Yahoo 2015 Annual Report Download - page 135

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 governing the Notes (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, 2015, 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 $1.4 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):
December 31,
2014
December 31,
2015
Liability component:
Principal $1,437,500 $1,437,500
Less: note discount (267,077) (204,015)
Net carrying amount $1,170,423 $1,233,485
Equity component(*) $ 305,569 $ 305,569
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