Sunbeam 2003 Annual Report Download - page 62

Jarden Corporation
Notes to Consolidated Financial Statements (continued)
proceeds, of which $1 million related to accrued interest that was owed to us. The remaining $4.4
million of proceeds is being amortized over the remaining life of the Notes as a credit to interest
expense and is included in our consolidated balance sheet as an increase to the value of the long-term
debt. Such amortization amount offsets the increased effective rate of interest that we pay on the Second
Replacement Swap.
In conjunction with the Notes, on April 24, 2002, we entered into the Initial Swap, to receive a fixed
rate of interest and pay a variable rate of interest based upon LIBOR. The Initial Swap had a maturity
date that was the same as the Notes. Interest was payable semi-annually in arrears on May 1 and
November 1, commencing on November 1, 2002. The initial effective rate of interest that we established
on this swap was 6.05%.
All of our swaps have been and, where applicable, are considered to be effective hedges against
changes in the fair value of our fixed-rate debt obligation for both tax and accounting purposes.
Accordingly, the interest rate swap contracts are reflected at fair value in the Company’s Consolidated
Balance Sheet and the related portion of fixed-rate debt being hedged is 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
swaps as of December 31, 2003 was against the Company in an amount of approximately $2.6 million
and is included as a liability 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 the interest rate swaps, 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 its current existing swap, a large financial institution. However, the Company does not anticipate non-
performance by the other party.
Cash Flow Hedge
Effective April 2, 2003, the Company entered into an interest rate swap such that converted $37
million of floating rate interest payments under its term loan facility for a fixed obligation that carries an
interest rate, including applicable margin, of 4.25% per annum. The swap has interest payment dates
that are the same as the term loan facility and it matures on September 30, 2004. The swap is considered
to be a cash flow hedge and is also considered to be an effective hedge against changes in the fair value
of the Company’s floating-rate debt obligation for both tax and accounting purposes. Gains and losses
related to the effective portion of the interest rate swap are reported as a component of other
comprehensive income and will be reclassified into earnings in the same period that the hedged
transaction affects earnings.
The Company’s derivative activities do not create additional risk because gains and losses on
derivative contracts offset gains and losses on the assets, liabilities and transactions being hedged. As
derivative contracts are initiated, the Company designates the instruments individually as either a fair
value hedge or a cash flow hedge. Management reviews the correlation and effectiveness of its derivatives
on a periodic basis.
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