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, 1999 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, 1999 was $341,207,000. As of April 30, 1999 there were 29,048,532 shares of Common Stock, $.10 par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Certain sections of the Company's definitive proxy statement, which is to be filed under the Securities Exchange Act of 1934 within 120 days of the end of the Company's fiscal year on February 28, 1999, are incorporated by reference into Part III hereof. Except for those portions specifically incorporated by reference herein, such document shall not be deemed to be filed with the Securities and Exchange Commission as part of this Form 10-K. Index to Exhibits - Page 43
2 TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> <C> PART I Item 1. Business 1 Item 2. Properties 5 Item 3. Legal Proceedings 5 Item 4. Submission of Matters to a Vote of Security Holders 5 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 6 Item 6. Selected Financial Data 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 15 Item 8. Financial Statements and Supplementary Data 16 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 40 PART III Item 10. Directors and Executive Officers of the Registrant 40 Item 11. Executive Compensation 40 Item 12. Security Ownership of Certain Beneficial Owners and Management 40 Item 13. Certain Relationships and Related Transactions 40 PART IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K 41 Signatures 42 </TABLE> i
3 PART I ITEM 1. BUSINESS GENERAL The registrant was incorporated as Helen of Troy Corporation in 1968. The registrant reincorporated as Helen of Troy Limited in Bermuda on February 16, 1994. Unless the context requires otherwise, references to the "Company" refer to Helen of Troy Limited and its subsidiaries. The Company designs, develops and sells a variety of personal care and comfort products, including hair dryers, curling irons, brush irons, lighted mirrors, hairsetters, hair brushes, combs, hair accessories, women's shavers, foot baths, body massagers and artificial finger nails. Third party manufacturers produce all of the products sold by the Company. Most of the Company's products are sold by mass merchandisers, drug chains, warehouse clubs, grocery stores and beauty supply retailers and wholesalers. The Company sells its products primarily in the United States. The Company sells products under trademarks licensed from third parties, as well as under trademarks owned by the Company. Products bearing licensed trademarks include those sold under the trademarks of Vidal Sassoon, licensed from Procter & Gamble Co.; Revlon(R), licensed from Revlon Consumer Products Corporation; Dr. Scholl's(R), licensed from Schering Plough Health Care Products, Inc.; and Scholl's(R) (in areas other than North America), licensed from Scholl PLC. Trademarks owned by the Company include Helen of Troy(R), Salon Edition(R), Hot Tools(R), Hotspa(R), Gallery Series(R), WIGO(R), Caruso, Dazey(R), Lady Dazey(R), Carel(R), Lady Carel(R), Sable(R), Karina(R), Kurl*Mi(R), Detangle*Mi, Heat*Mi and DCNL. PRODUCTS The Company designs, develops and sells a full line of personal care and comfort products, including hair dryers, curling irons, brush irons, lighted mirrors, hairsetters, hair care appliances, hair brushes, combs, hair care accessories, women's shavers, body massagers and artificial fingernails. The Company sells full-size, mid-size and compact hand-held hair dryers in a variety of sizes in order to accommodate the needs and preferences of individual consumers. The Company's hand-held hair dryers sell under the trademarks Vidal Sassoon, Revlon(R), Helen of Troy(R), Salon Edition(R), Hot Tools(R), Gallery Series(R), WIGO(R) and Sable(R). Hard and soft-bonnet hair dryers are sold under the Dazey(R), Lady Dazey(R), Carel(R) and Hot Tools(R) trademarks. The Company sells curling irons and brush irons under trademarks that include Vidal Sassoon, Revlon(R), Helen of Troy(R), Salon Edition(R), Hot Tools(R), Gallery Series(R) and Sable(R). The Company sells hairsetters that bear the Vidal Sassoon, Revlon(R) and Caruso trademarks. The trademarks under which the Company sells hair brushes and combs include Vidal Sassoon, Revlon(R), Detangle*Mi and Kurl*Mi(R). Hair accessories sold by the Company include bows, barrettes, clips, rollers, headbands, ponytail holders and bobby pins. The Company sells hair accessories under trademarks that include Vidal Sassoon, Karina(R), Sweet Things and Trendsetters. The Company also sells foot baths, foot massagers and body massagers under the Dr. Scholl's(R), Scholl's(R), Carel(R) and Hotspa(R) trademarks. The Company sells artificial fingernails under the Revlon(R) trademark. 1
4 The Company continues to develop new products and enhance existing products in order to maintain and improve its position in the personal care and comfort product market. The Company's marketing and engineering departments develop new products with assistance from independent consulting firms. In addition to internal product development, the Company expanded its product lines through the acquisitions of the WIGO(R) trademark for hair care appliances, Karina, Inc. and DCNL, Inc. in fiscal 1999. The Company markets its products primarily within the United States. Sales within the United States comprised 92% of total sales in fiscal 1999 and 1998 and 93% of total sales in fiscal 1997. The products discussed above are sold primarily through mass merchandisers, drug chains, warehouse clubs, grocery stores and beauty supply retailers and wholesalers. The Company markets its products in the United States through approximately 100 manufacturers' representative organizations, beauty and barber supply representative organizations and through its own sales staff. Products sold under the Vidal Sassoon, Revlon(R) and Scholl's(R) trademarks comprise most of the Company's international sales. The Company sells products under the Vidal Sassoon trademark in various countries in Western Europe and under the Revlon(R) trademark worldwide, except in Western Europe. Certain products are sold internationally under the Scholl's(R) trademark. WIGO(R) professional hair care appliances are also marketed worldwide. The Company is licensed to sell various other products outside of the United States. The Company's products are sold outside of the United States through mass merchandisers, chain drug stores, catalogs, grocery stores and beauty supply retailers and wholesalers. Internationally, the Company markets its products through manufacturers' representative organizations, independent distributors, and its own sales staff. The Procter & Gamble Company has engaged in extensive television and other national media advertising of its Vidal Sassoon liquid hair care products. Revlon Consumer Products Corporation also engages in extensive national advertising of its beauty care products. The Dr. Scholl's(R) trademark is also widely recognized, partially because of advertising and the sale of a variety of products. The Company benefits from the name recognition associated with the Vidal Sassoon, Revlon(R) and Dr. Scholl's(R) trademarks and works through its own advertising and product development efforts to further improve the name recognition and perceived quality of all of the trademarks under which it sells products. The Company promotes its products primarily through print media, including consumer and trade magazines, and sales promotions. The Company has also expanded its use of television advertising, largely through its infomercial campaign promoting Caruso molecular steam hair setters. MANUFACTURING AND DISTRIBUTION The Company contracts with unaffiliated manufacturers in the Far East, primarily in the Peoples' Republic of China (the "PRC"), Thailand, Taiwan and South Korea, to build most of its products. The Company purchases a small percentage of its products from third party manufacturers in North America and Europe. In generating products for the Company, manufacturers use molds and certain other tooling owned by the Company. The Company employs numerous technical and quality control persons to monitor the quality of products purchased by the Company. Because most of the Company's products are imported, they are subject to customs duties. The Company is subject to certain risks as a result of the manufacture of the vast majority of its products in the Far East. These risks include changing international political relations, changes in customs duties and 2
5 other trade barriers, changes in shipping costs, currency exchange fluctuations and political unrest. To date, these factors have not significantly affected the Company's production in the Far East. The Company's products that are sold in North America and manufactured in the Far East are shipped to the West Coast of the United States. The products are then shipped by truck or rail service to warehouse facilities in El Paso, Texas; Memphis, Tennessee; and Toronto, Canada or directly to customers. The Company ships substantially all of its products sold to North American customers from these warehouses by ground transportation services. Products sold throughout the rest of the world are shipped from manufacturers, primarily in the Far East, to warehouses that the Company rents in Veenendaal, The Netherlands and Nottinghamshire, the United Kingdom, or directly to customers. Products stored at the warehouses in the Netherlands and the United Kingdom are shipped from those warehouses to distributors or retailers. LICENSE AGREEMENTS, TRADEMARKS AND PATENTS The Company is materially dependent upon the continued use of the Vidal Sassoon and the Revlon(R) trademarks. Although the Company has filed or obtained licenses for design and utility patents in the United States and several foreign countries, the Company does not believe that any particular patent or patent license is materially important to its business. Two license agreements with Procter & Gamble (P&G) allow the Company to sell certain products using the Vidal Sassoon trademark in the United States and Canada. Products covered by these licenses include hair dryers, curling irons, brush irons, hairsetters, lighted mirrors, brushes, combs and hair care accessories in the United States and Canada. The Company is also licensed to sell the above categories of Vidal Sassoon products in Western Europe and Mexico. The Company is licensed to use the Revlon(R) trademark worldwide, except in Western Europe, on electric hair care appliances, brushes, combs, functional hair accessories and hand-held mirrors, as well as battery-operated and electric women's shavers. In addition, the Company has a license to sell artificial fingernails and related products worldwide under the Revlon(R) trademark. The Company sells foot baths, foot massagers and body massagers bearing the Dr. Scholl's(R) trademark in the United States and North America, under a license agreement with Schering-Plough Corporation. The Company also sells these products bearing the Scholl's(R) trademark in other areas of the world through a license agreement with Scholl PLC. During fiscal 1999, the Company sold Dr. Scholl's(R) and Scholl's(R) products primarily in the United States, Canada and various European countries. The Company entered into a license agreement with Mattel, Inc. in mid-February 1999. Under this license agreement, the Company will develop and market hair dryers, hair brushes, combs, and combination packs in the United States under the Barbie(R) trademark. The Company expects to begin selling products under this license agreement in fiscal 2000. All of the license agreements under which the Company sells or intends to sell products with trademarks owned by other entities require approval from the various licensors prior to the Company's introduction of new products under those trademarks. 3
6 RELIANCE ON ONE CUSTOMER Sales to one customer and its affiliate accounted for 29% of the Company's net sales in fiscal 1999 and in fiscal 1998. Sales to that same customer comprised 27% of net sales for fiscal 1997. ORDER BACKLOG The Company normally ships products within 48 hours of receiving an order. There was no backlog of orders at February 28, 1999. COMPETITIVE CONDITIONS The Company encounters significant levels of competition with respect to all of its products. Product pricing, performance and packaging, as well as trademark recognition, affect competition in the market for personal care and comfort products. The Company's primary competitors include Conair; Windmere-Durable Holdings, Inc.; Remington Products Company; Goody Products, Inc., a division of Newell Company; and L & N Marketing and Sales Corporation. These competitors possess known trademarks and significant resources. SEASONALITY The Company's business is somewhat seasonal. Sales in the second and third quarters, combined, accounted for 55%, 58% and 59% of total sales in fiscal 1999, 1998 and 1997, respectively. As a result of the seasonality of sales, the Company's working capital needs fluctuate during the year. REGULATION The Company's electrical products are designed, manufactured and tested to meet the safety standards of Underwriters Laboratories Inc. (U.L.). Electrical products sold by the Company must meet the safety standards imposed in various national, state, local and provincial jurisdictions. The Company has experienced no material difficulty in meeting safety standards. EMPLOYEES The Company employs 470 full-time employees in the United States, Hong Kong and Europe, of whom 109 are marketing and sales employees, 160 are distribution employees, 71 are engineering and development employees and 130 are administrative personnel. None of the Company's employees are covered by any collective bargaining agreement. The Company has never experienced a work stoppage and believes it has satisfactory working relations with its employees. 4
7 ITEM 2. PROPERTIES PLANT AND FACILITIES The corporate offices that the Company owns consist of a 40,000 square foot office building located on approximately one acre of land at 6827 Market Street in El Paso, Texas. The Company also owns and maintains approximately 12,000 square feet of warehouse space situated on a lot of approximately 62,000 square feet adjacent to the property on which the corporate headquarters is located. The Company's main warehouse in El Paso, Texas totals 408,000 square feet and is located on a 50-acre plot of land owned by the Company. The Company is also constructing a new corporate headquarters facility on that same plot of land. The new office facility is scheduled for completion in the summer of 1999 and will consist of 135,000 square feet. The Company also leases 108,000 square feet of warehouse space in El Paso, Texas. During fiscal 1999, the Company purchased 22 acres of land in El Paso, Texas, near the 50 acres on which the warehouse and future corporate headquarters are located. The Company purchased this land for future business use, due to its proximity to other facilities of the Company. A subsidiary located in Hong Kong leases approximately 19,000 square feet of office space in Hong Kong. Prior to fiscal 1996 this Hong Kong subsidiary was headquartered in approximately 12,000 square feet of office space that was acquired by condominium ownership. In fiscal 1998 that office space was subleased to a third party. The Company also leases small offices in the United Kingdom and Germany. The Company also leases warehouse space in public warehouses located in Memphis, Tennessee; Veenendaal, The Netherlands; Nottinghamshire, The United Kingdom; Toronto, Canada; and Hong Kong. ITEM 3. LEGAL PROCEEDINGS The Hong Kong Inland Revenue Department has audited the operations of some of the Company's subsidiaries and has required the Company to purchase tax reserve certificates to secure the proposed adjustments. Tax reserve certificates represent the prepayment by a taxpayer of potential tax liabilities. The amounts paid for tax reserve certificates are refundable in the event that the value of the tax reserve certificates exceeds the related tax liability. The Company is defending its position in this matter. However, the issue remains open and management can offer no assurances that the Company will prevail. The Company is involved in various other legal claims and proceedings in the normal course of 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 5
8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK The Company's Common Stock is 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 1999 First quarter $ 22 13/16 $ 15 1/8 Second quarter 26 1/2 17 1/4 Third quarter 22 7/32 12 Fourth quarter 17 1/2 12 13/16 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 The Company had one class of equity security outstanding at February 28, 1999, Common Stock with a par value of $0.10. As of April 30, 1999, there were 621 holders of record of the Company's Common Stock. 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. CASH 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. The Company's current intention is to pay no cash dividends in fiscal 2000. 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. SHAREHOLDERS' RIGHTS PLAN Under the terms of a Shareholders' Rights Plan approved by the Board of Directors on December 1, 1998 the Board of Directors declared, on that date, a dividend of one preference share right ("Right") for each outstanding share of Common Stock. The dividend, which was payable to shareholders of record on December 15, 1998, resulted in no cash payment by the Company, created no liability on the part of the Company and did not change the number of shares of Common Stock outstanding. 6
9 Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A First Preference Shares ("Preference Shares"), par value $1.00, at a price of $100 per one one-thousandth of a Preference Share. One one-thousandth of a Preference Share would have voting rights essentially equivalent to those associated with one share of Common Stock. Should certain persons or groups of affiliated persons acquire more than 15% of the Company's outstanding Common Stock, they would become an "Acquiring Person." At that time, the Board may distribute Rights that are separable from the Common Stock (on the "Distribution Date") and may adjust the price of a Preference Share. The Rights are not exercisable and are inseparable from the Common Stock until the Distribution Date. The Rights associated with an Acquiring Person's shares of Common Stock would not be exercisable. The Rights will expire on December 1, 2008 (the "Final Expiration Date"), unless the Final Expiration Date is advanced or extended or unless the Rights are earlier redeemed or exchanged by the Company. A more complete explanation of the Shareholders' Rights Plan, along with the Plan itself, is contained in the Form 8-K filed by the Company with the Securities and Exchange Commission on December 4, 1998. RECENT SALES OF UNREGISTERED SECURITIES In September and October 1998, the Company issued 691,760 and 350,000 shares of Common Stock, respectively, in connection with the acquisition of Karina, Inc. and DCNL, Inc. The Company also issued 350,000 contingent value rights to the owners of DCNL, Inc. in October 1998, in connection with the acquisition of DCNL, Inc. Each contingent value right entitles the holder to obtain shares of Common Stock equal to the product of (i) one, times (ii) a fraction, the numerator of which is $20 minus the average of closing price of a share of Common Stock for the five consecutive trading days prior to October 16, 1999 (the "Current Market Value"), and the denominator of which is the Current Market Value. The shares of Common Stock and contingent value rights were issued to the owners of Karina, Inc. and DCNL, Inc. in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended. A registration statement on Form S-3, which included 691,760 shares of Common Stock issued in September 1998, was declared effective by the Securities and Exchange Commission on October 21, 1998. Additionally, a registration statement on Form S-3, which included 350,000 shares of Common Stock and 350,000 shares of Common Stock issuable upon exercise or redemption of contingent value rights issued in October 1998, was declared effective by the Securities and Exchange Commission on December 2, 1998. 7
10 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, 1999, have been audited by KPMG 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 -------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- (in thousands, except earnings per share) <S> <C> <C> <C> <C> <C> Statements of Income Data: Net sales $ 294,487 $ 248,098 $ 213,035 $ 167,053 $ 138,143 Cost of sales 175,293 153,087 132,861 102,341 86,405 ---------- ---------- ---------- ---------- ---------- Gross profit 119,194 95,011 80,174 64,712 51,738 Selling, general and administrative expenses 82,862 64,911 57,438 47,356 37,139 ---------- ---------- ---------- ---------- ---------- Operating income 36,332 30,100 22,736 17,356 14,599 Interest expense (3,337) (3,487) (2,262) (1,795) (915) Other income, net 2,418 2,203 1,665 1,286 811 ---------- ---------- ---------- ---------- ---------- Earnings before income taxes 35,413 28,816 22,139 16,847 14,495 Income taxes 7,083 6,484 4,981 3,790 3,279 ---------- ---------- ---------- ---------- ---------- Net earnings $ 28,330 $ 22,332 $ 17,158 $ 13,057 $ 11,216 ========== ========== ========== ========== ========== Earnings per share:(1) Basic $ 1.00 $ .83 $ .66 $ .51 $ .44 Diluted $ .96 $ .77 $ .62 $ .49 $ .41 Weighted average number of common and common equivalent shares outstanding: Basic 28,279 26,856 26,078 25,834 25,406 Diluted 29,596 28,851 27,770 26,746 27,192 </TABLE> 8
11 <TABLE> <CAPTION> Last Day of February -------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- (in thousands) <S> <C> <C> <C> <C> <C> Balance Sheet Data: Working capital $ 150,940 $ 154,294 $ 111,937 $ 110,606 $ 59,079 Total assets 294,036 227,560 182,226 154,588 133,243 Long-term debt 55,450 55,450 40,450 40,450 -- Stockholders' equity (2) 199,842 149,484 120,482 101,878 88,627 </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 1995 the Company repurchased 2,597,600 shares at a cost of $9,309,000. 9
12 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 -------------------------------- 1999 1998 1997 ------ ------ ------ <S> <C> <C> <C> Net sales 100.0% 100.0% 100.0% Cost of sales 59.5 61.7 62.4 ------ ------ ------ Gross Profit 40.5 38.3 37.6 Selling, general and administrative expenses 28.2 26.2 27.0 ------ ------ ------ Operating income 12.3 12.1 10.6 Interest expense (1.1) (1.4) (1.0) Other income, net .8 .9 .8 ------ ------ ------ Earnings before income taxes 12.0 11.6 10.4 Income taxes 2.4 2.6 2.3 ------ ------ ------ Net earnings 9.6% 9.0% 8.1% ====== ====== ====== </TABLE> 10
13 FISCAL YEAR ENDED FEBRUARY 28, 1999 COMPARED TO FISCAL YEAR ENDED FEBRUARY 28, 1998 Fiscal 1999 net sales increased $46,389,000, or 18.7%, to $294,487,000, compared to fiscal 1998 net sales of $248,098,000. The introduction of new product lines, including the Caruso molecular steam hair setter, and the expansion of the Company's line of comfort products, such as foot baths and massagers, contributed significantly to the sales increase. During fiscal 1999, in separate transactions, the Company acquired 100% of the outstanding stock of Karina, Inc., a New Jersey corporation, and of DCNL, Inc., a California corporation, both of which market and distribute hair brushes, combs, and hair care accessories. Increased sales of hair accessories, including those attributable to the Company's acquisitions of Karina, Inc. and DCNL, Inc., played an important role in the overall increase in net sales. In addition, the Company's non-U.S. business continues to grow. Gross profit as a percentage of sales increased to 40.5% in fiscal 1999 from 38.3% in fiscal 1998. Increases in sales of certain comfort products and hair accessories, which generate slightly higher gross margins than many of the Company's other products, as a percentage of the Company's overall sales had a positive effect on gross profit as a percentage of sales. Additionally, a lower cost per unit on some goods was partially responsible for the increase in gross profit as a percentage of sales from fiscal 1998 to 1999. Selling, general and administrative expenses (SG&A) as a percentage of sales increased to 28.2% in fiscal 1999 from 26.2% in fiscal 1998. Advertising expense increased as a percentage of sales, due partially to the Company's fiscal 1999 Caruso infomercial campaign. Other administrative charges connected with the Caruso infomercial also increased SG&A as a percentage of sales in fiscal 1999, compared to fiscal 1998. Additionally, the Company recognized bad debt expense of $740,000 in the second quarter of fiscal 1999, due to the bankruptcy of a Russian distributor of its product. That account was the Company's only significant exposure to credit risk in Russia or Asia. Interest expense decreased $150,000, or 4.3%, in fiscal 1999, compared to fiscal 1998. The decrease was primarily due to the capitalization of interest on the construction of the Company's new corporate headquarters office building. Construction is expected to be complete in the summer of 1999. Other income increased by $215,000, or 9.8% in fiscal 1999, compared to fiscal 1998. Interest income increased as a result of the receipt of interest payments on a note receivable. The effect of the increase in interest income was partially offset by the fact that the Company recorded a gain on the sale of land in fiscal 1998. FISCAL YEAR ENDED FEBRUARY 28, 1998 COMPARED TO 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 was attributable to increased volume in all product categories. The growth was attributed primarily to the introduction of competitive new products and improved packaging. 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 was 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 was a result of the increase in net sales and the relatively fixed nature of certain expenses. 11
14 Interest expense in fiscal 1998 increased over interest expense in fiscal 1997 due to the increase in average outstanding debt that resulted from the issuance of $15,000,000 in Senior Notes by the Company 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 the land which occurred in the second quarter. LIQUIDITY AND CAPITAL RESOURCES The Company's cash balance decreased $21,979,000 from $55,670,000 at February 28, 1998 to $33,691,000 at February 28, 1999. The Company's operating activities produced a positive cash flow of $11,677,000 during fiscal 1999. Net earnings, adjusted for expenses that did not utilize cash, such as depreciation and amortization, had a significant positive effect on cash flows from operations. Increases in the Company's accounts receivable and inventory partially offset the effect of the Company's earnings, adjusted for non-cash items. Investing activities utilized $36,413,000 in cash as the Company made significant capital expenditures associated with constructing a new office building, paid cash in connection with acquisitions and purchased other non-current assets, including tax reserve certificates in Hong Kong and a deposit on a distribution agreement. Financing activities increased the Company's cash balance by $2,757,000, as short-term borrowings more than offset the effect of the payment of withholding taxes associated with stock options exercised during fiscal 1999. The increase in other long-term assets during fiscal 1999 was mainly attributable to the Company's investment in the WIGO(R) trademark for hair care appliances, a deposit made in connection with a distribution agreement and the purchase of prepaid tax reserves in Hong Kong. Tax reserve certificates represent the prepayment by a taxpayer of potential liabilities. The amounts paid for tax reserve certificates are refundable in the event that the value of the tax reserve certificates exceeds the related tax liability. The purchases of the prepaid tax reserves in Hong Kong were made in accordance with requirements set forth by the Inland Revenue Department (the "IRD") in Hong Kong. The IRD has audited the operations of some of the Company's subsidiaries and has required the Company to purchase tax reserve certificates to secure the proposed adjustments. Working capital decreased from $154,294,000 at February 28, 1998 to $150,940,000 at February 28, 1999. The Company's current ratio (computed by dividing current assets by current liabilities) was 4.9 at February 28, 1999 and was 7.8 at February 28, 1998. The decreases in working capital and in the current ratio are largely due to the use of cash to fund construction of the Company's new headquarters and to invest in long-term assets, as discussed above. Additionally, a $10,000,000 note payable outstanding at February 28, 1999 reduced the current ratio. The Company maintains a line of credit with a bank to facilitate short-term borrowings and for the issuance of letters of credit. This line of credit is limited to $10,000,000, bears interest at the bank's prime interest rate or at alternate rates based on Eurodollar investment rates for specific time periods and expires July 31, 1999. This line of credit allows the Company to finance up to $3,000,000 in letters of credit, subject to the $10,000,000 total limit. The interest rate on outstanding borrowings under this line of credit at February 28, 1999 was 5.82% and was based on Eurodollar investment rates. At February 28, 1999, the Company had an outstanding loan of $10,000,000 under this line of credit to fund short term cash needs. Due to the loan outstanding, none of this line of credit was available for the issuance of letters of credit at February 28, 1999. The Company repaid the loan, plus interest, on March 10, 1999. 12
15 In order to allow the issuance of letters of credit, the Company maintains a facility with a bank. This facility is limited to $2 million and bears interest at the bank's prime interest rate plus two percent (9.75% at February 28, 1999). At February 28, 1999, $140,000 of this facility was used to finance letters of credit, which were funded by the Company after February 28, 1999. This facility expires July 31, 1999. The Company had a total of $55,450,000 of long-term debt outstanding at February 28, 1999, consisting of $40,000,000 in long-term Senior Notes, a $15,000,000 long-term Senior Note and a $450,000 long-term note. Interest rates on the long-term notes ranged from 7.01% to 7.75%. The interest rate on $40,000,000 of the Company's Senior Notes was 7.01% at February 28, 1999. Principal payments on the $40,000,000 in Senior Notes begin in fiscal 2005, with the remaining unpaid principal amount due in fiscal 2008. The interest rate on the $15,000,000 Senior Note was 7.24% at February 28, 1999, with principal payments beginning in fiscal 2009 and due in full in fiscal 2013. The remaining $450,000 note is payable in full in January 2001, with interest paid monthly. The interest rate on the $450,000 note is based on the prime rate for corporate loans at major U.S. money center commercial banks (7.75% at February 28, 1999). Capital expenditures totaled $17,731,000, $3,255,000 and $10,785,000 in fiscal 1999, 1998 and 1997, respectively. As of February 28, 1999, the Company had entered into commitments of $2,527,000 for capital expenditures associated with construction of a new office facility. The Company expects to fund these commitments with cash provided by operations. The Company's operations are not capital intensive. Other than the construction of the new office facility, management believes that the Company' short and long-term capital needs will stem primarily from factors associated with its normal operations, such as the need to carry sufficient levels of inventory. Based on the Company's current financial condition, management believes that cash flows from operations and available financing sources will continue to provide sufficient capital resources to fund the Company's ongoing liquidity needs for the foreseeable future. YEAR 2000 Until recently most computer software and hardware, as well as chips and processors embedded in various products, (collectively referred to as "computer applications") used two digits, rather than four, to define the applicable year. Such computer applications might process incorrectly any date after December 31, 1999. Consequently, many business and governmental entities face the risk of some degree of interruption in their operations when using computer applications to process dates of January 1, 2000 and beyond. This is known as the Year 2000 ("Y2K") Issue. The Company's sales, accounts receivable, inventory management, accounts payable, general ledger, payroll and Electronic Data Interchange systems comprise its critical information technology ("IT") systems. The Company has assessed its Y2K readiness with regard to critical IT systems. Based on internal assessments and upon vendor representations, the Company believes that it will complete all of the necessary actions to bring all of its critical IT systems into Y2K compliance by September 1999. Software and hardware, such as security and telephone systems, that facilitate the operations of its warehouses and corporate headquarters, as well as computer chips embedded in its products, comprise the Company's primary non-IT systems. With the exception of the security system at its El Paso warehouse, the Company has completed the updates necessary 13
16 to bring these systems into Y2K compliance. The Company expects to complete procedures to bring the remaining non-compliant security system into compliance by June 30, 1999. The computer chips embedded in the products sold by the Company are not date-sensitive and therefore pose no Y2K risk. The Company has not incurred, nor does it expect to incur, any material expenses in readying its computer applications for the Year 2000. The IT and non-IT systems currently in place or expected to be in place on January 1, 2000 were not purchased specifically, nor was their installation accelerated, because of the Y2K issue. Because its system updates did not occur specifically because of the Y2K issue, the Company has not tracked costs associated with Y2K compliance efforts. The Company has substantially completed its analysis of its relationships with its business partners. The Company has inquired with major customers as to their Y2K compliance. Based on its assessment of customers' representations in their reports to the Securities and Exchange Commission and their answers to the Company's inquiries, the Company's management believes that its major customers will be Y2K compliant. The Company has made inquiries of key suppliers and has tested its computer links with key suppliers in the Far East for Y2K compliance. Based on written responses to these inquiries and the results of its tests, management does not believe that the Y2K issue will cause the Company to experience any significant difficulties in obtaining products. The Company has received communications from its key financial service providers indicating that they are actively working to resolve their Y2K service issues. The Company has made inquiries of its primary domestic utility service providers as to their Y2K readiness. The responses received to date have not indicated that any of the Company's primary domestic utility service providers expect any service disruptions due to the Y2K issue. However, the Company continues to monitor these service providers' Y2K readiness through additional inquiries. There can be no guarantee that the Company or its trading partners will not experience Y2K compliance difficulties. If the Company or its significant trading partners experience Y2K compliance problems, adverse business consequences could result. The Company believes that the most likely negative effects, if any, could include disruptions in both shipments and receipts of products, delays in the Company's receipt of payments from customers and delays in the ability to pay certain suppliers. The Company believes that the Y2K compliance of its IT systems, the on-going updates to its non-IT systems, as well as its efforts to assess the Y2K compliance of its trading partners should minimize the business difficulties encountered as a result of the Y2K issue. However, the Company is in the process of formulating limited contingency plans. Management expects that these contingency plans, when formulated, will entail procedures to be followed if certain IT or non-IT systems experience unexpected Y2K difficulties or if customers experience difficulties in transmitting orders due to the Y2K issue. INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS This report, including the matters discussed in Management's Discussion and Analysis of Financial Condition and Result of Operations, financial projections and Year 2000, some of the Company's press releases and some of the Company's comments to the news media, contain certain forward-looking statements that are based on management's current expectations with respect to future events or financial performance. A number of risks or uncertainties could cause actual results to differ materially from historical or anticipated results. Generally, the words "anticipates," "believes," "expects" and other similar words identify forward-looking statements. The Company cautions readers not to place undue reliance on forward-looking statements. Forward-looking statements are subject to risks that could cause such statements to differ materially from actual 14
17 results. Factors that could cause actual results to differ from those anticipated include: (1) general industry conditions and competition, (2) credit risks, (3) the Company's material reliance on individual customers or small numbers of customers, (4) the Company's material reliance on certain trademarks, (5) risks associated with inventory, including potential obsolescence, (6) risks associated with operating in foreign jurisdictions, (7) worldwide and domestic economic conditions, (8) the impact of current and future laws, including tax laws and litigation, (9) uninsured losses, (10) reliance on computer systems, (11) management's reliance on the representations of third parties, (12) risks associated with newly acquired product lines and subsidiaries, including the acquisitions of Karina, Inc., DCNL, Inc., and the WIGO(R) trademark during fiscal 1999, (13) technological issues associated with the Year 2000 compliance efforts and (14) the risks described from time to time in the Company's reports to the Securities and Exchange Commission, including this report. NEW ACCOUNTING GUIDANCE In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes accounting and reporting standards for derivative instruments and is effective for financial statements issued for fiscal quarters of fiscal years beginning after June 15, 1999. Earlier application is encouraged. Based on the nature of its current operations, the Company does not expect SFAS 133 to have a material effect on its financial statements. In March 1998 the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is effective for financial statements issued for years ending after December 15, 1998. SOP 98-1 requires the capitalization of certain costs that are related to computer software developed or obtained for internal use and that would have been expensed as incurred under previous accounting standards. The Company does not expect the adoption of SOP 98-1 to have a material effect on the Company's 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"). SOP 98-5 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 any effect on the Company's financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company contracts with unaffiliated manufacturers in acquiring most of its products and sells products to some customers outside the United States. Additionally, the Company has long-term debt, substantially all of which is fixed-rate debt. Therefore, the Company is exposed to market risk from changes in interest rates and foreign exchange rates. The Company does not engage in material hedging transactions in order to modify the risk from interest rate and foreign currency exchange fluctuations, does not invest in financial instruments for trading purposes and is not a party to any leveraged derivatives. 15
18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE <TABLE> <CAPTION> PAGE ---- <S> <C> Independent Auditors' Report 17 Consolidated Financial Statements: Consolidated Balance Sheets as of February 28, 1999 and 1998 18 Consolidated Statements of Income for each of the years in the three-year period ended February 28, 1999 20 Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended February 28, 1999 21 Consolidated Statements of Cash Flows for each of the years in the three-year period ended February 28, 1999 22 Notes to Consolidated Financial Statements 24 Financial Statement Schedule - Schedule II - Valuation and Qualifying Accounts for each of the years in the three-year period ended February 28, 1999 39 </TABLE> All other schedules are omitted as the required information is included in the consolidated financial statements or is not applicable. 16
19 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 16. 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 16. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended February 28, 1999, 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 LLP El Paso, Texas April 1, 1999 17
20 HELEN OF TROY LIMITED AND SUBSIDIARIES Consolidated Balance Sheets February 28, 1999 and 1998 (in thousands, except par value and shares) <TABLE> <CAPTION> 1999 1998 -------- -------- <S> <C> <C> Assets Current assets: Cash and cash equivalents $ 33,691 $ 55,670 Receivables - principally trade, less allowance for doubtful receivables of $1,756 in 1999 and $568 in 1998 59,799 44,569 Inventories 90,288 71,357 Prepaid expenses 2,048 3,802 Deferred income tax benefits 3,858 1,522 -------- -------- Total current assets 189,684 176,920 Property and equipment, net of accumulated depreciation of $6,905 in 1999 and $4,892 in 1998 42,464 26,255 Goodwill, net of accumulated amortization of $2,224 in 1999 and $1,053 in 1998 39,052 10,856 License agreements, at cost less accumulated amortization of $9,085 in 1999 and $8,068 in 1998 7,967 8,984 Other assets at cost, net of amortization 14,869 4,545 -------- -------- $294,036 $227,560 ======== ======== </TABLE> (Continued) 18
21 HELEN OF TROY LIMITED AND SUBSIDIARIES Consolidated Balance Sheets February 28, 1999 and 1998 (in thousands, except par value and shares) <TABLE> <CAPTION> 1999 1998 -------- -------- <S> <C> <C> Liabilities and Stockholders' Equity Current liabilities: Notes payable to banks $ 10,000 $ -- Accounts payable, principally trade 1,592 1,430 Accrued expenses: Advertising and promotional 4,935 4,599 Other 8,563 7,389 Income taxes payable 13,654 9,208 -------- -------- Total current liabilities 38,744 22,626 Long-term debt 55,450 55,450 -------- -------- Total liabilities 94,194 78,076 -------- -------- Stockholders' equity: Cumulative preferred stock, non-voting, $1.00 par value. Authorized 2,000,000 shares; none issued -- -- Common stock, $.10 par value. Authorized 50,000,000 shares; 29,047,332 and 27,281,242 shares issued and outstanding at February 28, 1999 and 1998, respectively 2,905 2,728 Additional paid-in-capital 53,750 31,899 Retained earnings 143,187 114,857 -------- -------- Total stockholders' equity 199,842 149,484 -------- -------- Commitments and contingencies $294,036 $227,560 ======== ======== </TABLE> See accompanying notes to consolidated financial statements. 19
22 HELEN OF TROY LIMITED AND SUBSIDIARIES Consolidated Statements of Income (in thousands, except shares and earnings per share) <TABLE> <CAPTION> Years Ended February 28, ------------------------------------------------ 1999 1998 1997 ------------ ------------ ------------ <S> <C> <C> <C> Net sales $ 294,487 $ 248,098 $ 213,035 Cost of sales 175,293 153,087 132,861 ------------ ------------ ------------ Gross profit 119,194 95,011 80,174 Selling, general and administrative expenses 82,862 64,911 57,438 ------------ ------------ ------------ Operating income 36,332 30,100 22,736 Other income (expense): Interest expense (3,337) (3,487) (2,262) Other income, net 2,418 2,203 1,665 ------------ ------------ ------------ Total other (expense) (919) (1,284) (597) ------------ ------------ ------------ Earnings before income taxes 35,413 28,816 22,139 Income taxes 7,083 6,484 4,981 ------------ ------------ ------------ Net earnings $ 28,330 $ 22,332 $ 17,158 ============ ============ ============ Earnings per share: Basic $ 1.00 $ .83 $ .66 Diluted $ .96 $ .77 $ .62 ============ ============ ============ Weighted average number of common and common equivalent shares used in computing net earnings per share: Basic 28,278,545 26,856,463 26,077,572 Diluted 29,596,189 28,850,689 27,769,608 </TABLE> See accompanying notes to consolidated financial statements. 20
23 HELEN OF TROY LIMITED AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended February 28, 1999, 1998 and 1997 (in thousands) <TABLE> <CAPTION> Additional Total Common Paid-In Retained Stockholders' Stock Capital Earnings Equity -------- ---------- -------- ------------- <S> <C> <C> <C> <C> Balances, February 29, 1996 $ 648 $ 25,863 $ 75,367 $ 101,878 Exercise of common stock options, net 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 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 Exercise of common stock options, net 73 255 -- 328 Issuance of common stock to acquire subsidiaries 104 21,596 -- 21,700 Net earnings -- -- 28,330 28,330 -------- ---------- -------- ------------- Balances, February 28, 1999 $ 2,905 $ 53,750 $143,187 $ 199,842 ======== ========== ======== ============= </TABLE> See accompanying notes to consolidated financial statements. 21
24 HELEN OF TROY LIMITED AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands) <TABLE> <CAPTION> Years Ended February 28, ------------------------------------ 1999 1998 1997 -------- -------- -------- <S> <C> <C> <C> Cash flows from operating activities: Net earnings $ 28,330 $ 22,332 $ 17,158 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 4,965 3,999 2,683 Provision for doubtful receivables 993 168 10 Deferred taxes, net (511) (246) (453) Gain on sale of assets -- (216) -- Non-cash charge to expenses -- -- 3,198 Changes in operating assets and liabilities: Accounts receivable (13,403) (7,786) (8,107) Inventory (15,720) (3,090) (19,695) Prepaid expenses 1,963 (2,863) (517) Accounts payable (4,030) (1,215) 1,640 Accrued expenses 688 2,474 2,862 Income taxes payable 8,402 4,074 3,124 -------- -------- -------- Net cash provided by operating activities 11,677 17,631 1,903 Cash flows used for investing activities: Capital and license expenditures (17,731) (3,255) (13,342) Cash paid for acquisitions, net of cash acquired (7,471) (2,227) (8,727) Proceeds from sale of assets -- 1,692 -- Other assets (11,211) (2,160) (1,569) Collection on notes receivable -- 522 484 -------- -------- -------- Net cash used for investing activities (36,413) (5,428) (23,154) </TABLE> (Continued) 22
25 HELEN OF TROY LIMITED AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands) <TABLE> <CAPTION> Years Ended February 28, ------------------------------------ 1999 1998 1997 -------- -------- -------- <S> <C> <C> <C> Cash flows provided by financing activities: Net proceeds from (payments on) short-term borrowings 10,000 (4,001) 1,408 Proceeds from (payments on) long-term debt (1,663) 15,000 -- Payment of payroll tax and income tax withholding associated with stock options exercised (6,669) -- -- Proceeds from exercise of stock options, net 1,089 6,670 1,446 -------- -------- -------- Net cash provided by financing activities 2,757 17,669 2,854 -------- -------- -------- Net increase (decrease) in cash and cash equivalents (21,979) 29,872 (18,397) Cash and cash equivalents, beginning of year 55,670 25,798 44,195 -------- -------- -------- Cash and cash equivalents, end of year $ 33,691 $ 55,670 $ 25,798 ======== ======== ======== Supplemental cash flow disclosures: Interest paid $ 4,003 $ 3,459 $ 2,915 Income taxes paid (net of refunds) (1,123) (213) 2,882 Details of acquisitions in which common stock was issued Fair value of assets acquired $ 32,107 -- -- Less: Liabilities assumed 6,804 -- -- Common stock issued 21,700 -- -- -------- -------- -------- Cash paid 3,603 -- -- Less: cash acquired (488) -- -- -------- -------- -------- Net cash paid for acquisitions in which common stock was issued $ 3,115 -- -- ======== ======== ======== </TABLE> See accompanying notes to consolidated financial statements. 23
26 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) General Helen of Troy Limited, a Bermuda company, and its subsidiaries (the "Company") design, develop, import, and engage in wholesale distribution of hair care appliances, hair brushes, combs and accessories and other personal care products. The Company purchases most of the products that it sells from unaffiliated manufacturers located in the Far East, including manufacturers in The People's Republic of China, Thailand, Taiwan and South Korea. The 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 preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Certain reclassifications were made to fiscal 1998 and 1997 information to conform to the fiscal 1999 presentation. (b) Principles of Consolidation The consolidated financial statements include the accounts of Helen of Troy Limited and its subsidiaries. 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) and consist primarily of finished goods. (d) Property and Equipment Property and equipment are stated at cost. Depreciation has been recorded on a straight-line basis over the estimated useful lives of the assets. (e) Intangible Assets Intangible assets, consist primarily of goodwill, license agreements and trademarks. The Company amortizes intangible assets using the straight-line method over appropriate periods ranging from five to forty years. The Company recorded amortization of intangible assets totaling $3,370,000, $2,695,000 and $1,869,000 during fiscal 1999, 1998 and 1997, respectively. The great majority of the Company's sales are made subject to License Agreements with the licensors of the Vidal Sassoon, Revlon(R) and Dr. Scholl's(R) trademarks. The Company amortizes the acquisition costs of the existing license agreements on a straight line basis over the lives of the respective agreements. Net sales subject to all license agreements comprised, 80%, 85% and 87% of total net sales for the fiscal years 1999, 1998 and 1997, respectively. 24
27 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED (f) Income Taxes The Company uses the asset and liability method to account for income taxes. Deferred income tax assets and liabilities are recognized for the future tax consequences of temporary differences between the book and tax bases of various assets and liabilities. Generally, deferred tax assets represent future tax reductions while deferred tax liabilities represent future tax liabilities. The Company measures deferred tax assets and liabilities using enacted tax rates for the years in which it expects that temporary differences will reverse or be settled. Changes in tax rates affect the carrying values of deferred tax assets and liabilities. The effects of tax rate changes are recognized in the periods in which they are enacted. (g) Earnings per Share 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 1,317,644, 1,994,226 and 1,692,036 for fiscal years 1999, 1998 and 1997, respectively. Dilutive securities for the year ended February 28, 1999 included 1,271,565 shares attributable to dilutive stock options and 46,079 shares contingently issuable as part of an acquisition (see note 10). All dilutive securities in fiscal 1998 and 1997 were attributable to dilutive stock options. All potentially dilutive securities are included in the calculation of diluted 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 27, 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. (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 is the functional currency of the Company in accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation." If applicable, all transactions of Helen of Troy Limited's non-U.S. subsidiaries have been re-measured in U.S. dollars using historical exchange rates. Changes in exchange rates that affect cash flows and the related receivables or payables are recognized as transaction gains and losses in the determination of net earnings. 25
28 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED (j) Advertising Advertising costs are expensed as incurred. During the fiscal years ended February 28, 1999, 1998 and 1997, $18,212,000, $13,522,000 and $10,544,000, 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 maximum of two years. The Company has established an accrual that management believes is sufficient to cover future warranty costs. (l) Long-Lived Assets The Company reviews long-lived assets and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amounts of those assets might not be recoverable. No changes in asset carrying amounts were made as a result of such reviews in any of the periods covered by these consolidated financial statements because no event or change in circumstances indicated the need for an assessment of the recoverability of any long-lived assets. (m) Interest Income Interest income is included in "Other income, net" on the Consolidated Statements of Income. Interest income totaled $1,496,000, $1,686,000 and $1,369,000 in fiscal 1999, 1998 and 1997, respectively. (n) 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 note 3 for management's assessment of the fair value of the Company's guaranteed Senior Notes. (o) Segment Disclosures Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 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. Management has determined that the Company has one operating segment. Appropriate disclosures in accordance with SFAS No. 131 are contained in note 9. 26
29 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED (p) Stock-Based Compensation Plans The Company accounts for its stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). Therefore, no compensation cost has been recognized in connection with the Company's stock option plans. Disclosures in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123"), appear in note 6. (q) Recent Accounting Pronouncements In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments and is effective for financial statements issued for fiscal quarters of fiscal years beginning after June 15, 1999. Earlier application is encouraged. Based on the nature of its current operations, the Company does not expect SFAS 133 to have a material effect on its financial statements. In March 1998 the American Institute of Certified Public Accountants issued Statement of Position 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is effective for financial statements issued for years ending after December 15, 1998. SOP 98-1 requires the capitalization of certain costs that are related to computer software developed or obtained for internal use and that would have been expensed as incurred under previous accounting standards. The Company does not expect the adoption of SOP 98-1 to have a material effect 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 any effect on the Company's financial statements. 27
30 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 As of February 28, Useful Lives ----------------------- (Years) 1999 1998 ------------ ---- ---- <S> <C> <C> <C> Land - $ 9,627 $ 8,656 Buildings and improvements 20 - 40 13,080 13,037 Computer and office equipment 3 - 5 7,755 5,461 Furniture and fixtures 5 1,451 848 Transportation equipment 3 - 5 906 929 Construction in progress - $ 16,550 $ 2,216 -------- -------- 49,369 31,147 Less accumulated depreciation (6,905) (4,892) -------- -------- Property and equipment, net $ 42,464 $ 26,255 ======== ======== </TABLE> During fiscal 1999 and 1998 the Company capitalized $663,000 and $43,000, respectively, of interest expense in connection with the construction of a new office facility. The Company recorded $1,595,000, $1,304,000 and $814,000 of depreciation expense for fiscal 1999, 1998 and 1997, respectively. Capital expenditures totaled $17,731,000, $3,255,000 and $10,785,000 in fiscal 1999, 1998 and 1997, respectively. As of February 28, 1999, the Company had entered into commitments of $2,527,000 for capital expenditures. 28
31 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (3) NOTES PAYABLE The Company maintains a line of credit with a bank to facilitate short-term borrowings and for the issuance of letters of credit. This line of credit is limited to $10,000,000, allows the issuance of up to $3,000,000 in letters of credit and bears interest at the bank's prime rate or at alternate rates based on Eurodollar investment rates for specific time periods. The interest rate on outstanding borrowings under this line of credit at February 28, 1999 was 5.82% and was based on Eurodollar investment rates. This line of credit expires on July 31, 1999. At February 28, 1999 the Company had an outstanding loan of $10,000,000 under this line of credit. Due to the loan outstanding, none of this line of credit was available for the issuance of letters of credit at February 28, 1999. The Company repaid the $10,000,000, plus interest, on March 10, 1999. To allow the issuance of letters of credit, a non-U.S. subsidiary maintains a facility with a bank. This facility is limited to $2,000,000 (U.S.) and bears interest at the bank's prime interest rate plus two percent (9.75% at February 28, 1999), with all outstanding balances due July 31, 1999. At February 28, 1999, no loans were outstanding under this facility and $140,000 was used to finance letters of credit, which were funded by the Company subsequent to February 28, 1999. (4) LONG-TERM DEBT On January 5, 1996 a 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 Helen of Troy Limited and certain of its subsidiaries 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, 1999 is approximately $37,574,000. On July 18, 1997 one of the Company's U.S. subsidiaries issued a $15,000,000 Senior Note. Interest is paid quarterly at a rate of 7.24%. The $15,000,000 Senior Note is unsecured, is guaranteed by Helen of Troy Limited and certain of its subsidiaries 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, 1999 is approximately $14,079,000. The remainder of long-term debt is comprised 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 (7.75% at February 28, 1999). The $450,000 note is payable in full on January 25, 2001. During fiscal 1999, the Company acquired all of the outstanding stock of Karina, Inc. and DCNL, Inc. As of the dates of the acquisitions, Karina, Inc. and DCNL, Inc. had a total of $1,663,000 in outstanding long-term debt. The Company repaid all of the long-term debt of both companies shortly after the respective acquisition dates. The Karina, Inc. and DCNL, Inc. acquisitions are discussed in note 10 -- "Acquisitions and Purchases of Trademarks." 29
32 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (5) INCOME TAXES The components of earnings before income tax expense are as follows: <TABLE> <CAPTION> Years ended February 28, ---------------------------------- (in thousands) 1999 1998 1997 -------- -------- -------- <S> <C> <C> <C> U.S $ 9,697 $ 6,588 $ 5,983 Non-U.S 25,716 22,228 16,156 -------- -------- -------- $ 35,413 $ 28,816 $ 22,139 ======== ======== ======== </TABLE> The components of income tax expense (benefit) are as follows: <TABLE> <CAPTION> 1999 1998 1997 -------- -------- -------- <S> <C> <C> <C> Current: U.S $ 4,734 $ 4,199 $ 4,901 Non-U.S 2,860 2,531 533 Deferred (511) (246) (453) -------- -------- -------- $ 7,083 $ 6,484 $ 4,981 ======== ======== ======== </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 February 28, ---------------------------------- (in thousands) 1999 1998 1997 -------- -------- -------- <S> <C> <C> <C> Expected income tax expense at the U.S. statutory rate of 35% $ 12,395 $ 10,086 $ 7,749 Decrease in income taxes resulting from income from non-U.S. operations subject to varying income tax rates (5,312) (3,602) (2,768) -------- -------- -------- Actual income tax expense $ 7,083 $ 6,484 $ 4,981 ======== ======== ======== </TABLE> 30
33 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, 1999 and 1998 are as follows: <TABLE> <CAPTION> 1999 1998 -------- -------- (in thousands) <S> <C> <C> Deferred tax assets: Net operating losses generated by the tax benefit of stock option exercises $ 1,825 $ -- Inventories, principally due to additional costs inventoried for tax purposes 922 637 Accrued expenses 758 683 Accounts receivable, property and equipment, and other 524 220 -------- -------- Total gross deferred tax assets 4,029 1,540 -------- -------- Deferred tax liabilities: Depreciation and amortization (171) (18) -------- -------- Net deferred tax asset $ 3,858 $ 1,522 ======== ======== </TABLE> The Inland Revenue Department (the "IRD") in Hong Kong has asserted that it may tax certain profits of the Company's foreign subsidiaries for the years 1990 through 1999. Hong Kong tax law allows for the taxation of profits earned from activities conducted in Hong Kong. The Company is defending its position in this matter. If the IRD were to prevail, the resulting tax liability could range from $400,000 to $13,000,000 (U.S.). Although the ultimate resolution of the IRD's claims cannot be predicted with certainty, management believes that adequate provision has been made in the financial statements for settlement of the IRD's claims. The U.S. federal tax returns of the Company's largest domestic subsidiary for the fiscal years 1994, 1995, and 1996 were examined by the Internal Revenue Service (IRS). The IRS examinations of these returns resulted in an increase of approximately $150,000 in the Company's taxable income for those fiscal years. The Company plans to permanently invest all of the undistributed earnings of the non-U.S. subsidiaries of the United States subsidiaries. In accordance with generally accepted accounting principles, the Company has made no provision for U.S. federal income taxes on these undistributed earnings. At February 28, 1999, undistributed earnings for which the Company had not provided deferred U.S. federal income taxes totaled $50,244,000. The Company's United States net operating loss of $5,250,000 expires if not utilized by fiscal 2014. 31
34 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements During fiscal years 1999, 1998 and 1997, officers and employees exercised certain stock options, resulting in a U.S. federal income tax deduction for the Company. The deductions attributable to the exercise of stock options did not affect income tax expense for financial reporting purposes. The tax effect of the stock option exercises increased additional paid-in-capital by $5,907,000, $2,533,000 and $362,000, respectively, in fiscal 1999, 1998 and 1997. (6) STOCK-BASED COMPENSATION PLANS The Company sponsors four stock-based compensation plans. The plans consist of two employee stock option plans, a non-employee director stock option plan and an employee stock purchase plan. These plans are described below. The Company accounts for its stock-based compensation plans under APB No. 25. Accordingly, no compensation expense has been recognized for the Company's stock option plans or its stock purchase plan. Had the Company recorded compensation expense for its stock option plans based on the fair value of the options at the dates of grant for those awards, consistent with the method of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts: <TABLE> <CAPTION> Years Ended February 28, ------------------------------------------------ 1999 1998 1997 ------------ ------------ ------------ <S> <C> <C> <C> Net Income: As Reported $ 28,330,000 $ 22,332,000 $ 17,158,000 Pro forma 25,533,000 19,539,000 16,204,000 Earnings per share: Basic: As Reported $ 1.00 $ .83 $ .66 Pro forma $ .90 $ .73 $ .62 Diluted: As Reported $ .96 $ .77 $ .62 Pro forma $ .86 $ .68 $ .58 </TABLE> The Company computed the pro forma figures disclosed above using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in fiscal 1999, 1998, and 1997, respectively; expected dividend yields of zero for all years; expected volatility of 27.4% for fiscal 1999, 23.4% for fiscal 1998 and 20.0% for fiscal 1997; risk-free interest rates of 5.4% for fiscal 1999 and 6.5% for fiscal 1998 and 1997; and expected lives of 3, 4, 5 or 10 years depending on the option granted. Under stock option and restricted stock plans adopted in 1994 and 1998 (the "1994 Plan" and the "1998 Plan" respectively) the Company reserved a total of 11,000,000 shares of its common stock for issuance to key officers and employees. Pursuant to the 1994 and 1998 Plans, the Company grants options to purchase its common stock at a price equal to or greater than the fair market value on the grant date. Both plans contain provisions for incentive stock options ("ISOs"), non-qualified stock options ("Non-Qs") and restricted stock grants. Generally, options granted under the 1994 and 1998 Plans become exercisable over a four or five-year vesting period and expire on a date ranging from seven to ten years from their date of grant. Under a stock option plan for non-employee directors (the "Directors' Plan"), adopted in fiscal 1996, the Company reserved a total of 480,000 shares of its common stock for issuance to non-employee members of the Board of 32
35 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (6) STOCK-BASED COMPENSATION PLANS, CONTINUED Directors. The Company grants options under the Directors' Plan at a price equal to the fair market value of the Company's common stock at the date of grant. Options granted under the Directors' Plan vest one year from their date of issuance and expire ten years after issuance. A summary of stock option activity under all plans is as follows: <TABLE> <CAPTION> Years Ended February 28, -------------------------------------------------------------------------------------- 1999 1998 1997 ------------------------- ------------------------- ---------------------- WEIGHTED- Weighted- Weighted- AVERAGE Average Average SHARES EXERCISE Shares Exercise Shares Exercise (000s) PRICE (000s) Price (000s) Price ------------------------- ------------------------- --------------------- <S> <C> <C> <C> <C> <C> <C> Options outstanding, beginning of year 4,554 $ 8.10 4,005 $ 3.95 4,214 $ 3.70 Options granted 1,110 15.76 1,643 15.68 170 8.33 Options exercised (724) 2.75 (994) 4.16 (355) 3.04 Options forfeited (547) 3.20 (100) 5.46 (24) 5.13 ------ ------- ------- ------- ------- ------ Options outstanding, end of year 4,393 11.53 4,554 8.10 4,005 3.95 ====== ======= ======= ======= ======= ====== Options exercisable at year-end 1,683 6.62 1,966 3.28 1,954 3.08 ====== ======= ======= Weighted-average fair value of options granted during the year 7.13 7.04 2.42 </TABLE> 33
36 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (6) STOCK-BASED COMPENSATION PLANS, CONTINUED The following table summarizes information about stock options at February 28, 1999: <TABLE> <CAPTION> Outstanding Stock Options Exercisable Stock Options -------------------------------------------- ------------------------- Weighted- Average Weighted- Weighted- Remaining Average Average Number of Contractual Exercise Number of Exercise Options Price Range Life Price Options Price ------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> ISOs 298,430 $ 3.65 to $ 7.81 5.37 $ 4.77 83,070 $ 4.56 163,306 $10.50 to $15.00 6.14 12.15 17,390 11.56 124,620 $15.13 to $24.31 7.59 17.56 7,750 16.72 --------- --------- Total 586,356 6.06 $ 9.54 108,210 $ 6.55 ========= ========= Non-Q's 1,322,028 $ 3.65 to $ 6.75 6.06 $ 4.52 1,264,408 $ 4.49 2,320,136 $12.09 to $17.63 9.09 15.80 166,268 16.02 --------- --------- Total 3,642,164 7.99 $11.70 1,430,676 $ 5.84 ========= ========= Directors' Plan 24,000 $ 5.13 to $ 7.06 7.01 $ 6.09 24,000 $ 6.09 140,000 $15.94 to $17.63 8.64 16.25 120,000 16.02 --------- --------- Total 164,000 8.40 $14.76 144,000 $14.36 ========= ========= </TABLE> In fiscal 1999 the Company's shareholders approved an employee stock purchase plan (the "Stock Purchase Plan") under which 500,000 shares of common stock are reserved for issuance to the Company's employees, nearly all of whom are eligible to participate. Under the terms of the stock purchase plan employees authorize the Company to withhold from 1% to 15% of their wages or salaries to purchase the Company's common stock. The purchase price for stock purchased under the plan is equal to 85 percent of the stock's fair market value on either the first day of each option period or the last day of each period, whichever is lower. The Company implemented the stock purchase plan in mid-January 1999, with the first option period scheduled to end in July 1999. Therefore, no stock has been issued under the stock purchase plan. 34
37 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, the officer may make an election to receive a cash payment for the balance of the obligations under the agreement. The expiration dates for these agreements range from September 2, 2000 to February 28, 2004. The aggregate commitment for future salaries, at February 28, 1999, excluding incentive compensation, was approximately $5,284,000. The Company purchases most of the appliances and products that it sells from unaffiliated manufacturers located in the Far East, principally in the Peoples' Republic of China, Thailand, Taiwan and South Korea. Due to the fact that most of its products are manufactured in the Far East, the Company is subject to risks associated with trade barriers, currency exchange fluctuations and political unrest. These risks have not materially affected the Company's operations. Additionally, the Company's management believes that it could obtain its products from facilities in other countries, if necessary. However, the relocation of production capacity could require substantial time and could result in increased costs. The Company is involved in various legal claims and proceedings in the normal course of operations. The Company is insured for substantially all of the various claims in which it is involved. 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 has purchased $5,750,000 (U.S.) in tax reserve certificates in Hong Kong as of February 28, 1999. Tax reserve certificates represent the prepayment by a taxpayer of potential tax liabilities. The amounts paid for tax reserve certificates are refundable in the event that the value of the tax reserve certificates exceeds the related tax liability. These certificates are denominated in Hong Kong currency and are subject to risks associated with foreign currency fluctuations. The purchase of these certificates is discussed in note 5 -- "Income Taxes." Under the terms of a Shareholders' Rights Plan approved by the Board of Directors in fiscal 1999, the Board of Directors declared a dividend of one preference share right ("Right") for each outstanding share of Common Stock. The Rights are inseparable from the shares of Common Stock and entitle the holders to purchase one one-thousandth of a share of Series A First Preference Shares ("Preference Shares"), par value $1.00, at a price of $100 per one-one thousandth of a Preference Share. Should certain persons or groups of persons ("Acquiring Persons") acquire more than 15% of the Company's outstanding Common Stock, the Board of Directors may either adjust the price at which holders of Rights may purchase Preference Shares or may redeem all of the then outstanding Rights at $.01 per Right. The Rights associated with the Acquiring Person's shares of Common Stock would not be exercisable. The Rights could cause substantial dilution to a person or group that attempts to acquire the Company in certain circumstances, but should not interfere with any merger or other business combination approved by the Board of Directors. The Rights expire December 1, 2008, unless their expiration date is advanced or extended or unless the Rights are earlier redeemed or exchanged by the Company. During fiscal years 1990 and 1989, the Company entered into barter agreements to exchange certain inventory items for advertising credits. During fiscal 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 for that fiscal year. 35
38 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> Fiscal 1999: Net sales $ 64,136 $ 72,162 $ 89,144 $ 69,045 $ 294,487 Gross profit 24,989 28,695 36,059 29,451 119,194 Net earnings 4,836 7,544 11,090 4,860 28,330 Earnings per share Basic .18 .27 .39 .17 1.00 Diluted .17 .26 .37 .16 .96 Fiscal 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 </TABLE> The business of the Company is somewhat seasonal. Between 55% and 60% of annual sales volume normally occurs in the second and third fiscal quarters. 36
39 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (9) SEGMENT INFORMATION The Company consists of a single operating segment that sells hair care and other personal care products in the United States and internationally. Most of the Company's products are procured through its subsidiary in Barbados, West Indies. That subsidiary obtains products from unaffiliated contractors on an order-by-order basis. The Company's domestic and international net revenues from third parties, classified on the basis of the customer's location, and long-lived assets are as follows: <TABLE> <CAPTION> 1999 1998 1997 -------- -------- -------- <S> <C> <C> <C> NET REVENUES FROM THIRD PARTIES: United States $270,600 $228,220 $198,164 International 23,887 19,878 14,871 -------- -------- -------- Total $294,487 $248,098 $213,035 ======== ======== ======== LONG-LIVED ASSETS: United States $ 85,697 $ 37,690 $ 38,306 International 18,655 12,950 10,689 -------- -------- -------- Total $104,352 $ 50,640 $ 48,995 ======== ======== ======== </TABLE> Sales to one customer and its affiliate accounted for 29% of the Company's net sales in fiscal 1999 and in fiscal 1998. Sales to that same customer comprised 27% of net sales for fiscal 1997. (10) ACQUISITIONS AND PURCHASES OF TRADEMARKS On October 4, 1996 the Company acquired the assets of two personal care lines of Dazey Corporation. 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(R) trade names. On June 12, 1997 the Company acquired the assets of Caruso International in a cash transaction. Included in the purchase were certain inventories, designs and trademarks. On July 31, 1998, the Company acquired the WIGO(R) trademark for hair care appliances, as well as certain other assets, from EWT Elektrogerate GmbH & Co. KG of Germany in a cash transaction. As a result, the Company now has the exclusive worldwide rights to design, market and sell various appliances, including professional salon hair care appliances, under the WIGO(R) trademark. On September 25, 1998, the Company acquired 100% of the stock of Karina, Inc., a New Jersey corporation. Karina develops, designs and markets basic and fashion hair accessories, brushes, combs, and various personal care implements. In exchange for the stock of Karina, the Company issued 691,760 shares of its common stock to Karina's shareholders. 37
40 HELEN OF TROY LIMITED AND SUBSIDIARIES Notes to Consolidated Financial Statements (10) ACQUISITIONS AND PURCHASES OF TRADEMARKS, CONTINUED On October 19, 1998, the Company acquired 100% of the stock of DCNL, Inc., a California corporation. DCNL develops, designs and markets specialized hair brushes and accessories. In exchange for the stock of DCNL, the Company issued 350,000 shares of its common stock and made additional cash payments to DCNL's shareholders. Under the terms of the agreement, DCNL's shareholders will receive additional shares of Helen of Troy common stock if the market price of the Company's common stock does not exceed a specified level. In order to qualify for that additional consideration, the former DCNL shareholders must hold the 350,000 shares of the Company's common stock until October 1999. The Company accounted for the acquisitions discussed above using the purchase method of accounting. Costs in excess of the fair value of the net tangible assets acquired in the Dazey, Caruso, WIGO(R), Karina and DCNL acquisitions total $40,195,000 and are included in goodwill. The Company is amortizing these costs over 15 years in the cases of the Dazey and Caruso transactions and 30 years for the WIGO(R), Karina and DCNL transactions. On a proforma basis these acquisitions would not have a material effect on net revenues or net earnings. 38
41 HELEN OF TROY LIMITED AND SUBSIDIARIES Schedule II Valuation and Qualifying Accounts Years ended February 28, 1999, 1998 and 1997 (in thousands) <TABLE> <CAPTION> Additions ----------------------- Charged Balance at to Write-off of Balance at beginning costs and uncollectible end of Description of year expenses Recoveries accounts year - --------------------------------- ---------- --------- ---------- ------------- ---------- <S> <C> <C> <C> <C> <C> Year ended February 28, 1999 Allowance for doubtful accounts $ 568 $ 2,267 $ 29 $ 1,108 1,756 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 </TABLE> 39
42 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information in the Company's Proxy Statement, which will be filed within 120 days of the end of the Company's 1999 fiscal year, is incorporated herein by reference in response to this Item 10. ITEM 11. EXECUTIVE COMPENSATION Information in the Company's Proxy Statement, which will be filed within 120 days of the end of the Company's 1999 fiscal year, is incorporated herein by reference in response to this Item 11. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information in the Company's Proxy Statement, which will be filed within 120 days of the end of the Company's 1999 fiscal year, is incorporated herein by reference in response to this Item 12. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information in the Company's Proxy Statement, which will be filed within 120 days of the end of the Company's 1999 fiscal year, is incorporated herein by reference in response to this Item 13. 40
43 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULE, 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. Schedule: Schedule II - Valuation and Qualifying Accounts (b) Reports on Form 8-K On December 4, 1998 the Company filed a report on Form 8-K. That report documented the Board of Director's declaration of a dividend of one preference share purchase right for each outstanding common share, par value $.10 per share, of the Company. On January 6, 1999 the Company filed a report on Form 8-K in connection with the public announcement of its third quarter fiscal 1999 earnings. 41
44 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 28, 1999 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 of the Board, Chief Executive Officer and Director /s/ Gerald J. Rubin (Principal Executive Officer) May 28, 1999 - ------------------------------ (Gerald J. Rubin) Senior Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting /s/ Dona Fisher Officer) May 28, 1999 - ------------------------------ (Dona Fisher) /s/ Stanlee N. Rubin Director May 28, 1999 - ------------------------------ (Stanlee N. Rubin) /s/ Christopher L. Carameros Director May 28, 1999 - ------------------------------ (Christopher L. Carmeros) /s/ Byron H. Rubin Director May 28, 1999 - ------------------------------ (Byron H. Rubin) /s/ Daniel C. Montaro Director May 28, 1999 - ------------------------------ (Daniel C. Montano) /s/ Gary B. Abromovitz Director May 28, 1999 - ------------------------------ (Gary B. Abromovitz) </TABLE> 42
45 HELEN OF TROY LIMITED EXHIBITS TO FORM 10-K For the Fiscal Year Ended February 28, 1999 COMMISSION FILE NUMBER 0-23312 43
46 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>
47 <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. 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 Deleted </TABLE>
48 <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION - ------ ----------- <S> <C> 10.21 Supply Agreement between Helen of Troy Corporation and Helen of Troy Limited, a Barbados corporation, dated February 28, 1994, as previously filed as Exhibit 10.21 of 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 as Exhibit 10.22 of 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 as Exhibit 10.23 of 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 as Exhibit 10.24 of Form 10-Q of Helen of Troy Limited for the period ending November 30, 1997, is hereby incorporated herein by reference. 10.25 Helen of Troy Limited 1995 Non-Employee Director Stock Option Plan, as previously filed, as Exhibit 4.3 of the registrant's registration statement on Form S-8, File Number 333-11181, filed with the Securities and Exchange Commission on August 30, 1996, is hereby incorporated herein by reference. 10.26 Helen of Troy Limited 1998 Employee Stock Option and Restricted Stock Plan, as previously filed as Exhibit 4.3 of the registrant's registration statement on Form S-8, File Number 333-67349, filed with the Securities and Exchange Commission on November 16, 1998, is hereby incorporated herein by reference. 10.27 Helen of Troy Limited 1998 Employee Stock Purchase Plan, as previously filed as Exhibit 4.3 of the registrant's registration statement on Form S-8, File Number 333-67369, filed with the Securities and Exchange Commission on November 16, 1998, is hereby incorporated herein by reference. 10.28 Rights Agreement, dated as of December 1, 1998, between Helen of Troy Limited and Harris Trust and Savings Bank, as Rights Agent, which includes as Exhibit A the Form of Certificate of Designations of Series A First Preference Shares of Helen of Troy Limited, as Exhibit B the Form of Right Certificate, and as Exhibit C the Summary of Rights to Purchase Preference Shares of Helen of Troy Limited, as previously filed as Exhibit 4 of the registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on December 4, 1998, 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>