E-Z-GO 2011 Annual Report Download - page 76

shares. In addition, the warrants were amended to reduce the number of shares covered by the warrants to 28.0 million and to
change the expiration dates specified in the original agreement to correspond with the final settlement period for the call options.
Pursuant to these amendments, we received $135 million for the call option transaction and paid $133 million for the warrant
transaction, and the net amount was recorded within shareholders’ equity. Subsequently, due to the additional repurchase of
convertible notes, we entered into separate agreements with each of the counterparties to further reduce the number of shares of
common stock covered by these instruments. Accordingly, we reduced the number of common shares covered under the call
options from 28.6 million shares to 16.5 million shares and reduced the number of shares covered by the warrants from 28.0
million shares to 16.5 million shares. The net value of $20 million related to these amendments was used to increase our capped
call position as discussed further below. In the aggregate, the reductions in the number of shares subject to the call options and
warrants equated to the number of shares of common stock into which the $384 million principal amount of all the notes
repurchased in the fourth quarter of 2011 would have been convertible.
At the end of 2011, the outstanding purchased call options give us the right to acquire from the counterparties 16.5 million shares
of our common stock (the number of shares into which all of the remaining notes are convertible) at an exercise price of $13.125
per share (the same as the initial conversion price of the notes), subject to adjustments that mirror the terms of the convertible
notes. 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 notes remain outstanding. The warrants give the counterparties the right to acquire, subject to anti-dilution
adjustments, an aggregate of 16.5 million shares of common stock at an exercise price of $15.75 per share. We may settle these
transactions in cash, shares or a combination of cash and shares, at our option. 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. 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 16.5 million shares at $15.75 per share and our purchase of shares from the counterparties at $13.125 per share.
Based on the structure of the call options and warrants, these contracts meet all of the applicable accounting criteria for equity
classification under the applicable accounting standards and, as such, are classified in shareholders’ equity in the Consolidated
Balance Sheet. In addition, since these contracts are classified in shareholders’ equity and indexed to our common stock, they are
not accounted for as derivatives, and, accordingly, we do not recognize changes in their fair value.
Capped Call Transactions
On October 25, 2011, we entered into capped call transactions with the counterparties for a cost of $32 million, which covered
17.1 million shares of our common stock. We subsequently amended the capped call transactions to cover an additional 11.5
million shares of our common stock in lieu of $20 million we would have received from the counterparties related to the
amendment of the option and warrant transactions discussed above. At December 31, 2011, the capped calls covered an aggregate
of 28.6 million shares of our common stock (the number of shares into which all of the repurchased notes would have been
convertible). We purchased the capped calls in order retain the potential value of the original call option and warrant transactions
which we would otherwise have given up upon the downsizing of those instruments. The capped calls have a strike price of
$13.125 per share and a cap price of $15.75 per share, which entitles us to receive at the May 2013 expiration date the per share
value of our stock price in excess of $13.125 up to a maximum stock price of $15.75. If the market price of our common stock at
the expiration date is less than $13.125, the capped call will expire with no value. The maximum value of the capped calls, in the
event that our stock price is at least $15.75 at the expiration date, is approximately $75 million. We may elect for the settlement of
the capped call transactions, if any, to be paid to us in shares of our common stock or cash or in a combination of cash and shares
of common stock. Based on the structure of the capped call, the transactions meet all of the applicable accounting criteria for
equity classification and will be classified within shareholders’ equity.
6% Fixed-to-Floating Rate Junior Subordinated Notes
The Finance group’s $300 million of 6% Fixed-to-Floating Rate Junior Subordinated Notes are unsecured and rank junior to all of
its existing and future senior debt. The notes mature on February 15, 2067; however, we have the right to redeem the notes at par
on or after February 15, 2017 and are obligated to redeem the notes beginning on February 15, 2042. The Finance group has
agreed in a replacement capital covenant that it will not redeem the notes on or before February 15, 2047 unless it receives a
capital contribution from the Manufacturing group and/or net proceeds from the sale of certain replacement capital securities at
specified amounts. Interest on the notes is fixed at 6% until February 15, 2017 and floats at the three-month London Interbank
Offered Rate + 1.735% thereafter.
Support Agreement
Under a Support Agreement, Textron Inc. is required to ensure that TFC maintains fixed charge coverage of no less than 125% and
consolidated shareholder’s equity of no less than $200 million. In 2011, 2010 and 2009, cash payments of $182 million, $383
million and $270 million, respectively, were paid to TFC to maintain compliance with the fixed charge coverage ratio. In addition,
we paid $240 million on January 17, 2012.
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