Estee Lauder 2004 Annual Report Download - page 71

THE EST{E LAUDER COMPANIES INC.
As of June 30, 2004, the Company had outstanding
$236.6 million of 6% Senior Notes due January 2012
(“6% Senior Notes”) consisting of $250.0 million princi-
pal, an unamortized debt discount of $0.9 million, and a
$12.5 million adjustment to reflect the fair value of an out-
standing interest rate swap. The 6% Senior Notes, when
issued in January 2002, were priced at 99.538% with a
yield of 6.062%. Interest payments are required to be
made semi-annually on January 15 and July 15 of each
year. In May 2003, the Company entered into an interest
rate swap agreement with a notional amount of $250.0
million to effectively convert the fixed rate interest on our
outstanding 6% Senior Notes to variable interest rates
based on six-month LIBOR.
In the first quarter of fiscal 2004, the Company
adopted SFAS No. 150 (see Note 2— Recently Issued
Accounting Standards) which required that the
Company’s cumulative redeemable preferred stock be
classified as a liability and the related dividends thereon as
interest expense. Restatement of financial statements for
fiscal 2003 was not permitted. During fiscal 2004, the
Company and the holders of the $6.50 Cumulative
Redeemable Preferred Stock exchanged all of the out-
standing shares due June 30, 2005 for a newly issued
series of cumulative redeemable preferred stock with
a mandatory redemption date of June 30, 2015 (“2015
Preferred Stock”) with a variable dividend rate. This
exchange transaction has been accounted for as a modi-
fication of the terms of the cumulative redeemable pre-
ferred stock, and accordingly, the effects of this
transaction on the Company’s operating results have been
limited to the prospective change in dividend rates. Such
dividends have preference over all other dividends
of stock issued by the Company. On April 24, 2004,
Mrs. Estée Lauder passed away. As a result, the Company’s
right to call for redemption $291.6 million of the 2015
Preferred Stock became exercisable and the Company
exercised this right for cash in June 2004. Upon this par-
tial redemption, the dividend rate on the remaining $68.4
million principal amount of the 2015 Preferred Stock
was reduced, for the period from April 25, 2004 through
June 30, 2004, from 4.75% per annum to 0.62% per
annum, which is a rate based on the after-tax yield on six-
month U.S. Treasuries. So long as the remaining shares of
2015 Preferred Stock are outstanding, the dividend rate
will be reset semi-annually in January and July at the then-
existing after-tax yield on six-month U.S. Treasuries. The
dividend rate for the six-month period from July 1, 2004
through December 31, 2004 is 0.994%. The $68.4 mil-
lion 2015 Preferred Stock may be put to the Company at
any time at face value but may not be redeemed by the
Company until May 24, 2005. As a result, the liability is
recorded at its redemption value and is classified as cur-
rent at June 30, 2004.
As of June 30, 2003, other long-term borrowings
consisted primarily of several term loans held by the
Darphin group of companies, which was acquired by the
Company in April 2003 (see Note 4). These loans had var-
ious maturities through July 2007 with variable and fixed
interest rates ranging from 2.5% to 5.8%. All of these
loans were repaid during fiscal 2004.
The Company maintains uncommitted credit facilities
in various regions throughout the world. Interest rate
terms for these facilities vary by region and reflect pre-
vailing market rates for companies with strong credit rat-
ings. During fiscal 2004 and 2003, the monthly average
amount outstanding was approximately $5.1 million and
$1.4 million, respectively, and the annualized monthly
weighted average interest rate incurred was approxi-
mately 5.7% and 5.4%, respectively.
Effective June 28, 2001, the Company entered into a
five-year $400.0 million revolving credit facility, expiring
on June 28, 2006, which includes an annual fee of .07%
on the total commitment. At June 30, 2004 and 2003, the
Company was in compliance with all related financial and
other restrictive covenants, including limitations on
indebtedness and liens. The Company also had an effec-
tive shelf registration statement covering the potential
issuance of up to $300.0 million and $500.0 million in
debt securities at June 30, 2004 and 2003, respectively,
and a $750.0 million commercial paper program under
which the Company may issue commercial paper in the
United States.
NOTE 9 – FINANCIAL INSTRUMENTS
Derivative Financial Instruments
The Company addresses certain financial exposures
through a controlled program of risk management that
includes the use of derivative financial instruments. The
Company primarily enters into foreign currency forward
exchange contracts and foreign currency options to
reduce the effects of fluctuating foreign currency
exchange rates. The Company, if necessary, enters into
interest rate derivatives to manage the effects of interest
rate movements on the Company’s aggregate liability
portfolio. The Company categorizes these instruments as
entered into for purposes other than trading.
All derivatives are recognized on the balance sheet at
their fair value. On the date the derivative contract is
entered into, the Company designates the derivative as
(i) a hedge of the fair value of a recognized asset or lia-
bility or of an unrecognized firm commitment (“fair value”
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