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Note 6 - Long-term Debt and Notes Payable to Bank

9 Months Ended

Jul. 31, 2019

(6)

Long-term Debt and Notes Payable to Bank

The Company has credit facilities consisting of a real estate term loan, as amended and restated (the “Virginia Real Estate Loan”), a supplemental real estate term loan, as amended and restated (the “North Carolina Real Estate Loan”) and a Revolving Credit Note and related agreements (collectively, the “Revolver”).

Both the Virginia Real Estate Loan and the North Carolina Real Estate Loan are with Pinnacle Bank (“Pinnacle”), have a fixed interest rate of 3.95% and are secured by a first priority lien on all of the Company’s personal property and assets, all money, goods, machinery, equipment, fixtures, inventory, accounts, chattel paper, letter of credit rights, deposit accounts, commercial tort claims, documents, instruments, investment property and general intangibles now owned or hereafter acquired by the Company and wherever located, as well as a first lien deed of trust on the Company’s real property.

Long-term debt as of July 31, 2019 and October 31, 2018 consists of the following:

	July 31,		October 31,
	2019		2018
Virginia Real Estate Loan ($6.5 million original principal) payable in monthly installments of $31,812, including interest (at 3.95%), with final payment of $3,644,211 due May 1, 2024	$	4,629,043	$	4,774,252
North Carolina Real Estate Loan ($2.24 million original principal) payable in monthly installments of $10,963, including interest (at 3.95%), with final payment of $1,255,850 due May 1, 2024		1,595,292		1,645,332
Total long-term debt		6,224,335		6,419,584
Less current installments		768,201		260,954
Long-term debt, excluding current installments	$	5,456,134	$	6,158,630

As of July 31, 2019, the Revolver with Pinnacle provided the Company with a $7.0 million revolving line of credit for the working capital needs of the Company. Under the Revolver, Pinnacle provided the Company with one or more revolving loans in a collective maximum principal amount of $7.0 million as of July 31, 2019. The Company may borrow, repay, and reborrow at any time or from time to time while the Revolver is in effect.

The applicable margin in the Revolver has a floor on the interest rate such that the rate will never be less than 2.50% per annum. As of July 31, 2019, the Revolver accrued interest at LIBOR plus 2.50% (resulting in a 4.90% rate at July 31, 2019). The Revolver is payable in monthly payments of interest only with principal and any outstanding interest due and payable at maturity.

On April 30, 2019, the Company entered into a Sixth Loan Modification Agreement with Pinnacle to modify the Credit Agreement dated April 26, 2016 entered into between the Company and Pinnacle and the term loans dated April 26, 2016. The Sixth Loan Modification Agreement extended the maturity date of the Revolver to June 30, 2020.

On September 11, 2019, subsequent to its fiscal quarter end, OCC entered into a Seventh Loan Modification Agreement (the “Agreement”) with Pinnacle to modify the Credit Agreement dated April 26, 2016 entered into between the Company and Pinnacle and the term loans dated April 26, 2016.

Pursuant to the Agreement, the Company has agreed to (i) reduce the total aggregate amount of funds available for lending under the Credit Agreement from $7.0 million to $6.5 million; (ii) reduce the aggregate outstanding balance under the Credit Agreement by $500,000 on or before November 29, 2019 by reducing the outstanding principal balances on each of the term loans by $250,000; and (iii) an interest rate on advances under the Revolver of prime lending rate plus 0.25%, effective September 10, 2019. In exchange for this consideration, the current ratio financial covenant was suspended for the fiscal quarter ended July 31, 2019.

Except as expressly amended and modified, all other terms and conditions of the Credit Agreement remain unaltered and in effect.

The Revolver is secured by a perfected first lien security interest on all assets, including but not limited to, accounts, as-extracted collateral, chattel paper, commodity accounts, commodity contracts, deposit accounts, documents, equipment, fixtures, furniture, general intangibles, goods, instruments, inventory, investment property, letter of credit rights, payment intangibles, promissory notes, software and general tangible and intangible assets owned now or later acquired. The Revolver is also cross-collateralized with the Company’s real property.

The terms of OCC’s credit facilities with Pinnacle require the Company to comply, on an annual basis, with specific financial covenants including a fixed charge coverage ratio. The Company is required to maintain a fixed charge coverage ratio of not less than 1.25 to 1.0. The ratio is calculated by dividing adjusted EBITDA, as defined in the loan agreements, by the sum of annual debt service, as defined in the loan agreements, and income taxes paid. Based on the financial results through the first nine months of fiscal year 2019, it is possible that the Company will not be in compliance with the fixed charge coverage ratio covenant at October 31, 2019 unless OCC is able to take steps to comply with the covenants through alternatives available to the Company. Additionally, the terms of OCC’s credit facilities with Pinnacle require the Company to comply, on a quarterly basis, with two other financial covenants including a current ratio.

Except as modified relative to the quarter ended July 31, 2019, the Company is required to maintain a current ratio of not less than 3.0 to 1.0. The ratio is calculated by dividing current assets by current liabilities. The Company’s Revolver is scheduled to mature on June 30, 2020, and therefore the $5.7 million of outstanding borrowings on the Revolver has been reclassified as a current liability as of July 31, 2019. As of July 31, 2019, the Company had a current ratio of 2.1 to 1.0. Had the maturity date of the Revolver been greater than one year from July 31, 2019, the $5.7 million of outstanding borrowings on the Revolver would have been classified as note payable to bank - noncurrent.

As of July 31, 2019, the Company had $5.7 million of outstanding borrowings on its Revolver and $1.3 million in available credit. As of October 31, 2018, the Company had outstanding borrowings of $3.0 million on its Revolver and $4.0 million in available credit.