Staples 2005 Annual Report Download - page 101

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STAPLES, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Continued)
C-16
NOTE F Derivative Instruments and Hedging Activities
Staples uses interest rate swaps to turn fixed rate debt into variable rate debt and currency swaps to fix the cash
flows associated with debt denominated in a foreign currency and to hedge a portion of the value of Staples’ net
investment in Canadian dollar denominated subsidiaries. These derivatives qualify for hedge accounting treatment as the
derivatives have been highly effective in achieving offsetting changes in fair value of the hedged items.
Interest Rate Swaps: During fiscal year 1999, Staples entered into interest rate swaps, for an aggregate notional
amount of $200 million, to turn Staples’ fixed rate Senior Notes into a variable rate obligation. On October 23, 2001,
Staples terminated these interest rate swaps which were originally scheduled to terminate on August 15, 2007. Upon
termination of the swaps, Staples realized a gain of $18.0 million, which is being amortized over the remaining term of
the underlying hedged debt instrument, as an adjustment to interest expense. Simultaneous to the termination of these
interest rate swaps, Staples entered into another $200 million of interest rate swaps whereby Staples is entitled to receive
semi-annual interest payments at a fixed rate of 7.125% and is obligated to make semi-annual interest payments at a
floating rate based on the LIBOR. These swap agreements, scheduled to terminate on August 15, 2007, are designated as
fair value hedges of the Senior Notes and the differential to be paid or received on the interest rate swap agreement is
accrued and recognized as an adjustment to interest expense over the life of the agreement. At January 28, 2006, the new
interest rate swap agreements had a fair value gain of $0.6 million, which was included in other assets.
On January 10, 2003, Staples entered into an interest rate swap, for an aggregate notional amount of $325 million,
designed to convert Staples’ Notes into a variable rate obligation. The swap agreement, scheduled to terminate on
October 1, 2012, is designated as a fair value hedge of the Notes. Under the interest rate swap agreement, Staples is
entitled to receive semi-annual interest payments at a fixed rate of 7.375% and is required to make semi-annual interest
payments at a floating rate equal to the 6 month LIBOR plus 3.088%. The interest rate swap agreement is being
accounted for as a fair value hedge and the differential to be paid or received on the interest rate swap agreement is
accrued and recognized as an adjustment to interest expense over the life of the agreements. At January 28, 2006, the
interest rate swap agreement had a fair value loss of $12.9 million, which was included in other long-term obligations.
Foreign Currency Swaps: During fiscal year 2000, Staples entered into a currency swap, for an aggregate notional
amount of $200 million. Upon maturity of the agreement, scheduled for August 15, 2007, or earlier termination thereof,
Staples is entitled to receive $200 million and is obligated to pay 298 million in Canadian dollars. Staples is also entitled
to receive semi-annual payments on $200 million at a fixed rate of 7.125% and is obligated to make semi-annual interest
payments on 298 million Canadian dollars at a fixed rate of 6.445%. This swap has been designated as a foreign currency
hedge on Staples’ net investment in Canadian dollar denominated subsidiaries and gains or losses were recorded as
cumulative translation adjustments in stockholders’ equity. At January 28, 2006, the currency swap had a fair value loss of
$62.3 million, which was included in other long-term obligations. During fiscal years 2005, 2004 and 2003, foreign
currency losses, net of taxes of $11.5 million, $13.4 million and $23.1 million, respectively were recorded in the
cumulative translation adjustment line.
NOTE G Commitments and Contingencies
Staples leases certain retail and support facilities under long-term non-cancelable lease agreements. Most lease
agreements contain renewal options and rent escalation clauses and, in some cases, allow termination within a certain
number of years with notice and a fixed payment. Certain agreements provide for contingent rental payments based on
sales.