Estee Lauder 2007 Annual Report Download - page 67

uncorrected misstatements and believes the conclusions
reached regarding its quantitative and qualitative assess-
ments of materiality of such items, both individually and in
the aggregate, were appropriate.
SAB No. 108 became effective for the Company’s fi scal
year ended June 30, 2007. In accordance with the transi-
tion guidance set forth in SAB No. 108, the Company
elected to record a one-time cumulative effect adjustment
to opening retained earnings to correct errors in certain
balance sheet accounts that arose in prior years, which
previously had been considered immaterial using the
“rollover” approach.
Since the fi scal 1996 acquisition of the Bobbi Brown
brand, the Company made payments to the sellers based
on a percentage of Bobbi Brown sales internationally,
which should have been capitalized as goodwill in accor-
dance with SFAS No. 141, “Business Combinations,” as
amended. These payments were previously recorded as
selling, general and administrative expenses in the con-
solidated statements of earnings. As such, goodwill
increased by $10.5 million and opening retained earnings
increased by $6.7 million, net of tax, in the accompanying
fi scal 2007 consolidated balance sheet.
In connection with the Company’s defi ned benefi t
pen sion obligations, certain liability amounts were incor-
rectly refl ected on the balance sheet in years prior to fi scal
2002, the majority of which related to benefi t plans for
the Company’s international operations. As such, other
noncurrent liabilities decreased by $8.7 million and
opening retained earnings increased by $5.0 million, net
of tax, in the accompanying fi scal 2007 consolidated
balance sheet.
Beginning in years prior to fi scal 2003, inventory valu-
ation was impacted by the incorrect application of profi t
in ending inventory partially offset by the overstatement
of inventory obsolescence reserves, culminating in the
current year net decrease to inventory of $2.5 million and
opening retained earnings decrease of $2.0 million, net
of tax, in the accompanying fi scal 2007 consolidated
balance sheet.
In years prior to fi scal 2004, the Company overstated
certain accrued liability positions. As such, other accrued
liabilities decreased by $19.1 million and opening retained
earnings increased by $14.5 million, net of tax, in the
accompanying fi scal 2007 consolidated balance sheet.
NOTE 4 — ACQUISITION AND DIVESTITURE OF
BUSINESSES AND LICENSE ARRANGEMENTS
During fi scal 2007, the Company purchased the remain-
ing minority equity interests in Bumble and Bumble
Products, LLC and Bumble and Bumble, LLC, which have
been accounted for as indefi nite lived intangible assets in
the accompanying consolidated balance sheet.
On April 10, 2006 (the “Effective Date”), the Company
completed the sale of certain assets and operations of the
reporting unit that marketed and sold Stila brand products
to Stila Corp. (the “Purchaser”), an affi liate of Sun Capital
Partners, Inc., for consideration of $23.0 million. The sale
price included cash of $9.3 million, a promissory note
with a notional value of $13.3 million and a fair value of
$11.0 million and convertible preferred stock with an
aggregate liquidation preference of $5.0 million and a fair
value of $2.7 million. As additional consideration for the
purchased assets, and subject to the terms and conditions
of the sale agreement, the Purchaser will pay the Company
an amount equal to two percent of the annual net sales of
the acquired business during the period commencing on
the Effective Date and ending August 20, 2019. The
Company will use these proceeds to satisfy its commit-
ment under the 1999 agreement pursuant to which it
originally purchased the Stila business. The Purchaser
immediately assumed responsibility for all decisions
regarding the operations of the Stila business and the
Company agreed to divest itself of continuing involve-
ment in the Stila business, except as described below.
In fi scal 2006, the Company recorded charges of $80.3
million (net of $43.3 million tax benefi t) to discontinued
operations, which refl ected the loss on the disposition of
the business of $69.9 million, net of tax, and adjustments
to the fair value of assets sold, the costs to dispose of those
assets not acquired by the Purchaser and other costs in
connection with the sale. The charges also include the
operating losses of $10.4 million, net of tax, for fi scal year
ended June 30, 2006. Net sales associated with the dis-
continued operations were $45.1 million for the fi scal year
ended June 30, 2006. All statement of earnings infor mation
for fi scal 2005 has been restated for com parative pur-
poses, including the restatement of the makeup product
category and each of the geographic regions presented in
Note 17 — Segment Data and Related Information.
In order to facilitate the transition of the Stila business
to the Purchaser, the Company agreed to provide certain
infor mation systems, accounting and other back offi ce
services to the Purchaser in exchange for monthly service
fees designed to recover the estimated costs of providing
these transition services. The Company also agreed with
the Purchaser to provide certain distribution and online
services. In both cases, the services concluded in
fi scal 2007.
In fi scal 2006, the Company settled its obligation,
recorded as goodwill at June 30, 2005, related to an earn-
out provision in the Company’s fi scal 2000 acquisition of
Jo Malone Limited.
66 THE EST{E LAUDER COMPANIES INC.