NOTE 10 – FINANCING ARRANGEMENTS

Revolving Credit Facility

On March 30, 2018, we entered into a revolving credit facility with J.P. Morgan Chase Bank that provides for borrowings of up to $50 million. This revolving credit facility expires on March 30, 2020. Borrowings under this revolving credit facility bear interest at either a Prime or LIBOR-based variable rate as selected by us on a periodic basis.

The revolving credit facility contains certain negative and affirmative covenants including financial covenants that require us to maintain a minimum level of earnings before interest, income taxes, depreciation, amortization and other non-cash charges (EBITDA) to interest ratio and a minimum senior indebtedness ratio as well as a total indebtedness coverage ratio, both measured on a quarterly basis.

1.625% Convertible Senior Unsecured Notes

As of February 28, 2018, we had outstanding $172.5 million aggregate principal amount of convertible senior unsecured notes (“Notes”). The Notes are senior unsecured obligations and bear interest at a rate of 1.625% per year payable in cash on May 15 and November 15 of each year. The Notes mature on May 15, 2020 unless converted earlier or repurchased in accordance with their terms. We may not redeem the Notes prior to their stated maturity date and they will be convertible into cash, shares of our common stock or a combination of cash and shares of common stock, at our election, based on an initial conversion rate of 36.2398 shares of common stock per $1,000 principal amount. This ratio is equivalent to an initial conversion price of $27.594 per share of common stock, subject to customary adjustments. Holders may convert their Notes at their option at any time prior to November 15, 2019 upon the occurrence of certain events in the future, as defined in the indenture agreement dated May 6, 2015 (the “Indenture”). During the period from November 15, 2019 to May 13, 2020, holders may convert all or any portion of their Notes regardless of the foregoing conditions. Our intent is to settle the principal amount of the Notes in cash upon conversion. If the conversion value exceeds the principal amount, we would deliver shares of common stock in respect to the remainder of the conversion obligation in excess of the aggregate principal amount (the “conversion spread”). The shares associated with the conversion spread, if any, would be included in the denominator for the computation of diluted earnings per share, with such shares calculated using the average closing price of our common stock during each period. As of February 28, 2018, the conditions allowing holders of the Notes to convert have not been met.

The net proceeds from the sale of the Notes were $167.2 million, net of issuance costs of $5.3 million. We used $15.4 million of the proceeds to pay the net cost of purchased convertible note hedges that was partially offset by the proceeds from the separate sale of warrants, as described below. Additionally, we have used the proceeds from the Notes for general corporate purposes including acquisitions or other strategic transactions and working capital.

The Indenture contains customary terms and conditions, including that upon certain events of default occurring and continuing, either the Trustee or the holders of at least 25% in aggregate principal amount of the then outstanding Notes, by notice to us and the Trustee, may declare 100% of the principal amount of, and accrued and unpaid interest, if any, on all the Notes then outstanding to be due and payable immediately. Such events of default include, without limitation, the default by us or any of our subsidiaries with respect to indebtedness for borrowed money in excess of $10 million and the entry of judgments for the payment of $10 million or more against us or any of our subsidiaries which are not paid, discharged or stayed within 60 days.

If we undergo a fundamental change (as defined in the Indenture), holders of the Notes may require us to repurchase their Notes at a repurchase price of 100% of the principal amount of the Notes, plus any accrued and unpaid interest, if any, to but not including the fundamental change repurchase date.

In addition, following certain corporate events that occur prior to maturity, we will increase the conversion rate for a holder who elects to convert our Notes in connection with such a corporate event in certain circumstances. In such event, an aggregate of up to 2.5 million additional shares of common stock could be issued upon conversions in connection with such corporate events, subject to adjustment in the same manner as the conversion rate.

Accounting guidance requires that convertible debt that can be settled for cash, such as the Notes, be separated into the liability and equity component at issuance and each be assigned a value. The value assigned to the liability component is the estimated fair value, as of the issuance date, of a similar debt without the conversion feature. The difference between the principal amount of the Notes and the estimated fair value of the liability component, representing the value of the embedded conversion option assigned to the equity component, is recorded as a debt discount on the issuance date. The fair value of the liability component of the Notes in the amount of $138.9 million was determined using a discounted cash flow analysis, in which the projected interest and principal payments were discounted back to the issuance date of the Notes at a market interest rate for nonconvertible debt of 6.2%, which represents a Level 3 fair value measurement. The remaining gross proceeds of the Notes of $33.6 million represents the fair value of the embedded conversion feature that was recorded as an increase in additional paid-in capital within the stockholders’ equity section, with an offsetting debt discount recorded of $33.6 million. The associated deferred tax effect of $16.0 million was recorded as a reduction of additional paid-in capital. The amount recorded in additional paid-in capital is not to be remeasured as long as it continues to meet the conditions for equity classification. The debt discount of $33.6 million is being amortized to interest expense using the effective interest method with an effective interest rate of 6.2% over the period from the issuance date through the contractual maturity date of the Notes of May 15, 2020.

In accounting for the issuance costs related to the Notes, we allocated the total amount of such costs incurred to the Note liability and equity components based on their relative fair values. Issuance costs of $4.3 million attributable to the liability component were recorded as a direct deduction from the carrying value of the Notes and are being amortized to expense over the term of the Notes using the effective interest method. Issuance costs of $1.0 million attributable to the equity component were recorded as a charge to additional paid-in capital within stockholders’ equity. Additionally, we recorded a deferred tax asset of $0.4 million related to the equity component of issuance costs because such costs are deductible for tax purposes.

Balances attributable to the Notes consist of the following (in thousands):

	February 28,
	2018			2017
Principal	$	172,500		$	172,500
Less: Unamortized debt discount		(16,143	)		(22,770	)
Unamortized debt issuance costs		(2,058	)		(2,903	)
Net carrying amount of the Notes	$	154,299		$	146,827

The Notes are carried at their principal face amount, less unamortized debt discount and issuance costs, and are not carried at fair value at each period end. The approximate fair value of the Notes as of February 28, 2018 was $188 million, which was estimated on the basis of inputs that are observable in the market and which is considered a Level 2 measurement method in the fair value hierarchy.

See Note 16 for information related to interest expense on the Notes.

Note Hedge and Warrant Arrangements

In connection with the Notes, we entered into note hedge transactions relating to 6.25 million shares of common stock with certain counterparties. The note hedges represent call options from the counterparties with respect to $172.5 million aggregate principal amount of the Notes. We paid $31.3 million for the note hedges and as a result approximately $19.3 million, net of deferred tax effects, was recorded as a reduction to additional paid-in capital within stockholders’ equity.

The note hedges cover the 6.25 million shares of our common stock that initially underlie the Notes and are intended to reduce the potential dilution to our outstanding common stock and/or reduce the amount of any cash payments we are required to make in excess of the principal amount of any converted Notes upon conversion in the event that the market price per share of our common stock is greater than the strike price of the note hedges, which is initially equal to $27.594.

Separately, we entered into warrant transactions with the same counterparties, giving them the right to acquire the same number of shares of common stock that underlie the Notes at a strike price of $39.42 per share which represents a premium of 100% over the last reported sale price of our common stock of $19.71 on April 30, 2015, the date on which the Notes were priced. The warrants will be exercisable in equal installments for a period of 80 trading days beginning on August 15, 2020. We received a total amount of $16.0 million in cash proceeds from the sale and issuance of the warrants.

The warrants will have a dilutive effect to the extent that the market price of our common stock exceeds the applicable strike price of the warrants on any expiration date of the warrants.

We entered into the note hedges and warrants as separate transactions with the counterparties. The note hedges and warrants are not part of the terms of the Notes and will not affect the holders’ rights under the Notes. In addition, holders of the Notes will not have any rights with respect to the note hedges or the warrants. The values ascribed to the note hedges and warrants were initially recorded to and continue to be classified as additional paid-in capital within stockholders’ equity. We are required to assess whether the note hedges and warrants continue to meet the stockholders’ equity classification requirements for the remaining term of the Notes. If in any future period these derivative instruments fail to satisfy those requirements, they would need to be reclassified out of stockholders’ equity, to either assets or liabilities depending on their nature, and be recorded at fair value with subsequent changes in their fair value reflected in earnings.

We elected to integrate the note hedge call options with the Notes for federal income tax purposes pursuant to applicable U.S. Treasury Regulations. Accordingly, the $31.3 million gross cost of the note hedges will be deductible for income tax purposes as original issue discount interest over the term of the Notes. We recorded a deferred tax asset of $12.0 million which represents the tax benefit of these tax deductions with an offsetting entry to additional paid-in capital.