EMC 2009 Annual Report Download - page 64

Table of Contents
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Upon conversion, we will pay cash up to the principal amount of the debt converted. With respect to any conversion value in excess of the principal
amount of the Notes converted, we have the option to settle the excess with cash, shares of our common stock, or a combination of cash and shares of our
common stock based on a daily conversion value, determined in accordance with the indenture, calculated on a proportionate basis for each day of the
relevant 20-day observation period. The initial conversion rate for the Notes will be 62.1978 shares of our common stock per one thousand dollars of principal
amount of Notes, which represents a 27.5% conversion premium from the date the Notes were issued and is equivalent to a conversion price of approximately
$16.08 per share of our common stock. The conversion price is subject to adjustment in some events as set forth in the indenture. In addition, if a
"fundamental change" (as defined in the indenture) occurs prior to the maturity date, we will in some cases increase the conversion rate for a holder of Notes
that elects to convert its Notes in connection with such fundamental change.
The Notes pay interest in cash at a rate of 1.75% semi-annually in arrears on December 1 and June 1 of each year.
In connection with the sale of the Notes, we entered into separate convertible note hedge transactions with respect to our common stock (the "Purchased
Options"). The Purchased Options allow us to receive shares of our common stock and/or cash related to the excess conversion value that we would pay to the
holders of the Notes upon conversion. The Purchased Options will cover, subject to customary anti-dilution adjustments, approximately 215 million shares of
our common stock. Half of the Purchased Options expire on December 1, 2011 and the remaining half of the Purchased Options expire on December 1, 2013.
We paid an aggregate amount of $669.1 million of the proceeds from the sale of the Notes for the Purchased Options.
We also entered into separate transactions in which we sold warrants to acquire, subject to customary anti-dilution adjustments, approximately
215 million shares of our common stock at an exercise price of approximately $19.55 per share of our common stock. Half of the Sold Warrants have
expiration dates between February 15, 2012 and March 15, 2012 and the remaining half of the Sold Warrants have expiration dates between February 18,
2014 and March 18, 2014. We received aggregate proceeds of $391.1 million from the sale of the Sold Warrants.
The Purchased Options and Sold Warrants will generally have the effect of increasing the conversion price of the Notes to approximately $19.55 per
share of our common stock, representing an approximate 55% conversion premium based on the closing price of $12.61 per share of our common stock on
November 13, 2006.
The carrying amount reported in the consolidated balance sheet as of December 31, 2009 for our long-term convertible debt was $3,100.3 million. The
fair value of the long-term convertible debt as of December 31, 2009 was $4,114.2 million based on active market prices for the debt.
The following table represents the key components of our convertible debt (table in thousands):
For the Twelve Months Ended
2009 2008 2007
Contractual interest expense on the coupon $ 60,375 $ 60,375 $ 60,375
Amortization of the discount component recognized as interest expense 108,347 102,581 96,939
Total interest expense on the convertible debt $ 168,722 $ 162,956 $ 157,314
As of December 31, 2009, the unamortized discount consists of $118.5 million which will be amortized over 2 years and an unamortized discount of
$231.2 million which will be amortized over 4 years. The effective interest rate on the Notes was 5.6% for the years ended December 31, 2009 and 2008. The
carrying amount of the equity component was $669.1 million at both December 31, 2009 and December 31, 2008.
G. Investments
In 2008, we adopted new authoritative guidance for fair value measurements that defines fair value, establishes a framework for measuring fair value
and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the
measurement date. Valuation techniques used to
62