On December 16, 2009, the Company entered into a credit agreement with Wells Fargo under which the Company may borrow up to $30.0 million or up to $40.0 million if it can satisfy certain defined criteria, on a revolving basis (the “Credit Agreement”).  All borrowings under the Credit Agreement are secured by a first lien on all of the Company’s assets.  The Company’s ability to draw on the credit line is limited to an amount equal to 80% of “eligible accounts receivable” and 80% of “eligible inventory” as defined in the Credit Agreement.  In connection with each draw down, the Company has an option to choose either a “Base Rate” or “Eurodollar” loan.  Interest on Base Rate Loans is payable quarterly and interest on Eurodollar Loans is generally payable monthly or quarterly as selected by the Company.  The annual rate of interest payable on Base Rate and Eurodollar loans fluctuate depending upon a number of factors, as described in the Credit Agreement.  At June 30, 2012, all outstanding borrowings under the credit facility were accruing interest at the rate of 2.51% per annum.  The Credit Agreement matures on July 30, 2013.

 

The Credit Agreement contains customary negative covenants restricting the Company’s ability to take certain actions without Wells Fargo’s consent, including incurring additional indebtedness, transferring or encumbering assets, paying dividends or making certain other payments, and acquiring other businesses.  If there is an “event of default”, including failure to pay, bankruptcy, breach of covenants and breach of representations and warranties, all amounts outstanding under the Credit Agreement will become immediately due and payable.  In addition, the Company must maintain certain financial covenants on a quarterly basis.

 

At June 30, 2012, approximately $20.6 million was outstanding under the credit facility out of a maximum availability of approximately $22.0 million based on the borrowing formula.

 

 

In connection with the Credit Agreement, the Company terminated an Interest Swap Agreement (“ISA”) it had with its previous lender and, consequently, discontinued hedge accounting as of December 16, 2009.  The Company incurred interest expense commensurate with its original, hedged risk.   The realized losses related to the ISA was not recognized immediately and was in accumulated other comprehensive income (loss).  These losses are reclassified into interest expense over the original contractual term of the ISA starting as of December 16, 2009 through July 5, 2012.