Note G - Notes Payable - LEVYS

9 Months Ended

Sep. 30, 2011

Accounts Payable and Accrued Liabilities Disclosure [Text Block]

NOTE G – NOTES PAYABLE – LEVYS

To satisfy our short-term liquidity needs, Jay Levy, Jean Levy, Warren Levy and Ronald Levy (the “Levys”) from time to time (prior to 2003) made loans to us.  Jay Levy, our former director, Chairman of the Board, Treasurer and Assistant Secretary, and Jean Levy are/were the parents of Warren Levy and Ronald Levy, our former executive officers and directors.  The outstanding principal and interest on these loans were $7,095,000 and $8,642,517, respectively, with interest rates ranging from 8.5% to 14.2%.  The total owed aggregated $15,737,517, of which approximately $8,900,000 in principal and interest were in default, and was restructured in 2007 as eight-year term notes, with a fixed simple interest rate of 9% per annum.  Interest expense was calculated using an effective interest method, at a rate of 7.6%, over the life of the notes due to the deferred payment schedule contained in the notes.  No gain or loss was recognized on the restructuring transaction.  Required quarterly payments of principal and interest under these new notes were to begin in May 2010 and continue over a five-year period.

In March 2010, in conjunction with the Victory Park refinancing, the Levy loans were amended and restated to modify their terms.  The amended notes, which continue to be secured by a secondary lien on certain of our equipment and certain of our United States patents and patent applications, bore interest at a rate of 9% per annum from May 10, 2007 to March 17, 2010 and 12% per annum thereafter, each of which shall be non-compounding.  As of March 17, 2010, interest expense was calculated using an effective interest method, at a rate of 8.2%, over the life of the notes due to the deferred payment schedule contained in the notes.  Subject to the conditions set forth in our financing agreement with Victory Park, we were obligated to make the following payments as set forth in, and pursuant to, the amended notes: an aggregate principal payment of $1,000,000 on May 10, 2010, which has been paid; an aggregate principal payment of $500,000 on November 10, 2010 (unpaid but adjusted as described below); an aggregate principal payment of $250,000 on May 10, 2011 (unpaid but adjusted as described below); and payment of all unpaid principal and accrued and unpaid interest on June 18, 2013. These loans remain subordinated to the Victory Park notes. Total interest expense on all Levy loans was approximately $430,000 and $397,000, respectively, for the three months ended September 30, 2011 and 2010 and $1,263,000 and $1,167,000, respectively, for the nine months ended September 30, 2011 and 2010.  As of September 30, 2011, total accrued interest on all Levy loans was $6,195,610 and the outstanding loans by these persons to us totaled $14,737,518, for an aggregate owed to them of $20,933,128.  These loans are collateralized by secondary security interests in our equipment and certain of our patents.

On March 10, 2011, we entered into the Settlement and Release Agreement and Amendments (the “Settlement Agreement”) by and among us and the Estate of Jean Levy, The Jaynjean Levy Family Limited Partnership, Dr. Warren Levy, our former president, and Dr. Ronald S. Levy, our former executive vice president (collectively, the “Levy Parties”).

Pursuant to the Settlement Agreement, the parties agreed to settle any and all claims, whether known or unknown, arising from or relating to the Levy employment agreements, the deferred compensation program for Dr. Warren Levy and Dr. Ronald Levy and the amended notes and the Levy Parties agreed to release their secondary mortgage and related liens on certain of our real property.  In connection with this settlement, we agreed, among other things, to make the following payments, which modified certain terms of the Levy employment agreements and the deferred compensation program referred to above:

(1) In March 2011, we paid (a) Dr. Warren Levy a lump-sum severance payment in the amount of $327,750; (b) Dr. Ronald Levy a lump-sum severance payment in the amount of $280,250; and (c) into escrow remaining severance payments in the aggregate amount of $303,996 (included in prepaid expenses and other current assets), $163,875 of which shall be released to Dr. Warren Levy and $140,125 of which shall be released to Dr. Ronald Levy, each  in accordance with his respective employment agreement in monthly increments beginning September 2011 (which has been paid) through February 2012;

(2) In March 2011, we paid (a) $151,268 to Dr. Warren Levy representing a portion of his vacation pay and (b) $136,736 to Dr. Ronald Levy representing a portion of his vacation pay;

(3) On October 11, 2012 and November 13, 2012, we will pay an aggregate of $162,296, $85,241 to Dr. Warren Levy and $77,055 to Dr. Ronald Levy, in full satisfaction of their respective vacation pay; and

(4) On November 13, 2012 and December 11, 2012, we will pay an aggregate of $200,000 into Rabbi Trust Accounts, $100,000 into an account for the benefit of Dr. Warren Levy and $100,000 into an account for the benefit of Dr. Ronald Levy, in full satisfaction of our obligations to each of them under the deferred compensation program.

Loan payments under the amended notes of $500,000 previously due on November 10, 2010 and $250,000 due on May 10, 2011 have been postponed under the Settlement Agreement.  The new payment schedule specifies five monthly payments of $150,000 from May 2012 through September 2012.  Due to the slight modification to the loan payment schedule, the effective interest rate remains at 8.2% and will be accounted for prospectively with no gain or loss being recognized.

Furthermore, we agreed that if we receive, before all of the payments due pursuant to the Settlement Agreement are paid in full, net cash proceeds (the “Proceeds”) totaling at least $10 million from a single transaction or transactions, subject to certain exceptions and qualifications described in the Settlement Agreement, we will pay certain specified remaining payments due under the Settlement Agreement in full within five business days of receipt of the Proceeds.

Accordingly, among other things, the Settlement Agreement (i) settled a disagreement between us and Dr. Warren Levy and Dr. Ronald Levy regarding the aggregate amount of, and the timing of the payments in respect of, their vacation pay; (ii) required that a portion of the previously agreed to severance payments be placed into escrow and then be released to Dr. Warren Levy and Dr. Ronald Levy at the times previously agreed; (iii) required our payment in 2012 of an aggregate of $200,000 under the deferred compensation program for Dr. Warren Levy and Dr. Ronald Levy, $100,000 to each of two Rabbi Trust Accounts; and (iv) accelerates the payment of certain remaining payments under the Settlement Agreement upon the receipt of the Proceeds.