Sunbeam 2002 Annual Report Download - page 48

Jarden Corporation
Notes to Consolidated Financial Statements (Continued)
established an initial effective rate of interest on this swap of 6.05%, which was due to be paid on November
1, 2002. This contract was considered to be an effective hedge against changes in the fair value of the
Company’s fixed-rate debt obligation for both tax and accounting purposes.
Effective September 12, 2002, the Company entered into an agreement, whereby it unwound the Initial
Swap and contemporaneously entered into a new $75 million interest rate swap (‘‘Replacement Swap’’). The
Replacement Swap has the same terms as the Initial Swap, except that the Company will pay a variable rate of
interest based upon 6 month LIBOR in arrears. The spread on this contract is 470 basis points. Based upon this
contract, the Company paid an effective interest rate of 6.32% on November 1, 2002. In return for unwinding
the Initial Swap, the Company received $5.4 million in cash proceeds, of which $1 million related to accrued
interest that was owed to the Company. The remaining $4.4 million of proceeds will be amortized over the
remaining life of the Notes as a credit to Interest Expense and is included in the Company’s Consolidated
Balance Sheet as an increase to the value of the Long-term Debt. Such amortization offsets the increased
effective rate of interest that the Company pays on the Replacement Swap. The Company has continued to
accrue interest on the Replacement Swap at a 6.32% effective rate for the remainder of 2002.
The Replacement Swap is also considered to be an effective hedge against changes in the fair value of the
Company’s fixed-rate debt obligation for both tax and accounting purposes. Accordingly, the interest rate swap
contract will be reflected at fair value in the Company’s Consolidated Balance Sheet and the related portion of
fixed-rate debt being hedged will be reflected at an amount equal to the sum of its carrying value plus an
adjustment representing the change in fair value of the debt obligations attributable to the interest rate risk
being hedged. The fair market value of the interest rate swap as of December 31, 2002 was approximately $2.4
million and is included as an asset within Other Assets in the Consolidated Balance Sheet, with a corresponding
offset to Long-term Debt. In addition, changes during any accounting period in the fair value of this interest
rate swap, as well as offsetting changes in the adjusted carrying value of the related portion of fixed-rate debt
being hedged, will be recognized as adjustments to Interest Expense in the Company’s Consolidated Statements
of Operations. The net effect of this accounting on the Company’s operating results is that interest expense on
the portion of fixed-rate debt being hedged is generally recorded based on variable interest rates. The Company
is exposed to credit loss, in the event of non-performance by the other party to the Replacement Swap, a large
financial institution, however, the Company does not anticipate non-performance by the other party.
Under its Old Credit Agreement (see Note 9), the Company used interest rate swaps to manage a portion of
its exposure to short-term interest rate variations with respect to the London Interbank Offered Rate (‘‘LIBOR’’)
on its term debt obligations. The Company designated the interest rate swaps as cash flow hedges. Gains and
losses related to the effective portion of the interest rate swaps were reported as a component of other
comprehensive income and reclassified into earnings in the same period the hedged transaction affected
earnings. Because the terms of the swaps exactly matched the terms of the underlying debt, the swaps were
perfectly effective. The interest rate swap agreements expired in March 2002.
17. Related Party Transactions
On May 7, 2001, the Company entered into a letter of intent (the ‘‘Letter’’) with Marlin Partners II, LP
(‘‘Marlin’’), Catterton Partners, L.P. and Alpha Private Equity Group (collectively, the ‘‘Other Investors’’) for the
acquisition by Marlin and the Other Investors of all of the issued and outstanding common stock of the
Company. At the time, Marlin was a related party due to its ownership of approximately 10 percent of the issued
and outstanding common stock of the Company. Mr. Martin Franklin, the Company’s current Chairman and
Chief Executive Officer, and Mr. Ian Ashken, the Company’s Vice Chairman and Chief Financial Officer,
respectively, were the managing partners of Marlin. The Company and Marlin terminated the letter of intent,
except for certain expense reimbursement provisions, in which Marlin was reimbursed approximately $480,000
of expenses related to the contemplated transaction. On June 24, 2001, Messrs. Franklin and Ashken became
Directors of the Company and on September 24, 2001, Messrs. Franklin and Ashken became executive officers
of the Company.
On November 6, 2002, one of the Company’s wholly owned subsidiaries entered into an arms length
agreement with NewRoads, Inc. (‘‘NewRoads’’), a third party provider of pick, pack and ship services, order
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