1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February 28, 1998 Commission file number 0-23312 HELEN OF TROY LIMITED (Exact name of the 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, TEXAS 79915 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (915) 779-6363 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK - $.10 PAR VALUE (Title of Class) 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant as of April 30, 1998 was $497,433,000. As of April 30, 1998 there were 27,808,570 shares of Common Stock, $.10 Par Value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE None Index to Exhibits - Page 44
2 TABLE OF CONTENTS <TABLE> <CAPTION> PAGE - ---------------------------------------------------------------------------------------- <S> <C> PART I Item 1. Business 1 Item 2. Properties 7 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security Holders 7 - ---------------------------------------------------------------------------------------- PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 8 Item 6. Selected Financial Data 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 8. Financial Statements and Supplementary Data 14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 36 - ---------------------------------------------------------------------------------------- PART III Item 10. Directors and Executive Officers of the Registrant 36 Item 11. Executive Compensation 38 Item 12. Security Ownership of Certain Beneficial Owners and Management 40 Item 13. Certain Relationships and Related Transactions 41 - ---------------------------------------------------------------------------------------- PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 42 Signatures 43 - ---------------------------------------------------------------------------------------- </TABLE> i
3 PART I ITEM 1. BUSINESS GENERAL The registrant was originally incorporated in 1968 and has been a public company since 1971. Helen of Troy Limited, a Bermuda company, was formed on December 1, 1993. On February 16, 1994, Helen of Troy Texas Corporation (originally incorporated in 1968), a Texas corporation, became a subsidiary of Helen of Troy Limited pursuant to the terms of the Exchange Agreement between Helen of Troy Texas Corporation and Helen of Troy Limited. Unless the context otherwise requires, references herein to the Company refer to the current Bermuda company and its subsidiaries. The Company designs and develops a variety of personal care appliances including hair dryers, curling irons, brush irons, lighted mirrors, hairsetters, ladies shavers, foot baths, massagers, and artificial nails, and markets them primarily to retailers, distributors and the professional hair care market in the United States, Canada, Europe and other countries throughout the world. The Company also designs and develops hair brushes, combs and other hair care accessories, and markets them to the same customers. The percentages of sales made in the United States for fiscal years ended the last day of February in 1998, 1997 and 1996 were 95%, 96% and 98% respectively. The Company markets its products primarily under the trademarks "Vidal Sassoon" under license from The Procter & Gamble Company, "Revlon" under license from Revlon Consumer Products Corporation, "Dr. Scholl's" under licenses from Schering-Plough Corporation, "Caruso", "Dazey," "Lady Dazey," "Lady Carel," "Sable," "Helen of Troy," "Salon Edition," "HOT Tools," "Professional Caruso," and "Gallery Series." Vidal Sassoon, Revlon, Dazey and Dr. Scholl's appliances and combs and brushes are sold to retailers, including mass merchandisers and catalog distributors, drug stores, department stores and grocery stores. Helen of Troy, Salon Edition, HOT Tools, Gallery Series, Professional Caruso, Lady Dazey and Lady Carel appliances are sold to professional stylists and their customers through a network of independent beauty and barber supply distributors. PRODUCTS Full lines of hair care appliances are sold under three principal trade names, Vidal Sassoon, Revlon and Helen of Troy. The Vidal Sassoon line includes hair dryers, curling irons, brush irons, lighted mirrors, hairsetters, brushes, combs and hair care accessories. The Company entered into license agreements with Revlon Consumer Products Corporation during the third quarter of fiscal year 1993 and began sales under this trademark in the United States during the first half of fiscal 1994. This line includes hair dryers, curling irons, brush irons, hairsetters, lady shavers, brushes, combs, mirrors, functional hair care accessories and artificial nails. The Sable and HOT Tools product lines of electric hair styling appliances were developed for meeting the special hair care needs of ethnic consumers. Where traditional styling irons may either overheat or not get hot enough, Sable's and HOT Tools' variable temperature controls offer a broad range of heat settings for naturally textured to fragile hair. The Company's hair dryers include a variety of popular features. Full-size dryers offer higher wattage, and more heat settings and blower speeds than the smaller models. Mid-size and compact dryers are offered to accommodate individual preferences and provide travel convenience. Special features such as folding handles and dual electrical current adaptability are included on several models. 1
4 Curling irons and brush irons are available with variable temperature settings and in a range of barrel sizes. Because barrel size affects the tightness of the curl, purchasers often buy multiple irons. Selected models also heat-up rapidly and automatically shut-off within one hour, providing enhanced convenience and safety. Hairsetters provide hot rollers in several size groups and are preferred by customers who want a longer lasting curl. Certain models include such features as steam injection, quick heat-up and cool touch tips that make the rollers easier to handle. Growth in the Company's Vidal Sassoon and Revlon brush and comb lines is being achieved by taking advantage of the strong brand name appeal, using competitive pricing and continually adding new products. Products in this category include a wide variety of hair care products ranging from classic wooden brushes with boar bristles to heat retaining aluminum brushes to unique hair styling tools. One of the Company's more recent product extensions is hair care accessories. Accessories introduced in fiscal 1996 under the Vidal Sassoon trade name include items such as bows, barrettes, clips, rollers, headbands, ponytail holders and bobby pins. Sales of accessories to mass merchandisers more than doubled in fiscal 1997 over fiscal 1996 and led the Company to further expand its product offering in fiscal 1998. In October 1996 the Company acquired the assets of two personal care lines of Dazey Corporation of Kansas City, Missouri. As a result of this purchase, the Company's product lines were expanded to include foot baths, foot massagers and body massagers under the Dr. Scholl's trade name pursuant to license agreements with Schering-Plough Corporation and hard hat salon hair dryers and turbo spa products under the Dazey, Lady Dazey and Lady Carel trade names. In the first quarter of fiscal 1997 the Company signed a license agreement with the Revlon Consumer Products Corporation to produce and distribute artificial nails and related implements and accessories using the Revlon trade name. The Company has developed a full line of artificial nails and related accessories. The first shipment of artificial nails was made in the first quarter of fiscal 1998. In June 1997 the Company acquired the assets of Caruso International. As a result of this purchase the Company acquired the Caruso tradename and all technology developed by Caruso International for steam hairsetters. The Company continues to respond to changes in the personal care appliance market and the health and beauty care market through developing new products and improving existing products. Development of new products designed to appeal to diverse consumer markets is performed by the Company's marketing and engineering staffs with assistance from independent consulting firms. MARKETING AND DISTRIBUTION The Company's products are sold primarily in the United States of America through three marketing divisions: the Consumer Appliances Division, the Health and Beauty Care Division and the Professional Salon Division. Extensive television and other national media advertising by The Procter & Gamble Company ("P & G") for its Vidal Sassoon liquid hair care products has resulted in wide recognition of the Vidal Sassoon name throughout the retail hair care market. The Company executed License Agreements with Revlon Consumer Products Corporation to market its products under the Revlon trademark. The Revlon trademark is known throughout the world. Products under this trademark began shipping during the first half of fiscal 1994. It is advertised extensively by the licensor in the United States and in major international markets, in television and 2
5 print media. As a result of the Company's October 1996 acquisition, which was mentioned above, the Company obtained rights to the Dr. Scholl's licenses in North America for foot baths, foot massagers and body massagers from the Schering-Plough Corporation. During fiscal 1998 the Company signed a Trade Mark Licence Agreement that allows the Company to distribute the products mentioned above using the Scholl's name in various countries in Europe, Central and South America, the Middle East and in the Far East. Dr. Scholl's is a famous trade name which is universally recognized and is supported by intensive media advertising. Additionally, the Company purchased the Dazey, Lady Dazey and Lady Carel trade names with respect to personal care appliances. The Company's cooperative advertising and promotion programs and its own media advertising campaigns have extended trade name recognition into the hair care appliance market and contributed to the growth of the Consumer Appliances Division and the Health and Beauty Care Division. Consumer Appliances Division and Health and Beauty Care Division sales for the Company were somewhat seasonal in fiscal 1998 with 58% of the sales being made in the second and third fiscal quarters of the year. At February 28, 1998, consistent with prior years and industry experience, the Company had no material amount of backlog orders for any product group. Approximately 29% of the Company's net sales in the year ended February 28, 1998 were made to one customer and its affiliate. Approximately 27% of the Company's net sales in the year ended February 28, 1997 were made to one customer and its affiliate and 29%, 10% and 10% of the Company's net sales in the year ended February 29, 1996 were made to three customers. Consumer Appliances Division and Heath and Beauty Care Division. These divisions are responsible for marketing products in the United States, Canada and Mexico. Primary trade names are Vidal Sassoon and Revlon. Vidal Sassoon and Revlon products consist of lines of hand-held hair dryers, curling irons, brush irons, hairsetters, lighted mirrors, ladies shavers, brushes, combs and other hair care accessories which are distributed to retailers, including mass merchandisers and catalog distributors, drug stores, department stores and grocery stores. With the October 1996 acquisition of two personal care lines of Dazey Corporation, the Consumer Appliances Division expanded its product lines to include foot baths, foot massagers and body massagers under the Dr. Scholl's trade name, and hard hat salon hair dryers and turbo spa products under the Dazey, Lady Dazey and Lady Carel trade names. A full line of artificial nails and related implements and accessories bearing the Revlon trade name were added to the products of the Health and Beauty Care Division in fiscal 1998. Caruso steam hairsetters were also added to the Consumer Appliances Division's products during fiscal 1998. The Company markets its consumer products through approximately 50 independent manufacturers' representative organizations and through its own sales staff. The Company promotes its consumer products primarily through print media and sales promotion campaigns. The Company also advertises its products on television and in numerous consumer and trade magazines. Professional Salon Division. The Company markets its "professional" products to professional stylists and beauticians through beauty and barber supply distributors for use and for resale. Sales are made through independent manufacturers' representatives throughout the United States. This division markets products under the trademarks Helen of Troy, Salon Edition, Gallery Series, HOT Tools, Dazey, Professional Caruso, Lady Dazey and Lady Carel. The Professional Salon Division also serves as a development resource for new products to be marketed in all of the Company's product groups. The Company believes it has responded to changes in the hair care appliance market while providing durable appliances that meet the exacting needs of the professional stylist. 3
6 International Sales. During fiscal 1990, the Company entered into a separate agreement (the "European Agreement") with The Procter & Gamble Company which grants the Company the exclusive license to sell personal hair care appliances, lighted mirrors, brushes, combs and hair care accessories in various countries in western Europe and the United Kingdom under the Vidal Sassoon trade name. As of January 1, 1993, the European Agreement was amended to include additional territories and to extend the term of the license. The expanded territory now includes the United Kingdom and all of western Europe. During fiscal 1992, the Company entered into a separate agreement (the "Mexico Agreement") with The Procter & Gamble Company which grants the Company the exclusive license to sell personal hair care appliances, lighted mirrors, combs, brushes, and hair care accessories in Mexico under the Vidal Sassoon trade name. As of January 1, 1993, the Mexico Agreement was amended to lengthen the term of the license. In fiscal 1993 the Company entered into the first of a series of agreements with Revlon Consumer Products Corporation which grant the Company the right to market personal care appliances, brushes and combs, ladies shavers and functional hair care accessories throughout the world except for certain markets such as Western Europe. Additionally, the Company can market artificial nails under the Revlon tradename throughout the world. See the section entitled "License Agreements." MANUFACTURING AND SUPPLIES The personal care products sold by the Company are manufactured primarily in The Peoples Republic of China, Thailand, Taiwan and South Korea (the "Far East"), utilizing molds and certain other tooling owned by the Company's wholly owned subsidiary, Helen of Troy Limited ("HOTB"), a Barbados corporation. The Company purchases from HOTB, which contracts with unrelated factories. The combined production capacity of these factories exceeds the Company's current needs and projected sales growth. The Company believes it will be able to continue purchasing on the same basis for the foreseeable future and that additional production capacity is available to the Company if needed. As a result of the manufacture of the Company's products in the Far East, the Company is subject to risks associated with trade barriers, currency exchange fluctuations and political unrest. Political changes in China have not affected the production or exportation of the Company's goods. The Company believes that adequate production facilities are available in other parts of the world should they be needed. However, the relocation of production capacity could require substantial time for the establishment of comparable production levels and could result in increased production costs. A small percentage of the Company's products are purchased in other countries such as the United States of America and Mexico. Virtually all of the Company's products are imported and most are subject to customs duty. The rates at which duties are charged are subject to legislative changes as political relationships between countries change. The Company's U.S. subsidiary operates under Supply Agreements with HOTB wherein HOTB purchases goods and sells them to the Company. HOTB contracts with an affiliated service company, a subsidiary of the Company, for the services of numerous electrical engineers, technicians and quality control supervisors and inspectors in the Far East to help assure the quality of products purchased by the Company. Manufacturing processes are supervised by these personnel and product acceptance is subject to quality control checks by inspectors in the factories. The Company offers up to a two year limited warranty on its products. In fiscal 1998, for distribution in the United States, Canada and Mexico, products manufactured in the Far East were shipped to the west coast of the United States and thereafter transported by truck or rail service 4
7 to warehouse facilities in El Paso, Texas; Memphis, Tennessee; and Toronto, Canada. Substantially all of the Company's products are shipped from these warehouses. For distribution in Europe, products are manufactured in the Far East and shipped to public warehouse facilities in Amsterdam, The Netherlands and Nottinghamshire, the United Kingdom or directly to customers. See Item 2 Properties - Plant and Facilities. LICENSE AGREEMENTS The Company is licensed by P & G to use the trademark Vidal Sassoon to manufacture, sell and distribute a line of electric personal hair care appliances and accessories. The license agreement with P & G provides the Company an exclusive license to distribute and sell, within the United States and Canada, under the Vidal Sassoon trademark, electric and battery operated personal hair care appliances, including hair dryers, curling irons, brush irons, hairsetters, lighted mirrors and hair care accessories. New products, including packaging and advertising, must be approved by the licensor. Through two other agreements with P & G, the "U.S. and Canadian Brush Licenses," the Company has the exclusive use of the trademark Vidal Sassoon on brushes, combs and hair care accessories in the United States and Canada. The term of the brush licenses runs concurrent with the appliance license. Cross marketing of products under the Vidal Sassoon licenses is allowed. During fiscal 1990, the Company entered into the European Agreement with P & G which grants the Company the exclusive license to sell personal hair care appliances, lighted mirrors and brushes, combs and hair care accessories in various countries in western Europe and in the United Kingdom under the Vidal Sassoon trade name. As of January 1, 1993, the European Agreement was amended to include additional territories and to extend the term of the license. The expanded territory now includes all of western Europe. During fiscal 1992, the Company entered into the Mexico Agreement with P & G which grants the Company the exclusive license to sell personal hair care appliances, lighted mirrors, brushes, combs, and hair care accessories in Mexico under the Vidal Sassoon trade name. As of January 1, 1993, the Mexico Agreement was amended to extend the term of the license. Under License Agreements entered into on September 30, 1992, the Company is licensed by Revlon Consumer Products Corporation to use the Revlon trademark to manufacture, sell and distribute a line of electric hair care appliances, including hair dryers, curling irons, hairsetters, brushes, combs, lady shavers, hand-held mirrors and functional hair care accessories. The license agreements include the United States, Canada and the rest of the world other than certain markets. In fiscal 1996 the Company amended its license agreement with Revlon to include women's electric and battery operated shavers. In the first quarter of fiscal 1997 the Company signed an agreement with Revlon Consumer Products Corporation to manufacture and distribute artificial nails and related implements and accessories under the Revlon trade name. Shipments of these new products began in the first quarter of fiscal 1998. The agreement allows the Company to distribute its products throughout the world. Initially artificial nails will be distributed in the United States. In connection with its acquisition of two personal care lines of Dazey Corporation in October 1996, the Company obtained rights to the Dr. Scholl's licenses for foot baths, foot massagers and body massagers from 5
8 the Schering-Plough Corporation. During fiscal 1998 the Company signed a Trade Mark Licence Agreement which enables the Company to distribute the above mentioned products in various countries in Europe, Central and South America, the Middle East and in the Far East. COMPETITION The Company encounters significant competition with respect to all of its products. The Company's primary competition for its Consumer Appliances Division comes from Conair Corporation, Windmere-Durable Holdings, Inc. and Remington Products Company. Competition for the Company's Health and Beauty Care Division primarily comes from Goody Products Inc., a division of Newell Company; Conair; and L and N Marketing and Sales Corporation. Competition for artificial nails comes from Cosmar, a division of Renaissance Cosmetics, Inc. These major competitors are large organizations with known brand names and substantial resources. Product pricing plays an important part in these competitive markets. Product packaging and performance as well as brand name recognition are other significant factors affecting competition within the personal care market. For sales in the United States of America, the Company believes that its Professional Salon Division is one of the primary sellers of personal hair care appliances to the professional trade. The major competitors for the Helen of Troy professional product group are Belson Products, a division of Windmere Corporation, and Conair Corporation. SEASONALITY Sales of the Company's products are somewhat seasonal, with a large percentage of net sales occurring during the Christmas selling season. The Company typically derives 58% of its annual net sales in the second and third fiscal quarters of each year. As a result of this seasonality, the Company's inventory and working capital needs fluctuate substantially during the year. In addition, Christmas orders from retailers are often made late in the year, making forecasting of production schedules and inventory purchases difficult. REGULATION Most of the Company's retail distributors in the United States of America (as well as several state and local authorities) require that the Company's retail appliance products meet the safety standards of Underwriters Laboratories, Inc. (U.L.). For products sold in Canada, the Company is subject to the standards of the Canadian Standards Association. Alternatively, the U.L. can also certify products for distribution in Canada. Electrical products sold in Europe or Mexico meet the safety standards imposed for those countries depending on the sales location. The Company has not experienced difficulty in satisfying such standards. For sales in the United States of America, the Company is also subject to the jurisdiction of the Federal Trade Commission with respect to, among other things, the content of advertising and other trade practices. TRADEMARKS AND PATENTS The Company's business is materially dependent upon the continued use of the trademarks Vidal Sassoon and Revlon which are registered by the respective licensors. See Item 1 Business - License Agreements. Certain of the trademarks and designs used in connection with the sale of the Company's products are registered with the United States Patent and Trademark Office and similar offices in certain other domains. The 6
9 Company frequently seeks registrations for various additional trademarks under which its products are sold. The Company does not believe that its business is otherwise materially dependent upon patents and patent protection. EMPLOYEES The Company employs 318 full-time employees (including officers) in the United States, Hong Kong and Europe of whom 127 are marketing, sales and distribution employees and 92 are administrative personnel. The remainder are engineering and development employees. The Company has enjoyed satisfactory working relations with its employees, none of whom are covered by any collective bargaining agreement, and the Company has never experienced a work stoppage. ITEM 2. PROPERTIES PLANT AND FACILITIES The corporate offices owned by the Company consist of an office building with approximately 40,000 square feet, situated on approximately one acre of land at 6827 Market Avenue in El Paso, Texas. Additionally, the Company owns and maintains 12,000 square feet of warehouse space on a 62,000 square foot lot adjacent to the headquarters building. During fiscal 1996 the Company purchased approximately 50 acres of land in El Paso, Texas, to house its corporate offices and distribution center. In fiscal 1997 the Company constructed a 408,000 square foot distribution center. This facility is used for storage and shipping of the Company's products. In fiscal 1998 the Company began construction of a corporate office facility adjacent to the distribution center. The new office facility is scheduled to be completed near the end of fiscal 1999 and will consist of approximately 135,000 square feet. The Company's Hong Kong subsidiary leases an office where it occupies approximately 19,000 square feet. Previously, the Company's Hong Kong subsidiary was headquartered in approximately 12,000 square feet of office space in Hong Kong acquired by condominium ownership. In fiscal 1998 this owned office was leased to a third party. The Company's United Kingdom and German subsidiaries each lease a small office. The Company utilizes warehouse space in public warehouses in Memphis, Tennessee; Amsterdam, the Netherlands; Nottinghamshire, the United Kingdom; Toronto, Canada; and Hong Kong, to facilitate inventory distribution. The Company believes storage capacity of its warehouse and the public warehouse space is sufficient for its present needs. ITEM 3. LEGAL PROCEEDINGS The Company is not aware of any legal proceedings of a material nature, pending or threatened, to which the Company is or may become a party. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Nothing was submitted. 7
10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK The Common Stock is currently listed on the NASDAQ National Market System [symbol: HELE]. The following table sets forth, for the periods indicated, in dollars per share, the high and low bid prices of the Common Stock as reported on the NASDAQ National Market System. These quotations reflect the inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. <TABLE> <CAPTION> High Low ---- --- <S> <C> <C> Fiscal 1997 First quarter 6 13/16 5 7/16 Second quarter 8 5 5/8 Third quarter 10 3/4 6 7/8 Fourth quarter 12 3/4 9 5/8 Fiscal 1998 First quarter 13 1/2 10 5/8 Second quarter 16 21/32 12 3/4 Third quarter 20 1/2 11 5/8 Fourth quarter 16 3/4 12 1/8 </TABLE> APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS <TABLE> <CAPTION> Approximate Number of Holders of Record Title of Class (as of April 30, 1998) ------------------------------- ------------------------ <S> <C> Common Stock, $.10 Par Value 461 (1) </TABLE> - ------------- (1) Shares held in "nominee" or "street" name at each bank nominee or brokerage house are included in the number of shareholders of record as a single shareholder. DIVIDENDS The Board of Directors' current policy is to retain earnings to provide funds for the operation and expansion of the Company's business and for potential acquisitions. The Company has not paid any cash dividends on its Common Stock since inception. Any change in dividend policy will depend upon future conditions, including earnings and financial condition, general business conditions, any applicable contractual limitations and other factors deemed relevant by the Board of Directors. 8
11 ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial information set forth below has been summarized from the Company's Consolidated Financial Statements which, for each of the years in the five year period ended February 28, 1998, have been audited by KPMG Peat Marwick LLP, independent certified public accountants. This information should be read in conjunction with the Consolidated Financial Statements and the related Notes to Consolidated Financial Statements included in Item 8 Financial Statements and Supplementary Data. All currency amounts in this document are denominated in U.S. dollars. <TABLE> <CAPTION> Twelve Months Ended Last Day of February ----------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (in thousands, except earnings per share) <S> <C> <C> <C> <C> <C> Statements of Income Data: Net sales $ 248,098 $ 213,035 $ 167,053 $ 138,143 $ 123,198 Cost of sales 153,087 132,861 102,341 86,405 77,917 --------- --------- --------- --------- --------- Gross profit 95,011 80,174 64,712 51,738 45,281 Selling, general and administrative expenses 64,911 57,438 47,356 37,139 35,473 --------- --------- --------- --------- --------- Operating income 30,100 22,736 17,356 14,599 9,808 Interest expense (3,487) (2,262) (1,795) (915) (881) Other income, net 2,203 1,665 1,286 811 453 --------- --------- --------- --------- --------- Earnings before income taxes 28,816 22,139 16,847 14,495 9,380 Income taxes 6,484 4,981 3,790 3,279 1,455 --------- --------- --------- --------- --------- Earnings before cumulative effect of change in accounting principle 22,332 17,158 13,057 11,216 7,925 Cumulative effect of change in accounting principle -- -- -- -- (397) --------- --------- --------- --------- --------- Net earnings $ 22,332 $ 17,158 $ 13,057 $ 11,216 $ 7,528 ========= ========= ========= ========= ========= Per Share Data: (1) Basic $ .83 $ .66 $ .51 $ .44 $ .28 Diluted $ .77 $ .62 $ .49 $ .41 $ .26 Weighted average number of common and common equivalent shares outstanding: Basic 26,856 26,078 25,834 25,406 27,317 Diluted 28,851 27,770 26,746 27,192 29,480 </TABLE> 9
12 <TABLE> <CAPTION> Last Day of February --------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (in thousands) <S> <C> <C> <C> <C> <C> Balance Sheet Data: Working capital $154,294 $111,937 $110,606 $ 59,079 $ 57,494 Total assets 227,560 182,226 154,588 133,243 122,759 Long-term debt 55,450 40,450 40,450 -- -- Stockholders' equity (2) $149,484 $120,482 $101,878 $ 88,627 $ 85,683 </TABLE> (1) Per share data has been adjusted for a 100% stock dividend that was paid on September 22, 1997, and for a 100% stock dividend that was paid on July 1, 1996. (2) In fiscal 1994 the Company repurchased 784,000 shares at a cost of $2,752,000. In fiscal 1995 the Company repurchased 2,597,600 shares at a cost of $9,309,000. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, selected consolidated operating data for the Company as a percentage of net sales. <TABLE> <CAPTION> Relationship to Net Sales Fiscal Year ------------------------- 1998 1997 1996 ---- ---- ---- <S> <C> <C> <C> Net sales 100.0% 100.0% 100.0% Cost of sales 61.7 62.4 61.3 --------- --------- --------- Gross profit 38.3 37.6 38.7 Selling, general and administrative expenses 26.2 27.0 28.3 --------- --------- --------- Operating income 12.1 10.6 10.4 Interest expense (1.4) (1.0) (1.1) Other income, net .9 .8 .7 --------- --------- --------- Earnings before income taxes 11.6 10.4 10.0 Income taxes 2.6 2.3 2.2 --------- --------- --------- Net earnings 9.0% 8.1% 7.8% ========= ========= ========= </TABLE> 10
13 FISCAL YEAR ENDED FEBRUARY 28, 1998 COMPARED WITH FISCAL YEAR ENDED FEBRUARY 28, 1997 During fiscal 1998, net sales increased 16.5% or $35,063,000 to $248,098,000 from fiscal 1997 net sales of $213,035,000. The increase in net sales is attributable to increased volume in all product categories. The growth is attributed primarily to the introduction of competitive new products, improved packaging and to the Company's performance as an outstanding vendor. Additionally, sales of Revlon artificial nails began in the first quarter of fiscal 1998. Gross profit, as a percent of net sales, increased to 38.3% in fiscal 1998 from 37.6% in fiscal 1997. The increased gross profit margin is primarily attributable to a favorable combination of changes in the mix of products sold. Selling, general and administrative expenses decreased as a percent of net sales to 26.2% in fiscal 1998 from 27.0% in fiscal 1997. The decreased percentage is a result of the increase in net sales and the relatively fixed nature of certain expenses. Interest expense in fiscal 1998 increased over interest expense in fiscal 1997 due to the increase in average outstanding debt which resulted from issuance of $15,000,000 in Senior Notes by the Company's U.S. subsidiary in July 1997. The issuance of those notes resulted in increased investments in short term securities, which increased interest income in fiscal 1998. Other income also increased in fiscal 1998 due to the gain on the sale of land which occurred in the second quarter. FISCAL YEAR ENDED FEBRUARY 28, 1997 COMPARED WITH FISCAL YEAR ENDED FEBRUARY 28, 1996 Net sales increased $45,982,000 during fiscal 1997, a 28% increase from fiscal 1996 net sales. Excluding the effect of sales attributed to the purchase of new lines of business in October 1996, the Company's increase in sales was 22%. The increase is attributable to increased volume as the Company's market share increased in the Divisions that make retail sales and the Professional Salon Division. 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, as a percent of net sales, decreased to 37.6% in fiscal 1997 from 38.7% in fiscal 1996. The lines of business acquired in October 1996 experienced lower than normal gross profit margins in the last five months of fiscal 1997. The exclusion of these sales and cost of goods sold during fiscal 1997 would have resulted in a gross profit margin of 38%. Gross profit margins in fiscal 1996 were higher than normal. Selling, general and administrative expenses decreased as a percent of net sales to 27.0% in fiscal 1997 from 28.3% in fiscal 1996. The decreased percentage is a result of the relatively fixed nature of certain expenses. Interest expense in fiscal 1997 increased over interest expense in fiscal 1996 due to the increase in average outstanding debt which resulted from issuance of the $40,000,000 in Senior Notes issued by the Company's U.S. 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 in fiscal 1997. LIQUIDITY AND CAPITAL RESOURCES The Company's U.S. subsidiary ("HOT") operates under a supply agreement with HOTB, which contracts with unrelated factories for the manufacture of products, which are sold to HOT and other purchasers. To allow the issuance of letters of credit, HOT and HOTB maintain lines of credit through two banks. The facilities are limited to $10 million and $4 million and expire in July 1999 and July 1998, respectively, and bear 11
14 interest at the banks' prime rates or, for HOT's line of credit, at alternate rates based on Eurodollar investment rates for specific time periods. Cash and cash equivalents increased $29,872,000 from $25,798,000 at February 28, 1997 to $55,670,000 at February 28, 1998. The increase in cash was due primarily to earnings and the issuance of $15,000,000 in Senior Notes. The increases in receivables, inventory and current liabilities are attributable to the Company's sales growth. Property and equipment increased as the Company's U.S. subsidiary began construction of a new office facility in the fourth quarter of fiscal 1998. Other assets increased because of the Company's acquisition of the assets of Caruso International in June 1997. The increase in long-term debt was due to HOT's issuance of $15,000,000 in Senior Notes in July 1997. Prepaid expenses increased because the Company's Hong Kong subsidiary purchased tax reserve certificates in Hong Kong. The Inland Revenue Department in Hong Kong has audited the operations of certain subsidiaries of the Company and has required the Company to purchase tax reserve certificates to secure the proposed adjustments. The Company is vigorously defending its position that the Company has complied with all applicable reporting and tax payment obligations. Management expects that the Company will prevail with its defenses and will recover the deposits; nevertheless, no assurances can be given at this time. Working capital increased $42,357,000 from $111,937,000 at February 28, 1997 to $154,294,000 at February 28, 1998. The current ratio was 7.8 to 1 at February 28, 1998. Management expects that operations and available financing sources will continue providing sufficient capital resources for the Company. On August 30, 1993, the Board of Directors approved a stock repurchase program under which Helen of Troy Corporation may buy up to six million shares of its common stock from time to time as market conditions dictate. On February 22, 1994, the Board of Directors of Helen of Troy Limited approved and ratified the continuation of that program. As of the end of fiscal 1995, the Company had repurchased 3,381,600 shares under this program at a cost of $12,061,000. During the Company's fiscal years ended the last day of February 1998, 1997 and 1996, no repurchase of stock occurred. In June 1997 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general- purpose financial statements and is effective for financial statements issued for periods beginning after December 15, 1997. Given the Company's current operations, the adoption of SFAS No. 130 is not expected to have an impact on the financial statements of the Company. In June 1997 the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 requires that companies report certain information about operating segments in complete sets of financial statements issued to shareholders and is effective for financial statements issued for periods beginning after December 15, 1997. The adoption of SFAS No. 131 could require the Company to include additional disclosures in future reports issued to shareholders. However, the Company does not expect the adoption of SFAS No. 131 to have a material impact on its financial statements. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5). The SOP requires that costs incurred during start-up activities, including organization costs, be expensed as incurred and is effective for financial statements issued for fiscal years beginning after December 15, 1998. The Company does not expect the adoption of SOP 98-5 to have a material impact on its financial statements. 12
15 In recent years, inflation has not had a material impact upon the results of the Company's operations. The Company continues to assess its exposure related to the impact of the Year 2000 date issue. The Year 2000 date issue arises from the fact that throughout the worldwide business community some computer programs use only two digits to identify a year in a date field. The Company's key financial and operational systems have been reviewed and it has been determined that the majority of the systems do not require burdensome modifications. Accordingly, management does not expect that any costs to be incurred will have a material adverse impact on the Company's financial position, results of operations or cash flows. However, the Company could be adversely impacted by the Year 2000 date issue if suppliers, customers and other businesses do not address this issue successfully. Management continues to assess these risks in order to reduce the impact on the Company. 13
16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE <TABLE> <CAPTION> Page ---- <S> <C> Independent Auditors' Report 15 Consolidated Financial Statements: Consolidated Balance Sheets as of February 28, 1998 and 1997 16 Consolidated Statements of Income for each of the years in the three-year period ended February 28, 1998 18 Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended February 28, 1998 19 Consolidated Statements of Cash Flows for each of the years in the three-year period ended February 28, 1998 20 Notes to Consolidated Financial Statements 22 Financial Statement Schedule - Schedule II - Valuation and Qualifying Accounts for each of the years in the three-year period ended February 28, 1998 35 </TABLE> All other schedules are omitted as the required information is included in the consolidated financial statements or is not applicable. 14
17 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Helen of Troy Limited: We have audited the consolidated financial statements of Helen of Troy Limited and subsidiaries as listed in the index on page 14. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the index on page 14. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Helen of Troy Limited and subsidiaries as of February 28, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended February 28, 1998, in conformity with accounting principles generally accepted in the United States. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK LLP El Paso, Texas April 30, 1998 15
18 HELEN OF TROY LIMITED AND SUBSIDIARIES Consolidated Balance Sheets February 28, 1998 and 1997 (in thousands, except par value and shares) <TABLE> <CAPTION> 1998 1997 ---- ---- <S> <C> <C> Assets Current assets: Cash and cash equivalents $ 55,670 $ 25,798 Receivables - principally trade, less allowance for doubtful receivables of $568 in 1998 and $400 in 1997 44,569 36,951 Inventories 71,357 68,267 Prepaid expenses 3,802 939 Deferred income tax benefits (note 5) 1,522 1,276 ---------- ---------- Total current assets 176,920 133,231 Property and equipment net of accumulated depreciation of $4,892 in 1998 and $3,983 in 1997 (note 2) 26,255 25,780 License agreements, at cost less accumulated amortization of $8,068 in 1998 and $7,117 in 1997 8,984 9,935 Other assets at cost, net of amortization 15,401 13,280 ---------- ---------- $ 227,560 $ 182,226 ========== ========== </TABLE> (Continued) 16
19 HELEN OF TROY LIMITED AND SUBSIDIARIES Consolidated Balance Sheets February 28, 1998 and 1997 (in thousands, except par value and shares) <TABLE> <CAPTION> 1998 1997 ---- ---- <S> <C> <C> Liabilities and Stockholders' Equity Current liabilities: Notes payable to banks (note 3) $ -- $ 4,001 Accounts payable, principally trade 1,430 2,645 Accrued expenses: Advertising and promotional 4,599 2,580 Other 7,389 6,934 Income taxes payable (note 5) 9,208 5,134 ---------- ---------- Total current liabilities 22,626 21,294 Long-term debt (note 4) 55,450 40,450 ---------- ---------- Total liabilities 78,076 61,744 ---------- ---------- Stockholders' equity (note 6): 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; 27,281,242 and 26,286,874 shares issued and outstanding at February 28, 1998 and 1997, respectively 2,728 1,314 Additional paid-in-capital 31,899 26,643 Retained earnings 114,857 92,525 ---------- ---------- Total stockholders' equity 149,484 120,482 ---------- ---------- Commitments and contingencies (notes 5 and 7) $ 227,560 $ 182,226 ========== ========== </TABLE> See accompanying notes to consolidated financial statements. 17
20 HELEN OF TROY LIMITED AND SUBSIDIARIES Consolidated Statements of Income (in thousands, except shares and earnings per share) <TABLE> <CAPTION> Years Ended Last Day of February --------------------------------- 1998 1997 1996 ---- ---- ---- <S> <C> <C> <C> Net sales $ 248,098 $ 213,035 $ 167,053 Cost of sales 153,087 132,861 102,341 ------------ ------------ ------------ Gross profit 95,011 80,174 64,712 Selling, general and administrative expenses (note 7) 64,911 57,438 47,356 ------------ ------------ ------------ Operating income 30,100 22,736 17,356 Other income (expense): Interest expense (3,487) (2,262) (1,795) Other income, net 2,203 1,665 1,286 ------------ ------------ ------------ Total other (expense) (1,284) (597) (509) ------------ ------------ ------------ Earnings from operations before income taxes 28,816 22,139 16,847 Income taxes (note 5) 6,484 4,981 3,790 ------------ ------------ ------------ Net earnings $ 22,332 $ 17,158 $ 13,057 ============ ============ ============ Earnings per share: (note 1) Basic $ .83 $ .66 $ .51 Diluted .77 .62 .49 ============ ============ ============ Weighted average number of common and common equivalent shares used in computing net earnings per share: Basic 26,856,463 26,077,572 25,834,056 Diluted 28,850,689 27,769,608 26,745,460 </TABLE> See accompanying notes to consolidated financial statements. 18
21 HELEN OF TROY LIMITED AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended last day of February 1998, 1997 and 1996 (in thousands) <TABLE> <CAPTION> Additional Total Common Paid-In Retained Stockholders Stock Capital Earnings Equity ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Balances, February 28, 1995 $ 643 $ 25,674 $ 62,310 $ 88,627 Exercise of common stock options, net (notes 5 and 6) 5 189 -- 194 Net earnings -- -- 13,057 13,057 ---------- ---------- ---------- ---------- Balances, February 29, 1996 648 25,863 75,367 101,878 Exercise of common stock options, net (notes 5 and 6) 15 1,431 -- 1,446 Stock dividend 651 (651) -- -- Net earnings -- -- 17,158 17,158 ---------- ---------- ---------- ---------- Balances, February 28, 1997 1,314 26,643 92,525 120,482 Exercise of common stock options, net (notes 5 and 6) 63 6,607 -- 6,670 Stock dividend 1,351 (1,351) -- -- Net earnings -- -- 22,332 22,332 ---------- ---------- ---------- ---------- Balances, February 28, 1998 $ 2,728 $ 31,899 $ 114,857 $ 149,484 ========== ========== ========== ========== </TABLE> See accompanying notes to consolidated financial statements. 19
22 HELEN OF TROY LIMITED AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands) <TABLE> <CAPTION> Years Ended Last Day of February --------------------------------- 1998 1997 1996 ---- ---- ---- <S> <C> <C> <C> Cash flows from operating activities: Net earnings $ 22,332 $ 17,158 $ 13,057 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 3,999 2,683 2,156 Provision for doubtful receivables 168 10 27 Deferred taxes, net (246) (453) (427) Gain on sale of assets (216) -- -- Non-cash charge to expenses (note 7) -- 3,198 -- Changes in operating assets and liabilities: Accounts receivable (7,786) (8,107) (3,697) Inventory (3,090) (19,695) (2,498) Prepaid expenses (2,863) (517) (298) Accounts payable (1,215) 1,640 (1,374) Accrued expenses 2,474 2,862 1,304 Income taxes payable 4,074 3,124 (4,879) ---------- ---------- ---------- Net cash provided by operating activities 17,631 1,903 3,371 Cash flows used for investing activities: Capital and license expenditures (3,255) (13,342) (4,627) Proceeds from sale of assets 1,692 -- -- Other assets (4,387) (10,296) (141) Collection on notes receivable 522 484 438 ---------- ---------- ---------- Net cash used for investing activities (5,428) (23,154) (4,330) </TABLE> (Continued) 20
23 HELEN OF TROY LIMITED AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands) <TABLE> <CAPTION> Years Ended Last Day of February -------------------------------- 1998 1997 1996 ---- ---- ---- <S> <C> <C> <C> Cash flows provided by financing activities: Net (repayments) borrowings on revolving line of credit (4,001) 1,408 (27,407) Proceeds from long-term debt 15,000 -- 40,450 Proceeds from exercise of options, net 6,670 1,446 194 ---------- ---------- ---------- Net cash provided by financing activities 17,669 2,854 13,237 ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents 29,872 (18,397) 12,278 Cash and cash equivalents, beginning of year 25,798 44,195 31,917 ---------- ---------- ---------- Cash and cash equivalents, end of year $ 55,670 $ 25,798 $ 44,195 ========== ========== ========== Supplemental cash flow disclosures: Interest paid $ 3,459 $ 2,915 $ 1,368 Income taxes paid (net of refunds) (213) 2,882 8,317 </TABLE> See accompanying notes to consolidated financial statements. 21
24 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements February 28, 1998 and 1997 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) General Helen of Troy Limited, a Bermuda company, was formed on December 1, 1993. On February 16, 1994, Helen of Troy Texas Corporation, a Texas corporation, became a subsidiary of Helen of Troy Limited pursuant to the terms of the Exchange Agreement between Helen of Troy Texas Corporation and Helen of Troy Limited. The accompanying consolidated financial statements are prepared in U.S. dollars and in accordance with generally accepted accounting principles followed in the United States of America. The Company and its subsidiaries are principally engaged in the design, development, importation and wholesale distribution of hair care appliances, hair brushes, combs and accessories and related personal care products. Most of the Company's purchases of such appliances and products are made from unaffiliated manufacturers principally located in The Peoples Republic of China, Thailand, Taiwan and South Korea (the "Far East"). As a result of the manufacture of the Company's products in the Far East, the Company is subject to risks associated with trade barriers, currency exchange fluctuations and political unrest. Political changes in the Far East have not affected the production of the Company's goods. The Company believes that adequate production facilities are available in other countries should they be needed. However, the relocation of production capacity could require substantial time for the establishment of comparable production levels and could result in increased production costs. (b) Principles of Consolidation The consolidated financial statements include the accounts of Helen of Troy Limited and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. (c) Inventories Inventories are stated at the lower of cost (first-in, first-out) or market (net realizable value). (d) Property and Equipment Property and equipment are stated at cost. Depreciation has been recorded by using the straight-line method over the estimated useful lives of the assets. (Continued) 22
25 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED (e) License Agreements The great majority of the Company's sales are made subject to License Agreements with the licensors of the Vidal Sassoon, Revlon and Dr. Scholl's trade names. The acquisition costs of the existing license agreements are being amortized on a straight line basis over the lives of the respective agreements. Net sales subject to all license agreements aggregated 85%, 87% and 89% of total net sales for the fiscal years 1998, 1997 and 1996, respectively. (f) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (g) Earnings per Share In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". SFAS No. 128 supersedes Accounting Principles Board (APB) No. 15, "Earnings Per Share" and requires the calculation and dual presentation of Basic and Diluted earnings per share (EPS), replacing the measures of Primary and Fully-diluted EPS as reported under APB No. 15. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997; earlier application is not permitted. 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 1,994,226, 1,692,036 and 911,404 for the fiscal years ended the last day of February 1998, 1997 and 1996, respectively. All potentially dilutive securities are included in earnings per share. On June 4, 1996, the Company's Directors approved a 2-for-1 stock split which was paid as a 100% stock dividend on July 1, 1996 to stockholders of record on June 17, 1996. On August 26, 1997, the Company's Directors approved a 2-for-1 stock split which was paid as a 100% stock dividend on September 22, 1997 to stockholders of record on September 8, 1997. 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. (Continued) 23
26 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED (h) Cash Equivalents The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. (i) Foreign Currency Transactions The U.S. dollar has been determined to be the functional currency of the Company and each of its subsidiaries in accordance with SFAS No. 52, "Foreign Currency Translation." If applicable, all transactions of the non-U.S. companies have been re-measured in U.S. dollars using historical exchange rates. Changes in exchange rates which affect cash flows and the related receivables or payables are recognized as transaction gains and losses in the determination of net earnings. (j) Advertising Advertising costs are expensed as incurred. During the fiscal years ended February 28, 1998, February 28, 1997 and February 29, 1996, $13,522,000, $10,544,000 and $7,319,000, respectively, of advertising costs were charged to selling, general and administrative expenses. (k) Warranties The Company's products are under warranty against defects in material and workmanship for a period of up to two years. The Company has established an accrual for these anticipated future warranty costs. (l) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (m) Stock-based Employee Compensation The Company accounts for stock-based compensation plans utilizing the provisions of APB No. 25, "Accounting for Stock Issued to Employees." In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." Under SFAS No. 123, companies are allowed to continue to apply the provisions of APB 25 to their stock-based employee compensation arrangements. The method used by the Company to adopt SFAS No. 123 requires the Company to supplement its financial statements with additional disclosures (note 6). (Continued) 24
27 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED (n) Accounting for Asset Impairment During March 1995 the FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The adoption of SFAS No. 121 had no material impact on the Company's financial position or the results of its operations at the time of adoption. (o) Financial Instruments SFAS No. 107, "Disclosure about Fair Value of Financial Instruments," requires the Company to disclose estimated fair values for its financial instruments. The carrying amounts of cash and cash equivalents, receivables, accounts payable, accrued expenses and income taxes payable approximate fair value because of the short maturity of these items. Based on prevailing interest rates for similar instruments, the fair value of notes payable to banks and a portion of long-term debt approximate their carrying value. See footnote 4 for management's assessment of the fair value of the Company's guaranteed Senior Notes. (p) Reporting Comprehensive Income In June 1997 the FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements and is effective for financial statements issued for periods beginning after December 15, 1997. Given the Company's current operations, the adoption of SFAS No. 130 is not expected to have an impact on the financial statements of the Company. (q) Segment Disclosures In June 1997 the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 requires that companies report certain information about operating segments in complete sets of financial statements issued to shareholders and is effective for financial statements issued for periods beginning after December 15, 1997. The adoption of SFAS No. 131 could require the Company to include additional disclosures in future reports issued to shareholders. However, the Company does not expect the adoption of SFAS No. 131 to have a material impact on its financial statements. (r) Reporting on Start-Up Costs In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5). The SOP requires that costs incurred during start-up activities, including organization costs, be expensed as incurred and is effective for financial statements issued for fiscal years beginning after December 15, 1998. The Company does not expect the adoption of SOP 98-5 to have a material impact on its financial statements. (Continued) 25
28 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements 2) PROPERTY AND EQUIPMENT A summary of property and equipment is as follows: <TABLE> <CAPTION> Estimated Useful Lives (Years) 1998 1997 ------- ---- ---- (in thousands) <S> <C> <C> <C> Land $ 8,656 $ 9,994 Buildings and improvements 20 - 40 13,037 13,046 Computer and office equipment 3 - 5 5,461 4,128 Furniture and fixtures 5 848 579 Transportation equipment 3 - 5 929 922 Construction in progress 2,216 1,094 -------- -------- 31,147 29,763 Less accumulated depreciation (4,892) (3,983) -------- -------- Property and equipment, net $ 26,255 $ 25,780 ======== ======== </TABLE> During the years ended February 28, 1998 and 1997 the Company's U.S. subsidiary capitalized $43,000 and $613,000, respectively of interest expense in connection with the construction of a new office facility and distribution center. (Continued) 26
29 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (3) NOTES PAYABLE The Company's U.S. subsidiary maintains a line of credit with a bank for the issuance of letters of credit. The facility is limited to $10 million (United States currency) and bears interest at the bank's prime rate or at alternate rates based on Eurodollar investment rates for specific time periods. The credit facility expires on July 31, 1999. The Company's U.S. subsidiary did not have any balance outstanding at February 28, 1998 under this credit facility nor was any of the facility used to finance letters of credit at February 28, 1998. At February 28, 1997 the Company's U.S. subsidiary had $4,001,000 outstanding under this credit facility. To allow the issuance of letters of credit, one of the Company's non-U.S. subsidiaries maintains a line of credit with a bank. The facility is limited to $4 million (United States currency) and bears interest at the bank's U.S. dollar base rate, with all outstanding balances due July 31, 1998. At February 28, 1998, no loans were outstanding under this agreement and $159,000 was used to finance letters of credit which were paid by the Company subsequent to February 28, 1998. (4) LONG-TERM DEBT On January 5, 1996 the Company's U.S. subsidiary issued guaranteed Senior Notes at face value of $40,000,000. Interest is paid quarterly at a rate of 7.01%. The Senior Notes are unsecured, are guaranteed by the Company and are due January 5, 2008. Principal payments begin in fiscal 2005. Using a discounted cash flow analysis based on estimated market rates, the estimated fair value of the guaranteed Senior Notes at February 28, 1998 is approximately $38,660,000. On December 31, 1996 the Company's U.S. subsidiary executed a $40,000,000 Guaranteed Senior Note Facility ("Facility"). The Facility allows the Company's U.S. subsidiary to draw up to $40,000,000 over a period of two years. As borrowings under the Facility occur, they become unsecured fixed rate long-term notes. On July 18, 1997 the Company's U.S. subsidiary issued a $15,000,000 Senior Note under this Facility. Interest is paid quarterly at a rate of 7.24%. The Senior Note is guaranteed by the Company and is due July 18, 2012. Principal payments begin in fiscal 2009. Using a discounted cash flow analysis based on estimated market rates, the estimated fair value of the guaranteed Senior Note at February 28, 1998 is approximately $14,350,000. Other long-term debt includes of a note for $450,000. Interest payments are made monthly based on the prime rate for corporate loans at major U.S. money center commercial banks (8.4% at February 28, 1998). The note is payable in full on January 25, 2001. (Continued) 27
30 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (5) INCOME TAXES <TABLE> <CAPTION> Years Ended Last Day of February ------------------------------------------ 1998 1997 1996 ---- ---- ---- (in thousands) <S> <C> <C> <C> The components of earnings before income tax expense are as follows: U.S $ 6,588 $ 5,983 $ 4,704 Non-U.S 22,228 16,156 12,143 ---------- ---------- ---------- $ 28,816 $ 22,139 $ 16,847 ========== ========== ========== The components of income tax expense (benefit) are as follows: Current: U.S $ 4,199 $ 4,901 $ 3,938 Non-U.S 2,531 533 279 Deferred (246) (453) (427) ---------- ---------- ---------- $ 6,484 $ 4,981 $ 3,790 ========== ========== ========== </TABLE> Total income tax expense differs from the amounts computed by applying the statutory tax rate to earnings before income taxes. The reasons for these differences are as follows: <TABLE> <CAPTION> Years Ended Last Day of February ------------------------------------ 1998 1997 1996 ---- ---- ---- (in thousands) <S> <C> <C> <C> Computed "expected" tax expense at the U.S. statutory rate of 35% $ 10,086 $ 7,749 $ 5,896 Increase (decrease) in income taxes resulting from: Income from non-U.S. operations subject to varying income tax levies (3,602) (2,768) (2,106) ---------- ---------- ---------- Actual tax expense $ 6,484 $ 4,981 $ 3,790 ========== ========== ========== </TABLE> (Continued) 28
31 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (5) INCOME TAXES, CONTINUED The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at February 28, 1998 and 1997 were: <TABLE> <CAPTION> 1998 1997 ---- ---- <S> <C> <C> Deferred tax assets: (in thousands) Inventories, principally due to additional costs inventories for tax purposes pursuant to the U.S. Tax Reform Act of 1986 $ 637 $ 507 Accrued expenses 687 601 Accounts receivable, property and equipment, and other 220 249 ---------- ---------- Total gross deferred tax assets 1,544 1,357 ---------- ---------- Deferred tax liabilities: Depreciation and amortization (18) (81) Accrued expenses (4) -- ---------- ---------- Total gross deferred tax liabilities (22) (81) ---------- ---------- Net deferred tax asset $ 1,522 $ 1,276 ========== ========== </TABLE> The U.S. Federal income tax returns of the Company's U.S. subsidiary for the fiscal years 1994, 1995 and 1996 have been examined by the Internal Revenue Service (the IRS). The IRS has proposed two adjustments which affect pricing between the Company's U.S. subsidiary and one of the Company's foreign subsidiaries. The impact of the two proposed adjustments could create a tax liability of approximately $780,000. The Company disagrees with the proposed adjustments and is vigorously defending the position of its U.S. subsidiary. Currently the Company is preparing to argue the position of its U.S. subsidiary before the appeals section of the IRS. Although the ultimate outcome of the appeals process cannot be predicted with certainty, management is of the opinion that adequate provision has been made in the financial statements for the estimated impact of the transfer pricing issues. The Inland Revenue Department (the IRD) in Hong Kong has made assertions concerning its ability to tax certain profits of the Company's foreign subsidiaries for the years 1990 through 1998. Hong Kong tax laws allow for the taxation of profits that are earned from activities conducted in Hong Kong. The Company is vigorously defending its position that the activities which produced the profits in question occurred outside of Hong Kong and that the Company has complied with all applicable reporting and tax payment obligations. If the position taken by the IRD were to prevail, the tax liability could range from U.S. $400,000 to U.S. $10,800,000. Management believes that the proposed adjustments lack legal merit and will be nullified. Although the ultimate outcome cannot be predicted with certainty, management is of the opinion that adequate provision has been made in the financial statements for the expected resolution of the IRD's claims. The Company plans to permanently invest all of the undistributed earnings of the non-U.S. subsidiaries of the U.S. Corporation in non-U.S. locations. In accordance with generally accepted accounting principles in the U.S., no provision has been made for U.S. federal income taxes on a portion of these undistributed earnings. At February 28, 1998, the undistributed earnings for which the Company has not provided deferred U.S. federal income taxes approximated $33,332,000. During fiscal years 1998, 1997 and 1996, certain stock options were exercised by officers and employees which resulted in a tax deduction for U.S. Federal income tax purposes but which did not affect tax expense for financial reporting purposes. The tax effect of these transactions for fiscal years 1998, 1997 and 1996 has been an increase to additional paid-in-capital of $2,533,000, $362,000 and $433,000, respectively. (Continued) 29
32 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (6) STOCK OPTIONS Pursuant to a stock option and restricted stock plan adopted in fiscal 1994, the Company has reserved 8,000,000 shares of its common stock for issuance to officers and key employees. The plan contains provisions for incentive stock options, non-qualified stock options and restricted stock grants. Incentive Stock Options (ISO's) and Non-Qualified Stock Options (Non-Q's) can be granted at an exercise price that is not less than the fair market value of the common stock on the date of grant. The vesting schedule under the plan adopted in 1994 is determined individually for each option grant. The Helen of Troy Limited 1995 Stock Option Plan for Non-Employee Directors (the Directors Plan) was adopted in fiscal 1996. The Directors Plan automatically issues 4,000 stock options to eligible directors on the grant date. The options are exercisable one year after issuance and have an exercise price equal to the mean between the high and low trading prices of the Company's common stock on the date of the grant. <TABLE> <CAPTION> Weighted Average Exercisable at 2/28/98 Number of Contractual Exercise Weighted Options Price Range Life Price Average Exercise Options Price ----------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> ISO's 523,878 $ 3.13 to $ 7.81 5.92 $ 4.67 115,210 $ 4.36 256,754 $10.50 to $19.44 6.69 $13.20 4,400 $10.66 ------- --------- Total 780,632 $ 3.13 to $19.44 -- $ 7.47 119,610 $ 4.59 Non-Q's 2,309,344 $ 1.89 to $ 6.75 4.17 $ 3.45 1,817,384 $ 3.14 1,315,546 $12.09 to $ 16.75 8.95 $15.96 1,000 $12.09 --------- --------- Total 3,624,890 $ 1.89 to $ 16.75 -- $ 7.99 1,818,384 $ 3.15 Directors Plan 28,000 $ 5.13 to $ 7.06 7.57 $ 6.23 28,000 $ 6.23 120,000 $15.94 to $ 16.41 9.00 $16.02 -- -- ------- --------- Total 148,000 $ 5.13 to $ 16.41 -- $14.15 28,000 $ 6.23 </TABLE> (Continued) 30
33 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (6) STOCK OPTIONS, CONTINUED The Company accounts for its option plans under APB No. 25, under which no compensation cost has been recognized in the income statements. Had compensation cost for these plans been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts: <TABLE> <CAPTION> 1998 1997 1996 ---- ---- ---- <S> <C> <C> <C> <C> Net Income: As reported $ 22,332,000 $ 17,158,000 $ 13,057,000 Pro Forma 19,539,000 16,204,000 12,157,000 Earnings per Share: Basic: As Reported $ .83 $ .66 $ .51 Pro Forma .73 .62 .47 Diluted: As Reported .77 .62 .49 Proforma .68 .58 .45 </TABLE> The following summarizes activity relating to stock options: <TABLE> <CAPTION> 1998 1997 1996 ---- ---- ---- SHARES WEIGHTED Shares Weighted Shares Weighted (000) AVERAGE (000) Average (000) Average EXERCISE Exercise Exercise PRICE Price Price -------- --------- ------- -------- -------- --------- <S> <C> <C> <C> <C> <C> <C> Options outstanding, beginning of year 4,005 $ 3.95 4,214 $ 3.70 2,344 $ 2.57 Options granted 1,643 15.68 170 8.33 2,338 4.53 Options exercised (994) 4.16 (355) 3.04 (230) 2.27 Options forfeited (100) 5.46 (24) 5.13 (238) 2.14 ------ ------- ------- Options outstanding, end of year 4,554 8.10 4,005 3.95 4,214 3.70 Options exercisable at year-end 1,966 3.28 1,954 3.08 1,428 2.65 Weighted average fair value of options granted during the year 7.04 2.42 1.78 </TABLE> The fair value of each option grant estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in fiscal 1998, 1997 and 1996: risk free interest rate of 6.5% for options granted under the 1994 stock option and restricted stock plan, and under the Directors Plan; a zero expected dividend yield; expected lives of 10, 5, 4, and 3 years depending on the term of the option granted; expected volatility of 23.4% for the fiscal year 1998 and 20% for the fiscal years 1997 and 1996. (Continued) 31
34 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (7) COMMITMENTS AND CONTINGENCIES The Company has employment contracts with certain of its officers. These agreements provide for minimum salary levels and potential incentive bonuses. One agreement automatically renews itself each month for a five year period and provides that in the event of a merger, consolidation or transfer of all or substantially all of the assets of the Company to an unaffiliated party, an election may be made by the officer to receive a cash payment for the balance of the obligations under the agreement. The expiration dates for these agreements range from February 28, 1999 to February 28, 2003. The aggregate commitment for future salaries, at February 28, 1998, excluding incentive compensation, was approximately $4,521,000. During fiscal years 1990 and 1989, the Company entered into barter agreements to exchange certain inventory items for advertising credits. As of February 28, 1997, the Company disposed of unused advertising credits. The fiscal year 1997 non-cash charge of $3,198,000 is included with the Company's selling, general and administrative expenses. There are claims and legal proceedings pending against the Company which arise in the normal course of the Company's operations. In the opinion of management, the outcome of these matters will not have a materially adverse effect on the consolidated financial position, results of operations or liquidity of the Company and its subsidiaries. The Company continues to assess its exposure related to the impact of the Year 2000 date issue. The Year 2000 date issue arises from the fact that throughout the worldwide business community some computer programs use only two digits to identify a year in a date field. The Company's key financial and operational systems have been reviewed and it has been determined that the majority of the systems do not require burdensome modifications. Accordingly, management does not expect that any costs to be incurred will have a material adverse impact on the Company's financial position, results of operations or cash flows. However, the Company could be adversely impacted by the Year 2000 date issue if suppliers, customers and other businesses do not address this issue successfully. Management continues to assess these risks in order to reduce the impact on the Company. (Continued) 32
35 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (8) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Selected unaudited quarterly financial data is as follows (in thousands, except per share amounts): <TABLE> <CAPTION> Three Months Ended the Last Day of -------------------------------------------------------------------------------------- May August November February Total ----- <S> <C> <C> <C> <C> <C> 1998: Net sales $52,448 $60,929 $82,780 $51,941 $248,098 Gross profit 19,811 23,263 31,801 20,136 95,011 Net earnings 3,552 5,897 9,243 3,640 22,332 Earnings per share Basic .13 .22 .34 .13 .83 Diluted .12 .21 .32 .13 .77 1997: Net sales $43,836 $50,491 $74,477 $44,231 $213,035 Gross profit 16,340 18,686 28,334 16,814 80,174 Net earnings 2,402 4,095 7,805 2,856 17,158 Earnings per share Basic .09 .16 .30 .11 .66 Diluted .09 .15 .28 .10 .62 </TABLE> The business of the Company is seasonal, with approximately fifty-eight percent of annual sales volume normally occurring in the second and third fiscal quarters. (Continued) 33
36 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (9) SEGMENT AND GEOGRAPHIC INFORMATION The Company operates in one industry segment - health, beauty and personal care appliances and accessories. Products are procured through the Company's non-U.S. contract manufacturing subsidiary located in Barbados, West Indies. Unaffiliated factories are used on an order-by-order basis. Approximately 90% and 91% of total assets are located in the United States of America at February 28, 1998 and 1997, respectively. The percentages of third party sales made in the United States for fiscal years ended in 1998, 1997 and 1996 were 95%, 96% and 98%, respectively. Approximately 29% and 27% of the Company's net sales in the years ended February 28, 1998 and 1997, respectively, were made to one customer and its affiliate. Approximately 29%, 10% and 10% of the Company's net sales in the year ended February 29, 1996 were made to three customers. (10) ASSET ACQUISITION On October 4, 1996 the Company acquired the assets of two personal care lines of Dazey Corporation, of Kansas City, Missouri. Included in the purchase were certain inventories, designs, equipment, tooling, license rights and trademarks for existing products bearing the Dazey, Lady Dazey, Lady Carel and Dr. Scholl's trade names. The purchase method of accounting was used to record the acquisition. Costs in excess of the fair value of assets acquired, which consist of the majority of the purchase price, are included in other assets and are being amortized over fifteen years. On June 12, 1997 the Company acquired the assets of Caruso International. Included in the purchase were certain inventories, designs and trademarks. The purchase method of accounting was used to record the acquisition. The majority of the purchase price is comprised of costs in excess of the fair value of assets acquired (included in other assets) and is being amortized over fifteen years. On a proforma basis these acquisitions would not have a material effect on net revenues or net earnings. 34
37 Schedule II HELEN OF TROY LIMITED AND SUBSIDIARIES Valuation and Qualifying Accounts Years Ended February 28, 1998, February 28, 1997 and February 29, 1996 (in thousands) <TABLE> <CAPTION> Balance Write-off of Balance at beginning Charged uncollectible end of Description of year to Recoveries accounts year ----------- ------- costs and ---------- -------- ---- expenses -------- <S> <C> <C> <C> <C> <C> Year ended February 28, 1998: Allowance for doubtful accounts $ 400 $ 551 $ -- $ 383 $ 568 Year ended February 28, 1997: Allowance for doubtful accounts 390 349 2 341 400 Year ended February 28, 1996: Allowance for doubtful accounts 363 289 1 263 390 </TABLE> 35
38 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been none. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The table below sets forth certain information regarding the directors and executive officers of the Company as of April 30, 1998. <TABLE> <CAPTION> Director Name Age Position With the Company Since - --------------- --- -------------------------- --------- <S> <C> <C> <C> Gerald J. Rubin 54 Chairman, Chief Executive Officer 1993 and Director Daniel C. Montano 49 Director 1993 Byron H. Rubin 48 Director 1993 Stanlee N. Rubin 53 Director 1993 Gary B. Abromovitz 55 Director 1993 Christopher L. Carameros 44 Director 1993 H. McIntyre Gardner 36 President and Chief Operating Officer -- Sam L. Henry 48 Senior Vice President, Finance, -- Chief Financial Officer, and Secretary </TABLE> Directors and executive officers each serve for a one year term or until their successors are elected and qualified to serve. Gerald J. Rubin and Byron H. Rubin are brothers. Set forth below are descriptions of the principal occupations during at least the past five years of the directors and executive officers of the Company. Gerald J. Rubin, founder of Helen of Troy Corporation, has been the Chairman and Chief Executive Officer of the Company since December 1993 and of Helen of Troy Corporation since 1984. Mr. Rubin has been a Director of the Company since December 1993 and of Helen of Troy Corporation since 1969. Daniel C. Montano has been a Director of the Company since December 1993 and of Helen of Troy Corporation since 1980. He has been the managing Director of C & K Capital since January 1997. From January of 1995 to December 1996, he was Director of Investment Banking at Brook Street Securities. Mr. Montano was President and a Director of Montano Securities Corporation from 1979 to January 1995. He also serves as a director of ESSCO USA, a Greek shipping company. Byron H. Rubin has been a director of the Company since December 1993 and of Helen of Troy Corporation since 1981. He has been a partner in the firm Daniels & Rubin (formerly known as Integrated Financial of Texas), an insurance and tax planning firm in Dallas, Texas since 1979. Stanlee N. Rubin is the wife of Gerald J. Rubin, Chairman of the Board of Directors. She has been a Director of the Company since December 1993 and of Helen of Troy Corporation since 1990. Mrs. Rubin 36
39 is active in civic and charitable organizations. She is a member of the University of Texas at El Paso Board of Development. She is presently on the Board of Directors of the Alumni Association of the University of Texas at El Paso, The National Conference of Christians and Jews and the El Paso Symphony Guild. Mrs. Rubin is also a Partner for The Susan G. Komen Breast Cancer Foundation. Gary B. Abromovitz has been a Director of the Company since December 1993 and of Helen of Troy Corporation since 1990. He has been a partner in the law offices of Bonn/Abromovitz Law Firm in Phoenix, Arizona since 1990. From 1985 to 1989, he was Of Counsel to the law firm Bonn & Anderson in Phoenix, Arizona. Christopher L. Carameros has been a Director of the company since December 1993 and of Helen of Troy Corporation since June 1993. From August 1997 to the present Mr. Carameros has been President of L & M Asset Management Inc., a financial services and asset management company. From September 1993 to July 1997 he was an Executive Vice President of Cactus Apparel Inc., an apparel manufacturing company. He also serves as a Director of Farah Incorporated. H. McIntyre Gardner has been the President and Chief Operating Officer of the Company since September 1997. From 1994 to September 1997 Mr. Gardner served as Executive Vice President and President of Appliance Corp. of America. Mr. Gardner also held the position of President for Hanover Associates, Inc. from 1991 to 1997. Sam L. Henry has been the Senior Vice-President, Finance, Chief Financial Officer and Secretary of the Company since December 1993 and of Helen of Troy Corporation since 1986. Except as indicated above, none of the directors of the Company is a director of any other publicly held company. 37
40 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the summary of compensation paid to the Company's Chief Executive Officer and its other Executive Officers during fiscal years 1996 through 1998. SUMMARY COMPENSATION TABLE <TABLE> <CAPTION> LONG TERM ALL OTHER ANNUAL COMPENSATION COMPENSATION COMPENSATION($) -------------------------------------------- ------------ --------------- OTHER NAME AND ANNUAL PRINCIPAL COMPENSATION OPTIONS/ POSITION YEAR SALARY ($) BONUS ($) $ SARS (#) - -------------------- ------- ------ ----- ---------- -------- <S> <C> <C> <C> <C> <C> <C> Gerald J. Rubin 1998 $ 625,003 $ 885,000 $ -0- 1,000,000 $ 16,414 (1)(2)(3) Chairman and Chief 1997 623,158 551,705 -0- -0- 15,821 (1)(2)(3) Executive Officer 1996 600,000 262,000 -0- 1,200,000 15,363 (1)(2)(3) H. McIntyre Gardner 1998 216,667 50,000 -0- 300,000 -0- President and Chief Operating Officer Sam L. Henry 1998 215,636 28,240 -0- 20,000 4,517 (1)(2) Senior Vice-President 1997 205,367 40,343 -0- -0- 4,517 (1)(2) Finance 1996 188,343 24,485 -0- 80,000 3,761 (1)(2) </TABLE> (1) These amounts include the Company's contributions to Helen of Troy Corporation's 401(k) Profit Sharing Plan. (2) Includes amounts representing premiums for life insurance or the economic benefit of split dollar policies paid by the Company for life insurance arrangements on behalf of the Executive Officer. (3) Amounts represent the annual lease value of a vehicle provided by the Company. 38
41 OPTION/SAR GRANTS IN LAST FISCAL YEAR <TABLE> <CAPTION> POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR OPTION TERM INDIVIDUAL GRANTS - ------------------------------------------------------------------------------------------------------------------ NUMBER OF SECURITIES % OF TOTAL UNDER- OPTIONS/ LYING SARS OPTIONS/ GRANTED TO SARS EMPLOYEES EXERCISE OF GRANTED IN FISCAL BASE PRICE EXPIRATION NAME (#) YEAR ($/SH) DATE 5%($) 10%($) ---- --------- ---------- ------------ ----------- ---- ------ <S> <C> <C> <C> <C> <C> <C> G. Rubin 1,000,000 60.9% $ 15.9375 08/26/07 $10,023,008 $25,400,270 H.M. Gardner 300,000 18.3% $ 16.75 09/02/07 $ 3,160,195 $ 8,008,556 S. Henry 20,000 1.2% $ 12.50 05/27/07 $ 157,224 $ 398,436 </TABLE> AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION/SAR VALUES <TABLE> <CAPTION> VALUE OF NUMBER OF UNEXERCISED SHARES UNEXERCISED IN-THE-MONEY ACQUIRED OPTIONS/SARS AT OPTIONS/SARS AT ON VALUE FISCAL YEAR END (#) FISCAL YEAR END ($) (1) EXERCISE REALIZED ----------------------------- ----------------------------- NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE --------------- --------- ----------- ----------- ------------- ----------- ------------- <S> <C> <C> <C> <C> <C> <C> G. Rubin -- -- 1,700,000 1,400,000 $20,628,140 $ 4,300,000 H. M. Gardner -- -- -- 300,000 -- -- S. Henry 60,000 598,903 47,000 91,000 523,984 822,375 </TABLE> (1) Based on the closing price of the NASDAQ National Market System - Composite Transactions of the Company's Common Stock on February 28, 1998 ($15.25). CONTRACTS The Company has entered into contracts with each of its directors and officers to indemnify them against certain fees and expenses incurred in legal proceedings to which the officer or director is made a party by reason of serving as an officer or director of the Company, so long as the party to be indemnified acted in good faith or in a manner reasonably believed to be in or not opposed to the best interests of the Company. 39
42 The Company has an employment contract with Mr. Gerald J. Rubin. The contract for Mr. Rubin was effective March 1, 1995, provided for a base salary of $600,000 and a bonus equal to 5% of adjusted earnings from continuing operations less Mr. Rubin's base salary. Mr. Rubin amended his employment contract to remove the bonus previously provided under his contract and to substitute the bonus payable thereunder for the bonus under the Helen of Troy 1997 Cash Bonus Performance Plan which was approved by the Company's shareholders. The Company has an employment contract with H. McIntyre Gardner. Mr. Gardner's contract was effective September 1, 1997, provides for a base salary of $400,000 and a bonus which is dependent upon the Company achieving specific pre-tax income levels. In the event of the death of Messrs. Rubin or Gardner, all unpaid benefits under these agreements are payable to their estates. Gerald J. Rubin's contract renews itself monthly for a new five year term. Gerald J. Rubin's and H. McIntyre Gardner's contracts grant them the right to elect a cash payment of the remainder of their contracts in the event of a merger, consolidation or transfer of all or substantially all of the Company's assets to any unaffiliated company or other person. The Company has purchased, pursuant to the terms of his employment contract, life insurance in the amount of $5.0 million on the life of Gerald J. Rubin, payable in the event of death to his respective designees. The Company has also purchased three "second to die" life insurance contracts in the cumulative amount of $29.0 million on the lives of Gerald J. Rubin and Stanlee N. Rubin, payable to their respective designee. All of the above policies referred to in this paragraph are Split Dollar policies, which provide for the return of premiums advanced by the Company to be reimbursed to the Company upon death of the insured(s). DIRECTOR COMPENSATION Each member of the board of directors of the Company who is not an employee or officer of the Company received a fee of $3,000 for each meeting of the Board of Directors attended, together with travel and lodging expenses incurred in connection therewith. Additional payments of $1,500 were made quarterly to each such director. As approved by the Company's shareholders in 1996, each non-employee director receives 4,000 stock options on September 1st of each year. As approved by the Company's shareholders in 1997, each non-employee director received a one-time grant on August 26, 1997 of 20,000 stock options. The stock options have an exercise price equal to the medium between the high and low market prices on the day the stock options are issued. The stock options vest after one year. Aaron M. Shenkman was a director and an employee of the Company for the first seven months of fiscal 1998. As an employee of the Company Mr. Shenkman was paid a salary of $87,500 and a bonus of $175,000. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of April 30, 1998, the beneficial ownership of common stock of the directors, all officers and directors of the Company as a group, and each person known to the Company to be the beneficial owner of more than 5% of its outstanding common stock: <TABLE> <CAPTION> NAME NUMBER OF SHARES PERCENT <S> <C> <C> Gerald J. Rubin (1)(2)(3)(4) 4,439,922 15.3% 6827 Market Avenue El Paso, Texas 79915 Byron H. Rubin -- * Daniel C. Montano 8,000 * Gary B. Abromovitz 12,000 * </TABLE> 40
43 <TABLE> <S> <C> <C> Stanlee N. Rubin (4) 8,000 * Christopher L. Carameros -- * Sam L. Henry 125,000 * All directors and officers as a group (8 persons) (3) 4,935,614 15.8% Fidelity Management and Research Company (5) 2,721,400 9.4% 82 Devonshire Street Boston, Massachusetts 02109 A I M Management Group Inc. (6) 2,311,600 7.9% 11 Greenway Plaza, Suite 1919 Houston, Texas 77046 </TABLE> * ownership of less than 1% of the outstanding common stock (1) Does not include 144,000 shares in a trust for the children of Gerald J. Rubin and Stanlee N. Rubin in which they disclaim any beneficial ownership. (2) Includes 276,980 shares in the case of Mr. Gerald J. Rubin held beneficially through a partnership in which Gerald J. Rubin is a partner. (3) Includes 1,200,000 shares in the case of Gerald J. Rubin, and 1,289,000 shares in the case of all directors and officers which are issuable pursuant to options which are exercisable within sixty days of April 30, 1998. (4) Includes 2,962,942 shares and all stock options granted which are subject to a one-half undivided community property interest with Stanlee N. Rubin. (5) As extracted from Form 13G filed as of February 14, 1998, by Fidelity Management and Research Company, this represents sole investment power for 2,721,400 shares and sole voting power for no shares. (6) As extracted from Form 13G filed as of February 9, 1998, by A I M Management Group Inc., this represents shared investment power for 2,311,600 shares and sole voting power for no shares. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 41
44 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of the report: 1. Financial Statements Independent Auditors' Report Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements 2. Schedules: Schedule II - Valuation and Qualifying Accounts (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended February 28, 1998. (c) Exhibits (numbered in accordance with Item 601 of Regulation S-K). 3(a) - See Exhibit Index 42
45 The registrant will send its annual report to security holders and proxy solicitation material subsequent to the filing of this form and shall furnish copies of both to the Commission when they are sent to security holders. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 By: s/Gerald J. Rubin --------------------------------------- Gerald J. Rubin, Chairman, Chief Executive Officer and Director Dated May 26, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. <TABLE> <CAPTION> Signature Title Date - ---------------------------------------- ------------------------------------- -------------- <S> <C> <C> Chairman, Chief Executive Officer and Director s/Gerald J. Rubin (Principal Executive Officer) May 26, 1998 - ---------------------------------------- (Gerald J. Rubin) Senior Vice President, Finance Secretary and Chief Financial Officer (Principal Financial and Accounting s/Sam L. Henry Officer) May 26, 1998 - ---------------------------------------- (Sam L. Henry) s/Stanlee N. Rubin Director May 26, 1998 - ---------------------------------------- (Stanlee N. Rubin) s/Christopher L. Carameros Director May 26, 1998 - ---------------------------------------- (Christopher L. Carameros) s/Byron H. Rubin Director May 26, 1998 - ---------------------------------------- (Byron H. Rubin) s/Daniel C. Montano Director May 26, 1998 - ---------------------------------------- (Daniel C. Montano) s/Gary B. Abromovitz Director May 26, 1998 - ---------------------------------------- (Gary B. Abromovitz) </TABLE> 43
46 HELEN OF TROY LIMITED EXHIBITS TO FORM 10-K For the Fiscal Year Ended February 28, 1998 COMMISSION FILE NUMBER 0-23312 44
47 INDEX TO EXHIBITS <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION ------- ----------- <S> <C> 3.1 - Memorandum of Association. Exhibit 3.1 to the Registrant's Registration Statement on Form S-4, File No. 33-73594 filed with the Securities and Exchange Commission on December 30, 1993, is hereby incorporated herein by reference. 3.2 - Bye-Laws. Exhibit 3.2 to the Registrant's Registration Statement on Form S-4, File No. 33-73594 filed with the Securities and Exchange Commission on December 30, 1993, is hereby incorporated herein by reference. 10.1 - Vidal Sassoon, Inc. Amended License Agreement of December 22, 1982. Exhibit 10.1 to the Helen of Troy Corporation's Registration Statement on Form S-2, File No. 2-82520 filed with the Securities and Exchange Commission on March 18, 1983, is hereby incorporated herein by reference. The request for confidential treatment of certain portions of this agreement has been granted by the Commission. 10.2 - Letter Agreements Amending Sassoon License Agreement. Exhibit 10.2 to the Helen of Troy Corporation's Registration Statement on Form S-2, File No. 33-13253 filed with the Securities and Exchange Commission on April 8, 1987, is hereby incorporated herein by reference. 10.3 - Form of Directors' and Executive Officers' Indemnity Agreement dated February 11, 1994 executed by each of Gerald J. Rubin, Sam L. Henry, Robert D. Spear, Stanlee N. Rubin, Gary B. Abromovitz, Byron H. Rubin, Daniel C. Montano, and Christopher L. Carameros. Exhibit 10.2 to the Registrant's Registration Statement on Form 8-K, filed with the Securities and Exchange Commission on February 25, 1994, is hereby incorporated herein by reference. 10.4 - 1994 Stock Option and Restricted Stock Plan, as previously filed with the Registrant's Registration Statement on Form S-4, File No. 33-73594, as Exhibit 10.1 filed with the Securities and Exchange Commission on December 30, 1993, is hereby incorporated herein by reference. 10.5 - 401(k) Profit Sharing Plan, dated April 12, 1988, as previously filed with Form 10-K of Helen of Troy Corporation for the period ending February 29, 1988, is hereby incorporated herein by reference. 10.6 - Flexible Spending Arrangement Plan, dated May 1, 1988, as previously filed with Form 10-K of Helen of Troy Corporation for the period ending February 29, 1988, is hereby incorporated herein by reference. 10.7 - Vidal Sassoon, Inc., European License Agreement, dated January 1, 1990, filed with the Securities and Exchange Commission on February 28, 1990, as previously filed with Form 10-K of Helen of Troy Corporation for the period ending February 28, 1990, is hereby incorporated herein by reference. The request for confidential treatment of certain portions of this agreement has been granted by the Commission. </TABLE>
48 <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION ------- ----------- <S> <C> 10.8 - Form of Employment Agreement, dated March 1, 1995, executed by Gerald J. Rubin as previously filed with Form 10-K of Helen of Troy Limited for the period ending February 29, 1996, is hereby incorporated herein by reference. 10.9 - 401(k) Profit Sharing Plan Adoption Agreement, dated December 24, 1991, with a retroactive effective date of January 1, 1988, as previously filed with Form 10-K of Helen of Troy Corporation for the period ending February 29, 1992, is hereby incorporated herein by reference. 10.10 - 401(k) Profit Sharing Plan Adoption Agreement, dated December 24, 1991, with an effective date of January 1, 1992, as previously filed with Form 10-K of Helen of Troy Corporation for the period ending February 29, 1992, is hereby incorporated herein by reference. 10.11 - Flexible Benefits Plan, Section 125, dated June 1, 1991, as previously filed with Form 10-K of Helen of Troy Corporation for the period ending February 29, 1992, is hereby incorporated herein by reference. 10.12 - Deleted. 10.13 - First Amendment to Revlon Consumer Products Corporation ("RCPC") North America Appliance License Agreement, dated September 30, 1992, as previously filed with Form 10-K of Helen of Troy Corporation for the period ending February 28, 1993, is hereby incorporated herein by reference. 10.14 - First Amendment to RCPC North America Comb and Brush License Agreement, dated September 30, 1992, as previously filed with Form 10-K of Helen of Troy Corporation for the period ending February 28, 1993, is hereby incorporated herein by reference. 10.15 - First Amendment to RCPC International Appliance License Agreement, dated September 30, 1992, as previously filed with Form 10-K of Helen of Troy Corporation for the period ending February 28, 1993, is hereby incorporated herein by reference. 10.16 - First Amendment to RCPC International Comb and Brush License Agreement, dated September 30, 1992, as previously filed with Form 10-K of Helen of Troy Corporation for the period ending February 28, 1993, is hereby incorporated herein by reference. 10.17 - Form of Non-Statutory Stock Option Agreement, dated February 28, 1994, executed by each of Gerald J. Rubin and Don Hall, as previously filed with Form 10-K of Helen of Troy Limited for the period ending February 28, 1994, is hereby incorporated herein by reference. </TABLE>
49 <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION ------- ----------- <S> <C> 10.18 - Form of Incentive Stock Option Agreement, dated February 28, 1994, executed by each of Gerald J. Rubin, Arthur A. August, Randolph Maxwell, Sam L. Henry, William D. McCorvey and Robert D. Spear, as previously filed with Form 10-K of Helen of Troy Limited for the period ending February 28, 1994, is hereby incorporated herein by reference. 10.19 - Deleted 10.20 - Form of Employment Agreement, dated January 3, 1994, executed by William D. McCorvey, as previously filed with Form 10-K of Helen of Troy Limited for the period ending February 28, 1994, is hereby incorporated herein by reference. 10.21 - Supply Agreement between Helen of Troy Corporation and Helen of Troy Limited, a Barbados corporation, dated February 28, 1994, as previously filed with Form 10-K of Helen of Troy Limited for the period ending February 28, 1994, is hereby incorporated herein by reference. 10.22 - License Agreement between Helen of Troy Corporation and Helen of Troy Limited, a Barbados corporation, dated February 28, 1994, as previously filed with Form 10-K of Helen of Troy Limited for the period ending February 28, 1994, is hereby incorporated herein by reference. 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, as previously filed with Form 10-Q of Helen of Troy Limited for the period ending November 30, 1996, is hereby incorporated herein by reference. 10.24 - Form of employment contract for H. McIntyre Gardner, as previously filed with Form 10-Q of Helen of Troy Limited for the period ending November 30, 1997, is hereby incorporated herein by reference. 21 - Subsidiaries of the Registrant, filed herewith. 23 - Independent Auditors' Consent, filed herewith. 27 - Financial Data Schedule, filed herewith. </TABLE>