2006 AnnualReport (CO-3022)Final 7/13/06 3:07 PM Page 1
2006 AnnualReport (CO-3022)Final 7/13/06 3:07 PM Page 2
Company Profile
H
elen of Troy Limited is a leading designer, global marketer and distributor of brand-name personal care
and household consumer products. The Company’s personal care products include hair dryers, curling
irons, hairsetters, women’s shavers, brushes, combs, hair accessories, home hair clippers, mirrors,
footbaths, body and foot massagers, paraffin baths, liquid hair styling products, body powder and skin care products.The
Company’s household products include consumer product tools for the kitchen, cleaning, barbecue, barware, storage,
organization, garden and automotive categories. The Company’s products are sold through mass merchandisers, drug
chains, department stores, warehouse clubs, specialty stores, grocery stores and home improvement stores.
Company growth strategy is facilitated by the sale of products under several world-respected trademarks and trade
names. The Company is licensed to sell products under the Vidal Sassoon, Revlon®, Dr. Scholl’s®, Scholl®, Sunbeam®, Health at
Home®, Health o meter®, Sea Breeze® and Vitapointe® trademarks and
trade names. Helen of Troy’s owned trademarks
include OXO®, Good Grips®, Brut®,Vitalis®, Final
Hair Care
& Grooming
Appliances
Food
Preparation
Grooming,
Skin Care
& Hair Care
Products
Brushes, Combs
& Accessories
P
E
R
S
O
N
Net®, Ammens®, Condition® 3-in-1,
SkinMilk®,Timeblock®, Epil-Stop®,
Dazey®, Caruso®, Karina®, DCNL®,
and Nandi® in consumer
product categories. The
Company also markets hair
and beauty care products
under the Helen of Troy®, Hot
Tools®, Hot Spa®, Salon Edition®,
Gallery Series® and Wigo®
trademarks to the professional
beauty salon industry.
The Company’s U.S. operations are
headquartered in El Paso,Texas, with offices
and warehouse facilities around the world.
Our Businesses
A
L
Wellness
Appliances
C
ARE
Foot Care
Appliances
Facial &
Skin Care
Appliances
Household
Cleaning
H
O
U
S
E
W
A
R
E
S
Storage
&
Organization
Hand &
Garden Tools
2006 AnnualReport (CO-3022)Final 7/13/06 3:07 PM Page 3
To Our Shareholders
F
iscal year 2006 turned out to be a very
challenging year for Helen of Troy.We originally
forecast a record year for fiscal 2006, and while
we were pleased with the record year in sales
and the sales increases achieved with the OXO
International and Idelle Labs products, we were disappointed with
the sales in the personal care category and the related
category softness in the mass merchandising distribution
channel. Fiscal year 2007 is expected to be a record year for sales,
with net earnings and diluted earnings per share expected to
show increases over the prior year.We continue to move toward
our target goal of $1 billion in total sales by fiscal year 2010. This
$1 billion goal is expected to be attained through category
increases and business acquisitions.
For the fiscal year ended February 28, 2006, net income
was $49.3 million or $1.56 per diluted share, compared to net
income of $76.4 million or $2.35 per diluted share in the previous
fiscal year. Sales increased 1.4 percent to a record $589.7 million
from $581.6 million over the prior year’s record sales level. Our
balance sheet also remains strong, with year-end cash of $18
million, shareholders’ equity of $475 million, accounts receivable
of $107 million, and inventory of $168 million.
In spite of the challenging retail environment in the
personal care segment over the past year, we were able to
successfully complete several of the corporate initiatives we
identified as objectives for the fiscal year. The initiatives last
year included the following:
• OXO International
• Completion of OXO integration into corporate operations
• Growth of existing products and new categories
• Build upon the Idelle Labs product categories of grooming,
skin and hair care brands
• Build upon European and Latin American appliance businesses
• Pursue strategic acquisitions in personal care and
housewares categories
• Leverage investment in capacity and infrastructure
through available synergies
We will continue to work on the remaining initiatives as we
move into fiscal 2007 and beyond. As we strive to do year after
year, we continue to strengthen our leadership position in the
personal care market by providing consumers with innovative,
high-quality products at affordable prices.
At the 2006 International Housewares Show in Chicago,
we introduced over 110 new personal care and household
consumer products, expanding on current product lines by using
new and improved technologies to add additional features
desired by consumers. In the household consumer products
category, OXO International, a recognized leader in the design
Gerald J. Rubin, Chief Executive Officer
and production of innovative
household consumer products,
introduced 37 distinct new
products. The new offerings from
OXO continue to expand on the
company’s portfolio of
consumer-friendly products in the
areas of food preparation, storage
and organization solutions,
cleaning utensils, garden tools,
hand tools and bath accessories.
In the personal hair care category, building on the success of its
revolutionary Ionic Technology, Helen of Troy introduced a range
of Tourmaline products under the Vidal Sassoon and Revlon®
brand names. Tourmaline is a natural gemstone that maximizes
ionic output for shinier, healthier-looking hair. Many of Helen of
Troy's new hair care products also feature a patented variable-ion
technology that allows consumers to select the exact amount of
hair-conditioning ions best suited for their individual needs. By
combining the best of ionic and ceramic technologies for its
dryers, flat irons, straighteners, curling irons and hairsetters, Helen
of Troy offers consumers a variety of ways to achieve the hair
styles they desire while leaving hair looking healthier and shinier.
Helen of Troy also launched an entirely new line of hair care
appliances under the Vidal Sassoon brand name–Studio Tools®.
This product line brings to the retail market the latest in
professional-quality hair dryers, flat irons, curling irons and other
hair care appliances. Additional personal care products introduced
at the Housewares Show included new Dr. Scholl’s massage
products focusing on personal health and wellness from head to
toe. Newly introduced massage products include
consumer-preferred features such as memory foam and
anti-stain materials. Many of the new massagers also incorporate
Massaging Gel as part of the nationally advertised Dr. Scholl’s
“Are you gellin’?” campaign. One of the most innovative
developments in the foot spa category resulted in a cordless
product using rechargeable batteries.
Excluding the quarterly earnings releases, additional
events occurring since last year’s report are as follows:
In December 2005, Helen of Troy announced a special
ribbon cutting ceremony for its new 1,200,000 square foot
distribution center in Southaven, Mississippi. This center expanded
the Company’s eastern United States distribution facilities to
accommodate the needs of the Company’s OXO International
business acquired on June 1, 2004, as well as potential needs for
future acquisitions.
In March 2006, it was announced that on February 24,
2006, the Compensation Committee of the Company’s Board of
Directors approved the immediate acceleration of vesting of
“out-of-the-money” stock options previously awarded to officers
2006 AnnualReport (CO-3022)Final 7/13/06 3:07 PM Page 4
To Our Shareholders
(continued)
and employees with option exercise prices greater than $19.65.
The Board of Directors of the Company also approved the
repatriation, pursuant to the American Jobs Creation Act of 2004,
of $48.5 million in foreign earnings. As a result, we incurred a
one-time tax charge of $2.8 million in our fourth quarter of fiscal
2006. The Act provides a one-time incentive for one of the
Company’s U.S. subsidiaries to repatriate certain amounts of
accumulated income in foreign jurisdictions at a reduced income
tax rate. The Company believes that the repatriation of these
funds will enhance the Company’s financial flexibility while
providing sufficient foreign working capital available to fund
growth and expansion abroad.
In April 2006, the company announced a license
agreement with Mascolo Limited of the United Kingdom for the
use of the Toni & Guy brand name for hair care appliance
products. Helen of Troy Limited will introduce a complete line of
hair care appliance products under the Toni & Guy brand name
that will include hair dryers, straighteners, stylers, tongs and a line
of male grooming hair care appliances. Initial marketing will
commence in the United Kingdom, followed by Western Europe
and portions of Asia, with product shipments to begin during the
third fiscal quarter of fiscal year 2007.
The overall business environment as we head into next
year continues to look somewhat challenging; however, we
believe our business and financial results will be an improvement
over the prior year for Helen of Troy. As always, I am grateful for
the people who help contribute to our success. I appreciate their
tireless efforts and extraordinary accomplishments year after
year.
To our loyal shareholders, I always appreciate your
continued support, and remain dedicated to increasing shareholder
value.We hope that every year brings increasing value to our
Company. Thank you for your support and confidence.
Gerald J. Rubin
Chairman, Chief Executive Officer and
President
Net Sales
Dollars in Millions
Net Earnings
Dollars in Millions
$700
$600
$500
$400
$300
$200
$100
$0
$2.50
$2.00
$1.50
$1.00
$ 0.50
$0.00
$80
$60
$40
$20
$0
02
03
04
05
06
02
02
03
03
04
04
05
05
06
06
Diluted Earnings Per Share
Dollars
Return on Average Stockholders’ Equity
Percent
20.0%
15.0%
10.0%
5.0%
0.0%
02
02
03
03
04
04
05
05
06
06
02
02
03
03
04
04
05
05
06
06
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 001-14669
HELEN OF TROY LIMITED
(Exact name of the registrant as specified in its charter)
BERMUDA
(State or other jurisdiction of
incorporation or organization)
74-2692550
(I.R.S. Employer
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
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON SHARES - $.10 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See
definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ]
Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of the last
day of the registrant's most recently completed second quarter was $640,758,495.
As of May 5, 2006 there were 30,029,072 shares of Common Shares, $.10 Par Value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required for Part III of this annual report will be set forth in and incorporated herein by reference into
Part III of this report from the Company’s definitive Proxy Statement for the 2006 Annual Meeting of Shareholders, which is
anticipated to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days following the
end of the Company’s fiscal year ended February 28, 2006.
Index to Exhibits - Page 100
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and
Issuer Purchases of Equity Securities
Selected Financial Data
Item 6.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Signatures
4
14
20
21
22
24
25
27
29
50
52
96
96
98
99
99
99
99
99
100
103
3
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Certain written and oral statements made by our Company and subsidiaries 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
(“SEC’), in press releases, and in certain other oral and written presentations. Generally, the words
"anticipates", "believes", "expects", "plans", "may", "will", "should", "seeks", "estimates", “project”, "predict",
"potential", "continue", "intends", 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 and are based upon the Company’s current
expectations and various assumptions. The Company believes there is a reasonable basis for its expectations and
assumptions, but there can be no assurance that the Company will realize its expectations or that the Company's
assumptions will prove correct. Forward-looking statements are subject to risks that could cause them to differ
materially from actual results. Accordingly, the Company cautions readers not to place undue reliance on
forward-looking statements. We believe that these risks include but are not limited to the risks described in this
report under "Item 1A. Risk Factors" and that are otherwise described from time to time in our SEC reports
filed after this report. 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.
ITEM 1. BUSINESS
PART I
In this report, unless the context suggest otherwise, references to "the Company," "our Company,"
"Helen of Troy," "we," "us" or "our" refer to Helen of Troy Limited and its subsidiaries. In this report, amounts
are expressed in U.S. dollars, except as otherwise indicated. Unless otherwise noted in this report and in our
consolidated financial statements and notes thereto, all dollar amounts are in thousands.
GENERAL
Helen of Troy Limited is a global designer, developer, importer and distributor of an expanding
portfolio of brand-name consumer products. We have two active segments: Personal Care and Housewares.
The Personal Care segment’s products include hair dryers, straighteners, curling irons, hairsetters, women’s
shavers, mirrors, hot air brushes, home hair clippers, paraffin baths, massage cushions, footbaths, body
massagers, brushes, combs, hair accessories, liquid hair styling products, men’s fragrances, men’s deodorants,
body powder, and skin care products. The Housewares segment reports the operations of OXO International
(“OXO”) which we acquired on June 1, 2004, as further discussed in Notes (4), (5) and (17) to our consolidated
financial statements. The Housewares segment’s products include kitchen tools, cutlery, bar and wine
accessories, household cleaning tools, tea kettles, trash cans, storage and organization products, hand tools,
gardening tools, kitchen mitts and trivets, and barbeque tools. Both our Personal Care and Housewares
segments sell their products primarily through mass merchandisers, drug chains, warehouse clubs, catalogs,
grocery stores, specialty stores, and beauty supply retailers and wholesalers.
In each of our segments we strive to be first to market with a broad line of competitively priced
innovative products. We believe this strategy is one of our most important growth drivers. Our goal is to
provide our consumers with unique features, better functionality and higher performance at competitive price
points. This strategy has allowed us to sustain, and in many categories to strengthen our market position in
4
many of our product lines. As we extend our product lines and enter new product categories, we intend to
expand our business in our existing customer base while attracting new customers.
As part of our overarching objective to grow our business and increase shareholder value, we have
established five core initiatives. These initiatives and their key elements are outlined below:
• Maximize high growth potential branded products. We seek to maximize high growth potential
products by selectively investing in consumer marketing propositions that offer the best
opportunities to capture market share and increase growth.
• Accelerate our new product pipeline. We will strive to accelerate the time required to develop and
introduce new products to meet changing consumer preferences and take advantage of opportunities
sooner.
• Leverage innovation. We intend to enhance and extend our existing products and develop new
products to grow our business. We believe that new innovative products will permit us to generate
higher margins and increase the value of our brand base.
• Broaden our growth opportunities. We plan to continue to seek opportunities to acquire brands
and product categories through aggressive external development and strategic joint ventures and
acquisitions.
• Reduce cost and increase productivity. We intend to seek to control our expenses and strengthen
operating margins by eliminating unnecessary spending and cost redundancy in the short term, and
by making other tools and productivity drivers the cornerstone and fabric of our Company.
We present financial information for each of our operating segments in Note (13) of the consolidated
financial statements. The matters discussed in this Item 1. “Business,” pertain to all existing operating
segments, unless otherwise specified.
We use outside manufacturers to produce our goods. Both our Personal Care and Housewares segments
sell their products primarily through mass merchandisers, drug chains, warehouse clubs, catalogs, grocery
stores, specialty stores, and beauty supply retailers and wholesalers.
We sell certain of our products under licenses from third parties. Our licensed trademarks, among
others, include:
• Vidal Sassoon®, licensed from The Procter & Gamble Company;
• Revlon® licensed from Revlon Consumer Products Corporation;
• Dr. Scholl's®, licensed from Schering-Plough HealthCare Products, Inc.;
• Scholl® (in areas other than North America), licensed from Scholl Ltd.;
• Sunbeam®, Health at Home® and Health o meter® licensed from Sunbeam Products, Inc.;
• Sea Breeze®, licensed from Shiseido Company Ltd.;
• Vitapointe®, licensed from Sara Lee Household and Body Care UK Limited; and
• Toni & Guy®, licensed from Mascolo Brothers Ltd. (acquired March 27, 2006)
5
We own and actively market under a number of trademarks, including:
• OXO®
• Good Grips®
• Soft Works®
• Touchables®
• Brut®
• Vitalis®
• Final Net®
• Ammens®
• Condition® 3-in-1
• TimeBlock®
• Skin Milk®
• Epil-Stop®
• Studio Tools™
• Dazey®
• Caruso®
• Karina®
• Visage Náturel®
• DCNL®
• Nandi®
• Isobel®
• HOT things®
We also market hair and beauty care products under the following trademarks to the professional beauty
salon industry:
• Helen of Troy®
• Hot Tools®
• Hot Spa®
• HOTSetter™
• Salon Edition®
• Salon Tools™
• Fusion Tools™
• Gallery Series®
• Wigo®
• The Beautician™
We were incorporated as Helen of Troy Corporation in Texas in 1968 and reincorporated as Helen of
Troy Limited in Bermuda in 1994.
6
PRODUCTS
Our business is acquiring, designing, developing, and selling a full line of personal care products and an
expanding line of housewares products. The following table lists the primary products we sell and some of the
brand names that appear on those products.
PRODUCTS
BRAND NAMES
PRODUCT
CATEGORY
Appliances
and
Accessories
Hand-held dryers
Curling irons, straightening irons,
hot air brushes, and brush irons
Hairsetters
Vidal Sassoon®, Revlon®, Sunbeam®, Helen of Troy®,
Salon Edition®, Hot Tools®, HOT Professional®,
Studio Tools™, Salon Tools™, Gold Series®, Gallery
Series®, Wigo® and Cosmopolitan™
Vidal Sassoon®, Revlon®, Sunbeam®, Helen of Troy®,
Salon Edition®, Hot Tools®, HOT Professional®,
Studio Tools™, Salon Tools™, Gold Series®, Gallery
Series®, Wigo® and Cosmopolitan™
Vidal Sassoon®, Revlon®, Sunbeam®, HOT Setter™,
Cosmopolitan™ and Caruso®
Revlon®, Hotspa®, Sunbeam®, Dr. Scholl's® and
Visage Náturel®
Paraffin baths, facial brushes, facial
saunas, and other skin care
appliances
Manicure/pedicure systems
Foot baths Dr. Scholl's®, Scholl®, Revlon®, Sunbeam®, Carel®
Revlon®, Dr. Scholl's®, Scholl® and The Beautician™
Foot massagers, hydro massagers,
cushion massagers, body
massagers, and memory foam
products
Hair clippers, trimmers, exfoliators,
and shavers
Hard and soft-bonnet hair dryers
Hair styling, hand-held mirrors,
lighted mirrors, and utility
implements
Decorative hair accessories
Grooming,
Skin Care,
and Hair
Care
Products
Liquid hair styling products
Liquid skin care products
Medicated skin care products
Fragrances, deodorants, and
antiperspirants
Hair depilatory products
and Hotspa®
Dr. Scholl's®, Health o meter®, Carel® and Hotspa®
Vidal Sassoon®, Revlon® and Hot Tools®
Dazey®, Carel®, and Hot Tools®
Vidal Sassoon® and Revlon®
Vidal Sassoon®, Revlon®, Karina®, Karina Girl™,
HOT things®, Isobel®, DCNL® and Nandi®
Vitalis®, Final Net®, Condition® 3-in-1 and
Vitapointe®
Sea Breeze®, TimeBlock® and Skin Milk®
Ammens®
Brut®
Epil-Stop®
7
PRODUCT
CATEGORY
Housewares
PRODUCTS
BRAND NAMES
OXO®, Good Grips®, Grind it™, Steel™, Softworks®,
Touchables® and Good Grips® Basics
Kitchen tools, cutlery, bar and
wine accessories, kitchen mitts and
trivets, and barbeque tools
Tea kettles
Household cleaning tools and trash
cans
Storage and organization products OXO®, Good Grips® and Softworks®
OXO®, Good Grips® and Softworks®
Hand and garden tools
OXO®, Good Grips® and Softworks®
OXO®, Good Grips®, Softworks® and Touchables®
We continue to develop new products, respond to market innovations and enhance existing products
with the objective of improving our position in the personal care and housewares markets.
During fiscal 2006, building on the success of our ionic technology, we developed a line of tourmaline
based hair care appliances for both the retail and professional markets under the Vidal Sassoon and Revlon
brand names. Tourmaline is a semi-precious stone that produces a high level of negative ions, as well as
infrared heat, which gently dries hair from the inside-out. Many of our new hair care products also feature a
patented variable-ion technology that allows consumers to select the exact amount of ions best suited for their
individual needs.
In our skin care product line, during fiscal 2006, we extended the Sea Breeze brand by adding “Actives”
and “Naturals” line extensions of the product. The “Actives” formulation is designed to appeal to teens and
young adults and has been formulated to provide a stronger, deeper and longer lasting skin cleansing treatment.
The “Naturals” formulation is designed to appeal to a more mature consumer and contains sea minerals and
nutrients to help the skin function in a normal and healthy manner.
In our Housewares division, during fiscal 2006, we introduced a new line of hand tools featuring our
highly desired non-slip Good Grips® comfort and ergonomic design. We also expanded our tea kettle line and
introduced a line of unique silicone based textile kitchen mitts and trivets. During fiscal 2007, we plan to
introduce a line of food storage containers.
Overall, in fiscal 2006 we introduced 474 new products across all our categories versus 426 new
products introduced in fiscal 2005. Currently, 488 additional products are in our product development pipeline
for fiscal 2007.
You can learn more about our currently marketed products at the following Internet address:
The information contained on the Company’s website is not included as a part of, or incorporated by reference
into, this report.
www.hotus.com
8
SALES AND MARKETING
We market our products primarily within the United States. Sales within the United States comprised
approximately 83, 82 and 84 percent of total net sales in fiscal 2006, 2005, and 2004, respectively. Both our
North American and International operations sell their products primarily through mass merchandisers, drug
chains, warehouse clubs, catalogs, grocery stores, specialty stores, and beauty supply retailers and wholesalers.
We market products through a combination of outside sales representatives and our own internal sales staff.
The companies from whom we license many of our brand names promote those names extensively. The
Revlon®, Vidal Sassoon®, Dr. Scholl's® and Sunbeam® trademarks are widely recognized because of
advertising and the sale of a variety of products. We believe we benefit from the name recognition associated
with a number of our licensed trademarks and seek to further improve the name recognition and perceived
quality of all trademarks under which we sell products through our own advertising and product development
efforts. We also promote our products through television advertising and through print media, including
consumer and trade magazines and various industry trade shows.
In fiscal 2004, we reached an agreement to become the title sponsor of the Sun Bowl through the
December 2006 game. We will continue as the sponsor for 2006 with an option to extend our sponsorship to
2007. The Sun Bowl is one of the longest running invitational post season college football games in the United
States with a history that spans over 70 years. The "Vitalis® Sun Bowl" became the official name of this event.
In 2004 and 2005, CBS Sports broadcast the Vitalis® Sun Bowl to nationwide audiences.
In January 2005, we entered into a three-year sponsorship agreement with Don Schumacher Racing, the
National Hot Rod Association (NHRA), and Just Marketing, Inc. to showcase our Brut® products and extend
the awareness of our products to target customers. We sponsor the Brut Racing team which is a "funny car"
drag racing team that competes in the NHRA POWERade Drag Racing series. Each year over a 10-month
period there is a series of 23 races that takes place in many major metropolitan markets, attracting an estimated
2.2 million in live attendance annually, and receiving over 150 hours of live or same-day coverage on ESPN.
MANUFACTURING AND DISTRIBUTION
We contract with unaffiliated manufacturers in the Far East, primarily in the Peoples' Republic of China,
Thailand, Taiwan, and South Korea, to manufacture a significant portion of our products in the appliance,
accessories and housewares product categories. Most of our grooming, skin care and hair care products are
currently manufactured in North America. For a discussion regarding our dependency on third party
manufacturers, see Item 1A., "Risk Factors". For fiscal 2006, 2005 and 2004, goods manufactured by vendors
in the Far East comprised approximately 86, 84 and 89 percent, respectively, of the dollar value of all segments’
inventory purchases.
Manufacturers who produce our products use formulas, molds, and certain other tooling, some of which
we own, in manufacturing those products. All our business segments employ numerous technical and quality
control persons to assure high product quality.
In total, we occupy approximately 2,600,000 square feet of distribution space in various locations to
support our operations. We expect this square footage to decline to approximately 1,900,000 square feet during
fiscal 2007 as we vacate existing facilities in Monee, Illinois and Southaven, Mississippi in order to consolidate
their inventories into our new Southaven, Mississippi facility. Products that are manufactured in the Far East
and sold in North America are shipped to the West Coast of the United States and Canada. The products are
then shipped by truck or rail service to warehouse facilities in El Paso, Texas; Southaven, Mississippi; Toronto,
9
Canada; and Vancouver, Canada, or directly to customers. We ship substantially all products to North American
customers from these warehouses by ground transportation services. Products sold outside the United States and
Canada are shipped from manufacturers primarily in the Far East, to warehouse facilities in The Netherlands,
the United Kingdom, Mexico, Brazil, or directly to customers. We ship products stored at the warehouses in
The Netherlands, the United Kingdom, Mexico, and Brazil to distributors or retailers.
Our customers seek to minimize their inventory levels and often demand that we fulfill their orders
within relatively short time frames. Consequently, these inventory management practices often require us to
carry substantial levels of inventory in order to meet our customers' needs.
Most of our products manufactured outside the countries in which they are sold are subject to import
duties, which increases the amount we pay to obtain such products.
LICENSE AGREEMENTS, TRADEMARKS, AND PATENTS
The Personal Care segment depends significantly upon the continued use of trademarks licensed under
various agreements. The Vidal Sassoon®, Revlon®, Sunbeam®, Health o meter® and Dr. Scholl's® trademarks
are of particular importance to this segment’s business. New product introductions under licensed trademarks
require approval from the respective licensors. The licensors also must approve the product packaging. Many of
the license agreements require the Company to pay minimum royalties, meet minimum sales volumes, and
make minimum levels of advertising expenditures. During fiscal 2006, we were in compliance with all terms of
these licensing agreements. The duration of the license agreements for the Revlon®, Vidal Sassoon®,
Sunbeam®, and Dr. Scholl's® trademarks, including the renewal terms, are 57, 27, 14 and 13 years,
respectively. If we decide to renew these agreements upon expiration of their current terms, we will be required
to pay prescribed renewal fees at the time of that election. The discussion below covers the primary product
categories that Helen of Troy currently sell under our material license agreements. The product categories
discussed do not necessarily include all of the products that Helen of Troy is entitled to sell under these or other
license agreements.
Under an agreement with The Procter & Gamble Company, Helen of Troy is licensed to sell certain
products bearing the Vidal Sassoon® trademark worldwide, except in Asia. Products sold under the terms of
this license include hair dryers, curling irons, straightening irons, styling irons, hairsetters, hot air brushes, hair
clippers and hair trimmers, mirrors, brushes, combs, and hair care accessories.
Under agreements with Revlon Consumer Products Corporation, we are licensed to sell worldwide,
except in Western Europe, hair dryers, curling irons, straightening irons, brush irons, hairsetters, brushes,
combs, mirrors, functional hair accessories, personal spa products, hair clippers and trimmers, and battery-
operated and electric women's shavers bearing the Revlon® trademark.
We are licensed to sell foot baths, foot massagers, hydro massagers, cushion massagers, body
massagers, paraffin baths, and support pillows bearing the Dr. Scholl's® trademark in the United States and
Canada under an agreement with Schering-Plough HealthCare Products, Inc. We also are licensed to sell the
same products under the Scholl® trademark in other areas of the world through an agreement with Scholl Ltd.
Under an agreement with Sunbeam Products, Inc., we are licensed to sell hair clippers, hair trimmers,
hair dryers, curling irons, hairsetters, hot air brushes, mirrors, manicure kits, hair brushes and combs, hair
rollers, hair accessories, paraffin baths, foot massagers, back massagers, body massagers, memory foam
products, and spa products bearing the Sunbeam®, Health at Home® and Health o meter® trademarks in the
United States, Canada, Mexico, Central America, South America, and the Caribbean.
10
Under an agreement with The Procter & Gamble Company we licensed the right to sell products under
the trademark Sea Breeze® pursuant to a perpetual royalty free license from Shiseido Company Ltd. We
currently sell a line of liquid skin care products under the Sea Breeze® name in the United States and Canada.
In March 2006, we entered into an agreement with Mascolo Brothers Ltd. for the use of the Toni &
Guy® brand name for hair care appliance products. Under the agreement, we are licensed to sell hair dryers,
straighteners, stylers, tongs and a line of male grooming hair care appliances in the United Kingdom, Western
Europe and portions of Asia. The duration of the initial license agreement is 5 years, expiring March 2011,
which may be extended an additional 2 years upon proper notice.
Helen of Troy has filed or obtained licenses for over 345 design and utility patents in the United States
and several foreign countries. Most of these patents cover product designs in our Housewares segment. We
also protect certain details about our processes, products and strategies as trade secrets, keeping confidential the
information that we believe provides us with a competitive advantage. Our ability to enforce patents,
copyrights, licenses, and other intellectual property is subject to general litigation risks, as well as uncertainty as
to the enforceability of various intellectual property rights in various countries.
CUSTOMERS
Sales to Wal-Mart Stores, Inc., and its affiliate, SAM'S Club, accounted for approximately 22 percent,
25 percent, and 28 percent of our net sales in fiscal 2006, 2005, and 2004, respectively. Sales to Target
Corporation accounted for approximately 10 percent, 8 percent, and 9 percent of our net sales in fiscal 2006,
2005, and 2004, respectively. No other customers accounted for ten percent or more of net sales during those
fiscal years. Sales to our top five customers accounted for approximately 46 percent, 44 percent and 49 percent
in fiscal 2006, 2005, and 2004, respectively.
ORDER BACKLOG
When placing orders, our retail and wholesale customers usually request that we ship the related
products within a short time frame. As such, there usually are no significant backlog of orders in any of our
distribution channels.
As a result of the transition of our Housewares segment to the new systems, we experienced delays in
warehouse order processing and shipments. These delays caused a backlog of orders within the Housewares
segment, and, in some cases, order cancellations. We believe that the impact was immaterial in the fourth
quarter of fiscal 2006; however, we do expect some impact in the first fiscal quarter of 2007 due to lost revenue
and costs associated with related concessions and accommodations to certain customers, and associated start up
costs of the distribution center. The extent of the impact on the first fiscal quarter of 2007 is not yet
determinable. We continue to work the backlog down, and expect operations to normalize in fiscal 2007.
In our Personal Care segment, there was no significant backlog of orders in any of our distribution
channels as of the end of fiscal 2006.
COMPETITIVE CONDITIONS
The markets in which we sell our products are very competitive and highly mature. Maintaining and
gaining market share depends heavily on product development and enhancement, pricing, quality, performance,
packaging and availability, brand name recognition, patents, and marketing and distribution approaches. In the
Personal Care segment, our primary competitors include Conair Corporation, Applica, Inc., Spectrum Brands,
11
Inc., Goody Products, Inc., a division of Newell Rubbermaid, Inc., Homedics-USA, Inc., Chattem, Inc., J&J
Boots, KAO Brands Company., The Proctor & Gamble Company, L′Oréal, Unilever, and Alberto-Culver
Company. In the Housewares segment, the competition is highly fragmented. Our primary competitors in that
segment include KitchenAid (Lifetime Brands, Inc.), Zyliss AG, Copco (Wilton Industries, Inc.), Simple
Human, Casabella and Interdesign, Inc.. Some of these competitors have significantly greater financial and
other resources than we do.
SEASONALITY
Our business is somewhat seasonal. Net sales in the third fiscal quarter accounted for approximately 34,
35, and 33 percent of fiscal 2006, 2005 and 2004 net sales, respectively. As a result of the seasonality of sales,
our working capital needs fluctuate during the year.
REGULATION
Our electrical products must meet the safety standards imposed in various national, state, local, and
provincial jurisdictions. Our electrical products sold in the United States are designed, manufactured, and tested
to meet the safety standards of Underwriters Laboratories, Inc. or Electronic Testing Laboratories.
Certain of our skin care products are regulated by the United States Food and Drug Administration.
EMPLOYEES
As of fiscal year end 2006, we employed 804 full-time employees in the United States, Canada, Macao,
China, Europe, Brazil, Peru, Venezuela and Mexico of which 126 are marketing and sales employees, 149 are
distribution employees, 50 are engineering and development employees, and 479 are administrative personnel.
We also use temporary, part time and seasonal employees as needed. None of the Company's employees are
covered by a collective bargaining agreement. We have never experienced a work stoppage and we believe that
we have satisfactory working relations with our employees.
GEOGRAPHIC INFORMATION
Note (13) to the consolidated financial statements contains geographic information concerning our net
sales and long-lived assets.
AVAILABLE INFORMATION
We maintain our Company’s main Internet site at the following address: http://www.hotus.com. The
information contained on the Company’s website is not included as a part of, or incorporated by reference into,
this report. We make available on or through our Internet website’s Investor Relations page under the heading
“SEC Filings” certain reports and amendments to those reports that we file with or furnish to the SEC in
accordance with the Securities Exchange Act of 1934, as amended (the "Securities Exchange Act"). These
include our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K,
amendments to these reports and the reports required under Section 16 of the Securities Exchange Act of
transactions in Company shares by directors and officers. Also on the Investor Relations page, under the
heading “Corporate Governance”, are the Company’s Code of Ethics, Corporate Governance Guidelines and the
Charters of the Committees of the Board of Directors. We make this information available on our website free
of charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the
SEC. The public may also read and copy any of the materials we file with the SEC in accordance with the
12
Securities Exchange Act at the SEC's Public Reference Room at 450 Fifth Street, N.W. Washington, D.C.
20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0300. The SEC maintains an Internet site that contains reports, proxy and information statements,
and other information about our Company. The address of the SEC's Internet site is http://www.sec.gov.
13
ITEM 1A. RISK FACTORS
The ownership of our common shares involves a number of risks and uncertainties. Potential investors
should carefully consider the following risk factors and uncertainties described below, together with the other
information contained in this report, in evaluating us and our business before making an investment decision
regarding our securities. If any of the events or circumstances described in the following risks actually occur,
our business, financial condition or results of operations could be materially adversely affected. The risks listed
below are not the only risks that we face. Additional risks that we do not yet know of or that we currently think
are not significant may also impair our business operations.
We rely on key senior management to operate our business; the loss of any of these senior managers could
have a material adverse impact on our business.
We do not have a large group of senior executives in our business. Accordingly, we depend on a
small number of key senior executives. We do not maintain "key man" life insurance on any of our key senior
executives. The loss of any of these persons could have a material adverse effect on our business, financial
condition and results of operations, particularly if we are unable to find, relocate and integrate adequate
replacements for any of these persons. Further, in order to continue to grow our business, we will need to
expand our key senior management team. We may be unable to attract or retain these persons. This could hinder
our ability to grow our business and could disrupt our operations or materially adversely affect the success of
our business.
We rely on our Global Enterprise Resource Planning System. Our failure to, or delays in, successfully
implementing this system, including the consolidation of our inventories in our Southaven, Mississippi
distribution facility could have a material adverse impact on our operations and profitability.
Our business operations are dependent on our logistical systems, which include our order management
system and our computerized warehouse network. These logistical systems depend on our new Global
Enterprise Resource Planning System. On September 7, 2004, we implemented our new Global Enterprise
Resource Planning System, along with other new technologies. Following the implementation of this new
system, most of our businesses (other than our Housewares segment) ran under one integrated information
system. We continue to closely monitor the new system and make normal and expected adjustments to improve
its effectiveness. Complications resulting from process adjustments could potentially cause considerable
disruptions to our business. The change to the new system continues to involve risk. Application program bugs,
system conflict crashes, user error, data integrity issues, customer data conflicts and integration issues with
certain remaining legacy systems all pose potential risks. Implementing new data standards and converting
existing data to accommodate the new system's requirements have required a significant effort across our entire
organization.
During the third fiscal quarter of 2005, we began the implementation and transition of our Housewares
segment to the new system. The transition was completed late in the fourth fiscal quarter of 2006. We continue
to implement several significant functionality enhancements related to both the Housewares segment’s and
Personal Care segment’s systems. We expect this process will continue during fiscal 2007.
This recent transition has included the:
• building of a new 1,200,000 square foot distribution facility in Southaven, Mississippi which was
completed and outfitted with new materials handling equipment and systems;
14
•
•
•
transitioning the warehousing, order fulfillment and shipment processes for our OXO products to our
new Global Enterprise Resource Planning system;
the physical movement of the existing OXO inventory from its former distribution facility in Illinois to
Mississippi;
the physical movement of other inventories from the Company’s existing distribution facilities to the
new facility in Southaven, Mississippi; and
•
testing and implementation of the new distribution facility and systems.
During the initial months after the transition of our Housewares segment to the new systems and
our distribution facility in Southaven, Mississippi, we experienced warehouse order processing and shipment
delays. These delays were the result of both software issues and adapting to the new equipment, new
employees, and the operation of our new distribution facility. In response to these issues, management
dedicated additional personnel and sent a seasoned operations management team to Southaven, Mississippi to
assist local management in resolving technical and operational issues. The delays did cause a backlog in orders
and in some cases, order cancellations. We continue to work this backlog down. We have addressed these
issues with the affected customers and believe that over the long-term, the strength of our customer
relationships will not be affected by the shipment delays. We believe that the impact was immaterial in the
fourth quarter of fiscal 2006; however, we do expect some impact in the first fiscal quarter of 2007 due to lost
revenue and costs associated with related concessions and accommodations to certain customers, and associated
start up costs of the distribution center. The extent of the impact on the first fiscal quarter of 2007 is not yet
determinable. We continue to work the backlog down, and expect operations to normalize in fiscal 2007.
While we believe we have taken appropriate measures to mitigate the recent shipment disruptions arising from
the transition of our Housewares segment, there can be no assurance that additional disruptions will not occur.
We expect that this and other planned implementations and functional software enhancements will
continue to strain our internal resources, could further impact our business, and may result in higher
implementation costs and reallocation of human resources.
To support these new technologies, we are continuously building and supporting a much larger and more
complex information technology infrastructure. Increased computing capacity, power requirements, back-up
capacities, broadband network infrastructure and increased security needs are all potential areas for failure and
risk. We continue to rely substantially on outside vendors to assist us with implementation and enhancements
and will continue to rely on certain vendors to assist us in maintaining some of our infrastructure. Should they
fail to perform due to events outside our control, it could affect our service levels and threaten our ability to
conduct business. We continue to transition many of these third party services to our in-house staff. The
transition from third party services to in-house staffing of such services poses risks that could cause additional
business disruptions. Finally, natural disasters may disrupt our infrastructure and our disaster recovery process
may not be sufficient to protect against loss.
Any interruption in our logistical systems would impact our ability to procure our products from our
factories and suppliers, transport them to our distribution facilities, and store and deliver them to our customers
on time and in the correct amounts. These and other factors described above could have a material and adverse
affect our business, financial condition and results of operations.
15
Acquisitions and partnerships may be more costly or less profitable than anticipated and may adversely affect
the price of our common shares.
We are constantly looking for opportunities to make additional complementary strategic business and/or
brand acquisitions. To the extent that these acquisitions are not favorably received by consumers, shareholders,
analysts, and others in the investment community, the price of our common shares could be adversely affected.
In addition, acquisitions involve numerous risks, including:
• difficulties in the assimilation of the operations, technologies, products and personnel associated with
the acquisitions,
•
the diversion of management's attention from other business concerns,
•
risks of entering markets in which we have no or limited prior experience, and
•
the potential loss of key employees associated with the acquisitions.
If we are unable to successfully integrate the operations, technologies, products, or personnel that we have
acquired, our business, results of operations, and financial condition could be materially adversely affected.
Our sales are dependent on sales from several large customers and the loss of, or substantial decline in sales
to, a top customer could have a material adverse effect on our revenues and profitability.
A few customers account for a substantial percentage of our sales. Our financial condition and results of
operations could suffer if we lost all or a portion of the sales to these customers. In particular, sales to Wal-
Mart Stores, Inc., and its affiliate, SAM'S Club, and sales to Target Corporation accounted for approximately 22
percent and 10 percent, respectively, of our net sales in fiscal 2006. While no other customers accounted for ten
percent or more of net sales, our top 5 customers accounted for approximately 46 percent of fiscal 2006 net
sales. Although we have long-standing relationships with our major customers, no contracts require these
customers to buy from us, or to purchase a minimum amount of our products. A substantial decrease in sales to
any of our major customers could have a material adverse effect on our financial condition and results of
operations.
With the growing trend towards retail trade consolidation, we are increasingly dependent upon key
customers whose bargaining strength is growing. We may be negatively affected by changes in the policies of
our customers, such as on-hand inventory reductions, limitations on access to shelf space, use of private label
brands, price demands and other conditions, which could negatively impact our financial condition and results
of operations.
A significant deterioration in the financial condition of our major customers could have a material
adverse effect on our sales and profitability. We regularly monitor and evaluate the credit status of our
customers and attempt to adjust sales terms as appropriate. Despite these efforts, a bankruptcy filing by a key
customer could have a material adverse effect on our business, financial condition and results of operations.
16
Our projections of sales and earnings are highly subjective and our future sales and earnings could vary in a
material amount from our projections.
Most of our major customers purchase our products electronically through electronic data interchange
and expect us to promptly deliver products from our existing inventories to the customers’ retail stores or
distribution centers. This method of ordering products allows our customers to immediately respond to changes
in demands of their retail customers. From time to time, we provide projections to our shareholders and the
investment community of our future sales and earnings. Since we do not require long-term purchase
commitments from our major customers and the customer order and ship process is very short, it is difficult for
us to accurately predict the amount of our sales and related earnings. Our projections are based on
management’s best estimate of sales using historical sales data and other information deemed relevant. These
projections are highly subjective since sales to our customers can fluctuate substantially based on the demands
of their retail customers and due to other risks described in this report. Additionally, changes in retailer
inventory management strategies could make inventory management more difficult. Because our ability to
forecast sales is highly subjective, there is a risk that our future sales and earnings could vary materially from
our projections.
We are dependent on third party manufacturers, most of which are located in the Far East and any inability
to obtain products from such manufacturers could have a material adverse effect on our business, financial
condition and results of operations.
All of our products are manufactured by unaffiliated companies, most of which are in the Far East. Risks
associated with such foreign manufacturing include: changing international political relations; changes in laws,
including tax laws, regulations and treaties; changes in labor laws, regulations, and policies; changes in customs
duties and other trade barriers; changes in shipping costs; currency exchange fluctuations; local political unrest;
an extended and complex transportation cycle; and the availability and cost of raw materials and merchandise.
To date, these factors have not significantly affected our production in the Far East. However, any change that
impairs our ability to obtain products from such manufacturers, or to obtain products at marketable rates, could
have a material adverse effect on our business, financial condition and results of operations.
With most of our manufacturers located in the Far East, our production lead times are relatively long.
Therefore, we must commit to production in advance of customer orders. If we fail to forecast customer or
consumer demand accurately, we may encounter difficulties in filling customer orders or in liquidating excess
inventories. We may also find that customers are canceling orders or returning products. Distribution difficulties
may have an adverse effect on our business by increasing the amount of inventory and the cost of storing
inventory. Any of these results could have a material adverse effect on our business, financial condition and
results of operations.
We have incurred substantial debt to fund acquisitions and capital expenditures, which could have an
adverse impact on our business and profitability.
During the second quarter of fiscal 2005, we incurred substantial debt. We incurred additional debt in
fiscal 2006. The terms of all our debt agreements are more fully described in Notes (5) and (7) to the
consolidated financial statements. As a result of these agreements, we are now operating under substantially
more leverage and have begun to incur higher interest costs. This substantial increase in debt has added new
constraints on our ability to operate our business, including but not limited to:
• our ability to obtain additional financing in the future for working capital, capital expenditures,
acquisitions, general corporate purposes, or other purposes,
17
• an increased portion of our cash flow from operations will be required to pay interest on our debt, which
will reduce the funds available to us for our operations,
• a significant portion of our debt has been issued at variable rates of interest, which may result in higher
interest expense in the event of increases in market interest rates,
• our level of indebtedness will increase our vulnerability to general economic downturns and adverse
industry conditions,
• our debt service obligations could limit our flexibility in planning for, or reacting to, changes in our
business and conditions in the industries in which we operate,
•
the debt agreements contain financial and restrictive covenants, and our failure to comply with them
could result in an event of default, which if not cured or waived, could have a material adverse effect on
us. Significant restrictive covenants include limitations on, among other things, our ability under certain
circumstances to:
• incur additional debt, including guarantees;
• incur certain types of liens;
• sell or otherwise dispose of assets;
• engage in mergers or consolidations;
• enter into substantial new lines of business; and
• enter into certain types of transactions with our affiliates.
Our disagreements with taxing authorities, tax compliance and the impact of changes in tax law could have
an adverse impact on our business.
As further discussed under Item 3. “Legal Proceedings,” and Note (8) to the accompanying consolidated
financial statements, we are involved in various tax audits and related disputes over tax issues with the Inland
Revenue Department (the “IRD") in Hong Kong and the United States Internal Revenue Service (the “IRS").
We believe that we have complied with all applicable reporting and tax payment obligations and disagree with
the taxing authorities’ positions on these various issues. We are vigorously defending our tax positions through
all available administrative and judicial avenues.
Although the final resolution of these disputes is uncertain and involves unsettled areas of the law, based
on currently available information, we have provided for our best estimate of the probable tax liability for these
matters. While the resolution of the issues may result in tax liabilities that are significantly higher or lower than
the reserves established for these matters, management currently believes that any resolution will not have a
material effect on our consolidated financial position or liquidity. However, an unfavorable resolution on any
matter could have a material effect on our consolidated results of operations or cash flows in the quarter in
which an adjustment is recorded or the tax is due or paid. See Note 18 to the consolidated financial statements
for subsequent developments regarding the pending settlement of Hong Kong tax liabilities for fiscal years 1995
through 1997.
The future impact of tax legislation, regulations or treaties, including any future legislation in the United
States or abroad that would affect the companies or subsidiaries that comprise our consolidated group is always
uncertain. Our ability to respond to such changes so that we maintain favorable tax treatment, the cost and
18
complexity of such compliance, and its impact on our ability to operate in jurisdictions flexibly always poses a
risk.
Favorable tax treatment of our non-U.S. earnings is dependent on our ability to avoid classification as a
Controlled Foreign Corporation. Changes in the composition of our shareholdings could have an impact on
our classification. If our classification were to change, it could have a material negative effect on the largest
U.S. shareholders and, in turn on the Company’s business.
Because our company is a foreign corporation, we incur risks associated with our ability to avoid
classification as a Controlled Foreign Corporation. In order for us to preserve our current tax treatment of our
non-U.S. earnings, it is critical that we avoid Controlled Foreign Corporation status. A Controlled Foreign
Corporation is a non-U.S. corporation whose largest U.S. shareholders (i.e., those owning 10 percent or more of
its shares) together own more than 50 percent of the shares in such corporation. If a change of ownership of the
Company were to occur such that the company became a Controlled Foreign Corporation, such a change could
have a material negative effect on the largest U.S. shareholders and, in turn, on the Company's business.
We materially rely on licensed trademarks, the loss of which could have a material adverse effect on our
revenues and profitability.
We are materially dependent on our licensed trademarks as a substantial portion of our sales revenue
comes from selling products under licensed trademarks. As a result, we are materially dependent upon the
continued use of such trademarks, particularly the Vidal Sassoon® and Revlon® trademarks. Actions taken by
licensors and other third parties could diminish greatly the value of any of our licensed trademarks. If we were
unable to sell products under these licensed trademarks or the value of the trademarks were diminished by the
licensor due to their continuing long-term financial capability to perform under the terms of the agreements or
other reasons, or due to the actions of third parties, the effect on our business, financial condition and results of
operations could be both negative and material.
We have recently become involved in securities class action litigation which could have a material adverse
effect on our business, consolidated financial position, results of operations and cash flows.
As further discussed under Item 3. “Legal Proceedings,” and Note 10 to the accompanying consolidated
financial statements, two class action lawsuits have been filed and consolidated into one action against the
Company and certain officers on behalf of purchasers of publicly-traded securities of the Company alleging
violations under the Securities Exchange Act. The lawsuit was brought in the United States District Court for
the Western District of Texas and is still in the preliminary stages. The Company intends to defend the
foregoing lawsuit vigorously, but, because the lawsuit has been recently filed, the Company cannot predict the
outcome and is not currently able to evaluate the likelihood of success or the range of potential loss, if any, that
might be incurred in connection with the action. The Company carries insurance that provides an aggregate
coverage of $20,000 ($20 million) after a self-insured retention $500 ($500 thousand) for the period during
which the claims were filed, but we cannot evaluate at this time whether such coverage will be adequate to
cover losses, if any, arising out of the lawsuit. There is a risk that such litigation could result in substantial costs
and divert management attention and resources from its business, which could adversely affect the Company's
business. If the Company were to lose on any issues connected with the lawsuit or if the lawsuit is not settled
on favorable terms, the judgement or settlement may have a material adverse effect on the Company's
consolidated financial position, results of operations and cash flows.
19
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
20
ITEM 2. PROPERTIES
PLANT AND FACILITIES
The Company owns, leases, or otherwise utilizes through third-party management service agreements, a
total of 31 facilities, which include selling, procurement, administrative and warehouse facilities worldwide.
All facilities operated by the Company are well maintained and adequate for the purpose for which they are
intended. Information regarding the location, use, segment, ownership and approximate size of the facilities
and undeveloped land as of February 28, 2006 is provided below:
Location
Type and Use
Business Segment
Owned or
Leased
Approximate
Square
Footage
El Paso, Texas, USA
El Paso, Texas, USA
Southaven, Mississippi, USA *
Land & Building - Distribution Facility
Land & Building - Distribution Facility
Personal Care
Personal Care
Land & Building - Corporate Headquarters
Personal Care & Housewares
Southaven, Mississippi, USA
Land & Building - Distribution Facility
Personal Care & Housewares
Brampton, Ontario, Canada
Third-Party Managed Distribution Facility
Personal Care
Delta, BC, Canada
Third-Party Managed Distribution Facility
Personal Care
Danbury, Connecticut, USA
Bentonville, Arkansas, USA
Troy, Michigan, USA
Office Space
Office Space
Office Space
Minneapolis, Minnesota, USA
Office Space
New York, New York, USA
Office Space
Personal Care
Personal Care
Personal Care
Personal Care
Housewares
Monee, Illinois, USA *
Third-Party Managed Distribution Facility
Housewares
El Paso, Texas, USA
Land (3 Parcels) - Held for Future Expansion
None
Etobicoke, Ontario, Canada
Office Space
Personal Care
Sheffield, England
Worksop, England
Land & Building - European Headquarters
Personal Care
Third-Party Managed Distribution Facility
Personal Care
Boulgne-Billancourt, France
Hurth, Germany
Office Space
Office Space
Personal Care
Personal Care
Nr Amsterdam, Netherlands
Third-Party Managed Distribution Facility
Personal Care
Mexico City, Mexico
Tlanepantla, Mexico
Tlanepantla, Mexico
Office Space
Personal Care
Third-Party Managed Distribution Facility
Personal Care
Third-Party Managed Distribution Facility
Personal Care
S. Jose dos Pinhais/PR-Brazil
Office Space
Personal Care
Vitoria, Brazil
Third-Party Managed Distribution Facility
Personal Care
Santiago de Surco, Lima, Perú
Office Space
Personal Care
TST, Gateway, Hong Kong
Office Space - Supply Chain Management
Personal Care & Housewares
TST, China HK City, Hong Kong
Office Space - Supply Chain Management
Personal Care & Housewares
Zhu Kuan, Macau, China
Office Space - Supply Chain Management
Personal Care & Housewares
Hang Kei, Macau, China
Apartment - Temporary Travelers Quarters
Personal Care & Housewares
Shenzhen, China
Shenzhen, China
Shenzhen, China
Office Space - Supply Chain Management
Personal Care & Housewares
Office Space - Supply Chain Management
Personal Care & Housewares
Office Space - Supply Chain Management
Personal Care & Housewares
Owned
Owned
Leased
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
135,000
408,000
619,000
1,200,000
50,000
7,000
16,000
5,000
1,600
1,000
9,900
100,000
32 Acres
2,900
10,000
85,000
1,400
2,300
85,000
900
20,000
20,000
1,100
5,400
900
18,600
10,100
11,600
1,200
800
500
1,300
* Facilities intended to be replaced in fiscal 2007 by the new 1,200,000 square foot distribution facility in Southaven, Mississippi.
21
ITEM 3. LEGAL PROCEEDINGS
Hong Kong Income Taxes – The Inland Revenue Department (the “IRD”) in Hong Kong has assessed a
total of $32,086 (U.S.) in tax on certain profits of our foreign subsidiaries for the fiscal years 1995 through
2003. Hong Kong levies taxes on income earned from certain activities previously conducted in Hong Kong.
We are vigorously defending our position that we conducted the activities that produced the profits in question
outside of Hong Kong. We also assert that we have complied with all applicable reporting and tax payment
obligations.
In connection with the IRD's tax assessment for the fiscal years 1995 through 2003, we have purchased
tax reserve certificates in Hong Kong totaling $28,425. 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.
On May 10, 2006, the IRD and the Company reached a settlement regarding tax liabilities for the fiscal
years 1995 through 1997. For those tax years, we have agreed to an assessment of approximately $4,019
including estimated penalties and interest. This agreement has been presented to the IRD’s Board of Review
and is subject to their approval. Our consolidated financial statements at February 28, 2006 include adequate
provisions for this liability. We expect the liability to be paid with $3,282 of tax reserve certificates and $737 in
cash. If this settlement is approved, we have approximately $25,143 remaining in available tax reserve
certificates for future settlement of any potential tax liability.
If the IRD were to successfully assert the same position for fiscal years after fiscal year 2003, the
resulting assessment could total $18,673 (U.S.) in taxes for fiscal years 2004 and 2005. We would vigorously
disagree with the proposed adjustments and would aggressively contest this matter through applicable taxing
authority and judicial procedures, as appropriate.
Although the final resolution of the proposed adjustments is uncertain and involves unsettled areas of
the law, based on currently available information, we have provided for our best estimate of the probable tax
liability for this matter. While the resolution of the issue may result in tax liabilities which are significantly
higher or lower than the reserves established for this matter, management currently believes that the resolution
will not have a material effect on our consolidated financial position or liquidity. However, an unfavorable
resolution could have a material effect on our consolidated results of operations or cash flows in the quarter in
which an adjustment is recorded or the tax is due or paid.
United States Income Taxes - The Internal Revenue Service (the “IRS”) has completed its audits of the
U.S. consolidated federal tax returns for fiscal years 2000, 2001 and 2002. We previously disclosed that the IRS
provided notice of proposed adjustments to taxes of approximately $13,424 for the three years under audit. We
have resolved the various tax issues and reached an agreement on additional tax in the amount of $3,568. The
resulting tax liability had already been provided for in our tax reserves and we have decreased our tax accruals
related to the IRS audits for fiscal years 2000, 2001 and 2002, accordingly. This additional tax liability and
associated interest of $914 were settled in the fourth quarter of fiscal 2006. The IRS is auditing the U.S.
consolidated federal tax returns for fiscal years 2003 and 2004. Although the ultimate outcome of the
examination cannot be predicted with certainty, management is of the opinion that adequate provisions for taxes
in those years have been made in the Company’s consolidated financial statements.
22
Securities Class Action Litigation - Class action lawsuits have been filed and consolidated into one
action against the Company, Gerald J. Rubin, the Company’s Chairman of the Board, President and Chief
Executive Officer, and Thomas J. Benson, the Company’s Chief Financial Officer, on behalf of purchasers of
publicly-traded securities of the Company. The Company understands that the plaintiffs allege violations of
Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 thereunder, on the grounds that the
Company and the two officers engaged in a scheme to defraud the Company’s shareholders through the
issuance of positive earnings guidance intended to artificially inflate the Company’s share price so that Mr.
Rubin could sell almost 400,000 of the Company’s common shares at an inflated price. The plaintiffs are
seeking unspecified damages, interest, fees, costs, an accounting of the insider trading proceeds, and injunctive
relief, including an accounting of and the imposition of a constructive trust and/or asset freeze on the
defendant’s insider trading proceeds. The class period stated in the complaint was October 12, 2004 through
October 10, 2005.
The lawsuit was filed in the United States District Court for the Western District of Texas in November,
2005 and is still in the preliminary stages. The Company intends to defend the foregoing lawsuit vigorously,
but, because the lawsuit has been recently filed, the Company cannot predict the outcome and is not currently
able to evaluate the likelihood of success or the range of potential loss, if any, that might be incurred in
connection with the action. However, if the Company were to lose on any issues connected with the lawsuit or
if the lawsuit is not settled on favorable terms, the judgement or settlement may have a material adverse effect
on the Company's consolidated financial position, results of operations and cash flows. There is a risk that such
litigation could result in substantial costs and divert management attention and resources from its business,
which could adversely affect the Company's business. The Company carries insurance that provides an
aggregate coverage of $20,000 ($20 million) after a self-insured retention $500 ($500 thousand) for the period
during which the claims were filed, but cannot evaluate at this time whether such coverage will be adequate to
cover losses, if any, arising out of the lawsuit.
Other Matters - We are involved in various other legal claims and proceedings in the normal course of
operations. In the opinion of management, the outcome of these matters will not have a material adverse effect
on our consolidated financial position, results of operations, or liquidity.
23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2006.
24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
PRICE RANGE OF COMMON SHARES
Our common shares are listed on the NASDAQ National Market System [symbol: HELE]. The
following table sets forth, for the periods indicated, in dollars per share, the high and low bid prices of the
common shares as reported on the NASDAQ National Market System. These quotations reflect the inter-dealer
prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual
transactions.
High
Low
--------------------- ---------------------
FISCAL 2006
First quarter
Second quarter
Third quarter
Fourth quarter
FISCAL 2005
First quarter
Second quarter
Third quarter
Fourth quarter
29.75
26.19
23.01
20.23
36.25
37.26
29.71
34.44
21.52
20.82
15.55
15.80
27.40
24.65
23.40
25.65
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
We have one class of equity security outstanding at February 28, 2006; common shares with a par value
of $0.10. As of May 5, 2006, there were approximately 343 holders of record of the Company's common shares.
Shares held in "nominee" or "street" name at each bank nominee or brokerage house are included in the number
of shareholders of record as a single shareholder.
CASH DIVIDENDS
Our current policy is to retain earnings to provide funds for the operation and expansion of the
Company's business and for potential acquisitions. We have not paid any cash dividends on our common shares
since inception. Our current intention is to pay no cash dividends in fiscal 2007. Any change in dividend policy
will depend upon future conditions, including earnings and financial condition, general business conditions, any
applicable contractual limitations, and other factors deemed relevant by our Board of Directors.
25
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table summarizes information about our equity compensation plans as of February 28,
2006. All outstanding awards relate to our common shares. All our equity compensation plans have been
approved by shareholder vote.
EQUITY COMPENSATION PLAN INFORMATION
Number of securities to
be issued upon exercise
of outstanding options,
warrants, and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants, and rights
(b)
-------------------------------------------- -------------------------------------------- --------------------------------------------
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c)
6,923,094
=========
$
14.83
=========
887,002
=========
-----------------------------------------------------
Equity compensation plans
approved by security holders
(1) Includes 331,716 shares authorized and available for issuance in connection with the Helen of Troy Limited
1998 Employee Stock Purchase Plan and 555,286 shares under the 1998 Employee Stock Option and
Restricted Stock Plan.
PURCHASES OF HELEN OF TROY COMMON SHARES
During the quarter ended August 31, 2003, our Board of Directors approved a resolution authorizing the
purchase, in open market or through private transactions, of up to 3,000,000 shares of our common shares over
a period extending through May 31, 2006. On April 25, 2006, our Board of Directors approved a resolution to
extend the existing plan for three more years through May 31, 2009.
We did not repurchase any common shares during fiscal 2006. We repurchased 757,710 and 806,126
shares at a total cost of $25,039 and $20,572, or an average price per share of $33.05 and $25.52 in fiscal 2005
and 2004, respectively. An additional 1,436,164 shares remain authorized for purchase under this plan.
26
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial information set forth below has been summarized from our
consolidated financial statements. This information contains certain reclassifications necessary to restate prior
years’ operations of Tactica as a discontinued segment. This information should be read in conjunction with the
consolidated financial statements and the related notes to consolidated financial statements included in Item 8.
"Financial Statements and Supplementary Data." All currency amounts in this document are denominated in
U.S. dollars.
For the year ended the last day of February,
(in thousands, except per share data)
Statements of Income Data
Net sales (2)
Cost of sales
Gross profit
Selling, general, and administrative expenses (2)
Operating income
Interest expense
Other income (expense)
Earnings before income taxes
Income tax expense
Income from continuing operations
Income (loss) from discontinued segment's
operations and impairment of related assets,
net of tax (1)
Net earnings
Per Share Data
Basic
Continuing operations
Discontinued operations
Total basic earnings per share
Diluted
Continuing operations
Discontinued operations
Total diluted earnings per share
Weighted average number of common shares
outstanding:
Basic
Diluted
2006
----------------
2005 (1)
----------------
2004 (1)
----------------
2003 (1)
----------------
2002 (1)
----------------
$
589,747
323,189
----------------
266,558
195,180
----------------
71,378
(16,866)
1,290
----------------
55,802
6,492
----------------
49,310
$
581,549
307,045
----------------
274,504
172,480
----------------
102,024
(9,870)
(2,575)
----------------
89,579
12,907
----------------
76,672
$
474,868
257,651
----------------
217,217
131,443
----------------
85,774
(4,047)
4,312
----------------
86,039
14,477
----------------
71,562
$
379,751
224,027
----------------
155,724
105,522
----------------
50,202
(3,965)
2,333
----------------
48,570
10,778
----------------
37,792
$
338,644
211,041
----------------
127,603
97,876
----------------
29,727
(4,185)
1,927
----------------
27,469
5,461
----------------
22,008
-
----------------
$
49,310
=========
(222)
----------------
76,450
$
=========
(11,040)
----------------
$
60,522
=========
924
----------------
38,716
$
=========
7,207
----------------
29,215
$
=========
1.65
$
$
-
$
1.65
1.56
$
$
-
$
1.56
$
$
$
2.58
(0.01)
2.57
$
$
$
2.52
(0.39)
2.13
$
$
$
1.34
0.03
1.37
$
$
$
2.36
(0.01)
2.35
$
$
$
2.29
(0.35)
1.94
$
$
$
1.28
0.03
1.31
$
$
$
0.78
0.26
1.04
$
$
$
0.75
0.25
1.00
29,919
31,605
29,710
32,589
28,356
31,261
28,189
29,548
28,089
29,199
27
ITEM 6. SELECTED FINANCIAL DATA, CONTINUED
As of last day of February,
(in thousands)
2004
--------------------- --------------------- --------------------- --------------------- ---------------------
2006
2003
2005
2002
Balance Sheet Data:
Working capital (1)
Total assets
Long-term debt
Shareholders' equity (3)
Cash dividends
$
185,568
857,744
254,974
475,377
-
$
156,312
811,449
260,000
420,527
-
$
166,445
489,609
45,000
350,103
-
$
163,452
405,629
55,000
289,602
-
$
182,791
357,558
55,000
250,326
-
(1) Fiscal year 2005, 2004, 2003 and 2002 results presented include 100 percent of the results of Tactica under
the line item, "Income (loss) from discontinued segment’s operations and impairment of related assets, net
of tax.” We acquired a 55 percent interest in Tactica in March 2000. On April 29, 2004 we completed the
sale of our interest in Tactica back to certain of its key operating manager-shareholders. Accordingly, the
results of operations of Tactica have been reclassified out of income from continuing operations and
working capital has been restated to eliminate the impact of Tactica's current assets and current liabilities.
Also, in the fourth fiscal quarter of 2004, we recorded a loss of $5,699 from the impairment of Tactica
goodwill, net of $1,938 of related tax benefits. Our consolidated financial statements for fiscal 2005 (for the
period of time we owned Tactica), 2004, 2003, 2002 and 2001, as restated include 100 percent of Tactica's
net income or loss because Tactica had accumulated a net deficit at the time that we acquired our ownership
interest, and because the minority shareholders of Tactica had not adequately guaranteed their portion of the
accumulated deficit.
(2) In fiscal 2003, we adopted Emerging Issues Task Force Abstract 01-9 ("EITF 01-9"). EITF 01-9 requires
that certain vendors record certain consideration given to customers as reductions of sales, rather than as
selling, general, and administrative expenses. Items totaling $3,930 in fiscal 2002, were classified as selling,
general, and administrative expenses have been reclassified as reductions to net sales.
(3) No common shares were repurchased during the fiscal years ended 2006, 2003 and 2002. In fiscal 2005, we
repurchased 757,710 common shares at a cost of $25,039. In fiscal 2004, we repurchased 806,126 common
shares at a cost of $20,572.
28
ITEM 7. 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 management’s
current expectations. Actual results may differ materially due to a number of factors, including those discussed
on Page 4 of this report in the section entitled "Disclosure Regarding Forward-Looking Statements,” Item 1A.
"Risk Factors,” and in Item 7A. "Quantitative and Qualitative Disclosures About Market Risk."
OVERVIEW OF THE YEAR'S ACTIVITIES
We have grown our brand portfolio by acquiring well-recognized brands from larger consumer products
companies, as well as other brands from smaller private companies. The brands we have purchased from larger
consumer products companies have long histories of support and brand development. We believe that at the
time we acquired them they were considered “non-core” by their previous owners and did not benefit from
focused management or strong marketing support. When we acquire brands from smaller private companies, we
usually do so because we believe they have been constrained by the limited resources of their prior owners.
After acquiring a brand, we seek to increase its sales, market share and distribution in both existing and new
channels. We pursue this growth through increased spending on advertising and promotion, new marketing
strategies, improved packaging and formulations and innovative new products.
In fiscal 2006, we continued to focus attention on growth opportunities on the international side of our
business. We have reconfigured sales and distribution arrangements in certain key European and Latin
American markets. Over the past year we have also set up distribution arrangements in a number of countries
where we previously have not done significant business. We believe this has staged us to continue to extend the
reach of our existing product portfolio abroad.
Recently, in certain European and Asian Markets, we secured the rights to introduce a line of hair care
appliances under the Toni & Guy® brand name. Toni & Guy® is an international chain of hundreds of hair
salons throughout Europe that has expanded operations into certain key urban markets in the United States. We
believe our association with Toni & Guy® will create a new sales opportunities for our products in Europe.
Domestically, our core business continues to present challenges as we operate in mature markets where
we already own significant market share. Our Company and industry are also facing challenges – sharply rising
energy costs, reduced sales and increased costs due to the economic impact from hurricanes, and domestic and
international marketplace pressures. Continued consolidation and growth in the largest of retailers has created a
very competitive environment that requires careful target pricing, superb customer service, operational
excellence in order to maintain deliveries and continuous product and process innovation. In this environment,
we believe that a key way we will grow is by becoming highly operationally effective and efficient.
We are now in the second year after the implementation of our global information system (which
became operational for most of our Personal Care segment in September 2004). We continue to devote
substantial internal resources to extending the functionality and performance of the system. We believe that
timely and effective change and evolution in our systems will increase the total value proposition we offer to
our customers and consumers, and thus increase our competitive advantage.
Over the last year, we pursued two key initiatives to extend the reach of our business information
systems. First, we converted our Housewares division to our new systems. Our Housewares segment
distribution and logistics requirements differ significantly from our traditional Personal Care segment business.
In our Housewares segment, we were required to improve our ability to deliver larger, more complex
29
assortments in smaller individual item volumes to a much more diverse group of retailers, as compared to our
Personal Care segment. The systems change-over for the Housewares segment occurred in mid-February 2006.
Conversions of this nature involve extremely complex processes, characterized by interruptions and the
diversion of management's attention for a period of time after the conversion as the organization adapts to the
new system and seeks to respond quickly to its day-to-day operations requirements. During the initial months
after the transition, we experienced some warehouse order processing and shipment delays resulting from
software issues and adapting to the new equipment, new employees, and the operation of the new distribution
facility. We continue to implement several significant functionality enhancements related to the Housewares
segment's systems, and expect this process to continue during fiscal 2007.
Our second key initiative over the past year has been to consolidate and rationalize our U.S. domestic
distribution capability. In the second quarter of fiscal 2006, we began construction of a 1,200,000 square foot
distribution facility in Southaven, Mississippi. In November 2005, we took possession of the completed
facility. Since then we have been transferring inventories to the new facility in stages. We now ship our
houseware, grooming, skin care, and hair care products out of the new facility.
Our next transition will be to move the balance of our domestic hair care appliance inventory from our
existing 619,000 square foot facility in Southaven to the new 1,200,000 square foot facility. The new facility
represents a complete, state-of-the-art distribution system and a significant additional technology investment for
the Company. When fully matured, the new facility will become a seamless physical extension of our
information technology system, and significantly extend our flexibility and effectiveness in serving our
customers by delivering the right product, in the right quantities, at the right price and the right time.
We believe these efforts and investments continue to stage us for the next level of growth as we now
have an infrastructure well poised to handle additional shipment volume. Over the next fiscal year, our internal
focus will be to integrate our Latin American operations into our operating system, and to look at additional
opportunities to increase the efficiency of our supply chain through improved systems and processes. Our
Housewares and Personal Care products businesses have begun to benefit from each segment’s industry specific
expertise as we select best practices from each segment’s business on how to bring new product to market. We
believe there are continued opportunities for increasing our efficiency and eliminating cost from our processes
through streamlining and careful process consolidation of both segment’s supply chain operations.
Financial Highlights from Fiscal 2006
• Consolidated net sales increased 1.4 percent, or $8,198, to $589,747 in fiscal 2006 versus $581,549 in
fiscal 2005. Our Housewares segment provided 8.2 percentage points of consolidated net sales growth,
or $47,657 over a full year of operations. Our Personal Care segment experienced a decline in sales of
7.9 percent, or $39,459, which is a 6.8 percentage point reduction based on consolidated net sales.
• From a geographic perspective, net sales in the United States grew 2.6 percent, or $12,408, Latin
America grew 27.1 percent, or $6,767, Canada grew 7.8 percent, or $1,624, and European and other
international operations (principally the United Kingdom) experienced an overall 20.8 percent decline in
net sales, or $12,601.
• Our net sales growth includes the benefit of a net positive foreign exchange impact of $1,204.
30
• Consolidated operating income declined 30 percent or $30,646 under the prior year. The change was
due to increased cost of goods sold and increased selling, general and administrative costs. Key
elements of increased cost of goods sold were raw materials price increases and product mix changes.
Key elements of increased selling, general and administrative costs were increased personnel costs
partially offset by lower incentive compensation costs, higher depreciation and amortization, increased
media advertising, higher warehousing costs, higher outbound freight costs, increased property rental
expense, and non-recurring costs associated with the consolidation of inventories and their transition to
our new 1,200,000 square foot distribution facility in Southaven, Mississippi.
•
Interest expense was $16,866 in fiscal 2006 compared to $9,870 in fiscal 2005. The increase was the
result of recognizing a full year’s worth of interest cost associated with our OXO acquisition, higher
variable interest rates, and $914 of IRS interest costs incurred due to the settlement of a tax audit.
• Other income (expense), net was $1,290 in fiscal 2006 compared to ($2,575) in fiscal 2005. Significant
items contributing to the fiscal 2006 amount were $463 of interest income on an income tax refund,
$400 of income from a favorable litigation settlement, a gain on the sale of a distribution facility of
$1,305 and a loss on a bankruptcy settlement of $1,550. Significant items in the fiscal 2005 amount
included an unrealized loss on marketable securities of ($3,410), interest income of $359, and other
miscellaneous income of $476.
•
Income tax expense was $6,492 in fiscal 2006, or 11.6 percent of earnings before income taxes,
compared to $12,907 in fiscal 2005, or 14.4 percent of earnings before income taxes. The decrease in
income tax was due to significantly lower earnings before income taxes, the trend of realizing more of
our income in lower tax rate jurisdictions, and tax losses in certain higher tax rate jurisdictions. These
impacts were offset by $2,792 of additional U.S. taxes arising from a repatriation of $48,554 in foreign
earnings as allowed under The American Jobs Creation Act of 2004.
• As a result of the items noted above, our net earnings decreased from $76,450 in fiscal 2005 to $49,310
in fiscal 2006 or, in percentage terms, by 35.5 percent below the prior year.
• Our diluted earnings per share decreased from $2.35 in fiscal 2005 to $1.56 in fiscal 2006, or by 33.5
percent.
Personal Care Segment
• Appliances. Products in this group include electronic curling irons, thermal brushes, hair straighteners,
hair crimpers, hair dryers, massagers, spa products, foot baths, electric clippers and trimmers. Net sales
for fiscal 2006 decreased 10.5 percent compared to fiscal 2005. The primary reason for the revenue
decline was our response to competitive pricing pressures both domestically and abroad, a loss of
product placement, weak market conditions in the United Kingdom where key retailers ended calendar
2005 with significant excess retail inventories, and high customer returns in the first quarter of fiscal
2006. Vidal Sassoon®, Revlon®, Hot Tools®, Dr. Scholl's®, Sunbeam®, and Health o Meter® were
key brands in this group.
• Grooming, Skin Care, and Hair Products. Net sales for fiscal 2006 increased 6.3% over fiscal 2005.
The gains were the result of the launch of new items and packaging in the U.S. and Latin America for
our Brut® and Sea Breeze® brands to which we are giving focused advertising support. Latin
American Brut® growth was exceptionally strong, with sales growth up 30.8 percent for the 2006 fiscal
year when compared to 2005 fiscal results. Including the U.S. and Canada, Brut® sales grew 15.9
31
percent for fiscal 2006 overall when compared to fiscal 2005 results. Our grooming, skin care, and hair
care portfolio includes the following brands: Brut®, Sea Breeze®, Skin Milk®, Vitalis®, Ammens®,
Condition 3-in-1®, Final Net®, Vitapointe®, TimeBlock® and Epil-Stop®.
• Brushes, Combs, and Accessories. Net sales for fiscal 2006 decreased 10.9 percent compared to fiscal
2005. The drop was primarily due to certain customers moving to other sourcing alternatives. We
continue to aggressively market a new line of Revlon® accessories and other product initiatives to
reverse the sales trend. We are emphasizing promotional placements across all channels of distribution
with key branded products, which we believe is helping us to secure new business in selected accounts.
Vidal Sassoon®, Revlon® and Karina® were key brands in this group.
Housewares Segment
• The Housewares segment’s reported net sales were $127,800 and $80,143 for fiscal years 2006 and
2005, respectively. We acquired OXO on June 1, 2004. Therefore, our reported net sales for fiscal
2005 did not include the net sales of OXO for the three months ended May 31, 2004, which was
$21,255. On a fully comparable period basis, our Housewares segment sales would be $127,800 for
fiscal 2006 versus $101,398 for the comparable months in fiscal 2005, for a net sales increase of 26.0
percent. Growth was driven by continued extension of our business within existing key customers and
the addition of a new line of hand tools featuring our highly desired non-slip Good Grips® comfort and
ergonomic design, which had significant initial shipments in the second half of fiscal 2006. In addition
to our new line of hand tools, we expanded our tea kettle line and introduced a line of unique silicone
based textile kitchen mitts and trivets which have been well received. Good Grips®, OXO Steel™ and
OXO SoftWorks® are our key brands in this group.
• During the third fiscal quarter of 2005, we began the implementation and transition of our Housewares
segment to our own internal management system. The transition was completed late in the fourth fiscal
quarter of 2006 and included a conversion of the warehousing, order fulfillment and shipment processes
for our OXO products to our new Global Enterprise Resource Planning system and the physical
movement of inventory from a leased managed distribution facility in Illinois to the Company’s new
distribution facility in Southaven, Mississippi. We continue to implement several significant
functionality enhancements related to the Housewares segment’s systems and expect this process to
continue during fiscal 2007.
During the initial months after the transition of our Housewares segment to the new systems and our
distribution facility in Southaven, Mississippi, we experienced warehouse order processing and
shipment delays. These delays were the result of both software issues and adapting to the new
equipment, new employees, and the operation of our new distribution facility. In response to these
issues, management dedicated additional personnel and sent a seasoned operations management team to
Southaven, Mississippi to assist local management in resolving technical and operational issues. The
delays did cause a backlog in orders and in some cases, order cancellations. We continue to work this
backlog down. We believe that the impact was immaterial in the fourth quarter of fiscal 2006; however,
we do expect some impact in the first fiscal quarter of 2007 due to lost revenue and costs associated with
related concessions and accommodations to certain customers, and associated start up costs of the
distribution center. The extent of the impact on the first fiscal quarter of 2007 is not yet determinable.
We continue to work the backlog down, and expect operations to normalize in fiscal 2007. We have
addressed these issues with the affected customers and believe that over the long-term, the strength of
our customer relationships will not be affected by the shipment delays.
32
While we believe we have taken appropriate measures to mitigate the recent shipment disruptions
arising from the transition of our Housewares segment, there can be no assurance that additional
disruptions will not occur.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, our selected operating data, in dollars, as a
percentage of net sales, and as a year-over-year percentage change.
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended (in thousands)
------------------------------------------------
2005
% Change
--------------------------
% of Net Sales (1)
---------------------------------------
2005
------------ ------------ ------------
------------ ------------
------------------------------------------------------------------------ --------------- --------------- ---------------
Net sales
06/05
05/04
2004
2006
2006
2004
Personal Care Segment
Housewares Segment
Total net sales
Cost of sales
Gross profit
Selling, general, and administrative expense
Operating income
Other income (expense):
Interest expense
Other income (expense), net
Total other income (expense)
Earnings before income taxes
Income tax expense
Income from continuing operations
Income (loss) from discontinued segment's
operations and impairment of related assets in
2004, net of tax
Net earnings
* Calculation is not meaningful
$
461,947
127,800
$
501,406
80,143
$
474,868
-
581,549
589,747
--------------- --------------- ---------------
474,868
--------------- --------------- ---------------
257,651
--------------- --------------- ---------------
217,217
323,189
307,045
266,558
274,504
195,180
172,480
131,443
--------------- --------------- ---------------
85,774
--------------- --------------- ---------------
102,024
71,378
(15,576)
(9,870)
(2,575)
(16,866)
1,290
(4,047)
4,312
--------------- --------------- ---------------
265
--------------- --------------- ---------------
86,039
14,477
--------------- --------------- ---------------
71,562
89,579
12,907
55,802
6,492
(12,445)
49,310
76,672
-
(222)
(11,040)
--------------- --------------- ---------------
$
60,522
======== ======== ========
49,310
76,450
$
$
78.3% 86.2% 100.0%
0.0%
21.7% 13.8%
------------ ------------ ------------
100.0% 100.0% 100.0%
------------ ------------ ------------
54.8% 52.8% 54.3%
------------ ------------ ------------
45.2% 47.2% 45.7%
-7.9%
59.5%
5.6%
*
------------ ------------
1.4% 22.5%
------------ ------------
5.3% 19.2%
------------ ------------
-2.9% 26.4%
33.1% 29.7% 27.7%
------------ ------------ ------------
12.1% 17.5% 18.1%
------------ ------------ ------------
13.2% 31.2%
------------ ------------
-30.0% 18.9%
------------ ------------
-2.6%
-2.9%
0.2%
-1.7%
-0.4%
-0.9%
0.9%
------------ ------------ ------------
0.1%
------------ ------------ ------------
9.5% 15.4% 18.1%
3.0%
2.2%
1.1%
------------ ------------ ------------
8.4% 13.2% 15.1%
-2.1%
0.0%
0.0%
-2.3%
------------ ------------ ------------
8.4% 13.1% 12.7%
======= ======= =======
*
25.2%
70.9% 143.9%
*
------------ ------------
*
------------ ------------
-37.7%
4.1%
-49.7% -10.8%
------------ ------------
7.1%
-35.7%
*
*
------------ ------------
-35.5% 26.3%
======= =======
(1) Net sales percentages by segment are computed as a percentage of the related segment's net sales to total net
sales. All other percentages shown are computed as a percentage of total net sales.
33
The following table sets forth, for the periods indicated, the impact acquisitions had on our net sales.
IMPACT OF ACQUISITION ON NET SALES
(in thousands)
Prior year's net sales
Components of net sales change
Core business net sales change
Net sales from acquisitions (non-core business net sales)
Change in net sales
Net sales
Total net sales growth
Core business net sales change
Net sales change from acquisitions (non-core business net sales change)
Fiscal Years Ended
---------------------------------------------------------------------------------
2005
-------------------------- -------------------------- --------------------------
379,751
$
474,868
581,549
$
$
2006
2004
3,075
103,606
(21,277)
29,475
54,043
41,074
-------------------------- -------------------------- --------------------------
95,117
-------------------------- -------------------------- --------------------------
$
474,868
=============== =============== ===============
581,549
106,681
589,747
$
$
8,198
1.4%
-3.7%
5.1%
22.5%
0.7%
21.8%
25.0%
14.2%
10.8%
In the table above, the percentages shown are the changes of each component as a percentage of the
prior year’s total net sales. Core business net sales change represents the change in net sales for business that
we operated over the same fiscal periods in the prior year. Net sales from acquisitions are net sales arising from
business acquired with no comparable sales in the prior fiscal period. The net sales from acquisitions in fiscal
2006 are the sales from our new Housewares division in the first fiscal quarter of the 2006 and the Skin Milk®
and TimeBlock® lines of skin care products through September 30, 2005. The Housewares segment was
acquired on June 1, 2004, accordingly, net sales for fiscal 2005 does not include Housewares sales for the first
fiscal quarter.
Net Sales:
Consolidated net sales increased 1.4 percent or $8,198 in fiscal 2006 over fiscal 2005. New product
acquisitions accounted for 5.1 percentage points, or $29,475 of the sales percentage growth over fiscal 2005.
Net sales from new product acquisitions included net sales for the first fiscal quarter of 2006 for our
Housewares segment (OXO) and the Skin Milk® and TimeBlock® lines of skin care products through
September 30, 2005. Core business growth (growth without acquisitions) showed an overall decline in fiscal
2006 of $21,277 or 3.7 percent. We experienced core business growth in our grooming, skin care and hair care
products business and our Housewares segment (net sales for the last 3 fiscal quarters of 2006), which
combined to provide 4.0 percentage points of net sales growth. This growth was partially offset by a negative
7.7 percentage point impact on net sales volume from declines in our appliances and our brushes, combs and
hair accessories business.
Consolidated net sales increased 22.5 percent or $106,681 in fiscal 2005 over fiscal 2004. New product
acquisitions accounted for 21.8 percentage points, or $103,606 of the sales growth over fiscal 2004. New
product acquisitions included all Housewares segment products, acquired in June 2004; Skin Milk® and
TimeBlock® lines of skin care products, acquired in September 2004; and seven months of sales of Brut®
men’s grooming products through September of 2004. Brut® was acquired on September 29, 2003, accordingly
the last five months of the 2005 fiscal year’s sales is treated as core sales because we have comparable sales for
the prior year. Core business growth (growth without acquisitions) in fiscal 2005 was $3,075 or 0.7 percent.
Core business growth came from our appliance businesses and grooming, skin care, and hair care products
34
business, providing 1.7 percentage points of our overall net sales growth, partially offset by the negative 1.0
percentage point impact of net sales volume declines in our brushes, combs and hair accessories business.
Segment Net Sales:
Net sales decreased 7.9 percent or $39,459 in our Personal Care segment in fiscal 2006 under fiscal
2005. On a percentage point basis (percent of total consolidated net sales), the net decline accounted for 6.8%
of the change in overall consolidated net sales. The grooming, skin care and hair care products business
provided 0.9 percentage points or $5,044 of our overall net sales growth. This was offset by declines of 7.0
percentage points, or $40,796 in our appliance business and 0.7 percentage points or $3,707 in our brushes,
combs and hair accessories business. The primary reason for the revenue decline was our response to
competitive pricing pressures both domestically and abroad, a loss of product placement, weak market
conditions in the United Kingdom where key retailers exited calendar 2005 with significant excess retail
inventories, and high customer returns in the first quarter of fiscal 2006. With the exception of the United
Kingdom, we experienced net sales growth in every other European market we operate in. In fiscal 2006,
appliances and brushes, combs and accessories accounted for 82 percent of the segment’s net sales while
grooming, skin care and hair care products accounted for 18 percent of the Personal Care segment’s net sales.
Net sales increased 5.6 percent or $26,538 in our Personal Care segment in fiscal 2005 over fiscal 2004.
$23,463 or 4.9 percentage points of the fiscal 2005 incremental net sales growth, was due to the acquisitions of
the Skin Milk® and TimeBlock® lines of skin care products in September 2004 and seven months of sales of
Brut® men’s grooming products through September of 2004. Brut® was acquired on September 29, 2003.
Accordingly, the last five months of fiscal 2005’s net sales was treated as core business sales because we had
comparable net sales for fiscal 2004. As previously discussed, core business growth in this segment contributed
$3,075 or 0.7 percentage points. Core business growth came from our appliance businesses and grooming, skin
care and hair care products business, providing 1.7 percentage points of our overall sales growth, offset by the
negative 1.0 percent impact of sales volume declines in our brushes, combs and hair accessories business. In
fiscal 2004, we sold certain niche products through various channels of distribution that accounted for $14,300
in fiscal 2004 net sales. We evaluated the financial results and effort required for this business and decided not
to continue marketing these products. We phased out of the business towards the end of fiscal 2004 and had
insignificant sales activity in fiscal 2005. Additionally, fourth quarter sales for fiscal 2005 were negatively
impacted by softer than expected holiday season sales across many categories of merchandise for certain
retailers. This, in turn, resulted in lower sales to these retailers in late January and early February 2005 as the
customers lowered their overall inventory levels. In fiscal 2005, appliances and brushes, combs and accessories
accounted for 84 percent of the segment’s net sales while grooming, skin care and hair care products accounted
for 16 percent of the segment’s net sales.
The Housewares segment’s reported net sales were $127,800 and $80,143 for fiscal years 2006 and
2005, respectively. Reported net sales for fiscal 2005 excluded $21,255 of pro forma net sales for the three
months ended May 31, 2004 since we did not acquire OXO until June 1, 2004. On a fully comparable period
basis, our Housewares segment sales would be $127,800 for fiscal 2006 versus $101,398 for the full fiscal 2005
year, for a net sales increase of 26.0 percent.
Growth has been driven by continued extension of our business within existing key customers, and the
addition of a new line of hand tools featuring our highly desired non-slip Good Grips® comfort and ergonomic
design, which had significant initial shipments in the second half of fiscal 2006. In addition to our new line of
hand tools, we expanded our tea kettle line and introduced a line of unique silicone based textile kitchen mitts
and trivets which have been well received. In fiscal 2006, food preparation products accounted for 76 percent
35
of the segment’s net sales, household cleaning tools accounted for 11 percent of the segment’s net sales, and
storage, organization, garden tools and all other categories accounted for 13 percent of the segment’s net sales.
As previously mentioned, the Housewares segment was in operation for the last nine months of fiscal
2005. The Housewares segment’s net sales during fiscal 2005 were $80,143. In fiscal 2005, food preparation
products accounted for 84 percent of the segment’s net sales, household cleaning tools accounted for 11 percent
of the segment’s net sales, and storage, organization, garden tools and all other categories accounted for 5
percent of the segment’s net sales.
Geographic Net Sales:
The following table sets forth, for the periods indicated, our net sales by geographic region, in dollars, as
a percentage of net sales, and as a year-over-year percentage change.
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended (in thousands)
------------------------------------------------
2005
% Change
--------------------------
% of Net Sales (1)
---------------------------------------
2005
------------ ------------ ------------
------------ ------------
------------------------------------------------------------------------ --------------- --------------- ---------------
Net sales by geographic region
05/04
06/05
2004
2006
2004
2006
$
United States
Canada
Europe and other
Latin America
2.6% 19.4%
7.8% 31.0%
-20.8% 21.0%
27.1% 125.7%
------------ ------------
1.4% 22.5%
======= =======
(1) Net sales percentages by geographic region are computed as a percentage of the geographic region’s net
397,856
15,801
50,154
11,057
--------------- --------------- ---------------
$
474,868
======== ======== ========
82.7% 81.7% 83.8%
3.8%
3.3%
3.6%
8.2% 10.4% 10.6%
2.3%
4.3%
5.4%
------------ ------------ ------------
100.0% 100.0% 100.0%
======= ======= =======
475,212
20,707
60,671
24,959
487,620
22,331
48,070
31,726
Total net sales
581,549
589,747
$
$
$
$
sales to total net sales.
In fiscal 2006, the United States accounted for 2.1 percentage points (percent of total consolidated net
sales), of our consolidated net sales growth, or $12,408, while international operations experienced an overall
0.7 percentage point decline, or $4,210 of our consolidated net sales growth. Latin American operations
accounted for 1.1 percentage points of our consolidated net sales growth, or $6,767. Canadian operations
accounted for 0.3 percentage points of our consolidated net sales growth, or $1,624. Europe and other country
operations accounted for a 2.1 percentage point decline, or a $12,601 consolidated net sales decline. Net sales
in the United Kingdom accounted for $16,209 of the European and other consolidated net sales decline due to
weak retail market conditions in most of our Personal Care segment product categories exacerbated by key
retailers ending calendar 2005 with significant excess retail inventories. With the exception of the United
Kingdom, we saw net sales growth in remaining European and other foreign markets in which we operate. Our
net sales growth included the benefit of a net positive foreign exchange impact of $1,204 in fiscal 2006. In
fiscal 2006 Canada, Europe and other, and Latin American regions accounted for approximately 22, 47 and 31
percent of international net sales, respectively.
In fiscal 2005, the United States accounted for 16.3 percent of our consolidated net sales growth, or
$77,356 while international operations provided 6.2 percent or $29,325 of our consolidated net sales growth.
Our net sales growth includes the benefit of a net positive foreign exchange impact of $4,260 in fiscal 2005.
Canada, Europe and other, and Latin American regions accounted for approximately 20, 57 and 23 percent of
international net sales, respectively.
36
Gross Profit Margins:
Gross profit, as a percentage of net sales, decreased to 45.2 percent in fiscal 2006 from 47.2 percent in
fiscal 2005. The 2.0 percent decrease in gross profit was due to:
• a combination of the higher costs of customer promotion programs which reduced net sales;
• a reduction in sales prices on certain key items in order to maintain our competitive position; and
• price increases on raw materials used in our grooming, skin care, and hair products.
Overall, margins benefited from favorable currency exchange rates; however, exchange rates were not as
favorable in 2006 as they were in 2005. The Canadian Dollar, Brazil Real and Mexican Peso were all a source
of exchange rate gains. These gains where somewhat offset by unfavorable exchange rates for the British
Pound and Euro in the second half of fiscal 2006. In fiscal 2006, almost all of our products were purchased in
U.S. dollars.
Gross profit, as a percentage of net sales, increased to 47.2 percent in fiscal 2005 from 45.7 percent in
fiscal 2004. The increase was primarily due to:
• a combination of sales mix changes to higher margin items resulting from the acquisition of six liquid
and powder hair and skin care brands from The Procter & Gamble Company in October 2002, the Brut®
acquisition in September 2003 and the OXO acquisition in June 2004;
• selected product cost decreases; and
• new item introductions at higher margins, all of which were partially offset by selling price decreases on
selected items.
Favorable currency exchange rates for the British Pound and Euro also helped improve margins in fiscal
2005 and fiscal 2004. During fiscal 2005, 41.3 percent of International sales were in British Pounds or Euros.
In fiscal 2005, almost all of our products were purchased in U.S. dollars.
Selling, general, and administrative expense ("SG&A"):
SG&A increased to 33.1 percent of net sales in fiscal 2006 from 29.7 percent in fiscal 2005. The 3.4
percent increase in SG&A between fiscal 2006 and fiscal 2005 was principally due to:
•
increased personnel expenses partially offset by lower incentive compensation costs;
• higher depreciation associated with our new information system;
•
increased advertising;
• higher warehouse costs due to the use of outside third party warehouses to manage and distribute certain
inventories which were consolidated into our new 1,200,000 square foot distribution facility in
Mississippi (as more fully discussed in Note 2 to our consolidated financial statements);
• non-recurring moving and start-up costs incurred in fourth fiscal quarter 2006 in connection with the
physical transition to the new distribution facility;
• higher outbound freight costs (primarily from a sharp rise in fuel surcharges);
37
• higher royalty costs due to the growth in the Housewares segment; and
•
increased operating rent expense and property taxes.
SG&A increased to 29.7 percent of net sales in fiscal 2005 from 27.7 percent in fiscal 2004. The 2.0
percent increase in SG&A between fiscal 2005 and fiscal 2004 was principally due to:
•
•
•
increased personnel expenses and incentive compensation costs;
increased consulting fees and depreciation associated with our new information system, which was
placed into service early in our third fiscal quarter of fiscal 2005;
increased consulting fees resulting from our compliance efforts with Section 404 of the Sarbanes-Oxley
Act of 2002; and
• an exchange rate loss of $1,142 in fiscal 2005 versus an exchange rate gain of $1,216 in fiscal 2004.
Operating Income by Segment:
Operating income by operating segment for fiscal 2006, 2005 and 2004 was as follows:
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended (in thousands)
------------------------------------------------
2005
% Change
--------------------------
% of Net Sales (1)
---------------------------------------
2005
------------ ------------ ------------
------------ ------------
------------------------------------------------------------------------ --------------- --------------- ---------------
Operating income by segment
06/05
05/04
2006
2004
2006
2004
Personal Care
Housewares
Total operating income
* Calculation is not meaningful
$
37,260
34,118
$
76,993
25,031
$
85,774
-
--------------- --------------- ---------------
$
85,774
======== ======== ========
102,024
71,378
$
$
8.1% 15.4% 18.1%
0.0%
26.7% 31.2%
------------ ------------ ------------
12.1% 17.5% 18.1%
======= ======= =======
-51.6% -10.2%
*
36.3%
------------ ------------
-30.0% 18.9%
======= =======
(1) Operating income percentages by segment shown are computed as a percentage of the segments’ net sales.
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 expenses 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. In connection with the acquisition of OXO, we agreed that World Kitchen, Inc. would perform
certain corporate functions for OXO for a transitional period of time. The costs of these functions are reflected
in SG&A for the Housewares segment’s operating income. These costs were incurred through the end of fiscal
2006. During this transitional period, we did not make an allocation of our corporate overhead to OXO. We
expect to begin making allocations of our corporate overhead to OXO during the first fiscal quarter of 2007
since the transition services provided by World Kitchen, Inc. have terminated and will be assumed by Helen of
Troy internally going forward. As a result of these allocations, there may be some reduction in operating
income for the Housewares segment, offset by an equal increase in operating income for the Personal Care
segment. The extent of this operating income impact between the segments has yet to be determined.
The Personal Care segment's operating income decreased $39,733 or 51.6 percent for fiscal 2006
compared to fiscal 2005 and decreased $8,781, or 10.2 percent for fiscal 2005 compared to fiscal 2004. The
Personal Care segment’s operating income as a percentage of the segment’s net sales was 8.1, 15.4, and 18.1
percent for fiscal 2006, 2005 and 2004, respectively. Sales declines, increased cost of sales and increases in
38
SG&A as previously discussed, accounted for the decrease in operating income in fiscal 2006 from fiscal 2005.
In fiscal 2005, increases in SG&A, as previously discussed, accounted for most of the decline from fiscal 2004.
The Housewares segment’s operating income increased $9,087 or 36.3 percent for fiscal 2006 compared
to fiscal 2005. $7,388 of the increase was due to the inclusion of the first fiscal quarter’s operations in fiscal
2006, while fiscal 2005 did not include first quarter operations since we did not acquire OXO until June 1,
2004. Gross profit declined due to product mix as OXO expanded its food preparation business, adding a
number of items which have lower margins, but carry higher price points. In 2005, OXO incurred price
increases from certain suppliers due to increases in resin and stainless steel materials prices. The Housewares
segment’s operating income as a percentage of the segment’s net sales was 26.7 and 31.2 percent for fiscal 2006
and 2005, respectively.
The Houseware segment’s decline in operating income as a percentage of the segment’s net sales was
4.5 percent in fiscal 2006 over fiscal 2005. This was principally due to higher warehouse costs due to the use of
outside third party warehouses to manage and distribute certain inventories which were consolidated into our
new 1,200,000 square foot distribution facility (as more fully discussed in Note 17 to our consolidated financial
statements), and one-time moving and start-up costs incurred in the fourth fiscal quarter in connection with the
physical transition to the new distribution facility.
Interest expense and Other income (expense):
Interest expense increased to $16,866 in fiscal 2006 compared to $9,870 in fiscal 2005. The overall
increase in interest expense is the result of the inclusion of a full year’s interest expense from the use of both
short-term and long-term debt to fund the fiscal 2005 acquisitions, $914 of interest incurred on IRS tax
payments made to settle tax disputes related to prior years (see Note (8) to our consolidated financial
statements), and an increase in interest rates on our variable rate debt.
Interest expense increased to $9,870 in fiscal 2005 compared to $4,047 in fiscal 2004. The overall
increase in interest expense is the result of the use of both short-term and long-term debt to fund the acquisition
of OXO business and TimeBlock® and Skin Milk® brands (see Notes (2), (4), (5), (7) and (17) to our
consolidated financial statements for related discussions of new debt financings and the OXO business, and
brand acquisitions).
Other income (expense) was $1,290, ($2,575) and $4,312 in fiscal 2006, 2005 and 2004, respectively.
The following schedule shows key components of other income (expense):
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended (in thousands)
------------------------------------------------
2005
% Change
--------------------------
% of Net Sales (1)
---------------------------------------
2005
------------ ------------ ------------
------------ ------------
------------------------------------------------------------------------ --------------- --------------- ---------------
Other income (expense):
06/05
05/04
2006
2006
2004
2004
Interest income
Realized and unrealized gain (losses) on securities
Litigation settlement gain, net
Miscellaneous other income
Total other income (expense)
* Calculation is not meaningful
$
$
$
889
(135)
400
136
359
(3,410)
-
476
438
311
2,600
963
--------------- --------------- ---------------
$
4,312
======== ======== ========
(2,575)
1,290
$
$
0.2%
0.0%
0.1%
0.0%
0.1%
-0.6%
0.0%
0.1%
0.1%
0.1%
0.5%
0.2%
------------ ------------ ------------
0.9%
======= ======= =======
-0.4%
0.2%
147.6% -18.0%
*
-96.0%
*
*
-71.4% -50.6%
------------ ------------
-150.1% -159.7%
======= =======
(1) Sales percentages shown are computed as a percentage of total net sales.
39
Fiscal year 2006 interest income was higher than the previous year primarily due to the receipt of $463
of interest on an income tax refund. Interest income continued to trend lower in fiscal 2005 and 2004 due to
lower levels of temporarily invested cash being held each year.
Realized and unrealized losses on securities for fiscal 2006 included a $30 loss on marketable securities
acquired in connection with the sale of Tactica (see Note 16 to our consolidated financial statements), and $95
of unrealized losses on other securities. The principal items comprising miscellaneous other income for fiscal
2006 includes a gain on the sale of a distribution facility of $1,304 (see Note (2) to our consolidated financial
statements) offset by a loss on a bankruptcy settlement of $1,550 (see Note (16) to our consolidated financial
statements).
Realized and unrealized losses on securities for fiscal 2005 included a $2,910 loss on marketable
securities acquired in connection with the sale of Tactica (see Note (16) to our consolidated financial
statements). These marketable securities carried a restriction that prevented us from disposing of the stock prior
to July 31, 2005, and were accordingly classified as stock available for sale. At acquisition, the securities had a
market value of $3,030. At February 28, 2005, the market value of these securities was $120. Management
determined the decline in market value to be other than temporary and accordingly recorded the $2,910 loss.
We recorded other income of $400 and $2,600 in fiscal 2006 and 2004, respectively, for favorable
litigation settlements. We pursued these cases in order to protect certain trademark and other intangible
property rights we own.
Income tax expense:
Our fiscal 2006 income tax expense was 11.6 percent of net income before taxes, continuing a trend
towards lower rates over the past years. The current year’s rate is substantially lower than the 14.4 percent and
16.8 percent rates that we experienced in fiscal 2005 and 2004, respectively. The decline was due to the
continuing trend of more of our income in fiscal 2006 and 2005 being taxed in lower tax rate jurisdictions as
non-U.S. operations continue to become a larger portion of our business. The Company established a Macao
offshore company (“MOC”) and began operating from Macao in the third quarter of fiscal 2005. As a MOC
we have been granted an indefinite tax holiday and currently pay no taxes. In addition, in fiscal 2006 we
incurred tax losses in certain higher rate jurisdictions, this impact was offset somewhat by $2,792 of additional
U.S. tax arising from our fourth quarter repatriation of $48,554 in foreign earnings as allowed under The
American Jobs Creation Act of 2004 (see Note (8) to our consolidated financial statements).
In fiscal 2005 we decreased our tax accruals by $2,046 due to the settlement reached with the United
States Internal Revenue Service for fiscal years 2000 through 2002. Had these accruals not been adjusted, our
income tax expense for fiscal 2005 would have been 16.7 percent of net income before taxes.
DISCONTINUED OPERATIONS
As more fully described in Note (16) to our consolidated financial statements, on April 29, 2004 we
completed the sale of our 55 percent interest in Tactica back to certain shareholder-operating managers. In
exchange for our 55 percent share of Tactica and the release of $16,396 of its secured debt and accrued interest
owed to us, we received marketable securities, intellectual properties, and the right to certain tax refunds.
Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144") provides accounting guidance for accounting for segments to be disposed by
sale and, in our circumstances, requires us to report Tactica as a discontinued operation. SFAS 144 requires us
40
to report Tactica's operating results, net of taxes, as a separate summarized component after net income from
continuing operations for each year presented. In fiscal 2005 we recorded a loss of $222 net of taxes in
connection with the discontinued operations of Tactica. For fiscal 2004, in connection with the discontinued
operations of Tactica and the impairment of its goodwill, we recorded a total loss of $11,040 net of taxes. The
accompanying consolidated statements of income and consolidated statements of cash flows contain all
appropriate reclassifications for each year presented.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
Selected measures of our liquidity and capital resources as of fiscal year end 2006 and 2005 are shown
below:
Accounts Receivable Turnover (Days) (1)
Inventory Turnover (Times) (1)
Working Capital
Current Ratio
Ending Debt to Equity Ratio (2)
Return on Average Equity (1)
2006
2005
--------------------- ---------------------
75.2
1.9
$185,568
2.5 : 1
55.7%
11.0%
70.0
2.4
$155,738
2.2 : 1
64.2%
19.9%
(1) Accounts receivable turnover, inventory turnover, and return on average equity computations use 12 month
trailing sales, cost of sales or net income components as required by the particular measure. The current
and four prior quarters' ending balances of accounts receivable, inventory, and equity are used for the
purposes of computing the average balance component as required by the particular measure.
(2) Total debt is defined as all debt outstanding at the balance sheet date. This includes the sum of the
following lines on our consolidated balance sheets: "Current portion of long-term debt" and "Long-term
debt, less current portion.” For further information regarding this financing, see Notes (2), (4), (5), (7) and
(17) to our consolidated financial statements and our discussion below under "Financing Activities.”
Operating Activities:
Our cash balance was $18,320 at the end of fiscal 2006 compared to $21,752 at the end of fiscal 2005.
Operating activities provided $34,755 of cash during fiscal 2006, compared to $45,370 during fiscal 2005.
In fiscal 2006, our accounts receivable decreased $4,450 to $107,289 while our accounts receivable
turnover increased to 75.2 days from 70.0 days in fiscal 2005. This calculation is based on a rolling five quarter
accounts receivable balance. We have experienced a trend towards increase in domestic and international
receivable turnover days due to retail shipping requirements and marketing, promotional, and incentive
programs we offer to remain competitive. This has required more follow-through and collections management
on each account in order to help our customers resolve billing issues and properly issue and apply any credits
due customers. We also experienced collection delays in the third and fourth quarters of fiscal 2005 associated
with the conversion to new information systems. We believe these issues were resolved as we gained operating
experience with the new systems. These processes have extended our collection cycle, but have not had a
negative impact on our overall credit quality or ultimate collection rates. Our international business (primarily
from European and Latin American countries) has longer credit terms than our domestic business.
In fiscal 2006, net income provided sufficient operating capital to fund $30,926 of inventory growth.
Over the fiscal year, inventory turnover decreased to 1.9 from 2.4 in fiscal 2005. The decreased turns were
caused by inventory increases incurred to build up certain inventories due to new product introductions and to
buffer against any disruptions in late fiscal 2006 and early fiscal 2007 from our relocation of certain inventories
41
as we consolidated our warehouse operations into our new Southaven, Mississippi distribution facility. In
addition, in some product categories, we increased our purchases to take advantage of favorable current prices,
which we expect may increase as a result of recent increases in petroleum prices and the prices of raw materials
such as copper, steel and plastics.
Working capital increased to $185,568 at the end of fiscal 2006 compared to $155,738 at the end of
fiscal 2005. Our current ratio increased to 2.5:1 in fiscal 2006 from 2.2:1 in fiscal 2005. Our current ratio
increased because our current assets grew in percentage terms faster than our current liabilities and long term
debt.
Investing Activities:
In fiscal 2006, investing activities used $35,264 of cash compared with $279,116 used in fiscal 2005.
Listed below are some significant highlights of our 2006 investing activities:
• During the second fiscal quarter of 2006, we commenced construction of a 1,200,000 square foot
distribution facility in Southaven, Mississippi. On November 22, 2005 we took possession of the
completed facility paying a final purchase price of $33,744. Total costs of the project, including
warehouse equipment and fixtures was $45,862. The project was funded out of a combination of cash
from operations, our existing revolving line of credit and draws against $15,000 of Industrial Revenue
Bonds, as further discussed under Note (7) to our consolidated financial statements and the proceeds
from the sale of our existing facility in Southaven, Mississippi, as discussed below.
• On February 2, 2006, we sold a 619,000 square foot distribution facility in Southaven, Mississippi for
$16,850 recording a gain on the sale of $1,304. We are currently in the process of transitioning the
operations in this facility to the new distribution facility discussed above. We entered into a temporary
lease agreement with the new owners through April 2006 calling for monthly rentals of $141 per month
including insurance and property tax payments. After April 2006, we will pay rent for this facility on a
month to month basis, as required in order for us to complete our transition of operations to our new
facility.
• For the 2006 fiscal year, we incurred capital expenditures of $267 on our Global Enterprise Resource
Planning System. Capital expenditures on this system have moderated over levels of spending in the past
two years. We expect to continue to invest in functionality enhancements to the new system in the
quarters to follow. Also during the latest fiscal year, we spent $842 converting OXO to the new system.
We currently estimate the balance of costs yet to be incurred on enhancements and the OXO conversion
to be $507.
•
In fiscal 2006, we also invested $1,497 in new molds and tooling, $689 on distribution equipment and
material handling systems at our existing operational facilities, $1,183 on general computer software and
hardware and $1,589 for recurring additions and/or replacements of fixed assets in the normal and
ordinary course of business.
• We continue to invest in new patents. During the first three quarters of fiscal 2006 we spent $438 on
new patent costs and registrations.
42
Listed below are some significant highlights of our 2005 and 2004 investing activities:
• On June 1, 2004 we spent $273,173 to acquire certain assets and liabilities of OXO International from
WKI Holding Company, Inc. OXO serves as the underlying business platform for our new Housewares
segment, offering home product tools in several categories including kitchen, cleaning, barbecue,
barware, garden, automotive, storage and organization. During fiscal 2005, $262,228 of the purchase
price and subsequent purchase price adjustments were recorded under the investing activities section of
the cash flow statement for the fiscal year ended February 28, 2005.
• On September 29, 2004, we acquired certain assets related to the worldwide production and distribution
of TimeBlock® and Skin Milk® body and skin care products lines from Naterra International, Inc.
TimeBlock® is a line of clinically tested anti-aging skin care products. Skin Milk® is a line of body,
bath and skin care products enriched with real milk proteins, vitamins and botanical extracts. The assets
consist principally of patents, trademarks and trade names, product formulations and production
technology, distribution rights and customer lists. The Company paid the purchase price of $12,001 in
cash funded out of the Company's revolving line of credit. The purchase price was allocated $11,906 to
trademarks and $95 to property and equipment. The entire purchase price was recorded in the investing
activities section of the cash flow statement for the fiscal year ended February 28, 2005.
• On December 15, 2004, we sold a 12,000 square foot office facility in Hong Kong for $6,726 resulting
in a $22 loss. The facility was previously used as a procurement office, procurement showroom and
staff training site. These functions were moved to other facilities we maintain in Macao and China. The
proceeds from the sale of this facility are recorded under the investing activities section of the cash flow
statement for the fiscal year ended February 28, 2005.
• During fiscal 2005, we incurred capital expenditures of $5,760 on our Global Enterprise Resource
Planning System. On September 7, 2004, we went live on the new system. Capital spending on the
initial implementation was substantially complete. In fiscal 2005, we spent $198 to begin the process of
converting OXO to the new system.
• During fiscal 2005, we also invested $991 in new molds and tooling, $1,734 on land to be used for
future expansion, $876 on additional computer software and hardware and $2,101 for recurring
additions and/or replacements of fixed assets in the normal and ordinary course of business.
• During fiscal 2005, we also invested an additional $374 in patent development costs primarily on behalf
of our Housewares segment.
•
In fiscal 2004, we spent $55,255 to acquire from Unilever NV all marketing rights, formulas, fixed
assets and production process know-how to distribute the Brut® brands in North America, Latin
America and the Caribbean. This transaction is more fully described in Note (4) to the consolidated
financial statements.
• We spent $947 in fiscal 2004 completing the outfitting and startup of our former Mississippi distribution
facility, $2,142 on our new office facility in the UK, $5,523 on our global information system, and $444
for normal and recurring additions and/or replacements of fixed assets in the normal and ordinary course
of business.
43
Financing Activities:
During fiscal 2006, financing activities used $2,923 of cash. Highlights of those activities follow.
• During fiscal 2006, 161,675 share option grants were exercised for common shares providing $1,798 of
cash and $402 of tax benefits. Purchases through our employee stock purchase plan of 22,171 shares
provided an additional $396 of cash. No common shares were repurchased during the fiscal year.
•
In August, 2005, we entered into a Loan Agreement with the Mississippi Business Finance Corporation
(the “MBFC”) in connection with the issuance by the MBFC of up to $15,000 Mississippi Business
Finance Corporation Taxable Industrial Development Revenue Bonds, Series 2005 (Helen of Troy LP
Southaven, MS Project) (the “Bonds”). The proceeds of the Bonds are to be used for the acquisition and
installation of equipment, machinery and related assets located in our new Southaven, Mississippi
distribution facility then under construction. Interim draws, accumulating up to the $15,000 limit can
be made through May 31, 2006, with interest paid quarterly. When all draws are completed, the
outstanding principal will convert to five-year Bonds with principal paid in equal annual installments
beginning May 31, 2007, and interest paid quarterly. The Bonds can be prepaid without penalty any
time after August 11, 2006.
The Bonds will bear interest at a variable rate as elected by the Company: based on either Bank of
America’s prime rate, or the respective 1, 2, 3, 6, or 12-month LIBOR rate plus a margin of 0.75% to
1.25% based upon the "Leverage Ratio" at the time. The "Leverage Ratio" is defined by the Loan
Agreement as the ratio of total consolidated indebtedness, including the subject funding on such date to
consolidated EBITDA (earnings before interest, taxes, depreciation and amortization) for the period of
the four consecutive fiscal quarters most recently ended.
In September 2005 we made an initial draw of $4,974 under the Bonds. At that time, pursuant to the
loan agreement, we elected a 12-month LIBOR rate plus a margin of 1.125 percent. As of February 28,
2006, we had principal outstanding of $4,974 under this agreement with interest payable at 5.42 percent.
In connection with the new Loan Agreement, we incurred $91of financing costs, which will be
amortized over the life of the new agreement.
As of February 28, 2006, we were in compliance with all covenants under all of our outstanding
financing agreements.
During fiscal 2005, financing activities provided $202,451 of cash. Highlights of those activities follow.
• During fiscal 2005, we entered into a series of financing transactions that established a new five-year,
$75,000 revolving credit facility, cancelled an existing $50,000 revolving credit facility, borrowed and
subsequently repaid $200,000 under a Term Loan Credit Agreement, and issued $225,000 of floating
rate senior debt with five, seven and ten year maturities.
On June 1, 2004, we acquired certain assets and liabilities of OXO International for a net cash purchase
price of $273,173, including the assumption of $4,040 of certain liabilities. To fund the acquisition, we
entered into a five-year $75,000 Revolving Line of Credit Agreement, dated as of June 1, 2004, with
Bank of America, N.A. and other lenders and a one year $200,000 Term Loan Credit Agreement, dated
as of June 1, 2004, with Banc of America Mezzanine Capital, LLC. The purchase price of the OXO
International acquisition was funded by borrowings of $73,173 under the Revolving Line of Credit
Agreement and $200,000 under the Term Loan Credit Agreement.
44
Borrowings under the Revolving Line of Credit Agreement accrue interest equal to the higher of the
Federal Funds Rate plus 0.50 percent or Bank of America's prime rate. Alternatively, upon timely
election by the Company, borrowings accrue interest based on the respective 1, 2, 3, or 6-month LIBOR
rate plus a margin of 0.75 percent to 1.25 percent based upon the "Leverage Ratio" at the time of the
borrowing. The "Leverage Ratio" is defined by the Revolving Line of Credit Agreement as the ratio of
total consolidated indebtedness, including the subject funding on such date to consolidated EBITDA for
the period of the four consecutive fiscal quarters most recently ended, with EBITDA adjusted on a pro
forma basis to reflect the acquisition of OXO and the disposition of Tactica. The rates paid on various
draws during the period from June 1, 2004 through February 28, 2005 ranged from 2.195 percent to
5.500 percent. The new credit line allows for the issuance of letters of credit up to $10,000. Outstanding
letters of credit reduce the $75,000 borrowing limit dollar for dollar. Upon the execution of this credit
facility, our previous $50,000 unsecured revolving credit facility with Bank of America was cancelled.
As of February 28, 2006, no borrowings or letters of credit were outstanding under the Revolving Line
of Credit. All amounts are due and the facility terminates on June 1, 2009. The five, seven and ten year
notes mature on June 29, 2009, 2011 and 2014, respectively. The Revolving Line of Credit Agreement
requires the maintenance of certain Debt/EBITDA, fixed charge coverage ratios, and other customary
covenants. The obligations under the agreement are unsecured. The agreement has been guaranteed, on
a joint and several basis, by the parent company, Helen of Troy Limited, and certain U.S. subsidiaries.
Borrowings under the $200,000 Term Loan Credit Agreement were subsequently paid off with the
proceeds of the funding of $225,000 Floating Rate Senior Notes on June 29, 2004, as discussed in Notes
(5) and (7) to the consolidated financial statements. For the period, outstanding borrowings under the
Term Loan Credit Agreement accrued interest at LIBOR plus a margin of 1.125 percent.
On June 29, 2004, we closed on a $225,000 Floating Rate Senior Note ("Senior Notes") financing
arranged by Banc of America Securities LLC with a group of ten financial institutions. The Senior
Notes consist of $100,000 of five year notes, $50,000 of seven year notes, and $75,000 of ten year notes.
Interest on the notes is payable quarterly. Interest rates are reset quarterly based on the three-month
LIBOR rate plus 85 basis points for the five and seven year notes, and the three-month LIBOR rate plus
90 basis points for the ten year notes. Interest rates during the latest fiscal year on these notes ranged
from 2.436 to 3.410 percent for the five and seven year notes, and 2.486 to 3.460 percent for the ten year
notes. The Senior Notes allow for prepayment subject to the following terms: five year notes could be
prepaid in the first year with a 2 percent penalty, thereafter there is no penalty; seven and ten year notes
could be prepaid after one year with a 1 percent penalty, and after two years with no penalty. The
proceeds of the Senior Notes financing were used to repay the $200,000 borrowings under the Term
Loan Credit Agreement, and $25,000 of the outstanding borrowings on our $75,000 Revolving Line of
Credit Agreement. The Senior Notes are unsecured and require the maintenance of certain
Debt/EBITDA, fixed charge coverage ratios, consolidated net worth levels, and other customary
covenants. The Senior Notes have been guaranteed, on a joint and several basis, by the parent company,
Helen of Troy Limited, and certain U.S. subsidiaries.
In connection our fiscal 2005 financing transactions, we incurred $4,429 of financing costs. These costs
are being amortized over the related lives of the various notes financed, ranging from 5 to 10 years.
• During fiscal 2005, we purchased and retired a total of 376,060 common shares on the open market at a
total purchase price of $11,242. An additional 381,650 common shares were tendered by a key
shareholder and retired as payment and satisfaction of $13,797 on share purchase price and federal
income tax obligations arising from the exercise of 1,000,000 options by a key employee-shareholder.
This transaction was valued at an average share price of $36.15 using the average of the high bid and
45
low bid prices for Helen of Troy shares as reported on the NASDAQ National Market System on the day
the shares were tendered.
• Proceeds from employee option exercises and purchases through our employee stock purchase plan
combined to provide $3,122 of cash and $8,320 in tax benefits in fiscal 2005.
During fiscal 2004, we funded our activities with internally generated cash flow. While we borrowed
from time to time against certain revolving credit facilities, all borrowings were short-term and were repaid
within months of the initial advances. Highlights of our 2004 financing activities follow.
• On September 22, 2003, certain of our subsidiaries entered into a $50,000 unsecured revolving credit
facility with Bank of America to facilitate short-term borrowings and the issuance of letters of credit. All
borrowings accrued interest equal to the higher of the Federal Funds Rate plus 0.50 percent or Bank of
America's prime rate. Alternatively, upon our timely election, borrowings accrued interest based on the
respective 1, 2, 3, or 6 month LIBOR rate plus 0.75 percent (based upon the term of the borrowing).
The credit facility was cancelled on June 1, 2004.
• During the second fiscal quarter of fiscal 2004, our Board of Directors approved a resolution to
purchase, in open market or through private transactions, up to 3,000,000 of our common shares.
During fiscal 2004, we purchased and retired a total of 344,000 common shares on the open market at a
total purchase price of $7,877. An additional 462,126 common shares were tendered by a key
shareholder and retired as payment and satisfaction of $12,695 of share purchase price and federal
income tax obligations arising from the exercise of 1,200,000 options by a key employee-shareholder.
This transaction was valued at an average share price of $27.47 using the average of the high bid and
low bid prices for Helen of Troy shares as reported on the NASDAQ National Market System on the day
the shares were tendered.
• Proceeds from employee option exercises and purchases through our employee stock purchase plan
combined to provide $8,026 of cash and $8,044 in tax benefits in fiscal 2004.
46
Contractual Obligations:
Our contractual obligations and commercial commitments, as of the end of fiscal 2006 were:
PAYMENTS DUE BY PERIOD ENDED THE LAST DAY OF FEBRUARY
(in thousands)
Contractual Obligations
----------------------------------------------------------------------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
Total
2007
1 year
2008
2 years
2009
3 years
2010
4 years
2011
5 years
After
5 years
Long-term debt - floating rate
Long-term debt - fixed rate
Interest on floating rate debt *
Interest on fixed rate debt
Open purchase orders
Minimum royalty payments
Advertising and promotional
Operating leases
Long-term incentive plan payouts
Implementation of enterprise resource planning
system
Other
Total contractual obligations
$
229,974
35,000
72,424
6,621
61,838
11,989
26,771
3,862
1,706
$
-
10,000
13,399
2,371
61,838
3,292
12,066
2,039
-
$
995
10,000
13,356
1,670
-
2,524
9,836
1,109
1,498
$
995
3,000
13,298
951
-
2,712
1,802
394
208
$
100,995
3,000
9,367
733
-
1,144
800
285
-
$
995
3,000
7,372
516
-
1,279
800
35
-
$
125,994
6,000
15,632
380
-
1,038
1,467
-
-
507
762
507
401
-
361
-
-
-
-
-
-
-
-
-------------- -------------- -------------- -------------- -------------- -------------- --------------
$
150,511
======== ======== ======== ======== ======== ======== ========
105,913
116,324
451,454
41,349
23,360
13,997
$
$
$
$
$
$
* The future obligation for interest on our variable rate debt is estimated assuming the rates in effect as of
February 28, 2006. This is only an estimate as actual rates will vary over time. For instance, a 1 percent
increase in interest rates could add $2,300 per year to floating rate interest expense over the next year.
Off-Balance Sheet Arrangements:
We have no existing activities involving special purpose entities or off-balance sheet financing.
Current and Future Capital Needs:
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 our capital needs to 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 continue to evaluate acquisition opportunities on a regular basis
and may augment our internal growth with acquisitions of complementary businesses or product lines. We may
finance acquisition activity with available cash, the issuance of common shares, 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.
Non-monetary Transactions:
We occasionally enter into barter transactions in which we exchange inventory for various services,
usually advertising. During fiscal 2005, we entered into two such transactions in which we exchanged
inventory with a book value of $1,011 for certain advertising credits. As a result of these transactions, we
recorded both sales and cost of goods sold equal to the exchanged inventory's net book value, which
approximated their fair value. At the end of 2005, the remaining credits were valued at $915 on our
consolidated balance sheets, and were included in the line item entitled "Prepaid Assets." As of February 28,
47
2006 all credits from the non-monetary transactions had been utilized. We have used $915, $1,196 and $1,400
of barter related advertising credits during fiscal 2006, 2005 and 2004, respectively.
CRITICAL ACCOUNTING POLICIES
The SEC 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." We consider the following policies to meet this definition.
Allowance for accounts receivable - We maintain an allowance for doubtful accounts for estimated
losses that may result from the inability of our customers to make required payments. That estimate is based on
historical collection experience, current economic and market conditions, and a review of the current status of
each customer's trade accounts receivable. If the financial condition of our customers were to deteriorate or our
judgment regarding their financial condition was to change negatively, additional allowances may be required
resulting in a charge to income in the period such determination was made. Conversely, if the financial
condition of our customers were to improve or our judgment regarding their financial condition was to change
positively, a reduction in the allowances may be required resulting in an increase in income in the period such
determination was made.
Income Taxes - We must make certain estimates and judgments in determining income tax expense for
financial statement purposes. These estimates and judgments must be used in the calculation of certain tax
assets and liabilities because of differences in the timing of recognition of revenue and expense for tax and
financial statement purposes. We must assess the likelihood that we will be able to recover our deferred tax
assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance
against the deferred tax assets that we estimate will not ultimately be recoverable. As changes occur in our
assessments regarding our ability to recover our deferred tax assets, our tax provision is increased in any period
in which we determine that the recovery is not probable.
In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of
other complex tax regulations. We recognize liabilities for anticipated tax audit issues in the United States and
other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. If
we ultimately determine that payment of these amounts are unnecessary, we reverse the liability and recognize a
tax benefit during the period in which we determine that the liability is no longer necessary. We record an
additional charge in our provision for taxes in the period in which we determine that the recorded tax liability is
less than we expect the ultimate assessment to be.
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. This process entails a significant amount of inherent subjectivity and uncertainty.
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 average cost or its net realizable value. Determination
of net realizable value requires us 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
48
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 we
consider whether circumstances or conditions exist which 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 and other
intangible assets during the first quarter of fiscal 2006, and accordingly, recorded no impairment.
Economic useful life of intangible assets - We apply Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" ("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
we 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 have completed our analysis of the remaining useful economic lives of our intangible
assets during the first quarter of fiscal 2007 and determined that the useful lives currently being used to
determine amortization of each asset are appropriate.
For a more comprehensive list of our accounting policies, we encourage you to read Note (1) included in
the accompanying consolidated financial statements. Note (1) contains several other policies, including policies
governing the timing of revenue recognition, that are important to the preparation of our consolidated financial
statements, but do not meet the SEC's definition of critical accounting policies because they do not involve
subjective or complex judgments.
NEW ACCOUNTING GUIDANCE
Refer to Note (1) of the notes to the consolidated financial statements for a discussion of new accounting
pronouncements and the potential impact to the Company’s consolidated results of operations and financial
position.
49
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Changes in interest rates and currency exchange rates are our primary financial market risks.
Fluctuation in interest rates causes variation in the amount of interest that we can earn on our available cash and
the amount of interest expense we incur on our short-term and long-term borrowings. Interest on our long-term
debt outstanding as of February 28, 2006 is both floating and fixed. Fixed rates are in place on $35,000 of
senior notes at rates ranging from 7.01 percent to 7.24 percent. Floating rates are in place on $229,974 of senior
notes. Interest rates on these notes are reset quarterly based on the three-month LIBOR rate plus 85 basis points
for the five and seven year notes, and the three-month LIBOR rate plus 90 basis points for the ten year notes.
Interest rates during the latest fiscal year on these notes ranged from 3.41 to 5.371 percent for the five and seven
year notes, and 3.46 to 5.421 percent for the ten year notes. On March 29, 2006, the interest rates on these notes
were reset for the next three months at 5.81 percent for the five and seven year notes and 5.86 percent for the
ten year notes. Increases in interest rates expose us to risk on this debt. Also, with respect to $35,000 of fixed
rate senior notes, as interest rates drop below the rates on this debt, our interest cost can exceed the cost of
capital of companies who borrow at lower rates of interest.
As mentioned under Note (7) to our consolidated financial statements, we have a five year, $75,000
revolving credit facility; $225,000 of floating rate senior debt with five, seven, and ten year maturities; and,
have recently secured an additional equipment credit facility that will allow us to draw up to $15,000 (which
will later convert to five-year Bonds when fully drawn). The credit facilities, senior debt, and Bonds bear
floating rates of interest. A 1 percent increase in our base interest rates could impact us by adding up to $3,150
of additional interest cost annually (assuming we fully draw on our $15,000 equipment financing). The addition
of these levels of debt exposure to our consolidated operations, and the uncertainty regarding the level of our
future interest rates, substantially increases our risk profile.
Because we purchase a 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 the United States are transacted in U.S.
Dollars. The majority of our sales in the United Kingdom are transacted in British Pounds, in France and
Germany are transacted in Euros, in Mexico are transacted in Pesos, in Brazil are transacted in Reals, and in
Canada 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 $85,692, $87,880
and $73,259 during the fiscal years ended 2006, 2005 and 2004, respectively. We incurred a foreign currency
exchange gains (losses) of $105, ($1,142) and $1,216 during the fiscal years ended 2006, 2005 and 2004,
respectively.
We hedge against foreign currency exchange rate risk by entering into a series of forward contracts
designated as cash flow hedges to protect against the foreign currency exchange risk inherent in our forecasted
transactions denominated in currencies other than the U.S. Dollar. For transactions designated as cash flow
hedges, the effective portion of the change in the fair value (arising from the change in the spot rates from
period to period) is deferred in Other Comprehensive Income. These amounts are subsequently recognized in
"Selling, general, and administrative expense" in the consolidated statements of income in the same period as
the forecasted transactions close out over the remaining balance of their terms. The ineffective portion of the
change in fair value (arising from the change in the difference between the spot rate and the forward rate) is
50
recognized in the period it occurred. These amounts are also recognized in "Selling, general, and administrative
expense" in the consolidated statements of income. We do not enter into any forward exchange contracts or
similar instruments for trading or other speculative purposes.
The following table summarizes the various forward contracts we designated as cash flow hedges that
were open at the end of fiscal 2006 and 2005:
February 28, 2006
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Market
Value of the
Contract in
U.S. Dollars
(Thousands)
-------------- -------------- ----------------- ------------------ ------------------ ------------------ ------------------ ------------------ ------------------- ------------------- ------------------
$584
Sell
Weighted
Average
Forward Rate
at Feb. 28,
2006
Weighted
Average
Forward Rate
at Inception
Spot Rate at
Contract
Date
Range of Maturities
------------------------------------
Spot Rate at
Feb. 28, 2006
Currency
to Deliver
Contract
Date
Notional
Amount
Contract
Type
£10,000,000
12/11/2006
1/26/2005
2/9/2007
Pounds
1.7644
1.7540
1.8228
1.8700
From
To
February 28, 2005
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Contract
Type
Currency
to Deliver
Range of Maturities
------------------------------------
Market
Value of the
Contract in
U.S. Dollars
(Thousands)
-------------- -------------- ----------------- ------------------ ------------------ ------------------ ------------------ ------------------ ------------------- ------------------- ------------------
($547)
Sell
(891)
Sell
(548)
Sell
(403)
Sell
($2,389)
Weighted
Average
Forward Rate
at Feb. 28,
2005
Weighted
Average
Forward Rate
at Inception
£5,000,000
£5,000,000
£10,000,000
€ 3,000,000
2/13/2004
5/21/2004
1/26/2005
5/21/2004
Spot Rate at
Contract
Date
11/10/2005
12/14/2005
12/11/2006
Pounds
Pounds
Pounds
Euros
2/17/2006
2/17/2006
2/9/2007
1.8800
1.7900
1.8700
1.2000
1.8949
1.8913
1.8776
1.3344
1.7854
1.7131
1.8228
1.2002
1.9231
1.9231
1.9231
1.3241
Spot Rate at
Feb. 28, 2005
Contract
Date
Notional
Amount
2/10/2006
From
To
Our cash flow hedges, while executed in order to minimize our foreign currency exchange rate risk, do
subject us to fair value fluctuations on the underlying contracts. The following table shows the potential fair
value gain or loss in U.S. Dollars that would arise from a hypothetical 10 percent change as of February 28,
2006 in each hedged currency’s forward rate.
Change in Fair Value Due To
a 10% Movement in Forward Rates
(in thousands)
-----------------------------------------------
Favorable
Unfavorable
----------------------- -----------------------
British Pound Hedges
$1,764
($1,764)
This table is for risk analysis purposes and does not purport to represent actual losses or gains in fair
value that we will incur. It is important to note that the change in value represents the estimated change in the
fair value of the contracts. Because the contracts hedge an underlying exposure, we would expect a similar and
opposite change in foreign exchange gains or losses over the same period as the contract. We expect that as
currency market conditions warrant, and our foreign denominated transaction exposure grows, we will continue
to execute additional contracts in order to hedge against potential foreign exchange losses.
51
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Management’s Report on Internal Control Over Financial Reporting
Reports of Independent Registered Public Accounting Firm
PAGE
53
54
Consolidated Financial Statements:
Consolidated Balance Sheets as of February 28, 2006 and February 28, 2005
57
Consolidated Statements of Income for each of the years in the three-year period
ended February 28, 2006
Consolidated Statements of Shareholders' Equity and Comprehensive Income for each of
the years in the three-year period ended February 28, 2006
Consolidated Statements of Cash Flows for each of the years in the three-year period
ended February 28, 2006
Notes to Consolidated Financial Statements
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for each of the years in the three-year
period ended February 28, 2006
58
59
60
61
95
All other schedules are omitted as the required information is included in the consolidated financial statements
or is not applicable.
52
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Helen of Troy’s management is responsible for establishing and maintaining adequate internal control
over financial reporting as defined by Rules 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934,
as amended.
Our internal control system was designed by, or under the supervision of, the Company’s principal
executive and principal financial officers, management, and other personnel, with guidance, where appropriate
from the Company’s Board of Directors, to provide reasonable assurance to the Company’s management and
Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles and includes those policies and
procedures that:
• pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of the Company;
• provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with authorizations of management
and the Board of Directors of the Company; and
• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use
or disposition of the Company's assets that could have a material effect on the financial statements.
There are inherent limitations in the effectiveness of any system of internal controls, including the
possibility of human error and the circumvention or overriding of controls. Accordingly, internal control over
financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to
future periods are subject to the risks that controls may become inadequate because of changes in conditions, or
that the degree of compliance with our policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company's internal control over financial
reporting as of February 28, 2006. In making this assessment, the Company’s management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-
Integrated Framework.
Based on its assessment, management believes that, as of February 28, 2006, the Company's internal
control over financial reporting was effective based on those criteria to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.
The Company's independent registered public accounting firm, KPMG LLP, has issued an audit report
on management’s assessment of the Company's internal control over financial reporting. This report appears
on page 54.
53
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Helen of Troy Limited:
We have audited the accompanying consolidated balance sheets of Helen of Troy Limited and
subsidiaries (the Company) as of February 28, 2006 and 2005 and the related consolidated statements of
income, shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-year
period ended February 28, 2006. In connection with our audits of the consolidated financial statements, we also
have audited financial statement schedule titled “Schedule II – Valuation and Qualifying Accounts.” These
consolidated financial statements and financial statement schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Helen of Troy Limited and subsidiaries as of February 28, 2006 and 2005, and
the results of their operations and their cash flows for each of the years in the three-year period ended February
28, 2006, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic consolidated financial statements taken as
a whole, present fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the Company’s internal control over financial reporting as of
February 28, 2006, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated May 12,
2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal
control over financial reporting.
/s/ KPMG LLP
El Paso, Texas
May 12, 2006
54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Helen of Troy Limited:
We have audited management's assessment, included in the accompanying Management’s Report on
Internal Control Over Financial Reporting, that Helen of Troy Limited and subsidiaries (the Company)
maintained effective internal control over financial reporting as of February 28, 2006, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on
the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating
management's assessment, testing and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and Board of Directors of
the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective internal control over
financial reporting as of February 28, 2006, is fairly stated, in all material respects, based on criteria established
in Internal Control—Integrated Framework issued by the COSO. Also, in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of February 28, 2006,
based on criteria established in Internal Control—Integrated Framework issued by the COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Helen of Troy Limited and subsidiaries as of
February 28, 2006 and 2005, and the related consolidated statements of income, shareholders’ equity and
55
comprehensive income, and cash flows for each of the years in the three-year period ended February 28, 2006,
and our report dated May 12, 2006 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
El Paso, Texas
May 12, 2006
56
HELEN OF TROY LIMITED AND SUBSIDIARIES
Consolidated Balance Sheets
February 28, 2006 and 2005
(in thousands, except shares and par value)
Assets
Current assets:
Cash and cash equivalents
Trading securities, at market value
Foreign currency forward contracts
Receivables - principally trade, less allowance of $850 and $2,167
Inventories
Prepaid expenses
Deferred income tax benefits
Total current assets
Property and equipment, at cost less accumulated depreciation of $27,039 and $31,424
Goodwill
Trademarks, net of accumulated amortization of $225 and $220
License agreements, net of accumulated amortization of $14,514 and $13,074
Other intangible assets, net of accumulated amortization of $3,044 and $1,287
Tax certificates
Deferred income tax benefits
Other assets
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt
Accounts payable, principally trade
Accrued expenses
Income taxes payable
Total current liabilities
Long-term compensation liability
Deferred income tax liability
Long-term debt, less current portion
Total liabilities
Commitments and contingencies (See Note 10)
Stockholders' equity
2006
2005
--------------------- ---------------------
$
$
18,320
97
584
107,289
168,401
5,793
10,690
21,752
192
-
111,739
137,475
8,421
6,582
--------------------- ---------------------
286,161
311,174
100,703
201,003
157,711
27,801
15,757
28,425
-
15,170
71,551
201,200
157,716
29,241
17,077
28,425
1,073
19,005
--------------------- ---------------------
$
811,449
============ ============
857,744
$
$
$
10,000
30,175
54,145
31,286
10,000
34,192
59,820
26,411
--------------------- ---------------------
130,423
125,606
1,706
81
254,974
499
-
260,000
--------------------- ---------------------
390,922
--------------------- ---------------------
382,367
Cumulative preferred shares, non-voting, $1.00 par. Authorized 2,000,000 shares; none issued
Common shares, $.10 par. Authorized 50,000,000 shares; 30,013,172 and 29,830,526 shares
-
-
issued and outstanding
Additional paid-in-capital
Retained earnings
Accumulated other comprehensive income (loss)
Total stockholders' equity
See accompanying notes to consolidated financial statements.
57
3,001
90,300
380,916
1,160
2,983
87,723
331,606
(1,784)
--------------------- ---------------------
420,527
--------------------- ---------------------
$
811,449
============ ============
475,377
857,744
$
HELEN OF TROY LIMITED AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands, except per share data)
Net sales
Cost of sales
Gross profit
Selling, general, and administrative expense
Operating income
Other income (expense):
Interest expense
Other income, net
Total other income (expense)
Earnings before income taxes
Income tax expense
Income from continuing operations
Loss from discontinued segment's operations and impairment of
related assets, net of tax benefits of $-0-, $442 and $8,394
Net earnings
Earnings per share:
Basic
Continuing operations
Discontinued operations
Total basic earnings per share
Diluted
Continuing operations
Discontinued operations
Total diluted earnings per share
Weighted average common shares used in computing net earnings per share
Basic
Diluted
2006
Years Ended The Last Day of February,
------------------------------------------------------------------
2005
--------------------- --------------------- ---------------------
474,868
$
257,651
--------------------- --------------------- ---------------------
217,217
589,747
323,189
581,549
307,045
274,504
266,558
$
$
2004
195,180
131,443
--------------------- --------------------- ---------------------
85,774
--------------------- --------------------- ---------------------
102,024
172,480
71,378
(15,576)
(9,870)
(2,575)
(16,866)
1,290
(4,047)
4,312
--------------------- --------------------- ---------------------
265
--------------------- --------------------- ---------------------
86,039
14,477
--------------------- --------------------- ---------------------
71,562
89,579
12,907
55,802
6,492
(12,445)
76,672
49,310
-
(11,040)
--------------------- --------------------- ---------------------
$
60,522
============ ============ ============
$
$
49,310
76,450
(222)
$
1.65
$
-
$
1.65
$
$
$
2.58
(0.01)
2.57
$
$
$
2.52
(0.39)
2.13
$
1.56
$
-
$
1.56
$
$
$
2.36
(0.01)
2.35
$
$
$
2.29
(0.35)
1.94
29,919
31,605
29,710
32,589
28,356
31,261
See accompanying notes to consolidated financial statements.
58
HELEN OF TROY LIMITED AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity and Comprehensive Income
Years Ended The Last Day of February, 2006, 2005, and 2004
(in thousands)
Balances February 28, 2003
Components of comprehensive income:
Accumulated
Other
Common
Shares
Comprehensive Retained
Earnings
Income (Loss)
-------------------- -------------------- -------------------- -------------------- --------------------
289,602
$
-
$
232,798
$
53,984
$
$
2,820
Total
Shareholders'
Equity
Additional
Paid-In
Capital
Net earnings
Unrealized loss on cash flow hedging derivatives
-
-
-
-
-
(918)
60,522
-
60,522
(918)
--------------------
59,604
--------------------
187
21,036
2
245
-
-
-
-
21,224
246
(81)
(20,572)
-------------------- -------------------- -------------------- -------------------- --------------------
350,103
(18,906)
274,413
(1,586)
73,679
2,929
(918)
-
-
-
-
-
-
-
-
-
-
-
129
16,747
2
322
-
2,610
(2,610)
(866)
-
-
-
76,450
-
-
-
76,450
2,610
(2,610)
(866)
--------------------
75,584
--------------------
2,679
2,679
-
-
16,876
324
(77)
(25,039)
-------------------- -------------------- -------------------- -------------------- --------------------
420,527
(21,937)
331,606
(1,784)
(3,025)
87,723
2,983
-
Total comprehensive income
Exercise of stock options, including
tax benefits of $8,045
Issuance of common shares
in connection with employee
stock purchase plan
Acquisition and retirement of
common shares
Balances February 29, 2004
Components of comprehensive income:
Net earnings
Change in value of stock available for sale
Reclassification of losses to income
Unrealized loss on cash flow hedging derivatives
Total comprehensive income
Elimination of minority interest upon sale of Tactica
Exercise of stock options, including
tax benefits of $8,301
Issuance of common shares
in connection with employee
stock purchase plan
Acquisition and retirement of
common shares
Balances February 28, 2005
Components of comprehensive income:
Total comprehensive income
Exercise of stock options, including
tax benefits of $402
Issuance of common shares
in connection with employee
stock purchase plan
Balances February 28, 2006
Net earnings
Unrealized gain on cash flow hedging derivatives
-
-
-
-
-
2,944
49,310
-
49,310
2,944
--------------------
52,254
--------------------
16
2,184
-
-
2,200
2
396
-------------------- -------------------- -------------------- -------------------- --------------------
$
475,377
=========== =========== =========== =========== ===========
$
380,916
$
90,300
$
$
1,160
3,001
394
-
-
59
See accompanying notes to consolidated financial statements.
HELEN OF TROY LIMITED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Years Ended The Last Day of February,
------------------------------------------------------------------
As Restated - See Note (1)(a)
-------------------------------------------
2005
------------------------------------------------------------------
2004
2006
Cash flows from operating activities:
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating activities
$
49,310
$
76,450
$
60,522
Depreciation and amortization
Provision for doubtful receivables
Purchases of trading securities
Proceeds from sales of trading securities
Realized gain - trading securities
Unrealized (gain) loss - trading securities and securities held for sale
Deferred taxes, net
Gain on disposal of property, plant, and equipment
Loss from operations of discontinued segment
Loss from impairment of goodwill of discontinued segment
Changes in operating assets and liabilities:
12,427
(1,317)
-
-
-
95
(2,954)
(1,304)
-
-
9,708
1,067
-
-
-
3,410
(1,725)
(180)
222
-
6,128
38
(197)
1,252
(223)
(82)
(1,791)
-
7,279
3,761
Foreign currency forward contracts
Accounts receivable
Inventories
Prepaid expenses
Prepayment of royalties
Purchase of Tax Certificates
Other assets
Accounts payable
Accrued expenses
Income taxes payable
Cash flows of discontinued operations
Net cash provided by operating activities
Cash flows from investing activities:
Capital, license, trademark, and other intangible expenditures
Proceeds from sales of property, plant, and equipment
Increase in other assets
Cash flows of discontinued operations
Net cash used by investing activities
Cash flows from financing activities:
Proceeds from debt
Repayment of short-term acquisition financing
Repayment of long-term debt
Payment of financing costs
Proceeds from exercise of stock options and employee stock purchases, net
Common share repurchases
Cash flows of discontinued operations
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental cash flow disclosures:
(2,973)
5,767
(30,926)
2,628
-
-
1,819
(4,017)
866
5,334
-
949
(15,674)
(3,279)
253
(5,251)
(3,282)
6,606
(721)
9,305
3,534
(5,132)
--------------------- --------------------- ---------------------
63,995
--------------------- --------------------- ---------------------
1,406
(37,473)
(33,418)
(1,209)
(1,689)
(25,144)
2,798
18,550
21,476
11,554
(433)
45,370
34,755
(52,367)
16,850
253
-
(65,120)
80
1,580
(3,121)
--------------------- --------------------- ---------------------
(66,581)
--------------------- --------------------- ---------------------
(286,263)
7,068
81
(2)
(279,116)
(35,264)
4,974
-
(10,000)
(91)
2,194
-
-
425,000
(200,000)
(10,000)
(4,429)
3,122
(11,242)
-
-
-
-
-
8,026
(7,877)
8,044
--------------------- --------------------- ---------------------
8,193
--------------------- --------------------- ---------------------
5,607
47,441
--------------------- --------------------- ---------------------
$
53,048
============ ============ ============
(31,295)
53,048
(3,432)
21,753
$
$
202,451
(2,923)
18,321
21,753
Interest paid for continuing operations
Income taxes paid for continuing operations (net of refunds)
Common shares received as exercise price of options
$
15,342
$
4,062
$
-
$
$
$
8,589
4,395
5,758
$
$
$
4,131
2,319
5,400
See accompanying notes to consolidated financial statements.
60
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) General
Helen of Troy Limited, a Bermuda company, and its subsidiaries ("the Company") design, develop, import,
and distribute an expanding portfolio of brand-name consumer products. We currently manage and report
on our business in two active segments: Personal Care and Housewares. The Personal Care segment’s
products include hair dryers, straighteners, curling irons, hairsetters, women’s shavers, mirrors, hot air
brushes, home hair clippers, paraffin baths, massage cushions, footbaths, body massagers, brushes, combs,
hair accessories, liquid hair styling products, men’s fragrances, men’s deodorants, body powder, and skin
care products. The Housewares segment reports the operations of OXO International (“OXO”), which we
acquired on June 1, 2004, as further discussed in Notes (4),(5), (7) and (17) to our consolidated financial
statements. The Houseware segment’s products include kitchen tools, cutlery, bar and wine accessories,
household cleaning tools, tea kettles, trash cans, storage and organization products, hand tools, gardening
tools, kitchen mitts and trivets, and barbeque tools. Both operating segments sell their portfolio of products
principally through mass merchants, general retail and specialty retail outlets in the United States and other
countries. We purchase our products from unaffiliated manufacturers, most of which are located in The
People's Republic of China, Thailand, Taiwan, South Korea, and the United States.
Our financial statements are prepared in U.S. Dollars and in accordance with U.S. generally accepted
accounting principles. These principles require management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues, expenses, and the disclosure of contingent assets and
liabilities. Actual results could differ from those estimates. Unless otherwise indicated, references in the
consolidated financial statements to 2006, 2005 and 2004 are to Helen of Troy’s fiscal years ended
February 28, 2006 and 2005 and February 29, 2004. We have reclassified certain prior-year amounts to
conform to this year's presentation.
For fiscal years 2005 and 2004, the Company has changed its presentation of its consolidated statements of
cash flows to separately disclosed the operating, investing and financing portions of the cash flows
attributable to its discontinued operations of Tactica International, Inc., which in prior periods were reported
on a combined basis as part of the single amount change in “Other assets” under the caption “Changes in
operating assets and liabilities.”
In these consolidated financial statements and accompanying notes, amounts shown are in thousands of U.S.
dollars, except as otherwise indicated.
(b) Consolidation
Our consolidated financial statements include the accounts of Helen of Troy Limited and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Tactica International, Inc. ("Tactica"), a subsidiary in which we acquired a 55 percent interest in fiscal 2001,
has been presented as a discontinued operation in accordance with the requirements of Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets.” As more fully described in Note (16) to our consolidated financial statements, on April 29, 2004 we
completed the sale of our ownership interest in Tactica back to certain of its key operating manager-
shareholders. For the periods presented through the date of Tactica’s sale, our consolidated net income
included 100 percent of Tactica's net income or loss because the minority interest in Tactica's accumulated
deficit had not been extinguished.
61
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(c) Revenue recognition
Sales are recognized when revenue is realized or realizable and has been earned. Sales and shipping terms
vary among our customers, and, as such, revenue is recognized when risk and title to the product transfer to
the customer. Net sales is comprised of gross revenues less estimates of expected returns, trade discounts,
and customer allowances, which include incentives such as cooperative advertising agreements and off-
invoice markdowns. Such deductions are recorded and/or amortized during the period the related revenue is
recognized.
(d) Consideration paid to customers
We offer our customers certain incentives in the form of cooperative advertising arrangements, volume
rebates, product markdown allowances, trade discounts, cash discounts, and slotting fees. We account for
these incentives in accordance with Emerging Issues Task Force Issue No. 01-9, "Accounting for
Consideration Given by a Vendor to a Customer" ("EITF 01-9"). In instances where the customer is
required to provide us with proof of performance, reductions in amounts received from customers as a result
of cooperative advertising programs are included in our consolidated statement of income on the line
entitled "Selling, general, and administrative expenses" ("SG&A"). Other reductions in amounts received
from customers as a result of cooperative advertising programs are recorded as reductions of net sales.
Markdown allowances, slotting fees, trade discounts, cash discounts, and volume rebates are all recorded as
reductions of net sales. Customer incentives included in SG&A were $12,124, $13,869, and $16,603, for the
fiscal years 2006, 2005, and 2004, respectively.
(e) Inventories and cost of sales
Our inventories consist almost entirely of finished goods. We account for inventory using a first-in, first-out
system in which we record inventory on our balance sheet at the lower of our average cost or net realizable
value. A product's average cost is comprised of the amount that we pay our manufacturer for product, tariffs
and duties associated with transporting product across national borders, freight costs associated with
transporting the product from our manufacturers to our warehouse locations, and general and administrative
expenses directly attributable to the procurement of inventory.
General and administrative expenses in inventory include all the expenses of operating the Company's Hong
Kong and Macao sourcing facilities, expenses incurred for production forecasting, and expenses incurred for
product design, engineering and packaging. We charged $10,667, $11,082, and $11,373 of such general and
administrative expenses to inventory during fiscal years 2006, 2005, and 2004, respectively. We estimate
that $5,075 and $4,192 of general and administrative expenses directly attributable to the procurement of
inventory were included in our inventory balances on hand at fiscal year ends 2006 and 2005, respectively.
When circumstances dictate that we use net realizable value in lieu of cost, we base our estimates on
expected future selling prices less expected disposal costs.
The "Cost of sales" line item on the consolidated statements of income is comprised of the book value
(lower of average cost or net realizable value) of inventory sold to customers during the reporting period.
62
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(f) Shipping and handling revenues and expenses
Shipping and handling expenses are included in our consolidated statements of income on the "Selling,
general, and administrative expenses" line. Our expenses for shipping and handling totaled $51,017,
$38,355, and $32,701 during fiscal years 2006, 2005, and 2004, respectively. We report revenue from
shipping and handling charges on the "Net sales" line of our consolidated statements of income, in
accordance with paragraph 5 of Emerging Issues Task Force Issue 00-10, "Accounting for Shipping and
Handling Fees and Costs." We only include charges for shipping and handling in "Net sales" for sales made
directly to consumers and retail customers ordering relatively small dollar amounts of product. Our shipping
and handling expenses far exceed our shipping and handling revenues.
(g) Valuation of accounts receivable
Our allowance for doubtful receivables reflects our best estimate of probable losses, determined principally
on the basis of historical experience and specific allowances for known troubled accounts.
(h) Property and equipment
These assets are stated at cost. Depreciation is recorded primarily on a straight-line basis over the estimated
useful lives of the assets. Expenditures for repair and maintenance of property and equipment are expensed
as incurred. For tax purposes, accelerated depreciation methods are used as allowed by tax laws.
(i) License agreements, trademarks, patents and other intangible assets.
A significant portion of our sales are made subject to license agreements with the licensors of the Vidal
Sassoon®, Revlon®, Sunbeam®, Health o meter® and Dr. Scholl's® trademarks. Our license agreements
are reported on the Company's consolidated balance sheets at cost, less accumulated amortization. The cost
of our license agreements represents amounts paid to licensors to acquire the license or to alter the terms of
the license in a manner which we believe to be in our best interest. Royalty payments are not included in the
cost of license agreements. We amortize license costs on a straight-line basis over the appropriate lives of
the respective agreements. Net sales subject to trademark license agreements comprised 52 percent, 56
percent, and 64 percent of total consolidated net sales for fiscal years 2006, 2005, and 2004, respectively.
Royalty expense under our license agreements is recognized as incurred and is included in our consolidated
statements of income on the "Selling, general, and administrative expenses" line.
We also sell products under trademarks that we own. Trademarks that we acquire from other entities are
recorded on our consolidated balance sheets based upon the appraised cost of acquiring the trademark, net
of any accumulated amortization. Costs associated with developing trademarks internally are recorded as
expenses in the period incurred. When trademarks have readily determinable useful lives, we amortize their
costs on a straight-line basis over such lives. In certain instances, we have determined that particular
trademarks have an indefinite useful life. In these cases, no amortization is recorded.
Patents acquired through purchase from other entities, if material, are recorded on our consolidated balance
sheets based upon the appraised cost of the acquired patents and amortized over the remaining life of the
patent in the jurisdiction filed. Additionally, we incur certain internal costs, primarily legal fees in
connection with the design, development and filing of patents on new products under development which
63
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
are capitalized as incurred and amortized on a straight-line basis over the life of the patent in the jurisdiction
filed, typically 14 years.
Other intangible assets include customer lists and a non-compete agreement that we acquired from other
entities. These are recorded on our consolidated balance sheets based upon the appraised cost of the
acquired asset and amortized on a straight-line basis over the remaining life of the asset as determined either
through outside appraisal (customer lists) or the term of the non-compete agreement.
See Notes (3) and (4) for additional information on our intangible assets.
(j) Income taxes
We use the asset and liability method to account for income taxes. Deferred income tax assets and liabilities
are recognized for the future tax consequences of temporary differences between the book and tax bases of
applicable assets and liabilities. Generally, deferred tax assets represent future income tax reductions while
deferred tax liabilities represent income taxes that we expect to pay in the future. We measure deferred tax
assets and liabilities using enacted tax rates for the years in which we expect temporary differences to be
reversed or be settled. Changes in tax rates affect the carrying values of our deferred tax assets and
liabilities. The effects of any tax rate changes are recognized in the periods where they become effective.
(k) Earnings per share
We compute basic earnings per share based upon the weighted average number of common shares
outstanding during the period. We compute diluted earnings per share based upon the weighted average
number of common shares plus the effects of potentially dilutive securities. Our dilutive securities consist
entirely of options for common shares.
The number of potentially dilutive securities was 1,686,000, 2,879,000 and 2,905,000 for fiscal years 2006,
2005, and 2004, respectively. Options to purchase common shares 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 price of our common shares totaled 934,161, 40,500, and -0- for fiscal 2006, 2005, and
2004, respectively.
(l) Cash equivalents
We consider all highly liquid debt instruments purchased with an original maturity of three months or less to
be cash equivalents. Cash equivalents comprised $18,549 and $17,530 of the amount reported on our
consolidated balance sheets as "Cash and cash equivalents" at fiscal year ends 2006 and 2005, respectively.
Our cash equivalents consist primarily of variable rate demand bonds that mature in 35 or fewer days.
(m) Trading securities and stock available for sale
Trading securities consist of shares of common stock of publicly traded companies and are stated on our
consolidated balance sheets at market value, as determined by the most recent trading price of each security
as of the balance sheet date. We determine the appropriate classification of our investments when those
investments are purchased and reevaluate those determinations at each balance sheet date. At February 28,
64
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
2006, we held investments in equity securities of unaffiliated companies for the purpose of trading them in
the near term. Therefore, certain investments in equity securities are classified as trading securities and
included in the "Current assets" section of our consolidated balance sheets. All unrealized gains and losses
attributable to such securities are included in "Other income" on the consolidated statements of income.
The sum of unrealized and realized net gains and (losses) attributable to trading securities totaled ($95),
($500) and $311 in fiscal 2006, 2005, and 2004, respectively.
In connection with the sale of Tactica, as further discussed in Note (16) to these consolidated financial
statements, we acquired certain marketable securities; which carried a restriction that prevented us from
disposing of the stock prior to July 31, 2005. Accordingly, we have classified this stock as available for
sale, which is included in the “Other assets” section of our consolidated balance sheets. If gains or losses on
stock available for sale are considered temporary, they are recognized as an element of “Other
comprehensive income” in our consolidated statement of shareholder’s equity and comprehensive
income. If losses are incurred which are considered other than temporary, they are included as an
unrealized loss in “Other income” in our consolidated statements of income. The stock available for sale
had a market value at acquisition of $3,030. In the third fiscal quarter of 2005, management determined the
decline in market value to be other than temporary and accordingly reversed the accumulated other
comprehensive losses taken to date and began recording unrealized losses on the stock. The stock had a
market value of $90 and $120 at fiscal year ends 2006 and 2005, respectively. Unrealized loss on stock
available for sale was $30 and $2,910 for fiscal 2006 and 2005, respectively.
(n) Foreign currency transactions and derivative financial instruments
The U.S. Dollar is our functional currency. All our non-U.S. subsidiaries' transactions involving other
currencies have been remeasured in U.S. Dollars using average exchange rates for the months in which the
transactions occurred. Changes in exchange rates that affect cash flows and the related receivables or
payables are included as part of the totals on our consolidated statements of income on the line entitled
"Selling, general, and administrative expenses.” Our foreign exchange gains (losses), including the impact
of currency hedges totaled $105, ($1,142) and $1,216 during fiscal years 2006, 2005, and 2004,
respectively.
In order to manage our exposure to changes in foreign currency exchange rates, we use forward currency
contracts to exchange foreign currencies for U.S. Dollars at specified rates. We first entered into such
contracts in fiscal 2003. We account for these transactions in accordance with Statement of Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 requires that these forward currency contracts be recorded on the balance sheet at their fair value
and that changes in the fair value of the forward exchange contracts are recorded each period in our
consolidated statements of income or our consolidated statement of shareholders' equity and comprehensive
income, depending on the type of hedging instrument and the effectiveness of the hedges. In our case, we
record these transactions on the line entitled "Selling, general, and administrative expenses" in our
consolidated statements of income, or the line entitled "Unrealized gain (loss) on cash flow hedging
derivatives" in our consolidated statement of shareholders' equity and comprehensive income, as
appropriate. All our current contracts are highly effective cash flow hedges and are adjusted to their fair
market values at the end of each calendar quarter. We evaluate all hedging transactions each quarter to
determine that they are highly effective. Any ineffectiveness is recorded in our consolidated statements of
65
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
income. See Note (14) to these consolidated financial statements for a further discussion of our hedging
activities.
(o) Advertising
Advertising costs are expensed in the fiscal year in which they are incurred and included in our consolidated
statements of income on the "Selling, general, and administrative expenses" line. We incurred advertising
costs of $29,066, $25,559 and $27,106 during fiscal years 2006, 2005, and 2004, respectively.
(p) Warranties
Our products are under warranty against defects in material and workmanship for a maximum of two years.
We have established accruals to cover future warranty costs of $7,373 and $5,767 as of fiscal year ends
2006 and 2005, respectively. We estimate our warranty accrual using historical trends and believe that these
trends are the most reliable method by which we can estimate our warranty liability. The following table
summarizes the activity in the Company's accrual for the past three fiscal years:
ACCRUAL FOR WARRANTY RETURNS
(in thousands)
Reductions of
accrual -
payments and
Fiscal Year
Ended February
credits issued Ending balance
---------------------------- --------------------- --------------------- --------------------- ---------------------
7,373
$
5,767
$
4,114
$
$ 5,767
$ 4,114
$
3,263
$
$
$
$
$
$
Additions to
accrual
Beginning
balance
22,901
19,880
15,848
21,295
18,227
14,996
2006
2005
2004
Certain entities whose financial statements are a part of these consolidated financial statements have
guaranteed obligations of other entities within the consolidated group. FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" requires disclosure of these guarantees, of our product warranty liabilities, and of
various indemnity arrangements to which we are a party. Additional disclosures related to this policy are
contained in Notes (5), (6), (7) and (10) to these consolidated financial statements.
(q) 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 we 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 the 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. In fiscal 2006 and 2005, we did not record any charges for impairment of long-lived assets. In
fiscal 2004, we recorded a goodwill impairment charge in connection with the discontinued operations of
our Tactica segment, as more fully described in Note (16) to our consolidated financial statements.
66
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(r) Economic useful lives and amortization of intangible assets
We apply Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142") in determining the useful economic lives of intangible assets that we acquire and report on
our consolidated balance sheets. SFAS 142 requires that we 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 existing intangible assets as well. We review the economic useful lives of our intangible
assets at least annually.
Intangible assets consist primarily of goodwill, license agreements, trademarks, customer lists and patents.
We amortize certain intangible assets using the straight-line method over appropriate periods ranging from
five to forty years. We recorded intangible asset amortization totaling $3,202, $2,732 and $1,445 during
fiscal 2006, 2005 and 2004, respectively. See Notes (3) and (4) to these consolidated financial statements
for more information about our intangible assets.
(s) Interest income
Interest income is included in "Other income, net" on the consolidated statements of income. Interest
income totaled $888, $359 and $438 in fiscal 2006, 2005, and 2004, respectively. Interest income is
normally earned on cash invested in short term accounts and cash equivalents, however in fiscal 2006,
interest income included interest earned on an income tax receivable of $463.
(t) Deferred financing costs
The Company has incurred debt issuance costs in connection with its long-term debt. These costs are
capitalized as deferred financing costs and amortized using the straight-line method over the term of the
related debt.
(u) Financial instruments
The carrying amounts of cash and cash equivalents, receivables, accounts payable, accrued expenses and
income taxes payable approximate fair value because of the short maturity of these items. See Note (7) for
our assessment of the fair value of our guaranteed Senior Notes. We hedge a portion of our foreign
exchange rate risk by entering into contracts to exchange foreign currencies for U.S. Dollars at specified
rates. The fair value of such contracts is determined in accordance with Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." See Note (14) for
more information on our hedging activities.
(v) Stock-based compensation plans
Statement of Financial Accounting Standards No. 123 (“SFAS 123”) and No. 123(R) (“SFAS 123(R)”),
"Accounting for Stock-Based Compensation," currently encourage, but do not require, companies to record
compensation expense for stock-based compensation plans at fair value. We have chosen to account for our
share-based compensation plans using the intrinsic value method prescribed in Accounting Principles Board
67
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, we
recognize no expense in connection with our stock-based compensation plans, as all stock option grants are
made at market value on the date of grant. Income tax benefits attributable to stock options exercised
are credited to "Additional paid-in-capital." We credited $402, $8,301 and $8,045 of tax benefits arising
from such exercises in fiscal 2006, 2005, and 2004, respectively. Disclosures about the Company's share-
based compensation plans are included in Note (9) to these consolidated financial statements.
As further discussed under “New accounting guidance” below, we plan to change our method of accounting
to comply with new requirements of SFAS 123(R), which will require expensing of the fair value of options
granted over the vesting lives of the options. This change will not take place until March 1, 2006, the start
of our fiscal 2007 year.
(w) New accounting guidance
Accounting Changes and Error Corrections - In May 2005, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard (SFAS) No. 154, "Accounting Changes and
Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154
requires retrospective application to prior periods’ financial statements of changes in accounting principle,
unless it is impracticable to determine either the period-specific effects or the cumulative effect of the
change. SFAS No. 154 also requires that retrospective application of a change in accounting principle be
limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a
change in contractual bonus payments resulting from an accounting change, should be recognized in the
period of the accounting change. SFAS No. 154 also requires that a change in depreciation, amortization, or
depletion method for long-lived, nonfinancial assets be accounted for as a change in accounting estimate
affected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted
for accounting changes and corrections of errors made in fiscal years beginning after the date this Statement
is issued. The Company will adopt the provisions of SFAS No. 154, if applicable, beginning in fiscal 2007.
Accounting for Stock Options - In December 2004, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 123(R) "Share-Based Payment" which
revises SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees.” The statement addresses the accounting for share-based
payment transactions (for example, stock options and awards of restricted shares) in which an employer
receives employee-services in exchange for equity securities of the company or other rights to receive future
compensation that are based on the fair value of the company’s equity securities. The statement eliminates
the use of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and generally requires such
transactions be accounted for using a fair-value-based method and recording compensation expense rather
than an optional pro forma disclosure of what expense amounts might be. The provisions of SFAS 123(R)
are effective for public companies at the beginning of their first annual period beginning after June 15,
2005.
We will adopt SFAS No. 123(R) on March 1, 2006.
68
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods:
1. A "modified prospective" method in which compensation cost is recognized beginning with the
effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments
granted after the effective date and (b) based on the requirements of SFAS No. 123(R) for all awards
granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the
effective date; or
2. A "modified retrospective" method which includes the requirements of the modified prospective
method described above, but also permits entities to restate based on the amounts previously
recognized under SFAS No. 123(R) for purposes of pro forma disclosures either (a) all prior periods
presented or (b) prior interim periods of the year of adoption.
The adoption of SFAS No. 123(R)’s fair value method will have an impact on our results of operations,
although it will have an insignificant impact on our overall financial position. During the fiscal year ended
February 28, 2006, we issued an additional 306,000 options to our employees and directors whose fair
values at the date of issue ranged from $6.05 per share to $9.33 per share. At February 28, 2006, we had
555,286 options available for issue under our employee stock option plan. 296,000 options previously
available for issue under our non-employee director’s stock option plan expired when the director’s stock
option plan terminated in June 2005. Also, at February 28, 2006, we had 331,716 shares available for issue
under our employee stock purchase plan. When these shares are sold, the discount on the sale is subject to
valuation and expensing under the provisions of the new standard.
On February 24, 2006, the Compensation Committee of the Company’s Board of Directors approved the
immediate acceleration of vesting on unvested and "out-of-the money" stock options previously awarded to
officers and employees with option exercise prices greater than $19.65. The affected options held by
officers and employees had a range of exercise prices between $20.35 and $33.88, with a weighted average
exercise price of $24.79. Vesting of options exercisable for a total of 285,217 shares was accelerated. The
closing price per share of the Company's common shares on February 24, 2006 was $19.65. Except for the
vesting change, all affected share options will continue to be governed by their respective original terms and
conditions. The accelerated options represent 4.1% of the total of all outstanding Company options.
The Company took this action in order to reduce the future compensation expense associated with unvested
stock options following the adoption of SFAS No.123(R) beginning with the first quarter of fiscal 2007. As
a result of the acceleration, the Company estimates that it will reduce future stock option related
compensation expense it otherwise would be required to record in connection with the accelerated options
by $1,641 on a pre-tax basis over the original option remaining vesting periods.
We continue to evaluate and revise our estimates of the impact of SFAS No. 123(R) on our operations.
Based upon our latest analysis of our amended stock option plan, using the existing options outstanding at
February 28, 2006 and expected employee stock purchase plan exercises in the next fiscal year, and
accounting for the impact of accelerated options discussed above, the latest estimated impact of adopting
SFAS No. 123(R) for fiscal 2007 (fiscal year of adoption) will be to add $454 after tax, to our annual
operating expense. Future grants could materially increase the amount of the aforementioned estimate,
however, their impact is difficult to measure because such impact will depend, among other things, on the
number of grants issued, market conditions prior to and as of the date of the grant, and option vesting
provisions.
69
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to
be reported as a financing cash flow, rather than as an operating cash flow as required under current
literature. This requirement will reduce net operating cash flows and increase net financing cash flows in
periods after adoption. We cannot estimate what those amounts will be in the future (because they depend
on, among other things, when employees exercise stock options).
On November 10, 2005, the FASB issued FASB Staff Position (“FSP”) No. FAS 123(R)-3 “Transition
Election Related to Accounting for Tax Effects of Share-Based Payment Awards.” The Company elected to
adopt the alternative transition method provided in this FSP for calculating the tax effects of share-based
compensation pursuant to SFAS 123(R), which method includes simplified methods to establish the
beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee
stock-based compensation, and to determine the subsequent impacts on the APIC pool and Consolidated
Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are
outstanding upon adoption of SFAS 123(R).
Foreign Earnings Repatriation - In December 2004, the FASB issued FASB Staff Position (FSP) No. 109-
2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the
American Job Creation Act of 2004 (“AJCA”).” The AJCA introduces a special one-time dividends
received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision),
provided certain criteria are met. FSP No.109-2 provides accounting and disclosure guidance for the
repatriation provision. We have described the impact of FSP No.109-2 on our financial statements in Note
(8) to these consolidated financial statements.
Exchanges of Nonmonetary Assets - In December 2004, the FASB issued SFAS No. 153 “Exchanges of
Nonmonetary Assets—an amendment of APB Opinion No. 29.” The guidance in APB Opinion No. 29,
“Accounting for Nonmonetary Transactions,” is based on the principle that exchanges of nonmonetary
assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion,
however, included certain exceptions to that principle. This Statement amends Opinion 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception
for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to change significantly as a result of
the exchange. The provisions of this Statement will be effective for nonmonetary asset exchanges occurring
in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a
material impact on our financial condition, results of operations, or cash flows.
Abnormal Inventory Costs - In November 2004, the Financial Accounting Standards Board (“FASB”)
issued Statement of Financial Accounting Standards (“SFAS”) No. 151, "Inventory Costs, an amendment of
ARB No. 43, Chapter 4" (“FAS 151”).” FAS 151 clarifies that abnormal inventory costs such as costs of
idle facilities, excess freight and handling costs, and wasted materials (spoilage) are required to be
recognized as current period charges. The provisions of SFAS 151 are effective for fiscal years beginning
June 15, 2005 or later. Management is currently evaluating the provisions of SFAS 151 and does not expect
that the adoption will have a material impact on the Company's consolidated financial position or results of
operations.
Other-Than-Temporary-Investments - In March 2004, the EITF reached a consensus on EITF Issue No.
03-1 ("EITF 03-1"), "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
70
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Investments," for which the measurement and recognition provisions were to be effective for reporting
periods beginning after June 15, 2004. However, in September 2004, the EITF issued FASB Staff Position
EITF Issue No. 03-1-1, "Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, `The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,'" which postponed the
measurement and recognition provisions of EITF 03-1, but maintained the disclosure requirements for all
investments within the scope of the guidance to be effective in annual financial statements for fiscal years
ending after June 15, 2004. EITF 03-1 provides a three-step process for determining whether investments,
including equity securities, are other than temporarily impaired and requires additional disclosures in annual
financial statements. An investment is impaired if the fair value of the investment is less than its cost. EITF
03-1 outlines that an impairment would be considered other than temporary unless: a) the investor has the
ability and intent to hold an investment for a reasonable period of time sufficient for the recovery of the fair
value up to (or beyond) the cost of the investment, and b) evidence indicating that the cost of the investment
is recoverable within a reasonable period of time outweighs evidence to the contrary. In addition, the
severity and duration of the impairment should also be considered in determining whether the impairment is
other than temporary. We have applied the guidance provided by EITF 03-1 and determined that certain
declines in the market value of securities acquired in connection with the sale of Tactica as discussed in
Notes (1) and (16) to our consolidated financial statements were other than temporary, and recorded the
appropriate recognition of a loss in our fiscal 2005 operating results.
NOTE 2 - PROPERTY AND EQUIPMENT
A summary of property and equipment (in thousands) was as follows:
Estimated
Useful Lives
(Years)
Last day of February,
-------------------------------------------
2006
--------------------- --------------------- ---------------------
2005
Land
Building and improvements
Computer and other equipment
Molds and tooling
Transportation equipment
Furniture and fixtures
Construction in process
Information system under development
Less accumulated depreciation
Property and equipment, net
-
10 - 40
3 - 10
1 - 3
3 - 5
5 - 15
-
-
$
$
9,623
62,374
37,601
4,907
3,875
7,865
457
1,040
8,658
44,357
23,330
13,613
3,840
8,127
750
300
--------------------- ---------------------
102,975
(31,424)
--------------------- ---------------------
71,551
$
============ ============
127,742
(27,039)
$
100,703
We recorded $7,264, $5,025 and $3,653 of depreciation expense for fiscal 2006, 2005, and 2004, respectively.
Capital expenditures for property and equipment totaled $51,929, $14,663 and $13,805 in fiscal 2006, 2005,
and 2004, respectively.
On May 2, 2005, we entered into an agreement with a third party developer to purchase a 1,200,000 square foot
distribution facility in Southaven, Mississippi to be built to our specifications on approximately 59 acres of
land. On November 22, 2005, we closed and took possession of the completed facility paying a final purchase
price of $33,744. The total costs of the project, including warehouse equipment and fixtures, was $45,862. The
project was funded out of a combination of cash from operations, our existing revolving line of credit, draws
71
NOTE 2 - PROPERTY AND EQUIPMENT, CONTINUED
against $15,000 of Industrial Revenue Bonds, as further discussed under Note (7), the proceeds from the sale of
our existing facility in Southaven, Mississippi, as discussed below, and foreign earnings repatriated for
investment in the U.S., as further discussed in Notes (8) and (11).
On February 2, 2006, we sold a 619,000 square foot distribution facility in Southaven, Mississippi for $16,850
recording a gain on the sale of $1,304. We are currently in the process of transitioning the operations in this
facility to the new distribution facility discussed above. We entered into a temporary lease agreement with the
new owners through April 2006 calling for monthly rentals of $141 per month including insurance and property
tax payments. After April 2006, we will pay rent for this facility on a month-to-month basis, as required in
order for us to complete our transition of operations to our new facility.
Through the end of fiscal 2006, we leased 108,000 square feet of warehouse space, as well as various
administrative office spaces, from a real-estate partnership in which our Chief Executive Officer and another
member of our Board of Directors are limited partners. This lease was terminated on February 28, 2006, and
associated inventory, furniture and equipment, and records storage were consolidated into other existing
facilities. During fiscal 2006, 2005, and 2004, we paid this real-estate partnership rent of $507, $526 and $454.
In fiscal 2006 we retired and removed from our books certain fully depreciated molds and tooling having an
original cost of $10,393, which were no longer being used in our business. This transaction had no impact on
fiscal 2006 net income.
NOTE 3 - INTANGIBLE ASSETS
The following table is a summary, by operating segment, of the carrying amounts and associated accumulated
amortization for our intangible asset balances as of February 28, 2006 and February 28, 2005.
INTANGIBLE ASSETS
(in thousands)
Type / Description
Segment
----------------------------------------------------- ------------------- ---------------- ------------------ ------------------- ------------------
February 28, 2006
--------------------------------------------------------
Accumulated
Gross
Net
Estimated Carrying Amortization Carrying
(if Applicable) Amount
Amount
Life
Gross
February 28, 2005
--------------------------------------------------------
Accumulated
Carrying Amortization Carrying
(if Applicable) Amount
Amount
Net
------------------ ------------------- ------------------
Goodwill:
OXO
All other goodwill
Trademarks:
Housewares
Personal Care
Indefinite
Indefinite
$
165,934
35,069
201,003
$
-
-
-
$
165,934
35,069
201,003
$
166,131
35,069
201,200
$
-
-
-
$
166,131
35,069
201,200
Housewares
OXO
Personal Care
Brut
All other trademarks - definite lives
Personal Care
All other trademarks - indefinite lives Personal Care
Indefinite
Indefinite
[1]
Indefinite
Licenses:
Seabreeze
All other licenses
Personal Care
Indefinite
Personal Care 8 - 25 Years
75,200
51,317
338
31,081
157,936
18,000
24,315
42,315
-
-
(225)
-
(225)
-
(14,514)
(14,514)
75,200
51,317
113
31,081
157,711
18,000
9,801
27,801
75,200
51,317
338
31,081
157,936
18,000
24,315
42,315
-
-
(220)
-
(220)
-
(13,074)
(13,074)
75,200
51,317
118
31,081
157,716
18,000
11,241
29,241
Other:
Patents, customer lists & non-compete
agreements
Total
Housewares 2 - 13 Years
18,801
(3,044)
15,757
18,364
(1,287)
17,077
$
420,055
$
(17,783)
$
402,272
$
419,815
$
(14,581)
$
405,234
[1] Includes one fully amortized trademark and one trademark with an estimated life of 30 years
72
NOTE 3 - INTANGIBLE ASSETS, CONTINUED
The following table summarizes the amortization expense attributable to intangible assets for the years 2006,
2005, and 2004, as well as estimated amortization expense for the fiscal years 2007 through 2011.
Aggregate Amortization Expense
For the twelve months ended
----------------------------------------------------------------
February 28, 2006
February 28, 2005
February 29, 2004
Estimated Amortization Expense
For the fiscal years ended
----------------------------------------------------------------
February 2007
February 2008
February 2009
February 2010
February 2011
(in thousands)
$
$
$
3,202
2,732
1,445
$
$
$
$
$
2,979
2,905
2,855
2,561
2,088
Many of the license agreements under which the Company sells or intends to sell products with trademarks
owned by other entities require that we pay minimum royalties and make minimum levels of advertising
expenditures. For the fiscal year ending February 28, 2007, minimum royalties due and minimum advertising
expenditures under certain of our license agreements total $3,292 and $6,735, respectively.
NOTE 4 - ACQUISITION OF TRADEMARKS AND OF RIGHTS UNDER LICENSE AGREEMENTS
On September 29, 2003, we acquired certain assets related to the Western Hemisphere production and
distribution of Brut® fragrances, deodorants, and antiperspirants from 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. We completed an analysis
of the economic lives of all the assets acquired and determined the appropriate allocation of the initial purchase
price. Based upon our analysis, we allocated $51,317 to trademarks having an indefinite economic life.
In the first fiscal quarter of 2005, as part of the proceeds of our sale of Tactica, we recorded $2,255 for the
Epil-Stop® trademark, which we believe to have an indefinite useful life (see Note 16).
On June 1, 2004, we acquired certain assets and liabilities of OXO International ("OXO") for a net cash
purchase price of $273,173 including the assumption of certain liabilities. The acquisition was funded through a
combination of short-term and long-term debt as further discussed in Notes (5) and (7) to these consolidated
financial statements. We completed an analysis of the economic lives of all the assets acquired and determined
the appropriate allocation of the initial purchase price based upon independent appraisals. In the acquisition,
we recorded goodwill of $165,388 (subsequently adjusted to $165,934), trademarks with indefinite useful lives
(and thus not subject to amortization) of $75,200, and other intangible assets totaling $17,990 (subsequently
adjusted to $18,364). "Other intangible assets" are subject to amortization over varying lives ranging from 2 to
13 years and consist of patents, customer lists and a non-compete agreement. We believe that the OXO
acquisition resulted in recognition of goodwill primarily because of its industry position, management strength,
and business growth potential. See Note (17) for a further discussion of the OXO acquisition.
On September 29, 2004, we acquired certain assets related to the worldwide production and distribution of
TimeBlock® and Skin Milk® body and skin care products lines from Naterra International, Inc. TimeBlock® is
73
NOTE 4 - ACQUISITION OF TRADEMARKS AND OF RIGHTS UNDER LICENSE AGREEMENTS,
CONTINUED
a line of clinically tested anti-aging skin care products. Skin Milk® is a line of body, bath and skin care
products enriched with real milk proteins, vitamins and botanical extracts. The assets consist principally of
patents, trademarks and trade names, product formulations and production technology, distribution rights, and
customer lists. The Company paid the purchase price of $12,001 in cash funded out of the Company's
revolving line of credit. We completed an analysis of the economic lives of all the assets acquired and
determined the appropriate allocation of the initial purchase price based upon independent appraisals. The
purchase price was allocated $11,906 to trademarks and $95 to property and equipment.
NOTE 5 – SHORT-TERM DEBT
On June 1, 2004, we cancelled a prior credit facility and entered into a five year $75,000 Credit Agreement
(“Revolving Line of Credit Agreement”), dated as of June 1, 2004, with Bank of America, N.A. and other
lenders and a one year $200,000 Term Loan Credit Agreement, dated as of June 1, 2004, with Banc of America
Mezzanine Capital, LLC. The Term Loan Credit Agreement was a temporary financing to fund the balance of
OXO's purchase price, as further discussed in Note (17) to these consolidated financial statements. We entered
into this Term Loan Credit Agreement until more permanent long-term financing could be put into place. The
purchase price of the OXO acquisition was funded by borrowings of $73,173 under the new Revolving Line of
Credit Agreement and $200,000 under the Term Loan Credit Agreement. Borrowings under the Term Loan
Credit Agreement were subsequently paid off with the proceeds of the funding of $225,000 Floating Rate
Senior Notes on June 29, 2004 as discussed in Note (7). For the period outstanding, borrowings under the Term
Loan Credit Agreement accrued interest at LIBOR plus a margin of 1.125 percent.
Borrowings under the Revolving Line of Credit Agreement accrue interest equal to the higher of the Federal
Funds Rate plus 0.50 percent or Bank of America's prime rate. Alternatively, upon timely election by the
Company, borrowings accrue interest based on the respective 1, 2, 3, or 6-month LIBOR rate plus a margin of
0.75 percent to 1.25 percent based upon the "Leverage Ratio" at the time of the borrowing. The "Leverage
Ratio" is defined by the Revolving Line of Credit Agreement as the ratio of total consolidated indebtedness,
including the subject funding on such date to consolidated EBITDA ("Earnings Before Interest, Taxes,
Depreciation and Amortization") for the period of the four consecutive fiscal quarters most recently ended, with
EBITDA adjusted on a pro forma basis to reflect the acquisition of OXO and the disposition of Tactica. The
rates paid on various draws during the 2006 fiscal year ranged from 4.09 percent to 7.50 percent. The credit
line allows for the issuance of letters of credit up to $10,000. Outstanding letters of credit reduce the $75,000
borrowing limit dollar for dollar. As of February 28, 2006, there were no revolving loans or open letters of
credit outstanding against this facility.
The Revolving Line of Credit Agreement requires the maintenance of certain Debt/EBITDA, fixed charge
coverage ratios, and other customary covenants. The agreements were guaranteed, on a joint and several basis,
by the parent company, Helen of Troy Limited, and certain U.S. subsidiaries. Any amounts outstanding under
the Revolving Line of Credit Agreement will mature on June 1, 2009.
74
Last day of February,
----------------------------------------
2006
2005
------------------- -------------------
$
$
24,176
7,603
7,617
2,671
2,577
1,502
1,495
858
593
-
5,053
20,008
13,507
9,392
1,929
1,732
1,239
1,229
1,640
123
2,389
6,632
------------------- -------------------
59,820
$
=========== ===========
$
54,145
NOTE 6 – ACCRUED EXPENSES
A summary of other accrued liabilities (in thousands) was as follows:
Accrued sales returns, discounts and allowances
Accrued compensation
Accrued advertising
Accrued interest
Accrued royalties
Accrued professional fees
Accrued benefits and payroll taxes
Accrued freight
Accrued property, sales and other taxes
Foreign currency forward contracts
Other
Total Other Accrued Liabilities
75
NOTE 7 - LONG-TERM DEBT
A summary of long-term debt (in thousands) was as follows:
Original
Date
Borrowed
Range of Interest Rates
--------------------------------
Latest
Rate
Last day of February,
----------------------------------
------------------ --------------- --------------- ----------- ------------------ ---------------- ----------------
2006
2005
Payable Maturity
2006
2005
$40,000 unsecured Senior Note Payable at a
fixed interest rate of 7.01%. Interest payable
quarterly, principal of $10,000,000 payable
annually beginning on January 2005.
$15,000 unsecured Senior Note Payable at a
fixed interest rate of 7.24%. Interest payable
quarterly, principal of $3,000,000 payable
annually beginning on July 2008.
$100,000 unsecured floating interest rate 5
Year Senior Notes. Interest set and payable
quarterly at three-month LIBOR plus 85 basis
points. Principal is due at maturity. Notes
can now be prepaid without penalty.
$50,000 unsecured floating interest rate 7
Year Senior Notes. Interest set and payable
quarterly at three-month LIBOR plus 85 basis
points. Principal is due at maturity. Notes can
be prepaid after June 2006 without penalty.
$75,000 unsecured floating interest rate 10
Year Senior Notes. Interest set and payable
quarterly at three-month LIBOR plus 90 basis
points. Principal is due at maturity. Notes can
be prepaid after June 2006 without penalty.
$15,000 Industrial Development Revenue
Bonds, interim draws, unsecured. Interest
is set and payable quarterly at Company's
election either Bank Prime or applicable
LIBOR plus 0.75% to 1.25% as determined
by loan agreement formula. Principal
to convert to five-year Bonds in May 2006,
due in annual installments beginning
May, 2007.
Less current portion of long-term debt
Long-term debt, less current portion
January 1996
7.01%
7.01%
7.01% January 2008
$
20,000
$
30,000
July 1997
7.24%
7.24%
7.24% July 2012
15,000
15,000
3.41%
to
5.371%
June 2004
2.436%
to
3.410% 5.81% June 2009
100,000
100,000
3.41%
to
5.371%
2.436%
to
3.41%
June 2004
5.81% June 2011
50,000
50,000
3.46%
to
5.421%
June 2004
2.486%
to
3.460% 5.86% June 2014
75,000
75,000
5.295%
to
5.42%
August 2005
-
5.42% May 2011
4,974
-
264,974
(10,000)
---------------- ----------------
270,000
(10,000)
---------------- ----------------
260,000
$
========= =========
254,974
$
Included in interest expense are amortized financing costs of $782, $601, and $33 for the fiscal years 2006,
2005 and 2004, respectively.
The fair market value at February 28, 2006 computed using discounted cash flow analysis was $20,350 and
$15,450 on the $20,000 and $15,000 of book value, fixed rate debt, respectively. All other long-term debt has
floating interest rates, and its book value approximates its fair value at February 28, 2006.
All of our long-term debt is guaranteed by either the parent company, Helen of Troy Limited, and/or certain
subsidiaries on a joint and several basis and has customary covenants covering Debt/EBITDA ratios, fixed
76
NOTE 7 - LONG-TERM DEBT, CONTINUED
charge coverage ratios, consolidated net worth levels, and other financial requirements. Additionally, the notes
restrict us from incurring liens on any of our properties, except under certain conditions as defined in the
various debt agreements. We are in compliance with all the terms of these notes.
NOTE 8 - INCOME TAXES
Our components of earnings from continuing operations before income tax expense are as follows:
Years Ended Last Day of February,
(in thousands)
------------------------------------------------------------------
2005
--------------------- --------------------- ---------------------
2006
2004
U.S.
Non-U.S.
$
$
7,045
48,757
13,760
72,279
--------------------- --------------------- ---------------------
86,039
$
============ ============ ============
15,529
74,050
$
$
$
55,802
89,579
Our components of income tax expense attributable to continuing operations are as follows:
Years Ended Last Day of February,
(in thousands)
------------------------------------------------------------------
2005
--------------------- --------------------- ---------------------
2006
2004
Current
Deferred
U.S.
Non-U.S.
$
$
$
2,481
1,869
2,142
5,105
8,444
928
--------------------- --------------------- ---------------------
14,477
$
============ ============ ============
5,410
9,108
(1,611)
$
$
12,907
6,492
Our total income tax expense from continuing operations differs from the amounts computed by applying the
statutory tax rate to earnings before income taxes. The reasons for these differences are as follows:
Years Ended Last Day of February,
(in thousands)
------------------------------------------------------------------
2005
--------------------- --------------------- ---------------------
2006
2004
Expected tax expense at the U.S. statutory
rate of 35%
$
19,531
$
31,353
$
30,114
Decrease in income taxes resulting from income
from non-U.S. operations subject to
varying income tax rates
(15,831)
(16,400)
(15,637)
Reversal of prior accruals as a result of final
tax audit settlements
-
Repatriation of prior years' foreign earnings
Actual tax expense
(2,046)
-
-
-
2,792
--------------------- --------------------- ---------------------
$14,477
$
============ ============ ============
$12,907
6,492
77
NOTE 8 - INCOME TAXES, CONTINUED
On February 22, 2006, the Board of Directors of a subsidiary of the Company approved the repatriation,
pursuant to The American Jobs Creation Act of 2004, of $48,554 in foreign earnings. As a result, we incurred a
one-time tax charge of $2,792 in the fourth fiscal quarter ending February 28, 2006.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and
liabilities as of the last day of February 2006 and 2005 are as follows:
2006
2005
--------------------- ---------------------
(in thousands)
Deferred tax assets:
Net operating loss carryforwards
Accounts receivable
Inventories, principally due to additional
cost of inventories for tax purposes
Write down of marketable securities
Accrued expenses and other
Contribution carryforward
Total gross deferred tax assets
Valuation allowance
Deferred tax liabilities:
Depreciation and amortization
Net deferred tax asset
$
4,861
1,801
$
6,080
2,502
4,275
1,170
3,078
793
1,723
1,039
609
721
--------------------- ---------------------
12,674
15,978
(368)
-
(5,001)
(5,019)
--------------------- ---------------------
7,655
$
============ ============
$
10,609
As of the end of fiscal 2006, $3,826 of our gross deferred tax assets arise from U.S. net operating loss
carryforwards which will expire if not utilized by various dates ranging from fiscal 2019 to 2025, and $1,035 of
our gross deferred tax assets arise from Non-U.S. net operating loss carryforwards which will expire if not
utilized by various dates between fiscal 2007 and fiscal 2015.
In assessing the realizeability of deferred tax assets, we consider whether it is more likely than not that some
portion of all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in which those temporary
differences become deductible. We consider the scheduled reversal of deferred tax liabilities, expected future
taxable income, and tax planning strategies in making this assessment. In order to fully realize the deferred tax
asset, we will need to generate future taxable income of approximately $54,270 prior to the expiration of net
operating loss carryforwards. Based upon the level of historical taxable income and our expectations for future
taxable income over the periods in which the deferred tax assets are deductible, as of February 28, 2006,
management believes it is more likely than not that the Company will realize the benefits of these deductible
differences. The amount of deferred tax asset considered realizable, however, could be reduced in the near term
if estimates of future taxable income during the carryforward period are reduced.
Hong Kong Income Taxes - The Inland Revenue Department (the “IRD”) in Hong Kong has assessed a total of
$32,086 (U.S.) in tax on certain profits of our foreign subsidiaries for the fiscal years 1995 through 2003. Hong
Kong levies taxes on income earned from certain activities previously conducted in Hong Kong. We are
vigorously defending our position that we conducted the activities that produced the profits in question outside
of Hong Kong. We also assert that we have complied with all applicable reporting and tax payment obligations.
78
NOTE 8 - INCOME TAXES, CONTINUED
In connection with the IRD's tax assessment for the fiscal years 1995 through 2003, we have purchased tax
reserve certificates in Hong Kong totaling $28,425. 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.
On May 10, 2006, the IRD and the Company reached a settlement regarding tax liabilities for the fiscal years
1995 through 1997. For those tax years, we have agreed to an assessment of approximately $4,019 including
estimated penalties and interest. This agreement has been presented to the IRD’s Board of Review and is
subject to their approval. Our consolidated financial statements at February 28, 2006 include adequate
provisions for this liability. We expect the liability to be paid with $3,282 of tax reserve certificates and $737 in
cash. If this settlement is approved, we have approximately $25,143 remaining in available tax reserve
certificates for future settlement of any potential tax liability.
If the IRD were to successfully assert the same position for fiscal years after fiscal year 2003, the resulting
assessment could total $18,673 (U.S.) in taxes for fiscal years 2004 and 2005. We would vigorously disagree
with the proposed adjustments and would aggressively contest this matter through applicable taxing authority
and judicial procedures, as appropriate.
Although the final resolution of the proposed adjustments is uncertain and involves unsettled areas of the law,
based on currently available information, we have provided for our best estimate of the probable tax liability for
this matter. While the resolution of the issue may result in tax liabilities which are significantly higher or lower
than the reserves established for this matter, management currently believes that the resolution will not have a
material effect on our consolidated financial position or liquidity. However, an unfavorable resolution could
have a material effect on our consolidated results of operations or cash flows in the quarter in which an
adjustment is recorded or the tax is due or paid.
Effective March 2005, we had concluded the conduct of all operating activities in Hong Kong that we believe
were the basis of the IRD’s assessments. Over the course of the prior year, the Company had moved these
activities to China and Macao. The Company established a Macao offshore company (“MOC”) and began
operating from Macao in the third quarter of fiscal 2005. As a MOC, we have been granted an indefinite tax
holiday and currently pay no taxes. Accordingly, no additional accruals for Hong Kong contingent tax
liabilities beyond February 2005 have been provided.
United States Income Taxes - The Internal Revenue Service (the “IRS”) has completed its audits of the U.S.
consolidated federal tax returns for fiscal years 2000, 2001 and 2002. We previously disclosed that the IRS
provided notice of proposed adjustments to taxes of $13,424 for the three years under audit. We have resolved
the various tax issues and reached an agreement on additional tax in the amount of $3,568. The resulting tax
liability had already been provided for in our tax reserves and we have decreased our tax accruals related to the
IRS audits for fiscal years 2000, 2001 and 2002, accordingly. This additional tax liability and associated
interest of $914 were settled in the fourth quarter of fiscal 2006. The IRS is auditing the U.S. consolidated
federal tax returns for fiscal years 2003 and 2004. Although the ultimate outcome of the examination cannot be
predicted with certainty, management is of the opinion that adequate provisions for taxes in those years have
been made in the Company’s consolidated financial statements.
79
NOTE 8 - INCOME TAXES, CONTINUED
Income Tax Provisions - We must make certain estimates and judgments in determining income tax expense
for financial statement purposes. These estimates and judgments must be used in the calculation of certain tax
assets and liabilities because of differences in the timing of recognition of revenue and expense for tax and
financial statement purposes. We must assess the likelihood that we will be able to recover our deferred tax
assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance
against the deferred tax assets that we estimate will not ultimately be recoverable. As changes occur in our
assessments regarding our ability to recover our deferred tax assets, our tax provision is increased in any period
in which we determine that the recovery is not probable.
In 1994, we engaged in a corporate restructuring that, among other things, resulted in a greater portion of our
income not being subject to taxation in the United States. If such income were subject to U.S. federal income
taxes, our effective income tax rate would increase materially. The AJCA included an anti-inversion provision
that denies certain tax benefits to companies that have reincorporated outside the United States after March 4,
2003. We completed our reincorporation in 1994; therefore, our transaction is grandfathered by the AJCA, and
we expect to continue to benefit from our current structure.
In addition to future changes in tax laws, our position on various tax matters may be challenged. Our ability to
maintain our position that the parent company is not a Controlled Foreign Corporation (as defined under the
U.S. Internal Revenue Code) is critical to the tax treatment of our non-U.S. earnings. A Controlled Foreign
Corporation is a non-U.S. corporation whose largest U.S. shareholders (i.e., those owning 10 percent or more of
its shares) together own more than 50 percent of the shares in such corporation. If a change of ownership were
to occur such that the parent company became a Controlled Foreign Corporation, such a change could have a
material negative effect on the largest U.S. shareholders and, in turn, on our business.
In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of other
complex tax regulations. We recognize liabilities for anticipated tax audit issues in the United States and other
tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. If we
ultimately determine that payment of these amounts are not probable, we reverse the liability and recognize a
tax benefit during the period in which we determine that the liability is no longer probable. We record an
additional charge in our provision for taxes in the period in which we determine that the recorded tax liability is
less than we expect the ultimate assessment to be.
80
NOTE 9 - STOCK-BASED COMPENSATION PLANS
We sponsor 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. All
options to date have been granted at or above market prices on the dates of grant. Accordingly, no
compensation expense has been recognized for our stock option plans or our stock purchase plan. Had we
recorded compensation expense for our stock option plans based on the fair value of the options at the dates of
grant for those awards adjusted for the related impact of income taxes, consistent with the method of Statement
of Financial Accounting Standards No. 123, "Accounting For Stock-Based Compensation," net earnings and
earnings per share would have been reduced to the following pro forma amounts:
Net earnings
As Reported
Years Ended The Last Day of February,
(in thousands)
----------------------------------------------------------------------------
2005
-------------------
$
76,450
2004
-------------------
$
60,522
2006
-------------------
$
49,310
Fair-value cost of options with original
vesting schedules
1,951
Fair-value cost of options where vesting
was accelerated on February 24, 2006
Earnings per share:
Pro forma
Basic: As Reported
Pro forma
Diluted: As Reported
Pro forma
1,181
-------------------
$
46,178
============
$
$
1.65
1.54
$
$
1.56
1.46
1,437
-
6,620
-
-------------------
$
75,013
===============
-------------------
53,902
$
===============
$
$
2.57
2.52
$
$
2.13
1.90
$
$
2.35
2.30
$
$
1.94
1.72
On February 24, 2006, the Compensation Committee of the Company’s Board of Directors approved the
immediate acceleration of vesting on unvested and "out-of-the money" stock options previously awarded to
officers and employees with option exercise prices greater than $19.65. The affected options held by officers
and employees had a range of exercise prices between $20.35 and $33.88, with a weighted average
exercise price of $24.79. Vesting of options exercisable for a total of 285,217 shares was accelerated. The
closing price per share of the Company's common shares on February 24, 2006 was $19.65. Except for the
vesting change, all affected stock options will continue to be governed by their respective original terms and
conditions. The accelerated options represent 4.1% of the total of all outstanding Company options.
The Company took this action in order to reduce the future compensation expense associated with unvested
stock options following the adoption of SFAS No.123R beginning with the first quarter of fiscal 2007. As a
result of the acceleration, the Company estimates that it will reduce future stock option related compensation
expense it otherwise would be required to record in connection with the accelerated options by $1,641 on a pre-
tax basis over the original remaining option vesting periods.
81
NOTE 9 - STOCK-BASED COMPENSATION PLANS, CONTINUED
We computed the pro forma figures disclosed above using the Black-Scholes option pricing model to estimate
grant date fair value of stock options for the periods shown above. The following Black-Scholes assumptions
were used:
Option Assumptions
---------------------------------------------------------------------------------------------------------------- --------------------- --------------------- ---------------------
2006
Years Ended The Last Day of February,
------------------------------------------------------------------
2005
2004
Dividend yield
Expected volatility
Risk-free interest rate
Expected option term
0.0%
41.6%
3.6%
(1)
0.0%
39.3%
3.7%
(1)
0.0%
42.5%
3.6%
(1)
(1) Expected lives of 3, 4, 5, or 10 years are used depending on the option granted.
On August 3, 2005, our shareholders approved a proposal to amend the 1998 Plan by increasing the number of
shares of common shares available for issuance to employees an additional 750,000 shares, limiting the
maximum amount of shares that can be issued in any fiscal year to 250,000, excluding Mr. Gerald J. Rubin, our
Chairman of the Board, Chief Executive Officer and President and Mr. Christopher L. Carameros, an Executive
Vice-President, from any future grants under the Plan, and requiring that each restricted share granted under the
plan will reduce the available shares under the plan by three shares.
Under stock option and restricted stock plans adopted in 1994 and 1998 (the "1994 Plan" and the "1998 Plan,"
respectively), as amended, we have reserved a total of 14,750,000 common shares for issuance to key officers
and employees. Pursuant to the 1994 and 1998 Plans, we grant options to purchase our common shares at a
price equal to or greater than the fair market value on the grant date. Both plans contain provisions for incentive
stock options ("ISO's"), non-qualified stock options ("Non-Q's") and restricted shares 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. As of February 28,
2006, 555,286 shares remained available for issue under these plans.
Under a stock option plan for non-employee directors (the "Directors’ Plan"), adopted in fiscal 1996, we
reserved a total of 980,000 shares of our common stock for issuance to non-employee members of the Board of
Directors. We granted options under the Directors' Plan at a price equal to the fair market value of our common
shares 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. The Directors’ Plan expired by its terms on June 6, 2005. On that date, the
remaining 284,000 shares available for issue expired.
82
NOTE 9 - STOCK-BASED COMPENSATION PLANS, CONTINUED
A summary of stock option activity under all plans is as follows:
Years Ended Last Day of February,
------------------------------------------------------------------------------------------------------------------------------------
2005
------------------------------------------- ------------------------------------------- -------------------------------------------
2006
2004
WEIGHTED
AVERAGE
EXERCISE
PRICE
SHARES
(000's)
WEIGHTED
AVERAGE
EXERCISE
PRICE
SHARES
(000's)
WEIGHTED
AVERAGE
EXERCISE
PRICE
SHARES
(000's)
--------------------- --------------------- --------------------- --------------------- --------------------- ---------------------
Options outstanding, beginning of year
Options granted
Options exercised
Options forfeited
Options outstanding, at year-end
Options exercisable at year-end
Weighted-average fair value of options
granted during the year
$
$
14.60
18.83
11.16
23.21
6,846
306
(162)
(67)
10.83
18.43
7.03
10.73
--------------------- --------------------- --------------------- --------------------- --------------------- ---------------------
12.97
============ ============ ============ ============ ============ ============
12.69
============ ============ ============ ============ ============ ============
8,615
1,315
(1,874)
(73)
7,983
190
(1,288)
(39)
12.97
29.49
6.65
17.01
$
$
$
$
14.64
14.83
6,494
6,923
14.60
13.97
7,182
6,846
6,142
7,983
$
7.14
$
9.92
$
8.97
The following table summarizes information about stock options at February 28, 2006:
--------------------------------------------------------------------------------------------------- -------------------------------------------
Outstanding Stock Options
Exercisable Stock Options
Weighted-
Average
Remaining
Contractual
Life (years)
Weighted-
Average
Exercise
Price
Price Range
--------------------------------
$
12.13
to
14.02
to
$
15.51
to
$
35.25
to
$
3.89
12.75
14.34
17.76
$
$
$
$
$
--------------------- --------------------- --------------------- ---------------------
8.52
13.58
14.96
25.03
8.66
13.77
15.06
22.47
4.38
4.49
3.50
6.86
$
ISOs
Total
Non-Qs
Total
Directors' Plan
Total
Number of
Options
---------------------
71,850
110,825
6,116
464,300
---------------------
653,091
============
1,539,125
1,658,311
1,756,834
1,029,233
---------------------
5,983,503
============
62,500
20,000
36,000
168,000
---------------------
286,500
============
$
$
$
$
5.69
12.53
14.47
17.63
$
$
$
$
4.41
12.53
14.47
16.41
to
to
to
to
to
to
to
to
$
$
$
$
11.84
14.02
15.94
23.38
$
$
$
$
11.84
13.13
15.94
33.35
6.15
$
19.40
5.32
5.29
2.89
5.34
$
9.82
13.05
15.56
19.63
4.59
$
14.09
4.49
6.36
3.64
8.18
$
8.02
12.89
15.44
26.06
6.67
$
19.87
Weighted-
Average
Exercise
Price
$
21.37
$
9.86
13.04
15.56
19.72
$
14.07
$
8.02
12.89
15.44
26.19
$
18.69
Number of
Options
48,800
40,675
2,916
262,985
---------------------
355,376
============
1,524,875
1,642,986
1,756,834
975,008
---------------------
5,899,703
============
62,500
20,000
36,000
120,000
---------------------
238,500
============
In fiscal 1999, our shareholders approved an employee stock purchase plan (the "Stock Purchase Plan") under
which 500,000 common shares are reserved for issuance to our employees, nearly all of whom are eligible to
participate. Under the terms of the Stock Purchase Plan, employees authorize the withholding of from
1 percent to 15 percent of their wages or salaries to purchase our common shares. The purchase price for shares
purchased under this plan is equal to the lower of 85 percent of the share’s fair market value on either the first
83
day of each option period or the last day of each period. During fiscal 2006, employees purchased 22,171
common shares from the Company under the Stock Purchase Plan. As of February 28, 2006, 331,716 shares
remained available for issue under this plan.
NOTE 10 – OTHER COMMITMENTS AND CONTINGENCIES
Indemnity Agreements - Under agreements with customers, licensors, and parties from whom we have
acquired assets or entered into business combinations, we indemnify these parties against liability associated
with our products. Additionally, we are party to a number of agreements under leases where we indemnify the
lessor for liabilities attributable to our action or conduct. The indemnity agreements to which we are a party do
not, in general, increase our liability for claims related to our products or actions and have not materially
affected our accompanying consolidated financial statements.
Employment Contracts - We have entered into employment contracts with certain of our officers. These
agreements provide for minimum salary levels and potential incentive bonuses. One agreement automatically
renews itself each month for a three-year period and provides that in the event of a merger, consolidation, or
transfer of all or substantially all of our assets to an unaffiliated party, the officer may make an election to
receive a cash payment for the balance of the obligations under the agreement. The expiration dates for these
agreements range from June 1, 2008 to February 28, 2009. The aggregate commitment for future salaries
pursuant to such contracts, at February 28, 2006, excluding incentive compensation, was $2,740.
On April 21, 2005, the Company and Gerald J. Rubin, the Chairman of the Board, Chief Executive Officer, and
President of the Company, executed an amendment to Mr. Rubin’s employment agreement, to be effective as of
April 15, 2005 making the following changes:
• The term of the agreement was reduced from five years to three years, renewing on a daily basis
for a new three-year term as currently provided in the original agreement; and
• Reduced the period for severance payouts from five years to three years. The formula for
calculating the amount of the annual severance payments required by the agreement remains
unchanged.
International Trade - We purchase most of our appliances and a significant portion of other products that we
sell from unaffiliated manufacturers located in the Far East, principally in The Peoples' Republic of China,
Thailand, Taiwan, and South Korea. Due to the fact that most of our products are manufactured in the Far East,
we are subject to risks associated with trade barriers, currency exchange fluctuations, and political unrest. These
risks have not historically affected our operations. Additionally, we believe that we could obtain similar
products from facilities in other countries, if necessary. However, the relocation of any production capacity
could require substantial time and increased costs.
Customer Incentives - We regularly enter into arrangements with customers whereby we offer those customers
incentives, including incentives in the form of volume rebates. Our estimate of the liability for such incentives
is included on the consolidated balance sheets on the line entitled "Accrued expenses," and in Note (6) included
in the line entitled “Accrued Sales Returns, Discounts and Allowances,” and is based on incentives applicable to
sales up to the respective balance sheet dates.
84
NOTE 10 - OTHER COMMITMENTS AND CONTINGENCIES, CONTINUED
Securities Class Action Litigation - Class action lawsuits have been filed and consolidated into one action
against the Company, Gerald J. Rubin, the Company’s Chairman of the Board, President and Chief Executive
Officer, and Thomas J. Benson, the Company’s Chief Financial Officer, on behalf of purchasers of publicly
traded securities of the Company. The Company understands that the plaintiffs allege violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder, on the
grounds that the Company and the two officers engaged in a scheme to defraud the Company’s shareholders
through the issuance of positive earnings guidance intended to artificially inflate the Company’s share price so
that Mr. Rubin could sell almost 400,000 of the Company’s common shares at an inflated price. The plaintiffs
are seeking unspecified damages, interest, fees, costs, an accounting of the insider trading proceeds, and
injunctive relief, including an accounting of and the imposition of a constructive trust and/or asset freeze on the
defendant’s insider trading proceeds. The class period stated in the complaint was October 12, 2004 through
October 10, 2005.
The lawsuit was brought in the United States District Court for the Western District of Texas and is still in the
preliminary stages. The Company intends to defend the foregoing lawsuit vigorously, but, because the lawsuit
has been recently filed, the Company cannot predict the outcome and is not currently able to evaluate the
likelihood of success or the range of potential loss, if any, that might be incurred in connection with the action.
However, if the Company were to lose on any issues connected with the lawsuit or if the lawsuit is not settled
on favorable terms, the judgement or settlement may have a material adverse effect on the Company's
consolidated financial position, results of operations and cash flows. There is a risk that such litigation could
result in substantial costs and divert management attention and resources from its business, which could
adversely affect the Company's business. The Company carries insurance that provides an aggregate coverage
of $20,000 ($20 million) after a self-insured retention $500 ($500 thousand) for the period during which the
claims were filed, but cannot evaluate at this time whether such coverage will be adequate to cover losses, if
any, arising out of the lawsuit.
Other Litigation - We are involved in various other legal claims and proceedings in the normal course of
operations. We believe the outcome of these matters will not have a material adverse effect on our consolidated
financial position, results of operations, or liquidity.
Preference Shares, Anti-takeover provisions - Under the terms of a Shareholders' Rights Plan approved by our
Board of Directors in fiscal 1999, we declared a dividend of one preference share right ("right") for each
outstanding share of common shares. The dividend resulted in no cash payment by us, created no liability on
our part, and did not change the number of shares of our common shares outstanding. The rights are
inseparable from the shares of our common shares and entitle its holders to purchase one one-thousandth of a
share of Series-A, First Preference Shares ("preference shares"), par value $1.00, at a price of $100 per one one-
thousandth of a preference share. Should certain persons or groups of persons ("Acquiring Persons") acquire
more than 15 percent of our outstanding common shares, our Board of Directors may either adjust the price at
which holders of rights may purchase preference shares or may redeem all of the then outstanding rights at $.01
per right. The rights associated with the acquiring person's shares of common shares would not be exercisable.
These rights have certain anti-takeover effects. The rights could cause substantial dilution to a person or group
that attempts to acquire Helen of Troy Limited in certain circumstances, but should not interfere with any
merger or other business combination approved by our Board of Directors. These rights expire December 1,
2008, unless their expiration date is advanced or extended or unless under the terms of the agreement these
rights are earlier redeemed or exchanged.
85
ITEM 10 - OTHER COMMITMENTS AND CONTINGENCIES, CONTINUED
Contractual Obligations and Commercial Commitments - Our contractual obligations and commercial
commitments, as of February 28, 2006 were:
PAYMENTS DUE BY PERIOD ENDED THE LAST DAY OF FEBRUARY
(in thousands)
Contractual Obligations
----------------------------------------------------------------------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
Total
2007
1 year
2008
2 years
2009
3 years
2010
4 years
2011
5 years
After
5 years
Long-term debt - floating rate
Long-term debt - fixed rate
Interest on floating rate debt *
Interest on fixed rate debt
Open purchase orders
Minimum royalty payments
Advertising and promotional
Operating leases
Long-term incentive plan payouts
Implementation of enterprise resource planning
system
Other
Total contractual obligations
$
229,974
35,000
72,424
6,621
61,838
11,989
26,771
3,862
1,706
-
$
10,000
13,399
2,371
61,838
3,292
12,066
2,039
-
$
995
10,000
13,356
1,670
-
2,524
9,836
1,109
1,498
$
995
3,000
13,298
951
-
2,712
1,802
394
208
$
100,995
3,000
9,367
733
-
1,144
800
285
-
$
995
3,000
7,372
516
-
1,279
800
35
-
$
125,994
6,000
15,632
380
-
1,038
1,467
-
-
507
762
507
401
-
361
-
-
-
-
-
-
-
-
-------------- -------------- -------------- -------------- -------------- -------------- --------------
150,511
$
======== ======== ======== ======== ======== ======== ========
451,454
105,913
116,324
23,360
41,349
13,997
$
$
$
$
$
$
* The future obligation for interest on our variable rate debt is estimated assuming the rates in effect as of
February 28, 2006. This is only an estimate; actual rates will vary over time. For instance, a 1 percent
increase in interest rates could add $2,300 per year to floating rate interest expense over the next year.
We lease certain facilities, equipment and vehicles under operating leases, which expire at various dates through
fiscal 2011. Certain of the leases contain escalation clauses and renewal or purchase options. Rent expense
related to our operating leases was $2,818, $1,757 and $1,610 for fiscal 2006, 2005 and 2004, respectively.
NOTE 11 - FOURTH QUARTER CHARGES/TRANSACTIONS
On February 24, 2006 the Board of Directors of a subsidiary of the Company approved the repatriation,
pursuant to The American Jobs Creation Act of 2004, of $48,554 in foreign earnings. As a result, we incurred a
one-time tax charge of $2,792 in the fourth fiscal quarter ending February 28, 2006. Our results for the fourth
quarter of fiscal 2005 did not contain any transactions of a non-routine nature. In the fourth quarter of fiscal
2004, we recorded a goodwill impairment loss of $5,699, net of tax benefits of $1,938 in connection with our
discontinued operations of Tactica, and its subsequent sale in fiscal 2005. The details of this transaction are
more fully described in Note (16).
86
NOTE 12 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected unaudited quarterly financial data is as follows (in thousands, except per share amounts):
May
November
--------------------- --------------------- --------------------- --------------------- ---------------------
February
August
Total
Fiscal 2006:
Net sales
Gross profit
Net earnings
Earnings per share
Basic
Diluted
Fiscal 2005:
Net sales
Gross profit
Net earnings from continuing operations
Income (loss) from discontinued segment's
operations and impairment of related assets,
net of tax
Net earnings
Earnings per share
Basic
Continuing operations
Discontinued operations
Total basic earnings per share
Diluted
Continuing operations
Discontinued operations
Total diluted earnings per share
$
127,392
$
130,389
$
197,458
$
134,508
$
589,747
58,692
10,547
0.35
0.33
60,218
9,452
0.32
0.30
86,044
22,666
0.76
0.72
61,604
6,645
0.22
0.21
266,558
49,310
1.65
1.56
$
107,021
$
141,229
$
205,682
$
127,617
$
581,549
50,240
14,705
(222)
14,483
0.50
(0.01)
0.49
0.45
(0.01)
0.44
66,913
18,848
98,651
31,135
58,700
11,984
274,504
76,672
-
-
-
18,848
31,135
11,984
(222)
76,450
0.63
-
0.63
0.57
-
0.57
1.04
-
1.04
0.97
-
0.97
0.41
-
0.41
0.37
-
0.37
2.58
(0.01)
2.57
2.36
(0.01)
2.35
87
NOTE 13 - SEGMENT INFORMATION
The following table contains segment information for fiscal 2006, 2005, and 2004.
(in thousands)
2006
----------------------------------------------------------------------------- --------------------- --------------------- --------------------- ---------------------
589,747
$
Net sales
71,378
Operating income
857,744
Identifiable assets
52,367
Capital, license, trademark and other intangible expenditures
12,427
Depreciation and amortization
$
-
-
-
-
-
127,800
34,118
345,150
22,388
3,407
461,947
37,260
512,594
29,979
9,020
Housewares (3)
$
$
Total
Personal
Care
Discontinued
Segment
2005
----------------------------------------------------------------------------- --------------------- --------------------- --------------------- ---------------------
581,549
Net sales
$
102,024
Operating income
811,449
Identifiable assets
286,263
Capital, license, trademark and other intangible expenditures
9,708
Depreciation and amortization
-
$
-
-
-
-
80,143
25,031
304,492
264,525
2,152
501,406
76,993
506,957
21,738
7,556
Housewares (2)
$
$
Total
Personal
Care (1)
Discontinued
Segment (1)
2004
----------------------------------------------------------------------------- --------------------- --------------------- --------------------- ---------------------
474,868
Net sales
$
85,774
Operating income
489,609
Identifiable assets
65,119
Capital, license, trademark and other intangible expenditures
6,128
Depreciation and amortization
-
$
-
23,185
-
-
-
$
-
-
-
-
474,868
85,774
466,424
65,119
6,128
Housewares
$
Total
Personal
Care
Discontinued
Segment (1)
(1) Segment information from prior periods has been restated due to the classification of Tactica as discontinued
operations and a change in our segments effective March 1, 2004.
(2) Includes only operations from June 1, 2004 through February 28, 2005.
(3) Capital expenditures and identifiable assets for the Housewares segment includes a $20,746 allocation for
the portion of the new Mississippi distribution facility costs incurred directly and indirectly for the benefit of
this segment.
The Personal Care segment’s products include hair dryers, straighteners, curling irons, hairsetters, women’s
shavers, mirrors, hot air brushes, home hair clippers, paraffin baths, massage cushions, footbaths, body
massagers, brushes, combs, hair accessories, liquid hair styling products, men’s fragrances, men’s deodorants,
body powder, and skin care products.
The Housewares segment reports the operations of OXO International (“OXO”) which we acquired on June 1,
2004, as further described in Note (17) to our consolidated financial statements. The Houseware segment’s
products include kitchen tools, cutlery, bar and wine accessories, household cleaning tools, tea kettles, trash
cans, storage and organization products, hand tools, gardening tools, kitchen mitts and trivets, and barbeque
tools.
88
NOTE 13 - SEGMENT INFORMATION, CONTINUED
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 expenses ("SG&A") 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. In connection with the acquisition of OXO, we agreed that World Kitchen, Inc. would perform
certain corporate functions for OXO for a transitional period of time. The costs of these functions are reflected
in SG&A for the Housewares segment’s operating income. These costs were incurred through the end of fiscal
2006. During this transitional period, we did not make an allocation of our corporate overhead to OXO. In
fiscal 2007, we expect to make an allocation of our corporate overhead to OXO as such transition services
provided by World Kitchen, Inc. terminate and are assumed by Helen of Troy. When we decide that such
allocations are appropriate, there may be some reduction in operating income for the Housewares segment,
offset by an equal increase in operating income for the Personal Care segment. The extent of this operating
income impact between the segments has yet to be determined.
Other items of income and expense, including income taxes, are not allocated to operating segments.
The Company's domestic and international net revenues from third parties and long-lived assets are as follows
(in thousands):
NET SALES FROM THIRD PARTIES:
United States
International
Total
LONG-LIVED ASSETS:
United States
International
Total
2006
2005
--------------------- --------------------- ---------------------
2004
$
$
487,620
102,127
397,856
77,012
--------------------- --------------------- ---------------------
474,868
$
============ ============ ============
475,212
106,337
589,747
581,549
$
$
$
$
$
507,478
39,092
221,647
24,222
--------------------- --------------------- ---------------------
245,869
$
============ ============ ============
497,135
28,153
546,570
525,288
$
$
$
Sales to our largest customer and its affiliate accounted for approximately 22 percent, 25 percent, and 28
percent of our net sales in our continuing operations for fiscal 2006, 2005, and 2004, respectively. Sales to our
second largest customer accounted for approximately 10 percent, 8 percent, and 9 percent of our net sales in
fiscal 2006, 2005, and 2004, respectively. No other customers accounted for ten percent or more of net sales
during those fiscal years.
Of our total sales to our largest customer and its affiliate, 91 percent, 95 percent and 100 percent, respectively
were made within the United States during fiscal 2006, 2005, and 2004, respectively. All of our total sales to
our second largest customer were made within the United States during fiscal 2006, 2005, and 2004.
89
NOTE 14 - FORWARD CONTRACTS
Our functional currency is the U.S. Dollar. By operating internationally, we are subject to foreign currency risk
from transactions denominated in currencies other than the U.S. Dollar ("foreign currencies"). Such transactions
include sales, certain inventory purchases and operating expense. As a result of such transactions, portions of
our cash, trade accounts receivable, and trade accounts payable are denominated in foreign currencies.
These sales were primarily denominated in the Canadian Dollar, the British Pound, Euro, Brazilian Real and the
Mexican Peso. We make most of our inventory purchases from the Far East and use the U.S. Dollar for such
purchases.
We identify foreign currency risk by regularly monitoring our foreign currency-denominated transactions and
balances. Where operating conditions permit, we reduce foreign currency risk by purchasing most of our
inventory with U.S. Dollars and by converting cash balances denominated in foreign currencies to U.S. Dollars.
We also hedge against foreign currency exchange rate-risk by using a series of forward contracts designated as
cash flow hedges to protect against the foreign currency exchange risk inherent in our forecasted transactions
denominated in currencies other than the U.S. Dollar. For transactions designated as cash flow hedges, the
effective portion of the change in the fair value (arising from the change in the spot rates from period to period)
is deferred in other comprehensive income. These amounts are subsequently recognized in "Selling, general,
and administrative expense" in the consolidated statements of income in the same period as the forecasted
transactions close out over the remaining balance of their terms. The ineffective portion of the change in fair
value (arising from the change in the difference between the spot rate and the forward rate) is recognized in the
period it occurred. These amounts are also recognized in "Selling, general, and administrative expense" in the
consolidated statements of income. We do not enter into any forward exchange contracts or similar instruments
for trading or other speculative purposes.
The following table summarizes the various forward contracts we designated as cash flow hedges that were
open at the end of fiscal 2006 and 2005:
February 28, 2006
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Market
Value of the
Contract in
U.S. Dollars
(Thousands)
-------------- -------------- ----------------- ------------------ ------------------ ------------------ ------------------ ------------------ ------------------- ------------------- ------------------
$584
Sell
Weighted
Average
Forward Rate
at Feb. 28,
2006
Weighted
Average
Forward Rate
at Inception
Spot Rate at
Contract
Date
Range of Maturities
------------------------------------
Spot Rate at
Feb. 28, 2006
Currency
to Deliver
Contract
Date
Notional
Amount
Contract
Type
£10,000,000
12/11/2006
1/26/2005
2/9/2007
Pounds
1.7644
1.7540
1.8228
1.8700
From
To
February 28, 2005
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Contract
Type
Currency
to Deliver
Range of Maturities
------------------------------------
Market
Value of the
Contract in
U.S. Dollars
(Thousands)
-------------- -------------- ----------------- ------------------ ------------------ ------------------ ------------------ ------------------ ------------------- ------------------- ------------------
($547)
Sell
(891)
Sell
(548)
Sell
(403)
Sell
($2,389)
Weighted
Average
Forward Rate
at Feb. 28,
2005
Weighted
Average
Forward Rate
at Inception
£5,000,000
£5,000,000
£10,000,000
€ 3,000,000
2/13/2004
5/21/2004
1/26/2005
5/21/2004
Spot Rate at
Contract
Date
11/10/2005
12/14/2005
12/11/2006
Pounds
Pounds
Pounds
Euros
2/17/2006
2/17/2006
2/9/2007
1.8800
1.7900
1.8700
1.2000
1.8949
1.8913
1.8776
1.3344
1.7854
1.7131
1.8228
1.2002
1.9231
1.9231
1.9231
1.3241
Spot Rate at
Feb. 28, 2005
Contract
Date
Notional
Amount
2/10/2006
From
To
90
NOTE 15 - NON-MONETARY TRANSACTIONS
We occasionally enter into barter transactions in which we exchange inventory for various services, usually
advertising. During fiscal 2005, we entered into two such transactions in which we exchanged inventory with a
book value of $1,011 for certain advertising credits. As a result of these transactions, we recorded both sales
and cost of goods sold equal to the exchanged inventory's net book value, which approximated their fair value.
At the end of fiscal 2005, the remaining credits were valued at $915 on our consolidated balance sheets, and
were included in the line item entitled "Prepaid Assets." As of February 28, 2006 all credits from the non-
monetary transactions had been utilized. We have used $915, $1,196 and $1,400 of barter related advertising
credits during fiscal 2006, 2005 and 2004, respectively.
NOTE 16 – SALE OF TACTICA INTERNATIONAL, INC. AND SUBSEQUENT BANKRUPTCY
On April 29, 2004, we sold our 55 percent interest in Tactica International, Inc., to certain shareholder-
operating managers. In exchange for our 55 percent ownership share of Tactica and the release of $16,936 of
its secured debt and accrued interest owed to us, we received marketable securities, intellectual properties
and the right to certain tax refunds. The fair value of net assets received was equal to the book value of net
assets transferred; accordingly, no gain or loss was recorded as a result of this sale.
The schedule below shows the assets we received in a non-cash exchange for our ownership interest in Tactica.
Assets Received in Noncash Exchange for Ownership Interest in Tactica
at April 29, 2004
(in thousands)
Tax refunds receivable
Marketable securities recorded as stock available for sale
Epil-Stop trademark
Total assets received
$
2,908
3,030
2,255
---------------------
$
8,193
============
The marketable securities received in the Tactica sale carry a restriction that prevents us from disposing of the
stock prior to July 31, 2005. At February 28, 2006 the market value of these securities was $90. In the third
fiscal quarter of 2005, management determined the decline in market value to be other than temporary and
accordingly began recording losses on the stock. For fiscal 2006 and 2005, the total loss on stock available for
sale was $30 and $2,910, respectively.
Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142")
requires at least an annual impairment review of goodwill and other intangible assets, which we normally
undertake on March 1 of each year. SFAS 142 also requires a review of goodwill for impairment upon the
occurrence of certain events that would more likely than not reduce the fair value of a segment below its
carrying amount. One of those events is the impending disposal of a segment. After evaluating the facts and
circumstances surrounding the fiscal 2004 operations of our Tactica operating segment and its subsequent sale,
against the guidelines established by SFAS 142, we recorded a loss of $5,699 for the impairment of 100 percent
of the Tactica goodwill, net of $1,938 of related tax benefits, in the fourth fiscal quarter of 2004.
Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-
Lived Assets" ("SFAS 144"), provides accounting guidance for accounting for segments to be disposed of by
sale and, in our circumstances, required us to report Tactica’s operating results, net of taxes, as a separate
91
NOTE 16 – SALE OF TACTICA INTERNATIONAL, INC. AND SUBSEQUENT BANKRUPTCY,
CONTINUED
summarized component after income from continuing operations for each year presented. The accompanying
consolidated statements of income and consolidated statements of cash flows contain all appropriate
reclassifications for each period presented.
On October 21, 2004, Tactica filed a voluntary petition for bankruptcy protection under Chapter 11 of the U.S.
Bankruptcy Code. Early in the fourth fiscal quarter of 2006, The U.S. Bankruptcy Court for the Southern
District of New York approved Tactica’s bankruptcy reorganization plan, which would among other things,
required Helen of Troy to pay Tactica’s unsecured creditors $1,800. The schedule below shows how the
liability was liquidated out of sums that were held in bankruptcy escrow:
Tactica International, Inc. Bankruptcy Settlement
(in thousands)
Funds due the Company from escrow:
Income tax refund receivable
Interest income on income tax refund receivable
Reimbursements due from Tactica's former minority shareholders
Total
Less amounts to be paid to unsecured creditors
Net proceeds received from escrow
$
2,908
463
250
---------------------
3,621
(1,800)
---------------------
$
1,821
============
In connection with the above settlement, we recorded a net settlement loss of $1,550 on the Company’s books
for the third fiscal quarter of 2006, and it is included in the line item entitled “Other expense, net” in the
consolidated statement of income. We have also incurred $378 of legal fees related to the Tactica Bankruptcy
during fiscal 2006. These legal fees were expensed as incurred and included in the line entitled “Selling,
general, and administrative expense” in the consolidated statement of income.
NOTE 17 – ACQUISITION OF OXO
On June 1, 2004, we acquired certain assets and liabilities of OXO International ("OXO") for a net cash
purchase price of $273,173 including the assumption of certain liabilities. This acquisition was accounted for as
the purchase of a business. The results of OXO's operations have been included in the consolidated financial
statements since that date. The assets acquired in the OXO acquisition included intellectual property, contracts,
goodwill, inventory and books and records. The assumed liabilities included contractual obligations and
accruals, and certain lease obligations assumed in connection with OXO's office facilities in New York City.
Thirty five OXO employees, including its President, joined the Company as part of the acquisition.
OXO is a world leader in providing innovative consumer products in a variety of product areas. OXO offers
consumer products in several categories, including: kitchen tools, cutlery, bar and wine accessories, household
cleaning tools, tea kettles, trash cans, storage and organization products, hand tools, gardening tools, kitchen
mitts and trivets, and barbeque tools. OXO also has strong customer relationships with leading specialty and
department store retailers. Each year approximately100 products have been introduced through the OXO Good
Grips®, OXO Steel™, OXO Good Grips i-Series®, and OXO SoftWorks® product lines.
92
NOTE 17 – ACQUISITION OF OXO, CONTINUED
The following schedule presents the net assets of OXO acquired at closing:
OXO - Net Assets Acquired on June 1, 2004
(in thousands)
Finished goods inventories
Property and equipment
Trademarks
Goodwill
Other intangible assets
Total assets acquired
Less: Current liabilities assumed
Net assets acquired
$
15,728
2,907
75,200
165,388
17,990
---------------------
277,213
(4,040)
---------------------
$
273,173
============
The allocations above reflect the completion of our analysis of the economic lives of the assets acquired and
appropriate allocation of the initial purchase price based upon independent appraisals. We believe that the
OXO acquisition resulted in recognition of goodwill primarily because of its industry position, management
strength, and business growth potential.
The following pro forma unaudited financial data for the years ending February 28, 2005 and February 29, 2004
is presented to illustrate the estimated effects of the OXO acquisition as if the transaction had occurred as of the
beginning of the fiscal periods presented.
Results of Operations if OXO Acquisition Had Been Completed at March 1, 2003
(in thousands, except per share data)
Net sales
Income from continuing operations
2006
Years Ended The Last Day of February,
---------------------------------------------------------------------------------
2005
------------------------------------------------------ --------------------------
561,374
$
83,337
589,747
49,310
602,804
79,924
$
$
2004
Diluted earnings from continuing operations per share
$
1.56
$
2.45
$
2.67
Weighted average diluted common shares
31,605
32,589
31,261
NOTE 18 – SUBSEQUENT EVENTS
Purchases of Helen of Troy Shares - During the quarter ended August 31, 2003, our Board of
Directors approved a resolution authorizing the purchase, in open market or through private transactions, of up
to 3,000,000 common shares over a period extending through May 31, 2006. On April 25, 2006 our Board of
Directors approved a resolution to extend the existing plan for three more years through May 31, 2009. We did
not repurchase any common shares during fiscal 2006. We repurchased 757,710 and 806,126 shares at a total
cost of $25,039 and $20,572, or an average price per share of $33.05 and $25.52 in fiscal 2005 and 2004,
respectively. An additional 1,436,164 shares remain authorized for purchase under this plan.
93
NOTE 18 – SUBSEQUENT EVENTS, CONTINUED
Hong Kong Income Taxes – On May 10, 2006, the Inland Revenue Department (the “IRD”) and the Company
reached a settlement regarding tax liabilities for the fiscal years 1995 through 1997. This agreement has been
presented to the IRD’s Board of Review and is subject to their approval. For those tax years, we have agreed to
an assessment of approximately $4,019 including estimated penalties and interest. Our consolidated financial
statements at February 28, 2006 include adequate provisions for this liability. We expect the liability to be paid
with $3,282 of tax reserve certificates and $737 in cash.
94
HELEN OF TROY LIMITED AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
Years ended the last day of February 2006, 2005 and 2004
(in thousands)
Write-off of
uncollectible Balance at
Description
End of Year
----------------------------------------------- -------------- -------------- -------------- -------------- --------------
Year ended February 28, 2006
Balance at Charged to
Beginning
of Year
cost and
expenses
Recoveries
accounts
Additions
-----------------------------
Allowance for accounts receivable
$
2,167
$
648
$
142
$
2,107
$
850
Year ended February 28, 2005
Allowance for accounts receivable
$
1,100
$
1,728
$
17
$
678
$
2,167
Year ended February 29, 2004
Allowance for accounts receivable
1,089
1,004
31
1,024
1,100
95
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, under the supervision and with the participation of our Chief Executive Officer (CEO)
and Chief Financial Officer (CFO), has evaluated the effectiveness of our disclosure controls and procedures as
defined in Rule 13a-15(e) promulgated under the Securities Exchange Act as of the end of the period covered
by this report. Management has concluded that our disclosure controls and procedures are effective to ensure
that information we are required to disclose in reports that we file or submit under the Securities Exchange Act
is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely
decisions regarding required disclosure and is recorded, processed, summarized, and reported within the time
periods specified in the SEC’s rules and forms.
The management reports on internal control over financial reporting and the attestation report of the
independent registered public accounting firm required by this item are set forth under Item 8 of this report on
pages 52 through 54, and are incorporated herein by reference.
Our management, including the CEO and CFO, does not expect that our disclosure controls or our
internal control over financial reporting will prevent all error and all fraud. A control system, no matter how
well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s
objectives will be met. Further, the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error
or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or
more people, or by management override of the controls. The design of any system of controls is based in part
on certain assumptions about the likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions. Over time, controls may become
inadequate because of changes in conditions or deterioration in the degree of compliance with policies or
procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
In the process of our evaluation, among other matters, we considered the existence of any “significant
deficiencies” or “material weaknesses” in our internal control over financial reporting, and whether we had
identified any acts of fraud involving personnel with a significant role in our internal control over financial
reporting. In the professional auditing literature, “significant deficiencies” are referred to as “reportable
conditions,” which are deficiencies in the design or operation of controls that could adversely affect our ability
to record, process, summarize and report financial data in the financial statements. Auditing literature defines
“material weakness” as a particularly serious reportable condition in which the internal control does not reduce
to a relatively low level the risk that misstatements caused by error or fraud may occur in amounts that would be
material in relation to the financial statements and the risk that such misstatements would not be detected within
a timely period by employees in the normal course of performing their assigned functions.
96
CHANGES IN INTERNAL CONTROLS
In connection with the evaluation described above, except for the activities discussed below in
connection with our implementation and transition of our Housewares segment’s key operating functions to our
in-house management information systems and distribution facilities, we identified no change in our internal
control over financial reporting that occurred during our fiscal quarter ended February 28, 2006, and that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
During fiscal 2005 we converted to a new global information system and committed substantial internal
and external resources to revise and document operational processes and related internal controls. Our objective
was to promote greater uniformity and consistency of transaction processing across all aspects of our
operations. Our conversion to the new information system included a project phase specifically focused on
revising our formal understanding of our system of internal control over financial reporting with the objective of
meeting the formalized requirements of Section 404 of the Sarbanes-Oxley Act.
During the third fiscal quarter of 2005, we began the implementation and transition of our Housewares
segment to the new system. The transition was completed late in the fourth fiscal quarter of 2006. We continue
to implement several significant functionality enhancements related to both the Housewares segment’s and
Personal Care segment’s systems. We expect this process will continue during fiscal 2007.
During the initial months after the transition of our Housewares segment to the new systems and our
distribution facility in Southaven, Mississippi, we experienced warehouse order processing and shipment
delays. These delays were the result of both software issues and adapting to the new equipment, new
employees, and the operation of our new distribution facility. In response to these issues, management
dedicated additional personnel and sent a seasoned operations management team to Southaven, Mississippi to
assist local management in resolving technical and operational issues. The delays did cause a backlog in orders
and, in some cases, order cancellations. We continue to work this backlog down. We have addressed these
issues with the affected customers and believe that over the long-term, the strength of our customer
relationships will not be affected by the shipment delays. We believe that the impact of these issues was
immaterial in the fourth quarter of fiscal 2006; however, we do expect some impact in the first fiscal quarter of
2007 due to lost revenue and costs associated with related concessions and accommodations to certain
customers, and associated start up costs of the distribution center. While we believe we have taken appropriate
measures to mitigate the recent shipment disruptions arising from the transition of our Housewares segment,
there can be no assurance that additional disruptions will not occur.
We will be transitioning Mexico and our Latin American operations to the new system during fiscal
2007 and 2008. Due to the complexities of these efforts, we expect to continue to experience a period of
significant change and tuning of the system for many months to come. While nothing has come to our attention
that would lead us to believe that we may experience errors or misstatements of our financial results during this
time-frame, we recognize that this continues to be a challenging transition for us and will require close
monitoring to keep our documentation of internal controls current. We believe we have the process and
appropriate management in place to effectively manage this transition and rapidly respond to mitigate any
issues that may arise as a result of the transition.
97
ITEM 9B. OTHER INFORMATION
None
98
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in our Proxy Statement, which will be filed within120 days of the end of our 2006 fiscal year, is
incorporated by reference in response to this Item 10, as noted below:
•
•
•
Information about our Directors who are standing for reelection is set forth under “Election of
Directors”;
Information about our executive officers is set forth under “Executive Officers”;
Information about our Audit Committee, including members of the committee, and our designated
“audit committee financial experts” is set forth under “Corporate Governance, The Board, Board
Committees and Meetings”; and
•
Information about Section 16(a) beneficial ownership reporting compliance is set forth under
“Section 16(a) Beneficial Ownership Reporting Compliance.”
We have adopted a Code of Ethics governing our Chief Executive Officer, Chief Financial and Principal
Accounting Officer, and finance department members. The full text of our Code of Ethics is published on our
website, at www.hotus.com, under the “Investor Relations-Corporate Governance” caption. We intend to
disclose future amendments to, or waivers from, certain provisions of this Code on our website or in a current
report on Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION
Information in our Proxy Statement, which will be filed within 120 days of the end of our 2006 fiscal
year, is incorporated by reference in response to this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED SHAREHOLDER MATTERS
Information in our Proxy Statement, which will be filed within 120 days of the end of our 2006 fiscal
year, is incorporated by reference in response to this Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in our Proxy Statement, which will be filed within 120 days of the end of our 2006 fiscal
year, is incorporated by reference in response to this Item 13.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information in our Proxy Statement, which will be filed within 120 days of the end of our 2006 fiscal
year, is incorporated by reference in response to this Item 14.
99
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a)
2.1
2.2
3.1
3.2
4.1
10.1†
10.2†
10.3
10.4
10.5
1.
2.
3.
Financial Statements: See "Index to Consolidated Financial Statements" under Item 8 on
page 51 of this Annual Report.
Financial Statement Schedule: See "Schedule II" on page 91 of this Annual Report
Exhibits
The exhibit numbers preceded by an asterisk (*) indicate exhibits physically filed with this
2006 Form 10-K. All other exhibit numbers indicate exhibits filed by incorporation by
reference. Exhibits preceded by cross (†) are management contracts or compensatory plans
or arrangements.
Acquisition Agreement, dated April 29, 2004, by and among World Kitchen (GHC), LLC, WKI
Holding Company, Inc., World Kitchen, Inc., Helen of Troy Limited (Barbados), and Helen of
Troy Limited (Bermuda) (incorporated by reference to Exhibit 2.1 to the Company’s Current
Report on Form 8-K, filed on April 30, 2004).
Amendment to the Acquisition Agreement, dated June 1, 2004, by and among World Kitchen
(GHC), LLC, WKI Holding Company, Inc., World Kitchen, Inc., Helen of Troy Limited
(Barbados), and Helen of Troy Limited (Bermuda) (incorporated by reference to Exhibit 2.2 to the
Company’s Current Report on Form 8-K, filed on June 3, 2004).
Memorandum of Association (incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-4, File No. 33-73594, filed with the Securities and Exchange
Commission on December 30, 1993 (the "1993 S-4")).
Bye-Laws, as Amended (incorporated by reference to Exhibit 4.2 to Helen of Troy Limited's
Registration Statement on Form S-8, File Number 333-128832, filed with the Securities and
Exchange Commission on October 10, 2005).
Rights Agreement, dated as of December 1, 1998, between Helen of Troy Limited and Harris Trust
and Savings Bank, as Rights Agent (incorporated by reference to Exhibit 4 to the Registrant's
Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 4,
1998).
Form of Directors' and Executive Officers' Indemnity Agreement (incorporated by reference to
Exhibit 10.2 to the 1993 S-4).
1994 Stock Option and Restricted Stock Plan (incorporated by reference to Exhibit 10.1 to the
1993 S-4).
Revlon Consumer Products Corporation (RCPC) North American Appliances License Agreement
dated September 30, 1992 (incorporated by reference to Exhibit 10.31 to Helen of Troy
Corporation's Quarterly Report on Form 10-Q for the period ending November 30, 1992 (the
"November 1992 10-Q")).
Revlon Consumer Products Corporation (RCPC) International Appliances License Agreement
dated September 30, 1992 (incorporated by reference to Exhibit 10.32 to the November 1992
10-Q).
Revlon Consumer Products Corporation (RCPC) North American Comb and Brush License
Agreement dated September 30, 1992 (incorporated by reference to Exhibit 10.33 to the November
1992 10-Q).
100
10.6
10.7
10.8
10.9
10.10
10.11
Revlon Consumer Products Corporation (RCPC) International Comb and Brush License
Agreement dated September 30, 1992 (incorporated by reference to Exhibit 10.34 to the November
1992 10-Q).
First Amendment to RCPC North America Appliance License Agreement, dated September 30,
1992 (incorporated by reference to Exhibit 10.26 to Helen of Troy Corporation's Annual Report
on Form 10-K for the period ending February 28, 1993 (the "1993 10-K")).
First Amendment to RCPC North America Comb and Brush License Agreement, dated September
30, 1992 (incorporated by reference to Exhibit 10.27 to the 1993 10-K).
First Amendment to RCPC International Appliance License Agreement, dated September 30, 1992
(incorporated by reference to Exhibit 10.28 to the 1993 10-K).
First Amendment to RCPC International Comb and Brush License Agreement, dated September
30, 1992 (incorporated by reference to Exhibit 10.29 to the 1993 10-K).
Amended and Restated Note Purchase, Guaranty and Master Shelf Agreement, $40,000,000 7.01
percent Guaranteed Senior Notes and $40,000,000 Guaranteed Senior Note Facility (incorporated
by reference to Exhibit 10.23 to Helen of Troy Limited's Quarterly Report on Form 10-Q for the
period ending November 30, 1996).
10.12† Helen of Troy Limited 1998 Employee Stock Purchase Plan (incorporated by reference to Exhibit
4.3 to Helen of Troy Limited's Registration Statement on Form S-8, File Number 333-67369, filed
with the Securities and Exchange Commission on November 17, 1998).
10.13† Amended and Restated Employment Agreement between Helen of Troy Limited and Gerald J.
Rubin, dated March 1, 1999 (incorporated by reference to Exhibit 10.29 to Helen of Troy Limited's
Quarterly Report on Form 10-Q for the period ending August 31, 1999 (the “August 1999 10-Q”)).
10.14† Amended and Restated Helen of Troy Limited 1995 Non-Employee Director Stock Option Plan
(incorporated by reference to Exhibit 10.30 to the August 1999 10-Q).
10.15 Master License Agreement dated October 21, 2002, between The Procter & Gamble Company and
10.16
Helen of Troy Limited (Barbados) (Confidential treatment has been requested with respect to
certain portions of this exhibit. Omitted portions have been filed separately with the Commission).
Acquisition Agreement, dated August 31, 2003, between Conopco, Inc. (a wholly owned
subsidiary of Unilever NV), Helen of Troy Limited (Barbados), Helen of Troy Limited (Bermuda),
and Helen of Troy Texas Corporation for the purchase of certain assets related to the North
American, Latin American and Caribbean production and distribution of Brut Fragrances,
Deodorants and Antiperspirants (incorporated by reference to Exhibit 2.1 of the Registrant's
Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 14,
2003).
10.17† Amended and Restated Helen of Troy 1997 Cash Bonus Performance Plan, dated August 26, 2003
10.18
10.19
(incorporated by reference to Exhibit 10.1 of Helen of Troy Limited's Quarterly Report on Form
10-Q for the period ended August 31, 2003 (the “August 2003 10-Q”)).
Credit Agreement, dated as of June 1, 2004, among Helen of Troy L.P., Helen of Troy Limited,
Bank of America, N.A. and the other lenders party thereto (incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K, filed on June 3, 2004).
Guaranty, dated as of June 1, 2004, made by Helen of Troy Limited (Bermuda), Helen of Troy
Limited (Barbados), Hot Nevada, Inc., Helen of Troy Nevada Corporation, Helen of Troy Texas
Corporation, Idelle Labs Ltd. and OXO International Ltd., in favor of Bank of America, N.A. and
other lenders, pursuant to the Credit Agreement, dated June 1, 2004 (incorporated by reference to
Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed on June 3, 2004).
101
10.20
Note Purchase Agreement, dated June 29, 2004, by and among Helen of Troy Limited (Bermuda),
Helen of Troy L.P., Helen of Troy Limited (Barbados) and the purchasers listed in Schedule A
thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
filed on July 2, 2004).
10.21† Amendment to Employment Agreement between Helen of Troy Limited and Gerald J. Rubin,
10.22
10.23
dated March 1, 1999 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K, filed on April 26, 2005).
Purchase and Sale Agreement between Helen of Troy L.P. (“Purchaser”) and DTC Eastgate 1, LLC
(“Seller”), effective May 2, 2005 (incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K, filed on May 6, 2005).
Second Amendment to Credit Agreement, dated as of September 23, 2005, among Helen of Troy
L.P., Helen of Troy Limited, Bank of America, N.A. and other lenders party thereto (incorporated
by reference to Exhibit 10.1 of Helen of Troy Limited's Quarterly Report on Form 10-Q for the
period ended November 30, 2005 (the “November 2006 10-Q”)).
10.24† Amended and Restated Helen of Troy Limited 1998 Stock Option and Restricted Stock Plan
(incorporated by reference to Appendix A of Helen of Troy Limited’s Definitive Proxy Statement
on Schedule 14A, File Number 001-14669, filed with the Securities and Exchange Commission on
June 15, 2005).
10.25*† Form of Helen of Troy Limited Nonstatutory Stock Option Agreement.
10.26*† Form of Helen of Troy Limited Incentive Stock Option Agreement.
10.27
Third Amendment to Credit Agreement, dated as of November 15, 2005, among Helen of Troy
L.P., Helen of Troy Limited, Bank of America, N.A. and other lenders party thereto (incorporated
by reference to Exhibit 10.2 to the November 2006 10-Q).
First Amendment to Guarantee Agreement, dated as of November 15, 2005, among Helen of Troy
Limited (Bermuda), Helen of Troy Limited (Barbados), HOT Nevada, Inc., Helen of Troy Nevada
Corporation, Helen of Troy Texas Corporation, Idelle Labs Ltd., OXO International Ltd. and Bank
of America, N.A. (as Guaranteed party) (incorporated by reference to Exhibit 10.3 to the
November 2006 10-Q).
Subsidiaries of the Registrant.
Consent of Independent Registered Public Accounting Firm.
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
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.
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.
10.28
21*
23*
31.1*
31.2*
32.1*
32.2*
102
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HELEN OF TROY LIMITED
By: /s/ Gerald J. Rubin
Gerald J. Rubin, Chairman,
Chief Executive Officer and Director
May 12, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Gerald J. Rubin /s/ Thomas J. Benson
Gerald J. Rubin
Chairman of the Board, Chief Executive Officer,
President, Director and Principal Executive Officer
May 12, 2006
Thomas J. Benson
Senior Vice President, Chief Financial Officer
May 12, 2006
/s/ Richard J. Oppenheim
Richard J. Oppenheim
Financial Controller and Principal Accounting
Officer
May 12, 2006
/s/ Stanlee N. Rubin
Stanlee N. Rubin
Director
May 12, 2006
/s/ Byron H. Rubin
Byron H. Rubin
Director
May 12, 2006
/s/ John B. Butterworth
John B. Butterworth
Director
May 12, 2006
/s/ Adolpho R. Telles
Adolpho R. Telles
Director
May 12, 2006
/s/ Darren G. Woody
Darren G. Woody
Director
May 12, 2006
/s/ Gary B. Abromovitz
Gary B. Abromovitz
Director, Deputy Chairman of the Board
May 12, 2006
/s/ Christopher L. Carameros
Christopher L. Carameros
Director
May 12, 2006
/s/ Timothy F. Meeker
Timothy F. Meeker
Director
May 12, 2006
103
SUBSIDIARIES OF THE REGISTRANT
Name
Incorporation
Costa Rica
France
Germany
Hong Kong
Hong Kong
Hong Kong
Hong Kong
Hungary
Jamaica
Luxembourg
Barbados
Helen of Troy Limited
Barbados
HOT International Marketing Limited
Brazil
Helen of Troy do Brasil Ltda.
Cayman Islands
H.O.T. Cayman Holding
Cayman Islands
Helen of Troy (Cayman) Limited
Chile
Helen of Troy Chile, S.A.
Helen of Troy Consulting (Shenzhen) Company Limited China
Helen of Troy Costa Rica, S.A.
Helen of Troy SARL
Helen of Troy GmbH
Asia Pacific Liaison Services Limited
Helen of Troy (Far East) Limited
Helen of Troy Manufacturing Limited
Helen of Troy Services Limited
Helen of Troy Szolgaltato KFT
HOT (Jamaica) Limited
H.O.T. (Luxembourg) SARL
Helen of Troy Comercial Offshore de Macau Limitada Macao
Mexico
Helen of Troy de Mexico S.de R.L. de C.V.
Mexico
Helen of Troy Servicios S.de R.L. de C.V.
Nevada
Helen of Troy Canada, Inc.
Nevada
Helen of Troy Nevada Corporation
Nevada
Helen of Troy, LLC
Nevada
HOT Latin America, LLC
Nevada
HOT Nevada Inc.
Nevada
Idelle Management Company
Nevada
OXO International Inc.
New Jersey
Karina, Inc.
Texas
DCNL, Inc.
Texas
Helen of Troy Texas Corporation
Texas Limited Partnership
Helen of Troy L.P.
Texas Limited Partnership
Idelle Labs, Ltd.
Texas Limited Partnership
OXO International Ltd.
The Netherlands
Helen of Troy International B.V.
United Kingdom
HOT (UK) Limited
Uruguay
Fontelux Trading, S.A.
117
EXHIBIT 21
Doing
Business as
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
Same Name
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 23
The Board of Directors
Helen of Troy Limited:
We consent to the incorporation by reference in the registration statements No. 33-75832, No. 333-
11181, No. 333-67349, No. 333-67369, No. 333-90776, No. 333-103825, and No. 333-128832 on Form S-8,
and the registration statement No. 333-99295 on Form S-3, of Helen of Troy Limited and subsidiaries of our
reports dated May 12, 2006, with respect to the consolidated balance sheets of Helen of Troy Limited and
subsidiaries as of February 28, 2006 and 2005, and the related consolidated statements of income, shareholders’
equity and comprehensive income, and cash flows and related financial statement schedule for each of the years
in the three-year period ended February 28, 2006, management’s assessment of the effectiveness of internal
control over financial reporting as of February 28, 2006 and the effectiveness of internal control over financial
reporting as of February 28, 2006, which reports appear in the February 28, 2006 annual report on Form 10-K
of Helen of Troy Limited.
El Paso, Texas
May 12, 2006
/s/ KPMG LLP
118
Exhibit 31.1
I, Gerald J. Rubin, certify that:
CERTIFICATION
1. I have reviewed this annual report on Form 10-K of Helen of Troy Limited;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects, the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation;
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: May 12, 2006
/s/ Gerald J. Rubin
Gerald J. Rubin
Chairman of the Board, Chief Executive Officer,
President, Director and Principal Executive Officer
119
Exhibit 31.2
I, Thomas J. Benson, certify that:
CERTIFICATION
1. I have reviewed this annual report on Form 10-K of Helen of Troy Limited;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects, the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation;
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: May 12, 2006
/s/ Thomas J. Benson
Thomas J. Benson
Senior Vice President and Chief Financial Officer
120
CERTIFICATION
Exhibit 32.1
I, Gerald J. Rubin hereby certify, for the purposes of section 1350 of chapter 63 of title 18 of the United States
Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in my capacity as Chairman of
the Board, Chief Executive Officer, President and Principal Executive Officer of Helen of Troy Limited (the
"Company"), that, to my knowledge, the Annual Report of Helen of Troy Limited on Form 10-K for the period
ended February 28, 2006, fully complies with the requirements of Section 13(a) of the Securities Exchange Act
of 1934 and that the information contained in such report fairly presents, in all material respects, the financial
condition and results of operation of the Company.
Date: May 12, 2006
/s/ Gerald J. Rubin
Gerald J. Rubin
Chairman of the Board, Chief Executive Officer,
President, Director and Principal Executive Officer
121
CERTIFICATION
Exhibit 32.2
I, Thomas J. Benson hereby certify, for the purposes of section 1350 of chapter 63 of title 18 of the United
States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in my capacity as Senior
Vice President, Chief Financial Officer and Principal Accounting Officer of Helen of Troy Limited (the
"Company"), that, to my knowledge, the Annual Report of Helen of Troy Limited on Form 10-K for the period
ended February 28, 2006, fully complies with the requirements of Section 13(a) of the Securities Exchange Act
of 1934 and that the information contained in such report fairly presents, in all material respects, the financial
condition and results of operation of the Company.
Date: May 12, 2006
/s/ Thomas J. Benson
Thomas J. Benson
Senior Vice President and Chief Financial Officer
122
2006 AnnualReport (CO-3022)Final 7/13/06 3:07 PM Page 5
Board of Directors
Gerald J. Rubin
Chairman, Chief Executive
Officer and President
Gary B. Abromovitz
Director
Byron H. Rubin
Director
Christopher L. Carameros
Director
Stanlee N. Rubin
Director
John B. Butterworth
Director
Timothy F. Meeker
Director
Darren G. Woody
Director
Adolph R. Telles
Director
Officers
Gerald J. Rubin
Chairman, Chief Executive Officer and President
Arthur A. August
Executive Vice President, Sales, Marketing – Appliances and Professional
Division
Christopher L. Carameros
Executive Vice President, Finance, Haircare Accessories, International, OXO
International, and Idelle Labs
Donald Hall
Senior Vice President, Manufacturing
Robert D. Spear
Senior Vice President and Chief Information Officer
Rosanna Hall
Senior Vice President, Purchasing
Alex Lee
President, OXO International
Kevin James
Senior Vice President, International
Michael Cafaro
Senior Vice President, New Product Development and Engineering
Alan Ames
Senior Vice President, Haircare Accessories
Jack Jancin
Senior Vice President, Idelle Labs
Thomas J. Benson
Senior Vice President and Chief Financial Officer
James R. Cooper
Vice President, Product Procurement and Forecasting
Larry Witt
Vice President, Sales and Marketing – OXO International
Scott Viola
Vice President, Sales – Appliances
Stuart Fox
Vice President, Sales – Appliances
Scott Hagstrom
Vice President, Sales – Professional Division
Omar A. Tovar
Vice President, Chief Logistics Officer
Scott Thrasher
Vice President, Sales – Appliances
Coquis Casavantes
Vice President, Corporate Tax Director
Vincent D. Carson
Vice President, General Counsel and Secretary
John Boomer
Vice President, Corporate Business Development
Carlos Jovel
Vice President, Latin America
John Hunnicutt
Vice President, Marketing – Idelle Labs
Perry Sansone
Vice President, Sales – Idelle Labs
Uma Tripathi
Vice President, R&D – Idelle Labs
Melinda Jordan
Vice President, Human Resources
Pedro T. Contreras
Vice President, Management Information Systems
Mary Esther Minjares
Vice President, Customer Services
Stephen H. Smith
Vice President, Distribution and Transportation
Deanna Nasser
Corporate Treasurer
Rick Oppenheim
Corporate Controller – Finance
Oscar Gereda
Corporate Controller – Operations
Shareholders’ Annual Meeting
Stock Traded Over the Counter
National NASDAQ Symbol: HELE
The Annual Meeting of Shareholders
The Annual Meeting of Shareholders will be held on Tuesday, August 8, 2006, at one o’clock p.m.
Registrar, Transfer Agent &
Dividend Disbursing Agent
Computershare Investor Service, LLC
2 North La Salle Street
Chicago, Illinois 60602
at the Camino Real Hotel, 101 South El Paso Street, El Paso,Texas 79901.
Form 10-K
A copy of the Company’s annual report on Form 10-K, as filed with the Securities and Exchange
Commission, will be furnished to any shareholder free of charge on request to the Chief Financial
Officer or Secretary of the Company.
2006 AnnualReport (CO-3022)Final 7/13/06 3:07 PM Page 6
Products for Your Lifestyle
S
ince its formation in 1968, Helen of Troy has
built a tradition of designing, developing and
marketing a variety of innovative, high-quality
beauty and personal care products. Its strong
market performance results from providing
customer products with unique features and superior product
functionality at each price point, all marketed under the most
instantly recognizable and trusted brand names. As a result of
this dedication to innovation and meeting customer needs,
Helen of Troy products can be found in nearly every room of
the house throughout the world.
Helen of Troy’s OXO® International division continued its
aggressive growth curve with the introduction of more than
130 products and the addition of
10 new employees. During fiscal
2006, the brand debuted the OXO
Good Grips™ Hardware Hand Tool line with an exclusive launch
at Lowe’s that was well received by consumers and offered the
brand an opportunity to expand its appeal to new customers.
OXO partnered with Lowe’s to co-promote the line with a
multi-city promotion that resulted in coverage in 113 media
outlets. OXO is also in the garden and food preparation
categories in Lowe’s and is positioned for expansion in other
categories.
Other areas of growth included the storage and
OXO Uplift Kettle & Travel Mug
organization category with
the introduction of two dish
racks designed to maximize
storage capacity and
convenience, a full-range of
cutting board sizes that have
become a favorite of the
largest cooking school in the
U.S., and plastic travel mugs
in a full range of colors that
retail at half the price of the stainless steel version. In a major
feature story on tea kettles, the iconic Uplift kettle, which also
enjoys placement on the sets of more than two dozen
primetime television shows, was described by the Los Angeles
Times as their “hands-down favorite stove-top model.” Another
unique product introduction was
the Mango Splitter, the only tool
designed to pit and halve a mango.
The novelty of the item garnered
an overwhelming amount of
editorial focus, reaching more than
43 million consumers. The new
OXO Mango Splitter
products and other grassroots marketing efforts resulted in 913
newspaper and magazine stories on the OXO brand that had a
combined circulation of 326 million readers.
Breathing new life into once-dormant brands in the
Men’s Grooming, Skin Care and Hair Care categories of
mass-marketed health and beauty brands is the mission of
Idelle Labs, Ltd., another Helen of Troy subsidiary. During its
first three years of existence, Idelle has re-energized household
names such as Brut®, Vitalis®, Final Net® and Sea Breeze®.
Focusing on the leverage of existing and well-developed
consumer equities, Idelle Labs has used a vigorous mix of
consumer advertising and promotion, new product innovation
and trade promotion to reacquaint lapsed product users and
attract new users with these personal care stalwarts.
Consistent with this strategy
is the recent launch of Sea
Breeze Naturals and the
upcoming launch (Fall 2006)
of Brut Revolution – an
exciting new premium
fragrance for younger
consumers. Brut also will continue its exciting sponsorship with
the National Hot Rod Association that will enhance the brand’s
connection with men, using a wide spectrum of advertising and
promotional tactics. Idelle’s versatile Skin Milk® brand continues
to grow on the strength of interesting alternative marketing
tactics featuring consumer events and on-line marketing.
Finally, Helen of Troy’s aggressive productivity efforts will drive
marketing re-investment to ensure Idelle’s increasing importance
as a leading developer and marketer of Men’s Grooming, Skin
and Hair Care products.
Brut 2006 Funny Car
For years Helen of Troy’s product innovations have made
huge impacts in the cutting-edge professional salon market,
where the Company has been the technological vanguard with
the Wigo®, Hot Tools®, and HotSpa® brands. Recent
breakthrough technologies rely
heavily on the use of Tourmaline, a
natural source of ions, which dries
hair faster by reducing the size of
water droplets on the hair.
Tourmaline is featured extensively
in Wigo and Hot Tools products, as
well as the new high-end Fusion
Tools™ brand. The launch of Fusion
Tools will include a complete line
of 23 products with innovative,
state-of-the-art packaging to
WIGO & Hot Tools Professional
Styling Appliances
2006 AnnualReport (CO-3022)Final 7/13/06 3:07 PM Page 7
complement the advanced technologies. The Wigo line
continues to flourish with products such as the Sensor Touch™
dryer with an automatic shut-off feature that provides
professional stylists the high quality, performance, and flexibility
their field demands. The Company continues to develop new
styling innovations and technologies, cementing its dominance
in professional styling salons worldwide.
In keeping with Revlon’s long tradition of glamour and
beauty, Helen of Troy recently launched an extensive line of
unique mirror products. Expanding on the myriad of styling
products available under the Revlon name, the Company has
introduced a patented variable ion dryer that allows consumers
to customize their experience to
the greatest degree possible.
The ladies’ shaver and trimmer
category also was expanded with
the addition of a new epilator.
Revlon Spa appliances and gift
sets deliver a wide array of
spa-quality skin, facial and nail
treatments to consumers who feel
the need to indulge themselves.
Revlon & Revlon Spa Appliances
Helen of Troy also markets numerous products under the
Vidal Sassoon banner, including a new line of professional-quality
styling tools under the Vidal Sassoon Studio Tools® sub-brand.
Best-selling hair
straightening and styling
irons incorporate ionic,
ceramic and tourmaline
technologies to allow
consumers to achieve
the hair styles they
desire while leaving hair healthier and shinier.
Vidal Sasoon / Studio Tools Appliances
To relieve today’s various stresses and strains, the
Company’s Dr. Scholl’s line sets the market standard for the
finest in personal care solutions.
From footbaths with Smart Heat
technology to massage cushions
and hand-held massagers with
innovative, patented design
technology, the Dr. Scholl’s line
provides head-to-toe relief with a
trusted household name. New
technological advances feature
memory foam and anti-stain
Dr. Scholl’s “Gellin” Footbath
and Massager
materials. Many of the footbaths, hand-held massagers and
massaging cushions incorporate “Massaging Gel” as part of the
nationally advertised Dr. Scholl’s “Are you gellin’?” campaign.
Helen of Troy continues to expand the Health o meter®
line of personal wellness products, launching a stress-relieving
ottoman and massaging chair and adding to the earlier
complete line of massagers and footbaths specially designed
to rejuvenate and revitalize the body.
The Company’s reach in hair care product expertise goes
Brushes, Combs and Accessories
beyond appliances with a
wide selection of brushes,
combs and fashion-right hair
accessories under the Revlon,
Vidal Sassoon, Hot Tools and
Karina® names. Proprietary,
patented fashion accessories,
new upscale Silver Technology
brushes featuring state-of-the-art metal packaging and the
Amber Waves™ hair care line, featuring patented designs that
correlate with trends in the ethnic hair care market, offer
retailers unique solutions for a distinctive marketplace.
The Company has also expanded its market
share internationally with products found in homes
throughout Europe, Asia and Latin America.
The Company recently
announced that it had
secured the rights to sell a
high-end line of hair
appliances in the UK and
Western Europe under the
Toni & Guy name. The Company also has continued to expand
its presence in Latin America. The Brut line has become a major
contributor to the success of Helen of Troy in Mexico and has
recently been launched in Brazil.
Toni & Guy Dryer and Men’s Trimmer
In addition to Helen of Troy’s commitment to unparalleled
innovation and new technologies, the Company realizes the
importance of service to consumers worldwide with a
customer-first strategy that emphasizes top-quality products
and satisfaction. Customers, ensured that their needs are our
main priority, reward us with repeat business and trust, enabling
us to build a solid foundation of long-lasting loyalty in highly
competitive markets worldwide.
Vidal Sassoon and related logos are trademarks of The Procter & Gamble Company used under license by Helen of Troy / Revlon® is a registered trademark of
Revlon Consumer Products Corporation / Dr. Scholl’s® and Scholl are registered trademarks of Schering-Plough
HealthCare Products, Inc. (US) and Scholl Ltd. (UK) / Vitapointe® is a registered trademark of Sara Lee Household and Body Care UK Limited / Sea Breeze® is a registered trademark
of Shiseido Company, Ltd. / Sunbeam®, Health at Home® and Health o meter® are trademarks used under license from Sunbeam Products, Inc. / Toni & Guy is a trademark of Toni & Guy Holdings Limited
2006 AnnualReport (CO-3022)Final 7/13/06 3:07 PM Page 8
Products for your lifestyle