Derivative Instruments

12. Derivative Instruments.

The Company utilizes derivative financial instruments to manage interest rate risk. The Company does not use derivative financial instruments for trading or speculative purposes, nor does it use leveraged financial instruments. The Company reports its derivative instruments separately as assets and liabilities unless a legal right of set-off exists under a master netting agreement enforceable by law. The Company's derivative instruments are recorded at their fair value, and are included in other long-term liabilities and other liabilities in the Consolidated Balance Sheets.

On May 2, 2007, the Company entered into a transaction with a financial institution to fix the underlying interest rate on $73.0 million of its then outstanding bank loan for a period of two years beginning June 30, 2007 (the 2007 Interest Rate Swap). This transaction essentially fixed the Company's base borrowing rate at 4.9425 percent as opposed to a floating rate, which reset at selected periods. On June 30, 2009, the 2007 Interest Rate Swap expired in accordance with the terms of the agreement, thus there was no related fair value measurement as of December 31, 2010 or December 31, 2009. The Company recorded a gain of $1.3 million for the year ended December 31, 2009 for the change in fair value of the 2007 Interest Rate Swap. The 2007 Interest Rate Swap was not designated as a hedging instrument for accounting purposes.

Effective July 1, 2009, pursuant to terms of the amended credit agreement, the Company entered into an interest rate cap contract, in order to mitigate the interest rate risk. The interest rate cap contract was for a notional amount of $51.0 million with a one-month LIBOR cap of 3.0 percent for a term of one year and expired on July 1, 2010, thus there was no related fair value measurement as of December 31, 2010. As this agreement was not designated as a hedging instrument, changes in the fair value of this agreement increased or decreased interest expense.

On February 18, 2011, the Company entered into an interest rate swap agreement to hedge a portion of its interest rate exposure on its senior secured debt (the 2011 Interest Rate Swap). The 2011 Interest Rate Swap has a notional amount of $25.0 million and fixes a portion of the Company's base borrowing rate, which is a floating rate based on a LIBOR swap rate that resets periodically. The 2011 Interest Rate Swap was designated as a hedging instrument for accounting purposes and is accordingly accounted for as a cash flow hedge. Any unrealized losses on the 2011 Interest Rate Swap agreement are included in accumulated other comprehensive income until the periodic interest settlements occur, at which time they will be recorded as interest expense in the Consolidated Statements of Operations and Comprehensive Income (Loss). The Company expects to reclassify losses of $0.3 million (pretax) from accumulated other comprehensive income to interest expense in the Consolidated Statements of Operations and Comprehensive Income (Loss) within the next twelve months.

As a result of the use of derivative instruments, the Company is exposed to risk that the counterparties will fail to meet their contractual obligations. To mitigate the counterparty credit risk, the Company only enters into contracts with carefully selected major financial institutions based upon their credit ratings and other factors, and continually assesses the creditworthiness of counterparties. As of December 31, 2011, the counterparty to the 2011 Interest Rate Swap had investment grade ratings and has performed in accordance with their contractual obligations.

The fair values of derivative instruments in the Consolidated Balance Sheets are as follows (in thousands):

Derivative designated as hedging instrument under ASC 815
Derivative designated as hedging instrument under ASC 815	Balance Sheet Classification	December 31, 2011	December 31, 2010
2011 Interest Rate Swap - current portion	Other liabilities	$ 310	$ -
2011 Interest Rate Swap - long-term portion	Other long-term liabilities	298	-
		$ 608	$ -

The following tables reflect the effect of derivative instruments on the Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2011, 2010 and 2009 (in thousands):

Derivatives in Cash Flow Hedging Relationships	Amount of Gain(Loss) Recognized in Accumulated Other Comprehensive Income on Derivative, net of tax

	Year Ended December 31,
	2011	2010	2009
2011 Interest Rate Swap	$ (380)	$ -	$ -

		Amount of Gain/Loss Reclassified from Accumulated Other Comprehensive Income into Income
Derivatives in Cash Flow Hedging Relationships	Location of Gain/Loss Reclassified from Accumulated Other Comprehensive Income into Income	Year Ended December 31,
		2011	2010	2009
2011 Interest Rate Swap	Interest expense	$ 310	$ -	$ -

The following table reflects the effect of derivative instruments on the Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2011, 2010, and 2009 (in thousands):

		Amount of Gain/Loss Recognized in Income on Derivative
Derivates Not Designated as Hedging Instruments	Location of Gain/Loss Recognized in Income on Derivate	Year Ended December 31,
		2011	2010	2009
2007 Interest Rate Swap	Interest expense	$ -	$ -	$ 1,345
Interest rate cap	Interest expense	$ -	$ -	$ -