Yahoo 2013 Annual Report Download - page 110

In connection with the issuance of the Notes, the Company entered into an indenture (the “Indenture”) with
respect to the Notes with The Bank of New York Mellon Trust Company, N.A., as trustee. Under the Indenture,
the Notes are senior unsecured obligations of Yahoo! Inc., the Notes will not bear regular interest, and the
principal amount of the Notes will not accrete. The Notes will mature on December 1, 2018, unless previously
purchased or converted in accordance with their terms prior to such date. The Company may not redeem Notes
prior to maturity. However, holders of the Notes may convert them at certain times and upon the occurrence of
certain events in the future, as outlined in the Indenture. Holders of the Notes who convert in connection with a
“make-whole fundamental change,” as defined in the Indenture, may require Yahoo to purchase for cash all or
any portion of their Notes at a purchase price equal to 100 percent of the principal amount, plus accrued and
unpaid special interest as defined in the Indenture, if any. The Notes will be convertible into shares of Yahoo’s
common stock at an initial conversion rate of 18.7161 shares per $1,000 principal amount of Notes (which is
equivalent to an initial conversion price of approximately $53.43 per share), subject to adjustment upon the
occurrence of certain events. Certain corporate events described in the Indenture may increase the conversion
rate for holders who elect to convert their Notes in connection with such corporate event should they occur. Upon
conversion of the Notes, holders will receive cash, shares of Yahoo’s common stock or a combination thereof, at
Yahoo’s election. The Company’s intent is to settle the principal amount of the Notes in cash upon conversion. If
the conversion value exceeds the principal amount, the Company would deliver shares of its common stock in
respect to the remainder of its conversion obligation in excess of the aggregate principal amount (conversion
spread). The conversion spread would be included in the denominator for the computation of diluted net income
per common share, using the treasury stock method. As of December 31, 2013, none of the conditions allowing
holders of the Notes to convert had been met.
In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity
components. The carrying amount of the liability component was calculated by measuring the estimated fair
value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity
component representing the conversion option was determined by deducting the fair value of the liability
component from the face value of the Notes as a whole. The excess of the principal amount of the liability
component over its carrying amount (“debt discount”) is amortized to interest expense over the term of the Notes
using the effective interest method with an effective interest rate of 5.26 percent per annum. The equity
component is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the transaction costs related to the Note issuance, the Company allocated the total amount
incurred to the liability and equity components based on their relative values. Issuance costs attributable to the
$1.1 billion liability component are being amortized to expense over the term of the Notes, and issuance costs
attributable to the $306 million equity component were included with the equity component in stockholders’
equity. Additionally, the Company recorded a deferred tax liability of $37 million on a portion of the equity
component transaction costs which are deductible for tax purposes.
The Notes consist of the following (in thousands):
Year Ended
December 31, 2013
Liability component:
Principal ................................................................. $1,437,500
Less: note discount ........................................................ (326,915)
Net carrying amount ........................................................... $1,110,585
Equity component(*) ........................................................... $ 305,569
(*) Recorded in the consolidated balance sheet within additional paid-in capital.
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