UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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 29, 2008

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

(Exact name of the registrant as specified in its charter)

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

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

NONE

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.                Yes [  ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.                       Yes [  ] No [X]

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 (§229.405 of this chapter) 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 a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [  ]                         Accelerated filer [X]                            Non-accelerated filer [  ]                     Smaller reporting company [  ]

                                               (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).                                 Yes [  ] No [X]

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of August 31, 2007, based upon the closing price of the common stock as reported by The NASDAQ Global Select Market on such date, was approximately $650,396,000.

As of May 7, 2008 there were 30,198,198 shares of Common Shares, $.10 par value per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required for Part III of this annual report will be set forth in and incorporated herein by reference into Part III of this report from the Company’s definitive Proxy Statement for the 2008 Annual General Meeting of Shareholders.

Index to Exhibits - Page 112

TABLE OF CONTENTS

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In this report and accompanying consolidated financial statements and notes thereto, unless the context suggests otherwise or otherwise indicated, references to “the Company,” “our Company,” “Helen of Troy,” “we,” “us” or “our” refer to Helen of Troy Limited and its subsidiaries, and amounts are expressed in thousands of U.S. Dollars.

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

                Certain written and oral statements made by our Company and subsidiaries 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 (“SEC”), in press releases, and in certain other oral and written presentations. Generally, the words “anticipates”, “believes”, “expects”, “plans”, “may”, “will”, “should”, “seeks”, “estimates”, “project”, “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 and are based upon our current expectations and various assumptions. We believe there is a reasonable basis for our expectations and assumptions, but there can be no assurance that we will realize our expectations or that our assumptions will prove correct.

Forward-looking statements are subject to risks that could cause them to differ materially from actual results.  Accordingly, we caution readers not to place undue reliance on forward-looking statements.  We believe that these risks include but are not limited to the risks described in this report under “Item 1A.  Risk Factors” and that are otherwise described from time to time in our SEC reports filed after this report.  As described later in this report, such risks, uncertainties and other important factors include, among others:

·      the departure and recruitment of key personnel;

·      our ability to deliver products to our customers in a timely manner and according to their fulfillment standards;

·      requirements to accurately project product demand and the timing of orders received from customers;

·      our relationship with key customers;

·      the costs of complying with the business demands and requirements of large sophisticated customers may adversely affect our gross profit and results of operations;

·      our dependence on foreign sources of supply and foreign manufacturing;

·      the impact of high costs of raw materials and energy on cost of sales and certain operating expenses;

·      our holding of auction rate securities which we may be unable to liquidate at their recorded values or at all;

·      circumstances which may contribute to future impairments of goodwill or indefinite-lived intangible assets;

·      our relationship with key licensors;

·      our dependence on the strength of retail economies;

·      our ability to develop and introduce a continuing stream of innovative new products to meet changing consumer preferences;

·      our expectation of future acquisitions and issues surrounding the integration of acquired business;

·      our use of debt to fund acquisitions and capital expenditures;

·      the costs, complexity and challenges of managing our global information systems;

·      the risks associated with a breach of our computer security systems;

·      the risks associated with tax audits and related disputes with taxing authorities;

·      our ability to continue to avoid classification as a controlled foreign corporation; and

·      litigation.

We undertake no obligation to publicly update or revise any forward-looking statements as a result of new information, future events, or otherwise.

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PART I

ITEM 1.  BUSINESS

GENERAL

We are a global designer, developer, importer and distributor of an expanding portfolio of brand-name consumer products.  We were incorporated as Helen of Troy Corporation in Texas in 1968 and reincorporated as Helen of Troy Limited in Bermuda in 1994.  We have two active segments: Personal Care and Housewares.  Our Personal Care products include hair dryers, straighteners, curling irons, hairsetters, women’s shavers, mirrors, hot air brushes, home hair clippers and trimmers, paraffin baths, massage cushions, footbaths, body massagers, brushes, combs, hair accessories, liquid hair styling products, men’s fragrances, men’s deodorants, foot powder, body powder, and skin care products.  Our Housewares segment reports the operations of OXO International (“OXO”) whose products include kitchen tools, cutlery, bar and wine accessories, household cleaning tools, food storage containers, tea kettles, trash cans, storage and organization products, hand tools, gardening tools, kitchen mitts and trivets, barbeque tools, and rechargeable lighting products.  We use third party manufacturers to produce our goods.  Both our Personal Care and Housewares segments sell their products primarily through mass merchandisers, drug chains, warehouse clubs, catalogs, grocery stores and specialty stores.  In addition, our appliances segment sells to beauty supply retailers and wholesalers.

On May 1, 2007, we acquired Belson Products (“Belson”), formerly the professional salon division of Applica Consumer Products, Inc.  By the end of the third fiscal quarter of fiscal 2008, we had substantially integrated Belson into our Personal Care segment.  Belson was acquired for a cash purchase price of $36,500 plus the assumption of certain liabilities.  This transaction was accounted for as a purchase of a business and was paid for using available cash on hand.  Belson is a supplier of personal care products to the professional salon industry. Belson markets its professional products to major beauty suppliers and other major distributors under brand names including Belson®, Belson Pro®, Gold ‘N Hot®, Curlmaster®, Premiere®, Profiles®, Comare®, Mega Hot®, and Shear Technology®.  Products include electrical hair care appliances, spa products and accessories, professional brushes and combs, and professional styling shears.  Belson products are principally distributed throughout the United States, as well as Canada and the United Kingdom.  We believe that Belson’s portfolio of professional salon products, in addition to our existing professional products, will continue to strengthen our leadership position in the professional distribution channels.

In each of our segments, we strive to be the first to market with a broad line of competitively priced innovative products.  We believe this strategy is one of our most important growth drivers.  Our goal is to provide consumers with unique features, better functionality and higher performance at competitive price points.  This strategy has allowed us to sustain, and in many categories to strengthen, our market position in many of our product lines.  As we extend our product lines and enter new product categories, we intend to expand our business in our existing customer base while attracting new customers.

As part of our overarching objective to grow our business and increase shareholder value, we have established five core initiatives. These initiatives and their key elements are outlined below:

·      Maximize high growth potential branded products.  We seek to maximize high growth products by selectively investing in consumer marketing propositions that we believe offer the best opportunities to capture market share and increase growth.  Ten key brands currently account for approximately 86 percent of our annual net sales volume.  When a brand fails to achieve a desired market potential, we evaluate whether to continue to invest in brand maintenance, exit the brand and/or selectively replace it with revenue streams from similar, more effectively performing branded products.

·      Accelerate our new product pipeline.  We strive to reduce the time required to develop and introduce new products to meet changing consumer preferences and take advantage of opportunities sooner.  A majority of our products are produced in China, where long production lead times are normal.  We continuously work with our manufacturing resources to simplify and shorten the length of our supply chain for new products.

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·      Leverage innovation.  We constantly seek ways to foster our culture of innovation and new product development.  We intend to enhance and extend our existing product categories and develop new allied product categories to grow our business.  We believe that new innovative products permit us to generate higher per unit sales prices and margins for both us and the customers we serve and increase the value of our brand base.

·      Broaden our growth opportunities.  We plan to continue to seek opportunities to acquire brands and product categories through aggressive external development and acquisitions.  For example, our recent acquisition of Belson provided us with nine significant brands that complement and broaden our existing professional product offerings.  When brand acquisition is not possible, we look for licensed brands that have developed substantial brand equity in product categories that will create synergies with our existing products.  For example, our recent licensing of Bed Head® and Toni&Guy® provides an opportunity to deliver professional quality appliances and accessories with Bed Head® branded products styled and packaged for introduction to a younger market through selective retail distribution channels and Toni&Guy® branded products targeted toward sophisticated retail buyers who appreciate European styling.

·      Reduce cost and increase productivity.  We seek to control our expenses and strengthen operating margins by eliminating unnecessary spending, co-innovating with our manufacturers to eliminate costs, leveraging technology, and making other tools and productivity drivers a key focus of our Company.

We present financial information for each of our operating segments in Note (13) of the consolidated financial statements. The matters discussed in this Item 1. “Business,” pertain to all existing operating segments, unless otherwise specified.

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LICENSES AND TRADEMARKS

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

·      Vidal Sassoon®, licensed from The Procter & Gamble Company;

·      Revlon®, licensed from Revlon Consumer Products Corporation;

·      Dr. Scholl’s®, licensed from Schering-Plough HealthCare Products, Inc.;

·      Scholl® (in areas other than North America), licensed from SSL International, PLC;

·      Sunbeam® and Health o meter®, licensed from Sunbeam Products, Inc.;

·      Sea Breeze®, licensed from Shiseido Company Ltd.;

·      Vitapointe®, licensed from Sara Lee Household and Body Care UK Limited;

·      Toni&Guy®, licensed from Mascolo Limited and its affiliates; and

·      Bed Head®, by TIGI licensed from an affiliate of Mascolo Limited.

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

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

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PRODUCTS

We market and sell a full line of personal care products and an expanding line of housewares products that we acquire, design and/or develop. 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, respond to market innovations and enhance existing products with the objective of improving our position in the personal care and housewares markets. Overall, in fiscal 2008, we introduced 526 new products across all of our categories compared to 389 and 474 new products introduced in fiscal 2007 and 2006, respectively.  Of the 526 products introduced during fiscal 2008, 25 of the products introduced were attributed to the Belson acquisition. Currently, 389 additional new products are in our product development pipeline for expected introduction in fiscal 2009.   The following discussion summarizes key product introductions and strategies we launched in fiscal 2008:

Appliances and Accessories:  In the retail category of our appliance business, our focus for much of fiscal 2008 was the domestic launch of our Bed Head® hair care appliances that use bright colors, fiber optics, and LED lights as part of their fashionable design appeal.  Bed Head® is targeted at retail consumers who want professional grade products. By fiscal year-end 2008, Bed Head® had become our third best selling brand in the retail appliance and accessory category (behind Revlon and Vidal Sassoon), and across all product categories was one of our top ten selling brands.  In Europe, we began marketing our Toni&Guy® line in the second quarter of fiscal 2007 and continued to stabilize and strengthen its distribution throughout fiscal 2008. Toni&Guy® shares the same approach as Bed Head® in the U.S., offering retail consumers professional grade products.  As of the end of fiscal 2008, Toni&Guy® was our third best selling appliance brand in Europe.

In our professional appliance category, we acquired Belson effective May 1, 2007.   We acquired Belson’s portfolio of professional salon products in order to strengthen our already existing leadership position in the professional distribution channels. We spent most of the second and third quarters of fiscal 2008, integrating the Belson business into our operating infrastructure and staffing positions required for its operations.  As we gained knowledge and experience with the business, we moved quickly to develop new product offerings into its existing brand portfolio and establish more cost-effective sourcing alternatives.  Belson markets under a number of brand names, the most significant under our ownership being Belson Pro®, Gold ‘N Hot®, Curlmaster®, Profiles®, Comare®, and Salon Creations®.

Men’s Grooming, Skin Care and Hair Care:  In our domestic markets, we significantly shifted our men’s grooming, skin care and hair care strategy during the year.  We now intend to focus our line extension efforts principally on the Brut® family of products, which we believe provides the most attractive opportunity for return on investment in this category, while maintaining the existing distribution of our other brands.  In the fourth quarter of fiscal 2007, we commenced our domestic re-introduction of the newly formulated Epil-Stop® product line.  In response to unsatisfactory consumer sales and the discontinuance of the Epil-Stop® line by certain retailers, we conducted a strategic review of the Epil-Stop® trademark in the third quarter of fiscal 2008. We also evaluated the future potential of our TimeBlock® brand in light of our recent experience with Epil-Stop®.  From these reviews, we concluded that the future undiscounted cash flows associated with these trademarks were insufficient to recover their carrying values.  We also believe that any significant additional investments in these brands will not generate potential returns in line with the Company’s investment expectations.  Accordingly, we recorded pretax impairment charges totaling $4,983 ($4,883 after tax) representing the total carrying value of these trademarks.  We currently expect to continue to hold these trademarks for use.

In Latin America, we continue to increase men’s grooming, skin care and hair care net sales and market penetration through a strategy of line extensions in selective markets targeted to reach new customers.  In the second half of the year, we worked on the Brut XT® line of men’s body sprays, which we presently expect to begin selling in Mexico in the first half of fiscal 2009.  We have also developed several product extensions to our Ammens line of skin care products, including an antibacterial gel, deodorants and selected baby products, that should commence distribution in the first half of fiscal 2009.

Housewares:  Our OXO® brands continue to exert significant influence in the U.S. kitchen gadget and tool markets.  OXO® products are based on the principles of Universal Design - a philosophy of making products that are easy to use for the widest possible spectrum of users.  Our development pipeline in this segment is extremely robust.  In fiscal 2008, we launched over 120 new items and currently have over 100 items scheduled for launch in fiscal 2009.   During the 2008 fiscal year, we launched our Good Grips® POP modular line of food storage containers which began shipping during the third quarter of fiscal 2008 and quickly became a top selling product category within our Housewares segment.  These containers are airtight, stackable and space-efficient.  New product offerings such as silicone utensils, sinkware, shower

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caddies and travel mugs also added significant incremental sales.  Overall, in fiscal 2008, significant new product introductions accounted for approximately $16,000 in incremental sales growth in the Housewares segment.

You can learn more about our products at www.hotus.com.  Information contained on the Company’s website is not included as a part of, or incorporated by reference into, this report.

SALES AND MARKETING

We now market our products in approximately 70 countries throughout the world.  Sales within the United States comprised approximately 78, 81 and 83 percent of total net sales in fiscal 2008, 2007, and 2006, respectively.  We sell our products through mass merchandisers, drug chains, warehouse clubs, catalogs, grocery stores, specialty stores, beauty supply retailers and wholesalers and distributors, as well as directly to end-user consumers. We collaborate extensively with our retail customers and in many instances produce specific versions of our product lines with exclusive designs and packaging for their stores, which are appropriately priced for their respective customer bases.

We market products through a combination of outside sales representatives and our own internal sales staff, supported by our internal marketing, category management, engineering, creative services and customer service staff.  These groups work closely together to develop pricing and distribution strategies and to design packaging and develop product line extensions and new products.

Regional sales and business unit managers work with our inside and outside sales representatives.  Our sales managers are organized by product group and geographic area and, in some cases, key customers.  Our regional managers are responsible for customer relations management, pricing, distribution strategies and sales generation.

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

We also use selective sports and entertainment venues to enhance our brand recognition and equity.  In fiscal 2004, Helen of Troy became the title sponsor of the Sun Bowl game, 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” was the official name for the December 2004 and 2005 games.  In fiscal 2007, we extended our agreement through the 2009 football season and changed the official name beginning with the December 2006 game to the “Brut® Sun Bowl.”  CBS Sports broadcasts the “Brut® Sun Bowl” game to nationwide audiences.

MANUFACTURING AND DISTRIBUTION

We contract with unaffiliated manufacturers in the Far East, primarily in the Peoples’ Republic of China, to manufacture a significant portion of our products in the appliance, accessories and housewares product categories.  Most of our grooming, skin care and hair care products are manufactured in North America.  For a discussion regarding our dependency on third party manufacturers, see Item 1A., “Risk Factors.”  For fiscal 2008, 2007 and 2006, goods manufactured by vendors in the Far East comprised approximately 87, 83 and 86 percent, respectively, of the dollar value of all segments’ inventory purchases.

Many of our key Far East manufacturers have been doing business with us since we went into business.  In some instances, we are now working with the second generation of entrepreneurs from the same families.  We believe these relationships give us a stable and sustainable advantage over many of our competitors.

Manufacturers who produce our products use formulas, molds, and certain other tooling, some of which we own, in manufacturing those products.  Both of our business segments employ numerous technical and quality control

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personnel responsible for ensuring high product quality.  Most of our products manufactured outside the countries in which they are sold are subject to import duties, which increases the amount we pay to obtain such products.

Our customers seek to minimize their inventory levels and often demand that we fulfill their orders within relatively short time frames. Consequently, our policy is to maintain several months of supply of inventory in order to meet our customers’ needs. Accordingly, we order products substantially in advance of the anticipated time of their sale to our customers. While we do not have any long-term formal arrangements with any of our suppliers, in most instances, we place purchase orders for products several months in advance of receipt of orders from our customers.  Our relationships and arrangements with most of our manufacturers allow for some flexibility in modifying the quantity, composition and delivery dates of orders.  Most purchase orders are in United States Dollars.  Because of our long lead times, from time to time we must discount end of model product or dispose of it in non-traditional ways to eliminate excess inventories.

In total, we occupy approximately 1,987,000 square feet of distribution space in various locations to support our operations.  At the end of February 2007, we completed the consolidation of our domestic appliance, housewares, men’s grooming, skin care and hair care inventories into a single 1,200,000 square foot Southaven, Mississippi distribution center. Approximately 69 percent of our consolidated sales volume shipped from this facility in fiscal 2008.  For a further discussion of the risks associated with our distribution capabilities, see Item 1A., “Risk Factors.”   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 distribution centers in El Paso, Texas; Southaven, Mississippi; and Toronto, Canada, or directly to customers. We ship substantially all products to North American customers from these distribution centers by ground transportation services. Products sold outside the United States and Canada are shipped from manufacturers, primarily in the Far East, to distribution centers in the Netherlands, the United Kingdom, Mexico, Brazil, Peru, Venezuela or directly to customers. We then ship products stored at these international distribution centers to distributors or retailers.

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®, Health o meter®, Dr. Scholl’s®, Bed Head® and Toni&Guy® trademarks are of particular importance to this segment’s business. New product introductions under licensed trademarks require approval from the respective licensors. The licensors must also approve the product packaging. Many of our license agreements require us to pay minimum royalties, meet minimum sales volumes, and make minimum levels of advertising expenditures.  To our knowledge, during fiscal 2008, we were in compliance with all terms of these licensing agreements.  The remaining duration of the license agreements for the Revlon®, Vidal Sassoon®, Sunbeam®, Dr. Scholl’s®, Bed Head® and Toni&Guy® trademarks, including the renewal terms, are approximately 55, 25, 12, 11, 6 and 5 years, respectively. If we decide to renew these agreements upon expiration of their current terms, we will be required to pay prescribed renewal fees at the time of that election. The discussion below covers the primary product categories that we currently sell under our key 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.

Revlon®: 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.

Vidal Sassoon®: Under an agreement with The Procter & Gamble Company, Helen of Troy is licensed to sell certain products bearing this 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 trimmers, mirrors, brushes, combs, and hair care accessories.

Dr. Scholl’s® and Scholl®:  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 SSL International, PLC.

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Sunbeam® and Health o meter®:  Under an agreement with Sunbeam Products, Inc., we are licensed to sell hair clippers and 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 these trademarks in the United States, Canada, Mexico, Central America, South America, and the Caribbean.

Sea Breeze®: We license the right to sell products in the United States, Canada, and the Caribbean under this trademark pursuant to a perpetual royalty free license from Shiseido Company Ltd.  We currently sell a line of liquid skin care products under this name in the United States and Canada.

Toni&Guy® and Bed Head®: Under an agreement with Mascolo Limited, we are licensed to sell hair care appliance products under the Toni&Guy® trademark in Western Europe and portions of Asia.  The license agreement is for five years, and may be extended an additional two years upon proper notice.

In December 2006, we also entered into two separate licensing arrangements with affiliates of Mascolo Limited for the use of the Bed Head® by TIGI trademark and for the use of the Toni&Guy® trademark.  Both licenses grant us the right to use the trademarks to market personal care products in the Western Hemisphere.  The initial terms of each license agreement expires in December 2011, and may be extended for five additional three-year terms upon proper notice.

Helen of Troy has filed or obtained licenses for over 500 design and utility patents in the United States and several foreign countries.  Most of these patents cover product designs in our Housewares segment, and over two-thirds of these are utility patents.  We believe the loss of the protection afforded by any one of these patents would not have a material adverse effect on our business as a whole.  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.  We believe our principal trademarks have high levels of brand name recognition among retailers and consumers throughout the world. In addition, we believe our brands have an established reputation for quality, reliability and value.  We monitor and protect our brands against infringement as we deem appropriate, however, 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 jurisdictions.

CUSTOMERS

Sales to Wal-Mart Stores, Inc. (including its affiliate, SAM’S Club) accounted for approximately 19, 21 and 22 percent of our net sales in fiscal 2008, 2007, and 2006, respectively.  Sales to Target Corporation accounted for approximately 9, 9 and 10 percent of our net sales in fiscal 2008, 2007, and 2006, respectively.  No other customers accounted for ten percent or more of net sales during those fiscal years.  Sales to our top five customers accounted for approximately 44, 45 and 46 percent in fiscal 2008, 2007, and 2006, respectively.

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 usually is no significant backlog of orders in any of our distribution channels.

COMPETITIVE CONDITIONS

The markets in which we sell our products are very competitive and highly mature.  The rapid growth of large mass merchandisers, together with changes in consumer shopping patterns, have contributed to a significant consolidation of the consumer products retail industry and the formation of dominant multi-category retailers with strong negotiating power.  Current trends among retailers include fostering high levels of competition among suppliers, the requirement to maintain or reduce prices and deliver products under shorter lead times.  Another current trend is for retailers to import generic products directly from foreign sources and to source and sell products under their own private label brands that compete with our Company’s products.  We believe that we have certain key competitive advantages, such as well recognized brands, engineering expertise and innovation, sourcing and supply chain know-how, and productive co-development relationships with our Far East manufacturers, some of which have been built over 30 years or more of

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working together. We believe these advantages allow us to bring our retailers a value proposition in our products that can significantly out-perform private label products.  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 Conair Corporation, Farouk Systems, Inc. (Chi), T3 Micro, Inc., International Consulting Associates, Inc. (InfraShine), Spectrum Brands, Inc., Goody Products, Inc., a division of Newell Rubbermaid, Inc., Homedics-U.S.A, Inc., Chattem, Inc., KAO Brands Company, The Procter & Gamble Company, LÓréal, Unilever, and Alberto-Culver Company. In the Housewares segment, the competition is highly fragmented.  Our primary competitors in that segment include KitchenAid (Lifetime Brands, Inc.), Zyliss AG, Copco (Wilton Industries, Inc.), Simple Human,  Casabella and Interdesign, Inc.  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 32, 34, and 34 percent of fiscal 2008, 2007 and 2006 net sales, respectively. Our lowest net sales usually occur in our first fiscal quarter, which accounted for approximately 22, 21 and 22 percent of fiscal 2008, 2007 and 2006 net sales, respectively.  As a result of the seasonality of sales, our working capital needs fluctuate during the year.

GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS

Our operations are subject to national, state, local and provincial jurisdictions’ environmental and health and safety laws and regulations, including those that impose workplace standards and regulate the discharge of pollutants into the environment and establish standards for the handling, generation, emission, release, discharge, treatment, storage and disposal of materials and substances including solid and hazardous wastes. We believe that we are in material compliance with these laws and regulations. Further, the cost of maintaining compliance has not had a material adverse effect on our business, consolidated results of operations and consolidated financial condition, nor do we expect it to do so in the foreseeable future.  Due to the nature of our operations and the frequently changing nature of environmental compliance standards and technology, we cannot predict with any certainty that future material capital or operating expenditures will not be required in order to comply with applicable environmental laws and regulations.

In July 2006, RoHS (Restriction of Hazardous Substances), a new European Directive became effective.  RoHS requires that electrical and electronic equipment sold in the European Union comply with certain requirements regarding maximum allowable levels of lead, cadmium, mercury, hexavalent chromium, polybrominated biphenyls (PBBs), and polybrominated diphenyl ethers (PBDEs).  We became RoHS compliant at the time the directive was effective.

Our electrical products must meet the safety standards imposed in various national, state, local, and provincial jurisdictions.  In the U.S., we maintain our own testing facilities that have been certified by various recognized public and private testing standards setting groups including Underwriters Laboratories, Inc. and Intertek Testing Laboratories.   We also are certified under the Scheme of the International Electrotechnical Commission System for Conformity Testing and Certification of Electrical Equipment (IECEE).  The scheme facilitates the international exchange and acceptance of product-safety test results among participating Certification Bodies (CB) for national approval or certification in one or more countries, normally without the need for additional testing.  Currently, 50 countries participate in the CB scheme, which provides significant advantages including reduction of product certification and compliance costs and reduced certification lead-times.

Certain of our skin care products are regulated by the United States Food and Drug Administration (“FDA”).   Among other things, the FDA enforces statutory prohibitions against misbranded and adulterated products, establishes ingredients and manufacturing procedures for certain products, establishes standards of identity for certain products, determines the safety of products and establishes labeling standards and requirements. In addition, various states regulate these products by enforcing federal and state standards of identity for selected products, limiting the volatility and types of aerosol agents that can be used, grading products, inspecting production facilities and imposing their own labeling requirements.

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In our Housewares segment, where applicable, our products are designed to comply with NSF International and American National Standards Institute (“ANSI”) standards for product quality, materials composition and safety.

EMPLOYEES

As of fiscal year end 2008, we employed 931 full-time employees in the United States, Canada, Macao, China, Japan, Europe, Brazil, Peru, Venezuela, Chile and Mexico of which 151 are marketing and sales employees, 259 are distribution employees, 47 are engineering and development employees, and 474 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 (13) to the consolidated financial statements contains geographic information concerning our net sales and long-lived assets.

AVAILABLE INFORMATION

We maintain our main Internet site at the following address: http://www.hotus.com. The information contained on this website is not included as a part of, or incorporated by reference into, this report.  We make available on or through our main 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 SEC in accordance with the Securities Exchange Act of 1934, as amended (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 shares 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.

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ITEM 1A.  RISK FACTORS

The ownership of our common shares involves a number of risks and uncertainties.  When evaluating us and our business before making a decision regarding investment in our securities, potential investors should carefully consider the risk factors and uncertainties described below, together with other information contained in this report.  If any of the events or circumstances described below or elsewhere in this report actually occur, our business, financial condition or results of operations could be materially adversely affected.  The risks listed below are not the only risks that we face. Additional risks that are presently unknown to us or that we currently think are not significant may also impact our business operations.

We rely on our chief executive officer and a small number of other key senior managers to operate our business. The loss of any of these individuals could have a material adverse effect on our business.

We do not have a large group of senior managers in our business.  The loss of our chief executive officer or any of our senior managers could have a material adverse effect on our business, financial condition and results of operations, particularly if we are unable to hire or relocate and integrate suitable replacements on a timely basis or at all.  Further, in order to continue to grow our business, we will need to expand our 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 otherwise have a material adverse effect on our business.

Our ability to deliver products to our customers in a timely manner and to satisfy our customers’ fulfillment standards are subject to several factors, some of which are beyond our control.

Retailers place great emphasis on timely delivery of our products for specific selling seasons, especially during our third fiscal quarter, and on the fulfillment of consumer demand throughout the year. We cannot control all of the various factors that might affect product delivery to retailers. Vendor production delays, difficulties encountered in shipping from overseas as well as customs clearance are on-going risks of our business. We also rely upon third-party carriers for our product shipments from our distribution centers to customers, and we rely on the shipping arrangements our suppliers have made in the case of products shipped directly to retailers from the suppliers. Accordingly, we are subject to risks, including labor disputes, inclement weather, natural disasters, possible acts of terrorism, availability of shipping containers and increased security restrictions, associated with such carriers’ ability to provide delivery services to meet our shipping needs.  Failure to deliver products in a timely and effective manner to retailers could damage our reputation and brands and result in loss of customers or reduced orders.

To make our distribution operations more efficient, we have consolidated many of our U.S. distribution, receiving and storage functions into our Southaven, Mississippi distribution center. Approximately 69 percent of our consolidated sales volume shipped from this facility in fiscal 2008.  For this reason, any disruption in our distribution process in this facility, even for a few days, could adversely effect our business and operating results.

Additionally, our Mississippi distribution center operations have grown to a level where we may incur capacity constraints during our peak shipping season, which occurs during our third fiscal quarter each year.  These and other factors described above could cause delays in delivery of our products and increases in shipping and storage costs that could have a material and adverse effect on our business and operating results.

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

Most of our major customers purchase our products electronically through electronic data interchange and expect us to promptly deliver products from our existing inventories to the customers’ retail stores or distribution centers.  This method of ordering products allows our customers to immediately respond to changes in demands of their retail customers.  From time to time, we provide projections to our shareholders and the investment community of our future sales and earnings.  Since we do not require long-term purchase commitments from our major customers and the customer

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order and ship process is very short, it is difficult for us to accurately predict the amount of our future sales and related earnings.  Our projections are based on management’s best estimate of sales using historical sales data and other information deemed relevant.  These projections are highly subjective since sales to our customers can fluctuate substantially based on the demands of their retail customers and due to other risks described in this report. Additionally, changes in retailer inventory management strategies could make inventory management more difficult. Because our ability to forecast sales is highly subjective, there is a risk that our future sales and earnings could vary materially from our projections.

Our sales are dependent on sales to 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. (including its affiliate, SAM’S Club) and sales to Target Corporation accounted for approximately 19 percent and 9 percent, respectively, of our net sales in fiscal 2008. While only one customer accounted for ten percent or more of net sales in fiscal 2008, our top 5 customers accounted for approximately 44 percent of fiscal 2008 net sales.  We expect customer concentrations will continue to account for a significant portion of our sales.  Although we have long-standing relationships with our major customers, we generally do not have written agreements that require these customers to buy from us or to purchase a minimum amount of our products.  A substantial decrease in sales to any of our major customers could have a material adverse effect on our financial condition and results of operations.

With the growing trend towards retail trade consolidation, we are increasingly dependent upon key customers whose bargaining strength is growing. We may be negatively affected by changes in the policies of our customers, such as on-hand inventory reductions, limitations on access to shelf space, use of private label brands, price demands and other conditions, which could negatively impact our financial condition and results of operations.

A significant deterioration in the financial condition of our major customers could have a material adverse effect on our sales and profitability. We regularly monitor and evaluate the credit status of our customers and attempt to adjust sales terms as appropriate.  Despite these efforts, a bankruptcy filing by a key customer could have a material adverse effect on our business, financial condition and results of operations.  For further information regarding potential liquidity issues with a significant customer, see “Current and Future Capital Needs”, under Item 7.” Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note (19) to the consolidated financial statements.

Large sophisticated customers may take actions that adversely affect our gross profit and results of operations.

In recent years, we have observed a consumer trend away from traditional grocery and drug store channels and toward mass merchandisers, which include super centers and club stores.  This trend has resulted in the increased size and influence of these mass merchandisers. As these mass merchandisers grow larger and become more sophisticated, they may demand lower pricing, special packaging, or impose other requirements on product suppliers.  These business demands may relate to inventory practices, logistics, or other aspects of the customer-supplier relationship.  If we do not effectively respond to the demands of these mass merchandisers, they could decrease their purchases from us.  A reduction in the demand of our products by these mass merchandisers and the costs of complying with customer business demands could have a material adverse effect on our business, financial condition and operating results.

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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, principally in China.  This exposes us to risks associated with doing business globally, including: changing international political relations; labor availability and cost; 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.  The political, legal and cultural environment in the Far East is rapidly evolving, and 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.

We have relationships with over 200 third-party manufacturers.  During fiscal 2008, the top two manufacturers fulfilled approximately 25 percent of our product requirements.  Over the same period, our top five suppliers fulfilled approximately 43 percent of our product requirements.

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

Historically, labor in China has been readily available at relatively low cost as compared to labor costs in North America.  China has experienced rapid social, political and economic change in recent years. There is no assurance that labor will continue to be available in China at costs consistent with historical levels or that changes in labor or other laws will not be enacted which would have a material adverse effect on product costs in China.  Labor shortages in China could result in supply delays and disruptions and drive a substantial increase in labor costs.  Similarly, evolving government labor regulations and associated compliance standards could cause our product costs to rise or could cause manufacturing partners we rely on to exit the business.  This could have an adverse impact on product availability and quality.  The Chinese economy has experienced rapid expansion and highly fluctuating rates of inflation.  Higher general inflation rates will require manufacturers to continue to seek increased product prices.  During fiscal 2008, the Chinese Renminbi appreciated approximately 9 percent with respect to the U.S. Dollar.  To the extent the Renminbi continues to appreciate with respect to the U.S. Dollar, the Company may experience cost increases on such purchases, and this could adversely impact profitability. The Company may not be successful at implementing customer pricing or other actions in an effort to mitigate the related effects of the product cost increases.  Although China currently enjoys “most favored nation” trading status with the U.S., the U.S. government has in the past proposed to revoke such status and to impose higher tariffs on products imported from China. There is no assurance that our business will not be affected by any of the aforementioned risks, each of which could have a material adverse effect on our business, financial condition and results of operations.

High costs of raw materials and energy may result in increased cost of sales and certain operating expenses and adversely effect our results of operations and cash flow.

Significant variations in the costs and availability of raw materials and energy may negatively affect our results of operations.  Our vendors purchase significant amounts of metals and plastics to manufacture our products. They also purchase significant amounts of electricity to supply the energy required in their production processes.  The rising cost of fuel may also increase our transportation costs.  The cost of these raw materials and energy, in the aggregate, represents a significant portion of our cost of sales and certain operating expenses.  Our results of operations have been and could in the future be adversely affected by increases in these costs.  We have had some success in implementing price increases or passing on cost increases by moving customers to newer product models with enhancements that justify higher prices and we intend to continue these efforts.  We can make no assurances that these efforts will be successful in the future or will materially offset the cost increases we may incur.

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We hold certain auction rate securities that we may be unable to liquidate at their recorded values or at all due to credit concerns in the U.S. capital markets.  Protracted illiquidity and any deterioration in the credit ratings of the issuers, dealers or credit insurers may require us to reclassify these holdings at some point to long-term assets and record impairment charges.

For further information, see Notes (1) and (14) to the consolidated financial statements.  At February 29, 2008, all of our temporary investments were auction rate notes collateralized by student loans, which had a carrying value of $63,825.  Liquidity for these securities is normally dependent on an auction process that provides an opportunity to sell the security and resets the applicable interest rate at pre-determined intervals, ranging from 7 to 35 days.  An auction fails when there is insufficient demand.  However, this does not represent a default by the issuer of the security. Upon an auction failure, the interest rates reset based on a formula contained in the security, and this rate is generally higher than the current market rate.

Recent credit concerns in the capital markets have significantly reduced our ability to liquidate our auction rate securities.  At this time, there is a very limited demand for these securities and limited acceptable alternatives to liquidate such securities.  Based on current market conditions, we believe it is likely that auctions of our holdings in these securities will be unsuccessful in the near term, resulting in us continuing to hold securities beyond their next scheduled auction reset dates and limiting the short-term liquidity of these investments.  Management intends to reduce our holdings in these securities as circumstances allow, but believes we have sufficient liquidity from operating cash flows and available financial sources, including our revolving credit facility, which we believe will continue to provide sufficient capital resources to fund our foreseeable short and long-term liquidity requirements.

While these failures in the auction process have affected our ability to access these funds in the near term, based on the related information currently at hand, we do not believe that any of our holdings of these securities are impaired.  If the issuers and brokers are unable to successfully close future auctions, and their credit ratings deteriorate or the credit ratings of the credit insurers deteriorate, the Company may be required to reclassify its holdings in these securities to long-term assets and to record an impairment charge on these investments in the future, which could have a material adverse effect on our business, financial condition and results of operations.

If our goodwill or indefinite-lived intangible assets become impaired, we may be required to record significant impairment charges.

A substantial portion of our long-term assets consist of goodwill and other indefinite-lived intangible assets recorded as a result of past acquisitions.  Under generally accepted accounting principles, goodwill and indefinite-lived intangible assets are not amortized but are reviewed for impairment on an annual basis or more frequently whenever events or changes in circumstances indicate that their carrying value may not be recoverable.  Future events may occur that could adversely affect the reported value of the Company’s assets and require impairment charges. Such events may include, but are not limited to, strategic decisions to exit a business made in response to changes in economic, political and competitive conditions, the impact of the economic environment on our customer base, or our internal expectations with regard to future revenue growth and the assumptions we make when performing our annual impairment reviews.  As a result of such circumstances, we may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or indefinite-lived intangible assets is determined.  Any such impairment charges could have a material adverse effect on our business, financial condition and operating results.  For further information, including estimated impairment charges expected in the first quarter of fiscal 2009, see “Results of Operations” under Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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 any inability 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.

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We are subject to risks related to our dependence on the strength of retail economies.

Our business depends on the strength of the retail economies in various parts of the world, primarily in North America and to a lesser extent Europe, Latin America and the Far East. These retail economies are affected primarily by factors such as consumer demand and the condition of the retail industry, which, in turn, are affected by general economic conditions and specific events such as natural disasters, terrorist attacks and political unrest. The impact of these external factors is difficult to predict, and one or more of the factors could adversely impact our business. In recent years, the retail industry in the U.S. and, increasingly, elsewhere has been characterized by intense competition among retailers. Because such competition, particularly in weak retail economies, can cause retailers to struggle or fail, we must continuously monitor, and adapt to changes in, the profitability, creditworthiness and pricing policies of our customers.  A significant weakening of retail economies could have a material adverse effect on our business, financial condition and results of operations.

To compete successfully, we must continually develop and introduce innovative new products to meet changing consumer preferences.

Our long-term success in the competitive retail environment depends on our ability to develop and commercialize a continuing stream of innovative new products that meet changing consumer preferences and take advantage of opportunities sooner. We face the risk that our competitors will introduce innovative new products that compete with our products. Our core initiatives include fostering our culture of innovation and new product development, enhancing and extending our existing product categories and developing new allied product categories.  There are numerous uncertainties inherent in successfully developing and commercializing new products on a continuing basis and new product launches may not deliver expected growth in sales or operating income.  If we are unable to develop and introduce a continuing stream of new products, it may have an adverse effect on our business, financial condition and results of operations.

Acquisitions may be more costly or less profitable than anticipated or we may not be able to identify suitable new acquisition opportunities, which may constrain our prospects for future growth and profitability and adversely affect the price of our common shares.

We are constantly looking for opportunities to make complementary strategic business and/or brand acquisitions. These acquisitions, if not favorably received by consumers, shareholders, analysts, and others in the investment community, could have a material adverse effect on the price of our common shares.  In addition, any acquisition involves numerous risks, including:

·      difficulties in the assimilation of the operations, technologies, products and personnel associated with the acquisitions;

·      difficulties in integrating distribution channels;

·      diversion of management’s attention from other business concerns;

·      difficulties in transitioning and preserving customer, contractor, supplier and other important third party relationships;

·      difficulties realizing anticipated cost savings, synergies and other benefits related to an acquisition;

·      risks associated with subsequent operating asset write-offs, contingent liabilities, and impairment of related acquired intangible assets;

·      risks of entering markets in which we have no or limited experience; and

·      potential loss of key employees associated with the acquisitions.

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Any difficulties encountered with acquisitions could have a material adverse effect on our business, financial condition and operating results.

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

As a result of our debt obligations, we are operating under substantially more leverage and higher interest costs.  Our debt has added constraints on our ability to operate our business, including but not limited to:

·      our ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate purposes, or other purposes could be limited;

·      an increased portion of our cash flow from operations will be required to service our debt, which will reduce the funds available to us for our operations;

·      a significant portion of our debt is fixed or effectively fixed through the use of interest rate swaps and these rates may produce higher interest expense than would be available with floating rate debt, in the event of decreases in market interest rates;

·      our level of indebtedness will increase our vulnerability to general economic downturns and adverse industry conditions;

·      our debt service obligations could limit our flexibility in planning for, or reacting to, changes in our business and conditions in the industries in which we operate; and

·      our debt agreements contain financial and restrictive covenants, and our failure to comply with them could result in an event of default, which if not cured or waived, could have a material adverse effect on us. Significant restrictive covenants include limitations on, among other things, our ability under certain circumstances to:

· incur additional debt, including guarantees;

· incur certain types of liens;

· sell or otherwise dispose of assets;

· engage in mergers, acquisitions or consolidations;

· enter into substantial new lines of business; and

· enter into certain types of transactions with our affiliates.

We rely on our central Global Enterprise Resource Planning Systems and other peripheral information systems.  Interruptions in the operation of our computerized systems or other information technologies could have a material adverse effect on our operations and profitability.

We conduct most of our businesses under one integrated Global Enterprise Resource Planning System, which we implemented in September 2004.  Most of our operations are dependent on this system.  Any failures or disruptions in this system could cause considerable disruptions to our business and may have a material adverse effect on our business, financial condition and results of operations.

We remain in the process of transitioning our Mexican operations to our global information system.  This transition has experienced delays as a result of the refocus of our priorities and internal resources on the integration of the Belson Products business, a project which was completed in fiscal 2008.  As a result, the transition by our Mexican operations to our global information system is currently not expected to be substantially complete until later in fiscal 2009.

We continuously make adjustments to improve the effectiveness of our systems. Complications resulting from such adjustments could potentially cause considerable disruptions to our business.  Application program bugs, system

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conflict crashes, user error, data integrity issues, customer data conflicts and related integration issues all pose significant risks.

To support new technologies, we continue to support a growing technology infrastructure base. Increased computing capacity, power requirements, back-up capacities, broadband network infrastructure and increased security needs are all potential areas for disruption or failure.  We rely on certain outside vendors to assist us with implementation and enhancements and other vendors to assist us in maintaining some of our infrastructure.  Should any of these vendors fail to perform as expected, it could adversely affect our service levels and threaten our ability to conduct business.

Natural disasters or other extraordinary events may disrupt our information systems and other infrastructure, and our data recovery processes may not be sufficient to protect against loss. Any interruption or loss of data in our information or logistical systems could materially impact our ability to procure our products from our factories and suppliers, transport them to our distribution centers, and store and deliver them to our customers on time and in the correct amounts. These and other factors described above could have a material adverse effect on our business, financial condition and results of operations.

A breach of our computer security systems, and unauthorized intrusion could subject us to fraudulent use of sensitive information and/or damage to critical data and systems.  Such activity could subject us to litigation and various other claims and have a material adverse effect on our financial condition, results of operations and the reputation of our business.

Information systems require constant updates to their security policies and hardware systems to reduce the risk of unauthorized access, malicious destruction of data, or information theft.  We believe we have taken steps designed to strengthen the security of our computer systems and protocols and have instituted an ongoing program to continue to do so.  Nevertheless, there can be no assurance that we will not suffer a data compromise. We rely on commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential information.  Improper activities by third parties, advances in computer and software capabilities and encryption technology, new tools and discoveries and other events or developments may facilitate or result in a compromise or breach of our computer systems.

Any such compromises or breach could cause interruptions in our operations and might require us to spend significant management time and money investigating the event and dealing with local and federal law enforcement.  In addition, we could become the subject of litigation and various claims from our customers, employees, suppliers, service providers and shareholders.  Regardless of the merits and ultimate outcome of these matters, litigation and proceedings of this type are expensive to respond to and defend, and we could devote substantial resources and time to responding to and defending them. The ultimate resolution of any such litigation, claims and investigations could cause damage to our reputation and have a material adverse effect on our financial condition, results of operations and reputation.

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

We are involved in a tax audits and related disputes with various taxing jurisdictions.  We believe that we have complied with all applicable reporting and tax payment obligations and disagree with taxing authority positions on these various issues.  We are vigorously defending our tax positions through all available administrative and judicial avenues.  For more information about tax audits and related disputes, see Item 3. “Legal Proceedings,” and Note (8) to the consolidated financial statements.

Although the final resolution of these disputes is uncertain and involves unsettled areas of the law, based on currently available information, we have established reserves for our best estimate of the probable tax liability for these matters. The resolution of the issues may result in tax liabilities that are significantly higher or lower than the reserves established for these matters.  An unfavorable resolution on any matter could have a material effect on our consolidated results of operations or cash flows.

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The future impact of tax legislation, regulations or treaties, including any future legislation in the U.S. or abroad that would effect 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 effectively operate in jurisdictions always presents a risk.

Favorable tax treatment of our non- U.S. earnings is dependent on our ability to avoid classification as a Controlled Foreign Corporation. Changes in the composition of our shareholdings could have an impact on our classification. If our classification were to change, it could have a material adverse effect on the largest U.S. shareholders and, in turn on the Company’s business.

A non-U.S. corporation, such as ours, will constitute a “controlled foreign corporation” or “CFC” for U.S. federal income tax purposes if its largest U.S. shareholders (i.e., those owning 10 percent or more of its shares) together own more than 50 percent of the shares outstanding.  If the IRS or a court determined that we were a CFC, then each of our U.S. shareholders who own (directly, indirectly, or constructively) 10 percent or more of the total combined voting power of all classes of our stock on the last day of our taxable year would be required to include in gross income for U.S. federal income tax purposes its pro rata share of our “subpart F income” (and the subpart F income of any our subsidiaries determined to be a CFC) for the period during which we (and our non-U.S. subsidiaries) were a CFC. In addition, any gain on the sale of our shares realized by such a shareholder may be treated as ordinary income to the extent of the shareholder’s proportionate share of our and our CFC subsidiaries’ undistributed earnings and profits accumulated during the shareholder’s holding period of the shares while we are a CFC.

We are involved in securities class action litigation which could have a material adverse effect on our business, consolidated financial position, results of operations and cash flows.

An agreement in principle has been reached to settle the consolidated class action lawsuits filed on behalf of purchasers of publicly traded securities of the Company against the Company, Gerald J. Rubin, the Company’s Chairman of the Board, President and Chief Executive Officer, and Thomas J. Benson, the Company’s Chief Financial Officer. In the consolidated action, the plaintiffs alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act, and Rule 10b-5 thereunder. The class period stated in the complaint was October 12, 2004 through October 10, 2005.  The lawsuit was brought in the United States District Court for the Western District of Texas.  For further information, see Item 3. “Legal Proceedings,” and Note (10) to the consolidated financial statements.

The proposed settlement remains subject to a number of conditions, including court approval following notice to class members.  The court has scheduled a hearing for June 19, 2008, where it will consider approving the proposed settlement.  Under the proposed settlement, the lawsuit would be dismissed with prejudice in exchange for a cash payment of $4.5 million.  The Company’s insurance carrier will pay the settlement amount and the Company’s remaining legal and related fees associated with defending the lawsuit, because the Company has met its self-insured retention obligation.  The Company and the two officers of the Company named in the lawsuit continue to deny any and all allegations of wrongdoing, and, if the settlement is approved, they will receive a full release of all claims. The Company cannot make any assurances that the proposed settlement will be concluded or approved by the court.  If the proposed settlement is not concluded or approved by the court, additional negotiations or litigation could ensue putting us at risk of a future judgment or settlement that may have a material adverse effect on the Company’s financial position, results of operations and cash flows.

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ITEM 1B.  UNRESOLVED STAFF COMMENTS

Not Applicable.

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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 33 facilities, which include selling, procurement, administrative and distribution facilities worldwide.  All facilities operated by the Company are adequate for the purpose for which they are intended.  Information regarding the location, use, segment, ownership and approximate size of the facilities and undeveloped land as of February 29, 2008 is provided below:

*     Facility is expected to be vacated in June 2008.  The lease is now month-to-month.

**   New headquarters for Housewares Segment expected to be occupied in June 2008.

Our Southaven, Mississippi distribution center operations have grown to a level where we may incur capacity constraints during our peak shipping season, which occurs during our third fiscal quarter each year. We are currently evaluating alternatives to address this issue, including use of third party logistics providers, if necessary, and a re-balancing of certain distribution operations between our Southaven, Mississippi and El Paso, Texas distribution centers.

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ITEM 3.  LEGAL PROCEEDINGS

Securities Class Action Litigation – An agreement in principle has been reached to settle the consolidated class action lawsuits filed on behalf of purchasers of publicly traded securities of the Company against the Company, Gerald J. Rubin, the Company’s Chairman of the Board, President and Chief Executive Officer, and Thomas J. Benson, the Company’s Chief Financial Officer. In the consolidated action, the plaintiffs alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act, and Rule 10b-5 thereunder. The class period stated in the complaint was October 12, 2004 through October 10, 2005.  The lawsuit was brought in the United States District Court for the Western District of Texas.

The proposed settlement remains subject to a number of conditions, including court approval following notice to class members.  The court has scheduled a hearing for June 19, 2008, where it will consider approving the proposed settlement.  Under the proposed settlement, the lawsuit would be dismissed with prejudice in exchange for a cash payment of $4.5 million.  The Company’s insurance carrier will pay the settlement amount and the Company’s remaining legal and related fees associated with defending the lawsuit, because the Company has met its self-insured retention obligation.  The Company and the two officers of the Company named in the lawsuit continue to deny any and all allegations of wrongdoing, and, if the settlement is approved, they will receive a full release of all claims. The Company cannot make any assurances that the proposed settlement will be concluded or approved by the court.

United States Income Taxes - The IRS is currently examining the U.S. consolidated federal tax return for fiscal year 2005.  On March 31, 2008, the IRS provided notice of a proposed adjustment of $7,750 to taxes for fiscal year 2005.  The Company is vigorously contesting this adjustment.  To date, this is the only adjustment that has been proposed; however, the audit has not yet been concluded.  Although the ultimate outcome of the dispute with the IRS cannot be predicted with certainty, management is of the opinion that an adequate provision for taxes for fiscal 2005 has been made in our consolidated financial statements.

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 2008.

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PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

PRICE RANGE OF COMMON SHARES

Our common shares are listed on the NASDAQ Global Select Market (“NASDAQ”) [symbol: HELE].  The following table sets forth, for the periods indicated, in dollars per share, the high and low sales prices of the common shares as reported on the NASDAQ.  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 OF RECORD

Our common shares with a par value of $0.10 per share are our only class of equity security outstanding at February 29, 2008. As of May 7, 2008, there were approximately 288 holders of record of the Company’s common shares. Shares held in “nominee” or “street” name at each bank nominee or brokerage house are included in the number of shareholders of record as a single shareholder.

CASH DIVIDENDS

Our current policy is to retain earnings to provide funds for the operation and expansion of our business and for potential acquisitions.  We have not paid any cash dividends on our common shares since inception.  Our current intention is to pay no cash dividends in fiscal 2009.  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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ISSUER PURCHASES OF EQUITY SECURITIES

During the quarter ended August 31, 2003, our Board of Directors approved a resolution authorizing the purchase, in open market or through private transactions, of up to 3,000,000 common shares over an initial period extending through May 31, 2006.  On April 25, 2006, our Board of Directors approved a resolution to extend the existing plan to May 31, 2009.

During the fiscal quarter ended August 31, 2007, a key employee tendered 728,500 common shares having a market value of $20,271 as payment for the exercise price and related federal tax obligations arising from the exercise of options.  We accounted for this activity as a purchase and retirement of the shares at a $27.83 per share average price.  For the fiscal quarter ended November 30, 2007, we did not repurchase any common shares.  During the fiscal quarter ended February 29, 2008, we purchased and retired an additional 366,892 common shares under this resolution at a total purchase price of $5,731, for a $15.62 per share average price.  From September 1, 2003 through February 29, 2008, we have repurchased 2,659,228 common shares at a total cost of $71,614, or an average price per share of $26.93.  An additional 340,772 common shares remain authorized for purchase under this plan as of February 29, 2008.

The following table provides information with respect to our purchases of our common shares during the fourth quarter of fiscal 2008:

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PERFORMANCE GRAPH

The graph below compares the cumulative total return of our Company to the NASDAQ Market Index and a peer group index, assuming $100 invested March 1, 2003. The Peer Group Index is the Dow Jones—U.S. Personal Products, Broad Market Cap, Yearly, Total Return Index.  The comparisons in this table are required by the SEC and are not intended to forecast or be indicative of the possible future performance of our common shares.

The Performance Graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to the liabilities of Section 18 under the Securities Exchange Act.  In addition, it shall not be deemed incorporated by reference by any statement that incorporates this annual report on Form 10-K by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act, except to the extent that we specifically incorporate this information by reference.

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ITEM 6.  SELECTED FINANCIAL DATA

The selected consolidated income statement data for the years ended on the last day of February 2008, 2007 and 2006, and the selected consolidated balance sheet data as of the last day of February 2008 and 2007, have been derived from our audited consolidated financial statements included in this report.  The selected consolidated income statement data for the years ended on the last day of February 2005 and 2004, and the selected consolidated balance sheet data as of the last day of February 2006, 2005 and 2004, have been derived from our audited consolidated financial statements which are not included in this report.  Information for the years ended on the last day of February 2005 and 2004 contains certain reclassifications necessary to restate prior years’ operations of Tactica as a discontinued segment.  This information should be read together with the discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes to those statements included in this report.  All currency amounts are denominated in U.S. Dollars.

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ITEM 6.  SELECTED FINANCIAL DATA, CONTINUED

(1)  Fiscal year 2005 and 2004 results presented include 100 percent of the results of Tactica under the line item, “Loss from discontinued segment’s operations, net of tax effects.”  We acquired a 55 percent interest in Tactica in March 2000. On April 29, 2004 we completed the sale of our interest in Tactica back to certain of its key operating manager-shareholders. Accordingly, the results of operations of Tactica have been reclassified out of income from continuing operations and working capital has been presented to eliminate the impact of Tactica’s current assets and current liabilities.  Also, in the fourth quarter of fiscal 2004, we recorded a loss of $5,699 from the impairment of Tactica goodwill, net of $1,938 of related tax benefits.  Our consolidated financial statements for fiscal 2005 (for the period of time we owned Tactica) and 2004, as restated include 100 percent of Tactica’s net loss because Tactica had accumulated a net deficit at the time that we acquired our ownership interest, and because the minority shareholders of Tactica had not adequately guaranteed their portion of the accumulated deficit.

(2)  Fiscal year 2005 and thereafter includes the results of operations of OXO International, which we acquired on June 1, 2004 for a net cash purchase price of $273,173 including the assumption of certain liabilities.  At acquisition, we recorded $11,668 of working capital, $2,907 of property and equipment, and $258,578 of goodwill, trademarks and other intangible assets.  The acquisition was funded by a $73,173 Revolving Line of Credit advance and a $200,000 Term Loan Credit Agreement. The $200,000 Term Loan Credit Agreement and a portion of the Revolving Line of Credit advance were subsequently repaid with the proceeds of $225,000 Floating Rate Senior Notes issued on June 29, 2004.

(3)  Fiscal year 2008 includes the results of operations of Belson Products, which we acquired on May 1, 2007 for a net cash purchase price of $36,500 including the assumption of certain liabilities.  The acquisition was funded with cash.  At acquisition, we recorded $13,980 of working capital, $139 of fixed assets, and $22,381 of goodwill, trademarks and other intangible assets.

(4)  During fiscal 2008, we settled certain tax disputes with the Inland Revenue Department (the “IRD”), and the IRS.  As a result of these settlements, we recorded tax benefits totaling $9,313 as a current year provision.  These benefits represent the reversal of tax provisions previously established for the periods under dispute.  See Note (8) to the consolidated financial statement for more information on our income taxes.

(5)  In fiscal 2008, we repurchased 1,095,392 common shares at a cost of $26,002. No common shares were repurchased during the fiscal years ended 2007 and 2006. In fiscal 2005, we repurchased 757,710 common shares at a cost of $25,039.  In fiscal 2004, we repurchased 806,126 common shares at a cost of $20,572.  All shares repurchased were concurrently cancelled.

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the other sections of this report, including Part I, “Item 1.  Business”;  Part II, “Item 6. Selected Financial Data”; and Part II, “Item 8. Financial Statements and Supplementary Data.” The various sections of this MD&A contain a number of forward-looking statements, all of which are based on our current expectations. Actual results may differ materially due to a number of factors, including those discussed on Page 2 of this report in the section entitled “Information Regarding Forward-Looking Statements,”  Item 1A. “Risk Factors,” and in Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.”  In this MD&A, unless otherwise indicated, or the context suggests otherwise, amounts expressed are in thousands of U.S. Dollars.

OVERVIEW

Fiscal 2008 was a very challenging year due to deteriorating domestic economic conditions beginning in our second fiscal quarter and accelerating throughout the year.  Generally, through the first half of the fiscal year, our overall business performance was in line with our expectations.  In the second quarter of fiscal 2008, we identified the following emerging unfavorable domestic economic trends whose effects had an increasingly pervasive impact on consumer spending throughout the balance of the year:

·                  Rising gasoline, energy and food costs;

·                  A significant slowdown in the U.S. housing market;

·                  Tightening credit markets and the related resulting impact emerging from the recent sub-prime mortgage crisis, causing many financial institutions to record large asset impairments, which restricted liquidity in the general capital markets; and

·                  A general decline in consumer confidence.

These trends have combined to create a difficult domestic retail environment, and many of our retail partners have faced slowing same store sales trends.   We cannot predict at this time when conditions will start to change.  While our Housewares segment continued to grow and expand its sales base, our Personal Care segment, whose domestic product categories are in more entrenched market positions, experienced sales declines.  Overall fiscal 2008 net sales increased $17,616 or 2.8 percent when compared to fiscal 2007.

Also during the year, global economic conditions continued to put upward pressure on our product costs. These conditions included:

·                  Rising energy costs, transportation costs and the costs of the basic materials used to manufacture our products, namely: plastic resins, copper, stainless steel, and other metals;

·                  Declining labor availability and evolving government labor regulations and associated compliance standards are causing increases in labor costs in China, where we currently source a significant portion of our products; and

·                  The continued appreciation of the Chinese Renminbi with respect to the U.S. Dollar, which will likely increase future product costs.

With the combined higher sales base from our Housewares and Personal Care Segments, we were able to offset rising product costs with some selling, general and administrative expense efficiency gains which enabled us to finish fiscal 2008 with a $2,134 increase in our operating income, when compared to fiscal 2007.

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Net earnings in fiscal 2008 increased $11,422 or 22.8 percent when compared to fiscal 2007.  A significant amount of this increase was attributed to specified non-operating income items, including: the one-time effects of various tax settlements, lower interest rates paid on reduced long-term debt levels, higher interest income earned on higher average levels of cash equivalents and temporary investments, and a gain on the sale of land.  These items were partially offset by impairment charges of $4,883.

Significant Developments and Events. Other significant developments and events that occurred during fiscal year 2008 are described below.

·                  Acquisition of Belson Products:  On May 1, 2007, we acquired Belson, formerly the professional salon division of Applica Consumer Products, Inc. for a cash purchase price of $36,500 plus the assumption of liabilities.  This transaction was accounted for as a purchase of a business and was paid for using available cash on hand.  Belson is a supplier of personal care products to the professional salon industry. Belson markets its professional products to major beauty suppliers and other major distributors under brand names including Belson®, Belson Pro®, Gold ‘N Hot®, Curlmaster®, Premiere®, Profiles®, Comare®, Mega Hot®, and Shear Technology®.  Products include electrical hair care appliances, spa products and accessories, professional brushes and combs, and professional styling shears.  Belson products are principally distributed throughout the United States, as well as Canada and the United Kingdom.

During fiscal 2008, we completed the integration of the Belson operations into our business structure and system, and staffed our new Belson team. A key element of our long term profitability strategy will depend on the extent to which we can continue to leverage our Far East supplier network and relationships to establish new, lower sourcing cost alternatives for Belson’s products. Regarding our Belson product lines, we expect to see margins improve over the next fiscal year as we continue to work out of inventories on hand at the time of the Belson acquisition and replace these with new Belson products sourced through our existing Far East supplier network.  We expect that recent economic conditions, including increased labor and production costs in the Far East and elsewhere will make our profitability strategy more difficult to achieve.  We believe that Belson’s portfolio of professional salon products, in addition to our existing professional products, will continue to strengthen our leadership position in the professional distribution channels.  Belson’s net sales for fiscal 2008 were in line with our expectations upon acquisition.

·                  Domestic Distribution:  During fiscal 2007, we placed a great deal of attention on our domestic distribution infrastructure completing the consolidation of many of our U.S. distribution, receiving and storage functions into a facility located in Southaven, Mississippi.  In fiscal 2008, this facility shipped approximately 69 percent of our consolidated net sales volume.  Throughout fiscal 2008, we continued to gain operational knowledge in the new facility, which contributed to lower overall distribution costs as a percentage of net sales.  Distribution costs as a percentage of net sales were 4.8 percent in fiscal 2008, compared to 5.6 and 5.3 percent in fiscal years 2007 and 2006, respectively. Key drivers of the fiscal 2008 cost savings were improved domestic warehouse labor and materials efficiency, lower costs associated with customer chargebacks and lower overall facilities costs due to the elimination of rent on a prior distribution facility.

Our Mississippi distribution center operations have grown to a level where we may incur capacity constraints during our peak shipping season, which occurs during our third fiscal quarter each year.  We are currently evaluating alternatives to address this issue, including use of third party logistics providers, if necessary, and a re-balancing of certain distribution operations between our Southaven, Mississippi and El Paso, Texas distribution centers.  As a result, we expect distribution costs improvements to moderate in fiscal 2009.

·                  International Sales Growth:  In Europe and outside the Western Hemisphere, our business continued its growth from fiscal 2006.  Overall net sales were up 25.7 and 18.7 percent in fiscal 2008 and 2007, respectively.  A significant part of this increase was fueled by the addition of Toni&Guy®  personal care appliances to our product offerings, growth in net sales of the Vidal Sasson® branded appliances, and the expansion of our Housewares segment’s OXO® kitchen gadget sales in the region.

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Our Latin American business also continued to grow in fiscal 2008. In the region, we had revenue growth of 16.4 and 27.4 percent in fiscal 2008 and 2007, respectively.  Our best performing brands and product categories in the region are the Brut® fragrances, Ammens® foot and body powders, Revlon® appliances and Vidal Sassoon® appliances.  We continue to believe certain countries in Latin America present attractive opportunities for continued expansion because of strong economic growth, the growing stability of their democratic governments, and recent high levels of foreign investment in the region.  We intend to continue to transition our Mexican operations to our global information system during the remainder of fiscal 2009.

·                  Supply Chain and Other Operational Improvements:   We manage a complex supply chain and operating platform that during fiscal 2008 shipped approximately 140 million units to over 16,000 wholesale, retail, and individual customers.  Our Company and industry are facing challenges, including slowing U.S. and international economies, rising energy costs and domestic and international marketplace pricing pressures.  Continued consolidation and growth in the largest retailers has created a very competitive environment that requires careful target pricing, superb customer service, operational excellence in order to maintain deliveries, and continuous product and process innovation.  In this environment, we believe that a key way we will grow is by increasing our operational efficiency.  The implementation of our Global Enterprise Resource Planning System, now in operation for approximately 4 ½ years has required us to closely examine and re-think how we do business.  In fiscal years 2008, 2007 and 2006, direct corporate information systems costs included in our consolidated statements of income in the “Selling, general and administrative expenses” line were $8,642, $8,248 and $8,080.  These amounts do not include the cost of personnel, telecommunications, software and computer equipment charges incurred and paid directly by our various local operations outside of El Paso, Texas.  We continue to invest resources to extend the functionality and performance of the system.  We believe that timely and effective change and evolution in our systems will increase the total value proposition we offer to our customers and consumers, and thus increase our competitive advantage.

Throughout fiscal 2008, we completed several initiatives to incrementally streamline our supply chain and simplify workflows in order to reduce costs, improve responsiveness and transactional accuracy, and reduce lead-times for nearly all of these key processes.  In our Personal Care segment, we implemented limited sourcing of liquid grooming and skin care products out of China beginning in the second fiscal quarter of 2008.  We are also currently evaluating additional geographic sourcing alternatives for these products.  In our Housewares segment, we began the transition of the majority of our U.S. based sourcing to our existing supply chain operations in the Far East, with the goal of completing the transition in the first half of fiscal 2009.

Over the upcoming year, given the global economic trends and developments in China we have previously discussed, we expect that one of our biggest challenges will be to balance increases in product costs against the need and ability to raise our selling prices, while continuing to ensure a steady flow of product from source to customer.

·                  Linens ‘n Things Bankruptcy: On May 2, 2008, Linens Holding Co., the operator of Linens ‘n Things retail chain (“Linens”) filed for protection under chapter 11 of the U.S. Bankruptcy Code. As of February 29, 2008, we had $4,590 of accounts receivable outstanding from Linens.  We received our last payment on account from Linens on April 11, 2008, leaving us with accounts receivable due from Linens of $4,112.  The $4,112 balance consisted of $3,072 for sales originating on or before February 29, 2008 and $1,040 for sales originating after February 29, 2008.  All orders processed for Linens since April 11, 2008 have been on a cash-in-advance basis. The Linens accounts receivable are unsecured, and the amount that the Company will ultimately recover, if any, is not presently determinable. Although the Company maintains an allowance for doubtful accounts to cover a customer’s inability to pay all or a portion of their accounts receivable, no additional specific reserve was established as of February 29, 2008 for Linens. Our allowance for doubtful accounts at February 29, 2008 may not prove to be sufficient to cover any losses arising as a result of the Linens bankruptcy and future incremental bad debts charges would negatively affect our results of operations particularly in our Housewares segment.   In addition, Linens is a significant customer of the Company with fiscal 2008 net sales of approximately $1,300 and $17,300, for our Personal Care and Housewares segments, respectively.  It is possible that future levels of revenue from this customer may be significantly reduced or eliminated, depending on the ultimate resolution of Linens liquidity issues and its ability to successfully emerge from bankruptcy protection.

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·                  The Company historically has completed its analysis of the carrying value of our goodwill and other intangible asses and our analysis of the remaining useful economic lives of our intangible assets other than goodwill during the first quarter of each fiscal year.  Our analyses are not yet complete, however, based upon preliminary work done to date, we expect to recognize impairment charges during the first quarter of fiscal 2009 on certain identified indefinite-lived intangible assets held by our Personal Care segment. We currently estimate that the charge will range between $7,000 and $10,000, and will be recorded as a component of operating income in the Company’s income statement for the fiscal quarter ended May 31, 2008.  These charges will reflect the amounts by which the carrying values of these assets exceed their estimated fair values determined by their estimated future discounted cash flows.

Financial Highlights for Fiscal 2008

·                  Consolidated net sales increased 2.8 percent, or $17,616, to $652,548 in fiscal 2008 compared to $634,932 in fiscal 2007.  Personal Care segment consolidated net sales decreased 1.9 percent in fiscal 2008 when compared to fiscal 2007.  Housewares segment net sales increased 19.7 percent in fiscal 2008 when compared to fiscal 2007. Our net sales growth includes the benefit of a net positive foreign exchange impact of $5,610.

·                  Consolidated gross profit margin as a percentage of net sales decreased 0.8 percentage points to 43.2 percent in fiscal 2008 compared to 44.0 percent in fiscal 2007.

·                  Selling, general and administrative expense (“SG&A”) as a percentage of net sales decreased 1.1 percentage points to 31.8 percent in fiscal 2008 compared to 32.9 percent in fiscal 2007.

·                  During the third fiscal quarter of 2008, we recorded pretax impairment charges totaling $4,983 ($4,883 after tax) representing the carrying value of our Epil-Stop® and TimeBlock® brands.

·                  On September 9, 2007, we sold 16.5 acres of raw land adjacent to our El Paso, Texas office and distribution center.  The land was sold for $5,998, less selling costs of $390 and we recorded a pretax gain on the sale of $3,609.

·                  Interest expense was $15,025 in fiscal 2008 compared to $17,912 in fiscal 2007.  Lower interest expense was due to the repayment of $35,000 of long-term debt during the year and the impact of lower overall interest rates on our outstanding debt.

·                  Other income, net was $3,748 in fiscal 2008 compared to $2,643 in fiscal 2007.  The increase in other income was principally due to the additional interest income we earned on accumulating levels of temporarily invested cash and higher interest rates earned on our mix of temporary investments.

·                  Our income tax benefit was $236 in fiscal 2008, or -0.4 percent of earnings before income taxes, compared to $5,060 of income tax expense in fiscal 2007, or 9.2 percent of earnings before income taxes.  Fiscal 2008 income tax expense includes the benefits of $9,313 due to various tax settlements with the Hong Kong Inland Revenue Department and the IRS.

·                  Our net earnings increased to $61,509 in fiscal 2008 from $50,087 in fiscal 2007, or 22.8 percent, however a significant amount of the increase was attributed to specified non-operating income items, including: the one-time effects of various tax settlements, lower interest rates paid on reduced long-term debt levels, higher interest earned on cash equivalents and temporary investments, and a gain on the sale of land.  These items were partially offset by impairment charges of $4,883.

·                  Our diluted earnings per share increased to $1.93 in fiscal 2008 from $1.58 in fiscal 2007, or by 22.2 percent.

·                  Our total assets grew by $5,721, our inventory levels remained relatively flat and our total debt decreased by $35,000.  At the end of fiscal 2008, we had $121,676 of cash and temporary investments compared to $91,205 of cash and temporary investments at the end of fiscal 2007.

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Key Revenue and Net Earnings Growth Drivers for Fiscal 2009:  We have outlined the following specific objectives for fiscal year 2009 that we believe should help us increase sales and net earnings:

·                  Continued growth and expansion of the OXO® product lines and market distribution;

·                  Improved gross margins for Belson products as the sourcing is shifted to lower cost providers;

·                  Continued focus on selling, general and administrative expense reduction where possible;

·                  Price increases to retailers in categories with increased cost of goods where possible;

·                  Expanded sales and distribution of our Bed Head® by TIGI product line of appliances and related products; and

·                  Re-evaluate our Personal Care segment’s domestic product line mix, and its selling, branding and production forecasting operations.

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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.