Supercuts 2004 Annual Report Download - page 78

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Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
As a result of the fair value hedging activities discussed in Note 5, an adjustment of approximately $3.5 and $8.5 million were made to
increase the carrying value of the Company’s long-term fixed rate debt at June 30, 2004 and 2003, respectively. Therefore, at June 30, 2004
and 2003, approximately 30 and 34 percent of the Company’s fixed rate debt has been marked to market, respectively. Considering the
mark-to-market adjustment and current market interest rates, the carrying values of the Company’s debt instruments, based upon discounted
cash flow analyses using the Company’s current incremental borrowing rate, approximate their fair values at June 30, 2004 and 2003.
Aggregate maturities of long-term debt, including associated fair value hedge obligations of $3.5 million and capital lease obligations of
$12.8 million at June 30, 2004, are as follows:
The primary market risk exposure of the Company relates to changes in interest rates in connection with its debt, some of which bears
interest at floating rates based on LIBOR plus an applicable borrowing margin. Additionally, the Company is exposed to foreign currency
translation risk related to its net investments in its foreign subsidiaries. The Company has established policies and procedures that govern the
management of these exposures. By policy, the Company does not enter into such contracts for the purpose of speculation.
The Company has established an interest rate management policy that attempts to minimize its overall cost of debt, while taking into
consideration the earnings implications associated with the volatility of short-term interest rates. As part of this policy, the Company has
elected to maintain a combination of floating and fixed rate debt. As of June 30, 2004 and 2003, the Company had the following outstanding
debt balances:
Considering the Company’
s policy of maintaining variable rate debt instruments, a one percent change in interest rates (including the impact
of existing interest rate swap contracts) may impact the Company’s interest expense by approximately $1.0 million. In this regards, the
Company has entered into the following financial instruments:
Cash Flow Hedges
The Company had interest rate swap contracts that pay fixed rates of interest and receive variable rates of interest (based on the three-month
LIBOR rate) on notional amounts of indebtedness of $11.8 million at June 30, 2004 and 2003. These cash flow hedges are recorded at fair
value within other noncurrent liabilities in the Consolidated Balance Sheet, with a corresponding offset in other comprehensive income
within shareholders’ equity.
Additionally, when interest payments are made on the underlying hedged items, a pre-tax adjustment to interest expense based on the net
settlement amounts on the swaps is recorded in the Consolidated Statement of Operations, as amounts are transferred out of accumulated
other comprehensive income to earnings at each interest payment date.
63
Fiscal year
(Dollars in thousands)
2005
$
19,128
2006
17,471
2007
61,396
2008
24,495
2009
78,900
Thereafter
99,753
$
301,143
5.
DERIVATIVE FINANCIAL INSTRUMENTS:
June 30,
(Dollars in thousands)
2004
2003
Fixed rate debt
$
271,743
$
278,957
Floating rate debt
29,400
22,800
$
301,143
$
301,757