Medtronic 2009 Annual Report Download - page 78

74 Medtronic, Inc.
Notes to Consolidated Financial Statements
(continued)
Senior Convertible Notes In April 2006, the Company issued
$2.200 billion of 1.500 percent Senior Convertible Notes due
2011 and $2.200 billion of 1.625 percent Senior Convertible Notes
due 2013 (collectively, the Senior Convertible Notes). The Senior
Convertible Notes were issued at par and pay interest in cash
semi-annually in arrears on April 15 and October 15 of each year.
The Senior Convertible Notes are unsecured unsubordinated
obligations and rank equally with all other unsecured and
unsubordinated indebtedness. The Senior Convertible Notes
had an initial conversion price of $56.14 per share. The Senior
Convertible Notes may only be converted: (i) during any calendar
quarter if the closing price of the Company’s common stock
reaches 140 percent of the conversion price for 20 trading days
during a specified period, or (ii) if specified distributions to holders
of the Company’s common stock are made or specified corporate
transactions occur, or (iii) during the last month prior to maturity
of the applicable notes. Upon conversion, a holder would receive:
(i) cash equal to the lesser of the principal amount of the note or
the conversion value and (ii) to the extent the conversion value
exceeds the principal amount of the note, shares of the Company’s
common stock, cash or a combination of common stock and cash,
at the Company’s option. In addition, upon a change in control, as
defined in the applicable indentures, the holders may require the
Company to purchase for cash all or a portion of their notes for
100 percent of the principal amount of the notes plus accrued
and unpaid interest, if any, plus a number of additional make-
whole shares of the Company’s common stock, as set forth in the
applicable indenture. The indentures under which the Senior
Convertible Notes were issued contain customary covenants.
A total of $2.500 billion of the net proceeds from these note
issuances were used to repurchase common stock. As of April 24,
2009, pursuant to provisions in the indentures relating to the
Company’s increase of its quarterly dividend to shareholders, the
conversion rates for each of the Senior Convertible Notes is now
18.0474, which correspondingly changed the conversion price per
share for each of the Senior Convertible Notes to $55.41.
Under EITF Issue No. 00-19, “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s
Own Stock” (EITF No. 00-19), the notes are accounted for similar to
traditional convertible debt (that is, as a combined instrument)
because the conversion spread meets the requirements of EITF
No. 00-19, including the provisions contained in paragraphs 12–32
of EITF No. 00-19. Accordingly, the “conversion spread” is not
separated as a derivative.
Concurrent with the issuance of the Senior Convertible Notes,
the Company purchased call options on its common stock in
private transactions. The call options allow the Company to
receive shares of the Company’s common stock and/or cash from
counterparties equal to the amounts of common stock and/or
cash related to the excess conversion value that it would pay to
the holders of the Senior Convertible Notes upon conversion.
These call options will terminate upon the earlier of the maturity
dates of the related Senior Convertible Notes or the first day all of
the related Senior Convertible Notes are no longer outstanding
due to conversion or otherwise. The call options, which cost an
aggregate $1.075 billion ($699 million net of tax benefit), were
recorded as a reduction of shareholders’ equity.
In separate transactions, the Company sold warrants to issue
shares of the Company’s common stock at an exercise price
of $76.56 per share in private transactions. Pursuant to these
transactions, warrants for 41 million shares of the Company’s
common stock may be settled over a specified period beginning
in July 2011 and warrants for 41 million shares of the Company’s
common stock may be settled over a specified period beginning
in July 2013 (the “settlement dates”). If the average price of the
Company’s common stock during a defined period ending on or
about the respective settlement dates exceeds the exercise price
of the warrants, the warrants will be settled in shares of the
Company’s common stock. Proceeds received from the issuance
of the warrants totaled approximately $517 million and were
recorded as an addition to shareholders’ equity. In April 2009,
certain of the holders requested adjustment to the exercise price
of the warrants from $76.30 to $75.56 pursuant to the anti-dilution
provisions of the warrants relating to the Company’s payment of
dividends to common shareholders.
EITF No. 00-19 provides that contracts are initially classified as
equity if (1) the contract requires physical settlement or net-share
settlement, or (2) the contract gives the Company a choice of net-
cash settlement or settlement in its own shares (physical
settlement or net-share settlement). The settlement terms of the
Company’s purchased call options and sold warrant contracts
provide for net cash settlement for the particular contract or net
share settlement, depending on the method of settlement, as
discussed above, which is at the option of the Company. Based on
the guidance from EITF No. 00-19 and SFAS No. 133, the purchased
call option contracts were recorded as a reduction of equity and
the warrants were recorded as an addition to equity as of the