Supercuts 2004 Annual Report Download - page 51

Table of Contents
Off-Balance Sheet Arrangements
Operating leases primarily represent long-term obligations for the rental of salon premises, including leases for company-
owned salons, as well
as franchisee subleases of approximately $126.4 million, which are funded by franchisees. Regarding the franchisee subleases, we generally
retain the right to the related salon assets net of any outstanding obligations in the event of a default by a franchise owner. Management has not
experienced and does not expect any material loss to result from these arrangements.
Other long-term obligations represent our guarantees, primarily entered into prior to December 31, 2002, on a limited number of equipment
lease agreements between our franchisees and leasing companies. If the franchisee should fail to make payments in accordance with the lease,
we will be held liable under such agreements and retain the right to possess the related salon operations. We believe the fair value of the salon
operations exceeds the maximum potential amount of future lease payments for which we could be held liable. The existing guaranteed lease
obligations, which have an aggregate undiscounted value of $2.7 million at June 30, 2004, terminate at various dates between June 2006 and
April 2009. The Company has not experienced and does not expect any material loss to result from these arrangements.
In certain franchise area development agreements, a buyback program was included allowing the franchisee to require us to purchase all of
their salon assets within a specified market for 90 percent of their original cost within two years from the date of the franchisee opening their
first salon. As of June 30, 2004, 17 existing franchise salons were covered by such agreements and the related maximum potential amount of
undiscounted future payments was estimated to be approximately $1.2 million. This potential obligation is not included in the table above as
the opportunity or the timing of the potential expenditures cannot be reasonably estimated. We have not and do not expect to incur material
expenditures under the buyback program as the program has been discontinued with respect to any new franchise area development agreements
and most franchisees who were offered the program in the past choose to continue operating the salons themselves. Further, in the case of a
franchisee initiating the buyback program, we anticipate finding another franchisee to purchase the salons directly rather than purchasing them
ourselves.
We have interest rate swap contracts, as well as a cross-currency swap to hedge a portion of our net investment in foreign operations. See
Item 7A., “Quantitative and Qualitative Disclosures about Market Risk,” for a detailed discussion of our derivative instruments.
We do not have other unconditional purchase obligations, or significant other commercial commitments such as commitments under lines of
credit, standby letters of credit and standby repurchase obligations or other commercial commitments.
We are in compliance with all covenants and other requirements of our credit agreements and senior notes. Additionally, the credit agreements
do not include rating triggers or subjective clauses that would accelerate maturity dates.
As a part of our salon development program, we continue to negotiate and enter into leases and commitments for the acquisition of equipment
and leasehold improvements related to future salon locations, and continue to enter into transactions to acquire established hair care salons and
businesses.
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance
or special purpose entities (SPEs), which would have been established for the purpose of facilitating off-balance sheet financial arrangements
or other contractually narrow or limited purposes at June 30, 2004. As such, we are not materially exposed to any financing, liquidity, market
or credit risk that could arise if we had engaged in such relationships.
Financing
Financing activities are discussed on page 37 and in Note 4 to the Consolidated Financial Statements, and derivative activities are discussed in
Note 5 to the Consolidated Financial Statements and Item 7A.,
“Quantitative and Qualitative Disclosures about Market Risk.”
Management believes that cash generated from operations and amounts available under existing debt facilities will be sufficient to fund its
anticipated capital expenditures, acquisitions and required debt repayments for the foreseeable future. As of June 30, 2004, we have an unused
committed line of credit amount of $220.6 million under our existing revolving credit facility.
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