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, 2002 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 001-14669 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.) Clarendon House Church Street Hamilton, Bermuda (Address of Principal Executive Offices) 1 Helen of Troy Plaza El Paso, Texas 79912 (Registrant's United States Mailing Address) (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 10, 2002 there were 28,181,464 shares of Common Stock, $.10 Par Value, outstanding.
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, 2002 (unaudited) and February 28, 2002 ........................ 3 Consolidated Condensed Statements of Income (unaudited) for the Three Months and Six Months Ended August 31, 2002 and August 31, 2001 ..................... 5 Consolidated Condensed Statements of Cash Flows (unaudited) for the Six Months Ended August 31, 2002 and August 31, 2001 ..................... 6 Notes to Consolidated Condensed Financial Statements .......................................... 8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations .................................................... 16 Item 4 Controls and Procedures ............................................... 27 PART II. OTHER INFORMATION Item 4 Submission of Matters to a Vote of Security Holders .................... 28 Item 6 Exhibits and Report on Form 8-K ........................................ 29 SIGNATURES ............................................................................. 30 </Table> 2
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL INFORMATION HELEN OF TROY LIMITED AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands, except shares) <Table> <Caption> August 31, February 28, 2002 2002 ------------ ------------ (unaudited) <S> <C> <C> Assets Current assets: Cash and cash equivalents $ 85,015 $ 64,293 Trading securities, at market value 1,665 145 Receivables, principally trade, less allowance of $6,933 at August 31, 2002 and $5,794 at February 28, 2002 79,584 69,943 Inventories 98,343 100,306 Prepaid expenses 4,474 3,256 Deferred income tax benefits 6,311 5,727 ------------ ------------ Total current assets 275,392 243,670 Property and equipment, net of accumulated depreciation of $13,628 at August 31, 2002 and $11,998 at February 28, 2002 44,383 45,716 Goodwill, net of accumulated amortization of $8,629 at August 31, 2002 and February 28, 2002 40,767 40,767 License agreements, at cost less accumulated amortization of $12,504 at August 31, 2002 and $11,842 at February 28, 2002 7,016 6,678 Other assets, net of accumulated amortization 17,397 20,727 ------------ ------------ $ 384,955 $ 357,558 ============ ============ </Table> (Continued) 3
HELEN OF TROY LIMITED AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands, except shares) <Table> <Caption> August 31, February 28, 2002 2002 ------------ ------------ (unaudited) <S> <C> <C> Liabilities and Stockholders' Equity Current liabilities: Accounts payable, principally trade $ 23,146 $ 11,549 Accrued expenses: Advertising and promotional 4,102 5,183 Other 18,068 15,369 Income taxes payable 18,520 20,131 ------------ ------------ Total current liabilities 63,836 52,232 Long-term debt 55,000 55,000 ------------ ------------ Total liabilities 118,836 107,232 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; 28,180,464 and 28,196,517 shares issued and outstanding at August 31, 2002 and February 28, 2002, respectively 2,819 2,820 Additional paid-in capital 53,751 53,424 Retained earnings 209,683 195,474 Minority interest in deficit of acquired subsidiary (134) (1,392) ------------ ------------ Total stockholders' equity 266,119 250,326 ------------ ------------ Commitments and contingencies $ 384,955 $ 357,558 ============ ============ </Table> See accompanying notes to consolidated condensed financial statements. 4
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, -------------------------------- -------------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Net sales $ 111,058 $ 112,688 $ 213,541 $ 204,071 Cost of sales 60,148 57,086 113,116 106,490 ------------ ------------ ------------ ------------ 50,910 55,602 100,425 97,581 Selling, general, and administrative expenses 38,636 44,671 78,140 79,357 ------------ ------------ ------------ ------------ Operating income 12,274 10,931 22,285 18,224 Other income (expense): Interest expense (953) (1,111) (2,020) (2,170) Other income (net) 415 390 728 552 ------------ ------------ ------------ ------------ Total other income (expense) (538) (721) (1,292) (1,618) ------------ ------------ ------------ ------------ Earnings before income taxes 11,736 10,210 20,993 16,606 Income tax expense (benefit): Current 3,920 4,374 6,110 6,197 Deferred (1,060) (1,467) (584) (1,485) ------------ ------------ ------------ ------------ Net earnings $ 8,876 $ 7,303 $ 15,467 $ 11,894 ============ ============ ============ ============ Earnings per share: Basic $ .31 $ .26 $ .55 $ .42 Diluted .30 .25 .52 .41 Weighted average number of common and common equivalent shares used in computing earnings per share: Basic 28,180,320 28,071,848 28,191,905 28,066,743 Diluted 29,538,429 29,337,253 29,642,531 28,938,065 </Table> See accompanying notes to consolidated condensed financial statements. 5
HELEN OF TROY LIMITED AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited, in thousands) <Table> <Caption> Six months ended August 31, 2002 2001 ------------ ------------ <S> <C> <C> Cash flows from operating activities: Net earnings $ 15,467 $ 11,894 Adjustments to reconcile net earnings to cash provided (used) by operating activities: Depreciation and amortization 3,331 4,308 Provision for doubtful receivables 1,922 562 Purchases of trading securities (3,487) -- Proceeds from sales of trading securities 1,679 1,614 Realized gain - trading securities (141) (584) Unrealized loss - trading securities 429 753 Gain on sale of fixed assets 3 -- Changes in operating assets and liabilities: Accounts receivable (11,563) (10,934) Inventory 1,963 (30,946) Deferred taxes (584) (1,485) Prepaid expenses (1,218) (2,972) Accounts payable 11,597 2,389 Accrued expenses 1,618 6,457 Income taxes payable (1,611) 4,763 ------------ ------------ Net cash provided (used) by operating activities 19,405 (14,181) ------------ ------------ Cash flows from investing activities: Capital and license expenditures (1,339) (516) Proceeds from the sale of fixed assets 40 -- Changes in other assets 2,290 (583) ------------ ------------ Net cash provided (used) by investing activities 991 (1,099) ------------ ------------ </Table> (Continued) 6
HELEN OF TROY LIMITED AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited, in thousands) <Table> <Caption> Six months ended August 31, 2002 2001 ------------ ------------ <S> <C> <C> Cash flows from financing activities: Exercise of stock options 326 7 Capital contribution to Tactica International, Inc. subsidiary from minority shareholders -- 600 ------------ ------------ Net cash provided by financing activities 326 607 ------------ ------------ Net increase (decrease) in cash and cash equivalents 20,722 (14,673) Cash and cash equivalents, beginning of period 64,293 25,937 ------------ ------------ Cash and cash equivalents, end of period $ 85,015 $ 11,264 ============ ============ Supplemental cash flow disclosures: Interest paid $ 1,982 $ 2,132 Income taxes paid, net of refunds 4,948 835 </Table> See accompanying notes to consolidated condensed financial statements. 7
HELEN OF TROY LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS August 31, 2002 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 position as of August 31, 2002 and February 28, 2002 and the results of its operations for the three-month and six-month periods ended August 31, 2002 and 2001. 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. Certain reclassifications were made to information for the three-month and six- months periods ended August 31, 2001 in order to conform to the presentation for the three-month and six-month periods ended August 31, 2002. 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 Company's consolidated financial position, results of operations, or cash flows. 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 1,358,109 and 1,265,405 for the three months ended August 31, 2002 and 2001, respectively, and 1,450,625 and 871,322 for the six months ended August 31, 2002 and 2001, respectively. All dilutive securities for the six months ended August 31, 2002 and August 31, 2001 consisted of stock options issued under the Company's stock option plans. Options to purchase common stock that were outstanding but not included in the computation of earnings per share because the exercise prices of such options were greater than the average market prices of the Company's common stock totaled 3,856,662 at August 31, 2002 and 3,184,162 at August 31, 2001. Note 4 - On September 29, 1999, the Company's Board of Directors approved a resolution authorizing the Company to purchase, in open market or private transactions, up to 3,000,000 shares of its common stock over a period extending to September 29, 2002. As of August 31, 2002, the Company had repurchased 1,342,341 of its shares under this resolution at a total cost of $8,699,000. The Company did not purchase any of its shares during the six months ended August 31, 2002. 8
Note 5 - The following table contains segment information as of and for the three-month and six-month periods ended August 31, 2002 and August 31, 2001. THREE MONTHS ENDED AUGUST 31, 2002 AND 2001 (in thousands) <Table> <Caption> North Corporate/ AUGUST 31, 2002 American International Tactica Other Total - ----------------------- ------------ ------------- ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Net sales $ 83,693 $ 6,223 $ 21,142 $ -- $ 111,058 Operating income (loss) 11,535 (514) 1,936 (683) 12,274 Capital / license expenditures 136 27 112 -- 275 Depreciation and amortization 705 344 36 378 1,463 AUGUST 31, 2001 - ----------------------- ------------ ------------ ------------ ------------ ------------ Net sales $ 74,379 $ 5,676 $ 32,633 $ -- $ 112,688 Operating income (loss) 9,350 (1,007) 3,926 (1,338) 10,931 Capital / license expenditures 257 8 46 -- 311 Depreciation and amortization 1,465 618 13 49 2,145 </Table> SIX MONTHS ENDED AUGUST 31, 2002 AND 2001 (in thousands) <Table> <Caption> North Corporate/ AUGUST 31, 2002 American International Tactica Other Total - ----------------------- ------------ ------------- ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Net sales $ 155,622 $ 10,427 $ 47,492 $ -- $ 213,541 Operating income (loss) 19,188 (1,065) 5,321 (1,159) 22,285 Capital / license expenditures 1,141 61 137 -- 1,339 Depreciation and amortization 2,205 691 57 378 3,331 AUGUST 31, 2001 - ----------------------- ------------ ------------ ------------ ------------ ------------ Net sales $ 142,923 $ 9,725 $ 51,423 $ -- $ 204,071 Operating income (loss) 15,768 (2,340) 6,515 (1,719) 18,224 Capital / license expenditures 431 8 77 -- 516 Depreciation and amortization 3,472 720 25 91 4,308 </Table> 9
Identifiable assets at August 31, 2002 and February 28, 2002 were as follows: (in thousands) <Table> <Caption> North Corporate/ American International Tactica Other Total ------------ ------------- ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> August 31, 2002 $ 313,734 $ 26,766 $ 30,465 $ 13,990 $ 384,955 February 28, 2002 287,897 21,248 31,229 17,184 357,558 </Table> The North American segment sells hair care appliances, other personal care appliances, including massagers and spa products, hairbrushes, combs, and utility and decorative hair accessories in the United States and Canada. The International segment sells the same types of products in countries outside the U.S. and Canada. Tactica sells a variety of personal care and other consumer products directly to consumers and to retailers. Operating profit for each operating segment is computed based on net sales, less cost of goods sold, less any selling, general and administrative expenses associated with the segment. The selling, general, and administrative expense totals used to compute each segment's operating profit are comprised of SG&A expense directly associated with those segments, plus corporate overhead expenses that are allocable to operating segments. Other items of income and expense, including income taxes, are not allocated to operating segments. Note 6 - The Hong Kong Inland Revenue Department ("the IRD") has assessed $6,564,000 in tax on certain profits of the Company's foreign subsidiaries for the fiscal years 1995 through 1997. Hong Kong taxes income earned from certain activities conducted in Hong Kong. The Company is vigorously defending its position that it conducted the activities that produced the profits in question outside of Hong Kong. The Company also asserts that it has complied with all applicable reporting and tax payment obligations. If the IRD's position were to prevail and if it were to assert the same position for years after fiscal 1997, the resulting assessment could total $30,077,000 (U.S.) for the period from fiscal 1995 through the quarter ended August 31, 2002. In connection with the IRD's tax assessment for the fiscal years 1995 through 1997, the Company was required to purchase $3,282,000 (U.S.) in tax reserve certificates in Hong Kong, which represented 50 percent of the liability assessed by the IRD. Tax reserve certificates represent the prepayment by a taxpayer of potential tax liabilities. The amounts paid for tax reserve certificates are refundable in the event that the value of the tax reserve certificates exceeds the ultimate related tax liability. These certificates are included on the Company's Consolidated Condensed Balance Sheets as of August 31, 2002 and February 28, 2002 on the line entitled "Other assets, net of accumulated amortization." The certificates are denominated in Hong Kong dollars and are subject to the risks associated with foreign currency fluctuations. 10
The IRD also assessed $4,468,000 in tax on certain profits of the Company's foreign subsidiaries for fiscal years 1990 through 1994. During the quarter ended August 31, 2002, the Company and the IRD settled their dispute related to those years for $2,505,000 (56 percent of the assessed amount), plus interest of approximately $100,000. As a result of the settlement, the Company forfeited tax reserve certificates previously valued at $2,468,000 on its balance sheet and paid the IRD approximately $137,000 in cash. The settlement did not affect the status of the IRD's assessments for fiscal years 1995 through 1997. Although the ultimate resolution of the IRD's claims cannot be predicted with certainty, management believes that adequate provision has been made in the consolidated condensed financial statements for the resolution of the IRD's assessments for the fiscal years 1995 through 1997 and potential future assessments relating to activity since fiscal 1997. Such provision appears on the Company's Consolidated Condensed Balance Sheets as of August 31, 2002 and February 28, 2002 on the line entitled "Income taxes payable." Note 7 - Helen of Troy's consolidated results of operations for the three-month periods ended August 31, 2002 and 2001 include 100 percent of the net earnings and losses of Tactica International, Inc. ("Tactica"), a subsidiary in which Helen of Troy owns a 55 percent interest. At the time of Helen of Troy's acquisition of this interest, Tactica reported an accumulated net deficit. Because the minority interest portion of that deficit was recorded as a reduction in Helen of Troy's stockholders' equity, rather than as an asset, Helen of Troy will include 100 percent of Tactica's net earnings and losses in its consolidated income statement until Tactica's accumulated deficit is eliminated. At August 31, 2002, Tactica's accumulated deficit remaining to be eliminated was approximately $298,000. Helen of Troy's 55 percent share of this deficit totals $163,900 with the minority interest totaling $134,100. Management believes that the deficit will be eliminated during the three-month period ending November 30, 2002. After the elimination of the deficit, the consolidated net earnings of the Company will include 55 percent, rather than 100 percent, of Tactica's net earnings. Note 8 - In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). The Company adopted SFAS 142 on March 1, 2002. SFAS 142 eliminates the amortization of goodwill and other intangible assets that have indefinite useful lives. Amortization will continue to be recorded for intangible assets with definite useful lives. SFAS 142 also requires at least an annual impairment review of goodwill and other intangible assets. Any asset deemed to be impaired is to be written down to its fair value. The Company has reviewed its goodwill for impairment, in accordance with SFAS 142. Based on the results of this review, the Company concluded that its goodwill was not impaired at March 1, 2002. Because it eliminates the amortization of goodwill, SFAS 142 decreased the Company's SG&A expense by approximately $537,000 and $1,052,000, respectively, for the three-month and six-month periods ending August 31, 2002. The following table presents the impact of SFAS 142 on net 11
earnings and earnings per share had the standard been in effect for the three and six-month periods ended August 31, 2001: <Table> <Caption> (in thousands, except per share amounts) Three Months Ended August 31, 2002 2001 ------------ ------------ <S> <C> <C> Reported net earnings $ 8,876 $ 7,303 ------------ ------------ Adjustments: Amortization of Goodwill -- 537 Income tax effect -- (107) ------------ ------------ Net adjustments -- 430 ------------ ------------ Adjusted net earnings $ 8,876 $ 7,733 ============ ============ Reported earnings per share - basic $ .31 $ .26 Adjusted earnings per share - basic $ .31 $ .28 Reported earnings per share - diluted $ .30 $ .25 Adjusted earnings per share - diluted $ .30 $ .26 </Table> <Table> <Caption> (in thousands, except per share amounts) Six Months Ended August 31, 2002 2001 ------------ ------------ <S> <C> <C> Reported net earnings $ 15,467 $ 11,894 ------------ ------------ Adjustments: Amortization of Goodwill -- 1,052 Income tax effect -- (210) ------------ ------------ Net adjustments -- 842 ------------ ------------ Adjusted net earnings $ 15,467 $ 12,736 ============ ============ Reported earnings per share - basic $ .55 $ .42 Adjusted earnings per share - basic $ .55 $ .45 Reported earnings per share - diluted $ .52 $ .41 Adjusted earnings per share - diluted $ .52 $ .44 </Table> The following table discloses information regarding the carrying amounts and associated accumulated amortization for intangible assets subject to amortization after the adoption of SFAS 142. <Table> <Caption> Amortized Intangible Assets (in thousands) August 31, 2002 February 28, 2002 ----------------------------------------------- ----------------------------------------------- Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Amount Amortization Amount Amount Amortization Amount <S> <C> <C> <C> <C> <C> <C> Trademarks(a) $ 338 (209) 129 338 (187) 151 Licenses $ 19,520 (12,504) 7,016 18,520 (11,842) 6,678 ------------ ------------ ------------ ------------ ------------ ------------ Total $ 19,858 (12,713) 7,145 18,858 (12,030) 6,829 ============ ============ ============ ============ ============ ============ </Table> (a) Included in Consolidated Condensed Balance Sheets on line entitled "Other assets, net of accumulated amortization." There were no unamortized intangible assets, other than goodwill, as of periods ending August 31, 2002 and February 28, 2002. 12
The following table summarizes the amortization expense attributable to intangible assets for the three and six-month periods ended August 31, 2002 and 2001, as well as estimated amortization expense for the fiscal years ending in February 2003 through 2008. <Table> <Caption> (in thousands) <S> <C> Aggregate Amortization Expense: For the three months ended - -------------------------- August 31, 2002 $ 331 August 31, 2001 $ 927(a) For the six months ended - ------------------------ August 31, 2002 $ 683 August 31, 2001 $ 1,751(a) Estimated Amortization Expense: For the fiscal years ended - -------------------------- February 2003 $ 1,317 February 2004 $ 1,151 February 2005 $ 1,151 February 2006 $ 1,151 February 2007 $ 1,151 February 2008 $ 1,151 </Table> (a) Totals for the three and six months ending August 31, 2001 include $537 and $1,052, respectively, of goodwill amortization. Note 9 - The following table is a summary by operating segment of the Company's goodwill balances as of August 31, 2002 and February 28, 2002. <Table> <Caption> Total Goodwill by Operating Segment (thousands) August 31, 2002 February 28, 2002 ----------------------------------------------- ----------------------------------------------- Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Amount Amortization Amount Amount Amortization Amount ------------ ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> <C> Operating Segment: North American $ 40,368 $ (7,573) $ 32,794 $ 40,368 $ (7,573) $ 32,794 International $ 2,925 (652) 2,273 2,925 (652) 2,273 Tactica $ 6,103 (404) 5,699 6,103 (404) 5,699 ------------ ------------ ------------ ------------ ------------ ------------ Total $ 49,396 $ (8,629) $ 40,767 $ 49,396 $ (8,629) $ 40,767 ============ ============ ============ ============ ============ ============ </Table> Note 10 - 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." In November 2001, the issues discussed in EITF 00-25 were codified with related issues into EITF 01-9, "Accounting for Consideration Given By a Vendor To a Customer (Including a Reseller of the Vendor's Products)," which addresses the income statement classification of slotting fees, cooperative 13
advertising arrangements with trade customers and buydowns. The consensus reached by the EITF requires that certain customer promotional payments that were previously classified as marketing expenses be classified as reductions of revenue. The Company adopted the consensus on March 1, 2002. Prior to the adoption of this consensus, the Company classified these payments as selling, general and administrative expenses in its Consolidated Statement of Income. The adoption of EITF 01-9 reduced net sales, gross profit and selling, general, and administrative expenses by $1,246,000 and $1,486,000 for the six-month periods ending August 31, 2002 and August 31, 2001, respectively. Because adoption of EITF 01-9 resulted solely in reclassification within the Consolidated Condensed Statement of Income, there was no effect on the Company's financial condition, operating income or net earnings for any of the periods presented. The following tables present the impact of EITF 01-9 on net sales and SG&A had the standard been in effect for the three and six month periods ending August 31, 2002 and 2001: <Table> <Caption> (in thousands) Three Months Ended August 31, 2002 2001 ------------ ------------ <S> <C> <C> Net sales prior to application of EITF 01-9 $ 111,586 $ 113,482 ------------ ------------ Adjustments: Slotting fees (229) (391) Cooperative advertising arrangements (299) (403) ------------ ------------ Net adjustments (528) (794) ------------ ------------ Net sales as reported herein $ 111,058 $ 112,688 ============ ============ SG&A prior to application of EITF 01-9 $ 39,164 $ 45,465 ------------ ------------ Adjustments: Slotting fees (229) (391) Cooperative advertising arrangements (299) (403) ------------ ------------ Net adjustments (528) (794) ------------ ------------ SG&A as reported herein $ 38,636 $ 44,671 ============ ============ </Table> <Table> <Caption> Six Months Ended August 31, 2002 2001 ------------ ------------ <S> <C> <C> Net sales prior to application of EITF 01-9 $ 214,787 $ 205,557 ------------ ------------ Adjustments: Slotting fees (532) (792) Cooperative advertising arrangements (714) (694) ------------ ------------ Net adjustments (1,246) (1,486) ------------ ------------ Net sales as reported herein $ 213,541 $ 204,071 ============ ============ SG&A prior to application of EITF 01-9 $ 79,386 $ 80,843 ------------ ------------ Adjustments: Slotting fees (532) (792) Cooperative advertising arrangements (714) (694) ------------ ------------ Net adjustments (1,246) (1,486) ------------ ------------ SG&A as reported herein $ 78,140 $ 79,357 ============ ============ </Table> 14
Note 11 - During the quarter ending August 31, 2002, 50,000 shares of the Company's common stock that had been held in escrow were returned to the Company. The Company retired these shares immediately upon receiving them, thereby reducing the number of outstanding shares of its common stock by 50,000. The escrow account in which these shares were held related to a previous acquisition by the Company. No further shares or other assets remain in the escrow account. Note 12 - On September 25, 2002, the Company signed a definitive agreement to acquire directly and through license agreements, six consumer brand names from The Procter & Gamble Company. The Company will create a new operating division to market these products. The Company expects to complete the acquisition within 90 days of September 25, 2002. The Company also entered into several agreements with The Procter & Gamble Company where they will continue to market, manufacture, and distribute products using these brands for a six-month transition period. In addition, Helen of Troy agreed to pay for inventory that The Procter & Gamble Company has on hand at the end of the six-month transition period. The Company estimates that the combination of the purchase price, inventory purchase, and on-going working capital requirements associated with the purchase of these brands will reduce our cash and working capital by $45,000,000 to $50,000,000. During September 2002, the Company signed amendments to certain of its licenses to sell appliances and combs and hair brushes in the United States and Canada. In connection with such amendments, the Company paid a total of $11,500,000 as a prepayment, at a discount, of minimum royalties due under the agreements from the third quarter of calendar 2002 through the fourth quarter of calendar 2005. In addition to the prepayment of minimum royalties, the amendments affected other provisions of these license agreements. We remain obligated to pay any earned royalties that exceed the minimum royalties for those periods. 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion contains a number of forward-looking statements, all of which are based on current expectations. Actual results may differ materially due to a number of factors, including those discussed in the section entitled "Information Relating to Forward Looking Statements" and in the Company's most recent report on Form 10-K. Results of Operations Quarter ended August 31, 2002 Consolidated Sales and Gross Profit Margins Our net sales for the three months ended August 31, 2002 decreased by $1,630,000, or 1.4 percent versus the three months ended August 31, 2001, as higher North American and International operating segment sales largely offset lower sales in our Tactica operating segment. Tactica's sales for the quarter declined by $11,491,000, or 35.2 percent, compared to the same period a year earlier, primarily because of lower sales of the Epil Stop(R) depilatory product. Higher sales of Tactica products such as a pore cleanser and the Twist-a-Braid hair styling implement, both sold under the IGIA(R) brand name, in the retail distribution channel offset part of the decline in Epil Stop(R) sales. We expect that Tactica's net sales totals during the second half of the fiscal year ending February 28, 2003 will also decrease, when compared to the second half of the fiscal year that ended February 28, 2002. North American operating segment sales grew by $9,314,000, or 12.5 percent. The primary product categories producing the North American segment's sales growth were hair care appliances with ionic technology, hair straighteners, and a line of electric hair setters aimed primarily at the teen market. Our hair care appliances that incorporate ionic technology produce negative ions, which reduce the size of water molecules, allowing the hair to absorb those molecules. This process is beneficial because it allows hair to retain more moisture and facilitates more efficient drying of hair. Hair straighteners are also referred to as flat curling irons and allow consumers to shape their hair in a different manner than with traditional curling irons. International operating segment sales grew by $547,000, or 9.6 percent for the quarter ended August 31, 2002, compared to the quarter ended August 31, 2001. The growth was fueled largely by increased sales in the United Kingdom. Sales to Latin and South American customers decreased, primarily because of lower sales in Brazil. Our introduction of a new line of hair care appliances under the Cosmopolitan brand name was an important factor in the United Kingdom sales growth. Gross profit, as a percentage of sales, declined from 49.3 percent for the quarter ended August 31, 2001 to 45.8 percent for the quarter ended August 31, 2002. This is largely the result of the increase in North American and International segment net sales, relative to net sales in the Tactica operating segment. Tactica experiences higher gross profit and higher selling, general, and administrative expense, as percentages of net sales, than do our other operating segments. Therefore, our consolidated gross margins change when our mix of net sales contributed by our three operating segments changes. 16
Selling, general and administrative expense Selling, general, and administrative expenses ("SG&A"), expressed as a percentage of net sales, decreased from 39.6 during the quarter ending August 31, 2001 to 34.8 percent during the quarter ending August 31, 2002. SG&A as a percentage of sales decreased in the North American and International operating segments combined, primarily due to lower inventory storage costs, the lack of goodwill amortization, and foreign currency exchange gains. Inventory storage expenses, in the North American and International operating segments combined, decreased by $669,000, when compared to the same quarter last year. The reduction in inventory storage expense results from lower inventory levels, compared to last year. Due to our adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), we recorded no goodwill amortization expense (see "New Accounting Guidance" below). The adoption of SFAS 142 reduced SG&A by $537,000 for the quarter ended August 31, 2002, compared to the same period a year earlier. Finally, during the quarter ended August 31, 2002, we experienced foreign currency exchange gains that were $408,000 greater than during the same period a year earlier. The exchange rate gains were primarily due to the U.S. Dollar's weakness versus the British Pound, the Euro, and the Canadian Dollar, relative to the same period last year. Tactica's SG&A increased slightly as a percentage of its net sales. This increase was due to the decrease in Tactica's sales, combined with the fixed nature of certain expenses. However, Tactica's SG&A as a percentage of its net sales was a less significant factor in consolidated SG&A as a percentage of net sales because of the growth in North American and International net sales as a percentage of consolidated net sales. Interest expense Interest expense for the quarter ended August 31, 2002 was slightly lower than the quarter ended August 31, 2001, decreasing to $953,000 from $1,111,000. This decline is due primarily to the fact that there were no short-term borrowings under the operating line of credit in the quarter ended August 31, 2002, compared to a $10,000,000 outstanding balance during the entire quarter ended August 31, 2001. Income tax expense For the three months ending August 31, 2002, our income tax expense was 24.4 percent of earnings before income taxes, as opposed to 28.5 percent for the three months ending August 31, 2001. Compared to the same period a year earlier, the North American segment contributed a higher percentage of our total consolidated earnings before income taxes for the three-month period ended August 31, 2002. Meanwhile, the proportion of earnings before income taxes produced by Tactica decreased. This change lowered our effective tax rate for the three-month period ended August 31, 2002, versus the same period a year earlier, as the North American segment incurs a total income tax rate of approximately 20 percent, versus approximately 45 percent for Tactica. 17
Six months ended August 31, 2002 Consolidated Sales and Gross Profit Margins Our net sales for the six months ended August 31, 2002 increased by $9,470,000, or 4.6 percent, versus the six months ended August 31, 2001. The factors producing this change were similar to those described in our discussion of Consolidated Sales and Gross Profit Margins for the three months ended August 31, 2002. The products most important to the $12,699,000, or 8.9 percent, North American operating segment sales growth were hair care appliances incorporating ionic technology, hair straighteners, and a line of electric hair setters marketed to teens. The International operating segment's sales grew by $702,000, or 7.2 percent, as sales in the United Kingdom and France increased, while sales to Latin American customers, particularly in Brazil, decreased. Tactica's sales decreased by $3,931,000, or 7.6 percent, due primarily to lower Epil Stop(R) sales. Gross profit, as a percentage of sales, declined from 47.8 percent for the six months ended August 31, 2001 to 47.0 percent for the six months ended August 31, 2002. As was the case for the three months ended August 31, 2002, the increase in the North American and International segments' net sales as a percentage of our consolidated net sales was the primary factor driving this decrease. Selling, general, and administrative expense For the six months ended August 31, 2002 SG&A, expressed as a percentage of net sales, decreased from 38.9 to 36.6 percent. As during the three months ended August 31, 2002, the adoption of SFAS 142, lower inventory storage costs and foreign currency exchange gains accounted for most of the drop in SG&A as a percentage of sales in the North American and International segments during the first half of the fiscal year. The adoption of SFAS 142, which eliminated the amortization of goodwill, reduced SG&A for the six-month period by $1,052,000, compared to the same period a year ago (see section below entitled "New Accounting Guidance"). In addition, lower inventory storage expenses ($1,039,000), and higher exchange rate gains ($830,000) reduced SG&A substantially. Tactica's SG&A increased slightly as a percentage of its net sales due to the combination of the fixed nature of certain expenses and the decrease in Tactica's net sales. Tactica's SG&A as a percentage of its net sales was a less significant factor in consolidated SG&A as a percentage of net sales because of the growth in North American and International net sales as a percentage of consolidated net sales. Interest expense and Other income / expense Interest expense for the six months ended August 31, 2002 was slightly lower than the six months ended August 31, 2001, decreasing to $2,020,000 from $2,170,000. This decline is due primarily to the fact that there were no short-term borrowings under the operating line of credit during the six-month period ending August 31, 2002, compared to an average month-end balance of $8,667,000 during the six-month period ending August 31, 2001. Income tax expense In the six months ending August 31, 2002, our income tax expense was 26.3 percent earnings before income taxes, as opposed to 28.4 percent in the same period a year earlier. Compared to the same period a year earlier, the proportion of consolidated earnings before 18
income taxes comprised of the North American segment increased for the six-month period ended August 31, 2002. Meanwhile, the proportion of earnings before income taxes produced by Tactica decreased. This change decreased our effective tax rate for the six-month period ended August 31, 2002, versus the same period a year earlier, as the North American segment incurs a total income tax rate of approximately 20 percent, versus approximately 45 percent for Tactica. WORK STOPPAGE AT WEST COAST PORTS On September 29, 2002, port operators and shipping lines locked out longshoremen working in 29 ports on the West Coast of the United States creating a work stoppage at those ports. We import a large majority of the product that we sell in the United States through the ports on the West Coast. During the lockout, our ability to import products into the United States was impaired significantly. Because of steps taken by the United States government under emergency provisions contained in the Taft-Hartley Act, the ports reopened on October 9, 2002. However, the lockout created a large backlog of products, including ours, waiting to enter the United States. There is no assurance that future work stoppages will not occur. To date, the work stoppage has not had a material financial effect on us, as we have been able to meet most orders using existing inventory. We are currently unable to estimate whether the backlog of products awaiting entry into the Untied States or any potential future work stoppages will have a material negative impact on our operations or financial condition. LIQUIDITY AND CAPITAL RESOURCES During the first six months of fiscal 2003, we continued to strengthen our financial condition. Our cash balance increased 32.2 percent to $85,015,000 at August 31, 2002 from $64,293,000 at February 28, 2002. Operating activities provided $19,405,000 of cash during the six months ended August 31, 2002, compared to using $14,181,000 during the six months ended August 31, 2001. The production of net income for the six-month period was the main factor leading to the production of cash by our operating activities. Investing activities used $991,000 of cash during the six months ended August 31, 2002. Two transactions comprise most of the activity in the "Cash flows from investing activities" section of the August 31, 2002 Consolidated Condensed Statement of Cash Flows. First, during the first six months of the fiscal year, we paid $1,000,000 to acquire additional territories under a license agreement. Second, as discussed in the section below entitled "Hong Kong Income Taxes," we utilized $2,468,000 in tax reserve certificates to settle a portion of our dispute with the Hong Kong Inland Revenue Department. Our net accounts receivable balance increased 13.8 percent from February 28, 2002 to August 31, 2002. Our net sales during the quarter ending August 31 tend to exceed our net sales for the quarter ending the final day of February, thereby producing relatively higher accounts receivable balances at the end of August. Our August 31, 2002 inventory balance remained relatively constant, totaling $98,343,000, versus $100,306,000 at February 28, 2002, a 2.0 percent decrease. Our working capital balance increased to $211,556,000 at August 31, 2002 from $191,438,000 at February 28, 2002. Our current ratio was 4.31 at August 31, 2002, compared to 4.67 at February 28, 2002. The increase in our working capital was largely due to the production of cash by our operating activities. The slight decline in our current ratio was due to a large 19
percentage increase in our accounts payable balance as compared with a smaller increase in our current assets as compared to the balances at February 28, 2002. The increase in our accounts payable balance at August 31, 2002, compared to February 28, 2002, is due to the fact that we purchase more inventory in the second quarter of our fiscal year, than in the fourth quarter. In connection with the acquisition of a 55 percent interest in Tactica, we loaned a total of $3,500,000 to the minority shareholders of Tactica. The interest rate on these loans is 8.75 percent. All principal and unpaid interest on these loans is due March 14, 2005. The total amounts of principal and accrued interest due to the Company under these loans were $4,256,000 and $4,103,000 at August 31, 2002 and February 28, 2002, respectively. These amounts are included in "Other assets" on the consolidated balance sheets. We maintain a revolving line of credit with a bank to facilitate short-term borrowings and the issuance of letters of credit. The line of credit allows borrowings totaling $25,000,000, charges interest at the three-month LIBOR rate plus a percentage that varies based on the ratio of the Company's debt to its Earnings Before Interest, Taxes, Depreciation, and Amortization ("EBITDA"), and expires August 31, 2003. At August 31, 2002 the interest rate applicable to the line of credit was 2.77 percent. The line of credit allows for the issuance of letters of credit up to $7,000,000. Any outstanding letters of credit reduce the $25,000,000 maximum borrowing limit on a dollar-for-dollar basis. At August 31, 2002, there were no borrowings under this line of credit and outstanding letters of credit totaled $3,235,963. The revolving credit agreement provides that we must satisfy requirements concerning minimum net worth, total debt to consolidated total capitalization ratio, debt to EBITDA ratio and our fixed charge coverage ratio. We are in compliance with all of these requirements. Our contractual obligations and commercial commitments as of August 31, 2002 were: <Table> <Caption> Payments Due by Period (in 000s) -------------------------------------------------------------------------------- Less than After Contractual Obligations Total 1 year 1-3 years 4-5 years 5 years - -------------------------------- ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Long-term debt $ 55,000 -- 20,000 10,000 25,000 Open purchase orders - inventory 22,171 22,171 -- -- -- Operating leases 4,011 1,809 2,202 -- -- Minimum royalty payments (a) 41,428 14,529 9,809 7,250 9,840 ------------ ------------ ------------ ------------ ------------ Total contractual obligations $ 122,610 38,509 32,011 17,250 34,840 ============ ============ ============ ============ ============ </Table> (a) Minimum royalty payments due in less than one year include $11,500 prepayment of royalties in September 2002. See discussion below in this section. We do not engage in any activities involving special purpose entities or off-balance sheet financing. Under a September 1999 Board of Directors resolution, the Company may repurchase up to a total of 3,000,000 shares of its common stock over a period extending to September 29, 2002. Since the inception of this common stock repurchase program, the Company repurchased a total of 1,342,431 shares of its common stock for $8,699,196, including commissions. No common stock was repurchased during the six months ended August 31, 2002 or in the period through September 29, 2002, the expiration date of the resolution. 20
Based on our current financial condition and operations, we believe that cash flows from operations and available financing sources will continue to provide sufficient capital resources to fund the Company's ongoing liquidity needs for the foreseeable future. We expect that our capital needs will stem primarily from the needs to purchase sufficient levels of inventory and to carry normal levels of accounts receivable on our balance sheet. In addition, we evaluate acquisition opportunities on a regular basis and might augment our internal growth with acquisitions of complimentary businesses and product lines (see discussion below). We might finance acquisition activity with available cash, the issuance of stock, or with additional debt, depending upon the size and nature of any such transaction and the status of the capital markets. Following August 31, 2002, we entered into two commercial relationships that will reduce our cash and current working capital by a minimum of $56,500,000 to $61,500,000. On September 25, 2002, we signed a definitive agreement to acquire directly and through license agreements, six consumer brand names from The Procter & Gamble Company. We will create a new operating division to market these products. We expect to complete the acquisition within 90 days of September 25, 2002. The purchase price for the acquisition is to be paid in cash at the completion of the acquisition. We also entered into several agreements with The Procter & Gamble Company where they will continue to market, manufacture and distribute products using these brands for a six-month transition period. In addition, we agreed to pay for inventory that The Procter & Gamble Company has on hand at the end of a six-month transition period. We believe that the combination of the purchase price, inventory purchase, and on-going working capital requirements associated with the purchase of these brands will reduce our cash and working capital by $45,000,000 to $50,000,000. During September 2002, we signed amendments to certain of our licenses to sell appliances and combs and hair brushes in the United States and Canada. In connection with such amendments, we paid a total of $11,500,000 as a prepayment, at a discount, of minimum royalties due under the agreements from the third quarter of calendar 2002 through the fourth quarter of calendar 2005. We remain obligated to pay any earned royalties that exceed the minimum royalties for those periods. HONG KONG INCOME TAXES The Hong Kong Inland Revenue Department (the "IRD") has assessed $6,564,000 in tax on certain profits of our foreign subsidiaries for the fiscal years 1995 through 1997. Hong Kong taxes income earned from certain activities conducted in Hong Kong. We are vigorously defending our position that we conducted the activities that produced the profits in question outside of Hong Kong. We also assert that we have complied with all applicable reporting and tax payment obligations. If the IRD's position were to prevail and if it were to assert the same position for years after fiscal 1997, the resulting assessment could total $30,077,000 (U.S.) for the period from fiscal 1995 through the quarter ended August 31, 2002. In connection with the IRD's tax assessment for the fiscal years 1995 through 1997, we were required to purchase $3,282,000 (U.S.) in tax reserve certificates in Hong Kong, which represented approximately 50 percent of the liability assessed by the IRD. Tax reserve certificates represent the prepayment by a taxpayer of potential tax liabilities. The amounts paid for tax reserve certificates are refundable in the event that the value of the tax reserve certificates 21
exceeds the related tax liability. These certificates are included on our Consolidated Condensed Balance Sheets as of August 31, 2002 and February 28, 2002 on the line entitled "Other assets, net of accumulated amortization." The tax reserve certificates are denominated in Hong Kong dollars and are subject to the risks associated with foreign currency fluctuations. The IRD also assessed $4,468,000 in tax on certain profits of our foreign subsidiaries for fiscal years 1990 through 1994. During the quarter ended August 31, 2002, we and the IRD settled our dispute related to those years for $2,505,000 (56 percent of the assessed amount), plus interest of approximately $100,000. As a result of the assessment, we forfeited tax reserve certificates previously valued at $2,468,000 on our balance sheet and paid approximately $137,000 in cash to the IRD. The settlement did not affect the current status of the IRD's assessments for fiscal years 1995 through 1997. Although the ultimate resolution of the IRD's claims cannot be predicted with certainty, we believe that we have made adequate provision in the financial statements for the resolution of the IRD's claims and potential future assessments relating to activity since fiscal 1997. Such provision appears on our Consolidated Condensed Balance Sheets as of August 31, 2002 and February 28, 2002 on the line entitled "Income taxes payable." PROPOSED UNITED STATES FEDERAL INCOME TAX LEGISLATION Currently, we benefit from an international corporate structure that results in relatively low tax rates on a consolidated basis. If we were to encounter significant changes in the rates or rules imposed by certain key taxing jurisdictions, such changes could have a material adverse effect on our financial position and profitability. In 1994, we engaged in a corporate restructuring that, among other things, resulted in a portion of our non-U.S. earnings not being subject to taxation in the United States. If such earnings were subject to United States federal income taxes, our effective income tax rate would increase materially. Several bills have been introduced recently in the United States Congress that, if enacted into law, could adversely affect our United States federal income tax status. At least one of the bills introduced would apply to companies such as ours that restructured several years ago. That bill could, if enacted into law, subject all of our earnings to United States income taxes, thereby reducing our net earnings. Other bills introduced recently would exempt restructuring transactions, such as ours, that were completed before certain dates ranging from 1996 to 2002, but would limit the deductibility of certain intercompany transactions for U.S. income tax purposes and would subject gains on certain asset transfers to U.S. income tax. In addition to the legislation introduced in Congress, the United States Treasury Department has issued a study of restructurings such as ours, which concluded in part that additional limitations should be imposed on the deductibility of certain intercompany transactions. It is not currently possible to predict whether the legislation that has been introduced will become law, whether any additional bills will be introduced, or the consequences of the Treasury Department's study. However, there is a risk that new laws in the United States could eliminate or substantially reduce the current income tax benefits of our corporate structure. If this were to occur, such changes could have a material adverse effect on our consolidated financial position and profitability. 22
CRITICAL ACCOUNTING POLICIES The U.S. Securities and Exchange Commission defines critical accounting policies as "those that are both most important to the portrayal of a company's financial condition and results, and require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain." Preparation of our financial statements involves the application of several such policies. These policies include: consolidation of Tactica International, Inc. (Tactica) under the purchase method, estimates of our exposure to liability for income taxes in Hong Kong, estimates of credits to be issued to customers for sales that have already been recorded, the calculation of our allowance for doubtful accounts, and the valuation of inventory on a lower-of-cost-or-market basis. Consolidation of Tactica - In March 2000 (fiscal 2001), we acquired a 55 percent interest in Tactica. At that time, we determined that use of the purchase method of accounting and consolidation was appropriate and we continue to use that method of consolidation. Because Tactica had accumulated a net deficit at the time that we acquired our interest in it and because the minority shareholders of Tactica have not adequately guaranteed their portion of the accumulated deficit, our Consolidated Statements of Income for the second quarters of fiscal 2003 and fiscal 2002 include 100 percent of Tactica's net income or loss. We will continue to recognize all of Tactica's net income or loss until such time as Tactica's accumulated deficit is extinguished. After that time, our consolidated net earnings will include 55 percent of Tactica's net income or loss. Tactica's remaining accumulated deficit at August 31, 2002 is $298,000. Hong Kong Income Taxes - The Inland Revenue Department (the "IRD") in Hong Kong assessed tax on certain profits of the Company's foreign subsidiaries for the fiscal years 1995 through 1997. The ultimate resolution of the IRD's claims cannot be predicted with certainty. However, we have recorded a liability for the IRD's claims, based on consultations with outside Hong Kong tax experts as to the probability that some or all of the IRD's claims prevail. Such liability is included in "Income taxes payable" on the Consolidated Condensed Balance Sheets. If the IRD's position were to prevail and it were to assert the same position with respect to fiscal years after 1997, the resulting tax liability could total $30,077,000 (U.S.) for the period from fiscal 1995 through fiscal 2002. Estimates of credits to be issued to customers - We regularly receive requests for credits from retailers for returned product or in connection with sales incentives, such as co-operative advertising and volume rebate agreements. We reduce sales or increase selling, general, and administrative expenses, depending on the nature of the credits, for estimated future credits to customers. Our estimates of these amounts are based either on historical information about credits issued, relative to total sales, or on specific knowledge of incentives offered to retailers. Allowance for doubtful accounts - From time to time, amounts due from certain customers become uncollectible due to specific customers' inability to pay. We record allowances specifically for customers' balances based on the probability that we will not receive payment. When major customers declare bankruptcy, we record an allowance equal to the amount due from that customer, less the portion of the receivable that we expect to collect 23
either by selling the receivable in a secondary market or through settlement with the bankruptcy estate. Valuation of inventory - We account for our inventory using a first-in-first-out system in which we record inventory on our balance sheet at the lower of its cost or its net realizable value. Determination of net realizable value requires management to estimate the point in time at which an item's net realizable value drops below its cost. We regularly review our inventory for slow-moving items and for items that we are unable to sell at prices above their original cost. When we identify such an item, we reduce its book value to the net amount that we expect to realize upon its sale. This process entails a significant amount of inherent subjectivity and uncertainty. In addition to the above policies, several other policies, including policies governing the timing of revenue recognition, are important to the preparation of our financial statements, but do not meet the definition of critical accounting policies because they do not involve subjective or complex judgements. INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS Certain written and oral statements made by our Company and subsidiaries or with the approval of an authorized executive officer of our Company may constitute "forward-looking statements" as defined under the Private Securities Litigation Reform Act of 1995. This includes statements made in this report, in other filings with the Securities and Exchange Commission, in press releases, and in certain other oral and written presentations. Generally, the words "anticipates," "believes," "expects" and other similar words identify forward-looking statements. All statements that address operating results, events or developments that we expect or anticipate will occur in the future, including statements related to sales, earnings per share results and statements expressing general expectations about future operating results, are 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. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Factors that could cause actual results to differ from those anticipated include: o general industry conditions and competition, o credit risks, o the Company's, or its operating segments' material reliance on individual customers or small numbers of customers, o the Company's material reliance on certain trademarks, o the impact of tax legislation, regulations, or treaties, including proposed legislation in the United States that would affect companies or subsidiaries of companies that have headquarters outside the United States and file U.S. income tax returns, o the impact of other current and future laws, and regulations, o the results of our disagreement with the Hong Kong Inland Revenue 24
Department concerning the portion of our profits that are subject to Hong Kong income tax, o any future disagreements with the United States Internal Revenue Service or other taxing authority regarding our assessment of the effects or interpretation of existing tax laws, regulations, or treaties, o risks associated with inventory, including potential obsolescence, o risks associated with new products and new product lines, o risks associated with operating in foreign jurisdictions, including the risk of delays in importing products from foreign manufacturers, o foreign currency exchange losses, o worldwide and domestic economic conditions, o uninsured losses, o reliance on computer systems, o management's reliance on the representations of third parties, o risks associated with new business ventures and acquisitions, o risks associated with investments in equity securities, and o the risks described from time to time in the Company's reports to the Securities and Exchange Commission, including this report. 25
NEW ACCOUNTING GUIDANCE As explained in the Note 10 to the consolidated condensed financial statements, on March 1, 2002, we adopted EITF 01-9 "Vendor Income Statement Characterization of Consideration Paid to a Reseller of a Vendor's Products". The adoption of EITF 01-9 had no effect on operating income, net earnings or earnings per share. The following tables present the impact of EITF 01-9 on net sales and SG&A had the standard been in effect for the three and six month periods ending August 31, 2002 and 2001 (in thousands): <Table> <Caption> (in thousands) Three Months Ended August 31, 2002 2001 ------------ ------------ <S> <C> <C> Net sales prior to application of EITF 01-9 $ 111,586 $ 113,482 ------------ ------------ Adjustments: Slotting fees (229) (391) Cooperative advertising arrangements (299) (403) ------------ ------------ Net adjustments (528) (794) ------------ ------------ Net sales as reported herein $ 111,058 $ 112,688 ============ ============ SG&A prior to application of EITF 01-9 $ 39,164 $ 45,465 ------------ ------------ Adjustments: Slotting fees (229) (391) Cooperative advertising arrangements (299) (403) ------------ ------------ Net adjustments (528) (794) ------------ ------------ SG&A as reported herein $ 38,636 $ 44,671 ============ ============ </Table> <Table> <Caption> Six Months Ended August 31, 2002 2001 ------------ ------------ <S> <C> <C> Net sales prior to application of EITF 01-9 $ 214,787 $ 205,557 ------------ ------------ Adjustments: Slotting fees (532) (792) Cooperative advertising arrangements (714) (694) ------------ ------------ Net adjustments (1,246) (1,486) ------------ ------------ Net sales as reported herein $ 213,541 $ 204,071 ============ ============ SG&A prior to application of EITF 01-9 $ 79,386 $ 80,843 ------------ ------------ Adjustments: Slotting fees (532) (792) Cooperative advertising arrangements (714) (694) ------------ ------------ Net adjustments (1,246) (1,486) ------------ ------------ SG&A as reported herein $ 78,140 $ 79,357 ============ ============ </Table> In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). The Company adopted SFAS 142 on March 1, 2002. SFAS 142 eliminates the amortization of goodwill and other intangible assets that have indefinite useful lives. Amortization will continue to be recorded for intangible assets with definite useful lives. SFAS 142 also requires at least an annual impairment review of goodwill and other intangible assets. Any asset deemed to be impaired is to be written down to its fair value. We have completed the first phase of our goodwill review to determine whether any of that goodwill is impaired. Based on the results of this review, we believe that our goodwill is not impaired. Therefore, we do not expect to incur an impairment charge as a result of the adoption of SFAS 142. Because it eliminates the amortization of goodwill, SFAS 142 decreased our SG&A expense by approximately $537,000 26
and $1,052,000 in the three-month and six-month periods ending August 31, 2002. The following tables present the impact of SFAS 142 on net earnings and earnings per share had the standard been in effect for the three and six month periods ending August 31, 2002 and 2001. (in thousands, except per-share amounts): <Table> <Caption> (in thousands, except per share amounts) Three Months Ended August 31, 2002 2001 ------------ ------------ <S> <C> <C> Reported net earnings $ 8,876 $ 7,303 ------------ ------------ Adjustments: Amortization of Goodwill -- 537 Income tax effect -- (107) ------------ ------------ Net adjustments -- 430 ------------ ------------ Adjusted net earnings $ 8,876 $ 7,733 ============ ============ Reported earnings per share - basic $ .31 $ .26 Adjusted earnings per share - basic $ .31 $ .28 Reported earnings per share - diluted $ .30 $ .25 Adjusted earnings per share - diluted $ .30 $ .26 </Table> <Table> <Caption> (in thousands, except per share amounts) Six Months Ended August 31, 2002 2001 ------------ ------------ <S> <C> <C> Reported net earnings $ 15,467 $ 11,894 ------------ ------------ Adjustments: Amortization of Goodwill -- 1,052 Income tax effect -- (210) ------------ ------------ Net adjustments -- 842 ------------ ------------ Adjusted net earnings $ 15,467 $ 12,736 ============ ============ Reported earnings per share - basic $ .55 $ .42 Adjusted earnings per share - basic $ .55 $ .45 Reported earnings per share - diluted $ .52 $ .41 Adjusted earnings per share - diluted $ .52 $ .44 </Table> ITEM 4. CONTROLS AND PROCEDURES Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of the Company's "disclosure controls and procedures" (as defined in Exchange Act Rules 13a-14(c) and 15-d-14(c)) as of a date (the "Evaluation Date") within 90 days of the filing date of this quarterly report, have concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and effective and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities. There were no significant changes in our internal controls or to our knowledge, in other factors that could significantly affect our disclosure controls and procedures subsequent to the Evaluation Date. 27
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 27, 2002 in El Paso, Texas. At that meeting, the shareholders voted on the following proposals: o Proposal 1. Election of Directors; o Proposal 2. To ratify the appointment of KPMG LLP as independent auditors of the Company to serve for the 2003 fiscal year; o Proposal 3. To consider an amendment to the Helen of Troy Limited 1995 Stock Option Plan For Non-Employee Directors to increase the number of shares of the Company's common stock available under such plan. A description of the foregoing matters is contained in the Company's Proxy Statement dated July 17, 2002, relating to the 2002 Annual Meeting of Shareholders. With respect to Proposal 1, the Directors received the following votes: <Table> <Caption> Against or For Withheld ------------ ------------ <S> <C> <C> Gerald J. Rubin 24,508,083 687,812 Daniel C. Montano 20,746,082 4,449,813 Byron H. Rubin 24,348,623 847,272 Stanlee N. Rubin 24,129,909 1,065,986 Gary B. Abromovitz 24,375,210 820,685 Christopher L. Carameros 24,510,824 685,071 John B. Butterworth 24,384,008 811,887 </Table> Proposal 2 received the following votes: <Table> <Caption> Proposal 2 Broker For Against Abstentions Non-Votes --------------------- ------------------- ----------------- --------------------- <S> <C> <C> <C> 24,967,700 196,960 31,235 0 </Table> Proposal 3 received the following votes: <Table> <Caption> Proposal 3 Broker For Against Abstentions Non-Votes --------------------- ------------------- ----------------- --------------------- <S> <C> <C> <C> 19,723,295 5,339,449 133,150 0 </Table> 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 99.1 CEO Certification 99.2 CFO Certification 29
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 17, 2002 /s/ Gerald J. Rubin ------------------------ ----------------------------------- Gerald J. Rubin Chairman of the Board, Chief Executive Officer and President (Principal Executive Officer) Date October 17, 2002 /s/ Russell G. Gibson ------------------------ ----------------------------------- Russell G. Gibson Senior Vice-President, Finance, and Chief Financial Officer (Principal Financial Officer) 30
CERTIFICATION I, Gerald J. Rubin, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Helen of Troy Limited; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: October 17, 2002 /s/ Gerald J. Rubin - ------------------------------------ Gerald J. Rubin Chairman of the Board, Chief Executive Officer and President (Principal Executive Officer) 31
CERTIFICATION I, Russell G. Gibson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Helen of Troy Limited; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: October 17, 2002 /s/ Russell G. Gibson - ------------------------------------------------ Russell G. Gibson Senior Vice President, Finance, and Chief Financial Officer (Principal Financial Officer) 32
Index to Exhibits <Table> <Caption> EXHIBIT NUMBER DESCRIPTION ------- ----------- <S> <C> 99.1 CEO Certification 99.2 CFO Certification </Table>