Saks Fifth Avenue 2008 Annual Report Download - page 78

SAKS INCORPORATED & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
Company’s share price is greater than 120% of the applicable conversion price for a certain trading period; if the
credit ratings of the notes are below a certain threshold; or upon the occurrence of certain consolidations, mergers
or share exchange transactions involving the Company.
The convertible notes are also subject to repurchase at the option of the holders in the event of a change of
control or a termination of trading of the Company’s common stock, and the holders may put the notes back to
the Company in 2014 or 2019. The Company can call the notes for redemption on or after March 21, 2011.
Subject to certain exceptions, the convertible notes restrict the Company from incurring secured debt or
entering into sale and leaseback transactions that are, in the aggregate, greater than 17.5% of consolidated net
tangible assets of the Company.
At January 31, 2009, the conversion criteria with respect to the credit rating requirements were met,
however the share price was significantly below the conversion price. Due to the share price being significantly
below the conversion price, the Company has classified the convertible notes in “long-term debt” on the
Company’s balance sheet as of January 31, 2009. At February 2, 2008, the holders of the convertible notes had
the ability to exercise their conversion rights as a result of the Company’s share price exceeding 120% of the
applicable conversion price for the trading period. Therefore, the convertible notes were classified within
“current portion of long-term debt” on the Company’s balance sheet as of February 2, 2008.
The Company used approximately $25,000 of the proceeds from the issuances of the convertible notes to
enter into a convertible note hedge and written call options on its common stock to reduce the exposure to
dilution from the conversion of the notes. The terms and conditions of the note hedge include: the strike price is
$11.97; the contract is indexed to 19,219 shares of the Company’s common stock; the maturity dates of the hedge
instruments range from March 24, 2011 to April 20, 2011. The fair value of the bond hedge is approximately
$4,382 at January 31, 2009. The sensitivity of the fair value to a $1 increase in the price of the underlying
common stock would be to increase the value of the hedge by approximately $5,151. The sensitivity of the fair
value to a $1 decrease in the price of the underlying common stock would be to decrease the value of the hedge
by approximately $3,190.
The terms of the written call options include: the strike price is $13.81; the contract is indexed to 19,219
shares of the Company’s common stock; the maturity date of the written call option instruments is August 2,
2011. The fair value of the call option is approximately $4,382 at January 31, 2009. The sensitivity of the fair
value to a $1 increase in the price of the underlying common stock would be to increase the value of the call
option by approximately $5,151. The sensitivity of the fair value to a $1 decrease in the price of the underlying
common stock would be to decrease the value of the call option by approximately $3,190.
These transactions were accounted for as a net reduction of stockholders’ equity of approximately $25,000
in 2004.
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