Saks Fifth Avenue 2010 Annual Report Download - page 30

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In June and July 2009, the Company repurchased $23.0 million 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 approximately
$0.8 million.
7.5% Convertible Notes
As of January 29, 2011, the Company had $120 million of convertible notes outstanding that bear cash
interest semiannually at an annual rate of 7.5% and mature in 2013. The provisions of the convertible notes allow
the holder to convert the notes at any time to shares of the Company’s common stock at a conversion rate of
180.5869 shares per one thousand dollars in principal amount of notes. The Company can settle a conversion
with shares, cash, or a combination thereof at its discretion. During 2009, the Company received net proceeds
from the convertible notes of approximately $115.3 million after deducting initial purchasers’ discounts and
offering expenses. The Company used the net proceeds to pay down amounts outstanding under its revolving
credit facility and for general corporate purposes.
On February 1, 2009, the Company adopted a new standard related to accounting for convertible debt
instruments that may be settled in cash upon conversion (including partial cash settlement), which specifies that
issuers of such instruments should separately account for the liability and equity components in a manner that
reflects the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods.
Upon issuance of the convertible notes, 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 $98.0 million. The difference
between the fair value and the principal amount of the 7.5% convertible notes was $22.0 million. This amount
was recorded as a debt discount and as an increase to additional paid-in capital as of the issuance date. The
current unamortized discount of $15.2 million is being accreted to interest expense over the remaining 2.8 year
period to the maturity date of the notes in December 2013 resulting in an increase in non-cash interest expense.
The convertible notes were classified within “long-term debt” on the Consolidated Balance Sheet as of
January 29, 2011 and January 30, 2010 because the Company can settle the principal amount of the notes with
shares, cash, or a combination thereof at its discretion.
2.0% Convertible Senior Notes
As of January 30, 2010, the Company had $230 million of convertible senior notes outstanding that bear
interest at a rate of 2.0% per annum and mature in 2024. The provisions of the convertible notes allow the holder
to convert the notes to shares of the Company’s common stock at a conversion rate of 83.5609 shares per one
thousand dollars in principal amount of notes (subject to an anti-dilution adjustment). The holder may put the
debt back to the Company in 2014 or 2019 and the Company can call the debt on or after March 21, 2011. The
Company can settle a conversion of the notes with shares, cash, or a combination thereof at its discretion. The
holders may convert the notes at the following times, among others: if the 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. As of January 29, 2011, the conversion criteria with respect to the credit rating
requirements were met.
The Company used approximately $25 million of the proceeds from the issuances 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.
Upon the February 1, 2009 adoption of the provisions of the standard related to accounting for convertible
debt instruments that may be settled in cash upon conversion (including partial cash settlement), the Company
estimated the fair value of the liability component, as of the date of issuance, of its 2.0% convertible senior notes
29