Estee Lauder 2002 Annual Report Download - page 62

THEEST{E LAUDER COMPANIES INC.
Related Party Royalties and Trademarks
Under agreements covering the Company’s purchase of
trademarks for a percentage of related sales, royalty pay-
ments totaling $16.5 million, $16.0 million and $15.5 mil-
lion in fiscal 2002, 2001 and 2000, respectively, have
been charged to income. Such payments were made to
Mrs. Estée Lauder. During fiscal 1996, the Company pur-
chased a stockholder’s rights to receive certain U.S.
royaltypayments for $88.5 million, which was fully amor-
tized in November 2000. In fiscal 2001 and 2000, $6.6
million and $17.7 million, respectively, were amortized as
charges against income.
Stock Compensation
The Company observes the provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation”, by continu-
ing to apply the provisions of Accounting Principles Board
(“APB”)Opinion No.25, “Accounting for Stock Issued to
Employees”, while providing the required pro forma
disclosures as if the fair value method had been applied.
See Note 14 “Stock Programs”.
Concentration of Credit Risk
The Company is a worldwide manufacturer, marketer and
distributor of skin care, makeup, fragrance and hair care
products. Domestic and international sales are made
primarily to department stores, specialty retailers, per-
fumeries and pharmacies. The Company grants credit to
all qualified customers and does not believe it is exposed
significantly to any undue concentration of credit risk.
For the fiscal year ended June 30, 2002, the Company’s
three largest customers accounted for 25% of net sales.
No customer accounted for more than 10% of the Com-
pany’s net sales during 2002. One department store
group accounted for 11% of the Company’s net sales in
fiscal years ended 2001 and 2000. In the same years,
another department store group accounted for 10% of
the Company’s net sales.
Additionally, as of June 30, 2002, the Company’s three
largest customers accounted for 28% of its outstanding
accounts receivable.
Management Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires man-
agement to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and
expenses reported in those financial statements. Actual
results could differ from those estimates and assumptions.
Derivative Financial Instruments
Effective July 1, 2000, the Company adopted SFAS No.
133, “Accounting for Derivative Instruments and Hedging
Activities”, as amended by SFAS No.138,“Accounting for
Certain Derivative Instruments and Certain Hedging
Activities”. These statements established accounting and
reporting standards for derivative instruments, including
certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133, as
amended, requires the recognition of all derivative instru-
ments as either assets or liabilities in the statement of
financial position measured at fair value.
In accordance with the provisions of SFAS No. 133, as
amended, the Company recorded a non-cash charge to
earnings of $2.2 million, after tax, to reflect the change in
time-value from the dates of the derivative instruments’
inception through the date of transition (July 1, 2000). This
charge is reflected as the cumulative effect of a change in
accounting principle in fiscal 2001 in the accompanying
consolidated statements of earnings.
Recently Issued Accounting Standards
Effective January 1, 2002, the Company adopted the
Emerging Issues Task Force (“EITF”) Issue No. 01-9,
“Accounting for Consideration Given by a Vendor to a
Customer”, which codified and reconciled the following
EITF Issues: Issue No. 00-14, “Accounting for Certain Sales
Incentives”, Issue No. 00-22, “Accounting for Points and
Certain Other Time-Based or Volume-Based Sales Incen-
tive Offers, and Offers for Free Products or Services to be
Delivered in the Future”, and Issue No. 00-25, “Vendor
Income Statement Characterization of Consideration Paid
to a Reseller of the Vendor’s Products”. Issue No. 00-14
addressed when sales incentives and discounts should be
recognized, as well as where the related revenues and
expenses should be classified in the financial statements.
Upon adoption of this Issue, the Company reclassified rev-
enues generated from purchase with purchase activities
as sales and costs of purchase with purchase and gift with
purchase activities as cost of sales, which were previously
reported net as operating expenses. Operating income
has remained unchanged by this adoption. These reclassi-
fications have been reported in the accompanying con-
solidated statements of earnings retroactively for all
periods reported.
In August 2001, the Financial Accounting Standards
Board issued SFAS No. 144, “Accounting for the Impair-
ment or Disposal of Long-Lived Assets”. This statement
addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS No. 144
will be effective for financial statements of fiscal years
beginning after December 15, 2001. The Company will
adopt this statement for the fiscal year ending June 30,
2003 and does not anticipate that it will have a material
impact on the Company’s consolidated financial results.
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