Tyson Foods 2008 Annual Report Download - page 45

43 2008 Annual Report
Notes to Consolidated Financial Statements (continued)
• during the fi ve business days after any 10 consecutive trading
days (measurement period) in which the trading price per $1,000
principal amount of notes for each trading day of the measure-
ment period was less than 98% of the product of the last reported
sale price of our Class A stock and the applicable conversion rate
on each such day; or
• upon the occurrence of specifi ed corporate events as defi ned in
the supplemental indenture.
On and after July 15, 2013, until the close of business on the second
scheduled trading day immediately preceding the maturity date,
holders may convert their notes at any time, regardless of the fore-
going circumstances. Upon conversion, we will deliver cash up to
the aggregate principal amount of the Convertible Notes to be con-
verted and shares of our Class A stock in respect of the remainder, if
any, of our conversion obligation in excess of the aggregate principal
amount of the Convertible Notes being converted.
The Convertible Notes were accounted for as a combined instrument
pursuant to EITF Issue 90-19, “Convertible Bonds with Issuer Option
to Settle for Cash upon Conversion.” Accordingly, we accounted for
the entire agreement as one debt instrument because the conver-
sion feature does not meet the requirements to be accounted for
separately as a derivative fi nancial instrument.
Convertible Note Hedge and Warrant Transactions In connection
with the issuance of the Convertible Notes, we entered into separate
convertible note hedge transactions with respect to our common
stock to minimize the potential economic dilution upon conversion
of the Convertible Notes. We also entered into separate warrant
transactions. We recorded the purchase of the note hedge trans-
actions as a reduction to capital in excess of par value, net of $36 mil-
lion pertaining to the related deferred tax asset, and we recorded
the proceeds of the warrant transactions as an increase to capital in
excess of par value. Subsequent changes in fair value of these instru-
ments are not recognized in the fi nancial statements as long as the
instruments continue to meet the criteria for equity classifi cation.
We purchased call options in private transactions for $94 million
that permit us to acquire up to approximately 27 million shares of
our Class A stock at an initial strike price of $16.89 per share, subject
to adjustment. The call options allow us to acquire a number of shares
of our Class A stock initially equal to the number of shares of Class A
stock issuable to the holders of the Convertible Notes upon conver-
sion. These call options will terminate upon the maturity of the
Convertible Notes.
We sold warrants in private transactions for total proceeds of
$44 million. The warrants permit the purchasers to acquire up to
approximately 27 million shares of our Class A stock at an initial
exercise price of $22.31 per share, subject to adjustment. The war-
rants are exercisable on various dates from January 2014 through
March 2014.
These transactions, in effect, increase the initial conversion price
of the Convertible Notes from $16.89 per share to $22.31 per share,
thus reducing the potential future economic dilution associated
with conversion of the Convertible Notes. The Convertible Notes
and the warrants could have a dilutive effect on our earnings per
share to the extent the price of our Class A stock during a given
measurement period exceeds the respective exercise prices of those
instruments. The call options are excluded from the calculation of
diluted earnings per share as their impact is anti-dilutive.
Credit Ratings On September 4, 2008, S&P downgraded the credit
rating applicable to the senior notes due April 1, 2016 (2016 Notes)
from “BBB–” to “BB.” This downgrade increased the interest rate on
the 2016 Notes from 6.85% to 7.35%, effective beginning with the
six month interest payment due October 1, 2008.
On November 13, 2008, Moody’s downgraded the credit rating from
“Ba1” to “Ba3.” This downgrade increased the interest rate on the 2016
Notes from 7.35% to 7.85%, effective beginning with the six month
interest payment due April 1, 2009.
Debt Covenants Our debt agreements contain various covenants, the
most restrictive of which contain maximum allowed leverage ratios and
a minimum required interest coverage ratio. On September 10, 2008,
we amended our revolving credit facility agreement to provide a less
restrictive maximum allowed leverage ratio, which takes effect in fi rst
quarter of fi scal 2009. We were in compliance with all covenants at
September 27, 2008.
Tyson Fresh Meats, Inc. (TFM), a wholly-owned subsidiary of the
Company, has fully and unconditionally guaranteed $960 million
of our 2016 Notes. The following fi nancial information presents
condensed consolidating fi nancial statements, which include Tyson
Foods, Inc. (TFI Parent); Tyson Fresh Meats, Inc. (TFM Parent); the
Non-Guarantor Subsidiaries on a combined basis; the elimination
entries necessary to consolidate the TFI Parent, TFM Parent and the
Non-Guarantor Subsidiaries; and Tyson Foods, Inc. on a consolidated
basis, is provided as an alternative to providing separate fi nancial
statements for the guarantor.