Note 9 - Debt

12 Months Ended

Dec. 31, 2011

9. Debt

Debt is classified on the balance sheet as follows:

	December 31, 2010		December 31, 2011
Current:
Capital lease obligations	$	286	$	544
Revolving credit agreement		8,016		2,477
		8,302		3,021
Non-current:
Capital lease obligations		503		897
Mandatorily redeemable preferred stock		-		12,673
		503		13,570

Total	$	8,805	$	16,591

Mandatorily Redeemable Preferred Stock

On February 4, 2011, the Company issued 140,000 shares of a Series A Preferred Stock, par value $.01 per share, at an original issue price of $100 per share. The Series A Preferred was issued to Stonington as part of the consideration given in the redemption of all 346,163 outstanding shares of the Company’s Convertible Preferred Stock (see Note 10). On March 21, 2011, Stonington completed the sale of all Series A Preferred to Saints in conjunction with the Stock Purchase Agreement dated February 18, 2011.

The Series A Preferred must be redeemed by the Company on or before February 4, 2017 and may be redeemed by the Company, in whole or in part, at any time after February 4, 2013, in each case at a price of $100 per share, plus any accrued but unpaid dividends. Based on the guidance in ASC 480, “Distinguishing Liabilities from Equity,” the Company has classified the Series A Preferred as a liability because it is mandatorily redeemable on February 4, 2017. Accordingly, the Company records the dividends as interest expense over the life of the Series A Preferred.

The Series A Preferred earns cumulative cash or stock dividends at the rate of 12% per annum, payable quarterly in arrears and accruing regardless of whether they are declared by the Board of Directors of the Company or funds are legally available to pay them. Any dividends accrued and not paid by the Company in cash shall be paid in additional shares of Series A Preferred valued at $100 per share. If the Company does not pay dividends in cash equal to at least 8% per share per annum, the rate of the dividend will increase by 4% per annum to 16% per annum. On May 12, 2011, the Company paid $261 in cash related to dividends accrued from February 4, 2011 to March 31, 2011. On August 11, 2011, the Company paid $280 in cash and issued 1,400 shares of additional Series A Preferred at an original issue price of $100 per share in payment of interest accrued from April 1, 2011 to June 30, 2011. On November 9, 2011, the Company’s Board approved payment of the dividend for the three month period ended September 30, 2011 to be made with additional Series A Preferred shares in lieu of cash. As noted above, given 100% of the payment was made in kind, the dividend rate for the payment was increased to 16% and the Company issued 5,630.4889 shares of Series A Preferred at an original issue price of $100 per share in payment of the dividend for the period on such date. As of December 31, 2011, the Company has accrued $434 for the fourth quarter interest payment.

The Company used the March 21, 2011 Stonington and Saints sale transaction as the basis for measuring fair value of the Series A Preferred. Stonington sold its 5,000,000 common shares and all 140,000 shares of the Series A Preferred to Saints for $14,500. The Company determined the fair value of the Series A Preferred Stock of $11,750 using the difference between the total transaction price and the fair value of the common stock as of the date of the Stock Purchase Agreement on February 18, 2011. The unamortized discount of $2,250 on the preferred stock will be amortized using the interest method over the 72 month term of the Series A Preferred. For the year ended December 31, 2011, the amortization of the discount of $220 was recorded as interest expense. The Company also incurred $1,061 of costs in relation to this transaction, which were recorded as deferred financing cost to be amortized over the term of the Series A Preferred.

The Series A Preferred has no conversion rights and will have no voting rights except (i) the right to elect a single additional member to the Company’s Board of Directors upon the Company’s failure for at least four consecutive quarters to pay at least an 8% cash dividend per annum; and (ii) to separately vote or consent to alter the terms of the Series A Preferred, create or increase the number or terms of shares of any class that is senior to or in parity with the Series A Preferred or to incur debt securities senior to the Series A Preferred, other than the Company’s existing credit facility or any replacement thereof if the incurrence of debt pursuant to such debt securities would cause the ratio of the Company’s total indebtedness to EBITDA to be greater than 3.5:1 excluding the Series A Preferred. The Certificate of Designation limits the ability of the Company to pay dividends on its common stock.

Revolving Credit Agreement

On August 13, 2010, the Company entered into a Revolving Credit and Security Agreement (the “PNC Agreement”) with PNC Bank (“PNC”). The PNC credit facility (the “Facility”) consists of a $14,000 revolving loan, or revolver, including up to $3,000 in letters of credit. Proceeds from the revolver were used to repay the indebtedness owed to Amalgamated Bank under a predecessor credit facility.

The maturity date of the Facility is August 13, 2013. The interest rate of the Facility is 3% over a “Base Rate,” which is a floating rate equal to the highest of (a) PNC’s publicly announced prime rate then in effect, (b) the Federal Funds Open Rate plus 0.5%, or (c) the LIBOR Rate plus 1%; or, at the advance election of the Company, 4% over PNC’s 30, 60 or 90 day Eurodollar Rate. As of December 31, 2011 the Base Rate plus 3% is 6.25%. The revolver is also subject to a 0.75% fee per annum payable quarterly on the undrawn amount.

The PNC Agreement requires that all customer receivables collected shall be deposited by the Company into a lockbox account controlled by PNC. All funds deposited into the lockbox will immediately be used to pay down the Facility. Additionally, the PNC agreement contains provisions that allow PNC to accelerate the scheduled maturities of the Facility for conditions that are not objectively determinable. As such, the Company has classified the PNC balance as a current liability.

On February 3, 2011, the Company entered into a Consent, Waiver and Amendment No. 1 (the “PNC Amendment”) to the PNC Agreement. The PNC Amendment consents to the transactions described in the Redemption Agreement between the Company and Stonington (see Note 12), waives certain covenants in order to permit the transactions, amends certain definitions and covenants contained in the Credit Agreement to account for the Series A Preferred and imposes financial covenants which must be satisfied prior to each cash dividend payment in respect of the Series A Preferred. The Facility includes a financial covenant requiring that the Company maintain a fixed charge coverage ratio (defined as EBITDA less unfinanced capital expenditures, less cash dividends, less cash paid for taxes over all debt service) of not less than 1.1 to 1.0 beginning in the quarter ending March 31, 2011, going forward. The Company was in compliance with all covenants as of December 31, 2011.

On March 21, 2011, the Company entered into a Consent, Waiver and Amendment No. 2 (the “PNC Amendment No. 2”) to the PNC Agreement. Pursuant to the PNC Amendment No. 2, PNC consents to the transactions described in the Stock Purchase Agreement entered into on February 18, 2011, between Stonington and Saints and amends certain definitions and covenants to replace references to Stonington with references to Saints. It further amends certain definitions and covenants which treat changes in a majority of the members of the Company’s Board of Directors as a change of control to exempt changes in the Company’s Board during the period between March 21, 2011 and June 22, 2011, which are approved either by the existing directors or by Saints.

On July 14, 2011, the Company entered into a letter of credit under the Facility in the amount of $350. The letter of credit was used to provide a security deposit on the real estate lease for the new facility in Carlstadt, NJ. On November 22, 2011, the Company entered into a letter of credit under the Facility in the amount of $1,500. The letter of credit was used to provide a security deposit on the real estate lease for the New York facility. The letters of credit reduce the availability under the Facility by $1,850.

Capital Leases

During the second quarter of 2011, the Company entered into a new capital lease agreement totaling $781. The proceeds from the lease were used to finance the acquisition of production equipment. The lease has a 60-month term expiring in March 2016 and has a fixed annual rate of 6.75%.

During the third quarter of 2011, the Company entered into two new capital lease agreements totaling $292. The proceeds from the lease were used to finance leasehold improvements to the new production facility in Carlstadt, NJ. Both leases have a 36-month term and have a fixed annual rate of 7.50%.

As of December 31, 2010 and 2011, the balance of all capital leases was $789 and $1,441, respectively, of which $286 and $544 is current, respectively.

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

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