Graco 2005 Annual Report Download - page 56

the Company regularly enters into transactions with the Ñnancing entity to sell an undivided interest in
substantially all of the Company's United States trade receivables to the Ñnancing entity. In 2001, the
Ñnancing entity issued $450.0 million in preferred debt securities to the Ñnancial institution. Certain levels
of accounts receivable write-oÅs and other events would permit the Ñnancial institution to terminate the
receivables facility and require redemption of the preferred debt securities. The receivables and preferred
debt securities are recorded in the consolidated accounts of the Company. The Ñnancing entity may cause
the preferred debt securities to be exchanged on September 18, 2006 for a two year Öoating rate note in an
aggregate principal amount equal to the par value of the preferred debt securities plus accrued but unpaid
return. Upon the exchange, the Ñnancing entity will pay to the preferred debt securities holder, a premium
for which the Company has accrued $4.6 million as of December 31, 2005. Because this debt matures in
2008, the entire amount is considered to be long-term debt. At any time prior to maturity of the note, the
holder may elect to convert it into new preferred debt securities of the Ñnancing company with a par value
equal to the outstanding principal amount of the note. The preferred debt securities must be retired or
redeemed, and any note for which such securities are exchanged must be repaid, before the Company can
have access to the Ñnancing entity's receivables. As of December 31, 2005 and 2004, the aggregate amount
of outstanding receivables sold under this facility was $746.9 million and $720.9 million, respectively.
Junior Convertible Subordinated Debentures: As of December 31, 2005, the Company fully and
unconditionally guarantees 8.3 million shares of 5.25% convertible preferred securities issued by a 100%
owned Ñnance subsidiary of the Company, which are callable at 101.050% of the liquidation preference,
decreasing over time to 100% by December 2007. Each of these ""Preferred Securities'' is convertible into
0.9865 of a share of the Company's common stock, and is entitled to a quarterly cash distribution at the
annual rate of $2.625 per share.
The proceeds of the Preferred Securities were invested in $515.5 million of the Company's 5.25%
Junior Convertible Subordinated Debentures (""Debentures''). The Debentures are the sole assets of the
subsidiary trust, mature on December 1, 2027, bear interest at an annual rate of 5.25%, are payable
quarterly and became redeemable by the Company beginning in December 2001. The Company may defer
interest payments on the Debentures for a period of up to 20 consecutive quarters, during which period
distribution payments on the Preferred Securities are also deferred. Under this circumstance, the Company
may not declare or pay any cash distributions with respect to its common or preferred stock or debt
securities that do not rank senior to the Debentures. As of December 31, 2005, the Company has not
elected to defer interest payments.
In 2005 and 2004, the Company purchased 750,000 and 825,000 shares, respectively, of its Preferred
Securities from holders at an average price of $47.075 per share ($35.3 million) and $43.6875 per share
($36.0 million), respectively. In connection with the purchases of these securities, the Company negotiated
the early retirement of the corresponding Debentures with the subsidiary trust. The Company accounted
for these transactions as an extinguishment of debt resulting in net gains of $1.7 million and $4.4 million
in 2005 and 2004, respectively, which were included in Other (income) expense, net.
Terminated Interest Rate Swaps: At December 31, 2005 and 2004, the carrying amount of long-term
debt and current maturities thereof includes $24.8 million (of which $12.8 million is classiÑed as current)
and $38.3 million, respectively, relating to terminated interest rate swap agreements.
EÅective March 9, 2004, the Company terminated an interest rate swap agreement prior to the
scheduled maturity date and received cash of $9.2 million. Of this amount, $5.5 million represented the
fair value of the swap that was terminated and the remainder represents net interest receivable on the
swap. The cash received relating to the fair value of the swap has been included in Other as an operating
activity in the Consolidated Statement of Cash Flows. On March 9, 2004, the Company entered into a
Ñxed to Öoating rate swap that eÅectively replaced the terminated swap.
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