Office Depot 2010 Annual Report Download - page 44

The initial liquidation value of $1,000 per preferred share and the conversion rate of $5.00 per common share
allow the two series of preferred stock to be initially convertible into 70 million shares of common stock. The
conversion rate is subject to anti-dilution adjustments. Until converted or otherwise redeemed, the Preferred
Stock is recorded outside of permanent equity on the Consolidated Balance Sheets because certain redemption
conditions are not solely within the control of Office Depot. The balance is presented inclusive of accrued
dividends and net of approximately $25 million of fees, including issuance costs paid for investment banking,
legal and accounting fees, and $3.5 million paid to BC Partners, approximately $2.8 million of which was
returned to the investing funds as a portion of a transaction funding fee.
Dividends are payable quarterly and will be paid in-kind or, in cash, only to the extent that the company has
funds legally available for such payment and a cash dividend is declared by the company’s board of directors and
allowed by credit facilities. If not paid in cash, an amount equal to the cash dividend due will be added to the
liquidation preference and measured for accounting purposes at fair value. After the third anniversary of
issuance, the dividend rate will be reduced to:
(i) 7.87% if at any time after June 23, 2010, the closing price of the company’s common stock is greater
than or equal to $6.62 per share for a period of 20 consecutive trading days, or
(ii) 5.75% if at any time after June 23, 2010, the closing price of the company’s common stock is greater
than or equal to $8.50 per share for a period of 20 consecutive trading days.
The Preferred Stock also may participate in dividends on common stock, if declared. However, if the closing
price of the common stock on the record date for a dividend payment is less than $45.00 per share, the company
may not declare or pay a cash dividend on the common stock per share for any fiscal quarter in excess of the
Preferred Stock dividend amounts.
The board of directors approved cash dividends on the Preferred Stock for each of the quarterly periods of 2010.
Dividends were accrued and paid in-kind for the quarterly periods of 2009. The stated-rate of those in-kind
dividends were added to the liquidation preference of the respective Series A and Series B Preferred Stock. For
accounting purposes, the dividends were measured at fair value using a binomial simulation model This
technique resulted in a fair value estimate of approximately $30.5 million, or approximately $12.4 million above
the increase in the liquidation preference amounts of the Preferred Stock. The liquidation preference and carrying
value of the Preferred Stock was $368.5 million and $356.0 million at December 25, 2010 and $368.1 million
and $355.3 million at December 26, 2009, respectively.
The Preferred Stock is redeemable, in whole or in part, at the option of the company at any time after June 23,
2012, subject to the right of the holder to first convert the preferred stock the company proposes to redeem. The
redemption price is initially 107% of the liquidation preference amount plus any accrued but unpaid dividends
and decreases by 1% each year until reaching 100% after June 23, 2019. At any time after June 23, 2011, if the
closing price of the common stock is greater than or equal to $9.75 per share for a period of 20 consecutive
trading days, the Preferred Stock is redeemable at 100% of the liquidation preference amount plus any accrued
but unpaid dividends, in whole or in part, at the option of the company, subject to the right of the holder to first
convert the Preferred Stock the company proposes to redeem. The Preferred Stock is redeemable at the option of
the holder at 101% of the liquidation preference in the event of certain fundamental change provisions (as
defined in the Certificate of Designations for each series), including sale, bankruptcy or delisting of our common
stock.
In connection with the transaction, the company entered into an Investor Rights Agreement. Subject to certain
exceptions, for so long as the Investors’ ownership percentage is equal to or greater than 10%, the approval of at
least one of the directors designated to the company’s board of directors by the Investors is required for the
company to incur any indebtedness for borrowed money in excess of $200 million in the aggregate during any
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