Debt and Leases

Long-term debt consists of the following at:



	December 31, 2018			December 31, 2017
Term loans payable, interest at a variable rate (4.34% at December 31, 2018) with monthly payments of interest and quarterly payments of principal through January 2023.	$	41,625,000		$	—
Term loan payable to Key Bank, interest at a variable rate (3.36% at December 31, 2017)	—			6,750,000
Revolving loans, interest at a variable rate (4.39% at December 31, 2018)	17,375,000			—
Total	59,000,000			6,750,000
Less deferred loan costs	(611,000		)	—
Less current portion	(3,230,000		)	(3,000,000		)
Long-term debt	$	55,159,000		$	3,750,000

Credit Agreement

On January 16, 2018, the Company entered into an A/R Credit Agreement with KeyBank National Association as administrative agent and various financial institutions party thereto as lenders (the "Lenders"). Pursuant to the terms of the A/R Credit Agreement (i) the Company may borrow revolving loans in the aggregate principal amount of up to $40,000,000 (the “US Revolving Loans”) from the Lenders and term loans in the aggregate principal amount of up to $32,000,000 from the Lenders, (ii) the Company's wholly-owned subsidiary, Horizon Plastics International, Inc., (the "Subsidiary") may borrow revolving loans in an aggregate principal amount of up to $10,000,000 from the Lenders (which revolving loans shall reduce the availability of the US Revolving Loans to the Company on a dollar-for-dollar basis) and term loans in an aggregate principal amount of up to $13,000,000 from the Lenders, (iii) the Company obtained a Letter of Credit Commitment of $250,000, of which $160,000 has been issued and (iv) the Company repaid the outstanding term loan balance of $6,750,000. The Credit Agreement is secured by a guarantee of each U.S. and Canadian subsidiary of the Company, and by a lien on substantially all of the present and future assets of the Company and its U.S. and Canadian subsidiaries, except that only 65% of the stock issued by Corecomposites de Mexico, S. de R.L. de C.V. has been pledged.

Concurrent with the closing of the A/R Credit Agreement the Company borrowed the $32,000,000 term loan and $2,000,000 from the US Revolving loan and the Subsidiary borrowed the $13,000,000 term loan and $2,500,000 from revolving loans to provide $49,500,000 of funding for the acquisition of Horizon Plastics.

On March 14, 2019, the Company entered into the first amendment (“First Amendment”) to the A/R Credit Agreement with the Lenders. Pursuant to the terms of the First Amendment, the Company and Lenders agreed to modify certain terms of the A/R Credit Agreement. These modifications included (1) implementation of an availability block on the U.S. Revolving Loans reducing availability from $40,000,000 to $32,500,000, (2) modification to the definition of EBITDA to add back certain one-time expenses, (3) waiver of non-compliance with the leverage covenant as of December 31, 2018 and modification of the leverage ratio definition and covenant to eliminate testing of the leverage ratio until December 31, 2019, (4) waiver of non-compliance with the fixed charge covenant as of December 31, 2018 and modification of the fixed charge coverage ratio definition and covenant requirement, (5) implementation of a capital expenditure spend limit of $7,500,000 during the first six months of 2019 and $12,500,000 for the full year 2019, (6) an increase of the applicable interest margin spread for existing term and revolving loans, and (7) an increase in the commitment fees on any unused U.S. Revolving Loans.

Term Loans

The $45,000,000 Term Loans were used to finance the acquisition of Horizon Plastics. This commitment has fixed quarterly principal payments payable over a five-year period. Borrowings made pursuant to these loans bear interest, payable monthly at 30 day LIBOR plus a basis point margin spread from 175 to 225 based on the Company's leverage ratio and was set at 200 basis points as of December 31, 2018. Effective March 14, 2019, upon entering into the First Amendment, the margin spread was changed to a range from 175 to 400 basis points based on the Company's leverage ratio. As of March 14, 2019, the applicable spread was set at 275 basis points.

A $15,500,000 Term Loan was used to finance the acquisition of CPI in 2015. This commitment had fixed monthly principal payments payable over a five-year period. Borrowings made pursuant to this loan had interest, payable monthly at 30 day LIBOR plus 180 basis points. The Company repaid the outstanding balance of $6,750,000 upon closing of the A/R Credit Agreement.

Revolving Loans

The Company has available $40,000,000, which was reduced to $32,500,000 effective March 14, 2019 upon entering into the First Amendment, of variable rate revolving loans of which $17,375,000 is outstanding as of December 31, 2018. These revolving loans are scheduled to mature in January 2023, and are classified as long term on the balance sheet. Borrowings made on the revolving loans bear interest, payable monthly at 30 day LIBOR plus a basis point margin spread from 175 to 225 based on the Company's leverage ratio and was set at 200 basis points as of December 31, 2018. Effective March 14, 2019, upon entering into the First Amendment, the margin spread was changed to a range from 175 to 400 basis points based on the Company's leverage ratio. As of March 14, 2019, the applicable spread was set at 275 basis points.

Annual maturities of long-term debt are as follows:



2019	$	3,375,000
2020	4,500,000
2021	5,625,000
2022	5,625,000
2023 and Thereafter	22,500,000
Total	$	41,625,000

Interest Rate Swaps

The Company entered into two interest rate swap agreements that became effective January 18, 2018 and continue through January 2023, one of which was designated as a cash flow hedge for $25,000,000 of the $32,000,000 term loan to the Company mentioned above and the other designated as a cash flow hedge for $10,000,000 of the $13,000,000 term loan to the Subsidiary mentioned above. Under these agreements, the Company pays a fixed rate of 2.49% to the counterparty and receives 30 day LIBOR for both cash flow hedges. The fair value of the interest rate swaps was a liability of $65,000 at December 31, 2018. While the Company is exposed to credit loss on its interest rate swaps in the event of non-performance by the counter party to the swap, management believes that such non-performance is unlikely to occur given the financial resources of the counter party.

Bank Covenants

The Company is required to meet certain financial covenants included in the Amended A/R Credit Agreement with respect to leverage ratios, fixed charge ratios, and capital expenditures, as well as other customary affirmative and negative covenants. As of December 31, 2018, the Company was not in compliance with its financial covenants associated with the loans made under the A/R Credit Agreement, but on March 14, 2019 entered into the First Amendment to the A/R Credit Agreement which waived the non-compliance as of December 31, 2018 and established new covenant levels. While management believes it will be able to meet its future covenants as established in the First Amendment, the ability to meet these covenants relies on certain operational and financial improvements consistent with our planned turn around and expected timetable. Should these improvements not materialize in the time frame planned, it could impact our ability to meet future covenants.

Leases

The Company has entered into an operating lease agreement through July 2019 for the manufacturing facility located in Batavia, Ohio. Additionally, the Company leases a warehouse and distribution center in Brownsville, Texas, which expires in October 2022, with an option to extend the lease for 36 months.

Concurrent with the acquisition of Horizon Plastics, the Company entered into leasing agreements for manufacturing facilities located in Cobourg, Canada and Escobedo, Mexico. The current lease agreement for the Canada facility expires in June 2019 and the Company has the option to extend the lease up to 10 years, which the Company intends to utilize. The current lease agreement for the Mexican facility expires in March 2021.

Total rental expense was $2,640,000, $825,000 and $808,000 for 2018, 2017 and 2016, respectively. Included in rental expense are both operating lease payments and rental costs related to the use of equipment during the normal course of business under nonbinding terms. Future binding minimum operating lease payments are as follows:



2019	$	1,579,000
2020	1,387,000
2021	1,128,000
2022	1,055,000
2023 and Thereafter	1,425,000
Total minimum lease payments	$	6,574,000