Note 9 - Debt

3 Months Ended

Mar. 31, 2012

Debt Disclosure [Text Block]

9.   Debt

Debt is classified on the balance sheet as follows:

	December 31,  2011		March 31,  2012
Current:
Capital lease obligations	$	544	$	555
Revolving credit agreement		2,477		2,741
		3,021		3,296
Non-current:
Capital lease obligations		897		754
Mandatorily redeemable preferred stock		12,673		13,317
		13,570		14,071
Total	$	16,591	$	17,367

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 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.

As of December 31, 2011, the Company had accrued $434 for the fourth quarter interest payment. On March 27, 2012, the Company’s Board approved payment of the dividend for the three month period ended December 31, 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 increased to 16% and the Company issued 5,781.1222 shares of Series A Preferred at an original issue price of $100 per share in payment of the dividend for the period.The incremental interest expense that was incurred as a result of the Board decision was recorded during the current quarter. At March 31, 2012, the Company did not meet the requirements under the PNC Revolving Credit Agreement which provided the Company the ability to pay the first quarter 2012 dividend payment in cash. As such, the dividend will be paid in stock and was accrued at 16% for the period.As of March, 31, 2012, the Company has accrued $589 for this dividend payment.  Until the Company meets the requirements, it will pay future dividends in additional shares of preferred stock at the annual rate of 16%.

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. The amortization of the discount of $33 and $66 was recorded as interest expensefor the three months ended March 31, 2011 and 2012, respectively. 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

During the second quarter of 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 March 31, 2012 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 Company has the option of moving some of its borrowings to LIBOR strips with limitations.  As of March 31, 2012, the Company had $1,500 of the $2,741 outstanding on the Facility in 90 day LIBOR borrowings at a rate of 4.475% .

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.

The Facility includes one financial covenant requiring that the Company maintain a fixed charge coverage ratio for the trailing twelve month period (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. As of the filing of this Form 10Q for the period ended March 31, 2012, the Company was not in compliance with the financial covenant. PNC has indicated to the Company that they do not intend to place the Company in default and have begun discussions to amend the current agreement and waive the financial covenant.  The Company expects this to be completed during the second quarter of 2012, however there are no assurances that this will take place.

As of March 31, 2012, the Company has letters of credit under the Facility in the amount of $2,000, which reduces the availability under the Facility by that amount. The letters of credit were used to provide security deposits on the real estate leases for the facilities in Carlstadt, NJ and New York, NY.

Management believes that with the Company’s cash balances, anticipated cash balances and the PNC Facility, provided PNC and the Company come to an agreement on a waiver amendment, or, if necessary, the Company is able to obtain a replacement facility, for which there can be no assurances, it has sufficient liquidity for the next twelve months.  However, the Company’s operating cash flow can be impacted by macroeconomic factors outside of its control.