EMC 2011 Annual Report Download - page 68

Table of Contents
EMC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
we received 29.5 million shares of net settlement on January 9, 2012, representing the excess conversion value of the options. The remaining 107.5 million 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 14, 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. Beginning February 15, 2012, a percentage of the 107.5 million warrants become exercisable each day over the
course of the settlement period through March 14, 2012. These warrants will be settled with shares of our common stock.
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, which was the issuance date of the Notes.
In 2010, EMC entered into interest rate swap contracts with an aggregate notional amount of approximately $900 million. These swaps were designated
as cash flow hedges of the forecasted issuance of debt in 2011 when our 2011 Notes were scheduled to become due. As such, the loss on these hedges was
recognized in other comprehensive loss until the underlying exposure was realized. In November 2011, we settled these swaps and replaced them with new
interest rate swap contracts for the forecasted issuance of debt in 2012. The notional amount and other terms match the underlying hedged item and both the
original and the new swaps were deemed as effective hedges. As such, the gain or loss on these new hedges was recorded in other comprehensive loss. The
realized loss on the replaced interest rate swap contracts was $141.0 million at the time of settlement. Since we intend to issue debt in 2012, this loss will be
realized over the life of the new debt issued under the related interest rate swap contracts and recognized as a component of interest expense in the
consolidated income statements. For the purposes of presentation in the consolidated statement of cash flows, the interest rate swap contracts are presented
within net cash used in financing activities.
F. Fair Value of Financial Assets and Liabilities
Our fixed income and equity investments 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.
Most of our fixed income securities are classified as Level 2, with the exception of some of our U.S. government and agency obligations and our
investments in publicly traded equity securities, which are classified as Level 1, and all of our auction rate securities, which are classified as Level 3. At
December 31, 2011, the vast majority of our Level 2 securities were priced by pricing vendors. These pricing vendors utilize the most recent observable
market information in pricing these securities or, if specific prices are not available for these securities, use other observable inputs like market transactions
involving identical or comparable securities. In the event observable inputs are not available, we assess other factors to determine the security's market value,
including broker quotes or model valuations. Each month, we perform independent price verifications of all of our fixed income holdings. In the event a price
fails a pre-established tolerance check, it is researched so that we can assess the cause of the variance to determine what we believe is the appropriate fair
market value.
In general, investments with remaining effective maturities of 12 months or less from the balance sheet date are classified as short-term investments.
Investments with remaining effective maturities of more than 12 months from the balance sheet date are classified as long-term investments. Our publicly
traded equity securities are classified as long-term investments. As a result of the
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