and we are assessing the state of readiness of the various suppliers and
customers.
We believe it is difficult to specifically identify the cause of the most
reasonable worst case Year 2000 scenario; however, based upon our work to date,
we believe it would likely be the result of the failure of third parties to be
Year 2000 compliant. Accordingly, we have formulated contingency plans to limit,
to the extent possible, lost revenues and other adverse effects arising from
third party failures. Such plans would necessarily be limited to matters which
we can reasonably control and may require the acceleration of certain shipments
which may necessitate adjustments to our production and procurement schedules.
We are in the process of implementing these plans and are
A-14
<PAGE>
determining the potential impact of these plans on our quarterly results of
operations and financial condition in fiscal 2000.
Incremental out-of-pocket costs incurred through December 31, 1998 have not
been significant and, based upon our current estimates, the costs of our Year
2000 program are expected to be immaterial. Such costs do not include internal
employee costs and costs related to the deferral of other information technology
projects. While we do not have a system to track internal employee costs
specifically related to the Year 2000, those costs are not expected to be
material to our results of operations or financial condition.
Our Year 2000 efforts are ongoing and our overall plan, as well as the
implementation of contingency plans, will continue to evolve as new information
becomes available. While we anticipate continuity of our business activities,
that continuity will be dependent upon our ability, and the ability of third
parties on whom we rely directly or indirectly, to be Year 2000 compliant.
EURO CONVERSION
As part of the European Economic and Monetary Union (EMU), a single
currency (the "Euro") will replace the national currencies of most of the
European countries in which we conduct business. The conversion rates between
the Euro and the participating nations' currencies were fixed irrevocably as of
January 1, 1999, and the participating national currencies will be removed from
circulation between January 1 and June 30, 2002 and replaced by Euro notes and
coinage. During the "transition period" from January 1, 1999 through
December 31, 2001, public and private entities as well as individuals may pay
for goods and services using either checks, drafts, or wire transfers
denominated in Euro or the participating country's national currency.
Under the regulations governing the transition to a single currency, there
is a "no compulsion, no prohibition" rule which states that no one is obliged to
use the Euro until the notes and coinage have been introduced on January 1,
2002. In keeping with this rule, we are Euro "compliant" (able to receive and
remit Euro denominated payments and able to invoice in Euro as requested by
customers, vendors or suppliers) in the affected countries. Full conversion of
all affected country operations to Euro is expected to be completed by the time
national currencies are removed from circulation. Phased conversion to the Euro
is currently underway and the effects on our revenues, costs and various
business strategies are being assessed. The cost of our software and business
process Euro conversion is not expected to be material.
ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999 and will not require
retroactive restatement of prior period financial statements. This statement
requires the recognition of all derivative instruments as either assets or
liabilities in the statement of financial position measured at fair value.
Generally, increases or decreases in the fair value of derivative instruments
will be recognized as gains or losses in earnings in the period of change. If
certain conditions are met where the derivative instrument has been designated
as a fair value hedge, the hedged item may also be marked to market through
earnings thus creating an offset. If the derivative is designated and qualifies
as a cash flow hedge, the changes in fair value of the derivative instrument may
be recorded in comprehensive income. We have not yet quantified the impact on
the consolidated financial statements of adopting SFAS No. 133; however, the
statement will likely result in a change in reported assets and liabilities and
may affect earnings and comprehensive income, as defined by SFAS No. 130
"Reporting Comprehensive Income."
A-15
<PAGE>
FORWARD-LOOKING STATEMENTS
We and our representatives from time to time make written or verbal
forward-looking statements, including statements contained in this prospectus
and our filings with the Commission and our reports to stockholders. The words
and phrases "will likely result," "expects," "believes," "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. Such statements include, without
limitation, our expectations regarding sales, earnings or other future financial
performance and liquidity, product introductions, entry into new geographic
regions and general optimism about 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 you that actual results will not differ materially from our expectations.
Factors that could cause actual results to differ from expectations include,
without limitation:
(i) increased competitive activity from companies in the skin care,
makeup, fragrance and hair care businesses, some of which have greater
resources than us;
(ii) consolidations and restructurings in the retail industry causing
a decrease in the number of stores that sell our products, an increase in
the ownership concentration within the retail industry or ownership of
retailers by our competitors;
(iii) social, political and economic risks to our foreign
manufacturing and retail operations, including changes in foreign
investment and trade policies and regulations of the host countries and of
the United States;
(iv) changes in the laws, regulations and policies, including changes
in accounting standards, that affect, or will affect, us in the United
States and abroad;
(v) foreign currency fluctuations affecting our results of operations
and value of our foreign assets, the relative prices at which we and our
foreign competitors sell our products in the same market and our operating
and manufacturing costs outside of the United States;
(vi) 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);
(vii) changes in product mix to ones which are less profitable; and
(viii) our ability and the ability of third parties, including
customers or suppliers, to adequately address Year 2000 issues.
We assume no responsibility to update forward-looking statements made
herein or otherwise.
A-16
<PAGE>
TRACES STOCKHOLDER
Pursuant to a forward purchase contract (the "Purchase Contract") between
the TRACES Trust and the stockholder listed below (the "TRACES Stockholder"), a
specified number of shares of Class A Common Stock may be required to be
delivered to the TRACES Trust by the TRACES Stockholder upon the exchange of
Automatic Common Exchange Securities. The following table sets forth certain
information for the TRACES Stockholder with respect to (i) the TRACES
Stockholder's beneficial ownership of Class A Common Stock and Class B Common
Stock as of the date of this prospectus and the percentage of total voting power
represented thereby and (ii) the maximum number of shares of Class A Common
Stock of the TRACES Stockholder that may be delivered to the TRACES Trust
pursuant to the Purchase Contract (without taking into account the underwriter's
over-allotment option in respect of the Automatic Common Exchange Securities).
The TRACES Stockholder's beneficial ownership of Class A Common Stock will not
change as a result of the offering of the Automatic Common Exchange Securities
unless, until and to the extent that the TRACES Stockholder delivers shares of
Class A Common Stock to the TRACES Trust pursuant to the Purchase Contract. As
described in the notes to the table, voting and/or investment power with respect
to certain shares of Common Stock is shared by the individuals named in the
notes. Consequently, such shares are shown as beneficially owned by more than
one person.
<TABLE>
<CAPTION>
AS OF FEBRUARY 9, 1999
-------------------------------------- MAXIMUM NUMBER OF
COMMON STOCK SHARES OF CLASS A
BENEFICIALLY COMMON STOCK
OWNED PERCENTAGE DELIVERABLE TO TRACES
----------------------- OF TOTAL TRUST PURSUANT TO THE PURCHASE
DELIVERING STOCKHOLDER CLASS A CLASS B VOTING POWER CONTRACT
- ------------------------------------------------ ---------- ---------- ------------ ------------------------------
<S> <C> <C> <C> <C>
The Estee Lauder 1994 Trust(1)(2)............... 4,640,548 6,094,926 10.4%
</TABLE>
- ------------------
(1) Leonard A. Lauder, Ronald S. Lauder and Ira T. Wender are co-trustees of The
Estee Lauder 1994 Trust (the "EL 1994 Trust"). Leonard A. Lauder and Ronald
S. Lauder share voting power and, with Mr. Wender, share investment power
with respect to the shares of Common Stock owned by the EL 1994 Trust and
they are each deemed to beneficially own all such shares. For information
regarding the beneficial ownership of Leonard A. Lauder, Ronald S. Lauder
and Ira T. Wender see notes (3), (4) and (5), respectively. Assuming
delivery of the maximum number of shares that may be delivered pursuant to
the Purchase Contract (without taking into account the underwriter's
over-allotment option in respect of the Automatic Common Exchange
Securities), the EL 1994 Trust, Leonard A. Lauder, Ronald S. Lauder and Ira
T. Wender will beneficially own (or will be deemed to beneficially own),
directly and indirectly, ____, _____, ____ and ____ shares, respectively,
which together will represent __%, __%, __% and __%, respectively, of the
outstanding voting power of the Common Stock after such delivery (assuming
no changes in the outstanding Common Stock and their other respective direct
or indirect holdings).
(2) Includes up to 1,603,030 shares of Class A Common Stock that may be
delivered by the EL 1994 Trust pursuant to a forward purchase contract to
the Estee Lauder Common Exchange Security Trust (the "Original TRACES
Trust") on June 5, 2001 (subject to extension and subsequent acceleration).
The Original TRACES Trust is not affiliated with The Estee Lauder Companies
Inc., the EL 1994 Trust, or its trustees.
(3) Leonard A. Lauder beneficially owns or is deemed to beneficially own:
6,239,646 shares of Class A Common Stock directly and with respect to which
he has sole voting and investment power (including 1,697,493 shares of
Class A Common Stock which are pledged to Mr. Lauder by Ronald S. Lauder);
4,492,361 shares of Class A Common Stock and 21,352,770 shares of Class B
Common Stock indirectly as the sole individual general partner and the
majority stockholder of the sole corporate general partner of a limited
partnership and with respect to which he has sole voting and investment
power; 4,640,548 shares of Class A Common Stock and 6,094,926 shares of
Class B Common Stock indirectly as co-trustee of the EL 1994 Trust with
respect to which he shares voting power with Ronald S. Lauder, as a
co-trustee, and investment power with Ronald S. Lauder and Ira T. Wender, as
co-trustees (see note (1) above); 7,692 shares of Class A Common Stock and
1,923,077 shares of Class B Common Stock indirectly as an individual general
partner of a limited partnership and as co-trustee of a trust (the "LAL
Trust"), which is a general partner of the same limited partnership, and
with respect to which he shares voting power with Ronald S. Lauder, who also
is an individual general partner of the limited partnership and co-trustee
of another trust (the "RSL Trust"), which is a general partner of the
limited partnership, and investment power with Ronald S. Lauder, as an
individual general partner of the limited partnership and as co-trustee of
the RSL Trust, Richard D. Parsons and Ira T. Wender, as co-trustees of the
RSL Trust, and Joel S. Ehrenkranz and Ira T. Wender, as co-trustees of the
LAL Trust; 239,731 shares of Class A Common Stock indirectly as a director
of The Lauder Foundation and with respect to which he shares voting and
investment power; and 200,000 shares of Class A Common Stock subject to
exercisable employee stock options held by Mr. Lauder. The shares of
Class A Common Stock beneficially owned by Mr. Lauder exclude 260,000 shares
of Class A Common Stock owned by his spouse, 5,000 shares subject to
exercisable employee stock options held by his spouse and an additional
1,900,000 shares of Class A Common Stock underlying stock options granted to
Mr. Lauder pursuant to his employment agreement. Leonard A. Lauder
(Footnotes continued on next page)
A-17
<PAGE>
(Footnotes continued from previous page)
disclaims beneficial ownership of the shares of Class A Common Stock owned
by The Lauder Foundation and his spouse. Shares owned by Mr. Lauder do not
include shares that may be attributed to him by reason of the Stockholders'
Agreement (as defined and described below under "Description of Capital
Stock--Stockholders' Agreement").
(4) Ronald S. Lauder beneficially owns or is deemed to beneficially own:
6,694,172 shares of Class A Common Stock and 18,769,415 shares of Class B
Common Stock directly and with respect to which he has sole voting and
investment power (including 937,554 shares of Class B Common Stock subject
to call options granted to Richard D. Parsons, as trustee, and excluding
937,554 shares of Class A Common Stock subject to call options granted to
Mr. Lauder by Mr. Parsons, as trustee); 1,591 shares of Class A Common Stock
and 1,591 shares of Class B Common Stock indirectly as sole trustee of a
trust for the benefit of his children and with respect to which he has sole
voting and investment power; 4,640,548 shares of Class A Common Stock and
6,094,926 shares of Class B Common Stock indirectly as co-trustee of the EL
1994 Trust with respect to which he shares voting power with Leonard A.
Lauder, as a co-trustee, and investment power with Leonard A. Lauder and
Mr. Wender, as co-trustees (see note (1) above); 7,692 shares of Class A
Common Stock and 1,923,077 shares of Class B Common Stock indirectly as an
individual general partner of a limited partnership and as co-trustee of the
RSL Trust, which is a general partner of the same limited partnership, and
with respect to which he shares voting power with Leonard A. Lauder, who
also is an individual general partner of the limited partnership, and co-
trustee of the LAL Trust, which is a general partner of the limited
partnership, and investment power with Leonard A. Lauder, as an individual
general partner of the limited partnership and as co-trustee of the LAL
Trust, Richard D. Parsons and Ira T. Wender, as co-trustees of the RSL
Trust, and Joel S. Ehrenkranz and Ira T. Wender, as co-trustees of the LAL
Trust; 239,731 shares of Class A Common Stock indirectly as a director of
The Lauder Foundation and with respect to which he shares voting and
investment power; 75,700 shares of Class A Common Stock as a Director of the
Ronald S. Lauder Foundation with respect to which he shares voting and
investment power; and 134,100 shares of Class A Common Stock as a Director
of The Jewish Renaissance Foundation with respect to which he shares voting
and investment power; and 50,000 shares of Class A Common Stock subject to
exercisable employee stock options held by Mr. Lauder. Ronald S. Lauder
disclaims beneficial ownership of the shares of Class A Common Stock and
Class B Common Stock owned by trusts for the benefit of one or more of his
children, The Lauder Foundation, the Ronald S. Lauder Foundation and The
Jewish Renaissance Foundation. Mr. Lauder borrowed shares of Class A Common
Stock from certain trusts for the benefit of certain family members and
Leonard A. Lauder which he sold in our initial public offering. Mr. Lauder
is obligated to repay the outstanding loans, which in the aggregate are in
respect of 6,590,909 shares of Class A Common Stock, by delivering to the
lending trusts and Leonard A. Lauder shares equal in number to the borrowed
shares. This obligation is secured by a pledge of an equal number of shares
owned by Mr. Lauder as to which he has sole voting power and shares
investment power with the respective pledgees. The shares of Class A Common
Stock beneficially owned by Mr. Lauder exclude an additional 475,000 shares
of Class A Common Stock underlying options granted to Mr. Lauder pursuant to
his employment agreement. Shares owned by Mr. Lauder do not include shares
that may be attributed to him by reason of the Stockholders' Agreement. See
"Description of Capital Stock--Stockholders' Agreement."
(5) Ira T. Wender beneficially owns or is deemed to beneficially own: 4,640,548
shares of Class A Common Stock and 6,094,926 shares of Class B Common Stock
indirectly as co-trustee of the EL 1994 Trust and with respect to which he
shares investment power with Leonard A. Lauder and Ronald S. Lauder (see
note (1) above); 7,692 shares of Class A Common Stock and 1,923,077 shares
of Class B Common Stock as co-trustee of the LAL Trust and as co-trustee of
the RSL Trust, each of which trusts are general partners of a limited
partnership, which owns the shares and with respect to which he shares
investment power with Leonard A. Lauder, as co-trustee of the LAL Trust and
who also is an individual general partner of the limited partnership, Joel
S. Ehrenkranz, as co-trustee of the LAL Trust, and Richard D. Parsons, as
co-trustee of the RSL Trust; and 2,700,000 shares of Class A Common Stock
with respect to which he has sole voting power as sole trustee of the RSL
4201 Trust. Mr. Wender disclaims beneficial ownership of such shares. The
shares of Class A Common Stock beneficially owned by Mr. Wender exclude
2,000 shares of Class A Common Stock owned by his spouse, for which he
disclaims beneficial ownership. Pursuant to a forward purchase contract
between the RSL 4201 Trust and the Original TRACES Trust (which is not
affiliated with Mr. Wender or the RSL 4201 Trust), the RSL 4201 Trust is
required to deliver up to 2,700,000 shares of Class A Common Stock to the
Original TRACES Trust on June 5, 2001. Shares owned by the RSL 4201 Trust
are not subject to the Stockholders' Agreement. Shares owned by Mr. Wender
do not include shares that may be attributed to him by reason of the
Stockholders' Agreement. See "Description of Capital Stock--Stockholders'
Agreement."
A-18
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 300,000,000 shares of Class A
Common Stock, 120,000,000 shares of Class B Common Stock, and 23,600,000 shares
of Preferred Stock, par value $.01 per share, including 3,600,000 shares of
$6.50 Cumulative Redeemable Preferred Stock. As of February 9, 1999, there were
61,505,483 shares of Class A Common Stock and 56,839,667 shares of Class B
Common Stock outstanding. All of the shares of Class B Common Stock are
beneficially owned by members of the Lauder family. Of the authorized shares of
Preferred Stock, 3,600,000 shares of $6.50 Cumulative Redeemable Preferred Stock
are outstanding and, as of the date of this prospectus, are beneficially owned
by members of the Lauder family. The following description is a summary and is
subject to and qualified in its entirety by reference to the provisions of the
Restated Certificate of Incorporation filed as an exhibit to the Registration
Statement of which this prospectus forms a part.
COMMON STOCK
The shares of Class A Common Stock and Class B Common Stock are identical
in all respects, except for voting rights, certain conversion rights and
transfer restrictions in respect of the shares of the Class B Common Stock, as
described below.
VOTING RIGHTS. Each share of Class A Common Stock entitles the holder to
one vote on each matter submitted to a vote of our stockholders and each share
of Class B Common Stock entitles the holder to ten votes on each such matter,
including the election of directors. There is no cumulative voting. Except as
required by applicable law, holders of the Class A Common Stock and Class B
Common Stock vote together on all matters submitted to a vote of the
stockholders. With respect to certain corporate changes, such as liquidations,
reorganizations, recapitalizations, mergers, consolidations and sales of all or
substantially all of our assets, holders of the Class A Common Stock and
Class B Common Stock vote together as a single class and the approval of 75% of
the outstanding voting power is required to authorize or approve such
transactions.
Any action that can be taken at a meeting of the stockholders may be taken
by written consent in lieu of the meeting if we receive consents signed by
stockholders having the minimum number of votes that would be necessary to
approve the action at a meeting at which all shares entitled to vote on the
matter were present. This could permit the holders of Class B Common Stock to
take all actions required to be taken by the stockholders without providing the
other stockholders the opportunity to make nominations or raise other matters at
a meeting. The right to take action by less than unanimous written consent
expires at such time as there are no shares of Class B Common Stock outstanding.
DIVIDENDS. Holders of Class A Common Stock and Class B Common Stock are
entitled to receive dividends at the same rate if, as and when such dividends
are declared by our Board of Directors out of assets legally available therefor
after payment of dividends required to be paid on shares of preferred stock, if
any.
If a dividend or distribution payable in shares of Class A Common Stock is
made on the Class A Common Stock, we must also make a pro rata and simultaneous
dividend or distribution on the Class B Common Stock payable in shares of
Class B Common Stock. Conversely, if a dividend or distribution payable in
shares of Class B Common Stock is made on the Class B Common Stock, we must also
make a pro rata and simultaneous dividend or distribution on the Class A Common
Stock payable in shares of Class A Common Stock.
RESTRICTIONS ON TRANSFER. If a holder of Class B Common Stock transfers
such shares, whether by sale, assignment, gift, bequest, appointment or
otherwise, to a person other than a Lauder Family Member (as defined below),
such shares will be converted automatically into shares of Class A Common Stock.
In the case of a pledge of shares of Class B Common Stock to a financial
institution, such shares will not be deemed to be transferred unless and until a
foreclosure occurs.
A-19
<PAGE>
As used in this prospectus, the term "Lauder Family Members" includes only
the following persons: (i) Mrs. Estee Lauder and her estate, guardian,
conservator or committee; (ii) each descendant of Mrs. Lauder (a "Lauder
Descendant") and their respective estates, guardians, conservators or
committees; (iii) each "Family Controlled Entity" (as defined below); and (iv)
the trustees, in their respective capacities as such, of each "Family Controlled
Trust" (as defined below). The term "Family Controlled Entity" means (i) any
not-for-profit corporation if at least 80% of its board of directors is composed
of Mrs. Lauder and/or Lauder Descendants; (ii) any other corporation if at least
80% of the value of its outstanding equity is owned by Lauder Family Members;
(iii) any partnership if at least 80% of the value of its partnership interests
is owned by Lauder Family Members; and (iv) any limited liability or similar
company if at least 80% of the value of the company is owned by Lauder Family
Members. The term "Family Controlled Trust" includes certain trusts existing on
November 16, 1995 and trusts the primary beneficiaries of which are
Mrs. Lauder, Lauder Descendants, spouses of Lauder Descendants and/or charitable
organizations provided that if the trust is a wholly charitable trust, at least
80% of the trustees of such trust consist of Mrs. Lauder and/or Lauder
Descendants.
CONVERSION. Class A Common Stock has no conversion rights. Class B Common
Stock is convertible into Class A Common Stock, in whole or in part, at any time
and from time to time at the option of the holder, on the basis of one share of
Class A Common Stock for each share of Class B Common Stock converted. In the
event of a transfer of shares of Class B Common stock to any person other than a
Lauder Family Member, each share of Class B Common Stock so transferred
automatically will be converted into one share of Class A Common Stock. Each
share of Class B Common Stock will also automatically convert into one share of
Class A Common Stock if, on the record date for any meeting of the stockholders,
the number of shares of Class B Common Stock then outstanding is less than 10%
of the aggregate number of shares of Class A Common Stock and Class B Common
Stock then outstanding.
LIQUIDATION. In the event of liquidation, after payment of our debts and
other liabilities and after making provision for the holders of Preferred Stock,
if any, our remaining assets will be distributable ratably among the holders of
the Class A Common Stock and Class B Common Stock treated as a single class.
MERGERS AND OTHER BUSINESS COMBINATIONS. Upon a merger or consolidation,
holders of each class of Common Stock are entitled to receive equal per share
payments or distributions, except that in any transaction in which shares of
capital stock are distributed, such shares may differ as to voting rights to the
extent and only to the extent that the voting rights of the Class A Common Stock
and Class B Common Stock differ at that time. We may not dispose of all or any
substantial part of our assets to, or merge or consolidate with, any person,
entity or "group" (as defined in Rule 13d-5 of the Exchange Act), which
beneficially owns in the aggregate ten percent or more of our outstanding Common
Stock (a "Related Person") without the affirmative vote of the holders, other
than such Related Person, of not less than 75% of the voting power of
outstanding Class A Common Stock and Class B Common Stock voting as a single
class. For the sole purpose of determining the 75% vote, a Related Person will
also include the seller or sellers from whom the Related Person acquired, during
the preceding six months, at least five percent of the outstanding shares of
Class A Common Stock in a single transaction or series of related transactions
pursuant to one or more agreements or other arrangements (and not through a
brokers' transaction) but only if such seller or sellers have beneficial
ownership of shares of Common Stock having a fair market value in excess of
$10 million in the aggregate following such disposition to such Related Person.
This 75% voting requirement is not applicable, however, if (i) the proposed
transaction is approved by a vote of not less than a majority of our board of
directors who are neither affiliated nor associated with the Related Person (or
the seller of shares to the Related Person as described above) or (ii) in the
case of a transaction pursuant to which the holders of Common Stock are entitled
to receive cash, property, securities or other consideration, the cash or fair
market value of the property, securities or other consideration to be received
per share in such transaction is not less than the higher of (A) the highest
price per share paid by the Related Person for any of its
A-20
<PAGE>
holdings of Common Stock within the two-year period immediately prior to the
announcement of the proposed transaction or (B) the highest closing sale price
during the 30-day period immediately preceding such date or during the 30-day
period immediately preceding the date on which the Related Person became a
Related Person, whichever is higher.
OTHER PROVISIONS. The holders of the Class A Common Stock and Class B
Common Stock are not entitled to preemptive rights. Neither the Class A Common
Stock nor the Class B Common Stock may be subdivided or combined in any manner
unless the other class is subdivided or combined in the same proportion.
TRANSFER AGENT AND REGISTRAR. The Transfer Agent and Registrar for the
Class A Common Stock is ChaseMellon Shareholder Services.
PREFERRED STOCK
$6.50 CUMULATIVE REDEEMABLE PREFERRED STOCK. 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. If such dividends are not paid in full, or declared in full and
sums set apart for full payment thereof, then no dividends may be paid or
declared upon the Common Stock or any other capital stock ranking junior to or
on parity with such $6.50 Cumulative Redeemable Preferred Stock. If, at the time
of an annual meeting of stockholders, the equivalent of six quarterly dividends
are in arrears, then the number of directors on our board of directors will be
increased by two and the holders of the outstanding $6.50 Cumulative Redeemable
Preferred Stock voting separately as a class will be entitled at the meeting to
vote for the election of two directors. The right to elect two directors and
such directors' terms on the board of directors will continue until such
arrearage in the payment of dividends ceases to exist. Shares of $6.50
Cumulative Redeemable Preferred Stock are subject to mandatory redemption on
June 30, 2005 at a redemption price of $100 per share. Following such date and
so long as such mandatory redemption obligations have not been discharged in
full, no dividends may be paid or declared upon the Common Stock, or on any
other capital stock ranking junior to or on a parity with such $6.50 Cumulative
Redeemable Preferred Stock and no shares of Common Stock or such junior or
parity stock may be redeemed or acquired by us for any consideration. We may
redeem the $6.50 Cumulative Redeemable Preferred Stock owned by the EL 1994
Trust and a trust for the primary benefit of Leonard A. Lauder ("LAL 1995
Trust"), in whole or in part, after the death of Mrs. Lauder or, if owned by
persons other than the EL 1994 Trust or the LAL 1995 Trust, after five years
following the disposition of such shares by the EL 1994 Trust or the LAL 1995
Trust, as the case may be. After the later of June 30, 2000 and Mrs. Lauder's
death, holders of the $6.50 Cumulative Redeemable Preferred Stock may put such
shares to us at a price of $100 per share (which amount represents the
liquidation preference per share).
OTHER PREFERRED STOCK. Our board of directors is authorized, subject to any
limitations prescribed by Delaware law or the rules of the NYSE or other
organizations on whose systems our stock may be quoted or listed, to provide for
the issuance of additional shares of Preferred Stock in one or more series, to
establish from time to time the number of shares to be included in each such
series, to fix the rights, powers, preferences and privileges of the shares of
each wholly unissued series and any qualifications, limitations or restrictions
thereon, and to increase or decrease the number of shares of such series,
without any further vote or action by the stockholders. The approval of the
holders of at least 75% of the outstanding shares of Class B Common Stock,
however, is required for the issuance of shares of Preferred Stock that have the
right to vote for the election of directors under ordinary circumstances or to
elect 50% or more of the directors under any circumstances. Depending upon the
terms of the Preferred Stock established by the board of directors, any or all
series of Preferred Stock could have preference over the Common Stock with
respect to dividends and other distributions and upon liquidation or could have
voting or conversion rights that could adversely affect the holders of the
outstanding Common Stock. In addition, the Preferred Stock could delay, defer or
prevent a change of control. We have no present plans to issue any additional
shares of Preferred Stock.
A-21
<PAGE>
STOCKHOLDERS' AGREEMENT
All Lauder Family Members (other than The Lauder Foundation, a tax exempt,
private foundation, Aerin Lauder Zinterhofer, Jane Lauder, the LAL 4002 Trust
and the RSL 4201 Trust) who beneficially own shares of Common Stock have agreed
pursuant to a stockholders' agreement with us (the "Stockholders' Agreement") to
vote all shares beneficially owned by them for Leonard A. Lauder, Ronald S.
Lauder and one person (if any) designated by each as directors of our company.
As of February 9, 1999, these stockholders beneficially owned, in the aggregate,
shares of Common Stock having approximately 94.1% of our voting power.
REGISTRATION RIGHTS AGREEMENT
We and certain members of the Lauder family, certain trusts and other
entities controlled by members of the Lauder family and Morgan Guaranty Trust
Company of New York ("Morgan Guaranty") are parties to a Registration Rights
Agreement (the "Master Registration Rights Agreement"), pursuant to which each
of Leonard A. Lauder, Ronald S. Lauder and Morgan Guaranty have three demand
registration rights and the EL 1994 Trust has six demand registration rights in
respect of shares of Class A Common Stock (including Class A Common Stock issued
upon conversion of Class B Common Stock) held by them. All the parties to the
Master Registration Rights Agreement (other than us) also have an unlimited
number of piggyback registration rights in respect of their shares. The rights
of Morgan Guaranty and any pledgee of the EL 1994 Trust under the Master
Registration Rights Agreement will be exercisable only in the event of a default
under certain loan arrangements.
PLAN OF DISTRIBUTION
The Automatic Common Exchange Securities will be distributed as described
in the Trust Prospectus under the caption "Underwriting." The underwriter and
certain of its affiliates have provided, are currently providing, and expect to
provide in the future, commercial and investment banking services to us and our
subsidiaries and certain Lauder Family Members for which such underwriter or its
affiliates have received and will receive fees and commissions.
TRUST PROSPECTUS
The Automatic Common Exchange Securities are being offered pursuant to the
Trust Prospectus. This prospectus relates only to the Class A Common Stock that
may be delivered upon exchange of the Automatic Common Exchange Securities. We
take no responsibility for any information included in or omitted from the Trust
Prospectus. The Trust Prospectus does not constitute a part of this prospectus
nor is it incorporated by reference herein.
LEGAL MATTERS
The validity of the shares of Class A Common Stock being offered hereby
will be passed upon for us by Weil, Gotshal & Manges LLP, New York, New York
(members of which own approximately 30,000 shares of Class A Common Stock) and
certain legal matters will be passed upon for the underwriter by Fried, Frank,
Harris, Shriver & Jacobson (a partnership including professional corporations),
New York, New York.
EXPERTS
The financial statements and schedule incorporated by reference in this
prospectus that are contained in our Annual Report on Form 10-K for the fiscal
year ended June 30, 1998 have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.
A-22
<PAGE>
------------------------------------------------------------
------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You
must not rely on any unauthorized information or representations. This
prospectus is an offer to sell only the securities offered hereby, but only
under circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its date.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Where You Can Find More Information................. A-2
Incorporation of Certain Documents by Reference..... A-2
The Company......................................... A-3
Use of Proceeds..................................... A-5
Price Range of Common Stock and Dividends........... A-5
Selected Consolidated Financial Information......... A-6
Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................................ A-7
TRACES Stockholder.................................. A-17
Description of Capital Stock........................ A-19
Plan of Distribution................................ A-22
Trust Prospectus.................................... A-22
Legal Matters....................................... A-22
Experts............................................. A-22
</TABLE>
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
Shares
THE ESTEE LAUDER
COMPANIES INC.
Class A Common Stock
----------------------
[LOGO]
----------------------
Goldman, Sachs & Co.
------------------------------------------------------------
------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses expected to be incurred in
connection with the issuance and distribution of the securities described in
this Registration Statement, other than the underwriting discount. All amounts,
except the SEC registration fees and the National Association of Securities
Dealers, Inc. ("NASD") filing fee, are estimated.
<TABLE>
<S> <C>
SEC registration fee.............................................................. $47,955
NASD filing fee................................................................... *
Printing, engraving and postage fees.............................................. *
Legal fees and expenses........................................................... *
Accounting fees and expenses...................................................... *
Miscellaneous..................................................................... *
-------
Total........................................................................ $ *
-------
-------
</TABLE>
- ------------------
* To be provided by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Generally, Section 145 of the General Corporation Law of the State of
Delaware (the "GCL") permits a corporation to indemnify certain persons made a
party to an action, by reason of the fact that such person is or was a director,
officer, employee or agent of the corporation or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation or enterprise. To the extent that person has been successful in any
such matter, that person shall be indemnified against expenses actually and
reasonably incurred by him. In the case of an action by or in the right of the
corporation, no indemnification may be made in respect of any matter as to which
that person was adjudged liable unless and only to the extent that the Delaware
Court of Chancery or the court in which the action was brought determines that
despite the adjudication of liability that person is fairly and reasonably
entitled to indemnity for proper expenses.
Our By-laws provide for indemnification of our directors and officers to
the fullest extent permitted by law.
Section 102(b)(7) of the GCL enables a Delaware corporation to include a
provision in its certificate of incorporation limiting a director's liability to
the corporation or its stockholders for monetary damages for breaches of
fiduciary duty as a director. We have adopted a provision in our Certificate of
Incorporation that provides for such limitation to the full extent permitted
under Delaware law.
Our directors and officers are covered by insurance policies indemnifying
against certain liabilities, including certain liabilities arising under the
Securities Act which might be incurred by them in such capacities and against
which we may not indemnify them.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL SCHEDULES
(a) Exhibits:
Exhibits identified in parentheses below are on file with the SEC and are
incorporated herein by reference to such previous filings. All other exhibits
are provided as part of this electronic transmission.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.*
3.1 Restated Certificate of Incorporation (filed as Exhibit 3.1 to Amendment No. 3 to the Company's
Registration Statement on Form S-1 (No. 33-97180) on November 13, 1995 (the "S-1")).
3.2 Form of Amended and Restated By-Laws (filed as Exhibit 3.2 to the S-1).
5.1 Opinion of Weil, Gotshal & Manges LLP with respect to the legality of the Class A Common Stock.*
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Weil, Gotshal & Manges LLP (included in the opinion filed as Exhibit 5.1).*
24.1 Power of Attorney.**
</TABLE>
- ------------------
* To be filed by amendment.
** Previously filed.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement, and to include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the Registrant's Annual
Report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") (and where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the Exchange
Act) that is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling
II-2
<PAGE>
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) That for purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THE REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN NEW YORK, NEW YORK, ON THIS 12TH DAY OF FEBRUARY 1999.
THE ESTEE LAUDER COMPANIES INC.
By: /s/ ROBERT J. BIGLER
---------------------------------
Name: Robert J. Bigler
Title: Senior Vice President and
Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ---------------------------------------- -------------------
<S> <C> <C>
* Chief Executive Officer and Director February 12, 1999
- ------------------------------------------ (Principal Executive Officer)
Leonard A. Lauder
* Director February 12, 1999
- ------------------------------------------
Ronald S. Lauder
* Director February 12, 1999
- ------------------------------------------
William P. Lauder
* Director February 12, 1999
- ------------------------------------------
Fred H. Langhammer
* Director February 12, 1999
- ------------------------------------------
Marshall Rose
* Director February 12, 1999
- ------------------------------------------
P. Roy Vagelos, M.D.
* Director February 12, 1999
- ------------------------------------------
Faye Wattleton
/s/ ROBERT J. BIGLER Senior Vice President and Chief February 12, 1999
- ------------------------------------------ Financial Officer (Principal Financial
Robert J. Bigler and Accounting Officer)
*By: /s/ ROBERT J. BIGLER
-------------------------------------
Robert J. Bigler
Attorney-in-Fact
</TABLE>
II-4
<PAGE>
EXHIBITS
The following is a complete list of Exhibits filed as part of this
Registration Statement, which are incorporated herein.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ --------------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.*
3.1 Restated Certificate of Incorporation (filed as Exhibit 3.1 to Amendment No. 3 to the Company's
Registration Statement on Form S-1 (No. 33-97180) on November 13, 1995 (the "S-1")).
3.2 Form of Amended and Restated By-Laws (filed as Exhibit 3.2 to the S-1).
5.1 Opinion of Weil, Gotshal & Manges LLP with respect to the legality of the Class A Common Stock.*
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Weil, Gotshal & Manges LLP (included in the opinion filed as Exhibit 5.1).*
24.1 Power of Attorney.**
</TABLE>
- ------------------
* To be filed by amendment
** Previously filed
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in this Registration Statement of our reports dated August 11, 1998
included in the Form 10-K of The Estee Lauder Companies Inc. for the year ended
June 30, 1998 and to all references to our Firm included in this Registration
Statement.
/s/ ARTHUR ANDERSEN LLP
------------------------------------
Arthur Andersen LLP
New York, N.Y.
February 12, 1999
