Note 11 Borrowings

5.5% senior convertible notes and interest expense

In November 2011, the Company completed the private placement of $152,000 of 5.50% senior convertible notes due in December 2016. These notes are senior unsecured obligations and rank equal in right of payment with all the Company’s existing and future senior unsecured indebtedness. They are also senior in right of payment to any subordinated indebtedness that the Company may incur in the future. The notes accrue interest at the rate of 5.50% per year payable in cash semi-annually on June 15 and December 15 of each year.

In May 2008, the FASB issued guidance contained in ASC Topic 470-20, “Debt with Conversion and Other Options” which applies to all convertible debt instruments that have a “net settlement feature”, which means that such convertible debt instruments, by their terms, may be settled either wholly or partially in cash upon conversion. This topic requires issuers of convertible debt instruments that may be settled wholly or partially in cash upon conversion to separately account for the liability and equity components in a manner reflective of the issuers’ non-convertible debt borrowing rate.

The Company recognized the estimated equity component of the convertible notes as $17,770, consisting of $18,210 in additional paid-in capital reduced by $440 of unamortized debt issuance costs allocated to the equity component and recognized this amount as a reduction to additional paid-in capital. The company also recognized a discount on convertible notes of $3,040, which is being amortized as non-cash interest expense over the life of the notes.

The Company recognized a deferred tax liability of $7,200 as the tax effect of the basis difference between carrying values and tax basis of the convertible notes. The carrying value of this deferred tax liability offset certain net deferred tax assets for determining valuation allowances against those deferred tax assets. See Note 20 to the consolidated financial statements.

The following table summarizes the principal amounts and related unamortized discount on convertible notes:


(in thousands)	2013		2012
Principal amount of convertible notes	$	12,540	$	90,960
Unamortized discount on convertible notes		(1,124)		(10,429)
Net carrying value	$	11,416	$	80,531

The following table summarizes other information related to the convertible notes:



Total amortization period for debt discount		5 years
Remaining amortization period for debt discount		3 years
Effective interest rates on convertible notes		9.51%

The following table summarizes interest costs recognized on convertible notes:


(in thousands)	2013		2012		2011
Contractual interest coupon	$	1,685	$	8,053	$	906
Amortization of debt discount		974		3,876		409
Total	$	2,659	$	11,929	$	1,315

These notes are convertible into shares of the Company’s Common Stock at an initial conversion rate equivalent to 69.9032 shares of Common Stock per $1 principal amount of notes, which represents an initial conversion rate of approximately $14.31 per share of Common Stock. The conversion rate is subject to adjustment in certain circumstances as more fully set forth in the indenture covering the notes. During 2013 note holders converted $80,754 aggregate principal amount of notes which converted into 5,482 shares of common stock on a split-adjusted basis. The Company recognized a loss of $11,275 and $7,021, respectively, at December 31, 2013 and 2012 on conversions of these notes in interest and other expense, net. As of December 31, 2013 and 2012, the aggregate principal of notes outstanding was $12,540 and $90,960, respectively.

If converted, the aggregate principal amount of the notes then outstanding may be settled in cash, shares of common stock, or a combination thereof, at the Company’s election. Subject to the terms of the indenture, holders may convert their notes at any time. The remaining notes are convertible into approximately 876 shares of common stock. In certain circumstances provided by the indenture, the number of shares of common stock issuable upon conversion of the notes may be increased, and with it, the aggregate principal amount of the notes. Unless earlier repurchased or converted, the notes will mature on December 15, 2016.

The notes were issued with an effective yield of 5.96% based upon an original issue discount at 98.0%. The net proceeds from the issuance of these Notes, after deducting original issue discount and capitalized issuance costs of $6,634, amounted to $145,366. The capitalized issuance costs are being amortized to interest expense over the life of the notes.

Redemption Features – convertible securities

Upon certain terms and conditions, the Company may elect to satisfy its conversion obligation with respect to the notes by paying cash, in whole or in part, for specified aggregate principal amount of the notes. In the event of certain types of fundamental changes, the Company will increase the conversion rate by a number of additional shares, up to a maximum of 1,118 shares which equates to a conversion price of approximately $11.22 per share at December 31, 2013.

Interest Expense

Interest expense totaled $3,425, $12,468, and $2,090 for the years ended December 31, 2013, 2012 and 2011, respectively. Interest income totaled $1,258, $168, and $51 for the years ended December 31, 2013, 2012 and 2011, respectively, reflecting the combined effect of the issuance and conversion of the senior convertible notes, lower interest rates on investments, and higher cash balances.