Supercuts 2008 Annual Report Download - page 98

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
month LIBOR rate) on notional amounts of indebtedness of $35.0 and $15.0 million as of June 30, 2008, and mature in March 2013 and March
2015, respectively. These swaps were designated and are effective as cash flow hedges. These cash flow hedges were recorded at fair value
within other noncurrent liabilities in the Consolidated Balance Sheet, with a corresponding offset in other comprehensive income within
shareholders' equity.
Forward Foreign Currency Contracts
On May 29, 2007, the Company entered into several forward foreign currency contracts to sell Canadian dollars and buy an aggregate of
$16.9 million U.S. dollars, with maturation dates between June 2007 and May 2010. On February 1, 2006, the Company entered into several
forward foreign currency contracts to sell Canadian dollars and buy an aggregate $15.8 million U.S. dollars, with maturation dates between July
2006 and May 2009. The purpose of the forward contracts is to protect against adverse movements in the Canadian dollar exchange rate. The
contracts were designated and are effective as cash flow hedges of Canadian dollar denominated forecasted intercompany transactions related to
monthly product shipments from the U.S. to Canadian salons. These cash flow hedges were recorded at fair value within other assets in the
Consolidated Balance Sheet, with a corresponding offset in other comprehensive income within shareholders' equity.
On January 3, 2007, the Company terminated its remaining Canadian forward foreign currency contracts entered into on February 1, 2006
having a $14.5 million notional amount. The termination resulted in a deferred gain of $0.4 million which is recorded in Accumulated Other
Comprehensive Income (AOCI) in the Consolidated Balance Sheet, as the contracts hedged currency risk associated with a portion of the
monthly forecasted intercompany foreign-currency-
denominated transactions stemming from the forecasted monthly product shipments from the
Company's subsidiaries located in the Unites States to its Canadian subsidiaries. The deferred gain will be recorded into income through May 31,
2009 as the forecasted foreign currency transactions are recognized in earnings. Approximately $0.2 and $0.1 million of the deferred gain was
amortized against cost of goods sold during fiscal years 2008 and 2007, respectively, resulting in a remaining deferred gain of $0.1 and
$0.3 million in AOCI at June 30, 2008 and 2007.
When the inventory from the hedged forecasted transaction is sold to an external party by the salon and, therefore, impacts cost of goods
sold in the Company's Consolidated Statement of Operations, amounts are transferred out of AOCI to earnings. The Company uses an inventory
turnover ratio (based on historical results) to estimate the timing of sales to an external third party. Therefore, amounts will be transferred from
AOCI into earnings based on this inventory turnover ratio.
Financial Statement Impact of Cash Flow Hedges
The cumulative tax-effected net loss or gain is included within shareholders' equity in the Consolidated Balance Sheet. At June 30, 2008,
the cumulative tax-effected net loss recorded in AOCI related to the cash flow hedges was $2.2 million. At June 30, 2007 and 2006, the
cumulative tax-effected net gain recorded in AOCI related to the cash flow hedges was, $1.7 and $1.9 million,
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