Yahoo 2014 Annual Report Download - page 131

November 20, 2013, with J.P. Morgan Securities LLC and Goldman, Sachs & Co., as representatives of
the several initial purchasers named therein (collectively, the “Initial Purchasers”). The Notes were
sold to the Initial Purchasers for resale to qualified institutional buyers pursuant to Rule 144A under
the Securities Act of 1933, as amended.
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, the Notes do not
bear regular interest. The Notes 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 are convertible, subject to certain conditions, into shares of Yahoo 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 will 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 will be included in the denominator for the computation of diluted net income per
common share, using the treasury stock method. As of December 31, 2014, 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 $1.2 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.
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