Unassociated Document
 
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 August 31, 2006
 
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 October 3, 2006
Common Shares, $0.10 par value per share
  
30,061,557 shares

 
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 August 31, 2006 (unaudited) and February 28, 2006
3
       
   
Consolidated Condensed Statements of Income (unaudited)
 
   
 for the Three Months and Six Months Ended
  
   
 August 31, 2006 and August 31, 2005
4
       
   
Consolidated Condensed Statements of Cash Flows (unaudited)
  
   
 for the Six Months Ended
  
   
 August 31, 2006 and August 31, 2005
5
       
   
Consolidated Condensed Statements of Comprehensive Income (unaudited)
  
   
 for the Three Months and Six Months Ended
  
   
 August 31, 2006 and August 31, 2005
6
       
   
Notes to Consolidated Condensed Financial Statements
7
       
 
Item 2
Management’s Discussion and Analysis of Financial Condition
  
   
 and Results of Operations
24
       
 
Item 3
Quantitative and Qualitative Disclosures about Market Risk
39
       
 
Item 4
Controls and Procedures
41
       
PART II.
OTHER INFORMATION
  
       
 
Item 1
 Legal Proceedings
42
       
 
Item 1A
 Risk Factors
44
       
 
Item 2
 Unregistered Sales of Equity Securities and Use of Proceeds
47
       
 
Item 4
 Submission of Matters to a Vote of Security Holders
47
       
 
Item 6
 Exhibits
48
       
  Signatures
49
 
-2-

 
PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


HELEN OF TROY LIMITED AND SUBSIDIARIES
          
Consolidated Condensed Balance Sheets
          
(in thousands, except shares and par value)
          
           
   
August 31,
  
February 28,
  
   
2006
  
2006
  
   
(unaudited)
      
Assets
          
Current assets:
          
Cash and cash equivalents
  
$
31,837
  
$
18,320
  
Trading securities, at market value
    
212
   
97
 
Foreign currency forward contracts
    
-
   
584
 
Receivables - principally trade, less allowance of $1,212 and $850
    
117,032
   
107,289
 
Inventories
    
185,324
   
168,401
 
Prepaid expenses
    
8,398
   
5,793
 
Deferred income tax benefits
    
10,387
   
10,690
 
Total current assets
    
353,190
   
311,174
 
               
Property and equipment, at cost less accumulated depreciation of $32,007 and $27,039
    
98,839
   
100,703
 
Goodwill
    
201,003
   
201,003
 
Trademarks, net of accumulated amortization of $228 and $225
    
157,708
   
157,711
 
License agreements, net of accumulated amortization of $15,233 and $14,514
    
27,082
   
27,801
 
Other intangible assets, net of accumulated amortization of $3,878 and $3,044
    
15,101
   
15,757
 
Tax certificates
    
25,144
   
28,425
 
Deferred income tax benefits
    
253
   
-
 
Other assets
    
14,897
   
15,170
 
   
$
893,217
  
$
857,744
  
               
Liabilities and Stockholders' Equity
              
Current liabilities:
              
Current portion of long-term debt
  
$
14,974
  
$
10,000
  
Accounts payable, principally trade
    
45,182
   
30,175
 
Accrued expenses
    
54,819
   
54,145
 
Income taxes payable
    
26,830
   
31,286
 
Total current liabilities
    
141,805
   
125,606
 
               
Long-term compensation liability
    
1,371
   
1,706
 
Deferred income tax liability
    
-
   
81
 
Long-term debt, less current portion
    
257,660
   
254,974
 
Total liabilities
    
400,836
   
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; 30,058,957 and 30,013,172 shares
              
issued and outstanding
    
3,006
   
3,001
 
Additional paid-in-capital
    
91,224
   
90,300
 
Retained earnings
    
398,469
   
380,916
 
Accumulated other comprehensive income (loss)
    
(318
)
  
1,160
 
Total stockholders' equity
    
492,381
   
475,377
 
   
$
893,217
  
$
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 August 31,
  
Six Months Ended August 31,
  
   
2006
  
2005
  
2006
  
2005
  
                   
Net sales
  
$
147,172
  
$
130,389
  
$
277,613
  
$
257,781
  
Cost of sales
    
80,504
   
70,171
   
153,004
   
138,871
 
Gross profit
    
66,668
   
60,218
   
124,609
   
118,910
 
                           
Selling, general, and administrative expense
    
50,028
   
46,088
   
97,053
   
89,482
 
Operating income
    
16,640
   
14,130
   
27,556
   
29,428
 
                           
Other income (expense):
                          
Interest expense
    
(4,696
)
  
(3,795
)
  
(9,202
)
  
(7,058
)
Other income, net
    
287
   
403
   
1,077
   
345
 
Total other income (expense)
    
(4,409
)
  
(3,392
)
  
(8,125
)
  
(6,713
)
                           
Earnings before income taxes
    
12,231
   
10,738
   
19,431
   
22,715
 
                           
Income tax expense:
                          
Current
    
833
   
233
   
1,772
   
1,106
 
Deferred
    
524
   
1,053
   
106
   
1,610
 
Net earnings
  
$
10,874
  
$
9,452
  
$
17,553
  
$
19,999
  
                           
Earnings per share:
                          
Basic
  
$
0.36
  
$
0.32
  
$
0.58
  
$
0.67
  
Diluted
  
$
0.35
  
$
0.30
  
$
0.56
  
$
0.63
  
                           
Weighted average common shares used in
                          
computing net earnings per share
                          
Basic
    
30,040
   
29,896
   
30,031
   
29,875
 
Diluted
    
31,506
   
31,877
   
31,483
   
31,945
 
                           
                           
See accompanying notes to consolidated condensed financial statements.
              
 
-4-

HELEN OF TROY LIMITED AND SUBSIDIARIES
          
Consolidated Condensed Statements of Cash Flows (unaudited)
          
(in thousands)
          
           
   
Six Months Ended August 31,
  
   
2006
  
2005
  
           
Cash flows from operating activities:
          
Net earnings
  
$
17,553
  
$
19,999
  
Adjustments to reconcile net earnings to net cash provided / (used) by operating activities
              
Depreciation and amortization
    
7,347
   
5,618
 
Provision for doubtful receivables
    
(362
)
  
(984
)
Stock-based compensation expense
    
370
   
-
 
Unrealized (gain) / loss - trading securities
    
(25
)
  
(66
)
Deferred taxes, net
    
12
   
496
 
Gain on the sale of property, plant and equipment
    
(422
)
  
-
 
Changes in operating assets and liabilities:
              
Accounts receivable
    
(9,381
)
  
1,910
 
Forward contracts
    
1,524
   
(1,959
)
Inventories
    
(16,923
)
  
(69,827
)
Prepaid expenses
    
(1,587
)
  
1,527
 
Other assets
    
1,843
   
(774
)
Accounts payable
    
15,007
   
6,602
 
Accrued expenses
    
(2,215
)
  
(8,472
)
Income taxes payable
    
(4,388
)
  
(593
)
Net cash provided / (used) by operating activities
    
8,353
   
(46,523
)
               
Cash flows from investing activities:
              
Capital, license, trademark, and other intangible expenditures
    
(3,748
)
  
(9,190
)
Proceeds from the sale of property, plant and equipment
    
666
   
150
 
Net cash used by investing activities
    
(3,082
)
  
(9,040
)
               
Cash flows from financing activities:
              
Proceeds from debt
    
7,660
   
-
 
Net borrowings on revolving line of credit
    
-
   
41,000
 
Payment of financing costs
    
-
   
(91
)
Proceeds from exercise of stock options and employee stock purchases
    
492
   
1,026
 
Share-based compensation tax benefit
    
94
   
-
 
Net cash provided by financing activities
    
8,246
   
41,935
 
Net increase / (decrease) in cash and cash equivalents
    
13,517
   
(13,628
)
Cash and cash equivalents, beginning of period
    
18,320
   
21,752
 
Cash and cash equivalents, end of period
  
$
31,837
  
$
8,124
  
               
Supplemental cash flow disclosures:
              
Interest paid
  
$
8,275
  
$
6,409
  
Income taxes paid (net of refunds)
  
$
6,159
  
$
2,358
  
               
               
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 August 31,
  
Six Months Ended August 31,
  
   
2006
  
2005
  
2006
  
2005
  
                   
Net earnings, as reported
  
$
10,874
  
$
9,452
  
$
17,553
  
$
19,999
  
Other comprehensive income (loss), net of tax:
                          
Cash flow hedges
    
(556
)
  
306
   
(1,478
)
  
2,691
 
Comprehensive income
  
$
10,318
  
$
9,758
  
$
16,075
  
$
22,690
  
                           
                           
See accompanying notes to consolidated condensed financial statements.
        
 
-6-

HELEN OF TROY LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
August 31, 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 August 31, 2006 and February 28, 2006, and the results of our consolidated operations for the three-month and six-month periods ended August 31, 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.

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 and accompanying footnotes, 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 (the "1994 Plan" and the "1998 Plan," respectively), as amended, 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 ("ISO's"), non-qualified stock options ("Non-Q's") and restricted share grants. Generally, options granted under the 1994 and 1998 Plans 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 August 31, 2006, 544,586 shares remained available for issue and 6,621,144 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 August 31, 2006, 278,500 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. At August 31, 2006, 319,231 shares remained available for future issue under this plan.
 
For the three-month and six-month periods ending August 31, 2006, the Company expensed $183 and $370 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 August 31,
  
Six Months Ended August 31,
  
   
2006
  
2005 (1)
  
2006
  
2005 (1)
  
                   
Stock options
  
$
133
  
$
-
  
$
320
  
$
-
  
Employee stock purchase plan
    
50
   
-
   
50
   
-
 
Share-based payment expense
  
$
183
  
$
-
  
$
370
  
$
-
  
                           
Share-based payment expense, net of income tax benefits of $54
                          
and $94 for the three and six months ended August 31, 2006.
  
$
129
  
$
-
  
$
276
  
$
-
  
                           
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 six-month periods ended August 31, 2005:
 
PRO FORMA NET INCOME AND PRO FORMA EARNINGS PER SHARE
          
(in thousands, except per share data)
          
           
   
August 31, 2005
  
   
(Three Months)
  
(Six Months)
  
           
Net income:
          
As reported
  
$
9,452
  
$
19,999
  
Share-based payment expense, net of income tax benefit of $132 and $238, respectively
    
454
   
750
 
Pro forma
  
$
8,998
  
$
19,249
  
               
Basic earnings per share:
              
As reported
  
$
0.32
  
$
0.67
  
Pro forma
    
0.30
   
0.64
 
               
Diluted earnings per share:
              
As reported
  
$
0.30
  
$
0.63
  
Pro forma
    
0.28
   
0.60
 
 
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 six-month periods ended August 31, 2006 and 2005:
 
FAIR VALUE OF AWARDS AND ASSUMPTIONS USED
                  
                   
   
Three Months Ended August 31,
  
Six Months Ended August 31,
  
   
2006
  
2005
  
2006
  
2005
  
                   
Weighted-average fair value of grants (in dollars)
  
$
6.71
  
$
7.91
  
$
7.16
  
$
8.68
  
Risk-free interest rate
    
4.94
%
  
3.63
%
  
4.95
%
  
3.70
%
Dividend yield
    
0.00
%
  
0.00
%
  
0.00
%
  
0.00
%
Expected volatility
    
38.65
%
  
42.04
%
  
39.13
%
  
42.42
%
Expected life (in years)
    
4.01
   
3.10
   
4.11
   
3.08
 
 
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 August 31, 2006, and changes during the six-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
    
(32
)
  
(9.19
)
                  
Forfeited / expired
    
(12
)
  
(19.23
)
                  
Outstanding at August 31, 2006
    
6,900
 
$
14.86
  
$
5.53
    
4.34
 
$
21,379
  
                                 
Exerciseable at August 31, 2006
    
6,602
 
$
14.75
  
$
5.48
    
4.21
 
$
21,189
  
                                 
The aggregate intrinsic value of options exercised during the six-month period ended August 31, 2006 was $309. A summary of non-vested option activity as of August 31, 2006, and changes during the six-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
    
(133
)
  
(5.87
)
Outstanding at August 31, 2006
    
298
 
$
6.51
  
 
A summary of the Company’s total unrecognized share-based compensation cost as of August 31, 2006 is as follows:
 
           
       
Weighted
 
       
Average
 
       
Remaining
  
       
Period of Expense
  
   
Unearned
  
Recognition
  
   
Compensation
  
(in months)
  
           
Stock options
  
$
1,346
    
43.1
 

-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, 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 and is still in the preliminary stages. The Company intends to defend the foregoing lawsuit vigorously, but, because the lawsuit has been recently filed, 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 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 1,466,683 and 1,452,051 for the three- and six-month periods ended August 31, 2006, respectively, and 1,980,758 and 2,069,738 for the three- and six-month periods ended August 31, 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 1,154,381 and 203,966 at August 31, 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 expense 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 six-month periods ended August 31, 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 six-month periods ended August 31, 2006, we allocated expenses totaling $3,333 and $5,758, respectively, to the Housewares segment, some of which were previously absorbed by the Personal Care segment. For the three-month and six-month periods ended August 31, 2005, transition charges of $2,811 and $4,784, respectively, were used to compute the Housewares segments operating income.

Major expense categories now allocated to the Housewares segment in lieu of the transition services charges the Housewares segment previously incurred include the following:

Customer Service
Credit, Collection and Accounting
Distribution Facility and Equipment Costs
Distribution Labor Charges
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. 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. Accordingly, we are in the process of re-evaluating our allocation methodology, and plan to change our methodology later in the current fiscal year. 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 AUGUST 31, 2006 AND 2005
          
(in thousands)
              
               
   
Personal
          
August 31, 2006
  
Care
  
Housewares
  
Total
  
               
Net sales
  
$
110,976
  
$
36,196
  
$
147,172
  
Operating income
    
9,701
   
6,939
   
16,640
 
Capital, license, trademark and other intangible expenditures
    
1,798
   
250
   
2,048
 
Depreciation and amortization
    
2,280
   
1,187
   
3,467
 
                     
 
    
Personal 
              
August 31, 2005
    
Care
    
Housewares
    
Total
  
                     
Net sales
  
$
100,861
  
$
29,528
  
$
130,389
  
Operating income
    
6,441
   
7,689
   
14,130
 
Capital, license, trademark and other intangible expenditures
    
4,987
   
447
   
5,434
 
Depreciation and amortization
    
2,103
   
789
   
2,892
 
 
SIX MONTHS ENDED AUGUST 31, 2006 AND 2005
          
(in thousands)
              
               
   
Personal
          
August 31, 2006
  
Care
  
Housewares
  
Total
  
               
Net sales
  
$
216,300
  
$
61,313
  
$
277,613
  
Operating income
    
15,893
   
11,663
   
27,556
 
Capital, license, trademark and other intangible expenditures
    
2,980
   
768
   
3,748
 
Depreciation and amortization
    
4,899
   
2,448
   
7,347
 
                     
 
    
Personal 
              
August 31, 2005
    
Care
    
Housewares
    
Total
  
                     
Net sales
  
$
201,377
  
$
56,404
  
$
257,781
  
Operating income
    
14,351
   
15,077
   
29,428
 
Capital, license, trademark and other intangible expenditures
    
8,317
   
873
   
9,190
 
Depreciation and amortization
    
4,065
   
1,553
   
5,618
 
 
The following tables contain net assets allocable to each segment for the periods covered by our consolidated condensed balance sheets:
 
IDENTIFIABLE NET ASSETS AT AUGUST 31, 2006 AND FEBRUARY 28, 2006
  
(in thousands)
              
               
   
Personal
          
   
Care
  
Housewares
  
Total
  
               
August 31, 2006
  
$
547,972
  
$
345,245
  
$
893,217
  
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
  
August 31,
  
February 28,
  
   
(Years)
  
2006
  
2006
  
               
Land
    
-
 
$
9,537
  
$
9,623
  
Building and improvements
    
10 - 40
    
63,281
   
62,374
 
Computer and other equipment
    
3 - 10
    
40,023
   
37,601
 
Molds and tooling
    
1 - 3
    
5,890
   
4,907
 
Transportation equipment
    
3 - 5
    
3,902
   
3,875
 
Furniture and fixtures
    
5 - 15
    
7,900
   
7,865
 
Construction in process
    
-
   
313
   
457
 
Information system under development
    
-
   
-
   
1,040
 
           
130,846
   
127,742
 
Less accumulated depreciation
          
(32,007
)
  
(27,039
)
Property and equipment, net
        
$
98,839
  
$
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 advanced approximately $89 to remodel and furnish this and other facilities and expect to incur approximately $111 of additional capital expenditures to complete the remodeling and furnishing of facilities.

We recorded depreciation of $2,540 and $4,968 for the three-month and six-month periods ended August 31, 2006, respectively, and $1,661and $3,265 for the three-month and six-month periods ended August 31, 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:


                                   
           
August 31, 2006
  
February 28, 2006
  
           
Gross
  
Accumulated
  
Net
  
Gross
  
Accumulated
  
Net
  
       
Estimated
 
Carrying
  
Amortization
  
Carrying
  
Carrying
  
Amortization
  
Carrying
  
Type / Description
  
Segment
  
Life
  
Amount
  
(if Applicable)
  
Amount
  
Amount
  
(if Applicable)
  
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
    
75,200
   
-
   
75,200
   
75,200
   
-
   
75,200
 
Brut
    
Personal Care
    
Indefinite
    
51,317
   
-
   
51,317
   
51,317
   
-
   
51,317
 
All other - definite lives
    
Personal Care
    
[1]
  
338
   
(228
)
  
110
   
338
   
(225
)
  
113
 
All other - indefinite lives
    
Personal Care
    
Indefinite
    
31,081
   
-
   
31,081
   
31,081
   
-
   
31,081
 
                 
157,936
   
(228
)
  
157,708
   
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
   
(15,233
)
  
9,082
   
24,315
   
(14,514
)
  
9,801
 
                 
42,315
   
(15,233
)
  
27,082
   
42,315
   
(14,514
)
  
27,801
 
                                                   
Other:
                                                  
Patents, customer lists and
                                            
non-compete agreements
Housewares
    
2 - 13 Years
    
18,979
   
(3,878
)
  
15,101
   
18,801
   
(3,044
)
  
15,757
 
                                                   
Total
              
$
420,233
  
$
(19,339
)
$
400,894
  
$
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 six-month periods ending August 31, 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
      
       
August 31, 2006
  
$
741
  
August 31, 2005
  
$
791
  
         
Aggregate Amortization Expense
        
For the six months ended
        
         
August 31, 2006
  
$
1,556
  
August 31, 2005
  
$
1,580
  
         
Estimated Amortization Expense
        
For the fiscal years ended
        
         
February 2007
  
$
3,046
  
February 2008
  
$
2,922
  
February 2009
  
$
2,673
  
February 2010
  
$
2,628
  
February 2011
  
$
2,155
  
February 2012
  
$
2,049
  
 
-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 timely election by the Company, borrowings accrue interest based on the respective 1, 2, 3, or 6-month LIBOR rate plus a margin of 0.75 percent to 1.25 percent based upon the "Leverage Ratio" at the time of the borrowing. The "Leverage Ratio" is defined by the Revolving Line of Credit Agreement as the ratio of total consolidated indebtedness, including the subject funding on such date, to consolidated EBITDA ("Earnings Before Interest, Taxes, Depreciation and Amortization") for the period of the four consecutive fiscal quarters most recently ended.

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 six-month periods ended August 31, 2006. As of August 31, 2006, there was a $616 open letter 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, effectively limited our ability to incur no more than $30,204 of additional debt from all sources, including draws on our Revolving Line of Credit. The agreement is guaranteed, on a joint and several basis, by the parent company, Helen of Troy Limited, and certain U.S. subsidiaries. Any amounts outstanding under the Revolving Line of Credit Agreement will mature on June 1, 2009. As of August 31, 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)
          
           
   
August 31,
  
February 28,
  
   
2006
  
2006
  
           
Accrued sales returns, discounts and allowances
  
$
25,449
  
$
24,176
  
Accrued compensation
    
3,984
   
7,603
 
Accrued advertising
    
7,242
   
7,617
 
Accrued interest
    
3,224
   
2,671
 
Accrued royalties
    
2,064
   
2,577
 
Accrued professional fees
    
1,397
   
1,502
 
Accrued benefits and payroll taxes
    
1,657
   
1,495
 
Accrued freight
    
1,671
   
858
 
Accrued property, sales and other taxes
    
1,174
   
593
 
Foreign currency forward contracts
    
899
   
-
 
Other
    
6,058
   
5,053
 
Total Accrued Expenses
  
$
54,819
  
$
54,145
  

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 $6,148 and $7,373 as of August 31, 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.

 
 
-16-

The following table summarizes the activity in the Company's accrual for the three-month and six-month periods ended August 31, 2006 and fiscal year ended February 28, 2006:
 
ACCRUAL FOR WARRANTY RETURNS
              
(in thousands)
              
               
           
February 28,
  
   
August 31, 2006
  
2006
  
   
(Three Months)
  
(Six Months)
  
(Year)
  
               
Balance at the beginning of the period
  
$
6,571
  
$
7,373
  
$
5,767
  
Additions to the accrual
    
3,510
   
8,481
   
22,901
 
Reductions of the accrual - payments and credits issued
    
(3,933
)
  
(9,706
)
  
(21,295
)
Balance at the end of the period
  
$
6,148
  
$
6,148
  
$
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 include 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 fiscal quarter just ended, 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.

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.  
 
-17-

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 the 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 examination 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.

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.
 
-18-
 
Note 12 - Long Term-Debt

A summary of long-term debt was as follows:

LONG-TERM DEBT
                              
(in thousands)
                              
                               
       
Range of Interest Rates
                  
       
Quarter
                      
   
Original
  
Ended
      
Latest
              
   
Date
  
August 31,
  
Fiscal
  
Rate
      
August 31,
  
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
    
5.81
%
  
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
    
5.81
%
  
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
    
5.86
%
  
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
    
6.12
%
  
5.42
%
  
6.65
%
  
05/11
    
12,634
   
4,974
 
                                   
272,634
   
264,974
 
Less current portion of long-term debt
                            
(14,974
)
  
(10,000
)
Long-term debt, less current portion
                          
$
257,660
  
$
254,974
  

Included in interest expense are amortized financing costs of $185 and $374 for the three-month and six-month periods ended August 31, 2006, respectively, and $203 and $401 for the three-month and six-month periods ended August 31, 2005, respectively.

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, effectively limited our ability to incur no more than $30,204 of additional debt from all sources, including draws on our Revolving Line of Credit. Additionally, our debt agreements restrict us from incurring liens on any of our properties, except under certain conditions. As of August 31, 2006, we are in compliance with all the terms of these agreements. 
-19-

During the fiscal quarter ended August 31, 2006, management evaluated the impact of prepaying some or all of its recently issued Industrial Development Revenue Bond (“the bond”). On September 15, 2006, the Company prepaid without penalty $4,974 of the 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. Accordingly, the Company reclassified $4,974 of the bond as current at August 31, 2006 and the remaining balance as due at maturity.
 
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 “September 2006 Swaps”). The interest rate swaps are a hedge of the variable LIBOR rates used to reset the floating rates on the Senior Notes. The September 2006 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. These swaps settle quarterly and terminate upon maturity of the related debt. These 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.

Note 13 - Contractual Obligations

Our contractual obligations and commercial commitments, as of August 31, 2006 were:
 
PAYMENTS DUE BY PERIOD - TWELVE MONTHS ENDED AUGUST 31:
                              
(in thousands)
                              
                               
       
2007
  
2008
  
2009
  
2010
  
2011
  
After
  
   
Total
  
1 year
  
2 years
  
3 years
  
4 years
  
5 years
  
5 years
  
                               
Recorded Contractual Obligations
                              
Term debt - floating rate
  
$
237,634
  
$
4,974
  
$
-
  
$
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
    
2,619
   
1,498
   
1,121
   
-
   
-
   
-
   
-
 
 
                     $  -                    
Unrecorded Contractual Obligations
                                            
Interest on floating rate debt *
    
69,592
   
13,826
   
13,813
   
13,323
   
7,923
   
7,560
   
13,147
 
Interest on fixed rate debt
    
5,493
   
2,079
   
1,351
   
842
   
624
   
407
   
190
 
Open purchase orders
    
65,975
   
65,975
   
-
   
-
   
-
   
-
   
-
 
Minimum royalty payments
    
59,091
   
2,380
   
2,501
   
2,417
   
5,967
   
6,208
   
39,618
 
Advertising and promotional
    
25,499
   
11,863
   
7,075
   
3,141
   
1,420
   
800
   
1,200
 
Operating leases
    
3,709
   
2,443
   
753
   
340
   
173
   
-
   
-
 
Capital spending commitments
    
1,611
   
1,611
   
-
   
-
   
-
   
-
   
-
 
Open letters of credit pending settlement
    
616
   
616
   
-
   
-
   
-
   
-
   
-
 
Other
    
569
   
414
   
155
   
-
   
-
   
-
   
-
 
Total contractual obligations
  
$
507,408
  
$
117,679
  
$
39,769
  
$
123,063
  
$
19,107
  
$
75,635
  
$
132,155
  
 
*     The future obligation for interest on our variable rate debt has normally 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 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 “September 2006 Swaps”). The interest rate swaps are a hedge of the variable LIBOR rates used to reset the floating rates on the Senior Notes. The September 2006 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 August 31, 2006. This is only an estimate, actual rates on the bond may vary over time. For instance, taking into account that $4,974 of the bond was prepaid on September 15, 2006; a 1 percent increase in interest rates could add approximately $77 per year to floating rate interest expense over the bond’s remaining maturity.
 

-20-

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. 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 $111 for remodeling and furnishing office facilities and approximately $1,500 for additional warehouse racking and forklifts, which will allow us to improve space utilization in our new Southaven, Mississippi distribution facility.

Rent expense related to our operating leases was $1,169 and $2,242 for the three-month and six-month periods ended August 31, 2006, respectively, and $591 and $1,224 for the three-month and six-month periods ended August 31, 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 six-month periods ended August 31, 2006, we transacted approximately 14 percent of our net sales in foreign currencies. During the three-month and six-month periods ended August 31, 2005, we transacted approximately 13 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. 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 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.
 
-21-

The following table summarizes the various forward contracts we designated as cash flow hedges that were open at August 31, 2006 and February 28, 2006:

CASH FLOW HEDGES
                              
   
August 31, 2006
  
Contract
 
Currency to
 
Notional
 
Contract
 
Range of Maturities
  
Spot Rate at Contract
 
Spot Rate at
August 31,
 
Weighted
Average
Forward
Rate at 
  
Weighted
Average
Forward
Rate at
August 31,
 
Market
Value of
the Contract
in U.S. Dollars
 
Type
  
Deliver
  
Amount
  
Date
  
From
  
To
  
Date
  
2006
  
 Inception
  
2006
  
(Thousands)
  
                                           
Sell
    
Pounds
    
£10,000,000
    
1/26/2005
    
12/11/2006
    
2/9/2007
    
1.8700
   
1.9047
   
1.8228
   
1.9059
    
($831
)
Sell
    
Pounds
    
£10,000,000
    
5/12/2006
    
12/14/2007
    
2/14/2008
    
1.8940
   
1.9047
   
1.9010
   
1.9079
    
($69
)
                                                           
($899
)
   
February 28, 2006
  
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 Feb. 28,
   
Market
Value of
the Contract
in U.S. Dollars
 
Type
    
Deliver 
    
Amount 
    
Date 
    
From 
    
To
    
Date 
    
2006 
    
 Inception 
    
2006 
    
(Thousands) 
  
                                                               
Sell
    
Pounds
    
£10,000,000
    
1/26/2005
    
12/11/2006
    
2/9/2007
    
1.8700
   
1.7540
   
1.8228
   
1.7644
  
$
584
  
                                                               

Note 15 - 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 for three more years through May 31, 2009. During the fiscal quarters ended August 31, 2006 and 2005, respectively, we did not repurchase any common shares. From September 1, 2003 through August 31, 2006, 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.

Note 16 - Customer and Supplier Concentrations

Customers - Sales to our largest customer and its affiliate accounted for approximately 22 percent and 25 percent of our net sales in fiscal 2006 and 2005, respectively. Sales to our second largest customer accounted for approximately 10 percent and 8 percent of our net sales in fiscal 2006 and 2005, respectively. No other customers accounted for ten percent or more of net sales during those fiscal years. Sales to our top five customers accounted for approximately 46 percent and 44 percent in fiscal 2006 and 2005, respectively.

Suppliers - We use third party manufacturers to fulfill our manufacturing needs. Most of these manufacturers are in the Far East, primarily in the Peoples' Republic of China. Most of our grooming, skin care and hair care products are currently manufactured in North America. We have found that contract manufacturing maximizes our flexibility and responsiveness to industry and consumer trends while minimizing the need for capital expenditures and the risk embedded in such expenditures. Manufacturers who produce our products use formulas, molds, and certain other tooling, some of which we own, in manufacturing those products. Both our business segments employ numerous technical and quality control persons to assure high product quality.

We have relationships with over 200 third-party manufacturers. Of those, the top two manufactures currently fulfill approximately 25 percent of our product requirements. Our top five suppliers currently fulfill approximately 42 percent of our product requirements.

 
-22-

We do not have long-term contracts with our manufacturers. We rely on our longstanding relationships with these suppliers to assure adequate sources of supply. Should one or more of our manufacturers stop producing product on our behalf, it could have a material adverse effect on our business, financial condition, and results from operations.
 
 
-23-
 
 
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

This discussion contains a number of forward-looking statements, all of which are based on current expectations. Actual results may differ materially due to a number of factors, including those discussed in the section entitled Item 3. "Quantitative and Qualitative Disclosures about Market Risk", "Information Regarding Forward Looking Statements", Part II, Item 1A, “Risk Factors” and in the Company's most recent report on Form 10-K. This discussion should be read in conjunction with our consolidated condensed financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2006.
 
OVERVIEW OF THE QUARTER'S AND YEAR-TO-DATE ACTIVITIES:

The second fiscal quarter’s net sales traditionally average approximately 23 percent of the fiscal year's total net sales on a historical basis. Our second fiscal quarter is traditionally characterized by stable shipping levels from June through the first half of July with increasing shipment levels beginning in the second half of July through August as we build towards a peak shipping season in the third quarter.

Our focus this quarter remained on our domestic distribution system. During the quarter, we continued to refine and improve our abilities to operate our new 1,200,000 square foot Southaven, Mississippi distribution facility. After we complete our peak shipping season, we plan to move our Personal Care appliance inventory to the same facility in the fourth fiscal quarter. Our current intent is to have the appliance move completed by the end of this fiscal year.

In the first fiscal quarter, we obtained an extension on the lease of our formerly owned distribution facility, which is currently used for our appliance inventory. As a result of the extension, the lease term expires February 28, 2007. This extension of the agreement was made in order to provide us additional flexibility in the timing of the transition of our remaining operations to the new facility to help ensure customer service levels. The need to operate out of two facilities is currently resulting in some duplication of costs. We do not expect to achieve anticipated cost savings relating to our distribution facility consolidation until early to the middle of fiscal 2008.

·
Consolidated net sales for the fiscal quarter just ended increased 12.9 percent to $147,172 compared to $130,389 for the same period last year. Consolidated net sales for the six month period ending August 31, 2006 increased 7.7% to $277,613 compared to $257,781 for the same period last year. Both the quarter and year to date periods produced sales increases across all product lines, when compared to the same fiscal periods last year except for our domestic sales of grooming, skin care, and hair product lines. Domestic sales of these lines were negatively impacted in the second fiscal quarter by a combination of (i) slowing reorders from major retail and mass merchant chains in order to reduce their inventory in the first fiscal quarter; (ii) competitive promotional pricing and close-out selling throughout the first half of the fiscal year; and (iii) lower retail point of sale unit volumes in the second fiscal quarter.
   
·
Consolidated gross profit margin for the fiscal quarter just ended decreased 0.9 percent to 45.3 percent compared to 46.2 percent for the same period last year. Consolidated gross profit margin for the six-month period ending August 31, 2006 decreased 1.2 percent to 44.9 percent compared to 46.1 percent for the same period last year.
   
·
Selling, general and administrative costs for the fiscal quarter just ended decreased 1.3 percent to 34.0 percent compared to 35.3 percent for the same period last year. Selling, general and administrative expense for the the six-month period ending August 31, 2006 increased 0.3 percent to 35.0 percent compared to 34.7 percent for the same period last year. The improvement for the quarter is due to the impact of higher sales volumes on our cost structure, offset somewhat by percentage increases in depreciation, advertising and higher facility related costs due to the operational transition of our domestic distribution system.
   
·
Our financial position continues to strengthen when compared to our financial position as of February 28, 2006 and August 31, 2005. Total assets increased 2.3 percent, or $20,184, to $893,217 at August 31, 2006 when compared with August 31, 2005. Total current and long-term debt outstanding at August 31, 2006 was $272,634 compared to $311,000 outstanding at August 31, 2005. Total stockholders’ equity was $492,381 at August 31, 2006 compared to $444,512 at August 31, 2005.
 
-24-
 
·
On August 9, 2006, we extended our agreement to remain the title sponsor of the Sun Bowl for the December 2007, 2008, and 2009 games and changed the name to the Brut® Sun Bowl beginning with the December 2006 game. The Brut® Sun Bowl is one of the nation’s longest-running invitational college football games with a 73 year history. CBS sports has announced that its network will continue to televise the games nationally through 2009.

We will be transitioning Mexico and other Latin American operations to our global information system later in fiscal 2007 and in fiscal 2008. In addition, our Housewares segment recently opened selling offices in Japan and Great Britain, and efforts to bring up appropriate software systems for these operations are underway. Due to the complexities of these efforts, we expect to continue to experience a period of significant change. While nothing has come to our attention that would lead us to believe that we may experience related operational issues, errors or misstatements of our financial results during this time-frame, we recognize that these continue to be challenging transitions for us and will require close monitoring to keep our documentation and application of internal controls current.

While we believe we have taken appropriate measures to mitigate the recent shipment disruptions arising from the transition of our Housewares segment, as discussed above, we still have significant transitions to complete. While we believe we have the process and appropriate management in place to effectively manage these transitions and rapidly respond to mitigate any issues that may arise as a result of the transition, there can be no assurance that additional disruptions will not occur.

Personal Care Segment

Net sales in the segment for the second fiscal quarter increased 10.0 percent to $110,976 compared with $100,861 for the same period last year. Net sales for the six month period ending August 31, 2006 increased 7.4 percent to $216,300 compared with $201,377 for the same period last year.

Two of our three major product lines: appliances and brushes, combs and accessories showed increases in the second quarter when compared with the same period last year. Our Grooming, Skin Care, and Hair lines showed overall declines for the quarter and year-to-date when compared to the same periods last year.

Domestically, we operate in mature markets where we compete on product innovation, price, quality and customer service. We continuously adjust our product mix, pricing and marketing programs in order to maintain, and in some cases, acquire more retail shelf space. Changes in product mix are generally allowing us to realize higher average unit prices, which offset is some categories, unit volume decreases. Over the last year, the prices of raw materials such as copper, steel, plastics and alcohol have experienced significant increases and we currently expect them to remain high for the foreseeable future. We largely have been able to avoid significant price increases to our customers due to raw materials increases, or pass these on by moving customers to newer product models with enhancements that we can charge higher prices for. We have and may continue to discuss the need to raise prices with our customers and have already put certain increases into effect. The extent to which we will be able to continue with price increases, the timing, and the ultimate impact of such increases on net sales is uncertain. Accordingly we expect to experience margin pressure in this segment throughout the balance of the year.

·
Appliances. Products in this line include electronic curling irons, thermal brushes, hair straighteners, hair crimpers, hair dryers, massagers, spa products, foot baths, electric clippers and trimmers. Net sales for the three- and six-month periods ended August 31, 2006 increased approximately 9.9 percent and 6.5 percent, respectively, over the same periods in the prior year. We have succeeded in moving our business to higher unit prices with increased unit volumes. For the quarter and year-to-date, increases in our average unit selling price contributed approximately 5.9 and 4.1 percent, respectively, to net sales growth while increases in our unit volumes contributed approximately 4.0 and 2.4 percent, respectively to net sales growth. Revlon®, Vidal Sassoon®, Hot Tools®, Dr. Scholl's®, Wigo®, Sunbeam®, and Health o Meter® were key selling brands in this line.
   
 
-25-
 
 
In March 2006, we secured the rights in certain European and Asian Markets to introduce a line of hair care appliances under the Toni & Guy® brand name. Toni & Guy® is an international chain of hundreds of hair salons throughout Europe that has expanded operations into certain key urban markets in the United States. We believe our association with Toni & Guy® will create new sales opportunities for our products in Europe. During the fiscal quarter ended August 31, 2006, we began shipment of product under the Toni & Guy® brand. Also in August, we began shipping our new Fusion Tools® line of professional appliances designed to compete at the higher end of the professional market.
   
 
Grooming, Skin Care, and Hair Products. Products in this line include liquid hair styling products, men’s fragrances, men’s deodorants, body powder, and skin care products. Our grooming, skin care, and hair care portfolio includes the Brut®, Sea Breeze®, Vitalis®, Condition® 3-in-1, Ammens®, and Skin Milk® brand names. Net sales for the second fiscal quarter ended August 31, 2006 decreased approximately 1.4 percent while net sales for the six-month period ended August 31, 2006 increased 2.1 percent, when compared against the same periods in the prior year.
   
 
Domestic net sales of grooming, skin care, and hair products continued to be soft during the second fiscal quarter and six-months ended August 31, 2006 due to a combination of (i) slowing reorders from major retail and mass merchant chains in order to reduce their inventory in the first fiscal quarter; (ii) competitive promotional pricing and close-out selling throughout the first half of the fiscal year; and (iii) lower retail point of sale unit volumes in the second fiscal quarter. In our domestic market, we are currently launching the third fiscal quarter release of Brut Revolution®, initially a newly formulated, glass bottled, higher-end men’s cologne that will sell at higher price points than Brut’s traditional plastic bottled line.
   
 
The Latin American region’s net sales within this product line continue to show strength, primarily from our Brut® and Ammens® brands. Growth resulted from the performance of Brut in the Mexican market, new distribution and continued expansion of our product lines across the Latin American region.
   
·
Brushes, Combs, and Accessories. Net sales for the three- and six-month periods ended August 31, 2006 increased approximately 42.3 percent and 29.3 percent, respectively over the same periods in the prior year. This was due to new customers and product development and positioning changes made over the last year. Our new lines and mix of Vidal Sassoon® and Revlon® accessories, high end private label products, and other product initiatives are achieving higher unit prices along with new distribution. Vidal Sassoon®, Revlon® and Karina® were key brands in this line.

Housewares Segment

Our Housewares segment includes the operations of OXO International, acquired in fiscal 2004. OXO Good Grips®, OXO Steel™ and OXO SoftWorks® are our key brands in this segment.

Net sales in the segment for the second fiscal quarter increased 22.6 percent to $36,196 compared with $29,528 for the same period last year. Net sales for the six month period ending August 31, 2006 increased 8.7 percent to $61,313 compared with $56,404 for the same period last year. In the first fiscal quarter, we experienced sales declines as a result of the distribution transition issues previously discussed. These issues had a negative impact on the first fiscal quarter net sales estimated between approximately $4.5 to $5 million. A portion of these sales were recovered during the second fiscal quarter, and accounted for part of our Housewares segment’s second quarter net sales increase when compared to the same period last year.
 
For the second fiscal quarter ended August 31, 2006, higher average unit prices and increased unit volumes favorably impacted net sales by approximately 20.2 and 2.4 percent, respectively when compared to the same period last year. Unit prices are increasing because the Houseware segment’s business has been expanding its product mix into higher price point goods such as trash cans, tea kettles, and hand tools. Unit volumes increased primarily through growth with existing accounts.
 
-26-
 
For the six-months ended August 31, 2006, higher average unit prices favorably impacted net sales by approximately 13.3 percent. As mentioned above, unit prices increased because the Houseware segment’s business has been expanding its product mix into higher price point goods such as trash cans, tea kettles, and hand tools. This was partially offset by first fiscal quarter declines in unit volumes due to issues associated with our transition to our new distribution center as previously discussed.
 
We have begun to expand our Housewares segment’s sales operations in Europe and Japan. In the second quarter, we terminated certain existing distribution agreements we had in these countries and are establishing our own selling offices, leveraging certain existing facilities, infrastructure and sales contacts, where possible. We believe that with relatively modest additional infrastructure investments, we can enhance our presence in those markets. This is a long range initiative and we do not expect any meaningful sales impact from these efforts through the end of the current fiscal year.

-27-
 
RESULTS OF OPERATIONS

Comparison of fiscal quarter and six-month periods ended August 31, 2006 to the same periods ended August 31, 2005.

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


SELECTED OPERATING DATA
                          
(dollars in thousands)
                          
                           
                   
% of Net Sales
  
Quarter ended August 31,
  
2006
  
2005
  
$ Change
  
% Change
  
2006
  
2005
  
                           
Net sales
                          
Personal Care Segment
  
$
110,976
  
$
100,861
  
$
10,115
    
10.0
%
  
75.4
%
  
77.4
%
Housewares Segment
    
36,196
   
29,528
   
6,668
   
22.6
%
  
24.6
%
  
22.6
%
Total net sales
    
147,172
   
130,389
   
16,783
   
12.9
%
  
100.0
%
  
100.0
%
Cost of sales
    
80,504
   
70,171
   
10,333
   
14.7
%
  
54.7
%
  
53.8
%
Gross profit
    
66,668
   
60,218
   
6,450
   
10.7
%
  
45.3
%
  
46.2
%
                                       
Selling, general, and administrative expense
    
50,028
   
46,088
   
3,940
   
8.5
%
  
34.0
%
  
35.3
%
Operating income
    
16,640
   
14,130
   
2,510
   
17.8
%
  
11.3
%
  
10.8
%
                                       
Other income (expense):
                                      
Interest expense
    
(4,696
)
  
(3,795
)
  
(901
)
  
23.7
%
  
-3.2
%
  
-2.9
%
Other income, net
    
287
   
403
   
(116
)
  
-28.8
%
  
0.2
%
  
0.3
%
Total other income (expense)
    
(4,409
)
  
(3,392
)
  
(1,017
)
  
30.0
%
  
-3.0
%
  
-2.6
%
Earnings before income taxes
    
12,231
   
10,738
   
1,493
   
13.9
%
  
8.3
%
  
8.2
%
Income tax expense
    
1,357
   
1,286
   
71
   
5.5
%
  
0.9
%
  
1.0
%
Net earnings
  
$
10,874
  
$
9,452
  
$
1,422
    
15.0
%
  
7.4
%
  
7.2
%
                                       
                                       
 
                   
% of Net Sales
  
Six Months ended August 31,
  
2006
  
2005
  
$ Change
  
% Change
  
2006
  
2005
  
                           
Net sales
                          
Personal Care Segment
  
$
216,300
  
$
201,377
  
$
14,923
    
7.4
%
  
77.9
%
  
78.1
%
Housewares Segment
    
61,313
   
56,404
   
4,909
   
8.7
%
  
22.1
%
  
21.9
%
Total net sales
    
277,613
   
257,781
   
19,832
   
7.7
%
  
100.0
%
  
100.0
%
Cost of sales
    
153,004
   
138,871
   
14,133
   
10.2
%
  
55.1
%
  
53.9
%
Gross profit
    
124,609
   
118,910
   
5,699
   
4.8
%
  
44.9
%
  
46.1
%
                                       
Selling, general, and administrative expense
    
97,053
   
89,482
   
7,571
   
8.5
%
  
35.0
%
  
34.7
%
Operating income
    
27,556
   
29,428
   
(1,872
)
  
-6.4
%
  
9.9
%
  
11.4
%
                                       
Other income (expense):
                                      
Interest expense
    
(9,202
)
  
(7,058
)
  
(2,144
)
  
30.4
%
  
-3.3
%
  
-2.7
%
Other income, net
    
1,077
   
345
   
732
   
*
    
0.4
%
  
0.1
%
Total other expense, net
    
(8,125
)
  
(6,713
)
  
(1,412
)
  
21.0
%
  
-2.9
%
  
-2.6
%
Earnings before income taxes
    
19,431
   
22,715
   
(3,284
)
  
-14.5
%
  
7.0
%
  
8.8
%
Income tax expense
    
1,878
   
2,716
   
(838
)
  
-30.9
%
  
0.7
%
  
1.1
%
Net earnings
  
$
17,553
  
$
19,999
  
$
(2,446
)
  
-12.2
%
  
6.3
%
  
7.8
%
                                       
* Calculation is Not Meaningful
 
-28-

Consolidated Sales and Gross Profit Margins

Consolidated net sales for the second fiscal quarter ending August 31, 2006 increased 12.9 percent to $147,172 compared with $130,389 for the same period last year. Consolidated net sales for the six-month period ending August 31, 2006 increased 7.7 percent to $277,613 compared with $257,781 for the same period last year. There were no new product acquisitions to provide net sales growth during the six-months ending August 31, 2006. All growth during the quarter came from our core business (business we operated during the same fiscal period last year). For the fiscal quarter ending August 31, 2005, new product acquisition included the Skin Milk® and Time Block® lines of skin care products, acquired in September, 2004. For the six-month period ending August 31, 2005, new product acquisitions included OXO Housewares products until May 31, 2005 and the Skin Milk® and Time Block® lines of skin care products for the full six months. The following table sets forth the impact acquisitions had on our net sales:
 
IMPACT OF ACQUISITION ON NET SALES
          
(in thousands)
          
           
   
Three Months Ended August 31,
  
   
2006
  
2005
  
           
Prior year's net sales for the same period
  
$
130,389
  
$
141,229
  
               
Components of net sales change
              
Core business net sales change
    
16,783
   
(12,099
)
Net sales from acquisitions (non-core business net sales)
    
-
   
1,259
 
Change in net sales
    
16,783
   
(10,840
)
Net sales
 
$
147,172
  
$
130,389
  
               
Total net sales growth
    
12.9
%
  
-7.7
%
Core business net sales change
    
12.9
%
  
-8.6
%
Net sales change from acquisitions (non-core business net sales change)
    
0.0
%
  
0.9
%
               
 
           
   
Six Months Ended August 31,
  
   
2006
  
2005
  
           
Prior year's net sales for the same period
  
$
257,781
  
$
248,250
  
               
Components of net sales change
              
Core business net sales change
    
19,832
   
(19,649
)
Net sales from acquisitions (non-core business net sales)
    
-
   
29,180
 
Change in net sales
    
19,832
   
9,531
 
Net sales
 
$
277,613
  
$
257,781
  
               
Total net sales growth
    
7.7
%
  
3.8
%
Core business net sales change
    
7.7
%
  
-7.9
%
Net sales change from acquisitions (non-core business net sales change)
    
0.0
%
  
11.7
%

For the three-months ended August 31, 2006, our personal care segment contributed $10,115, or 7.8 percent to our consolidated net sales growth and our Housewares segment contributed $6,668, or 5.1 percent to our consolidated net sales growth for a combined growth rate of 12.9 percent.

For the six-months ended August 31, 2006, our personal care segment contributed $14,923, or 5.8 percent to our consolidated net sales growth and our Housewares segment contributed $4,909, or 1.9 percent to our consolidated net sales growth for a combined growth rate of 7.7 percent.

In our Personal Care segment, overall product mix changes allowed us to realize higher average unit prices in all product lines except for our grooming, skin care, and hair product lines, as previously discussed. For the three- and six-month periods ended August 31, 2006, average unit volume increases contributed 8.6 and 4.2 percent, respectively, to sales growth while average unit price increases contributed 1.4 and 3.2 percent, respectively, to sales growth over the same periods in the prior year.
 
-29-

In our Housewares segment, product mix changes also allowed us to realize higher average unit prices. For the three- and six-month periods ended August 31, 2006, average unit prices increases contributed 20.2 and 13.3 percent, respectively, to sales growth over the same periods in the prior year. For the three-months ended August 31, 2006, unit volume increases contributed 2.4 percent to our sales growth over the same period in the prior year. For the six-month period ended August 31, 2006, we experienced an overall unit volume decline of 4.6 percent over the same period in the prior year. As previously discussed, the decline in unit volumes was due to issues associated with our transition to our new distribution center during the first fiscal quarter.

Consolidated gross profit, as a percentage of sales for the three- and six-month periods ended August 31, 2006, decreased 0.9 and 1.2 percent to 45.3 and 44.9 percent, respectively, compared to 46.2 and 46.1 percent, respectively, for the same periods in the prior year. The decrease in gross profit is primarily due to:

·
price concessions, allowances and accommodations granted to customers for late shipments in our Housewares segment during the first fiscal quarter;
   
·
the Housewares segment’s expansion into higher price point lower margin product lines;
   
·
margin pressure in our Personal Care segment due to raw materials price increases in grooming, skin care, and hair products line; and
   
·
promotional pricing and close-out selling throughout the first half of the fiscal year primarily in the grooming, skin care, and hair products and brushes, combs and accessories lines of our personal care businesses in order to reduce domestic inventory levels.

In the fiscal quarter ended August 31, 2006, margins continued to benefit from an overall favorable impact on net sales of exchange rates. The dollar reversed its first fiscal quarter year-over-year trend of strengthening against the British Pound and Euro and began to weaken. The dollar continued its first quarter trend of strengthening against the Mexican Peso. The overall net impact of foreign currency changes was to provide approximately $526 and $714 of additional sales dollars for the three- and six-month periods ended August 31, 2006 when compared to the same periods in the prior year. For the six-month period ended August 31, 2006, the British Pound, the Euro, Canadian Dollar and Brazil Real were a source of exchange rate gains, which were partially offset by unfavorable exchange rates for the Mexican Peso and other Latin American currencies.

Selling, general, and administrative expenses

Selling, general, and administrative expenses, expressed as a percentage of net sales, decreased for the three-months ended August 31, 2006 to 34.0 percent from 35.3 percent for the same period in the prior year. The improvement for the quarter is due to the impact of higher sales volumes on our cost structure, offset somewhat by percentage increases in depreciation, advertising and higher facility related costs due to the operational transition of our domestic distribution system.

Selling, general, and administrative expenses, expressed as a percentage of net sales, increased for the six-months ended August 31, 2006 to 35.0 percent from 34.7 percent for the same period in the prior year. The change is primarily due to percentage of net sales increases in depreciation and higher facility related costs due to the operational transition of our domestic distribution system.

 
-30-
Operating Income by Segment:

The following table sets forth, for the periods indicated, our operating income by segment, as a percentage of net sales, and as a year-over-year percentage change:
 
OPERATING INCOME BY SEGMENT
                          
(dollars in thousands)
                          
                           
                           
                   
% of Segment Net Sales
  
Quarter Ended August 31,
  
2006
  
2005
  
$ Change
  
% Change
  
2006
  
2005
  
                           
Personal Care
  
$
9,701
  
$
6,441
  
$
3,260
    
50.6
%
  
8.7
%
  
6.4
%
Housewares
    
6,939
   
7,689
   
(750
)
  
-9.8
%
  
19.2
%
  
26.0
%
Total operating income
  
$
16,640
  
$
14,130
  
$
2,510
    
17.8
%
  
11.3
%
  
10.8
%
                                       
 
                           
                   
% of Segment Net Sales
  
Six Months Ended August 31,
  
2006
  
2005
  
$ Change
  
% Change
  
2006
  
2005
  
                           
Personal Care
  
$
15,893
  
$
14,351
  
$
1,542
    
10.7
%
  
7.3
%
  
7.1
%
Housewares
    
11,663
   
15,077
   
(3,414
)
  
-22.6
%
  
19.0
%
  
26.7
%
Total operating income
  
$
27,556
  
$
29,428
  
$
(1,872
)
  
-6.4
%
  
9.9
%
  
11.4
%
                                       
 
In addition to the changes in operating income components discussed above, during the three- and six-month periods ended August 31, 2006, we began allocating corporate overhead to our Housewares segment. The operating income for the three- and six-month periods ended August 31, 2005 does not include this allocation for the reasons 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 expense 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- and six-month periods ended August 31, 2006, we began making allocations of corporate overhead and distribution center expenses to Housewares in lieu of the transition charges recorded in the prior year. These allocations had a negative impact on the operating income from the Housewares segment. For the three- and six-month periods ended August 31, 2006, we allocated expenses totaling $3,333 and $5,758, respectively, to the Housewares segment, some of which were previously absorbed by the Personal Care segment. For the three- and six-month periods ended August 31, 2005, transition charges of $2,811 and $4,784, respectively, were used to compute the Housewares segments operating income. For additional discussion of these charges, see Note 5 to the accompanying consolidated condensed financial statements.

The recent transition of our Houseware segment’s operations to our internal operating systems and our new distribution facility in Southaven, Mississippi and the pending consolidation of our domestic appliance inventories into the same new distribution facility have caused us to incur, and will continue to cause us to incur, additional expenses that we believe will decline when operations in the new distribution facility stabilize. Accordingly, we are in the process of re-evaluating our allocation methodology, and plan to change our methodology later in the current fiscal year. 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 can not yet be determined.
 
-31-
 
Interest expense and other income / expense

Interest expense for the three- and six-month periods ended August 31, 2006 increased to $4,696 and $9,202, respectively, compared to $3,795 and $7,058, respectively, for the same periods in the prior year. The overall increase is the result of increased interest rates on our floating rate debt and interest expense recorded in our first fiscal quarter ended May 31, 2006 in connection with a Hong Kong tax settlement.

Other income, net for the three- and six-month periods ended August 31, 2006 was $287 and $1,077, respectively, compared to $403 and $345, respectively, for the same periods in the prior year. The following table sets forth, for the periods indicated, the key components of other income and expense, as a percentage of net sales, and as a year-over-year percentage change:
 
OTHER INCOME (EXPENSE)
                          
(dollars in thousands)
                          
                           
                   
% of Net Sales
  
Quarter Ended August 31,
  
2006
  
2005
  
$ Change
  
% Change
  
2006
  
2005
  
                           
Interest income
  
$
345
  
$
50
  
$
295
    
*
    
0.2
%
  
*
  
Net unrealized gains (losses) on securities
    
(36
)
  
188
   
(224
)
  
*
    
*
    
0.2
%
Miscellaneous other income
    
(22
)
  
165
   
(187
)
  
*
    
*
    
0.1
%
Total other income, net
  
$
287
  
$
403
  
$
(116
)
  
-28.8
%
  
0.2
%
  
0.3
%
                                       
* Calculation is not meaningful
                                      
                                       
 
                           
                   
% of Net Sales
  
Six Months Ended August 31,
  
2006
  
2005
  
$ Change
  
% Change
  
2006
  
2005
  
                           
Interest income
  
$
634
  
$
135
  
$
499
    
*
    
0.2
%
  
0.1
%
Net unrealized gains on securities
    
24
   
7
   
17
   
*
    
*
    
*
  
Miscellaneous other income
    
419
   
203
   
216
   
*
    
0.2
%
  
0.1
%
Total other income, net
  
$
1,077
  
$
345
  
$
732
    
*
    
0.4
%
  
0.1
%
                                       
* Calculation is not meaningful
                                      

Interest income is higher for the three- and six-month periods ended August 31, 2006 when compared to the same periods last year due to higher levels of temporarily invested cash being held thus far this year and higher interest rates earned.

Miscellaneous other income for the six-month period ended August 31, 2006 includes a $422 first quarter gain from the sale of 3.9 acres of raw land adjacent to our El Paso, Texas office and distribution center.

Income tax expense

Income tax expense for the three-month and six-month periods ended August 31, 2006 was 11.1 and 9.7 percent of earnings before income taxes, respectively, versus 12.0 percent of earnings before income taxes, respectively, for the same periods in the prior year. Our tax expense for the latest fiscal quarter has increased to more normalized levels on a year-to-date basis over the 7.2 percent of earnings recorded for the first three months of the current fiscal year. This is due to:

·
In the first fiscal quarter of the current year, we reversed $192 of tax provision previously established in connection with a Hong Kong tax settlement. This had the effect of lowering that quarter’s tax expense by 2.7 percent; and
   
·
During the latest fiscal quarter, more income was recognized in higher tax rate jurisdictions than was recognized in the previous fiscal quarter.
 
-32-
 
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES

Selected measures of our liquidity and capital resources as of August 31, 2006 and August 31, 2005 are shown below:

SELECTED MEASURES OF OUR LIQUIDITY AND CAPITAL RESOURCES
          
           
   
Six Months Ended August 31,
  
   
2006
  
2005
  
           
Accounts Receivable Turnover (Days) (1)
    
73.7
   
77.1
 
Inventory Turnover (Times) (1)
    
1.9
   
2.0
 
Working Capital (in thousands)
  
$
211,385
  
$
173,051
  
Current Ratio
    
2.5 : 1
   
2.0 : 1
 
Ending Debt to Ending Equity Ratio (2)
    
55.4
%
  
70.0
%
Return on Average Equity (1)
    
9.9
%
  
15.1
%

(1)
Accounts receivable turnover, inventory turnover, and return on average equity computations use 12-month trailing sales, cost of sales, or net income components as required by the particular measure. The current and four prior quarters' ending balances of accounts receivable, inventory, and equity are used for the purposes of computing the average balance component as required by the particular measure.
   
(2) 
Total debt is defined as all debt outstanding at the balance sheet date. This includes the sum of the following lines when they appear on our consolidated condensed balance sheets: "Revolving line of credit", "Current portion of long-term debt", and "Long-term debt, less current portion."

Operating Activities

Our cash balance was $31,837 at August 31, 2006 compared to $18,320 at February 28, 2006. Operating activities provided $8,353 of cash during the first six months of fiscal 2007, compared to $46,523 of cash consumed during the same period in fiscal 2006.

Accounts receivable increased $9,743 to $117,032 as of August 31, 2006 compared to $107,289 at the end of fiscal 2006. Accounts receivable turnover improved to 73.7 days at August 31, 2006 from 77.1 days at August 31, 2005. The change is due to improving receivables management. Our twelve month trailing sales was $609,579 at August 31, 2006 against $591,080 at August 31, 2005 while over the same period, our average receivables investment was $123,003 and $124,894, respectively.

Inventories increased $16,923 to $185,324 as of August 31, 2006 compared to $168,401 at the end of fiscal 2006. Normally, inventory levels increase in the first half of the fiscal year, as we build up new product introductions for late summer and fall. Inventory turnover decreased to 1.9 at the end of August, 2006 when compared to 2.0 at the end of August 2005. Higher product costs and a higher average inventory investment for the five quarters ended August 31, 2006 as compared to the five quarters ended August 31, 2005 accounted for the change.  

Working capital increased to $211,385 at August 31, 2006 compared to $173,051 at August 31, 2005. Our current ratio increased to 2.5:1 at August 31, 2006 compared to 2.0:1 at August 31, 2005. The improvements in our working capital and current ratio positions over the past year is the result of the strength of our cash flow, which allowed us to pay down $38,366 of debt while increasing our investable cash by $23,713.
 
-33-
 
Investing Activities

Investing activities used $3,082 of cash during the six months ended August 31, 2006. Listed below are some significant highlights of our investing activities:
 
·
We spent $507 on the Housewares segment conversion to our new information systems. We expect that significant spending on this project is now complete.
   
·
We spent $830 to acquire office space in Mexico City.
   
·
We spent an additional $356 on our equipment and building improvements in our new Southaven Mississippi distribution facility.
   
·
We spent $952 on molds and tooling, $377 on information technology infrastructure, and $548 for recurring additions and/or replacements of fixed assets in the normal and ordinary course of business.
   
·
We spent $178 on new patent costs and registrations.
   
·
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 resulted in a gain on the sale of $422.

Financing Activities

Financing activities provided $8,246 of cash during the six months ended August 31, 2006. Highlights of those activities follow.

·
We drew $7,660 against our $15,000 industrial revenue bond established to acquire equipment, machinery and related assets for our new Southaven, Mississippi distribution facility. At May 31, 2006 we converted the $12,634 total drawn into a five-year industrial revenue bond. See Note 12 to the accompanying condensed financial statements for additional information concerning the prepayment of $4,974 of this debt in September, 2006 and change in its balance sheet classification.
   
·
For the three- and six-month periods ended August 31, 2006, proceeds from employee option exercises provided $159 and $302 of cash, respectively.
   
·
In July 2006, purchases through our employee stock purchase plan provided $190 of cash.

Our ability to access our Revolving Line of Credit facility is subject to our compliance with the terms and conditions of the credit facility and long-term debt agreements, including financial covenants. The financial covenants require us to maintain certain Debt/EBITDA ratios, fixed charge coverage ratios, consolidated net worth levels, and other financial requirements. Certain covenants as of August 31, 2006, effectively limited our ability to incur no more than $30,204 of additional debt from all sources, including draws on our Revolving Line of Credit. Additionally, our debt agreements restrict us from incurring liens on any of our properties, except under certain conditions. In the event we were to default on any of our other debt, it would constitute a default under our credit facilities as well. As of August 31, 2006, we are in compliance with the terms of the various credit agreements.

-34-
 
Contractual Obligations:
 
Our contractual obligations and commercial commitments, as of August 31, 2006 were:

PAYMENTS DUE BY PERIOD - TWELVE MONTHS ENDED AUGUST 31:
                              
(in thousands)
                              
                               
       
2007
  
2008
  
2009
  
2010
  
2011
  
After
  
   
Total
  
1 year
  
2 years
  
3 years
  
4 years
  
5 years
  
5 years
  
                               
Recorded Contractual Obligations
                              
Term debt - floating rate
  
$
237,634
  
$
4,974
  
$
-
  
$
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
    
2,619
   
1,498
   
1,121
   
-
   
-
   
-
   
-
 
 
                     $  -                    
Unrecorded Contractual Obligations
                                            
Interest on floating rate debt *
    
69,592
   
13,826
   
13,813
   
13,323
   
7,923
   
7,560
   
13,147
 
Interest on fixed rate debt
    
5,493
   
2,079
   
1,351
   
842
   
624
   
407
   
190
 
Open purchase orders
    
65,975
   
65,975
   
-
   
-
   
-
   
-
   
-
 
Minimum royalty payments
    
59,091
   
2,380
   
2,501
   
2,417
   
5,967
   
6,208
   
39,618
 
Advertising and promotional
    
25,499
   
11,863
   
7,075
   
3,141
   
1,420
   
800
   
1,200
 
Operating leases
    
3,709
   
2,443
   
753
   
340
   
173
   
-
   
-
 
Capital spending commitments
    
1,611
   
1,611
   
-
   
-
   
-
   
-
   
-
 
Open letters of credit pending settlement
    
616
   
616
   
-
   
-
   
-
   
-
   
-
 
Other
    
569
   
414
   
155
   
-
   
-
   
-
   
-
 
Total contractual obligations
  
$
507,408
  
$
117,679
  
$
39,769
  
$
123,063
  
$
19,107
  
$
75,635
  
$
132,155
  
 
*     The future obligation for interest on our variable rate debt has normally 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 “September 2006 Swaps”). The interest rate swaps are a hedge of the variable LIBOR rates used to reset the floating rates on the Senior Notes. The September 2006 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 August 31, 2006. This is only an estimate, actual rates on the bond may vary over time. For instance, taking into account that $4,974 of the bond was prepaid on September 15, 2006; a 1 percent increase in interest rates could add approximately $77 per year to floating rate interest expense over the bond’s remaining maturity.

Off-Balance Sheet Arrangements:

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

Current and Future Capital Needs:

Based on our current financial condition and current operations, we believe that cash flows from operations and available financing sources will continue to provide sufficient capital resources to fund the Company's foreseeable short and long-term liquidity requirements. We expect our capital needs to stem primarily from the need to purchase sufficient levels of inventory, to carry normal levels of accounts receivable on our balance sheet, to fund normal levels of capital expenditure, to continue to enhance our North American distribution and logistics capabilities, and to continue to expand the scope of our operations in selected European, Asian and Latin American markets. Over the longer term, we expect we will have sufficient capability to repay maturities of our fixed and floating rate debt through a combination of cash generated from operations, the issuance of additional common shares, and the proceeds of associated new financings.

The Company may elect to repurchase additional shares of its common stock from time to time based upon its assessment of its liquidity position and market conditions at the time, and subject to limitations contained in its debt agreements.
 
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We continue to evaluate acquisition opportunities on a regular basis and may augment our internal growth with acquisitions of complementary businesses or product lines. We may finance acquisition activity with available cash, the issuance of common shares, or with additional debt, depending upon the size and nature of any such transaction and the status of the capital markets at the time of such acquisition.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The U.S. Securities and Exchange Commission defines critical accounting policies as "those that are both most important to the portrayal of a company's financial condition and results, and require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain." Preparation of our financial statements involves the application of several such policies. These policies include: estimates used in computing share based compensation expense, estimates of our exposure to liability for income taxes, estimates of credits to be issued to customers for sales that have already been recorded, the valuation of inventory on a lower-of-cost-or-market basis, the carrying value of long-lived assets, and the economic useful life of intangible assets.

Stock Options - Effective March 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), ‘‘Share-Based Payment’’ (‘‘SFAS 123R’’), using the modified prospective method and therefore has not restated results for prior periods. Under this transition method, stock-based compensation expense for the first quarter of fiscal 2007 includes compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of March 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, “Accounting for Stock-based Compensation” (“SFAS 123”). Share-based compensation expense for all awards granted after February 28, 2006 is based on the grant-date fair value estimated in accordance with the provision of SFAS 123R. The Company recognizes stock based compensation expense on a straight-line basis over the requisite service period of the award, which is generally the underlying option’s vesting term. Prior to the adoption of SFAS 123R, the Company recognized stock-based compensation expense by applying the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”. In March 2005, the Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the SEC’s interpretation of SFAS 123R as it pertains to public companies. The Company has considered the provisions of SAB 107 in its adoption of SFAS 123R. Determining the appropriate fair value model and calculating the fair value of share-based payment awards require the input of subjective assumptions, including the expected life of the awards and stock price volatility. The assumptions used in calculating the fair value represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our compensation expense could be materially different in the future. In addition, we are required to estimate the expected pre-vesting forfeiture rate and only recognize expense for those shares expected to vest. If our actual pre-vesting forfeiture rate is materially different from our estimate, the stock-based compensation expense could be significantly different from our estimates. See Note 2 to the consolidated condensed financial statements for a further discussion of stock-based compensation.

Income Taxes - 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 addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. If we ultimately determine that payment of these amounts are unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. 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.

-36-
 
Estimates of credits to be issued to customers - We regularly receive requests for credits from retailers for returned products or in connection with sales incentives, such as cooperative advertising and volume rebate agreements. We reduce sales or increase selling, general, and administrative expenses, depending on the nature of the credits, for estimated future credits to customers. Our estimates of these amounts are based either on historical information about credits issued, relative to total sales, or on specific knowledge of incentives offered to retailers. This process entails a significant amount of inherent subjectivity and uncertainty.

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

Carrying value of long-lived assets - We apply the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") and Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144") in assessing the carrying values of our long-lived assets. SFAS 142 and SFAS 144 both require that we consider whether circumstances or conditions exist which suggest that the carrying value of a long-lived asset might be impaired. If such circumstances or conditions exist, further steps are required in order to determine whether the carrying value of the asset exceeds its fair market value. If analyses indicate that the asset's carrying value does exceed its fair market value, the next step is to record a loss equal to the excess of the asset's carrying value over its fair value. The steps required by SFAS 142 and SFAS 144 entail significant amounts of judgment and subjectivity. We completed our analysis of the carrying value of our goodwill and other intangible assets during the first quarter of fiscal 2007, and accordingly, recorded no impairment.
 
Economic useful life of intangible assets - We apply Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") in determining the useful economic lives of intangible assets that we acquire and that we report on our consolidated balance sheets. SFAS 142 requires that we amortize intangible assets, such as licenses and trademarks, over their economic useful lives, unless those assets' economic useful lives are indefinite. If an intangible asset's economic useful life is deemed to be indefinite, that asset is not amortized. When we acquire an intangible asset, we consider factors such as the asset's history, our plans for that asset, and the market for products associated with the asset. We consider these same factors when reviewing the economic useful lives of our previously acquired intangible assets as well. We review the economic useful lives of our intangible assets at least annually. The determination of the economic useful life of an intangible asset requires a significant amount of judgment and entails significant subjectivity and uncertainty. We have completed our analysis of the remaining useful economic lives of our intangible assets during the first quarter of fiscal 2007 and determined that the useful lives currently being used to determine amortization of each asset are appropriate.
 
For a more comprehensive list of our accounting policies, we encourage you to read Note 1 - Summary of Significant Accounting Policies, accompanying the consolidated financial statements included in our latest annual report on Form 10-K. Note 1 in the consolidated financial statements included with Form 10-K contains several other policies, including policies governing the timing of revenue recognition, that are important to the preparation of our consolidated financial statements, but do not meet the SEC's definition of critical accounting policies because they do not involve subjective or complex judgments.

-37-
NEW ACCOUNTING GUIDANCE

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 FASB SFAS 106 (“SFAS 106”), “Employers’ Accounting for Postretirement Benefits Other Than Pensions” to endorsement split-dollar life insurance arrangements. SFAS 106 would require the Company to recognize a liability for the discounted future benefit obligation that the Company 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 effective for fiscal years beginning after December 15, 2006. The Company may have certain policies subject to the provisions of this new pronouncement and is currently determining the effect the adoption of EITF 06-4 will have on its financial statements during its 2008 fiscal year.
 
Uncertainty in Income Taxes - In July 2006, the 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. The Company is currently determining the effect, if any, the adoption of FIN 48 will have on its financial statements.

Fair Value Measurements - In September 2006, 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. The Company is currently determining the effect, if any, this pronouncement will have on its financial statements.


 
-38-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Changes in interest rates and currency exchange rates are our primary financial market risks. Fluctuation in interest rates causes variation in the amount of interest that we can earn on our available cash and the amount of interest expense we incur on our short-term and long-term borrowings. Interest on our long-term debt outstanding as of August 31, 2006 is both floating and fixed. Fixed rates are in place on $35,000 of senior notes at rates ranging from 7.01 percent to 7.24 percent.
 
Floating rates are in place on $237,634 of debt. Interest rates on these notes are reset as outlined in Note 12 to our consolidated condensed financial statements. Interest rates during the latest fiscal quarter on these notes ranged from 5.81 to 6.65 percent. 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 “September 2006 Swaps”). The interest rate swaps are a hedge of the variable LIBOR rates used to reset the floating rates on the Senior Notes. The September 2006 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. These swaps settle quarterly and terminate upon maturity of the related debt. These 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.

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 August 31, 2006. This is only an estimate, actual rates on the bond may vary over time. For instance, taking into account that $4,974 of the bond was prepaid on September 15, 2006, a 1 percent increase in interest rates could add approximately $77 per year to floating rate interest expense over the bond’s remaining maturity.

The addition of these levels of debt, the future impact of any draws against our Revolving Line of Credit, whose interest rates can vary with the term of each draw, and the uncertainty regarding the level of future interest rates, increases our risk profile.

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

During the three-month and six-month periods ended August 31, 2006, we transacted approximately 14 percent of our net sales in foreign currencies. During the three-month and six-month periods ended August 31, 2005, we transacted approximately 13 percent of our net sales in foreign currencies. For the three-month and six-month periods ended August 31, 2006, we incurred net foreign exchange gains of $570 and $886, respectively. During the same fiscal periods in the prior year, we incurred net foreign exchange losses of $227 and $925.
 
We hedge against foreign currency exchange rate risk by entering into a series of forward contracts designated as cash flow hedges to protect against the foreign currency exchange risk inherent in our forecasted transactions denominated in currencies other than the U.S. Dollar. 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 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. Our cash flow hedges, while executed in order to minimize our foreign currency exchange rate risk, do subject us to fair value fluctuations on the underlying contracts. We do not enter into any forward exchange contracts or similar instruments for trading or other speculative purposes.
 
-39-

The following table summarizes the various forward contracts we designated as cash flow hedges that were open at August 31, 2006 and February 28, 2006:

CASH FLOW HEDGES
                              
   
August 31, 2006
  
Contract
 
Currency to
 
Notional
 
Contract
 
Range of Maturities
  
Spot Rate at Contract
 
Spot Rate at
August 31,
 
Weighted
Average
Forward
Rate at 
  
Weighted
Average
Forward
Rate at
August 31,
 
Market
Value of
the Contract
in U.S. Dollars
 
Type
  
Deliver
  
Amount
  
Date
  
From
  
To
  
Date
  
2006
  
 Inception
  
2006
  
(Thousands)
  
                                           
Sell
    
Pounds
    
£10,000,000
    
1/26/2005
    
12/11/2006
    
2/9/2007
    
1.8700
   
1.9047
   
1.8228
   
1.9059
    
($831
)
Sell
    
Pounds
    
£10,000,000
    
5/12/2006
    
12/14/2007
    
2/14/2008
    
1.8940
   
1.9047
   
1.9010
   
1.9079
    
($69
)
                                                           
($899
)
   
February 28, 2006
  
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 Feb. 28,
   
Market
Value of
the Contract
in U.S. Dollars
 
Type
    
Deliver 
    
Amount 
    
Date 
    
From 
    
To
    
Date 
    
2006 
    
 Inception 
    
2006 
    
(Thousands) 
  
                                                               
Sell
    
Pounds
    
£10,000,000
    
1/26/2005
    
12/11/2006
    
2/9/2007
    
1.8700
   
1.7540
   
1.8228
   
1.7644
  
$
584
  
                                                               
 
We expect that as currency market conditions warrant, and our foreign denominated transaction exposure grows, we will continue to execute additional contracts in order to hedge against potential foreign exchange losses.

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

Certain written and oral statements made by our Company and subsidiaries of our Company may constitute "forward-looking statements" as defined under the Private Securities Litigation Reform Act of 1995. This includes statements made in this report, in other filings with the SEC, in press releases, and in certain other oral and written presentations. Generally, the words "anticipates", "believes", "expects", "plans", "may", "will", "should", "seeks", "estimates", “project”, "predict", "potential", "continue", "intends", and other similar words identify forward-looking statements. All statements that address operating results, events or developments that we expect or anticipate will occur in the future, including statements related to sales, earnings per share results, and statements expressing general expectations about future operating results, are forward-looking statements and are based upon the Company’s current expectations and various assumptions. The Company believes there is a reasonable basis for its expectations and assumptions, but there can be no assurance that the Company will realize its expectations or that the Company's assumptions will prove correct. Forward-looking statements are subject to risks that could cause them to differ materially from actual results. Accordingly, the Company cautions readers not to place undue reliance on forward-looking statements. We believe that these risks include but are not limited to the risks described in this report under Part II, Item 1A. “Risk Factors", and that are otherwise described from time to time in our SEC reports filed after this report. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
 
-40-
 
ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Our management, under the supervision and with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), has evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act as of the end of the period covered by this report. Based on these evaluations management believes that our disclosure controls and procedures are effective and ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure and is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

Our management, including the CEO and CFO, does not expect that our disclosure controls or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

In the process of our evaluation, among other matters, we considered the existence of any “significant deficiencies” or “material weaknesses” in our internal control over financial reporting, and whether we had identified any acts of fraud involving personnel with a significant role in our internal control over financial reporting. In the professional auditing literature, “significant deficiencies” are referred to as “reportable conditions,” which are deficiencies in the design or operation of controls that could adversely affect our ability to record, process, summarize and report financial data in the financial statements. Auditing literature defines “material weakness” as a particularly serious reportable condition in which the internal control does not reduce to a relatively low level the risk that misstatements caused by error or fraud may occur in amounts that would be material in relation to the financial statements and the risk that such misstatements would not be detected within a timely period by employees in the normal course of performing their assigned functions.

CHANGES IN INTERNAL CONTROLS

In connection with the evaluation described above, we identified no change in our internal control over financial reporting that occurred during our fiscal quarter ended August 31, 2006, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
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PART 2. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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, 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 and is still in the preliminary stages. The Company intends to defend the foregoing lawsuit vigorously, but, because the lawsuit has been recently filed, 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 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.

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 include adequate provisions for this liability. As a result of this tax settlement, in the first fiscal quarter of 2007, we reversed $192 of tax provision previously established and recorded $279 of associated interest. During the fiscal quarter just ended, 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.
 
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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.
 
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 the 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 examination 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.

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.

 
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ITEM 1A. RISK FACTORS

The ownership of our common shares involves a number of risks and uncertainties. In evaluating us and our business before making an investment decision regarding our securities, potential investors should carefully consider the risk factors and uncertainties described in "Item 1A. Risk Factors" to Part I of our Annual Report on Form 10-K for the year ended February 28, 2006 as well as the risk factors listed below, which supplement the risk factors contained in our Form 10-K. If any of the events or circumstances described in our 10-K or listed below actually occur, our business, financial condition or results of operations could be materially adversely affected. The risks contained in our 10-K and those listed below are not the only risks that we face. Additional risks that we do not yet know of or that we currently think are not significant may also impact our business operation.

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

We do not have a large group of senior executives in our business. Accordingly, we depend on a small number of key senior executives. The loss of any of these persons could have a material adverse effect on our business, financial condition and results of operations, particularly if we are unable to find, relocate and integrate adequate replacements for any of these persons. Further, in order to continue to grow our business, we will need to expand our key senior management team. We may be unable to attract or retain these persons. This could hinder our ability to grow our business and could disrupt our operations or materially adversely affect the success of our business.

We have experienced delays in implementing the consolidation of our inventories into our new Southaven, Mississippi distribution facility. Additional delays could have a material adverse impact on our operations and profitability.

Our business operations are dependent on our logistical systems, which include our order management system and our computerized warehouse management system. These logistical systems depend on our new Global Enterprise Resource Planning System. On September 7, 2004, we implemented our new Global Enterprise Resource Planning System, along with other new technologies. Following the implementation of this new system, most of our businesses (other than our Housewares segment) ran under one integrated information system. We continue to closely monitor the new system and make normal and expected adjustments to improve its effectiveness. Complications resulting from process adjustments could potentially cause considerable disruptions to our business. The change to the new system continues to involve risk. Application program bugs, system conflict crashes, user error, data integrity issues, customer data conflicts and integration issues with certain remaining legacy systems all pose potential risks. Implementing new data standards and converting existing data to accommodate the new system's requirements have required a significant effort across our entire organization.

During the third fiscal quarter of 2005, we began the implementation and transition of our Housewares segment to the new system. The information system transition was completed late in the fourth fiscal quarter of 2006. We continue to implement several significant functionality enhancements related to both the Housewares segment’s and Personal Care segment’s systems. We expect this process will continue during fiscal 2007.

The Houseware segment’s move to our new 1,200,000 square foot distribution facility in Southaven, Mississippi and conversion to related distribution systems began in December 2005 and is substantially complete. Our Housewares segment distribution and logistics requirements differ significantly from our traditional Personal Care segment business. In our Housewares segment, we were required to improve our ability to deliver larger, more complex assortments in smaller individual item volumes to a much more diverse group of retailers, as compared to our Personal Care segment. Conversions of this nature involve extremely complex processes, characterized by interruptions and the diversion of management's attention for a period of time after the conversion as the organization adapts to the new system and seeks to respond quickly to its day-to-day operations requirements. Initially, we experienced warehouse order processing and shipment delays. These delays were the result of software issues, adapting to the new equipment, new employees, and the operation of the new distribution facility. The delays caused a backlog in orders and in some cases, order cancellations. Throughout the first fiscal quarter of 2007 we continued to work to resolve the technical and operational issues that were causing the delays and address the issues with affected customers. By the end of the quarter, we believe we had addressed the most significant issues and the new facility began to attain its originally planned operational throughput. In the fourth quarter of fiscal 2006, we also completed the move of our grooming, skin care, and hair products inventories from our El Paso, Texas distribution facility to the new Southaven, Mississippi facility and commenced shipments from that facility. In this move, we experienced transitional issues, but none of the magnitude or impact as those we experienced with Housewares.
 
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We originally had planned to move the balance of our domestic Personal Care segment appliance inventory into the new distribution facility by the end of the first fiscal quarter. However, due to the issues we experienced with our Housewares segment, we decided to delay the completion of this transition. Once we are satisfied that operations have stabilized with respect to the inventories in place at the new distribution facility, and we are past our peak shipping season, we will move the balance of our appliance inventory from its existing distribution facility to the new distribution facility. In connection with this decision, we have recently obtained an extension on the lease of our formerly owned distribution facility which is currently used for our appliance inventory. As a result of the extension, the lease term expires February 28, 2007. 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 distribution facilities.

While we believe we have taken appropriate measures to mitigate the recent shipment disruptions arising from the transition of our Housewares segment, as discussed above, we still have a significant inventory transition to complete with our Personal Care Segment appliance product line. Unanticipated operational changes made as a result of this and future transitions may impact the level of the cost benefits we ultimately realize. These transitions will increase the risk that operations might be further disrupted, and that the cost benefits expected to be achieved through facility consolidation will continue to be delayed. While we believe we have the process and appropriate management in place to effectively manage these transitions and rapidly respond to mitigate any issues that may arise as a result of the transition, there can be no assurance that additional disruptions will not occur.
 
We rely on our Global Enterprise Resource Planning System for a significant portion of our operations. Certain international operations still need to be transitioned to the new system. Our failure to, or delays in, successfully transitioning all our operations onto this system, could have a material adverse impact on our operations and profitability.

We will be transitioning Mexico and other Latin American operations to the new system later in fiscal 2007 and in fiscal 2008. In addition, our Housewares segment recently opened selling offices in Japan and Great Britain and efforts to bring up appropriate software systems for these operations are underway. Due to the complexities of these efforts, we expect to continue to experience a period of significant change and tuning of the system for many months. While nothing has come to our attention that would lead us to believe that we may experience additional operational issues, errors or misstatements of our financial results during this time-frame, we recognize that these continue to be challenging transitions for us and will require close monitoring to keep our documentation and application of internal controls current.

We expect that these and other planned implementations and functional software enhancements will continue to strain our internal resources, could further impact our business, and may result in higher implementation costs and reallocation of human resources. While we believe we have the process and appropriate management in place to effectively manage these changes and rapidly respond to mitigate any issues that may arise as a result of the transition, there can be no assurance that additional disruptions will not occur.

To support these new technologies, we are continuously building and supporting a much larger and more complex information technology infrastructure. Increased computing capacity, power requirements, back-up capacities, broadband network infrastructure and increased security requirements are all potential areas for failure and risk. We continue to rely on outside vendors to assist us with implementation and enhancements and will continue to rely on certain vendors to assist us in maintaining some of our infrastructure. Should they fail to perform due to events outside our control, it could affect our service levels and threaten our ability to conduct business. We continue to transition many of these third party services to our in-house staff. The transition from third party services to in-house staffing of such services poses risks that could cause additional business disruptions. Finally, natural disasters may disrupt our infrastructure and our disaster recovery process may not be sufficient to protect against loss.
 
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Any interruption in our logistical systems would impact our ability to procure our products from our factories and suppliers, transport them to our distribution facilities, and store and deliver them to our customers on time and in the correct amounts. These and other factors described above could have a material and adverse affect on our business, financial condition and results of operations.
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ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the quarter ended August 31, 2003, our Board of Directors authorized us to purchase, in the open market or through private transactions, up to 3,000,000 shares of our common stock over a period extending to May 31, 2006. On April 25, 2006 our Board of Directors approved a resolution to extend the existing plan for three more years through May 31, 2009. During the three- and six-months ended August 31, 2006 and 2005, respectively, we did not repurchase any common shares. From September 1, 2003 through August 31, 2006, we have repurchased 1,563,836 shares at a total cost of $45,611,690 or an average share price of $29.17. An additional 1,436,164 shares are authorized for purchase under this plan.
 
ITEM 4. 
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company's Annual Meeting of Shareholders was held August 8, 2006 in El Paso, Texas. At that meeting, the shareholders voted on the following proposals:

·
Proposal 1. 
Election of a board of eight directors;
     
·
 Proposal 2.
 Appointment of KPMG LLP as independent auditors of the Company to serve for the 2007 fiscal year.
 
A description of the foregoing matters is contained in the Company's Proxy Statement dated June 29, 2006, relating to the 2006 Annual Meeting of Shareholders.

With respect to Proposal 1, the shareholders elected each of the following directors to the Company's Board of Directors by the votes indicated below, to serve for the ensuing year:


   
For
  
Against
  
           
Gary B. Abromovitz
    
23,828,775
   
4,084,929
 
John B. Butterworth
    
25,700,018
   
2,213,686
 
Timothy F. Meeker
    
18,826,642
   
9,087,062
 
Byron H. Rubin
    
18,992,969
   
8,920,735
 
Gerald J. Rubin
    
19,566,148
   
8,347,556
 
Stanlee N. Rubin
    
17,441,202
   
10,472,502
 
Adolpho R. Telles
    
25,692,853
   
2,220,851
 
Darren G. Woody
    
25,190,598
   
2,723,106
 
 
The proposal to appoint KPMG LLP as independent auditors of the Company received the following votes:

           
Broker
  
For
  
Against
  
Abstentions
  
Non-Votes
  
               
27,762,341
   
119,908
   
31,455
   
-
 
 
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ITEM 6. EXHIBITS  
       
 
(a)
Exhibits
  
       
   
31.1
Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
   
31.2
Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
   
32.1
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       
   
32.2
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       

 

 
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SIGNATURES

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


 
HELEN OF TROY LIMITED
 
(Registrant)
   
   
Date: October 9, 2006
/s/ Gerald J. Rubin
 
Gerald J. Rubin
 
Chairman of the Board, Chief
 
Executive Officer, President, Director
 
and Principal Executive Officer
   
Date: October 9, 2006
/s/ Thomas J. Benson
 
Thomas J. Benson
 
Senior Vice-President
 
and Chief Financial Officer
   
Date: October 9, 2006
/s/ Richard J. Oppenheim
 
Richard J. Oppenheim
 
Financial Controller
 
and Principal Accounting Officer
   
 
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Index to Exhibits

31.1*
Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2*
Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1*
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2*
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith

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