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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________TO __________
COMMISSION FILE NUMBER 001-14669
HELEN OF TROY LIMITED
(Exact name of the registrant as specified in its charter)
BERMUDA 74-2692550
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
CLARENDON HOUSE
CHURCH STREET
HAMILTON, BERMUDA
(Address of Principal Executive Offices)
1 HELEN OF TROY PLAZA
EL PASO, TEXAS 79912
(Registrant's United States Mailing Address) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (915) 225-8000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes [X] No [ ]
As of October 8, 2003 there were 28,427,689 shares of issuer's common
stock, $.10 par value, outstanding.
HELEN OF TROY LIMITED AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1 Consolidated Condensed Balance
Sheets as of August 31, 2003 (unaudited) and February 28, 2003............................ 3
Consolidated Condensed Statements of Income (unaudited)
for the Three Months and Six Months Ended
August 31, 2003 and August 31, 2002....................................................... 5
Consolidated Condensed Statements of Cash Flows (unaudited)
for the Six Months Ended
August 31, 2003 and August 31, 2002....................................................... 6
Consolidated Condensed Statements of Comprehensive Income (unaudited)
for the Three Months and Six Months Ended
August 31, 2003 and August 31, 2002....................................................... 7
Notes to Consolidated Condensed Financial Statements.......................................... 8
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................. 17
Item 3 Quantitative and Qualitative Disclosures About Market Risk.................................... 27
Item 4 Controls and Procedures....................................................................... 28
PART II. OTHER INFORMATION
Item 1 Legal Proceedings............................................................................. 28
Item 4 Submission of Matters to a Vote of Security Holders........................................... 28
Item 5 Other Information............................................................................. 29
Item 6 Exhibits and Report on Form 8-K............................................................... 30
SIGNATURES..................................................................................................... 31
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HELEN OF TROY LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
August 31, February 28,
2003 2003
----------- ------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 33,395 $ 47,837
Marketable securities, at market value 1,367 1,442
Receivables - principally trade, less allowance of
$ 5,163 at August 31, 2003 and $ 5,107 at February 28, 2003 80,832 61,990
Inventories 147,054 111,966
Prepaid expenses and other current assets 11,431 8,454
Deferred income tax benefits 5,559 3,147
----------- ------------
Total current assets 279,638 234,836
Property and equipment, at cost less accumulated depreciation of
$ 15,726 at August 31, 2003 and $ 14,302 at February 28, 2003 66,591 63,082
Goodwill, net of accumulated amortization of
$ 8,629 at August 31, 2003 and February 28, 2003 40,767 40,767
Trademarks, at cost, net of accumulated amortization of
$ 213 at August 31, 2003 and $ 211 at February 28, 2003 17,046 17,048
License agreements, at cost less accumulated amortization of
$ 10,938 at August 31, 2003 and $ 10,194 at February 28, 2003 26,628 27,372
Other assets 20,335 22,524
----------- ------------
Total assets $ 451,005 $ 405,629
=========== ============
(Continued)
3
HELEN OF TROY LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
August 31, February 28,
2003 2003
----------- ------------
(unaudited)
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable, principally trade $ 30,141 $ 19,613
Accrued expenses:
Advertising and promotional 6,044 5,662
Other 15,148 16,802
Income taxes payable 24,846 18,950
----------- ------------
Total current liabilities 76,179 61,027
Long-term debt 55,000 55,000
----------- ------------
Total liabilities 131,179 116,027
----------- ------------
Stockholders' equity:
Cumulative preferred stock, non-voting, $1.00 par value
Authorized 2,000 shares; none issued - -
Common stock, $.10 par value. Authorized 50,000 shares;
28,405 and 28,202 shares issued and outstanding at
August 31, 2003 and February 28, 2003, respectively 2,840 2,820
Additional paid-in capital 55,940 53,984
Other comprehensive income 306 -
Retained earnings 262,341 233,774
Minority interest in deficit of acquired subsidiary (1,601) (976)
----------- ------------
Total stockholders' equity 319,826 289,602
----------- ------------
Total liabilities and stockholders' equity $ 451,005 $ 405,629
=========== ============
See accompanying notes to consolidated condensed financial statements.
4
HELEN OF TROY LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three months ended August 31, Six months ended August 31,
2003 2002 2003 2002
--------- ------------ ----------- ----------
Net sales $ 115,782 $ 111,058 $ 222,282 $ 213,541
Cost of sales 62,727 60,148 116,432 113,116
--------- ------------ ----------- ---------
Gross profit 53,055 50,910 105,850 100,425
Selling, general, and administrative expenses 38,381 38,636 74,980 78,140
--------- ------------ ----------- ---------
Operating income 14,674 12,274 30,870 22,285
Other income (expense):
Interest expense (956) (953) (1,965) (2,020)
Other income, net 699 415 3,587 728
--------- ------------ ----------- ---------
Total other income (expense) (257) (538) 1,622 (1,292)
--------- ------------ ----------- ---------
Earnings before income taxes 14,417 11,736 32,492 20,993
--------- ------------ ----------- ---------
Income tax expense:
Current 3,846 3,920 6,962 6,110
Deferred (2,527) (1,060) (2,412) (584)
--------- ------------ ----------- ---------
Net earnings $ 13,098 $ 8,876 $ 627,942 $ 15,467
========= ============ =========== =========
Earnings per share:
Basic $ 0.46 $ 0.31 $ 0.99 $ 0.55
Diluted 0.42 0.30 0.92 0.52
Weighted average number of common shares used in
computing earnings per share:
Basic 28,268 28,180 28,239 28,192
Diluted 30,859 29,538 30,379 29,643
See accompanying notes to consolidated condensed financial statements.
5
HELEN OF TROY LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
Six months ended August 31,
2003 2002
-------- --------
Cash flows from operating activities:
Net earnings $ 27,942 $ 15,467
Adjustments to reconcile net earnings to cash provided (used) by operating activities:
Depreciation and amortization 3,030 3,331
Provision for doubtful receivables 2,599 1,922
Purchases of trading securities (195) (3,487)
Proceeds from sales of trading securities 470 1,679
Realized gain - trading securities (84) (141)
Unrealized (gain)/loss - trading securities (116) 429
Deferred taxes, net (2,412) (584)
Gain/loss on sale of fixed assets - 3
Changes in operating assets and liabilities:
Accounts receivable (21,441) (11,563)
Forward contracts 43 -
Inventory (35,088) 1,963
Prepaid expenses (2,747) (1,218)
Other assets 1,667 --
Accounts payable 10,528 11,597
Accrued expenses (1,238) 1,618
Income taxes payable 5,896 (1,611)
-------- --------
Net cash provided (used) by operating activities (11,146) 19,405
Cash flows from investing activities:
Capital and license expenditures (5,015) (1,339)
Proceeds from the sales of fixed assets - 40
Other assets (257) 2,290
-------- --------
Net cash provided (used) by investing activities (5,272) 991
Cash flows from financing activities:
Exercise of stock options 1,976 331
Common stock repurchase - (5)
-------- --------
Net cash provided by financing activities 1,976 326
Net increase (decrease) in cash and cash equivalents (14,442) 20,722
Cash and cash equivalents, beginning of period 47,837 64,293
-------- --------
Cash and cash equivalents, end of period $ 33,395 $ 85,015
======== ========
Supplemental cash flow disclosures:
Interest paid $ 1,945 $ 1,982
Income taxes paid, net of refunds 847 4,948
See accompanying notes to consolidated condensed financial statements.
6
HELEN OF TROY LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED, IN THOUSANDS)
Three months ended August 31, Six months ended August 31,
2003 2002 2003 2002
-------- -------- -------- -------
Net earnings, as reported $ 13,098 $ 8,876 $ 27,942 $ 15,467
Other comprehensive income (loss), net of tax:
Cash flow hedges 520 - 306 -
-------- -------- -------- --------
Comprehensive income $ 13,618 $ 8,876 $ 28,248 $ 15,467
======== ======== ======== ========
See accompanying notes to consolidated condensed financial statements.
7
HELEN OF TROY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
AUGUST 31, 2003
NOTE 1 - In the opinion of the Company, the accompanying consolidated
condensed financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to
present fairly its consolidated financial position as of
August 31, 2003 and February 28, 2003 and the results of its
consolidated operations for the three-month and six-month
periods ended August 31, 2003 and 2002. While the Company
believes that the disclosures presented are adequate to make
the information not misleading, these statements should be
read in conjunction with the consolidated financial statements
and the notes included in the Company's latest annual report
on Form 10-K.
NOTE 2 - The Company is involved in various claims and legal actions
arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of such claims and legal
actions will not have a material adverse effect on the
consolidated financial position, results of operations, or
cash flows of the Company.
NOTE 3 - Basic earnings per share is computed based upon the weighted
average number of common shares outstanding during the period.
Diluted earnings per share is computed based upon the weighted
average number of common shares plus the effects of dilutive
securities. The number of dilutive securities was 2,590,398
and 1,358,109 for the three months ended August 31, 2003 and
2002, respectively, and 2,139,977 and 1,450,625 for the six
months ended August 31, 2003 and 2002, respectively. All
dilutive securities during these periods consisted of stock
options issued under the Company's stock option plans. There
were options to purchase common stock that were outstanding
but not included in the computation of earnings per share
because the exercise prices of such options were greater than
the average market prices of the Company's common stock. These
options totaled 335,133 and 3,856,662 at August 31, 2003 and
2002, respectively.
NOTE 4 - During the latest fiscal quarter, the Company's Board of
Directors approved a resolution authorizing the Company to
purchase, in open market or private transactions, up to
3,000,000 shares of its common stock over a period extending
to May 31, 2006. In September 2003, the Company purchased and
retired a total of 81,800 of its shares under this resolution
at a total cost of $ 2,025,000, for a $ 24.76 per share
average price. The Company did not purchase any of its shares
during the six months ended August 31, 2003.
8
NOTE 5 - The following table contains segment information for the three
month and six month periods ended August 31, 2003 and 2002
THREE MONTHS ENDED AUGUST 31, 2003 AND 2002
(IN THOUSANDS)
North Corporate/
August 31, 2003 American International Tactica Other Total
--------------- ---------- ------------- ---------- ---------- ----------
Net sales $ 94,537 $ 10,798 $ 10,447 $ - $ 115,782
Operating income (loss) 18,582 224 (3,303) (829) 14,674
Capital / license expenditures 1,291 1,991 8 4 3,294
Depreciation and amortization 1,258 253 18 69 1,598
North Corporate/
August 31, 2002 American International Tactica Other Total
--------------- ---------- ------------- ---------- ---------- ----------
Net sales $ 83,693 $ 6,223 $ 21,142 $ - $ 111,058
Operating income (loss) 11,535 (514) 1,936 (683) 12,274
Capital / license expenditures 136 27 112 - 275
Depreciation and amortization 705 344 36 378 1,463
SIX MONTHS ENDED AUGUST 31, 2003 AND 2002
(IN THOUSANDS)
North Corporate/
August 31, 2003 American International Tactica Other Total
--------------- ---------- ------------- ---------- ---------- ----------
Net sales $ 175,924 $ 20,647 $ 25,711 $ - $ 222,282
Operating income (loss) 35,919 1,440 (2,928) (3,561) 30,870
Capital / license expenditures 2,981 2,018 10 6 5,015
Depreciation and amortization 2,355 498 37 140 3,030
North Corporate/
August 31, 2002 American International Tactica Other Total
--------------- ---------- ------------- ---------- ---------- ----------
Net sales $ 155,622 $ 10,427 $ 47,492 $ - $ 213,541
Operating income (loss) 19,188 (1,065) 5,321 (1,159) 22,285
Capital / license expenditures 1,141 61 137 - 1,339
Depreciation and amortization 2,205 691 57 378 3,331
Identifiable assets at August 31, 2003 and February 28, 2003 were as follows:
(IN THOUSANDS)
North Corporate/
American International Tactica Other Total
---------- ------------- ---------- ---------- ----------
August 31, 2003 $ 368,057 $ 36,479 $ 30,899 $ 15,570 $ 451,005
February 28, 2003 337,596 26,049 27,928 14,056 405,629
9
The North American segment sells hair care appliances, other
personal care appliances, including massagers and spa
products, hair and skin care products, hairbrushes, combs, and
decorative hair accessories in the United States and Canada.
The International segment sells hair care appliances, personal
care appliances, hair and skin care products, hairbrushes,
combs, and decorative hair accessories in other countries.
Tactica sells a variety of personal care and other consumer
products directly to customers and to retailers. The column
above entitled "Corporate/Other" contains items not allocated
to any specific operating segment.
Operating profit for each operating segment is computed based
on net sales, less cost of goods sold, less any selling,
general, and administrative expenses associated with the
segment. The selling, general, and administrative expense
("SG&A") totals used to compute each segment's operating
profit are comprised of SG&A expense directly associated with
those segments, plus overhead expenses that are allocable to
operating segments. Other items of income and expense,
including income taxes, are not allocated to operating
segments.
NOTE 6 - The Hong Kong Inland Revenue Department ("IRD") has assessed
$6,753,000 in tax on certain profits of the Company's foreign
subsidiaries for the fiscal years 1995 through 1997. If the
IRD were to assert the same position for later years and that
position were to prevail, the resulting tax liability would
total approximately $ 38,980,000 for fiscal 1995 through the
fiscal quarter ended August 31, 2003. The Company has recorded
a liability for the IRD's claims and potential claims, based
on consultations with outside Hong Kong tax counsel as to the
probability that some or all of the IRD's claims prevail.
Although the ultimate resolution of the IRD's claims and
potential claims cannot be predicted with certainty,
management believes that adequate provision has been made in
the consolidated condensed financial statements for the
resolution of those claims. In connection with the IRD's tax
assessment for the fiscal years 1995 through 1997, the Company
purchased tax reserve certificates in Hong Kong. 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 dollars and
are subject to the risks associated with foreign currency
fluctuations. As of August 31, 2003 and February 28, 2003, the
tax reserve certificates were valued at $ 3,282,000 (U.S.), or
approximately 49 percent of the liability assessed by the IRD
for fiscal 1995 through 1997. The value of the tax reserve
certificates comprises part of the amounts reported on the
line entitled "Other assets" on the Company's August 31, 2003
and February 28, 2003 condensed consolidated balance sheets.
The United States Internal Revenue Service ("IRS") has audited
the U.S. federal tax returns of the Company's largest U.S.
subsidiary for fiscal years 1997 through 1999. The IRS
proposed adjustments to those returns. If the IRS's positions
with respect to those adjustments were to prevail, the
resulting tax liability could total $ 7,500,000. The Company
is vigorously contesting these adjustments. Although the
ultimate outcome of the examination cannot be predicted with
certainty, management is of the opinion that adequate
provision for the proposed adjustments has been made in the
Company's condensed consolidated financial statements as of
August 31, 2003 and February 28, 2003. The IRS also is
auditing the U.S. federal tax returns of the Company's largest
U.S. subsidiary for fiscal years 2000 through 2002. To date,
the IRS has not proposed any material adjustments to these
returns. The Company cannot predict with certainty the results
of the IRS audits for these years.
10
NOTE 7 - Helen of Troy's consolidated results of operations for the
three-month and six-month periods ended August 31, 2003 and
2002 include 100 percent of the net earnings and losses of
Tactica International, Inc. ("Tactica"), a subsidiary in which
Helen of Troy owns a 55 percent interest. Because Tactica had
accumulated a net deficit at the time that Helen of Troy
acquired its interest and because the minority shareholders of
Tactica have not adequately guaranteed their portion of the
accumulated deficit, Helen of Troy will include 100 percent of
Tactica's net earnings and losses in its consolidated income
statement until Tactica's accumulated deficit is eliminated.
At August 31, 2003, Tactica's accumulated deficit remaining to
be eliminated was approximately $ 3,561,000. Helen of Troy's
55 percent share of this deficit totals $ 1,960,000, with the
minority interest totaling $ 1,601,000. The Company will
continue to recognize all of Tactica's net income or loss
until such time as Tactica's accumulated deficit is fully
recovered.
NOTE 8 - In accordance with Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"),
the Company does not record amortization expense on goodwill
or other intangible assets that have indefinite useful lives.
Amortization expense is recorded for intangible assets with
definite useful lives. SFAS 142 also requires at least an
annual impairment review of goodwill and other intangible
assets. Any asset deemed to be impaired is to be written down
to its fair value. The Company has performed the analysis
required by SFAS 142 and has determined that none of its
goodwill is impaired.
The following table discloses information regarding the
carrying amounts and associated accumulated amortization for
intangible assets, other than goodwill.
INTANGIBLE ASSETS (IN THOUSANDS)
August 31, 2003 February 28, 2003
------------------------------------ -----------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
-------- ------------ -------- -------- ------------ --------
Licenses (a) $ 37,566 $ (10,938) $ 26,628 $ 37,566 $ (10,194) $ 27,372
Trademarks (a) 17,259 (213) 17,046 17,259 (211) 17,048
(a) August 31, 2003 and February 28, 2003 gross and net carrying amounts
include $ 16,920,000 of trademarks and $ 18,000,000 of licenses not
subject to amortization.
The following table summarizes the amortization expense
attributable to intangible assets for the three and six months
ending August 31, 2003 and 2002, as well as estimated
amortization expense for the fiscal years ending the last day
of February 2004 through 2009.
Three months ended August 31, Six months ended August 31,
2003 2002 2003 2002
---- ---- ---- ----
Aggregate amortization expense (in thousands) $ 384 $ 331 $ 746 $ 683
Estimated Amortization Expense (in thousands):
For the fiscal years ended
- --------------------------
February 2004 $ 1,450
February 2005 1,450
February 2006 1,450
February 2007 1,450
February 2008 1,040
February 2009 834
11
NOTE 9 - The consolidated group's parent company, Helen of Troy
Limited, a Bermuda company, and various subsidiaries guarantee
certain obligations and arrangements on behalf of some members
of the consolidated group of companies whose financial
position and results are included in our consolidated
financial statements.
The $ 55,000,000 reflected as "Long-term debt" in our
consolidated condensed balance sheets as of August 31, 2003
and February 28, 2003, represents senior notes issued by one
of the Company's U.S. subsidiaries. The consolidated group's
parent company, located in Bermuda, one of its subsidiaries
located in Barbados, and three of its U.S. subsidiaries
guarantee the senior notes on a joint and several basis.
Helen of Troy Limited, the parent company of the consolidated
group, has guaranteed a commitment of its subsidiary based in
the United Kingdom (the "UK subsidiary"). Under this guarantee
arrangement with a marketing company used by the UK
subsidiary, the parent company guaranteed up to 600,000
British Pounds on behalf of the UK subsidiary. No liability is
recorded on the August 31, 2003 and February 28, 2003
Consolidated Condensed Balance Sheets for the parent company
guarantee on behalf of the UK subsidiary.
Tactica leases office space in New York City. One of the
Company's U.S. subsidiaries has issued a $389,000 standby
letter of credit to the lessor. The lessor may draw funds from
the standby letter of credit if Tactica fails to meet its
obligations under the lease. The standby letter of credit
decreases to $195,000 on April 30, 2005 and expires on the
same date as the related lease, February 27, 2006.
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 of approximately
$ 3,282,000 and $ 3,263,000 as of August 31, 2003 and
February 28, 2003, respectively, to cover future warranty
costs. The Company estimates its warranty accrual using
historical trends. The Company believes that these trends are
the most reliable method by which it can estimate its warranty
liability. The following table summarizes the activity in the
Company's accrual for the fiscal quarter ended August 31, 2003
and fiscal year ended February 28, 2003:
ACCRUAL FOR WARRANTY RETURNS
(IN THOUSANDS)
Reduction of
Accrual--
Beginning Additions Payments and Ending
Period ended Balance to Accrual Credits Issued Balance
- ------------ --------- ---------- --------------- -------
August 31, 2003 (Three Months) $ 2,894 $ 3,514 $ 3,126 $ 3,282
August 31, 2003 (Six Months) 3,263 6,839 6,820 3,282
February 28, 2003 (Twelve Months) 3,428 12,408 12,573 3,263
12
Our contractual obligations and commercial commitments as of
August 31, 2003 were:
PAYMENTS DUE BY PERIOD
(IN THOUSANDS)
After
Contractual Obligations Total 1 year 2 years 3 years 4 years 5 years 5 years
----------------------- ------ ------- ------- ------- ------- ------- -------
Long-term debt $ 55,000 $ - $10,000 $10,000 $10,000 $13,000 $12,000
Open purchase orders - inventory 51,470 51,470 - - - - -
Minimum royalty payments 21,784 4,312 3,473 2,775 2,653 2,644 5,927
Advertising and promotional
commitments 21,242 5,907 6,211 3,031 1,474 888 3,731
Operating leases 3,897 1,552 1,318 849 178 - -
Purchase and implementation of
enterprise resource planning
(ERP) system 3,718 3,718 - - - - -
Other 1,570 362 362 363 362 121 -
-------- ------- ------- ------- ------- ------- -------
Total contractual obligations $158,681 $67,321 $21,364 $17,018 $14,667 $16,653 $21,658
======== ======= ======= ======= ======= ======= =======
NOTE 10 - 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. As all options
were granted at or above market prices on the dates of grant,
no compensation expense has been recognized for the Company's
stock option plans or its stock purchase plan.
The following table sets forth the computation of basic and
diluted earnings per share for the three months and six months
ended August 31, 2003 and 2002, respectively, and illustrates
the effect on net income and earnings per share if the Company
had applied the fair value recognition provisions of SFAS 123,
"Accounting for Stock-Based Compensation" to stock-based
employee compensation.
PROFORMA STOCK-BASED EMPLOYEE COMPENSATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three months ended August 31, Six months ended August 31,
2003 2002 2003 2002
---- ---- ---- ----
Net Income: As Reported $ 13,098 $ 8,876 $ 27,942 $ 15,467
Fair-value cost 2,956 2,321 4,797 4,306
-------- ------- -------- --------
Proforma $ 10,142 $ 6,555 $ 23,145 $ 11,161
======== ======= ======== ========
Earnings per share:
Basic: As Reported $ 0.46 $ 0.31 $ 0.99 $ 0.55
Proforma 0.36 0.23 0.82 0.40
Diluted: As Reported $ 0.42 $ 0.30 $ 0.92 $ 0.52
Proforma 0.33 0.22 0.76 0.38
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 14,000,000 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
13
contain provisions for incentive stock options, non-qualified
stock options and restricted stock grants. Generally, options
granted under the 1994 and 1998 Plans become exercisable
immediately, or over a one, four, or five-year vesting period
and expire on a date ranging from seven to ten years from
their date of grant. At August 31, 2003 and February 28, 2003,
435,661 and 1,257,226 shares respectively, remained available
for future grants under these plans.
Under a stock option plan for non-employee directors (the
"Directors' Plan"), adopted in fiscal 1996, the Company
reserved a total of 980,000 shares of its common stock for
issuance to non-employee members of the Board of 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. At August 31, 2003 and
February 28, 2003, 472,000 and 512,000 shares respectively,
remained available for future grants under this plan.
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 percent to
15 percent of their wages or salaries to purchase the
Company's common stock. The purchase price for stock purchased
under the plan is equal to the lower of 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. During the
second quarter of fiscal 2004, plan participants acquired
6,099 shares at an average price of $ 11.91 per share from the
Company under the stock purchase plan. At August 31, 2003 and
February 28, 2003, 377,921 and 384,020 shares respectively,
remained available for future purchases under this plan.
NOTE 11 - The following table is a summary by operating segment of the
Company's goodwill balances as of August 31, 2003 and February
28, 2003.
TOTAL GOODWILL BY OPERATING SEGMENT (IN THOUSANDS)
August 31, 2003 February 28, 2003
----------------------------------- ------------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
-------- ------------ -------- -------- ------------ --------
Operating Segment:
North America $ 42,212 $ (7,792) $ 34,420 $ 42,212 $ (7,792) $ 34,420
International 1,081 (433) 648 1,081 (433) 648
Tactica 6,103 (404) 5,699 6,103 (404) 5,699
-------- ----------- -------- -------- ----------- --------
Total $ 49,396 $ (8,629) $ 40,767 $ 49,396 $ (8,629) $ 40,767
======== =========== ======== ======== =========== ========
NOTE 12 - On October 21, 2002, the Company acquired from The Procter &
Gamble Company the right to sell products under six
trademarks. The Company acquired all rights to the trademarks
and certain rights to the formulas and production processes
for four of the six trademarks; Ammens(R), Vitalis(R),
Condition 3-in-1(R), and Final Net(R). The Procter & Gamble
Company assigned to the Company its rights under licenses to
sell products bearing the other two trademarks; Sea Breeze(R)
and Vitapointe(R). The Sea Breeze(R) license is perpetual. The
Company has completed its analysis of the economic lives of
the trademarks acquired and is of the initial belief that
these trademarks have indefinite economic lives except for the
Vitapointe(R) license. The Company has determined that the
license covering the Vitapointe(R) trademark has an economic
life equal to its initial term through December 2010 and is
currently amortizing the intangible asset over that period.
The Company recorded amortization expense during the three and
six months ended August 31, 2003 of $ 32,000 and $ 64,000,
respectively.
14
NOTE 13- During the fiscal year ended February 28, 2003, the Company entered
into nonmonetary transactions in which it exchanged inventory with a
net book value of approximately $3,100,000 for advertising credits. As
a result of these transactions, the Company recorded both sales and
cost of goods sold equal to the inventory's net book value. The Company
used approximately $600,000 of the credits during the fiscal year
ending 2003 and expects to use the remaining advertising credits
acquired by the end of fiscal year 2004. The remaining credits are
valued at $ 2,501,000 on the Company's Consolidated Condensed Balance
Sheets at August 31, 2003 and February 28, 2003 and are included in the
line item entitled "Prepaid expenses."
NOTE 14- The Company's functional currency is the U.S. Dollar. Because it
operates internationally, the Company is subject to foreign currency
risk from transactions denominated in currencies other than the U.S.
Dollar ("foreign currencies"). Such transactions include sales and
certain inventory purchases. As a result of such transactions, portions
of the Company's cash, trade accounts receivable, and trade accounts
payable are denominated in foreign currencies. During the three- and
six-month periods ended August 31, 2003 and 2002, the Company
transacted 11%, 10%, 5%, and 5% respectively, of its sales in foreign
currencies. These sales were primarily denominated in the Canadian
Dollar, the British Pound and the Euro. The Company makes most of its
inventory purchases from the Far East and uses the U.S. Dollar for such
purchases.
The Company identifies foreign currency risk by regularly monitoring
its foreign currency-denominated transactions and balances. The Company
sought to reduce its foreign currency risk by purchasing most of its
inventory using U.S. Dollars and by converting cash balances
denominated in foreign currencies to U.S. Dollars on a regular basis.
During fiscal 2003, the Company entered into a series of forward
contracts to exchange British Pounds for U.S. Dollars. These contracts
were cash flow hedges that hedge the foreign currency risk associated
with a portion of the Company's forecasted net British Pound cash flows
and closed during March 2003. During the quarter ended May 31, 2003,
the Company entered into another series of contracts that were cash
flow hedges that hedge the foreign currency risk associated with a
portion of the Company's forecasted net cash flows from the British
Pound and the Euro.
The line item entitled "Other income (net)" in the Consolidated
Condensed Statements of Income and Comprehensive Income includes
$ 467,000 of income for the quarter ended August 31, 2003 and $ 230,000
of income for the six months ended August 31, 2003 associated with
hedges of foreign currency risk related to the contracts entered into
during the six month periods ended August 31, 2003. The $ 467,000 of
income is comprised of $ 53,000 of expense resulting from changes in
"spot" exchange rates during the quarter ended August 31, 2003 and the
remaining $ 520,000 of income is due to changes in the time value of
the forward contracts. For the six months ended August 31, 2003 the
$ 230,000 of income is comprised of $ 76,000 of expense resulting from
changes in "spot" exchange rates and the remaining $ 306,000 of income
is due to changes in the time value of the forward contracts.
Current cash flows hedged by the Company's outstanding forward
contracts total $ 5,000,000 in British Pounds and $ 2,500,000 in Euros.
The anticipated sales are forecasted to occur during the twelve months
ending February 28, 2004. Changes in "spot" exchange rates have
increased the value of Euro contracts by $ 8,500 and British Pound
contracts by $ 297,500 since their inception. These amounts are
recorded against Other Comprehensive Income ("OCI") for the three and
six months ended August 31, 2003 as $ 520,000 of Comprehensive Income
and $ 214,000 of Comprehensive Expense, respectively. The cumulative
$ 306,000 is the entire amount reflected as OCI and Accumulated OCI in
the Company's August 31, 2003 Consolidated Condensed Statement of
Comprehensive Income and Consolidated Condensed Balance Sheets,
respectively. The Company expects to reclassify the $ 306,000 amount
recorded as OCI against "Other income, net" as the forecasted
transactions close out over the remaining balance of their terms.
15
NOTE 15- In the first quarter of fiscal 2004, the Company recorded income of
$2,600,000, net of legal fees, in connection with the settlement of
litigation matters. This income is included in the line item entitled
"Other income, net" in the Consolidated Condensed Statements of Income
for the six months ended August 31, 2003.
NOTE 16- On September 22, 2003, certain subsidiaries of the Company entered into
a new credit facility with the Bank of America for $ 50,000,000 to
facilitate short-term borrowings and the issuance of letters of credit.
All borrowings are at interest equal to the higher of the Federal Funds
Rate plus 0.50% or the Bank of America's prime; or upon timely election
by the Company, on the respective 1, 2, 3, or 6 month LIBOR rate plus
0.75% (based upon the term of the borrowing).
The line allows for issuance of letters of credit up to $ 10,000,000,
which will reduce the maximum credit line borrowing limit dollar for
dollar. The credit facility expires in September of 2004. The new
agreement contains covenants and requires maintenance of certain
Debt/EBITDA and fixed charge coverage ratios customary to loan
facilities of this nature. The new credit facility has been fully
guaranteed, on a joint and several basis, by our parent company,
located in Bermuda and certain U.S. subsidiaries. As mentioned in Note
17 below, the Company used $ 32,000,000 of this line to fund the
acquisition of the Brut(R) family of products from Unilever.
NOTE 17- On September 29, 2003, the Company issued a press release announcing
that it had received all required regulatory approvals and completed
the transaction to acquire certain assets related to the North
American, Latin American, and Caribbean production and distribution of
Brut(R) fragrances, deodorants and antiperspirants from Conopco, Inc.,
a wholly owned subsidiary of Unilever NV. The assets consist
principally of patents, trademarks and trade names, product
formulations and production technology, related finished goods
inventories, distribution rights, and customer lists. The Company paid
$ 55,000,000 in cash in the transaction. The transaction was funded by
drawing $ 32,000,000 against a new $ 50,000,000 short-term credit
facility with Bank of America, and the balance funded out of the
Company's cash on hand.
The Company is in the process of completing its analysis of the
economic lives of the assets acquired and appropriate allocation of the
initial purchase price. Our initial belief is that most of the purchase
price will be allocated to assets having indefinite economic lives. The
Company expects to complete its analysis at some time during the late
third fiscal quarter or early fourth fiscal quarter of 2004. Depending
on the results of this analysis, the Company might, in future periods,
record amortization expense on one or more of the intangible assets
associated with the acquisition.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion contains a number of forward-looking statements, all of
which are based on current expectations. Actual results may differ materially
due to a number of factors, including those discussed in the section entitled
Information Relating to Forward-Looking Statements and in the Company's most
recent report on Form 10-K.
RESULTS OF OPERATIONS
COMPARISON OF QUARTER ENDED AUGUST 31, 2003 TO QUARTER ENDED AUGUST 31, 2002
consolidated sales and gross profit margins
Our net sales for the three months ended August 31, 2003 improved
4.3 percent or $ 4,724,000 versus the three months ended August 31, 2002. Net
sales increased in our North American and International operating segments,
while our Tactica segment's net sales decreased.
Net sales in the North American segment grew $ 10,844,000, or
13 percent for the three months ended August 31, 2003 versus the same period a
year earlier. In October 2002, we acquired six brands from The Procter & Gamble
Company which comprise the majority of our liquid and powder hair and skin care
products. Sales of these products resulted in $ 7,664,000 of sales growth in the
three months ended August 31, 2003 and accounted for 71 percent of the quarter's
growth in the North American segment. We entered the hair and skin care products
market during the third quarter of the prior fiscal year; therefore, net sales
figures for the three months ended August 31, 2002 include no sales of such
products. Exclusive of liquid and powder hair and skin care product sales, our
North American segment grew $ 3,180,000, or 3.8 percent, over the same period
last year. This growth resulted from increased sales of existing product lines
that have been enhanced with new technologies and features. Examples include
hair care appliances utilizing ionic and ceramic technology, rather than
traditional heating surfaces. We also experienced increased sales in our Hot
Tools and Wigo brands through our professional distribution channel, and in our
Vidal Sassoon(R), Revlon(R) and Dr. Scholl's(R) line of products sold at retail.
Our International segment's sales for the three month period ended
August 31, 2003 grew by 74 percent, or $ 4,575,000, compared to the same period
a year earlier. Increased sales in the United Kingdom and France accounted for
most of this quarter's International segment sales growth. Also contributing to
International growth has been the strengthening of the British Pound and the
Euro versus the U.S. Dollar which provided approximately $ 400,000 of additional
sales dollars for this quarter. In addition to the contributions to North
American segment's sales, as discussed above, liquid and powder hair and skin
care sales also contributed to the International segment's sales growth. These
sales produced $ 2,524,000 of sales growth in the International segment which
accounted for 55 percent of the segment's total growth. International sales,
excluding liquid and powder hair and skin care sales increased $ 2,051,000 or
33 percent.
The Tactica operating segment experienced a $ 10,695,000, or
51 percent, decrease in its net sales during the three months ended August 31,
2003, versus the three months ended August 31, 2002. Sales decreases in Tactica
were primarily due to a reduction in sales of Epil-Stop products that were a
large part of sales last year, and general softness of demand for products sold
through television infomercials. Sales were also negatively impacted by new
product supply shortages, principally due to demand exceeding planned supply,
which created an order backlog in excess of $ 4,000,000 at quarter end. It is
likely that some of this backlog will be cancelled in the normal course of
business, with the balance of the backlog producing sales in our third quarter
of this year. The extent of the impact of cancellations and delayed sales on
future quarters is indeterminate at the time of this report.
Consolidated gross profit, as a percentage of sales for the quarter
ended August 31, 2003, was consistent with the prior year's quarter ended August
31, 2002, holding at 45.8 for both quarters. North American and International
segment gross profit margins increased significantly primarily due to a
favorable change in the mix of products sold and our ability to source product
more efficiently. The North American segment also experienced a lower volume of
closeout sales with higher gross margins as
17
compared to a higher volume of closeout sales with lower margins during the same
period last year. The North American segment's gross profit also benefited from
the addition of the six brands acquired from Procter & Gamble Company which
produce higher gross margins than the remainder of the segment. The
International gross margin also benefited from the strengthening of the Euro and
the British Pound. The North American and International segment gross margin
increases were offset by Tactica's decline in gross margins and lower sales
volume.
Selling, general, and administrative expenses
Comparing the second quarter of fiscal 2003 to the second quarter of
fiscal 2004, selling, general, and administrative expenses, expressed as a
percentage of net sales, decreased from 34.8 to 33.1 percent. This decrease is
due to lower royalty expense being partially offset by increases in freight out,
payroll, insurance and warehouse storage costs. Additionally, we experienced
foreign currency exchange losses of ($ 653,000) versus gains of $ 673,000 during
the same period a year earlier. The exchange rate losses in the quarter ended
August 31, 2003 were primarily due to the U.S. Dollar's strength versus the
British Pound and the Euro. The exchange rate gains in the quarter ended August
31, 2002 were primarily due to the U.S. Dollar's weakness versus the British
Pound and the Euro.
Interest expense and other income / expense
Interest expense for the quarter ended August 31, 2003 increased
slightly compared with the quarter ended August 31, 2002, increasing to
$956,000 from $ 953,000.
Other income for the quarter ended August 31, 2003 was $ 699,000
compared with $ 415,000 for the quarter ended August 31, 2002. Interest income
was $ 352,000 lower for the quarter ended August 31, 2003 versus the quarter
ended August 31, 2002. The drop in interest was due to less investable cash and
reduced interest rates. The Company had realized and unrealized gains on
securities of $ 247,000 for the quarter ended August 31, 2003 versus a loss,
both realized and unrealized on securities of $ 281,000 for the quarter ended
August 31, 2002.
Income tax expense
In the second quarter of fiscal 2004, our income tax expense was
9.1 percent of earnings before income taxes, as opposed to 24.4 percent in the
second quarter of fiscal 2003. Tactica incurs a total income tax rate of
approximately 45 percent, versus approximately 18 percent for our other two
segments combined and Tactica's current quarter's operating loss of $ 3,303,000
and resulting tax benefit caused a reduction in our overall tax rate. Tactica
does not qualify to join the Company's consolidated tax filing and thus files
separate U.S. federal, state and local tax returns.
COMPARISON OF SIX MONTHS ENDED AUGUST 31, 2003 TO SIX MONTHS ENDED
AUGUST 31, 2002
Consolidated Sales and Gross Profit Margins
Our net sales for the six months ended August 31, 2003 improved
4.1 percent or $ 8,741,000 versus the six months ended August 31, 2002. Net
sales increased in our North American and International operating segments,
while our Tactica segment's net sales decreased.
Net sales in the North American segment grew $ 20,302,000, or
13 percent for the six months ended August 31, 2003 versus the same period a
year earlier. In October 2002, we acquired six brands from The Procter & Gamble
Company which comprise the majority of our liquid and powder hair and skin care
products. Sales of these products resulted in $ 15,698,000 of sales in the six
months ended August 31, 2003 and accounted for 77 percent of the growth in the
North American segment during this period.
18
We entered the hair and skin care products market during the third quarter of
the prior fiscal year; therefore, net sales figures for the six months ended
August 31, 2002 included no sales of such products. Exclusive of the liquid and
powder hair and skin care product sales, our North American segment grew
$4,604,000, or 3 percent, over the same period last year. This growth resulted
from increased sales of existing product lines that have been enhanced with new
technologies and features. Examples include hair care appliances utilizing ionic
and ceramic technology, rather than traditional heating surfaces. We also
experienced increased sales in our Hot Tools and Wigo brands through our
professional distribution channel, and in our Vidal Sassoon(R), Revlon(R),
Sunbeam(R) and Dr. Scholl's(R) line of products sold at retail.
Our International segment's sales for the six month period ended August
31, 2003 grew by 98 percent, or $ 10,220,000, compared to the same period a year
earlier. Increased sales in the United Kingdom and France accounted for most of
this year's International segment sales growth. In addition to the contributions
to the North American segment's sales, as discussed, liquid and powder hair and
skin care sales also contributed to the International segment's sales growth.
These sales produced $ 3,585,000 of sales growth in the International segment
which accounted for 35 percent of the segment's total growth. International
sales, excluding liquid and powder hair and skin care sales, increased
$6,635,000 or 64 percent.
The Tactica operating segment experienced a $ 21,781,000, or 46
percent, decrease in its net sales during the six months ended August 31, 2003,
versus the six months ended August 31, 2002. Sales decreases in Tactica were
primarily due to a reduction in sales of Epil-Stop products that were a large
part of sales last year, and general softness of demand for products sold
through television infomercials. Sales were also negatively impacted by new
product supply shortages, principally due to demand exceeding planned supply,
which created an order backlog in excess of $ 4,000,000 at quarter end. It is
likely that some of this backlog will be cancelled in the normal course of
business, with the balance of the backlog producing sales in our third quarter
of this year. The extent of the impact of cancellations and delayed sales on
future quarters is indeterminate at the time of this report.
Consolidated gross profit, as a percentage of sales for the six months
ended August 31, 2003, rose as compared with the prior six months ended August
31, 2002, increasing from 47 percent to 47.6 percent. North American and
International segment gross profit margins increased significantly primarily due
to a favorable change in the mix of products sold and our ability to source
product more efficiently. The North American segment also experienced a lower
volume of closeout sales with higher gross margins as compared to a high volume
of closeout sales with low margins during the same period last year. The North
American segment's gross profit also benefited from the addition of the Idelle
Labs division that produces higher gross margins than the remainder of the
segment. The North American and International segment gross margin increases
were offset partially by Tactica's decline in gross margins and lower sales
volume.
Selling, general, and administrative expenses
Comparing the first six months of fiscal 2003 to the first six months
of fiscal 2004, selling, general, and administrative expenses, expressed as a
percentage of net sales, decreased from 36.6 to 33.7 percent. This decrease is
due to lower royalty expense being partially offset by increases in freight out,
payroll, insurance and warehouse storage costs. Additionally, we experienced
foreign currency exchange losses of ($ 87,000) versus gains of $ 926,000 during
the same period a year earlier. The exchange rate losses in the six months ended
August 31, 2003 were primarily due to the U.S. Dollar's strength versus the
British Pound and the Euro. The exchange rate gains in the six months ended
August 31, 2002 were primarily due to the U.S. Dollar's weakness versus the
British Pound and the Euro.
Interest expense and other income / expense
Interest expense for the six months ended August 31, 2003 decreased
slightly compared with the six months ended August 31, 2002, decreasing to
$1,965,000 from $ 2,020,000.
Other income for the six months ended August 31, 2003 was $ 3,587,000
compared with $ 728,000 for the six months ended August 31, 2002. Interest
income was $ 418,000 lower for the six months ended August 31, 2003 versus the
six months
19
ended August 31, 2002. The drop in interest was due to less investable cash and
reduced interest rates. The Company had realized and unrealized gains on
securities of $ 200,000 in the six months ended August 31, 2003 versus a loss,
both realized and unrealized gains on securities of $ 281,000 for the six months
ended August 31, 2002. As discussed in Note 15, the Company recorded other
income of $ 2,600,000 during the six months ended August 31, 2003 in connection
with the settlement of two litigation issues.
Income tax expense
In the six months ended August 31, 2003, our income tax expense was
14 percent of earnings before income taxes, as opposed to 26.3 percent for the
six months ended August 31, 2002. Tactica incurs a total income tax rate of
approximately 45 percent, versus approximately 18 percent for our other two
segments combined and Tactica's operating loss of $ 2,928,000 for the six months
ended August 31, 2003 and resulting tax benefit caused a reduction in our
overall tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Our cash balance was $ 33,395,000 at August 31, 2003 compared to
$47,837,000 at February 28, 2003. Operating activities utilized $ 11,146,000 of
cash during the first six months of fiscal 2004, compared to generating
$19,405,000 during the first six months of fiscal 2003. The production of net
income of $ 27,942,000 along with an increase in accounts payable of $10,528,000
offset by an increase in accounts receivable of $ 21,441,000 and increased
inventory of $ 35,088,000 were the major reasons $ 11,146,000 of cash was
utilized in operating activities. The inventory increase of $ 35,088,000 was due
to $ 5,200,000 of inventory associated with our new liquid and powder hair and
skin care business and the remainder of the inventory increase is in
anticipation of the fall and holiday selling season. Investing activities used
$5,272,000 of cash during the six months ended August 31, 2003. Of the
$5,272,000, $ 1,915,000 was for the acquisition of a new office facility in the
UK and $ 2,175,000 was associated with costs incurred in the conversion to a new
integrated data processing system scheduled to go live in the first quarter of
fiscal 2005. Financing activities provided $ 1,976,000 due to the exercise of
stock options.
Our working capital balance increased to $ 203,459,000 at August 31,
2003 from $ 173,809,000 at February 28, 2003. Our current ratio decreased
slightly from 3.85 at February 28, 2003 to 3.67 at August 31, 2003. The increase
in our working capital was largely due to the increase in accounts receivable
and inventory levels offset partially by a smaller increase in accounts payable
and income taxes payable.
In connection with the acquisition of a 55 percent interest in Tactica,
we loaned $3,500,000 to the minority shareholders of Tactica. The interest rate
on these loans is 8.75 percent. All principal and unpaid interest on these loans
is due March 14, 2005. The total amounts of principal and accrued interest due
to the Company under these loans were $ 4,562,000 and $ 4,409,000 at August 31,
2003 and February 28, 2003, respectively. These amounts are included in "Other
assets" on the Consolidated Condensed Balance Sheets.
The Company maintains a revolving line of credit with a bank to
facilitate short-term borrowings and the issuance of letters of credit. This
line of credit allows borrowings totaling $ 25,000,000, charges interest at the
three-month LIBOR rate plus a percentage that varies based on the ratio of the
Company's debt to its earnings before interest, taxes, depreciation, and
amortization (EBITDA). This facility, which was originally set to expire on
August 31, 2003, was extended through October 30, 2003. At August 31, 2003 the
interest rate charged under the line of credit was 2.11 percent. This existing
line of credit allows for the issuance of letters of credit of up to $7,000,000.
Any outstanding letters of credit reduce the existing $ 25,000,000 maximum
borrowing limit on a dollar-for-dollar basis. At August 31, 2003, there were no
borrowings under this line of credit and outstanding letters of credit totaled
$5,115,000.
20
On September 22, 2003, certain subsidiaries entered into a new credit
facility with Bank of America in the amount of $ 50,000,000 to facilitate
additional short-term borrowings and the issuance of letters of credit. All
borrowings are at interest rates equal to the higher of the Federal Funds Rate
plus 0.50% or the Bank of America's prime; or upon timely election by the
Company, on the respective 1, 2, 3, or 6 month LIBOR rate plus 0.75% (based upon
the term of the borrowing).
The line allows for issuance of letters of credit up to $ 10,000,000, which will
reduce the maximum credit line borrowing limit dollar for dollar. The credit
facility expires in September of 2004. On September 29, 2003, the Company used
$32,000,000 of this line to fund the acquisition of the Brut(R) family of
products from Unilever.
Both the existing and new credit agreements require the maintenance of
certain Debt/EBITDA, and fixed charge coverage ratios, and other customary
covenants common to loan facilities of this nature. Both agreements have also
been fully guaranteed, on a joint and several basis, by our parent company,
located in Bermuda and certain U.S. subsidiaries.
Our contractual obligations and commercial commitments as of August 31,
2003 were:
PAYMENTS DUE BY PERIOD
(IN THOUSANDS)
After
Contractual Obligations Total 1 year 2 years 3 years 4 years 5 years 6 years
- -------------------------------- -------- -------- -------- -------- -------- -------- --------
Long-term debt $ 55,000 $ - $ 10,000 $ 10,000 $ 10,000 $ 13,000 $ 12,000
Open purchase orders - inventory 51,470 51,470 - - - - -
Minimum royalty payments 21,784 4,312 3,473 2,775 2,653 2,644 5,927
Advertising and promotional
commitments 21,242 5,907 6,211 3,031 1,474 888 3,731
Operating leases 3,897 1,552 1,318 849 178 - -
Purchase and implementation of
enterprise resource planning
(ERP) system 3,718 3,718 - - - - -
Other 1,570 362 362 363 362 121 -
-------- -------- -------- -------- -------- -------- --------
Total contractual obligations $158,681 $ 67,321 $ 21,364 $ 17,018 $ 14,667 $ 16,653 $ 21,658
======== ======== ======== ======== ======== ======== ========
We do not engage in any activities involving special purpose entities
or off-balance sheet financing.
Under a June 2003 Board of Directors resolution, the Company may
repurchase up to a total of 3,000,000 shares of its common stock over a period
extending to May 31, 2006. In September 2003, pursuant to this resolution, the
Company repurchased 81,800 shares of stock for $ 2,025,000, for a $ 24.76 per
share average price.
Based on our current financial condition and current operations, we
believe that cash flows from operations and available financing sources will
continue to provide sufficient capital resources to fund the Company's
foreseeable short and long-term liquidity requirements. We expect that our
capital needs will stem primarily from the need to purchase sufficient levels of
inventory and to carry normal levels of accounts receivable on our balance
sheet. In addition, we evaluate acquisition opportunities on a regular basis and
may augment our internal growth with acquisitions of complementary businesses or
product lines. Additionally, we may finance acquisition activity with available
cash, the issuance of stock, or with additional debt, depending upon the size
and nature of any such transaction and the status of the capital markets at the
time of such acquisition.
On October 2, 2003 the Company announced that it has started evaluating
strategic alternatives for its investment in Tactica with a view towards
maximizing shareholder value. These alternatives include a possible sale of all
or a partial interest in Tactica. There can be no assurance that any transaction
involving Tactica will occur, or that the impact of such a sale will have a
favorable effect on the Company's liquidity.
21
INCOME TAXES
The Hong Kong Inland Revenue Department ("IRD") has assessed
$6,753,000 in tax on certain profits of our foreign subsidiaries for the fiscal
years 1995 through 1997. If the IRD were to assert the same position for later
years and that position were to prevail, the resulting tax liability would total
approximately $ 38,980,000 for fiscal 1995 through the fiscal quarter ended
August 31, 2003. We have recorded a liability for the IRD's claims and potential
claims, based on consultations with outside Hong Kong tax counsel as to the
probability that some or all of the IRD's claims prevail. Although the ultimate
resolution of the IRD's claims and potential claims cannot be predicted with
certainty, we believe that an adequate provision has been made in the financial
statements for the resolution of those claims. In connection with the IRD's tax
assessment for the fiscal years 1995 through 1997, we purchased tax reserve
certificates in Hong Kong. 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 dollars and are subject to the risks associated with
foreign currency fluctuations. As of August 31, 2003 and February 28, 2003, the
tax reserve certificates were valued at $ 3,282,000 (U.S.), or approximately
49 percent of the liability assessed by the IRD for fiscal 1995 through 1997.
The value of the tax reserve certificates comprises part of the amounts reported
on the line entitled "Other assets" on the Company's August 31, 2003 and
February 28, 2003 Consolidated Condensed Balance Sheets.
The United States Internal Revenue Service ("IRS") has audited the U.S.
federal tax returns of our largest U.S. subsidiary for fiscal years 1997 through
1999. The IRS has proposed adjustments to those returns. If the IRS's positions
with respect to those adjustments were to prevail, the resulting tax liability
could total $ 7,500,000. We are vigorously contesting these adjustments.
Although the ultimate outcome of the examination cannot be predicted with
certainty, we are of the opinion that adequate provision for the adjustments
proposed has been made in our Condensed Consolidated Financial Statements. The
IRS also is auditing the U.S. federal tax returns of the Company's largest U.S.
subsidiary for fiscal years 2000 through 2002. To date, the IRS has not proposed
any material adjustments to these returns. We cannot predict with certainty the
results of the IRS audits for these years.
PROPOSED UNITED STATES FEDERAL INCOME TAX LEGISLATION
Currently, we benefit from an international corporate structure that
results in relatively low tax rates on a consolidated basis. If we were to
encounter significant changes in the rates or rules imposed by certain key
taxing jurisdictions, such changes could have a material adverse effect on the
Company's consolidated financial position and profitability. In 1994, we engaged
in a corporate restructuring that, among other things, resulted in a portion of
our income not being subject to taxation in the United States. If such income
were subject to United States federal income taxes, our effective income tax
rate would increase materially. Several bills have been introduced recently in
the United States Congress that, if enacted into law, could adversely affect our
United States federal income tax status. At least one of the bills introduced
would apply to companies such as ours that restructured several years ago. That
bill could, if enacted into law, subject all of our income to United States
income taxes, thereby reducing our net income. Other bills introduced recently
would exempt restructuring transactions, such as ours, that were completed
before certain dates in 2001 and under certain conditions thereafter, but would
limit the deductibility of certain intercompany transactions for U.S. income tax
purposes and would subject gains on certain asset transfers to U.S. income tax.
In addition to the legislation introduced in Congress, the United States
Treasury Department has issued a study of restructurings such as ours, which
concluded in part that additional limitations should be imposed on the
deductibility of certain inter-company transactions. It is not currently
possible to predict whether any legislation that has been introduced will become
law, whether any additional bills will be introduced, or the consequences of the
Treasury Department's study. However, there is a risk that new laws in the
United States, or elsewhere, could eliminate or substantially reduce the current
income tax benefits of our corporate structure. If this were to occur, such
changes could have a material adverse effect on our consolidated financial
position and profitability.
22
CRITICAL ACCOUNTING POLICIES
The U.S. Securities and Exchange Commission defines critical accounting
policies as "those that are both most important to the portrayal of a company's
financial condition and results, and require management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain." Preparation of our
financial statements involves the application of several such policies. These
policies include: consolidation of Tactica International, Inc. ("Tactica") under
the purchase method, estimates of our exposure to liability for income taxes in
Hong Kong and the United States, estimates of credits to be issued to customers
for sales that have already been recorded, the valuation of inventory on a
lower-of-cost-or-market basis, the carrying value of long-lived assets and the
economic useful life of intangible assets.
CONSOLIDATION OF TACTICA - In March 2000 (fiscal 2001), we acquired a
55 percent interest in Tactica. At that time, we determined that use of the
purchase method of accounting and consolidation was appropriate and we continue
to use that method of consolidation. Because Tactica had accumulated a net
deficit at the time that we acquired our interest in it and because the minority
shareholders of Tactica have not adequately guaranteed their portion of the
accumulated deficit, our Condensed Consolidated Statements of Income for the
three months and six months ended August 31, 2003 and 2002 include 100 percent
of Tactica's net income and losses for those periods. We will continue to
recognize all of Tactica's net income or loss until Tactica's accumulated
deficit is extinguished. At August 31, 2003, Tactica's accumulated deficit
totaled $ 3,561,000.
INCOME TAXES - The Inland Revenue Department (the "IRD") in Hong Kong
assessed tax on certain profits of the Company's foreign subsidiaries for the
fiscal years 1990 through 1997. During fiscal 2003, we came to an agreement with
the IRD, settling its assessment for fiscal 1990 through 1994 for approximately
56 percent of the amount originally assessed. The IRD has assessed $ 6,753,000
in tax on certain profits of the Company's foreign subsidiaries for the fiscal
years 1995 through 1997. In connection with the IRD's tax assessment for the
fiscal years 1995 through 1997, the Company also purchased tax reserve
certificates in Hong Kong. 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 dollars and are subject to the risks associated with
foreign currency fluctuations. As of August 31, 2003 and February 28, 2003, the
tax reserve certificates were valued at $ 3,282,000 (U.S.), or approximately
49 percent of the liability assessed by the IRD for fiscal 1995 through 1997. If
the IRD's position were to prevail and it were to assert the same position with
respect to fiscal years after 1997, the resulting tax liability could total
$38,980,000 (U.S.) for the period from fiscal 1995 through August 31, 2003. The
ultimate resolution of the remaining IRD claims cannot be predicted with
certainty. However, we have recorded a liability for the IRD's claims, based on
consultations with outside Hong Kong tax counsel as to the probability that some
or all of the IRD's claims prevail. Such liability is included in "Income taxes
payable" on the Consolidated Condensed Balance Sheets.
The United States Internal Revenue Service ("IRS") has audited the U.S.
federal tax returns of our largest U.S. subsidiary for fiscal years 1997 through
1999. The IRS has proposed adjustments to those returns. If the IRS's positions
with respect to those adjustments were to prevail, the resulting tax liability
could total $ 7,500,000. The Company is vigorously contesting these adjustments.
Although the ultimate outcome of the examination cannot be predicted with
certainty, we are of the opinion that adequate provision for the adjustments
proposed has been made in our Condensed Consolidated Financial Statements. The
IRS also is auditing the U.S. federal tax returns of the Company's largest U.S.
subsidiary for fiscal years 2000 through 2002. To date, the IRS has not proposed
any material adjustments to these returns. The Company cannot predict with
certainty the results of the IRS audits for these years.
ESTIMATES OF CREDITS TO BE ISSUED TO CUSTOMERS - We regularly receive
requests for credits from retailers for returned products or in connection with
sales incentives, such as cooperative advertising and volume rebate agreements.
We reduce sales or increase selling, general, and administrative expenses,
depending on the nature of the credits, for estimated future credits to
customers. Our estimates of these amounts are based either on historical
information about credits issued, relative to total sales, or on specific
knowledge of incentives offered to retailers.
23
VALUATION OF INVENTORY - We account for our inventory using a
first-in-first-out system in which we record inventory on our balance sheet at
the lower of its cost or its net realizable value. Determination of net
realizable value requires management to estimate the point in time at which an
item's net realizable value drops below its cost. We regularly review our
inventory for slow-moving items and for items that we are unable to sell at
prices above their original cost. When we identify such an item, we reduce its
book value to the net amount that we expect to realize upon its sale. This
process entails a significant amount of inherent subjectivity and uncertainty.
CARRYING VALUE OF LONG-LIVED ASSETS - We apply the provisions of Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142") and Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144") in
assessing the carrying values of our long-lived assets. SFAS 142 and SFAS 144
both require that a company consider whether circumstances or conditions exist
that suggest that the carrying value of a long-lived asset might be impaired. If
such circumstances or conditions exist, further steps are required in order to
determine whether the carrying value of the asset exceeds its fair market value.
If analyses indicate that the asset's carrying value does exceed its fair market
value, the next step is to record a loss equal to the excess of the asset's
carrying value over its fair value. The steps required by SFAS 142 and SFAS 144
entail significant amounts of judgment and subjectivity. We completed our
analysis of the carrying value of our goodwill during the first quarter of
fiscal 2004 and, accordingly, recorded no impairment.
ECONOMIC USEFUL LIFE OF INTANGIBLE ASSETS - We apply SFAS 142 in
determining the useful economic lives of intangible assets that we acquire and
that we report on our consolidated balance sheets. SFAS 142 requires that
companies amortize intangible assets, such as licenses and trademarks, over
their economic useful lives, unless those assets' economic useful lives are
indefinite. If an intangible asset's economic useful life is deemed to be
indefinite, that asset is not amortized. When we acquire an intangible asset, we
consider factors such as the asset's history, our plans for that asset, and the
market for products associated with the asset. We consider these same factors
when reviewing the economic useful lives of our previously acquired intangible
assets as well. We review the economic useful lives of our intangible assets at
least annually. The determination of the economic useful life of an intangible
asset requires a significant amount of judgment and entails significant
subjectivity and uncertainty. We completed our analysis of the useful economic
lives of our intangible assets during the first quarter of fiscal 2004 and
determined that the useful lives currently being used to determine amortization
of each asset are appropriate.
In addition to the above policies, several other policies, including
policies governing the timing of revenue recognition, are important to the
preparation of our financial statements, but do not meet the definition of
critical accounting policies because they do not involve subjective or complex
judgments.
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
Certain written and oral statements made by our Company and subsidiaries or
with the approval of an authorized executive officer of our Company may
constitute "forward-looking statements" as defined under the Private Securities
Litigation Reform Act of 1995. This includes statements made in this report, in
other filings with the Securities and Exchange Commission, in press releases,
and in certain other oral and written presentations. Generally, the words
"anticipates", "believes", "expects", and other similar words identify
forward-looking statements. All statements that address operating results,
events or developments that we expect or anticipate will occur in the future,
including statements related to sales, earnings per share results, and
statements expressing general expectations about future operating results, are
forward-looking statements. The Company cautions readers not to place undue
reliance on forward-looking statements. Forward-looking statements are subject
to risks that could cause such statements to differ materially from actual
results. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
24
Factors that could cause actual results to differ from those
anticipated include:
- general industry conditions and competition,
- credit risks,
- the Company's, or its operating segments', material reliance on
individual customers or small numbers of customers,
- the Company's material reliance on certain trademarks,
- the impact of tax legislation, regulations, or treaties,
including proposed legislation in the United States that would
affect companies or subsidiaries of companies that have
headquarters outside the United States and file U.S. income tax
returns,
- the impact of other current and future laws and regulations,
- the results of our disagreement with the Hong Kong Inland Revenue
Department concerning the portion of our profits that are subject
to Hong Kong income tax,
- any future disagreements with the United States Internal Revenue
Service or other taxing authority regarding our assessment of the
effects or interpretation of existing tax laws, regulations, or
treaties,
- risks associated with inventory, including potential
obsolescence,
- risks associated with new products and new product lines,
- risks associated with the Company's material reliance on certain
manufacturers for a significant portion of its production needs,
- risks associated with operating in foreign jurisdictions,
- foreign currency exchange losses,
- worldwide and domestic economic conditions,
- uninsured losses,
- reliance on computer systems,
- management's reliance on the representations of third parties,
- risks associated with new business ventures and acquisitions,
- risks associated with investments in equity securities, and
- 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 December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" ("SFAS 148"). This statement amends Statement of Financial
Accounting Standards No. 123, "Accounting For Stock-Based Compensation" ("SFAS
123") by providing alternative methods of transition to the fair-value-based
method of accounting for stock-based employee compensation. It also amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures of
stock compensation information, including the method used to account for
stock-based compensation and the effects of that method on reported financial
results in interim, as well as annual, financial statements. The Company
accounts for stock-based compensation using the intrinsic value method in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. Accordingly, it recognizes no
compensation expense in our financial statements for stock options issued with
exercise prices that equal or exceed the cost of our common stock on the date
such options are issued. As a result, the Company does not expect the provisions
of SFAS 148 covering the transition to fair-value method accounting for
stock-based compensation to affect its financial statements.
25
The following table sets forth the computation of basic and diluted
earnings per share for the three months and six months months ended August 31,
2003 and August 31, 2002, and illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
SFAS 123, "Accounting for Stock-Based Compensation" to stock-based employee
compensation.
PROFORMA STOCK-BASED EMPLOYEE COMPENSATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three months ended August 31, Six months ended August 31,
2003 2002 2003 2002
-------- -------- -------- --------
Net Income: As Reported $ 13,098 $ 8,876 $ 27,942 $ 15,467
Fair-value cost 2,956 2,321 4,797 4,306
-------- -------- -------- --------
Proforma $ 10,142 $ 6,555 $ 23,145 $ 11,161
======== ======== ======== ========
Earnings per share:
Basic: As Reported $ 0.46 $ 0.31 $ 0.99 $ 0.55
Proforma 0.36 0.23 0.82 0.40
Diluted: As Reported $ 0.42 $ 0.30 $ 0.92 $ 0.52
Proforma 0.33 0.22 0.76 0.38
In November 2002, the FASB issued FASB Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 requires that a
guarantor record a liability for and disclose certain types of guarantees. For
certain other guarantees, FIN 45 requires only disclosure in the notes to the
financial statements. The Company has not made any of the types of guarantees
for which FIN 45 requires that a liability be recorded. However, certain
entities whose financial statements are a part of these consolidated financial
statements have guaranteed obligations of other entities within the consolidated
group. FIN 45 requires disclosure of these guarantees, of the Company's product
warranties, and of various indemnity arrangements to which the Company is a
party. These disclosures are contained in Note 9 in our consolidated condensed
financial statements.
On April 30, 2003, the FASB issued FASB Statement No. 149 "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149").
These amendments clarify the definition of derivatives, expand the nature of
exemptions from Statement 133, clarify the application of hedge accounting when
using certain instruments and modify the cash flow presentation of derivative
instruments that contain financing elements. The Statement clarifies the
accounting for option-based contracts used as hedging instruments in a cash flow
hedge of the variability of the functional-currency-equivalent cash flows for a
recognized foreign-currency-denominated asset or liability that is remeasured at
spot exchange rates. This approach was issued to alleviate income statement
volatility that is generated by the mark-to-market accounting of an option's
time value component. This Statement is effective for all derivative
transactions and hedging relationships entered into or modified after June 30,
2003. These types of contracts are discussed in Note 14 in our consolidated
condensed financial statements. Management does not believe that SFAS 149 will
have a material effect on our consolidated financial statements.
In May 2003, the FASB issued FASB Statement No. 150 "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity" ("SFAS 150"). This Statement establishes standards for how an issuer
classifies and measures in its statement of financial position certain financial
instruments with characteristics of both liabilities and equity. It requires
that issuers classify as liabilities a financial instrument that is within its
scope as a liability because that financial instrument embodies an obligation of
the issuer. This Statement does not affect the timing of recognition of
financial instruments as contingent consideration nor does it apply to
obligations under stock-based compensation arrangements if those obligations are
accounted
26
for under APB Opinion No. 25. We are still reviewing the effects of SFAS 150 on
our financial statements. We currently believe that we do not have any financial
instruments that are covered under this statement; however we will make interim
disclosures required by SFAS 150 in our next interim report if considered
necessary.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Changes in interest rates and currency exchange rates represent our
primary financial market risks. Fluctuation in interest rates causes variation
in the amount of interest that we can earn on our available cash. Interest on
our long-term debt is fixed at rates ranging from 7.01 percent to 7.24 percent.
Increases in interest rates do not expose us to risk on this debt. However, as
interest rates drop below the rates on our long-term debt, our interest cost can
exceed the cost of capital of companies who borrow at lower rates of interest.
As mentioned in the "Liquidity and Capital Resources" discussion,
interest rates on our revolving credit agreements vary based on the three-month
LIBOR rate and on our ratio of debt to EBITDA. Therefore, the potential for
interest rate increases exposes us to interest rate risk on our revolving credit
agreement. One agreement allows maximum borrowings of $ 25,000,000. At August
31, 2003, no borrowings were outstanding under this agreement. A second
agreement, entered into after August 31, 2003 allows for maximum borrowings of
$ 50,000,000. At August 31, 2003 there were no borrowings under this agreement,
however in September of 2003, the Company drew $ 32,000,000 against this new
line. The need to borrow under this new agreement could ultimately subject us to
higher interest rates, thus increasing the future cost of such debt. We do not
currently hedge against interest rate risk.
Because we purchase a substantial majority of our inventory using U.S.
Dollars, we are subject to minimal short-term foreign exchange rate risk in
purchasing inventory. However long-term declines in the value of the U.S. Dollar
could subject us to higher inventory costs. Such an increase in inventory costs
could occur if foreign vendors were to react to such a decline by raising
prices. Sales in countries other than the United Kingdom, Germany, France,
Brazil, Canada, and Mexico are transacted in U.S. Dollars. The majority of our
sales are in the United Kingdom which are transacted in British Pounds, in
France and Germany which are invoiced in Euros, and in Canada which are
transacted in Canadian Dollars. When the U.S. Dollar strengthens against other
currencies in which we transact sales, we are exposed to foreign exchange losses
on those sales because our foreign currency sales prices are not adjusted for
currency fluctuations. When the U.S. Dollar weakens against those currencies, we
could realize foreign currency gains.
Our net sales denominated originally in currencies other than the U.S.
Dollar totaled approximately $ 13,046,000 and $ 6,896,000 for the quarters ended
August 31, 2003 and August 31, 2002, and $ 22,799,000 and $ 11,237,000 for the
six months there ended, converted at the month-end exchange rates. Our foreign
currency exchange gains totaled $ 653,000 and $ 673,000 for quarters ended
August 31, 2003 and August 31, 2002, and a loss of $ 87,000 and gain of
$ 926,000 for the six months ended August 31, 2003 and August 31, 2002,
respectively.
During fiscal 2003, we began hedging against foreign currency exchange
rate risk by entering into forward contracts to exchange a total of 5,000,000
British Pounds for U.S. Dollars at rates ranging from 1.5393 to 1.5480 dollars
per British Pound. This forward contract closed during March 2003. During the
quarter ended May 31, 2003, we entered into two series of forward contracts. The
first contract was to exchange 5,000,000 British Pounds for U.S. Dollars at
rates ranging from 1.6056 to 1.6153 U.S. Dollars per British Pound. The second
forward contract was to exchange 2,500,000 Euros for U.S. Dollars at a rate of
1.09 U.S. Dollars per Euro. All forward contracts remained outstanding at August
31, 2003 and are scheduled to expire by February 28, 2004. We do not anticipate
entering into any additional forward contracts at this time.
27
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Securities
Exchange Act reports is recorded, processed, summarized, and reported within the
time periods specified in the SEC's rules and forms, and that such information
is accumulated and communicated to the Company's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. Based on their evaluation as of the end
of the period covered by this Quarterly Report on Form 10-Q, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that the Company's
"disclosure controls and procedures" (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) are
effective to ensure that information required to be disclosed by the Company in
the reports that it files or submits under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
During the Company's fiscal quarter ended August 31, 2003, no change
occurred in the Company's internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the fourth quarter of the fiscal year ended February 28, 2001, the
Company recorded a $2,457,000 charge for the remaining unamortized costs under a
distribution agreement (which was later formally terminated) with The Schawbel
Corporation ("Schawbel"), the supplier of the Company's butane hair care
products. In a related matter, in September 1999, Schawbel commenced litigation
in the U.S. District Court for the District of Massachusetts against The Conair
Corporation ("Conair"), the predecessor distributor for Schawbel's butane
products. In its action, amended in June 2000, Schawbel alleged, among other
things, that Conair, following Schawbel's termination of the Conair distribution
agreement, stockpiled and sold Schawbel product beyond the 120 day "sell-off"
period afforded under the agreement, and manufactured, marketed and sold its own
line of butane products which infringed patents held by Schawbel. The Company
intervened as a plaintiff in the action to assert claims against Conair similar
to the claims raised by Schawbel. Conair responded by filing a counterclaim
alleging that the Company conspired with Schawbel to unlawfully terminate
Conair's distribution agreement with Schawbel, and to disparage Conair's
reputation in the industry. In June 2003, the parties to the litigation settled
their claims and the proceeding was dismissed. See Note 15 to the Company's
Consolidated Condensed Financial Statements for the fiscal quarter ended August
31, 2003 for a description of the impact of the settlement of this litigation
and one other lawsuit on the Company's consolidated condensed financial
statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held August 26, 2003
in El Paso, Texas. At that meeting, the shareholders voted on the following
proposals:
- - Proposal 1. Election of a board of seven directors;
- - Proposal 2. Amendment to the Helen of Troy 1998 Stock Option and
Restricted Stock Plan to increase the number of shares of the
Company's common stock available under such plan;
- - Proposal 3. Amendment to the Helen of Troy 1997 Cash Bonus Performance
Plan to amend the bonus payable to the Company's Chief
Executive Officer and President; and
- - Proposal 4. Appointment of KPMG LLP as independent auditors of the
Company to serve for the 2004 fiscal year.
28
A description of the foregoing matters is contained in the Company's
Proxy Statement dated July 17, 2003, relating to the 2003 Annual Meeting of
Shareholders.
With respect to Proposal 1, the directors received the following votes:
For Against
---------- ---------
Gary B. Abromovitz 24,880,426 780,183
John B. Butterworth 24,872,825 787,784
Christopher L. Carameros 24,810,457 850,152
Daniel C. Montano 24,287,062 1,373,547
Byron H. Rubin 24,788,959 871,650
Gerald J. Rubin 24,798,173 862,436
Stanlee N. Rubin 24,786,127 874,482
Proposal 2, to amend the limited 1998 Stock Option Plan and Restricted
Stock plan received the following votes:
Broker
For Against Abstentions Non-Votes
--- ------- ----------- ---------
5,433,885 12,151,027 515,747 -
Proposal 3, to amend the 1997 Cash Bonus Performance Plan received the
following votes:
Broker
For Against Abstentions Non-Votes
--- ------- ----------- ---------
12,717,019 4,845,849 537,791 -
Proposal 4, to appoint KPMG LLP as independent auditors received the
following votes:
Broker
For Against Abstentions Non-Votes
--- ------- ----------- ---------
25,479,518 123,840 57,251 -
ITEM 5. OTHER INFORMATION
On October 2, 2003 the Company announced that it has started evaluating
strategic alternatives for its investment in Tactica with a view towards
maximizing shareholder value. These alternatives include a possible sale of all
or a partial interest in Tactica. There can be no assurance that any transaction
involving Tactica will occur.
29
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibits
10.1 Amended 1997 Cash Bonus Performance Plan
31.1 Certification of the Chief Executive Officer
required by Rule 13a-14(a) or Rule 15d-14(a)
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of the Chief Financial Officer
required by Rule 13a-14(a) or Rule 15d-14(a)
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification of the Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as
adopted pursuanct to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as
adopted pursuanct to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Report on Form 8-K
On July 16, 2003, the Company furnished a report on Form 8-K
in connection with the public announcement of its 1st quarter
fiscal 2003 earnings release and its board approval of a $
3,000,000 stock repurchase plan.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HELEN OF TROY LIMITED
---------------------------------
(Registrant)
Date October 15, 2003 /s/ Gerald J. Rubin
---------------------------------
Gerald J. Rubin
Chairman of the Board, Chief
Executive Officer and President
(Principal Executive Officer)
Date October 15, 2003 /s/ Thomas J. Benson
---------------------------------
Thomas J. Benson
Senior Vice-President
and Chief Financial Officer
(Principal Financial Officer)
31
INDEX TO EXHIBITS
10.1 Amended 1997 Cash Bonus Performance Plan
31.1 Certification of the Chief Executive Officer required by Rule
13a-14(a) or Rule 15d-14(a) pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer required by Rule
13a-14(a) or Rule 15d-14(a) pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32