Supercuts 2005 Annual Report Download - page 84

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Cash Flow Hedges
The Company had an interest rate swap contract that paid fixed rates of interest and received variable rates of interest (based on the three-
month LIBOR rate) on a notional amount of indebtedness of $11.8 million at June 30, 2004. This cash flow hedge was recorded at fair value
within other noncurrent liabilities in the Consolidated Balance Sheet, with a corresponding offset in other comprehensive income within
shareholders’ equity. During the fourth quarter of fiscal year 2005, the cash flow swap and the underlying hedged debt matured.
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.
The cumulative tax-effected net loss recorded in accumulated other comprehensive income, set forth under the caption shareholders’
equity in the Consolidated Balance Sheet, related to the cash flow swap was $0.3 million at June 30, 2004 (and zero at June 30, 2005, as the
swap matured during the fourth quarter). The following table depicts the hedging activity in other comprehensive income related to the cash
flow swap for the years ended June 30, 2005, 2004 and 2003.
Fair Value Hedges
The Company has interest rate swap contracts that pay variable rates of interest (based on the three-month and six-month LIBOR rates
plus a credit spread) and receive fixed rates of interest on an aggregate $48.5 and $81.0 million notional amount at June 30, 2005 and 2004,
respectively, with maturation dates between July 2005 and July 2008. These swaps were designated as hedges of a portion of the Company’s
senior term notes and are being accounted for as fair value hedges.
During fiscal year 2003, the Company terminated a portion of a $40.0 million interest rate swap contract. The remainder of this swap
contract was terminated during the fourth quarter of fiscal year 2005. The terminations resulted in the Company realizing a gain of $1.5 million
during fiscal year 2003 and an additional gain of $1.1 million during the fourth quarter of fiscal year 2005, which is deferred in long-term debt
in the Consolidated Balance Sheet and is being amortized against interest expense over the remaining life of the underlying debt that matures in
July 2008. Approximately $0.3 million of the deferred gain was amortized against interest expense during each of fiscal year 2005 and 2004
and $0.1 million was amortized during fiscal year 2003, resulting in a remaining deferred gain of $1.9 and $1.1 million in long-term debt at
June 30, 2005 and 2004, respectively.
83
2005
2004
2003
(Dollars in thousands)
Tax-effected gain (loss) on cash flow hedge recorded in other
comprehensive income:
Realized net loss transferred from other comprehensive income to
earnings
$
271
$
386
$
2,510
Unrealized net gain (loss) from changes in fair value of cash flow swap
480
(231
)
(684
)
$
751
$
155
$
1,826