HELEN OF TROY LTD - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q

X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934

For the quarterly period ended May 31, 2002

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 For the transition period from to
--------- ---------

Commission file number 001-14669

HELEN OF TROY LIMITED
---------------------
(Exact name of the registrant as specified in its charter)

Bermuda 74-2692550
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

Clarendon House
Church Street
Hamilton, Bermuda
(Address of Principal Executive Offices)

1 Helen of Troy Plaza
El Paso, Texas 79912
(Registrant's United States Mailing Address) (Zip Code)

Registrant's telephone number, including area code: (915) 225-8000

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---

As of July 8, 2002 there were 28,161,117 shares of Common Stock, $.10
Par Value, outstanding.

1

HELEN OF TROY LIMITED AND SUBSIDIARIES

INDEX

2

PART I. FINANCIAL INFORMATION

HELEN OF TROY LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except shares)

(Continued)

3

HELEN OF TROY LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except shares)

See accompanying notes to consolidated condensed financial statements.

4

HELEN OF TROY LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(unaudited)
(in thousands, except shares and earnings per share)

See accompanying notes to consolidated condensed financial statements.

5

HELEN OF TROY LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)

(Continued)

6

HELEN OF TROY LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)

See accompanying notes to consolidated condensed financial statements.

7

HELEN OF TROY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
May 31, 2002

Note 1- In the opinion of the Company, the accompanying consolidated
condensed financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to
present fairly its financial position as of May 31, 2002 and
February 28, 2002 and the results of its operations for the
three-month periods ended May 31, 2002 and 2001. While the
Company believes that the disclosures presented are adequate
to make the information not misleading, these statements
should be read in conjunction with the financial statements
and the notes included in the Company's latest annual report
on Form 10-K.

Certain reclassifications were made to information for the
three months ended May 31, 2001 in order to conform to the
presentation for the three months ended May 31, 2002.

Note 2 - The Company is involved in various claims and legal actions
arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of such claims and legal
actions will not have a material adverse effect on the
financial position, results of operations, or cash flows of
the Company.

Note 3 - Basic earnings per share is computed based upon the weighted
average number of common shares outstanding during the period.
Diluted earnings per share is computed based upon the weighted
average number of common shares plus the effects of dilutive
securities. The number of dilutive securities was 1,543,132
and 477,239 for the three months ended May 31, 2002 and 2001,
respectively. All dilutive securities for the three months
ended May 31, 2002 and May 31, 2001 consisted of stock options
issued under the Company's stock option plans. Options to
purchase common stock that were outstanding but not included
in the computation of earnings per share because the exercise
prices of such options were greater than the average market
prices of the Company's common stock totaled 2,271,650 at May
31, 2002 and 3,577,962 at May 31, 2001.

Note 4 - On September 29, 1999, the Company's Board of Directors
approved a resolution authorizing the Company to purchase, in
open market or private transactions, up to 3,000,000 shares of
its common stock over a period extending to September 29,
2002. As of May 31, 2002, the Company had repurchased
1,342,341 of its shares under this resolution at a total cost
of $8,699,000. The Company did not purchase any of its shares
during the three months ended May 31, 2002.

8

Note 5 - The following table contains segment information for first
quarters of fiscal 2003 and 2002.

Identifiable assets at May 31, 2002 and February 28, 2002 were as
follows:

The North American segment sells hair care appliances, other
personal care appliances, including massagers and spa
products, hairbrushes, combs, and utility and decorative hair
accessories in the United States and Canada. The International
segment sells the same types of products in countries outside
the U.S. and Canada. Tactica sells a variety of personal care
and other consumer products directly to consumers and to
retailers.

9

Operating profit for each operating segment is computed based
on net sales, less cost of goods sold, less any selling,
general and administrative expenses associated with the
segment. The selling, general, and administrative expense
totals used to compute each segment's operating profit are
comprised of SG&A expense directly associated with those
segments, plus corporate overhead expenses that are allocable
to operating segments. Other items of income and expense,
including income taxes, are not allocated to operating
segments.

Note 6 - The Hong Kong Inland Revenue Department ("the IRD") has
assessed $11,033,000 in tax on certain profits of the
Company's foreign subsidiaries for the fiscal years 1990
through 1997. Hong Kong taxes income earned from certain
activities conducted in Hong Kong. The Company is vigorously
defending its position that it conducted the activities that
produced the profits in question outside of Hong Kong. The
Company also asserts that it has complied with all applicable
reporting and tax payment obligations. If the IRD's position
were to prevail and if it were to assert the same position for
years after fiscal 1997, the resulting assessment, could total
$30,520,000 (U.S.) for the period from fiscal 1990 through
fiscal 2002. In connection with the IRD's tax assessment for
the fiscal years 1990 through 1997, the Company was required
to purchase $5,750,000 (U.S.) in tax reserve certificates in
Hong Kong, which represented approximately 52 percent of the
liability assessed by the IRD. 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.

The Company is engaged in dialogue with the IRD authorities to
resolve the issues associated with the IRD's assessment. As a
result, the IRD has proposed to settle a portion of the audit
period. The years covered by the proposed settlement are
fiscal years 1990 through 1994. The assessment for that period
is $4,468,000 and the IRD has offered to settle the amount for
$2,505,000 (56 percent of the assessed amount), plus interest
of approximately $100,000. The Company has conditionally
accepted the settlement, subject to minor modifications to the
interest due. The Company is awaiting the IRD's response to
its conditional acceptance of the proposed settlement. The
settlement would not have a material effect on the Company's
financial position or results of operations. Because, it could
apply certain of the tax reserve certificates discussed above
to amounts due under the proposed settlement, the Company
estimates that it will be required to pay the IRD
approximately $37,000 of additional cash, plus interest.

The proposed settlement would not affect the current status of
the IRD's assessments for fiscal years 1995 through 1997.
Although the ultimate resolution of the IRD's claims cannot be
predicted with certainty, management believes that adequate
provision has been made in the financial statements for the
resolution of

10

the IRD's assessments for the fiscal years 1990 through 1997
and potential future assessments relating to activity since
fiscal 1997.

Note 7 - Helen of Troy's consolidated results of operations for the
three-month periods ended May 31, 2002 and 2001 include 100
percent of the net earnings and losses of Tactica
International, Inc. ("Tactica"), a subsidiary in which Helen
of Troy owns a 55 percent interest. At the time of Helen of
Troy's acquisition of this interest, Tactica reported an
accumulated net deficit. Because the minority interest portion
of that deficit was recorded as a reduction in Helen of Troy's
stockholders' equity, rather than as an asset, Helen of Troy
will include 100 percent of Tactica's net earnings and losses
in its consolidated income statement until Tactica's
accumulated deficit is eliminated. At May 31, 2002, Tactica's
accumulated deficit remaining to be eliminated was
approximately $1,305,000. Helen of Troy's 55 percent share of
this deficit totals $718,000 with the minority interest
totaling $587,000. Management believes that the deficit will
be eliminated during the three-month period ending August 31,
2002. Thereafter, the consolidated net earnings of the Company
will include 55 percent, rather than 100 percent, of Tactica's
net earnings.

Note 8 - In June 2001, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" (SFAS 142).
The Company adopted SFAS 142 on March 1, 2002. SFAS 142
eliminates the amortization of goodwill and other intangible
assets that have indefinite useful lives. Amortization will
continue to be recorded for intangible assets with definite
useful lives. SFAS 142 also requires at least an annual
impairment review of goodwill and other intangible assets. Any
asset deemed to be impaired is to be written down to its fair
value. The Company is currently performing the first phase of
its goodwill review to determine whether any of that goodwill
is impaired. As prescribed by SFAS 142, the Company will
finish this phase no later than August 31, 2002. Because it
eliminates the amortization of goodwill, SFAS 142 decreased
the Company's SG&A expense by approximately $515,000 in the
first quarter of fiscal 2003. The following table presents the
impact of SFAS 142 on net earnings and earnings per share had
the standard been in effect for the quarter ended May 31, 2001
(in thousands, except per-share amounts):

11

Note 9 - In April 2001, the EITF reached a consensus on Issue No.
00-25, "Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor's Products." In
November 2001, the issues discussed in EITF 00-25 were
codified with related issues into EITF 01-9, "Accounting for
Consideration Given By a Vendor To a Customer (Including a
Reseller of the Vendor's Products)," which addresses the
income statement classification of slotting fees, cooperative
advertising arrangements with trade customers and buydowns.
The consensus reached by the EITF requires that certain
customer promotional payments that were previously classified
as marketing expenses be classified as a reduction of revenue.
The Company adopted the consensus on March 1, 2002. Prior to
the adoption of this consensus, the Company classified these
payments as selling, general and administrative expenses in
its Consolidated Statement of Operations. The adoption of EITF
01-9 reduced net sales, gross profit and selling, general and
administrative expenses by $719,000 and $692,000 for the
quarters ending May 31, 2002 and May 31, 2001, respectively.
Because adoption of EITF 01-9 resulted solely in
reclassification within the Consolidated Statement of
Operations, there was no impact on the Company's financial
condition, operating income or net earnings for any of the
periods presented.

Note 10 - Subsequent to May 31, 2002, 50,000 shares of the Company's
common stock that had been in escrow were returned to the
Company. The Company retired these shares immediately upon
receiving them, thereby reducing the number of outstanding
shares of its common stock by 50,000. The escrow account in
which these shares were held related to a previous acquisition
by the Company. No further shares or other assets remain in
the escrow account.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This discussion contains a number of forward-looking statements, all of
which are based on current expectations. Actual results may differ materially
due to a number of factors, including those discussed in the section entitled
"Information Relating to Forward Looking Statements" and in the Company's most
recent report on Form 10-K.

RESULTS OF OPERATIONS

Consolidated Sales and Gross Profit Margins

Our net sales for the three months ended May 31, 2002 improved 12
percent or $11,100,000, versus the three months ended May 31, 2001. All three of
our operating segments exceeded their sales totals for the comparable period the
previous year. The Tactica operating segment produced $7,560,000, or 68 percent
of the first quarter sales increase. Most of Tactica's sales increase occurred
in the retail distribution channel. The North American operating segment was
responsible for $3,385,000, or 30 percent of our first quarter sales growth.
Sales of hair dryers incorporating Ionic Technology contributed significantly to
the North American segment's sales growth. Sales growth in the United Kingdom
and France offset declines in other parts of the world, resulting in slight
sales improvement in the International Segment.

Gross profit, as a percentage of sales, improved from 45.9 percent for
the quarter ended May 31, 2001 to 48.3 percent for the quarter ended May 31,
2002. Most of this increase was attributable to an increase in Tactica's sales
as a percentage of total consolidated sales. Tactica's net revenues made up
25.7 percent of our consolidated first quarter 2003 net sales, versus 20.5
percent in the same quarter of fiscal 2002, thus increasing the effect of its
relatively high gross margins on consolidated gross margins. Tactica achieves
higher gross profit percentages than our other segments but also experiences
higher selling, general and administrative expenses, as a percentage of sales,
primarily because of advertising expenses. Gross margins in the North American
and International segments also improved one-half percentage point due primarily
to a favorable change in the mix of products sold and lower product costs.

Selling, general and administrative expense

From the first quarter of fiscal 2002 to the first quarter of fiscal
2003, selling, general, and administrative expenses ("SG&A"), expressed as a
percentage of net sales, increased from 38.0 to 38.5 percent. As discussed
above, Tactica incurs substantially higher SG&A, as a percentage of its sales,
than do the North American and International segments. Because Tactica grew
significantly during the first quarter, both in its sales volume and as a
percentage of our consolidated business, all of its operating statistics,
including SG&A as a percentage of sales, became more significant to our overall
results. Tactica's SG&A expense grew as a percentage of its sales due to higher
advertising costs. Excluding Tactica, our first quarter fiscal 2003 SG&A as a
percentage of sales was slightly lower than it was during the first quarter of
fiscal 2002 due primarily to lower inventory storage expenses and to the fact
that,

13

due to our adoption of SFAS 142, no goodwill amortization expense was recorded.
During the quarter ended May 31, 2001, we recorded $515,000 in goodwill
amortization expense.

Interest expense and Other income / expense

Interest expense for the quarter ended May 31, 2002 was consistent with
the quarter ended May 31, 2001, increasing to $1,067,000 from $1,059,000.

Income tax expense

In the first quarter of fiscal 2003, our income tax expense was 28.8
percent of net income before income taxes, as opposed to 28.2 percent in the
first quarter of fiscal 2002. The reason for this increase was Tactica. Tactica
incurs a total income tax rate of approximately 45 percent, versus 20 percent
for our other two segments combined.

LIQUIDITY AND CAPITAL RESOURCES

During the first quarter of fiscal 2003, we continued to strengthen our
financial condition. Our cash balance increased 37.5 percent to $88,410,000 at
May 31, 2002 from $64,293,000 at February 28, 2002. Operating activities
provided $25,554,000 of cash during the first quarter of fiscal 2003, compared
to using $18,068,000 during the previous fiscal year's first quarter. In
addition to net income, our successful efforts to reduce inventory balances were
instrumental in the production of cash from operating activities. Investing
activities used $1,568,000 of cash during the quarter ended May 31, 2002, due
primarily to a fee paid to acquire additional territories under a license
agreement. Financing activities provided $131,000 due to the exercise of stock
options.

Net accounts receivable decreased 5.5 percent from February 28, 2002 to
May 31, 2002. Our May 31, 2002 inventory balance totaled $85,237,000, versus
$100,306,000 at February 28, 2002, a 15.0 percent decrease. This decrease is a
result of the successful continuation of our efforts to reduce inventory
levels.

Our working capital balance increased to $198,460,000 at May 31, 2002
from $191,438,000 at February 28, 2001. Our current ratio was 4.93 at May 31,
2002, compared to 4.67 at February 28, 2002. The increases in our working
capital and current ratio were largely due to the production of cash by our
operating activities.

In connection with the acquisition of a 55 percent interest in Tactica,
we loaned $3,500,000 to the minority shareholders of Tactica. The interest rate
on these loans is 8.75 percent. All principal and unpaid interest on these
loans is due March 14, 2005. The total amounts of principal and accrued interest
due to the Company under these loans were $4,180,000 and $4,103,000 at May 31,
2002 and February 28, 2002, respectively. These amounts are included in "Other
assets" on the consolidated balance sheets.

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We maintain a revolving credit loan with a bank to facilitate
short-term borrowings and the issuance of letters of credit. This line of credit
allows borrowings totaling $25,000,000, charges interest at the three-month
LIBOR rate plus a percentage that varies based on the ratio of the Company's
debt to its earnings before interest, taxes, depreciation, and amortization
(EBITDA), and expires August 31, 2003. At May 31, 2002 the interest rate charged
under the line of credit was 2.85 percent. This line of credit allows for the
issuance of letters of credit up to $7,000,000. Any outstanding letters of
credit reduce the $25,000,000 maximum borrowing limit on a dollar-for-dollar
basis. At May 31, 2002, there were no borrowings under this line of credit and
outstanding letters of credit totaled $1,069,426. The revolving credit agreement
provides that the Company must satisfy requirements concerning its minimum net
worth, total debt to consolidated total capitalization ratio, debt to EBITDA
ratio and its fixed charge coverage ratio. The Company is in compliance with all
of these requirements.

Our contractual obligations and commercial commitments as of May 31,
2002 were:

We do not engage in any activities involving special purpose entities
or off-balance sheet financing.

Under a September 1999 Board of Directors resolution, the Company may
repurchase up to a total of 3,000,000 shares of its common stock over a period
extending to September 29, 2002. Since the inception of this common stock
repurchase program, the Company repurchased a total of 1,342,431 shares of its
common stock for $8,699,196, including commissions. No common stock was
repurchased during the first quarter of fiscal 2003.

Based on our current financial condition and current operations, we
believe that cash flows from operations and available financing sources will
continue to provide sufficient capital resources to fund the Company's ongoing
liquidity needs for the foreseeable future. We expect that our capital needs
will stem primarily from the needs to purchase sufficient levels of inventory
and to carry normal levels of accounts receivable on our balance sheet. In
addition, we evaluate acquisition opportunities on a regular basis and might
augment our internal growth with acquisitions of complimentary businesses and
product lines. We might finance acquisition activity with available cash, the
issuance of stock, or with additional debt, depending upon the size and nature
of any such transaction and the status of the capital markets.

15

HONG KONG INCOME TAXES

The Hong Kong Inland Revenue Department (the "IRD") has assessed
$11,033,000 in tax on certain profits of the Company's foreign subsidiaries for
the fiscal years 1990 through 1997. Hong Kong taxes income earned from certain
activities conducted in Hong Kong. The Company is vigorously defending its
position that it conducted the activities that produced the profits in question
outside of Hong Kong. The Company also asserts that it has complied with all
applicable reporting and tax payment obligations. If the IRD's position were to
prevail and if it were to assert the same position for years after fiscal 1997,
the resulting assessment could total $30,520,000 (U.S.) for the period from
fiscal 1990 through fiscal 2002. In connection with the IRD's tax assessment for
the fiscal years 1990 through 1997, the Company was required to purchase
$5,750,000 (U.S.) in tax reserve certificates in Hong Kong, which represented
approximately 52 percent of the liability assessed by the IRD. 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.

The Company is engaged in dialogue with the IRD authorities to resolve
the issues associated with the IRD's assessment. As a result, the IRD has
proposed to settle a portion of the audit period. The years covered by the
proposed settlement are fiscal years 1990 through 1994. The assessment for that
period totaled $4,468,000 and the IRD has offered to settle the amount for
$2,505,000 (56 percent of the assessed amount), plus interest of approximately
$100,000. The Company has conditionally accepted the settlement, subject to
minor modifications to the interest due. The Company is awaiting the IRD's
response to its conditional acceptance of the proposed settlement. The
settlement would not have a material effect on the Company's financial position
or results of operations. Because, it could apply certain of the tax reserve
certificates discussed above to amounts due under the proposed settlement, the
Company estimates that it will be required to pay the IRD approximately $37,000
of additional cash, plus interest.

The proposed settlement would not affect the current status of the
IRD's assessments for fiscal years 1995 through 1997. Although the ultimate
resolution of the IRD's claims cannot be predicted with certainty, management
believes that adequate provision has been made in the financial statements for
the resolution of the IRD's claims and potential future assessments relating to
activity since fiscal 1997.

PROPOSED UNITED STATES FEDERAL INCOME TAX LEGISLATION

Currently, we benefit from an international corporate structure that
results in relatively low tax rates on a consolidated basis. If we were to
encounter significant changes in the rates or rules imposed by certain key
taxing jurisdictions, such changes could have a material adverse effect on the
Company's financial position and profitability. In 1994, we engaged in a
corporate restructuring that, among other things, resulted in a portion of our
income not being subject to taxation in the United States. If such income were
subject to United States federal income taxes, our effective income tax rate
would increase materially. Several bills have been introduced recently in the
United States Congress that, if enacted into law, could adversely affect our
United States federal income tax status. At least one of the bills introduced
would apply to companies

16

such as ours that restructured several years ago. That bill could, if enacted
into law, subject all of our income to United States income taxes, thereby
reducing our net income. Other bills introduced recently would exempt
restructuring transactions, such as ours, that were completed before certain
dates in 2001 and 2002, but would limit the deductibility of certain
intercompany transactions for U.S. income tax purposes and would subject gains
on certain asset transfers to U.S. income tax. In addition to the legislation
introduced in Congress, the United States Treasury Department has issued a study
of restructurings such as ours, which concluded in part that additional
limitations should be imposed on the deductibility of certain intercompany
transactions. It is not currently possible to predict whether the legislation
that has been introduced will become law, whether any additional bills will be
introduced, or the consequences of the Treasury Department's study. However,
there is a risk that new laws in the United States could eliminate or
substantially reduce the current income tax benefits of our corporate structure.
If this were to occur, such changes could have a material adverse effect on our
financial position and profitability.

CRITICAL ACCOUNTING POLICIES

The U.S. Securities and Exchange Commission defines critical accounting
policies as "those that are both most important to the portrayal of a company's
financial condition and results, and require management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain." Preparation of our
financial statements involves the application of several such policies. These
policies include: consolidation of Tactica International, Inc. (Tactica) under
the purchase method, estimates of our exposure to liability for income taxes in
Hong Kong, estimates of credits to be issued to customers for sales that have
already been recorded, the calculation of our allowance for doubtful accounts,
and the valuation of inventory on a lower-of-cost-or-market basis.

Consolidation of Tactica - In March 2000 (fiscal 2001), we acquired a
55 percent interest in Tactica. At that time, we determined that use of
the purchase method of accounting and consolidation was appropriate and
we continue to use that method of consolidation. Because Tactica had
accumulated a net deficit at the time that we acquired our interest in
it and because the minority shareholders of Tactica have not adequately
guaranteed their portion of the accumulated deficit, our Consolidated
Statements of Income for the first quarters of fiscal 2003 and fiscal
2002 include 100 percent of Tactica's net income or loss. We will
continue to recognize all of Tactica's net income or loss until such
time as Tactica's accumulated deficit is extinguished. After that time,
our consolidated net earnings will include 55 percent of Tactica's net
income or loss.

Hong Kong Income Taxes - The Inland Revenue Department (the "IRD") in
Hong Kong assessed tax on certain profits of the Company's foreign
subsidiaries for the fiscal years 1990 through 1997. The ultimate
resolution of the IRD's claims cannot be predicted with certainty.
However, we have recorded a liability for the IRD's claims, based on
consultations with outside Hong Kong tax experts as to the probability
that some or all of the IRD's claims prevail. Such liability is
included in "Income taxes payable" on the Consolidated Balance Sheets.
If the IRD's position were to prevail and it were to assert the same
position with respect to fiscal years after 1997, the resulting tax
liability could

17

total $30,520,000 (U.S.) for the period from fiscal 1990 through fiscal
2002.

Estimates of credits to be issued to customers - We regularly receive
requests for credits from retailers for returned product or in
connection with sales incentives, such as co-operative advertising and
volume rebate agreements. We reduce sales or increase selling, general,
and administrative expenses, depending on the nature of the credits,
for estimated future credits to customers. Our estimates of these
amounts are based either on historical information about credits
issued, relative to total sales, or on specific knowledge of incentives
offered to retailers.

Allowance for doubtful accounts - From time to time, amounts due from
our customers become uncollectible due to the customers' inability to
pay. We record allowances specifically for customers' balances based on
the probability that we will not receive payment. When major customers
declare bankruptcy, we record an allowance equal to the amount due from
that customer, less the portion of the receivable that we expect to
collect either by selling the receivable in a secondary market or
through settlement with the bankruptcy estate.

Valuation of inventory - We account for our inventory using a
first-in-first-out system in which we record inventory on our balance
sheet at the lower of its cost or its net realizable value.
Determination of net realizable value requires management to estimate
the point in time at which an item's net realizable value drops below
its cost. We regularly review our inventory for slow-moving items and
for items that we are unable to sell at prices above their original
cost. When we identify such an item, we reduce its book value to the
net amount that we expect to realize upon its sale. This process
entails a significant amount of inherent subjectivity and uncertainty.

In addition to the above policies, several other policies, including
policies governing the timing of revenue recognition, are important to the
preparation of our financial statements, but do not meet the definition of
critical accounting policies because they do not involve subjective or complex
judgements.

INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS

Certain written and oral statements made by our Company and
subsidiaries or with the approval of an authorized executive officer of our
Company may constitute "forward-looking statements" as defined under the Private
Securities Litigation Reform Act of 1995. This includes statements made in this
report, in other filings with the Securities and Exchange Commission, in press
releases, and in certain other oral and written presentations. Generally, the
words "anticipates," "believes," "expects" and other similar words identify
forward-looking statements. All statements that address operating results,
events or developments that we expect or anticipate will occur in the future,
including statements related to sales, earnings per share results and statements
expressing general expectations about future operating results, are
forward-looking statements. The Company cautions readers not to place undue
reliance on forward-looking statements. Forward-looking statements are subject
to risks that could cause such statements to differ materially from actual
results. The Company undertakes no obligation to publicly update

18

or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise.

Factors that could cause actual results to differ from those
anticipated include:

o general industry conditions and competition,

o credit risks,

o the Company's, or its operating segments' material reliance on
individual customers or small numbers of customers,

o the Company's material reliance on certain trademarks,

o the impact of tax legislation, regulations, or treaties, including
proposed legislation in the United States that would affect
companies or subsidiaries of companies that have headquarters
outside the United States and file U.S. income tax returns,

o the impact of other current and future laws, and regulations,

o the results of our disagreement with the Hong Kong Inland Revenue
Department concerning the portion of our profits that are subject
to Hong Kong income tax,

o any future disagreements with the United States Internal Revenue
Service or other taxing authority regarding our assessment of the
effects or interpretation of existing tax laws, regulations, or
treaties,

o risks associated with inventory, including potential obsolescence,

o risks associated with new products and new product lines,

o risks associated with operating in foreign jurisdictions,

o foreign currency exchange losses,

o worldwide and domestic economic conditions,

o uninsured losses,

o reliance on computer systems,

o management's reliance on the representations of third parties,

o risks associated with new business ventures and acquisitions,

o risks associated with investments in equity securities, and

o the risks described from time to time in the Company's reports to
the Securities and Exchange Commission, including this report.

NEW ACCOUNTING GUIDANCE

As explained in the Note 8 to the consolidated condensed financial
statements, on March 1, 2002, we adopted EITF 01-9 "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of a Vendor's Products."
The adoption of EITF 01-9 resulted in the following reclassification in the
first quarter of fiscal 2002 income statements. Net sales, gross profit and
selling, general and administrative expense were reduced by $692,000. The
adoption of EITF 01-9 had no impact on profit from operations, net earnings or
earnings per share.

19

In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). The Company adopted SFAS 142 on March 1, 2002.
SFAS 142 eliminates the amortization of goodwill and other intangible assets
that have indefinite useful lives. Amortization will continue to be recorded for
intangible assets with definite useful lives. SFAS 142 also requires at least an
annual impairment review of goodwill and other intangible assets. Any asset
deemed to be impaired is to be written down to its fair value. In our fiscal
2002 Form 10-K, we estimated that the cumulative effect of adopting SFAS 142
would be a non-cash after tax charge of approximately $15 to $20 million. We are
currently performing the first phase of our goodwill review to determine whether
any of that goodwill is impaired. As prescribed by SFAS 142, we will finish this
phase no later than August 31, 2002. As we have further analyzed the facts and
circumstances surrounding our goodwill, we have revised this estimate. We now
estimate that the impairment testing under SFAS 142 could produce consequences
ranging from no impairment to an after-tax charge of $20 million. Because it
eliminates the amortization of goodwill, SFAS 142 decreased our SG&A expense by
approximately $515,000 in the first quarter of fiscal 2003.

The following table presents the impact of SFAS 142 on net earnings and earnings
per share had the standard been in effect for the first quarter of fiscal 2002
(in thousands, except per-share amounts):

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

HELEN OF TROY LIMITED
---------------------
(Registrant)

Date July 11, 2002 /s/ GERALD J. RUBIN
------------------- ----------------------------------

Gerald J. Rubin
Chairman of the Board, Chief
Executive Officer and President
(Principal Executive Officer)

Date July 11, 2002 /s/ RUSSELL G. GIBSON
------------------- ----------------------------------

Russell G. Gibson
Senior Vice-President, Finance,
and Chief Financial Officer
(Principal Financial Officer)

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