Dick's Sporting Goods 2007 Annual Report Download - page 34

Dick’s Sporting Goods, Inc. | 2007 Annual Report32
The Company believes that cash flows generated from operations and funds available under our Credit Agreement will be sufficient
to satisfy our capital requirements through fiscal 2008. Other new business opportunities or store expansion rates substantially in
excess of those presently planned may require additional funding.
In February 2004, the Company completed a private offering of $172.5 million issue price of senior unsecured convertible notes
due 2024 (“notes”). The notes bear interest at an annual rate of 2.375% of the issue price payable semi-annually on August 18th
and February 18th of each year until February 18, 2009. After February 18, 2009, the notes do not pay cash interest, but the initial
principal amount of the notes will accrete daily at an original issue discount rate of 2.625% per year, until maturity on February 18,
2024, when a holder will receive $1,000 per note. Subject to the Company’s obligations to pay cash for a certain portion of the
notes and its right, if it elects, to pay all amounts due under the notes in cash as more fully described below, the notes are convertible
into the Company’s common stock (upon the occurrence of certain events) at the election of the holder in each of the first 20 fiscal
quarters following their issuance when the price per share of the Company’s common stock (calculated for a certain period of time)
exceeds $23.59 per share. This conversion threshold trigger price permitting the notes to be converted by the holders has been
met and the notes are eligible and will remain convertible for so long as they remain outstanding.
Upon conversion of a note, the Company is obligated to pay cash for each $1,000 of face amount of a note equal to the lesser of:
(i) the accreted principal amount (the sum of the initial issue price of $676.25 per $1,000 face amount and the accrued original
issue discount as of the conversion date (no original issue discount occurs until 2009)), and (ii) the product of (a) the number of
shares of the Company’s common stock into which the note otherwise would have been converted if no cash payment were made
by the Company (i.e. 34.4044 shares per $1,000 face amount), multiplied by (b) the average of the closing per share sale price on
the fifteen consecutive trading days commencing on the fourth trading day after the conversion date. In addition, the Company at its
election has the ability to pay cash or deliver shares for any “balance shares” due under the notes. The number of “balance shares”
is equal to the number of shares of common stock into which a note otherwise would be converted if no cash payment were made
by the Company, less the accreted principal amount (the sum of the initial issue price of $676.25 and the accrued original issue
discount as of the conversion date of), divided by the average sale price (the average of the closing per share sale price on the
fifteen consecutive trading days commencing on the fourth trading day after the conversion date) of a share of common stock.
All such calculations are controlled by and governed by the promissory note under which the notes are issued and the indenture,
as amended, governing the notes. If the number of balance shares is a positive number, the Company has the option to deliver cash
or a combination of cash and shares of common stock for the balance shares by electing for each full balance share for which the
Company has chosen to deliver cash to pay cash in an amount equal to the average sale price of a share of common stock.
The 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 issue
discount and any accrued cash interest, if any.
Concurrently, with the sale of the notes, the Company purchased a bond hedge designed to mitigate the potential dilution to
stockholders from the conversion of the 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 $19.66 per share. The aggregate number of shares that the Company could be
obligated to issue upon conversion of the notes is 8,776,048 shares of common stock. The cost of the purchased bond hedge was
partially offset by the sale of warrants to acquire up to 17,551,896 shares of the common stock to the counterparty with whom the
Company entered into the bond hedge. The warrants are exercisable by the counterparty in year five at a price of $28.08 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 $28.08 per share. The net effect of the bond hedge and
the warrants is to reduce the potential dilution from the conversion of the notes if the Company elects a net share settlement.
There would be dilution impact from the conversion of the notes to the extent that the then market price per share of the common
stock exceeds $28.08 per share at the time of conversion.
The Company’s common stock price has triggered an optional conversion right with respect to the notes. Based on the current price
of the Company’s common stock, the Company believes that if the notes were currently converted there would not be any dilutive
effect on the Company’s estimated outstanding number of shares as a result of the notes or the warrants. However, as the convertible
notes remain outstanding in the future, depending on the price of the Company’s common stock, the notes may have dilutive effect
and increase the number of shares of common stock outstanding beyond that which we estimate or may estimate in the future. If the
trading price in our common stock exceeds $28.08 per share, we may incur dilution as a result of the notes and/or the warrants and
further increases in our common stock price may cause us to have to increase the number of shares outstanding and impact our
earnings per share calculation. At this time, we would not anticipate that the outstanding notes will be converted currently and believe