| DEBT | (11) DEBT
5.25% Convertible Senior Notes Payable
On March 18, 2014, the Company entered into an indenture (the
“Indenture”) with Wells Fargo Bank, National
Association, as trustee, relating to the Company’s issuance
of $100 million of 5.25% Convertible Senior Notes (the
“Notes”). The Notes bear interest at the rate of 5.25%
per year, payable semi-annually in arrears on March 1 and
September 1 of each year, beginning on September 1, 2014.
The Notes will mature on March 1, 2019, unless earlier
repurchased by the Company or converted by the holder in accordance
with their terms prior to such maturity date.
Holders of the Notes may convert all or any portion of their notes,
in multiples of $1,000 principal amount, at their option at any
time prior to the close of business or the business day immediately
preceding the maturity date. Each $1,000 of principal of the Notes
will initially be convertible into 166.2593 shares of our common
stock, which is equivalent to an initial conversion price of
approximately $6.01 per share, subject to adjustment upon the
occurrence of certain events, or, if the Company obtains the
required consent from its stockholders, into shares of the
Company’s common stock, cash or a combination of cash and
shares of its common stock, at the Company’s election. If the
Company has received stockholder approval, and it elects to settle
conversions through the payment of cash or payment or delivery of a
combination of cash and shares, the Company’s conversion
obligation will be based on the volume weighted average prices
(“VWAP”) of its common stock for each VWAP trading day
in a 40 VWAP trading day observation period. The Notes and any of
the shares of common stock issuable upon conversion have not been
registered. As of April 30, 2018, the if-converted
Holders will have the right to require the Company to repurchase
their Notes, at a repurchase price equal to 100% of the principal
amount of the Notes plus accrued and unpaid interest, upon the
occurrence of certain fundamental changes, subject to certain
conditions. No fundamental changes occurred during the nine months
ended April 30, 2018.
The Company may not redeem the Notes prior to the maturity date,
and no sinking fund is provided for the Notes. The Company will
have the right to elect to cause the mandatory conversion of the
Notes in whole, and not in part, at any time on or after
March 6, 2017, if the last reported sale price of its common
stock has been at least 130% of the conversion price then in effect
for at least 20 trading days (whether or not consecutive),
including the trading day immediately preceding the date on which
the Company notifies holders of its election to mandatorily convert
the Notes, during any 30 consecutive trading day period ending on,
and including, the trading day immediately preceding the date on
which the Company notifies holders of its election to mandatorily
convert the notes.
The Company has valued the debt using similar nonconvertible debt
as of the original issuance date of the Notes and bifurcated the
conversion option associated with the Notes from the host debt
instrument and recorded the conversion option of $28.1 million
in stockholders’ equity prior to the allocation of debt
issuance costs. The initial value of the equity component, which
reflects the equity conversion feature, is equal to the initial
debt discount. The resulting debt discount on the Notes is being
accreted to interest expense at the effective interest rate over
the estimated life of the Notes. The equity component is included
in the additional paid-in-capital No. 2015-03. paid-in
The fair value of the Company’s Notes payable, calculated as
of the closing price of the traded securities, was
$66.3 million and $63.9 million as of April 30, 2018
and July 31, 2017, respectively. This value does not represent
the settlement value of these long-term debt liabilities to the
Company. The fair value of the Notes payable could vary each period
based on fluctuations in market interest rates, as well as changes
to our credit ratings. The Notes payable are traded and their fair
values are based upon traded prices as of the reporting dates. As
of April 30, 2018 and July 31, 2017, the net carrying
value of the Notes was $63.3 million and $59.8 million,
respectively.
April 30, July 31,
(In
thousands)
Carrying amount of equity component (net of allocated debt issuance
costs) $ 26,961 $ 26,961
Principal amount of Notes $ 67,625 $ 67,625
Unamortized debt discount (3,997 ) (7,227 )
Unamortized debt issuance costs (354 ) (640 )
Net carrying amount $ 63,274 $ 59,758
As of April 30, 2018, the remaining period over which the
unamortized discount will be amortized is 10 months.
Three Months Ended Nine Months Ended
2018 2017 2018 2017
(In
thousands) (In
thousands)
Interest expense related to contractual interest coupon $ 914 $ 914 $ 2,741 $ 2,737
Interest expense related to accretion of the discount 1,113 973 3,230 2,913
Interest expense related to debt issuance costs 99 86 286 258
$ 2,126 $ 1,973 $ 6,257 $ 5,908
During the three and nine months ended April 30, 2018, the
Company recognized interest expense associated with the Notes of
$2.1 million and $6.3 million, respectively. During the
three and nine months ended April 30, 2017, the Company
recognized interest expense associated with the Notes of
$2.0 million and $5.9 million, respectively. The
effective interest rate on the Notes, including amortization of
debt issuance costs and accretion of the discount, is 13.9%. The
notes bear interest at 5.25%.
PNC Bank Credit Facility
On June 30, 2014, two direct and wholly owned subsidiaries of
the Company (the “ModusLink Borrowers”) entered into a
revolving credit and security agreement (as amended, the
“Credit Agreement”), as borrowers and guarantors, with
PNC Bank and National Association, as lender and as agent,
respectively.
The Credit Agreement has a five (5) year term which expires on
June 30, 2019. It includes a maximum credit commitment of
$50.0 million, is available for letters of credit (with a
sublimit of $5.0 million) and has a $20.0 million uncommitted
accordion feature. The actual maximum credit available under the
Credit Agreement varies from time to time and is determined by
calculating the applicable borrowing base, which is based upon
applicable percentages of the values of eligible accounts
receivable and eligible inventory minus reserves determined by the
Agent (including other reserves that the Agent may establish from
time to time in its permitted discretion), all as specified in the
Credit Agreement.
Generally, borrowings under the Credit Agreement bear interest at a
rate per annum equal to, at the ModusLink Borrowers’ option,
either (a) LIBOR (adjusted to reflect any required bank
reserves) for an interest period equal to one, two or three months
(as selected by the ModusLink Borrowers) plus a margin of 2.25% per
annum or (b) a base rate determined by reference to the
highest of (1) the base commercial lending rate publicly
announced from time to time by PNC Bank, National Association,
(2) the sum of the Federal Funds Open Rate in effect on such
day plus one half of one percent (0.5%) per annum, or (3) the
LIBOR rate (adjusted to reflect any required bank reserves) in
effect on such day plus 1.00% per annum. In addition to paying
interest on outstanding principal under the Credit Agreement, the
ModusLink Borrowers are required to pay a commitment fee, in
respect of the unutilized commitments thereunder, of 0.25% per
annum, paid quarterly in arrears. The ModusLink Borrowers are also
required to pay a customary letter of credit fee equal to the
applicable margin on revolving credit LIBOR loans and fronting
fees.
Obligations under the Credit Agreement are guaranteed by the
ModusLink Borrowers’ existing and future direct and indirect
wholly-owned domestic subsidiaries, subject to certain limited
exceptions; and the Credit Agreement is secured by security
interests in substantially all the ModusLink Borrowers’
assets and the assets of each subsidiary guarantor, whether owned
as of the closing or thereafter acquired, including a pledge of
100.0% of the equity interests of each subsidiary guarantor that is
a domestic entity (subject to certain limited exceptions) and 65.0%
of the voting equity interests of any direct first tier foreign
entity owned by either Borrower or by a subsidiary guarantor. The
Company is not a borrower or a guarantor under the Credit
Agreement.
The Credit Agreement contains certain customary negative covenants,
which include limitations on mergers and acquisitions, the sale of
assets, liens, guarantees, investments, loans, capital
expenditures, dividends, indebtedness, changes in the nature of
business, transactions with affiliates, the creation of
subsidiaries, changes in fiscal year and accounting practices,
changes to governing documents, compliance with certain statutes,
and prepayments of certain indebtedness. The Credit Agreement also
contains certain customary affirmative covenants (including
periodic reporting obligations) and events of default, including
upon a change of control. The Credit Agreement requires compliance
with certain financial covenants providing for maintenance of
specified liquidity, maintenance of a minimum fixed charge coverage
ratio and/or maintenance of a maximum leverage ratio following the
occurrence of certain events and/or prior to taking certain
actions, all as more fully described in the Credit Agreement. The
Company believes that the Credit Agreement provides greater
financial flexibility to the Company and the ModusLink Borrowers
and may enhance their ability to consummate one or several larger
and/or more attractive acquisitions and should provide our clients
and/or potential clients with greater confidence in the
Company’s and the ModusLink Borrowers’ liquidity.
During the three months ended April 30, 2018, the Company did
not meet the criteria that would cause its financial covenants to
be applicable. As of April 30, 2018 and July 31, 2017,
the Company did not have any balance outstanding on the PNC Bank
credit facility.
Cerberus Credit Facility
On December 15, 2017, MLGS, a wholly owned subsidiary of the
Company, entered into a Financing Agreement (the “Financing
Agreement”), by and among the MLGS (as the initial borrower),
Instant Web, LLC, a Delaware corporation and wholly owned
subsidiary of IWCO (as “Borrower”), IWCO, and certain
of IWCO’s subsidiaries (together with IWCO, the
“Guarantors”), the lenders from time to time party
thereto, and Cerberus Business Finance, LLC, as collateral agent
and administrative agent for the lenders. MLGS was the initial
borrower under the Financing Agreement, but immediately upon the
consummation of the IWCO Acquisition, as described above, Borrower
became the borrower under the Financing Agreement.
The Financing Agreement provides for $393.0 million term loan
facility (the “Term Loan”) and a $25.0 million
revolving credit facility (collectively, the “Cerberus Credit
Facility”). Proceeds of the Cerberus Credit Facility were
used (i) to finance a portion of the IWCO Acquisition,
(ii) to repay certain existing indebtedness of the Borrower
and its subsidiaries, (iii) for working capital and general
corporate purposes and (iv) to pay fees and expenses related
to the Financing Agreement and the IWCO Acquisition.
The Cerberus Credit Facility has a maturity of five years.
Borrowings under the Cerberus Credit Facility bear interest, at the
Borrower’s option, at a Reference Rate plus 3.75% or a LIBOR
Rate plus 6.5%, each as defined the Financing Agreement. The
initial interest rate under the Cerberus Credit Facility is at the
LIBOR Rate option.
The Term Loan under the Cerberus Credit Facility is repayable in
consecutive quarterly installments, each of which will be in an
amount equal per quarter of $1.5 million and each such
installment to be due and payable, in arrears, on the last day of
each calendar quarter commencing on March 31, 2018 and ending
on the earlier of (a) December 15, 2022 and (b) upon
the payment in full of all obligations under the Financing
Agreement and the termination of all commitments under the
Financing Agreement. Further, the Term Loan would be permanently
reduced pursuant to certain mandatory prepayment events including
an annual “excess cash flow sweep” of 50% of the
consolidated excess cash flow, with a step-down to 25% when the
Leverage Ratio (as defined in the Financing Agreement) is below
3.50:1.00; provided that, in any calendar year, any voluntary
prepayments of the Term Loan shall be credited against the
Borrower’s “excess cash flow” prepayment
obligations on a dollar-for-dollar
Borrowings under the Financing Agreement are fully guaranteed by
the Guarantors and are collateralized by substantially all the
assets of the Borrower and the Guarantors and a pledge of all of
the issued and outstanding equity interests of each of IWCO’s
subsidiaries.
The Financing Agreement contains certain representations,
warranties, events of default, mandatory prepayment requirements,
as well as certain affirmative and negative covenants customary for
financing agreements of this type. These covenants include
restrictions on borrowings, investments and dispositions, as well
as limitations on the ability of the Borrower and the Guarantors to
make certain capital expenditures and pay dividends. Upon the
occurrence and during the continuation of an event of default under
the Financing Agreement, the lenders under the Financing Agreement
may, among other things, terminate all commitments and declare all
or a portion of the loans under the Financing Agreement immediately
due and payable and increase the interest rate at which loans and
obligations under the Financing Agreement bear interest.
On May 9, 2018, IWCO entered into a Waiver and Amendment No.1
to Financing Agreement (the “Amendment No. 1”) in
order to, among other things, amend the definition of “Fiscal
Year” to mean the twelve (12) month period ending on
July 31st of each calendar year for IWCO and its subsidiaries and
to make other related conforming changes to the Financing
Agreement. Amendment No.1 also waived an event of default existing
under the Financing Agreement that resulted from the failure of the
Borrower and the Guarantors to deliver certain financial statements
and an opinion for the Fiscal Year, which, prior to the
effectiveness of Amendment No.1, was based on a year ending on
December 31st of each year. The Company anticipates delivering the
required financial statements and opinion for the “Fiscal
Year” ended July 31, 2018, as now required under the
amended Financing Agreement. There were no events of default under
the Financing Agreement during the three months ended
April 30, 2018 (after giving effect to the above-described
waiver).
During the first quarter of fiscal year 2017, the Company adopted
ASU No. 2015-03.
April 30, 2018
(In thousands)
Principal amount outstanding on the Term Loan $ 391,500
Unamortized debt issuance costs (1,230 )
Net carrying value of the Term Loan $ 390,270 |
