Edgar Filing: HELEN OF TROY LTD

Unassociated Document

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended November 30, 2006

or

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission file number: 001-14669

HELEN OF TROY LIMITED

(Exact name of registrant as specified in its charter)

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

Clarenden House Church Street Hamilton, Bermuda
(Address of principal executive offices)

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

(915) 225-8000

(Registrant’s telephone number, including area code)

[Not Applicable]

(Former name, former address and former fiscal year, if changed since last report)

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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class		Outstanding at January 5, 2007
Common Shares, $0.10 par value per share		30,258,943 shares

Table of Contents

HELEN OF TROY LIMITED AND SUBSIDIARIES

INDEX - FORM 10-Q

			Page
PART I.	FINANCIAL INFORMATION
	Item 1	Financial Statements
		Consolidated Condensed Balance Sheets as of November 30, 2006 (unaudited) and February 28, 2006	3
		Consolidated Condensed Statements of Income (unaudited) for the Three Months and Nine Months Ended November 30, 2006 and November 30, 2005	4
		Consolidated Condensed Statements of Cash Flows (unaudited) for the Nine Months Ended November 30, 2006 and November 30, 2005	5
		Consolidated Condensed Statements of Comprehensive Income (unaudited) for the Three Months and Nine Months Ended November 30, 2006 and November 30, 2005	6
		Notes to Consolidated Condensed Financial Statements	7
	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
	Item 3	Quantitative and Qualitative Disclosures about Market Risk	41
	Item 4	Controls and Procedures	44
PART II.	OTHER INFORMATION
	Item 1	Legal Proceedings	45
	Item 1A	Risk Factors	47
	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	50
	Item 6	Exhibits	51
	Signatures		52

- 2 -

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HELEN OF TROY LIMITED AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
*(in thousands, except shares and par value)*


	November 30,			February 28,
	2006			2006
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	59,017		$	18,320
Trading securities, at market value		221			97
Foreign currency forward contracts		—			584
Receivables - principally trade, less allowance of $1,157 and $850		168,445			107,289
Inventories		146,155			168,401
Prepaid expenses		6,613			5,793
Deferred income tax benefits		13,360			10,690
Total current assets		393,811			311,174

Property and equipment, at cost less accumulated depreciation of $32,827 and $27,039		98,369			100,703
Goodwill		201,003			201,003
Trademarks, net of accumulated amortization of $229 and $225		158,061			157,711
License agreements, net of accumulated amortization of $15,593 and $14,514		26,722			27,801
Other intangible assets, net of accumulated amortization of $4,177 and $3,044		15,019			15,757
Tax certificates		25,144			28,425
Other assets		13,846			15,170
	$	931,975		$	857,744

Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt	$	10,000		$	10,000
Accounts payable, principally trade		42,607			30,175
Accrued expenses		76,304			54,145
Income taxes payable		27,848			31,286
Total current liabilities		156,759			125,606

Long-term compensation liability		1,735			1,706
Deferred income tax liability		164			81
Long-term debt, less current portion		257,660			254,974
Total liabilities		416,318			382,367

Commitments and contingencies (See Notes 3, 11 and 13)

Stockholders' equity
Cumulative preferred shares, non-voting, $1.00 par. Authorized 2,000,000 shares; none issued		—			—
Common shares, $.10 par. Authorized 50,000,000 shares; 30,255,243 and 30,013,172 shares issued and outstanding		3,025			3,001
Additional paid-in-capital		94,417			90,300
Retained earnings		421,282			380,916
Accumulated other comprehensive income (loss)		(3,067	)		1,160
Total stockholders' equity		515,657			475,377
	$	931,975		$	857,744

See accompanying notes to consolidated condensed financial statements.

- 3 -

HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Statements of Income (unaudited)

(in thousands, except per share data)


	Three Months Ended November 30,						Nine Months Ended November 30,
	2006			2005			2006			2005

Net sales	$	213,437		$	197,458		$	491,050		$	455,239
Cost of sales		121,960			111,414			274,964			250,285
Gross profit		91,477			86,044			216,086			204,954

Selling, general, and administrative expense		62,375			57,396			159,428			146,878
Operating income		29,102			28,648			56,658			58,076

Other income (expense):
Interest expense		(4,487	)		(4,259	)		(13,689	)		(11,317	)
Other income (expense), net		863			(623	)		1,940			(277	)
Total other income (expense)		(3,624	)		(4,882	)		(11,749	)		(11,594	)

Earnings before income taxes		25,478			23,766			44,909			46,482

Income tax expense (benefit):
Current		3,938			1,287			5,710			2,393
Deferred		(1,273	)		(187	)		(1,167	)		1,423
Net earnings	$	22,813		$	22,666		$	40,366		$	42,666

Earnings per share:
Basic	$	0.76		$	0.76		$	1.34		$	1.43
Diluted	$	0.72		$	0.72		$	1.28		$	1.34

Weighted average common shares used in
computing net earnings per share
Basic		30,160			29,935			30,074			29,895
Diluted		31,769			31,272			31,578			31,767

See accompanying notes to consolidated condensed financial statements.

- 4 -

HELEN OF TROY LIMITED AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows (unaudited)
*(in thousands)*


	Nine Months Ended November 30,
	2006			2005

Cash flows from operating activities:
Net earnings	$	40,366		$	42,666
Adjustments to reconcile net earnings to net cash provided / (used) by operating activities
Depreciation and amortization		10,756			8,738
Provision for doubtful receivables		(307	)		(1,086	)
Stock-based compensation expense		499			—
Unrealized (gain) / loss - trading securities		(34	)		30
Deferred taxes, net		(1,288	)		309
Gain on the sale of property, plant and equipment		(419	)		—
Changes in operating assets and liabilities:
Accounts receivable		(60,849	)		(52,816	)
Forward contracts		5,429			(3,312	)
Inventories		22,246			(47,266	)
Prepaid expenses		198			3,105
Other assets		2,582			(276	)
Accounts payable		12,432			22,711
Accrued expenses		11,687			7,226
Income taxes payable		(3,478	)		307
Net cash provided / (used) by operating activities		39,860			(19,664	)

Cash flows from investing activities:
Capital, license, trademark, and other intangible expenditures		(6,287	)		(48,302	)
Proceeds from the sale of property, plant and equipment		666			150
Net cash used by investing activities		(5,621	)		(48,152	)

Cash flows from financing activities:
Proceeds from debt		7,660			4,974
Repayment of debt		(4,974	)		—
Net borrowings on revolving line of credit		—			60,000
Payment of financing costs		—			(91	)
Proceeds from exercise of stock options and employee stock purchases		3,642			1,135
Share-based compensation tax benefit		130			—
Net cash provided by financing activities		6,458			66,018
Net increase / (decrease) in cash and cash equivalents		40,697			(1,798	)
Cash and cash equivalents, beginning of period		18,320			21,752
Cash and cash equivalents, end of period	$	59,017		$	19,954

Supplemental cash flow disclosures:
Interest paid	$	12,771		$	10,587
Income taxes paid (net of refunds)	$	8,562		$	3,015

See accompanying notes to consolidated condensed financial statements.

- 5 -

HELEN OF TROY LIMITED AND SUBSIDIARIES
Consolidated Condensed Statements Of Comprehensive Income (unaudited)
*(in thousands)*


	Three Months Ended November 30,					Nine Months Ended November 30,
	2006			2005		2006			2005

Net earnings, as reported	$	22,813		$	22,666	$	40,366		$	42,666
Other comprehensive income (loss), net of tax:
Cash flow hedges - Interest Rate Swaps		(1,793	)		—		(1,793	)		—
Cash flow hedges - Foreign Currency		(956	)		1,561		(2,434	)		4,252
Comprehensive income	$	20,064		$	24,227	$	36,139		$	46,918

See accompanying notes to consolidated condensed financial statements.

- 6 -

HELEN OF TROY LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

November 30, 2006

Note 1 - Basis of Presentation

In our opinion, the accompanying consolidated condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly our consolidated financial position as of November 30, 2006 and February 28, 2006, and the results of our consolidated operations for the three-month and nine-month periods ended November 30, 2006 and 2005. The same accounting policies are followed in preparing quarterly financial data as are followed in preparing annual data.

Due to the seasonal nature of our business, quarterly revenues, expenses, earnings and cash flows are not necessarily indicative of the results that may be expected for the full fiscal year. While we believe that the disclosures presented are adequate and the consolidated condensed financial statements are not misleading, these statements should be read in conjunction with the consolidated financial statements and the notes included in our latest annual report on Form 10-K, and our other reports on file with the Securities and Exchange Commission (“SEC”).

We have reclassified certain prior-period amounts, and in some cases provided additional information in our consolidated condensed financial statements and accompanying footnotes to conform to the current period’s presentation. These reclassifications have no impact on previously reported net earnings.

In these consolidated condensed financial statements, accompanying footnotes, and elsewhere in this report, amounts shown are in thousands of U.S. Dollars, except as otherwise indicated.

Note 2 - Adoption of New Accounting Standard for Share-Based Payments

The Company has equity awards outstanding under four share-based compensation plans. The plans consist of two employee stock option and restricted stock plans, a non-employee director stock option plan, and an employee stock purchase plan. These plans are described below. The plans are generally administered by the Compensation Committee of the Board of Directors, consisting of non-employee directors.

Effective March 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), ‘‘Share-Based Payment’’ (‘‘SFAS 123R’’), utilizing the modified prospective method whereby prior periods will not be restated for comparability. SFAS 123R requires recognition of share-based compensation expense in the statements of income over the vesting period based on the fair value of the award at the grant date. Previously, the Company used the intrinsic value method under Accounting Principles Board Opinion No. 25, ‘‘Accounting for Stock Issued to Employees’’ (‘‘APB 25’’), as amended by related interpretations of the Financial Accounting Standards Board (“FASB”). Under APB 25, no compensation cost was recognized for stock options because the quoted market price of the stock at the grant date was equal to the amount per share the employee had to pay to acquire the stock after fulfilling the vesting period. SFAS 123R supersedes APB 25 as well as Statement of Financial Accounting Standard 123 "Accounting for Stock-Based Compensation", which permitted pro forma footnote disclosures to report the difference between the fair value method and the intrinsic value method.

Under stock option and restricted stock plans adopted in 1994 and 1998, as amended (the "1994 Plan" and the "1998 Plan," respectively), we have reserved a total of 14,750,000 common shares for issuance to key officers and employees. Under these plans, we grant options to purchase our common shares at a price equal to or greater than the fair market value on the grant date. Both plans contain provisions for incentive stock options, non-qualified stock options and restricted share grants. Generally, options granted under the 1994 Plan and the 1998 Plan become exercisable immediately or over one, four, or five-year vesting periods and expire on dates ranging from seven to ten years from the date of grant. As of November 30, 2006, 569,086 shares remained available for issue and 6,418,858 options were outstanding under these plans.

- 7 -

Under a stock option plan for non-employee directors (the "Directors’ Plan") adopted in fiscal 1996, we reserved a total of 980,000 of our common shares for issuance to non-employee members of the Board of Directors. We granted options under the Directors' Plan at a price equal to the fair market value of our common shares at the date of grant. Options granted under the Directors' Plan vest one year from the date of issuance and expire ten years after issuance. The Directors’ Plan expired by its terms on June 6, 2005. On that date, the remaining 284,000 shares available for issue expired. As of November 30, 2006, 260,000 options were outstanding under this plan.

Under an employee stock purchase plan (the "Stock Purchase Plan"), we have reserved a total of 500,000 common shares for issuance to our employees, nearly all of whom are eligible to participate. Under the terms of the Stock Purchase Plan, employees authorize the withholding of from 1 percent to 15 percent of their wages or salaries to purchase our common shares. The purchase price for shares acquired under the Stock Purchase Plan is equal to the lower of 85 percent of the share’s fair market value on either the first day of each option period or the last day of each period. During the second quarter of fiscal 2007, plan participants acquired 12,485 shares at a price of $15.21 per share under the Stock Purchase Plan. During the third quarter of fiscal 2007, no shares were issued under the Stock Purchase Plan. At November 30, 2006, 319,231 shares remained available for future issue under this plan.

For the three-month and nine-month periods ending November 30, 2006, the Company expensed $130 and $500 pre-tax, respectively, for stock options issued and employee share purchases under the above plans. These amounts were classified in selling, general, and administrative expense in the consolidated condensed statements of income for the fiscal periods then ended. The following table highlights the impact of share based compensation expense:

SHARE BASED PAYMENT EXPENSE

(in thousands, except per share data)


	Three Months Ended November 30,				Nine Months Ended November 30,
	2006		2005 (1)		2006		2005 (1)

Stock options	$	130	$	—	$	450	$	—
Employee stock purchase plan		—		—		50		—
Share-based payment expense	$	130	$	—	$	500	$	—

Share-based payment expense, net of income tax benefits of $36 and $130 for the three and nine months ended November 30, 2006.	$	94	$	—	$	370	$	—

Earnings per share impact of share based payment expense:
Basic	$	0.00	$	—	$	0.01	$	—
Diluted	$	0.00	$	—	$	0.01	$	—

(1) Prior year amounts are before adoption of SFAS 123R under the modified prospective method. Under this method, periods prior to adoption are not restated.

- 8 -

The following table provides the pro forma effect on net earnings and earnings per share as if the fair-value-based measurement method had been applied to all stock-based compensation for the three-month and nine-month periods ended November 30, 2005:

PRO FORMA NET INCOME AND PRO FORMA EARNINGS PER SHARE
*(in thousands, except per share data)*


	November 30, 2005
	(Three Months)		(Nine Months)

Net income:
As reported	$	22,666	$	42,666
Share-based payment expense, net of income tax benefit of $170 and $408, respectively		299		1,049
Pro forma	$	22,367	$	41,617

Basic earnings per share:
As reported	$	0.76	$	1.43
Pro forma		0.75		1.39

Diluted earnings per share:
As reported	$	0.72	$	1.34
Pro forma		0.72		1.31

The fair value of all share-based payment awards are estimated using the Black-Scholes option pricing model with the following assumptions and weighted-average fair values for the three-month and nine-month periods ended November 30, 2006 and 2005:

FAIR VALUE OF AWARDS AND ASSUMPTIONS USED


	Three Months Ended November 30,					Nine Months Ended November 30,
	2006 [1]		2005			2006			2005

Weighted-average fair value of grants (in dollars)		N/A	$	6.78		$	7.26		$	7.25
Risk-free interest rate		N/A		4.33	%		4.95	%		4.20	%
Dividend yield		N/A		0.00	%		0.00	%		0.00	%
Expected volatility		N/A		41.45	%		39.90	%		41.66	%
Expected life (in years)		N/A		3.86			4.11			3.69

[1] No stock options were granted during the quarter.

The following describes how certain assumptions affecting the estimated fair value of options or discounted employee share purchases (“share based payments”) are determined. The risk-free interest rate is based on U.S. Treasury securities with maturities equal to the expected life of the share based payments. The dividend yield is computed as zero because the Company has not historically paid dividends nor does it expect to at this time. Expected volatility is based on a weighted average of the market implied volatility and historical volatility over the expected life of the underlying share based payments. The Company uses its historic experience to estimate the expected life of each stock-option grant and also to estimate the impact of exercise, forfeitures, termination and holding period behavior for fair value expensing purposes.

Employee share purchases vest immediately at the time of purchase. Accordingly, the fair value award associated with their discounted purchase price is expensed at the time of purchase.

- 9 -

A summary of option activity as of November 30, 2006, and changes during the nine-months then ended is as follows:

SUMMARY OF STOCK OPTION ACTIVITY
*(in thousands, except contractual term and per share data)*


									Weighted
									Average
				Weighted			Weighted		Remaining
				Average			Average		Contractual		Aggregate
				Exercise			Grant Date		Term		Intrinsic
	Options			Price			Fair Value		(in years)		Value

Outstanding at February 28, 2006		6,923		$	14.83		$	5.52		4.83	$	39,317
Granted		21			18.82
Exercised		(228	)		(12.60	)
Forfeited / expired		(37	)		(19.80	)
Outstanding at November 30, 2006		6,679		$	14.89		$	5.52		4.04	$	59,482

Exerciseable at November 30, 2006		6,427		$	14.79		$	5.48		3.92	$	57,915

The aggregate intrinsic value of options exercised during the nine-month period ended November 30, 2006 was $2,060. A summary of non-vested option activity as of November 30, 2006, and changes during the nine-month period then ended is as follows:

NON-VESTED STOCK OPTION ACTIVITY
*(in thousands, except per share data)*


				Weighted
				Average
	Non-Vested			Grant Date
	Options			Fair Value

Outstanding at February 28, 2006		410		$	6.27
Granted		21			7.16
Vested or forfeited		(179	)		(5.96	)
Outstanding at November 30, 2006		252		$	6.56

A summary of the Company’s total unrecognized share-based compensation cost as of November 30, 2006 is as follows:

UNRECOGNIZED SHARE BASED COMPENSATION EXPENSE
*(in thousands, except weighted average expense period data)*


			Weighted
			Average
			Remaining
			Period of Expense
	Unearned		Recognition
	Compensation		(in months)

Stock options	$	1,216		41.1

- 10 -

Note 3 - Litigation

Securities Class Action Litigation - Class action lawsuits have been filed and consolidated into one action 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, on behalf of purchasers of publicly traded securities of the Company. The Company understands that the plaintiffs allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 thereunder, on the grounds that the Company and the two officers engaged in a scheme to defraud the Company’s shareholders through the issuance of positive earnings guidance intended to artificially inflate the Company’s share price so that Mr. Rubin could sell almost 400,000 of the Company’s common shares at an inflated price. The plaintiffs are seeking unspecified damages, interest, fees, costs, an accounting of the insider trading proceeds, and injunctive relief, including an accounting of and the imposition of a constructive trust and/or asset freeze on the defendants’ insider trading proceeds. 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 Company intends to defend the foregoing lawsuit vigorously, but, because the lawsuit is still in the preliminary stages, the Company cannot predict the outcome and is not currently able to evaluate the likelihood of success or the range of potential loss, if any, that might be incurred in connection with the action. However, if the Company were to lose on any issues connected with the lawsuit or if the lawsuit is not settled on favorable terms, the judgement or settlement may have a material adverse effect on the Company's consolidated financial position, results of operations and cash flows. There is a risk that such litigation could result in substantial costs and divert management’s attention and resources from its business, which could adversely affect the Company's business. The Company carries insurance that provides an aggregate coverage of $20 million after a self-insured retention of $500 thousand for the period during which the claims were filed, but cannot evaluate at this time whether such coverage will be adequate to cover losses, if any, arising out of the lawsuit.

On May 15, 2006, the Company filed a motion to dismiss the aforementioned lawsuit citing numerous deficiencies with the claims asserted in the lawsuit. On June 29, 2006, the plaintiffs filed with the court their opposition to the Company’s motion to dismiss. On July 17, 2006, the Company filed a reply rebutting the plaintiffs’ June 29th opposition. As of the date this report was filed, this matter was before the court for its consideration.

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

Note 4 - Earnings per Share

Basic earnings per share is computed based upon the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed based upon the weighted average number of shares of common stock plus the effects of dilutive securities. The number of dilutive securities was 1,609,412 and 1,504,504 for the three- and nine-month periods ended November 30, 2006, respectively, and 1,337,269 and 1,872,714 for the three- and nine-month periods ended November 30, 2005. All dilutive securities during these periods consisted of stock options issued under our stock option plans. There were options to purchase common shares that were outstanding but not included in the computation of earnings per share because the exercise prices of such options were greater than the average market prices of our common shares. These options totaled 536,300 and 946,368 at November 30, 2006 and 2005, respectively.

- 11 -

Note 5 - Segment Information

In the tables that follow, we present two segments: Personal Care and Housewares. The Personal Care segment’s products include hair dryers, straighteners, curling irons, hairsetters, women’s shavers, mirrors, hot air brushes, home hair clippers, paraffin baths, massage cushions, footbaths, body massagers, brushes, combs, hair accessories, liquid hair styling products, men’s fragrances, men’s deodorants, body powder, and skin care products. The Housewares segment’s products include kitchen tools, cutlery, bar and wine accessories, household cleaning tools, tea kettles, trash cans, storage and organization products, hand tools, gardening tools, kitchen mitts and trivets, and barbeque tools. Both segments sell their portfolio of products principally through mass merchants, general retail and specialty retail outlets in the United States and other countries.

The accounting policies of our segments are the same as those described in the summary of significant accounting policies in Note 1 to the consolidated financial statements in our 2006 Annual Report in Form10-K, except as discussed below.

Operating profit for each operating segment is computed based on net sales, less cost of goods sold and any selling, general, and administrative expenses ("SG&A") associated with the segment. The selling, general, and administrative expenses used to compute each segment's operating profit are comprised of SG&A directly associated with the segment, plus overhead expenses that are allocable to the operating segment. In connection with the acquisition of our Housewares segment, the seller agreed to perform certain operating functions for the segment for a transitional period of time that ended February 28, 2006. The costs of these functions were reflected in SG&A for the Housewares segment’s operating income. During the transitional period, we did not make an allocation of our corporate overhead to Housewares. For the three-month and nine-month periods ended November 30, 2006, we began making an allocation of corporate overhead and distribution center expenses to Housewares in lieu of transition charges previously recorded. For the three-month and nine-month periods ended November 30, 2006, we allocated expenses totaling $3,690 and $9,448, respectively, to the Housewares segment, some of which were previously absorbed by the Personal Care segment. For the three-month and nine-month periods ended November 30, 2005, transition charges of $3,303 and $8,087, respectively, were used to compute the Housewares segments operating income.

Major expense categories presently allocated to the Housewares segment, in lieu of the transition charges the Housewares segment incurred prior to March 1, 2006, include the following:

	Customer Service;
	Credit, Collection and Accounting;
	Distribution Facility and Equipment Costs;
	Distribution Labor Charges; and
	General and Administrative Overhead.

During the first quarter of fiscal 2007, we completed the transition of our Housewares segment’s operations to our internal operating systems and our new distribution facility in Southaven, Mississippi. The process of consolidating our domestic appliance inventories into the same new facility is still underway with major activity planned during the last quarter of fiscal 2007. As a result of these transitions, we have incurred, and will continue to incur, additional expenses that we believe will decline as operations in the new facility stabilize at some point later in fiscal 2008.

We are in the process of re-evaluating our allocation methodology, and plan to change our methodology in fiscal 2008 to better reflect the evolving economics of our operation. At that time, we expect the new methodology to result in some reduction in operating income for the Housewares segment, offset by an increase in the operating income for the Personal Care segment. Until we finalize our approach, the extent of this operating income impact between the segments cannot be determined.

Other items of income and expense, including income taxes, are not allocated to operating segments.

- 12 -

The following tables contain segment information for the periods covered by our consolidated condensed statements of income:

THREE MONTHS ENDED NOVEMBER 30, 2006 AND 2005
*(in thousands)*


	Personal
November 30, 2006	Care		Housewares		Total

Net sales	$	173,741	$	39,696	$	213,437
Operating income		20,077		9,025		29,102
Capital, license, trademark and other intangible expenditures		1,456		1,083		2,539
Depreciation and amortization		2,182		1,227		3,409


	Personal
November 30, 2005	Care		Housewares		Total

Net sales	$	161,007	$	36,451	$	197,458
Operating income		19,045		9,603		28,648
Capital, license, trademark and other intangible expenditures		28,478		10,634		39,112
Depreciation and amortization		2,378		742		3,120

NINE MONTHS ENDED NOVEMBER 30, 2006 AND 2005
*(in thousands)*


	Personal
November 30, 2006	Care		Housewares		Total

Net sales	$	390,041	$	101,009	$	491,050
Operating income		35,970		20,688		56,658
Capital, license, trademark and other intangible expenditures		4,436		1,851		6,287
Depreciation and amortization		7,081		3,675		10,756


	Personal
November 30, 2005	Care		Housewares		Total

Net sales	$	362,384	$	92,855	$	455,239
Operating income		33,396		24,680		58,076
Capital, license, trademark and other intangible expenditures		36,795		11,507		48,302
Depreciation and amortization		6,443		2,295		8,738

The following tables contain net assets allocable to each segment for the periods covered by our consolidated condensed balance sheets:

IDENTIFIABLE NET ASSETS AT NOVEMBER 30, 2006 AND FEBRUARY 28, 2006
*(in thousands)*


	Personal
	Care		Housewares		Total

November 30, 2006	$	582,426	$	349,549	$	931,975
February 28, 2006		512,594		345,150		857,744

- 13 -

Note 6 - Property and Equipment

A summary of property and equipment is as follows:

PROPERTY AND EQUIPMENT

(in thousands)


	Estimated
	Useful Lives		November 30,			February 28,
	(Years)		2006			2006

Land		—	$	9,537		$	9,623
Building and improvements		10 - 40		62,577			62,374
Computer and other equipment		3 - 10		39,529			37,601
Molds and tooling		1 - 3		6,138			4,907
Transportation equipment		3 - 5		3,902			3,875
Furniture and fixtures		5 - 15		7,722			7,865
Construction in process		—		1,791			457
Information system under development		—		—			1,040
				131,196			127,742
Less accumulated depreciation				(32,827	)		(27,039	)
Property and equipment, net			$	98,369		$	100,703

On May 31, 2006, we sold 3.9 acres of raw land adjacent to our El Paso, Texas office and distribution center. The land was sold for $666 and we recorded a gain on the sale of $422.

On July 7, 2006, we acquired a 3,600 square foot office facility in Mexico City for approximately $830. To date we have paid approximately $179 to remodel and furnish this and other facilities and expect to incur approximately $21 of additional capital expenditures to complete the remodeling and furnishing of facilities.

During the fiscal quarter ended November 30, 2006, we paid approximately $1,029 against a $1,500 commitment to acquire and install additional storage racking, and associated handling equipment for our new Southaven, Mississippi distribution facility.

We recorded depreciation of $2,531 and $7,499 for the three-month and nine-month periods ended November 30, 2006, respectively, and $1,962 and $5,227 for the three-month and nine-month periods ended November 30, 2005, respectively.

Note 7 - Intangible Assets

In accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), we do not record amortization expense on goodwill or other intangible assets that have indefinite useful lives. Amortization expense is recorded for intangible assets with definite useful lives. SFAS 142 also requires at least an annual impairment review of goodwill and other intangible assets. Any asset deemed to be impaired is to be written down to its fair value. We completed our annual impairment test during the first quarter of fiscal 2007 as required by SFAS 142, and have determined that none of our goodwill or other intangible assets were impaired at that time.

- 14 -

The following table discloses information regarding the carrying amounts and associated accumulated amortization for all intangible assets and indicates the operating segments to which they belong:

INTANGIBLE ASSETS
*(in thousands)*


					November 30, 2006							February 28, 2006
							Accumulated							Accumulated
					Gross		Amortization			Net		Gross		Amortization			Net
Type / Description	Segment		Estimated Life		Carrying Amount		(if Applicable)			Carrying Amount		Carrying Amount		(if Applicable)			Carrying Amount

Goodwill:
OXO		Housewares		Indefinite	$	165,934	$	—		$	165,934	$	165,934	$	—		$	165,934
All other goodwill		Personal Care		Indefinite		35,069		—			35,069		35,069		—			35,069
						201,003		—			201,003		201,003		—			201,003

Trademarks:
OXO		Housewares		Indefinite		75,554		—			75,554		75,200		—			75,200
Brut		Personal Care		Indefinite		51,317		—			51,317		51,317		—			51,317
All other - definite lives		Personal Care		[1]		338		(229	)		109		338		(225	)		113
All other - indefinite lives		Personal Care		Indefinite		31,081		—			31,081		31,081		—			31,081
						158,290		(229	)		158,061		157,936		(225	)		157,711

Licenses:
Seabreeze		Personal Care		Indefinite		18,000		—			18,000		18,000		—			18,000
All other licenses		Personal Care		8 - 25 Years		24,315		(15,593	)		8,722		24,315		(14,514	)		9,801
						42,315		(15,593	)		26,722		42,315		(14,514	)		27,801

Other:
Patents, customer lists and non-compete agreements		Housewares		2 - 13 Years		19,196		(4,177	)		15,019		18,801		(3,044	)		15,757

Total					$	420,804	$	(19,999	)	$	400,805	$	420,055	$	(17,783	)	$	402,272

[1] Includes one fully amortized trademark and one trademark with an estimated life of 30 years

The following table summarizes the amortization expense attributable to intangible assets for the three-month and nine-month periods ending November 30, 2006 and 2005, as well as our latest estimate of amortization expense for the fiscal years ending the last day of February 2007 through 2012.

AMORTIZATION OF INTANGIBLES
*(in thousands)*

Aggregate Amortization Expense
For the three months ended

November 30, 2006	$	660
November 30, 2005	$	791


Aggregate Amortization Expense
For the nine months ended

November 30, 2006	$	2,216
November 30, 2005	$	2,372


Estimated Amortization Expense
For the fiscal years ended

February 2007	$	2,951
February 2008	$	2,889
February 2009	$	2,639
February 2010	$	2,595
February 2011	$	2,122
February 2012	$	2,016

- 15 -

Note 8 - Short Term Debt

On June 1, 2004, we entered into a five year $75,000 Credit Agreement (“Revolving Line of Credit Agreement”), with Bank of America, N.A. and other lenders. Borrowings under the Revolving Line of Credit Agreement accrue interest equal to the higher of the Federal Funds Rate plus 0.50 percent or Bank of America's prime rate. Alternatively, upon election by the Company, borrowings accrue interest based on the respective 1, 2, 3, or 6-month LIBOR rate plus a margin of 0.75 percent to 1.25 percent based upon the "Leverage Ratio" at the time of the borrowing. The "Leverage Ratio" is defined by the Revolving Line of Credit Agreement as the ratio of total consolidated indebtedness, including the subject funding on such date, to consolidated EBITDA ("Earnings Before Interest, Taxes, Depreciation and Amortization") for the period of the four consecutive fiscal quarters most recently ended.

The credit line allows for the issuance of letters of credit up to $10,000. Outstanding letters of credit reduce the $75,000 borrowing limit dollar for dollar. There were no outstanding borrowings or associated interest expense during the fiscal three-month and nine-month periods ended November 30, 2006. As of November 30, 2006, there were no open letters of credit outstanding against this facility.

The Revolving Line of Credit Agreement requires the maintenance of certain Debt/EBITDA, fixed charge coverage ratios, and other customary covenants. Certain covenants, as of the latest balance sheet date, limit our total outstanding indebtedness from all sources to no more than 3.5 times the latest twelve months trailing EBITDA. These covenants effectively limited our ability to incur no more than $40,333 of additional debt from all sources, including draws on our Revolving Line of Credit Agreement. The agreement is guaranteed, on a joint and several basis, by the parent company, Helen of Troy Limited, and certain subsidiaries. Any amounts outstanding under the Revolving Line of Credit Agreement will mature on June 1, 2009. As of November 30, 2006, we were in compliance with the terms of this agreement.

Note 9 - Accrued Expenses

A summary of accrued expenses was as follows:

ACCRUED EXPENSES
*(in thousands)*

	November 30,		February 28,
	2006		2006

Accrued sales returns, discounts and allowances	$	32,791	$	24,176
Accrued compensation		7,231		7,603
Accrued advertising		12,024		7,617
Accrued interest		3,002		2,671
Accrued royalties		3,747		2,577
Accrued professional fees		1,247		1,502
Accrued benefits and payroll taxes		2,011		1,495
Accrued freight		1,250		858
Accrued property, sales and other taxes		1,856		593
Foreign currency forward contracts		2,129		—
Interest rate swaps		2,716		—
Other		6,300		5,053
Total Accrued Expenses	$	76,304	$	54,145

- 16 -

Note 10 - Product Warranties

The Company's products are under warranty against defects in material and workmanship for a maximum of two years. We have established accruals to cover future warranty costs of approximately $8,401 and $7,373 as of November 30, 2006 and February 28, 2006, respectively. We estimate our warranty accrual using historical trends. We believe that these trends are the most reliable method by which we can estimate our warranty liability.

The following table summarizes the activity in the Company's accrual for the three-month and nine-month periods ended November 30, 2006 and fiscal year ended February 28, 2006:

ACCRUAL FOR WARRANTY RETURNS
*(in thousands)*


	November 30, 2006						February 28,
	(Three Months)			(Nine Months)			2006 (Year)

Balance at the beginning of the period	$	6,148		$	7,373		$	5,767
Additions to the accrual		6,764			15,245			22,901
Reductions of the accrual - payments and credits issued		(4,511	)		(14,217	)		(21,295	)
Balance at the end of the period	$	8,401		$	8,401		$	7,373

Note 11 - Income Taxes

Hong Kong Income Taxes - On May 10, 2006, the Inland Revenue Department (the “IRD”) and the Company reached a settlement regarding tax liabilities for the fiscal years 1995 through 1997. This agreement was subsequently approved by the IRD’s Board of Review. For those tax years, we agreed to an assessment of approximately $4,019 including estimated penalties and interest. Our consolidated financial statements at May 31, 2006 and February 28, 2006 included adequate provisions for this liability. As a result of this tax settlement, in the first quarter of fiscal 2007, we reversed $192 of tax provision previously established and recorded $279 of associated interest. During the second fiscal quarter of 2007, the liability was paid with $3,282 of tax reserve certificates and the balance in cash.

For the fiscal years 1998 through 2003, the IRD has assessed a total of $25,461 (U.S.) in tax on certain profits of our foreign subsidiaries. Hong Kong levies taxes on income earned from certain activities previously conducted in Hong Kong. Negotiations with the IRD regarding these issues are ongoing, and it is unclear at this time when they will be resolved.

In connection with the IRD's tax assessment for the fiscal years 1998 through 2003, we have purchased tax reserve certificates in Hong Kong totaling $25,144. Tax reserve certificates represent the prepayment by a taxpayer of potential tax liabilities. The amounts paid for tax reserve certificates are refundable in the event that the value of the tax reserve certificates exceeds the related tax liability. These certificates are denominated in Hong Kong dollars and are subject to the risks associated with foreign currency fluctuations.

If the IRD were to successfully assert the same position for fiscal years after fiscal year 2003, the resulting assessment could total $18,673 (U.S.) in taxes for fiscal years 2004 and 2005. We would vigorously disagree with any such proposed adjustments and would aggressively contest this matter through the applicable taxing authority and judicial process, as appropriate.

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

- 17 -

Effective March 2005, we had concluded the conduct of all operating activities in Hong Kong that we believe were the basis of the IRD’s assessments. In the third quarter of fiscal 2005, the Company established a Macao offshore company (“MOC”) and began operating from Macao. As a MOC, we have been granted an indefinite tax holiday and currently pay no taxes. Accordingly, no additional accruals for Hong Kong contingent tax liabilities beyond fiscal 2005 have been provided.

United States Income Taxes - The Internal Revenue Service (the “IRS”) has completed its audits of the U.S. consolidated federal tax returns for fiscal years 2000, 2001 and 2002. We previously disclosed that the IRS provided notice of proposed adjustments to taxes of $13,424 for the three years under audit. We have resolved the various tax issues and reached an agreement on additional tax in the amount of $3,568. The resulting tax liability had already been provided for in our tax reserves and prior to the current fiscal year we had decreased our tax accruals related to the IRS audits for fiscal years 2000, 2001 and 2002, accordingly. This additional tax liability and associated interest of $914 were settled in the fourth quarter of fiscal 2006.

The IRS is auditing our U.S. consolidated federal tax returns for fiscal years 2003 and 2004 and has provided notice of proposed adjustments of $5,953 to taxes for the years under audit. The Company is vigorously contesting these adjustments. Although the ultimate outcome of the dispute with the IRS cannot be predicted with certainty, management is of the opinion that adequate provisions for taxes in those years have been made in the Company’s consolidated condensed financial statements.

Repatriation of Foreign Earnings - On February 22, 2006, the Board of Directors of a subsidiary of the Company approved the repatriation, pursuant to The American Jobs Creation Act of 2004 (the “AJCA”), of $48,554 in foreign earnings. As a result, we incurred a one-time tax charge of $2,792 in the fourth fiscal quarter ending February 28, 2006.

Income Tax Provisions - We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments must be used in the calculation of certain tax assets and liabilities because of differences in the timing of recognition of revenue and expense for tax and financial statement purposes. We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. As changes occur in our assessments regarding our ability to recover our deferred tax assets, our tax provision is increased in any period in which we determine that the recovery is not probable.

In 1994, we engaged in a corporate restructuring that, among other things, resulted in a greater portion of our income not being subject to taxation in the United States. If such income were subject to U.S. federal income taxes, our effective income tax rate would increase materially. The AJCA included an anti-inversion provision that denies certain tax benefits to companies that have reincorporated outside the United States after March 4, 2003. We completed our reincorporation in 1994; therefore, our inverted corporate structure is grandfathered by the AJCA.

In addition to future changes in tax laws, our position on various tax matters may be challenged. Our ability to maintain our position that the parent company is not a Controlled Foreign Corporation (as defined under the U.S. Internal Revenue Code) is critical to the tax treatment of our non-U.S. earnings. A Controlled Foreign Corporation is a non-U.S. corporation whose largest U.S. shareholders (i.e., those owning 10 percent or more of its shares) together own more than 50 percent of the shares in such corporation. If a change of ownership were to occur such that the parent company became a Controlled Foreign Corporation, such a change could have a material negative effect on the largest U.S. shareholders and, in turn, on our business.

- 18 -

The calculation of our tax liabilities involves dealing with uncertainties in the application of other complex tax regulations. We recognize liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. If we ultimately determine that payment of these amounts are not probable, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer probable. We record an additional charge in our provision for taxes in the period in which we determine that the recorded tax liability is less than we expect the ultimate assessment to be.

Note 12 - Long Term-Debt

A summary of long-term debt was as follows:

LONG-TERM DEBT
*(in thousands)*

			Range of Interest Rates
	Original Date		Quarter Ended November 30,			Fiscal			Latest Rate					November 30,			February 28,
	Borrowed		2006			2006			Payable			Matures		2006			2006

$40,000 unsecured Senior Note Payable at a
fixed interest rate of 7.01%. Interest payable
quarterly, principal of $10,000 payable
annually beginning on January 2005.		01/96		7.01	%		7.01	%		7.01	%		01/08	$	20,000		$	20,000

$15,000 unsecured Senior Note Payable at a
fixed interest rate of 7.24%. Interest payable
quarterly, principal of $3,000 payable
annually beginning on July 2008.		07/97		7.24	%		7.24	%		7.24	%		07/12		15,000			15,000

$100,000 unsecured floating interest rate 5
Year Senior Notes. Interest set and payable
quarterly at three-month LIBOR plus 85 basis				5.89	%		3.41	%
points. Principal is due at maturity. Notes				to			to
can be prepaid without penalty. *		06/04		6.35	%		5.371	%		5.89	%		06/09		100,000			100,000

$50,000 unsecured floating interest rate 7
Year Senior Notes. Interest set and payable
quarterly at three-month LIBOR plus 85 basis				5.89	%		3.41	%
points. Principal is due at maturity. Notes can				to			to
be prepaid without penalty. *		06/04		6.35	%		5.371	%		5.89	%		06/11		50,000			50,000

$75,000 unsecured floating interest rate 10
Year Senior Notes. Interest set and payable
quarterly at three-month LIBOR plus 90 basis				6.01	%		3.46	%
points. Principal is due at maturity. Notes can				to			to
be prepaid without penalty. *		06/04		6.40	%		5.421	%		6.01	%		06/14		75,000			75,000

$12,634 unsecured Industrial Development
Revenue Bond. Interest is set and payable
quarterly at Company's election at either Bank
prime or applicable LIBOR plus 75 to 125
basis points as determined by loan agreement
formula. Principal converted to five-year							5.295	%
bonds in May 2006, balance due							to
May, 2011. **		08/05		6.65	%		5.42	%		6.65	%		05/11		7,660			4,974
															267,660			264,974
Less current portion of long-term debt															(10,000	)		(10,000	)
Long-term debt, less current portion														$	257,660		$	254,974

*	Floating interest rates have been hedged with interest rate swaps to effectively fix interest rates as discussed later in this note.

**	On September 15, 2006, the Company prepaid without penalty $4,974 of the Industrial Development Revenue Bond as discussed later in this note.

- 19 -

The following table contains a summary of the components of our interest expense for the periods covered by our consolidated condensed statements of income:

INTEREST EXPENSE
(in thousands)

	Three Months Ended November 30,					Nine Months Ended November 30,
	2006			2005		2006			2005

Interest and Commitment Fees	$	4,392		$	4,073	$	13,220		$	10,730
Deferred Finance Costs		213			186		587			587
Interest Rate Swap Settlements		(118	)		—		(118	)		—
Total Interest Expense	$	4,487		$	4,259	$	13,689		$	11,317

All of our long-term debt is guaranteed by either the parent company, Helen of Troy Limited, and/or certain subsidiaries on a joint and several basis and has customary covenants covering Debt/EBITDA ratios, fixed charge coverage ratios, consolidated net worth levels, and other financial requirements. Certain covenants as of the latest balance sheet date, limit our total outstanding indebtedness from all sources to no more than 3.5 times the latest twelve months trailing EBITDA. These covenants effectively limited our ability to incur no more than $40,333 of additional debt from all sources, including draws on our Revolving Line of Credit Agreement. Additionally, our debt agreements restrict us from incurring liens on any of our properties, except under certain conditions. As of November 30, 2006, we are in compliance with all the terms of these agreements.

On September 15, 2006, the Company prepaid without penalty $4,974 of the Industrial Development Revenue Bond and agreed with its holder that the remaining balance would be due at maturity in May 2011. Management continues to be able, at its discretion, to prepay any or all of the remaining balance due on the bond without penalty.

On September 28, 2006, the Company entered into interest rate hedge agreements in conjunction with its outstanding unsecured floating interest rate $100,000, 5 Year; $50,000, 7 Year; and $75,000, 10 Year Senior Notes (the “swaps”). The swaps are a hedge of the variable LIBOR rates used to reset the floating rates on the Senior Notes. The swaps effectively fix the interest rates on the 5, 7 and 10 Year Senior Notes at 5.89, 5.89 and 6.01 percent, respectively, beginning September 29, 2006. The swaps settle quarterly and terminate upon maturity of the related debt. The swaps are considered cash flow hedges under SFAS No. 133 because they are intended to hedge, and are effective as a hedge, against variable cash flows.

- 20 -

Note 13 - Contractual Obligations

Our contractual obligations and commercial commitments, as of November 30, 2006 were:

PAYMENTS DUE BY PERIOD - TWELVE MONTHS ENDED NOVEMBER 30:
*(in thousands)*


			2007		2008		2009		2010		2011		After
	Total		1 year		2 years		3 years		4 years		5 years		5 years

Term debt - floating rate	$	232,660	$	—	$	—	$	100,000	$	—	$	57,660	$	75,000
Term debt - fixed rate		35,000		10,000		13,000		3,000		3,000		3,000		3,000
Long-term incentive plan payouts		3,110		1,498		1,612		—		—		—		—
Interest on floating rate debt *		66,252		13,815		13,815		11,852		7,925		6,825		12,020
Interest on fixed rate debt		4,813		1,846		1,121		787		570		353		136
Open purchase orders		67,979		67,979		—		—		—		—		—
Minimum royalty payments		59,068		2,911		2,832		2,752		5,104		6,241		39,228
Advertising and promotional		22,205		10,696		6,398		1,934		1,377		800		1,000
Operating leases		2,726		1,744		572		314		96		—		—
Capital spending commitments		492		492		—		—		—		—		—
Other		468		418		50		—		—		—		—
Total contractual obligations	$	494,773	$	111,399	$	39,400	$	120,639	$	18,072	$	74,879	$	130,384

The future obligation for interest on our variable rate debt has historically been estimated assuming the rates in effect as of the end of the latest fiscal quarter on which we are reporting. As mentioned above in Note 12, on September 28, 2006, the Company entered into interest rate hedge agreements in conjunction with its outstanding unsecured floating interest rate $100,000, 5 Year; $50,000, 7 Year; and $75,000, 10 Year Senior Notes (the “swaps”). The swaps are a hedge of the variable LIBOR rates used to reset the floating rates on the Senior Notes. The swaps effectively fix the interest rates on the 5, 7 and 10 Year Senior Notes at 5.89, 5.89 and 6.01 percent, respectively, beginning September 29, 2006. Accordingly, the future interest obligations related to this debt has been estimated using these rates. We also have an unsecured Industrial Development Revenue Bond, whose rate is subject to periodic adjustment. The bond’s interest rate has not been hedged. Accordingly, we estimated our future obligation for interest on it using the rates in effect as of November 30, 2006. This is only an estimate, actual rates on the bond may vary over time. For instance, a one percent increase in interest rates could add approximately $77 per year to floating rate interest expense over the bond’s remaining maturity.

We lease certain facilities, equipment and vehicles under operating leases, which expire at various dates through fiscal 2011. Certain of the leases contain escalation clauses and renewal or purchase options.

On February 2, 2006, we sold a 619,000 square foot distribution facility in Southaven, Mississippi for $16,850 recording a gain on the sale of $1,304. We entered into an initial lease agreement with the new owners through April 2006 calling for monthly rentals of $141 per month including insurance and property tax payments.

In the first quarter of fiscal 2007, we obtained an extension on the lease of our formerly owned distribution facility. As a result we will now be making monthly lease payments of $175 including insurance and property tax payments through the end of the new lease term, which expires on February 28, 2007. The distribution facility is primarily used for appliances inventory, which we are in the process of moving from this facility to our new 1,200,000 square foot distribution facility, also located in Southaven, Mississippi. This extension of the agreement was made in order to provide us additional flexibility in the timing of the transition of our remaining operations between facilities.

Capital spending commitments include $21 for remodeling and furnishing office facilities and approximately $471 due on a project to install additional warehouse racking and forklifts, which will allow us to improve space utilization in our new Southaven, Mississippi distribution facility.

- 21 -

Rent expense related to our operating leases was $1,132 and $3,374 for the three-month and nine-month periods ended November 30, 2006, respectively, and $853 and $2,077 for the three-month and nine-month periods ended November 30, 2005, respectively.

Note 14 - Forward Contracts

Our functional currency is the U.S. Dollar. By operating internationally, we are subject to foreign currency risk from transactions denominated in currencies other than the U.S. Dollar ("foreign currencies"). Such transactions include sales, certain inventory purchases and operating expenses. As a result of such transactions, portions of our cash, trade accounts receivable, and trade accounts payable are denominated in foreign currencies. During the three-month and nine-month periods ended November 30, 2006, we transacted approximately 17 and 16 percent, respectively of our net sales in foreign currencies. During the three-month and nine-month periods ended November 30, 2005, we transacted approximately 18 and 15 percent, respectively of our net sales in foreign currencies. These sales were primarily denominated in the British Pound, the Euro, the Canadian Dollar, the Brazilian Real and the Mexican Peso. We make most of our inventory purchases from the Far East and use the U.S. Dollar for such purchases.

We identify foreign currency risk by regularly monitoring our foreign currency-denominated transactions and balances. Where operating conditions permit, we reduce foreign currency risk by purchasing most of our inventory with U.S. Dollars and by converting cash balances denominated in foreign currencies to U.S. Dollars.

We also hedge against foreign currency exchange rate-risk by using a series of forward contracts designated as cash flow hedges to protect against the foreign currency exchange risk inherent in our forecasted transactions denominated in currencies other than the U.S. Dollar. In these transactions, we execute a forward currency contract that will settle at the end of a forecasted period. During the forecasted period, a hedging relationship is created because the size and terms of the forward contract are designed so that its fair market value will move in the opposite direction and approximate magnitude of the underlying foreign currency’s forecasted exchange gain or loss. To the extent we forecast the expected foreign currency cash flows from the period the forward contract is entered into until the date it will settle with reasonable accuracy, we significantly lower or materially eliminate a particular currency’s exchange risk exposure over the life of the related forward contract.

For transactions designated as foreign currency cash flow hedges, the effective portion of the change in the fair value (arising from the change in the spot rates from period to period) is deferred in other comprehensive income. These amounts are subsequently recognized in "Selling, general, and administrative expense" in the consolidated condensed statements of income in the same period as the forecasted transactions close out over the remaining balance of their terms. The ineffective portion of the change in fair value (arising from the change in the difference between the spot rate and the forward rate) is recognized in the period it occurred. These amounts are also recognized in "Selling, general, and administrative expense" in the consolidated condensed statements of income. We do not enter into any forward exchange contracts or similar instruments for trading or other speculative purposes.

During the third quarter of fiscal 2007, the Company decided to actively manage most of its floating rate debt using interest rate swaps. The Company entered into three interest rate swaps that convert an aggregate notional principal of $225,000 from floating interest rate payments under its 5, 7 and 10 Year Senior Notes to fixed interest rate payments ranging from 5.89 to 6.01 percent. In these transactions, we executed three contracts to pay fixed rates of interest on an aggregate notional principal amount of $225,000 at rates currently ranging from 5.04 to 5.11 percent while simultaneously receiving floating rate interest payments currently set at 5.37 percent on the same notional amount. The fixed rate side of the swap will not change over the life of the swap. The floating rate payments are reset quarterly based on three month LIBOR. The resets are concurrent with the interest payments made on the underlying debt. These swaps are used to reduce the Company’s risk of the possibility of increased interest costs; however, should interest rates drop significantly, we could also lose the benefit that floating rate debt can provide in a declining interest rate environment.

- 22 -

The swaps are considered 100 percent effective. Gains and losses related to the swaps, net of related tax effects are reported as a component of “Accumulated other comprehensive income” and will not be reclassified into earnings until the conclusion of the hedge. A partial net settlement occurs quarterly concurrent with interest payments made on the underlying debt. The settlement is the net difference between the fixed rates payable and the floating rates receivable over the quarter under the swap contracts. The settlement is recognized as a component of "Interest expense" in the consolidated condensed statements of income.

The following table summarizes the various forward contracts and interest rate swap contracts we designated as cash flow hedges that were open at November 30, 2006 and February 28, 2006:

CASH FLOW HEDGES

November 30, 2006

Contract

Currency to

Notional

Contract

Range of Maturities

Spot Rate at Contract

Spot Rate at November 30,

Weighted Average Forward Rate at