Black & Decker 2011 Annual Report Download - page 80

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In May 2010, the Company completed the contractually required remarketing of the $320.0 million of Convertible Notes. Holders of
$8.7 million of the Convertible Notes elected to participate in the remarketing. Following the remarketing, the Convertible Notes bear
interest at an annual rate of 3 month LIBOR minus 3.5%, reset quarterly (but not less than zero).
The conversion premium for the Convertible Notes is 19.0%, equivalent to the conversion price of $63.92 based on the $53.72 value
of the Company’s common stock (as adjusted for standard anti-dilution provisions). Upon conversion on May 17, 2012 (or a cash
merger event), the Company will deliver to each holder of the Convertible Notes, $1,000 cash for the principal amount of the note.
Additionally at conversion, to the extent, if any, that the conversion option is “in the money”, the Company will deliver, at its election,
either cash or shares of the Company’s common stock based on a conversion rate of 15.6439 shares (equivalent to the conversion price
set at $63.92) and the applicable market value of the Company’s common stock. The ultimate conversion rate will be increased above
15.6439 shares in accordance with standard anti-dilution provisions applicable to the Convertible Notes or in the event of a cash
merger. An increase in the ultimate conversion rate will apply to the extent that the Company increases the per share common stock
dividend rate during the five year term of the Convertible Notes; accordingly such changes to the conversion rate are within the
Company’s control under its discretion regarding dividends it may declare. Also, the holders may elect to accelerate conversion, and
“make whole” adjustments to the conversion rate may apply, in the event of a cash merger or “fundamental change”. Subject to the
foregoing, if the market value of the Company’s common shares is below the conversion price at conversion, (set at a rate equating to
$63.92 per share), the conversion option would be “out of the money” and the Company would have no obligation to deliver any
consideration beyond the $1,000 principal payment required under each of the Convertible Notes. To the extent, that the conversion
option of the Convertible Notes becomes “in the money” in any interim period prior to conversion, there will be a related increase in
diluted shares outstanding utilized in the determination of the Company’s diluted earnings per share in accordance with the treasury
stock method prescribed by ASC 260. The conversion option was “in the money” as of December 31, 2011 and January 1, 2011 and
had a very minor dilutive impact during the year.
There was no interest expense recorded for 2011, 2010 and 2009 related to the contractual interest coupon on the Convertible Notes
for the periods presented based upon the applicable 3-month LIBOR minus 3.5% rate in these periods. The Company had derivative
contracts fixing the interest rate on the $320.0 million floating rate Convertible Notes (3-month LIBOR less 350 basis points) at 1.43%
which matured in May 2010 and accordingly recognized no expense in 2011. The Company recognized $1.6 million and $4.8 million
of interest expense pertaining to these interest rate swaps for the years ended January 1, 2011 and January 2, 2010, respectively. The
non-cash interest expense accretion related to the amortization of the liability balance as required by the accounting standards totaled
$11.0 million for 2011, $10.5 million for 2010 and $10.2 million for 2009. The total interest expense recognized on the Convertible
Notes reflecting the contractual interest coupon, the fixed interest rate swaps and the interest accretion required by the accounting
standards represented an effective interest rate of 3.54% for the period ended December 31, 2011, 4.08% for the period ended
January 1, 2011 and 5.2% for the period ended January 2, 2010.
Convertible Notes Hedge: In order to offset the common shares that may be deliverable pertaining to the previously discussed
conversion option feature of the Convertible Notes, the Company entered into Bond Hedges with certain major financial institutions.
The Company paid the financial institutions a premium of $49.3 million for the Bond Hedge which was recorded, net of $14.0 million
of anticipated tax benefits, as a reduction of Shareowners’ equity. The terms of the Bond Hedge mirror those of the conversion option
feature of the Convertible Notes such that the financial institutions may be required to deliver shares of the Company’s common stock
to the Company upon conversion at its exercise in May 2012. To the extent, that the conversion option feature becomes “in the
money” during the five year term of the Convertible Notes, diluted shares outstanding will increase accordingly. Because the Bond
Hedge is anti-dilutive, it will not be included in any diluted shares outstanding computation prior to its maturity. However, at maturity
of the Convertible Notes and the Bond Hedge in 2012, the aggregate effect of these instruments is that there will be no net increase in
the Company’s common shares.
Stock Warrants: Simultaneously, the Company issued 5,092,956 of unregistered common stock warrants (“Stock Warrants”) to
financial institutions for $18.8 million. The cash proceeds received were recorded as an increase to Shareowners’ equity. The Stock
Warrants are exercisable during the period August 17, 2012 through September 28, 2012, and have a strike price of $85.94 established
at 160% of the market value of $53.72 (as adjusted for standard anti-dilution provisions). The Stock Warrants will be net share settled
and are deemed to automatically be exercised at their expiration date if they are “in the money” and were not previously exercised.
The strike price for the Stock Warrants will be adjusted for increases to the Company’s dividend rate per share, or special dividends, if
any, that occur during their five year term (consistent with the standard anti-dilution provisions discussed earlier with respect to the
conversion spread on the Convertible Notes). In the event the Stock Warrants become “in the money” during their five year term due
to the market value of the Company’s common stock exceeding the strike price, there will be a related increase in diluted shares
outstanding utilized in the determination of the Company’s diluted earnings per share. In November 2008, 154,332 Stock Warrants
were repurchased from the financial institutions at a cost of $0.15 per warrant, pertaining to the previously mentioned $10 Million
Repurchase. As a result, there were 4,938,624 Stock Warrants Outstanding as of December 31, 2011.