Pier 1 2011 Annual Report Download - page 54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
During the third quarter of fiscal 2010, all $61,255,000 of the Company’s 9% Notes voluntarily converted
into shares of the Company’s common stock at a conversion rate of 399.2016 shares for each $1,000 principal
amount, representing a conversion price of $2.5050 per share. The Company issued 24,453,065 shares of
common stock as a result of the conversion of the 9% Notes. Interest on the outstanding balance of the 9% Notes
was payable at a rate of 9% per year and all accrued interest was paid to the holders at the time of conversion.
The Company incurred non-operating charges of $18,308,000 during fiscal 2010 to record amortization of the
remaining debt issuance costs and debt discounts of $13,616,000, and a $4,692,000 derivative fair value
adjustment, as discussed in more detail below.
The 9% Notes contained make-whole interest provisions. During the third quarter of fiscal 2010, upon
voluntary conversion of the 9% Notes into common stock and pursuant to the indenture, the holders received
additional make-whole interest equal to 2.5 years of interest. The cash payment of make-whole interest totaled
$13,782,000. The Company separately accounted for the additional interest payment feature of the 9% Notes as
an embedded derivative instrument. For the purpose of accounting for the 9% Notes, the fair value of this
embedded derivative upon issuance reduced the carrying value of the debt and was reflected as a debt discount.
This potential interest payout was initially recorded at its estimated fair value as both a $9,090,000 derivative
liability and a $9,090,000 discount to the 9% Notes based on the probability of when holders of the 9% Notes
would convert their notes into shares of the Company’s common stock and assumptions regarding the
Company’s common stock price. Upon conversion, the fair value of this derivative for the make-whole interest
provision was adjusted to its settlement value of $13,782,000, which resulted in a $4,692,000 charge to other
nonoperating expense during the third quarter.
The 9% Notes also included a beneficial conversion feature because the price of the Company’s common
stock on the issuance date of the notes exceeded the effective conversion price. In accordance with applicable
accounting guidance, the Company recorded a $3,343,000 discount to the 9% Notes and a $3,343,000 addition to
paid-in-capital representing the intrinsic value of the beneficial conversion feature.
The two underlying features described above resulted in a total debt discount of $12,433,000 and an
initial carrying amount of the 9% Notes on the Company’s balance sheet of $48,822,000 compared to a face
amount of $61,255,000. When the notes were converted into common stock during the third quarter, the
remaining unamortized debt discount and debt issuance costs of $13,616,000 were charged to interest expense at
that time.
On February 15, 2011, the remaining $16,577,000 of the 6.375% Notes were surrendered in full and the
Company paid the holders $17,100,000 which included principal and accrued interest.
The Company’s remaining long-term debt matures as follows (in thousands):
Fiscal Year Debt
2012 -
2013 -
2014 -
2015 -
Thereafter 9,500
Total debt $ 9,500
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