Supercuts 2006 Annual Report Download - page 45

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Interest
Interest expense was as follows:
(1)
Represents the basis point change in interest expense as a percent of total revenues as compared to the corresponding period of the prior
fiscal year.
The increase in interest expense during the years ended June 30, 2006 and 2005 was primarily due to an increase in our debt level
stemming from fiscal year 2006 and 2005 acquisition activity, including additional beauty schools and the fiscal year 2005 acquisition of the
hair restoration centers. Additionally, increased borrowing rates contributed to the fiscal year 2006 increase in interest expense as a percent of
total revenues.
Income Taxes
Our reported effective tax rate was as follows:
The improvement in the overall effective tax rate during fiscal year 2006 was related to the prior year goodwill impairment charge in the
international salon segment, which was non-deductible for tax purposes. The goodwill impairment caused an 11.0 percent increase in the fiscal
year 2005 tax rate. Excluding the impact of the goodwill impairment, the increase in the fiscal year 2006 tax rate over the prior year was
primarily due to the elimination of the Work Opportunity Credits, which expired on December 31, 2005. During fiscal year 2005, excluding the
impact of the goodwill impairment, the improvement in the effective tax rate over fiscal year 2004 was primarily due to the successful
settlement of our federal audit and the retroactive reinstatement of the Work Opportunity Credit during fiscal year 2005 (see Note 8 to the
Consolidated Financial Statements).
Recent Accounting Pronouncements
Recent accounting pronouncements are discussed in Note 1 to the Consolidated Financial Statements.
Effects of Inflation
We compensate some of our salon employees with percentage commissions based on sales they generate, thereby enabling salon payroll
expense as a percent of company-owned salon revenues to remain relatively constant. Accordingly, this provides us certain protection against
inflationary increases, as payroll expense and related benefits (our major expense components) are variable costs of sales. In addition, we may
increase pricing in our salons to offset any significant increases in wages. Therefore, we do not believe inflation has had a significant impact on
the results of our operations.
44
Expense as %
of Total
Increase (Decrease) Over Prior Fiscal Year
Years Ended June 30,
Interest
Revenues
Dollar
Percentage
Basis Point(1)
(Dollars in thousands)
2006
$
34,989
1.4
%
$
10,604
43.5
%
30
2005
24,385
1.1
7,321
42.9
20
2004
17,064
0.9
(4,330
)
(20.2
)
(40
)
Effective
Basis Point (Increase)
Years Ended June 30,
Rate
Improvement
2006
35.6
%
890
2005
44.5
(850
)
2004
36.0
140