Sunbeam 2004 Annual Report Download - page 72

Jarden Corporation
Notes to Consolidated Financial Statements (cont’d)
December 31, 2004
Company received $3.2 million of cash proceeds. Of this amount, approximately $1 million of proceeds
related to accrued interest that was owed to the Company at such time. The remaining $2.2 million of
proceeds is being amortized over the remaining life of the Notes as a credit to interest expense and the
unamortized balances are included in the Company’s Consolidated Balance Sheet as an increase to the
value of the long-term debt.
Effective September 12, 2002, the Company entered into an agreement, whereby it unwound a $75
million interest rate swap (“Initial Swap”) and contemporaneously entered into the First Replacement
Swap. The First Replacement Swap had the same terms as the Initial Swap, except that the Company was
required to pay a variable rate of interest based upon six-month LIBOR in arrears. The spread on this
contract was 470 basis points. 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 it. 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 the Company’s 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
the Company pays 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%.
The New Swap and Second Replacement Swap 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 these interest rate swaps as of December 31, 2004, was unfavorable in an amount of
approximately $2.0 million and is included as a long-term 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 Income. 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 Hedges
In December 2004, the Company entered into two interest rate swaps, effective in January 2005, that
converted an aggregate of $300 million of floating rate interest payments (excluding the Company’s2%
applicable margin) under its term loan facility for a fixed obligation. The first interest rate swap, for
$150 million of notional value, carries a fixed interest rate of 3.625% per annum for a term of three
years. The second interest rate swap, also for $150 million of notional value, carries a fixed interest rate
of 4.0675% per annum for a term of five years. The swaps have interest payment dates that are the same
70