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 August 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 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 October 10, 2002 there were 28,181,464 shares of Common Stock,
$.10 Par Value, outstanding.

HELEN OF TROY LIMITED AND SUBSIDIARIES

INDEX

2

PART I. FINANCIAL INFORMATION

ITEM 1. 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
August 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 August 31, 2002
and February 28, 2002 and the results of its operations for
the three-month and six-month periods ended August 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-month and six- months periods ended August 31, 2001 in
order to conform to the presentation for the three-month and
six-month periods ended August 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
Company's consolidated financial position, results of
operations, or cash flows.

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 1,358,109
and 1,265,405 for the three months ended August 31, 2002 and
2001, respectively, and 1,450,625 and 871,322 for the six
months ended August 31, 2002 and 2001, respectively. All
dilutive securities for the six months ended August 31, 2002
and August 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 3,856,662 at August 31,
2002 and 3,184,162 at August 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 August 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 six months ended August 31, 2002.

8

Note 5 - The following table contains segment information as of and for
the three-month and six-month periods ended August 31, 2002
and August 31, 2001.

THREE MONTHS ENDED AUGUST 31, 2002 AND 2001
(in thousands)

SIX MONTHS ENDED AUGUST 31, 2002 AND 2001
(in thousands)

9

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

(in thousands)

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.

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 $6,564,000 in tax on certain profits of the Company's
foreign subsidiaries for the fiscal years 1995 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 $30,077,000
(U.S.) for the period from fiscal 1995 through the quarter
ended August 31, 2002.

In connection with the IRD's tax assessment for the fiscal
years 1995 through 1997, the Company was required to purchase
$3,282,000 (U.S.) in tax reserve certificates in Hong Kong,
which represented 50 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 ultimate
related tax liability. These certificates are included on the
Company's Consolidated Condensed Balance Sheets as of August
31, 2002 and February 28, 2002 on the line entitled "Other
assets, net of accumulated amortization." The certificates are
denominated in Hong Kong dollars and are subject to the risks
associated with foreign currency fluctuations.

10

The IRD also assessed $4,468,000 in tax on certain profits of
the Company's foreign subsidiaries for fiscal years 1990
through 1994. During the quarter ended August 31, 2002, the
Company and the IRD settled their dispute related to those
years for $2,505,000 (56 percent of the assessed amount), plus
interest of approximately $100,000. As a result of the
settlement, the Company forfeited tax reserve certificates
previously valued at $2,468,000 on its balance sheet and paid
the IRD approximately $137,000 in cash. The settlement did not
affect the 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 consolidated condensed
financial statements for the resolution of the IRD's
assessments for the fiscal years 1995 through 1997 and
potential future assessments relating to activity since fiscal
1997. Such provision appears on the Company's Consolidated
Condensed Balance Sheets as of August 31, 2002 and February
28, 2002 on the line entitled "Income taxes payable."

Note 7 - Helen of Troy's consolidated results of operations for the
three-month periods ended August 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 August 31, 2002,
Tactica's accumulated deficit remaining to be eliminated was
approximately $298,000. Helen of Troy's 55 percent share of
this deficit totals $163,900 with the minority interest
totaling $134,100. Management believes that the deficit will
be eliminated during the three-month period ending November
30, 2002. After the elimination of the deficit, 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 has reviewed its goodwill for impairment,
in accordance with SFAS 142. Based on the results of this
review, the Company concluded that its goodwill was not
impaired at March 1, 2002. Because it eliminates the
amortization of goodwill, SFAS 142 decreased the Company's
SG&A expense by approximately $537,000 and $1,052,000,
respectively, for the three-month and six-month periods ending
August 31, 2002. The following table presents the impact of
SFAS 142 on net

11

earnings and earnings per share had the standard been in
effect for the three and six-month periods ended August 31,
2001:

The following table discloses information regarding the carrying
amounts and associated accumulated amortization for intangible assets
subject to amortization after the adoption of SFAS 142.

(a) Included in Consolidated Condensed Balance Sheets on line entitled "Other
assets, net of accumulated amortization."

There were no unamortized intangible assets, other than goodwill, as of periods
ending August 31, 2002 and February 28, 2002.

12

The following table summarizes the amortization expense attributable to
intangible assets for the three and six-month periods ended August 31,
2002 and 2001, as well as estimated amortization expense for the fiscal
years ending in February 2003 through 2008.

(a) Totals for the three and six months ending August 31, 2001 include
$537 and $1,052, respectively, of goodwill amortization.

Note 9 - The following table is a summary by operating segment of the
Company's goodwill balances as of August 31, 2002 and February
28, 2002.

Note 10 - 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

13

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 reductions 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 Income. The adoption of EITF
01-9 reduced net sales, gross profit and selling, general, and
administrative expenses by $1,246,000 and $1,486,000 for the
six-month periods ending August 31, 2002 and August 31, 2001,
respectively. Because adoption of EITF 01-9 resulted solely in
reclassification within the Consolidated Condensed Statement
of Income, there was no effect on the Company's financial
condition, operating income or net earnings for any of the
periods presented.

The following tables present the impact of EITF 01-9 on net
sales and SG&A had the standard been in effect for the three
and six month periods ending August 31, 2002 and 2001:

14

Note 11 - During the quarter ending August 31, 2002, 50,000 shares of
the Company's common stock that had been held 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.

Note 12 - On September 25, 2002, the Company signed a definitive
agreement to acquire directly and through license agreements,
six consumer brand names from The Procter & Gamble Company.
The Company will create a new operating division to market
these products. The Company expects to complete the
acquisition within 90 days of September 25, 2002. The Company
also entered into several agreements with The Procter & Gamble
Company where they will continue to market, manufacture, and
distribute products using these brands for a six-month
transition period. In addition, Helen of Troy agreed to pay
for inventory that The Procter & Gamble Company has on hand at
the end of the six-month transition period. The Company
estimates that the combination of the purchase price,
inventory purchase, and on-going working capital requirements
associated with the purchase of these brands will reduce our
cash and working capital by $45,000,000 to $50,000,000.

During September 2002, the Company signed amendments to
certain of its licenses to sell appliances and combs and hair
brushes in the United States and Canada. In connection with
such amendments, the Company paid a total of $11,500,000 as a
prepayment, at a discount, of minimum royalties due under the
agreements from the third quarter of calendar 2002 through the
fourth quarter of calendar 2005. In addition to the prepayment
of minimum royalties, the amendments affected other provisions
of these license agreements. We remain obligated to pay any
earned royalties that exceed the minimum royalties for those
periods.

15

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

Quarter ended August 31, 2002

Consolidated Sales and Gross Profit Margins

Our net sales for the three months ended August 31, 2002 decreased by
$1,630,000, or 1.4 percent versus the three months ended August 31, 2001, as
higher North American and International operating segment sales largely offset
lower sales in our Tactica operating segment. Tactica's sales for the quarter
declined by $11,491,000, or 35.2 percent, compared to the same period a year
earlier, primarily because of lower sales of the Epil Stop(R) depilatory
product. Higher sales of Tactica products such as a pore cleanser and the
Twist-a-Braid hair styling implement, both sold under the IGIA(R) brand name, in
the retail distribution channel offset part of the decline in Epil Stop(R)
sales. We expect that Tactica's net sales totals during the second half of the
fiscal year ending February 28, 2003 will also decrease, when compared to the
second half of the fiscal year that ended February 28, 2002. North American
operating segment sales grew by $9,314,000, or 12.5 percent. The primary product
categories producing the North American segment's sales growth were hair care
appliances with ionic technology, hair straighteners, and a line of electric
hair setters aimed primarily at the teen market. Our hair care appliances that
incorporate ionic technology produce negative ions, which reduce the size of
water molecules, allowing the hair to absorb those molecules. This process is
beneficial because it allows hair to retain more moisture and facilitates more
efficient drying of hair. Hair straighteners are also referred to as flat
curling irons and allow consumers to shape their hair in a different manner than
with traditional curling irons. International operating segment sales grew by
$547,000, or 9.6 percent for the quarter ended August 31, 2002, compared to the
quarter ended August 31, 2001. The growth was fueled largely by increased sales
in the United Kingdom. Sales to Latin and South American customers decreased,
primarily because of lower sales in Brazil. Our introduction of a new line of
hair care appliances under the Cosmopolitan brand name was an important factor
in the United Kingdom sales growth.

Gross profit, as a percentage of sales, declined from 49.3 percent for
the quarter ended August 31, 2001 to 45.8 percent for the quarter ended August
31, 2002. This is largely the result of the increase in North American and
International segment net sales, relative to net sales in the Tactica operating
segment. Tactica experiences higher gross profit and higher selling, general,
and administrative expense, as percentages of net sales, than do our other
operating segments. Therefore, our consolidated gross margins change when our
mix of net sales contributed by our three operating segments changes.

16

Selling, general and administrative expense

Selling, general, and administrative expenses ("SG&A"), expressed as a
percentage of net sales, decreased from 39.6 during the quarter ending August
31, 2001 to 34.8 percent during the quarter ending August 31, 2002. SG&A as a
percentage of sales decreased in the North American and International operating
segments combined, primarily due to lower inventory storage costs, the lack of
goodwill amortization, and foreign currency exchange gains. Inventory storage
expenses, in the North American and International operating segments combined,
decreased by $669,000, when compared to the same quarter last year. The
reduction in inventory storage expense results from lower inventory levels,
compared to last year. Due to our adoption of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), we
recorded no goodwill amortization expense (see "New Accounting Guidance" below).
The adoption of SFAS 142 reduced SG&A by $537,000 for the quarter ended August
31, 2002, compared to the same period a year earlier. Finally, during the
quarter ended August 31, 2002, we experienced foreign currency exchange gains
that were $408,000 greater than during the same period a year earlier. The
exchange rate gains were primarily due to the U.S. Dollar's weakness versus the
British Pound, the Euro, and the Canadian Dollar, relative to the same period
last year. Tactica's SG&A increased slightly as a percentage of its net sales.
This increase was due to the decrease in Tactica's sales, combined with the
fixed nature of certain expenses. However, Tactica's SG&A as a percentage of
its net sales was a less significant factor in consolidated SG&A as a
percentage of net sales because of the growth in North American and
International net sales as a percentage of consolidated net sales.

Interest expense

Interest expense for the quarter ended August 31, 2002 was slightly
lower than the quarter ended August 31, 2001, decreasing to $953,000 from
$1,111,000. This decline is due primarily to the fact that there were no
short-term borrowings under the operating line of credit in the quarter ended
August 31, 2002, compared to a $10,000,000 outstanding balance during the entire
quarter ended August 31, 2001.

Income tax expense

For the three months ending August 31, 2002, our income tax expense was
24.4 percent of earnings before income taxes, as opposed to 28.5 percent for the
three months ending August 31, 2001. Compared to the same period a year earlier,
the North American segment contributed a higher percentage of our total
consolidated earnings before income taxes for the three-month period ended
August 31, 2002. Meanwhile, the proportion of earnings before income taxes
produced by Tactica decreased. This change lowered our effective tax rate for
the three-month period ended August 31, 2002, versus the same period a year
earlier, as the North American segment incurs a total income tax rate of
approximately 20 percent, versus approximately 45 percent for Tactica.

17

Six months ended August 31, 2002

Consolidated Sales and Gross Profit Margins

Our net sales for the six months ended August 31, 2002 increased by
$9,470,000, or 4.6 percent, versus the six months ended August 31, 2001. The
factors producing this change were similar to those described in our discussion
of Consolidated Sales and Gross Profit Margins for the three months ended August
31, 2002. The products most important to the $12,699,000, or 8.9 percent, North
American operating segment sales growth were hair care appliances incorporating
ionic technology, hair straighteners, and a line of electric hair setters
marketed to teens. The International operating segment's sales grew by $702,000,
or 7.2 percent, as sales in the United Kingdom and France increased, while sales
to Latin American customers, particularly in Brazil, decreased. Tactica's sales
decreased by $3,931,000, or 7.6 percent, due primarily to lower Epil Stop(R)
sales.

Gross profit, as a percentage of sales, declined from 47.8 percent for
the six months ended August 31, 2001 to 47.0 percent for the six months ended
August 31, 2002. As was the case for the three months ended August 31, 2002, the
increase in the North American and International segments' net sales as a
percentage of our consolidated net sales was the primary factor driving this
decrease.

Selling, general, and administrative expense

For the six months ended August 31, 2002 SG&A, expressed as a
percentage of net sales, decreased from 38.9 to 36.6 percent. As during the
three months ended August 31, 2002, the adoption of SFAS 142, lower inventory
storage costs and foreign currency exchange gains accounted for most of the drop
in SG&A as a percentage of sales in the North American and International
segments during the first half of the fiscal year. The adoption of SFAS 142,
which eliminated the amortization of goodwill, reduced SG&A for the six-month
period by $1,052,000, compared to the same period a year ago (see section below
entitled "New Accounting Guidance"). In addition, lower inventory storage
expenses ($1,039,000), and higher exchange rate gains ($830,000) reduced SG&A
substantially. Tactica's SG&A increased slightly as a percentage of its net
sales due to the combination of the fixed nature of certain expenses and the
decrease in Tactica's net sales. Tactica's SG&A as a percentage of its net sales
was a less significant factor in consolidated SG&A as a percentage of net sales
because of the growth in North American and International net sales as a
percentage of consolidated net sales.

Interest expense and Other income / expense

Interest expense for the six months ended August 31, 2002 was slightly
lower than the six months ended August 31, 2001, decreasing to $2,020,000 from
$2,170,000. This decline is due primarily to the fact that there were no
short-term borrowings under the operating line of credit during the six-month
period ending August 31, 2002, compared to an average month-end balance of
$8,667,000 during the six-month period ending August 31, 2001.

Income tax expense

In the six months ending August 31, 2002, our income tax expense was
26.3 percent earnings before income taxes, as opposed to 28.4 percent in the
same period a year earlier. Compared to the same period a year earlier, the
proportion of consolidated earnings before

18

income taxes comprised of the North American segment increased for the
six-month period ended August 31, 2002. Meanwhile, the proportion of earnings
before income taxes produced by Tactica decreased. This change decreased our
effective tax rate for the six-month period ended August 31, 2002, versus the
same period a year earlier, as the North American segment incurs a total income
tax rate of approximately 20 percent, versus approximately 45 percent for
Tactica.

WORK STOPPAGE AT WEST COAST PORTS

On September 29, 2002, port operators and shipping lines locked out
longshoremen working in 29 ports on the West Coast of the United States creating
a work stoppage at those ports. We import a large majority of the product that
we sell in the United States through the ports on the West Coast. During the
lockout, our ability to import products into the United States was impaired
significantly. Because of steps taken by the United States government under
emergency provisions contained in the Taft-Hartley Act, the ports reopened on
October 9, 2002. However, the lockout created a large backlog of products,
including ours, waiting to enter the United States. There is no assurance that
future work stoppages will not occur. To date, the work stoppage has not had a
material financial effect on us, as we have been able to meet most orders using
existing inventory. We are currently unable to estimate whether the backlog of
products awaiting entry into the Untied States or any potential future work
stoppages will have a material negative impact on our operations or financial
condition.

LIQUIDITY AND CAPITAL RESOURCES

During the first six months of fiscal 2003, we continued to strengthen
our financial condition. Our cash balance increased 32.2 percent to $85,015,000
at August 31, 2002 from $64,293,000 at February 28, 2002. Operating activities
provided $19,405,000 of cash during the six months ended August 31, 2002,
compared to using $14,181,000 during the six months ended August 31, 2001. The
production of net income for the six-month period was the main factor leading to
the production of cash by our operating activities. Investing activities used
$991,000 of cash during the six months ended August 31, 2002. Two transactions
comprise most of the activity in the "Cash flows from investing activities"
section of the August 31, 2002 Consolidated Condensed Statement of Cash Flows.
First, during the first six months of the fiscal year, we paid $1,000,000 to
acquire additional territories under a license agreement. Second, as discussed
in the section below entitled "Hong Kong Income Taxes," we utilized $2,468,000
in tax reserve certificates to settle a portion of our dispute with the Hong
Kong Inland Revenue Department.

Our net accounts receivable balance increased 13.8 percent from
February 28, 2002 to August 31, 2002. Our net sales during the quarter ending
August 31 tend to exceed our net sales for the quarter ending the final day of
February, thereby producing relatively higher accounts receivable balances at
the end of August. Our August 31, 2002 inventory balance remained relatively
constant, totaling $98,343,000, versus $100,306,000 at February 28, 2002, a 2.0
percent decrease.

Our working capital balance increased to $211,556,000 at August 31,
2002 from $191,438,000 at February 28, 2002. Our current ratio was 4.31 at
August 31, 2002, compared to 4.67 at February 28, 2002. The increase in our
working capital was largely due to the production of cash by our operating
activities. The slight decline in our current ratio was due to a large

19

percentage increase in our accounts payable balance as compared with a smaller
increase in our current assets as compared to the balances at February 28, 2002.
The increase in our accounts payable balance at August 31, 2002, compared to
February 28, 2002, is due to the fact that we purchase more inventory in the
second quarter of our fiscal year, than in the fourth quarter.

In connection with the acquisition of a 55 percent interest in Tactica,
we loaned a total of $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 $4,256,000 and $4,103,000 at
August 31, 2002 and February 28, 2002, respectively. These amounts are included
in "Other assets" on the consolidated balance sheets.

We maintain a revolving line of credit with a bank to facilitate
short-term borrowings and the issuance of letters of credit. The 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 August 31, 2002 the interest rate
applicable to the line of credit was 2.77 percent. The 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 August 31, 2002, there were no borrowings under this line of credit
and outstanding letters of credit totaled $3,235,963. The revolving credit
agreement provides that we must satisfy requirements concerning minimum net
worth, total debt to consolidated total capitalization ratio, debt to EBITDA
ratio and our fixed charge coverage ratio. We are in compliance with all of
these requirements.

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

(a) Minimum royalty payments due in less than one year include $11,500
prepayment of royalties in September 2002. See discussion below in this
section.

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 six months ended August 31, 2002 or in the period through
September 29, 2002, the expiration date of the resolution.

20

Based on our current financial condition and 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
(see discussion below). 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.

Following August 31, 2002, we entered into two commercial relationships
that will reduce our cash and current working capital by a minimum of
$56,500,000 to $61,500,000.

On September 25, 2002, we signed a definitive agreement to acquire
directly and through license agreements, six consumer brand names from The
Procter & Gamble Company. We will create a new operating division to market
these products. We expect to complete the acquisition within 90 days of
September 25, 2002. The purchase price for the acquisition is to be paid in cash
at the completion of the acquisition. We also entered into several agreements
with The Procter & Gamble Company where they will continue to market,
manufacture and distribute products using these brands for a six-month
transition period. In addition, we agreed to pay for inventory that The Procter
& Gamble Company has on hand at the end of a six-month transition period. We
believe that the combination of the purchase price, inventory purchase, and
on-going working capital requirements associated with the purchase of these
brands will reduce our cash and working capital by $45,000,000 to $50,000,000.

During September 2002, we signed amendments to certain of our licenses
to sell appliances and combs and hair brushes in the United States and Canada.
In connection with such amendments, we paid a total of $11,500,000 as a
prepayment, at a discount, of minimum royalties due under the agreements from
the third quarter of calendar 2002 through the fourth quarter of calendar 2005.
We remain obligated to pay any earned royalties that exceed the minimum
royalties for those periods.

HONG KONG INCOME TAXES

The Hong Kong Inland Revenue Department (the "IRD") has assessed
$6,564,000 in tax on certain profits of our foreign subsidiaries for the fiscal
years 1995 through 1997. 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. 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 $30,077,000 (U.S.) for the period from fiscal 1995 through the
quarter ended August 31, 2002.

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, which represented approximately 50 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

21

exceeds the related tax liability. These certificates are included on our
Consolidated Condensed Balance Sheets as of August 31, 2002 and February 28,
2002 on the line entitled "Other assets, net of accumulated amortization." The
tax reserve certificates are denominated in Hong Kong dollars and are subject to
the risks associated with foreign currency fluctuations.

The IRD also assessed $4,468,000 in tax on certain profits of our
foreign subsidiaries for fiscal years 1990 through 1994. During the quarter
ended August 31, 2002, we and the IRD settled our dispute related to those years
for $2,505,000 (56 percent of the assessed amount), plus interest of
approximately $100,000. As a result of the assessment, we forfeited tax reserve
certificates previously valued at $2,468,000 on our balance sheet and paid
approximately $137,000 in cash to the IRD. The settlement did 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, we believe that we have made adequate provision in the
financial statements for the resolution of the IRD's claims and potential future
assessments relating to activity since fiscal 1997. Such provision appears on
our Consolidated Condensed Balance Sheets as of August 31, 2002 and February 28,
2002 on the line entitled "Income taxes payable."

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 our
financial position and profitability. In 1994, we engaged in a corporate
restructuring that, among other things, resulted in a portion of our non-U.S.
earnings not being subject to taxation in the United States. If such earnings
were subject to United States federal income taxes, our effective income tax
rate would increase materially. Several bills have been introduced recently in
the United States Congress that, if enacted into law, could adversely affect our
United States federal income tax status. At least one of the bills introduced
would apply to companies such as ours that restructured several years ago. That
bill could, if enacted into law, subject all of our earnings to United States
income taxes, thereby reducing our net earnings. Other bills introduced recently
would exempt restructuring transactions, such as ours, that were completed
before certain dates ranging from 1996 to 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 consolidated financial position and profitability.

22

CRITICAL ACCOUNTING POLICIES

The U.S. Securities and Exchange Commission defines critical accounting
policies as "those that are both most important to the portrayal of a company's
financial condition and results, and require management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain." Preparation of our
financial statements involves the application of several such policies. These
policies include: consolidation of Tactica International, Inc. (Tactica) under
the purchase method, estimates of our exposure to liability for income taxes in
Hong Kong, 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 second 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. Tactica's remaining accumulated deficit at August 31,
2002 is $298,000.

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 1995 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 Condensed
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 total $30,077,000 (U.S.) for the period
from fiscal 1995 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
certain customers become uncollectible due to specific 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

23

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 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

24

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,
including the risk of delays in importing products from
foreign manufacturers,

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.

25

NEW ACCOUNTING GUIDANCE

As explained in the Note 10 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 had no effect on operating income,
net earnings or earnings per share. The following tables present the impact of
EITF 01-9 on net sales and SG&A had the standard been in effect for the three
and six month periods ending August 31, 2002 and 2001 (in thousands):

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. We have completed
the first phase of our goodwill review to determine whether any of that goodwill
is impaired. Based on the results of this review, we believe that our goodwill
is not impaired. Therefore, we do not expect to incur an impairment charge as a
result of the adoption of SFAS 142. Because it eliminates the amortization of
goodwill, SFAS 142 decreased our SG&A expense by approximately $537,000

26

and $1,052,000 in the three-month and six-month periods ending August 31, 2002.

The following tables present the impact of SFAS 142 on net earnings and earnings
per share had the standard been in effect for the three and six month periods
ending August 31, 2002 and 2001. (in thousands, except per-share amounts):

ITEM 4. CONTROLS AND PROCEDURES

Our Chief Executive Officer and our Chief Financial Officer, after
evaluating the effectiveness of the Company's "disclosure controls and
procedures" (as defined in Exchange Act Rules 13a-14(c) and 15-d-14(c)) as of a
date (the "Evaluation Date") within 90 days of the filing date of this quarterly
report, have concluded that as of the Evaluation Date, our disclosure controls
and procedures were adequate and effective and designed to ensure that material
information relating to us and our consolidated subsidiaries would be made known
to them by others within those entities.

There were no significant changes in our internal controls or to our
knowledge, in other factors that could significantly affect our disclosure
controls and procedures subsequent to the Evaluation Date.

27

PART II. OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company's Annual Meeting of Shareholders was held August 27, 2002 in El
Paso, Texas. At that meeting, the shareholders voted on the following proposals:

o Proposal 1. Election of Directors;

o Proposal 2. To ratify the appointment of KPMG LLP as independent auditors of
the Company to serve for the 2003 fiscal year;

o Proposal 3. To consider an amendment to the Helen of Troy Limited 1995 Stock
Option Plan For Non-Employee Directors to increase the number of
shares of the Company's common stock available under such plan.

A description of the foregoing matters is contained in the Company's Proxy
Statement dated July 17, 2002, relating to the 2002 Annual Meeting of
Shareholders.

With respect to Proposal 1, the Directors received the following votes:

Proposal 2 received the following votes:

Proposal 3 received the following votes:

28

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

99.1 CEO Certification

99.2 CFO Certification

29

SIGNATURES

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

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

Date October 17, 2002 /s/ Gerald J. Rubin
------------------------ -----------------------------------

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

Date October 17, 2002 /s/ Russell G. Gibson
------------------------ -----------------------------------
Russell G. Gibson
Senior Vice-President, Finance,
and Chief Financial Officer
(Principal Financial Officer)

30

CERTIFICATION

I, Gerald J. Rubin, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Helen of Troy Limited;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a)
designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared; b) evaluated the
effectiveness of the registrant's disclosure controls and procedures as of a
date within 90 days prior to the filing date of this quarterly report (the
"Evaluation Date"); and c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and b) any fraud, whether
or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: October 17, 2002

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

31

CERTIFICATION

I, Russell G. Gibson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Helen of Troy Limited;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a)
designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared; b) evaluated the
effectiveness of the registrant's disclosure controls and procedures as of a
date within 90 days prior to the filing date of this quarterly report (the
"Evaluation Date"); and c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and b) any fraud, whether
or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: October 17, 2002

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

32

Index to Exhibits