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Derivative Instruments
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Jun. 30, 2011
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| Derivative Instruments [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| DERIVATIVE INSTRUMENTS |
The Company is subject to interest rate risk to the extent we borrow against credit
facilities with variable interest rates as described above. The Company has potential
interest rate exposure with respect to the $33.0 million outstanding balance on our variable
rate term loan. During January 2011, the Company reduced its exposure to changes in
interest rates by entering into an interest rate swap agreement (“Swap”) with Wells Fargo
Bank, N.A., which became effective on April 1, 2011. The Swap contract exchanges a floating
rate for fixed interest payments periodically over the life of the Swap without exchange of
the underlying $20.0 million notional amount. The interest payments under the Swap are
settled on a net basis. The notional amount of the Swap is used to measure interest to be
paid or received and does not represent the amount of exposure to credit loss. Our credit
risk related to the Swap is considered low because the agreement is with a creditworthy
financial institution. The Company does not hold or issue derivative financial instruments
for trading purposes.
The Swap became effective April 1, 2011 and continues through April 1, 2016. The Company
will pay interest at a fixed rate of 1.9% on the notional amount of $20.0 million, which
will be reduced by $1.0 million quarterly in July, October, January and April of each
year. The terms of the interest rate swap agreement also require Wells Fargo Bank to pay
based upon the variable LIBOR rate. The net interest payments, based on the notional
amount, will match the timing of the related liabilities. The Swap is not designated as a
hedge for accounting purposes under ASC Topic 815, “Derivatives and Hedging.” The Company
recognized the derivative as a liability on the balance sheet and is included in long-term
debt, and marked the derivative to fair value through the income statement income as a fair
value adjustment of the derivative. During the quarter ended June 30, 2011, the Company
paid interest on the hedged portion of the debit ($20 million) at a net rate of 8.65%, and
paid interest on the non-hedged portion of the debt ($13 million) at rate of 7.0%.
The following table presents the historical fair value of the interest rate swaps recorded
in the accompanying condensed consolidated balance sheets as of June 30, 2011. The Company
had no interest swap agreements during the fiscal year ended December 31, 2010.
Fair Value
Fair value approximates the amount we would pay if these contracts were settled at the
respective valuation dates. Fair value is recognized based on estimates provided by Wells
Fargo Bank, which are based upon current, and predictions of future, interest rate levels
along a yield curve, the remaining duration of the instruments and other market conditions,
and therefore, is subject to significant estimation and a high degree of variability and
fluctuation between periods. The fair value is adjusted, to reflect the impact of credit
ratings of the counterparties or the Company, as applicable. These adjustments resulted in a
reduction in the fair values as compared to their settlement values.
The net effect of our floating-to-fixed interest rate swap resulted in an increase in
interest expense of $82,500 for the three and six months ended June 30, 2011, as compared to
the contractual rate of the underlying hedged debt for the period. During the three and six
months ended June, 30, 2011, due to the derivative not being designated as a hedging
instrument, we recognized a loss on the change in the fair value of the swap of $350,343.
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