Pier 1 2008 Annual Report Download - page 49

conversion under the Notes. The cost of $9,145,000 of the purchased call option is included in shareholders’
equity, partially offset by a tax benefit of the call option of $3,396,000.
EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock” (“EITF 00-19”), provides guidance for distinguishing between when a
financial instrument should be accounted for permanently in equity, temporarily in equity or as an asset or
liability. The conversion feature of the Notes and the call option each meet the requirements of EITF 00-19 to
be accounted for as equity instruments. Therefore, the conversion feature has not been accounted for as a
derivative, which would require a mark-to-market adjustment each period. In the event the debt is exchanged,
the transaction will be accounted for with the cash payment of principal reducing the recorded liability and the
issuance of common shares recorded in shareholders’ equity. In addition, the premium paid for the call option
has been recorded as additional paid-in capital in the accompanying consolidated balance sheet and is not
accounted for as a derivative. Incremental net shares for the Note conversion feature will be included in the
Company’s future diluted earnings per share calculations for those periods in which the Company’s average
common stock price exceeds $15.19 per share.
As a result of the offsetting call and put features of the Notes in five years from issuance, the Company
anticipates the entire $165,000,000 in Notes will be repaid or refinanced on February 15, 2011. Therefore, the
Notes are included in fiscal 2011 long-term debt maturities in the table below. Long-term debt matures as
follows (in thousands):
Fiscal Year
Long-term
Debt
2009 ............................................................... —
2010 ............................................................... —
2011 ............................................................... 165,000
2012 ............................................................... —
2013 ............................................................... —
Thereafter ........................................................... 19,000
Total long-term debt .................................................. $184,000
The Company has a $325,000,000 secured credit facility, which was amended effective May 31, 2007.
The facility now matures in May 2012 and is secured by the Company’s eligible merchandise inventory, third-
party credit card receivables and certain Company-owned real estate. The amendment also revised certain
advance rates and other definitions and terms of the facility, including the allowable use of proceeds and
permitted distributions. During 2008, the Company had no cash borrowings under this facility. As of March 1,
2008, the Company’s borrowing base, as defined by the agreement, was $325,000,000, of which $171,559,000
was available for cash borrowings. The facility bears interest at LIBOR plus 1.0% for cash borrowings. The
Company pays a fee of 1.0% for standby letters of credit, 0.5% for trade letters of credit and a commitment
fee of 0.25% for any unused amounts. As of March 1, 2008, the Company utilized approximately
$120,941,000 in letters of credit against the secured credit facility. Of the outstanding balance, approximately
$51,514,000 related to trade letters of credit and bankers acceptances for merchandise purchases, $45,867,000
related to standby letters of credit for the Company’s workers’ compensation and general liability insurance
policies, $19,430,000 related to standby letters of credit related to the Company’s industrial revenue bonds,
and $4,130,000 related to other miscellaneous standby letters of credit. The Company will not be required to
comply with restrictive covenants under the facility unless the availability under such agreement is less than
$32,500,000. The Company does not anticipate falling below this minimum availability in the foreseeable
future. The Company was in compliance with all required debt covenants at fiscal 2008 year end. This facility
may limit certain investments and, in some instances, limit payment of cash dividends and repurchases of the
Company’s common stock. Under this credit facility, the Company will not be restricted from paying cash
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Pier 1 Imports, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)