Note 7. Debt

The Company records debt at its carrying amount. The Company uses a market approach to determine fair value, which results in a Level 2 fair value measurement. As of September 30, 2013 the carrying value of the Company’s debt approximated its fair value. The following table provides the components of debt and weighted average interest rates related to the Company’s outstanding debt instruments (in thousands, except percentages):

		September 30, 2013				December 31, 2012
		Carrying Amount	Weighted Average Interest Rate		Carrying Amount		Weighted Average Interest Rate
Notes payable	$	7,954			$	12,003
Notes payable related to NeoPhotonics Semiconductor acquisition	$	3,570	1.50	%	$	-
Short-term debt		7,000	2.93	%		5,000	2.20	%
Total short-term debt	$	10,570			$	5,000
Long-term notes payable related to NeoPhotonics Semiconductor acquisition	$	7,140	1.50	%	$	-
Long-term debt		19,250	2.93	%		17,167	2.20	%
Total long-term debt	$	26,390			$	17,167

Notes payable

The Company frequently directs its banking partners to issue notes payable to its suppliers in China in exchange for accounts payable. These banks issue notes to vendors and issue payment to the vendors upon redemption. The Company owes the payable balance to the issuing bank. These notes are unsecured, noninterest bearing and are due approximately six months after issuance. As a condition of the notes payable lending arrangements, the Company is required to keep a compensating balance at the issuing banks that is a percentage of the total notes payable balance until the notes payable are paid by its subsidiaries in China. These balances are classified as restricted cash on the Company’s condensed consolidated balance sheets. As of September 30, 2013, restricted cash totaled $1.6 million.

Notes payable related to NeoPhotonics Semiconductor acquisition

In connection with the acquisition of NeoPhotonics Semiconductor on March 29, 2013, the Company is obligated to pay 1,050 million Japanese Yen in three equal installments on the first, second and third anniversaries of the closing date for the purchase of the real estate used by NeoPhotonics Semiconductor. The obligation bears interest at 1.5% per year and the acquired real estate property is security for the loan to Lapis.

Bank borrowings

The Company has lending arrangements with several financial institutions, including a loan and security agreement with Comerica Bank in the U.S., which has been amended several times.

●	As of December 31, 2012, $8.0 million was outstanding under the revolving line of credit agreement and $0.0 million was available for borrowing. Borrowings under this facility bear interest at a rate of LIBOR plus 2%.

●	As of December 31, 2012, no amounts were outstanding under the equipment advance line advance and all $7.0 million was available for borrowing. Borrowings under this facility would bear interest at a rate of LIBOR plus 2%.

●	As of December 31, 2012, $14.2 million was outstanding under the acquisition advance and $5.8 million was available for borrowing. The advances bear interest at a rate of LIBOR plus 2%.

On March 21, 2013, the Company amended and restated the prior loan and security agreement in its entirety. The components of the available credit facilities as of September 30, 2013 are as follows:

●

As of September 30, 2013, no amount was outstanding under the revolving line of credit agreement and all $20.0 million was available for borrowing subject to covenant requirements. Amounts are due on or before March 2016 and borrowings under this revolving line of credit include an interest rate option of a base rate as defined in the agreement plus 1.5% or LIBOR plus 2.5%. As of September 30, 2013 the rate on the LIBOR option was 2.68%.

●

As of September 30, 2013, $26.3 million was outstanding under the term loan of the credit facility and interest is payable quarterly in arrears; the principal is paid in equal quarterly installments over the term of the loan ending in June 2017. Borrowings under the term loan include an interest rate option of a base rate as defined in the agreement plus 1.75% or LIBOR plus 2.75%. As of September 30, 2013 the rate on the LIBOR option was 2.93%.

The Company’s Credit Agreement requires the maintenance of specified financial covenants, including a liquidity ratio, restricts its ability to incur additional debt or to engage in specified transactions, restricts the payment of dividends and is secured by substantially all of its U.S. assets, other than intellectual property assets. A breach of any of these covenants in the future could have an adverse impact on availability of financial assurances. In addition, the amounts outstanding could also be subject to acceleration of maturity. If such acceleration were to occur, the Company may not have sufficient liquidity available to repay the indebtedness. As of September 30, 2013 and December 31, 2012, the Company was in compliance with the covenants contained in this agreement.

Subsequent to December 31, 2013, the Company executed a series of amendments to the Credit Agreement that modified certain covenants and extended the delivery date of the Company’s September 30, 2013 quarterly report on form 10-Q and its amended March 31, 2013 and June 30, 2013 quarterly reports on forms 10-Q/A. The amendments also increased the applicable interest margins by 0.25% per annum. Loans under the term loan facility bear interest equal to either the LIBOR rate, plus an applicable margin equal to 3.00% per annum, or a base rate (as defined) plus an applicable margin equal to 2.00% per annum. Loans under the revolving loan facility bear interest at a rate equal to either the LIBOR rate, plus an applicable margin equal to 2.75% per annum, or a base rate (as defined) plus an applicable margin equal to 1.75% per annum. These new interest rate options will be in effect at least until the lender’s review of the Company’s June 30, 2014 financial statements.