Black & Decker 2014 Annual Report Download - page 86

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Capped Call Transactions:
In order to offset the potential economic dilution associated with the common shares issuable upon settlement of the Equity
Purchase Contracts, the Company entered into capped call transactions with a major financial institution (the “counterparty”). The
capped call transactions cover, subject to customary anti-dilution adjustments, the number of shares equal to the number of shares
issuable upon settlement of the Equity Purchase Contracts at the 1.0122 minimum settlement rate. The capped call transactions
have a term of approximately three years and initially had a lower strike price of $98.80, which corresponds to the minimum
settlement rate of the Equity Purchase Contracts, and an upper strike price of $112.91, which is approximately 40% higher than
the closing price of the Company's common stock on November 25, 2013, and are subject to customary anti-dilution adjustments.
With respect to the impact on the Company, the capped call transactions and Equity Units, when taken together, result in the
economic equivalent of having the conversion price on Equity Units at $112.86, the upper strike of the capped call as of January
3, 2015. The Company paid $9.7 million of cash to fund the cost of the capped call transactions, which was recorded as a reduction
of Shareowners’ Equity. The capped call transactions may be settled by net share settlement or, at the Company’s option and
subject to certain conditions, cash settlement, physical settlement or modified physical settlement (in which case the number of
shares the Company will receive will be reduced by a number of shares based on the excess, if any, of the volume-weighted average
price of its common stock, as measured under the terms of the capped call transactions, over the upper strike price of the capped
call transactions). If the capped call transactions are exercised and the volume-weighted average price per share of common stock,
as measured under the terms of the capped call transactions, is greater than the lower strike price of the capped call transactions
but not greater than the upper strike price of the capped call transactions, then the value the Company expects to receive from the
capped call counterparties will be generally based on the amount of such excess. As a result, the capped call transactions may
offset the potential dilution upon settlement of the Equity Purchase Contracts. If, however, the volume-weighted average price
per share of common stock, as measured under the terms of the capped call transactions, exceeds the upper strike price of the
capped call transactions, the value the Company expects to receive upon settlement of the capped call transactions (or portions
thereof) will be approximately equal to (x) the excess of the upper strike price of the capped call transactions over the lower strike
price of the capped call transactions times (y) the number of shares of common stock relating to the capped call transactions (or
the portions thereof) being exercised, in each case as determined under the terms of the capped call transactions. As a result, the
dilution mitigation under the capped call transactions will be limited based on such capped value. See Note J, Capital Stock -
Other Equity Arrangements, for further details on the capped call transactions.
Convertible Preferred Units
In November 2010, the Company issued 6,325,000 Convertible Preferred Units (the “Convertible Preferred Units”), each with a
stated amount of $100. The Convertible Preferred Units are initially comprised of a 1/10, or 10%, undivided beneficial ownership
in a $1,000 principal amount junior subordinated note (the “Note”) and a Purchase Contract (the “Purchase Contract”) obligating
holders to purchase one share (subject to adjustment under certain circumstances if holders elect to settle their Purchase Contracts
early) of the Company’s 4.75% Series B Perpetual Cumulative Convertible Preferred Stock (the “Convertible Preferred Stock”).
The Company received $613.5 million in cash proceeds from the Convertible Preferred Units offering, net of underwriting fees.
These proceeds were used to redeem all of the Company’s outstanding 5.902% Fixed Rate/Floating Rate Junior Subordinated
Debt Securities due 2045, at a price of $312.7 million, to contribute $150.0 million to a U.S. pension plan to improve the funded
status of the Company’s pension obligations, to fund the $50.3 million cost of the capped call transaction as more fully described
below, and the remainder to reduce outstanding short-term borrowings and for other general corporate purposes.
Purchase Contracts:
Each Purchase Contract obligates the holder to purchase, on the earlier of (i) November 17, 2015 (the “Purchase Contract settlement
date”) or (ii) the triggered early settlement date (as described below), for $100, one newly-issued share (subject to adjustment
under certain circumstances if holders elect to settle their Purchase Contracts early) of Convertible Preferred Stock. A maximum
of 6,325,000 shares of Convertible Preferred Stock may be issued on the Purchase Contract settlement date, resulting in total
additional cash proceeds to the Company of up to $632.5 million. The Notes, described further below, are pledged as collateral
to guarantee the holders’ obligations to purchase Convertible Preferred Stock under the terms of the Purchase Contracts. Purchase
Contract holders may elect to settle their obligations under the Purchase Contracts early, in cash, at any time prior to the second
business day immediately preceding the Purchase Contract settlement date or the triggered early settlement date, as applicable,
subject to certain exceptions and conditions.
Upon early settlement of any Purchase Contracts, except in connection with a “fundamental change” or trigger event, the Company
will deliver a number of shares of Convertible Preferred Stock equal to 85% of the number of Purchase Contracts tendered for
early settlement. Upon the occurrence of a fundamental change, holders of Purchase Contracts will have the right, subject to certain
exceptions and conditions, to settle their Purchase Contracts early at 100% of the settlement rate for the Purchase Contracts.