DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

12 Months Ended

Aug. 31, 2011

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES [Abstract]

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

NOTE 14 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company is exposed to certain risks relating to its ongoing business operations. One risk managed by the Company using derivative instruments is interest rate risk.  To manage interest rate exposure, the Company enters into hedge transactions (interest rate swaps) using derivative financial instruments.  The objective of entering into interest rate swaps is to eliminate the variability of cash flows in the LIBOR interest payments associated with variable-rate loans over the life of the loans.  As changes in interest rates impact the future cash flow of interest payments, the hedges provide a synthetic offset to interest rate movements.

In addition, the Company is exposed to foreign currency and interest rate cash flow exposure related to a non-functional currency long-term debt of one of its wholly owned subsidiaries. To manage this foreign currency and interest rate cash flow exposure, the Company's subsidiary entered into a cross currency interest rate swap that converts its foreign currency denominated floating interest payments to functional currency fixed interest payments during the life of the hedging instrument.  As changes in foreign exchange and interest rates impact the future cash flow of interest payments, the hedge is intended to offset changes in cash flows attributable to interest rate and foreign exchange movements.

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction is determined to be ineffective.  There were no such amounts for the periods reported herein.

The Company formally documents the hedging relationships for all derivative instruments. As of August 31, 2011 and August 31, 2010, all of the Company's derivative financial instruments are designated and qualify as cash flow hedges.  The Company has procedures in place in order to monitor and control the use of derivative financial instruments and ensure they are not used for trading or speculative purposes.

The Company's Colombia subsidiary entered into a cross-currency interest rate swap agreement on May 5, 2011 with the Bank of Nova Scotia ("Scotia Bank") for a notional amount of $8.0 million. The cross-currency interest rate swap agreement converts the Company's foreign currency United States dollar denominated floating interest payments on the $8.0 million long-term debt with Scotia Bank to functional currency fixed interest payments during the life of the hedging instrument.  As changes in foreign exchange and interest rates impact the future cash flow of interest payments, the hedge is intended to offset changes in cash flows attributable to interest rate and foreign exchange movements. The hedged loan has a variable interest rate of 3 month LIBOR plus a margin of 0.7%. Under the cross-currency interest rate swap agreement, the Company will receive variable U.S. dollar interest based on the three-month LIBOR rate plus 0.7% on a notional amount of US$8.0 million and pay fixed Colombian peso ("COP") interest of 6.09% on a notional amount of COP 14,136,000,000 for a term of approximately five years (effective date of April 1, 2011 through April 1, 2016).  The LIBOR reset dates for the hedged long-term debt and the cross-currency interest rate swap occur on the first day of January, April, July, and October, beginning on July 5, 2011. The quarterly interest due to or due from Scotia Bank on the derivative instrument will be settled on a net basis. That is, if the floating leg is greater than the fixed leg on the swap, then the Company will receive a single, net amount from Scotia Bank.  Conversely, if the fixed leg is greater than the floating leg, the Company will pay a single net amount to Scotia Bank.

In the first quarter of fiscal 2009, the Company's Trinidad subsidiary entered into an interest rate swap agreement with the Royal Bank of Trinidad & Tobago LTD ("RBTT") for a notional amount of $8.9 million. This swap agreement was entered into in order to fix the interest rate of a $9.0 million loan entered into in fiscal year 2008. The loan has a variable interest rate of one year LIBOR plus a margin of 2.75%. Under the swap agreement, the Company will pay a fixed rate of 7.05% for a term of approximately five years (until September 26, 2013). The notional amount of $8.9 million is scheduled to amortize to $4.5 million over the term of the swap. The LIBOR reset dates for the $9.0 million loan and the notional amount of $8.9 million on the interest rate swap are effective annually on August 26. As the interest rate swap is fixed at 7.05%, the difference between the actual floating rate (one year LIBOR plus margin of 2.75%) and the fixed rate of 7.05% applied against the notional amount of the swap is paid to or received from RBTT monthly.

In the second quarter of fiscal year 2008, the Company's Barbados subsidiary entered into an interest rate swap agreement with Citibank, N.A. for a notional amount of $4.5 million. This swap agreement was entered into in order to fix the interest rate on a $4.5 million loan obtained in U.S. dollars in fiscal year 2008. The loan has a variable interest rate of nine-month LIBOR plus a margin of 1.5%. Under the swap agreement, the Company will pay a fixed rate of 5.22% for a term of approximately five years (until November 14, 2012). The notional amount of $4.5 million is scheduled to amortize to $2.25 million over the term of the swap. The LIBOR reset dates for the $4.5 million loan and the notional amount of $4.5 million on the interest rate swap are effective semi-annually on November 15 and May 15. As the interest rate swap is fixed at 5.22%, the difference between the actual floating rate (six month LIBOR plus a margin of 1.5%) and the fixed rate of 5.22% applied against the notional amount of the swap is paid to or received from Citibank, N.A. semi-annually.

For the twelve-month periods ended August 31, 2011, 2010, and 2009 the Company included the gain or loss on the hedged items (that is, variable-rate borrowings) in the same line item-interest expense-as the offsetting gain or loss on the related interest rate swaps as follows (in thousands):

Income Statement Classification		Interest expense on Borrowings	Loss on Swaps		Interest expense
Interest expense for the twelve-months ended August 31, 2011	$	407	$	450	$	857
Interest expense for the twelve-months ended August 31, 2010	$	446	$	293	$	739
Interest expense for the twelve-months ended August 31, 2009	$	675	$	144	$	780

The total notional amount of the Company's pay-fixed/receive-variable interest rate swaps was as follows (in thousands):

Floating Rate Payer (Swap Counterparty)		Notional Amount as of August 31, 2011	Notional Amount as of August 31, 2010
RBTT	$	6,300	$	7,200
Scotiabank	$	8,000	$	-
Citibank N.A.	$	2,925	$	3,375
Total	$	17,225	$	10,575

The Company measures the fair value for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis or on a nonrecurring basis during the reporting period as further described within Note 2.  The debt fair value is measured as the net present value of the debt cash payments.  This requires estimating the payments and the timing of the payments and taking the discounted cash flow of these payments.  The amount and timing of the cash flows are often determined by the debt instrument assuming no defaults.  The discount rate used to calculate the net present value of the debt is the current risk-free rate plus the risk premium adjustment reflecting the credit rating.  The Company considered the effect of its credit risk (credit standing) on the fair value of the liability in all periods in which the liability was measured at fair value.

The following table summarizes the fair value of derivative instruments (in thousands):

	Liability Derivatives
	August 31, 2011			August 31, 2010
Derivatives designated as cash flow hedging instruments	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate swaps(1)	Other Accrued Expenses	$	544	Other Accrued Expenses	$	767
Cross currency interest rate swap(2)	Other Accrued Expenses		340	Other Accrued Expenses		-
Total derivatives designated as hedging instruments(3)		$	884		$	767

(1)	The effective portion of the interest rate swaps was recorded as a loss to accumulated other comprehensive loss for $408,000 and $576,000, net of tax, as of August 31, 2011, and August 31, 2010, respectively.  The Company has recorded a deferred tax asset amount of $136,000.
(2)	The effective portion of the cross currency interest rate swap was recorded as a loss to accumulated other comprehensive loss for $340,000 as of August 31, 2011.  The Company has recorded a valuation allowance on the related deferred tax asset.
(3)	All derivatives were designated as cash flow hedging instruments.