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 November 30, 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) (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 January 10, 1997 there were 13,093,662 shares of Common Stock, $.10 Par Value, outstanding.
2 HELEN OF TROY LIMITED AND SUBSIDIARIES INDEX <TABLE> <CAPTION> Page No. <S> <C> PART I. FINANCIAL INFORMATION Item 1 Consolidated Condensed Balance ------ Sheets as of November 30, 1996 and February 29, 1996 .......................... 3 Consolidated Condensed Statements of Income for the Three and Nine Months Ended November 30, 1996 and November 30, 1995 .......................... 5 Consolidated Condensed Statements of Cash Flows for the Nine Months ended November 30, 1996 and November 30, 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 </TABLE> 2
3 PART I. FINANCIAL INFORMATION HELEN OF TROY LIMITED AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands, except shares) <TABLE> <CAPTION> November 30, February 29, 1996 1996 ------------ ------------ (unaudited) <S> <C> <C> Assets Current Assets: Cash and cash equivalents $ 14,506 $ 44,195 Receivables - principally trade, less allowance for doubtful receivables of $1,470 at November 30, 1996 and $390 at February 29, 1996 64,231 28,854 Inventories 62,765 48,572 Prepaid expenses 748 422 Deferred income tax benefits 1,850 823 -------- -------- Total current assets 144,100 122,866 Property and equipment net of accumulated depreciation of $3,784 at November 30, 1996 and $3,229 at February 29, 1996 24,092 15,750 License agreements, at cost, less amortization of $6,928 at November 30, 1996 and $6,361 at February 29, 1996 10,124 8,191 Note receivable 577 1,006 Other assets, net of amortization 14,812 6,775 -------- -------- Total assets $193,705 $154,588 ======== ======== </TABLE> (continued) 3
4 HELEN OF TROY LIMITED AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands, except shares) <TABLE> <CAPTION> November 30, February 29, 1996 1996 ---------- -------- (unaudited) <S> <C> <C> Liabilities and Stockholders' Equity Current liabilities: Notes payable $ 8,801 $ 2,593 Accounts payable, principally trade 5,098 1,005 Accrued expenses: Advertising and promotional 7,694 1,740 Other 9,176 4,912 Income taxes payable 5,522 2,010 -------- -------- Total current liabilities 36,291 12,260 Long-term debt 40,450 40,450 -------- -------- Total liabilities 76,741 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, 13,093,162 shares at November 30, 1996 and 12,965,162 shares at February 29, 1996 1,309 648 Additional paid-in-capital 25,987 25,863 Retained earnings 89,668 75,367 -------- -------- Total stockholders' equity 116,964 101,878 -------- -------- Commitments and contingencies (Note 2) -- -- Total liabilities and stockholders' equity $193,705 $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> For the Three Months For the Nine Months Ended November 30, Ended November 30, 1996 1995 1996 1995 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Net sales $ 74,477 $ 55,353 $ 168,804 $ 131,579 Cost of sales 46,143 34,389 105,445 80,894 ------------ ------------ ------------ ------------ Gross profit 28,334 20,964 63,359 50,685 Selling, general and administrative expenses 18,278 12,992 44,553 35,766 ------------ ------------ ------------ ------------ Operating income 10,056 7,972 18,806 14,919 Other income (expense): Interest (expense) (311) (489) (1,777) (1,159) Interest income 245 161 1,215 537 Other, net 83 53 211 (87) ------------ ------------ ------------ ------------ Total other income (expense) 17 (275) (351) (709) ------------ ------------ ------------ ------------ Earnings before income taxes 10,073 7,697 18,455 14,210 Income tax expense (benefit): Current 2,935 2,278 5,176 3,949 Deferred (667) (555) (1,023) (752) ------------ ------------ ------------ ------------ Net earnings $ 7,805 $ 5,974 $ 14,302 $ 11,013 ============ ============ ============ ============ Net earnings per common and common equivalent share (Note 3) - Primary $ .56 $ .45 $ 1.04 $ .82 Weighted average number of common and common equivalent shares used in computing net earnings per share - Primary 13,964,888 13,334,122 13,776,155 13,379,166 </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> Nine Months Ended November 30 1996 1995 -------- -------- <S> <C> <C> Cash flows from operating activities: Net earnings $ 14,302 $ 11,013 Adjustments to reconcile net income to net cash used by operating activities: Depreciation and amortization 1,902 1,601 Provision for doubtful receivables 1,080 (20) Deferred tax benefit (1,027) (752) Changes in operating assets and liabilities: Receivables (36,457) (26,330) Inventories (14,193) (4,093) Prepaid expenses (326) (654) Accounts payable 4,093 242 Accrued expenses 10,218 5,065 Income taxes payable 3,512 2,810 -------- -------- Net cash used by operating activities (16,896) (11,118) Cash flows from investing activities: Capital and license expenditures (11,398) (3,943) Other assets (8,816) 714 Collection on note receivable 429 360 -------- -------- Net cash used by investing activities (19,785) (2,869) </TABLE> (continued) 6
7 HELEN OF TROY LIMITED AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited, in thousands) <TABLE> <CAPTION> Nine Months Ended November 30, 1996 1995 -------- -------- <S> <C> <C> Cash flows from financing activities: Net borrowings on notes payable $ 6,208 $ 8,718 Proceeds from exercise of options and warrants 784 156 -------- -------- Net cash provided by financing activities 6,992 8,874 -------- -------- Net decrease in cash and cash equivalents (29,689) (5,113) -------- -------- Cash and cash equivalents, beginning of period 44,195 31,917 -------- -------- Cash and cash equivalents, end of period $ 14,506 $ 26,804 ======== ======== Supplemental cash flow disclosures: Interest paid $ 2,241 $ 1,065 Income taxes paid 1,728 690 </TABLE> See accompanying notes to consolidated condensed financial statements. 7
8 HELEN OF TROY LIMITED AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS November 30, 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 November 30, 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 November 30, 1996, the Company has unused advertising credits, with a carrying amount of $2,198,000 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 December 2, 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 Bankrupt 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 is 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 common share 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 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 November 30, 1996 Net sales increased $19,124,000 during the three-month period ended November 30, 1996, a 34.5% increase when compared with the quarter ended November 30, 1995. Excluding the effect of sales attributed to the purchase of new lines of business in Oct. 1996, the Company's increase in sales was 24%. That 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. The Company's gross profit margin for the quarter ended November 30, 1996 was 38%, which is comparable with the Company's gross profit margin for the quarter ended November 30, 1995. The lines of business acquired in October 1996 experienced lower than normal gross profit margins in the quarter. The exclusion of these sales and cost of goods sold for the quarter would result in a gross profit margin of 38.7% for the quarter ended November 30, 1996. Selling, general and administrative expenses increased as a percentage of sales to 24.5% in the quarter ended November 30, 1996 as compared to 23.5% for the same quarter in 1995. This increase was primarily related to the transitioning, to the Company, of manufacturing and operating costs associated with the Company's acquisition of assets. Interest paid during the quarter ended November 30, 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. Nine-month period ended November 30, 1996 Net sales increased $37,225,000 for the nine-month period ended November 30, 1996, when compared with the same period in 1995. The reason for the 28% increase is discussed above. (continued) 10
11 The Company's gross profit margin for the nine-month period ended November 30, 1996, decreased to 37.5% from 38.5% for the nine-month period ended November 30, 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 37.5%. Selling, general and administrative expenses decreased slightly to 26.4% during the nine-month period ended November 30, 1996, when compared with 27% for the same period during 1995. Interest expense for the nine-month period ended November 30, 1996, increased over interest expense for the nine-month period ended November 30, 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 $14,506,000 at November 30, 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. Also, 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 $64,231,000 at November 30, 1996 from $28,854,000 at February 29, 1996, and inventory increased to $62,765,000 at November 30, 1996 from $48,572,000 at February 29, 1996. These increases relate to the seasonal increase in sales in the third fiscal quarter as compared to the fourth fiscal quarter and to the growth in sales. The Company's working capital was $107,809,000 at November 30, 1996 and the current ratio was 4 to 1. Short term debt increased $6,208,000 from February 29, 1996 to November 30, 1996. In December 1996, the Company's U.S. subsidiary negotiated a shelf, long-term debt facility. The new long-term debt facility provides for an additional $40 million. As of the filing date of this report, no funds have been drawn on this facility. 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 November 30, 1996. (continued) 11
12 Contingencies As of November 30, 1996, the Company has unused advertising credits, with a carrying amount of $2,198,000 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 December 2, 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 Bankrupt 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 Computation of Per Share Earnings 10.23 Amended and Restated Note Purchase, Guaranty and Master Shelf Agreement, $40,000,000 7.01% Guaranteed Senior Notes and $40,000,000 Guaranteed Senior Note Facility. 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 January 10, 1997 s/Gerald J. Rubin ----------------------- ---------------------------------- Gerald J. Rubin Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date January 10, 1997 s/Sam L. Henry ----------------------- ---------------------------------- Sam L. Henry Senior Vice-President, Finance, and Chief Financial Officer (Principal Financial Officer)
15 INDEX TO EXHIBITS <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION - ------- ----------- <S> <C> 11 Computation of Per Share Earnings 10.23 Amended and Restated Note Purchase, Guaranty and Master Shelf Agreement, $40,000,000 7.01% Guaranteed Senior Notes and $40,000,000 Guaranteed Senior Note Facility. 27 Financial Data Schedule </TABLE>