Note 7 - Bank Lines of Credit and Other Debt

9 Months Ended

Sep. 30, 2012

Debt Disclosure [Text Block]

7.             Bank Lines of Credit and Other Debt

The Company’s bank lines of credit, long-term debt, long-term capital leases and outstanding letters of credit were as follows (in thousands):

	September 30, 2012		December 31, 2011
Bank lines of credit	$	5,323	$	9,716
Long-term debt		148		398
Long-term capital leases		221		0
Total bank lines of credit, long-term debt and long-term capital leases	$	5,692	$	10,114
Outstanding letters of credit, not included above	$	294	$	280

Bank Lines of Credit

Outstanding bank lines of credit were as follows (dollars and Euros in thousands):

	September 30, 2012		December 31, 2011
Secured Variable Rate Lines of Credit with Financial Institutions:
Credit Facility of $35,000 at an interest rate of 4.50% at September 30, 2012, due April 23, 2016 (1)	$	0	$	0
Bank line of credit of $21,000 at an interest rate of 2.69% at December 31, 2011, due July 1, 2013 (2)		0		9,716
Facility of €4,000, or approximately $5,141, at September 30, 2012, at an interest rate of 0.98%, due December 31, 2012 and approximately $5,182, at December 31, 2011, at an interest rate of 2.13%, due December 31, 2012 (3)		5,323		0
Facilities of €1,200, or approximately $1,542, at September 30, 2012, at interest rates ranging from 1.42% to 2.60%, due December 31, 2012 and facilities of €1,000, or approximately $1,296, at December 31, 2011, at interest rates ranging from 2.56% to 3.12%, due December 31, 2011 (3) (4)		0		0
Total bank lines of credit	$	5,323	$	9,716
Outstanding letters of credit, not included above	$	294	$	280

(1) Secured by all assets of K•Swiss Inc., K•Swiss Sales Corp. and K•Swiss Direct Inc.  The amount available to borrow on this line of credit at September 30, 2012 was $19,162.  See further discussion below.

(2) Fully secured by cash (or the Company’s restricted cash and cash equivalents and restricted investments available for sale, see Note 3).  This facility was fully paid off on April 25, 2012.  See further discussion below.

(3) These lines of credit are secured by Palladium’s assets including accounts receivable and/or intellectual property rights (i.e. trademarks), as well as Palladium common stock.

(4) These lines of credit are renewable every six months.

On April 25, 2012, the Company and two of its subsidiaries, K•Swiss Sales Corp. and K•Swiss Direct Inc. (collectively with the Company, the “Borrowers”) entered into a Credit Agreement (the “Credit Facility”) with Wells Fargo Bank, National Association and Wells Fargo Capital Finance, LLC (collectively as “Wells Fargo” or the “Lenders”).  The Credit Facility consists of revolving loans of up to $35,000,000 (subject to the limitations described below) available in U.S. Dollars, Euro and Pound Sterling, and up to $5,000,000 of which may be drawn in the form of letters of credit.  The Credit Facility matures April 23, 2016.

Loans made under the Credit Facility bear interest at:

(1) the greatest of (i) the Federal Funds Rate plus 0.5%, (ii) the LIBOR Rate plus 1%, and (iii) Wells Fargo’s prime rate (the “Base Rate”); or

(2) the rate per annum appearing on Bloomberg L.P.’s Page BBAM1/Official BBA USD Dollar Libor Fixings two Business Days prior to the commencement of the requested Interest Period, for a term and in an amount comparable to the interest period and the amount requested (the “LIBOR Rate”); or

(3) for loans made in Euros or Pound Sterling, the LIBOR Rate;

plus, in each case, the “Applicable Margin.”

If the average use of the Credit Facility is less than 50% of the Maximum Revolver Amount (as defined below) during the previous fiscal quarter, the Applicable Margin is 1.25% for Base Rate loans, 2.25% for U.S. Dollar LIBOR Rate loans, and 3.00% for loans made in Euros or Pound Sterling.  If the average use of the Credit Facility is more than 50% of the Maximum Revolver Amount, the Applicable Margin is 1.50% for Base Rate loans, 2.50% for U.S. Dollar LIBOR Rate loans, and 3.25% for loans made in Euros or Pound Sterling.

The “Maximum Revolver Amount” is $35,000,000; provided that the amount of revolving loans and letters of credit under the Credit Facility may not exceed (a) 85% of Eligible Accounts (as defined in the Credit Facility) plus the lesser of (i) 85% of Eligible Accounts that are Extended Pay Accounts (as defined in the Credit Facility) and (ii) $1,500,000 (minus any dilution reserve), plus (b) the lesser of (i) $20,000,000 or (ii) an amount equal to (x) the lesser of (1) 65% of Eligible Inventory or (2) 85% of Net Recovery Percentage (each as defined in the Credit Facility), minus (y) a reserve of $3,500,000 and any other reserves established by Wells Fargo in its permitted discretion.

The financial covenants contained in the Credit Facility are as follows (in each case, with respect to the Company and its subsidiaries on a consolidated basis):

· The Company must achieve Minimum EBITDA specified in the Credit Facility for each month through November 30, 2013.

· The Company must maintain a Fixed Charge Coverage Ratio for each twelve month fiscal period, commencing for the fiscal period ending on December 31, 2013, of not less than 1.0:1.0.

· The Company must limit Capital Expenditures for each fiscal year to $2,400,000, except with the Lender’s consent.

These financial covenants apply on the date that Excess Availability (as defined in the Credit Facility) has fallen below 20% of the Maximum Revolver Amount and ends on the date that Excess Availability has been greater than 20% of the Maximum Revolver Amount for any period of thirty consecutive days thereafter.

The obligations of the Borrowers under the Credit Facility are guaranteed by four of the Company’s other domestic subsidiaries (the “Guarantors”) pursuant to a Guaranty and Security Agreement, dated April 25, 2012 (the “Guaranty and Security Agreement”).  Pursuant to the Guaranty and Security Agreement, the Borrowers and the Guarantors pledged substantially all of their respective assets as collateral security for the loans to be made pursuant to the Credit Facility.  The foreign subsidiaries of the Borrowers did not guaranty the Credit Facility or pledge any of their directly-owned assets.  The Company has also granted a security interest in its real property to the Lenders, consisting of a deed of trust securing its corporate headquarters building.

The Credit Facility contains other certain affirmative and negative covenants, as well as event of default provisions.  The affirmative covenants include certain reporting requirements, maintenance of properties, payment of taxes and insurance, compliance with laws, environmental compliance, and other provisions customary in such agreements.  Negative covenants limit or restrict, among other things, dividends, secured and unsecured indebtedness, mergers and fundamental changes, asset sales, investments and acquisitions, liens and encumbrances, transactions with affiliates, redemption distributions to former employees, officers or directors, and other matters customarily restricted in such agreements.

Wells Fargo and its affiliates are permitted to make loans to, issue letters of credit, accept deposits, provide Bank Products (as defined in the Credit Facility) to, acquire equity interests in, and generally engage in any kind of banking, trust, financial advisory, underwriting, or other business with the Company, its subsidiaries and affiliates.

At September 30, 2012, the Company was in compliance with its covenants under the Credit Facility.

On April 25, 2012, the Company drew down approximately $9,924,000 under the Credit Facility to repay in full all indebtedness outstanding under its previous line of credit with Bank of America and to pay fees and expenses related to the Credit Facility. The Company intends to utilize the Credit Facility for working capital, to issue letters of credit in connection with purchases of inventory and other general corporate purposes.

Long-term Debt

Long-term debt outstanding were as follows (dollars and Euros in thousands):

	September 30, 2012		December 31, 2011
Secured Fixed Rate Term Loans with Financial Institutions of €800, or approximately $1,028, at September 30, 2012, at an interest rate of 5.42%, due February 2013 and €1,320, or approximately $1,710, at December 31, 2011, with interest rates ranging from 5.42% to 5.84%, due between February 2012 and February 2013 (1)	$	147	$	394
Accrued interest		1		4
Total long-term debt	$	148	$	398
Current portion of long-term debt	$	148	$	250
Long-term debt	$	0	$	148

(1) These are secured by Palladium’s assets including accounts receivable and/or intellectual property rights (i.e. trademarks), as well as Palladium common stock.

Long-term Capital Leases

Long-term capital leases outstanding were as follows (dollars in thousands):

	September 30, 2012
Capital leases for information systems, with interest rates ranging from 2.01% to 5.05%, due between June 2014 and December 2016	$	221
Current portion of long-term capital leases	$	82
Long-term capital leases	$	139
Leased property – Information systems, net	$	273

Interest expense

Interest expense incurred on the Company’s bank loans, lines of credit and capital leases and amortization of loan origination costs on the Wells Fargo credit facility were as follows (in thousands):

	Nine Months Ended September 30,				Three Months Ended September 30,
	2012		2011		2012		2011
Interest expense	$	200	$	177	$	60	$	106