Pier 1 2010 Annual Report Download - page 56

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The 9% Notes contained make-whole interest provisions. During the third quarter of fiscal 2010, all of the
holders voluntarily converted their 9% Notes into common stock and pursuant to the indenture, received
additional make-whole interest at that time equal to 2.5 years of interest. The cash payment of make-whole
interest totaled $13,782,000. The Company separately accounted for the additional interest payment feature of
the 9% Notes as an embedded derivative instrument. For the purpose of accounting for the 9% Notes, the fair
value of this embedded derivative upon issuance reduced the carrying value of the debt and was reflected as a
debt discount. This potential interest payout was initially recorded at its estimated fair value as both a $9,090,000
derivative liability and a $9,090,000 discount to the 9% Notes based on the probability of when holders of the 9%
Notes would convert their notes into shares of the Company’s common stock and assumptions regarding the
Company’s common stock price. Upon conversion, the fair value of this derivative for the make-whole interest
provision was adjusted to its settlement value of $13,782,000, which resulted in a $4,692,000 charge to other
nonoperating expense during the third quarter.
The 9% Notes also included a beneficial conversion feature because the price of the Company’s common
stock on the issuance date of the notes exceeded the effective conversion price. In accordance with applicable
accounting guidance, the Company recorded a $3,343,000 discount to the 9% Notes and a $3,343,000 addition to
paid-in-capital representing the intrinsic value of the beneficial conversion feature.
The two underlying features described above resulted in a total debt discount of $12,433,000 and an
initial carrying amount of the 9% Notes on the Company’s balance sheet of $48,822,000 compared to a face
amount of $61,255,000. When the notes were converted into common stock during the third quarter, the
remaining unamortized debt discount and debt issuance costs of $13,616,000 were charged to interest expense at
that time.
Effective March 1, 2009, the Company adopted the new guidance on “Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement),” which clarifies
that issuers of convertible debt instruments that may be settled wholly or partially in cash upon conversion
should separately account for the liability and equity components in a manner that will reflect the entity’s
nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The 6.375% Notes are
convertible into cash and, if applicable, shares of the Company’s common stock. In accordance with the new
guidance, the Company estimated the fair value of the debt component of the 6.375% Notes as of the date of their
issuance using an income approach by discounting the present value of future payments associated with the
notes, assuming no conversion features. The Company did not apply the provisions of the new guidance
retrospectively on its 6.375% Notes as it determined that the effect on prior periods was not material. The impact
of adoption representing the remaining value of the equity component of the 6.375% Notes as of the beginning of
the fiscal year was $2,818,000, recorded as a reduction in carrying value of the notes and an increase in
additional paid-in capital. This amount was to be amortized as interest expense over the remaining life of the
6.375% Notes, or through February 2011. However, as a result of the retirement and exchange of the majority of
the 6.375% Notes as discussed above, the Company’s gain on the transactions included the write-off of a portion
of this unamortized discount. As of February 27, 2010, the remaining unamortized discount related to the 6.375%
Notes totaled $142,000.
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