E-Z-GO 2011 Annual Report Download - page 75

Convertible Senior Notes and Related Transactions
On May 5, 2009, we issued $600 million of convertible senior notes with a maturity date of May 1, 2013 and interest payable
semiannually. 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 $134 million at the issuance date. We are amortizing the debt discount
utilizing the effective interest method over the life of the notes, which increases the effective interest rate of the convertible notes
from its coupon rate of 4.50% to 11.72%.
These 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. These notes are convertible only under the following circumstances:
(1) during any calendar quarter when 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.
In September 2011, we announced a cash tender offer for any and all of the outstanding convertible notes. In accordance with the
terms of the tender offer, for each $1,000 principal amount of the convertible notes tendered, we paid the holder $1,524 plus
accrued and unpaid interest up to the October 13, 2011 settlement date. In the aggregate, the holders validly tendered $225 million
principal amount, or 37.5%, of the convertible notes. Subsequent to the tender offer, we also purchased $151 million principal
amount of the convertible notes in a small number of privately negotiated transactions and retired another $8 million related to a
holder-initiated conversion in the fourth quarter of 2011. By the end of 2011, we had paid approximately $580 million in cash
related to these transactions and had reduced the principal amount of the convertible notes by 64%. In accordance with the
applicable authoritative accounting guidance, we determined the fair value of the liability component of the convertible notes
purchased in the tender offer and subsequent transactions to be $398 million, with the balance of $182 million representing the
equity component. The carrying value of these convertible notes, including unamortized issuance costs, was $343 million, which
resulted in a pretax loss of $55 million that was recorded in Other losses (gains), net in the fourth quarter of 2011, along with a
$182 million reduction to shareholders’ equity.
We incurred cash and non-cash interest expense of $58 million in 2011 and $60 million in 2010 for these notes. At the end of
2011 and 2010, the face value of the notes totaled $216 million and $600 million, respectively, and the unamortized discount
totaled $21 million and $96 million, respectively.
Based on a December 31, 2011 stock price of $18.49, the “if converted value” exceeded the face amount of the notes by $88
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 $45 million, a 2.4 million net share issuance, or a
combination of cash and stock, at our option. 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, 2011. Accordingly, the notes are
convertible at the holder’s option through March 31, 2012. 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. 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.
Call Option and Warrant Transactions
Concurrently with the pricing of the convertible notes in May 2009, 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.
On October 25, 2011, we entered into separate agreements with each of the counterparties to the call option and warrant
transactions to adjust the number of shares of common stock covered by these instruments to reflect the results of the tender offer.
Accordingly, we reduced the number of common shares covered under the call options from 45.7 million shares to 28.6 million
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64 Textron Inc. Annual Report • 2011