NOTE 13 - Derivative Financial Instruments

In June 1998, the FASB issued SPAS No. 133 "Accounting for Derivative Instruments and Hedging Activities," which was amended in June 2000 by SFAS No. 138. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments and hedging activities. The new standards require that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Changes in the fair value of those instruments will be reported in earnings or other comprehensive income depending on the use of the derivative and whether it qualifies for hedge accounting. The accounting for gains and losses associated with changes in the fair value of the derivative and the effect on the consolidated financial statements will depend on its hedge designation and whether the hedge is highly effective in achieving offsetting changes in fair value of cash flows of the asset or liability hedged.
     The Company has entered into an interest rate swap contract under which the Company agrees to pay a fixed-rate of interest times a notional principal amount, and to receive in return an amount equal to a specified variable-rate amount times a notional principal amount. Interest rate swaps are contractual agreements between two parties for the exchange of interest payments on notational principal amount and agreed upon fixed or floating rates, for defined time periods. The notional amounts of the contract are not exchanged. No other cash payments are made unless the contract is terminated prior to maturity, in which case the amount paid or received in settlement is established by an agreement at the time of termination, and usually represents the net present value, at current rates of interest, of the remaining obligations to exchange payments under the terms of the contract.
     The interest rate swap contract under which the Company agreed to pay a fixed rate of interest is considered to be a hedge against the change in the amount of future cash flows associated with the Company's interest payments of the Company's variable-rate debt obligations. Accordingly, this interest rate swap contract is reflected at fair value in the Company's consolidated balance sheet and the related gains or losses on this contract are deferred in shareholders' equity as a component of comprehensive income. These deferred gains or losses are then amortized as an adjustment to interest expense over the same period in which the related interest payments that are being hedged are recognized in income. However, to the extent that any of these contracts are not considered to be perfectly effective in offsetting the change in the value of interest payments being hedged, any changes in fair value relating to the ineffective portion of these contracts are immediately recognized in income. The net effect of this accounting on operating results is that interest expense on the portion of variable-rate debt being hedged is generally recorded based on fixed interest rates.
     At December 30, 2001, the Company had an interest rate swap contract to pay fixed rates of interest (average rate of 5.84%) and receive variable rates of interest (average three-month LIBOR rate of 1.88%) on $200,000 notional principal amount of indebtedness. This agreement terminates on January 27, 2003.
     The Company adopted SFAS No. 133, as amended, on January 1, 2001, resulting in a cumulative effect of approxi-mately $1,002 after-tax ($1,677 pre-tax) being credited to other comprehensive income. At December 30, 2001 the Company has recorded a liability for the fair value of this interest rate swap of $8,493, net of taxes of approximately $3,420. This amount is reflected in other comprehensive income, as the Company has designated the contract as a cash flow hedge.
     In the unlikely event that the counterparty fails to perform under the contract, the Company bears the credit risk that payments due to the Company, if applicable, may not be collected.