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Note 7 - Debt

12 Months Ended

Dec. 31, 2013

7. Debt

Long-term debt consists of the following:

	December 31,
	2013			2012
Term loan payable to Triumph Commercial Finance through September 2016 at $20,000 monthly plus interest at the U.S. Prime Rate plus 400 basis points (7.25% at December 31, 2013) collateralized by accounts receivable, inventory, and equipment	$	1,160,000		$	—
Term loan payable to Bank of America Merrill Lynch through December 2015 at $16,667 monthly plus interest at LIBOR rate plus 375 basis points (3.963% at December 31, 2012) collateralized by accounts receivable, inventory, and equipment		—		$	600,000
Less current portion		(240,000	)		(200,000	)
Long-term portion	$	920,000		$	400,000

The Company entered into a credit agreement with Bank of America Merrill Lynch (“BAML”), pursuant to which it obtained a $1 million term loan, a $2.5 million revolving line of credit and a $500,000 draw note. The credit agreement contained certain covenants with which the Company was required to comply, including a debt service coverage ratio and a funded debt-to-EBITDA ratio. For the quarters ended March 31, 2013 and June 30, 2013, we were not in compliance with either covenant. On September 13, 2013, the Company entered into a Forbearance Agreement with BAML pursuant to which BAML agreed to waive the Company’s obligation to meet these financial covenants and forbear from enforcing its remedies against the Company with respect to such failure through November 30, 2013. On September 30, 2013, the Company terminated the credit agreement with BAML and repaid in full all of the borrowings under these credit facilities.

On September 30, 2013, the Company and its subsidiaries, Security Manufacturing Corporation and American Locker Security Systems, Inc., entered into a Loan Agreement (the “Loan Agreement”) with Triumph Savings Bank, SSB (d/b/a Triumph Commercial Finance) (the “Lender”). The Loan Agreement provides for a $2.8 million revolving credit facility (the “Revolver”) and a $1.2 million term loan facility (the “Term Loan”). The Company initially borrowed approximately $1.7 million on the Revolver and $1.2 million on the Term Loan. The Company used these proceeds to repay in full the outstanding indebtedness under the Company’s prior credit facilities and equipment leases with BAML and for working capital and general corporate purposes.

The Revolver matures on September 30, 2016 and the Lender may, in its sole discretion, extend the maturity of the Revolver for a period of one year, and may further extend the Revolver for one-year periods thereafter. Available borrowings under the Revolver are limited to a borrowing base of 85% of eligible trade receivables plus 50% of eligible inventory (capped at $1,000,000) less any availability reserves established by the Lender. The interest rate on the Revolver is 3.50% plus the greater of (a) the U.S. prime rate as published in The Wall Street Journal or (b) 3.25%.

The Term Loan is payable in equal monthly installments based on a 60-month amortization schedule. All unpaid principal on the Term Loan is due and payable on September 30, 2016, the maturity date. The interest rate on the Term Loan is 4.00% plus the greater of (a) the U.S. prime rate as published in The Wall Street Journal or (b) 3.25%. In the event of a default under the Loan Agreement, the Revolver and the Term Loan will each bear interest at the applicable rate plus an additional 2.00%.

The Company will pay Lender an annual facility fee of $30,000 in the first year and, thereafter, an annual facility fee of 0.75% of the Revolver amount. In addition, the Company will pay Lender a monthly unused line fee equal to 0.50% per annum of the average daily unused portion of the Revolver for the preceding month. In the event the Company desires to terminate the Loan Agreement and prepay in full the amounts outstanding under the Revolver and the Term Loan, it will pay a termination fee equal to $120,000 if terminated before September 30, 2014, $80,000 if terminated after September 30, 2014 but before September 30, 2015, and $40,000 if terminated after September 30, 2015 but before September 30, 2016.

The credit facilities under the Loan Agreement are secured by a security interest in substantially all of the assets of the Company, and its subsidiaries Security Manufacturing Corporation and American Locker Security Systems, Inc., including a pledge of a portion of the stock of Canadian Locker Company Limited, a subsidiary of American Locker Security Systems, Inc., and each is jointly and severally liable for all borrowings under the Loan Agreement. The Company is required to use the net cash proceeds from any asset disposition or the issuance of equity securities (excluding issuances to employees or another borrower) or debt securities to prepay, first, the Term Loan and, if any proceeds remain, to pay down the Revolver.

The Loan Agreement includes various representations, warranties, affirmative and negative covenants, events of default, remedies and other provisions customary for a transaction of this nature. In addition, the Company is required to comply with certain financial covenants on a monthly basis, including a maximum debt to tangible net worth ratio, a minimum fixed charge ratio and a minimum tangible net worth. For the months ended December 31, 2013, January 31, 2014 and February 28, 2014, the Company was not in compliance with these financial covenants. On April 7, 2014, Triumph waived the Company’s failure to meet these financial covenants and the parties amended the Loan Agreement to modify the ratio of debt to tangible net worth covenant, the fixed charge ratio covenant and the tangible net worth covenant. We believe we will be able to comply with each of the financial covenants in the Loan Agreement, as amended, in 2014, though we can give no assurances of such compliance.

On December 10, 2013, the Company executed a Promissory Note (the “Note”), effective as of November 13, 2013, in favor of Anthony B. Johnston, the Company’s Chairman and Chief Executive Officer, in the principal amount of $200,000 to evidence a loan by Mr. Johnston to the Company. The principal balance of the Note, together with accrued but unpaid interest, is due and payable on November 30, 2014. The interest rate on the Note is 6.00% and the Company may prepay the Note at any time and from time to time without premium or penalty. The Note is unsecured and contains event of default provisions that are customary for a transaction of this nature. The Company used the proceeds from the Note for working capital and general corporate purposes.

- 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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