Sally Beauty Supply 2007 Annual Report Download - page 111

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The Company utilizes interest rate swaps to manage the cash flow risk associated with changing interest rates and accounts for them under SFAS 133, which
requires that all derivatives be marked to market (fair value). The Company does not purchase or hold any derivative instruments for trading purposes. The
interest rate swap agreements do not currently qualify as hedges and, therefore, the change in fair value of the interest rate swap agreements are recorded in the
consolidated statements of earnings. The fair value of the swap agreements at September 30, 2007 was recorded as a liability of approximately $3.0 million.
Fair value estimates presented for the swap agreements are based on third-party information and were determined using proprietary models based upon
well-recognized financial principles and reasonable estimates about relevant future market conditions.
The counter-parties to these swap instruments are large financial institutions which the Company believes are of high quality creditworthiness. While the
Company may be exposed to potential losses due to the credit risk of nonperformance by these counter-parties, such losses are not anticipated.
The marked to market impact of the swap arrangements on interest expense was an increase of approximately $3.0 million in fiscal year 2007. Changes in the fair
value of the interest rate swap agreements will either increase or decrease the Company's net interest expense and therefore may affect the Company's earnings.
14. 401(k) and Profit Sharing Plan
The Company sponsors the Sally Beauty 401(k) and Profit Sharing Plan (the "401k Plan"), which is a qualified defined contribution plan. The 401k Plan covers
employees of the Company who meet certain eligibility requirements and who are not members of a collective bargaining unit. Under the 401k Plan, employees
may contribute a percentage of their annual compensation to the 401k Plan up to certain maximums, as defined by the 401k Plan and by the Internal Revenue
Service ("IRS"). The Company currently matches a percentage of employee contributions. Prior to the Separation Transactions, employees of the Company
participated in the Sally Beauty 401(k) Savings Plan. The Company recognized expense of $3.3 million, $2.1 million and $2.2 million in fiscal years 2007, 2006
and 2005, respectively, related to these plans. These amounts are included in selling, general and administrative expenses.
In addition, pursuant to the 401k Plan, employees who meet certain eligibility requirements and who are not members of a collective bargaining unit may
participate in the profit sharing program. The Company's profit sharing contributions to the 401k Plan are determined by the Compensation Committee of its
board of directors. Prior to the Separation Transactions, employees of the Company participated in the Alberto-Culver Profit Sharing Plan. The Company's
contributions to the plan were determined at the discretion of the Alberto-Culver board of directors. The Company recognized expense of $6.2 million,
$8.6 million and $9.0 million in fiscal years 2007, 2006 and 2005, respectively, related to these plans. These amounts are included in selling, general and
administrative expenses.
15. Income Taxes
In conjunction with the Separation Transactions, the Company became a separate entity for tax reporting purposes. Prior to the Separation Transactions, the
Company was included in the U.S. Federal income tax return of Alberto-Culver; however, income taxes are provided in the accompany consolidated historical
financial statements as if the Company was filing a separate return.
F-29
Source: Sally Beauty Holding, 10-K, November 29, 2007