Medtronic 2012 Annual Report Download - page 108

Medtronic, Inc.
Notes to Consolidated Financial Statements (Continued)
91
Senior Convertible Notes In April 2006, the Company issued $2.200 billion of 1.500 percent Senior
Convertible Notes due 2011 (2011 Senior Convertible Notes) and $2.200 billion of 1.625 percent Senior
Convertible Notes due 2013 (2013 Senior Convertible Notes) (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 2011 Senior Convertible Notes were repaid in April 2011. The
2013 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. As of April 27, 2012, pursuant to provisions in the indentures relating to the Company’s
increase of its quarterly dividend to shareholders, the conversion rate for the Senior Convertible Notes is
now 18.8218, which correspondingly changed the conversion price per share for the Senior Convertible
Notes to $53.13.
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 2013 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 that began 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. As of April 27, 2012, warrants for 41 million shares of the Company’s common stock
had expired.
Under authoritative guidance, the Company concluded that the purchased call options and sold
warrants were indexed to its own stock and should continue to be classified in shareholders’ equity and not
be separated as a derivative.
Authoritative guidance 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 existing guidance, 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 trade date. Existing guidance states that a reporting entity shall not consider contracts to
be derivative instruments if the contract issued or held by the reporting entity is both indexed to its own
stock and classified in shareholders’ equity in its statement of financial position. The Company concluded
that the purchased call option contracts and the sold warrant contracts should be accounted for in
shareholders’ equity.
The Company accounted for the Senior Convertible Notes in accordance with the authoritative
guidance for convertible debt, which requires the proceeds from the issuance of the Senior Convertible
Notes to be allocated between a liability component (issued at a discount) and an equity component. The
resulting debt discount is amortized over the period the 2013 Senior Convertible Notes are expected to be
outstanding as additional non-cash interest expense.