E-Z-GO 2012 Annual Report Download - page 74

62 Textron Inc. Annual Report ● 2012
At December 29, 2012, the face value of our convertible notes outstanding was $215 million and the unamortized discount totaled
$5 million. Under the terms of the Indenture that governs the notes, the notes are currently convertible at the holder’s option
through April 29, 2013, the second day preceding their May 1, 2013 maturity. The notes are convertible 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. We intend to settle the face value of
the convertible notes in cash. Based on a December 29, 2012 stock price of $24.12, the “if converted value” exceeded the face
amount of the notes by $180 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 $137 million, a 5.7
million net share issuance, or a combination of cash and stock, at our option.
At December 31, 2011, the face value of the notes totaled $216 million, and the unamortized discount totaled $21 million. In
September 2011, we announced a cash tender offer for any and all of the outstanding convertible notes. In the aggregate, the
holders validly tendered $225 million principal amount 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 2011. We paid approximately $580 million in cash related to these
transactions. 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, net in 2011, along with a
$182 million reduction to shareholders’ equity.
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
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 repurchases of
convertible notes, we entered into amendments 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 principal amount of all the notes repurchased in the fourth quarter of 2011
would have been convertible.
At the end of 2012, the outstanding purchased call options gave us the right to acquire from the counterparties 16.4 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 16.4 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 16.4 million shares at $15.75 per share and our purchase of shares from the counterparties at $13.125 per share.