Radio Shack 2011 Annual Report Download - page 60

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Because the principal amount of the 2013 Convertible
Notes will be settled in cash upon conversion, the 2013
Convertible Notes will only affect diluted earnings per share
when the price of our common stock exceeds the
conversion price (currently $23.77 per share). We will
include the effect of the additional shares that may be
issued upon conversion in our diluted net income per share
calculation by using the treasury stock method.
When accounting for the 2013 Convertible Notes, we apply
accounting guidance related to the accounting for
convertible debt instruments that may be settled in cash
upon conversion. This guidance requires us to account
separately for the liability and equity components of these
notes in a manner that reflects our nonconvertible debt
borrowing rate when interest cost is recognized in
subsequent periods. This guidance requires bifurcation of a
component of the debt, classification of that component in
equity, and then accretion of the resulting discount on the
debt as part of interest expense being reflected in the income
statement.
Accordingly, we recorded an adjustment to reduce the
carrying value of our 2013 Convertible Notes by $73.0
million and recorded this amount in stockholders’ equity.
This adjustment was based on the calculated fair value of a
similar debt instrument in August 2008 (at issuance) that
did not have an associated equity component. The annual
interest rate calculated for a similar debt instrument in
August 2008 was 7.6%. The resulting discount is being
amortized to interest expense over the remaining term of
these notes. The carrying value of the 2013 Convertible
Notes was $346.9 million and $330.8 million at December
31, 2011 and 2010, respectively. We recognized interest
expense of $9.4 million in 2011, 2010 and 2009 related to
the stated 2.50% coupon. We recognized non-cash interest
expense of $16.1 million, $15.0 million, and $13.8 million in
2011, 2010 and 2009, respectively, for the amortization of
the discount on the liability component.
Debt issuance costs of $7.5 million were capitalized and
are being amortized to interest expense over the term of
the 2013 Convertible Notes. Unamortized debt issuance
costs were $2.1 million at December 31, 2011. Debt
issuance costs of $1.9 million were related to the equity
component and were recorded as a reduction of additional
paid-in capital.
For federal income tax purposes, the issuance of the 2013
Convertible Notes and the purchase of the convertible note
hedges are treated as a single transaction whereby we are
considered to have issued debt with an original issue
discount. The amortization of this discount in future periods
is deductible for tax purposes.
2011 Long-Term Notes: On May 11, 2001, we sold $350
million of 10-year 7.375% notes (“2011 Notes”) in a private
offering to qualified institutional buyers. In August 2001,
under the terms of an exchange offering filed with the SEC,
we exchanged substantially all of these notes for a similar
amount of publicly registered notes. The exchange resulted
in substantially all of the notes becoming registered with the
SEC and did not result in additional debt being issued.
The annual interest rate on the 2011 Notes was 7.375% per
annum, with interest payable on November 15 and May 15
of each year. The 2011 Notes contained certain non-
financial covenants and matured on May 15, 2011. In
September 2009, we completed a tender offer to purchase
for cash any and all of these notes. Upon expiration of the
offer, $43.2 million of the aggregate outstanding principal
amount of the 2011 Notes was validly tendered and
accepted. We paid a total of $46.6 million, which consisted of
the purchase price of $45.4 million for the tendered notes
plus $1.2 million in accrued and unpaid interest, to the
holders of the tendered notes. We incurred $0.2 million in
expenses and adjusted the carrying value of the tendered
notes by an incremental $0.8 million to reflect a proportionate
write-off of the balance associated with our fair value hedge
included in long-term debt. This transaction resulted in a loss
of $1.6 million classified as other loss on our Consolidated
Statements of Income.
A portion of the 2011 Notes were hedged by our interest rate
swaps. Upon repurchase of these notes, we were required to
discontinue the hedge accounting treatment associated with
these derivative instruments, which used the short-cut
method. The remaining balance associated with our fair
value hedge was recorded as an adjustment to the carrying
value of these notes and was amortized to interest expense
over the remaining term of the notes.
In March 2011, we redeemed all of our 2011 Notes. The
redemption of these notes resulted in a loss on
extinguishment of debt of $4.1 million, which was classified
as other loss on our Consolidated Statements of Income.
2011 Credit Facility: Our $325 million credit facility
provided us a source of liquidity. Interest charges under this
facility were derived using a base LIBOR rate plus a margin
that changed based on our credit ratings. This facility had
customary terms and covenants, and we were in
compliance with these covenants at December 31, 2010.
As of December 31, 2010, we had $292.3 million in
borrowing capacity available under the facility. We did not
borrow under the facility during 2010, but we did arrange for
the issuance of standby letters of credit totaling $32.7
million under the facility.
This credit facility was scheduled to expire in May of 2011.
On January 4, 2011, we terminated the facility and replaced
it with a new $450 million five-year asset-based revolving
credit facility.