Saks Fifth Avenue 2009 Annual Report Download - page 80

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Table of Contents
SAKS INCORPORATED & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
During June and July 2007, the Company extinguished an additional $10,420 in principal amount primarily relating to its 8.25% senior notes. The
repurchase of these notes resulted in a loss on extinguishment of debt of approximately $412.
During June and July 2009, the Company extinguished $23,013 of its 7.5% senior notes that mature in December 2010. The repurchase of these notes
resulted in a gain on extinguishment of debt of $783.
CONVERTIBLE NOTES
7.5% Convertible Notes
The Company issued $120,000 of 7.5% convertible notes in May 2009 (the “7.5% Convertible Notes”). The 7.5% Convertible Notes mature in December
2013 and are convertible, at the option of the holders at any time, into shares of the Company’s common stock at a conversion rate of $5.54 per share of common
stock (21,670 shares of common stock to be issued upon conversion). The Company can settle a conversion of the notes with shares, cash, or a combination
thereof at its discretion. Authoritative accounting literature requires the allocation of convertible debt proceeds between the liability component and the
embedded conversion option (i.e., the equity component). The liability component of the debt instrument is accreted to par value using the effective interest
method over the remaining life of the debt. The accretion is reported as a component of interest expense. The equity component is not subsequently revalued as
long as it continues to qualify for equity treatment.
Upon issuance, the Company estimated the fair value of the liability component of the 7.5% Convertible Notes, assuming a 13% non-convertible
borrowing rate, to be $97,994. The difference between the fair value and the principal amount of the 7.5% Convertible Notes was $22,006. This amount was
recorded as a debt discount and as an increase to additional paid-in capital as of the issuance date. The discount is being accreted to interest expense over the 4.5
year period to the maturity date of the notes in December 2013 resulting in an increase in non-cash interest expense in future periods.
The following tables provide additional information about the Company’s 7.5% Convertible Notes.
January 30,
2010
Carrying amount of the equity component (additional paid-in capital) $ 22,006
Principal amount of the 7.5% Convertible Notes $ 120,000
Unamortized discount of the liability component $ 19,430
Net carrying amount of liability component $ 100,570
2009
Effective interest rate on liability component 12.9%
Cash interest expense recognized $ 6,100
Non-cash interest expense recognized $ 2,576
The remaining period over which the unamortized discount will be recognized is 3.8 years. As of January 30, 2010, the if-converted value of the notes
exceeded its principal amount by $19,558.
F-24
Source: SAKS INC, 10-K, March 18, 2010 Powered by Morningstar® Document Research℠