ITEM 1. BUSINESS
GENERAL
Unless the context requires otherwise, references to “the Company,” to “our Company,” or to “Helen of Troy” and references such as “we”, “our” and “us” refer to Helen of Troy Limited and its subsidiaries.
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, mirrors, hot air brushes, home hair clippers, paraffin baths, massage cushions, footbaths, body massagers, brushes, combs, hair accessories, liquid hair styling products, body powder and skin care products. The Housewares segment is new this year and reports the operations of OXO International (“OXO”) which we acquired on June 1, 2004, as further discussed in Notes (4), (5), (6) and (16) to our consolidated financial statements. The Houseware segment’s products include kitchen tools, household cleaning tools, storage and organization products, and gardening tools. Both segments sell their portfolio of products principally through mass merchants, general retail and specialty retail outlets in the United States and other countries.
In each of our segments, we rely on a strategy of providing a broad line of competitively priced innovative products, always striving to be first to market with new product ideas. Our goal is to provide our consumers with more functionality and higher performance at competitive price points. This strategy has allowed us to continue to strengthen our position in both of our segments. 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.
We also report on a Discontinued Segment, which shows the operations of Tactica International, Inc. (“Tactica”), which sold personal care and other consumer products to retailers and used direct response marketing to sell such products directly to consumers. As more fully described in Note (15) 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. In exchange for our 55 percent ownership share of Tactica and the release of $16,936,000 of its secured debt and accrued interest owed to us, we received marketable securities, intellectual properties, and the right to certain tax refunds. No gain or loss was recorded as a result of the sale. 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, 2005 the market value of these securities was $120,000. 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 2005, the total loss on stock available for sale was $2,910,000.
We are continually looking for opportunities to expand our brand portfolio both through internal product development and selective acquisitions. In the Personal Care segment in the second fiscal quarter of 2005, we began selling footbaths, massagers and memory foam products under the Health at Home® and Health o meter® names (licensed from Sunbeam Products, Inc.). In September 2004, we acquired the TimeBlock® and Skin Milk® body and skin care product lines from Naterra International, Inc. (“Naterra”) as further discussed in Note (4) to our consolidated financial statements. The Housewares segment is new this year resulting from the acquisition of OXO which added six brands: Good Grips®, Grind it™, Steel™, Softworks®, Touchables® and Good Grips® Basics. OXO products have strong consumer recognition and appeal due to their unique stylish ergonomic designs and great utility at affordable prices.
Over the past fiscal year, we have devoted substantial resources to the implementation of our new global information system, which became operational in September 2004. With the implementation of the new system, most of our businesses with the exception of the newly acquired Housewares segment run under one integrated information system. We intend to transition the Housewares segment to our new system over the next year. The new system continues to improve and evolve as we extend functionality, tune performance and gain operating experience.
We present financial information for each of our operating segments in Note (12) of the consolidated financial statements. The matters discussed in this Item 1, pertain to all of our existing operating segments, unless otherwise specified.
We use outside manufacturers to produce our goods. We sell our products to mass merchandisers, drug chains, warehouse clubs, grocery stores, beauty supply retailers and wholesalers, and specialty retailers in the United States and other countries.
We sell certain of our products under licenses from third parties. Our licensed trademarks include:
• Vidal Sassoon®, licensed from The Procter & Gamble Company;
• Revlon® licensed from Revlon Consumer Products Corporation;
• Dr. Scholl’s®, licensed from Schering-Plough HealthCare Products, Inc.;
• Scholl® (in areas other than North America), licensed from SSL Int. Ltd.;
• Sunbeam®, Health at Home® and Health o meter® licensed from Sunbeam Products, Inc.;
• Sea Breeze®, licensed from Shiseido Company Ltd.; and
• Vitapointe®, licensed from Sara Lee Household and Body Care UK Limited.
We own and actively market a number of trademarks, including:
We also market hair and beauty care products under the following trademarks to the professional beauty salon industry:
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 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®, Ecstasy™, Gold Series®, Gallery Series®, Wigo®, Cosmopolitan™, and Sable®
Curling irons, straightening irons, hot air brushes, and brush irons
Vidal Sassoon®, Revlon®, Sunbeam®, Helen of Troy®, Salon Edition®, Hot Tools®, HOT Professional®, Gold Series®, Gallery Series®, Ecstasy™, Wigo®, Cosmopolitan™, and Sable®
Hairsetters
Vidal Sassoon®, Revlon®, Sunbeam®, Cosmopolitan™, and Caruso™
Paraffin baths, facial brushes, facial saunas, and other skin care appliances
Revlon®, Hotspa®, Sunbeam®, Dr. Scholl’s®, and Visage Naturel™
Manicure/Pedicure Systems
Revlon®
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®, Scholl®, Sunbeam®, Health o Meter®, Carel®, and Hotspa®
Hair clippers, trimmers, exfoliators, and shavers
Vidal Sassoon®, Revlon®, and Sunbeam®
Hard and soft-bonnet hair dryers
Dazey®, Lady Dazey®, Carel®, and Hot Tools®
Hair styling, hand held mirrors, lighted mirrors, and utility implements
Vidal Sassoon®, Revlon®, Sunbeam®, Wave Rage™, Nandi™, DCNL®, and Ecstasy™
Decorative hair accessories
Vidal Sassoon®, Revlon®, Karina®, Karina Girl™, HOT things™, Isobel™, DCNL®, and DCNL Signature™
Grooming, Skin Care, and Hair Care Products
Liquid hair styling products
Vitalis®, Final Net®, Condition 3-in-1®, and Vitapointe®
Liquid skin care products
Sea Breeze®, TimeBlock®, Skin Milk®, and Visage Naturel™
Medicated skin care products
Ammens®
Fragrances, deodorants, and antiperspirants
Brut®
Hair depilatory products
Epil Stop®
PRODUCT CATEGORY
PRODUCTS
BRAND NAMES
Housewares
Kitchen tools
OXO®, Good Grips®, Grind it™, Steel™, Softworks®, Touchables® and Good Grips® Basics
Household cleaning tools
OXO®, Good Grips®, Softworks® and Touchables®
Storage and organization products
OXO®, Good Grips®, Softworks® and Touchables®
Garden tools
OXO®, Good Grips® and Softworks®
We continue to develop new products and enhance existing products in order to maintain and improve our position in the Personal Care and Housewares markets. For example, during fiscal 2005 we improved existing products by adding new technologies to them. Ceramic styling plates with Pulse Technology® and digital Ionic® dryers are examples of new technologies. Ceramic is easy to clean and radiates heat quickly while helping to retain moisture in the hair. We were also the first to market with jade plates in straighteners that transfer high quality temperatures and maintain heat longer than conventional straighteners. We re-formulated, re-packaged, and re-introduced the Vitalis® brand of men’s hair care products; giving them nationally televised exposure to an estimated audience of 14.8 million people in December 2004 with our sponsorship of the Vitalis® Sun Bowl college football game. For our Brut® line of men’s grooming products, we launched a new print advertising campaign, re-established customer promotion and re-introduced holiday gift packs. Our Housewares Segment had strong consumer acceptance of its OXO Good Grips Mandoline, a precision food cutting tool which has been compared favorably in the trade press to products selling at multiples of its retail price.
Overall, in fiscal 2005 we introduced 426 new products across all our categories. Currently, 470 additional products are in our product development pipeline for fiscal 2006. At the 2005 International Housewares Show in Chicago, we introduced 120 new products, up from our record 95 the previous year. Included in our new products are important new line extensions such as new Revlon® ladies shavers, the Vidal Sasoon® “Studio Tools®” line of professional hair styling appliances, Brut® shaving products, the Sea Breeze® “Naturals” line of facial care products formulated and targeted for women 21 and older, new OXO® tea kettles, and an expanded line of OXO® home storage and organization products. With the increasing breadth and depth of our product lines, we believe we are well positioned for fiscal 2006 and beyond to continue to deliver high levels of service to our customers and great value and choice to our consumers.
You can learn more about our currently marketed products at the following Internet addresses:
http://www.hotus.com
http://www.oxo.com
http://www.brutworld.com
SALES AND MARKETING
We market our products primarily within the United States. Sales within the United States comprised approximately 82, 84 and 90 percent of total net sales in fiscal 2005, 2004, and 2003, 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 continue to explore and test other channels of distribution including selected tele-marketing campaigns and online sales. 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 the 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 for the next three years starting with the December 2004 game. 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, CBS Sports broadcast the game to an estimated nationwide audience of 14.8 million people providing us an opportunity to re-introduce the Vitalis® brand to a whole new generation of consumers. We will continue as the sponsor for 2005 and 2006 with an option to extend our sponsorship to 2007.
In January 2005, we entered into agreements with Don Schumacher Racing, the National Hot Rod Association and Just Marketing, Inc., to Sponsor Brut Racing, a funny car drag racing team that has begun participating in the NHRA Powerade Drag Racing Competition. This series of races occurs in 23 major metropolitan markets, attracts over 2,000,000 in live attendance annually, and receives over 150 hours of live or same day coverage on ESPN. The agreement is for three years and will give us the opportunity to extend the introduction of the Brut® Brand to our target consumers.
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. Almost all of our grooming, skin care and hair care products are manufactured in North America (see discussion of our dependency on third party manufacturers in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Forward-Looking Information and Factors That May Affect Future Results”). For fiscal 2005, 2004 and 2003, goods manufactured by vendors in the Far East comprised approximately 84, 89 and 95 percent, respectively, of the dollar value of all segments’ inventory purchases. Our new Housewares segment sources approximately 99 percent of its goods from vendors in the Far East. Our Far East percentage has been declining as the impact of purchases for our grooming, skin care and hair care products (manufactured primarily in North America) continues to become a larger share of our purchasing activity.
The manufacturers who produce our products use formulas, molds, and certain other tooling, some of which we own, in manufacturing those products. All our business segments employ numerous technical and quality control persons to assure high product quality.
In total, we occupy in excess of 1,600,000 square feet of distribution space in various locations to support our operations. Products that are manufactured in the Far East and sold in North America are shipped to the West Coast of the United States and Canada. The products are then shipped by truck or rail service to warehouse facilities in El Paso, Texas; Southaven, Mississippi; Monee, Illinois; Toronto, Canada; and Vancouver, Canada, or directly to customers. We ship substantially all products to North American customers from these warehouses by ground transportation services. Products sold outside the United States and Canada are shipped from manufacturers primarily in the Far East, to warehouse facilities in The Netherlands, the United
Kingdom, Mexico, Brazil, or directly to customers. We ship products stored at the warehouses in The Netherlands, the United Kingdom, Mexico, and Brazil to distributors or retailers.
Our customers seek to minimize their inventory levels and often demand that we fulfill their orders within relatively short time frames. Consequently, these inventory management practices often require us to carry substantial levels of inventory in order to meet our customers’ needs.
Most of our products manufactured outside the countries in which they are sold are subject to import duties, which have the effect of increasing the amount we pay to obtain such products.
LICENSE AGREEMENTS, TRADEMARKS, AND PATENTS
The Personal care segment depends significantly upon the continued use of trademarks licensed under various agreements. The Vidal Sassoon®, Revlon®, Sunbeam® and Dr. Scholl’s® trademarks are of particular importance. New product introductions under licensed trademarks require approval from the respective licensors. The licensors also must approve the product packaging. Many of the license agreements require the Company to pay minimum royalties, meet minimum sales volumes, and make minimum levels of advertising expenditures. The duration of the license agreements for the Revlon®, Vidal Sassoon®, Sunbeam®, and Dr. Scholl’s® trademarks, including the renewal terms, are 58, 28, 15 and 14 years, respectively. Upon expiration of the current terms of these agreements, we have the right to extend their terms upon payment of a renewal fee. The discussion below covers the primary product categories that Helen of Troy currently sells under its major license agreements. The product categories discussed do not necessarily include all of the products that Helen of Troy is entitled to sell under these or other license agreements.
Under an agreement with The Procter & Gamble Company, Helen of Troy is licensed to sell certain products bearing the Vidal Sassoon® trademark worldwide, except in Asia. Products sold under the terms of this license include hair dryers, curling irons, straightening irons, styling irons, hairsetters, hot air brushes, hair clippers and hair trimmers, mirrors, brushes, combs, and hair care accessories.
Under agreements with Revlon Consumer Products Corporation, we are licensed to sell worldwide except in Western Europe, hair dryers, curling irons, straightening irons, brush irons, hairsetters, brushes, combs, mirrors, functional hair accessories, personal spa products, hair clippers and trimmers, and battery-operated and electric women’s shavers bearing the Revlon® trademark.
We are licensed to sell foot baths, foot massagers, hydro massagers, cushion massagers, body massagers, paraffin baths, and support pillows bearing the Dr. Scholl’s® trademark in the United States and Canada, under an agreement with Schering-Plough HealthCare Products, Inc. We also are licensed to sell the same products under the Scholl® trademark in other areas of the world through an agreement with Scholl Limited.
Under an agreement with Sunbeam Products, Inc., we are licensed to sell hair clippers, hair trimmers, hair dryers, curling irons, hairsetters, hot air brushes, mirrors, manicure kits, hair brushes and combs, hair rollers, hair accessories, paraffin baths, foot massagers, back massagers, body massagers, memory foam products, and spa products bearing the Sunbeam®, Health at Home® and Health o meter® trademarks in the United States, Canada, Mexico, Central America, South America, and the Caribbean.
In October 2002, we acquired from The Procter & Gamble Company the right to sell products under the trademark Sea Breeze® pursuant to a perpetual royalty free license from Shiseido Company Ltd. We currently sell a line of liquid skin care products under the Sea Breeze® name in the United States and Canada.
Helen of Troy has filed or obtained licenses for over 250 design and utility patents in the United States and several foreign countries. Most of these patents cover product designs in our Housewares segment. We also protect certain details about our processes, products and strategies as trade secrets, keeping confidential the information that we believe provides us with a competitive advantage. Our ability to enforce patents, copyrights, licenses, and other intellectual property is subject to general litigation risks, as well as uncertainty as to the enforceability of various intellectual property rights in various countries.
CUSTOMERS
Sales to Wal-Mart Stores, Inc., and its affiliate, SAM’S Club, accounted for approximately 25 percent, 28 percent, and 29 percent of our net sales in fiscal 2005, 2004, and 2003, respectively. No other customer accounted for ten percent or more of net sales during those fiscal years.
ORDER BACKLOG
When placing orders, our retail and wholesale customers usually request that we ship the related products within a short time frame. As such, there was no significant backlog of orders in any of our distribution channels as of the end of fiscal 2005.
COMPETITIVE CONDITIONS
The markets in which we sell our products are very competitive and highly mature. Maintaining and gaining market share depends heavily on product development and enhancement, pricing, quality, performance, packaging and availability, brand name recognition, patents, and marketing and distribution approaches. In the Personal Care segment, our primary competitors include The Conair Corporation, Applica Incorporated, Remington Products Company, Goody Products, Inc., a division of Newell Rubbermaid, Inc., Homedics-USA, Inc., Chattem, J&J Boots, Andrew Jergens, Loreal, Unilever, and Alberto Culver. In the Housewares segment, the competition is highly fragmented. Our primary competitors include Kitchenaid (Lifetime Hoan Corporation), Zyliss AG, Copco (Wilton Industries, Inc.), Simple Human, Casabella and Interdesign. Some of these competitors have significantly greater financial and other resources than we do.
SEASONALITY
Our business is somewhat seasonal. Net sales in the third fiscal quarter accounted for approximately 35, 35, and 33 percent of fiscal 2005, 2004 and 2003 net sales, respectively. As a result of the seasonality of sales, our working capital needs fluctuate during the year.
REGULATION
Our electrical products must meet the safety standards imposed in various national, state, local, and provincial jurisdictions. Our electrical products sold in the United States are designed, manufactured, and tested to meet the safety standards of Underwriters Laboratories, Inc. or Electronic Testing Laboratories.
The medicated skin powder that we sell under the Ammens® trademark is regulated by the United States Food and Drug Administration.
EMPLOYEES
As of fiscal year end 2005, we employed 711 full-time employees in the United States, Canada, Hong Kong, Europe, Brazil, Peru, Venezuela and Mexico of which 161 are marketing and sales employees, 111 are distribution employees, 36 are engineering and development employees, and 403 are administrative personnel. We also use temporary, part time and seasonal employees as needed. None of the Company’s employees are covered by a collective bargaining agreement. We have never experienced a work stoppage and we believe that we have satisfactory working relations with our employees.
GEOGRAPHIC INFORMATION
Note (12) to the consolidated financial statements contains geographic information concerning our net sales and long-lived assets.
AVAILABLE INFORMATION
We maintain an Internet site at the following address: http://www.hotus.com. The information contained on the Company’s website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. We make available on or through our Internet website’s Investor Relations page under the heading “SEC Filings” certain reports and amendments to those reports that we file with or furnish to the Securities and Exchange Commission (the “SEC”) in accordance with the Securities Exchange Act of 1934 (the “Securities Exchange Act”). These include our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, amendments to these reports and the reports required under Section 16 of the Securities Exchange Act of transactions in Company stock by directors and officers. Also on the Investor Relations page, under the heading “Corporate Governance” are the Company’s Code of Ethics, Corporate Governance Guidelines and the Charters of the Committees of the Board of Directors. We make this information available on our website free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC. The public may also read and copy any of the materials we file with the SEC in accordance with the Securities Exchange Act at the SEC’s Public Reference Room at 450 Fifth Street, N.W. Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0300. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information about our Company. The address of the SEC’s Internet site is http://www.sec.gov.
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.
We own our corporate headquarters, a 135,000 square foot office building with an adjacent 408,000 square foot warehouse, located on 50 acres in El Paso, Texas. We also own 32 acres of land in El Paso, Texas near the 50 acres on which our corporate headquarters and warehouse are located. Included in the 32 acres is 10 acres which we acquired in July 2004. The Company is holding this land for future business expansion.
Personal Care Segment - We have two warehouses in El Paso, Texas: a 408,000 square foot warehouse that we own (adjacent to our corporate headquarters), and a 108,000 square foot warehouse under lease. We also own a 619,000 square foot warehouse in Southaven, Mississippi, (servicing our Personal Care segment) as well as the 29 acre plot of land on which that warehouse is located. We lease warehouse space in public warehouses located in Canada, Hong Kong, The Netherlands, and the United Kingdom.
We own a sales and administrative facility in Sheffield, England. We also lease various sales and administrative facilities in Danbury, Connecticut; Bentonville, Arkansas; Minneapolis, Minnesota; and Troy, Michigan. Internationally, we lease various sales and administrative facilities in Canada, France, Germany, Mexico, Brazil, Peru, Hong Kong, Macao and Mainland China.
Housewares Segment - We lease approximately 10,000 square feet for the Housewares’ selling and administrative offices in New York City, New York. Through a management services agreement, we utilize approximately 200,000 square feet of warehouse space in Monee, Illinois.
Discontinued Segment - As more fully described in Note (15) to our consolidated financial statements, in April 2004 we completed the sale of our ownership interest in Tactica back to certain of its key operating manager-shareholders. At and prior to that time, Tactica leased administrative offices in New York City, New York and leased public warehouse space in Reno, Nevada.
Future Expansion - As further discussed in Note (17) to our consolidated financial statements, towards the end of fiscal 2006 or early in fiscal 2007, the Company is planning to move its Southaven, Mississippi and Monee, Illinois distribution operations to a newly constructed and owned 1,200,000 square foot warehouse. We expect to sell our original Southaven, Mississippi facility. We do not expect to incur any losses on the disposition of this facility.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Hong Kong Income Taxes - The Inland Revenue Department (“the IRD”) in Hong Kong has assessed a total of $32,086,000 (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 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 1997, we were required to purchase $3,282,000 (U.S.) in tax reserve certificates in Hong Kong. During fiscal 2005, we purchased $25,144,000 (U.S.) of additional tax reserve certificates as required by the IRD. With the purchase of these certificates, we have purchased $28,426,000 of tax reserve certificates for fiscal years 1995 through 2003. 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. If the IRD’s position were to prevail and if it were to assert the same position for fiscal years after fiscal year 2003, the resulting assessment could total $18,340,000 (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 $13,424,000 for the three years under audit. We have resolved the various tax issues and reached an agreement on additional tax in the amount of $3,568,000. 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 will be settled with funds already on deposit with the IRS.
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 2005.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
PRICE RANGE OF COMMON STOCK
Our common stock is listed on the NASDAQ National Market System [symbol: HELE]. The following table sets forth, for the periods indicated, in dollars per share, the high and low bid prices of the common stock as reported on the NASDAQ National Market System. These quotations reflect the inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions.
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
We have one class of equity security outstanding at February 28, 2005; common stock with a par value of $0.10. As of May 5, 2005 there were approximately 370 holders of record of the company’s common stock. Shares held in “nominee” or “street” name at each bank nominee or brokerage house are included in the number of shareholders of record as a single shareholder. We estimate that approximately 30,200 individuals and institutions hold our common stock.
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 stock since inception. Our current intention is to pay no cash dividends in fiscal 2006. 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, 2005. All outstanding awards relate to our common stock. All our equity compensation plans have been approved by shareholder vote.
EQUITY COMPENSATION PLAN INFORMATION
PURCHASES OF HELEN OF TROY COMMON STOCK
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 stock over a period extending through May 31, 2006. During the quarter ended February 28, 2005, we did not purchase any shares. From September 1, 2003 through February 28, 2005, we have repurchased 1,563,836 shares at a total cost of $45,611,670 or an average share price of $29.17. An additional 1,436,164 shares are 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 in the section entitled “Forward-Looking Information and Factors That May Affect Future Results” and in Item 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Changes in interest rates and currency exchange rates represent our primary financial market risks. Fluctuation in interest rates causes variation in the amount of interest that we can earn on our available cash 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, 2005 is both floating and fixed. Fixed rates are in place on $45,000,000 senior notes at rates ranging from 7.01 percent to 7.24 percent. Floating rates are in place on $225,000,000 of senior notes. Interest rates on these notes are reset quarterly based on the 3 month LIBOR rate plus 85 basis points for the five and seven year notes, and the 3 month LIBOR rate plus 90 basis points for the ten year notes. Interest rates during the latest fiscal year on these notes ranged from 2.436 to 3.410 percent for the five and seven year notes, and 2.486 to 3.460 percent for the ten year notes. On March 29, 2005, the interest rates on these notes were reset for the next three months at 3.940 percent for the five and seven year notes and 3.990 percent for the ten year notes. Increases in interest rates expose us to risk on this debt. Also, with respect to our $45,000,000 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 in “Financial Condition, Liquidity, and Capital Resources”, interest rates on our revolving credit agreement vary based on the higher of the Federal Funds Rate + 0.50 percent or Bank of America’s prime rate, or alternatively at our election, the LIBOR rate and the period we lock LIBOR in for. Therefore, the potential for interest rate increases exposes us to interest rate risk on our revolving credit agreement. Our revolving credit agreement allows for maximum revolving borrowings of $75,000,000. At the end of fiscal 2005, there were no outstanding borrowings and $150,000 of open letters of credit under this credit agreement. The need to borrow under this agreement could ultimately subject us to higher interest rates, thus increasing the future cost of such debt. We do not currently hedge against interest rate risk.
As mentioned under Notes (5) and (6) to our consolidated financial statements, “Financial Condition, Liquidity, and Capital Resources”, and “Forward-Looking Information and Factors that may affect Future Results”, on June 29, 2004, we established a new five year, $75,000,000 revolving credit facility, cancelled our existing $50,000,000 revolving credit facility, and placed $225,000,000 of floating rate senior debt with five, seven, and ten year maturities. Both the new revolving credit facility and the senior debt bear floating rates of interest. For example, a 1 percent increase in our base interest rates could impact us by adding up to $3,000,000 of additional interest cost annually. The addition of this level 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 Canada are transacted in Canadian Dollars and in Mexico are transacted in Pesos. When the U.S. Dollar strengthens against other currencies in which we transact sales, we are exposed to foreign exchange losses on those sales because our foreign currency sales prices are not adjusted for currency fluctuations. When the U.S. Dollar weakens against those currencies, we could realize foreign currency gains.
Our net sales denominated originally in currencies other than the U.S. Dollar totaled approximately $87,880,000, $73,259,000 and $43,366,000 during the fiscal years ended 2005, 2004 and 2003, respectively. In fiscal 2005, we incurred a foreign currency exchange loss of $1,142,000. We incurred foreign currency exchange gains totaling $1,216,000 and $1,638,000 for the fiscal years ended 2004 and 2003, 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 2005 and 2004:
February 28, 2005
February 29, 2004
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, 2005 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, 2005. 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, 2005, 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.
In conducting our evaluation of the effectiveness of internal control over financial reporting, we have excluded the operating assets and liabilities and results of operations of OXO International, which we acquired on June 1, 2004, as permitted by Securities and Exchange Commission rules and regulations. See Note (16) for a further discussion of the OXO acquisition. The operating assets resulting from this acquisition constituted approximately 5.2 percent of consolidated assets as of February 28, 2005; and 13.8 percent of consolidated revenues and 24.5 percent of consolidated operating income for the year then ended.
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 51.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
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, 2005 and February 29, 2004 and the related consolidated statements of income, stockholders’ equity and comprehensive loss, and cash flows for each of the years in the three year period ended February 28, 2005. 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, 2005 and February 29, 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended February 28, 2005, 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, 2005, 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 14, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting. Our audit of internal control over financial reporting of the Company excluded an evaluation of the internal control over financial reporting of the Company’s Housewares segment containing the operations of OXO International. OXO International was acquired by the Company during the fiscal year ended February 28, 2005 and was excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of February 28, 2005.
/s/ KPMG LLP
El Paso, Texas
May 14, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
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, 2005, 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, 2005, 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, 2005, based on criteria established in Internal Control-Integrated Framework issued by the COSO.
Helen of Troy Limited acquired OXO International during the fiscal year ended February 2005. Management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of February 28, 2005, OXO International’s internal control over financial reporting associated with total assets of $42,259,000 and net revenues of $80,143,000 included in the consolidated financial statements of the Company as of and for the year ended February 28, 2005. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of OXO International.
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, 2005 and February 29, 2004, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three year period ended February 28, 2005, and our report dated May 14, 2005 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
El Paso, Texas
May 14, 2005
HELEN OF TROY LIMITED AND SUBSIDIARIES
Consolidated Balance Sheets
February 28, 2005 and February 29, 2004
(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 Stockholders’ Equity and Comprehensive Income
Years Ended The Last Day of February, 2005, 2004, and 2003
(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, mirrors, hot air brushes, home hair clippers, paraffin baths, massage cushions, footbaths, body massagers, brushes, combs, hair accessories, liquid hair styling products, body powder and skin care products. The Housewares segment is new this year and reports the operations of OXO International (“OXO”), which we acquired on June 1, 2004, as further discussed in Notes (4),(5), (6) and (16) to our consolidated financial statements. The Houseware segment’s products include kitchen tools, household cleaning tools, storage and organization products, and gardening 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. We have reclassified certain prior-year amounts to conform to this year’s presentation.
(b) Consolidation
Our consolidated financial statements include the accounts of Helen of Troy Limited and its subsidiaries. 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.” Accordingly, the consolidated balance sheet for the year ended February 29, 2004 presents Tactica’s total assets in the line “Assets of discontinued operation held for sale”, and its total liabilities in the line “Liabilities of discontinued operations held for sale.” As more fully described in Note (15) 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. We eliminate intercompany balances and transactions in consolidation.
(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.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(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 $13,869,000, $16,603,000, and $14,942,000, for the fiscal years 2005, 2004, and 2003, 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 $11,082,000, $11,373,000, and $10,195,000 of such general and administrative expenses to inventory during fiscal years 2005, 2004, and 2003, respectively. We estimate that $4,192,000 and $4,745,000 of general and administrative expenses directly attributable to the procurement of inventory were included in our inventory balances on hand at fiscal year ends 2005 and 2004, 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.
(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 $38,355,000, $32,701,000, and $24,489,000 during the fiscal years ended 2005, 2004, and 2003, 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.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(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 at Home®, 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 license agreements comprised 56 percent, 64 percent, and 71 percent of total consolidated net sales for fiscal years 2005, 2004, and 2003, 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 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.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(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 stock options.
The number of potentially dilutive securities was 2,879,000, 2,905,000 and 1,359,000 for fiscal years 2005, 2004, and 2003, respectively. Options to purchase common stock that were outstanding but not included in the computation of earnings per share because the exercise prices of such options were greater than the average market price of our common stock totaled 40,500, -0- and 4,162,662 for fiscal 2005, 2004, and 2003, 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 $17,530,000 and $31,159,000 of the amount reported on our consolidated balance sheets as “Cash and cash equivalents” at fiscal year ends 2005 and 2004, 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, 2005, 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.
In connection with the sale of Tactica, as further discussed in Note (15) to these consolidated financial statements, we acquired certain marketable securities; which carry a restriction that prevents 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
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
comprehensive income” in our consolidated statement of stockholder’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 $3,030,000. As of February 28, 2005, this stock had a market value of $120,000. 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. For fiscal 2005, the total unrealized loss on stock available for sale was $2,910,000.
The sum of unrealized and realized net gains and (losses) attributable to trading securities totaled ($500,000), $311,000, and $67,000 in fiscal 2005, 2004, and 2003, 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 re-measured 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 ($1,142,000), $1,216,000 and $1,638,000 during the fiscal years ended 2005, 2004, and 2003, 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 stockholders’ 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 loss on cash flow hedging derivatives” in our consolidated statement of stockholders’ 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 income. See Note (13) to these consolidated financial statements for a further discussion of our hedging activities.
(o) Advertising
Advertising costs are expensed in the fiscal year in which they are incurred and included in our consolidated statements of income on the “Selling, general, and administrative expenses” line. We incurred advertising costs of $25,559,000, $27,106,000 and $20,133,000 during the fiscal years ended 2005, 2004, and 2003, respectively.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(p) Warranties
Our products are under warranty against defects in material and workmanship for a maximum of two years. We have established accruals to cover future warranty costs of approximately $5,767,000 and $4,114,000 as of fiscal year ends 2005 and 2004, respectively. We estimate our warranty accrual using historical trends and believe that these trends are the most reliable method by which we can estimate our warranty liability. The following table summarizes the activity in the Company’s accrual for the past three fiscal years:
ACCRUAL FOR WARRANTY RETURNS
(in thousands)
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) and (9) 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 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 (15) to our consolidated financial statements.
(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
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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 $2,732,000, $1,445,000 and $1,330,000 during fiscal 2005, 2004 and 2003, 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 $359,000, $438,000 and $1,088,000 in fiscal 2005, 2004, and 2003, respectively.
(t) 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 (6) 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 (13) for more information on our hedging activities.
(u) Stock-based compensation plans
Statement of Financial Accounting Standards No. 123 (“SFAS 123”) and No. 123R (“SFAS 123R”), “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 stock-based compensation plans using the intrinsic value method prescribed in Accounting Principles Board 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.” In fiscal 2005, we credited $8,301,000 of tax benefits arising from such exercise. In fiscal 2004, we credited $8,045,000 of tax benefits arising from such exercise. Disclosures about the Company’s stock-based compensation plans are included in Note (8) 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 123R, 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.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(v) New accounting guidance
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 153 is not expected to have a material impact on our financial condition, results of operations, or cash flows.
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 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 recent declines in the market value of securities acquired in connection with the sale of Tactica as discussed in Notes (1) and (15) to our consolidated financial statements were “other-than-temporary”, and recorded the appropriate recognition of a loss in our fiscal 2005 operating results.
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 FAS 151 are effective for fiscal years beginning June 15, 2005 or later. Management is currently evaluating the provisions of FAS 151 and does not expect that the adoption will have a material impact on the Company’s consolidated financial position or results of operations.
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123R “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,
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
stock options and awards of restricted stock) 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 123R are effective for public companies at the beginning of their first annual period beginning after June 15, 2005. We expect to adopt SFAS No. 123R on March 1, 2006.
SFAS No. 123R 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. 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123R for all awards granted to employees prior to the effective date of SFAS No. 123R 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. 123R 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. 123R’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. At February 28, 2005, we had 24,486 options available for issue under our employee stock option plan, and 336,000 options available for issue under our non-employee director’s stock option plan. The director’s stock option plan is set to terminate in June 2005, so effectively; we plan to issue only 56,000 options under this plan. Based upon our analysis of the current stock option plans in place, and assuming no further modifications to these plans, the estimated impact of adopting SFAS No. 123R for fiscal 2007 (fiscal year of adoption) will be to add approximately $856,000 net of tax benefits, to our annual operating expense. 123R 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).
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.” FSP No. 109-2 amends the existing accounting literature that requires companies to record deferred taxes on foreign earnings, unless they intend to indefinitely reinvest those earnings outside the U.S. This pronouncement temporarily allows companies that are evaluating whether to repatriate foreign earnings under the American Jobs Creation Act of 2004 to delay recognizing any related taxes until that decision is made. This pronouncement also requires companies that are considering repatriating earnings to disclose the status of their evaluation and the potential amounts being considered for repatriation. The U.S. Treasury Department has not issued final guidelines for applying the repatriation provisions of the American Jobs Creation Act. We continue to evaluate this legislation and FSP No. 109-2 to determine whether we will
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
repatriate any foreign earnings and the impact, if any, that this pronouncement will have on our consolidated financial statements.
NOTE 2 - PROPERTY AND EQUIPMENT
A summary of property and equipment (in thousands) was as follows:
We recorded $5,025,000, $3,653,000 and $4,049,000 of depreciation expense for fiscal 2005, 2004, and 2003, respectively. Capital expenditures totaled $14,663,000, $13,805,000 and $19,294,000 in fiscal 2005, 2004, and 2003, respectively.
We lease 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. During fiscal 2005, 2004, and 2003, we paid this real-estate partnership rentals of $526,000 $454,000, and $614,000.
During fiscal 2005, molds and tooling having a net book value of $124,000 at February 29, 2004, were reclassified from “Other assets” to “Property and equipment.” The acquisition of OXO International (“OXO”) accounted for most of the increase in the net book value of molds since February 29, 2004. Given the scope and nature of OXO’s activities, management now believes this reclassification to be a more appropriate characterization of the nature of the assets acquired and has reclassified all previously acquired similar assets accordingly. See Note (16) for a further discussion of the OXO acquisition.
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, 2005 and February 29, 2004.
INTANGIBLE ASSETS
(in thousands)
[1] Includes one fully amortized trademark and one trademark with an estimated life of 30 years
During fiscal 2005, we reclassified $17,717,000 from Brut® goodwill to Brut® trademarks having an indefinite life and have reclassified this amount in the February 29, 2004 consolidated balance sheet and related schedules accordingly. The reclassification has no impact on the consolidated statements of income. Management believes this reclassification to be a more appropriate characterization of the nature of the acquisition costs paid for the Brut® brand.
NOTE 3 - INTANGIBLE ASSETS, CONTINUED
The following table summarizes the amortization expense attributable to intangible assets for the years ending on the last day of February 2005, 2004, and 2003, as well as estimated amortization expense for the fiscal years ending the last day of February 2006 through 2010.
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, 2006, minimum royalties due and minimum advertising expenditures under these agreements total $3,595,000 and $6,875,000, respectively.
NOTE 4 - ACQUISITION OF TRADEMARKS AND OF RIGHTS UNDER LICENSE AGREEMENTS
On October 21, 2002, we acquired from The Procter & Gamble Company the right to sell products under six trademarks. We acquired all rights to the trademarks and certain rights to the formulas and production processes for four of the six trademarks: Ammens®, Vitalis®, Condition 3-in-1®, and Final Net®. The Procter & Gamble Company also assigned to us its rights under licenses to sell products for two additional trademarks, Sea Breeze® and Vitapointe®. The Sea Breeze® license is perpetual. We have completed an analysis of the economic lives of the trademarks acquired and believe these trademarks to have indefinite economic lives except for the Vitapointe® license. We have determined that the license covering the Vitapointe® trademark has an economic life equal to its initial term through December 2010 and are currently amortizing the intangible asset over that period. We recorded amortization expense on the Vitapointe® license of $255,000 and $128,000 for the fiscal years ended February 28, 2005 and February 29, 2004, respectively.
On September 29, 2003, we acquired certain assets related to the Western Hemisphere production and distribution of Brut® fragrances, deodorants, and antiperspirants from Sonoco, Inc., a wholly owned subsidiary of Unilever NV. The assets consist principally of patents, trademarks, and trade names, product formulations and production technology, related finished goods inventories, distribution rights, and customer lists. We paid $55,255,000 in cash in the transaction. The transaction was funded with $32,000,000 drawn against a short-term revolving credit facility with Bank of America, and $23,255,000 of cash on hand. We completed our 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 $51,317,000 to trademarks having an indefinite economic life, $3,725,000 to inventory, and $213,000 to fixed assets.
In the first fiscal quarter of 2005, as part of the proceeds of our sale of Tactica, we recorded $2,255,000 for the Epil Stop® trademark, which we believe to have an indefinite useful life (see Note 13).
NOTE 4 - ACQUISITION OF TRADEMARKS AND OF RIGHTS UNDER LICENSE AGREEMENTS, CONTINUED
On June 1, 2004, we acquired certain assets and liabilities of OXO International (“OXO”) for a net cash purchase price of approximately $273,173,000 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 (6) to these consolidated financial statements. In the acquisition, we recorded goodwill of $165,388,000 (subsequently adjusted to $166,131,000), additional trademarks with indefinite useful lives (and thus not subject to amortization) of $75,200,000, and other intangible assets totaling $17,990,000 (subsequently adjusted to $18,364,000). “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. These allocations 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. See Note (16) 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 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 $12,001,000 in cash funded out of the Company’s revolving line of credit. The purchase price was allocated $11,906,000 to trademarks and $95,000 to property and equipment. 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.
NOTE 5 - SHORT-TERM DEBT
On September 22, 2003, certain subsidiaries of the Company entered into a $50,000,000 unsecured revolving credit facility with Bank of America to facilitate short-term borrowings and the issuance of letters of credit. All borrowings accrued interest equal to the higher of the Federal Funds Rate plus 0.50 percent or Bank of America’s prime rate. Alternatively, with timely election, borrowings could accrue interest based on the respective 1, 2, 3, or 6-month LIBOR rate plus 0.75 percent (based upon the term of the borrowing). The credit facility allowed for the issuance of letters of credit up to $10,000,000. Outstanding letters of credit reduced the $50,000,000 borrowing limit dollar for dollar. The credit agreement required the maintenance of certain Debt/EBITDA, fixed charge coverage ratios, and other customary covenants. We were in compliance with all these requirements. The agreement was guaranteed, on a joint and several basis, by our parent company, Helen of Troy Limited, and certain U.S. subsidiaries. This credit facility was cancelled effective June 1, 2004.
On June 1, 2004, we entered into a five year $75,000,000 Revolving Line of Credit Agreement, dated as of June 1, 2004, with Bank of America, N.A. and other lenders and a one year $200,000,000 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 (16) 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 International acquisition was funded by borrowings of $73,173,000 under the new Revolving Line of Credit Agreement and $200,000,000 under the Term Loan Credit Agreement. Borrowings under the Term Loan Credit Agreement were subsequently paid off with the proceeds of the funding of $225,000,000 Floating Rate Senior Notes on
NOTE 5 - SHORT-TERM DEBT, CONTINUED
June 29, 2004 as discussed in Note (6). 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 period from June 1, 2004 through February 28, 2005 ranged from 2.195 percent to 5.500 percent. The new credit line allows for the issuance of letters of credit up to $10,000,000. Outstanding letters of credit reduce the $75,000,000 borrowing limit dollar for dollar. Upon the execution of this new credit facility, our previous $50,000,000 unsecured revolving credit facility with Bank of America was cancelled. As of February 28, 2005, there were no revolving loans and $150,000 of open letters of credit outstanding against this facility.
The Revolving Line of Credit Agreement continues to require and the Term Loan Credit Agreement required 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.
Other Letters of Credit
One of the Company’s U.S. subsidiaries had issued a $389,000 standby letter of credit to the lessor of Tactica’s office space in New York City. The lessor could draw funds from the standby letter of credit if Tactica failed to meet its obligations under the lease. After our sale of Tactica as discussed in Note (15), we took measures to cancel the original letter of credit and issue another standby letter of credit under a new banking relationship. Tactica has since filed for bankruptcy and did indeed fail to meet its obligations under the lease. The lessor had requested draws against the original letter of credit for a total of $241,000, through February 28, 2005, which has been adequately provided for in our consolidated financial statements.
NOTE 6 - LONG-TERM DEBT
Long-Term Debt Agreements Outstanding at February 29, 2004
On January 5, 1996, one of our U.S. subsidiaries issued guaranteed Senior Notes at face value of $40,000,000. Interest is paid quarterly at an annual rate of 7.01 percent. The Senior Notes are unsecured, and are guaranteed by Helen of Troy Limited and certain of our subsidiaries. Annual principal payments of $10,000,000 each began on January 5, 2005, with the final payment due January 5, 2008. $30,000,000 and $40,000,000 were outstanding under these Senior Notes at February 28, 2005 and February 29, 2004, respectively. Using a discounted cash flow analysis based on estimated market rates, the estimated fair value of the guaranteed Senior Notes at February 28, 2005 is approximately $31,580,000.
On July 18, 1997, one of our U.S. subsidiaries issued a $15,000,000 Senior Note. Interest is paid quarterly at an annual rate of 7.24 percent. The $15,000,000 Senior Note is unsecured, is guaranteed by Helen of Troy Limited
NOTE 6 - LONG-TERM DEBT, CONTINUED
and certain of our subsidiaries and is due July 18, 2012. Annual principal payments of $3,000,000 each begin July 18, 2008, with the final payment due July 18, 2012. Using a discounted cash flow analysis based on estimated market rates, the estimated fair value of the guaranteed Senior Note at February 28, 2005 is approximately $16,560,000.
Both the $40,000,000 and $15,000,000 Senior Notes contain covenants that require that we meet certain net worth 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 Senior Note agreements. We are in compliance with all the terms of these notes. Under the terms of the Senior Notes, one of our U.S. subsidiaries is the borrower. Our consolidated group’s parent company, located in Bermuda, one of our subsidiaries located in Barbados, and three of our U.S. subsidiaries fully guarantee the Senior Notes on a joint and several basis.
Long-Term Debt Agreements Entered into During the Current Fiscal Year
On June 29, 2004, we closed on a $225,000,000 Floating Rate Senior Note financing arranged by Banc of America Securities LLC with a group of ten financial institutions. The Senior Notes consist of $100,000,000 of five year notes, $50,000,000 of seven year notes, and $75,000,000 of ten year notes. Interest on the notes is payable quarterly. Interest rates are reset quarterly based on the 3 month LIBOR rate plus 85 basis points for the five and seven year notes, and the 3 month LIBOR rate plus 90 basis points for the ten year notes. Interest rates during the latest fiscal year on these notes ranged from 2.436 to 3.410 percent for the five and seven year notes, and 2.486 to 3.460 percent for the ten year notes. On March 29, 2005, the quarterly interest rates on these notes were reset from 3.410 to 3.940 percent for the five and seven year notes and from 3.460 to 3.990 percent for the ten year notes. The Senior Notes allow for prepayment subject to the following terms: five year notes can be prepaid in the first year with a 2 percent penalty, thereafter there is no penalty; seven and ten year notes can be prepaid after one year with a 1 percent penalty, and after two years with no penalty.
The proceeds of the Senior Notes financing were used to repay the $200,000,000 borrowings under the Term Loan Credit Agreement, and $25,000,000 of the outstanding borrowings on our $75,000,000 Revolving Line of Credit Agreement.
The Senior Notes are unsecured and require the maintenance of certain Debt/EBITDA, fixed charge coverage ratios, consolidated net worth levels, and other customary covenants. The Senior Notes have been guaranteed, on a joint and several basis, by the parent company, Helen of Troy Limited, and certain U.S. subsidiaries.
See Note (9) to these consolidated financial statements for maturity schedules of principal amounts due under all Senior Notes.
NOTE 7 - 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 7 - INCOME TAXES, CONTINUED
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 2005 and 2004 are as follows:
As of the end of fiscal 2005, $5,963,000 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 $117,000 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 2006 and fiscal 2014.
Hong Kong Income Taxes - The Inland Revenue Department (“the IRD”) in Hong Kong has assessed a total of $32,086,000 (U.S.) in tax on certain profits of our foreign subsidiaries for the fiscal years 1995 through 2003. Hong Kong taxes income earned from certain activities 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 1997, we were required to purchase $3,282,000 (U.S.) in tax reserve certificates in Hong Kong. During fiscal 2005, we purchased additional tax reserve certificates in the amount of $25,144,000 (U.S.) as required by the IRD. With the purchase of these certificates, we have purchased tax reserve certificates totaling $28,426,000 for fiscal years 1995 through 2003. 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.
If the IRD’s position were to prevail and if it were to assert the same position for fiscal years after fiscal year 2003, the resulting assessment could total $18,340,000 (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
NOTE 7 - INCOME TAXES, CONTINUED
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 $13,424,000 for the three years under audit. We have resolved the various tax issues and reached an agreement on additional tax in the amount of $3,568,000. 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 will be settled with funds already on deposit with the IRS.
The American Jobs Creation Act (“AJCA”) was signed into law by the President on October 22, 2004. The AJCA creates a temporary incentive for U.S. multinational corporations to repatriate accumulated income earned outside the United States by providing an 85 percent dividend received deduction for certain dividends from controlled foreign corporations. According to the AJCA, the amount of eligible repatriation is limited to $500 million or the amount described as permanently reinvested earnings outside the United States in the most recent audited financial statements filed with the Securities and Exchange Commission on or before June 30, 2003. Whether the Company will ultimately take advantage of the provision depends on a number of factors including potential forthcoming Congressional actions, Treasury regulations and development of a qualified reinvestment plan.
At this time, we have not made any changes to our existing position on reinvestment of foreign earnings subject to the AJCA. Our position is that we will permanently reinvest all of the undistributed earnings of the non-U.S. subsidiaries of certain U.S. subsidiaries, and accordingly have made no provision for U.S. federal income taxes on these undistributed earnings. At February 28, 2005, undistributed earnings for which we had not provided deferred U.S. federal income taxes totaled $37,748,000.
Income Tax Provisions - We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from 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. In addition to potential changes in tax laws, the Company’s 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 stock) together own more than 50 percent of the stock in such corporation. If a change of ownership of the Company were to occur
NOTE 7 - INCOME TAXES, CONTINUED
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 the Company’s 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 unnecessary, 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 8 - 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, 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:
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:
(1) Expected lives of 3, 4, 5, or 10 years are used depending on the option granted.
NOTE 8 - STOCK-BASED COMPENSATION PLANS, CONTINUED
Under stock option and restricted stock plans adopted in 1994 and 1998 (the “1994 Plan” and the “1998 Plan,” respectively) we reserved a total of 14,000,000 shares of our common stock for issuance to key officers and employees. Pursuant to the 1994 and 1998 Plans, we grant options to purchase our common stock at a price equal to or greater than the fair market value on the grant date. Both plans contain provisions for incentive stock options (“ISO’s”), non-qualified stock options (“Non-Q’s”) and restricted stock grants. Generally, options granted under the 1994 and 1998 Plans become exercisable immediately, or over a one, four, or five-year vesting period and expire on a date ranging from seven to ten years from their date of grant. As of February 28, 2005, 24,486 shares remained available for issue under these plans.
In fiscal 1996, we reserved a total of 980,000 shares of our common stock for issuance to non-employee members of our Board of Directors (the “Directors’ Plan”). We grant options under the Directors’ Plan at a price equal to the fair market value of our common stock at the date of grant. Options granted under the Directors’ Plan vest one year from their date of issuance and expire ten years after issuance. As of February 28, 2005, 336,000 shares remained available for issue under the Directors’ Plan.
A summary of stock option activity under all plans is as follows:
NOTE 8 - STOCK-BASED COMPENSATION PLANS, CONTINUED
The following table summarizes information about stock options at February 28, 2005:
In fiscal 1999, our shareholders approved an employee stock purchase plan (the “Stock Purchase Plan”) under which 500,000 shares of common stock 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 stock. The purchase price for stock purchased under this plan is equal to the lower of 85 percent of the stock’s fair market value on either the first day of each option period or the last day of each period. During fiscal 2005, employees purchased 12,375 shares of common stock from the Company under the Stock Purchase Plan.
NOTE 9 - OTHER COMMITMENTS AND CONTINGENCIES
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.
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 five-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, 2006 to February 28, 2010. The aggregate commitment for future salaries pursuant to such contracts, at
NOTE 9 - OTHER COMMITMENTS AND CONTINGENCIES, CONTINUED
February 28, 2005, excluding incentive compensation, was approximately $3,940,000. See Note (17) to these consolidated financial statements for additional information regarding the modification of the terms of one of these employment agreements on April 15, 2005.
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.
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 is based on incentives applicable to sales up to the respective balance sheet dates.
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.
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 stock. 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 stock outstanding. The rights are inseparable from the shares of our common stock 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 stock, 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 stock 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.
NOTE 9 - OTHER COMMITMENTS AND CONTINGENCIES, CONTINUED
Our contractual obligations and commercial commitments, as of February 28, 2005 were:
PAYMENTS DUE BY PERIOD ENDED THE LAST DAY OF FEBRUARY
(in thousands)
We lease certain facilities, equipment and vehicles under operating leases, which expire at various dates through fiscal 2010. Certain of the leases contain escalation clauses and renewal or purchase options. Rent expense related to our operating leases was $1,757,000, $1,610,000 and $1,386,000 for fiscal 2005, 2004 and 2003, respectively.
NOTE 10 - FOURTH QUARTER CHARGES/TRANSACTIONS
In the fourth quarter of fiscal 2004, we recorded a goodwill impairment loss of $5,699,000, net of tax benefits of $1,938,000 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 (15). Our results for the fourth quarters of fiscal 2005 and 2003 did not contain any transactions of a non-routine nature.
NOTE 11 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data is as follows (in thousands, except per share amounts):
The business of the Company is somewhat seasonal. Annual net sales volume of 35 percent normally occurs in the third fiscal quarter.
NOTE 12 - SEGMENT INFORMATION
The following table contains segment information for fiscal 2005, 2004, and 2003.
(1) Segment information from prior periods has been restated due to the classification of Tactica as discontinued operations and a change in our segments effective March 1, 2004.
The Personal Care segment’s products include hair dryers, straighteners, curling irons, hairsetters, mirrors, hot air brushes, home hair clippers, paraffin baths, massage cushions, footbaths, body massagers, brushes, combs, hair accessories, mirrors, hair care products, body powder and skin care products.
The Housewares segment is new this year and reports the operations of OXO International (“OXO”) which we acquired on June 1, 2004, as further described in Note (16) to our consolidated financial statements. The Houseware segment’s products include food preparation tools and gadgets, household cleaning tools and gardening tools.
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
NOTE 12 - SEGMENT INFORMATION, CONTINUED
in SG&A for the Housewares segment’s operating income. These costs are currently expected to continue to be incurred through the end of fiscal 2006. During this transitional period, we have not made an allocation of our corporate overhead to OXO. We do not expect to make any allocation of our corporate overhead to OXO until such time as the 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 one customer and its affiliate accounted for 25 percent, 28 percent, and 29 percent of the net sales in our continuing operations for fiscal 2005, 2004, and 2003, respectively. Of our total sales to that customer and its affiliate, 95 percent, 100 percent, and 92 percent, respectively were made within the United States during fiscal 2005, 2004, and 2003, respectively.
NOTE 13 - 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 Canadian Dollars, British Pounds, Euros and Mexican Pesos. We make most inventory purchases from the Far East using 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
NOTE 13 - FORWARD CONTRACTS, CONTINUED
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 2005 and 2004:
February 28, 2005
February 29, 2004
NOTE 14 - NON-MONETARY TRANSACTIONS
During fiscal 2003, we entered into two non-monetary transactions in which we exchanged inventory with a net book value of approximately $3,100,000 for advertising credits. During fiscal 2005, we entered into two additional nonmonetary transactions in which we exchanged inventory with a book value of approximately $1,011,000 for additional 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. We used approximately $1,196,000, $1,400,000 and $600,000 of the advertising credits during fiscal 2005, 2004 and 2003, respectively. All credits from the 2003 transaction have been utilized. All remaining credits are valued at $915,000 and $1,100,000 on our consolidated balance sheets at the end of fiscal 2005 and 2004, respectively, and are included in the line item entitled “Prepaid Assets.”
NOTE 15 - SALE OF TACTICA INTERNATIONAL, INC.
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 $16,936,000 of its secured debt and accrued interest owed to us, we received marketable securities, intellectual properties
NOTE 15 - SALE OF TACTICA INTERNATIONAL, INC., CONTINUED
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, 2005 the market value of these securities was $120,000. 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 2005, the total loss on stock available for sale was $2,910,000.
Tactica was sold because we believed it no longer fit into our business model and that a sale was the most appropriate course of action to maximize our long-term shareholder value.
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 $5,699,000 for the impairment of 100 percent of the Tactica goodwill, net of $1,938,000 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 segments to be disposed by sale and, in our circumstances, required us to report Tactica as a discontinued operation. In accordance with SFAS 144, we classified all assets and liabilities of Tactica as “Assets of discontinued segment held for sale” and “Liabilities of discontinued segment held for sale” in the accompanying consolidated balance sheet as of February 29, 2004. SFAS 144 also requires us to report Tactica’s operating results, net of taxes, as a separate 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.
NOTE 16 - ACQUISITION OF OXO
On June 1, 2004, we acquired certain assets and liabilities of OXO International (“OXO”) for a net cash purchase price of approximately $273,173,000 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 approximately 500 consumer product tools in several categories, including: kitchen, cleaning, barbecue, barware, garden, automotive, storage, and organization. OXO also has strong customer relationships with leading specialty and department store retailers. Each year approximately 90 products are introduced through the OXO Good Grips®, OXO Steel™, OXO Good Grips i-Series®, and OXO SoftWorks® product lines.
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.
NOTE 16 - ACQUISITION OF OXO, CONTINUED
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 17 - SUBSEQUENT EVENTS
On May 2, 2005, we entered into an agreement with a third party developer to purchase a 1,200,000 square foot warehouse facility in Southaven, Mississippi to be built to our specifications on approximately 59 acres of land. The initial purchase price will be approximately $33,000,000, subject to adjustment for change orders and liquidated damages in the event construction runs beyond the term the developer has agreed to. Total costs of the project including warehouse equipment and fixtures is estimated to be approximately $45,000,000, which we expect to fund out of a combination of cash from operations, our existing revolving line of credit, and the proceeds from the sale of our existing facility in Southaven, Mississippi. We may also look at other types of financing. The agreement gives us a 24-month option to purchase an additional adjacent 31 acre tract of land for approximately $1,600,000, to allow for additional expansion. The purchase agreement also gives the company a “put option” to require the developer to purchase our existing Southaven, Mississippi 619,000 square foot warehouse for $16,000,000 at any time between 30 and 180 days following the closing on the purchase of the new facility. We do not expect to incur any losses on the disposition of our existing facility. We expect to occupy the new facility in the last fiscal quarter of fiscal 2006.
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.
HELEN OF TROY LIMITED AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
Years ended the last day of February 2005, 2004 and 2003
(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 Securities and Exchange Commission (SEC) Rule 13a-15(e) as of the end of the period covered by this 2005 Form 10-K. 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 2005 Annual Report on pages 47 and 48, 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, we identified no change in our internal control over financial reporting that occurred during our fiscal quarter ended February 28, 2005, 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. Our intent was to establish the Disclosure Controls and more pervasive Internal Controls over Financial Reporting as dynamic systems that can undergo appropriately authorized change as conditions warrant.
The conversion to our new global information system is still very recent. Also, we continue to phase in additional reports and functionality, and will be transitioning OXO, Mexico and our Latin American operations to the new system during fiscal 2006 and 2007. 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.
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 we will be filed within 120 days of the end of our 2005 fiscal year, is incorporated by reference in response to this Item 10., as noted below:
• Information about our Directors;
• Information about our Executive Officers;
• Information about our compliance with Section 16(a) of the Securities Exchange Act of 1934, regarding certain beneficial owners of our common stock;
• Information about our Nominating and Corporate Governance Committee;
• Information about our Audit Committee, including the members of the committee, and our Audit Committee financial experts; and
• Information about the Code of Ethical Business Conduct governing all our employees, and the more specific Code of Ethics governing our Chief Executive Officer, Chief Financial and Principal Accounting Officer, and finance department members.
Information in our Proxy Statement, which will be filed within 120 days of the end of our 2005 fiscal year, is incorporated by reference in response to this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information in our Proxy Statement, which will be filed within 120 days of the end of our 2005 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 2005 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 2005 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 46 of this Annual Report.
2.
Financial Statement Schedule: See “Schedule II” on page 84 of this Annual Report
3.
Exhibits
The exhibit numbers preceded by an asterisk (*) indicate exhibits physically filed with this 2005 Form 10-K. All other exhibit numbers indicate exhibits filed by incorporation by reference. Exhibits preceded by two asterisks (**) are management contracts or compensatory plans or arrangements.
2.1
Acquisition Agreement, dated April 29, 2004, by and among World Kitchen (GHC), LLC, WKI Holding Company, Inc., World Kitchen, Inc., Helen of Troy Limited (Barbados), and Helen of Troy Limited (Bermuda) (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed on April 30, 2004).
2.2
Amendment to the Acquisition Agreement, dated June 1, 2004, by and among World Kitchen (GHC), LLC, WKI Holding Company, Inc., World Kitchen, Inc., Helen of Troy Limited (Barbados), and Helen of Troy Limited (Bermuda) (incorporated by reference to Exhibit 2.2 to the Company’s Current Report on Form 8-K, filed on June 3, 2004).
3.1
Memorandum of Association (incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-4, File No. 33-73594, filed with the Securities and Exchange Commission on December 30, 1993 (the “1993 S-4”)).
3.2
By-Laws (incorporated by reference to Exhibit 3.2 of the 1993 S-4).
4.1
Rights Agreement, dated as of December 1, 1998, between Helen of Troy Limited and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to Exhibit 4 to the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 4, 1998).
10.1**
Form of Directors’ and Executive Officers’ Indemnity Agreement (incorporated by reference to Exhibit 10.2 to the 1993 S-4).
10.2**
1994 Stock Option and Restricted Stock Plan (incorporated by reference to Exhibit 10.1 to the 1993 S-4).
10.3
Revlon Consumer Products Corporation (RCPC) North American Appliances License Agreement dated September 30, 1992 (incorporated by reference to Exhibit 10.31 to Helen of Troy Corporation’s Quarterly Report on Form 10-Q for the period ending November 30, 1992 (the “November 1992 10-Q”)).
10.4
Revlon Consumer Products Corporation (RCPC) International Appliances License Agreement dated September 30, 1992 (incorporated by reference to Exhibit 10.32 to the November 1992 10-Q).
10.5
Revlon Consumer Products Corporation (RCPC) North American Comb and Brush License Agreement dated September 30, 1992 (incorporated by reference to Exhibit 10.33 to the November 1992 10-Q).
10.6
Revlon Consumer Products Corporation (RCPC) International Comb and Brush License Agreement dated September 30, 1992 (incorporated by reference to Exhibit 10.34 to the November 1992 10-Q).
10.7
First Amendment to RCPC North America Appliance License Agreement, dated September 30, 1992 (incorporated by reference to Exhibit 10.26 to Helen of Troy Corporation’s Annual Report on Form 10-K for the period ending February 28, 1993 (the “1993 10-K”)).
10.8
First Amendment to RCPC North America Comb and Brush License Agreement, dated September 30, 1992 (incorporated by reference to Exhibit 10.27 to the 1993 10-K).
10.9
First Amendment to RCPC International Appliance License Agreement, dated September 30, 1992 (incorporated by reference to Exhibit 10.28 to the 1993 10-K).
10.10
First Amendment to RCPC International Comb and Brush License Agreement, dated September 30, 1992 (incorporated by reference to Exhibit 10.29 to the 1993 10-K).
10.11
Amended and Restated Note Purchase, Guaranty and Master Shelf Agreement, $40,000,000 7.01 percent Guaranteed Senior Notes and $40,000,000 Guaranteed Senior Note Facility (incorporated by reference to Exhibit 10.23 to Helen of Troy Limited’s Quarterly Report on Form 10-Q for the period ending November 30, 1996).
10.12**
Helen of Troy Limited 1998 Employee Stock Option and Restricted Stock Plan (incorporated by reference to Exhibit 4.3 to Helen of Troy Limited’s Registration Statement on Form S-8, File Number 333-67369, filed with the Securities and Exchange Commission on November 6, 1998).
10.13**
Helen of Troy Limited 1998 Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.3 to Helen of Troy Limited’s Registration Statement on Form S-8, File Number 333-67349, filed with the Securities and Exchange Commission on November 16, 1998).
10.14**
Amended and Restated Employment Agreement between Helen of Troy Limited and Gerald J. Rubin, dated March 1, 1999 (incorporated by reference to Exhibit 10.29 to Helen of Troy Limited’s Quarterly Report on Form 10-Q for the period ending August 31, 1999 (the August 1999 10-Q)).
10.15**
Amended and Restated Helen of Troy Limited 1995 Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit 10.30 to the August 1999 10-Q).
10.16
Master License Agreement dated October 21, 2002, between The Procter & Gamble Company and Helen of Troy Limited (Barbados) (Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Commission).
10.17
Acquisition Agreement, dated August 31, 2003, between Conopco, Inc. (a wholly owned subsidiary of Unilever NV), Helen of Troy Limited (Barbados), Helen of Troy Limited (Bermuda), and Helen of Troy Texas Corporation for the purchase of certain assets related to the North American, Latin American and Caribbean production and distribution of Brut Fragrances, Deodorants and Antiperspirants (incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 14, 2003).
10.18
Loan Agreement, dated September 22, 2003, Helen of Troy Limited (Barbados), Helen of Troy L.P. (Texas), and Bank of America, N.A. (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 14, 2003).
10.19**
Amended and Restated Helen of Troy 1997 Cash Bonus Performance Plan, dated August 26, 2003 (incorporated by reference to Exhibit 10.1 of Helen of Troy Limited’s Quarterly Report on Form 10-Q for the period ended August 31, 2003 (the August 2003 10-Q)).
10.20
Credit Agreement, dated as of June 1, 2004, among Helen of Troy L.P., Helen of Troy Limited, Bank of America, N.A. and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on June 3, 2004).
10.21
Term Loan Credit Agreement, dated as of June 1, 2004, among Helen of Troy L.P., Helen of Troy Limited, Banc of America Mezzanine Capital, LLC and the other lenders party thereto (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed on June 3, 2004).
10.22
Guaranty, dated as of June 1, 2004, made by Helen of Troy Limited (Bermuda), Helen of Troy Limited (Barbados), Hot Nevada, Inc., Helen of Troy Nevada Corporation, Helen of Troy Texas Corporation, Idelle Labs Ltd. and OXO International Ltd., in favor of Bank of America, N.A. and other lenders, pursuant to the Credit Agreement, dated June 1, 2004 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed on June 3, 2004).
10.23
Guaranty, dated as of June 1, 2004, made by Helen of Troy Limited (Bermuda), Helen of Troy Limited (Barbados), Hot Nevada, Inc., Helen of Troy Nevada Corporation, Helen of Troy Texas Corporation, Idelle Labs Ltd. and OXO International Ltd., in favor of Banc of America Mezzanine Capital, LLC and other lenders, pursuant to the Term Loan Credit Agreement, dated June 1, 2004 (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K, filed on June 3, 2004).
10.24
Note Purchase Agreement, dated June 29, 2004, by and among Helen of Troy Limited (Bermuda), Helen of Troy L.P., Helen of Troy Limited (Barbados) and the purchasers listed in Schedule A thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on July 2, 2004).
10.25
Amendment to Employment Agreement between Helen of Troy Limited and Gerald J. Rubin, dated March 1, 1999 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on April 26, 2005).
10.26
Purchase and Sale Agreement between Helen of Troy L.P. (“Purchaser”) and DTC Eastgate 1, LLC (“Seller”), effective May 2, 2005 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on May 6, 2005).
21*
Subsidiaries of the Registrant.
23*
Consent of Independent Registered Public Accounting Firm.
31.1*
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*
Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
The registrant will send its annual report to security holders and proxy solicitation material subsequent to the filing of this form and shall furnish copies of both to the Commission when they are sent to security holders.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Gerald J. Rubin
/s/ Thomas J. Benson
Gerald J. Rubin
Thomas J. Benson
Chairman of the Board, Chief Executive Officer, President, Director and Principal Executive Officer
Senior Vice President, Chief Financial Officer
May 16, 2005
May 16, 2005
/s/ Richard J. Oppenheim
/s/ Stanlee N. Rubin
Richard J. Oppenheim
Stanlee N. Rubin
Financial Controller and Principal Accounting Officer
Director
May 16, 2005
May 16, 2005
/s/ Byron H. Rubin
/s/ Gary B. Abromovitz
Byron H. Rubin
Gary B. Abromovitz
Director
Director, Deputy Chairman of the Board
May 16, 2005
May 16, 2005
/s/ John B. Butterworth
/s/ Christopher L. Carameros
John B. Butterworth
Christopher L. Carameros
Director
Director
May 16, 2005
May 16, 2005
/s/ James C. Swaim
/s/ Timothy F. Meeker
James C. Swaim
Timothy F. Meeker
Director
Director
May 16, 2005
May 16, 2005
/s/ Darren G. Woody
Darren G. Woody
Director
May 16, 2005