Medtronic 2010 Annual Report Download - page 80

76 Medtronic, Inc.
Notes to Consolidated Financial Statements
(continued)
maturity of the applicable notes. Upon conversion, a holder
would receive: (i) cash equal to the lesser of the principal amount
of the note or the conversion value and (ii) to the extent the
conversion value exceeds the principal amount of the note, shares
of the Company’s common stock, cash or a combination of
common stock and cash, at the Company’s option. In addition,
upon a change in control, as defined in the applicable indentures,
the holders may require the Company to purchase for cash all or
a portion of their notes for 100 percent of the principal amount of
the notes plus accrued and unpaid interest, if any, plus a number
of additional make-whole shares of the Company’s common
stock, as set forth in the applicable indenture. The indentures
under which the Senior Convertible Notes were issued contain
customary covenants, all of which the Company remains in
compliance with as of April 30, 2010. A total of $2.500 billion of the
net proceeds from these note issuances were used to repurchase
common stock. As of April 30, 2010, pursuant to provisions in the
indentures relating to the Company’s increase of its quarterly
dividend to shareholders, the conversion rates for each of the
Senior Convertible Notes is now 18.2508, which correspondingly
changed the conversion price per share for each of the Senior
Convertible Notes to $54.79.
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 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 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 million and were
recorded as an addition to shareholders’ equity. During the fourth
quarter of fiscal year 2010, certain of the holders requested
adjustment to the exercise price of the warrants from $75.30 to
$74.71 pursuant to the anti-dilution provisions of the warrants
relating to the Company’s payment of dividends to common
shareholders.
In June 2008, the FASB issued new authoritative guidance on
determining whether an instrument (or embedded feature) is
indexed to an entity’s own stock. This new authoritative guidance
provides guidance for determining whether an entity-linked
financial instrument (or embedded feature) is indexed to an
entity’s own stock and classified in shareholders’ equity or
whether it should be bifurcated and classified as a separate asset
or liability and marked-to-market through earnings. The Company
adopted this new authoritative guidance in the first quarter
of fiscal year 2010. In applying this 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; thus consistent with prior periods,
the existing guidance for accounting for derivative financial
instruments indexed to and potentially settled in, a company’s
own stock would still apply.
Under this existing guidance, the Senior Convertible Notes are
accounted for as a combined instrument because the conversion
spread meets the requirements to not be separated as a derivative.
Existing 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 the purchased call option contracts and the
warrant contracts should be accounted for in shareholders’ equity.