EX-13 8 dex13.htm PORTIONS OF ANNUAL REPORT DATED SEPTEMBER 30, 2002 PORTIONS OF ANNUAL REPORT DATED SEPTEMBER 30, 2002
 
Consolidated Statements of Earnings
Alberto-Culver Company and Subsidiaries
 
    
Year ended September 30,
  
    
2002
   
2001
   
2000
  
(In thousands, except per share data)
       
Net sales
   
$
2,650,976
   
2,379,117
   
2,137,737
 
Cost of products sold
   
 
1,356,530
   
1,228,509
   
1,120,079
 
    
  
  
Gross profit
   
 
1,294,446
   
1,150,608
   
1,017,658
 
Advertising, marketing, selling and administrative
   
 
1,060,018
   
961,542
   
853,425
 
Non-recurring gain (note 9)
   
 
—  
   
—  
   
(9,257
)
    
  
  
Operating earnings
   
 
234,428
   
189,066
   
173,490
 
Interest expense, net of interest income of $3,377 in 2002, $5,479 in 2001
and $4,538 in 2000
   
 
22,636
   
21,830
   
19,209
 
    
  
  
Earnings before provision for income taxes
   
 
211,792
   
167,236
   
154,281
 
Provision for income taxes
   
 
74,127
   
56,860
   
51,097
 
    
  
  
Net earnings
   
$
137,665
   
110,376
   
103,184
 
    
  
  
Net earnings per share:
                   
Basic
   
$
2.40
   
1.96
   
1.85
 
Diluted
   
$
2.32
   
1.91
   
1.83
 
    
  
  
 
See accompanying notes to consolidated financial statements.

 
Consolidated Balance Sheets
Alberto-Culver Company and Subsidiaries
 
    
September 30,
  
    
2002
       
2001
  
(In thousands, except share data)
       
Assets
                  
Current assets:
                  
Cash and cash equivalents
   
$
217,485
 
     
201,970
 
Short-term investments
   
 
—  
 
     
869
 
Receivables, less allowance for doubtful accounts of
    $17,550 in 2002 and $11,387 in 2001 (note 3)
   
 
209,010
 
     
169,657
 
Inventories:
                  
Raw materials
   
 
39,932
 
     
41,521
 
Work-in-process
   
 
5,545
 
     
4,782
 
Finished goods
   
 
476,731
 
     
432,008
 
    
    
Total inventories
   
 
522,208
 
     
478,311
 
Other current assets
   
 
35,514
 
     
26,142
 
    
    
Total current assets
   
 
984,217
 
     
876,949
 
Property, plant and equipment:
                  
Land
   
 
12,981
 
     
13,593
 
Buildings and leasehold improvements
   
 
166,700
 
     
151,306
 
Machinery and equipment
   
 
339,338
 
     
306,958
 
    
    
Total property, plant and equipment
   
 
519,019
 
     
471,857
 
Accumulated depreciation
   
 
271,169
 
     
236,035
 
    
    
Property, plant and equipment, net
   
 
247,850
 
     
235,822
 
Goodwill, net
   
 
343,431
 
     
264,339
 
Trade names, net
   
 
79,681
 
     
79,532
 
Other assets
   
 
74,312
 
     
59,859
 
    
    
Total assets
   
$
1,729,491
 
     
1,516,501
 
    
    
Liabilities and Stockholders’ Equity
                  
Current liabilities:
                  
Short-term borrowings
   
$
2,513
 
     
2,482
 
Current maturities of long-term debt
   
 
1,189
 
     
404
 
Accounts payable
   
 
233,942
 
     
191,410
 
Accrued expenses
   
 
208,311
 
     
165,525
 
Income taxes
   
 
14,492
 
     
30,482
 
    
    
Total current liabilities
   
 
460,447
 
     
390,303
 
Long-term debt
   
 
320,181
 
     
321,183
 
Deferred income taxes
   
 
38,337
 
     
39,086
 
Other liabilities
   
 
48,067
 
     
29,920
 
Stockholders’ equity:
                  
Common stock, par value $.22 per share:
                  
Class A authorized 75,000,000 shares; 30,612,798 shares
    issued at September 30, 2002 and 2001
   
 
6,735
 
     
6,735
 
Class B authorized 75,000,000 shares; 37,710,655 shares
    issued at September 30, 2002 and 2001
   
 
8,296
 
     
8,296
 
Additional paid-in capital
   
 
205,470
 
     
190,368
 
Retained earnings
   
 
897,106
 
     
779,792
 
Unearned compensation
   
 
(5,849
)
     
(4,826
)
Accumulated other comprehensive income – foreign currency translation
   
 
(77,603
)
     
(61,284
)
    
    
    
 
1,034,155
 
     
919,081
 
Less treasury stock, at cost (Class A common stock: 2002 – 4,765,673 shares and
    2001 – 6,741,946 shares; Class B common stock: 2002 – 5,379,015 shares
    and 2001 – 4,753,184 shares)
   
 
(171,696
)
     
(183,072
)
    
    
Total stockholders’ equity
   
 
862,459
 
     
736,009
 
    
    
Total liabilities and stockholders’ equity
   
$
1,729,491
 
     
1,516,501
 
    
    
 
See accompanying notes to consolidated financial statements.

2

 
Consolidated Statements of Cash Flows
Alberto-Culver Company and Subsidiaries
 
    
Year ended September 30,
  
    
2002
     
2001
     
2000
  
(In thousands)
       
Cash Flows from Operating Activities:
                       
Net earnings
   
$
137,665
 
   
110,376
 
   
103,184
 
Adjustments to reconcile net earnings to net cash provided by operating activities:
                       
Depreciation
   
 
43,415
 
   
37,315
 
   
36,575
 
Amortization of goodwill, trade names and other assets
   
 
3,799
 
   
14,090
 
   
13,063
 
Non-recurring gain
   
 
—  
 
   
—  
 
   
(9,257
)
Deferred income taxes
   
 
(6,011
)
   
738
 
   
73
 
Cash effects of changes in (exclusive of acquisitions):
                       
Receivables, net
   
 
9,668
 
   
(14,582
)
   
(9,612
)
Inventories
   
 
(20,286
)
   
(28,246
)
   
(5,056
)
Other current assets
   
 
(1,913
)
   
43
 
   
(3,236
)
Accounts payable and accrued expenses
   
 
66,050
 
   
37,771
 
   
(3,085
)
Income taxes
   
 
(7,128
)
   
14,541
 
   
1,655
 
Other assets
   
 
(6,654
)
   
(6,713
)
   
(4,644
)
Other liabilities
   
 
13,088
 
   
(128
)
   
(530
)
    
  
  
Net cash provided by operating activities
   
 
231,693
 
   
165,205
 
   
119,130
 
    
  
  
Cash Flows from Investing Activities:
                       
Short-term investments
   
 
881
 
   
(538
)
   
1,538
 
Capital expenditures
   
 
(55,464
)
   
(36,752
)
   
(37,527
)
Payments for purchased businesses, net of acquired companies’ cash
   
 
(110,133
)
   
(18,791
)
   
(144,832
)
Proceeds from sale of trademark
   
 
—  
 
   
—  
 
   
10,000
 
Proceeds from disposals of assets
   
 
6,002
 
   
1,340
 
   
3,172
 
    
  
  
Net cash used by investing activities
   
 
(158,714
)
   
(54,741
)
   
(167,649
)
    
  
  
Cash Flows from Financing Activities:
                       
Short-term borrowings
   
 
(2
)
   
(1,073
)
   
464
 
Proceeds from issuance of long-term debt
   
 
177
 
   
42
 
   
308,508
 
Debt issuance costs
   
 
—  
 
   
—  
 
   
(1,544
)
Repayments of long-term debt
   
 
(398
)
   
(20,512
)
   
(189,028
)
Termination of interest rate swap
   
 
2,772
 
   
—  
 
   
—  
 
Proceeds from sale of accounts receivable
   
 
—  
 
   
—  
 
   
5,000
 
Repurchase of previously sold accounts receivable
   
 
(40,000
)
   
—  
 
   
—  
 
Proceeds from exercise of stock options
   
 
36,771
 
   
15,490
 
   
2,712
 
Cash dividends paid
   
 
(20,351
)
   
(18,215
)
   
(16,182
)
Stock purchased for treasury
   
 
(35,650
)
   
(1,348
)
   
(3,460
)
    
  
  
Net cash provided (used) by financing activities
   
 
(56,681
)
   
(25,616
)
   
106,470
 
    
  
  
Effect of foreign exchange rate changes on cash
   
 
(783
)
   
2,485
 
   
755
 
    
  
  
Net increase in cash and cash equivalents
   
 
15,515
 
   
87,333
 
   
58,706
 
Cash and cash equivalents at beginning of year
   
 
201,970
 
   
114,637
 
   
55,931
 
    
  
  
Cash and cash equivalents at end of year
   
$
217,485
 
   
201,970
 
   
114,637
 
    
  
  
Supplemental Cash Flow Information:
                       
Cash paid for:
                       
Interest
   
$
26,704
 
   
27,673
 
   
16,687
 
Income taxes
   
$
86,225
 
   
40,659
 
   
48,711
 
Non-cash investing activities:
                       
Issuance of Class A common shares for acquisition
   
$
10,010
 
   
—  
 
   
1,959
 
    
  
  
 
See accompanying notes to consolidated financial statements.

3

 
Consolidated Statements of Stockholders’ Equity
Alberto-Culver Company and Subsidiaries
 
    
Number of Shares
     
Dollars
  
    
Common
Stock Issued
   
Treasury Stock
     
Common
Stock Issued
   
Additional Paid-in Capital
     
Retained Earnings
       
Unearned Compensation
       
Accumulated Other Comprehensive Income (Loss)
     
Treasury Stock
     
Total Stockholders’
Equity
  
    
Class A
   
Class B
   
Class A
     
Class B
     
Class A
   
Class B
                      
(In thousands)
       
Balance at September 30, 1999
   
30,613
   
37,711
   
(7,845
)
   
(4,753
)
   
$6,735
   
$8,296
   
$191,063
 
   
$600,629
 
     
$(3,040
)
     
$(31,160
)
   
$(206,743
)
   
$565,780
 
    
  
  
  
  
  
  
  
    
    
  
  
Comprehensive income (loss):
                                                                                
Net earnings
                                            
103,184
 
                            
103,184
 
Foreign currency translation
                                                              
(23,240
)
          
(23,240
)
    
  
  
  
  
  
  
  
    
    
  
  
Total comprehensive income (loss)
                                            
103,184
 
              
(23,240
)
          
79,944
 
Cash dividends
                                            
(16,182
)
                            
(16,182
)
Stock options exercised
             
193
 
                    
(1,048
)
                            
4,169
 
   
3,121
 
Stock issued pursuant to employee     incentive plans
             
15
 
                    
(19
)
                            
317
 
   
298
 
Stock issued for acquisition
             
75
 
                    
343
 
                            
1,616
 
   
1,959
 
Restricted stock issued, net
             
101
 
                    
(202
)
            
(2,104
)
            
2,183
 
   
(123
)
Restricted stock amortization
                                                     
923
 
                   
923
 
Stock purchased for treasury
             
(170
)
                                                    
(3,460
)
   
(3,460
)
    
  
  
  
  
  
  
  
    
    
  
  
Balance at September 30, 2000
   
30,613
   
37,711
   
(7,631
)
   
(4,753
)
   
6,735
   
8,296
   
190,137
 
   
687,631
 
     
(4,221
)
     
(54,400
)
   
(201,918
)
   
632,260
 
    
  
  
  
  
  
  
  
    
    
  
  
Comprehensive income (loss):
                                                                                
Net earnings
                                            
110,376
 
                            
110,376
 
Foreign currency translation
                                                              
(6,884
)
          
(6,884
)
    
  
  
  
  
  
  
  
    
    
  
  
Total comprehensive income (loss)
                                            
110,376
 
              
(6,884
)
          
103,492
 
Cash dividends
                                            
(18,215
)
                            
(18,215
)
Stock options exercised
             
850
 
                    
(117
)
                            
18,382
 
   
18,265
 
Stock issued pursuant to employee     incentive plans
             
17
 
                    
65
 
                            
371
 
   
436
 
Restricted stock issued, net
             
67
 
                    
283
 
            
(1,819
)
            
1,441
 
   
(95
)
Restricted stock amortization
                                                     
1,214
 
                   
1,214
 
Stock purchased for treasury
             
(45
)
                                                    
(1,348
)
   
(1,348
)
    
  
  
  
  
  
  
  
    
    
  
  
Balance at September 30, 2001
   
30,613
   
37,711
   
(6,742
)
   
(4,753
)
   
6,735
   
8,296
   
190,368
 
   
779,792
 
     
(4,826
)
     
(61,284
)
   
(183,072
)
   
736,009
 
    
  
  
  
  
  
  
  
    
    
  
  
Comprehensive income (loss):
                                                                                
Net earnings
                                            
137,665
 
                            
137,665
 
Foreign currency translation
                                                              
(16,319
)
          
(16,319
)
    
  
  
  
  
  
  
  
    
    
  
  
Total comprehensive income (loss)
                                            
137,665
 
              
(16,319
)
          
121,346
 
Cash dividends
                                            
(20,351
)
                            
(20,351
)
Stock options exercised
             
1,820
 
                    
8,596
 
                            
39,468
 
   
48,064
 
Stock issued pursuant to employee     incentive plans
             
43
 
                    
505
 
                            
932
 
   
1,437
 
Stock issued for acquisition
             
221
 
                    
5,076
 
                            
4,934
 
   
10,010
 
Restricted stock issued, net
             
78
 
                    
925
 
            
(2,705
)
            
1,692
 
   
(88
)
Restricted stock amortization
                                                     
1,682
 
                   
1,682
 
Stock purchased for treasury
             
(186
)
   
(626
)
                                             
(35,650
)
   
(35,650
)
    
  
  
  
  
  
  
  
    
    
  
  
Balance at September 30, 2002
   
30,613
   
37,711
   
(4,766
)
   
(5,379
)
   
$6,735
   
$8,296
   
$205,470
 
   
$897,106
 
     
 $(5,849
)
     
$(77,603
)
   
$(171,696
)
   
$862,459
 
    
  
  
  
  
  
  
  
    
    
  
  
 
See accompanying notes to consolidated financial statements.

4

 
Notes to the Consolidated Financial Statements
Alberto-Culver Company and Subsidiaries
 
(1) Summary of Significant Accounting Policies
 
Principles of Consolidation and Use of Estimates
 
The consolidated financial statements include the accounts of Alberto-Culver Company and its subsidiaries (“company”). All significant intercompany accounts and transactions have been eliminated. Certain amounts for prior periods have been reclassified to conform to the current year’s presentation.
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the financial statements. Actual results may differ from these estimates. Management believes these estimates and assumptions are reasonable.
 
Financial Instruments
 
All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents. These investments are stated at cost which approximates market value.
 
Short-term investments are stated at cost which approximates market value.
 
The carrying amounts of accounts receivable, accounts payable and short-term borrowings approximate fair value due to the short maturities of these financial instruments.
 
The fair value of long-term debt was approximately $336.9 million at September 30, 2002. Fair value estimates are calculated using the present value of the projected debt cash flows based on the current market interest rates of comparable debt instruments.
 
Allowance for Doubtful Accounts
 
The allowance for doubtful accounts requires management to estimate future amounts of receivables to be collected. Management records allowances for doubtful accounts based on historical collection statistics and current customer credit information.
 
Inventories
 
Inventories are stated at the lower of cost (first-in, first-out method) or market (net realizable value). When necessary, the company provides allowances to adjust the carrying value of inventories to the lower of cost or market, including costs to sell or dispose, and for estimated inventory shrinkage. Estimates of the future demand for the company’s products, anticipated product re-launches, changes in formulas and packaging and reductions of stock-keeping units are key factors used by management in assessing the net realizable value of inventories. The company estimates inventory shrinkage based on historical experience.
 
Property, Plant and Equipment
 
Property, plant and equipment are carried at cost. Depreciation is recorded primarily on the straight-line method over the estimated useful lives of the respective classes of assets. Buildings and building improvements are depreciated over periods of 20-40 years. Leasehold improvements are depreciated over the lives of the related leases. The depreciation of machinery and equipment is over periods of 5-15 years. Expenditures for maintenance and repairs are expensed as incurred.
 
Goodwill and Trade Names
 
Prior to October 1, 2001, the cost of goodwill and trade names was amortized on a straight-line basis over periods ranging from ten to forty years. As required, the company implemented the Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” for previously acquired intangibles and discontinued the amortization of goodwill effective October 1, 2001. In accordance with SFAS No. 142, the company determined that its trade names have indefinite lives and, therefore, ceased amortization of trade names effective October 1, 2001.
 
Goodwill and trade names are tested for impairment annually or more frequently if significant events or changes indicate possible impairment in accordance with the provisions of SFAS No. 142. For impairment testing purposes, fair values of reporting units are estimated based on the company’s best estimate of the present value of expected future cash flows and are compared with the corresponding carrying value of the reporting unit, including goodwill.

5

 
Notes to the Consolidated Financial Statements (continued)
Alberto-Culver Company and Subsidiaries
 
Foreign Currency Translation
 
Foreign currency balance sheet accounts are translated at the rates of exchange in effect at the balance sheet date. Results of operations are translated using the average exchange rates during the period.
 
Revenue Recognition
 
The company recognizes revenue on merchandise sold at the time products are shipped to customers. The company’s specialty distribution segment also recognizes revenue when a customer consummates a point-of-sale transaction in a store. Appropriate provisions for sales returns, cash discounts and doubtful accounts are made at the time sales are recorded.
 
Sales Incentives
 
Sales incentives primarily include trade promotion activities and consumer coupons. The company records accruals for sales incentives based on estimates of the ultimate cost of each program. The company tracks its commitments for sales incentive programs and, using historical experience, records an accrual at the end of each period for the estimated incurred, but unpaid, costs of these programs.
 
Shipping and Handling
 
Amounts invoiced to customers for shipping and handling are included in net sales with the related expense reported on the advertising, marketing, selling and administrative line of the consolidated statements of earnings.
 
Costs of Products Sold
 
The company’s consumer products segments include direct material costs and direct and indirect expenses incurred to manufacture products in cost of products sold. The company’s specialty distribution segment includes the cost of merchandise purchased from suppliers in the cost of products sold.
 
Advertising and Marketing
 
Advertising and marketing costs are expensed as incurred and amounted to $189.1 million, $179.0 million and $162.7 million in fiscal years 2002, 2001 and 2000, respectively.
 
Research and Development
 
Research and development costs are expensed as incurred and amounted to $9.8 million in 2002, $9.6 million in 2001 and $8.5 million in 2000.
 
Income Taxes
 
Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are estimated to be recovered or settled.
 
Weighted Average Shares Outstanding
 
The following table provides information about basic and diluted weighted average shares outstanding:
 
    
2002
   
2001
   
2000
(In thousands)
     
Basic weighted average shares outstanding
   
57,380
   
56,176
   
55,790
Assumed exercise of stock options
   
1,457
   
1,299
   
564
Assumed vesting of restricted stock
   
377
   
363
   
—  
Other
   
—  
   
—  
   
56
    
  
  
Diluted weighted average shares outstanding
   
59,214
   
57,838
   
56,410
    
  
  
 
No stock options were anti-dilutive in fiscal years 2002 or 2001. Stock options for 722,200 shares were excluded from the computation of diluted net earnings per share in fiscal year 2000 as the options’ exercise prices were greater than the average market price and, therefore, were anti-dilutive.

6

 
Notes to the Consolidated Financial Statements (continued)
Alberto-Culver Company and Subsidiaries
 
Stock-Based Compensation
 
The company uses the intrinsic method of accounting for its stock-based compensation plans.
 
New Accounting Standards
 
In November, 2001, the FASB’s Emerging Issues Task Force (EITF) released Issue No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products.” EITF No. 01-09 consolidates EITF No. 00-14, “Accounting for Certain Sales Incentives,” which addresses the recognition, measurement and income statement classification for various types of sales incentives including coupons, rebates and free products, and EITF No. 00-25, “Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s Products,” which addresses the income statement classification for various types of consideration paid by a vendor to a retailer. EITF No. 01-09 does not change the accounting treatment set forth by EITF Nos. 00-14 and 00-25. As required, the company adopted the provisions of EITF No. 01-09 in the first quarter of fiscal year 2002. In accordance with EITF No. 01-09, the company reclassified certain amounts for fiscal years 2001 and 2000 to conform to the current year’s presentation resulting in a $115.1 million reduction in net sales, an $11.1 million increase in cost of products sold and a $126.2 million decrease in promotion expense for fiscal year 2001 and a $109.4 million reduction in net sales, a $14.3 million increase in cost of products sold and a $123.7 million decrease in promotion expense for fiscal year 2000. Consolidated net earnings were not affected by these reclassifications.
 
In June, 2001, the FASB issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 addresses financial accounting and reporting for business combinations. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets, requires companies to discontinue the amortization of goodwill and certain other intangible assets and requires an impairment test of existing goodwill and certain other intangible assets based on a fair value method. As required, the company adopted SFAS No. 141 in the fourth quarter of fiscal year 2001. The company also adopted SFAS No. 142 as required in the fourth quarter of fiscal year 2001 for new acquisitions and in the first quarter of fiscal year 2002 for previously acquired intangibles. In accordance with SFAS No. 142, the company determined that its trade names have indefinite lives and, therefore, the amortization of trade names was discontinued effective October 1, 2001. Based on the results of the company’s transitional impairment testing, no impairment of indefinite-lived trade names existed at October 1, 2001. In addition, as required by SFAS No. 142, the company ceased the amortization of goodwill effective October 1, 2001. In accordance with the adoption provisions of SFAS No. 142, the company has completed the required transitional goodwill impairment tests and has determined that goodwill was not impaired as of October 1, 2001, the date of adoption. Prospectively, goodwill and trade names will be reviewed for impairment at least annually, with ongoing recoverability monitored based on applicable reporting unit performance and consideration of significant events or changes in the overall business environment.
 
In accordance with SFAS No. 142, the consolidated statements of earnings for fiscal years 2001 and 2000 have not been restated for the effects of ceasing goodwill and trade name amortization. Had goodwill and trade name amortization been discontinued effective October 1, 1999, net earnings and net earnings per share for the fiscal years ended September 30, 2002, 2001 and 2000 would have been as follows:
 
    
2002
   
2001
   
2000*
(In thousands, except per share data)
     
Reported net earnings
   
$
137,665
   
110,376
   
103,184
Elimination of goodwill and trade name amortization, net of income taxes
   
 
—  
   
8,759
   
7,832
    
  
  
Pro-forma net earnings
   
$
137,665
   
119,135
   
111,016
    
  
  
Reported basic net earnings per share
   
$
2.40
   
1.96
   
1.85
Elimination of goodwill and trade name amortization, net of income taxes
   
 
—  
   
.16
   
.14
    
  
  
Pro-forma basic net earnings per share
   
$
2.40
   
2.12
   
1.99
    
  
  
Reported diluted net earnings per share
   
$
2.32
   
1.91
   
1.83
Elimination of goodwill and trade name amortization, net of income taxes
   
 
—  
   
.15
   
.14
    
  
  
Pro-forma diluted net earnings per share
   
$
2.32
   
2.06
   
1.97
    
  
  
 
*
 
Fiscal year 2000 includes a non-recurring gain from the sale of a trademark. The non-recurring gain increased net earnings by $6.0 million and basic and diluted net earnings per share by 11 cents.

7

 
Notes to the Consolidated Financial Statements (continued)
Alberto-Culver Company and Subsidiaries
 
The change in the carrying amount of goodwill by operating segment for the fiscal year ended September 30, 2002 is as follows:
 
    
Consumer Products
       
Specialty Distribution-Sally
     
Total
  
    
North America
     
International
          
(In thousands)
       
Balance at September 30, 2001
   
$
69,379
 
   
79,648
 
     
115,312
 
   
264,339
 
Additions, net of purchase price adjustments
   
 
(214
)
   
—  
 
     
92,240
 
   
92,026
 
Foreign currency translation effect
   
 
—  
 
   
(12,906
)
     
(28
)
   
(12,934
)
    
  
    
  
Balance at September 30, 2002
   
$
69,165
 
   
66,742
 
     
207,524
 
   
343,431
 
    
  
    
  
 
Indefinite-lived trade names by operating segment at September 30, 2002 and 2001 are as follows:
 
    
2002
   
2001
(In thousands)
     
Consumer products:
            
Alberto-Culver North America
   
$
  45,414
   
  45,414
Alberto-Culver International
   
 
30,145
   
33,857
    
  
Total consumer products
   
 
75,559
   
79,271
Specialty distribution - Sally
   
 
4,122
   
261
    
  
    
$
79,681
   
79,532
    
  
 
(2) Accrued Expenses
 
Accrued expenses consist of the following:
 
    
2002
   
2001
(In thousands)
     
Compensation and benefits
   
$
103,449
   
83,403
Advertising and promotions
   
 
38,943
   
35,125
Other
   
 
65,919
   
46,997
    
  
    
$
208,311
   
165,525
    
  
 
(3) Long-Term Debt and Other Financing Arrangements
 
Long-term debt, exclusive of current maturities, consists of the following:
 
    
2002
   
2001
(In thousands)
     
8.25% notes due November, 2005
   
$
200,000
   
200,000
6.375% debentures due June, 2028
   
 
120,000
   
120,000
Other
   
 
181
   
1,183
    
  
    
$
320,181
   
321,183
    
  
 
Maturities of long-term debt for the next five fiscal years are as follows (in thousands): 2003 - $1,189; 2004 - $96; 2005 - $63; 2006 - $200,021; 2007 - $1; 2008 and later - $120,000.
 
In June, 1998, the company issued $120 million of 6.375% debentures due June 15, 2028. The debentures are subject to repayment, in whole or in part, on June 15, 2008 at the option of the holders. In addition, the company has the option to redeem the debentures at any time, in whole or in part, at a price equal to 100% of the principal amount plus accrued interest and, if applicable, a make-whole premium.
 
In April, 2000, the company issued $200 million of 8.25% senior notes due November 1, 2005. The company has the option to redeem the notes at any time, in whole or in part, at a price equal to 100% of the principal amount plus accrued interest and, if applicable, a make-whole premium.

8

 
Notes to the Consolidated Financial Statements (continued)
Alberto-Culver Company and Subsidiaries
 
The company has a $300 million, three-year revolving credit facility expiring in September, 2005. The previous credit facility, which was for $250 million, expired in September, 2002. No borrowings were outstanding under the revolving credit facilities at September 30, 2002 or 2001. The revolving credit facility has an interest rate based on a fixed spread over LIBOR and may be drawn in U.S. dollars or certain foreign currencies.
 
The $300 million revolving credit facility imposes restrictions on such items as total debt, liens and interest expense. At September 30, 2002, the company was in compliance with the covenants of the revolving credit facility.
 
The company also has a 400 million Swedish krona revolving credit facility (approximately $43.2 million at September 30, 2002) which expires in April, 2003. The facility had no borrowings outstanding at September 30, 2002 or 2001. The interest rate for the facility is based on a fixed spread over the Stockholm Interbank Offered Rate.
 
In May, 2002, the company entered into an interest rate swap agreement with a notional amount of $100 million in order to convert a portion of its fixed rate 8.25% senior notes into a variable rate obligation. In July, 2002, the company terminated the interest rate swap resulting in a gain of $2.8 million, which is being amortized over the remaining term of the 8.25% senior notes as a reduction of interest expense. The unamortized portion of the gain is included in other liabilities and totaled $2.6 million as of September 30, 2002.
 
The company had an agreement to sell, without recourse, up to $40 million of designated trade receivables on an ongoing basis. Costs related to this arrangement were included in administrative expenses. In March, 2002, the company repurchased the $40 million of accounts receivable previously sold under this facility. The facility subsequently expired in September, 2002. The agreement involved the sale of accounts receivable to a wholly-owned, consolidated special purpose entity (SPE), which in turn sold an undivided interest in a revolving pool of eligible receivables to a financial institution. The SPE was a separate corporate entity with its own creditors that were entitled to be satisfied out of the SPE’s assets prior to those assets becoming available to its parent. At September 30, 2001, the facility was fully utilized. As a result of the repurchase of receivables previously sold under the facility, accounts receivable at September 30, 2002 increased $40 million compared to the prior year. As of September 30, 2002, the company has no off-balance sheet financing arrangements other than operating leases incurred in the ordinary course of business as disclosed in “note 8.”
 
(4) Stockholders’ Equity
 
The company has two classes of common stock, both of which are listed on the New York Stock Exchange. Except for voting, dividend and conversion rights, the Class A and Class B common stock are identical. Class A has one-tenth vote per share and Class B has one vote per share. No dividend may be paid on the Class B unless an equal or greater dividend is paid on the Class A, and dividends may be paid on the Class A in excess of dividends paid, or without paying dividends, on the Class B. All, and not less than all, of the Class A may at any time be converted into Class B on a share-for-share basis at the option of the company. The Class B is convertible at any time into Class A on a share-for-share basis at the option of the holders.
 
Cash dividends for Class B common stock in fiscal years 2002, 2001 and 2000 were $11.4 million or $.3525 per share, $10.6 million or $.3225 per share and $9.6 million or $.29 per share, respectively. Cash dividends for Class A common stock in fiscal years 2002, 2001 and 2000 were $8.9 million or $.3525 per share, $7.6 million or $.3225 per share and $6.6 million or $.29 per share, respectively. Class A common stock dividends per share have been equal to those of Class B common stock since the Class A shares were issued in April, 1986.
 
During fiscal years 1998 and 1999, the Board of Directors authorized the company to purchase up to 9.0 million shares of its Class A common stock. Prior to the fourth quarter of fiscal year 2002, the company had purchased 7.3 million Class A common shares under this program at a total cost of $162.9 million with the last purchase occurring in October, 1999. In July, 2002, the Board of Directors re-authorized the company to purchase up to 1.7 million shares of Class A common stock remaining under this program. In the fourth quarter of fiscal year 2002, the company purchased 164,200 Class A shares at a total cost of $7.4 million. A total of 1,535,800 Class A shares remain available for purchase under this program as of September 30, 2002. During fiscal year 2002, the company also acquired $28.3 million of Class A and Class B common shares surrendered by employees in connection with the exercises of stock options and the payment of withholding taxes as provided under the terms of certain incentive plans. Shares acquired under these plans are not subject to the company’s stock repurchase program.

9

 
Notes to the Consolidated Financial Statements (continued)
Alberto-Culver Company and Subsidiaries
 
(5) Stock Option and Restricted Stock Plans
 
Pursuant to its stock option plans, the company is authorized to issue non-qualified options to employees and non-employee directors to purchase a limited number of shares of the company’s Class A common stock at a price not less than the fair market value of the stock on the date of grant. Options under the plans expire ten years from the date of grant and are exercisable on a cumulative basis in four equal annual increments commencing one year after the date of grant. A total of 15.6 million shares have been authorized to be issued under the plans, of which 5.1 million shares remain available for future grants at September 30, 2002.
 
SFAS No. 123, “Accounting for Stock-Based Compensation,” requires either the adoption of a fair value based method of accounting for stock-based compensation or the continuance of the intrinsic value method with pro-forma disclosures as if the fair value method was adopted. The company has elected to continue measuring compensation expense for its stock-based plans, using the intrinsic value method prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and, accordingly, no compensation cost related to stock options has been recognized in the consolidated statements of earnings.
 
Had compensation expense for these stock option plans been determined based upon the fair value of stock options on the dates of grant and recognized over the vesting period consistent with SFAS No. 123, the company’s pro-forma net earnings and net earnings per share for the fiscal years ended September 30, 2002, 2001 and 2000 would have been as follows (in thousands, except per share amounts):
 
    
2002
   
2001
   
2000
Net earnings:
                 
As reported
   
$
137,665
   
110,376
   
103,184
Pro-forma
   
$
130,685
   
104,591
   
98,633
Basic net earnings per share:
                 
As reported
   
$
2.40
   
1.96
   
1.85
Pro-forma
   
$
2.28
   
1.86
   
1.77
Diluted net earnings per share:
                 
As reported
   
$
2.32
   
1.91
   
1.83
Pro-forma
   
$
2.21
   
1.81
   
1.75
    
  
  
 
The weighted average fair value of options at the date of grant in fiscal years 2002, 2001 and 2000 was $8.83, $7.49 and $5.77 per option, respectively. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
 
    
2002
   
2001
   
2000
Expected life
   
       5 years
   
       5 years
   
       5 years
Volatility
   
         25.5%
   
        25.4%
   
        24.8%
Risk-free interest rate
   
3.5%-4.5%
   
4.6%-5.9%
   
5.8%-6.5%
Dividend yield
   
0.8%-1.0%
   
1.0%-1.2%
   
1.1%-1.4%
 
Summarized information on the company’s outstanding stock options at September 30, 2002 is as follows (options in thousands):
 
      
Options Outstanding
     
Options Exercisable
Range of
Exercise
Prices
     
Number of Options
     
Average
Remaining
Contractual
Life
     
Weighted
Average
Option
Price
     
Number
of
Options
     
Weighted
Average
Option
Price
$  9.75-$13.38
     
    394
     
2.6 years
     
$12.40
     
    394
     
$12.40
$19.75-$23.19
     
1,650
     
6.4 years
     
$20.39
     
1,280
     
$20.48
$24.94-$26.19
     
1,598
     
7.6 years
     
$25.12
     
    821
     
$25.28
$29.44-$32.66
     
1,694
     
9.0 years
     
$32.64
     
    420
     
$32.64
$38.64-$42.46
     
      31
     
9.6 years
     
$40.77
     
    —  
     
    —  

10

 
Notes to the Consolidated Financial Statements (continued)
Alberto-Culver Company and Subsidiaries
 
Stock option activity under the plans is summarized as follows (options in thousands):
 
    
Number
of Options
     
Weighted
Average
Option
Price
Outstanding at September 30, 1999
   
3,710
 
   
$
19.01
    
  
Granted
   
1,590
 
   
$
19.93
Exercised
   
(193
)
   
$
14.05
Canceled
   
(153
)
   
$
21.42
    
  
Outstanding at September 30, 2000
   
4,954
 
   
$
19.42
    
  
Granted
   
1,716
 
   
$
24.98
Exercised
   
(850
)
   
$
18.22
Canceled
   
(290
)
   
$
22.29
    
  
Outstanding at September 30, 2001
   
5,530
 
   
$
21.18
    
  
Granted
   
1,728
 
   
$
32.81
Exercised
   
(1,820
)
   
$
20.20
Canceled
   
(71
)
   
$
26.13
    
  
Outstanding at September 30, 2002
   
5,367
 
   
$
25.19
    
  
Exercisable at September 30:
              
2000
   
2,912
 
   
$
18.40
2001
   
3,357
 
   
$
20.04
2002
   
2,915
 
   
$
22.50
    
  
 
The company is also authorized to grant up to 1,000,000 shares of Class A common stock to employees under its restricted stock plan. The restricted shares vest on a cumulative basis in four equal annual installments commencing four years after the date of grant for grants made prior to July 26, 2001 and in four equal annual installments commencing two years after the date of grant for all subsequent grants. The total value of restricted shares is recorded as unearned compensation at the time of grant based on the fair market value of the shares on the date of grant. The unearned compensation balance is amortized into expense over the vesting period. During fiscal year 2002, employees were granted 85,800 restricted shares at a weighted average fair value of $32.66 per share on the date of grant. At September 30, 2002, there were 363,950 restricted shares outstanding and 539,200 Class A shares remained authorized for future issuance. The unearned compensation balance included as a separate component of stockholders’ equity was $5.8 million at September 30, 2002.
 
The company is seeking authorization from shareholders at the January, 2003 annual meeting of shareholders for two new Class B stock option plans and a new Class B restricted stock plan. If approved, the new plans will be authorized to grant up to 6.15 million non-qualified stock options to employees and non-employee directors to purchase the company’s Class B shares and up to 600,000 restricted shares of Class B common stock to employees. If these new plans are approved, the company will no longer be authorized to grant stock options or restricted shares of Class A common stock under the current stock option and restricted stock plans.
 
(6) Income Taxes
 
The provision for income taxes consists of the following:
 
    
2002
     
2001
     
2000
  
    
(In thousands)
  
Current:
                       
Federal
   
$
67,802
 
   
45,989
 
   
35,739
 
Foreign
   
 
9,193
 
   
7,624
 
   
12,000
 
State
   
 
3,143
 
   
2,509
 
   
3,285
 
    
  
  
    
 
80,138
 
   
56,122
 
   
51,024
 
    
  
  
Deferred:
                       
Federal
   
 
(9,364
)
   
808
 
   
(874
)
Foreign
   
 
3,008
 
   
134
 
   
1,327
 
State
   
 
345
 
   
(204
)
   
(380
)
    
  
  
    
 
(6,011
)
   
738
 
   
73
 
    
  
  
    
$
74,127
 
   
56,860
 
   
51,097
 
    
  
  

11

 
Notes to the Consolidated Financial Statements (continued)
Alberto-Culver Company and Subsidiaries
 
The difference between the United States statutory federal income tax rate and the effective income tax rate is summarized below:
 
    
2002
     
2001
     
2000
  
U.S. statutory tax rate
   
35.0
%
   
35.0
%
   
35.0
%
Effect of foreign income tax rates
   
(1.0
)
   
(.5
)
   
(2.6
)
State income taxes, net of federal tax benefit
   
1.1
 
   
.9
 
   
1.2
 
Tax exempt interest income
   
(.3
)
   
(.6
)
   
(.3
)
Other, net
   
.2
 
   
(.8
)
   
(.2
)
    
  
  
Effective tax rate
   
35.0
%
   
34.0
%
   
33.1
%
    
  
  
 
Significant components of the company’s deferred tax assets and liabilities at September 30, 2002 and 2001 are as follows:
 
    
2002
   
2001
(In thousands)
     
Deferred tax assets attributable to:
            
Accrued expenses
   
$
20,653
   
      15,052
Long-term liabilities
   
 
7,555
   
1,757
Other
   
 
2,057
   
1,288
    
  
Total deferred tax assets
   
 
30,265
   
18,097
    
  
Deferred tax liabilities attributable to:
            
Depreciation and amortization
   
 
47,275
   
41,802
Inventory adjustments
   
 
375
   
1,617
State income taxes
   
 
674
   
329
    
  
Total deferred tax liabilities
   
 
48,324
   
43,748
    
  
Net deferred tax liabilities
   
$
18,059
   
25,651
    
  
 
Other current assets at September 30, 2002 and 2001 include $20.3 million and $13.4 million, respectively, of net deferred tax assets. Management believes that it is more likely than not that results of future operations will generate sufficient taxable income to realize the deferred tax assets. Accordingly, there is no valuation allowance recorded at September 30, 2002 and 2001.
 
Domestic earnings before provision for income taxes were $171.1 million, $140.7 million and $124.4 million in fiscal years 2002, 2001 and 2000, respectively. Foreign operations had earnings before provision for income taxes of $40.7 million, $26.5 million and $29.9 million (including the 2000 non-recurring gain) in fiscal years 2002, 2001 and 2000, respectively.
 
Undistributed earnings of the company’s foreign operations amounting to $235.6 million at September 30, 2002 are intended to remain permanently invested to finance future growth and expansion. Accordingly, no U.S. income taxes have been provided on those earnings at September 30, 2002. Should such earnings be distributed, the company estimates that the credits for foreign income taxes paid would substantially offset applicable U.S. income taxes.
 
(7) Business Segments and Geographic Area Information
 
The presentation of segment information reflects the manner in which management organizes segments for making operating decisions and assessing performance. The company’s consumer products business includes two segments, “Alberto-Culver North America” and “Alberto-Culver International,” and includes developing, manufacturing, distributing and marketing branded consumer products worldwide. The Alberto-Culver North America segment also includes the manufacturing of custom label products for other companies. The “Specialty distribution - Sally” business segment consists of Sally Beauty Company, a distributor of professional beauty supplies through its Sally Beauty Supply stores and its Beauty Systems Group full-service operations.
 
The accounting policies of the segments are the same as those described in the summary of significant accounting policies in “note 1.” The company accounts for sales between segments as if the sales were to a third party, however, sales between segments are eliminated in consolidation.

12

 
Notes to the Consolidated Financial Statements (continued)
Alberto-Culver Company and Subsidiaries
 
Segment data for the years ended September 30, 2002, 2001 and 2000 is as follows:
 
Business Segments Information
 
(In thousands)
   
2002
     
2001
     
2000
  
Net sales:
                       
Consumer products:
                       
Alberto-Culver North America
   
$
617,014
 
   
562,427
 
   
498,769
 
Alberto-Culver International
   
 
398,983
 
   
392,795
 
   
386,851
 
    
  
  
Total consumer products
   
 
1,015,997
 
   
955,222
 
   
885,620
 
Specialty distribution - Sally
   
 
1,667,052
 
   
1,452,539
 
   
1,275,475
 
Eliminations
   
 
(32,073
)
   
(28,644
)
   
(23,358
)
    
  
  
    
$
2,650,976
 
   
2,379,117
 
   
2,137,737
 
    
  
  
Earnings before provision for income taxes (1):
                       
Consumer products:
                       
Alberto-Culver North America
   
$
71,070
 
   
52,511
 
   
37,284
 
Alberto-Culver International
   
 
16,710
 
   
15,945
 
   
15,874
 
    
  
  
Total consumer products
   
 
87,780
 
   
68,456
 
   
53,158
 
Specialty distribution - Sally
   
 
172,750
 
   
144,688
 
   
125,640
 
    
  
  
Segment operating profit
   
 
260,530
 
   
213,144
 
   
178,798
 
Non-recurring gain (note 9)
   
 
—  
 
   
—  
 
   
9,257
 
Unallocated expenses, net (2)
   
 
(26,102
)
   
(24,078
)
   
(14,565
)
Interest expense, net of interest income
   
 
(22,636
)
   
(21,830
)
   
(19,209
)
    
  
  
    
$
211,792
 
   
167,236
 
   
154,281
 
    
  
  
Identifiable assets:
                       
Consumer products:
                       
Alberto-Culver North America
   
$
330,188
 
   
324,495
 
   
316,656
 
Alberto-Culver International
   
 
359,081
 
   
361,144
 
   
374,206
 
    
  
  
Total consumer products
   
 
689,269
 
   
685,639
 
   
690,862
 
Specialty distribution - Sally
   
 
835,026
 
   
655,825
 
   
589,955
 
Corporate (3)
   
 
205,196
 
   
175,037
 
   
104,781
 
    
  
  
    
$
1,729,491
 
   
1,516,501
 
   
1,385,598
 
    
  
  
Depreciation and amortization expense (1):
                       
Consumer products:
                       
Alberto-Culver North America
   
$
13,197
 
   
14,849
 
   
14,587
 
Alberto-Culver International
   
 
9,231
 
   
12,197
 
   
12,471
 
    
  
  
Total consumer products
   
 
22,428
 
   
27,046
 
   
27,058
 
Specialty distribution - Sally
   
 
21,972
 
   
22,132
 
   
20,527
 
Corporate
   
 
2,814
 
   
2,227
 
   
2,053
 
    
  
  
    
$
47,214
 
   
51,405
 
   
49,638
 
    
  
  
Capital expenditures:
                       
Consumer products:
                       
Alberto-Culver North America
   
$
20,766
 
   
13,237
 
   
10,259
 
Alberto-Culver International
   
 
11,553
 
   
5,785
 
   
10,337
 
    
  
  
Total consumer products
   
 
32,319
 
   
19,022
 
   
20,596
 
Specialty distribution - Sally
   
 
23,145
 
   
17,730
 
   
16,931
 
    
  
  
    
$
55,464
 
   
36,752
 
   
37,527
 
    
  
  
 
(1)
 
As required, the company implemented SFAS No. 142 in fiscal year 2002 and, accordingly, discontinued amortization of goodwill and trade names. In accordance with SFAS No. 142, earnings before provision for income taxes and depreciation and amortization expense for fiscal years 2001 and 2000 have not been restated and, therefore, include amortization of goodwill and trade names. See “note 1” for further discussion.
(2)
 
“Unallocated expenses, net” principally consists of general corporate expenses.
(3)
 
Corporate identifiable assets are primarily cash, cash equivalents, short-term investments and equipment.

13

 
Notes to the Consolidated Financial Statements (continued)
Alberto-Culver Company and Subsidiaries
 
Geographic data for the years ended September 30, 2002, 2001 and 2000 is as follows:
 
Geographic Area Information
 
    
2002
     
2001
     
2000
  
(In thousands)
       
Net sales:
                       
United States
   
$
2,121,633
 
   
1,884,278
 
   
1,652,800
 
Foreign
   
 
541,219
 
   
513,199
 
   
507,182
 
Eliminations
   
 
(11,876
)
   
(18,360
)
   
(22,245
)
    
  
  
    
$
2,650,976
 
   
2,379,117
 
   
2,137,737
 
    
  
  
Segment operating profit (1):
                       
United States
   
$
216,931
 
   
178,177
 
   
147,021
 
Foreign
   
 
43,599
 
   
34,967
 
   
31,777
 
    
  
  
    
$
260,530
 
   
213,144
 
   
178,798
 
    
  
  
Identifiable assets:
                       
United States
   
$
1,084,552
 
   
935,874
 
   
871,727
 
Foreign
   
 
439,743
 
   
405,590
 
   
409,090
 
Corporate (2)
   
 
205,196
 
   
175,037
 
   
104,781
 
    
  
  
    
$
1,729,491
 
   
1,516,501
 
   
1,385,598
 
    
  
  
 
(1)
 
As required, the company implemented SFAS No. 142 in fiscal year 2002 and, accordingly, discontinued amortization of goodwill and trade names. In accordance with SFAS No. 142, segment operating profit for fiscal years 2001 and 2000 has not been restated and, therefore, includes amortization of goodwill and trade names. See “note 1” for further discussion.
(2)
 
Corporate identifiable assets are primarily cash, cash equivalents, short-term investments and equipment.
 
(8) Lease Commitments
 
The major portion of the company’s leases are for Sally Beauty Company stores. Other leases cover certain manufacturing and warehousing properties, office facilities and data processing equipment. At September 30, 2002, future minimum payments under non-cancelable leases by fiscal year are as follows:
 
    
Operating Leases
   
Capital Leases
(In thousands)
     
2003
   
$
67,635
   
115
2004
   
 
56,353
   
73
2005
   
 
41,750
   
58
2006
   
 
30,177
   
15
2007
   
 
16,212
   
—  
2008 and later
   
 
34,030
   
—  
    
  
Total minimum lease payments
   
$
246,157
   
261
    
  
 
Total rental expense for operating leases amounted to $92.3 million in 2002, $82.7 million in 2001 and $74.9 million in 2000. Certain leases require the company to pay real estate taxes, insurance, maintenance and special assessments.
 
9) Non-Recurring Gain
 
In the first quarter of fiscal year 2000, the company sold a European trademark with a nominal carrying value for $10.0 million. The transaction resulted in a non-recurring pre-tax gain of $9.3 million and an increase in net earnings of $6.0 million. The non-recurring gain added 11 cents to the company’s basic and diluted net earnings per share in fiscal year 2000.

14

 
Notes to the Consolidated Financial Statements (continued)
Alberto-Culver Company and Subsidiaries
 
(10) Quarterly Financial Data
 
Unaudited quarterly consolidated statement of earnings information for the fiscal years ended September 30, 2002 and 2001 is summarized below (in thousands, except per share amounts):
 
    
1st
Quarter
   
2nd Quarter
   
3rd Quarter
   
4th Quarter
2002:
                      
Net sales
   
$
614,260
   
657,762
   
681,074
   
697,880
Gross profit
   
$
300,672
   
317,838
   
332,396
   
343,540
Net earnings
   
$
29,294
   
32,650
   
36,401
   
39,320
Net earnings per share:
                      
Basic
   
$
.52
   
.57
   
.63
   
.68
Diluted
   
$
.50
   
.55
   
.61
   
.66
    
  
  
  
2001:
                      
Net sales
   
$
563,867
   
592,942
   
605,047
   
617,261
Gross profit
   
$
269,610
   
289,981
   
293,497
   
297,520
Net earnings
   
$
23,626
   
25,892
   
29,071
   
31,787
Net earnings per share:
                      
Basic
   
$
.42
   
.46
   
.52
   
.56
Diluted
   
$
.41
   
.45
   
.50
   
.55
    
  
  
  
 
(11) Acquisitions
 
The company made acquisitions during fiscal years 2002, 2001 and 2000 which individually were insignificant to the consolidated financial statements. The total amount paid for the acquisitions in fiscal years 2002, 2001 and 2000 were $120.1 million, $18.8 million and $146.8 million, respectively. The acquisitions were accounted for using the purchase method, and accordingly, the results of operations of the acquired businesses have been included in the consolidated financial statements from the dates of acquisition. Total goodwill of $92.0 million, $11.6 million and $101.9 million was recorded in fiscal years 2002, 2001 and 2000, respectively, as a result of the acquisitions. The company acquired $3.9 million and $16.5 million of trade names with indefinite lives in fiscal years 2002 and 2000, respectively. No trade names were acquired in fiscal year 2001.

15

 
Independent Auditors’ Report
Alberto-Culver Company and Subsidiaries
 
The Board of Directors and Stockholders
Alberto-Culver Company:
 
We have audited the accompanying consolidated balance sheets of Alberto-Culver Company and Subsidiaries as of September 30, 2002 and 2001 and the related consolidated statements of earnings, cash flows and stockholders’ equity for each of the years in the three-year period ended September 30, 2002. These consolidated financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Alberto-Culver Company and Subsidiaries as of September 30, 2002 and 2001 and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2002, in conformity with accounting principles generally accepted in the United States of America.
 
As discussed in “note 1” to the consolidated financial statements, in the year ended September 30, 2002, the company changed its method of accounting for goodwill and trade names.
 
/s/  KPMG LLP
KPMG LLP
Chicago, Illinois
October 22, 2002

16

 
Management’s Discussion and Analysis of Results of Operations and Financial Condition
Alberto-Culver Company and Subsidiaries
 
Results of Operations
 
Fiscal year 2002 marked the company’s eleventh consecutive year of record sales and record operating earnings. Net sales for the year ended September 30, 2002 were $2.65 billion, an increase of 11.4% over prior year sales of $2.38 billion. Net sales in 2000 were $2.14 billion.
 
Record net earnings of $137.7 million in 2002 increased 24.7% from the prior year’s net earnings of $110.4 million. Basic net earnings per share of $2.40 in fiscal year 2002 were 44 cents or 22.4% higher than 2001. Diluted net earnings per share increased 21.5% to $2.32 in fiscal year 2002 from $1.91 in fiscal year 2001.
 
As discussed later under “New Accounting Standards,” the company discontinued the amortization of goodwill and trade names at the beginning of fiscal year 2002. Had last year’s results been restated to eliminate goodwill and trade name amortization, net earnings for the year ended September 30, 2002 would have increased $18.5 million or 15.6% compared to the prior year. Basic net earnings per share would have increased 28 cents or 13.2% versus the prior year while diluted net earnings per share would have increased 26 cents or 12.6%.
 
As described in “note 9” to the consolidated financial statements, the company sold a European trademark for $10.0 million in fiscal year 2000. As a result, the company recognized a non-recurring pre-tax gain of $9.3 million and an increase in net earnings of $6.0 million. Accordingly, basic and diluted net earnings per share increased 11 cents as a result of the gain. Excluding the fiscal year 2000 non-recurring gain, fiscal year 2001 net earnings increased 13.6% and basic and diluted net earnings per share were 12.6% and 11.0% higher than 2000, respectively. Fiscal year 2001 net earnings increased $7.2 million or 7.0% compared to fiscal year 2000 net earnings including the non-recurring gain.
 
Sales of Alberto-Culver North America consumer products in fiscal year 2002 increased 9.7% to $617.0 million from $562.4 million in 2001. The current year sales increase was primarily due to higher sales of TRESemmé shampoos, conditioners and styling products, including TRESemmé Hydrology, St. Ives Swiss Formula apricot scrubs, lotions and body washes, Alberto VO5 shampoos and conditioners and Pro-Line’s ethnic hair care products including Soft & Beautiful, TCB and Motions, along with increased sales for custom label filling operations. In fiscal year 2001, sales increased 12.8% compared to 2000 sales of $498.8 million primarily due to the Pro-Line business acquired in March, 2000, the introduction of TRESemmé Hydrology and higher sales for St. Ives Swiss Formula facial products and body washes, the Motions line of hair care products and the Alberto VO5 line of shampoos and conditioners.
 
Alberto-Culver International consumer products sales increased 1.6% to $399.0 million in 2002 compared to $392.8 million in 2001. The fiscal year 2002 results were negatively impacted by the effect of foreign exchange rates. Had foreign exchange rates in fiscal year 2002 been the same as 2001, Alberto-Culver International sales would have increased 3.1%, primarily due to sales increases for the company’s European and Latin American businesses. In fiscal year 2001, International sales increased 1.5% to $392.8 million from $386.9 million in fiscal year 2000.
 
Sales of the “Specialty distribution - Sally” business segment increased to $1.67 billion in fiscal year 2002, compared to $1.45 billion and $1.28 billion in 2001 and 2000, respectively. The sales increases of 14.8% in 2002 and 13.9% in 2001 were attributable to the expansion of Sally’s full-service operations, including acquisitions, higher sales for established Sally Beauty Company outlets and the addition of stores during the year. The number of Sally stores increased 25.7% during the last three fiscal years to a total of 2,712, including 130 franchise stores, at September 30, 2002 compared to 2,428 and 2,325 at the end of fiscal years 2001 and 2000, respectively.
 
Cost of products sold as a percentage of sales was 51.2% in fiscal year 2002 compared to 51.6% in 2001 and 52.4% in 2000. The lower cost of products sold percentages in fiscal years 2002 and 2001 were primarily due to increased sales of higher margin products and lower costs.
 
Advertising, marketing, selling and administrative expenses increased 10.2% in fiscal year 2002 and 12.7% in 2001. The increases in fiscal years 2002 and 2001 primarily resulted from the higher selling and administration costs associated with the growth of the Sally Beauty Company business, including acquisitions, and higher expenditures for advertising and marketing.

17

 
Management’s Discussion and Analysis of Results of Operations and Financial Condition (continued)
Alberto-Culver Company and Subsidiaries
 
Advertising and marketing expenditures were $189.1 million, $179.0 million and $162.7 million in fiscal years 2002, 2001 and 2000, respectively. The higher expenses in fiscal year 2002 were mainly attributable to increased advertising expenditures for North America primarily related to TRESemmé, St. Ives Swiss Formula and Pro-Line’s ethnic hair care products.
 
Interest expense, net of interest income, was $22.6 million, $21.8 million and $19.2 million in fiscal years 2002, 2001 and 2000, respectively. Interest expense was $26.0 million in fiscal year 2002 versus $27.3 million in 2001 and $23.7 million in 2000. The decrease in interest expense in 2002 was primarily attributable to the elimination of borrowings under the company’s Swedish krona revolving credit facility and lower interest resulting from an interest rate swap. Interest income in fiscal year 2002 was $3.4 million compared to $5.5 million in 2001 and $4.5 million in 2000. The decrease in 2002 was principally due to lower interest rates on investments.
 
The provision for income taxes as a percentage of earnings before income taxes was 35.0% in 2002, 34.0% in 2001 and 33.1% in 2000. The higher tax rate in 2002 compared to the two previous fiscal years was primarily due to the mix of foreign taxable earnings and the favorable settlements of certain tax years in 2001 and 2000. Other factors which influenced the effective tax rates for those years are described in “note 6” to the consolidated financial statements.
 
Financial Condition
 
Working capital at September 30, 2002 was $523.8 million, an increase of $37.1 million from the prior year’s working capital of $486.7 million. The resulting current ratio was 2.14 to 1.00 at September 30, 2002 compared to 2.25 to 1.00 last year. The increase in working capital in fiscal year 2002 was primarily due to net working capital generated from the growth of the company, including acquisitions, substantially offset by cash outlays for the purchases of full-service beauty supply distributors, capital expenditures, cash dividends and purchases of treasury stock.
 
Cash and cash equivalents increased $15.5 million during fiscal year 2002 primarily due to cash flow from operating activities and cash received from the exercise of stock options, partially offset by $110.1 million of cash paid for acquisitions of full-service beauty supply distributors by Sally Beauty Company, $55.5 million of capital expenditures, the repurchase of $40.0 million of accounts receivable previously sold under the company’s conduit facility and $35.7 million of treasury stock purchases, primarily related to shares surrendered by employees in connection with stock option exercises.
 
Accounts receivable increased 23.2% to $209.0 million from $169.7 million last year. The increase was due to the repurchase of $40.0 million of accounts receivable previously sold under the company’s conduit facility. See “note 3” to the consolidated financial statements.
 
Inventories were $522.2 million at September 30, 2002, up 9.2% compared to $478.3 million last year. The increase primarily resulted from the acquisitions of full-service beauty supply distributors and the growth of Sally Beauty Company.
 
Other current assets increased $9.4 million to $35.5 million at September 30, 2002 primarily due to an increase in net deferred tax assets principally resulting from an increase in accrued expenses.
 
Net property, plant and equipment increased $12.0 million to $247.9 million at September 30, 2002. The increase resulted primarily from expenditures for additional Sally stores, acquisitions, office facilities, machinery and equipment and information systems, partially offset by depreciation during fiscal year 2002.
 
Net goodwill increased $79.1 million during fiscal year 2002 mainly due to goodwill resulting from acquisitions during the year, partially offset by the effects of foreign exchange rates.
 
Other assets increased $14.5 million to $74.3 million at September 30, 2002. The increase was primarily due to acquisitions of full-service beauty supply distributors.
 
Accounts payable of $233.9 million at September 30, 2002 increased $42.5 million compared to 2001 primarily due to increased inventory levels applicable to overall sales growth, including acquisitions, and the timing of vendor payments.
 
Accrued expenses increased 25.8% to $208.3 million from $165.5 million last year. The increase was primarily attributable to the continued growth of Sally Beauty Company, including acquisitions, and higher accruals for compensation and benefits, insurance, advertising and promotion expenditures.
 
Income taxes payable and deferred income taxes decreased $16.7 million to $52.8 million at September 30, 2002 mainly due to the timing of tax payments and tax benefits realized from the exercise of employee stock options in fiscal year 2002.
 
Other liabilities were $48.1 million at September 30, 2002, an increase of $18.1 million compared to last year. The increase was primarily due to higher accruals for insurance, incentive and retirement plans and a deferred gain resulting from the termination of an interest rate swap.

18

 
Management’s Discussion and Analysis of Results of Operations and Financial Condition (continued)
Alberto-Culver Company and Subsidiaries
 
Accumulated other comprehensive income – foreign currency translation increased $16.3 million to $77.6 million from $61.3 million last year. The increase was primarily attributable to the effect of the devaluation of the Argentine peso, partially offset by the weakening of the U.S. dollar versus certain foreign currencies, primarily the British pound and Swedish krona.
 
Total stockholders’ equity increased $126.5 million to $862.5 million as of September 30, 2002. The increase was primarily due to net earnings for the fiscal year and proceeds from the exercise of employee stock options, partially offset by dividend payments.
 
Liquidity and Capital Resources
 
The company’s primary sources of cash over the past three years have been from funds provided by operating activities and the issuance of $200 million of 8.25% senior notes in April, 2000. Operating activities provided cash of $231.7 million, $165.2 million and $119.1 million in fiscal years 2002, 2001 and 2000, respectively.
 
The company has obtained long-term financing as needed to fund acquisitions and other growth opportunities. Funds also may be obtained prior to their actual need in order to take advantage of opportunities in the debt markets. In April, 2000, the company issued $200 million of 8.25% senior notes due November, 2005. In June, 1998, the company issued $120 million of 6.375% debentures due June, 2028. In September, 1997, the company obtained a five-year, $200 million revolving credit facility, which was increased to $250 million in fiscal year 2000 and subsequently replaced with a three-year, $300 million revolving credit facility in fiscal year 2002. The current $300 million facility, which had no borrowings outstanding at September 30, 2002, may be drawn in U.S. dollars or certain foreign currencies. Under debt covenants, the company has the ability to incur up to $969 million of additional borrowings.
 
The primary uses of cash during the three-year period ended September 30, 2002 were $273.8 million for acquisitions, $209.9 million for repayments of long-term debt, $129.7 million for capital expenditures and $54.7 million for cash dividends.
 
Compared to 1999, cash dividends per share increased 38.2% over the three-year period ended September 30, 2002. Cash dividends paid on Class A and Class B common stock were $.3525 per share in 2002, $.3225 per share in 2001 and $.29 per share in 2000.
 
The company anticipates that cash flows from operations and available credit will be sufficient to fund operating requirements in future years. During fiscal year 2003, the company expects that cash will continue to be used for acquisitions, capital expenditures, new product development, market expansion and dividend payments. The company may also purchase shares of its common stock depending on market conditions. During fiscal years 1998 and 1999, the Board of Directors authorized the company to purchase up to 9.0 million shares of its Class A common stock. Prior to the fourth quarter of fiscal year 2002, the company had purchased 7.3 million Class A common shares under this program at a total cost of $162.9 million with the last purchase occurring in October, 1999. In July, 2002, the Board of Directors re-authorized the company to purchase up to 1.7 million shares of Class A common stock remaining under this program. In the fourth quarter of fiscal year 2002, the company purchased 164,200 Class A shares at a total cost of $7.4 million. A total of 1,535,800 Class A shares remain available for purchase under this program as of September 30, 2002. During fiscal year 2002, the company also acquired $28.3 million of Class A and Class B common shares surrendered by employees in connection with the exercises of stock options and the payment of withholding taxes as provided under the terms of certain incentive plans. Shares acquired under these plans are not subject to the company’s stock repurchase program.

19

 
Management’s Discussion and Analysis of Results of Operations and Financial Condition (continued)
Alberto-Culver Company and Subsidiaries
 
The following table reflects a summary of contractual cash obligations and commitments outstanding by future payment date as of September 30, 2002:
 
    
Payments Due by Fiscal Year
    
2003
   
2004
   
2005
   
2006
   
2007
and Later
   
Total
    
(In thousands)
Long-term debt, including current maturities (1)
   
$
1,189
   
96
   
63
   
200,021
   
120,001
   
321,370
Operating leases (2)
   
 
67,635
   
56,353
   
41,750
   
30,177
   
50,242
   
246,157
Other long-term obligations (3)
   
 
3,577
   
3,506
   
2,489
   
2,089
   
6,255
   
17,916
    
  
  
  
  
  
Total
   
$
72,401
   
59,955
   
44,302
   
232,287
   
176,498
   
585,443
    
  
  
  
  
  
 
(1)
 
The company’s $120.0 million 6.375% debentures are due in June, 2028, but are subject to repayment, at the option of the holders, in June, 2008.
(2)
 
In accordance with accounting principles generally accepted in the United States of America, these obligations are not reflected in the accompanying consolidated balance sheets.
(3)
 
Other long-term obligations represent commitments under various acquisition-related agreements including non-compete, consulting and severance agreements. These obligations are included in other liabilities in the accompanying consolidated balance sheets.
 
At September 30, 2002, the company had $15.7 million in outstanding standby letters of credit related to various insurance programs. The company does not have other unconditional purchase obligations or significant other commercial commitments.
 
The company is in compliance with all covenants and other requirements of its revolving credit agreement and public debt securities. Additionally, the revolving credit agreement and the indenture for the public debt securities do not include rating triggers or subjective clauses that would accelerate maturity dates.
 
Inflation
 
The company was not significantly affected by inflation during the past three years. Management continuously attempts to resist cost increases and counteract the effects of inflation through productivity improvements, cost reduction programs and price increases within the constraints of the highly competitive markets in which the company operates.
 
Market Risk
 
As a multinational corporation that manufactures and markets products in countries throughout the world, the company is subject to certain market risks including foreign currency fluctuations, interest rates and government actions. The company considers a variety of practices to manage these market risks, including, when deemed appropriate, the occasional use of derivative financial instruments. The company uses derivative financial instruments only for risk management and does not use them for trading or speculative purposes. As of September 30, 2002, the company had no material derivative financial instruments outstanding.
 
The company is exposed to potential gains or losses from foreign currency fluctuations affecting net investments and earnings denominated in foreign currencies. The company’s primary exposures are to changes in exchange rates for the U.S. dollar versus the Swedish krona, British pound sterling, Canadian dollar, Euro, Australian dollar, Argentine peso and Mexican peso.
 
The company’s various currency exposures often offset each other, providing a natural hedge against currency risk. Periodically, specific foreign currency transactions (e.g. inventory purchases, intercompany transactions, etc.) are hedged with forward contracts to reduce the foreign currency risk. Gains and losses on these foreign currency hedges are included in the basis of the underlying hedged transactions. As of September 30, 2002, the company had no material outstanding foreign currency contracts.
 
The company considers combinations of fixed rate and variable rate debt, along with varying maturities, in its management of interest rate risk. At September 30, 2002, the company had no variable rate long-term debt outstanding.

20

 
Management’s Discussion and Analysis of Results of Operations and Financial Condition (continued)
Alberto-Culver Company and Subsidiaries
 
The company has periodically used interest rate swaps to manage interest rate risk on debt securities. These instruments allow the company to exchange variable rate debt into fixed rate or fixed rate debt into variable rate. Interest rate differentials paid or received on these arrangements are recognized as adjustments to interest expense over the life of the agreement. At September 30, 2002, the company had no interest rate swaps outstanding.
 
In May, 2002, the company entered into an interest rate swap agreement with a notional amount of $100 million in order to convert a portion of its fixed rate 8.25% senior notes into a variable rate obligation. In July, 2002, the company terminated the interest rate swap resulting in a gain of $2.8 million, which is being amortized over the remaining term of the 8.25% senior notes as a reduction of interest expense. The unamortized portion of the gain is included in other liabilities and totaled $2.6 million as of September 30, 2002.
 
The company’s quantitative information on market risk as of September 30, 2002 is as follows (in millions):
 
    
Debt
Expected Maturities
   
Short-Term
Fixed Rate
     
Long-Term Fixed Rate(1)
   
Total
2003 (4.3% average rate)
   
$
3.7
     
—  
   
3.7
2004 (8.5% average rate)
   
 
—  
     
0.1
   
0.1
2005 (9.2% average rate)
   
 
—  
     
0.1
   
0.1
2006 (8.3% average rate)
   
 
—  
     
200.0
   
200.0
Thereafter (6.4% average rate)
   
 
—  
     
120.0
   
120.0
    
    
  
Total
   
$
3.7
     
320.2
   
323.9
    
    
  
Fair value
   
$
3.7
     
336.9
   
340.6
    
    
  
 
 
(1)
 
The company’s $120.0 million 6.375% debentures are due in June, 2028, but are subject to repayment, at the option of the holders, in June, 2008.
 
The company is exposed to credit risk on certain assets, primarily cash equivalents, short-term investments and accounts receivable. The credit risk associated with cash equivalents and short-term investments is mitigated by the company’s policy of investing in a diversified portfolio of securities with high credit ratings.
 
The company provides credit to customers in the ordinary course of business and performs ongoing credit evaluations. Concentrations of credit risk with respect to trade receivables are limited due to the number of customers comprising the company’s customer base. Although Wal-Mart is a significant customer of the company’s consumer products segments, sales to Wal-Mart are less than 10% of the company’s consolidated net sales in fiscal year 2002. The company believes its allowance for doubtful accounts is sufficient to cover customer credit risks.
 
New Accounting Standards
 
In December, 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition.” SAB No. 101 provides guidance in applying generally accepted accounting principles to revenue recognition. The company implemented SAB No. 101 in the first quarter of fiscal year 2001 and its adoption did not have a material effect on the consolidated financial statements.
 
In September, 2000, the Financial Accounting Standards Board’s (FASB) Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-10, “Accounting for Shipping and Handling Fees and Costs.” EITF No. 00-10 addresses the income statement classification of shipping and handling fees and costs. The company implemented EITF No. 00-10 in the first quarter of fiscal year 2001 and its adoption did not have a material effect on the consolidated financial statements.
 
In September, 2000, the FASB issued Statement of Accounting Standards (SFAS) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 140 replaces SFAS No. 125 and revises the standards for accounting for securitizations and other transfers of financial assets and collateral. The company implemented SFAS No. 140 in the third quarter of fiscal year 2001 and its adoption did not have a material effect on the consolidated financial statements.

21

 
Management’s Discussion and Analysis of Results of Operations and Financial Condition (continued)
Alberto-Culver Company and Subsidiaries
 
In November, 2001, the FASB’s EITF released Issue No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products.” EITF No. 01-09 consolidates EITF No. 00-14, “Accounting for Certain Sales Incentives,” which addresses the recognition, measurement and income statement classification for various types of sales incentives including coupons, rebates and free products, and EITF No. 00-25, “Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s Products,” which addresses the income statement classification for various types of consideration paid by a vendor to a retailer. EITF No. 01-09 does not change the accounting treatment set forth by EITF Nos. 00-14 and 00-25. As required, the company adopted the provisions of EITF No. 01-09 in the first quarter of fiscal year 2002. In accordance with EITF No. 01-09, the company reclassified certain amounts for fiscal years 2001 and 2000 to conform to the current year’s presentation resulting in a $115.1 million reduction in net sales, an $11.1 million increase in cost of products sold and a $126.2 million decrease in promotion expense for fiscal year 2001 and a $109.4 million reduction in net sales, a $14.3 million increase in cost of products sold and a $123.7 million decrease in promotion expense for fiscal year 2000. Consolidated net earnings were not affected by these reclassifications.
 
In June, 2001, the FASB issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 addresses financial accounting and reporting for business combinations. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets, requires companies to discontinue the amortization of goodwill and certain other intangible assets and requires an impairment test of existing goodwill and certain other intangible assets based on a fair value method. As required, the company adopted SFAS No. 141 in the fourth quarter of fiscal year 2001. The company also adopted SFAS No. 142 as required in the fourth quarter of fiscal year 2001 for new acquisitions and in the first quarter of fiscal year 2002 for previously acquired intangibles. In accordance with SFAS No. 142, the company determined that its trade names have indefinite lives and, therefore, the amortization of trade names was discontinued effective October 1, 2001. Based on the results of the company’s transitional impairment testing, no impairment of indefinite-lived trade names existed at October 1, 2001. In addition, as required by SFAS No. 142, the company ceased the amortization of goodwill effective October 1, 2001. In accordance with the adoption provisions of SFAS No. 142, the company has completed the required transitional goodwill impairment tests and has determined that goodwill was not impaired as of October 1, 2001, the date of adoption. Prospectively, goodwill and trade names will be reviewed for impairment at least annually, with ongoing recoverability monitored based on applicable reporting unit performance and consideration of significant events or changes in the overall business environment.
 
In accordance with SFAS No. 142, the consolidated statements of earnings for fiscal years 2001 and 2000 have not been restated for the effects of ceasing goodwill and trade name amortization. Had goodwill and trade name amortization been discontinued effective October 1, 1999, net earnings and net earnings per share for the fiscal years ended September 30, 2002, 2001 and 2000 would have been as follows:
 
    
2002
   
2001
   
2000*
    
(In thousands, except per share data)
Reported net earnings
   
$
137,665
   
110,376
   
103,184
Elimination of goodwill and trade name amortization, net of income taxes
   
 
—  
   
8,759
   
7,832
    
  
  
Pro forma net earnings
   
$
137,665
   
119,135
   
111,016
    
  
  
Reported basic net earnings per share
   
$
2.40
   
1.96
   
1.85
Elimination of goodwill and trade name amortization, net of income taxes
   
 
—  
   
.16
   
.14
    
  
  
Pro forma basic net earnings per share
   
$
2.40
   
2.12
   
1.99
    
  
  
Reported diluted net earnings per share
   
$
2.32
   
1.91
   
1.83
Elimination of goodwill and trade name amortization, net of income taxes
   
 
—  
   
.15
   
.14
    
  
  
Pro forma diluted net earnings per share
   
$
2.32
   
2.06
   
1.97
    
  
  
*
 
Fiscal year 2000 includes a non-recurring gain from the sale of a trademark. The non-recurring gain increased net earnings by $6.0 million and basic and diluted net earnings per share by 11 cents.
 
The change in the carrying amount of goodwill by operating segment for the fiscal year ended September 30, 2002 is as follows:
 
    
Consumer Products
       
Specialty Distribution-Sally
     
Total
  
    
North America
     
International
          
    
(In thousands)
  
Balance at September 30, 2001
   
$
69,379
 
   
79,648
 
     
115,312
 
   
264,339
 
Additions, net of purchase price adjustments
   
 
(214
)
   
—  
 
     
92,240
 
   
92,026
 
Foreign currency translation effect
   
 
—  
 
   
(12,906
)
     
(28
)
   
(12,934
)
    
  
    
  
Balance at September 30, 2002
   
$
69,165
 
   
66,742
 
     
207,524
 
   
343,431
 
    
  
    
  

22

 
Management’s Discussion and Analysis of Results of Operations and Financial Condition (continued)
Alberto-Culver Company and Subsidiaries
 
Indefinite-lived trade names by operating segment at September 30, 2002 and 2001 are as follows:
 
    
2002
   
2001
    
(In thousands)
Consumer products:
            
Alberto-Culver North America
   
$
45,414
   
45,414
Alberto-Culver International
   
 
30,145
   
33,857
    
  
Total consumer products
   
 
75,559
   
79,271
Specialty distribution - Sally
   
 
4,122
   
261
    
  
    
$
79,681
   
79,532
    
  
 
In August, 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets, including the presentation of discontinued operations in the statement of earnings. The company is required to adopt the provisions of SFAS No. 144 no later than the first quarter of fiscal year 2003 and does not expect its implementation to have a material effect on the consolidated financial statements.
 
In January, 2002, the FASB’s EITF released Issue No. 00-23, “Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25, Accounting for Stock Issued to Employees, and FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation.” Issue 41 of EITF No. 00-23 addresses the accounting consequences of converting any class of stock into a surviving class of stock and, in connection therewith, converting outstanding stock options in that class of stock into stock options in the surviving class of stock. Issue 41 of EITF No. 00-23 is effective for any elimination of a class of stock occurring after January 24, 2002. As described in “note 4” to the consolidated financial statements, the company has two classes of common stock, Class A and Class B. All, but not less than all, of the Class A shares may at any time be converted into Class B on a share-for-share basis at the option of the company. From time-to-time, the Board of Directors has considered the question of whether it would be advisable and in the best interests of the company and its shareholders to declassify its classes of common stock and revert to the single class capital structure which existed before 1986. Most recently, in the spring of 2002, the board undertook a serious review of a possible declassification. Although no action or board vote was undertaken in that regard, it was the sense of the board that a declassification would have significant merit, but that it may not have been advisable and in the best interests of the company and its shareholders at that time because of EITF No. 00-23. Under Issue 41 of EITF No. 00-23, a declassification by the company may result in a material non-cash charge in the period of declassification and in each subsequent quarter of the remaining vesting periods of outstanding Class A stock options and restricted stock. The Board of Directors reserves the right to revisit this matter from time-to-time and at any time could conclude that it would be advisable and in the best interests of company and it shareholders to pursue a declassification with or without a resolution of this accounting issue.
 
In July, 2002, the FASB issued SFAS No 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The company is required to adopt the provisions of SFAS No. 146 prospectively for exit or disposal activities initiated after December 31, 2002 and does not expect its implementation to have a material effect on the consolidated financial statements.
 
Critical Accounting Policies
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the financial statements. Actual results may differ from these estimates. Management believes these estimates and assumptions are reasonable.
 
Accounting policies are considered critical when they require management to make assumptions about matters that are highly uncertain at the time the accounting estimate is made and when different estimates that management reasonably could have used have a material impact on the presentation of the company’s financial condition, changes in financial condition or results of operations.
 
The company’s critical accounting policies relate to the calculation and treatment of sales incentives, allowance for doubtful accounts and the valuation of inventories.
 
Sales Incentives – Sales incentives primarily include trade promotion activities and consumer coupons. The company records accruals for sales incentives based on estimates of the ultimate cost of each program. The company tracks its commitments for sales incentive programs and, using historical experience, records an accrual at the end of each period for the estimated incurred, but unpaid, costs of these programs. Actual costs differing from estimated costs could significantly affect these estimates and the related accruals.

23

 
Management’s Discussion and Analysis of Results of Operations and Financial Condition (continued)
Alberto-Culver Company and Subsidiaries
 
Allowance for Doubtful Accounts – The allowance for doubtful accounts requires management to estimate future amounts of receivables to be collected. Management records allowances for doubtful accounts based on historical collection statistics and current customer credit information. These estimates could be significantly affected as a result of actual collections differing from historical statistics or changes in a customer’s credit status.
 
Valuation of Inventories – When necessary, the company provides allowances to adjust the carrying value of inventories to the lower of cost or market, including costs to sell or dispose, and for estimated inventory shrinkage. Estimates of the future demand for the company’s products, anticipated product re-launches, changes in formulas and packaging and reductions of stock-keeping units are key factors used by management in assessing the net realizable value of inventories. The company estimates inventory shrinkage based on historical experience. Actual results differing from these estimates could significantly affect the company’s inventories and cost of products sold.

24

 
Market Price of Common Stock and Cash Dividends Per Share
Alberto-Culver Company and Subsidiaries
 
The high and low sales prices of both classes of the company’s common stock on the New York Stock Exchange and cash dividends per share in each quarter of fiscal years 2002 and 2001 are as follows:
 
    
Market Price Range
   
Cash Dividends Per Share
    
2002
   
2001
   
    
High
   
Low
   
High
   
Low
   
2002
   
2001
Class A (NYSE Symbol ACVA):
                                  
First Quarter
   
$
39.80
   
32.26
   
36.50
   
24.00
   
$
.0825
   
.0750
Second Quarter
   
$
49.33
   
37.15
   
36.00
   
30.63
   
 
.0900
   
.0825
Third Quarter
   
$
51.95
   
44.52
   
37.40
   
30.90
   
 
.0900
   
.0825
Fourth Quarter
   
$
48.05
   
39.60
   
39.50
   
31.70
   
 
.0900
   
.0825
                          
  
                          
$
.3525
   
.3225
                          
  
Class B (NYSE Symbol ACV):
                                  
First Quarter
   
$
45.90
   
38.13
   
43.50
   
28.44
   
$
.0825
   
.0750
Second Quarter
   
$
55.82
   
42.80
   
42.75
   
36.88
   
 
.0900
   
.0825
Third Quarter
   
$
57.91
   
47.70
   
44.45
   
37.15
   
 
.0900
   
.0825
Fourth Quarter
   
$
50.95
   
41.55
   
46.26
   
37.35
   
 
.0900
   
.0825
                          
  
                          
$
.3525
   
.3225
                          
  
 
Stockholders of record, which excludes a large number of stockholders with shares held in “street name,” totaled 877 for Class A shares and 865 for Class B shares as of November 15, 2002.
 
 
 
 
 
 
 
The following trademarks and servicemarks owned by Alberto-Culver Company and its subsidiaries appear in this report: 4+4, Alberto, Alberto European, Alberto VO5, Armstrong-McCall, Beauty Systems Group, BLIW, Botanicals, BSG, Cederroth International, FDS, Grilling Blends, Hydrology, Indola, Just For Me, Molly McButter, Motions, Mrs. Dash, Pro-Line, Sally, Sally Beauty, Sally Beauty Supply, Soft & Beautiful, St. Ives, St. Ives Swiss Formula, Salvekvick, Static Guard, TCB, TRESemmé, TRESpac and VO5.
 
The following are trademarks and servicemarks of other companies which appear in this report:
Farouk (Farouk Systems, Inc.), Graham Webb (Graham Webb International, Inc.), L’Oreal (L’Oreal S.A.), Matrix (L’Loreal USA Creative, Inc.), Paul Mitchell (John Paul Mitchell Systems), Redken (L’Oreal USA Creative, Inc.), Sebastian (Sebastian International, Inc.), Shiseido (Shiseido Company Limited), TIGI (Toni & Guy (USA) Limited), Wal-Mart (Wal-Mart Stores, Inc.) and WELLA (The Wella Corporation).

25

Selected Financial Data
Alberto-Culver Company and Subsidiaries
 
As of or for the fiscal year ended September 30,
   
2002
  
2001
  
2000
    
1999
  
1998
  
1997
    
1996
  
1995
  
1994
  
1993
    
1992
(In thousands, except per share data)
Operating Results:
                                                    
Net sales (1)
  
$
2,650,976
  
2,379,117
  
2,137,737
 
  
1,882,719
  
1,743,955
  
1,694,728
 
  
1,523,939
  
1,297,589
  
1,150,514
  
1,093,330
 
  
1,038,096
Cost of products sold  (1)
  
 
1,356,530
  
1,228,509
  
1,120,079
 
  
990,568
  
916,499
  
896,152
 
  
816,343
  
689,793
  
605,900
  
572,770
 
  
541,153
Interest expense
  
 
26,013
  
27,309
  
23,747
 
  
14,849
  
12,170
  
11,826
 
  
15,905
  
9,946
  
8,630
  
9,661
 
  
11,665
Earnings before provision for income taxes (2)
  
 
211,792
  
167,236
  
154,281
(3)
  
133,783
  
132,378
  
136,121
(4)
  
100,014
  
84,242
  
71,078
  
65,129
 
  
61,356
Provision for income taxes
  
 
74,127
  
56,860
  
51,097
(3)
  
47,493
  
49,311
  
50,704
(4)
  
37,270
  
31,591
  
27,010
  
23,857
 
  
22,740
Net earnings (2)
  
 
137,665
  
110,376
  
103,184
(3)
  
86,290
  
83,067
  
85,417
(4)
  
62,744
  
52,651
  
44,068
  
41,272
 
  
38,616
Net earnings per share (2)(5):
                                                    
Basic
  
 
2.40
  
1.96
  
1.85
(3)
  
1.53
  
1.46
  
1.53
(4)
  
1.13
  
.95
  
.79
  
.72
 
  
.68
Diluted
  
 
2.32
  
1.91
  
1.83
(3)
  
1.51
  
1.37
  
1.41
(4)
  
1.06
  
.94
  
.79
  
.72
 
  
.68
Weighted average shares
outstanding (5):
                                              
Basic
  
 
57,380
  
56,176
  
55,790
 
  
56,378
  
56,845
  
55,967
 
  
55,571
  
55,430
  
56,063
  
57,361
 
  
56,726
Diluted
  
 
59,214
  
57,838
  
56,410
 
  
57,162
  
62,420
  
63,377
 
  
62,776
  
57,053
  
56,083
  
57,434
 
  
56,726
Shares outstanding at
year end (5):
                                                    
Class A
  
 
25,847
  
23,871
  
22,982
 
  
22,768
  
24,063
  
22,610
 
  
22,097
  
21,926
  
21,826
  
23,126
 
  
23,491
Class B
  
 
32,332
  
32,957
  
32,957
 
  
32,957
  
33,148
  
33,533
 
  
33,533
  
33,533
  
33,534
  
33,604
 
  
33,604
Financial Condition:
                                                    
Current ratio
  
 
2.14 to 1
  
2.25 to 1
  
2.17 to 1
 
  
1.92 to 1
  
1.89 to 1
  
1.86 to 1
 
  
1.79 to 1
  
2.28 to 1
  
1.86 to 1
  
2.05 to 1
 
  
1.88 to 1
Working capital
  
$
523,770
  
486,646
  
399,748
 
  
309,153
  
277,940
  
269,007
 
  
226,123
  
301,706
  
185,747
  
205,050
 
  
193,080
Cash, cash equivalents and short-term investments
  
 
217,485
  
202,839
  
114,951
 
  
57,816
  
73,305
  
87,600
 
  
71,557
  
146,985
  
50,362
  
73,947
 
  
80,158
Property, plant and equipment, net
  
 
247,850
  
235,822
  
240,091
 
  
238,753
  
223,476
  
190,998
 
  
175,920
  
157,791
  
132,881
  
124,449
 
  
121,703
Total assets
  
 
1,729,491
  
1,516,501
  
1,385,598
 
  
1,181,494
  
1,065,343
  
998,056
 
  
908,412
  
814,757
  
610,208
  
593,046
 
  
610,400
Long-term debt
  
 
320,181
  
321,183
  
340,948
 
  
225,173
  
171,760
  
149,441
 
  
161,548
  
183,094
  
42,976
  
80,184
 
  
84,549
Stockholders’ equity
  
 
862,459
  
736,009
  
632,260
 
  
565,780
  
531,150
  
495,001
 
  
424,242
  
370,574
  
326,970
  
298,857
 
  
286,222
Cash dividends
  
 
20,351
  
18,215
  
16,182
 
  
14,394
  
13,220
  
10,909
 
  
9,724
  
8,590
  
7,708
  
7,893
(6)
  
6,665
Cash dividends per
share (5)(6)
  
 
.3525
  
.3225
  
.290
 
  
.255
  
.230
  
.195
 
  
.175
  
.155
  
.1375
  
.1375
(6)
  
.1175
(1)
 
As required, the company implemented the Financial Accounting Standards Board’s (FASB) Emerging Issues Task Force (EITF) Issue No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products,” in fiscal year 2002. In accordance with EITF No. 01-09, net sales and cost of products sold for fiscal years 1992 through 2001 have been reclassified to conform to the current year’s presentation. Net earnings was not affected by these reclassifications.
(2)
 
As required, the company implemented the FASB’s Statement of Financial Accounting Standards (SFAS) No. 142 ,“Goodwill and Other Intangible Assets,” in fiscal year 2002 and, accordingly, discontinued the amortization of goodwill and trade names. In accordance with SFAS No. 142, earnings before provision for income taxes, net earnings and net earnings per share for fiscal years 1992 through 2001 have not been restated and, therefore, include amortization of goodwill and trade names.
(3)
 
Fiscal year 2000 includes a non-recurring gain from the sale of a trademark (note 9). The non-recurring gain increased earnings before provision for income taxes by $9.3 million, net earnings by $6.0 million and basic and diluted net earnings per share by 11 cents.
(4)
 
Fiscal year 1997 includes a non-recurring gain from an insurance settlement for the loss of the company’s corporate airplane. The non-recurring gain increased earnings before provision for income taxes by $15.6 million, net earnings by $9.8 million and basic and diluted net earnings per share by 18 cents and 16 cents, respectively.
(5)
 
Net earnings per share, shares outstanding and cash dividends per share have been restated to reflect the 100% stock dividend on the company’s Class A and Class B outstanding shares in February, 1997.
(6)
 
Cash dividends per share on Class A common stock and Class B common stock have been equal since the Class A shares were issued in April, 1986. Cash dividends paid in fiscal 1993 included a one-time extraordinary dividend of one cent per share in recognition of the company surpassing one billion dollars in net sales for the fiscal year ended September 30, 1992.

26