Pier 1 2010 Annual Report Download - page 55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
to have occurred upon (1) certain changes in beneficial ownership of the Company’s common equity as described
in the Indenture, (2) certain share exchanges, consolidations, mergers, or assets transactions as described in the
Indenture, (3) “Continuing Directors” as defined in the Indenture ceasing to constitute at least a majority of the
Company’s board of directors, (4) the Company’s stockholders approving any plan or proposal for the
Company’s liquidation or dissolution, or (5) the Company’s common stock ceasing to be listed on a national
securities exchange or quoted on the Nasdaq National Market or another established automated over-the-counter
trading market in the United States.
In connection with the issuance of the 6.375% Notes, the Company purchased a call option with respect
to its common stock. If the call option, which expires February 15, 2011, is exercised by the Company, it must be
net share settled, and, in all cases, the Company would receive shares. This transaction has no effect on the terms
of the 6.375% Notes, but is intended to reduce the potential dilution upon future conversion of the 6.375% Notes
by effectively increasing the initial conversion price to $17.09 per share, representing a 57.5% conversion
premium at issuance. The call option is exercisable under the same circumstances which can trigger conversion
under the 6.375% Notes so long as the Company remains listed on the New York Stock Exchange, The American
Stock Exchange, or the Nasdaq National Market or their respective successors.
The conversion feature of the 6.375% Notes and the call option each met the requirements of the
accounting guidance on financial instruments indexed to, and potentially settled in, a company’s own stock to be
accounted for as equity instruments. Therefore, the conversion feature has not been accounted for as a derivative,
which would require a mark-to-market adjustment each period. In the event the debt is exchanged, the transaction
will be accounted for with the cash payment of principal reducing the recorded liability and the issuance of
common shares recorded in shareholders’ equity. In addition, the premium paid for the call option has been
recorded as additional paid-in capital in the accompanying consolidated balance sheet and is not accounted for as
a derivative. Incremental net shares for the 6.375% Notes conversion feature will be included in the Company’s
future diluted earnings per share calculations for those periods in which the Company’s average common stock
price exceeds $15.19 per share.
During the first quarter of fiscal 2010, a foreign subsidiary of the Company purchased $78,941,000 of the
Company’s outstanding 6.375% Notes in privately negotiated transactions at a purchase price of $27,399,000,
including accrued interest. The Company recognized a gain of $47,811,000 in connection with this transaction.
During August 2009, the $78,941,000 in 6.375% Notes were retired by the Company.
During the second quarter of fiscal 2010, the Company entered into separate privately negotiated
exchange agreements for $64,482,000 of the Company’s outstanding 6.375% Notes retiring these notes. Under
the exchange agreements, the exchanging holders received $61,255,000 in aggregate principal of the Company’s
new 9% convertible senior notes due 2036 (the “9% Notes”). In addition to this exchange, the Company also
purchased $5,000,000 of the outstanding 6.375% Notes for $4,750,000 in cash. The Company recognized a net
gain of $1,843,000 related to these transactions during the second quarter of fiscal 2010. Currently $16,577,000
of the Company’s 6.375% Notes remain outstanding.
During the third quarter of fiscal 2010, all $61,255,000 of the Company’s 9% Notes voluntarily converted
into shares of the Company’s common stock. The 9% Notes were convertible into shares of the Company’s
common stock at a conversion rate of 399.2016 shares for each $1,000 principal amount, representing a
conversion price of $2.5050 per share. The Company issued 24,453,065 shares of common stock as a result of
the conversion of the 9% Notes. Interest on the outstanding balance of the 9% Notes was payable at a rate of
9% per year and all accrued interest was paid to the holders at the time of conversion. The Company incurred
non-operating charges of $18,308,000 during fiscal 2010 to record amortization of the remaining debt issuance
costs and debt discounts of $13,616,000, and a $4,692,000 derivative fair value adjustment, as discussed in more
detail below.
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