Pier 1 2009 Annual Report Download - page 61

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5—LONG-TERM DEBT AND AVAILABLE CREDIT (Continued)
The holders of the Notes can, at their option, require the Company to purchase all or a portion of
their Notes at a repurchase price in cash equal to 100% of the principal amount of the repurchased
Notes at February 15, 2011, February 15, 2016, February 15, 2021, February 15, 2026 and February 15,
2031, or if a fundamental change occurs. ‘‘Fundamental change’’ is defined in the Indenture and will be
deemed to have occurred upon (1) certain changes in beneficial ownership of the Company’s common
equity as described in the Indenture, (2) certain share exchanges, consolidations, mergers, or assets
transactions as described in the Indenture, (3) ‘‘Continuing Directors’’ as defined in the Indenture
ceasing to constitute at least a majority of the Company’s board of directors, (4) the Company’s
stockholders approving any plan or proposal for the Company’s liquidation or dissolution, or (5) the
Company’s common stock ceasing to be listed on a national securities exchange or quoted on the
Nasdaq National Market or another established automated over-the-counter trading market in the
United States. The Company believes that it will continue to be able to satisfy the above requirement
for the listing or quotation of its common stock. If the Company is, however, unable to comply with
this provision of the Notes, the holders of the Notes could, at their option, require the Company to
repurchase all or a portion of their Notes. Such an event could have a material adverse effect on the
Company if the Company does not have sufficient cash, is unable to raise sufficient additional capital
for such repurchases, or is otherwise unable to refinance the Notes.
In connection with the issuance of the Notes, the Company purchased a call option with respect to
its common stock. If the call option, which expires February 15, 2011, is exercised by the Company, it
must be net share settled, and, in all cases, the Company would receive shares. This transaction has no
effect on the terms of the Notes, but is intended to reduce the potential dilution upon future
conversion of the Notes by effectively increasing the initial conversion price to $17.09 per share,
representing a 57.5% conversion premium at issuance. The call option is exercisable under the same
circumstances which can trigger conversion under the Notes so long as the Company remains listed on
the New York Stock Exchange, The American Stock Exchange, or the Nasdaq National Market or their
respective successors. The cost of $9,145,000 of the purchased call option is included in shareholders’
equity.
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 discussed in Note 13 of the Notes to Consolidated Financial Statements, on March 20, 2009 a
foreign subsidiary of the Company purchased $78,941,000 of the Company’s outstanding Notes at a
purchase price of $27,399,000, including accrued interest. The foreign subsidiary intends to hold the
Notes until maturity. As a result of this transaction, the Company has reduced its outstanding
convertible debt to $86,059,000 on a consolidated basis. The Company expects to recognize a gain of
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