Note 7 - Debt

12 Months Ended

Dec. 31, 2014

Notes

Note 7 - Debt

Note 7 –Debt

Long-term debt consisted of the following as of December 31, 2014 and 2013:

	2014	2013
First mortgage note payable due in monthly installments of $23 (interest   at 5.75%) through January 1, 2024; payment and rate subject to   adjustment every 3 years, next adjustment January 14, 2016	$1,957	$2,116
Second mortgage note payable due in monthly installments of $4 (interest   at 5.75%) through October 1, 2028; payment and rate subject to   adjustment every 5 years, next adjustment October 1, 2018	405	423
Sale/leaseback financing	-	2,818
Total debt	2,362	5,357
Current portion of long-term debt	(2,362)	(2,995)
Long-term debt, net of current portion	$-	$2,362

Mortgage Notes

The first mortgage note payable represents the balance on a $3,200 note (“First Mortgage Note”) issued on January 14, 2004 by Spitz. The First Mortgage Note requires repayment in monthly installments of principal and interest over 20 years.  On each third anniversary of the First Mortgage Note, the interest rate is adjusted to the greater of 5.75% or 3% over the Three-Year Constant Maturity Treasury Rate published by the United States Federal Reserve (“3YCMT”).  The monthly installment is recalculated on the first month following a change in the interest rate. The recalculated monthly installment is equal to the monthly installment sufficient to repay the principal balance, as of the date of the change in the interest rate, over the remaining portion of the original 20-year term.  On January 15, 2014, the 3YCMT was 0.81% and the interest rate on the First Mortgage Note remained at 5.75% per annum. As a result, the monthly installment amount remained at $23.

The second mortgage note payable represents the balance on a $500 note (“Second Mortgage Note”) issued on September 11, 2008 by Spitz. The Second Mortgage Note requires repayment in monthly installments of principal and interest over 20 years.  On each fifth anniversary of the Second Mortgage Note, the interest rate is adjusted to the greater of 5.75% or 3% over 3YCMT.  The monthly installment is recalculated on the first month following a change in the interest rate. The recalculated monthly installment is equal to the monthly installment sufficient to repay the principal balance, as of the date of the change in the interest rate, over the remaining portion of the original 20-year term.  On September 11, 2013, the fifth anniversary of the Second Mortgage Note, the 3YCMT was 0.88%. As a result, interest continues at 5.75% until possible adjustment on the next 5-year anniversary. The monthly installment also remains unchanged at $4.

The Mortgage Notes are secured by the real property occupied by Spitz pursuant to a Mortgage and Security Agreement.  The real property had a carrying value of $4,425 as of December 31, 2014. The Mortgage Notes are guaranteed by E&S.

On October 3, 2014, the holder of the mortgage notes, a commercial bank, notified the Company that the liens placed on the Company’s assets by the Pension Plan constituted an event of default under the mortgage notes’ loan agreements. The commercial bank has agreed to forbear from exercising any further remedies, other than suspension of advances under the working capital line of credit, until March 31, 2015 while the Company negotiates the settlement of its pension liabilities. The agreement to forbear from exercising any further remedies is subject to the Company continuing to make debt service payments under the mortgage note agreements, the occurrence of no further adverse events in the condition of the Company and the Company’s agreement to the incorporation of the financial covenants in the line of credit agreement as additional covenants in the mortgage loan agreements effective immediately and continuing until the loans are paid in full. One of the covenants requires Spitz to maintain tangible net worth of at least $6,000 measured upon issuance of quarterly and annual financial statements. As of the end of the second and third quarter of 2014, Spitz’ tangible net worth was measured at $5,914 and $5,801, respectively. The commercial bank has granted a waiver of the event of default for the failure of Spitz to maintain tangible net worth of at least $6,000 as of the end of the second and third quarter of 2014.  The measurement of Spitz’ tangible net worth as of December 31, 2014 will not be completed until the issuance of separate Spitz 2014 annual financial statements after the issuance of this Form 10-K. The Company expects that the Spitz’ tangible net worth as of December 31, 2014 will measure at approximately $5,700. The commercial bank has advised the Company that is agreeable to granting a waiver for the failure of Spitz to maintain tangible net worth of at least $6,000 as of December 31, 2014. In the future, the Company believes that it will be able to comply with the additional covenants based on forecasts and management of intercompany accounts payable and receivable. Upon settlement of the pension liabilities, the Pension Plan liens will be replaced by consensual liens in favor of the PBGC which will be subordinate to the commercial bank’s lien under terms agreeable to the commercial bank. If necessary, the Company believes that it will have sufficient funds to satisfy the Spitz mortgage note balances, which total $2,362 as of December 31, 2014, if the bank were to accelerate the maturity under its default remedy. However, the Company further believes that it will conclude a satisfactory settlement with the PBGC by March 31, 2015 or within an extended time frame acceptable to the bank. The Company continues to progress through the termination process toward a settlement; however, as of the date of this filing, the Company is uncertain of the timing or the ultimate outcome and it cannot provide assurance that its expectations set forth above will occur in a timely manner or at all.

Line of Credit

The Company is a party to a Credit Agreement with a commercial bank which until October 3, 2014, permitted borrowings of up to $1,100 to fund Spitz working capital requirements. Under the agreement interest would be charged on amounts borrowed at the Wall Street Journal Prime Rate.  Any borrowings under the Credit Agreement would be secured by Spitz real and personal property and all of the outstanding shares of Spitz common stock. The Credit Agreement and Mortgage Notes contain cross default provisions whereby the default of either agreement will result in the default of both agreements. On October 3, 2014, the commercial bank notified the Company that it is no longer obligated to make advances under the credit agreement and elected to suspend future advances because of events of default on loan covenants resulting from the liens placed on the Company’s assets by the Pension Plan. The Company expects that upon settlement of the pension liabilities, it will be able to comply with covenants as required by the commercial bank to permit new borrowings for potential working capital requirements. There were no borrowings outstanding under the Credit Agreement during 2014 and 2013 and, as of December 31, 2014, there was no amount outstanding under the Credit Agreement.

Sale/Leaseback Financing

In November 2009, the Company completed a purchase agreement with a buyer, Wasatch Research Park I, LLC (“Wasatch”) to sell its corporate office buildings and its interest in the lease for the land occupied by the buildings in Utah for $2,500.  Under the agreement, E&S transferred legal title of the buildings including improvements and assigned the related land lease to Wasatch. E&S also entered into a sublease agreement to lease back the land and building for rent of $501 per year, of which $126 represents the land lease and $375 represents the building lease.   The sublease agreement had a term of 5 years with an option for two subsequent 5-year renewal periods.  The agreement provided the Company with a 5-year option to repurchase all of the buildings under lease or only one of the buildings known as the Substation along with the lease interest in the land. In 2011, Rocky Mountain Power (“RMP”), a public utility company, obtained a decree of condemnation of the Substation so that RMP may repurpose the Substation for public use. As such, the Company no longer had the option to buy the Substation.

The arrangement was accounted for as a financing and no sale was recorded because the Company had the right to repurchase the property.  Therefore, the assets representing the building and improvements remained in property and equipment and the Company recorded the net proceeds of the sale as long-term debt. The $126 portion of the sublease payment attributable to the land lease was equivalent to the payment under the assigned land lease and therefore was subject to the same rent escalations the Company was bound to before the assignment. The land lease portion of the sublease payment was recorded as rent expense consistent with the treatment of the prior land lease payment before the assignment of the lease. The $375 portion of the sublease agreement attributable to the building lease was accounted for as debt service under the financing transaction.  The net proceeds of the financing amounted to $2,329 consisting of the $2,500 sales price less a security deposit of $125, prorated building rent of $15 and the first monthly payment of $31. E&S recorded interest expense at a rate of approximately 20% imputed from the estimated cash flows assuming it would exercise the option to repurchase the property at the end of the 5-year term.

The repurchase transaction was required to have been completed by October 31, 2014. On November 4, 2014, the Company agreed to an extension of its current lease for a term of 5 years. As a condition of the extension, the Company will no longer have a right to repurchase the buildings. Base annual rent for the extended 5-year term will be is $548.

The extension of the lease for 5 years without a repurchase option resulted in a new operating lease and the extinguishment of the lease debt obligation in the amount of $3,152 along with the disposal of building assets amounting to $2,532. As a result, there was a gain on the disposal of the building assets in the amount of $620 which was deferred under sale leaseback accounting rules (see Note 5).