LensCrafters 2007 Annual Report Download - page 148

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS | 147 <
In June 2005, the Company entered into four interest rate swap transactions with various banks with
an aggregate initial notional amount of Euro 120 million which will decrease by Euro 30 million every
six months starting on March 30, 2007 (“Intesa OPSM Swaps”). These swaps will expire on
September 30, 2008. The Intesa OPSM Swaps were entered into as a cash flow hedge on a portion
of the Banca Intesa Euro 200 million unsecured credit facility discussed above. The Intesa OPSM
Swaps exchange the floating rate of Euribor for an average fixed rate of 2.45% per annum. The
ineffectiveness of cash flow hedges was tested at the inception date and throughout the year. The
results of the tests indicated that the cash flow hedges are highly effective. As a consequence
approximately Euro 0.44 million, net of taxes, is included in other comprehensive income as of
December 31, 2007. Based on current interest rates and market conditions, the estimated
aggregate amount to be recognized as earnings from other comprehensive income for these cash
flow hedges in fiscal 2008 is approximately Euro 0.41 million, net of taxes.
In December 2005, the Company entered into an unsecured credit facility with Banco Popolare di
Verona e Novara. The 18-month credit facility consists of a revolving loan that provides borrowing
availability of up to Euro 100 million; amounts borrowed under the revolving portion can be
borrowed and repaid until final maturity. At December 31, 2007, Euro 100 million had been drawn
from the revolving portion. Interest accrues on the revolving loan at Euribor (as defined in the
agreement) plus 0.25% (4.98% on December 31, 2007). In 2007 the credit facility was renewed and
therefore its final maturity is December 3, 2008. The Company can select interest periods of one,
three or six months.
(b) On September 3, 2003, US Holdings closed a private placement of US$ 300 million (Euro
205.4 million at the exchange rate of December 31, 2007) of senior unsecured guaranteed notes
(the “Notes”), issued in three series (Series A, Series B and Series C). Interest on the Series A
Notes accrues at 3.94% per annum and interest on Series B and Series C Notes accrues at 4.45%
per annum. The Series A and Series B Notes mature on September 3, 2008 and the Series C
Notes mature on September 3, 2010. The Series A and Series C Notes require annual
prepayments beginning on September 3, 2006 through the applicable dates of maturity. The Notes
are guaranteed on a senior unsecured basis by the Company and Luxottica S.r.l., a wholly owned
subsidiary. The notes contain certain financial and operating covenants. US Holdings was in
compliance with those covenants as of December 31, 2007. In December 2005, US Holdings
terminated the fair value interest rate swap agreement described below, and as such, US Holdings
will amortize the final adjustment to the carrying amount of the hedged interest-bearing financial
instruments as an adjustment to the fixed-rate debt yield over the remaining life of the debt. The
effective interest rates on the Series A, B, and C Notes for their remaining lives are 5.64%, 5.99%,
and 5.44%, respectively. Under this credit facility Euro 97.9 million and Euro 165.0 million were
borrowed as of December 31, 2007 and 2006, respectively.
In connection with the issuance of the Notes, US Holdings entered into three interest rate swap
agreements with Deutsche Bank AG (the “DB Swaps”). The three separate agreements’ notional
amounts and interest payment dates coincided with the Notes. The DB Swaps exchanged the fixed
rate of the Notes for a floating rate of the six-month LIBOR rate plus 0.6575% for the Series A Notes
and the six-month LIBOR rate plus 0.73% for the Series B and Series C Notes. These swaps were
treated as fair value hedges of the related debt and qualified for the shortcut method of hedge
accounting (assuming no ineffectiveness in a hedge in an interest rate swap). Thus the interest
income/expense on the swaps was recorded as an adjustment to the interest expense on the debt,
effectively changing the debt from a fixed rate of interest to the swap rate. In December 2005, the
Company terminated the DB Swaps. The Company paid the bank an aggregate of Euro 7.0 million
(US$ 8.4 million), excluding accrued interest, for the final settlement of the DB Swaps.