FINANCING OBLIGATIONS

9 Months Ended

Sep. 30, 2012

Financing Obligations [Abstract]

FINANCING OBLIGATIONS

2.       FINANCING OBLIGATIONS

The Company has a revolving credit facility (the “Credit Facility”) with Wells Fargo, N.A. (the “Bank”) which has a maximum borrowing limit of $15.0 million.  The Credit Facility is used to fund the Company’s capital expenditures, operational working capital and seasonal working capital needs.  The Credit Facility was renewed on March 27, 2009 when the Company entered into a Fourth Amended and Restated Loan and Security Agreement with the Bank, setting forth the new terms of the Credit Facility.  The Credit Agreement has been further amended by the First, Second and Third Amendments on May 14, 2010, March 30, 2011 and March 29, 2012, respectively.  The Third Amendment to the Credit Facility (the “Third Amendment”) provided for a $1.8 million equipment 5 year term loan (the “Equipment Loan”) as part of the $15.0 million borrowing limit. The amended Credit Agreement includes a maturity date of June 30, 2013 and continues the Bank’s security interest in all of the Company’s assets.  As of September 30, 2012 the Equipment Loan had a balance of $1.7 million and there was no advance under the Credit Facility.

Interest on borrowings pursuant to the Credit Facility is payable monthly at specified rates of either, at the Company’s option, the Base Rate (as defined in the Credit Facility) plus between 2.00% and 2.50%, or the LIBOR Rate (as defined in the Credit Facility) plus between 3.00% and 3.50%, in each case with the applicable margin depending on the Company’s Average Excess Availability (as defined in the Credit Facility).  Interest on amounts advanced to the Company on the 2012 Equipment Loan is payable monthly at specified rates of either, at the Company’s option, the Base Rate (as defined in the Credit Facility) plus 3.00%, or the LIBOR Rate (as defined in the Credit Facility) plus 4.00%.  The Company pays a specified fee on undrawn amounts under the Credit Facility which fee was one-half of one percent, or 0.5% on and before March 30, 2011, the date of Second Amendment to the Credit Agreement, and is three quarters of one percent, or 0.75% thereafter.  After an event of default, all loans will bear interest at the otherwise applicable rate plus 2.00% per annum.

The Credit Facility contains financial, affirmative and negative covenants by the Company as are usual and customary for financings of this kind which can result in the acceleration of the maturity of amounts borrowed under the Credit Facility, including, without limitation, a restriction on cash dividends, a change in ownership control covenant, a subjective material adverse change covenant and financial covenants.  The financial covenants include an annual capital expenditure limit, a minimum excess availability limit and a fixed charge ratio covenant.   The provisions of the Credit Facility require that the Company maintain a lockbox arrangement with the Bank, and allows the Bank to declare any outstanding borrowings to be immediately due and payable as a result of noncompliance with any of the covenants.  Accordingly, in the event of noncompliance, the Company’s payment obligations with respect to such borrowings could be accelerated.  Therefore, amounts outstanding on the Company’s Credit Facility and any amounts outstanding on the Equipment Loan are classified as current liabilities.  As of September 30, 2012, the Company was in compliance with all terms of the Credit Facility.

The Third Amendment was entered into on March 29, 2012 to i) increase the annual capital expenditure limit for 2012 to $6.0 million as required by the Company to invest in equipment for an eighth fulfillment facility, in Groveport, Ohio, required to support new business, ii) include up to $1.8 million of fulfillment equipment owned by the Company as collateral under the Credit Facility, iii) advance $1.8 million under a five year Equipment Loan to partially fund equipment purchased for the new Groveport facility, and; iv) reset requirements of the excess availability block (the “Availability Block”), representing the amount of collateral held by the Company before any advances can be made on the Credit Facility, to depend upon the Company obtaining specific fixed charge ratio (as defined in the Credit Facility) values.  As a result of the Third amendment, the Availability Block is set at $4.0 million until which time i) the Company reports a twelve month trailing fixed charge ratio of at least 1.1 resulting in the Availability Block being reduced to $3.0 million or ii) the Company reports a trailing twelve month fixed charge ratio for three consecutive months of at least 1.2 and simultaneously projects exceeding a fixed charge ratio of at least 1.2 for the immediately upcoming three consecutive months resulting in the Availability Block to be reduced to $2.5 million.

During the three months ended September 30, 2012, the Company estimated that capital expenditures for the twelve months ended December 31, 2012 required to support new business would exceed the $6.0 million limit.  Based on this estimate and the Company’s discussions with the Bank, the limit was raised to $6.4 million for 2012.  Additionally, in September, the Company reported a twelve month trailing fixed charge ratio of greater than 1.1 resulting in the Availability Block being reduced to $3.0 million as provided by the Third amendment. The Company expects the fixed charge ratio to remain above 1.1 for the remainder of 2012.

Although the maximum borrowing limit was $15.0 million at September 30, 2012, the Credit Facility limits borrowings to the value of total collateral under the Credit Facility calculated as the sum of i) a specified percentage of eligible accounts receivable and inventory, which totaled $14.1 million at September 30, 2012 and ii) the value, as determined by an independent appraiser, of selected fulfillment equipment owned by the Company.  As provided by the Third Amendment, the value of the equipment included as collateral supporting the Equipment Loan at any future date will be reduced simultaneously with each monthly payment.   Additionally, the terms of the Credit Facility provide that the amount borrowed and outstanding at any time combined with certain reserves for rental payments, letters of credit outstanding and Availability Block be subtracted from the Credit Facility limit or the value of the total collateral to arrive at an amount of unused availability to borrow.  Also, from time to time, as determined as necessary by the Bank, the value of the equipment included as collateral can be adjusted as an independent appraisal of that equipment may require.  The Equipment Loan was fully advanced in June 2012 and will be paid back in 60 equal $30,000 monthly payments with an equal offsetting monthly reduction in the value of the selected fulfillment equipment included as collateral under the Credit Facility.

At September 30, 2012, three monthly payments had been made on the Equipment Loan resulting in a remaining loan balance of $1.7 million.  Excluding the $1.7 million of equipment supporting the Equipment Loan, the total collateral under the Credit Facility at September 30, 2012 amounted to $14.1 million.  Excluding the Equipment Loan, there were no amounts borrowed under the Credit Facility at September 30, 2012, however the value of reserves, letters of credit and Availability Block at that date totaled $4.2 million.  As a result, the Company had $9.9 million of borrowing availability under the Credit Facility at September 30, 2012.

The Company has entered into various capital leases mainly for the purchase of fork lift trucks, computer technology equipment and computer software.  These capital leases have a term of 3 years.  The amortization of these assets is included in depreciation expense.  The total amount of remaining lease payments to be paid on capital leases, including interest and taxes, was $1.2 million and $606,000 at September 30, 2012 and December 31, 2011 respectively.  For the three months ended September 30, 2012, the Company repaid $105,000 of principal outstanding and $25,000 of interest expense related to capital leases.  For the three months ended September 30, 2011, the Company repaid $71,000 of principal outstanding and $3,000 of interest expense related to capital leases.  For the nine months ended September 30, 2012, the Company repaid $321,000 of principal outstanding and $52,000 of interest expense related to capital leases.  For the nine months ended September 30, 2011, the Company repaid $212,000 of principal outstanding and $14,000 of interest expense related to capital leases.

For both the three months ended September 30, 2012 and September 30, 2011, we recorded less than $1,000 of interest expense on the Credit Facility, at a weighted average interest rate of 3.27% for the three months ended September 30, 2012 and a weighted average interest rate of 3.23% for the three months ended September 30, 2011.  The rate of interest being charged on the Credit Facility at September 30, 2012 was 3.21%.  The Company also incurred unused Credit Facility fees of approximately $23,000 and $27,000 for the three months ended September 30, 2012 and 2011 respectively, which unused Credit Facility fees are included in the total interest expense of $90,000 and $44,000 for the three months ended September 30, 2012 and 2011 respectively.

For the nine months ended September 30, 2012, we recorded interest expense of $7,000 on the Credit Facility at a weighted average interest rate of 3.28%.  For the nine months ended September 30, 2011, we recorded interest expense of $7,000 on the Credit Facility at a weighted average interest rate of 3.14%.  The Company also incurred unused Credit Facility fees of approximately $75,000 and $69,000 for the nine months ended September 30, 2012 and 2011 respectively, which unused Credit Facility fees are included in the total interest expense of $212,000 and $138,000 for the nine months ended September30, 2012 and 2011 respectively.