Electronic Arts 2014 Annual Report Download - page 162

any ten consecutive trading day period in which the trading price per $1,000 principal amount of notes falls
below 98 percent of the last reported sale price of our common stock multiplied by the conversion rate on each
trading day; or (3) specified corporate transactions, including a change in control, occur. On or after April 15,
2016, a holder may convert any of its Notes at any time prior to the close of business on the second scheduled
trading day immediately preceding the maturity date. The conversion rate is subject to customary anti-dilution
adjustments (for example, certain dividend distributions or tender or exchange offer of our common stock), but
will not be adjusted for any accrued and unpaid interest. The Notes are not redeemable prior to maturity except
for specified corporate transactions and events of default, and no sinking fund is provided for the Notes. The
Notes do not contain any financial covenants.
We separately account for the liability and equity components of the Notes. The carrying amount of the equity
component representing the conversion option is equal to the fair value of the Convertible Note Hedge, as
described below, which is a substantially identical instrument and was purchased on the same day as the Notes.
The carrying amount of the liability component was determined by deducting the fair value of the equity
component from the par value of the Notes as a whole, and represents the fair value of a similar liability that does
not have an associated convertible feature. A liability of $525 million as of the date of issuance was recognized
for the principal amount of the Notes representing the present value of the Notes’ cash flows using a discount
rate of 4.54 percent. The excess of the principal amount of the liability component over its carrying amount is
amortized to interest expense over the term of the Notes using the effective interest method. The equity
component is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for $15 million of issuance costs paid in July 2011 related to the Notes issuance, we allocated $13
million to the liability component and $2 million to the equity component. Debt issuance costs attributable to the
liability component are being amortized to interest expense over the term of the Notes, and issuance costs
attributable to the equity component were netted with the equity component in additional paid-in capital.
The carrying values of the liability and equity components of the Notes are reflected in our Consolidated Balance
Sheets as follows (in millions):
As of
March 31, 2014
As of
March 31, 2013
Principal amount of Notes ............................................ $633 $633
Unamortized discount of the liability component .......................... (53) (74)
Net carrying amount of Notes ....................................... $580 $559
Equity component, net ............................................ $105 $105
As of March 31, 2014, the remaining life of the Notes is 2.2 years.
Convertible Note Hedge and Warrants Issuance
In July 2011, we entered into privately negotiated convertible note hedge transactions (the “Convertible Note
Hedge”) with certain counterparties to reduce the potential dilution with respect to our common stock upon
conversion of the Notes. The Convertible Note Hedge, subject to customary anti-dilution adjustments, provides
us with the option to acquire, on a net settlement basis, approximately 19.9 million shares of our common stock
at a strike price of $31.74, which corresponds to the conversion price of the Notes and is equal to the number of
shares of our common stock that notionally underlie the Notes. As of March 31, 2014, we have not purchased
any shares under the Convertible Note Hedge. We paid $107 million for the Convertible Note Hedge, which was
recorded as an equity transaction.
Separately, in July 2011 we also entered into privately negotiated warrant transactions with the certain
counterparties whereby we sold to independent third parties warrants (the “Warrants”) to acquire, subject to
customary anti-dilution adjustments that are substantially the same as the anti-dilution provisions contained in
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