Black & Decker 2014 Annual Report Download - page 99

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transactions have a term of approximately three years and initially have 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. The capped call transactions may be settled by net share settlement (the default settlement method) or, at
the Company’s option and subject to certain conditions, cash settlement, physical settlement or modified physical settlement.
The aggregate fair value of the options at January 3, 2015 was $15.8 million.
Convertible Preferred Units and Equity Option
As described more fully in Note H, Long-Term Debt and Financing Arrangements, in November 2010, the Company issued
Convertible Preferred Units comprised of $632.5 million of Notes due November 17, 2018 and Purchase Contracts. There have
been no changes to the terms of the Convertible Preferred Units. The Purchase Contracts obligate the holders to purchase, on
the earlier of (i) November 17, 2015 (the Purchase Contract Settlement date) or (ii) the triggered early settlement date, 6.3
million shares, for $100 per share, of the Company’s 4.75% Series B Cumulative Convertible Preferred Stock (the “Convertible
Preferred Stock”), resulting in cash proceeds to the Company of up to $632.5 million.
Following the issuance of Convertible Preferred Stock upon settlement of a holder’s Purchase Contracts, a holder of
Convertible Preferred Stock may, at its option, at any time and from time to time, convert some or all of its outstanding shares
of Convertible Preferred Stock at a conversion rate of 1.3333 shares of the Company’s common stock per share of Convertible
Preferred Stock (subject to customary anti-dilution provisions), which is equivalent to an initial conversion price of
approximately $75.00 per share of common stock. Assuming conversion of the 6.3 million shares of Convertible Preferred
Stock at the 1.3333 initial conversion rate a total of 8.4 million shares of the Company’s common stock may be issued upon
conversion. As of January 3, 2015, due to the customary anti-dilution provisions, the conversion rate on the Convertible
Preferred Stock was 1.3684 (equivalent to a conversion price of approximately $73.08 per common share). In the event that
holders elect to settle their Purchase Contracts prior to November 17, 2015, the Company will deliver a number of shares of
Convertible Preferred Stock equal to 85% of the Purchase Contracts tendered, together with cash in lieu of fractional shares.
Upon a conversion on or after November 15, 2017 the Company may elect to pay or deliver, as the case may be, solely shares
of common stock, together with cash in lieu of fractional shares (“physical settlement”), solely cash (“cash settlement”), or a
combination of cash and common stock (“combination settlement”). The Company may redeem some or all of the Convertible
Preferred Stock on or after December 22, 2015 at a redemption price equal to 100% of the $100 liquidation preference per
share plus accrued and unpaid dividends to the redemption date.
In November 2010, contemporaneously with the issuance of the Convertible Preferred Units described above, the Company
paid $50.3 million, or an average of $5.97 per option, to enter into capped call transactions (equity options) on 8.4 million
shares of common stock with certain major financial institutions. The purpose of the capped call transactions is to offset the
common shares that may be deliverable upon conversion of shares of Convertible Preferred Stock. With respect to the impact
on the Company, the capped call transactions and the Convertible Preferred Stock, when taken together, result in the economic
equivalent of having the conversion price on the Convertible Preferred Stock at $95.44, the upper strike price of the capped call
(as of January 3, 2015). Refer to Note H, Long-Term Debt and Financing Arrangements. In accordance with ASC 815-40 the
$50.3 million premium paid was recorded as a reduction to equity.
The capped call transactions cover, subject to customary anti-dilution adjustments, the number of shares of common stock
equal to the number of shares of common stock underlying the maximum number of shares of Convertible Preferred Stock
issuable upon settlement of the Purchase Contracts. Each of the capped call transactions has a term of approximately five years
and initially had a lower strike price of $75.00, which corresponded to the initial conversion price of the Convertible Preferred
Stock, and an upper strike price of $97.95, which was approximately 60% higher than the closing price of the common stock on
November 1, 2010. The capped call transactions may be settled by net share settlement (the default settlement method) or, at
the Company’s option and subject to certain conditions, cash settlement, physical settlement or modified physical settlement.
The aggregate fair value of the options at January 3, 2015 was $141.1 million.