Chili's 2002 Annual Report Download - page 52

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
transactions. The accreted conversion price is equal to the issue price of the Debenture plus accrued original
issue discount divided by 18.08 shares.
The $46.0 million of unsecured senior notes bear interest at an annual rate of 7.8%. Interest is payable
semi-annually and principal of $14.3 million is due annually through fiscal 2004 with the remaining unpaid
balance due in fiscal 2005.
The Company has credit facilities aggregating $375.0 million at June 26, 2002. A revolving credit facility of
$275.0 million bears interest at LIBOR (1.855% at June 26, 2002) plus a maximum of 1.375% (0.50% at June 26,
2002) and expires in fiscal 2006. At June 26, 2002, $60.0 million was outstanding under this facility. The
remaining credit facilities bear interest based upon the lower of the banks’ ‘‘Base’’ rate, certificate of deposit rate,
negotiated rate, or LIBOR rate plus 0.375%, and expire at various times beginning in fiscal 2003. Unused credit
facilities available to the Company were approximately $311.5 million at June 26, 2002. Obligations under the
Company’s credit facilities, which require short-term repayments, have been classified as long-term debt,
reflecting the Company’s intent and ability to refinance these borrowings through the existing credit facilities.
Pursuant to the acquisition of NERCO (see Note 2), the Company assumed $43.5 million in mortgage loan
obligations. The obligations require monthly principal and interest payments, mature on various dates from
September 2002 through March 2020, and bear interest at rates ranging from 8.44% to 10.75% per year. The
obligations are collateralized by the acquired restaurant properties.
Excluding capital lease obligations (see Note 8), the Company’s long-term debt maturities for the five years
following June 26, 2002 are as follows (in thousands):
Fiscal Year
2003 ....................................................... $ 16,456
2004 ....................................................... 18,145
2005 ....................................................... 18,073
2006 ....................................................... 65,890
2007 ....................................................... 2,261
Thereafter ................................................... 287,099
$407,924
7. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Company enters into interest rate swaps to manage fluctuations in interest expense and to maintain the
value of fixed-rate debt (senior notes). The fixed-rate debt is exposed to changes in fair value as market-based
interest rates fluctuate. The Company entered into two interest rate swaps in April 2000 with a total notional
value of $42.8 million at June 26, 2002. This fair value hedge changes the fixed-rate interest on the entire balance
of the Company’s senior notes to variable-rate interest. Under the terms of the hedges (which expire in fiscal
2005), the Company pays semi-annually a variable interest rate based on 90-Day LIBOR (1.86% at June 26,
2002) plus 0.530% for one of the swaps and 180-Day LIBOR (1.91% at June 26, 2002) plus 0.395% for the other
swap, in arrears, compounded at three-month intervals. The Company receives semi-annually the fixed interest
rate of 7.8% on the senior notes. The estimated fair value of these agreements at June 26, 2002 was
approximately $3.2 million, which is included in other assets in the Company’s consolidated balance sheet at
June 26, 2002. The Company’s interest rate swap hedges meet the criteria for the ‘‘short-cut method’’ under
SFAS No. 133, ‘‘Accounting for Derivative Instruments and Hedging Activities.’’ Accordingly, the changes in fair
value of the swaps are offset by a like adjustment to the carrying value of the debt and no hedge ineffectiveness is
assumed.
The Company entered into three interest rate swaps in December 2001 with a total notional value of
$117.8 million at June 26, 2002. These fair value hedges change the fixed-rate interest component of an operating
lease commitment for certain real estate properties entered into in November 1997 to variable-rate interest.
Under the terms of the hedges (which expire in fiscal 2018), the Company pays monthly a variable rate based on
30-Day LIBOR (1.84% at June 26, 2002) plus 1.26%. The Company receives monthly the fixed interest rate of
7.156% on the lease. The estimated fair value of these agreements at June 26, 2002 was an asset of approximately
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