5. Notes Payable and Long-term Debt

Credit Agreement

On September 29, 2011, Colt Defense LLC, as the U.S. Borrower, Colt Canada Corporation, as the Canadian Borrower and Colt Finance Corp., as Guarantor, entered into a credit agreement (“Credit Agreement”) with Wells Fargo Capital Finance, LLC. Under the terms of the Credit Agreement, senior secured revolving loans are available up to $50,000, inclusive of $20,000 available for letters of credit. Revolving loans are subject to, among other things, the borrowing base, which is calculated monthly based on specified percentages of eligible accounts receivable and inventory and specified values of fixed assets. The Company expects to use the proceeds for working capital and general corporate purposes, as needed.

Borrowings under the Credit Agreement bear interest at a variable rate based on the London Inter-Bank Offer Rate (“LIBOR”), the Canadian Banker’s Acceptance Rate or the lender’s prime rate, as defined in the Credit Agreement, plus a spread. The interest rate spread on borrowing and fees for letters of credit varies based on both the rate option selected and our quarterly average excess availability under the Credit Agreement. There is an unused line fee ranging from .375% to .50% per annum, payable quarterly on the unused portion under the facility and a $40 annual servicing fee.

Under the Credit Agreement, our obligations are secured by a first-priority security interest in substantially all of our assets, including accounts receivable, inventory and certain other collateral. We paid $1,636 of debt issuance costs in 2011 related to the Credit Agreement, which matures on September 28, 2016.

The Credit Agreement limits our ability to incur additional indebtedness, make investments or certain payments, pay dividends and merge, acquire or sell assets. In addition, certain covenants would be triggered if excess availability were to fall below the specified level, including a fixed charge coverage ratio requirement. Excess availability is determined as the lesser of our borrowing base or $50,000, reduced by outstanding obligations under the credit agreement and trade payables that are more than 60 days past due. Furthermore, if excess availability falls below $11,000 or an event of default occurs, the lender may assume control over our cash until such event of default is cured or waived or the excess availability exceeds such amount for 60 consecutive days.

The Credit Agreement contains customary events of default, including, without limitation, payment defaults, breaches of representations and warranties, cross-defaults with other material indebtedness, certain events of bankruptcy or insolvency, judgments in excess of a certain threshold and the failure of any guaranty or security document supporting the agreement to be in full force and effect. In addition, if excess availability falls below $9,000 and the fixed charge coverage ratio is less than 1.0 to 1.0, we would be in default under the Credit Agreement. As of December 31, 2012, we were in compliance with all covenants and restrictions.

As of December 31, 2012, there was a $6 line of credit advance and $1,715 of letters of credit outstanding under the Credit Agreement. The $6 advance, which was automatically made by Wells Fargo on our behalf in order to pay a letter of credit fee, was non-interest bearing and was repaid in full in January 2013.

Senior Notes

On November 10, 2009, Colt Defense LLC (Parent) and Colt Finance Corp, a 100%-owned finance subsidiary, jointly and severally co-issued $250,000 of unsecured senior notes (“Senior Notes”). The Senior Notes bear interest at 8.75% and mature November 15, 2017. Interest is payable semi-annually in arrears on May 15 and November 15, commencing on May 15, 2010. We issued the Senior Notes at a discount of $3,522 from their principal value. This discount will be amortized as additional interest expense over the life of the indebtedness.

No principal repayments are required until maturity. However, in the event of a change in control of our company, we are required to offer to purchase the Senior Notes at a price equal to 101% of their principal amount, together with accrued and unpaid interest. In addition, the Senior Notes may be redeemed at our option under certain conditions as follows:

· at any time prior to November 15, 2013, we may redeem some or all of the Senior Notes at a price equal to 100% of their principal amount together with accrued and unpaid interest plus a make whole premium, as defined in the indenture; and

· on and after November 15, 2013, we may redeem all or, from time to time, a part of the Senior Notes at the following redemption price (expressed as a percentage of principal amount of the Senior Notes to be redeemed) plus accrued and unpaid interest, including additional interest, if any on the Senior Notes to the applicable redemption date if redeemed during the twelve month period beginning on November 15 of the years indicated below:

Year	Percentage
2013	104.375	%
2014	102.187	%
2015 and thereafter	100.00	%

The Senior Notes are not guaranteed by any of our subsidiaries and do not have any financial condition covenants that require us to maintain compliance with any financial ratios or measurements on a periodic basis. The Senior Notes do contain incurrence-based covenants that, among other things, limit our ability to incur additional indebtedness, enter into certain mergers or consolidations, incur certain liens and engage in certain transactions with our affiliates. Under certain circumstances, we are required to make an offer to purchase our senior notes offered hereby at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase with the proceeds of certain asset dispositions. In addition, the indenture restricts our ability to pay dividends or make other Restricted Payments (as defined in the indenture) to our members, subject to certain exceptions, unless certain conditions are met, including that (1) no default under the indenture shall have occurred and be continuing, (2) we shall be permitted by the indenture to incur additional indebtedness and (3) the amount of distributions to our unit holders may not exceed a certain amount based on, among other things, our consolidated net income. Such restrictions are not expected to affect our ability to meet our cash obligations for the next 12 months. The indenture does not restrict the ability to pay dividends or provide loans to the Parent or the net assets of our subsidiaries’, inclusive of the co-issuer Colt Finance Corp, which itself has no subsidiaries. Additionally, the Senior Notes contain certain cross default provisions with other indebtedness, including the Credit Agreement, if such indebtedness in default aggregates to $20,000 or more.

On May 11, 2011, Colt Defense completed an exchange offer for up to $250,000 in the aggregate principal amount of our registered 8.75% Senior Notes due 2017 for up to a like aggregate principal amount of our outstanding 8.75% Senior Notes due 2017 issued pursuant to Rule 144A. The Company did not recognize any gain or loss for accounting purposes as a result of the exchange offer.

Outstanding long-term debt balances and weighted average interest rates at December 31, 2012 and 2011 were as follows:

				Weighted					Weighted
	Year Ended			Average		Year Ended			Average
	December 31,			Effective		December 31,			Effective
	2012			Interest Rate		2011			Interest Rate
Senior notes (a)(b)	$	250,000		9.0	%	$	250,000		9.0	%
Unamortized discount	(2,433		)			(2,814		)
	247,567					247,186
Less: current portion	—					—
	$	247,567				$	247,186

(a) Interest expense for 2012 and 2011 includes $381 and $348, respectively, of amortization of original issue discount.

(b) The senior notes bear interest at 8.75%. The effective rate of these notes is 9%, giving effect to the original issue discount.

Financing Costs

When we incur costs associated with financing arrangements, we defer the costs and amortize them to interest expense over the term of the related debt. In 2011, we incurred $1,653 of financing costs when we entered into the Credit Agreement, of which $1,636 was paid in 2011. The remaining $17 of accrued financing costs was subsequently reversed in 2012. In 2010, we incurred $75 of financing costs to amend a revolving credit facility, which was subsequently terminated when we entered into the Credit Agreement. Amortization of deferred financing costs for years ended December 31, 2012, 2011 and 2010 were $1,653, $1,498 and $1,835, respectively.

A summary of deferred financing fee activity follows:

	Total
Balance at December 31, 2010	$	9,452
Amortization of deferred financing costs	(1,498		)
Debt prepayment expense	(295		)
Financing fees paid and accrued	1,653
Balance at December 31, 2011	$	9,312
Amortization of deferred financing costs	(1,653		)
Debt prepayment expense	—
Financing fees paid and accrued	(17		)
Balance at December 31, 2012	$	7,642

Debt Prepayment Expense

If a financing arrangement is terminated early, we expense any unamortized financing costs to debt prepayment expense at the time of termination. Total debt prepayment expense, which was included in the Consolidated Statements of Operations, related to the above debt refinancing activities and amendments were:

	2012		2011		2010
Write-off of deferred financing costs	$	—	$	295	$	1,246
	$	—	$	295	$	1,246