Tesla 2015 Annual Report Download - page 80

In connection with the offering of these notes in March 2014, we entered into convertible note hedge transactions whereby we have the
option to purchase initially (subject to adjustment for certain specified events) a total of approximately 5.6 million shares of our common stock
at a price of approximately $359.87 per share. The total cost of the convertible note hedge transactions was $524.7 million. In addition, we sold
warrants whereby the holders of the warrants have the option to purchase initially (subject to adjustment for certain specified events) a total of
approximately 2.2 million shares of our common stock at a price of $512.66 for the 2019 Notes and a total of approximately 3.3 million shares of
our common stock at a price of $560.64 per share for 2021 Notes. We received $338.4 million in cash proceeds from the sale of these warrants.
Similarly, in connection with the issuance of additional notes in April 2014, we entered into convertible note hedge transactions and paid an
aggregate $78.7 million. In addition, we sold warrants to purchase (subject to adjustment for certain specified events) a total of approximately
0.3 million shares of our common stock at a strike price of $512.66 per share for the warrants relating to 2019 Notes, and a total of
approximately 0.5 million shares of our common stock at a strike price of $560.64 per share for the warrants relating to 2021 Notes. We received
aggregate proceeds of approximately $50.8 million from the sale of the warrants. Taken together, the purchase of the convertible note hedges
and the sale of warrants are intended to offset any actual dilution from the conversion of these notes and to effectively increase the overall
conversion price from $359.87 to $512.66 per share in the case of warrants relating to 2019 Notes and from $359.87 to $560.64 in the case of
warrants relating to 2021 Notes. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in
stockholders’ equity and are not accounted for as derivatives. The net cost incurred in connection with the convertible note hedge and warrant
transactions was recorded as a reduction to additional paid-in capital on the consolidated balance sheet as of December 31, 2014.
1.50% Convertible Senior Notes and Bond Hedge and Warrant Transactions
In May 2013, we issued $660.0 million aggregate principal amount of 2018 Notes in a public offering. The net proceeds from the offering,
after deducting transaction costs, were approximately $648.0 million. We incurred $12.0 million of debt issuance costs in connection with the
issuance of the 2018 Notes which we recorded in other assets and are amortizing to interest expense using the effective interest method over the
contractual term of the 2018 Notes. The interest under the 2018 Notes is fixed at 1.50% per annum and is payable semi-annually in arrears on
June 1 and December 1 of each year, commencing on December 1, 2013. During the years ended December 31, 2014 and 2013, we recognized
$2.0 million and $1.2 million, respectively, of interest expense related to the amortization of debt issuance costs and $9.8 million and $5.9
million, respectively, of coupon interest expense.
Each $1,000 of principal of the 2018 Notes will initially be convertible into 8.0306 shares of our common stock, which is equivalent to an
initial conversion price of approximately $124.52 per share, subject to adjustment upon the occurrence of specified events. Holders of the 2018
Notes may convert their 2018 Notes at their option on or after March 1, 2018. Further, holders of the 2018 Notes may convert their 2018 Notes
at their option prior to March 1, 2018, only under the following circumstances: (1) during any fiscal quarter beginning after the fiscal quarter
ending September 30, 2013, if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during
the last 30 consecutive trading days of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each
applicable trading day; (2) during the five business day period following any five consecutive trading day period in which the trading price for
the 2018 Notes is less than 98% of the average of the closing sale price of our common stock for each day during such five trading day period; or
(3) if we make specified distributions to holders of our common stock or if specified corporate transactions occur. Upon conversion, we would
pay the holders in cash for the principal amount of the 2018 Notes and, if applicable, shares of our common stock (subject to our right to deliver
cash in lieu of all or a portion of such shares of our common stock) based on a calculated daily conversion value. If a fundamental change occurs
prior to the maturity date, holders of the 2018 Notes may require us to repurchase all or a portion of their 2018 Notes for cash at a repurchase
price equal to 100% of the principal amount of the 2018 Notes, plus any accrued and unpaid interest. In addition, if specific corporate events
occur prior to the maturity date, we will increase the conversion rate for a holder who elects to convert its 2018 Notes in connection with such a
corporate event in certain circumstances.
In accordance with accounting guidance on embedded conversion features, we valued and bifurcated the conversion option associated
with the 2018 Notes from the host debt instrument and recorded the conversion option of $82.8 million in stockholders’ equity. The resulting
debt discount on the 2018 Notes is being amortized to interest expense at an effective interest rate of 4.29% over the contractual term of the 2018
Notes. During the years ended December 31, 2014 and 2013, we recognized $15.5 million and $9.1 million, respectively, of interest expense
related to the amortization of the debt discount. As of December 31, 2014, the net carrying value of the 2018 Notes was $601.6 million. The
remaining bond discounts of the 2018 Notes of $58.2 million will be amortized over its remaining life of approximately 3.2 years.
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