Note 6. Debt

Total outstanding debt of the Company as of December 28, 2012 and March 31, 2012 consisted of the following (in thousands):

	December 28, 2012		March 31, 2012
Bank term loan	$	750	$	1,000
Bank line of credit		0		500
MEDC/MSF loans		1,064		1,461
Total	$	1,814	$	2,961

Bank Debt

On September 25, 2008, API executed a loan agreement (the PrivateBank Loan Agreement) with The PrivateBank and Trust Company (PrivateBank). The initial PrivateBank Loan Agreement provided the Company with a term loan and a $3.0 million line of credit. On September 23, 2011, the Company entered into a fifth amendment to the PrivateBank Loan Agreement (the Fifth Amendment) which established a new $1.0 million term loan and extended the existing $3.0 million line of credit. The term loan was to be repaid in monthly principal payments of $20,833, plus interest at prime plus 0.5%, until maturity on October 1, 2015. The line of credit incurred interest at prime plus 0.5% and any outstanding borrowings were due on September 25, 2014. The availability under the line of credit was determined by a calculation of a borrowing base that includes a percentage of accounts receivable and inventory.

The line of credit was guaranteed by each of the Company’s wholly-owned subsidiaries and the term loan was secured by a security agreement among API, the Company’s subsidiaries and PrivateBank, pursuant to which PrivateBank received a first-priority security interest in certain described assets.

On January 31, 2012, API entered into a loan and security agreement (and such other documents which constitute the SVB Loan Agreement) with Silicon Valley Bank (SVB) and terminated the PrivateBank Loan Agreement by paying off the outstanding balances. The terms of the SVB Loan Agreement provide for a $5 million line of credit with a $3 million Export-Import (EX-IM) sublimit at an interest rate that ranges from prime plus 50 basis points on up to prime plus 375 basis points depending on the Company’s liquidity ratio and adjusted six month rolling EBITDA as defined in the SVB Loan Agreement. The SVB Loan Agreement contains a covenant for an initial minimum six month rolling adjusted EBITDA of negative $1,250,000 which reduces over time to $1 as of April, 2013. There is also a minimum liquidity ratio of 2.25 based on outstanding cash, receivables and debt as defined in the SVB Loan Agreement. The amount that can be drawn on the line of credit is subject to a formula based on the Company’s outstanding receivables and inventory. In addition, the SVB Loan Agreement provides for a $1 million term loan with principal payable over three years in equal monthly installments and interest at a rate ranging from prime plus 100 basis points to prime plus 425 basis points dependent on the Company’s liquidity ratio and adjusted six month rolling EBITDA as defined in the SVB Loan Agreement. Under the SVB Loan Agreement, the Company may prepay all, but not less than all, of the term loan by paying a prepayment premium equal to (i) 1.00% of the amount outstanding if prepayment occurs before the first anniversary of the term loan; (ii) 0.50% of the amount outstanding if prepayment occurs after the first, but before the second anniversary of the term loan; and (iii) 0.25% of the amount outstanding if prepayment occurs after the second anniversary of the term loan. In addition, if the term loan becomes due and payable because of the occurrence and continuance of an Event of Default (as defined in the SVB Loan Agreement), the Company will be required to pay a termination fee equal to 1.00% of the amount outstanding.

On October 25, 2012, the Company and SVB agreed to modify the initial covenants retroactive to the September 28, 2012 quarter end, and revise the interest rate structure and other terms of the SVB Loan Agreement. The amendment provided for a three month rolling EBITDA calculation with up to negative $1 million allowed through November 2012. The minimum adjusted EBITDA as defined in the SVB Loan Agreement reduces over time to $1 beginning in April 2013. The liquidity ratio was relaxed from 2.25 to 2.00. The maximum interest rate on any outstanding line of credit balances widened from prime plus 375 to prime plus 400 basis points depending on the Company’s liquidity ratio and adjusted three month rolling EBITDA. The maximum interest rate on the SVB term loan widened from prime plus 425 basis points up to prime plus 450 basis points depending on the Company’s liquidity ratio and adjusted three month rolling EBITDA. Finally, The Company has been given an additional $500,000 in Permitted Liens for a total of $750,000. The interest rates on the SVB term loan and line of credit as of December 28, 2012 were 6.25% and 5.75%, respectively, and 6.75% and 6.25%, respectively, as of October 25, 2012. The Company was in compliance loan covenants at quarter end, had nothing outstanding on the SVB line of credit with approximately $2.6 million in additional borrowing capacity as of December 28, 2012.

The EX-IM line of credit with SVB is guaranteed by API and its subsidiaries and all borrowings under the SVB Loan Agreement are secured by a first priority security interest that the Company and its subsidiaries granted to SVB over substantially all their respective assets. The terms of the SVB term loan and line of credit are three years and two years, respectively, the latter of which can be extended by mutual consent.

Total interest payments made to the Company’s bank lenders during the nine months ended December 28, 2012 and December 30, 2011 were $43,000 and $42,000, respectively. Total interest payments made to the Company’s bank lenders during both the three months ended December 28, 2012 and December 30, 2011 were $13,000.

Subsequent to the quarter end, the Company entered into a secured debt agreement with Partners for Growth III, L.P. (PFG) on February 8, 2013 which is subordinated to SVB’s senior secured position (the PFG Loan Agreement). In conjunction with this transaction, the Company executed a second amendment to the SVB loan to allow PFG a subordinated position and to adjust the previous covenant levels. The terms of the PFG Loan Agreement provide for receipt by the Company of $2.5 million in cash in return for monthly principal and interest payments over a period of 42 months at an initial interest rate of 11.75%. The interest rate may reduce by 2% to 9.75% based on the achievement of certain revenue and adjusted EBITDA metrics in future periods. Consistent with a second amendment to the SVB Loan Agreement, the PFG Loan Agreement provides for a rolling three month adjusted EBITDA covenant on a go forward basis and a minimum liquidity ratio of 2.25 to 1.00. The new adjusted EBITDA covenant begins at a negative adjusted EBITDA of $750,000 for the period from January to June 2013, negative adjusted EBITDA of $300,000 for July through October 2013, adjusted EBITDA of $1 for November 2013 through February 2014, and a minimum of $100,000, thereafter subject to reset based on mutual agreement once a fiscal year 2015 budget is submitted to the lenders. The Company is restricted under the agreement from borrowing more than $1.5M on the SVB line of credit for the first six months of the PFG Loan Agreement.

As part of the consideration for the PFG Loan Agreement, the Company will grant PFG and certain of its affiliates warrants to purchase up to 1,195,000 shares of the Company’s Class A Common Stock upon receiving NYSE MKT’s approval of an additional listing application covering the shares of Class A Common Stock issuable under such warrants. 995,000 of the shares issuable under the warrants will be granted at initial strike price equal to the lower of (i) $0.50 per share, or (ii) the volume-weighted average price per share of the Company’s Class A Common Stock on the NYSE MKT stock exchange for the ten (10) trading days ending on the business day immediately preceding the warrant grant, and the remaining 200,000 shares issuable under the warrants will be granted at a $1.00 strike price. In the event that the Company achieves at least $32,600,000 in Revenues and $412,000 in EBITDA during the fiscal year ending March 31, 2014, the warrant agreements pursuant to which the warrants will be issued (the PFG Warrant Agreements) provide that an aggregate of 100,000 of the $0.50 warrants and an aggregate of 100,000 of the $1.00 warrants will be cancelled. The PFG Warrant Agreements also include a net exercise provision pursuant to which the warrant holders would receive the number of shares equal to (i) the product of (A) the number of warrants exercised multiplied by (B) the difference between (1) the fair market value of a share of Class A Common Stock (with fair value generally being equal to the highest closing price of the Company’s Class A Common Stock during the 45 consecutive trading days prior to the date of exercise) and (2) the strike price of the warrant, (ii) divided by the fair market value of a share of Class A Common Stock. In addition, in the event the Company is acquired, liquidates, conducts a public offering, or the warrants expire, each warrant holder will have the right to “put” its warrants to the Company in exchange for a per share cash payment that varies with the number of shares issuable under each warrant, but in the aggregate will not exceed $250,000.

The PFG Loan Agreement will close upon the Company’s issuance of the warrants and the satisfaction of other closing conditions customary for transactions of this nature. The Company expects to close the PFG Loan Agreement during the week of February 11, 2013.

Subsequent to the quarter end, a Second Amendment to the SVB Loan Agreement was signed and provided for an increase in the liquidity covenant from 2.00: 1.00 to 2.25: 1.00, a revision to the three month rolling adjusted EBITDA covenant to conform to the EBITDA covenant in the PFG Loan Agreement, a change to the streamline reporting trigger, and an agreement to waive the restriction on granting any security interest to other parties to permit the Company to enter into the PFG Loan Agreement. The Company currently enjoys streamline reporting if it has at least $1 in adjusted EBITDA and a liquidity ratio of at least 2.50: 1.00. The streamline reporting provision was amended to permit the Company to provide streamlined reporting any time it has more than $3 million in cash and line of credit availability, and no funds drawn against the line of credit. The interest rate structure of the loan remains substantially the same. The Second Amendment to the SVB Loan Agreement will become effective upon the closing of the PFG Loan Agreement.

MEDC/MSF Loans

The Michigan Economic Development Corporation (MEDC) entered into two unsecured loan agreements with the Company’s subsidiary Picometrix: one in fiscal 2005 (MEDC-loan 1) and one in fiscal 2006 (MEDC-loan 2). Both loans have been modified as to the interest rate and principal repayment terms in prior years. Currently both loans have an interest rate of 4% and the maturity dates on MEDC-loan 1 and on MEDC-loan 2 are November, 2014 and September, 2014, respectively.

Interest payments made to the MEDC/MSF were $38,000 and $58,000 during the nine months ended December 28, 2012 and December 30, 2011, respectively. Interest payments made to the MEDC/MSF were $10,000 and $20,000 during the three months ended December 28, 2012 and December 30, 2011, respectively.

Related Parties Debt

As a result of the 2005 acquisition of Picotronix, Inc., the Company issued four year promissory notes (the Picometrix Notes) to Robin Risser, the Company’s COO, and Steve Williamson, the Company’s CTO (collectively, the Note Holders) in the aggregate principal amount of $2,900,500. API had the option of prepaying the Picometrix Notes without penalty. The maturity date of the Picometrix Notes was subsequently extended in a series of amendments. In particular, on November 29, 2010, the Company and the Note Holders entered into the fifth amendment to the Picometrix Notes (the Fifth Note Amendment). The Fifth Note Amendment required the Company to pay the Note Holders a restructuring fee of $156,312 (11%) and extended the due dates for the remaining principal balance payments on the Picometrix Notes (in the aggregate amount of $1,400,500) through September 1, 2012.

As part of the Fifth Note Amendment, the interest rate on the Picometrix Notes was increased from prime plus 1% to prime plus 2%, and interest was to be paid quarterly through the maturity date. The Company received Board approval to pay both the September 1, 2011 and December 1, 2011 principal payments on September 1, 2011. Pursuant to the terms of the SVB Loan Agreement, on January 31, 2012, the Company used $728,735 of the proceeds of the term loan to pay all indebtedness (including accrued interest) owed to the Note Holders.

Interest payments made to Related Parties during the nine month periods ended December 28, 2012 and December 30, 2011 were zero and $44,000, respectively. Interest payments made to Related Parties during the three month periods ended December 28, 2012 and December 30, 2011 were zero and $13,000, respectively.