Harman Kardon 2009 Annual Report Download - page 61

The Notes are convertible at the option of the holders:
• during any calendar quarter commencing after December 31, 2007, if the closing price of our common
stock exceeds 130 percent of the conversion price for at least 20 trading days during any period of 30
consecutive trading days, ending on the last trading day of the preceding calendar quarter;
• during the five business day period immediately after any five-day trading period in which the trading
price per $1,000 principal amount of the Notes for each day of the trading period was less than 98
percent of the product of (1) the closing price of our common stock on such date and (2) the conversion
rate on such date;
• upon the occurrence of specified corporate transactions that are described in the Indenture; or
• at any time after June 30, 2012 until the close of business on the business day immediately prior to
October 15, 2012.
Upon conversion, a holder will receive in respect of each $1,000 of principal amount of Notes to be
converted an amount in cash equal to the lesser of (a) $1,000 or (b) the conversion value, determined in the
manner set forth in the Indenture. If the conversion value per Note exceeds $1,000, we will also deliver, at our
election, cash or common stock or a combination of cash and common stock for the conversion value in excess of
$1,000. If not converted, the Notes are due October 15, 2012.
Debt issuance costs of $4.8 million associated with this transaction were capitalized and are being amortized
to interest expense in our Consolidated Statements of Operations over the term of the Notes. The unamortized
balance of debt issuance costs at June 30, 2009 was $3.2 million.
In May 2008, the FASB issued FSP APB 14-1, “Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1
requires the issuer of convertible debt instruments with cash settlement features to account separately for the
liability and equity components of the instrument. The debt would be recognized at the present value of its cash
flows discounted using the issuer’s nonconvertible debt borrowing rate at the time of issuance. The equity
component would be recognized as the difference between the proceeds from the issuance of the note and the fair
value of the liability. FSP APB 14-1 will also require an accretion of the resultant debt discount over the
expected life of the debt. The proposed transition guidance requires retrospective application to all periods
presented, and does not grandfather existing instruments. FSP APB 14-1 is effective for fiscal years beginning
after December 15, 2008. Early adoption is not permitted. FSP APB 14-1 is effective for us beginning July 1,
2009. We expect the implementation of FSP APB 14-1 to have a material impact on our consolidated financial
statements and will result in higher non-cash interest expense from fiscal year 2008 through October 23, 2012
and will be dilutive to earnings per share. The adoption of FSP APB 14-1 will result in additional interest
expense of $75.7 million, before taxes relating to amortization of the debt discount. Of the $75.7 million, $9.5
million and $14.1 million will be recognized retrospectively in fiscal years 2009 and 2008, respectively and
$14.9 million, $15.7 million, $16.6 million and $5.0 million will be recognized in fiscal years 2010 through
2013, respectively, as interest expense in our Consolidated Statements of Operations.
Off-Balance Sheet Arrangements
Although we rarely utilize off-balance sheet arrangements in our operations, we enter into operating leases for
land, buildings and equipment in the normal course of business which are not included in our Consolidated Balance
Sheets. In addition, we had outstanding letters of credit of $7.4 million at June 30, 2009 that were not included in
our Consolidated Balance Sheets. There were $6.0 million of outstanding letters of credit at June 30, 2008.
40