1 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 August 31, 2000 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES - --- EXCHANGE ACT OF 1934 For the transition period from ____________to _____________ Commission file number 0-23312 HELEN OF TROY LIMITED --------------------- (Exact name of registrant as specified in its charter) Bermuda 74-2692550 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Helen of Troy Plaza El Paso, TX 79912 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (915) 225-8000 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 [ ] As of October 2, 2000 there were 28,378,148 shares of Common Stock, $.10 Par Value, outstanding.
2 HELEN OF TROY LIMITED AND SUBSIDIARIES INDEX <TABLE> <CAPTION> Page No. <S> <C> PART I. FINANCIAL INFORMATION Item 1 Consolidated Condensed Balance Sheets as of August 31, 2000 and February 29, 2000..............................3 Consolidated Condensed Statements of Income for the Three and Six Months Ended August 31, 2000 and August 31, 1999................................5 Consolidated Condensed Statements of Cash Flows for the Six Months Ended August 31, 2000 and August 31, 1999................................6 Notes to Consolidated Condensed Financial Statements...........................7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.....................................9 PART II. OTHER INFORMATION Item 4 Submission of Matters to a Vote of Security Holders....13 Item 6 Exhibits and Reports on Form 8-K.......................13 SIGNATURES........................................................................14 </TABLE> 2
3 PART I. FINANCIAL INFORMATION HELEN OF TROY LIMITED AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands, except par value and shares) <TABLE> <CAPTION> August 31, February 29, 2000 2000 ----------- ------------ (unaudited) <S> <C> <C> Assets Current assets: Cash and cash equivalents $ 5,996 $ 34,265 Marketable securities, at market value 767 994 Receivables, principally trade, less allowance for doubtful receivables of $2,263 at August 31, 2000 and $2,514 at February 29, 2000 72,460 52,916 Inventories 105,523 96,959 Prepaid expenses 3,880 3,919 Deferred income tax benefits 4,499 4,970 -------- -------- Total current assets 193,125 194,023 Property and equipment, net of accumulated depreciation of $7,867 at August 31, 2000 and $6,212 at February 29, 2000 48,706 47,739 Goodwill, net of accumulated amortization of $5,598 at August 31, 2000 and $4,569 at February 29, 2000 44,202 40,850 License agreements, at cost less accumulated amortization of $ 9,913 at August 31, 2000 and $9,384 at February 29, 2000 8,607 5,504 Other assets, net of accumulated amortization 19,137 16,136 -------- -------- $313,777 $304,252 ======== ======== </TABLE> (Continued) 3
4 HELEN OF TROY LIMITED AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands, except par value and shares) <TABLE> <CAPTION> August 31, February 29, 2000 2000 ----------- ------------ (unaudited) <S> <C> <C> Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt $ 450 $ 450 Accounts payable, principally trade 12,409 6,295 Accrued expenses: Advertising and promotional 7,165 4,602 Other 16,430 15,227 Income taxes payable 12,125 13,054 -------- -------- Total current liabilities 48,579 39,628 Long-term debt 55,000 55,000 -------- -------- Total liabilities 103,579 94,628 Stockholders' equity: Cumulative preferred stock, non-voting, $1.00 par value Authorized 2,000,000 shares; none issued -- -- Common stock, $.10 par value. Authorized 50,000,000 shares; 28,444,333 and 28,837,609 shares issued and outstanding at August 31, 2000 and February 29, 2000, respectively 2,844 2,884 Additional paid-in capital 52,855 53,494 Retained earnings 158,407 153,246 Minority interest in deficit of acquired subsidiary (3,908) -- -------- -------- Total stockholders' equity 210,198 209,624 Commitments and contingencies -- -- -------- -------- $313,777 $304,252 ======== ======== </TABLE> See accompanying notes to consolidated condensed financial statements. 4
5 HELEN OF TROY LIMITED AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (unaudited) (in thousands, except shares and earnings per share) <TABLE> <CAPTION> Three months ended Six months ended August 31, August 31, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Net sales $ 88,233 $ 71,520 $ 164,344 $ 143,708 Cost of sales 54,416 44,525 100,598 87,764 ------------ ------------ ------------ ------------ Gross profit 33,817 26,995 63,746 55,944 Selling, general and administrative expenses 29,600 23,266 56,002 44,831 ------------ ------------ ------------ ------------ Operating income 4,217 3,729 7,744 11,113 Other income (expense): Interest expense (1,038) (844) (2,020) (1,380) Other income (net) 439 5,944 843 6,403 ------------ ------------ ------------ ------------ Total other income (expense) (599) 5,100 (1,177) 5,023 ------------ ------------ ------------ ------------ Earnings before income taxes 3,618 8,829 6,567 16,136 Income tax expense (benefit): Current (384) 733 16 2,220 Deferred 256 (44) 471 (70) ------------ ------------ ------------ ------------ Net earnings $ 3,746 $ 8,140 $ 6,080 $ 13,986 ============ ============ ============ ============ Earnings per share: Basic $ .13 $ .28 $ .21 $ .48 Diluted .13 .27 .21 .46 Weighted average number of common and common equivalent shares used in computing earnings per share: Basic 28,479,321 29,082,717 28,598,401 29,065,592 Diluted 28,793,026 30,353,589 28,955,461 30,142,326 </TABLE> See accompanying notes to consolidated condensed financial statements. 5
6 HELEN OF TROY LIMITED AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited, in thousands) <TABLE> <CAPTION> Six months ended August 31, 2000 1999 ---------- ---------- <S> <C> <C> Cash flows from operating activities: Net earnings $ 6,080 $ 13,986 Adjustments to reconcile net income to cash provided (used) by operating activities: Depreciation and amortization 4,063 3,078 Provision for doubtful receivables 67 622 Deferred taxes, net 471 (70) Purchases of marketable securities, net of proceeds 286 (11,244) Realized gain - marketable securities (17) (1,183) Unrealized gain - marketable securities (42) (4,363) Changes in operating assets and liabilities: Accounts receivable (19,611) (8,405) Inventory (7,162) (5,100) Prepaid expenses 39 (594) Accounts payable (721) 1,867 Accrued expenses 2,119 1,738 Income taxes payable (929) 1,717 ---------- ---------- Net cash used by operating activities (15,357) (7,951) Cash flows from investing activities: Capital and license expenditures (2,663) (5,501) Other assets (5,543) (2,130) Cash paid for acquisition, net of cash acquired (2,205) -- ---------- ---------- Net cash used by investing activities (10,411) (7,631) Cash flows from financing activities: Exercise of stock options 139 560 Common stock repurchases (2,640) -- ---------- ---------- Net cash (used) provided by financing activities (2,501) 560 Net (decrease) in cash and cash equivalents (28,269) (15,022) Cash and cash equivalents, beginning of period 34,265 33,691 ---------- ---------- Cash and cash equivalents, end of period $ 5,996 $ 18,669 ========== ========== Supplemental cash flow disclosures: Interest paid $ 2,020 $ 2,036 Income taxes paid, net of refunds 830 498 </TABLE> See accompanying notes to consolidated condensed financial statements. 6
7 HELEN OF TROY LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS August 31, 2000 Note 1 - In the opinion of the Company, the accompanying consolidated condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly its financial condition as of August 31, 2000 and February 29, 2000 and the results of its operations for the three-month and six-month periods ended August 31, 2000 and 1999. While the Company believes that the disclosures presented are adequate to make the information not misleading, these statements should be read in conjunction with the financial statements and the notes included in the Company's latest annual report on Form 10-K. Note 2 - The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of such claims and legal actions will not have a material adverse effect on the financial position, results of operations, or cash flows of the Company. Note 3 - Basic earnings per share is computed based upon the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed based upon the weighted average number of common shares plus the effects of dilutive securities. The number of dilutive securities was 313,705 and 1,270,872, respectively, for the three months ended August 31, 2000 and 1999, and 357,060 and 1,076,734, respectively, for the six months ended August 31, 2000 and 1999. For the three months ended August 31, 2000, dilutive securities consisted of 246,232 dilutive stock options and 67,473 shares of common stock contingently issuable as part of an October 1998 acquisition. Dilutive securities for the six months ended August 31, 2000 consisted of 289,587 dilutive stock options and 67,473 contingently issuable shares. Dilutive securities for the three months ended August 31, 1999 consisted of 1,129,644 dilutive stock options and 141,228 shares that were contingently issuable. Dilutive securities for the six months ended August 31, 1999 consisted of 960,647 dilutive stock options and 116,087 contingently issuable shares of common stock. Note 4 - Included in other income for the three-month and six-month periods ended August 31, 2000 and August 31, 1999 is income related to marketable securities. For the three months and six months ended August 31, 2000 the Company recognized net unrealized gains of $179,000 and $42,000, respectively from the appreciation of marketable securities. During the first quarter of fiscal 2001, the Company sold marketable securities, realizing total proceeds of $286,000 and a gain of $17,000. The Company sold no securities during the second quarter of fiscal 2001. Included in net earnings for the three months and the six months ended August 31, 1999 are $1,183,000 in net realized gains from sales of marketable securities and $4,363,000 in net unrealized gains from the appreciation of marketable securities. Marketable 7
8 securities consist of shares of common stock of publicly traded companies and are stated at market value, as determined by the most recent trading price of each security as of the balance sheet date. Management determines the appropriate classification of the Company's investments when those investments are purchased and reevaluates those determinations at each balance sheet date. At February 29, 2000 and at August 31, 2000, the Company held its investments in equity securities of unaffiliated companies for the purpose of trading them in the near term (see Management's Discussion and Analysis of Financial Condition and Results of Operations - Information Relating to Forward-looking Statements). Therefore, all investments in equity securities are classified as marketable securities. Note 5 - On September 29, 1999, the Company's Board of Directors approved a resolution authorizing the Company to purchase, in open market transactions, up to 3,000,000 shares of its common stock over a period extending to September 29, 2002. As of August 31, 2000, the Company had repurchased 946,519 shares of its common stock under this resolution at a total cost of $6,716,000. Between August 31, 2000 and October 2, 2000, the Company repurchased 66,185 additional shares at a total cost of $344,410. Note 6 - On March 14, 2000 the Company acquired a 55 percent ownership interest in Tactica International, Inc. (Tactica) for $2,500,000. The Company used the purchase method of accounting to record the acquisition of Tactica and recorded goodwill of $6,170,000. That goodwill will be amortized over a 30-year period. The results of Tactica's operations from the acquisition date through August 31, 2000 and Tactica's financial position at that date are included in the Company's condensed consolidated financial statements. Tactica's net sales and results of operations for the three months ended August 31, 2000 were $5,395,000 and a net loss of $1,350,000, respectively. For the six months ended August 31, 2000, Tactica's net sales were $9,240,000 and its net loss was $2,012,000. As of the date of the acquisition, Tactica had an accumulated deficit of approximately $6,673,000. The Company has classified the minority interest in deficit related to this acquisition as a reduction in stockholders' equity. The Company will record 100 percent of the earnings (or losses) of Tactica until such time as the minority interest in deficit has been satisfied. The Company has also agreed to fund Tactica's working capital requirements through an intercompany revolving credit facility limited to $17,500,000. Additionally, the Company loaned $3,500,000 to stockholders of Tactica. The notes receivable from those stockholders are included in other assets in the consolidated condensed balance sheets. The notes bear interest at 8.75 percent and are due March 14, 2005. 8
9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Quarter ended August 31, 2000 Second quarter net sales increased $16,713,000, or 23.4 percent, to $88,233,000 for the three months ended August 31, 2000, compared to $71,520,000 for the three months ended August 31, 1999. Domestic sales of the Company's personal care appliances and health care products increased in the second quarter of fiscal 2001, versus the same period in fiscal 2000. The Company's introduction of personal care appliances under the Sunbeam(R) brand during fiscal 2001 and sales generated by Tactica International Inc. (Tactica), a subsidiary in which the Company acquired a 55 percent interest in fiscal 2001, also contributed to the second quarter domestic sales growth. International sales were also higher for the three months ended August 31, 2000 than for the three months ended August 31, 1999. Sales of brushes, combs, and hair accessories were lower during the three months ended August 31, 2000 than during the same period the prior year. Gross profit as a percentage of sales increased to 38.3 percent for the quarter ended August 31, 2000, from 37.7 percent for the quarter ended August 31, 1999. Excluding Tactica sales, gross profit as a percentage of sales was 36.4 percent for the quarter ended August 31, 2000. The decrease in gross profit as a percentage of sales, excluding Tactica, is due to changes in the mix of products sold. For the three months ended August 31, 2000, selling, general and administrative expense as a percentage of sales increased to 33.5 percent, compared to 32.5 percent for the three months ended August 31, 1999. Excluding Tactica's operations, selling, general, and administrative expenses as a percentage of sales for the three-month period were 28.3 percent, with the drop largely due to lower levels of cooperative advertising and customer chargeback expenses compared to the same period the prior year. An increase in interest expense and a decrease in income from marketable securities accounted for most of the change in other income (expense) to $599,000 of expense for the three months ended August 31, 2000 from $5,100,000 of income for the three months ended August 31, 1999. Interest expense totaled $1,038,000 for the three months ended August 31, 2000, compared to $844,000 for the three months ended August 31, 1999. The capitalization of interest on construction of the Company's new headquarters reduced interest expense during the three months ended August 31, 1999. Capitalization of interest expense on the new headquarters building ended concurrently with it being placed in service. Additionally, other income (expense) for the three months ended August 31, 2000 included $179,000 of gains associated with marketable securities, compared to $5,546,000 of such gains for the three months ended August 31, 1999. The Company recorded an income tax benefit equal to 3.5 percent of pre-tax income for the quarter ended August 31, 2000, compared to income tax expense of 7.8 percent for the quarter ended August 31, 1999. The tax benefit recorded for the three months ended August 31, 2000 was due primarily to the Company's tax benefits on the losses of Tactica. Exclusive of Tactica, the Company recorded 9
10 tax expense at a rate of 20 percent on its pre-tax income for the three months ended August 31, 2000. For the three months ended August 31, 1999, the Company recorded income tax at a rate of 20 percent on all of its income, except for $5,380,000 of its net gains on marketable securities for that period. Helen of Troy Limited, a Bermuda company, typically holds the consolidated group's investments in equity securities and is not subject to tax on the sale of equity securities. Six Months Ended August 31, 2000 Net sales for the six months ended August 31, 2000 increased $20,636,000, or 14.4 percent, when compared to the six months ended August 31, 1999. For the six-month period ended August 31, 2000, domestic personal care appliance sales, including sales associated with the Company's introduction of Sunbeam(R) personal care appliances, and sales resulting from the acquisition of Tactica, contributed significantly to the sales increase versus the same period a year earlier. International sales also improved for the six months ended August 31, 2000, compared to the six months ended August 31, 1999. Brush, comb, and hair accessory sales decreased for the six months ended August 31, 2000. Gross profit as a percentage of sales for the six months ended August 31, 2000 was 38.8 percent; a level comparable to the 38.9 percent achieved in the six months ended August 31, 1999. When the effects of Tactica sales are removed, the Company's gross profit as a percentage of sales for the first six months of fiscal 2001 was 37.2 percent. The decrease, after the exclusion of Tactica sales, is due to changes in the mix of products sold. Selling, general and administrative expenses as a percentage of sales increased to 34.1 percent for the six months ended August 31, 2000, compared to 31.2 percent for the same period in the prior year. Excluding Tactica's operations, selling, general, and administrative expenses as a percentage of sales for the six-month period were 30.2 percent, with the drop largely due to lower levels of cooperative advertising and customer chargeback expenses compared to the same period the prior year. Higher interest expense and decreased income from marketable securities produced most of the change in other income (expense) to $1,177,000 of expense for the six months ended August 31, 2000 from $5,023,000 of income for the six months ended August 31, 1999. Interest expense totaled $2,020,000 for the six months ended August 31, 2000, versus $1,380,000 for the six months ended August 31, 1999. The capitalization of interest on construction of the Company's new headquarters reduced interest expense during the six months ended August 31, 1999. As noted above, capitalization of interest expense on the new headquarters building ended concurrently with it being placed in service. Other income (expense) for the three months ended August 31, 2000 also included $59,000 of net gains related to marketable securities, compared to $5,546,000 of such gains for the three months ended August 31, 1999. Income tax expense was 7.4 percent of pre-tax income for the six months ended August 31, 2000, versus 13.3 percent for the six months ended August 31, 1999. As was the case for the three months ended August 31, 2000, discussed above, the tax benefit associated with Tactica's loss for the period reduced the Company's effective tax rate for the six-month period. The tax treatment of investment 10
11 income, also covered above in the discussion of the three months ended August 31, 2000, reduced the Company's tax rate for the six months ended August 31, 1999. Other than the Tactica net loss for the six months ended August 31, 2000 and the investment income for the six months ended August 31, 1999, the Company recorded income tax expense of 20 percent on the rest of its pre-tax income for both six-month periods. Liquidity and Capital Resources The Company's working capital and current ratio were $144,546,000 and 4.0, respectively, at August 31, 2000, compared to $154,395,000 and 4.9, respectively, at February 29, 2000. The Company's cash and cash equivalents balances decreased to $5,996,000 at August 31, 2000, from $34,265,000 at February 29, 2000. The primary uses of cash during the six months ended August 31, 2000 were due to increases in inventory and accounts receivable balances, as well as capital and license expenditures, the Tactica acquisition, and repurchases of the Company's common stock. Accounts receivable increased because of seasonal patterns in sales as well as the addition of Tactica in fiscal 2001. The increase in the Company's inventory levels is due to the addition of Sunbeam personal care appliances to its product line, as well as the March 14, 2000 acquisition of Tactica. The Company replaced the facility that it maintained with a bank to allow the issuance of letters of credit. The old facility expired July 31, 2000. The new facility is limited to $4 million, bears interest at the bank's prime interest rate plus two percent (11.5 percent at October 5, 2000), and expires August 1, 2001. The Company's line of credit to facilitate short-term borrowings and the issuance of additional letters of credit expired July 31, 2000. The Company currently is negotiating with various banks regarding the replacement of this line of credit. The Company has not had the need for short-term borrowings since the line of credit expired and anticipates that it will be able to replace this line of credit on acceptable terms. The Company believes its capital resources are adequate to finance growth and to fund its ongoing liquidity needs for the foreseeable future. Common Stock Repurchase On September 29, 1999, the Company's Board of Directors approved a resolution authorizing the Company to purchase, in open market transactions, up to 3,000,000 shares of its common stock over a period extending to September 29, 2002. As of August 31, 2000, the Company had repurchased 946,519 shares of its common stock under this resolution at a total cost of $6,716,000. Between August 31, 2000 and October 2, 2000, the Company repurchased 66,185 additional shares at a total cost of $344,410. 11
12 Information Relating to Forward-looking Statements This report, some of the Company's press releases and some of the Company's comments to the news media, contain certain forward-looking statements that are based on management's current expectations with respect to future events or financial performance. A number of risks or uncertainties could cause actual results to differ materially from historical or anticipated results. Generally, the words "anticipates," "believes," "expects" and other similar words identify forward-looking statements. The Company cautions readers not to place undue reliance on forward-looking statements. Forward-looking statements are subject to risks that could cause such statements to differ materially from actual results. Factors that could cause actual results to differ from those anticipated include: (1) general industry conditions and competition, (2) credit risks, (3) the Company's material reliance on individual customers or small numbers of customers, (4) the Company's material reliance on certain trademarks, (5) risks associated with inventory, including potential obsolescence, (6) risks associated with operating in foreign jurisdictions, (7) worldwide and domestic economic conditions, (8) the impact of current and future laws, including tax laws and litigation, (9) uninsured losses, (10) reliance on computer systems, (11) management's reliance on the representations of third parties, (12) risks associated with newly acquired product lines and subsidiaries, (13) risks associated with investments in equity securities, and (14) the risks described from time to time in the Company's reports to the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K for the year ended February 29, 2000. New Accounting Guidance In June 1998, the Financial Accounting Standards Board, ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes accounting and reporting standards for derivative instruments and is effective for financial statements issued for fiscal quarters of fiscal years beginning after June 15, 2000. Earlier application is encouraged. Based on the nature of its current operations, the Company does not expect SFAS 133 to have a material effect on its financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB101). The bulletin provides guidance to a large number of revenue recognition issues and is effective no later than the fourth quarter of fiscal years beginning after December 15, 1999. The Company does not expect SAB101 to have a material effect on its financial statements. 12
13 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Company's Annual Meeting of Shareholders was held August 29, 2000, in El Paso, Texas. At that meeting, the shareholders voted on the following proposal: o Proposal 1. Election of Directors A description of the foregoing matters is contained in the Company's Proxy Statement dated July 17, 2000, relating to the 2000 Annual Meeting of Shareholders. With respect to Proposal 1, the Directors received the following votes: <TABLE> <CAPTION> Authority to Vote For Nominee Broker For Withheld Non-Votes <S> <C> <C> <C> Gerald J. Rubin 22,522,160 20,654 0 Gary B. Abromovitz 22,528,719 14,095 0 Stanlee N. Rubin 22,496,977 45,837 0 Christopher L. Carameros 22,529,894 12,920 0 Byron H. Rubin 22,505,447 37,367 0 Daniel C. Montano 21,928,902 613,912 0 </TABLE> Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule 13
14 SIGNATURES 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. HELEN OF TROY LIMITED (Registrant) Date October 11, 2000 /s/ Gerald J. Rubin --------------------- ------------------------------- Gerald J. Rubin Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date October 11, 2000 /s/ Russell Gibson --------------------- ------------------------------- Russell Gibson Senior Vice-President, Finance, and Chief Financial Officer (Principal Financial Officer) 14
15 INDEX TO EXHIBITS <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION ------ ----------- <S> <C> 27 Financial Data Schedule </TABLE>