Medtronic 2008 Annual Report Download - page 74

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 and were recorded as an addition to
shareholders’ equity. In April 2008, certain of the holders requested
adjustment to the exercise price of the warrants from $76.47 to $76.30
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
Medtronic. 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 trade date. SFAS No. 133 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 the purchased call option contracts and the
warrant contracts should be accounted for in shareholders’ equity.
Senior Notes In September 2005, the Company issued two tranches of
Senior Notes with the aggregate face value of $1,000. The first tranche
consisted of $400 of 4.375 percent Senior Notes due 2010 and the
second tranche consisted of $600 of 4.750 percent Senior Notes due
2015. Each tranche was issued at a discount which resulted in an
effective interest rate of 4.433 percent and 4.760 percent for the five and
ten year Senior Notes, respectively. Interest on each series of Senior
Notes is payable semi-annually, on March 15 and September 15 of each
year. The Senior Notes are unsecured unsubordinated obligations of the
Company and rank equally with all other unsecured and unsubordinated
indebtedness of the Company. The indentures under which Senior
Notes were issued contain customary covenants. The Company used
the net proceeds from the sale of the Senior Notes for repayment of a
portion of its outstanding commercial paper.
In November 2005, the Company entered into a five year interest rate
swap agreement with a notional amount of $200. This interest rate swap
agreement was designated as a fair value hedge of the changes in fair
value of a portion of the Company’s fixed-rate $400 Senior Notes due
2010. The Company pays variable interest equal to the three-month
London Interbank Offered Rate (LIBOR) minus 55 basis points and it
receives a fixed interest rate of 4.375 percent. The outstanding market
value of this swap agreement was an $8 unrealized gain at April 25,
2008. The unrealized gain of $8 at April 25, 2008 is recorded in long-term
debt with the offset recorded in other long-term assets on the
consolidated balance sheets. There was no unrealized gain or loss at
April 27, 2007.
In June 2007, the Company entered into an eight year interest rate
swap agreement with a notional amount of $300. This interest rate swap
agreement was designated as a fair value hedge of the changes in fair
value of a portion of the Company’s fixed-rate $600 Senior Notes due
2015. The Company pays variable interest equal to the three-month
London LIBOR minus 90 basis points and it receives a fixed interest rate
of 4.750 percent. The outstanding market value of this swap agreement
was a $27 unrealized gain at April 25, 2008. The unrealized gain of $27
at April 25, 2008 is recorded in long-term debt with the offset recorded
in other long-term assets on the consolidated balance sheets.
Contingent Convertible Debentures In September 2001, the Company
completed a $2,013 private placement of 1.250 percent Contingent
Convertible Debentures due September 2021 (Old Debentures). Interest
is payable semi-annually. Each Old Debenture is convertible into shares
of common stock at an initial conversion price of $61.81 per share;
however, the Old Debentures are not convertible before their final
maturity unless the closing price of the Company’s common stock
reaches 110 percent of the conversion price for 20 trading days during
a consecutive 30 trading day period. In September 2002 and 2004, as a
result of certain holders of the Old Debentures exercising their put
options, the Company repurchased $39 and $1, respectively, of the Old
Debentures for cash. On January 24, 2005, the Company completed an
exchange offer whereby holders of approximately $1,930 of the total
principal amount of the Old Debentures exchanged their existing
securities for an equal principal amount of 1.250 percent Contingent
Convertible Debentures, Series B due 2021 (New Debentures), as
described below. Following the completion of the exchange offer,
the Company repurchased approximately $2 of the Old Debentures
for cash.
Notes to Consolidated Financial Statements
(continued)
(dollars in millions, except per share data)
70 Medtronic, Inc.