EMC 2010 Annual Report Download - page 66

Table of Contents
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Based upon the closing price of our common stock for the prescribed measurement period during the three months ended December 31, 2010, the
contingent conversion thresholds on the Notes were exceeded. As a result, the Notes are convertible at the option of the holder through March 31, 2011.
Accordingly, since the terms of the Notes require the principal to be settled in cash, we reclassified from equity the portion of the Notes attributable to the
conversion feature which had not yet been accreted to its face value and the Notes have been classified as a current liability. Contingencies continue to exist
regarding the holders' ability to convert such Notes in future quarters. The determination of whether the Notes are convertible will be performed on a quarterly
basis. Consequently, the Notes might not be convertible in future quarters and therefore the 2013 Notes may be reclassified as long-term debt, if the
contingent conversion thresholds are not met.
The carrying amount reported in the consolidated balance sheet as of December 31, 2010 for our convertible debt was $3,450.0 million and the fair
value was $5,102.8 million. The carrying amount of the equity component was $433.9 million at December 31, 2010.
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.
The following table represents the key components of our convertible debt (table in thousands):
For the Twelve Months Ended
2010 2009 2008
Contractual interest expense on the coupon $ 60,375 $ 60,375 $ 60,375
Amortization of the discount component recognized as interest expense 114,481 108,347 102,581
Total interest expense on the convertible debt $ 174,856 $ 168,722 $ 162,956
As of December 31, 2010, the unamortized discount consists of $58.4 million which will be amortized over 2011 and an unamortized discount of
$176.8 million which will be amortized over 3 years. The effective interest rate on the Notes was 5.6% for the years ended December 31, 2010, 2009 and
2008.
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 that was recorded as additional paid-in-
capital in Shareholders' Equity.
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 associated warrants have
expiration dates between February 15, 2012 and March 15, 2012 and the remaining half of the associated 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 associated warrants. Upon exercise, the value of the
warrants is required to be settled in shares.
The Purchased Options and associated 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.
F. Fair Value of Financial Assets and Liabilities
Our investments are comprised primarily of debt securities that are classified as available for sale and recorded at their fair market values. We
determine fair value using the following hierarchy:
• Level 1 – Quoted prices in active markets for identical assets or liabilities.
• Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full
term of the assets or liabilities.
• Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
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