Dick's Sporting Goods 2006 Annual Report Download - page 55

convertible notes are convertible into the Company’s common stock (the “common stock”) at an initial conversion price in each
of the first 20 fiscal quarters following issuance of the notes of $39.31 per share, upon the occurrence of certain events. Thereafter,
the conversion price per share of common stock increases each fiscal quarter by the accreted original issue discount for the quarter.
Upon conversion of a note, the Company is obligated to pay cash in lieu of issuing some or all of the shares of common stock, in
an amount up to the accreted principal amount of the note, and whether any shares of common stock are issuable in addition to
this cash payment would depend upon the then market price of the Company’s common stock. The senior convertible notes will
mature on February 18, 2024, unless earlier converted or repurchased. The Company may redeem the notes at any time on or
after February 18, 2009, at its option, at a redemption price equal to the sum of the issue price, accreted original discount and
any accrued cash interest, if any. The total face amount of the senior convertible notes was $255.1 million prior to the original
discount of $82.6 million.
Concurrently, with the sale of the senior convertible notes, the Company purchased a bond hedge designed to mitigate the
potential dilution to shareholders from the conversion of the senior convertible notes. Under the five year term of the bond hedge,
one of the initial purchasers (“the counterparty”) will deliver to the Company upon a conversion of the bonds a number of shares
of common stock based on the extent to which the then market price exceeds $39.31 per share. The aggregate number of shares
that the Company could be obligated to issue upon conversion of the senior convertible notes is 4,388,024 shares.
The cost of the purchased bond hedge was partially offset by the sale of warrants (the “warrants”) to acquire up to 8,775,948 shares
of the common stock to the counterparty with whom the Company entered into the bond hedge. The warrants are exercisable in
year five at a price of $56.16 per share. The warrants may be settled at the Company’s option through a net share settlement or a
net cash settlement, either of which would be based on the extent to which the then market price exceeds $56.16 per share.
The net effect of the purchased bond hedge and the warrants is to either reduce the potential dilution from the conversion of the
senior convertible notes if the Company elects a net share settlement or to increase the net cash proceeds of the offering if a net
cash settlement is elected if the senior convertible notes are converted at a time when the market price of the common stock
exceeds $39.31 per share. There would be dilution from the conversion of the senior convertible notes to the extent that the then
market price per share of the common stock exceeds $56.16 at the time of conversion.
Revolving Credit Agreement — On July 28, 2004, the Company executed its Second Amended and Restated Credit Agreement
(the “Credit Agreement”), between Dick’s and lenders named therein. The Credit Agreement became effective on July 29, 2004 and
provides for a revolving credit facility in an aggregate outstanding principal amount of up to $350 million, including up to $75 million
in the form of letters of credit. The Credit Agreement’s term was extended to May 30, 2008.
As of February 3, 2007 and January 28, 2006, the Company’s total remaining borrowing capacity, after subtracting letters of credit,
under the Credit Agreement was $333.5 million and $275.6 million, respectively. Borrowing availability under the Company’s Credit
Agreement is generally limited to the lesser of 70% of the Company’s eligible inventory or 85% of the Company’s inventory’s
liquidation value, in each case net of specified reserves and less any letters of credit outstanding. Interest on outstanding
indebtedness under the Credit Agreement is based upon a formula at either (a) the prime corporate lending rate or (b) the
one-month London Interbank Offering Rate (“LIBOR”), plus the applicable margin of 1.25% to 1.75% based on the level of excess
borrowing availability. Borrowings are collateralized by the assets of the Company, excluding store and distribution center equipment
and fixtures that have a net carrying value of $103.5 million as of February 3, 2007.
At February 3, 2007 and January 28, 2006, the prime rate was 8.25% and 7.25%, respectively, and LIBOR was 5.32% and 4.57%,
respectively. There were no outstanding borrowings at February 3, 2007 and January 28, 2006.
The Credit Agreement contains restrictive covenants including the maintenance of a certain fixed charge coverage ratio of not less
than 1.0 to 1.0 in certain circumstances and prohibits payment of any dividends. As of February 3, 2007, the Company was in
compliance with the terms of the Credit Agreement.
The Credit Agreement provides for letters of credit not to exceed the lesser of (a) $75 million, (b) $350 million less the outstanding
loan balance and (c) the borrowing base minus the outstanding loan balance. As of February 3, 2007 and January 28, 2006, the
Company had outstanding letters of credit totaling $16.5 million and $17.8 million, respectively.
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