E-Z-GO 2010 Annual Report Download - page 72

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4.50% Convertible Senior Notes
On May 5, 2009, we issued $600 million of 4.50% Convertible Senior Notes (Convertible Notes) with a maturity date of May 1, 2013
and interest payable semiannually. The Convertible Notes are convertible at the holder’s option, under certain circumstances, into
shares of our common stock at an initial conversion rate of 76.1905 shares of common stock per $1,000 principal amount of
Convertible Notes, which is equivalent to an initial conversion price of approximately $13.125 per share. Upon conversion, we have
the right to settle the conversion of each $1,000 principal amount of Convertible Notes with any of the three following alternatives: (1)
cash, (2) shares of our common stock or (3) a combination of cash and shares of our common stock.
The Convertible Notes are convertible only under the following certain circumstances: (1) during any calendar quarter commencing
after June 30, 2009 and only during such calendar quarter if the last reported sale price of our common stock for at least 20 trading
days during the 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is more than 130% of the
applicable conversion price per share of common stock on the last trading day of such preceding calendar quarter, (2) during the five-
business-day period after any 10 consecutive trading day measurement period in which the trading price per $1,000 principal amount
of Convertible Notes for each day in the measurement period was less than 98% of the product of the last reported sale price of our
common stock and the applicable conversion rate, (3) if specified distributions to holders of our common stock are made or specified
corporate transactions occur or (4) at any time on or after February 19, 2013.
Our common stock price exceeded the conversion threshold price of $17.06 per share for at least 20 trading days during the 30
consecutive trading days ended December 31, 2010. Accordingly, the notes are convertible at the holder’s option through March 31,
2011. We may deliver cash, shares of common stock or a combination of cash and shares of common stock in satisfaction of our
obligations upon conversion of the Convertible Notes. We intend to settle the face value of the Convertible Notes in cash. Based on a
January 1, 2011 stock price of $23.64, the “if converted value” exceeds the face amount of the notes by $480.7 million; however, after
giving effect to the exercise of the call options and warrants described below, the incremental cash or share settlement in excess of the
face amount would result in either a cash payment of $360.7 million, a 15 million net share issuance, or a combination of cash and
stock, at our option. We have continued to classify these Convertible Notes as long term based on our intent and ability to maintain
the debt outstanding for at least one year through the use of various funding sources available to us.
The net proceeds from the issuance of the Convertible Notes totaled approximately $582 million after deducting discounts,
commissions and expenses. The Convertible Notes are accounted for in accordance with generally accepted accounting principles,
which require us to separately account for the liability (debt) and the equity (conversion option) components of the Convertible Notes
in a manner that reflected our non-convertible debt borrowing rate at time of issuance. Accordingly, we recorded a debt discount and
corresponding increase to additional paid-in capital of approximately $135 million as of the date of issuance. Transaction costs of $18
million were proportionately allocated between the liability and equity components. We are amortizing the debt discount utilizing the
effective interest method over the life of the Convertible Notes, which increases the effective interest rate of the Convertible Notes
from its coupon rate of 4.50% to 11.72%. As of January 1, 2011, the unamortized discount amount, including issuance costs totaled
$96 million. We incurred cash and non-cash interest expense of $60 million in 2010 and $38 million in 2009 for these Convertible
Notes.
Concurrently with the pricing of the Convertible Notes, we entered into transactions with two counterparties, including an underwriter
and an affiliate of an underwriter of the Convertible Notes, pursuant to which we purchased from the counterparties call options to
acquire our common stock and sold to the counterparties warrants to purchase our common stock. We entered into these transactions
for the purposes of reducing the cash outflow and/or the potential dilutive effect to our shareholders upon the conversion of the
Convertible Notes.
The purchased call options give us the right to acquire from the counterparties 45,714,300 shares of our common stock (the number of
shares into which all of the Convertible Notes are convertible) at the initial strike price of $13.125 per share (the same as the initial
conversion price of the Convertible Notes), subject to adjustments that mirror the terms of the Convertible Notes. We may settle these
transactions in cash, shares or a combination of cash and shares, at our option. The call options will terminate at the earlier of the
maturity date of the related Convertible Notes or the last day on which any of the related Convertible Notes remain outstanding. The
cost of the call options was $140 million, which was recorded as a reduction to additional paid-in capital. The warrants give the
counterparties the right to acquire, subject to anti-dilution adjustments, an aggregate of 45,714,300 shares of common stock at an
exercise price of $15.75 per share. We may also settle the exercise of the warrants in cash, shares or a combination of cash and shares,
at our option. The warrants expire ratably over a 45-trading-day period beginning August 1, 2013. The aggregate proceeds from the
sale of the warrants were $95 million, which was recorded as an increase to additional paid-in capital.
When evaluated in aggregate, the call options and warrants have the effect of increasing the effective conversion price of the
Convertible Notes from $13.125 to $15.75, a 50% premium over the May 2009 common stock price of $10.50. Accordingly, we will
not incur the cash outflow or the dilution that would be experienced due to the increase of the share price from $13.125 per share to
$15.75 per share because we are entitled to receive from the counterparties the difference between our sale to the counterparties of
45,714,300 shares at $15.75 per share and our purchase of shares from the counterparties at $13.125 per share.