Prepared by R.R. Donnelley Financial -- FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED:
 
June 30, 2002
 
-OR-
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File No. 1-5050
 
 
ALBERTO-CULVER COMPANY
(Exact name of registrant as specified in its charter)
 
 
Delaware

    
36-2257936

(State or other jurisdiction of
    
(I.R.S. Employer
incorporation or organization)
    
Identification No.)
 
 
2525 Armitage Avenue Melrose Park, Illinois

    
60160

(Address of principal executive offices)
    
(Zip code)
 
 
Registrant’s telephone number, including area code: (708) 450-3000
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.      YES    X        NO        
 
At June 30, 2002, the company had 25,765,479 shares of Class A common stock and 32,331,640 shares of Class B common stock outstanding.


PART I
 
ITEM 1. FINANCIAL STATEMENTS
 
ALBERTO-CULVER COMPANY AND SUBSIDIARIES
 
Consolidated Statements of Earnings
Three Months Ended June 30, 2002 and 2001
(in thousands, except per share data)
 
    
(Unaudited)

    
2002

  
2001

Net sales (Note 7)
  
$
681,074
  
605,047
Cost of products sold (Note 7)
  
 
348,678
  
311,550
    

  
Gross profit
  
 
332,396
  
293,497
Advertising, marketing, selling and administrative (Note 7)
  
 
270,885
  
244,165
    

  
Operating earnings
  
 
61,511
  
49,332
Interest expense, net of interest income of $680 in 2002 and $1,430 in 2001
  
 
5,509
  
5,285
    

  
Earnings before provision for income taxes
  
 
56,002
  
44,047
Provision for income taxes
  
 
19,601
  
14,976
    

  
Net earnings (Note 6)
  
$
36,401
  
29,071
    

  
Net earnings per share (Note 6)
           
Basic
  
$
0.63
  
0.52
    

  
Diluted
  
$
0.61
  
0.50
    

  
Cash dividends paid per share
  
$
0.09
  
0.0825
    

  
 
See Notes to Consolidated Financial Statements.

2


ALBERTO-CULVER COMPANY AND SUBSIDIARIES
 
Consolidated Statements of Earnings
Nine Months Ended June 30, 2002 and 2001
(in thousands, except per share data)
 
    
(Unaudited)

    
2002

  
2001

Net sales (Note 7)
  
$
1,953,096
  
1,761,856
Cost of products sold (Note 7)
  
 
1,002,190
  
908,768
    

  
Gross profit
  
 
950,906
  
853,088
Advertising, marketing, selling and administrative (Note 7)
  
 
782,613
  
717,306
    

  
Operating earnings
  
 
168,293
  
135,782
Interest expense, net of interest income of $2,549 in 2002 and $3,939 in 2001
  
 
16,993
  
16,707
    

  
Earnings before provision for income taxes
  
 
151,300
  
119,075
Provision for income taxes
  
 
52,955
  
40,486
    

  
Net earnings (Note 6)
  
$
98,345
  
78,589
    

  
Net earnings per share (Note 6)
           
Basic
  
$
1.72
  
1.40
    

  
Diluted
  
$
1.66
  
1.36
    

  
Cash dividends paid per share
  
$
.2625
  
.240
    

  
 
See Notes to Consolidated Financial Statements.

3


ALBERTO-CULVER COMPANY AND SUBSIDIARIES
 
Consolidated Balance Sheets
June 30, 2002 and September 30, 2001
(dollars in thousands, except share data)
 
    
(Unaudited) June 30,
2002

    
September 30, 2001

 
ASSETS
             
Current assets:
               
Cash and cash equivalents
  
$
149,464
 
  
201,970
 
Short-term investments
  
 
—  
 
  
869
 
Receivables, less allowance for doubtful accounts ($15,950 at 6/30/02 and
$11,387 at 9/30/01)
  
 
218,008
 
  
169,657
 
Inventories:
               
Raw materials
  
 
37,844
 
  
41,521
 
Work-in-process
  
 
4,811
 
  
4,782
 
Finished goods
  
 
470,976
 
  
432,008
 
    


  

Total inventories
  
 
513,631
 
  
478,311
 
Other current assets
  
 
28,275
 
  
26,142
 
    


  

Total current assets
  
 
909,378
 
  
876,949
 
    


  

Property, plant and equipment at cost, less accumulated depreciation ($263,696 at 6/30/02 and $236,035 at 9/30/01)
  
 
250,949
 
  
235,822
 
Goodwill, net
  
 
340,338
 
  
264,339
 
Trade names, net
  
 
75,783
 
  
79,532
 
Other assets
  
 
66,547
 
  
59,859
 
    


  

Total assets
  
$
1,642,995
 
  
1,516,501
 
    


  

LIABILITIES AND STOCKHOLDERS’ EQUITY
             
Current liabilities:
               
Short-term borrowings and current maturities of long-term debt
  
$
3,818
 
  
2,886
 
Accounts payable
  
 
214,736
 
  
191,410
 
Accrued expenses
  
 
194,483
 
  
165,525
 
Income taxes
  
 
13,398
 
  
30,482
 
    


  

Total current liabilities
  
 
426,435
 
  
390,303
 
    


  

Long-term debt
  
 
322,455
 
  
321,183
 
Deferred income taxes
  
 
39,286
 
  
39,086
 
Other liabilities
  
 
33,014
 
  
29,920
 
Stockholders’ equity:
               
Common stock, par value $.22 per share:
               
Class A authorized 75,000,000 shares; issued 30,612,798 shares
  
 
6,735
 
  
6,735
 
Class B authorized 75,000,000 shares; issued 37,710,655 shares
  
 
8,296
 
  
8,296
 
Additional paid-in capital
  
 
195,136
 
  
190,368
 
Retained earnings
  
 
863,016
 
  
779,792
 
Deferred compensation
  
 
(6,256
)
  
(4,826
)
                 
Accumulated other comprehensive income—foreign currency translation
  
 
(75,310
)
  
(61,284
)
    


  

    
 
991,617
 
  
919,081
 
Less treasury stock at cost (Class A common shares: 4,847,319 at 6/30/02 and 6,741,946 at 9/30/01; Class B common shares:
               
5,379,015 at 6/30/02 and 4,753,184 at 9/30/01)
  
 
(169,812
)
  
(183,072
)
    


  

Total stockholders’ equity
  
 
821,805
 
  
736,009
 
    


  

Total liabilities and stockholders’ equity
  
$
1,642,995
 
  
1,516,501
 
    


  

 
See Notes to Consolidated Financial Statements.

4


 
ALBERTO-CULVER COMPANY AND SUBSIDIARIES
 
Consolidated Statements of Cash Flows
Nine Months Ended June 30, 2002 and 2001
(in thousands)
 
    
(Unaudited)

 
    
2002

    
2001

 
Cash Flows from Operating Activities:
               
Net earnings
  
$
98,345
 
  
78,589
 
Adjustments to reconcile net earnings to net cash provided by operating activities:
               
Depreciation
  
 
32,603
 
  
28,189
 
Amortization of goodwill, trade names and other assets
  
 
2,883
 
  
10,319
 
Cash effects of changes in (exclusive of acquisitions):
               
Receivables, net
  
 
(1,316
)
  
(10,861
)
Inventories, net
  
 
(15,627
)
  
(38,447
)
Other current assets
  
 
282
 
  
(1,544
)
Accounts payable and accrued expenses
  
 
40,349
 
  
32,391
 
Income taxes
  
 
(15,107
)
  
(274
)
Other assets
  
 
(6,276
)
  
(4,478
)
Other liabilities
  
 
955
 
  
2,542
 
    


  

Net cash provided by operating activities
  
 
137,091
 
  
96,426
 
    


  

Cash Flows from Investing Activities:
               
Short-term investments
  
 
897
 
  
(544
)
Capital expenditures
  
 
(45,132
)
  
(23,514
)
Payments for purchased businesses, net of acquired companies’ cash
  
 
(100,635
)
  
(19,359
)
Proceeds from disposals of assets
  
 
1,386
 
  
964
 
    


  

Net cash used by investing activities
  
 
(143,484
)
  
(42,453
)
    


  

Cash Flows from Financing Activities:
               
Short-term borrowings, net
  
 
1,009
 
  
(1,074
)
Proceeds from long-term debt
  
 
193
 
  
27
 
Repayments of long-term debt
  
 
(281
)
  
(12,579
)
Repurchase of previously sold accounts receivable
  
 
(40,000
)
  
—  
 
Cash dividends paid
  
 
(15,122
)
  
(13,531
)
Proceeds from exercise of stock options
  
 
36,293
 
  
13,571
 
Stock purchased for treasury
  
 
(28,297
)
  
(1,348
)
    


  

Net cash used by financing activities
  
 
(46,205
)
  
(14,934
)
    


  

Effect of foreign exchange rate changes
  
 
92
 
  
4,138
 
    


  

Net increase (decrease) in cash and cash equivalents
  
 
(52,506
)
  
43,177
 
Cash and cash equivalents at beginning of period
  
 
201,970
 
  
114,637
 
    


  

Cash and cash equivalents at end of period
  
$
149,464
 
  
157,814
 
    


  

 
See Notes to Consolidated Financial Statements.

5


ALBERTO-CULVER COMPANY AND SUBSIDIARIES
 
Notes to Consolidated Financial Statements
 
(1) BASIS OF PRESENTATION
 
The consolidated financial statements contained in this report have not been audited by independent public accountants, except for balance sheet information presented at September 30, 2001. However, in the opinion of the company, the consolidated financial statements reflect all adjustments, which include only normal adjustments, necessary to present fairly the data contained therein. The results of operations for the periods covered are not necessarily indicative of results for a full year. Certain amounts for the prior year have been reclassified to conform to the current year’s presentation.
 
(2) STOCKHOLDERS’ EQUITY
 
In fiscal year 1998, the Board of Directors authorized the company to purchase up to 6.0 million shares of its Class A common stock. This authorization was increased to 9.0 million shares in fiscal year 1999. As of June 30, 2002, the company had purchased approximately 7.3 million Class A common shares under this program at a total cost of $162.9 million. No Class A shares have been purchased under this program since October, 1999. In July, 2002, the Board of Directors re-authorized the company to purchase up to 1.7 million shares of the Class A common stock remaining on the 1998-1999 authorizations.
 
During the nine months ended June 30, 2002, the company 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 above-mentioned stock repurchase program.
 
(3) WEIGHTED AVERAGE SHARES OUTSTANDING
 
The following table provides information about basic and diluted weighted average shares outstanding (in thousands):
 
    
Three Months
Ended June 30,

  
Nine Months
Ended June 30

    
2002

  
2001

  
2002

  
2001

Basic weighted average shares outstanding
  
57,544
  
56,309
  
57,240
  
56,093
Effect of dilutive securities:
                   
Assumed exercise of stock options
  
1,689
  
1,431
  
1,443
  
1,270
Assumed vesting of restricted stock
  
399
  
365
  
399
  
365
    
  
  
  
Diluted weighted average shares outstanding
  
59,632
  
58,105
  
59,082
  
57,728
    
  
  
  
 
No stock options were anti-dilutive for the three months or nine months ended June 30, 2002 or 2001.

6


ALBERTO-CULVER COMPANY AND SUBSIDIARIES
 
Notes to Consolidated Financial Statements (Continued)
 
(4) COMPREHENSIVE INCOME
 
Comprehensive income consists of net earnings and foreign currency translation adjustments as follows (in thousands):
 
    
Three Months
Ended June 30,

    
Nine Months
Ended June 30,

 
    
2002

  
2001

    
2002

    
2001

 
Net earnings
  
$
36,401
  
29,071
 
  
98,345
 
  
78,589
 
Other comprehensive income—  
                           
foreign currency translation
  
 
11,634
  
(2,365
)
  
(14,026
)
  
(7,823
)
    

  

  

  

Comprehensive income
  
$
48,035
  
26,706
 
  
84,319
 
  
70,766
 
    

  

  

  

 
Foreign currency translation losses in the nine-month period ended June 30, 2002 were primarily due to the devaluation of the Argentine Peso.
 
(5) BUSINESS SEGMENT INFORMATION
 
Segment data for the three and nine months ended June 30, 2002 and 2001 is as follows (in thousands):
 
    
Three Months
Ended June 30,

    
Nine Months
Ended June 30,

 
    
2002

    
2001

    
2002

    
2001

 
Net sales:
                             
Consumer products:
                             
Alberto-Culver North America
  
$
152,358
 
  
138,821
 
  
449,974
 
  
410,417
 
Alberto-Culver International
  
 
101,139
 
  
99,988
 
  
289,528
 
  
290,404
 
    


  

  

  

Total consumer products
  
 
253,497
 
  
238,809
 
  
739,502
 
  
700,821
 
Specialty distribution—Sally
  
 
435,908
 
  
374,044
 
  
1,234,976
 
  
1,082,566
 
Eliminations
  
 
(8,331
)
  
(7,806
)
  
(21,382
)
  
(21,531
)
    


  

  

  

    
$
681,074
 
  
605,047
 
  
1,953,096
 
  
1,761,856
 
    


  

  

  

Earnings before provision for income taxes:
                             
Consumer products:
                             
Alberto-Culver North America
  
$
15,892
 
  
10,464
 
  
46,542
 
  
35,347
 
Alberto-Culver International
  
 
5,474
 
  
5,608
 
  
9,113
 
  
8,522
 
    


  

  

  

Total consumer products
  
 
21,366
 
  
16,072
 
  
55,655
 
  
43,869
 
Specialty distribution—Sally
  
 
48,182
 
  
39,005
 
  
130,549
 
  
110,182
 
    


  

  

  

Segment operating profit
  
 
69,548
 
  
55,077
 
  
186,204
 
  
154,051
 
Unallocated expenses, net
  
 
(8,037
)
  
(5,745
)
  
(17,911
)
  
(18,269
)
Interest expense, net of interest income
  
 
(5,509
)
  
(5,285
)
  
(16,993
)
  
(16,707
)
    


  

  

  

    
$
56,002
 
  
44,047
 
  
151,300
 
  
119,075
 
    


  

  

  

 

7


ALBERTO-CULVER COMPANY AND SUBSIDIARIES
 
Notes to Consolidated Financial Statements (Continued)
 
(6) GOODWILL AND TRADE NAMES
 
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (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. The company adopted SFAS No. 141 in the fourth quarter of fiscal year 2001. The company also adopted SFAS No. 142 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 bySFAS 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 will be reviewed for impairment at least annually, with its 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, fiscal year 2001 results in the consolidated statement of earnings 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, 2000, net earnings and earnings per share for the three and nine months ended June 30, 2002 and 2001 would have been as follows (in thousands, except per share data):
 
    
Three Months
Ended June 30,

  
Nine Months
Ended June 30,

    
2002

  
2001

  
2002

  
2001

Reported net earnings
  
$
36,401
  
29,071
  
98,345
  
78,589
Elimination of goodwill and trade name amortization, net of income taxes
  
 
—  
  
2,152
  
—  
  
6,384
    

  
  
  
Pro forma net earnings
  
$
36,401
  
31,223
  
98,345
  
84,973
    

  
  
  
Reported basic net earnings per share
  
$
0.63
  
0.52
  
1.72
  
1.40
                       
Elimination of goodwill and trade name amortization, net of income taxes
  
 
—  
  
0.03
  
—  
  
0.11
    

  
  
  
Pro forma basic net earnings per share
  
$
0.63
  
0.55
  
1.72
  
1.51
    

  
  
  
Reported diluted net earnings per share
  
$
0.61
  
0.50
  
1.66
  
1.36
                       
Elimination of goodwill and trade name amortization, net of income taxes
  
 
—  
  
0.04
  
—  
  
0.11
    

  
  
  
Pro forma diluted net earnings per share
  
$
0.61
  
0.54
  
1.66
  
1.47
    

  
  
  

8


ALBERTO-CULVER COMPANY AND SUBSIDIARIES
 
Notes to Consolidated Financial Statements (Continued)
 
(6) GOODWILL AND TRADE NAMES (Continued)
 
The change in the carrying amount of goodwill by operating segment for the nine months ended June 30, 2002 is as follows (in thousands):
 
    
Consumer Products

    
Specialty Distribution-
Sally

      
    
North America

    
International

       
Total

 
Goodwill, net:
                           
Balance as of September 30, 2001
  
$
69,379
 
  
79,648
 
  
115,312
  
264,339
 
                             
Additions, net of purchase price adjustments
  
 
(216
)
  
—  
 
  
88,473
  
88,257
 
                             
Foreign currency translation effect
  
 
—  
 
  
(12,807
)
  
549
  
(12,258
)
    


  

  
  

Balance as June 30, 2002
  
$
69,163
 
  
66,841
 
  
204,334
  
340,338
 
    


  

  
  

 
Indefinite-lived trade names by operating segment at June 30, 2002 and September 30, 2001 are as follows (in thousands):
 
    
June 30, 2002

    
September 30, 2001

Trade names, net:
             
Consumer products:
             
Alberto-Culver North America
  
$
45,412
    
45,414
Alberto-Culver International
  
 
30,148
    
33,857
    

    
Total consumer products
  
 
75,560
    
79,271
Specialty distribution—Sally
  
 
223
    
261
    

    
    
$
75,783
    
79,532
    

    
 
(7) NEW ACCOUNTING PRONOUNCEMENTS
 
In May 2000, the FASB’s Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-14, “Accounting for Certain Sales Incentives.” EITF Issue No. 00-14 addresses the recognition, measurement and income statement classification for various types of sales incentives including coupons, rebates and free products. In April 2001, the EITF reached a consensus on Issue 
No. 00-25, “Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s Products.” EITF Issue No. 00-25 addresses the income statement classification for various types of consideration paid by a vendor to a retailer. The company adopted the provisions of EITF Issue Nos. 00-14 and 00-25 in the first quarter of fiscal year 2002. In connection with the adoption of EITF Issue Nos. 00-14 and 00-25, the company reclassified certain amounts for the third quarter and first nine months of fiscal year 2001 to conform to the current year presentation resulting in a $29.4 million reduction in net sales, a $1.9 million increase in cost of products sold and a $31.3 million decrease in promotion expense for the three months ended June 30, 2001 and a $88.7 million reduction in net sales, a $7.7 million increase in cost of products sold and a $96.4 million decrease in promotion expenses for the nine months ended June 30, 2001. Consolidated net earnings were not affected by these reclassifications.

9


ALBERTO-CULVER COMPANY AND SUBSIDIARIES
 
Notes to Consolidated Financial Statements (Continued)
 
(8) INTEREST RATE SWAP
 
On May 1, 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. The swap agreement, which was terminated subsequent to June 30, 2002, had a maturity date of November 1, 2005, and was designated as a fair value hedge. Under the interest rate swap agreement, the company was to receive semi-annual interest payments at a fixed rate of 8.25% and was required to make semi-annual interest payments at a variable rate based on a fixed spread over the six-month London Interbank Offered Rate (“LIBOR”). The differential to be received on the interest rate swap for the six months ended November 1, 2002, was being amortized over that period as a reduction of interest expense. On a pro-forma basis taking into account the interest rate swap, approximately 69% of the company’s $322.5 million of long-term debt at June 30, 2002 was based on a fixed interest rate with the remaining 31% based on a variable interest rate. The fair value of the interest rate swap as of June 30, 2002 was a gain of $1.1 million, which was included in other assets on the consolidated balance sheet with an offsetting amount included in long-term debt.
 
On July 24, 2002, the company terminated the interest rate swap resulting in a gain of $2.8 million. The gain will be amortized over the remaining term of the 8.25% senior notes (due in November, 2005) as a reduction of interest expense.

10


ALBERTO-CULVER COMPANY AND SUBSIDIARIES
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
 
RESULTS OF OPERATIONS
 
Third Quarter and Nine Months Ended June 30, 2002 versus Second Quarter and Nine Months Ended June 30, 2001
 
The company achieved record third quarter net sales of $681.1 million in fiscal year 2002, up $76.0 million or 12.6% over the comparable period of the prior year. For the nine-month period ended June 30, 2002, net sales reached a new high of $1.95 billion, representing a 10.9% increase compared to last year’s nine-month period total of $1.76 billion. Fiscal year 2002 sales were negatively affected by foreign exchange rates. Had foreign exchange rates this year been the same as the third quarter and first nine months of fiscal 2001, sales would have increased 12.7% for the third quarter and 11.5% for the first nine months.
 
Net earnings were $36.4 million for the three months ended June 30, 2002 or 25.2% higher than the prior year’s third quarter net earnings of $29.1 million. Basic earnings per share of 63 cents in the third quarter of fiscal year 2002 were 11 cents or 21.2% higher than the same period of fiscal year 2001. Diluted earnings per share for the current quarter increased 22.0% to 61 cents versus 50 cents in the same period of the prior year.
 
Net earnings for the nine months ended June 30, 2002 were $98.3 million or 25.1% higher than the prior year’s first nine-month net earnings of $78.6 million. Basic earnings per share of $1.72 in fiscal year 2002 were 32 cents or 22.9% higher than the same period of fiscal year 2001. Diluted earnings per share increased 22.1% to $1.66 compared to $1.36 in the first nine months of fiscal year 2001.
 
As discussed under “New Accounting Pronouncements,” 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 three months and nine months ended June 30, 2002 would have increased $5.2 million or 16.6% and $13.4 million or 15.7%, respectively, compared to prior year. Basic earnings per share for the three-month and nine-month periods ended June 30, 2002 would have increased 8 cents or 14.5% and 21 cents or 13.9%, respectively, versus the prior year while diluted earnings per share would have increased 7 cents or 13.0% and 19 cents or 12.9%, respectively.
 
Compared to the same periods of the prior year, sales of Alberto-Culver North America (“North America”) consumer products increased 9.8% and 9.6% in the third quarter and first nine months of fiscal year 2002, respectively. The increases were primarily due to higher sales of Alberto V05 shampoos and conditioners, TRESemme shampoos, conditioners and styling products, TRESemme Hydrology shampoos and conditioners, St. Ives Swiss Formula lotions and body washes and Mrs. Dash seasonings along with increased sales for custom label filling operations. Sales for the current nine month period also increased due to higher sales of  
Pro-Line’s Soft & Beautiful Botanicals and TCB ethnic hair care products.
 
Sales of Alberto-Culver International consumer products (“International”) increased 1.2% in the third quarter and decreased 0.3% in the first nine months of fiscal 2002 compared to the same periods last year. Fiscal year 2002 sales were negatively affected by foreign exchange rates. Had foreign exchange rates this year been the same as the third quarter and first nine months of fiscal 2001, International sales would have increased 1.9% and 2.3%, respectively.
 
The “Specialty distribution—Sally” (“Sally”) business segment achieved sales increases of 16.5% for the third quarter and 14.1% for the first nine months of fiscal year 2002. The sales increases were mainly 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. At June 30, 2002, Sally had 2,662 stores, including 130 franchise stores, offering a full range of professional beauty supplies.

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ALBERTO-CULVER COMPANY AND SUBSIDIARIES
 
RESULTS OF OPERATIONS (continued)
 
Cost of products sold as a percentage of net sales was 51.2% for the third quarter and 51.3% for the first nine months of fiscal year 2002 compared to 51.5% for the third quarter and 51.6% for the first nine months of the prior year. The decreased cost of products sold percentages in the third quarter and first nine months of fiscal year 2002 was primarily attributable to increased sales of higher margin products and lower manufacturing costs.
 
Compared to the prior year, advertising, marketing, selling and administrative expenses in fiscal year 2002 increased $26.7 million or 10.9% for the third quarter and $65.3 million or 9.1% for the first nine months. The increase primarily resulted from the higher selling and administrative costs associated with the growth of the Sally Beauty Company business and higher expenditures for advertising and marketing.
 
Advertising and marketing expense was $47.6 million for the third quarter and $140.9 million for the first nine months of fiscal 2002 versus $47.1 million for the third quarter and $134.8 million for the first nine months of fiscal year 2001. The increase in advertising and marketing expense for the first nine months of fiscal year 2002 versus the prior year primarily resulted from higher advertising expenditures for North America.
 
The provision for income taxes as a percentage of earnings before income taxes was 35.0% for the third quarter and first nine months of fiscal year 2002 compared to 34.0% for the third quarter and first nine months of the prior year. The higher tax rate for the first half of fiscal year 2002 is mainly due to the mix of foreign taxable earnings.

12


ALBERTO-CULVER COMPANY AND SUBSIDIARIES
 
FINANCIAL CONDITION
 
June 30, 2002 versus September 30, 2001
 
Working capital at June 30, 2002 was $483.0 million, a decrease of $3.6 million from $486.6 million at September 30, 2001. The resulting ratio of current assets to current liabilities was 2.13 to 1.00 at June 30, 2002 compared to 2.25 to 1.00 at September 30, 2001. The decrease in fiscal year 2002 working capital and the ratio of current assets to current liabilities was primarily due to the cash paid for the acquisitions of Armstrong-McCall and other full-service beauty supply distributors by Sally Beauty Company and capital expenditures, offset in part by working capital generated from operations.
 
Cash and cash equivalents decreased $52.5 million during the first nine months of fiscal year 2002 primarily due to the $100.6 million of acquisitions of full-service beauty supply distributors by Sally Beauty Company, the repurchase of $40.0 million of accounts receivable previously sold under the company’s conduit facility and $45.1 million of capital expenditures, partially offset by cash flows from operating activities.
 
Accounts receivable increased $48.4 million to $218.0 million during the first nine months of fiscal year 2002 primarily due to the repurchase of $40.0 million of accounts receivable previously sold under the company’s conduit facility.
 
Inventories increased $35.3 million or 7.4% to $513.6 million during the first nine months of fiscal year 2002 principally due to the acquisitions of full-service beauty supply distributors and the growth of Sally Beauty Company.
 
Net goodwill increased $76.0 million during the first nine months of fiscal year 2002 mainly due to goodwill from acquisitions during the year, partially offset by the effects of foreign exchange rates.
 
Accounts payable increased $23.3 million to $214.7 million during the first nine months of fiscal year 2002 primarily due to increased inventory levels required to support sales growth and the timing of vendor payments.
 
Accrued expenses increased $29.0 million to $194.5 million primarily due to higher accruals for advertising and marketing, compensation and insurance expenditures.
 
Income taxes payable and deferred income taxes decreased $16.9 million to $52.7 million during the first nine months of fiscal year 2002 mainly due to the timing of tax payments and tax benefits realized from the exercise of employee stock options in fiscal year 2002.
 
Accumulated other comprehensive income—foreign currency translation increased $14.0 million during the first nine months of fiscal year 2002 primarily due to the effect of the devaluation of the Argentine Peso.

13


ALBERTO-CULVER COMPANY AND SUBSIDIARIES
 
NEW ACCOUNTING PRONOUNCEMENTS
 
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (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. The company adopted SFAS No. 141 in the fourth quarter of fiscal year 2001. The company also adopted SFAS No. 142 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 bySFAS 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 will be reviewed for impairment at least annually, with its 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, fiscal year 2001 results in the consolidated statement of earnings 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, 2000, net earnings and earnings per share for the three and nine months ended June 30, 2002 and 2001 would have been as follows (in thousands, except per share data):
 
    
Three Months
Ended June 30,

  
Nine Months
Ended June 30,

    
2002

  
2001

  
2002

  
2001

Reported net earnings
  
$
36,401
  
29,071
  
98,345
  
78,589
Elimination of goodwill and trade name amortization, net of income taxes
  
 
—  
  
2,152
  
—  
  
6,384
    

  
  
  
Pro forma net earnings
  
$
36,401
  
31,223
  
98,345
  
84,973
    

  
  
  
Reported basic net earnings per share
  
$
0.63
  
0.52
  
1.72
  
1.40
                       
Elimination of goodwill and trade name amortization, net of income taxes
  
 
—  
  
0.03
  
—  
  
0.11
    

  
  
  
Pro forma basic net earnings per share
  
$
0.63
  
0.55
  
1.72
  
1.51
    

  
  
  
Reported diluted net earnings per share
  
$
0.61
  
0.50
  
1.66
  
1.36
                       
Elimination of goodwill and trade name amortization, net of income taxes
  
 
—  
  
0.04
  
—  
  
0.11
    

  
  
  
Pro forma diluted net earnings per share
  
$
0.61
  
0.54
  
1.66
  
1.47
    

  
  
  

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ALBERTO-CULVER COMPANY AND SUBSIDIARIES
 
NEW ACCOUNTING PRONOUNCEMENTS (Continued)
 
The change in the carrying amount of goodwill by operating segment for the nine months ended June 30, 2002 is as follows (in thousands):
 
    
Consumer Products

    
Specialty
Distribution-
Sally

      
    
North America

    
International

       
Total

 
Goodwill, net:
                           
Balance as of September 30, 2001
  
$
69,379
 
  
79,648
 
  
115,312
  
264,339
 
                             
Additions, net of purchase price adjustments
  
 
(216
)
  
—  
 
  
88,473
  
88,257
 
                             
Foreign currency translation effect
  
 
—  
 
  
(12,807
)
  
549
  
(12,258
)
    


  

  
  

Balance as June 30, 2002
  
$
69,163
 
  
66,841
 
  
204,334
  
340,338
 
    


  

  
  

 
Indefinite-lived trade names by operating segment at June 30, 2002 and September 30, 2001 are as follows (in thousands):
 
    
June 30,
2002

    
September 30,
2001

Trade names, net:
             
Consumer products:
             
Alberto-Culver North America
  
$
45,412
    
45,414
Alberto-Culver International
  
 
30,148
    
33,857
    

    
Total consumer products
  
 
75,560
    
79,271
Specialty distribution – Sally
  
 
223
    
261
    

    
    
$
75,783
    
79,532
    

    
 
In May 2000, the FASB’s Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-14, “Accounting for Certain Sales Incentives.” EITF Issue No. 00-14 addresses the recognition, measurement and income statement classification for various types of sales incentives including coupons, rebates and free products. In April 2001, the EITF reached a consensus on Issue
No. 00-25,” Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s Products.” EITF Issue
No. 00-25 addresses the income statement classification for various types of consideration paid by a vendor to a retailer. The company adopted the provisions of EITF Issue Nos. 00-14 and 00-25 in the first quarter of fiscal year 2002. In connection with the adoption of EITF Issue Nos. 00-14 and 00-25, the company reclassified certain amounts for the third quarter and first nine months of fiscal year 2001 to conform to the current year presentation resulting in a $29.4 million reduction in net sales, a $1.9 million increase in cost of products sold and a $31.3 million decrease in promotion expense for the three months ended June 30, 2001 and an $88.7 million reduction in net sales, a $7.7 million increase in cost of products sold and a $96.4 million decrease in promotion expenses for the nine months ended June 30, 2001. Consolidated net earnings were not affected by these reclassifications.
 
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 companyis 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.

15


ALBERTO-CULVER COMPANY AND SUBSIDIARIES
 
FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q and the documents incorporated by reference herein, if any, may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements are based on management’s current expectations and assessments of risks and uncertainties and reflect various assumptions concerning anticipated results, which may or may not prove to be correct. Some of the factors that could cause actual results to differ materially from estimates or projections contained in such forward-looking statements include the pattern of brand sales, including variations in sales volume within periods; competition within the relevant product markets, including the ability to develop and successfully introduce new products, ensuring product quality, pricing, promotional activities, introduction of competing products, continuing customer acceptance of existing products and loss of distributorship rights; risks inherent in acquisitions and strategic alliances; the loss of one or more key employees; the effects of a prolonged United States or global economic downturn or recession; changes in costs, including changes in labor costs, raw material prices or advertising and marketing expenses; the costs and effects of unanticipated legal or administrative proceedings; variations in political, economic or other factors such as currency exchange rates, inflation rates, tax changes, legal and regulatory changes or other external factors over which Alberto-Culver Company has no control. Alberto-Culver Company has no obligation to update any forward-looking statement in this Quarterly Report on Form 10-Q or any incorporated document.
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
There have been no material changes in the company’s market risk during the three months or nine months ended June 30, 2002.
 
On May 1, 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. The swap agreement, which was terminated subsequent to June 30, 2002, had a maturity date of November 1, 2005, and was designated as a fair value hedge. Under the interest rate swap agreement, the company was to receive semi-annual interest payments at a fixed rate of 8.25% and was required to make semi-annual interest payments at a variable rate based on a fixed spread over the six-month London Interbank Offered Rate (“LIBOR”). The differential to be received on the interest rate swap for the six months ended November 1, 2002, was being amortized over that period as a reduction of interest expense. On a pro-forma basis taking into account the interest rate swap, approximately 69% of the company’s $322.5 million of long-term debt at June 30, 2002 was based on a fixed interest rate with the remaining 31% based on a variable interest rate. The fair value of the interest rate swap as of June 30, 2002 was a gain of $1.1 million, which was included in other assets on the consolidated balance sheet with an offsetting amount included in long-term debt.
 
On July 24, 2002, the company terminated the interest rate swap resulting in a gain of $2.8 million. The gain will be amortized over the remaining term of the 8.25% senior notes (due in November, 2005) as a reduction of interest expense.

16


ALBERTO-CULVER COMPANY AND SUBSIDIARIES
 
PART II
 
ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K
 
(a)
Exhibits:
 
 
99(a)
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
99(b)
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
(b)
Reports on Form 8-K:
 
No report on Form 8-K was filed by the registrant during the quarter ended June 30, 2002.

17


SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
ALBERTO-CULVER COMPANY
    (Registrant)
By:
 
/s/    WILLIAM J. CERNUGEL

   
William J. Cernugel
Senior Vice President and Chief Financial Officer (Principal Financial Officer)
 
August 8, 2002

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