<PAGE>
Pursuant to Rule 424(b)(4)
Registration No. 333-77977
3,418,000 Shares
THE ESTEE LAUDER COMPANIES INC.
Class A Common Stock
------------------------
This prospectus relates to an offering of 3,418,000 shares of Class A
Common Stock. The selling stockholders identified in this prospectus are
offering all of the shares to be sold in the offering. The Estee Lauder
Companies Inc. will not receive any of the proceeds from the offering.
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. After completion of the offering,
members of the Lauder family will own shares of Class A Common Stock and
Class B Common Stock having 93.4% of the outstanding voting power of the Common
Stock.
On April 26, 1999, the Board of Directors of The Estee Lauder Companies
Inc. approved a two-for-one stock split in the form of a 100% stock dividend on
all of the issued and outstanding Class A Common Stock and Class B Common Stock.
The stock dividend is payable on June 2, 1999 to all holders of record of shares
of our Common Stock at the close of business on May 10, 1999. Purchasers of
shares of Class A Common Stock being offered by this prospectus who hold such
shares on June 2, 1999 will receive the stock dividend payable with respect to
such shares. Unless otherwise indicated, the information included in this
prospectus, including share ownership data, does not reflect the stock split.
The Class A Common Stock is listed on the New York Stock Exchange under the
symbol "EL". The last reported sale price of the Class A Common Stock on May 19,
1999 was $92.75 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.
------------------------
<TABLE>
<CAPTION>
Per Share Total
--------- ------------
<S> <C> <C>
Initial price to public................................................... $ 92.75 $317,019,500
Underwriting discount..................................................... $ 3.02 $ 10,322,360
Proceeds, before expenses, to the selling stockholders.................... $ 89.73 $306,697,140
</TABLE>
The underwriters may under certain circumstances purchase up to an
additional 512,700 shares from certain of the selling stockholders at the
initial price to the public less the underwriting discount. In the event the
delivery of these shares to the underwriters takes place after June 2, 1999, the
number of shares to be purchased and the price to the underwriters will be
adjusted to reflect the stock split.
------------------------
The underwriters expect to deliver the shares against payment in New York,
New York on May 25, 1999.
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
<PAGE>
J.P. MORGAN & CO.
------------------------
Prospectus dated May 19, 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, December 31, 1998 and March 31, 1999; 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 Section 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."
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 broadened our distribution to
include new channels, namely self-select outlets and salons. In fiscal 1999, we
began selling Clinique products directly to consumers over the internet.
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 34% and
35% of our net sales in the nine months ended March 31, 1999 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 36% of our net sales in each
of the nine months ended March 31, 1999 and our fiscal 1998.
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 28% and 27% of our net
sales in the nine months ended March 31, 1999 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 nine
months ended March 31, 1999 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
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 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.
4
<PAGE>
In addition to the foregoing brands, we also manufacture and sell La Mer
skin care products, including Creme de la Mer, and fragrances under the Kiton
name. These products including Creme de la Mer, 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 May 18, 1999, shares
of Class A Common Stock and Class B Common Stock having approximately 94.0% 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 shares of Class A
Common Stock. All of the shares of Class A Common Stock being offered are
beneficially owned by the selling stockholders named in this prospectus.
PRICE RANGE OF 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 May 19, 1999 was $92.75 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................................................................ 95 1/2 76 3/4 .085
Fourth Quarter (through May 19, 1999)........................................ 103 83 3/4 .10(1)
</TABLE>
- ------------------
(1) The dividend on the Class A Common Stock for the fourth quarter of fiscal
1999, which was declared by our Board of Directors on April 26, 1999, is on
a pre-split basis and is payable July 2, 1999 to holders of record on
June 16, 1999.
As noted above, on April 26, 1999, our Board of Directors approved a
two-for-one stock split in the form of a 100% stock dividend on all of our
outstanding Common Stock. The stock dividend is payable on June 2, 1999 to all
holders of record of shares of our Common Stock at the close of business on
May 10, 1999. The market price and cash dividends shown above have not been
adjusted to reflect the stock split.
We expect to continue the payment of cash dividends in the future, but we
cannot assure you that these payments of cash dividends will continue.
As of May 18, 1999, there were 2,569 record holders of Class A Common Stock
and 15 record holders of Class B Common Stock.
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
nine-month periods ended March 31, 1999 and March 31, 1998. 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>
NINE MONTHS ENDED
MARCH 31, YEAR ENDED JUNE 30,
-------------------- ---------------------------------------------------------
1999 1998 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...................... $3,052.8 $2,773.0 $3,618.0 $3,381.6 $3,194.5 $2,899.1 $2,576.4
Gross profit................... 2,357.3 2,144.2 2,798.5 2,616.5 2,463.5 2,224.3 1,956.1
Operating income............... 373.7 331.7 409.1 359.1 310.3 230.9 175.8
Earnings before income taxes
and minority interest........ 359.4 329.5 402.8 362.9 313.0 233.0 173.2
Net earnings................... 222.5 192.8 236.8 197.6 160.4 121.2 93.0
Preferred stock dividends...... 17.6 17.6 23.4 23.4 57.5 25.3 23.0
Net earnings attributable to
common stock................. 204.9 175.2 213.4 174.2 102.9 95.9 70.0
OTHER DATA:
Earnings before interest, taxes
depreciation and amortization
(EBITDA)(a).................. 462.4 402.3 506.6 435.1 369.1 272.9 215.9
PER SHARE DATA, PRE-SPLIT:
Net earnings per common
share(b):
Basic........................ 1.73 1.48 1.80 1.48 1.18(c) -- --
Diluted...................... 1.70 1.46 1.78 1.47 1.17(c) -- --
Weighted average common shares
outstanding(b):
Basic........................ 118.4 118.4 118.4 117.7 116.3(c) -- --
Diluted...................... 120.4 119.6 119.7 118.6 116.6(c) -- --
Cash dividends declared per
common share................. 0.255 0.255 0.34 0.34 0.17 -- --
PER SHARE DATA, POST-SPLIT:
Net earnings per common
share(b)(d):
Basic........................ 0.87 0.74 0.90 0.74 0.59(c) -- --
Diluted...................... 0.85 0.73 0.89 0.73 0.59(c) -- --
Weighted average common shares
outstanding(b)(d):
Basic........................ 236.8 236.8 236.8 235.4 232.6(c) -- --
Diluted...................... 240.7 239.1 239.5 237.1 233.2(c) -- --
Cash dividends declared per
common share(d):............. 0.1275 0.1275 0.17 0.17 0.085 -- --
</TABLE>
<TABLE>
<CAPTION>
AT
MARCH 31,
AT JUNE 30,
--------------------------------------------------------
1999
1998 1997 1996 1995 1994
----------- -------- -------- -------- -------- --------
(UNAUDITED) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital...................... $ 733.9 $ 617.2 $ 551.6 $ 467.5 $ 469.6 $ 422.7
Total assets......................... 2,717.0 2,512.8 1,873.1 1,779.4 1,701.4 1,453.2
Total debt........................... 431.5 436.5 31.1 127.5 194.0 170.4
Redeemable preferred stock........... 360.0 360.0 360.0 360.0 360.0 --
Stockholders' equity................. 889.2 696.4 547.7 394.2 335.1 577.7
</TABLE>
6
<PAGE>
- ------------------
(a) 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. 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.
(b) 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 (c) below.
(c) 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.
(d) On April 26, 1999, our Board of Directors approved a two-for-one stock split
in the form of a 100% stock dividend on all of our outstanding Common Stock.
The stock dividend is payable on June 2, 1999 to all holders of record of
shares of our Common Stock at the close of business on May 10, 1999.
Purchasers of shares of Class A Common Stock being offered by this
prospectus who hold such shares on June 2, 1999 will receive the stock
dividend payable with respect to such shares. The per share data shown as
"post-split" has been restated to reflect the stock split.
7
<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 is a
comparative summary of net sales by region and product category and operating
income by region for the nine month periods ended March 31, 1999 and 1998 and
the fiscal years ended June 30, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31, YEAR ENDED JUNE 30,
------------------- ------------------------------
1999 1998 1998 1997 1996
-------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
NET SALES
BY REGION:
The Americas................................ $1,883.2 $1,715.2 $2,204.7 $1,939.4 $1,799.4
Europe, the Middle East & Africa............ 815.5 716.8 960.8 909.3 855.9
Asia/Pacific................................ 354.1 341.0 452.5 532.9 539.2
-------- -------- -------- -------- --------
$3,052.8 $2,773.0 $3,618.0 $3,381.6 $3,194.5
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
BY PRODUCT CATEGORY:
Skin Care................................... $1,026.4 $ 931.9 $1,252.9 $1,293.6 $1,274.0
Makeup...................................... 1,107.4 1,009.8 1,320.2 1,253.4 1,131.6
Fragrance................................... 849.4 796.4 988.4 817.9 769.7
Hair Care................................... 69.6 34.9 56.5 16.7 19.2
-------- -------- -------- -------- --------
$3,052.8 $2,773.0 $3,618.0 $3,381.6 $3,194.5
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
OPERATING INCOME
The Americas................................ $ 232.3 $ 216.7 $ 248.0 $ 189.9 $ 133.0
Europe, the Middle East & Africa............ 108.6 98.7 131.3 122.7 115.5
Asia/Pacific................................ 32.8 16.3 29.8 46.5 61.8
-------- -------- -------- -------- --------
$ 373.7 $ 331.7 $ 409.1 $ 359.1 $ 310.3
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
The following table sets forth certain consolidated earnings data as a
percentage of net sales:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
MARCH 31, YEAR ENDED JUNE 30,
-------------- -----------------------------
1999 1998 1998 1997 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales............................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................................... 22.8 22.7 22.7 22.6 22.9
----- ----- ----- ----- -----
Gross profit............................................ 77.2 77.3 77.3 77.4 77.1
----- ----- ----- ----- -----
Operating expenses before depreciation and amortization:
Selling, general and administrative................... 61.3 61.9 62.4 63.5 64.4
Related party royalties............................... 0.8 0.9 0.9 1.0 1.2
----- ----- ----- ----- -----
62.1 62.8 63.3 64.5 65.6
----- ----- ----- ----- -----
Earnings before interest, taxes, depreciation and
amortization (EBITDA)................................. 15.1 14.5 14.0 12.9 11.5
Depreciation and amortization........................... 2.9 2.5 2.7 2.3 1.8
----- ----- ----- ----- -----
Operating income........................................ 12.2 12.0 11.3 10.6 9.7
Interest (expense) income, net.......................... (0.4) (0.1) (0.2) 0.1 0.1
----- ----- ----- ----- -----
Earnings before income taxes and minority interest...... 11.8 11.9 11.1 10.7 9.8
Provision for income taxes.............................. 4.5 4.8 4.5 4.5 4.3
Minority interest....................................... -- (0.1) (0.1) (0.4) (0.5)
----- ----- ----- ----- -----
Net earnings............................................ 7.3% 7.0% 6.5% 5.8% 5.0%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
8
<PAGE>
NINE MONTHS ENDED MARCH 31, 1999 COMPARED WITH NINE MONTHS ENDED MARCH 31,
1998
NET SALES. Our net sales increased 10% or $279.8 million to $3,052.8
million for the nine months ended March 31, 1999 as compared with the same
prior-year period. Sales growth was primarily due to increased sales of skin
care products and the domestic strength of makeup product sales, which includes
Sassaby and Aveda. Further, double digit gains were achieved in each of the skin
care, makeup and fragrance categories in the European region. Foreign currency
translation did not significantly impact net sales.
PRODUCT CATEGORIES
SKIN CARE. Our net sales of skin care products increased 10% or $94.5
million to $1,026.4 million. The increase reflects the retail launch of Stop
Signs and Resilience Lift in the most recent quarter, as well as the continued
success of All About Eyes and Diminish. These increases were partially offset by
lower sales of Fruition Extra.
MAKEUP. Our net sales of makeup products increased 10% or $97.6 million to
$1,107.4 million. Higher makeup product sales were primarily due to the recent
introductions of Quickliner For Eyes and Smudgesicles, as well as contributions
from relatively new products such as Two-In-One Eyeshadow and Double Matte. The
category's net sales also benefited from the inclusion of sales by Sassaby and
Aveda for the full year-to-date period. These increases were partially offset by
lower sales of Indelible Lipstick and Virtual Skin.
FRAGRANCE. Our net sales of fragrance products increased 7% or $53.0
million to $849.4 million. The increase is primarily attributable to the
worldwide success of Clinique Happy and the successful current year introduction
of Dazzling Gold and Dazzling Silver. Additionally, 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.
HAIR CARE. Our net sales of hair care products increased nearly 100% as
compared with the same prior-year period. The increase reflects the inclusion of
Aveda hair care products for the full nine month period.
GEOGRAPHIC. Our net sales in the Americas increased 10% or $168.0 million
to $1,883.2 million. This increase was driven by sales of new and existing
products across all categories and the inclusion of Aveda and Sassaby for the
full year-to-date period. In Europe, the Middle East & Africa, net sales
increased 14% or $98.7 million to $815.5 million. The increase was primarily the
result of higher net sales in the United Kingdom, Spain, and the distributor and
travel retail businesses. Excluding the impact of foreign currency translation,
sales in Europe, the Middle East & Africa increased 11%. Net sales in
Asia/Pacific increased 4% or $13.1 million to $354.1 million, primarily related
to higher net sales in Japan and Thailand. Excluding the impact of foreign
currency translation, Asia/Pacific sales grew 7% over the prior-year period.
COST OF SALES. Our cost of sales for the nine months ended March 31, 1999
were 22.8% of net sales compared with 22.7% of net sales in the prior-year
period. The increase principally reflects the integration of acquired companies,
particularly Sassaby and Aveda, which have cost structures higher than our other
brands. This increase has been substantially offset by a shift in core brand
product mix as well as continued production efficiencies.
OPERATING EXPENSES. Total operating expenses decreased to 65.0% of net
sales for the nine months ended March 31, 1999, compared with 65.4% of net sales
in the same prior-year period. This improvement primarily relates to operating
efficiencies and the favorable integration of the cost structures of acquired
companies. 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 $42.0 million to
$373.7 million for the nine months ended March 31, 1999 as compared with the
same prior-year period. Operating margins were 12.2% of net sales in the current
period as compared to 12.0% in the same prior year period. The increase in
operating income and margins was due to higher net sales coupled with
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operational efficiencies and the timing of advertising and promotional spending.
Operating income in the Americas increased 7% or $15.6 million to
$232.3 million for the nine months ended March 31, 1999, primarily due to
increases in the skin care and makeup segments, as well as the inclusion of
operating results from recent acquisitions. In Europe, the Middle East & Africa,
operating income increased 10% or $9.9 million to $108.6 million primarily due
to improved operating results in Spain, Belgium, Italy and the distributor and
travel retail businesses. In Asia/Pacific, operating income increased
$16.5 million to $32.8 million due to higher results in Japan, as a result of
planned operating expense efficiencies, as well as improvements in Australia and
Taiwan.
EBITDA. 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, and, in our opinion, many of the underlying assets, both tangible
and intangible, create value for us 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 15% to $462.4 million or 15.1% of net sales as compared to
$402.3 million or 14.5% 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, NET. Net interest expense was $14.3 million and $2.2
million for the nine months ended March 31, 1999 and 1998, respectively.
Interest expense increased as borrowings related to the acquisition of new
businesses were outstanding for the full year-to-date period in fiscal 1999.
PROVISION FOR INCOME TAXES. The provision for income taxes represents
federal, foreign, state and local income taxes. The effective rate for income
taxes for the nine months ended March 31, 1999 was 38% compared with 40% 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 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.
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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 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 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%
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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 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.
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.
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
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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% 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% as compared to 42% in fiscal 1997 and 44% in fiscal 1996.
These rates principally reflect the effect of state and 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 cash flows from
operations and borrowings under uncommitted and committed credit lines provided
by banks in the United States and abroad. In May 1999, we issued commercial
paper to refinance approximately one half of our seven-year term loan. At
March 31, 1999, we had cash and cash equivalents of $370.1 million compared with
$277.5 million at June 30, 1998.
Uncommitted lines of credit amounted to $249.7 million at March 31, 1999,
of which none were used. Unused committed lines of credit available at March 31,
1999 amounted to $400.0 million. Total debt as a percentage of total
capitalization (including short-term debt) was 26% at March 31, 1999 and 29% at
June 30, 1998.
Cash used for investing activities for the nine months ended March 31, 1999
was significantly lower than the comparable nine-month period in the prior year
as a result of the fiscal 1998 costs to acquire Aveda, Sassaby and the remaining
interest in MoAoC. In March 1999, we made a final payment to satisfy the
earn-out portion of the Bobbi Brown acquisition.
Cash used for financing activities relates to dividend payments of $47.7
million as compared to $37.7 million in the same prior-year period, and
repayments of short-term debt. The change in
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dividend payments relates to the timing of dividend declarations and
distributions. Cash from financing activities decreased on a comparable basis as
a result of the prior year inclusion of proceeds from long-term borrowings.
On April 26, 1999, the Board of Directors approved a two-for-one stock
split in the form of a 100% stock dividend on all of our outstanding Common
Stock. The stock dividend is payable on June 2, 1999 to all holders of record of
shares of Common Stock at the close of business on May 10, 1999. Additionally,
the Board approved a 17.6% increase in the next Class A and Class B quarterly
Common Stock dividend from $.085 to $.10 per share, on a pre-split basis.
On September 18, 1998, the Company's Board of Directors authorized a share
repurchase program. The Company has purchased and may continue to purchase, over
an 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 conduct business in many foreign currencies. As a result, we are subject
to foreign currency exchange rate risk which impacts the costs and cash flows of
our foreign subsidiaries.
We address our foreign currency and interest rate 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 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. Management believes 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
March 31, 1999, we had contracts to exchange foreign currencies in the form of
forward exchange contracts and purchased currency options in the amount of
$281.1 million and $14.7 million, respectively. 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 the annual report on Form 10-K for the year ended June
30, 1998.
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We believe that cash on hand, internally generated cash flows, 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 the Board of Directors and
the Audit Committee.
We have identified potential deficiencies related to Year 2000 in our
information systems and we 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 we are in the process of assessing whether they
are Year 2000 compliant. We have completed testing of critical embedded chips
and anticipate completing 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 continuing our discussions
with our larger customers and critical non-inventory suppliers about their Year
2000 readiness. Further, we have identified and contacted other suppliers and
customers. These meetings and communications are ongoing and we are continuing
our assessment of the state of readiness of the various suppliers and customers.
We are currently validating Year 2000 processes and procedures as they are
completed.
We believe it is difficult to specifically identify the cause of the most
reasonable worst case Year 2000 scenario, and based upon our work to date, we
continue to believe it is likely to 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. These plans would necessarily be limited to
matters over which we can reasonably control and will include the acceleration
of certain shipments which will necessitate adjustments to the production and
procurement schedules. In order to support ongoing global operations on or about
January 1, 2000, we will be establishing, prior to that date, a Y2K
Communications Center which will expedite the implementation of contingency
plans, if necessary. We are in the process of implementing our overall
contingency plans and are determining the potential impact of the plans on our
quarterly results of operations and financial condition in fiscal 2000.
Incremental out-of-pocket costs incurred through March 31, 1999 have not
been significant and, based upon 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 whom we rely on 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
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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."
FORWARD-LOOKING INFORMATION
We and our representatives from time to time make written or verbal forward
looking statements, including statements contained in this and other filings
with the Securities and Exchange Commission and in 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 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, distribution and retail operations, including changes in
foreign investment and trade policies and regulations of the host countries
and of the United States;
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(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.
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SELLING STOCKHOLDERS
The following table sets forth certain information for each selling
stockholder identified below (collectively, the "Selling Stockholders") with
respect to (i) such Selling Stockholder's beneficial ownership of Class A Common
Stock and Class B Common Stock prior to the offering and the percentage of total
voting power represented thereby and (ii) the number of shares of Class A Common
Stock and Class B Common Stock to be beneficially owned by such Selling
Stockholder after the offering and the percentage of total voting power
represented thereby (without taking into account the underwriters'
over-allotment option). 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
named stockholders. Consequently, these shares are shown as beneficially owned
by more than one stockholder.
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------------------- --------------------------------------
SHARES OF
COMMON STOCK CLASS A COMMON STOCK
BENEFICIALLY COMMON STOCK TO BE BENEFICIALLY
OWNED PERCENTAGE TO BE SOLD OWNED PERCENTAGE
NAME OF SELLING ----------------------- OF TOTAL IN THE ----------------------- OF TOTAL
STOCKHOLDER(1) CLASS A CLASS B VOTING POWER OFFERING CLASS A CLASS B VOTING POWER
- ------------------------- ---------- ---------- ------------ ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Leonard A. Lauder(2)(6).. 14,388,067 29,370,773 48.9% 300,000 14,088,067 29,370,773 48.8%
Trust f/b/o William P.
Lauder(3).............. 578,852 571,727 1.0 50,000 528,852 571,727 1.0
Gary M. Lauder(4)........ 1,833,867 1,914,608 3.3 220,000 1,613,867 1,914,608 3.3
Trust f/b/o Gary M.
Lauder(5).............. 536,268 571,727 1.0 53,000 483,268 571,727 1.0
LAL Family Partners
L.P.(6)................ 4,251,883 21,352,770 34.6 250,000 4,001,883 21,352,770 34.5
The 4003 Corporation(7).. 545,000 0 0.1 545,000 0 0 0
The 4202 Corporation(8).. 2,681,179 1,418,821 2.7 2,000,000 681,179 1,418,821 2.4
</TABLE>
- ------------------
(1) Shares owned by the Selling Stockholders do not include shares that may be
attributed to them by reason of the Stockholders' Agreement. See
"Description of Capital Stock--Stockholders' Agreement." The
4003 Corporation and The 4202 Corporation are not subject to the
Stockholders' Agreement.
(2) Leonard A. Lauder beneficially owns or is deemed to beneficially own:
5,694,646 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);
4,251,883 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; 3,994,115 shares of Class A Common Stock and 6,094,926 shares of
Class B Common Stock indirectly as co-trustee of the Estee Lauder 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; 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 wife, 8,333 shares subject to
(Footnotes continued on next page)
18
<PAGE>
(Footnotes continued from previous page)
exercisable employee stock options held by his wife 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 disclaims
beneficial ownership of the shares of Class A Common Stock owned by The
Lauder Foundation and his spouse.
(3) 50,000 shares of Class A Common Stock are being sold in the offering by the
Separate Share Trust f/b/o William P. Lauder u/a/d December 15, 1976,
created by Leonard A. Lauder, as grantor (the "WPL Separate Share Trust").
Anthony E. Malkin and Patrick J. Landers, as co-trustees of the WPL Separate
Share Trust, share investment and voting power with respect to the shares
owned by the Trust and are deemed to beneficially own all such shares.
Mr. Malkin and Mr. Landers disclaim beneficial ownership of all such shares.
Neither Mr. Malkin nor Mr. Landers owns, either directly or indirectly, any
additional shares of Class A Common Stock or Class B Common Stock.
(4) Includes shares beneficially owned or deemed to be beneficially owned,
directly or indirectly, by Gary M. Lauder. Mr. Lauder shares voting and
dispositive power with William P. Lauder, and dispositive power with Joel S.
Ehrenkranz, in each case as co-trustees of a trust that owns 1,391,157
shares of Class A Common Stock and 1,914,608 shares of Class B Common Stock.
(5) 53,000 shares of Class A Common Stock are being sold in the offering by the
Separate Share Trust f/b/o Gary M. Lauder u/a/d December 15, 1976, created
by Leonard A. Lauder, as grantor (the "GML Separate Share Trust"). Daniel J.
Aaron, as the sole trustee of the GML Separate Share Trust, has sole
investment and voting power with respect to the shares owned by the Trust
and is deemed to beneficially own all such shares. Mr. Aaron disclaims
beneficial ownership of all such shares. Mr. Aaron does not own, either
directly or indirectly, any additional shares of Class A Common Stock or
Class B Common Stock.
(6) Leonard A. Lauder, as the sole individual general partner of LAL Family
Partners and the majority stockholder of LAL Family Corporation, which is
the sole corporate general partner of LAL Family Partners, has sole voting
and investment power over the shares owned by LAL Family Partners and is
deemed to beneficially own all such shares.
(7) All of the issued and outstanding shares of common stock of The 4003
Corporation are owned by George W. Schiele in his capacity as the sole
trustee of The LAL 4003 Trust f/b/o Leonard A. Lauder u/a/d May 18, 1999,
created by Leonard A. Lauder, as grantor. George W. Schiele, as the sole
trustee of The LAL 4003 Trust and a director and officer of The 4003
Corporation, and Lloyd O. Martin, as a director and officer of The 4003
Corporation, share voting and investment power with respect to the shares
owned by The 4003 Corporation and are deemed to beneficially own all such
shares. Mr. Schiele and Ms. Martin disclaim beneficial ownership of all such
shares. Neither Mr. Schiele nor Ms. Martin owns, either directly or
indirectly, any additional shares of Class A Common Stock or Class B Common
Stock.
(8) All of the issued and outstanding shares of common stock of The 4202
Corporation are owned by Deborah F. Stiles in her capacity as the sole
trustee of The RSL 4202 Trust f/b/o Ronald S. Lauder u/a/d May 18, 1999,
created by Ronald S. Lauder, as grantor. Deborah F. Stiles, as the sole
trustee of The RSL 4202 Trust and a director and officer of The 4202
Corporation, William H. Healy, as a director and officer of The 4202
Corporation, and Lloyd O. Martin, as a director and officer of The 4202
Corporation, share voting and investment power over the shares owned by The
4202 Corporation and are deemed to beneficially own all such shares.
Ms. Stiles, Mr. Healy and Ms. Martin disclaim beneficial ownership of all
such shares. Neither Ms. Stiles nor Ms. Martin owns, either directly or
indirectly, any additional shares of Class A Common Stock or Class B Common
Stock. Mr. Healy owns 1,113 shares of Class A Common Stock and no shares of
Class B Common Stock.
19
<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 May 18, 1999, there were
61,727,666 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.
On April 26, 1999, our Board of Directors approved a two-for-one stock
split in the form of a 100% stock dividend on all of our outstanding Common
Stock. The stock dividend is payable on June 2, 1999 to all holders of record of
shares of our Common Stock at the close of business on May 10, 1999. Purchasers
of shares of Class A Common Stock being offered by this prospectus who hold such
shares on June 2, 1999 will receive the stock dividend payable with respect to
such shares. Unless otherwise indicated, the information included in this
prospectus, including share ownership data, does not reflect the stock split.
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,
20
<PAGE>
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.
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
21
<PAGE>
such seller or sellers have beneficial ownership of shares of Common Stock
having a fair market value in excess of $10 million in the aggregate following
such disposition to such Related Person. This 75% voting requirement is not
applicable, however, if (i) the proposed transaction is approved by a vote of
not less than a majority of our board of directors who are neither affiliated
nor associated with the Related Person (or the seller of shares to the Related
Person as described above) or (ii) in the case of a transaction pursuant to
which the holders of Common Stock are entitled to receive cash, property,
securities or other consideration, the cash or fair market value of the
property, securities or other consideration to be received per share in such
transaction is not less than the higher of (A) the highest price per share paid
by the Related Person for any of its holdings of Common Stock within the
two-year period immediately prior to the announcement of the proposed
transaction or (B) the highest closing sale price during the 30-day period
immediately preceding such date or during the 30-day period immediately
preceding the date on which the Related Person became a Related Person,
whichever is higher.
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 Estee Lauder
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 Estee Lauder 1994 Trust or the LAL 1995 Trust, after five
years following the disposition of such shares by the Estee Lauder 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
22
<PAGE>
approval of the holders of at least 75% of the outstanding shares of Class B
Common Stock, however, is required for the issuance of shares of Preferred Stock
that have the right to vote for the election of directors under ordinary
circumstances or to elect 50% or more of the directors under any circumstances.
Depending upon the terms of the Preferred Stock established by the board of
directors, any or all series of Preferred Stock could have preference over the
Common Stock with respect to dividends and other distributions and upon
liquidation or could have voting or conversion rights that could adversely
affect the holders of the outstanding Common Stock. In addition, the Preferred
Stock could delay, defer or prevent a change of control. We have no present
plans to issue any additional shares of Preferred Stock.
STOCKHOLDERS' AGREEMENT
All Lauder Family Members (other than The Lauder Foundation, a tax exempt,
private foundation, Aerin Lauder Zinterhofer, Jane Lauder, The 4003 Corporation
and The 4202 Corporation) who beneficially own shares of Common Stock have
agreed pursuant to a stockholders' agreement with us (the "Stockholders'
Agreement") to vote all shares beneficially owned by them for Leonard A. Lauder,
Ronald S. Lauder and one person (if any) designated by each as directors of our
company. As of May 18, 1999, these stockholders beneficially owned, in the
aggregate, shares of Common Stock having approximately 91.2% 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 Estee Lauder 1994 Trust has six demand registration
rights in respect of shares of Class A Common Stock (including Class A Common
Stock issued upon conversion of Class B Common Stock) held by them. All the
parties to the 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 Estee Lauder 1994 Trust
under the Master Registration Rights Agreement will be exercisable only in the
event of a default under certain loan arrangements.
23
<PAGE>
UNDERWRITING
The Selling Stockholders and the underwriters for the offering (the
"Underwriters") named below have entered into an underwriting agreement with
respect to the shares being offered. Subject to certain conditions, each
Underwriter has severally agreed to purchase the number of shares indicated in
the following table.
<TABLE>
<CAPTION>
Number of
Shares of Class A
Underwriters Common Stock
-----------------
<S> <C>
Goldman, Sachs & Co................................................................. 1,709,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated........................................................... 854,500
J.P. Morgan Securities Inc.......................................................... 854,500
---------
Total............................................................................. 3,418,000
---------
---------
</TABLE>
If the Underwriters sell more shares than the total number set forth in the
table above, the Underwriters have an option to buy up to an additional 512,700
shares from certain of the Selling Stockholders to cover such sales. They may
exercise that option for 30 days. If any shares are purchased pursuant to this
option, the Underwriters will severally purchase shares in approximately the
same proportion as set forth in the table above. In the event the delivery of
these additional option shares to the Underwriters takes place after June 2,
1999, the number of shares to be purchased and the price to the Underwriters
will be adjusted to reflect the stock split.
The following tables show the per share and total underwriting discounts
and commissions to be paid to the Underwriters by the Selling Stockholders. Such
amounts are shown assuming both no exercise and full exercise of the
Underwriters' option to purchase 512,700 additional shares.
<TABLE>
<CAPTION>
Paid by the Selling
Stockholders
----------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share.............................................................. $ 3.02 $ 3.02
Total.................................................................. $10,322,360 $11,870,714
</TABLE>
Shares sold by the Underwriters to the public will initially be offered at
the initial price to public set forth on the cover of this prospectus. Any
shares sold by the Underwriters to securities dealers may be sold at a discount
of up to $1.82 per share from the initial price to public. Any such securities
dealers may resell any shares purchased from the Underwriters to certain other
brokers or dealers at a discount of up to $0.10 per share from the initial price
to public. If all the shares are not sold at the initial price to public, the
Underwriters may change the offering price and the other selling terms.
The Estee Lauder Companies Inc., the Selling Stockholders and Ronald S.
Lauder have agreed with the Underwriters not to dispose of any of their Class A
Common Stock or securities convertible into or exchangeable for shares of
Class A Common Stock during the period from the date of this prospectus
continuing through the date 90 days after the date of this prospectus, except
with the prior written consent of Goldman, Sachs & Co., or as otherwise provided
in the underwriting agreement, and except for transfers among Lauder Family
Members. This agreement does not apply to any existing employee benefit plans.
In connection with the offering, the Underwriters may purchase and sell
shares of Class A Common Stock in the open market. These transactions may
include short sales, stabilizing transactions and purchases to cover positions
created by short sales. Short sales involve the sale by the Underwriters of a
greater number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the Class A
Common Stock while the offering is in progress.
24
<PAGE>
The Underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the other underwriters a portion of the
underwriting discount received by it because the Underwriters have repurchased
shares sold by or for the account of such underwriter in stabilizing or short
covering transactions.
These activities by the Underwriters may stabilize, maintain or otherwise
affect the market price of the Class A Common Stock. As a result, the price of
the Class A Common Stock may be higher than the price that otherwise might exist
in the open market. If these activities are commenced, they may be discontinued
by the Underwriters at any time. These transactions may be effected on the NYSE,
in the over-the-counter market or otherwise.
The Selling Stockholders, who are paying all of the expenses of this
offering, estimate that their total expenses in the offering, excluding
underwriting discounts and commissions, will be approximately $621,000. The
Estee Lauder Companies Inc. will not pay any expenses in the offering.
The Estee Lauder Companies Inc. has agreed with the Selling Stockholders to
indemnify the several Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933.
Certain of the Underwriters and their affiliates have provided, are
currently providing, and expect to provide in the future, commercial and
investment banking services to The Estee Lauder Companies Inc. and certain
Lauder Family Members for which such Underwriters and their affiliates have
received and will receive fees and commissions. Morgan Guaranty, an affiliate of
J.P. Morgan Securities Inc. and J.P. Morgan Securities Ltd., is a lender to The
Estee Lauder Companies Inc. and certain Lauder Family Members. More than ten
percent of the net proceeds of the offering may be used to repay borrowings to
Morgan Guaranty. Accordingly, this offering will be conducted in accordance with
NASD Conduct Rule 2710(c)(8).
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 Underwriters 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.
25
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<PAGE>
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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................. 2
Incorporation of Certain Documents by Reference..... 2
The Company......................................... 3
Use of Proceeds..................................... 5
Price Range of Common Stock and Dividends........... 5
Selected Consolidated Financial Information......... 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 8
Selling Stockholders................................ 18
Description of Capital Stock........................ 20
Underwriting........................................ 24
Legal Matters....................................... 25
Experts............................................. 25
</TABLE>
3,418,000 Shares
THE ESTEE LAUDER
COMPANIES INC.
Class A Common Stock
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[LOGO]
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GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
J.P. MORGAN & CO.
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