E-Z-GO 2001 Annual Report Download - page 52

Litchfield Financial Corporation (Litchfield, a subsidiary of Textron Financial Corporation) w as acquired by
Textron Financial Corporation during 1999. Prior to the acquisition, a trust sponsored and wholly ow ned by
Litchfield issued Series A Preferred Securities to the public (for $26 million), the proceeds of w hich w ere
invested by the trust in $26 million aggregate principal amount of Litchfield’s new ly issued 10% Series A
Junior Subordinated Debentures (Series A Debentures), due 2029. The debentures are the sole asset of the
trust. The preferred securities w ere recorded by Textron Financial Corporation at the fair value of $29 million
as of the acquisition date. The amounts due to the trust under the subordinated debentures and the
related income statement amounts have been eliminated in Textron’s consolidated financial statements.
The preferred securities accrue and pay cash distributions quarterly at a rate of 10% per annum. The trust’s
obligation under the Series A Preferred Securities is fully and unconditionally guaranteed by Litchfield. The
trust will redeem all of the outstanding Series A Preferred Securities when the Series A Debentures are
paid at maturity on June 30, 2029, or otherw ise become due. Litchfield will have the right to redeem
100% of the principal plus accrued and unpaid interest on or after June 30, 2004. As a result of its acquisi-
tion of Litchfield, Textron Financial Corporation has agreed to make payments to the holders of the
Preferred Securities when due, to the extent not paid by or on behalf of the trust or subsidiary.
In 1996, a trust sponsored and w holly owned by Textron issued preferred securities to the public (for $500
million) and shares of its common securities to Textron (for $15.5 million), the proceeds of w hich w ere
invested by the trust in $515.5 million aggregate principal amount of Textron’s new ly issued 7.92% Junior
Subordinated Deferrable Interest Debentures, due 2045. The debentures are the sole asset of the trust.
The proceeds from the issuance of the debentures w ere used by Textron for the repayment of long-term
borrowings and for general corporate purposes. The amounts due to the trust under the debentures and
the related income statement amounts have been eliminated in Textron’s consolidated financial statements.
The preferred securities accrue and pay cash distributions quarterly at a rate of 7.92% per annum. Textron
has guaranteed, on a subordinated basis, distributions and other payments due on the preferred securities.
The guarantee, when taken together w ith Textron’s obligations under the debentures and in the indenture
pursuant to w hich the debentures w ere issued and Textron’s obligations under the Amended and Restated
Declaration of Trust governing the trust, provides a full and unconditional guarantee of amounts due on
the preferred securities. The preferred securities are mandatorily redeemable upon the maturity of the
debentures on March 31, 2045, or earlier to the extent of any redemption by Textron of any debentures. The
redemption price in either such case w ill be $25 per share plus accrued and unpaid distributions to the
date fixed for redemption.
Capital Stock
Textron has authorization for 15,000,000 shares of preferred stock and 500,000,000 shares of 12.5 cent
per share par value common stock. Each share of $2.08 Preferred Stock ($23.63 approximate stated value)
is convertible into 4.4 shares of common stock and can be redeemed by Textron for $50 per share. Each
share of $1.40 Preferred Dividend Stock ($11.82 approximate stated value) is convertible into 3.6 shares of
common stock and can be redeemed by Textron for $45 per share.
Performance Share Units and Stock Options
Textron’s 1999 Long-Term Incentive Plan (the “ 1999 Plan” ) authorizes aw ards to key employees of Textron
and its related companies in three forms: (a) options to purchase Textron shares; (b) performance share
units and (c) restricted stock. In 2001, Textron’s Board of Directors amended the 1999 Plan to revise the
maximum number of share aw ards authorized as follow s: (a) 12,200,000 options to purchase Textron
shares; (b) 2,000,000 performance units and (c) 500,000 shares of restricted stock.
Pro forma information regarding net income and earnings per share has been determined using the fair
value method. For the purpose of developing the pro forma information, the fair values of options granted
after 1995 are estimated at the date of grant using the Black-Scholes option-pricing model. The estimated
fair values are amortized to expense over the options’ vesting period. Using this methodology, net income
would have been reduced by $26 million or $0.18 per diluted share in 2001, $25 million or $0.17 per diluted
share in 2000, and $9 million or $0.06 per diluted share in 1999.
The assumptions used to estimate the fair value of an option granted in 2001, 2000 and 1999, respec-
tively, are approximately as follows: dividend yield of approximately 3% , 3% and 2% ; expected volatility
of 34% , 27% and 22% ; risk-free interest rates of 4% , 5% and 6% , and w eighted average expected lives
of 3.5 years. Under these assumptions, the w eighted-average fair value of an option to purchase one share
granted in 2001, 2000 and 1999 w as approximately $11, $10 and $15, respectively.
11. Shareholders’
Equity
10. Textron –
Obligated
Mandatorily
Redeemable
Preferred
Securities of
Subsidiary Trust
Holding Solely
Textron Junior
Subordinated
Debt Securities
9. Textron Finance –
Obligated
Mandatorily
Redeemable
Preferred
Securities of
Finance
Subsidiary
Holding Solely
Junior
Subordinated
Debentures
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