ITEM 1. BUSINESS
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
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:
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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.
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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.
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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.
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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.
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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:
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Vidal Sassoon®, licensed from The Procter & Gamble Company;
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Revlon® licensed from Revlon Consumer Products Corporation;
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Dr. Scholl’s®, licensed from Schering-Plough HealthCare Products, Inc.;
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Scholl® (in areas other than North America), licensed from Scholl Ltd.;
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Sunbeam®, Health at Home® and Health o meter® licensed from Sunbeam Products, Inc.;
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Sea Breeze®, licensed from Shiseido Company Ltd.;
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Vitapointe®, licensed from Sara Lee Household and Body Care UK Limited; and
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Toni & Guy®, licensed from Mascolo Brothers Ltd. (acquired March 27, 2006)
We own and actively market under a number of trademarks, including:
• OXO®
• Ammens®
• Caruso®
• Good Grips®
• Condition® 3-in-1
• Karina®
• Soft Works®
• TimeBlock®
• Visage Náturel®
• Touchables®
• Skin Milk®
• DCNL®
• Brut®
• Epil-Stop®
• Nandi®
• Vitalis®
• Studio Tools™
• Isobel®
• Final Net®
• Dazey®
• HOT things®
We also market hair and beauty care products under the following trademarks to the professional beauty salon industry:
• Helen of Troy®
• Salon Tools™
• Hot Tools®
• Fusion Tools™
• Hot Spa®
• Gallery Series®
• HOTSetter™
• Wigo®
• Salon Edition®
• 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.
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.
PRODUCT
CATEGORY
PRODUCTS
BRAND NAMES
Appliances
and
Accessories
Hand-held dryers
Vidal Sassoon®, Revlon®, Sunbeam®, Helen of Troy®, Salon Edition®, Hot Tools®, HOT Professional®, Studio Tools™, Salon Tools™, Gold Series®, Gallery Series®, Wigo® and Cosmopolitan™
Curling irons, straightening irons, hot air brushes, and brush irons
Vidal Sassoon®, Revlon®, Sunbeam®, Helen of Troy®, Salon Edition®, Hot Tools®, HOT Professional®, Studio Tools™, Salon Tools™, Gold Series®, Gallery Series®, Wigo® and Cosmopolitan™
Hairsetters
Vidal Sassoon®, Revlon®, Sunbeam®, HOT Setter™, Cosmopolitan™ and Caruso®
Paraffin baths, facial brushes, facial saunas, and other skin care appliances
Revlon®, Hotspa®, Sunbeam®, Dr. Scholl’s® and Visage Náturel®
Manicure/pedicure systems
Revlon®, Dr. Scholl’s®, Scholl® and The Beautician™
Foot baths
Dr. Scholl’s®, Scholl®, Revlon®, Sunbeam®, Carel® and Hotspa®
Foot massagers, hydro massagers, cushion massagers, body massagers, and memory foam products
Dr. Scholl’s®, Health o meter®, Carel® and Hotspa®
Hair clippers, trimmers, exfoliators, and shavers
Vidal Sassoon®, Revlon® and Hot Tools®
Hard and soft-bonnet hair dryers
Dazey®, Carel®, and Hot Tools®
Hair styling, hand-held mirrors, lighted mirrors, and utility implements
Vidal Sassoon® and Revlon®
Decorative hair accessories
Vidal Sassoon®, Revlon®, Karina®, Karina Girl™, HOT things®, Isobel®, DCNL® and Nandi®
Grooming,
Skin Care,
Liquid hair styling products
Vitalis®, Final Net®, Condition® 3-in-1 and Vitapointe®
and Hair
Liquid skin care products
Sea Breeze®, TimeBlock® and Skin Milk®
Care
Medicated skin care products
Ammens®
Products
Fragrances, deodorants, and antiperspirants
Brut®
Hair depilatory products
Epil-Stop®
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:
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.
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.
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:
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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;
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transitioning the warehousing, order fulfillment and shipment processes for our OXO products to our new Global Enterprise Resource Planning system;
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the physical movement of the existing OXO inventory from its former distribution facility in Illinois to Mississippi;
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the physical movement of other inventories from the Company’s existing distribution facilities to the new facility in Southaven, Mississippi; and
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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.
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,
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the diversion of management’s attention from other business concerns,
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risks of entering markets in which we have no or limited prior experience, and
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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.
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:
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our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes, or other purposes,
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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,
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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,
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our level of indebtedness will increase our vulnerability to general economic downturns and adverse industry conditions,
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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,
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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:
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incur additional debt, including guarantees;
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incur certain types of liens;
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sell or otherwise dispose of assets;
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engage in mergers or consolidations;
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enter into substantial new lines of business; and
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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
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.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 2.
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:
* Facilities intended to be replaced in fiscal 2007 by the new 1,200,000 square foot distribution facility in Southaven, Mississippi.
ITEM 3.
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.
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.
ITEM 4.
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.
PART II
ITEM 5.
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.
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.
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
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.
ITEM 6.
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)
ITEM 6. SELECTED FINANCIAL DATA, CONTINUED
As of last day of February,
(in thousands)
ITEM 7.
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.
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
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:
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.
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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
All other schedules are omitted as the required information is included in the consolidated financial statements or is not applicable.
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.
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
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 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
HELEN OF TROY LIMITED AND SUBSIDIARIES
Consolidated Balance Sheets
February 28, 2006 and 2005
(in thousands, except shares and par value)
See accompanying notes to consolidated financial statements.
HELEN OF TROY LIMITED AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands, except per share data)
See accompanying notes to consolidated financial statements.
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)
See accompanying notes to consolidated financial statements.
HELEN OF TROY LIMITED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
See accompanying notes to consolidated financial statements.
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.
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.
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
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,
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
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
ACCRUAL FOR WARRANTY RETURNS
(in thousands)
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.
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
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.
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.
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
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:
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
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)
[1] Includes one fully amortized trademark and one trademark with an estimated life of 30 years
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.
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
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.
NOTE 6 - ACCRUED EXPENSES
A summary of other accrued liabilities (in thousands) was as follows:
NOTE 7 - LONG-TERM DEBT
A summary of long-term debt (in thousands) was as follows:
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
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:
Our components of income tax expense attributable to continuing operations are as follows:
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:
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:
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.
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.
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.
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:
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.
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:
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.
NOTE 9 - STOCK-BASED COMPENSATION PLANS, CONTINUED
A summary of stock option activity under all plans is as follows:
The following table summarizes information about stock options at February 28, 2006:
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
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.
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.
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)
*
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).
NOTE 12 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected unaudited quarterly financial data is as follows (in thousands, except per share amounts):
NOTE 13 - SEGMENT INFORMATION
The following table contains segment information for fiscal 2006, 2005, and 2004.
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.
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):
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.
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:
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)
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
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)
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 approximately 100 products have been introduced through the OXO Good Grips®, OXO Steel™, OXO Good Grips i-Series®, and OXO SoftWorks® product lines.
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)
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)
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.
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.
HELEN OF TROY LIMITED AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
Years ended the last day of 2005 and 2004 February 2006,
(in thousands)
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.
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.
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.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10.
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 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.
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.
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.
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.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
1. Financial Statements: See “Index to Consolidated Financial Statements” under Item 8 on page 51 of this Annual Report.
2.
Financial Statement Schedule: See “Schedule II” on page 91 of this Annual Report
3.
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.
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.
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
Gerald J. Rubin
Chairman of the Board, Chief Executive Officer,
President, Director and Principal Executive Officer
May 12, 2006
/s/ Thomas J. Benson
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/ Gary B. Abromovitz
Gary B. Abromovitz
Director, Deputy Chairman of the Board
May 12, 2006
/s/ John B. Butterworth
John B. Butterworth
Director
May 12, 2006
/s/ Christopher L. Carameros
Christopher L. Carameros
Director
May 12, 2006
/s/ Adolpho R. Telles
Adolpho R. Telles
Director
May 12, 2006
/s/ Timothy F. Meeker
Timothy F. Meeker
Director
May 12, 2006
/s/ Darren G. Woody
Darren G. Woody
Director
May 12, 2006