Edgar Filing: HELEN OF TROY LTD

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

FORM 10-Q

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

	For the quarterly period ended November 30, 2008

	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)

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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer £ Accelerated filer T Non-accelerated filer £ Smaller reporting company £

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

Yes £ No 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 January 5, 2008
Common Shares, $0.10 par value per share		30,147,731

Table of Contents

HELEN OF TROY LIMITED AND SUBSIDIARIES

INDEX – FORM 10-Q

			Page
PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Consolidated Condensed Balance Sheets
		as of November 30, 2008 (Unaudited) and February 29, 2008	3

		Consolidated Condensed Statements of Income (Unaudited)
		for the Three- and Nine-Months Ended
		November 30, 2008 and November 30, 2007	4

		Consolidated Condensed Statements of Cash Flows (Unaudited)
		for the Nine Months Ended
		November 30, 2008 and November 30, 2007	5

		Consolidated Condensed Statements of Comprehensive Income
		(Unaudited) for the Three- and Nine-Months Ended
		November 30, 2008 and November 30, 2007	6

		Notes to Consolidated Condensed Financial Statements (Unaudited)	7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	52

	Item 4.	Controls and Procedures	57

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings	58

	Item 1A.	Risk Factors	59

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60

	Item 6.	Exhibits	61

	Signatures		62

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Balance Sheets

(in thousands, except shares and par value)

	November 30,			February 29,
	2008			2008
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	87,557		$	57,851
Temporary investments	-			63,825
Trading securities, at market value	421			36
Receivables - principally trade, less allowance of $2,009 and $1,331	142,891			105,615
Inventories	171,724			144,867
Prepaid expenses	3,706			6,290
Income taxes receivable	3,709			861
Deferred income tax benefits	12,771			16,419
Total current assets	422,779			395,764

Property and equipment, net of accumulated depreciation of $49,449 and $44,524	85,957			91,611
Goodwill	212,621			212,922
Trademarks, net of accumulated amortization of $238 and $235	157,414			161,922
License agreements, net of accumulated amortization of $18,166 and $17,343	23,653			24,972
Other intangible assets, net of accumulated amortization of $7,989 and $6,432	16,189			15,544
Long-term investments	20,048			-
Deferred income tax benefits	887			-
Other assets, net of accumulated amortization of $3,296 and $2,865	9,186			9,258
Total assets	$	948,734		$	911,993

Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt	$	78,000		$	3,000
Accounts payable, principally trade	51,693			42,763
Accrued expenses and other current liabilities	79,302			73,697
Total current liabilities	208,995			119,460

Long-term compensation and other liabilities	2,957			2,566
Long-term income taxes payable	4,173			9,181
Deferred income tax liability	-			410
Long-term debt, less current portion	134,000			212,000
Total liabilities	350,125			343,617

Commitments and contingencies

Stockholders’ equity:
Cumulative preferred shares, non-voting, $1.00 par. Authorized 2,000,000 shares; none issued	-			-
Common shares, $0.10 par. Authorized 50,000,000 shares; 30,141,908 and 30,374,703 shares issued and outstanding	3,014			3,038
Additional paid-in-capital	104,821			100,328
Retained earnings	500,564			473,361
Accumulated other comprehensive loss	(9,790		)	(8,351		)
Total stockholders’ equity	598,609			568,376
Total liabilities and stockholders’ equity	$	948,734		$	911,993

See accompanying notes to consolidated condensed financial statements.

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HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Statements of Income (Unaudited)

(in thousands, except per share data)

	Three Months Ended November 30,						Nine Months Ended November 30,
	2008			2007			2008			2007

Net sales	$	185,619		$	210,348		$	484,165		$	508,442
Cost of sales	112,075			120,280			282,456			290,130
Gross profit	73,544			90,068			201,709			218,312

Selling, general, and administrative expense	53,543			59,387			149,428			157,832
Operating income before impairment and gain	20,001			30,681			52,281			60,480

Impairment charges	-			4,983			7,760			4,983
Gain on sale of land	-			(3,609		)	-			(3,609		)
Operating income	20,001			29,307			44,521			59,106

Other income (expense):
Interest expense	(3,380		)	(3,603		)	(10,317		)	(11,536		)
Other income, net	575			741			2,244			2,216
Total other income (expense)	(2,805		)	(2,862		)	(8,073		)	(9,320		)

Earnings before income taxes	17,196			26,445			36,448			49,786

Income tax expense (benefit):
Current	2,534			4,466			1,929			(514		)
Deferred	(428		)	(863		)	3,273			(912		)
Net earnings	$	15,090		$	22,842		$	31,246		$	51,212

Earnings per share:
Basic	$	0.50		$	0.74		$	1.03		$	1.68
Diluted	$	0.48		$	0.73		$	1.00		$	1.60

Weighted average common shares used in computing net earnings per share
Basic	30,196			30,708			30,206			30,507
Diluted	31,229			31,296			31,162			31,924

See accompanying notes to consolidated condensed financial statements.

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HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Statements of Cash Flows (Unaudited)

(in thousands)

	Nine Months Ended November 30,
	2008			2007

Cash flows from operating activities:
Net earnings	$	31,246		$	51,212
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	10,604			10,785
Provision for doubtful receivables	678			331
Share-based compensation	1,037			821
Write off of deferred finance costs due to early extinguishment of debt	-			282
Unrealized loss on trading securities	68			190
Deferred taxes, net	3,205			(1,167		)
Gain on the sale of property and equipment	(100		)	(3,614		)
Impairment charges	7,760			4,983
Changes in operating assets and liabilities, net of effects of business acquisitions:
Accounts receivable	(37,795		)	(39,818		)
Inventories	(26,209		)	5,832
Prepaid expenses	2,584			(957		)
Other assets	(376		)	(408		)
Accounts payable	8,930			10,356
Accrued expenses	5,810			19,020
Income taxes payable	(4,268		)	(1,710		)
Net cash provided by operating activities	3,174			56,138

Cash flows from investing activities:
Capital, license, trademark, and other intangible expenditures	(4,964		)	(4,624		)
Business acquisitions	(4,765		)	(36,500		)
Purchase of investments	(453		)	(141,000		)
Sale of investments	40,575			145,100
Proceeds from the sale of property and equipment	2,613			5,702
Net cash provided / (used) by investing activities	33,006			(31,322		)

Cash flows from financing activities:
Repayment of long-term debt	(3,000		)	(25,000		)
Proceeds from exercise of stock options, net	515			4,278
Proceeds from employee stock purchase plan	212			210
Common share repurchases	(4,264		)	-
Payment of tax obligations resulting from cashless option exercise	-			(4,505		)
Share-based compensation tax benefit	63			173
Net cash used by financing activities	(6,474		)	(24,844		)
Net increase (decrease) in cash and cash equivalents	29,706			(28		)
Cash and cash equivalents, beginning of period	57,851			35,455
Cash and cash equivalents, end of period	$	87,557		$	35,427

Supplemental cash flow disclosures:
Interest paid	$	9,797		$	11,121
Income taxes paid (net of refunds)	$	6,156		$	24,367
Common shares received as exercise price of options	$	-		$	15,938

See accompanying notes to consolidated condensed financial statements.

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HELEN OF TROY LIMITED AND SUBSIDIARIES

Consolidated Condensed Statements Of Comprehensive Income (Unaudited)

(in thousands)

	Three Months Ended November 30,						Nine Months Ended November 30,
	2008			2007			2008			2007

Net earnings, as reported	$	15,090		$	22,842		$	31,246		$	51,212
Other comprehensive income (loss), net of tax:
Cash flow hedges - Interest rate swaps	(4,046		)	(3,638		)	(805		)	(3,496		)
Cash flow hedges - Foreign currency	254			(562		)	1,480			(1,177		)
Unrealized losses - Auction rate securities	(529		)	-			(2,114		)	-
Comprehensive income	$	10,769		$	18,642		$	29,807		$	46,539

See accompanying notes to consolidated condensed financial statements.

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HELEN OF TROY LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

November 30, 2008

Note 1 - Basis of Presentation

In our opinion, the accompanying consolidated condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly our consolidated financial position as of November 30, 2008 and February 29, 2008, and the results of our consolidated operations for the three- and nine-month periods ended November 30, 2008 and 2007. The same accounting policies are followed in preparing quarterly financial data as are followed in preparing annual data.

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

In some cases, we have provided additional information for prior periods in the accompanying notes to consolidated condensed financial statements to conform to the current period’s presentation.

In this report and these accompanying consolidated condensed financial statements and notes, unless the context suggests otherwise or otherwise indicated, references to “the Company,” “our Company,” “Helen of Troy,” “we,” “us” or “our” refer to Helen of Troy Limited and its subsidiaries.

Note 2 – New Accounting Pronouncements

New Accounting Standards Currently Adopted

Liability Recognition on Endorsement Split-Dollar Life Insurance Arrangements - In June 2006, the Emerging Issues Task Force of the FASB (“EITF”) reached a consensus on EITF Issue No. 06-4 (“EITF 06-4”), “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements,” which requires the application of the provisions of SFAS No. 106 (“SFAS 106”), “Employers’ Accounting for Postretirement Benefits Other Than Pensions” to endorsement split-dollar life insurance arrangements (if, in substance, a postretirement benefit plan exists), or Accounting Principles Board Opinion No. 12 (if the arrangement is, in substance, an individual deferred compensation contract). SFAS 106 would require us to recognize a liability for the discounted value of the future premium benefits that we will incur through the death of the underlying insureds. An endorsement-type arrangement generally exists when the Company owns and controls all incidents of ownership of the underlying policies. EITF 06-4 became effective for fiscal years beginning after December 15, 2007. We adopted the provisions of EITF 06-4 at the beginning of fiscal 2009. The Company reviewed an endorsement-type policy agreement it currently maintains and believes that all subject policies fall outside the scope of EITF 06-4 because the agreement will not survive the retirement of the affected employee. Accordingly, the adoption of EITF 06-4 had no impact on our consolidated condensed financial statements.

Liability Recognition on Collateral Assignment Split-Dollar Life Insurance Arrangements - In March 2007, the EITF reached a consensus on EITF Issue No. 06-10 (“EITF 06-10”), “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements,” which provides guidance to help companies determine whether a liability for the postretirement benefit associated with a collateral assignment split-dollar life insurance arrangement should be recorded in accordance with either SFAS 106 (if, in substance, a postretirement benefit plan exists), or Accounting Principles Board Opinion No. 12 (if the arrangement is, in substance, an individual deferred compensation contract). EITF 06-10 also provides guidance

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on how a company should recognize and measure the asset in a collateral assignment split-dollar life insurance contract. EITF 06-10 became effective for fiscal years beginning after December 15, 2007. We adopted the provisions of EITF 06-10 at the beginning of fiscal 2009. We have certain policies that fall within the scope of the new pronouncement, however, the effects of recording the resulting $0.66 million liability as a cumulative effect adjustment to retained earnings at adoption was not material to our consolidated condensed financial statements.

Fair Value Measurements - In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. At the beginning of fiscal 2009, we adopted the provisions of SFAS 157 related to financial assets and liabilities. These provisions, which have been applied prospectively, did not have a material impact on the Company’s consolidated financial statements. Certain other provisions of SFAS 157 related to other nonfinancial assets and liabilities will be effective for the Company at the beginning of fiscal 2010, and will be applied prospectively. We are currently determining the effect the provisions of SFAS 157 related to nonfinancial assets and liabilities will have, if any, on our consolidated condensed financial statements. See Note 15 for current required disclosures related to SFAS 157.

Fair Value Option for Financial Assets and Financial Liabilities - In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 also established presentation and disclosure requirements designed to facilitate comparisons that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We adopted the provisions of SFAS 159 at the beginning of fiscal 2009 and did not elect the fair value option established by the standard. As such, the adoption had no impact on our consolidated condensed financial statements.

Hierarchy of Generally Accepted Accounting Principles - In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162 (“SFAS 162”), “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP (the “GAAP hierarchy”). SFAS 162 became effective on November 15, 2008 following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The adoption of SFAS 162 did not have a material effect on our consolidated condensed financial statements.

New Accounting Standards Subject to Future Adoption

Accounting for Business Combinations - In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”), which establishes the principles and requirements for how an acquirer: (1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) replaces SFAS No. 141, “Business Combinations.” SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, and will have no impact on our transactions recorded to date.

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Disclosures about Derivative Instruments and Hedging Activities - In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161 (“SFAS 161”), “Disclosures About Derivative Instruments and Hedging Activities,” which amends Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) and expands disclosures to include information about the fair value of derivatives, related credit risks and a company’s strategies and objectives for using derivatives. SFAS 161 is effective for fiscal periods beginning on or after November 15, 2008. Early adoption is encouraged. We are currently determining the effect, if any, this pronouncement will have on our consolidated condensed financial statements.

Note 3 – Litigation

Securities Class Action Litigation – An agreement was reached to settle the consolidated class action lawsuit filed on behalf of purchasers of publicly traded securities of the Company against the Company, Gerald J. Rubin, the Company’s Chairman of the Board, President and Chief Executive Officer, and Thomas J. Benson, the Company’s Chief Financial Officer. In the consolidated action, the plaintiffs alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 thereunder. The class period stated in the complaint was October 12, 2004 through October 10, 2005. The lawsuit was brought in the United States District Court for the Western District of Texas.

On June 19, 2008, the Court held a hearing at which it approved the terms of the settlement, the certification of the class for purposes of the settlement, and the award of attorney’s fees and costs related to the lawsuit. The order approving the settlement became final on July 19, 2008. Under the settlement, the lawsuit has been dismissed with prejudice in exchange for a cash payment of $4.5 million. The Company’s insurance carrier paid the settlement amount and the Company’s remaining legal and related fees associated with defending the lawsuit because the Company had met its self-insured retention obligation. The Company and the two officers of the Company named in the lawsuit have denied any and all allegations of wrongdoing and have received a full release of all claims.

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 outstanding during the period plus the effect of dilutive securities. The number of common shares underlying dilutive securities was 1,032,747 and 955,898 for the three- and nine-month periods ended November 30, 2008, respectively, and 588,478 and 1,417,329 for the three- and nine-month periods ended November 30, 2007, respectively. All dilutive securities during these periods consisted of stock options which were 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 were exercisable for a total of 1,437,408 common shares and 1,241,100 common shares at November 30, 2008 and 2007, respectively.

Note 5 – Segment Information

In the tables that follow, we present two segments: Personal Care and Housewares. Our Personal Care segment’s products include hair dryers, straighteners, curling irons, hairsetters, women’s shavers, mirrors, hot air brushes, home hair clippers and trimmers, paraffin baths, massage cushions, footbaths, body massagers, brushes, combs, hair accessories, liquid hair styling products, men’s fragrances, men’s deodorants, foot powder, body powder and skin care products. Our Housewares segment reports the operations of OXO International (“OXO”) whose products include kitchen tools, cutlery, bar and wine accessories, household cleaning tools, food storage

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containers, tea kettles, trash cans, storage and organization products, hand tools, gardening tools, kitchen mitts and trivets, barbeque tools and rechargeable lighting products. We use third-party manufacturers to produce our goods. Both our Personal Care and Housewares segments sell their products primarily through mass merchandisers, drug store chains, warehouse clubs, catalogs, grocery stores and specialty stores. In addition, the Personal Care segment sells extensively through beauty supply retailers and wholesalers. The accounting policies of our segments are the same as those described in the summary of significant accounting policies in Note 1 to the consolidated financial statements in our annual report on Form 10-K for the fiscal year ended February 29, 2008.

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

THREE MONTHS ENDED NOVEMBER 30, 2008 AND 2007

(in thousands)

	Personal
November 30, 2008	Care		Housewares		Total

Net sales	$	140,318	$	45,301	$	185,619
Operating income	11,780		8,221		20,001
Capital, license, trademark and other intangible expenditures	190		767		957
Depreciation and amortization	2,221		1,313		3,534

	Personal
November 30, 2007	Care		Housewares		Total

Net sales	$	162,992	$	47,356	$	210,348
Operating income	20,336		8,971		29,307
Capital, license, trademark and other intangible expenditures	1,086		872		1,958
Depreciation and amortization	2,385		1,249		3,634

NINE MONTHS ENDED NOVEMBER 30, 2008 AND 2007

(in thousands)

	Personal
November 30, 2008	Care		Housewares		Total

Net sales	$	353,258	$	130,907	$	484,165
Operating income	26,383		18,138		44,521
Capital, license, trademark and other intangible expenditures	1,576		3,388		4,964
Depreciation and amortization	6,793		3,811		10,604

	Personal
November 30, 2007	Care		Housewares		Total

Net sales	$	388,306	$	120,136	$	508,442
Operating income	36,139		22,967		59,106
Capital, license, trademark and other intangible expenditures	1,996		2,628		4,624
Depreciation and amortization	7,144		3,641		10,785

Operating income for each operating segment is computed based on net sales, less cost of goods sold and any selling, general, and administrative expenses (“SG&A”) associated with the segment. The SG&A used to compute each segment’s operating income are comprised of SG&A directly associated with the segment, plus overhead expenses that are allocable to the operating segment. The following tables contain net assets allocable to each segment for the periods covered by our consolidated condensed balance sheets:

IDENTIFIABLE NET ASSETS AT NOVEMBER 30, 2008 AND FEBRUARY 29, 2008

(in thousands)

	Personal
	Care		Housewares		Total

November 30, 2008	$	580,592	$	368,142	$	948,734
February 29, 2008	552,329		359,664		911,993

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Note 6 – Significant Charge against Allowance for Doubtful Accounts

On May 2, 2008, Linens Holding Co., the operator of the Linens ‘n Things retail chain (“Linens”), filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Our accounts receivable balance with Linens at the date of bankruptcy was $4.17 million. For the fiscal quarter ended May 31, 2008, a bad debt provision charge of $3.88 million was made to SG&A and we established a specific allowance of the same amount to account for the portion of the receivable we estimated to be uncollectible. For the fiscal quarter ended August 31, 2008, we charged the remaining $0.29 million unreserved balance of Linen’s pre-petition accounts receivables to our bad debt provision and wrote off the resulting 100 percent reserved balance as uncollectable. During the fiscal quarter ended November 30, 2008, Linens announced plans to liquidate by December 31, 2008. Linens has been a significant customer of the Company with fiscal 2008 net sales of approximately $1.30 million and $17.30 million, for our Personal Care and Housewares segments, respectively. We expect no further sales from Linens in future quarters and we have fully collected all post-petition receivables as of November 30, 2008. Linens’ contribution to the Company’s net sales for the nine months ended November 30, 2008 totaled $0.55 million and $7.24 million for the Personal Care and Housewares segments, respectively, compared to net sales of $1.12 million and $12.76 million, respectively, for the same period last year.

Note 7 – Property and Equipment

A summary of property and equipment is as follows:

PROPERTY AND EQUIPMENT

(in thousands)

	Estimated
	Useful Lives	November 30,			February 29,
	(Years)	2008			2008

Land	-	$	9,073		$	9,073
Building and improvements	10 - 40	64,848			62,832
Computer and other equipment	3 - 10	43,214			42,461
Molds and tooling	1 - 3	8,558			8,299
Transportation equipment	3 - 5	367			3,991
Furniture and fixtures	5 - 15	8,363			8,168
Construction in process	-	983			1,311
		135,406			136,135
Less accumulated depreciation		(49,449		)	(44,524		)
Property and equipment, net		$	85,957		$	91,611

In two separate transactions, we sold all fractional shares in our corporate jets for a combined $2.57 million and recognized a combined pretax gain of $0.11 million during the 2009 fiscal year.

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

Depreciation expense was $2.55 million and $7.79 million for the three- and nine-month periods ended November 30, 2008, respectively, and $2.66 million and $7.82 million for the three- and nine-month periods ended November 30, 2007, respectively.

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Note 8 – Intangible Assets

We do not record amortization expense on goodwill or other intangible assets that have indefinite useful lives. Amortization expense is recorded for intangible assets with definite useful lives. We also perform an annual impairment review of goodwill and other intangible assets. Any asset deemed to be impaired is written down to its fair value.

The Company has historically completed its analysis of the carrying value of our goodwill and other intangible assets and our analysis of the remaining useful economic lives of our intangible assets other than goodwill during the first quarter of each fiscal year. As a result of this fiscal year’s analysis, we recorded pretax impairment charges of $7.76 million on certain intangible assets associated with our Personal Care segment. The charges were recorded in the Company’s consolidated condensed income statement for the fiscal quarter ended May 31, 2008 as a component of operating income. The impairment charges reflect the amounts by which the carrying values of the associated assets exceeded their estimated fair values, determined by their estimated future discounted cash flows.

In response to unsatisfactory consumer sales and the discontinuance of the Epil-Stop® line by certain retailers, in the third quarter of the 2008 fiscal year, we conducted a strategic review of the Epil-Stop® trademark. We also evaluated the future potential of our Time-block® brand in light of our recent experience with Epil-Stop®. As a result, during the quarter ended November 30, 2007, we recorded pretax impairment charges totaling $4.98 million ($4.88 million after tax) representing the carrying value of the Epil-Stop® and Time-block® trademarks. At that time, we concluded that the future undiscounted cash flows associated with these trademarks were insufficient to recover their carrying values and that any significant additional investments in these brands would not generate potential returns in line with the Company’s investment expectations.

A summary of the carrying amounts and associated accumulated amortization for all intangible assets by operating segment is as follows:

INTANGIBLE ASSETS

(in thousands)

			Gross
			Carrying													Net Book
			Amount at		Nine Months Ended November 30, 2008											Value at
		Estimated	February 29,							Acquisition			Accumulated			November 30,
Type / Description	Segment	Life	2008		Additions		Impairments			Adjustments			Amortization			2008

Goodwill:
OXO	Housewares	Indefinite	$	166,131	$	-	$	-		$	-		$	-		$	166,131
All other goodwill	Personal Care	Indefinite	46,791		-		-			(301		)	-			46,490
			212,922		-		-			(301		)	-			212,621

Trademarks:
OXO	Housewares	Indefinite	75,554		-		-			-			-			75,554
Brut	Personal Care	Indefinite	51,317		-		-			-			-			51,317
All other - definite lives	Personal Care	[1]	338		-		-			-			(238		)	100
All other - indefinite lives	Personal Care	Indefinite	34,948		2,759		(7,264		)	-			-			30,443
			162,157		2,759		(7,264		)	-			(238		)	157,414

Licenses:
Seabreeze	Personal Care	Indefinite	18,000		-		(377		)	-			-			17,623
All other licenses	Personal Care	8 - 25 Years	24,315		-		(119		)	-			(18,166		)	6,030
			42,315		-		(496		)	-			(18,166		)	23,653

Other:
Patents, customer lists and non-compete agreements
	Housewares	2 - 14 Years	19,741		332		-			-			(7,227		)	12,846
	Personal Care	3 - 8 Years	2,235		1,870		-			-			(762		)	3,343
			21,976		2,202		-			-			(7,989		)	16,189

Total			$	439,370	$	4,961	$	(7,760	)	$	(301	)	$	(26,393	)	$	409,877

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

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The following table summarizes the amortization expense attributable to intangible assets for the three- and nine-month periods ended November 30, 2008 and 2007, as well as our latest estimate of amortization expense for the fiscal years ending the last day of each February from 2009 through 2014.

AMORTIZATION OF INTANGIBLES

(in thousands)

Aggregate amortization expense
For the three months ended

November 30, 2008	$	839
November 30, 2007	$	852

Aggregate amortization expense
For the nine months ended

November 30, 2008	$	2,383
November 30, 2007	$	2,478

Estimated amortization expense
For the fiscal years ended

February 2009	$	3,272
February 2010	$	3,502
February 2011	$	2,825
February 2012	$	2,712
February 2013	$	2,579
February 2014	$	2,063

NOTE 9 - Acquisitions

Ogilvie Products Acquisition - On October 10, 2008, we acquired from Ascendia Brands, Inc. the rights to trademarks, customer lists, formulas and inventory of the Ogilvie® brand of home permanent and hair-straightening products for a cash purchase price of $4.77 million. In addition, upon acquisition, we recorded an additional $0.35 million of liabilities that we expect we will incur as a result of pre-acquisition operations. The products acquired will be sold through our Personal Care segment. We completed an analysis of the economic lives of all the assets acquired and determined the appropriate allocation of the initial purchase price based upon the fair value of the assets acquired. Based upon the fair values, we assigned the acquired trademarks indefinite economic lives and will amortize the customer list over an expected life of 4.2 years. The following schedule presents the assets acquired at closing and our allocation of the initial purchase price:

Ogilvie® - Brand Assets Acquired on October 10, 2008

(in thousands)

Inventories	$	521
Trademarks	2,726
Customer list	1,870
Total assets acquired	5,117
Less: Current liabilities recorded at acquisition	(352		)
Net assets acquired	$	4,765

Belson Products Acquisition - Effective May 1, 2007, we acquired certain assets of Belson Products (“Belson”), formerly the professional salon division of Applica Consumer Products, Inc., for a cash purchase price of $36.50 million plus the assumption of certain liabilities. This transaction was accounted for as a purchase of a business and was paid for using available cash on hand. Belson is a supplier of personal care products to the professional salon industry. Belson markets its professional products to major beauty suppliers and other major distributors under brand names including Belson®, Belson Pro®, Gold ‘N Hot®, Curlmaster®, Premiere®, Profiles®, Comare®, Mega Hot® and Shear Technology®. Products include electrical hair care appliances, spa products and accessories, professional brushes and combs, and professional styling shears. Belson products are principally distributed throughout the U.S., as well as Canada and the United Kingdom.

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Net assets acquired consist principally of accounts receivable, finished goods inventories, goodwill, patents, trademarks, tradenames, product design specifications, production know-how, certain fixed assets, distribution rights and customer lists, a covenant not-to-compete, less certain customer related operating accruals and liabilities. We have completed our analysis of the economic lives of all the assets acquired and determined the appropriate allocation of the initial purchase price based on an independent appraisal. The following schedule presents the net assets of Belson acquired at closing:

Belson Products - Net Assets Acquired on May 1, 2007

(in thousands)

Accounts receivable, net	$	7,449
Inventories	8,426
Fixed assets	139
Goodwill	11,296
Trademarks and other intangible assets	11,085
Total assets acquired	38,395
Less: Current liabilities assumed	(1,895		)
Net assets acquired	$	36,500

Subsequent to the acquisition, we made certain post-closing adjustments which cumulatively increased goodwill by $0.13 million.

Note 10 – Short Term Debt

We entered into a five year revolving Credit Agreement (“Revolving Line of Credit Agreement”), dated as of June 1, 2004, between Helen of Troy L.P., as borrower, and Bank of America, N.A. and other lenders. During the quarter ended November 30, 2008, borrowings under the Revolving Line of Credit Agreement accrued 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, during the fiscal quarter ended November 30, 2008, borrowings accrued interest based on the respective 1, 2, 3, or 6 month LIBOR rate plus a margin of 0.75 percent to 1.25 percent based upon the “Leverage Ratio” at the time of the borrowing. The “Leverage Ratio” is defined by the Revolving Line of Credit Agreement as the ratio of total consolidated indebtedness, including the subject funding on such date to consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the period of the four consecutive fiscal quarters most recently ended. The credit line allows for the issuance of letters of credit up to $15 million. We incur loan commitment fees at a current rate of 0.25 percent per annum on the unused balance of the Revolving Line of Credit Agreement and letter of credit fees at a current rate of 1.0 percent per annum on the face value of the letter of credit. During the second quarter of fiscal 2008, we permanently reduced the commitment under our Revolving Line of Credit Agreement from $75 million to $50 million, which resulted in a proportionate decline in the cost of associated commitment fees under the facility. Outstanding letters of credit reduce the borrowing limit dollar for dollar. During the first nine months of fiscal 2009 and all of fiscal 2008, we did not draw on the Revolving Line of Credit facility. As of November 30, 2008, there were no revolving loans and $0.60 million of open letters of credit outstanding under this facility.

The Revolving Line of Credit Agreement requires the maintenance of certain debt/EBITDA, fixed charge coverage ratios, and other customary covenants. The agreement is guaranteed, on a joint and several basis, by the parent company, Helen of Troy Limited, and certain subsidiaries. Additionally, our debt agreements restrict us from incurring liens on any of our properties, except under certain conditions. As of November 30, 2008, we were in compliance with the terms of our agreements.

On December 15, 2008, we entered into an amendment to the Revolving Line of Credit Agreement, which, among other things, extended the maturity date from June 1, 2009 to December 15, 2013, adjusted interest rate margins and modified certain of our financial covenants. For additional information regarding the amendment, see Note 21.

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Note 11 – Accrued Expenses and Current Liabilities

A summary of accrued expenses and other current liabilities is as follows:

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

(in thousands)

	November 30,			February 29,
	2008			2008

Accrued sales returns, discounts and allowances	$	29,832		$	24,969
Accrued compensation	6,640			11,675
Accrued advertising	12,280			6,917
Accrued interest	2,181			2,092
Accrued royalties	3,215			3,029
Accrued professional fees	1,080			1,273
Accrued benefits and payroll taxes	1,561			1,431
Accrued freight	1,742			1,446
Accrued property, sales and other taxes	2,009			1,196
Foreign currency contracts	(1,783		)	(83		)
Interest rate swaps	13,669			12,449
Other	6,876			7,303
Total accrued expenses and other current liabilities	$	79,302		$	73,697

Note 12 – 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 $9.39 million and $7.64 million as of November 30, 2008 and February 29, 2008, respectively. We estimate our warranty accrual using historical trends, which we believe is the most reliable method by which we can estimate our warranty liability. This liability is included in the line entitled “Accrued sales returns, discounts and allowances” in Note 11.

The following table summarizes the activity in the Company’s accrual for the three- and nine-month periods ended November 30, 2008 and fiscal year ended February 29, 2008:

ACCRUAL FOR WARRANTY RETURNS

(in thousands)

							February 29,
	November 30, 2008						2008
	(Three Months)			(Nine Months)			(Year)

Balance at the beginning of the period	$	8,296		$	7,635		$	6,450
Additions to the accrual	5,152			14,852			22,722
Reductions of the accrual - payments and credits issued	(4,057		)	(13,096		)	(21,537		)
Balance at the end of the period	$	9,391		$	9,391		$	7,635

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Note 13 – Income Taxes

Hong Kong Income Taxes – On August 24, 2007, the Inland Revenue Department of Hong Kong (the “IRD”) and the Company reached a settlement regarding tax liabilities assessed for fiscal years 1998 through 2003. Concurrent with these settlement negotiations, we reached an agreement regarding fiscal years 2004 and 2005, for which we had not previously been assessed a tax liability. The amounts due related to the tax settlement for years 1998 through 2003, and the agreement for years 2004 and 2005, were settled with previously acquired tax reserve certificates. We received a cash refund, including interest, of $4.54 million. During the second quarter of fiscal 2008, in connection with the settlement, we:

· reversed $5.41 million representing a portion of the tax provision previously established for those years and recorded $0.20 million of interest income related to tax reserve certificates in excess of the settlement amount; and

· reversed $1.94 million of a tax provision and $0.40 million of estimated penalties established for this jurisdiction for future years ending after fiscal 2005, on the basis of the settlement for previous years.

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. The Company established a Macao offshore company (“MOC”) and began similar activities in Macao and China in the third quarter of fiscal 2005. As a MOC, we have been granted an indefinite tax holiday and pay no taxes.

United States Income Taxes - We previously disclosed that the U.S. Internal Revenue Service (the “IRS”) provided notice of proposed adjustments of $5.95 million to taxes for fiscal years 2003 and 2004. In April 2008, we resolved all outstanding tax issues resulting in no adjustments to either year. As a result of the settlement, in the fourth quarter of fiscal 2008, we reversed $3.68 million of tax provisions, including interest and penalties, previously established for those years. Of the $3.68 million, $1.36 million was credited to fiscal year 2008 tax expense and $2.32 million was credited to additional paid-in-capital. The amount credited to additional paid-in-capital was for the tax effects of prior year stock compensation expense that was deemed to be deductible under the audit, and when originally accrued, was charged against additional paid-in-capital.

The IRS recently completed its audit of our U.S. consolidated federal tax return for fiscal year 2005. As a result of its audit, the IRS proposed adjustments totaling $8.63 million to taxes. On December 11, 2008, the Company and the IRS reached a settlement agreement. As a result of the settlement, we agreed to adjustments totaling $0.49 million to fiscal 2005 taxes and interest and reversed $3.15 million of tax provisions, including interest and penalties previously established for fiscal 2005. Of the $3.15 million, $0.46 million was credited to fiscal year 2009 tax expense and $2.69 million was credited to additional paid-in-capital. The amount credited to additional paid-in-capital was for the tax effects of prior year stock compensation expense that was deemed to be deductible under the audit, and when originally accrued, was charged against additional paid-in-capital.

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 U.S. If such income were subject to U.S. federal income taxes, our effective income tax rate would increase materially. The American Jobs Creation Act of 2004 (the “AJCA”) included an anti-inversion provision that denies certain tax benefits to companies that have reincorporated outside

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the U.S. after March 4, 2003. We completed our reincorporation in 1994; therefore, our transaction is grandfathered by the AJCA, and we expect to continue to benefit from our current structure. In addition to future changes in tax laws, our position on various tax matters may be challenged. Our ability to maintain our position that the parent company is not a Controlled Foreign Corporation (as defined under the U.S. Internal Revenue Code) is critical to the tax treatment of our non-U.S. earnings. A Controlled Foreign Corporation is a non-U.S. corporation whose largest U.S. shareholders (i.e., those owning 10 percent or more of its shares) together own more than 50 percent of the shares in such corporation. If a change of ownership were to occur such that the parent company became a Controlled Foreign Corporation, such a change could have a material negative effect on the largest U.S. shareholders and, in turn, on our business.

Uncertainty in Income Taxes – 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 U.S. 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 is not probable, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer probable. We record an additional charge in our provision for taxes in the period in which we determine that the recorded tax liability is less than we expect the ultimate assessment to be.

Effective March 1, 2007, we adopted FASB Interpretation No. 48 (“FIN 48”), which provides guidance for the recognition, derecognition and measurement in financial statements of tax positions taken in previously filed tax returns or tax positions expected to be taken in tax returns. FIN 48 requires an entity to recognize the financial statement impact of a tax position when it is more likely than not that the position will be sustained upon examination. If the tax position meets the more-likely-than-not recognition threshold, the tax effect is recognized at the largest amount of the benefit that has greater than a fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance for classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 requires that a liability created for unrecognized tax benefits be presented as a separate liability and not combined with deferred tax liabilities or assets.

As of November 30, 2008, tax years under examination or still subject to examination by major tax jurisdictions, for our most significant subsidiaries were as follows:

Jurisdiction	Examinations in Process	Open Years

Hong Kong	- None -	2006	-	2008
Mexico	- None -	2003	-	2007
United Kingdom	- None -	2006	-	2008
United States	- None -	2006	-	2008

The following table summarizes the net change to unrecognized tax benefits during the first nine months of fiscal 2009:

UNRECOGNIZED TAX BENEFITS
*(in thousands)*

February 29, 2008	$	9,181
Changes in tax positions taken during a prior year	196
Impact of foreign currency remeasurement on unrecognized tax benefits in the current year	(628		)
Changes due to settlements and agreements with tax authorities	(4,576		)
November 30, 2008	$	4,173

When there is uncertainty in a tax position taken or expected to be taken in a tax return, FIN 48 requires a liability to be recorded for the amount of the position that could be challenged and overturned through any combination of

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audit, appeals or litigation process. This amount is determined through criteria and a methodology prescribed by FIN 48 and is referred to as an “unrecognized tax benefit.”

We do not expect any material changes to our existing unrecognized tax benefits during the next twelve months resulting from any issues currently pending with tax authorities.

The Company’s income tax expense and resulting effective tax rate are based upon the respective estimated annual effective tax rates applicable for the respective years adjusted for the effect of items required to be treated as discrete interim period items. The effective tax rates for the three- and nine-month periods ended November 30, 2008 were expenses of 12.2 and 14.3 percent compared to an expense of 13.6 and a benefit of 2.9 percent, respectively, for the three- and nine-month periods ended November 30, 2007.

The tax benefit for the nine month period ended November 30, 2007 resulted from the impact of reaching tax settlements with the IRD for fiscal years 1998 through 2003, and tax agreements for fiscal years 2004 and 2005.

In any given period, there may be significant transactions or events that are incidental to our core businesses and that by a combination of their nature and jurisdiction, can have a disproportionate impact on our reported effective tax rates. Without these transactions, the trend in our effective tax rates would follow a more normalized pattern.

The following table shows the comparative impact of these items on our pretax earnings, tax expense and our overall effective tax rates, for three- and nine-month periods ended November 30, 2008 and 2007:

IMPACT OF SIGNIFICANT ITEMS ON PRETAX EARNINGS, TAX EXPENSE AND EFFECTIVE TAX RATES
*(dollars in thousands)*
	Three Months Ended November 30,
	2008 - Increase (Decrease)								2007 - Increase (Decrease)
	Pretax			Tax			Effective		Pretax			Tax			Effective
	Earnings			Expense			Tax rates		Earnings			Expense			Tax rates

Tax benefit of IRS Settlement, including reversal of interest	$	-		$	(461	)	-2.7	%	$	-		$	-		0.0	%

Impairment charges	-			-			0.0	%	(4,983		)	(100		)	2.1	%

Gain on sale of land	-			-			0.0	%	3,609			1,364			3.1	%


	Nine Months Ended November 30,
	2008 - Increase (Decrease)								2007 - Increase (Decrease)
	Pretax			Tax			Effective		Pretax			Tax			Effective
	Earnings			Expense			Tax rates		Earnings			Expense			Tax rates

Tax benefit of HK IRD Settlement, including interest income and reversal of penalties	$	-		$	-		0.0	%	$	-		$	(7,950	)	-15.5	%

Tax benefit of IRS Settlement, including reversal of interest	-			(461		)	-1.0	%	-			-			0.0	%

Impairment charges	(7,760		)	(155		)	2.1	%	(4,983		)	(100		)	-0.5	%

Charge to allowance for doubtful accounts due to customer bankruptcy	(3,876		)	(1,360		)	-1.8	%	-			-			0.0	%

Gain on sale of land	-			-			0.0	%	3,609			1,364			2.8	%

Gain on casualty insurance settlement	2,702			67			-0.7	%	-			-			0.0	%

For the three- and nine-month periods ended November 30, 2008, the combined net effect of the significant items shown above was to decrease our effective tax rates by 2.7 percent and 1.4 percent, respectively. For the three- and nine-month periods ended November 30, 2007, the net effect of the significant items shown above was to increase and decrease our effective tax rates by 5.2 percent and 13.2 percent, respectively.

In addition to the items shown above, other shifts in our effective tax rates for the periods presented are generally attributable to shifts in the mix of taxable income earned between the various high and low tax rate jurisdictions in which we conduct our business.

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Note 14 – Long-Term Debt

A summary of long-term debt was as follows:

LONG-TERM DEBT

(in thousands)

Original

Date

Interest

November 30,

February 29,

Borrowed

Rates

Matures

2008

2008

$15 million unsecured Senior Note Payable at a fixed interest rate of 7.24%. Interest payable quarterly, principal of $3 million payable annually beginning July 2008.

07/97

7.24

07/12

12,000

15,000

$75 million unsecured floating interest rate 5 Year Senior Notes. Interest set and payable quarterly at three-month LIBOR plus 85 basis points. Principal is due at maturity. Notes can be prepaid without penalty. (1)

06/04

5.89

06/09

75,000

75,000

$50 million unsecured floating interest rate 7 Year Senior Notes. Interest set and payable quarterly at three-month LIBOR plus 85 basis points. Principal is due at maturity. Notes can be prepaid without penalty. (1)

06/04

5.89

06/11

50,000

50,000

$75 million unsecured floating interest rate 10 Year Senior Notes. Interest set and payable quarterly at three-month LIBOR plus 90 basis points. Principal is due at maturity. Notes can be prepaid without penalty. (1)

06/04

6.01

06/14

75,000

75,000

Total long-term debt

212,000

215,000

Less current portion of long-term debt

(78,000

)

(3,000

)

Long-term debt, less current portion

134,000

212,000

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

Interest rate hedge agreements (the “swaps”) are in place for our floating interest rate $75 million, 5 year; $50 million, 7 year; and $75 million, 10 year Senior Notes (the “Senior Notes”). The swaps are a hedge of the variable LIBOR rates used to reset the floating rates on these Senior Notes. The swaps effectively fix the interest rates on the 5, 7 and 10 Year Senior Notes at 5.89, 5.89 and 6.01 percent, respectively. Under the swaps, we agree with other parties to exchange quarterly the difference between fixed-rate and floating-rate interest amounts calculated by reference to notional amounts that perfectly match our underlying debt. Under these swaps, we pay the fixed rates and receive the floating rates. The swaps settle quarterly and terminate upon maturity of the related debt. The swaps are considered cash flow hedges because they are intended to hedge, and are effective as a hedge, against variable cash flows.

All of our long-term debt is unconditionally guaranteed by 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. Additionally, our debt agreements restrict us from incurring liens on any of our properties, except under certain conditions. As of November 30, 2008, we are in compliance with the terms of these agreements.

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

INTEREST EXPENSE
*(in thousands)*
	Three Months Ended November 30,					Nine Months Ended November 30,
	2008		2007			2008		2007

Interest and commitment fees	$	2,437	$	3,575		$	7,098	$	11,347
Deferred finance costs	144		121			431		485
Interest rate swap settlements	799		(93		)	2,788		(415		)
Reduction of debt and revolving credit agreement commitment	-		-			-		119
Total interest expense	$	3,380	$	3,603		$	10,317	$	11,536

For the nine months ended November 30, 2007, the line entitled “Reduction of debt and revolving credit agreement commitment” includes the write off of $0.28 million of unamortized deferred finance fees incurred in connection with the prepayment of $25 million of long-term debt and the reduction of the commitment under our Revolving Line of Credit Agreement from $75 million to $50 million, partially offset by a gain of $0.16 million upon the liquidation of our position in $25 million of associated interest rate swaps.

Note 15 – Fair Value

In the first quarter of fiscal 2009, we adopted SFAS 157, which defines fair value, establishes a framework for measuring fair value under GAAP, and requires expanded disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but rather generally applies to other accounting pronouncements that require or permit fair value measurements. SFAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). These valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. SFAS 157 utilizes a fair value hierarchy that prioritizes inputs to fair value measurement techniques into three broad levels. The following is a brief description of those three levels:

· Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets.

· Level 2: Observable inputs other than quoted prices that are directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets; quoted prices for similar or identical assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

· Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

The FASB issued FSP 157-2 which delayed the effective date of SFAS 157 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, until the beginning of our fiscal 2010 year. The Company’s financial assets and liabilities adjusted to fair value at November 30, 2008 are money market accounts, auction rate securities, trading securities, foreign currency contracts and interest rate swaps. These assets and liabilities are subject to the measurement and disclosure requirements of SFAS 157. The Company adjusts the value of these instruments to fair value each reporting period. No adjustment to retained earnings resulted from the adoption of SFAS 157.

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The fair value hierarchy of our financial assets and liabilities carried at fair value and measured on a recurring basis is as follows:

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
*(in thousands)*
			Quoted Prices in		Significant Other		Significant
			Active Markets		Observable		Unobservable
	Fair Value at		for Identical Assets		Market Inputs		Inputs
Description	November 30, 2008		(Level 1)		(Level 2)		(Level 3)

Assets:
Money market accounts	$	74,303	$	74,303	$	-	$	-
Trading securities	421		421		-		-
Auction rate securities	20,048		-		-		20,048
Foreign currency contracts	1,783		-		1,783		-
Total	$	96,555	$	74,724	$	1,783	$	20,048

Liabilities:
Interest rate swaps	$	13,669	$	-	$	13,669	$	-

Money market accounts are included in cash and cash equivalents on the accompanying consolidated condensed balance sheets and are classified as Level 1 assets. Trading securities are also classified as Level 1 assets because they consist of certain publicly traded stocks which are stated on our consolidated condensed balance sheets at market value, as determined by the most recent trading price of each security as of the balance sheet date.

We use derivatives for hedging purposes pursuant to SFAS 133, and our derivatives are primarily foreign currency contracts and interest rate swaps. We determine the fair value of our derivative instruments based on Level 2 inputs in the SFAS 157 fair value hierarchy.

We hold investments in auction rate securities (“ARS”) collateralized by student loans (with underlying maturities from 19.8 to 37 years). Substantially all such collateral in the aggregate is guaranteed by the U.S. government under the Federal Family Education Loan Program. Liquidity for these securities was normally dependent on an auction process that resets the applicable interest rate at pre-determined intervals, ranging from 7 to 35 days. Beginning in February 2008, the auctions for the ARS held by us and others were unsuccessful, requiring us to hold them beyond their typical auction reset dates. Auctions fail when there is insufficient demand. However, this does not represent a default by the issuer of the security. Upon an auction’s failure, the interest rates reset based on a formula contained in the security. The rate is generally equal to or higher than the current market rate for similar securities. The securities will continue to accrue interest and be auctioned until one of the following occurs: the auction succeeds; the issuer calls the securities; or the securities mature.

At February 29, 2008, these securities were valued at their original cost and classified as current assets in the consolidated condensed balance sheet under the heading “Temporary investments,” which we believed was appropriate based on the circumstances and level of information we had at that time. Between February 29, 2008 and November 30, 2008, we have liquidated $40.58 million of these securities with no gain or loss. Each of the remaining securities in our portfolio has been subject to failed auctions. These failures in the auction process have affected our ability to access these funds in the near term. We intend to reduce our remaining holdings as soon as practicable, but currently believe it is unlikely that we will be able to liquidate all of our holdings over the next twelve months. Accordingly, at May 31, 2008, we reclassified all remaining ARS as non-current assets held for sale under the heading “Long-term investments” in our consolidated condensed balance sheet and the Company determined that original cost no longer approximates fair value.

As a result of the lack of liquidity in the ARS market, in the first quarter of fiscal 2009, we recorded a pre-tax temporary unrealized loss on our ARS of $1.51 million, which is reflected in accumulated other comprehensive loss in our consolidated condensed balance sheet, net of related tax effects of $0.51 million. Our estimate of fair value as of May 31, 2008 was based upon a survey of recent write-downs reported by a sample of public

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companies with similar investment holdings in student loan backed ARS. The recording of this unrealized loss was not a result of the quality of the underlying collateral, but rather a temporary markdown reflecting a lack of liquidity and other current market conditions.

During the quarter ended August 31, 2008, we developed a series of discounted cash flow models and began using them to value our ARS. Based on these models, for the three- and nine-months ended November 30, 2008, we recorded total pre-tax temporary unrealized losses on our ARS of $0.80 million and $3.20 million, respectively, which is reflected in accumulated other comprehensive loss in our consolidated condensed balance sheet at November 30, 2008 net of related tax effects of $1.09 million.

Some of the inputs into the discounted cash flow models we use are unobservable in the market and have a significant effect on valuation. The assumptions used in preparing the models include, but are not limited to, periodic coupon rates, market required rates of return and the expected term of each security. The coupon rate was estimated using implied forward rate data on interest rate swaps and U.S. treasuries, and limited where necessary by any contractual maximum rate paid under a scenario of continuing auction failures. We believe implied forward rates inherently account for a lack of liquidity. In making assumptions of the required rates of return, we considered risk-free interest rates and credit spreads for investments of similar credit quality. The expected term was based on a weighted probability-based estimate of the time the principal will become available to us. The principal can become available under three different scenarios: (1) the ARS is called; (2) the market has returned to normal and auctions have recommenced and are successful; and (3) the principal has reached maturity.

The table below presents a reconciliation for our assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three- and nine-months ended November 30, 2008:

FAIR VALUE MEASUREMENTS USING SIGNIFICANT UNOBSERVABLE INPUTS (Level 3)
Auction Rate Securities
*(in thousands)*
For the three months ended

Balance at August 31, 2008	$	45,025
Total gains or (losses) (realized/unrealized)
Included in earnings	-
Included in other comprehensive loss	(802		)
Sales at par	(24,175		)
Balance at November 30, 2008	$	20,048

For the nine months ended

Balance at February 29, 2008	$	-
Transfers into Level 3 at August 31, 2008	47,067
Total gains or (losses) (realized/unrealized)
Included in earnings	-
Included in other comprehensive loss	(1,694		)
Sales at par	(25,325		)
Balance at November 30, 2008	$	20,048

Total gains or losses included in earnings for the three months ended November 30, 2008	$	-
Total gains or losses included in earnings for the nine months ended November 30, 2008	$	-
Cumulative change in unrealized gains or (losses) relating to assets still held at the reporting date	$	(3,202	)

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Note 16 – Contractual Obligations and Commercial Commitments

Our contractual obligations and commercial commitments as of November 30, 2008 were:

PAYMENTS DUE BY PERIOD - TWELVE MONTHS ENDED NOVEMBER 30:

(in thousands)

2009

2010

2011

2012

2013

After