Radio Shack 2012 Annual Report Download - page 58

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2012 and 2011, each $1,000 of principal of the 2013
Convertible Notes was convertible, under the
circumstances previously discussed, into 42.0746 shares of
our common stock, which is the equivalent of $23.77 per
share. Accordingly, conversion of all of the 2013
Convertible Notes would result in the issuance of
approximately 15.8 million shares of our common stock.
Holders who convert their 2013 Convertible Notes in
connection with a change in control may be entitled to a
make-whole premium in the form of an increase in the
conversion rate. In addition, upon a change in control,
liquidation, dissolution or delisting, the holders of the 2013
Convertible Notes may require us to repurchase for cash all
or any portion of their 2013 Convertible Notes for 100% of
the principal amount of the notes plus accrued and unpaid
interest, if any. As of December 31, 2012, none of the
conditions allowing holders of the 2013 Convertible Notes
to convert or requiring us to repurchase the 2013
Convertible Notes had been met.
In connection with the issuance of the 2013 Convertible
Notes, we entered into separate convertible note hedge
transactions and separate warrant transactions with respect
to our common stock to reduce the potential dilution upon
conversion of the 2013 Convertible Notes (collectively
referred to as the “Call Spread Transactions”). The
convertible note hedges and warrants generally have the
effect of increasing the economic conversion price of the
2013 Convertible Notes to $35.88 per share of our common
stock, representing a 100% conversion premium based on
the closing price of our common stock on August 12, 2008.
See Note 6 - “Stockholders’ Equity,” for more information
on the Call Spread Transactions.
In the third quarter of 2012, we repurchased $88.1 million of
aggregate principal amount of the 2013 Convertible Notes.
We paid a total of $84.8 million, which consisted of the
purchase price of $84.6 million for the 2013 Convertible
Notes plus $0.2 million in accrued and unpaid interest, to
the holders of the 2013 Convertible Notes. This transaction
resulted in a loss of $0.6 million classified as other loss on
our Consolidated Statements of Income. At December 31,
2012, there was $286.9 million aggregate principal amount
of 2013 Convertible Notes still outstanding.
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 $278.7 million and $346.9 million at December
31, 2012 and 2011, respectively. We recognized interest
expense of $8.7 million, $9.4 million, and $9.4 million in
2012, 2011 and 2010, respectively, related to the stated
2.50% coupon. We recognized non-cash interest expense
of $16.0 million, $16.1 million, and $15.0 million in 2012,
2011 and 2010, 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 $0.4 million at December 31, 2012. 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: In 2001 we issued $350 million of
10-year 7.375% notes (“2011 Notes”). Interest was payable
on November 15 and May 15 of each year. In March 2011,
we redeemed all of our remaining 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.