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, 1996 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.) 6827 Market Avenue El Paso, TX 79915 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (915) 779-6363 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, 1996 there were 13,053,462 shares of Common Stock, $.10 Par Value, outstanding.
2 HELEN OF TROY LIMITED AND SUBSIDIARIES INDEX Page No. PART I. FINANCIAL INFORMATION Item 1 Consolidated Condensed Balance ------ Sheets as of August 31, 1996 and February 29, 1996...................................3 Consolidated Condensed Statements of Income for the Three and Six Months Ended August 31, 1996 and August 31, 1995.....................................5 Consolidated Condensed Statements of Cash Flows for the Six Months Ended August 31, 1996 and August 31, 1995.....................................6 Notes to Consolidated Condensed Financial Statements................................8 Item 2 Management's Discussion and Analysis of ------ Financial Condition and Results of Operations.........................................10 PART II. OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K..........................13 ------ SIGNATURES..................................................................14 2
3 PART I. FINANCIAL INFORMATION HELEN OF TROY LIMITED AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands, except shares) <TABLE> <CAPTION> August 31, February 29, 1996 1996 ---- ---- (unaudited) <S> <C> <C> Assets Current Assets: Cash and cash equivalents $ 28,715 $ 44,195 Receivables - principally trade, less allowance for doubtful receivables of $849 at August 31, 1996 and $390 at February 29, 1996 38,938 28,854 Inventories 59,077 48,572 Prepaid expenses 930 422 Deferred income tax benefits 1,183 823 --------- --------- Total current assets 128,843 122,866 Property and equipment net of accumulated depreciation of $3,599 at August 31, 1996 and $3,229 at February 29, 1996 21,410 15,750 License agreements, at cost, less accumulated amortization of $6,739 at August 31, 1996 and $6,361 at February 29, 1996 10,313 8,191 Note receivable 772 1,006 Other assets, net of amortization 6,790 6,775 --------- --------- Total assets $ 168,128 $ 154,588 ========= ========= </TABLE> (continued) 3
4 HELEN OF TROY LIMITED AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands, except shares) <TABLE> <CAPTION> August 31, February 29, 1996 1996 ---- ---- (unaudited) <S> <C> <C> Liabilities and Stockholders' Equity Current liabilities: Notes payable $ -- $ 2,593 Accounts payable, principally trade 4,502 1,005 Accrued expenses: Advertising and promotional 5,666 1,740 Other 5,801 4,912 Income taxes payable 2,956 2,010 --------- -------- Total current liabilities 18,925 12,260 Long-term Debt 40,450 40,450 --------- -------- Total liabilities 59,375 52,710 Stockholders' equity: Cumulative preferred stock, non-voting, $1.00 par value. authorized 2,000,000 shares; none issued -- -- Common stock, $.10 par value. Authorized 25,000,000 shares; issued and outstanding 13,027,362 shares at August 31, 1996 and 12,965,162 shares at February 29, 1996 1,303 648 Additional paid-in-capital 25,587 25,863 Retained earnings 81,863 75,367 --------- -------- Total stockholders' equity 108,753 101,878 --------- -------- Commitments and contingencies (Note 2) -- -- Total liabilities and stockholders' equity $ 168,128 $154,588 ========= ======== </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, 1996 1995 1996 1995 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net Sales $ 50,491 $ 42,682 $ 94,327 $ 76,226 Cost of sales 31,805 25,457 59,301 46,505 ---------- ---------- ---------- ---------- Gross profit 18,686 17,225 35,026 29,721 Selling, general and administrative expenses 13,157 12,544 26,275 22,774 ---------- ---------- ---------- ---------- Operating income 5,529 4,681 8,751 6,947 Other income (expense): Interest expense (710) (413) (1,466) (669) Other income, net 465 77 1,098 235 ---------- ---------- ---------- ---------- Total other income (expense) (245) (336) (368) (434) ---------- ---------- ---------- ---------- Earnings before income taxes 5,284 4,345 8,383 6,513 Income tax expense (benefit): Current 1,376 1,148 2,242 1,671 Deferred (187) (160) (356) (197) ---------- ---------- ---------- ---------- Net earnings $ 4,095 $ 3,357 $ 6,497 $ 5,039 ========== ========== ========== ========== Net earnings per common and common equivalent share: (Note 3) - Primary $ .30 $ .25 $ .47 $ .38 Weighted average number of common and common equivalent shares used in computing net earnings per share - Primary 13,801,225 13,426,796 13,709,970 13,402,010 </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 May 31, 1996 1995 ---- ---- <S> <C> <C Cash flows from operating activities: Net earnings $ 6,497 $ 5,039 Adjustments to reconcile net income to net cash used by operating activities: Depreciation and amortization 1,202 1,089 Provision for doubtful receivables 459 69 Provision for deferred tax benefit (360) (198) Changes in operating assets and liabilities: Accounts receivable (10,543) (11,300) Inventory (10,505) (13,108) Prepaid expenses (508) (563) Accounts payable 3,497 559 Accrued expenses 4,815 3,761 Income taxes payable 946 531 ------- -------- Net cash used by operating activities (4,500) (14,121) Cash flows from investing activities: Capital and license expenditures (8,510) (1,283) Other assets (489) 22 Collection on note receivable 234 207 ------- -------- Net cash used by investing activities (8,765) (1,054) </TABLE> (continued) 6
7 HELEN OF TROY LIMITED AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited, in thousands) <TABLE> <CAPTION> Six Months Ended May 31, 1996 1995 ---- ---- <S> <C> <C> Cash flows from financing activities: Net payments on revolving line of credit (2,593) 700 Proceeds from exercise of options 378 232 -------- ------- Net cash used by financing activities (2,215) 932 -------- ------- Net decrease in cash and cash equivalents (15,480) (14,243) -------- ------- Cash and cash equivalents, beginning of period 44,195 31,917 -------- ------- Cash and cash equivalents, end of period $ 28,715 $17,674 ======== ======= Supplemental cash flow disclosures: Interest paid $ 1,530 $ 639 Income taxes paid, net of refund 1,189 669 </TABLE> See accompanying notes to consolidated condensed financial statements. 7
8 HELEN OF TROY LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENT August 31, 1996 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 and the results of its operations for the periods ended August 31, 1996 and 1995. While the Company believes that the disclosures presented are adequate to make the information not misleading, it is suggested that these statements 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 of the Company. As of August 31, 1996, the Company has unused advertising credits, with a carrying amount of $3,198,000 which are available until used. Benefits to be received by the Company from utilization of all remaining credits could exceed the carrying amount. In July 1995, the company which is obligated to provide advertising in connection with the credits (the Bankrupt Entity) filed a voluntary Chapter 11 petition in the United States Bankruptcy Court (Court). Through September 25, 1996, a plan of reorganization had not been filed in the bankruptcy proceedings and the Court had not ruled as to the treatment of the Company's advertising credits. Management has been informed that counsel for the Bankruptcy Entity has petitioned in Court for approval to classify or treat these barter credits as executory contracts. If the Court determines that barter credits are executory contracts and the Bankrupt Entity emerges from Chapter 11, the Company could realize the full value of the barter credits. In the event the Court rules that the advertising credits represent unsecured liabilities of the Bankrupt Entity, the value of the advertising credits to the Company would be reduced significantly, and therefore, this reduction in the value of the advertising credits would be charged against income in the fiscal quarter in which that determination were made. The loss of these credits to the Company would have no impact on the liquidity or the future operations of the Company. The ultimate outcome of the bankruptcy proceeding cannot currently be determined. (continued) 8
9 Note 3 - Primary earnings per common and common equivalent share are computed based upon the weighted average number of common shares plus common share equivalents (dilutive stock options and warrants) outstanding during the period. Fully diluted earnings per share is based on the weighted average number of common shares plus equivalents determined on the basis of maximum potential dilution from stock options and warrants. Earnings per common and common equivalent share, assuming full dilution, is not materially dilutive for any of the periods presented. Note 4 - The business of the Company is seasonal with greater than 60% of annual sales volume normally occurring in the second and third fiscal quarters. Note 5 - On June 4, 1996, the Company's Directors approved a 2-for-1 stock split which was paid as a 100% stock dividend. The stock dividend was paid on July 1, 1996 to stockholders of record on June 17, 1996. All references in the financial statements to number of shares and per share amounts of the Company's common stock have been retroactively restated to reflect the increased number of common shares outstanding. Note 6 - During September 1996, the Company's U.S. subsidiary and the Internal Revenue Service (IRS) completed a settlement which closes all tax years up to and including the year ended February 28, 1993. Additionally, the settlement with the IRS is applicable to certain types of foreign source income for the year ended February 28, 1994. As discussed in the Company's February 29, 1996 annual report on Form 10-K, all payments made with respect to the settlement had been provided for in previous years. Note 7- On October 4, 1996 the Company acquired the assets of two personal care lines of the Dazey Corp., of Kansas City, Missouri. Included in the purchase are certain inventories, designs, equipment, tooling, license rights and trademarks for existing products bearing the Dazey, Carel and Dr. Scholl's trade names. 9
10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Quarter ended August 31, 1996 Net sales increased $7,809,000 during the three month period ended August 31, 1996, an 18% increase in net sales when compared with the quarter ended August 31, 1995. The increase is attributable to increased market share. Gains were registered in both the consumer sales division and the professional salon division. Hair care appliance sales make up the great majority of consumer products division volume. The introduction of new hair care appliance models, increased brush and comb sales, and sales of hair care accessories were the primary causes of the market share increase. Gross profit for the quarter ended August 31, 1996 was 37%, as compared with 40% for the quarter ended August 31, 1995. The 40% gross profit margin in the second quarter of the prior year was higher than normal, which was about 37 to 38 percent. The second quarter fiscal 1997 gross profit margin is about the same as in the first quarter of this year. Selling, general and administrative expenses decreased as a percentage of sales to 26% in the quarter ended August 31, 1996 as compared to 29% for the same quarter in 1995. This decrease, as a percent of net sales, was primarily due to the relatively fixed nature of some expenses. Interest expense for the quarter ended August 31, 1996, increased over interest expense for the same quarter in the previous year due to the $40,000,000 in senior notes issued by the Company's US subsidiary in January, 1996. The issuance of those notes, net of payment of outstanding bank loans, resulted in increased investments in short term securities, which increased interest income. Six-month period ended August 31, 1996 Net sales increased $18,101,000 for the six-month period ended August 31, 1996, when compared with the same period in 1995. The reason for the 24% increase is discussed above. The Company's gross profit margin for the six-month period ended August 31, 1996, decreased to 37% from 39% for the six- month period ended August 31, 1995. The higher gross profit rate of the prior year was above the normal rate, which is in line with the fiscal 1997 rate of 37%. (continued) 10
11 Selling, general and administrative expenses decreased to 28% during the six-month period ended August 31, 1996, when compared with 30% for the same period during 1995. The decrease, as a percent of net sales, was due primarily to the relatively fixed nature of expenses associated with increased sales during the six-month period ended August 31, 1996. Interest expense for the six-month period ended August 31, 1996, increased over interest expense for the six-month period ended August 31, 1995, due to the $40,000,000 in senior notes issued by the Company's US subsidiary in January, 1996. The issuance of those notes, net of payment of outstanding bank loans, resulted in increased investments in short term securities, which increased interest income. Liquidity and Capital Resources Cash and cash equivalents declined to $28,715,000 at August 31, 1996 from $44,195,000 at February 29, 1996, primarily due to the seasonal increase in accounts receivable and inventory balances and also to the use of internal funds to finance the construction of a new company owned distribution facility. Subsequent to August 31, 1996, the Company acquired the assets of two personal care lines of the Dazey Corp., of Kansas City, Missouri. The purchase price was made from internal funds. Receivables increased to $38,938,000 at August 31, 1996 from $28,854,000 at February 29, 1996, and inventory increased to $59,077,000 at August 31, 1996 from $48,572,000 at February 29, 1996. These increases relate to the seasonal increase in sales in the second fiscal quarter as compared to the fourth fiscal quarter. The Company's working capital was $109,918,000 at August 31, 1996 and the current ratio was 6.8 to 1. Short term debt decreased $2,593,000 from February 29, 1996 to August 31, 1996. The Company believes its capital resources are adequate to finance all anticipated funding requirements. Additionally, the Company believes that funds are available to finance the construction of a central distribution facility, which accounts for the increase in property and equipment from February 29, 1996 to August 31, 1996. Contingencies As of August 31, 1996, the Company has unused advertising credits, with a carrying amount of $3,198,000 which are available until used. Benefits to be received by the Company from utilization of all remaining credits could exceed the carrying amount. In July 1995, the company which is obligated to provide advertising in connection with the credits (the Bankrupt Entity) filed (continued) 11
12 a voluntary Chapter 11 petition in the United States Bankruptcy Court (Court). Through September 25, 1996, a plan of reorganization had not been filed in the bankruptcy proceedings and the Court had not ruled as to the treatment of the Company's advertising credits. Management has been informed that counsel for the Bankruptcy Entity has petitioned in Court for approval to classify or treat these barter credits as executory contracts. If the Court determines that barter credits are executory contracts and the Bankrupt Entity emerges from Chapter 11, the Company could realize the full value of the barter credits. In the event the Court rules that the advertising credits represent unsecured liabilities of the Bankrupt Entity, the value of the advertising credits to the Company would be reduced significantly, and therefore, this reduction in the value of the advertising credits would be charged against income in the fiscal quarter in which that determination were made. The loss of these credits to the company would have no impact on the liquidity or the future operations of the Company. The ultimate outcome of the bankruptcy proceeding cannot currently be determined. 12
13 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 11 Earnings Per Share Computation 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 8, 1996 s/Gerald J. Rubin ---------------------------- ---------------------------------- Gerald J. Rubin Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date October 8, 1996 s/Sam L. Henry ----------------------------- ---------------------------------- Sam L. Henry Senior Vice-President, Finance, and Chief Financial Officer (Principal Financial Officer) 14
15 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION ----------- ----------- 11 Computation of Earnings per Share 27 Financial Date Schedule 15