Saks Fifth Avenue 2010 Annual Report Download - page 72

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SAKS INCORPORATED & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
the fair value and the principal amount of the 2.0% Convertible Notes was $71,852. This amount was recorded as
a debt discount and as an increase to additional paid-in capital as of the issuance date. In accordance with the
authoritative accounting guidance, the debt discount should be amortized over the expected life of a similar
liability that does not have an associated equity component (considering the effects of embedded features other
than the conversion option). Since the holders of the notes have put options in 2014 and 2019, the debt
instrument is accreted to par value using the effective interest method from issuance until the first put date in
2014 resulting in an increase in non-cash interest expense.
In connection with the issuance of the 2.0% Convertible Notes, the Company entered into a convertible note
hedge and written call options on its common stock to reduce the Company’s exposure to dilution from the
conversion of the 2.0% Convertible Notes. The terms and conditions of the note hedge include: strike price of
$11.97; contract is indexed to 19,219 shares of the Company’s common stock; maturity dates of the hedge
instruments range from March 24, 2011 to April 20, 2011. The terms of the written call options include: strike
price of $13.81; contract is indexed to 19,219 shares of the Company’s common stock; maturity date of the
written call option instruments is August 2, 2011. These transactions were accounted for as a net reduction of
stockholders’ equity of approximately $25,000 in 2004. The estimated fair value of the convertible note hedge
and written call option was $4,901 and $521 as of January 29, 2011 and January 30, 2010, respectively.
The following tables provide additional information about the Company’s 2.0% Convertible Notes.
January 29,
2011
January 30,
2010
Carrying amount of the equity component (additional paid-in capital) ............... $ 71,852 $ 71,852
Principal amount of the 2.0% Convertible Notes ................................ $230,000 $230,000
Unamortized discount of the liability component ................................ $ 27,352 $ 35,054
Net carrying amount of liability component .................................... $202,648 $194,946
2010 2009 2008
Effective interest rate on liability component ................................ 6.2% 6.2% 6.2%
Cash interest expense recognized .......................................... $4,600 $4,600 $4,600
Non-cash interest expense recognized ...................................... $7,702 $7,243 $6,811
The remaining period over which the unamortized discount will be recognized is 3.1 years. As of
January 29, 2011, the if-converted value of the notes did not exceed its principal amount.
The 2.0% Convertible Notes are 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.
F-22