Long-Term Debt and Other Financing Arrangements Long-Term Debt and Other Financing Arrangements (Notes) | 9 Months Ended |
Sep. 30, 2014 |
Debt Disclosure [Abstract] | ' |
Long-term Debt [Text Block] | ' |
LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS |
Revolving Credit Facility |
On July 1, 2013, AOL entered into a $250 million Credit Facility Agreement (the “Credit Facility Agreement”). Under the terms of the Credit Facility Agreement, AOL may request an increase in the commitments of up to an additional $250 million with commitments from either new lenders or increased commitments from existing lenders, subject to the satisfaction of certain conditions. The Credit Facility Agreement is guaranteed by all of AOL’s material domestic subsidiaries, as defined in the Credit Facility Agreement, and substantially all of the property and assets of AOL have been pledged as collateral, subject to customary exceptions. |
Interest on borrowings under the Credit Facility Agreement is payable at rates per annum equal to, at the option of AOL: (1) a fluctuating base rate equal to JPMorgan’s adjusted base rate (“ABR”) plus the applicable margin, or (2) a periodic fixed rate equal to the Eurodollar rate plus the applicable margin. The ABR will be the highest of (i) the federal funds rate plus 0.5%, (ii) JPMorgan’s publicly announced prime rate and (iii) one-month LIBOR plus 1.0%. The applicable margin relating to any Eurodollar loan is 2.0% and the applicable margin relating to any ABR loan is 1.0%. AOL is required to pay a commitment fee of 0.5% per annum based on the unused portion of the commitments under the Credit Facility Agreement. |
The Credit Facility Agreement contains various affirmative, negative and financial covenants. Financial covenants in the agreement include a ratio of debt (net of unrestricted cash up to an agreed cap) to EBITDA (as defined in the Credit Facility Agreement, "EBITDA") and a ratio of EBITDA to interest expense. The debt to EBITDA ratio must not exceed a specified maximum. The EBITDA to interest expense ratio requires the Company to meet or exceed a specified minimum. Each of the above ratios are tested at the end of each fiscal quarter and measured on a rolling four-quarter basis. To date, the Company is in compliance with its covenants under the Credit Facility Agreement. |
Any amounts outstanding under the Credit Facility Agreement will be due and payable on July 1, 2018, and the commitments thereunder will terminate on such date. The Company intends to use borrowings under the Credit Facility Agreement for general corporate purposes. |
On August 4, 2014, the Company repaid $30.0 million of borrowings under the Credit Facility Agreement. The Company repaid the remaining $75.0 million outstanding on September 11, 2014, through use of the proceeds from the convertible senior notes discussed below. As of September 30, 2014 there were no amounts outstanding under the Credit Facility Agreement and the available borrowing capacity was $250 million. |
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Convertible Senior Notes |
On August 14, 2014, the Company issued $379.5 million aggregate principal amount of 0.75% convertible senior notes due September 1, 2019 (the “Notes”) through a private placement. The Company sold the Notes under a purchase agreement, dated August 13, 2014, with Goldman, Sachs & Co. (“Goldman Sachs”) and J.P. Morgan Securities LLC (“J.P. Morgan”) as representatives of the several purchasers (the “Initial Purchasers”). The Notes were issued under an indenture, dated as of August 19, 2014 (the "Indenture") between the Company and The Bank of New York Mellon, as trustee. |
The net proceeds from the Company's sale of the Notes were approximately $369.1 million, net of issuance costs of $10.4 million. The Company used $40.0 million of the net proceeds from this offering to repurchase shares of its common stock from the purchasers of Notes in this offering in privately negotiated transactions through Goldman Sachs as its agent. These repurchases are part of the 2014 Stock Repurchase Program discussed in "Note 7". The Company used $36.6 million of the net proceeds to pay the cost of the convertible note hedge transactions (after such cost was partially offset by the proceeds to the Company from the sale of warrants pursuant to the warrant transactions) as described below under “Note Hedge and Warrant Arrangements.” The Company used $75.0 million of the net proceeds to repay borrowings under the Credit Facility Agreement discussed above. The Company expects to use the remaining net proceeds from the offering of the Notes for general corporate purposes including, but not limited to, additional share repurchases, acquisitions or other strategic transactions and working capital. |
Under the Indenture, the Notes bear interest at a rate of 0.75% per year payable semiannually in arrears in cash on March 1 and September 1 of each year, beginning on March 1, 2015. The Notes will mature on September 1, 2019, unless earlier converted or repurchased in accordance with their terms. The Notes rank senior in right of payment to all of the Company’s indebtedness that is expressly subordinated in right of payment to the Notes, will rank equally in right of payment with all of the Company’s existing and future liabilities that are not so subordinated, will be effectively junior to any of the Company's secured indebtedness to the extent of the value of the assets securing such indebtedness (including amounts outstanding under the Company’s current credit facility) and will be structurally subordinated to all indebtedness and other liabilities (including trade payables) of the Company’s subsidiaries. |
If the Company undergoes a fundamental change, subject to certain conditions, holders of the Notes may require the Company to purchase for cash all or a part of their Notes in principal amounts of $1,000 or a multiple thereof at a repurchase price equal to 100% of the principal amount of Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, following certain corporate events that occur prior to maturity, the Company will increase the conversion rate for a holder who elects to convert its Notes in connection with such a corporate event in certain circumstances. In such event, an aggregate of up to 2.3 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. |
The Notes will be convertible into cash, shares of common stock, or a combination of cash and shares of common stock, at the Company’s election based on an initial conversion rate of 17.4456 shares of common stock per $1,000 principal amount of Notes (which is equivalent to an initial conversion price of approximately $57.32 per share of common stock) subject to customary adjustments. Holders may convert their Notes at their option at any time prior to the close of business on the business day immediately preceding May 1, 2019 upon the occurrence of certain events in the future, as defined in the Indenture. On or after May 1, 2019 to the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes, regardless of the foregoing conditions. 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 would deliver shares of its common stock in respect to the remainder of its conversion obligation in excess of the aggregate principal amount (the "conversion spread"). The conversion spread would be included in the denominator for the computation of diluted net income per common share, using the treasury stock method. As of September 30, 2014, none of the conditions allowing holders of the Notes to convert have been met. |
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 estimated fair value of the liability component, representing the value of the conversion premium 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 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 yield, and represents a Level 3 fair value measurement. The Company estimated the straight debt yield by modeling the convertible note as a combination of a straight debt and a European call option. This required the use of a combination of inputs for similar assets observable in the market place to determine a yield on similar instruments without a conversion option and a significant unobservable input to estimate the future volatility of the Company's stock. The Company's stock volatility was estimated at 40% based on historical AOL stock price volatilities, as well as implied volatilities from option contracts traded immediately prior to the issuance date of the Notes. The Company estimated the straight debt borrowing rates at issuance to be 5.39% for similar debt to the Notes without the conversion feature, which resulted in a fair value of the liability component of approximately $301.5 million and a debt discount of $78.0 million. As a result, a conversion premium of $45.4 million, net of tax, was recorded in additional paid-in capital within stockholders' equity. The debt discount is amortized to interest expense using the effective interest method over the period from the issuance date through the contractual maturity date of the Notes on September 1, 2019. |
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 fair values. Issuance costs attributable to the liability component were recorded within other assets on the condensed consolidated balance sheet and are being amortized to expense over the term of the Notes using the effective interest method. Issuance costs attributable to the equity component were recorded as a charge to additional paid-in capital within stockholders' equity. |
Balances attributable to the Notes consist of the following (in millions): |
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| | | | | | | |
| September 30, | | December 31, |
2014 | 2013 |
Liability component: | | | |
Principal | $ | 379.5 | | | $ | — | |
|
Less: note discount | 76.4 | | | — | |
|
Net carrying amount | $ | 303.1 | | | $ | — | |
|
Equity component* | $ | 75.7 | | | $ | — | |
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(*) Recorded in the condensed consolidated balance sheet in additional-paid-in capital within stockholders' equity. |
The Notes are carried at their original issuance value, net of unamortized debt discount, and are not marked to market each period. The approximate fair value of the Notes as of September 30, 2014, was $394.2 million. The fair value of the Notes was estimated on the basis of inputs that are observable in the market and are considered Level 2 in the fair value hierarchy. |
The Company recognized interest expense related to the Notes of $2.1 million for the three and nine months ended September 30, 2014, consisting of $0.3 million for the contractual coupon interest, $1.6 million for the accretion of the convertible note discount and $0.2 million for the amortization of deferred transaction costs. |
Note Hedge and Warrant Arrangements |
In connection with the sale of the Notes, the Company entered into privately negotiated note hedge transactions relating to approximately 6.6 million shares of common stock (the "Note Hedges") with certain option counterparties (the “Option Counterparties”). The Note Hedges represent call options from the Option Counterparties with respect to $379.5 million aggregate principal amount of the Notes. The strike price of the Note Hedges is $57.32 with a maturity date of September 1, 2019. These Note Hedges are designed to offset the Company’s exposure to potential dilution and/or amounts the Company is required to pay in excess of the principal amount of converted Notes upon conversion of the Notes in the event that the market value per share of the Common Stock at the time of exercise is greater than the strike price of the Note Hedges (which strike price corresponds to the initial conversion price of the Notes, subject to certain customary adjustments). During the three months ended September 30, 2014, the Company paid $70.1 million for the Note Hedges. |
Separately, the Company also entered into privately negotiated warrant transactions with the Option Counterparties giving them the right to purchase in aggregate up to 13.2 million shares of common stock from the Company at a strike price of $84.92 per share. The warrant transactions will have a dilutive effect with respect to the Company’s common stock to the extent that the market price per share of its common stock exceeds the strike price of $84.92 per share of the warrants on or prior to the expiration date of the warrants. The warrants expire over a three month period beginning on December 2, 2019. During the three months ended September 30, 2014, the Company received $33.5 million in proceeds from the issuance of warrants. |
The Note Hedges and warrants are not marked to market. The Note Hedges and the warrant transactions are separate transactions, entered into by the Company with the Option Counterparties and 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 value of the Note Hedges and warrants were initially recorded to and continue to be classified as additional paid-in capital within stockholders' equity. |