Note 7 – Borrowings

In August 2010, the Company executed a Loan and Security Agreement (the "Loan Agreement") and other definitive documentation for a $35 million secured credit facility (the "Facility"). Silicon Valley Bank ("Bank") is the lender under the Facility. The Facility is comprised of a term loan in the original principal amount of $25 million and a revolving line of credit with availability up to $10 million. The Facility has a final maturity date of June 30, 2014, and borrowings under the Facility bear interest, at the election of the Company, at LIBOR (with a floor of 1.25%) plus a margin of from 2.00% to 3.00% per annum, or at the Wall Street Journal Prime Rate plus a margin of from 1.00% to 2.00% per annum, based upon the Company's maximum funded debt ratio. An unused revolving line fee of 0.375% per annum is payable on the undrawn committed amount of the revolving line of credit. Interest on outstanding borrowings under the term loan and the revolving line of credit is payable no less than quarterly and the outstanding principal of the term loan is amortized over four years and payable quarterly, with any outstanding amount under the Facility to be paid in full on the final maturity date. Borrowings under the Facility are secured by liens over all assets of the Company, including shares of stock in each of the Company's subsidiaries. Ten of the Company's subsidiaries are acting as co-borrowers under the Facility.

The Loan Agreement requires the Company to comply with a number of restrictive covenants, including financial covenants related to maximum funded debt to consolidated EBITDA, liquidity, and consolidated fixed charge coverage ratios; negative pledge requirements; requirements to deliver quarterly and annual consolidated financial statements; requirements to maintain adequate insurances; prohibitions on changes in the business and disposition of the Company's assets; and other customary covenants. The Loan Agreement also requires the Company to obtain a prior written consent from the Bank when the Company determines to pay any dividends on or make any distribution related to its common stock. The Loan Agreement includes usual and customary events of defaults and remedies for facilities of this nature. In February and October 2011, the Company and the Bank entered into Amendment No. 1 and Amendment No. 2, respectively, to Loan and Security Agreement and Limited Waiver (collectively, the "Amendments"). The Amendments waived the Company's lack of compliance with the consolidated fixed charge ratio covenant in the Loan Agreement as of January 1, 2011 and October 1, 2011 to more readily accommodate the Company's integration of the WAG acquisition. In December 2011, the Company and the Bank entered into Amendment No. 3 to Loan and Security Agreement, to amend the Loan Agreement, as amended (the "Third Amendment"). The Third Amendment amends the Company's permitted indebtedness to allow debt to certain other banks in connection with a vendor purchasing card program in an aggregate amount not to exceed $2,500,000 at any one time outstanding.

 

As of January 1, 2011, the required consolidated fixed charge coverage ratio was 1.10:1.00 and the Company's consolidated fixed charge coverage ratio was 0.60:1.00. For purposes of calculating the consolidated fixed charge coverage ratio, the Amendment No. 1 amended the definition of "Consolidated EBITDA" to allow the Company to add back restructuring costs and transaction fees and expense related to the WAG acquisition to the extent paid on or before June 30, 2011 in an amount not to exceed $5,000,000 in the aggregate for the fourth quarter ending January 1, 2011 and three consecutive fiscal quarters thereafter to the extent paid during such periods. As amended, the Company's consolidated fixed charge coverage ratio was 1.25:1.00 and was in compliance.

As of October 1, 2011, the required consolidated fixed charge coverage ratio was 1.25:1.00 and the Company's consolidated fixed charge coverage ratio was 0.92:1.00. For purposes of calculating the consolidated fixed charge coverage ratio, the Amendment No. 2 amended the definition of "Consolidated EBITDA" to allow the Company to add back restructuring costs and transaction fees and expenses related to the WAG acquisition to the extent paid in the four consecutive fiscal quarters ended October 1, 2011. As amended, the Company's consolidated fixed charge coverage ratio was 1.80:1.00 and was in compliance.

As of December 31, 2011, the Loan Agreement, as amended, contains the following remaining financial covenant requirements:

 

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Maximum funded debt to consolidated EBITDA. A ratio of aggregate credit extensions outstanding to trailing 12 month consolidated EBITDA of not greater than the following:

 

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1.50:1.00 for quarters ending October 1, 2011 through June 30, 2012

 

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1.00:1.00 for each quarter ending thereafter

 

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Consolidated fixed charge coverage ratio of not less than the ratio set forth below:

 

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1.25:1.00 for quarters ending July 2, 2011, October 1, 2011 and December 31, 2011

 

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1.50:1.00 for each quarter ending thereafter (refer to March 2012 amendment below)

 

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Liquidity as follows:

 

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Unrestricted cash and cash equivalents minus outstanding advances of at least $7,500,000.

 

For the quarter ended December 31, 2011, the Company was in compliance with all covenants, as amended, under the Loan Agreement. The Company's financial covenant ratios under the Loan Agreement as of December 31, 2011, as amended, were 1.21 for maximum funded debt to consolidated EBITDA and 1.32 for consolidated fixed charge coverage. As of December 31, 2011, the Company's liquidity was $11,460,000.

During March 2012, the Company determined it was probable that the consolidated fixed charge coverage ratio would not be in compliance with the required 1.50:1.00 minimum level for the quarter ending March 31, 2012. This determination was made during the Company's monitoring of their covenants, which includes monthly calculations of "Consolidated EBITDA" projected to quarter end. As a result, on March 23, 2012, the Company and the Bank entered into Amendment No. 4 to Loan and Security Agreement (the "Fourth Amendment"). The Fourth Amendment reduced the required consolidated fixed charge coverage ratio to a minimum of 1.00:1:00 for the one quarter ending March 31, 2012 and to 1.25:1.00 for each quarter ending thereafter. Based on the current covenant calculations, the Company's consolidated fixed charge coverage ratio is projected to be in compliance as of March 31, 2012. All financial covenants are expected to be in compliance as of March 31, 2012 and through the remainder of fiscal 2012.

The Company expects to be in compliance with the financial covenants, as amended, in the Loan Agreement through the remaining term of the Loan Agreement, however, it is possible that a breach of the financial covenants may occur in the future, should the Company's forecasted EBITDA levels not be achieved. If the Company breaches any of the covenants under the Loan Agreement and is unable to obtain waivers from the Bank, the Bank will be able to exercise their rights and remedies under the Loan Agreement, including a call provision on outstanding debt, which would have a material adverse effect on the Company's business and financial condition.

At December 31, 2011, the LIBOR rate and the margin were 1.25% (floor rate) and 2.50% per annum, respectively. The Company had no borrowings on the revolving line of credit at December 31, 2011. The remaining term loan balance was $17.9 million as of December 31, 2011 and is to be repaid according to the following schedule (in thousands):

 

Payments Due by Period
Total				2012				2013				2014
	$    17,875			$	6,250			$	6,875			$	4,750

Based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the fair value of our long-term debt under the Facility approximated its carrying amount as of December 31, 2011.

As of December 31, 2011, the Company had a capital lease obligation of $172,000. See "Note 12 – Commitments and Contingencies" for further detail.