Unassociated Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

T
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
  
     
 
For the quarterly period ended May 31, 2007
  
     
 
or
  
     
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
  
 
OF 1934
  
     
 
For the transition period from ________ to ________
 

Commission file number: 001-14669

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

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

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 £ 
  Accelerated filer T
 Non-accelerated filer £
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes £  No T
 
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 July 5, 2007
Common Shares, $0.10 par value per share
  
30,391,606 shares
 
 
HELEN OF TROY LIMITED AND SUBSIDIARIES

INDEX - FORM 10-Q

       
Page
PART I.
FINANCIAL INFORMATION
  
         
 
Item 1
Financial Statements (Unaudited)
  
         
   
Consolidated Condensed Balance Sheets
  
     
as of May 31, 2007 and February 28, 2007
3
         
   
Consolidated Condensed Statements of Income
 
     
for the Three Months Ended
  
     
May 31, 2007 and May 31, 2006
4
         
   
Consolidated Condensed Statements of Cash Flows
  
     
for the Three Months Ended
  
     
May 31, 2007 and May 31, 2006
5
         
   
Consolidated Condensed Statements of Comprehensive Income
  
     
for the Three Months Ended
  
     
May 31, 2007 and May 31, 2006
6
         
   
Notes to Consolidated Condensed Financial Statements
7
         
 
Item 2
Management’s Discussion and Analysis of Financial Condition
  
     
and Results of Operations
27
         
 
Item 3
Quantitative and Qualitative Disclosures about Market Risk
39
         
 
Item 4
Controls and Procedures
42
         
PART II.
OTHER INFORMATION
  
         
 
Item 1
Legal Proceedings
43
         
 
Item 1A
Risk Factors
44
         
 
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
44
         
 
Item 6
Exhibits
45
         
 
Signatures
46
 
-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)
          
   
May 31,
  
February 28,
  
   
2007
  
2007
  
   
(unaudited)
      
Assets
          
Current assets:
              
Cash and cash equivalents
  
$
29,169
  
$
35,455
  
Temporary investments
    
30,250
   
55,750
 
Trading securities, at market value
    
134
   
189
 
Receivables - principally trade, less allowance of $1,075 and $1,002
    
111,500
   
115,896
 
Inventories
    
156,214
   
144,070
 
Prepaid expenses and other assets
    
11,105
   
8,379
 
Deferred income tax benefits
    
11,009
   
13,479
 
Total current assets
    
349,381
   
373,218
 
               
Property and equipment, at cost less accumulated depreciation of $37,891 and $35,325
    
95,405
   
96,669
 
Goodwill
    
212,496
   
201,002
 
Trademarks, net of accumulated amortization of $232 and $230
    
166,909
   
158,061
 
License agreements, net of accumulated amortization of $16,313 and $15,953
    
26,002
   
26,362
 
Other intangible assets, net of accumulated amortization of $4,975 and $4,561
    
16,573
   
14,653
 
Tax certificates
    
25,144
   
25,144
 
Other assets
    
11,040
   
11,163
 
Total assets
  
$
902,950
  
$
906,272
  
               
               
Liabilities and Stockholders' Equity
              
Current liabilities:
              
Current portion of long-term debt
  
$
10,000
  
$
10,000
  
Accounts payable, principally trade
    
34,471
   
37,779
 
Accrued expenses and current liabilities
    
52,940
   
62,384
 
Income taxes payable
    
25,660
   
24,924
 
Total current liabilities
    
123,071
   
135,087
 
               
Long-term compensation liabilities
    
1,285
   
2,095
 
Long-term income taxes payable
    
9,313
   
-
 
Deferred income tax liability
    
894
   
1,673
 
Long-term debt, less current portion
    
240,000
   
240,000
 
Total liabilities
    
374,563
   
378,855
 
               
Commitments and contingencies (See Notes 3, 12, 14, 15 and 18)
              
               
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; 30,328,456 and 30,286,406 shares issued and outstanding
    
3,033
   
3,029
 
Additional paid-in-capital
    
89,867
   
94,951
 
Retained earnings
    
435,209
   
431,003
 
Accumulated other comprehensive income
    
278
   
(1,566
)
Total stockholders' equity
    
528,387
   
527,417
 
Total liabilities and stockholders' equity
  
$
902,950
  
$
906,272
  
 
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 May 31,
  
   
2007
  
2006
  
           
Net sales
  
$
140,170
  
$
130,441
  
Cost of sales
    
80,152
   
72,500
 
Gross profit
    
60,018
   
57,941
 
               
Selling, general, and administrative expense
    
45,717
   
47,025
 
Operating income
    
14,301
   
10,916
 
               
Other income (expense):
              
Interest expense
    
(4,113
)
  
(4,506
)
Other income, net
    
1,254
   
790
 
Total other income (expense)
    
(2,859
)
  
(3,716
)
               
Earnings before income taxes
    
11,442
   
7,200
 
               
Income tax expense (benefit):
              
Current
    
592
   
939
 
Deferred
    
733
   
(418
)
Net earnings
  
$
10,117
  
$
6,679
  
               
Earnings per share:
              
Basic
  
$
0.33
  
$
0.22
  
Diluted
  
$
0.32
  
$
0.21
  
               
Weighted average common shares used in computing net earnings per share
              
Basic
    
30,294
   
30,022
 
Diluted
    
32,035
   
31,460
 
 
See accompanying notes to consolidated condensed financial statements.


-4-

HELEN OF TROY LIMITED AND SUBSIDIARIES
      
Consolidated Condensed Statements of Cash Flows (unaudited)
      
(in thousands)
      
   
Three Months Ended May 31,
  
   
2007
  
2006
  
           
Cash flows from operating activities:
          
Net earnings
  
$
10,117
  
$
6,679
  
Adjustments to reconcile net earnings to net cash (used) / provided by operating activities:
              
Depreciation and amortization
    
3,524
   
3,880
 
Provision for doubtful receivables
    
73
   
(228
)
Share-based compensation expense
    
190
   
187
 
Unrealized (gain) / loss - trading securities
    
55
   
(60
)
Deferred taxes, net
    
583
   
(458
)
Gain on the sale of property, plant and equipment
    
-
   
(422
)
Changes in operating assets and liabilities, net of effects of acquisitions
              
Accounts receivable
    
11,772
   
(6,722
)
Inventories
    
(3,718
)
  
4,382
 
Prepaid expenses and other assets
    
(4,228
)
  
(2,845
)
Other assets
    
(408
)
  
(298
)
Accounts payable
    
(3,298
)
  
2,352
 
Accrued expenses and current liabilities
    
(7,843
)
  
(6,046
)
Income taxes payable
    
(1,909
)
  
542
 
Net cash provided by operating activities
    
4,910
   
943
 
               
Cash flows from investing activities:
              
Capital, license, trademark, and other intangible expenditures
    
(1,111
)
  
(1,700
)
Acquisitions of business
    
(36,500
)
  
-
 
Proceeds from the sale of property, plant and equipment
    
-
   
666
 
Purchase of temporary securities
    
(57,350
)
  
(15,000
)
Sale of temporary securities
    
82,850
   
15,000
 
Net cash used by investing activities
    
(12,111
)
  
(1,034
)
               
Cash flows from financing activities:
              
Proceeds from debt
    
-
   
7,660
 
Proceeds from exercise of stock options, including related tax benefits
    
864
   
143
 
Share-based compensation tax benefit
    
51
   
40
 
Net cash provided by financing activities
    
915
   
7,843
 
               
Net (decrease) / increase in cash and cash equivalents
    
(6,286
)
  
7,752
 
Cash and cash equivalents, beginning of period
    
35,455
   
18,320
 
Cash and cash equivalents, end of period
  
$
29,169
  
$
26,072
  
               
               
Supplemental cash flow disclosures:
              
Interest paid
  
$
3,847
  
$
3,707
  
Income taxes paid (net of refunds)
  
$
2,516
  
$
396
  
 
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 May 31,
  
   
2007
  
2006
  
           
Net earnings, as reported
  
$
10,117
  
$
6,679
  
Other comprehensive income (loss), net of tax:
              
Cash flow hedges - Interest Rate Swaps
    
1,941
   
-
 
Cash flow hedges - Foreign Currency
    
(97
)
  
(922
)
Comprehensive income
  
$
11,961
  
$
5,757
  
 
See accompanying notes to consolidated condensed financial statements.
 
-6-

HELEN OF TROY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
May 31, 2007

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 May 31, 2007 and February 28, 2007, and the results of our consolidated operations for the three month periods ended May 31, 2007 and 2006. 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 - New Accounting Pronouncements

New Accounting Standards Currently Adopted

Effects of Misstatements - In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current year’s financial statements are materially misstated. SAB 108 permits registrants to record the cumulative effect of initial adoption by recording the necessary “correcting” adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings, only if material under the dual method. We were not required to record any adjustments upon the application of SAB 108.

Uncertainty in Income Taxes - In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation 48, “Accounting for Uncertainty in Income Taxes—An Interpretation of Statement of Financial Accounting Standards No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements, and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. We adopted the provisions of FIN 48 at the beginning of the first quarter of fiscal 2008, and the details of our adoption of FIN 48 are described in Note 12.


-7-
 
New Accounting Standards Subject to Future Adoption

Liability Recognition on Endorsement Split-Dollar Life Insurance Arrangements - In June 2006, the EITF reached a consensus on EITF Issue No. 06-4 ("EITF 06-4"), "Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements," which requires the application of the provisions of SFAS No. 106 (“SFAS 106”), “Employers’ Accounting for Postretirement Benefits Other Than Pensions” to endorsement split-dollar life insurance arrangements. SFAS 106 would require us to recognize a liability for the discounted future benefit obligation that we will have to pay upon the death of the underlying insured employee. An endorsement-type arrangement generally exists when the Company owns and controls all incidents of ownership of the underlying policies. EITF 06-4 is currently effective for fiscal years beginning after December 15, 2007. We have certain life insurance policies which may be subject to the provisions of this new pronouncement and are currently determining the effect, if any, the adoption of EITF 06-4 will have on our financial statements.

Fair Value Measurements - In September 2006, the FASB issued SFAS 157 “Fair Value Measurements.” This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements. Accordingly, this Statement does not require any new fair value measurements, but will potentially require additional disclosures regarding existing fair value measurements we currently report. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently determining the effect, if any, this pronouncement will have on our financial statements.

Fair Value Option for Financial Assets and Financial Liabilities - In February 2007, the FASB issued Statement of Financial Accounting Standards No.159 “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 also established presentation and disclosure requirements designed to facilitate comparisons that choose different measurement attributes for similar types of assets and liabilities. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently determining the effect, if any, this pronouncement will have on our financial statements.

Liability Recognition on Collateral Assignment Split-Dollar Life Insurance Arrangements - In March 2007, the EITF reached a consensus on EITF Issue No. 06-10 ("EITF 06-10"), "Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements," which provides guidance to help companies determine whether a liability for the postretirement benefit associated with a collateral assignment split-dollar life insurance arrangement should be recorded in accordance with either SFAS 106 (if, in substance, a postretirement benefit plan exists), or Accounting Principles Board Opinion No. 12 (if the arrangement is, in substance, an individual deferred compensation contract). EITF 06-10 also provides guidance on how a company should recognize and measure the asset in a collateral assignment split-dollar life insurance contract. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. We have certain life insurance policies which may be subject to the provisions of this new pronouncement and are currently determining the effect, if any, the adoption of EITF 06-10 will have on our financial statements.

From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that we adopt as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective are either not applicable to the Company at this time, or will not have a material impact on our consolidated condensed financial statements upon adoption.

-8-
 
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 any alleged insider trading proceeds, and injunctive relief, including an accounting of and the imposition of a constructive trust and/or asset freeze on the defendants’ alleged 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 May 24, 2007, the motion to dismiss was denied. The discovery phase of the litigation is now underway.

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 1,740,309 and 1,437,418 for the three month periods ended May 31, 2007 and 2006, respectively. 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 284,379 and 908,580 at May 31, 2007 and 2006, respectively.
 
 
-9-
 
Note 5 - Segment Information

In the tables that follow, we present two segments: Personal Care and Housewares. Our Personal Care segment’s 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, tea kettles, trash cans, storage and organization products, hand tools, gardening tools, kitchen mitts and trivets, barbeque tools, and rechargeable lighting products. We use outside 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, the Personal Care segment sells extensively through beauty supply retailers and wholesalers.

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 2007 Annual Report on Form 10-K.
 
The following tables contain segment information for the periods covered by our consolidated condensed statements of income:

THREE MONTHS ENDED MAY 31, 2007 AND 2006
(in thousands)
              
May 31, 2007
 
Personal
Care
 
Housewares
 
Total
  
Net sales
  
$
106,812
  
$
33,358
  
$
140,170
  
Operating income
    
8,872
   
5,429
   
14,301
 
Capital, license, trademark and other intangible expenditures
    
314
   
797
   
1,111
 
Depreciation and amortization
    
2,368
   
1,156
   
3,524
 
               
May 31, 2006
  
Personal
Care
  
Housewares
  
Total
  
Net sales
  
$
105,324
  
$
25,117
  
$
130,441
  
Operating income
    
6,192
   
4,724
   
10,916
 
Capital, license, trademark and other intangible expenditures
    
1,182
   
518
   
1,700
 
Depreciation and amortization
    
2,619
   
1,261
   
3,880
 
 
The following tables contain net assets allocable to each segment for the periods covered by our consolidated condensed balance sheets:

IDENTIFIABLE NET ASSETS AT MAY 31, 2007 AND FEBRUARY 28, 2007
(in thousands)
              
 
 
Personal
Care
 
Housewares
 
Total
  
May 31, 2007
  
$
560,374
  
$
342,576
  
$
902,950
  
February 28, 2007
    
554,295
   
351,977
   
906,272
 
 
Operating income 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 income are comprised of SG&A directly associated with the segment, plus overhead expenses that are allocable to the operating segment.
 
-10-
 
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. In the last quarter of fiscal 2007, we completed the consolidation of our domestic appliance inventories into the same facility.

Throughout fiscal 2007, we conducted an evaluation of our shared cost allocation methodology given the structural and process changes that were taking place in our operations, and changed our methodology in the first quarter of fiscal 2008. We believe the new method better reflects the economics of our newly consolidated operations. The table below summarizes the expense allocations made to the Housewares segment for the three months ended May 31, 2007 compared to the same period in the previous year. Some of these expenses were previously absorbed by the Personal Care segment.

Housewares Segment Expense Allocation
(in thousands)
      
   
Three Months Ended May 31,
  
   
2007
  
2006
  
Distribution and sourcing expense
  
$
2,854
  
$
1,427
  
Other operating and corporate overhead expense
    
1,326
   
998
 
Total allocated expenses
  
$
4,180
  
$
2,425
  
               
Expense allocation as a percentage of net sales:
              
Distribution and sourcing expense
    
8.6%
 
  
5.7%
 
Other operating and corporate overhead expense
    
4.0%
 
  
4.0%
 
Total allocated expenses
    
12.5%
 
  
9.7%
 

Note 6 - Property and Equipment

A summary of property and equipment is as follows:

PROPERTY AND EQUIPMENT
      
(in thousands)
              
   
Estimated
          
   
Useful Lives
  
May 31,
  
February 28,
  
   
(Years)
  
2007
  
2007
  
Land
    
-
 
$
9,537
  
$
9,537
  
Building and improvements
    
10 - 40
    
62,917
   
62,666
 
Computer and other equipment
    
3 - 10
    
41,388
   
41,265
 
Molds and tooling
    
1 - 3
    
7,281
   
6,538
 
Transportation equipment
    
3 - 5
    
3,957
   
3,912
 
Furniture and fixtures
    
5 - 15
    
8,005
   
7,815
 
Construction in process
    
-
   
211
   
261
 
           
133,296
   
131,994
 
Less accumulated depreciation
          
(37,891
)
  
(35,325
)
Property and equipment, net
        
$
95,405
  
$
96,669
  
 
We recorded depreciation of $2,566 and $2,428 for the three month periods ended May 31, 2007 and 2006, respectively.

Note 7 - Intangible Assets

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. We also perform 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 2008, and have determined that none of our goodwill or other intangible assets were impaired at that time.
 
-11-

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)
           
May 31, 2007
  
February 28, 2007
  
Type / Description
 
Segment
 
Estimated
Life
 
Gross Carrying
Amount
 
Accumulated Amortization (if Applicable)
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization (if Applicable)
 
Net Carrying Amount
  
                                   
Goodwill:
                                  
OXO
    
Housewares
    
Indefinite
  
$
166,131
  
$
-
  
$
166,131
  
$
165,934
  
$
-
  
$
165,934
  
All other goodwill
    
Personal Care
    
Indefinite
    
46,365
   
-
   
46,365
   
35,068
   
-
   
35,068
 
                 
212,496
   
-
   
212,496
   
201,002
   
-
   
201,002
 
                                                   
Trademarks:
                                                  
OXO
    
Housewares
    
Indefinite
    
75,554
   
-
   
75,554
   
75,554
   
-
   
75,554
 
Brut
    
Personal Care
    
Indefinite
    
51,317
   
-
   
51,317
   
51,317
   
-
   
51,317
 
All other - definite lives
    
Personal Care
    
[1]
 
  
338
   
(232
)
  
106
   
338
   
(230
)
  
108
 
All other - indefinite lives
    
Personal Care
    
Indefinite
    
39,932
   
-
   
39,932
   
31,082
   
-
   
31,082
 
                 
167,141
   
(232
)
  
166,909
   
158,291
   
(230
)
  
158,061
 
                                                   
Licenses:
                                                  
Seabreeze
    
Personal Care
    
Indefinite
    
18,000
   
-
   
18,000
   
18,000
   
-
   
18,000
 
All other licenses
    
Personal Care
    
8 - 25 Years
    
24,315
   
(16,313
)
  
8,002
   
24,315
   
(15,953
)
  
8,362
 
                 
42,315
   
(16,313
)
  
26,002
   
42,315
   
(15,953
)
  
26,362
 
                                                   
Other:
                                                  
Patents, customer lists and non-compete agreements
    
Housewares
    
2 - 14 Years
    
19,313
   
(4,938
)
  
14,375
   
19,214
   
(4,561
)
  
14,653
 
 
    
Personal Care 
    
3 - 8 Years
    
2,235
   
(37
)
  
2,198
   
-
   
-
   
-
 
                 
21,548
   
(4,975
)
  
16,573
   
19,214
   
(4,561
)
  
14,653
 
                                                   
Total
              
$
443,500
  
$
(21,520
)
$
421,980
  
$
420,822
  
$
(20,744
)
$
400,078
  
 
[1] Includes one fully amortized trademark and one trademark with an estimated life of 30 years
 
-12-
 
The following table summarizes the amortization expense attributable to intangible assets for the three month periods ending May 31, 2007 and 2006, as well as our latest estimate of amortization expense for the fiscal years ending the last day of February 2008 through 2013.

AMORTIZATION OF INTANGIBLES
  
(in thousands)      
Aggregate Amortization Expense
      
For the three months ended
      
May 31, 2007
  
$
776
  
May 31, 2006
  
$
815
  
         
       
Estimated Amortization Expense
      
For the fiscal years ended
      
February 2008
  
$
3,276
  
February 2009
  
$
3,100
  
February 2010
  
$
3,056
  
February 2011
  
$
2,372
  
February 2012
  
$
2,224
  
February 2013
  
$
2,190
  

NOTE 8 - Acquisitions And New Trademark License Agreements

Belson Products Acquisition - Effective May 1, 2007, we acquired certain assets and liabilities of Belson Products (“Belson”), the professional salon division of Applica Consumer Products, Inc. for a cash purchase price of $36,500 plus the assumption of estimated liabilities. This transaction was accounted for as a purchase of a business and was paid for out of 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 Helen of Troy professional products, will continue to strengthen our leadership position in the professional distribution channels.

Net assets acquired consist principally of accounts receivable, finished goods inventories, goodwill, patents, trademarks, tradenames, product design specifications, production know-how, certain fixed assets, distribution rights and customer lists, a covenant not-to-compete, less certain customer related operating accruals and liabilities. The following schedule presents the initial net assets of Belson acquired at closing:

Belson Products - Net Assets Acquired on May 1, 2007
(in thousands)
        
Accounts receivable, net
  
$
7,449
  
Inventories
    
8,426
 
Fixed assets
    
139
 
Trademarks, goodwill and other intangible assets
    
22,381
 
Total assets acquired
    
38,395
 
Less: Current liabilities assumed
    
(1,895
)
Net assets acquired
  
$
36,500
  
 
We are in the process of completing our analysis of the economic lives of the assets acquired and appropriate allocation of the initial purchase price. Based on our preliminary analysis, we believe that a significant portion of the purchase price will be allocated to assets having indefinite economic lives. We expect to complete our analysis during fiscal 2008.
 
Bed Head® by TIGI and Toni&Guy® - On December 6, 2006, we entered into licensing arrangements with MBL/TIGI Products, L.P. and MBL/Toni&Guy Products L.P. for the use of the Bed Head® by TIGI and Toni&Guy® trademarks for personal care products in the Western Hemisphere. We plan on introducing a line of hair care appliance products under the Bed Head® by TIGI and Toni&Guy® brand names that eventually will include hair dryers, hair styling irons and straighteners, hot air brushes, hair setters, combs, brushes and hair care accessories, as well as a variety of other personal care products. We have begun marketing in the United States, and plan to market in the remainder of the Western Hemisphere. Initial domestic product shipments began during the first fiscal quarter of 2008.
 
-13-
 
Candela® Acquisition - On September 25, 2006, we acquired all rights to trademarks, certain patents, formulas, tooling and production processes to Vessel, Inc.’s rechargeable lighting products under various brand names, including Candela®. The products will be sold by our Housewares segment. We believe the acquired trademarks have indefinite economic lives. The following schedule presents the assets acquired at closing and management’s purchase price allocation: 

Assets Acquired from Vessel, Inc.
      
(in thousands)
        
Trademarks
  
$
354
  
Patents
    
120
 
Fixed Assets
    
26
 
Total assets acquired
  
$
500
  
 
Note 9 - Short Term Debt

We entered into a five year Revolving Credit Agreement (“Revolving Line of Credit Agreement”), dated as of June 1, 2004, 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 timely election by the Company, borrowings accrue interest based on the respective 1, 2, 3, or 6-month LIBOR rate plus a margin of 0.75 percent to 1.25 percent based upon the "Leverage Ratio" at the time of the borrowing. The "Leverage Ratio" is defined by the Revolving Line of Credit Agreement as the ratio of total consolidated indebtedness, including the subject funding on such date to consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA") 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. We incur loan commitment fees at a current rate of 0.30 percent per annum on the unused balance of the Revolving Line of Credit Agreement and letter of credit fees at a current rate of 1.125 percent per annum on the face value of the letter of credit. On June 7, 2007, we gave notice to permanently reduce our Revolving Line of Credit Agreement from $75,000 to $50,000. Outstanding letters of credit reduce the borrowing limit dollar for dollar. During fiscal 2007, we did not draw on the Revolving Line of Credit. As of May 31, 2007, there were no revolving loans and $1,260 of 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 $66,923 of additional debt from all sources, including draws on our Revolving Line of Credit Agreement. The agreement is unconditionally 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 May 31, 2007, we were in compliance with the terms of this agreement.

Note 10 - Accrued Expenses and Current Liabilities

A summary of accrued expenses was as follows:
 
ACCRUED EXPENSES AND CURRENT LIABILITIES
    
(in thousands)
          
   
May 31,
  
February 28,
  
   
2007
  
2007
  
Accrued discounts and allowances
  
$
22,573
  
$
25,054
  
Accrued compensation
    
3,632
   
8,889
 
Accrued advertising
    
9,145
   
9,269
 
Accrued interest
    
2,917
   
2,833
 
Accrued royalties
    
1,214
   
2,549
 
Accrued professional fees
    
1,430
   
1,218
 
Accrued benefits and payroll taxes
    
1,388
   
1,438
 
Accrued freight
    
1,297
   
1,390
 
Accrued property, sales and other taxes
    
1,351
   
831
 
Foreign currency contracts
    
789
   
616
 
Interest rate swaps
    
-
   
1,501
 
Other
    
7,204
   
6,796
 
Total Accrued Expenses and Current Liabilities
  
$
52,940
  
$
62,384
  


-14-
 
Note 11 - 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 $5,856 and $6,450 as of May 31, 2007 and February 28, 2007, respectively. We estimate our warranty accrual using historical trends, which we believe 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 period ended May 31, 2007 and fiscal year ended February 28, 2007:
 
ACCRUAL FOR WARRANTY RETURNS
    
(in thousands)
          
   
May 31,
2007
  
February 28,
2007
  
   
(Three Months)
  
(Year)
  
Balance at the beginning of the period
  
$
6,450
  
$
7,373
  
Additions to the accrual
    
5,607
   
18,080
 
Reductions of the accrual - payments and credits issued
    
(6,201
)
  
(19,003
)
Balance at the end of the period
  
$
5,856
  
$
6,450
  
 
Note 12 - Income Taxes

Hong Kong Income Taxes - On May 10, 2006, the Inland Revenue Department (the “IRD”) of Hong Kong 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 quarter of fiscal 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 is seeking to levy taxes on income earned from certain activities previously conducted in Hong Kong. Negotiations with the IRD regarding these issues and their settlement 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. 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 total 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.
 
-15-
 
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. Over the course of the prior year, the Company had moved these activities to China and Macao. The Company established a Macao offshore company (“MOC”) and began operating from Macao in the third quarter of fiscal 2005. As a MOC, we have been granted an indefinite tax holiday and currently pay no taxes.

United States Income Taxes - 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 our consolidated financial statements.

The IRS recently began an examination of the U.S. consolidated federal tax return for fiscal year 2005. The audit is in the preliminary stages and, to date, no adjustments have been proposed.

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 American Jobs Creation Act of 2004 (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 transaction is grandfathered by the AJCA, and we expect to continue to benefit from our current structure.
 
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.
 
-16-
 
Uncertainty in Income Taxes - 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.

Effective March 1, 2007, we adopted FIN 48, which provides guidance for the recognition, derecognition and measurement in financial statements of tax positions taken in previously filed tax returns or tax positions expected to be taken in tax returns. FIN 48 requires an entity to recognize the financial statement impact of a tax position when it is more likely than not that the position will be sustained upon examination. If the tax position meets the more-likely-than-not recognition threshold, the tax effect is recognized at the largest amount of the benefit that has greater than a fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance for classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 requires that a liability created for unrecognized tax benefits shall be presented as a liability and not combined with deferred tax liabilities or assets.

Upon adopting FIN 48, we recorded a $12,055 increase in the liability for unrecognized tax benefits (including interest and penalties), and corresponding reductions to retained earnings and additional paid-in-capital in the amounts of $5,911 and $6,144, respectively. Amounts charged against additional paid-in-capital related to the tax effect of stock compensation expense that was originally recorded as an increase to paid-in-capital.

Upon adoption of FIN 48, we had approximately $39,387 of total gross unrecognized tax benefits, of which $32,913 would impact the effective tax rate, if recognized. With the adoption of FIN 48, we recognize interest and penalties accrued related to unrecognized tax benefits in the provision for income taxes. Included in our total gross unrecognized tax benefits we had approximately $4,783 accrued for penalties and $307 accrued for interest, net of tax benefits. We file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. As of March 1, 2007, tax years under examination or still subject to examination by major tax jurisdictions, for our most significant subsidiaries were as follows:

Jurisdicton
  
Examinations in Process
  
Open Years
Hong Kong
  
1998- 2003
  
2004
-
2007
Mexico
  
- None -
  
2003
-
2007
United Kingdom
  
2005
  
2006
-
2007
United States
  
2003- 2005
  
2006
-
2007

We anticipate that it is reasonably possible that the total amount of unrecognized tax benefits may materially change by the end of fiscal 2008 due to issues pending settlement with the IRS. Depending on the outcome of the settlement negotiations, estimates including accrued penalties and interest, net of tax benefits where applicable, range from a $7,600 decrease to a $11,600 increase in unrecognized tax benefits.

-17-
 
Note 13 - Long Term-Debt

A summary of long-term debt was as follows:

LONG TERM DEBT
(in thousands)
                          
       
Range of Interest Rates
                  
   
Original Date Borrowed
  
Quarter Ended May 31, 2007
  
Fiscal
2007
  
Latest Rate Payable
  
Matures
  
May 31,
2007
  
February 28,
2007
  
                               
$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
  
$
10,000
  
$
10,000
  
                                             
$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
                
5.37%
 
                        
points. Principal is due at maturity. Notes
               
to
                          
can be prepaid without penalty. (1)
    
06/04
    
5.89
%
  
6.35%
 
  
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
                
5.37%
 
                        
points. Principal is due at maturity. Notes can
                
to
                          
be prepaid without penalty. (1)
    
06/04
    
5.89
%
  
6.35%
 
  
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
                
5.42%
 
                        
points. Principal is due at maturity. Notes can
                
to
                          
be prepaid without penalty. (1)
    
06/04
    
6.01
%
  
6.40%
 
  
6.01
%
  
06/14
    
75,000
   
75,000
 
                                   
250,000
   
250,000
 
Less current portion of long-term debt
                                  
(10,000
)
  
(10,000
)
Long-term debt, less current portion
                                
$
240,000
  
$
240,000
  

(1) Floating interest rates have been hedged with interest rate swaps to effectively fix interest rates as discussed later in this note.
 
-18-
 
On September 28, 2006, we entered into interest rate hedge agreements in conjunction with our 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. Under our swaps, we agree with other parties to exchange quarterly the difference between fixed-rate and floating-rate interest amounts calculated by reference to notional amounts that perfectly match our underlying debt. Under these swap agreements, we pay the fixed rates and receive the floating rates. The swaps settle quarterly and terminate upon maturity of the related debt. The swaps are considered cash flow hedges because they are intended to hedge, and are effective as a hedge, against variable cash flows.
 
All of our long-term debt is unconditionally 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 $66,923 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 May 31, 2007, we are in compliance with all the terms of these agreements.
 
-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 May 31,
  
   
2007
  
2006
  
Interest and commitment fees
 
$
4,098
  
$
4,317
  
Deferred finance costs
    
182
   
189
 
Interest rate swap settlements
    
(167
)
  
-
 
Total interest expense
  
$
4,113
  
$
4,506
  
 
Note 14 - Contractual Obligations

Our contractual obligations and commercial commitments, as of May 31, 2007 were:

PAYMENTS DUE BY PERIOD - TWELVE MONTHS ENDED MAY 31:
(in thousands)
                              
 
 
 
2008
 
2009
 
2010
 
2011
 
2012
 
After
 
 
 
Total
 
1 year
 
2 years
 
3 years
 
4 years
 
5 years
 
5 years
  
                               
Term debt - fixed rate
  
$
25,000
  
$
10,000
  
$
3,000
  
$
3,000
  
$
3,000
  
$
3,000
  
$
3,000
  
Term debt - floating rate (1) (2)
    
225,000
   
-
   
-
   
100,000
   
-
   
50,000
   
75,000
 
Long-term incentive plan payouts
    
2,614
   
1,611
   
843
   
160
   
-
   
-
   
-
 
Interest on floating rate debt (1)
    
56,226
   
13,343
   
13,343
   
7,943
   
7,453
   
4,753
   
9,391
 
Interest on fixed rate debt
    
3,861
   
1,553
   
896
   
679
   
462
   
244
   
27
 
Open purchase orders
    
80,096
   
80,096
   
-
   
-
   
-
   
-
   
-
 
Minimum royalty payments
    
69,713
   
2,636
   
6,840
   
8,393
   
8,110
   
7,800
   
35,934
 
Advertising and promotional
    
72,921
   
9,237
   
5,797
   
7,542
   
7,199
   
7,366
   
35,780
 
Operating leases
    
11,692
   
1,915
   
1,170
   
1,236
   
928
   
943
   
5,500
 
Open letters of credit pending settlement
    
1,063
   
1,063
   
-
   
-
   
-
   
-
   
-
 
Other
    
250
   
250
   
-
   
-
   
-
   
-
   
-
 
Total contractual obligations
  
$
548,436
  
$
121,704
  
$
31,889
  
$
128,953
  
$
27,152
  
$
74,106
  
$
164,632
  
 
(1)
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 13, 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. On June 8, 2007, we amended our interest rate swap agreement, concurrent with a notice to prepay $25,000 of our $100,000 5 year floating rate Senior notes, reducing the notional amount of the swap contracts from $100,000 to $75,000, and recording a gain of $163 upon the liquidation of our position in $25,000 of swaps. The gain will be recorded as a component of “Interest expense” for the fiscal quarter ending August 31, 2007. The remaining interest rate swaps are considered highly effective and will continue to be accounted for as cash flow hedges.
 
-20-
 
(2)
On June 8, 2007, we gave notice to prepay $25,000 of our $100,000, 5 year floating rate Senior Notes without penalty. This prepayment was made on June 29, 2007. The amount prepaid will reduce the amount due in June 2009 from $100,000 to $75,000.

We lease certain facilities, equipment and vehicles under operating leases, which expire at various dates through fiscal 2017. Certain of the leases contain escalation clauses and renewal or purchase options.

Rent expense related to our operating leases was $675 and $1,073 for the three month periods ended May 31, 2007 and 2006, respectively.

Note 15 - Foreign Currency Contracts and Interest Rate Swaps

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 periods ended May 31, 2007 and 2006, we transacted approximately 15 percent 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. 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 during the forecasted period, a hedging relationship is created. 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 statements of income in the same period as the forecasted transactions close out over the remaining balance of their terms. The ineffective portion of the change in fair value (arising from the change in the difference between the spot rate and the forward rate) is recognized in the period it occurred. These amounts are also recognized in "Selling, general, and administrative expense" in the consolidated statements of income. We do not enter into any forward exchange contracts or similar instruments for trading or other speculative purposes.

During the third quarter of fiscal 2007, we decided to manage our floating rate debt using interest rate swaps (the “swaps”). We entered into three interest rate swaps that converted an aggregate notional principal of $225,000 from floating interest rate payments under our 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 ranging from 5.04 to 5.11 percent while simultaneously receiving floating rate interest payments set at 5.35 percent as of May 31, 2007 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.
 
-21-
 
The swaps are considered highly effective. Unrealized 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 statements of income.

The following table summarizes the various foreign currency contracts and interest rate swap contracts we designated as cash flow hedges that were open at May 31, 2007 and February 28, 2007:
 
CASH FLOW HEDGES
May 31, 2007
  
Contract
  
Currency to
  
Notional
  
Contract
  
       Range of Maturities      
 
Spot Rate at Contract
  
Spot Rate at May 31,
  
Weighted Average Forward Rate
  
Weighted Average Forward Rate at May 31,
  
Market Value of the Contract in U.S. Dollars
  
Type
  
Deliver
  
Amount
  
Date
  
From
  
To
  
Date
  
2007
  
at Inception
  
2007
  
(Thousands)
  
Foreign Currency Contracts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sell
 
Pounds
 
 
£10,000,000
 
 
5/12/2006
 
 
12/14/2007
 
 
2/14/2008
 
 
1.8940
 
 
1.9796
 
 
1.9010
 
 
1.9709
 
 
($699
)
Sell
 
Pounds
 
 
£5,000,000
 
 
11/28/2006
 
 
12/11/2008
 
 
1/15/2009
 
 
1.9385
 
 
1.9796
 
 
1.9242
 
 
1.9550
 
 
($154
)
Sell
 
Pounds
 
 
£5,000,000
 
 
4/17/2007
 
 
2/17/2009
 
 
8/17/2009
 
 
2.0000
 
 
1.9796
 
 
1.9644
 
 
1.9517
 
 
$64
 
Subtotal
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($789
)
Interest Rate Swap Contracts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Swap
 
Dollars
 
 
$100,000,000
 
 
9/28/2006
 
6/29/2009
(Pay fixed rate at 5.04%, receive floating rate at 5.35%)
$359
 
Swap
 
Dollars
 
 
$50,000,000
 
 
9/28/2006
 
6/29/2011
(Pay fixed rate at 5.04%, receive floating rate at 5.35%)
 
$330
 
Swap
 
Dollars
 
 
$75,000,000
 
 
9/28/2006
 
6/29/2014
(Pay fixed rate at 5.11%, receive floating rate at 5.35%)
 
$750
 
Subtotal
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$1,439
 
Fair Value of Cash Flow Hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$650
 
   
   
February 28, 2007
  
Contract
  
Currency to
  
Notional
  
Contract
  
   Range of Maturities  
 
Spot Rate at Contract
  
Spot Rate at Feb. 28,
  
Weighted Average Forward Rate at
  
Weighted Average Forward Rate at
  
Market Value of the Contract in U.S. Dollars
  
Type
  
Deliver
  
Amount
  
Date
  
From
  
To
  
Date
  
2007
  
Inception
  
Feb. 28, 2007
  
(Thousands)
  
Foreign Currency Contracts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sell
 
Pounds
 
 
£10,000,000
 
 
5/12/2006
 
 
12/14/2007
 
 
2/14/2008
 
 
1.8940
 
 
1.9636
 
 
1.9010
 
 
1.9543
 
 
($533
)
Sell
 
Pounds
 
 
£5,000,000
 
 
11/28/2006
 
 
12/11/2008
 
 
1/15/2009
 
 
1.9385
 
 
1.9636
 
 
1.9242
 
 
1.9408
 
 
($83
)
Subtotal
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($616
)
Interest Rate Swap Contracts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Swap
 
Dollars
 
 
$100,000,000
 
 
9/28/2006
 
6/29/2009
(Pay fixed rate at 5.04%, receive floating rate at 5.36%)
 
($326
)
Swap
 
Dollars
 
 
$50,000,000
 
 
9/28/2006
 
6/29/2011
(Pay fixed rate at 5.04%, receive floating rate at 5.36%)
 
($342
)
Swap
 
Dollars
 
 
$75,000,000
 
 
9/28/2006
 
6/29/2014
(Pay fixed rate at 5.11%, receive floating rate at 5.36%)
 
($833
)
Subtotal
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($1,501
)
Fair Value of Cash Flow Hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($2,117
)
 
The Company is exposed to credit risk in the event of non-performance by the other party (a large financial institution) to its current existing forward and swap contracts. However, the Company does not anticipate non-performance by the other party.
 
Note 16 - Repurchase of Helen of Troy Shares

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 quarters ended May 31, 2007 and 2006, respectively, we did not repurchase any common shares. From September 1, 2003 through May 31, 2007, we have repurchased 1,563,836 shares at a total cost of $45,612, or an average price per share of $29.17. An additional 1,436,164 shares remain authorized for purchase under this plan.
 
-22-

Note 17 - Share-Based Compensation Plans

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. The plans are generally administered by the Compensation Committee of the Board of Directors, consisting of non-employee directors.

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 May 31, 2007, 238,786 shares remained available for issue under the 1998 plan and options for 6,685,808 common shares were outstanding under these plans. The 1998 Plan will terminate in August of 2008.

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. As of May 31, 2007, options for 260,000 common shares 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 up 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. No shares were issued during the fiscal quarter ended May 31, 2007, and as of that date, 307,386 shares remained available for future issue under the plan. The Stock Purchase Plan will terminate in July of 2008.

-23-
 
The Company recorded stock-based compensation expense in selling, general and administrative expense for the three months ended May 31, 2007 and 2006, respectively, as follows:
 
SHARE BASED PAYMENT EXPENSE
(in thousands, except per share data)
      
   
Three Months Ended May 31,
  
   
2007
 
2006
  
Stock options
  
$
190
  
$
187
  
Employee stock purchase plan
    
-
   
-
 
Share-based payment expense
  
$
190
  
$
187
  
 
              
 
              
Share-based payment expense, net of income tax benefits of $51 and $40
              
for the three months ended May 31, 2007 and 2006, respectively.
  
$
139
  
$
147
  
               
Earnings per share impact of share based payment expense:
              
Basic
  
$
0.00
  
$
0.00
  
Diluted
  
$
0.00
  
$
0.00
  

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 periods ended May 31, 2007 and 2006:

FAIR VALUE OF AWARDS AND ASSUMPTIONS USED
      
   
Three Months Ended May 31,
  
   
2007
 
2006
  
Weighted average fair value of grants (in dollars)
  
$
9.23
  
$
8.22
  
Risk free interest rate
    
4.65
%
  
4.32
%
Dividend yield
    
0.00
%
  
0.00
%
Expected volatility
    
37.21
%
  
40.21
%
Weighted average expected life (in years)
    
3.89
   
4.32
 

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 historical 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.

-24-
 
A summary of option activity as of May 31, 2007, and changes during the three 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, 2007
    
6,751
 
$
15.01
  
$
5.57
    
3.87
 
$
56,211
  
Granted
    
245
   
26.14
                   
Exercised
    
(42
)
  
(18.23
)
              
336
 
Forfeited / expired
    
(8
)
  
(16.10
)
                  
Outstanding at May 31, 2007
    
6,946
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