LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION

9 Months Ended

Dec. 31, 2011

LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION

LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION

NOTE 8 – LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION

Long-term debt and capital lease obligations outstanding on:

	December 31, 2011			March 31, 2011
Term Note	$	714,286		$	1,142,857
Capital expenditure note	471,341			674,151
Staged advance note	537,869			556,416
Series A Bonds	4,055,208			3,663,991
Series B Bonds	1,393,518			535,488
Obligations under capital leases	5,124			16,285
Total long-term debt	7,177,346			6,589,188
Principal payments due within one year	(1,362,766		)	(1,371,767		)
Principal payments due after one year	$	5,814,580		$	5,217,421

On February 24, 2006, the Company entered into a loan and security agreement (“Loan Agreement”) with Sovereign Bank (the “Bank”), which has since been amended as further described below.  Pursuant to the Loan Agreement, as amended, the Bank provided the Company with a secured term loan of $4,000,000 (“Term Note”) and also extended a revolving line of credit of up to $2,000,000 (“Revolving Note”).  On January 29, 2007, the Loan Agreement was amended, adding a capital expenditure line of credit facility of $3,000,000 (“Capital Expenditure Note”).  On March 29, 2010, the Bank agreed to extend to the Company a loan facility (“Staged Advance Note”) in the amount of up to $1,900,000 for the purpose of acquiring a gantry mill machine.

On December 30, 2010, the Company completed a $6,200,000 tax exempt bond financing with the Massachusetts Development Finance Authority (“MDFA”) pursuant to which the MDFA sold to the Bank MDFA Revenue Bonds, Ranor Issue, Series 2010A in the original aggregate principal amount of $4,250,000 (“Series A Bonds”) and MDFA Revenue Bonds, Ranor Issue, Series 2010B in the original aggregate principal amount of $1,950,000 (“Series B Bonds”) (together with the Series A Bonds, the “Bonds”) and Sovereign Bank (the “Bank”).  The Bank loaned the proceeds of such sale to the Company under the terms of that certain Mortgage Loan and Security Agreement, dated as of December 1, 2010, by and among the Company, MDFA and the Bank (as Bondowner and Disbursing Agent thereunder) (the “MLSA”).

In connection with the December 30, 2010 bond financing, the Company executed an Eighth Amendment to the Loan Agreement (“Eighth Amendment”).  The Eighth Amendment incorporated borrowing of the Bond proceeds into the borrowings covered by the Loan Agreement.  The MLSA provides for customary events of default, including any event of default under the Loan Agreement described above.  Subject to lapse of any applicable cure period, a default under the MLSA would cause the acceleration of all outstanding obligations of the Company under the MLSA.  Under the MLSA and the Eighth Amendment, the Company must meet certain financial covenants applicable while the Bonds remain outstanding, including, among other things, that the ratio of earnings available to cover fixed charges will be greater than or equal to 120%; the interest coverage ratio equal or exceed 2:1 as of the end of each fiscal quarter; and that Ranor’s leverage ratio will be less than or equal to 3:1. As of December 31, 2011 we were in compliance with the leverage ratio (1:1).  However, we did not meet the ratio of earnings available to cover fixed charges or the interest coverage covenants; our ratio of earnings to cover fixed charges as of December 31, 2011was 20% (compared with 120% requirement) and our interest coverage ratio was 0.4:1 (compared with the 2:1 requirement). The Company has obtained a waiver of the breach of such covenants from the Bank, which waiver covers the breach that otherwise would have occurred in connection with the covenant testing for the quarter ended December 31, 2011 and waives these covenants at March 31, 2012.  The waiver does not apply to any future covenant testing dates.  The Company expects to be in compliance with all financial covenants through December 31, 2012.  In the event of default (which default may occur in connection with a non-waived breach), the Bank may choose to accelerate payment of any long-term debt outstanding and, under certain circumstances, the bank may be entitled to cancel the facilities.  If the Company were unable to obtain a waiver for a breach of covenant and the Bank accelerated the payment of any outstanding amounts, such acceleration may cause the Company’s cash position to deteriorate or, if cash on hand were insufficient to satisfy any payment due, may require the Company to obtain alternate financing to satisfy any accelerated payment obligation.

On August 8, 2011, an appraisal was completed on the Westminster, Massachusetts property assigning a value of $4.8 million to such property. The Series A Bonds require that the loan-to-value ratio not exceed 75%, indicating a maximum loan amount of $3.6 million. The bond balance exceeded such maximum loan amount at December 31, 2011 by approximately $437,000. On October 28, 2011 the Company and the Bank agreed to resolve the collateral shortfall by establishing a separate interest bearing restricted cash account in the amount of $490,000 which is pledged as additional collateral to the debt and restricted from use for any other purpose. The required restricted balance will be amortized down at the current monthly debt principal amount of $17,708. At December 31, 2011, the cash is classified as a collateral deposit in other current and noncurrent assets of $212,500 and $224,376, respectively.

Obligations under the Term Note, Revolving Note, Capital Expenditure Note and Staged Advance Note are guaranteed by the Company.  Collateral securing such notes comprises all personal property of the Company, including cash, accounts receivable, inventories, equipment, financial and intangible assets.

Term Note:

The Term Note issued on February 24, 2006 has a term of 7 years with an initial fixed interest rate of 9% which converted to a variable rate on February 28, 2011.  From February 28, 2011 until maturity the note will bear interest at the prime rate plus 1.5%.  Principal of $142,857, plus interest is payable in quarterly installments, with final payment due on March 1, 2013.

Series A Bonds and Series B Bonds

The proceeds of the sale of the Series A Bonds were used to finance the Ranor facility acquisition and also to finance the 19,500 sq. ft. expansion of Ranor’s manufacturing facility located at in Westminster, Massachusetts.  The proceeds of the sale of the Series B Bonds were used to finance acquisitions of certain manufacturing equipment installed at the Westminster facility.

The initial rate of interest on the Bonds was 1.9606% for a period from the bond date to and including January 31, 2011. The interest rate thereafter is 65% times 275 basis points plus one-month LIBOR.  On February 1, 2011, the Company made principal payments of $17,708 and $23,214 on the Series A Bonds and the Series B Bonds, respectively.  Monthly payments are required to be made after such initial payment until the maturity date or earlier redemption of each Bond.  The Series A Bonds and the Series B Bonds will mature on January 1, 2021 and January 1, 2018, respectively.  The Bonds are redeemable pursuant to the MLSA prior to maturity, in whole or in part, on any payment date in accordance with the terms of the MLSA.

In connection with the Bond financing, the Company and the Bank entered into the International Swap and Derivatives Association, Inc. 2002 Master Agreement, dated December 30, 2010 (“ISDA Master Agreement”), pursuant to which the variable interest rates applicable to the Bonds were swapped for fixed interest rates of 4.14% on the Series A Bonds and 3.63% on the Series B Bonds.  Under the ISDA Master Agreement, the Company and the Bank entered into two swap transactions, each with an effective date of January 3, 2011.  The notional amount of outstanding fair-value interest rate swaps, which are designated as cash flow hedges, totaled $5.7 and $6.1 million at December 31, 2011 and March 31, 2011, respectively. These derivative instruments, which are designated as cash flow hedges, are carried on the Company’s balance sheet at fair value with the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income and subsequently reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.  The swaps will terminate on January 4, 2021 and January 2, 2018.  The change in fair value of the interest rate swaps for the three and nine month periods ending December 31, 2011 is recorded as an adjustment to accumulated other comprehensive income (see Note 16 to our Consolidated Financial Statements for detail on other comprehensive income). The fair value of the interest rate swaps contracts were measured using market based level 2 inputs. The method employed to calculate the values conforms to the industry convention for calculation of such values. The swap’s market value can be calculated any time by comparing the fixed rate set at the inception of the transaction and the “swap replacement rate,” which represents the market rate for an offsetting interest rate swap with the same Notional Amounts and final maturity date. The market value is then determined by calculating the present value interest differential between the contractual swap and the replacement swap. The termination value is the sum of the present value interest differential as described above plus the accrued interest due at termination.

Revolving Note:

Any outstanding amounts due under the Revolving Note bear interest at an annual rate equal to the prime rate, plus 1.5%.  The borrowing limit on the Revolving Note is limited to the sum of 70% of our eligible accounts receivable plus 40% of eligible inventory up to a maximum borrowing limit of $2,000,000.  There were no borrowings outstanding under this facility as of December 31, 2011 and March 31, 2011.  The facility was renewed on July 30, 2011 and the maturity date changed to July 31, 2012.  The Company pays an unused credit line fee of 0.25% on the average unused credit line amount in the previous month.

Capital Expenditure Note:

The initial borrowing limit under the Capital Expenditure Note was $500,000 and has been amended several times resulting in a  borrowing limit of $3,000,000.  The facility was subject to renewal on an annual basis.  On November 30, 2009, the Company elected not to renew this facility when it terminated because the Company plans to finance any future equipment financing needs on a specific basis rather than under a blanket revolving line of credit.  Under the facility, the Company was permitted to borrow 80% of the original purchase cost of qualifying capital equipment.  The current rate of interest is based on LIBOR plus 3%.  Principal and interest payments are due monthly based on a five year amortization schedule.  There was $471,341 and $674,151 outstanding under this facility at December 31, 2011 and March 31, 2011, respectively.

Staged Advance Note:

Borrowing under the Staged Advance Note is limited $1,900,000; the proceeds of this Note were intended to be used to acquire a gantry mill machine.  The machine serves as collateral for such loans.  The total aggregate amount of advances under the Staged Advance Note cannot exceed 80% of the actual purchase price of the gantry mill machine.  All advances provided for monthly interest-only payments through February 28, 2011, and thereafter, no further borrowings are permitted under this facility.  The interest rate is LIBOR plus 4%.  Beginning on April 1, 2011, the Company was obligated to pay principal and interest to amortize the outstanding balance on a five year schedule.  On March 29, 2010 and September 29, 2010, the Company drew down equal amounts of $556,416 under this facility to finance the initial deposit on the purchase of the gantry mill machine.  On December 30, 2010, the Company paid $556,416 of principal using proceeds from the Series B Bonds and amended the Staged Advance Note to limit advances at $556,416, with no further advances permitted.

Capital Lease:

The Company leases certain office equipment under a non-cancelable capital lease.  This lease will expire in 2012.  Future minimum payments under this lease for fiscal periods ending on December 31, 2012 are $5,188.  Interest payments included in the above amounts total $64 and the present value of all future minimum lease payments total $5,124.  Lease payments for capital lease obligations for the three and nine months ended December 31, 2011 totaled $3,891 and $11,673, respectively.