Helen of Troy - 10-K annual report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 2005
OR
[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

Commission file number 001-14669

HELEN OF TROY LIMITED

CLARENDON HOUSE
CHURCH STREET
HAMILTON, BERMUDA
(Address of principal executive offices)

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

Securities registered pursuant to Section 12(b) of the Act:
NONE

Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK - $.10 PAR VALUE
(Title of Class)

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

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes [X] No [ ]

      The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as the last day of the registrant’s most recently completed second quarter was $741,421,161.

      As of May 5, 2005 there were 29,873,851 shares of Common Stock, $.10 Par Value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

      Certain sections of the Company’s definitive proxy statement, which is to be filed under the Securities Exchange Act of 1934 within 120 days of the end of the Company’s fiscal year on February 28, 2005, are incorporated by reference into Part III hereof. Except for those portions specifically incorporated by reference herein, such document shall not be deemed to be filed with the Securities and Exchange Commission as part of this Form 10-K.

Index to Exhibits - Page 91

TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS

GENERAL

      Unless the context requires otherwise, references to “the Company,” to “our Company,” or to “Helen of Troy” and references such as “we”, “our” and “us” refer to Helen of Troy Limited and its subsidiaries.

      Helen of Troy Limited is a global designer, developer, importer and distributor of an expanding portfolio of brand-name consumer products. We have two active segments: Personal Care and Housewares. The Personal Care segment’s products include hair dryers, straighteners, curling irons, hairsetters, mirrors, hot air brushes, home hair clippers, paraffin baths, massage cushions, footbaths, body massagers, brushes, combs, hair accessories, liquid hair styling products, body powder and skin care products. The Housewares segment is new this year and reports the operations of OXO International (“OXO”) which we acquired on June 1, 2004, as further discussed in Notes (4), (5), (6) and (16) to our consolidated financial statements. The Houseware segment’s products include kitchen tools, household cleaning tools, storage and organization products, and gardening tools. Both segments sell their portfolio of products principally through mass merchants, general retail and specialty retail outlets in the United States and other countries.

      In each of our segments, we rely on a strategy of providing a broad line of competitively priced innovative products, always striving to be first to market with new product ideas. Our goal is to provide our consumers with more functionality and higher performance at competitive price points. This strategy has allowed us to continue to strengthen our position in both of our segments. As we extend our product lines and enter new product categories, we intend to expand our business in our existing customer base while attracting new customers.

      We also report on a Discontinued Segment, which shows the operations of Tactica International, Inc. (“Tactica”), which sold personal care and other consumer products to retailers and used direct response marketing to sell such products directly to consumers. As more fully described in Note (15) to our consolidated financial statements, on April 29, 2004 we completed the sale of our ownership interest in Tactica back to certain of its key operating manager-shareholders. In exchange for our 55 percent ownership share of Tactica and the release of $16,936,000 of its secured debt and accrued interest owed to us, we received marketable securities, intellectual properties, and the right to certain tax refunds. No gain or loss was recorded as a result of the sale. The marketable securities received in the Tactica sale carry a restriction that prevents us from disposing of the stock prior to July 31, 2005. At February 28, 2005 the market value of these securities was $120,000. In the third fiscal quarter of 2005, management determined the decline in market value to be other-than-temporary and accordingly began recording losses on the stock. For fiscal 2005, the total loss on stock available for sale was $2,910,000.

      We are continually looking for opportunities to expand our brand portfolio both through internal product development and selective acquisitions. In the Personal Care segment in the second fiscal quarter of 2005, we began selling footbaths, massagers and memory foam products under the Health at Home® and Health o meter® names (licensed from Sunbeam Products, Inc.). In September 2004, we acquired the TimeBlock® and Skin Milk® body and skin care product lines from Naterra International, Inc. (“Naterra”) as further discussed in Note (4) to our consolidated financial statements. The Housewares segment is new this year resulting from the acquisition of OXO which added six brands: Good Grips®, Grind it™, Steel™, Softworks®, Touchables® and Good Grips® Basics. OXO products have strong consumer recognition and appeal due to their unique stylish ergonomic designs and great utility at affordable prices.

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      Over the past fiscal year, we have devoted substantial resources to the implementation of our new global information system, which became operational in September 2004. With the implementation of the new system, most of our businesses with the exception of the newly acquired Housewares segment run under one integrated information system. We intend to transition the Housewares segment to our new system over the next year. The new system continues to improve and evolve as we extend functionality, tune performance and gain operating experience.

      We present financial information for each of our operating segments in Note (12) of the consolidated financial statements. The matters discussed in this Item 1, pertain to all of our existing operating segments, unless otherwise specified.

      We use outside manufacturers to produce our goods. We sell our products to mass merchandisers, drug chains, warehouse clubs, grocery stores, beauty supply retailers and wholesalers, and specialty retailers in the United States and other countries.

      We sell certain of our products under licenses from third parties. Our licensed trademarks include:

      We own and actively market a number of trademarks, including:

      We also market hair and beauty care products under the following trademarks to the professional beauty salon industry:

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      We were incorporated as Helen of Troy Corporation in Texas in 1968 and reincorporated as Helen of Troy Limited in Bermuda in 1994.

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PRODUCTS

      Our business is designing, developing, and selling a full line of personal care products and an expanding line of housewares products. The following table lists the primary products we sell and some of the brand names that appear on those products.

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      We continue to develop new products and enhance existing products in order to maintain and improve our position in the Personal Care and Housewares markets. For example, during fiscal 2005 we improved existing products by adding new technologies to them. Ceramic styling plates with Pulse Technology® and digital Ionic® dryers are examples of new technologies. Ceramic is easy to clean and radiates heat quickly while helping to retain moisture in the hair. We were also the first to market with jade plates in straighteners that transfer high quality temperatures and maintain heat longer than conventional straighteners. We re-formulated, re-packaged, and re-introduced the Vitalis® brand of men’s hair care products; giving them nationally televised exposure to an estimated audience of 14.8 million people in December 2004 with our sponsorship of the Vitalis® Sun Bowl college football game. For our Brut® line of men’s grooming products, we launched a new print advertising campaign, re-established customer promotion and re-introduced holiday gift packs. Our Housewares Segment had strong consumer acceptance of its OXO Good Grips Mandoline, a precision food cutting tool which has been compared favorably in the trade press to products selling at multiples of its retail price.

      Overall, in fiscal 2005 we introduced 426 new products across all our categories. Currently, 470 additional products are in our product development pipeline for fiscal 2006. At the 2005 International Housewares Show in Chicago, we introduced 120 new products, up from our record 95 the previous year. Included in our new products are important new line extensions such as new Revlon® ladies shavers, the Vidal Sasoon® “Studio Tools®” line of professional hair styling appliances, Brut® shaving products, the Sea Breeze® “Naturals” line of facial care products formulated and targeted for women 21 and older, new OXO® tea kettles, and an expanded line of OXO® home storage and organization products. With the increasing breadth and depth of our product lines, we believe we are well positioned for fiscal 2006 and beyond to continue to deliver high levels of service to our customers and great value and choice to our consumers.

      You can learn more about our currently marketed products at the following Internet addresses:

http://www.hotus.com
http://www.oxo.com
http://www.brutworld.com

SALES AND MARKETING

      We market our products primarily within the United States. Sales within the United States comprised approximately 82, 84 and 90 percent of total net sales in fiscal 2005, 2004, and 2003, respectively. Both our North American and International operations sell their products primarily through mass merchandisers, drug chains, warehouse clubs, catalogs, grocery stores, specialty stores, and beauty supply retailers and wholesalers. We continue to explore and test other channels of distribution including selected tele-marketing campaigns and online sales. We market products through a combination of outside sales representatives and our own internal sales staff.

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      The companies from whom we license many of our brand names promote those names extensively. The Revlon®, Vidal Sassoon®, Dr. Scholl’s® and Sunbeam® trademarks are widely recognized because of advertising and the sale of a variety of products. We believe we benefit from the name recognition associated with a number of our licensed trademarks and seek to further improve the name recognition and perceived quality of all the trademarks under which we sell products through our own advertising and product development efforts. We also promote our products through television advertising and through print media, including consumer and trade magazines and various industry trade shows.

      In fiscal 2004, we reached an agreement to become the title sponsor of the Sun Bowl for the next three years starting with the December 2004 game. The Sun Bowl is one of the longest running invitational post season college football games in the United States with a history that spans over 70 years. The “Vitalis® Sun Bowl” became the official name of this event. In 2004, CBS Sports broadcast the game to an estimated nationwide audience of 14.8 million people providing us an opportunity to re-introduce the Vitalis® brand to a whole new generation of consumers. We will continue as the sponsor for 2005 and 2006 with an option to extend our sponsorship to 2007.

      In January 2005, we entered into agreements with Don Schumacher Racing, the National Hot Rod Association and Just Marketing, Inc., to Sponsor Brut Racing, a funny car drag racing team that has begun participating in the NHRA Powerade Drag Racing Competition. This series of races occurs in 23 major metropolitan markets, attracts over 2,000,000 in live attendance annually, and receives over 150 hours of live or same day coverage on ESPN. The agreement is for three years and will give us the opportunity to extend the introduction of the Brut® Brand to our target consumers.

MANUFACTURING AND DISTRIBUTION

      We contract with unaffiliated manufacturers in the Far East, primarily in the Peoples’ Republic of China, Thailand, Taiwan, and South Korea, to manufacture a significant portion of our products in the appliance, accessories and housewares product categories. Almost all of our grooming, skin care and hair care products are manufactured in North America (see discussion of our dependency on third party manufacturers in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Forward-Looking Information and Factors That May Affect Future Results”). For fiscal 2005, 2004 and 2003, goods manufactured by vendors in the Far East comprised approximately 84, 89 and 95 percent, respectively, of the dollar value of all segments’ inventory purchases. Our new Housewares segment sources approximately 99 percent of its goods from vendors in the Far East. Our Far East percentage has been declining as the impact of purchases for our grooming, skin care and hair care products (manufactured primarily in North America) continues to become a larger share of our purchasing activity.

      The manufacturers who produce our products use formulas, molds, and certain other tooling, some of which we own, in manufacturing those products. All our business segments employ numerous technical and quality control persons to assure high product quality.

      In total, we occupy in excess of 1,600,000 square feet of distribution space in various locations to support our operations. Products that are manufactured in the Far East and sold in North America are shipped to the West Coast of the United States and Canada. The products are then shipped by truck or rail service to warehouse facilities in El Paso, Texas; Southaven, Mississippi; Monee, Illinois; Toronto, Canada; and Vancouver, Canada, or directly to customers. We ship substantially all products to North American customers from these warehouses by ground transportation services. Products sold outside the United States and Canada are shipped from manufacturers primarily in the Far East, to warehouse facilities in The Netherlands, the United

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Kingdom, Mexico, Brazil, or directly to customers. We ship products stored at the warehouses in The Netherlands, the United Kingdom, Mexico, and Brazil to distributors or retailers.

      Our customers seek to minimize their inventory levels and often demand that we fulfill their orders within relatively short time frames. Consequently, these inventory management practices often require us to carry substantial levels of inventory in order to meet our customers’ needs.

      Most of our products manufactured outside the countries in which they are sold are subject to import duties, which have the effect of increasing the amount we pay to obtain such products.

LICENSE AGREEMENTS, TRADEMARKS, AND PATENTS

      The Personal care segment depends significantly upon the continued use of trademarks licensed under various agreements. The Vidal Sassoon®, Revlon®, Sunbeam® and Dr. Scholl’s® trademarks are of particular importance. New product introductions under licensed trademarks require approval from the respective licensors. The licensors also must approve the product packaging. Many of the license agreements require the Company to pay minimum royalties, meet minimum sales volumes, and make minimum levels of advertising expenditures. The duration of the license agreements for the Revlon®, Vidal Sassoon®, Sunbeam®, and Dr. Scholl’s® trademarks, including the renewal terms, are 58, 28, 15 and 14 years, respectively. Upon expiration of the current terms of these agreements, we have the right to extend their terms upon payment of a renewal fee. The discussion below covers the primary product categories that Helen of Troy currently sells under its major license agreements. The product categories discussed do not necessarily include all of the products that Helen of Troy is entitled to sell under these or other license agreements.

      Under an agreement with The Procter & Gamble Company, Helen of Troy is licensed to sell certain products bearing the Vidal Sassoon® trademark worldwide, except in Asia. Products sold under the terms of this license include hair dryers, curling irons, straightening irons, styling irons, hairsetters, hot air brushes, hair clippers and hair trimmers, mirrors, brushes, combs, and hair care accessories.

      Under agreements with Revlon Consumer Products Corporation, we are licensed to sell worldwide except in Western Europe, hair dryers, curling irons, straightening irons, brush irons, hairsetters, brushes, combs, mirrors, functional hair accessories, personal spa products, hair clippers and trimmers, and battery-operated and electric women’s shavers bearing the Revlon® trademark.

      We are licensed to sell foot baths, foot massagers, hydro massagers, cushion massagers, body massagers, paraffin baths, and support pillows bearing the Dr. Scholl’s® trademark in the United States and Canada, under an agreement with Schering-Plough HealthCare Products, Inc. We also are licensed to sell the same products under the Scholl® trademark in other areas of the world through an agreement with Scholl Limited.

      Under an agreement with Sunbeam Products, Inc., we are licensed to sell hair clippers, hair trimmers, hair dryers, curling irons, hairsetters, hot air brushes, mirrors, manicure kits, hair brushes and combs, hair rollers, hair accessories, paraffin baths, foot massagers, back massagers, body massagers, memory foam products, and spa products bearing the Sunbeam®, Health at Home® and Health o meter® trademarks in the United States, Canada, Mexico, Central America, South America, and the Caribbean.

      In October 2002, we acquired from The Procter & Gamble Company the right to sell products under the trademark Sea Breeze® pursuant to a perpetual royalty free license from Shiseido Company Ltd. We currently sell a line of liquid skin care products under the Sea Breeze® name in the United States and Canada.

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      Helen of Troy has filed or obtained licenses for over 250 design and utility patents in the United States and several foreign countries. Most of these patents cover product designs in our Housewares segment. We also protect certain details about our processes, products and strategies as trade secrets, keeping confidential the information that we believe provides us with a competitive advantage. Our ability to enforce patents, copyrights, licenses, and other intellectual property is subject to general litigation risks, as well as uncertainty as to the enforceability of various intellectual property rights in various countries.

CUSTOMERS

      Sales to Wal-Mart Stores, Inc., and its affiliate, SAM’S Club, accounted for approximately 25 percent, 28 percent, and 29 percent of our net sales in fiscal 2005, 2004, and 2003, respectively. No other customer accounted for ten percent or more of net sales during those fiscal years.

ORDER BACKLOG

      When placing orders, our retail and wholesale customers usually request that we ship the related products within a short time frame. As such, there was no significant backlog of orders in any of our distribution channels as of the end of fiscal 2005.

COMPETITIVE CONDITIONS

      The markets in which we sell our products are very competitive and highly mature. Maintaining and gaining market share depends heavily on product development and enhancement, pricing, quality, performance, packaging and availability, brand name recognition, patents, and marketing and distribution approaches. In the Personal Care segment, our primary competitors include The Conair Corporation, Applica Incorporated, Remington Products Company, Goody Products, Inc., a division of Newell Rubbermaid, Inc., Homedics-USA, Inc., Chattem, J&J Boots, Andrew Jergens, Loreal, Unilever, and Alberto Culver. In the Housewares segment, the competition is highly fragmented. Our primary competitors include Kitchenaid (Lifetime Hoan Corporation), Zyliss AG, Copco (Wilton Industries, Inc.), Simple Human, Casabella and Interdesign. Some of these competitors have significantly greater financial and other resources than we do.

SEASONALITY

      Our business is somewhat seasonal. Net sales in the third fiscal quarter accounted for approximately 35, 35, and 33 percent of fiscal 2005, 2004 and 2003 net sales, respectively. As a result of the seasonality of sales, our working capital needs fluctuate during the year.

REGULATION

      Our electrical products must meet the safety standards imposed in various national, state, local, and provincial jurisdictions. Our electrical products sold in the United States are designed, manufactured, and tested to meet the safety standards of Underwriters Laboratories, Inc. or Electronic Testing Laboratories.

      The medicated skin powder that we sell under the Ammens® trademark is regulated by the United States Food and Drug Administration.

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EMPLOYEES

      As of fiscal year end 2005, we employed 711 full-time employees in the United States, Canada, Hong Kong, Europe, Brazil, Peru, Venezuela and Mexico of which 161 are marketing and sales employees, 111 are distribution employees, 36 are engineering and development employees, and 403 are administrative personnel. We also use temporary, part time and seasonal employees as needed. None of the Company’s employees are covered by a collective bargaining agreement. We have never experienced a work stoppage and we believe that we have satisfactory working relations with our employees.

GEOGRAPHIC INFORMATION

      Note (12) to the consolidated financial statements contains geographic information concerning our net sales and long-lived assets.

AVAILABLE INFORMATION

      We maintain an Internet site at the following address: http://www.hotus.com. The information contained on the Company’s website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. We make available on or through our Internet website’s Investor Relations page under the heading “SEC Filings” certain reports and amendments to those reports that we file with or furnish to the Securities and Exchange Commission (the “SEC”) in accordance with the Securities Exchange Act of 1934 (the “Securities Exchange Act”). These include our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, amendments to these reports and the reports required under Section 16 of the Securities Exchange Act of transactions in Company stock by directors and officers. Also on the Investor Relations page, under the heading “Corporate Governance” are the Company’s Code of Ethics, Corporate Governance Guidelines and the Charters of the Committees of the Board of Directors. We make this information available on our website free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC. The public may also read and copy any of the materials we file with the SEC in accordance with the Securities Exchange Act at the SEC’s Public Reference Room at 450 Fifth Street, N.W. Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0300. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information about our Company. The address of the SEC’s Internet site is http://www.sec.gov.

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ITEM 2. PROPERTIES

PLANT AND FACILITIES

      The Company owns, leases, or otherwise utilizes through third party management service agreements, a total of 31 facilities which include selling, procurement, administrative and warehouse facilities worldwide. All facilities operated by the Company are well maintained and adequate for the purpose for which they are intended.

      We own our corporate headquarters, a 135,000 square foot office building with an adjacent 408,000 square foot warehouse, located on 50 acres in El Paso, Texas. We also own 32 acres of land in El Paso, Texas near the 50 acres on which our corporate headquarters and warehouse are located. Included in the 32 acres is 10 acres which we acquired in July 2004. The Company is holding this land for future business expansion.

      Personal Care Segment - We have two warehouses in El Paso, Texas: a 408,000 square foot warehouse that we own (adjacent to our corporate headquarters), and a 108,000 square foot warehouse under lease. We also own a 619,000 square foot warehouse in Southaven, Mississippi, (servicing our Personal Care segment) as well as the 29 acre plot of land on which that warehouse is located. We lease warehouse space in public warehouses located in Canada, Hong Kong, The Netherlands, and the United Kingdom.

      We own a sales and administrative facility in Sheffield, England. We also lease various sales and administrative facilities in Danbury, Connecticut; Bentonville, Arkansas; Minneapolis, Minnesota; and Troy, Michigan. Internationally, we lease various sales and administrative facilities in Canada, France, Germany, Mexico, Brazil, Peru, Hong Kong, Macao and Mainland China.

      Housewares Segment - We lease approximately 10,000 square feet for the Housewares’ selling and administrative offices in New York City, New York. Through a management services agreement, we utilize approximately 200,000 square feet of warehouse space in Monee, Illinois.

      Discontinued Segment - As more fully described in Note (15) to our consolidated financial statements, in April 2004 we completed the sale of our ownership interest in Tactica back to certain of its key operating manager-shareholders. At and prior to that time, Tactica leased administrative offices in New York City, New York and leased public warehouse space in Reno, Nevada.

      Future Expansion - As further discussed in Note (17) to our consolidated financial statements, towards the end of fiscal 2006 or early in fiscal 2007, the Company is planning to move its Southaven, Mississippi and Monee, Illinois distribution operations to a newly constructed and owned 1,200,000 square foot warehouse. We expect to sell our original Southaven, Mississippi facility. We do not expect to incur any losses on the disposition of this facility.

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ITEM 3. LEGAL PROCEEDINGS

      Hong Kong Income Taxes - The Inland Revenue Department (“the IRD”) in Hong Kong has assessed a total of $32,086,000 (U.S.) in tax on certain profits of our foreign subsidiaries for the fiscal years 1995 through 2003. Hong Kong levies taxes on income earned from certain activities conducted in Hong Kong. We are vigorously defending our position that we conducted the activities that produced the profits in question outside of Hong Kong. We also assert that we have complied with all applicable reporting and tax payment obligations.

      In connection with the IRD’s tax assessment for the fiscal years 1995 through 1997, we were required to purchase $3,282,000 (U.S.) in tax reserve certificates in Hong Kong. During fiscal 2005, we purchased $25,144,000 (U.S.) of additional tax reserve certificates as required by the IRD. With the purchase of these certificates, we have purchased $28,426,000 of tax reserve certificates for fiscal years 1995 through 2003. Tax reserve certificates represent the prepayment by a taxpayer of potential tax liabilities. The amounts paid for tax reserve certificates are refundable in the event that the value of the tax reserve certificates exceeds the related tax liability. These certificates are denominated in Hong Kong dollars and are subject to the risks associated with foreign currency fluctuations. If the IRD’s position were to prevail and if it were to assert the same position for fiscal years after fiscal year 2003, the resulting assessment could total $18,340,000 (U.S.) in taxes for fiscal years 2004 and 2005. We would vigorously disagree with the proposed adjustments and would aggressively contest this matter through applicable taxing authority and judicial procedures, as appropriate.

      Although the final resolution of the proposed adjustments is uncertain and involves unsettled areas of the law, based on currently available information, we have provided for our best estimate of the probable tax liability for this matter. While the resolution of the issue may result in tax liabilities which are significantly higher or lower than the reserves established for this matter, management currently believes that the resolution will not have a material effect on our consolidated financial position or liquidity. However, an unfavorable resolution could have a material effect on our consolidated results of operations or cash flows in the quarter in which an adjustment is recorded or the tax is due or paid.

      United States Income Taxes - The Internal Revenue Service (“the IRS”) has completed its audits of the U.S. consolidated federal tax returns for fiscal years 2000, 2001 and 2002. We previously disclosed that the IRS provided notice of proposed adjustments to taxes of approximately $13,424,000 for the three years under audit. We have resolved the various tax issues and reached an agreement on additional tax in the amount of $3,568,000. The resulting tax liability had already been provided for in our tax reserves and we have decreased our tax accruals related to the IRS audits for fiscal years 2000, 2001 and 2002, accordingly. This additional tax liability will be settled with funds already on deposit with the IRS.

      Other Matters - We are involved in various other legal claims and proceedings in the normal course of operations. In the opinion of management, the outcome of these matters will not have a material adverse effect on our consolidated financial position, results of operations, or liquidity.

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

      No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2005.

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PART II

PRICE RANGE OF COMMON STOCK

      Our common stock is listed on the NASDAQ National Market System [symbol: HELE]. The following table sets forth, for the periods indicated, in dollars per share, the high and low bid prices of the common stock as reported on the NASDAQ National Market System. These quotations reflect the inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions.

APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS

      We have one class of equity security outstanding at February 28, 2005; common stock with a par value of $0.10. As of May 5, 2005 there were approximately 370 holders of record of the company’s common stock. Shares held in “nominee” or “street” name at each bank nominee or brokerage house are included in the number of shareholders of record as a single shareholder. We estimate that approximately 30,200 individuals and institutions hold our common stock.

CASH DIVIDENDS

      Our current policy is to retain earnings to provide funds for the operation and expansion of the Company’s business and for potential acquisitions. We have not paid any cash dividends on our common stock since inception. Our current intention is to pay no cash dividends in fiscal 2006. Any change in dividend policy will depend upon future conditions, including earnings and financial condition, general business conditions, any applicable contractual limitations, and other factors deemed relevant by our Board of Directors.

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SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

      The following table summarizes information about our equity compensation plans as of February 28, 2005. All outstanding awards relate to our common stock. All our equity compensation plans have been approved by shareholder vote.

EQUITY COMPENSATION PLAN INFORMATION

PURCHASES OF HELEN OF TROY COMMON STOCK

      During the quarter ended August 31, 2003, our Board of Directors approved a resolution authorizing the purchase, in open market or through private transactions, of up to 3,000,000 shares of our common stock over a period extending through May 31, 2006. During the quarter ended February 28, 2005, we did not purchase any shares. From September 1, 2003 through February 28, 2005, we have repurchased 1,563,836 shares at a total cost of $45,611,670 or an average share price of $29.17. An additional 1,436,164 shares are authorized for purchase under this plan.

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ITEM 6. SELECTED FINANCIAL DATA

      The selected consolidated financial information set forth below has been summarized from our consolidated financial statements. This information contains certain reclassifications necessary to restate prior years’ operations of Tactica as a discontinued segment. This information should be read in conjunction with the consolidated financial statements and the related Notes to consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.” All currency amounts in this document are denominated in U.S. dollars.

For the year ended the last day of February,
(in thousands, except per share data)

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ITEM 6. SELECTED FINANCIAL DATA — CONTINUED

As of last day of February,
(in thousands)

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion contains a number of forward-looking statements, all of which are based on management’s current expectations. Actual results may differ materially due to a number of factors, including those discussed in the section entitled “Forward-Looking Information and Factors That May Affect Future Results” and in Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.”

OVERVIEW OF THE YEAR’S ACTIVITIES

      Fiscal 2005 was a year of transition for our Company. We now manage and present our operating activities under two active segments, Personal Care and Housewares; and a Discontinued Segment. The Personal Care segment includes the global operations of hair care appliances, hair brushes, combs, hair accessories, hair care and skin care liquids and powders, and other personal care products business. The Housewares segment includes the operations of OXO whose key lines of business include kitchen tools, household cleaning tools, storage and organization products, and gardening tools. Within our two active segments, we follow a business strategy to develop and increase our market positions by expanding our lines of competitively priced innovative products that provide the consumer with more functionality and higher performance at competitive price points. We also continue to look for opportunities to expand our product portfolio through selective acquisition of brands or operating businesses that expand or complement existing product lines, and can fit synergistically with our sourcing and distribution capabilities. The following is a summary of the key activities that we have completed or continue to implement in order to sustain future growth and increase profitability:

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RESULTS OF OPERATIONS

      The following table sets forth, for the periods indicated, our selected operating data, in dollars, as a percentage of net sales, and as a year-over-year percentage change.

      * Calculation is not meaningful

Net Sales:

      Consolidated net sales increased 22.5 percent or $106,681,000 in fiscal 2005 over fiscal 2004. New product acquisitions accounted for 21.8 percentage points, or $103,606,000 of the sales percentage growth over fiscal 2004. New product acquisitions included all OXO Housewares products, acquired in June 2004; Skin Milk® and TimeBlock® lines of skin care products, acquired in September 2004; and seven months of sales of Brut® men’s grooming products through September of 2004. Brut® was acquired on September 29, 2003, accordingly the last five months of the current fiscal year’s sales is treated as core sales because we have comparable sales for the prior year. Core growth (growth without acquisitions) in fiscal 2005 was $3,075,000 or 0.7 percent. Core growth came from our appliance businesses and grooming, skin care, and hair care products business, providing 1.7 percentage points of our overall sales growth, offset by the negative 1.0 percent impact of sales volume declines in our brushes, combs and hair accessories business.

      Consolidated net sales increased 25.0 percent or $95,117,000 in fiscal 2004 over fiscal 2003. $41,074,000, or 10.8 percentage points of the fiscal 2004 incremental sales growth is due to the acquisition in October 2002 of six new brands and of one new brand in September 2003 in the grooming, skin care, and hair care product group. Core growth (growth without acquisitions) in fiscal 2004 was $54,043,000, or 14.2 percent.

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Our core growth was as a result of both unit growth and higher price points due to new product enhancements through technology and added features. Examples include hair care appliances utilizing ionic and ceramic technology rather than traditional heating systems. Incremental sales volume in all distribution channels also came from an expansion of our line of massagers under the Dr. Scholl’s® brand and introduction of new products marketed on infomercials and sold at retail outlets.

Segment Net Sales:

      Net sales increased 5.6 percent or $26,538,000 in our Personal Care segment in fiscal 2005 over fiscal 2004. $23,463,000 or 4.9 percentage points of the fiscal 2005 incremental sales growth, is due to the acquisitions of the Skin Milk® and TimeBlock® lines of skin care products in September 2004 and seven months of sales of Brut® men’s grooming products through September of 2004. Brut® was acquired on September 29, 2003, accordingly the last five months of the current fiscal year’s sales is treated as core sales because we have comparable sales for the prior year. As previously discussed, core growth in this segment contributed $3,075,000 or 0.7 percentage points. Core growth came from our appliance businesses and grooming, skin care and hair care products business, providing 1.7 percentage points of our overall sales growth, offset by the negative 1.0 percent impact of sales volume declines in our brushes, combs and hair accessories business. In fiscal 2004 we sold certain niche products through various channels of distribution that accounted for approximately $14,300,000 in fiscal 2004 net sales. We evaluated the financial results and effort required for this business and decided not to continue marketing these products. We phased out of the business towards the end of fiscal 2004 and had insignificant sales activity in fiscal 2005. Additionally, fourth quarter sales for fiscal 2005 were negatively impacted by softer than expected holiday season sales across many categories of merchandise for certain retailers. This, in turn, resulted in lower sales to these retailers in late January and early February as the customers lowered their overall inventory levels. In fiscal 2005, appliances and accessories accounted for approximately 84 percent of the segment’s net sales while grooming, skin care and hair care products accounted for approximately 16 percent of the segment’s net sales. Key selling brands in this segment were Vidal Sassoon®, Revlon®, Brut®, Hot Tools®, Dr. Scholl’s® and Sunbeam®.

      Net sales increased 25.0 percent or $95,117,000 in our Personal Care segment in fiscal 2004 over fiscal 2003. $41,074,000 or 10.8 percentage points of the fiscal 2004 incremental net sales growth is due to the acquisition in October 2002 of Ammens®, Condition 3-in-1®, Final Net®, Sea Breeze®, Vitalis® and Vitapointe® brands, and the acquisition in September 2003 of the Brut® brand. $54,043,000 or 14.2 percentage points of the fiscal 2004 incremental net sales growth is due to core growth. In fiscal 2004, appliances and accessories accounted for approximately 89 percent of the segment’s net sales while grooming, skin care and hair care products accounted for approximately 11 percent of the segment’s net sales.

      Our Housewares segment was established through the acquisition of the OXO product lines from WKI Holding Company in June 2004. Net sales for the nine months of its operations during fiscal 2005 were $80,143,000. In fiscal 2005, food preparation products accounted for approximately 84 percent of the segment’s net sales, household cleaning tools accounted for approximately 11 percent of the segment’s net sales, and storage, organization and garden tools accounted for 5 percent of the segment’s net sales. Key selling brands in this segment were OXO Good Grips® and OXO Softworks®.

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Geographic Net Sales:

      The following table sets forth, for the periods indicated, our net sales by geographic region, in dollars, as a percentage of net sales, and as a year-over-year percentage change.

      In fiscal 2005, the United States accounted for 16.3 percent of our consolidated net sales growth, or approximately $77,356,000 while International operations provided 6.2 percent or $29,325,000 of our consolidated net sales growth. Our net sales growth includes the benefit of a net positive foreign exchange impact of $4,260,000 in fiscal 2005. The United Kingdom, Canada, and Mexico accounted for approximately 36, 20 and 15 percent of International sales, respectively. The United Kingdom and Mexico were particularly strong contributors to our International growth.

      In fiscal 2004, the United States accounted for 15.4 percentage points of our consolidated net sales growth, or approximately $58,319,000 while International operations provided 9.6 percentage points or $36,798,000 of our consolidated net sales growth. Our net sales growth includes the benefit of a net positive foreign exchange impact of $4,405,000 in fiscal 2004. The United Kingdom, Canada, and Mexico accounted for approximately 40, 24 and 11 percent of international sales, respectively.

Gross Profit Margins:

      Gross profit, as a percentage of sales increased to 47.2 percent in fiscal 2005 from 45.7 percent in fiscal 2004 and 41.0 percent in fiscal 2003. The increase is primarily due to a combination of sales mix changes to higher margin items resulting from the acquisition of six liquid and powder hair and skin care brands from The Procter & Gamble Company in October 2002, the Brut® acquisition in September 2003 and the OXO acquisition in June 2004. In addition, in fiscal 2005 our margins benefited from selected product cost decreases, new item introductions at higher margins, all of which were partially offset by selling price decreases on selected items. Favorable currency exchange rates for the British Pound and Euro also helped improve margins in fiscal 2005 and fiscal 2004. Almost all of our products are purchased in U.S. dollars. 41.3 percent and 51.6 percent of International sales were in British Pounds or Euros during fiscal 2005 and fiscal 2004, respectively.

Selling, general, and administrative expense (“SG&A”):

      SG&A increased to 29.7 percent of net sales in fiscal 2005 from 27.7 percent in fiscal 2004. The 2.0 percent increase in SG&A between fiscal 2005 and fiscal 2004 was principally due to increased personnel expenses, increased incentive compensation costs, increased consulting fees and depreciation associated with our new information system, which was placed into service early in our third fiscal quarter of fiscal 2005, increased consulting fees resulting from our compliance efforts with Section 404 of the Sarbanes-Oxley Act of 2002, and an exchange rate loss of $1,142,000 in fiscal 2005 versus an exchange rate gain of $1,216,000 in fiscal 2004.

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      SG&A decreased to 27.7 percent of net sales in fiscal 2004 from 27.8 percent in fiscal 2003. The 0.1 percent decrease in SG&A between fiscal 2004 and fiscal 2003 resulted from the continued decrease in royalty expense as a percentage of sales due to our renewing of royalty agreements on more favorable terms, the benefit of prepaying minimum royalties, and an increase in sales for which we own the brand and thus do not incur royalty payments. Freight out costs saw increases mostly due to higher fuel sur-charges. The increased transportation costs were offset by lower distribution costs as a result of opening our new Southaven, Mississippi warehouse in early fiscal 2004.

Operating Income by Segment:

      Operating income by operating segment for fiscal 2005, 2004 and 2003 was as follows:

      Operating profit for each operating segment is computed based on net sales, less cost of goods sold, less any selling, general, and administrative expenses associated with the segment. The selling, general, and administrative expenses used to compute each segment’s operating profit are comprised of SG&A expense directly associated with those segments, plus overhead expenses that are allocable to operating segments. In connection with the acquisition of OXO, we agreed that World Kitchen, Inc. would perform certain corporate functions for OXO for a transitional period of time. The costs of these functions are reflected in SG&A for the Housewares segment’s operating income. These costs are currently expected to continue to be incurred through the end of fiscal 2006. During this transitional period, we have not made an allocation of our corporate overhead to OXO. We do not expect to make any allocation of our corporate overhead to OXO until such time as the transition services provided by World Kitchen, Inc. terminate and are assumed by Helen of Troy. When we decide that such allocations are appropriate, there may be some reduction in operating income for the Housewares segment, offset by an equal increase in operating income for the Personal Care segment. The extent of this operating income impact between the segments has yet to be determined.

      The Personal Care segment’s operating income decreased $8,781,000, or 10.2 percent for fiscal 2005 compared to fiscal 2004, and increased $35,572,000, or 70.9 percent for fiscal 2004 compared to fiscal 2003. The Personal Care segment’s operating income as a percentage of the segment’s net sales was 15.4, 18.1, and 13.2 percent for fiscal 2005, 2004 and 2003, respectively. Increased personnel expenses, increased incentive compensation costs, increased consulting fees and depreciation associated with our new information system which was placed into service early in our third fiscal quarter of fiscal 2005, increased consulting fees resulting from our compliance efforts with Section 404 of the Sarbanes-Oxley Act of 2002, and an exchange rate loss of $1,142,000 in fiscal 2005 versus an exchange rate gain of $1,216,000 in fiscal 2004, accounted for most of the decline in fiscal 2005 operating income. In fiscal 2004, net sales growth, improved gross margins, and decreased SG&A, as previously discussed were the significant contributing factors to the increased operating income in fiscal 2004 when compared to fiscal 2003.

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      The Housewares segment’s operating income as a percentage of net sales for the Housewares segment was 31.2 percent. In connection with the acquisition of OXO, we agreed that World Kitchen, Inc. would perform certain corporate functions for OXO for a transitional period of time. The costs of these functions are reflected in SG&A for the Housewares segment’s operating income. These costs are currently expected to continue to be incurred through the end of fiscal 2006. During this transitional period, we have not made an allocation of our corporate overhead to OXO. We do not expect to make any allocation of our corporate overhead to OXO until such time as the transition services provided by World Kitchen, Inc. terminate and are assumed by Helen of Troy. When we decide that such allocations are appropriate, there may be some reduction in operating income for the Housewares segment, offset by an equal increase in operating income for the Personal Care segment. The extent of this operating income impact between the segments has yet to be determined.

      Interest expense and Other income (expense):

      Interest expense increased to $9,870,000 in fiscal 2005 compared to $4,047,000 in fiscal 2004. The overall increase in interest expense is the result of the use of both short-term and long-term debt to fund the $273,173,000 acquisition of OXO and the $12,001,000 acquisition of TimeBlock® and Skin Milk® (See Notes 4, 5, 6 and 16 to our consolidated financial statements for related discussions of new debt financings and the OXO, TimeBlock® and Skin Milk® acquisitions).

      Interest expense increased to $4,047,000 in fiscal 2004 compared to $3,965,000 in fiscal 2003. The additional $82,000 was due to our draw of $32,000,000 under a revolving line of credit at the end of September 2003 to purchase the rights to produce and distribute Brut® products. By the end of fiscal year 2004 we had repaid all borrowings against the loan.

      Other income (expense) was ($2,575,000) of loss in fiscal 2005 compared to income of $4,312,000 and $2,333,000 in fiscal 2004 and 2003, respectively. The following schedule shows key components of other income (expense):

      * Calculation is not meaningful

      Interest income continued to trend lower in fiscal 2005, 2004 and 2003 due to lower levels of temporarily invested cash being held each year and lower interest rates in fiscal 2004.

      Realized and unrealized losses on securities for fiscal 2005 included a $2,910,000 loss on marketable securities acquired in connection with the sale of Tactica (see Note 15 to our consolidated financial statements). These marketable securities carry a restriction that prevents us from disposing of the stock prior to July 31, 2005, and are accordingly classified as stock available for sale. At acquisition, the securities had a market value of $3,030,000. At February 28, 2005 the market value of these securities was $120,000. Management determined the decline in market value to be other-than-temporary and accordingly recorded the $2,910,000 loss.

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      In fiscal 2004, we recorded other income of $2,600,000 in connection with the settlement of litigation.

Income tax expense:

      Our fiscal 2005 income tax expense was 14.4 percent of net income before taxes, a rate substantially lower than the 16.8 percent and 22.2 percent rates that we experienced in fiscal 2004 and 2003, respectively. The decline was due to the continuing trend of more of our income in fiscal 2005 and 2004 being taxed in lower tax rate jurisdictions as non-United States operations continue to become a larger portion of our business. Also, in fiscal 2005 we decreased our tax accruals by $2,046,000 due to the settlement reached with the United States Internal Revenue Service for fiscal years 2000 through 2002. Had these accruals not been adjusted, our income tax expense for fiscal 2005 would have been 16.7 percent of net income before taxes.

DISCONTINUED OPERATIONS

      As more fully described in Note (15) to our consolidated financial statements, on April 29, 2004 we completed the sale of our 55 percent interest in Tactica back to certain shareholder-operating managers. In exchange for our 55 percent share of Tactica and the release of $16,396,000 of its secured debt and accrued interest owed to us, we received marketable securities, intellectual properties, and the right to certain tax refunds.

      Tactica was sold because we believed it no longer fit into our business model. We believe selling Tactica was the most appropriate course of action to maximize our long-term shareholder value. The sale freed key corporate managers to concentrate their efforts on our remaining core operating divisions and to explore and integrate new business opportunities better suited to our long-term objectives and operating system.

      Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) provides accounting guidance for accounting for segments to be disposed by sale and, in our circumstances, requires us to report Tactica as a discontinued operation. In accordance with SFAS 144, we classified all assets and liabilities of Tactica as “Assets of discontinued segment held for sale” and “Liabilities of discontinued segment held for sale” in the accompanying consolidated balance sheet as of the end of fiscal 2004. SFAS 144 also requires us to report Tactica’s operating results, net of taxes, as a separate summarized component after net income from continuing operations for each year presented. In fiscal 2005, we recorded a loss of $222,000 net of taxes in connection with the discontinued operations of Tactica, to record its losses incurred for the fiscal year through the date of sale. For fiscal 2004, in connection with the discontinued operations of Tactica and the impairment of its goodwill, we recorded a total loss of $11,040,000, net of taxes. The accompanying consolidated statements of income and consolidated statements of cash flows contain all appropriate reclassifications for each year presented.

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FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES

      Selected measures of our liquidity and capital resources as of fiscal year end 2005 and 2004 are shown below:

Operating Activities:

      Our cash balance was $21,752,000 at the end of fiscal 2005 compared to $53,048,000 at the end of fiscal 2004. Operating activities provided $45,367,000 of cash during fiscal 2005, compared to $68,918,000 during fiscal 2004. During fiscal 2005 and fiscal 2004, net income, along with an increase in accounts payable, accrued expenses, and income taxes payable provided operating capital necessary to fund $72,356,000 and $18,915,000 of combined growth in accounts receivable and inventory, respectively.

      In 2005, the growth in inventory and accounts receivable were required to support growth in our new Housewares segment and the grooming, skin care, and hair care product groups in our Personal Care segment. Accounts receivable grew $38,938,000, or 53.5 percent during fiscal 2005, compared to an increase of $15,636,000, or 27.4 percent during fiscal 2004. Inventory grew $33,418,000 or 32.1 percent during fiscal 2005, compared to $3,279,000 or 3.3 percent during fiscal 2004.

      In fiscal 2005, our accounts receivable turnover increased to 70.0 days from 60.9 days in fiscal 2004. This growth is due to the impact throughout the year of growth in International sales, which has longer credit terms than United States customers, extended holiday dating in the third fiscal quarter, and the unfavorable temporary impact on our collection group’s operational effectiveness during the conversion to, and in the first few months after implementation of our new Global Information System. In fiscal 2005, inventory turnover increased to 2.4 from 2.2 in fiscal 2004. The increased turns were due to improved operations in our traditional appliance business and the growth in significance of our new lines of business, which can operate on lower inventory levels, principally the housewares, grooming, skin care, and hair care product groups.

      Working capital decreased to $156,312,000 at the end of fiscal 2005 compared to $166,445,000 at the end of fiscal 2004. Our current ratio dropped to 2.2:1 in fiscal 2005 from 3.2:1 in fiscal 2004. Our current ratio

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continues to drop because our current liabilities, principally accounts payable and accrued expenses, are growing in percentage terms faster than our current assets, principally receivables and inventory.

      Working capital was also affected by the prepayment of certain license renewals and royalty obligations in order to take advantage of discounts offered by licensors in exchange for early payment. In fiscal 2005, we spent $1,689,000 prepaying certain future minimum royalty obligations. In fiscal 2004, we spent $4,749,000 prepaying license renewals and $5,251,000 prepaying certain future minimum royalty obligations. In fiscal 2003, we spent $11,500,000 prepaying certain minimum royalty obligations.

Investing Activities:

      In fiscal 2005, investing activities used $279,114,000 of cash compared with $63,460,000 used in fiscal 2004. Listed below are some significant highlights of our 2005 investing activities:

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Financing Activities:

      During fiscal 2005, financing activities provided $202,451,000 of cash.

      As mentioned in Notes (5) and (6) to our consolidated financial statements, and further discussed under “Forward-Looking Information and Factors that may affect Future Results”, during the second quarter of fiscal 2005 we entered into a series of financing transactions that established a new five-year, $75,000,000 revolving credit facility, cancelled our existing $50,000,000 revolving credit facility, and we borrowed and subsequently repaid a $200,000,000 Term Loan Credit Agreement, and placed $225,000,000 of floating rate senior debt with five, seven and ten year maturities.

      On June 1, 2004, we acquired certain assets and liabilities of OXO International for a net cash purchase price of approximately $273,173,000, including the assumption of approximately $4,040,000 of certain liabilities. To fund the acquisition, we entered into a five-year $75,000,000 Revolving Line of Credit Agreement, dated as of June 1, 2004, with Bank of America, N.A. and other lenders and a one year $200,000,000 Term Loan Credit Agreement, dated as of June 1, 2004, with Banc of America Mezzanine Capital, LLC. The purchase price of the OXO International acquisition was funded by borrowings of $73,173,000 under the Revolving Line of Credit Agreement and $200,000,000 under the Term Loan Credit Agreement.

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      Borrowings under the Revolving Line of Credit Agreement accrue interest equal to the higher of the Federal Funds Rate plus 0.50 percent or Bank of America’s prime rate. Alternatively, upon timely election by the Company, borrowings accrue interest based on the respective 1, 2, 3, or 6-month LIBOR rate plus a margin of 0.75 percent to 1.25 percent based upon the “Leverage Ratio” at the time of the borrowing. The “Leverage Ratio” is defined by the Revolving Line of Credit Agreement as the ratio of total consolidated indebtedness, including the subject funding on such date to consolidated EBITDA (“Earnings Before Interest, Taxes, Depreciation and Amortization”) for the period of the four consecutive fiscal quarters most recently ended, with EBITDA adjusted on a pro forma basis to reflect the acquisition of OXO and the disposition of Tactica. The rates paid on various draws during the period from June 1, 2004 through February 28, 2005 ranged from 2.195 percent to 5.500 percent. The new credit line allows for the issuance of letters of credit up to $10,000,000. Outstanding letters of credit reduce the $75,000,000 borrowing limit dollar for dollar. Upon the execution of this new credit facility, our previous $50,000,000 unsecured revolving credit facility with Bank of America was cancelled. By the end of fiscal 2005, we had paid off all borrowings under the Revolving Line of Credit. The Revolving Line of Credit Agreement requires the maintenance of certain Debt/EBITDA, fixed charge coverage ratios, and other customary covenants. The agreement has been guaranteed, on a joint and several basis, by the parent company, Helen of Troy Limited, and certain U.S. subsidiaries.

      Borrowings under the $200,000,000 Term Loan Credit Agreement were subsequently paid off with the proceeds of the funding of $225,000,000 Floating Rate Senior Notes on June 29, 2004, as discussed in Notes (5) and (6) to the consolidated financial statements. For the period, outstanding borrowings under the Term Loan Credit Agreement accrued interest at LIBOR plus a margin of 1.125 percent.

      On June 29, 2004, we closed on a $225,000,000 Floating Rate Senior Note (“Senior Notes”) financing arranged by Banc of America Securities LLC with a group of ten financial institutions. The Senior Notes consist of $100,000,000 of five year notes, $50,000,000 of seven year notes, and $75,000,000 of ten year notes. Interest on the notes is payable quarterly. Interest rates are reset quarterly based on the 3 month LIBOR rate plus 85 basis points for the five and seven year notes, and the 3 month LIBOR rate plus 90 basis points for the ten year notes. Interest rates during the latest fiscal year on these notes ranged from 2.436 to 3.410 percent for the five and seven year notes, and 2.486 to 3.460 percent for the ten year notes. On March 29, 2005, the interest rates on these notes were reset for the next three months at 3.940 percent for the five and seven year notes and 3.990 percent for the ten year notes. The Senior Notes allow for prepayment subject to the following terms: five year notes can be prepaid in the first year with a 2 percent penalty, thereafter there is no penalty; seven and ten year notes can be prepaid after one year with a 1 percent penalty, and after two years with no penalty. The proceeds of the Senior Notes financing were used to repay the $200,000,000 borrowings under the Term Loan Credit Agreement, and $25,000,000 of the outstanding borrowings on our $75,000,000 Revolving Line of Credit Agreement. The Senior Notes are unsecured and require the maintenance of certain Debt/EBITDA, fixed charge coverage ratios, consolidated net worth levels, and other customary covenants. The Senior Notes have been guaranteed, on a joint and several basis, by the parent company, Helen of Troy Limited, and certain U.S. subsidiaries.

      At February 28, 2005, we were in compliance with all covenants under all of our financing agreements.

      With the completion of these financings, the Company now operates under substantially more leverage and incurs higher interest costs. While at February 29, 2004 we had total indebtedness of $55,000,000, as of February 28, 2005 we had $270,000,000 in total indebtedness outstanding. This increase in debt has added new constraints on our ability to operate our business, including but not limited to:

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      In connection with these financing transactions, we incurred $4,429,000 of financing costs. These costs are being amortized over the related lives of the various notes financed, ranging from 5 to 10 years.

      On September 22, 2003, certain of our subsidiaries entered into a $50,000,000 unsecured revolving credit facility with Bank of America to facilitate short-term borrowings and the issuance of letters of credit. All borrowings accrued interest equal to the higher of the Federal Funds Rate plus 0.50 percent or Bank of America’s prime rate. Alternatively, upon our timely election, borrowings accrued interest based on the respective 1, 2, 3, or 6 month LIBOR rate plus 0.75 percent (based upon the term of the borrowing). The credit facility allowed for the issuance of letters of credit up to $10,000,000. Outstanding letters of credit reduced the $50,000,000 borrowing limit dollar for dollar. The Bank of America credit agreement required the maintenance of certain Debt/EBITDA, fixed charge coverage ratios, and other customary covenants. The agreement was guaranteed, on a joint and several basis, by our parent company, Helen of Troy Limited, and certain U.S. subsidiaries. The credit facility was cancelled on June 1, 2004.

      During fiscal 2004 and fiscal 2003, we funded our activities with internally generated cash flow. While we borrowed from time to time against certain revolving credit facilities, all borrowings were short-term and repaid within months of the initial advances. Our most significant short-term borrowing was the draw of $32,000,000 of cash to initially fund our September 29, 2004 acquisition of the Brut® brand. As of fiscal year end 2004, we used internally generated operating cash flow to pay off this advance.

      During the second fiscal quarter of fiscal 2004, our Board of Directors approved a resolution to purchase, in open market or through private transactions, up to 3,000,000 shares of our common stock.

      During fiscal 2005, we purchased and retired a total of 376,060 shares of our common stock on the open market at a total purchase price of $11,243,000. An additional 381,650 shares of common stock were tendered

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by a key shareholder and retired as payment and satisfaction of $13,797,000 of stock purchase price and federal income tax obligations arising from the exercise of 1,000,000 options by a key employee-shareholder. This transaction was valued at an average share price of $36.15 using the average of the high bid and low bid prices for Helen of Troy stock as reported on the NASDAQ National Market System on the day the stock was tendered.

      During fiscal 2004, we purchased and retired a total of 344,000 shares of our common stock on the open market at a total purchase price of $7,877,000. An additional 462,126 shares of common stock were tendered by a key shareholder and retired as payment and satisfaction of $12,695,000 of stock purchase price and federal income tax obligations arising from the exercise of 1,200,000 options by a key employee-shareholder. This transaction was valued at an average share price of $27.47 using the average of the high bid and low bid prices for Helen of Troy stock as reported on the NASDAQ National Market System on the day the stock was tendered.

      Proceeds from employee option exercises and purchases through our employee stock purchase plan combined to provide $3,122,000 of cash and $8,320,000 in tax benefits in fiscal 2005, and $8,026,000 of cash and $8,045,000 in tax benefits in fiscal 2004.

Contractual Obligations:

      Our contractual obligations and commercial commitments, as of the end of fiscal 2005 were:

PAYMENTS DUE BY PERIOD ENDED THE LAST DAY OF FEBRUARY
(in thousands)

Off-Balance Sheet Arrangements:

      We have no existing activities involving special purpose entities or off-balance sheet financing.

Current and Future Capital Needs:

      Based on our current financial condition and current operations, we believe that cash flows from operations and available financing sources will continue to provide sufficient capital resources to fund the Company’s foreseeable short and long-term liquidity requirements. We expect our capital needs to stem primarily from the need to purchase sufficient levels of inventory and to carry normal levels of accounts receivable on our balance sheet. In addition, we continue to evaluate acquisition opportunities on a regular basis and may augment our internal growth with acquisitions of complementary businesses or product lines. We may

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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 at the time of such acquisition.

Non-monetary Transactions:

      During fiscal 2003, we entered into two non-monetary transactions in which we exchanged inventory with a net book value of approximately $3,100,000 for advertising credits. During fiscal 2005, we entered into additional non-monetary transactions in which we exchanged inventory with a book value of approximately $1,011,000, for additional advertising credits. As a result of these transactions, we recorded both sales and cost of goods sold equal to the exchanged inventory’s net book value, which approximated their fair value. We used approximately $1,196,000, $1,400,000 and $600,000 of the advertising credits during fiscal 2005, 2004 and 2003, respectively. As of February 28, 2005, all credits from the 2003 transaction had been utilized. All remaining credits are valued at $915,000 and $1,100,000 on our consolidated balance sheets at the end of fiscal 2005 and 2004, respectively, and are included in the line item entitled “Prepaid Assets.”

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.” We consider the following policies to meet this definition.

      Hong Kong Income Taxes - The Inland Revenue Department (“the IRD”) in Hong Kong has assessed a total of $32,086,000 (U.S.) in tax on certain profits of our foreign subsidiaries for the fiscal years 1995 through 2003. Hong Kong taxes income earned from certain activities conducted in Hong Kong. We are vigorously defending our position that we conducted the activities that produced the profits in question outside of Hong Kong. We also assert that we have complied with all applicable reporting and tax payment obligations.

      In connection with the IRD’s tax assessment for the fiscal years 1995 through 1997, we were required to purchase $3,282,000 (U.S.) in tax reserve certificates in Hong Kong. During fiscal 2005, we purchased additional tax reserve certificates in the amount of $25,144,000 (U.S.) as required by the IRD. With the purchase of these certificates, we have purchased tax reserve certificates totaling $28,426,000 for fiscal years 1995 through 2003. Tax reserve certificates represent the prepayment by a taxpayer of potential tax liabilities. The amounts paid for tax reserve certificates are refundable in the event that the value of the tax reserve certificates exceeds the related tax liability. These certificates are denominated in Hong Kong dollars and are subject to the risks associated with foreign currency fluctuations.

      If the IRD’s position were to prevail and if it were to assert the same position for fiscal years after fiscal year 2003, the resulting assessment could total $18,340,000 (U.S.) in taxes for fiscal year 2004 and 2005. We would vigorously disagree with the proposed adjustments and would aggressively contest this matter through applicable taxing authority and judicial procedures, as appropriate. Although the final resolution of the proposed adjustments is uncertain and involves unsettled areas of the law, based on currently available information, we have provided for our best estimate of the probable tax liability for this matter. While the resolution of the issue may result in tax liabilities which are significantly higher or lower than the reserves established for this matter, management currently believes that the resolution will not have a material effect on our consolidated financial position or liquidity. However, an unfavorable resolution could have a material effect on our consolidated results of operations or cash flows in the quarter in which an adjustment is recorded or the tax is due or paid.

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      Income Tax Provisions - We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes.

      We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. As changes occur in our assessments regarding our ability to recover our deferred tax assets, our tax provision is increased in any period in which we determine that the recovery is not probable.

      In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of other complex tax regulations. We recognize liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. If we ultimately determine that payment of these amounts are unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer probable. We record an additional charge in our provision for taxes in the period in which we determine that the recorded tax liability is less than we expect the ultimate assessment to be.

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

      Allowance for accounts receivable - We maintain an allowance for doubtful accounts for estimated losses that may result from the inability of our customers to make required payments. That estimate is based on historical collection experience, current economic and market conditions, and a review of the current status of each customer’s trade accounts receivable. If the financial condition of our customers were to deteriorate or our judgment regarding their financial condition was to change negatively, additional allowances may be required resulting in a charge to income in the period such determination was made. Conversely, if the financial condition of our customers were to improve or our judgment regarding their financial condition was to change positively, a reduction in the allowances may be required resulting in an increase in income in the period such determination was made.

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

      Carrying value of long-lived assets - We apply the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) and Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) in assessing the carrying values of our long-lived assets. SFAS 142 and SFAS 144 both require that we consider whether circumstances or conditions exist that suggest that the carrying value of a long-lived asset

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might be impaired. If such circumstances or conditions exist, further steps are required in order to determine whether the carrying value of the asset exceeds its fair market value. If analyses indicate that the asset’s carrying value does exceed its fair market value, the next step is to record a loss equal to the excess of the asset’s carrying value over its fair value. The steps required by SFAS 142 and SFAS 144 entail significant amounts of judgment and subjectivity. In fiscal 2004, we recorded a goodwill impairment charge in connection with the discontinued operations of our Tactica segment, as more fully described in Note (15) to our consolidated financial statements. No impairment charges were recorded in fiscal 2005.

      Economic useful life of intangible assets - We apply Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) in determining the useful economic lives of intangible assets that we acquire and that we report on our consolidated balance sheets. SFAS 142 requires that we amortize intangible assets, such as licenses and trademarks, over their economic useful lives, unless those assets’ economic useful lives are indefinite. If an intangible asset’s economic useful life is deemed to be indefinite, that asset is not amortized. When we acquire an intangible asset, we consider factors such as the asset’s history, our plans for that asset, and the market for products associated with the asset. We consider these same factors when reviewing the economic useful lives of our previously acquired intangible assets as well. We review the economic useful lives of our intangible assets at least annually. The determination of the economic useful life of an intangible asset requires a significant amount of judgment and entails significant subjectivity and uncertainty.

      For a more comprehensive list of our accounting policies, we encourage you to read Note 1 - Summary of Significant Accounting Policies, included in the accompanying consolidated financial statements. Note (1) contains several other policies, including policies governing the timing of revenue recognition, that are important to the preparation of our consolidated financial statements, but do not meet the SEC’s definition of critical accounting policies because they do not involve subjective or complex judgments.

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FORWARD-LOOKING INFORMATION AND FACTORS THAT MAY AFFECT FUTURE RESULTS

      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”, “plans”, “may”, “will”, “should”, “seeks”, “estimates”, “predict”, “potential”, “continue”, “intends”, and other similar words identify forward-looking statements. All statements that address operating results, events or developments that we expect or anticipate will occur in the future, including statements related to sales, earnings per share results, and statements expressing general expectations about future operating results, are forward-looking statements. 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.

Risk Factors

We rely on key senior management to operate our business; the loss of any of these senior managers could have an adverse impact on our business.

      We do not have a large group of senior executives in our business. Accordingly, we depend on a small number of key senior executives to run our business. In particular, we rely heavily on the services of Mr. Rubin, our Chief Executive Officer and President. We do not maintain “key man” life insurance on any of our key senior executives. The loss of any of these persons could have a material adverse effect on our business, financial condition and results of operations, particularly if we are unable to find, relocate and integrate adequate replacements for any of these persons. Further, in order to continue to grow our business, we will need to expand our key senior management team. We may be unable to attract or retain these persons. This could hinder our ability to grow our business and could disrupt our operations or materially adversely affect the success of our business.

We rely on our new Global Enterprise Resource Planning System; the failure of which could have an adverse impact on our profitability.

      On September 7, 2004, we implemented our new Global Enterprise Resource Planning System, along with other new technologies. With the implementation of this new system, most of our businesses with the significant exception of the newly acquired Housewares segment run under one integrated information system. We continue with the process of closely monitoring the new system and making normal and expected adjustments to improve its effectiveness. Complications resulting from the continuing process adjustments could potentially cause considerable disruptions to our business. The change from the old system to the new system continues to involve risk. Application program bugs, system conflict crashes, user error, data integrity issues, customer data conflicts and integration issues with certain remaining legacy systems all pose potential risks. Implementing new data standards and converting existing data to accommodate the new system’s requirements have required a significant effort across our entire organization. During the third fiscal quarter of 2005, we began the implementation and transition of our Housewares segment to the new system. We also are implementing several significant functionality enhancements. These additional implementations will continue to strain our internal resources, could impact our ability to do business, and may result in higher implementation costs and concurrent reallocation of human resources.

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      To support these new technologies, we are building and supporting a much larger and more complex information technology infrastructure. Increased computing capacity, power requirements, back-up capacities, broadband network infrastructure and increased security needs are all potential areas for failure and risk. We continue to rely substantially on outside vendors to assist us with implementation and enhancements and will continue to rely on certain vendors to assist us in maintaining some of our new infrastructure. Should they fail to perform due to events outside our control, it could affect our service levels and threaten our ability to conduct business. Over time, we plan to transition many of these third party services to our in-house staff and continue with significant training efforts in order to do so. The transition from third party services to in-house staffing of such services poses risks that could cause additional business disruptions. Finally, natural disasters may disrupt our infrastructure and our disaster recovery process may not be sufficient to protect against loss.

      Our business operations are dependent on our logistical systems, which include our order management system and our computerized warehouse network. These logistical systems depend on our new Global Enterprise Resource Planning System. Any interruption in our logistical systems would impact our ability to procure our products from our factories and suppliers, transport them to our distribution facilities, store them and deliver them to our customers on time and in the correct amounts.

Acquisitions and partnerships may be more costly or less profitable than anticipated and may adversely affect the price of our company stock.

      As previously mentioned, we acquired certain assets and liabilities of OXO International on June 1, 2004. On September 29, 2004, we acquired certain assets related to the worldwide production and distribution of TimeBlock® and Skin Milk® body and skin care products lines from Naterra International, Inc. TimeBlock® is a line of clinically tested anti-aging skin care products. Skin Milk® is a line of body, bath and skin care products enriched with real milk proteins, vitamins and botanical extracts. To the extent that these acquisitions are not favorably received by consumers, shareholders, analysts, and others in the investment community, the price of our common stock could be adversely affected. In addition, acquisitions involve numerous risks, including:

If we are unable to successfully integrate the operations, technologies, products, or personnel that we have acquired, our business, results of operations, and financial condition could be materially adversely affected.

Our sales are dependent on sales from several large customers and the loss of, or substantial decline in sales to, a top customer could have a material adverse effect on our revenues and profitability.

      A few customers account for a substantial percentage of our sales. Our financial condition and results of operations could suffer if we lost all or a portion of the sales to these customers. In particular, sales to Wal-Mart Stores, Inc., and its affiliate, SAM’S Club, accounted for approximately 25 percent of our net sales in fiscal 2005. While no other customer accounted for ten percent or more of net sales, our top 5 customers accounted for approximately 44 percent of fiscal 2005 net sales. Although we have long-standing relationships

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with our major customers, no contracts require these customers to buy from us, or to purchase a minimum amount of our products. A substantial decrease in sales to any of our major customers could have a material adverse effect on our financial condition and results of operations.

Our projections of sales and earnings are highly subjective and our future sales and earnings could vary in a material amount from our projections.

      Most of our major customers purchase our products electronically through electronic data interchange and expect us to promptly deliver products from our existing inventories to the customers’ retail stores or distribution centers. This method of ordering products allows our customers to immediately respond to changes in demands of their retail customers. From time to time, we provide projections to our shareholders and the investment community of our future sales and earnings. Since we do not have long-term purchase commitments from our major customers and the customer order and ship process is short, it is difficult for us to accurately predict the amount of our sales and related earnings. Our projections are based on management’s best estimate of sales using historical sales data and other information deemed relevant. These projections are highly subjective since sales to our customers can fluctuate substantially based on the demands of their retail customers. Additionally, changes in retailer inventory management strategies could make inventory management more difficult. Because our ability to forecast sales is highly subjective, there is a risk that our future sales and earnings could vary materially from our projections.

We are dependent on third party manufacturers, most of which are located in the Far East and any inability to obtain products from such manufacturers could have a material adverse effect on our business, financial condition and results of operations.

      All of our products are manufactured by unaffiliated companies, most of which are in the Far East. Risks associated with such foreign manufacturing include: changing international political relations; changes in laws, including tax laws, regulations and treaties; changes in labor laws, regulations, and policies; changes in customs duties and other trade barriers; changes in shipping costs; currency exchange fluctuations; local political unrest; an extended and complex transportation cycle; and the availability and cost of raw materials and merchandise. To date, these factors have not significantly affected our production in the Far East. However, any change that impairs our ability to obtain products from such manufacturers, or to obtain products at marketable rates, could have a material adverse effect on our business, financial condition and results of operations.

      With most of our manufacturers located in the Far East, our production lead times are relatively long. Therefore, we must commit to production in advance of customer orders. If we fail to forecast customer or consumer demand accurately, we may encounter difficulties in filling customer orders or in liquidating excess inventories, or may find that customers are canceling orders or returning products. Distribution difficulties may have an adverse effect on our business by increasing the amount of inventory and the cost of storing inventory. Any of these results could have a material adverse effect on our business, financial condition and results of operations.

We have incurred substantial debt to fund acquisitions which could have an adverse impact on our business and profitability.

      During the second quarter of fiscal 2005, we incurred substantial debt as more fully described in Notes (5) and (6) to the consolidated financial statements and under the “Financing Activities” section of our Management’s Discussion and Analysis of Financial Condition and Results of Operations. We are now operating under substantially more leverage and have begun to incur higher interest costs. This substantial increase in debt has added new constraints on our ability to operate our business, including but not limited to:

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Our disagreements with taxing authorities, tax compliance and the impact of changes in tax law could have an adverse impact on our business.

      Hong Kong Income Taxes - The Inland Revenue Department (“the IRD”) in Hong Kong has assessed a total of $32,086,000 (U.S.) in tax on certain profits of our foreign subsidiaries for the fiscal years 1995 through 2003. Hong Kong taxes income earned from certain activities conducted in Hong Kong. We are vigorously defending our position that we conducted the activities that produced the profits in question outside of Hong Kong. We also assert that we have complied with all applicable reporting and tax payment obligations.

      In connection with the IRD’s tax assessment for the fiscal years 1995 through 1997, we were required to purchase $3,282,000 (U.S.) in tax reserve certificates in Hong Kong. During fiscal 2005, we purchased additional tax reserve certificates in the amount of $25,144,000 (U.S.) as required by the IRD. With the purchase of these certificates, we have purchased tax reserve certificates totaling $28,426,000 for fiscal years 1995 through 2003. Tax reserve certificates represent the prepayment by a taxpayer of potential tax liabilities. The amounts paid for tax reserve certificates are refundable in the event that the value of the tax reserve certificates exceeds the related tax liability. These certificates are denominated in Hong Kong dollars and are subject to the risks associated with foreign currency fluctuations.

      If the IRD’s position were to prevail and if it were to assert the same position for fiscal years after fiscal year 2003, the resulting assessment could total $18,340,000 (U.S.) in taxes for fiscal years 2004 and 2005. We would vigorously disagree with the proposed adjustments and would aggressively contest this matter through applicable taxing authority and judicial procedures, as appropriate. Although the final resolution of the proposed

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adjustments is uncertain and involves unsettled areas of the law, based on currently available information, we have provided for our best estimate of the probable tax liability for this matter. While the resolution of the issue may result in tax liabilities which are significantly higher or lower than the reserves established for this matter, management currently believes that the resolution will not have a material effect on our consolidated financial position or liquidity. However, an unfavorable resolution could have a material effect on our consolidated results of operations or cash flows in the quarter in which an adjustment is recorded or the tax is due or paid.

      United States Income Taxes - The Internal Revenue Service (“the IRS”) has completed its audits of the U.S. consolidated federal tax returns for fiscal years 2000, 2001 and 2002. We previously disclosed that the IRS provided notice of proposed adjustments to taxes of approximately $13,424,000 for the three years under audit. We have resolved the various tax issues and reached an agreement on additional tax in the amount of $3,568,000. The resulting tax liability had already been provided for in our tax reserves and we have decreased our tax accruals related to the IRS audits for fiscal years 2000, 2001 and 2002, accordingly. This additional tax liability will be settled with funds already on deposit with the IRS.

      The American Jobs Creation Act (“AJCA”) was signed into law by the President on October 22, 2004. The AJCA creates a temporary incentive for U.S. multinational corporations to repatriate accumulated income earned outside the United States by providing an 85 percent dividend received deduction for certain dividends from controlled foreign corporations. According to the AJCA, the amount of eligible repatriation is limited to $500 million or the amount described as permanently reinvested earnings outside the United States in the most recent audited financial statements filed with the Securities and Exchange Commission on or before June 30, 2003. Whether the Company will ultimately take advantage of the provision depends on a number of factors including potential forthcoming Congressional actions, Treasury regulations and development of a qualified reinvestment plan.

      At this time, we have not made any changes to our existing position on reinvestment of foreign earnings subject to the AJCA. Our position is that we will permanently reinvest all of the undistributed earnings of the non-U.S. subsidiaries of certain U.S. subsidiaries, and accordingly have made no provision for U.S. federal income taxes on these undistributed earnings. At February 28, 2005, undistributed earnings for which we had not provided deferred U.S. federal income taxes totaled $37,748,000.

      Compliance with and Changes in Tax Law - The future impact of tax legislation, regulations or treaties, including any future legislation in the United States or abroad that would affect the companies or subsidiaries that comprise our consolidated group is always uncertain. Our ability to respond to such changes so that we maintain favorable tax treatment, the cost and complexity of such compliance, and its impact on our ability to operate in jurisdictions flexibly always poses a risk.

      In addition, because our Parent Company is a foreign corporation, we incur risks associated with our ability to avoid classification of our parent company as a Controlled Foreign Corporation. In order for us to preserve our current tax treatment of our non-U.S. earnings, it is critical we avoid Controlled Foreign Corporation status. A Controlled Foreign Corporation is a non-U.S. corporation whose largest U.S. shareholders (i.e., those owning 10 percent or more of its stock) together own more than 50 percent of the stock in such corporation. If a change of ownership of the Company were to occur such that the parent company became a Controlled Foreign Corporation, such a change could have a material negative effect on the largest U.S. shareholders and, in turn, on the Company’s business.

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We materially rely on licensed trademarks, the loss of which could have a material adverse effect on our revenues and profitability.

      We are materially dependent on our licensed trademarks as a substantial portion of our sales revenue comes from selling products under licensed trademarks. As a result, we are materially dependent upon the continued use of such trademarks, particularly the Vidal Sassoon® and Revlon® trademarks. Actions taken by licensors and other third parties could diminish greatly the value of any of our licensed trademarks. If we were unable to sell products under these licensed trademarks or the value of the trademarks were diminished by the licensor due to their continuing long-term financial capability to perform under the terms of the agreements or other reasons, or due to the actions of third parties, the effect on our business, financial condition and results of operations could be both negative and material.

In our Housewares segment, we rely on a third party to provide certain warehousing, order fulfillment and shipment services. Any inability of the third party to continue to provide us these services until such time as we can effectively transfer these operations to our own warehouse facilities, or problems encountered during the transition to our own warehouse facilities, could have an adverse affect on the Company’s revenues and profitability and impair this segment’s business.

On June 1, 2004 the Company announced that, indirectly through its subsidiary Helen of Troy Limited (Barbados), the Company had completed its acquisition of certain assets and liabilities of OXO from World Kitchen (GHC), LLC, WKI Holding Company, Inc. and World Kitchen, Inc. (collectively, “Seller”) for approximately $273.2 million plus the assumption of certain liabilities. In connection with this acquisition, Seller agreed to perform certain transitional services for the Company until March 31, 2005, including, the warehousing, order fulfillment and shipment of OXO products. Seller and the Company agreed to extend the period of these services until February 28, 2006. The Company is in the process of planning the transition of the warehousing, order fulfillment and shipment services from Seller to Company on or before February 28, 2006. This transition includes, the:

Any delays in construction of the new warehouse facility or problems encountered in connection with any of the foregoing requirements for transitioning the warehousing, order fulfillment and shipment services could have an adverse effect on the Company’s ability to fill orders for OXO products which could adversely affect the Company’s revenues and profitability and impair the OXO business.

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NEW ACCOUNTING GUIDANCE

      In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets—an amendment of APB Opinion No. 29.” The guidance in APB Opinion No. 29, “Accounting for Nonmonetary Transactions”, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of this Statement will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS 153 is not expected to have a material impact on our financial condition, results of operations, or cash flows.

      In March 2004, the EITF reached a consensus on EITF Issue No. 03-1 (“EITF 03-1”), “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” for which the measurement and recognition provisions were to be effective for reporting periods beginning after June 15, 2004. However, in September 2004, the EITF issued FASB Staff Position EITF Issue No. 03-1-1, “Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” which postponed the measurement and recognition provisions of EITF 03-1, but maintained the disclosure requirements for all investments within the scope of the guidance to be effective in annual financial statements for fiscal years ending after June 15, 2004. EITF 03-1 provides a three-step process for determining whether investments, including equity securities, are other than temporarily impaired and requires additional disclosures in annual financial statements. An investment is impaired if the fair value of the investment is less than its cost. EITF 03-1 outlines that an impairment would be considered other-than-temporary unless: a) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for the recovery of the fair value up to (or beyond) the cost of the investment, and b) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. In addition, the severity and duration of the impairment should also be considered in determining whether the impairment is other-than-temporary. We have applied the guidance provided by EITF 03-1 and determined that certain recent declines in the market value of securities acquired in connection with the sale of Tactica, as discussed in Notes (1) and (15) to our consolidated financial statements were “other-than-temporary”, and recorded the appropriate recognition of a loss in our fiscal 2005 operating results.

      In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (FAS 151). FAS 151 clarifies that abnormal inventory costs such as costs of idle facilities, excess freight and handling costs, and wasted materials (spoilage) are required to be recognized as current period charges. The provisions of FAS 151 are effective for fiscal years beginning June 15, 2005 or later. Management is currently evaluating the provisions of FAS 151 and does not expect that the adoption will have a material impact on the Company’s consolidated financial position or results of operations.

      In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123R “Share-Based Payment” which revises SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” The statement addresses the accounting for share-based payment transactions (for example, stock options and awards of restricted stock) in which an employer receives employee-services in exchange for equity securities of the company or other rights to receive future compensation that are based on the fair value of the company’s equity securities. The statement eliminates the use of APB Opinion No. 25, “Accounting for Stock

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Issued to Employees”, and generally requires such transactions be accounted for using a fair-value-based method and recording compensation expense rather than an optional pro forma disclosure of what expense amounts might be. The provisions of SFAS 123R are effective for public companies at the beginning of their first annual period beginning after June 15, 2005.

      We expect to adopt SFAS No. 123R on March 1, 2006.

      SFAS No. 123R permits public companies to adopt its requirements using one of two methods:

      The adoption of SFAS No. 123R’s fair value method will have an impact on our results of operations, although it will have an insignificant impact on our overall financial position. At February 28, 2005, we had 24,486 options available for issue under our employee stock option plan, and 336,000 options available for issue under our non-employee director’s stock option plan. The director’s stock option plan is set to terminate in June 2005, so effectively; we plan to issue only 56,000 options under this plan. Based upon our analysis of our current stock option plans in place, and assuming no further modifications to these plans, the estimated impact of adopting SFAS No. 123R for fiscal 2007 (fiscal year of adoption) will be to add approximately $856,000 net of tax benefits, to our annual operating expense. SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. We cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options).

      In December 2004, the FASB issued FASB Staff Position (FSP) No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Job Creation Act of 2004.” FSP No. 109-2 amends the existing accounting literature that requires companies to record deferred taxes on foreign earnings, unless they intend to indefinitely reinvest those earnings outside the U.S. This pronouncement temporarily allows companies that are evaluating whether to repatriate foreign earnings under the American Jobs Creation Act of 2004 to delay recognizing any related taxes until that decision is made. This pronouncement also requires companies that are considering repatriating earnings to disclose the status of their evaluation and the potential amounts being considered for repatriation. The U.S. Treasury Department has not issued final guidelines for applying the repatriation provisions of the American Jobs Creation Act. We continue to evaluate this legislation and FSP No. 109-2 to determine whether we will repatriate any foreign earnings and the impact, if any, that this pronouncement will have on our consolidated financial statements.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      Changes in interest rates and currency exchange rates represent our primary financial market risks. Fluctuation in interest rates causes variation in the amount of interest that we can earn on our available cash and the amount of interest expense we incur on our short-term and long-term borrowings. Interest on our long-term debt outstanding as of February 28, 2005 is both floating and fixed. Fixed rates are in place on $45,000,000 senior notes at rates ranging from 7.01 percent to 7.24 percent. Floating rates are in place on $225,000,000 of senior notes. Interest rates on these notes are reset quarterly based on the 3 month LIBOR rate plus 85 basis points for the five and seven year notes, and the 3 month LIBOR rate plus 90 basis points for the ten year notes. Interest rates during the latest fiscal year on these notes ranged from 2.436 to 3.410 percent for the five and seven year notes, and 2.486 to 3.460 percent for the ten year notes. On March 29, 2005, the interest rates on these notes were reset for the next three months at 3.940 percent for the five and seven year notes and 3.990 percent for the ten year notes. Increases in interest rates expose us to risk on this debt. Also, with respect to our $45,000,000 senior notes, as interest rates drop below the rates on this debt, our interest cost can exceed the cost of capital of companies who borrow at lower rates of interest.

      As mentioned in “Financial Condition, Liquidity, and Capital Resources”, interest rates on our revolving credit agreement vary based on the higher of the Federal Funds Rate + 0.50 percent or Bank of America’s prime rate, or alternatively at our election, the LIBOR rate and the period we lock LIBOR in for. Therefore, the potential for interest rate increases exposes us to interest rate risk on our revolving credit agreement. Our revolving credit agreement allows for maximum revolving borrowings of $75,000,000. At the end of fiscal 2005, there were no outstanding borrowings and $150,000 of open letters of credit under this credit agreement. The need to borrow under this agreement could ultimately subject us to higher interest rates, thus increasing the future cost of such debt. We do not currently hedge against interest rate risk.

      As mentioned under Notes (5) and (6) to our consolidated financial statements, “Financial Condition, Liquidity, and Capital Resources”, and “Forward-Looking Information and Factors that may affect Future Results”, on June 29, 2004, we established a new five year, $75,000,000 revolving credit facility, cancelled our existing $50,000,000 revolving credit facility, and placed $225,000,000 of floating rate senior debt with five, seven, and ten year maturities. Both the new revolving credit facility and the senior debt bear floating rates of interest. For example, a 1 percent increase in our base interest rates could impact us by adding up to $3,000,000 of additional interest cost annually. The addition of this level of debt exposure to our consolidated operations, and the uncertainty regarding the level of our future interest rates, substantially increases our risk profile.

      Because we purchase a majority of our inventory using U.S. Dollars, we are subject to minimal short-term foreign exchange rate risk in purchasing inventory. However long-term declines in the value of the U.S. Dollar could subject us to higher inventory costs. Such an increase in inventory costs could occur if foreign vendors were to react to such a decline by raising prices. Sales in the United States are transacted in U.S. Dollars. The majority of our sales in the United Kingdom are transacted in British Pounds, in France and Germany are transacted in Euros, in Canada are transacted in Canadian Dollars and in Mexico are transacted in Pesos. When the U.S. Dollar strengthens against other currencies in which we transact sales, we are exposed to foreign exchange losses on those sales because our foreign currency sales prices are not adjusted for currency fluctuations. When the U.S. Dollar weakens against those currencies, we could realize foreign currency gains.

      Our net sales denominated originally in currencies other than the U.S. Dollar totaled approximately $87,880,000, $73,259,000 and $43,366,000 during the fiscal years ended 2005, 2004 and 2003, respectively. In fiscal 2005, we incurred a foreign currency exchange loss of $1,142,000. We incurred foreign currency exchange gains totaling $1,216,000 and $1,638,000 for the fiscal years ended 2004 and 2003, respectively.

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      We hedge against foreign currency exchange rate-risk by entering into a series of forward contracts designated as cash flow hedges to protect against the foreign currency exchange risk inherent in our forecasted transactions denominated in currencies other than the U.S. Dollar. For transactions designated as cash flow hedges, the effective portion of the change in the fair value (arising from the change in the spot rates from period to period) is deferred in Other Comprehensive Income. These amounts are subsequently recognized in “Selling, general, and administrative expense” in the consolidated statements of income in the same period as the forecasted transactions close out over the remaining balance of their terms. The ineffective portion of the change in fair value (arising from the change in the difference between the spot rate and the forward rate) is recognized in the period it occurred. These amounts are also recognized in “Selling, general, and administrative expense” in the consolidated statements of income. We do not enter into any forward exchange contracts or similar instruments for trading or other speculative purposes.

      The following table summarizes the various forward contracts we designated as cash flow hedges that were open at the end of fiscal 2005 and 2004:

February 28, 2005

February 29, 2004

      Our cash flow hedges, while executed in order to minimize our foreign currency exchange rate risk, do subject us to fair value fluctuations on the underlying contracts. The following table shows the potential fair value gain or loss in U.S. Dollars that would arise from a hypothetical 10 percent change as of February 28, 2005 in each hedged currency’s forward rate.

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      This table is for risk analysis purposes and does not purport to represent actual losses or gains in fair value that we will incur. It is important to note that the change in value represents the estimated change in the fair value of the contracts. Because the contracts hedge an underlying exposure, we would expect a similar and opposite change in foreign exchange gains or losses over the same period as the contract. We expect that as currency market conditions warrant, and our foreign denominated transaction exposure grows, we will continue to execute additional contracts in order to hedge against potential foreign exchange losses.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE

All other schedules are omitted as the required information is included in the consolidated financial statements or is not applicable.

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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

      Helen of Troy’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined by Rules 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934, as amended.

      Our internal control system was designed by, or under the supervision of, the Company’s principal executive and principal financial officers, management, and other personnel, with guidance, where appropriate from the Company’s Board of Directors, to provide reasonable assurance to the Company’s management and board of directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

      There are inherent limitations in the effectiveness of any system of internal controls, including the possibility of human error and the circumvention or overriding of controls. Accordingly, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with our policies or procedures may deteriorate.

      The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of February 28, 2005. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

      Based on its assessment, management believes that, as of February 28, 2005, the Company’s internal control over financial reporting was effective based on those criteria to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

      In conducting our evaluation of the effectiveness of internal control over financial reporting, we have excluded the operating assets and liabilities and results of operations of OXO International, which we acquired on June 1, 2004, as permitted by Securities and Exchange Commission rules and regulations. See Note (16) for a further discussion of the OXO acquisition. The operating assets resulting from this acquisition constituted approximately 5.2 percent of consolidated assets as of February 28, 2005; and 13.8 percent of consolidated revenues and 24.5 percent of consolidated operating income for the year then ended.

      The Company’s independent registered public accounting firm, KPMG LLP, has issued an audit report on management’s assessment of the Company’s internal control over financial reporting. This report appears on page 51.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Helen of Troy Limited:

      We have audited the accompanying consolidated balance sheets of Helen of Troy Limited and subsidiaries (the Company) as of February 28, 2005 and February 29, 2004 and the related consolidated statements of income, stockholders’ equity and comprehensive loss, and cash flows for each of the years in the three year period ended February 28, 2005. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule titled “Schedule II — Valuation and Qualifying Accounts.” These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

      We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Helen of Troy Limited and subsidiaries as of February 28, 2005 and February 29, 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended February 28, 2005, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of February 28, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated May 14, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting. Our audit of internal control over financial reporting of the Company excluded an evaluation of the internal control over financial reporting of the Company’s Housewares segment containing the operations of OXO International. OXO International was acquired by the Company during the fiscal year ended February 28, 2005 and was excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of February 28, 2005.

/s/ KPMG LLP

El Paso, Texas
May 14, 2005

50

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Helen of Troy Limited:

      We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Helen of Troy Limited and subsidiaries (the Company) maintained effective internal control over financial reporting as of February 28, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

      A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and Board of Directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of February 28, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the COSO. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 28, 2005, based on criteria established in Internal Control—Integrated Framework issued by the COSO.

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      Helen of Troy Limited acquired OXO International during the fiscal year ended February 2005. Management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of February 28, 2005, OXO International’s internal control over financial reporting associated with total assets of $42,259,000 and net revenues of $80,143,000 included in the consolidated financial statements of the Company as of and for the year ended February 28, 2005. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of OXO International.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Helen of Troy Limited and subsidiaries as of February 28, 2005 and February 29, 2004, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three year period ended February 28, 2005, and our report dated May 14, 2005 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

El Paso, Texas
May 14, 2005

52

HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Balance Sheets

February 28, 2005 and February 29, 2004
(in thousands, except shares and par value)

See accompanying notes to consolidated financial statements.

53

HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Statements of Income
(in thousands, except per share data)