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Heelys, Inc. Message Board

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  • avdaugust avdaugust Sep 28, 2007 6:40 PM Flag

    Credit line

    can't see the logic of haveing a credit line for 2MM. a

    company with all the cash they have,it doesn't appear they

    need such a small credit. relate this to your terms, its

    like you haveing a credit line for a $1000. when your worth

    a million dollars. would you tie up all your assets subject

    to approval. they can't even buy pencils for that

    amount.....another reason I can't understand this

    company. the only thing I can see is the restriction of

    borrowing other funds is all about law suits......

    the only other reason is they can't get favorable terms with

    other parties unless someone backs it up with a line of

    credit..........they must of lost their creditability

    with suppliers.....while I still am high on the company, I

    can't understand this action.

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    • I am not an expert in finance, but I believe in good leverage versus bad leverage. I realize the amount is low, but they may only need a little bit because the rest of cash needed for working capital is being generated from operations. They may also want to avoid tapping into the cash that is on their books (although they still may on occasion - probably a better sign to the market than increasing their line of credit), because they are getting a good return on that cash simply sitting in a bank and it may be their goal to add cash to their balance sheet every quarter. If you go to their annual report at their website and search by the word "credit", you can see how they have used their line of credit over the years, how it used to be very large and they have decreased it to $2M, and that the previous line of credit agreement ended 6/30/07, so it needed to be renegotiated if they were going to access it. I suspect they might have decided to do that the day after the Fed meeting when Ben dropped the Fed funds rate by 50 basis points. In their earnings report, they mention that increases in rates can actually create a hit on earnings, so I would imagine the decrease in rates and subsequent renegotiated agreement with their bank will actually help with EPS (albeit by a very small amount). Again, I am not an expert but that is one way to look at it. I also don't see them being restricted too much by the $2M line of credit. I believe they cannot pay dividends, but I am happy that they have actively restricted themselves from doing so.

      Here is a blurb from their Feb filing that shows that the $2M line of credit is standard practice for them:

      On February 7, 2007, Heeling Sports Limited (the "Company"), a wholly owned subsidiary of Heelys, Inc., entered into an Amendment to Credit Agreement (the "Amendment") with JPMorgan Chase Bank, N.A. (the "Bank"), thereby amending the Credit Agreement dated August 20, 2004, as previously amended through August 28, 2006 (the "Original Agreement") between the Company and the Bank. The Original Agreement, which provided the Company with a $25 million revolving line of credit, has been modified effective February 7, 2007 to (a) provide the Company with a $2 million revolving line of credit, (b) eliminate the 0.25% non-usage fee on the average daily unused portion of the line of credit and (c) eliminate other terms, including terms requiring the Company to provide to the Bank monthly reports regarding the Company's inventory and accounts receivable.

      Good luck with your investments. Have a good weekend.