Note 7. Convertible Notes

The components of the convertible notes are as follows (in thousands):


				Carrying Amount,
	Interest Rates			December 31,
Debt	December 31, 2015		Maturities	2015		2014
4.75% Convertible Senior Notes due 2015	4.75	%	2015	$	—	$	85,186
0.375% Convertible Senior Notes due 2018	0.375	%	2018		324,031		307,978
1.25% Convertible Senior Notes due 2020	1.25	%	2020		295,862		282,003
					619,893		675,167
Less current portion					—		85,186
				$	619,893	$	589,981

Annual maturities of all convertible notes are as follows (in millions):


2016	$	—
2017		—
2018		375.0
2019		—
2020		374.8
Thereafter		—
	$	749.8

The carrying amount and fair value of our convertible notes are as follows (in thousands):


	December 31,
	2015				2014
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
4.75% Convertible Senior Notes due 2015	$	—	$	—	$	85,186	$	755,143
0.375% Convertible Senior Notes due 2018		324,031		807,422		307,978		560,156
1.25% Convertible Senior Notes due 2020		295,862		816,123		282,003		577,736
	$	619,893	$	1,623,545	$	675,167	$	1,893,035

The fair values of the 4.75% Convertible Senior Notes due 2015 (the “2015 Notes”), 0.375% Convertible Senior Notes due 2018 (the “2018 Notes”) and 1.25% Convertible Senior Notes due 2020 (the “2020 Notes”) are based on data from readily available pricing sources which utilize market observable inputs and other characteristics for similar types of instruments, and, therefore, these convertible senior notes are classified within Level 2 in the fair value hierarchy.

On November 14, 2013, we issued, in a private placement, $375.0 million aggregate principal amount of the 2018 Notes and $375.0 million aggregate principal amount of the 2020 Notes (together with the 2018 Notes, the “Notes”). Entities affiliated with Julian C. Baker, one of our directors and principal stockholders (the “Baker Entities”), purchased $250.0 million aggregate principal amount of the 2018 Notes and $250.0 million aggregate principal amount of the 2020 Notes in this private placement. As of December 31, 2015 and 2014, the Baker Entities owned $259.0 million and $274.5 million aggregate principal amounts of the 2018 and 2020 Notes, respectively. The 2018 Notes bear interest at a rate of 0.375% per annum and the 2020 Notes bear interest at a rate of 1.25% per annum, in each case payable semi‑annually in arrears in cash on May 15 and November 15 of each year, beginning on May 15, 2014. The 2018 Notes will mature on November 15, 2018 and the 2020 Notes will mature on November 15, 2020, in each case unless earlier purchased or converted. We may not redeem the Notes prior to their relevant scheduled maturity dates.

Prior to May 14, 2014, the Notes were not convertible except in connection with a make whole fundamental change, as defined in the respective indentures. Beginning on, and including, May 15, 2014, the Notes are convertible prior to the close of business on the business day immediately preceding May 15, 2018, in the case of the 2018 Notes, and May 15, 2020, in the case of the 2020 Notes, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on March 31, 2014 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price for the 2018 Notes or 2020 Notes, as applicable, on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of 2018 Notes or 2020 Notes, as applicable, for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate for the 2018 Notes or 2020 Notes, as applicable, on each such trading day; or (3) upon the occurrence of specified corporate events. On or after May 15, 2018, in the case of the 2018 Notes, and May 15, 2020, in the case of the 2020 Notes, until the close of business on the second scheduled trading day immediately preceding the relevant maturity date, the Notes are convertible at any time, regardless of the foregoing circumstances. Upon conversion we will pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at our election.

On January 1, 2016, the Notes became convertible through at least March 31, 2016, based on the meeting the conversion criteria related to the sale price of our common stock during the calendar quarter ended December 31, 2015 as described in (1) above. Management’s intent is to settle any conversions of the Notes during this period in shares of our common stock and, therefore, the Notes are reflected in long term liabilities on the consolidated balance sheet at December 31, 2015.

The initial conversion rate for the 2018 Notes is 19.3207 shares of common stock per $1,000 principal amount, equivalent to an initial conversion price of approximately $51.76 per share. The initial conversion rate for the 2020 Notes is 19.3207 shares of common stock per $1,000 principal amount, equivalent to an initial conversion price of approximately $51.76 per share. The conversion rate for each series of the Notes will be subject to adjustment for certain events but will not be adjusted for any accrued and unpaid interest. Upon the occurrence of certain fundamental changes, the holders of the Notes may require us to purchase all or a portion of their Notes for cash at a price equal to 100% of the principal amount of the Notes, plus accrued and unpaid interest, including additional interest, if any, to, but excluding, the fundamental change purchase date. In addition, if, and to the extent, a holder elects to convert any Note in connection with a make‑whole fundamental change transaction, as defined in the indenture, we will, under certain circumstances, increase the applicable conversion rate by a number of additional shares of our common stock.

Since the Notes can be settled in cash or common shares or a combination of cash and common shares at our option, we determined the embedded conversion options in the Notes are not required to be separately accounted for as a derivative. However, since the Notes are within the scope of the accounting guidance for cash convertible instruments, we are required to separate the Notes into a liability and equity component. The carrying amount of the liability component is calculated by measuring the fair value of a similar liability that does not have an associated equity component. The carrying amount of the equity component representing the embedded conversion option is determined by deducting the fair value of the liability component from the initial proceeds. The excess of the principal amount of the liability component over its carrying amount is amortized to interest expense over the expected life of a similar liability that does not have an associated equity component using the effective interest method. The equity component is not re‑measured as long as it continues to meet the conditions for equity classification in the accounting guidance for contracts in an entity’s own equity.

The liability component of the 2018 Notes on the date of issuance was estimated at $299.4 million, and accordingly, the equity component on the date of issuance was $75.6 million. The discount on the 2018 Notes is being amortized to interest expense over the term of the 2018 Notes, using the effective interest method. The carrying value of the 2018 Notes was $324.0 million and $308.0 million, respectively (net of $51.0 million and $67.0 million of debt discount and issuance costs, respectively) at December 31, 2015 and December 31, 2014.

The liability component of the 2020 Notes on the date of issuance was estimated at $274.8 million, and accordingly, the equity component on the date of issuance was $100.2 million. The discount on the 2020 Notes is being amortized to interest expense over the term of the 2020 Notes, using the effective interest method. The carrying value of the 2020 Notes was $295.9 million and $282.0 million, respectively, (net of $78.9 million and $93.0 million debt discount and issuance costs, respectively) at December 31, 2015 and December 31, 2014.

The 2015 Notes were due on October 1, 2015 and bore interest at the rate of 4.75% per year, payable semi‑annually on April 1 and October 1, and the remaining de minimis principal balance of 2015 Notes that were not converted into common stock were repaid on that date. We could not redeem the 2015 Notes prior to their scheduled maturity date. If we underwent a fundamental change, as defined in the indenture, subject to certain conditions, holders could have required us to repurchase their 2015 Notes at a purchase price equal to 100% of the principal amount being purchased, plus accrued and unpaid interest, up to the date of purchase. The 2015 Notes were convertible into shares of our common stock at an initial conversion rate of 113.9601 shares per $1,000 principal amount, equivalent to an initial conversion price of approximately $8.78 per share. In addition, if, and to the extent, a holder elected to convert any 2015 Notes in connection with a make‑whole fundamental change transaction, as defined in the indenture, we would, under certain circumstances, have been required to increase the applicable conversion rate by a number of additional shares of our common stock.

During 2013, we entered into separately negotiated agreements with certain holders of the 2015 Notes pursuant to which such holders agreed to exchange a total of $186.0 million in aggregate principal amount of the 2015 Notes for the shares of our common stock into which the 2015 Notes were convertible, aggregating 21.2 million shares, and $11.5 million in cash. During 2014, we entered into separately negotiated agreements with certain holders of the 2015 Notes pursuant to which such holders agreed to exchange a total of $4.9 million in aggregate principal amount of the 2015 Notes for the shares of our common stock into which the 2015 Notes were convertible, aggregating 0.7 million shares, and $0.3 million in cash. We have recorded $0.3 million and $11.5 million, respectively, in debt exchange expense on senior note conversions for the years ended December 31, 2014 and 2013.

Also during 2013, we used a portion of the net proceeds from the 2018 Notes and the 2020 Notes to repurchase a portion of the outstanding 2015 Notes held by the Baker Entities, in privately negotiated transactions, for an aggregate consideration, including accrued interest, of approximately $500.0 million. The repurchase resulted in the retirement of approximately $117.3 million aggregate principal amount of the 2015 Notes. As the 2015 Notes could not be settled for cash under their original terms, the repurchase represented a modification of the original arrangement, and as the modification was deemed substantial, extinguishment accounting applied for both the liability and equity components of the 2015 Notes that were repurchased. In order to allocate the $500.0 million repurchase price to the debt and equity components of the 2015 Notes that were repurchased, we estimated the relative fair value of these components. This fair value resulted in $118.6 million attributed to the debt component and $381.4 million attributed to the equity component. The difference between the $118.6 million attributed to the debt component and the $100.7 million carrying value of the repurchased 2015 Notes of $17.9 million was recorded as a loss on debt repurchase of senior notes in our consolidated statement of operations for the year ended December 31, 2013. The $381.4 million of the repurchase price attributed to the equity component was recorded as a reduction of additional‑paid‑in‑capital.

In addition, during 2015, certain holders of the 2015 Notes converted a total of $90.8 million in aggregate principal amount of the 2015 Notes for the shares of our common stock into which the 2015 Notes were convertible, aggregating 10.4 million shares. The Baker Entities converted $43.3 million in aggregate principal amount of the 2015 Notes for 4.9 million shares.