JanOne Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Liquidity and Credit Agreement

Liquidity and Credit Agreement

12 Months Ended

Dec. 29, 2012

Liquidity and Capital Resources [Abstract]

For the year ended December 29, 2012, we incurred a net loss attributable to controlling interests of $3,852 compared with generating a net income attributable to controlling interest of $4,461 for the year ended December 31, 2011. The $8,313 decline in our operating results had a direct impact on our covenant compliance and liquidity.

The following table illustrates changes in key liquidity measurements for the years ended December 29, 2012 and December 31, 2011:



	2012		2011
Cash and cash equivalents	$	3,174	$	4,401
Working capital	7,631		11,445
Available borrowing under our line of credit	2,531		3,505

As of September 29, 2012, and December 29, 2012, we were not in compliance with the minimum fixed charge coverage ratio covenant and the limitation on loans to affiliates under the Revolving Credit, Term Loan and Security Agreement (“Credit Agreement”) with PNC.


•	The Credit Agreement requires that we meet a minimum fixed charge coverage ratio of 1.10 to 1.00, measured on a trailing twelve-month basis. The fixed charge coverage ratio for the twelve months ended September 29, 2012, and December 29, 2012, was -1.55 to 1.00, and -2.06 to 1.00, respectively. The fixed charge coverage ratio for the fiscal year ended December 31, 2011, was 10.10 to 1.00.

•

The Credit Agreement provides that the outstanding balance of loans from us to AAP will not exceed specified amounts ($800 until June 30, 2012, $550 from July 1, 2012, through December 31, 2012, and $300 thereafter). The outstanding balance of loans to AAP exceeded the permitted amount as of July 27, 2012 and at certain dates thereafter. As of December 29, 2012, and March 20, 2013, the outstanding balance of such loans were $749 and $669, respectively.

These covenant violations are “events of default” under the Credit Agreement and entitle PNC to certain remedies, including but not limited to increasing the interest rate on our obligations under the Credit Agreement by two percentage points, retroactive to the date the default first occurred (July 27, 2012), limiting our available borrowings, or declaring the entire amount of our obligations immediately due and payable. On October 23, 2012, we received a letter from PNC (“default notice”) notifying us that we had failed to comply with the covenant regarding loans to AAP and that PNC was reserving all rights and remedies available to it under the Credit Agreement or otherwise, but PNC did not increase the interest rate or accelerate the obligations.

On March 14, 2013, we executed the third amendment to our Credit Agreement with PNC that extended the agreement two additional years until January 24, 2016, waived our prior “events of default,” reset our financial covenants and increased our interest rate, among other things. The amended terms under the Credit Agreement are as follows:


•	We must meet monthly minimum EBITDA requirements set forth in the amendment through 2013.


•	The affiliate loan balance must be reduced by $40 per month in 2013 and the affiliate loan balance will be capped at $300 on January 25, 2014, and thereafter.


•	Starting on December 28, 2013, we must meet a minimum fixed charge coverage ratio of 1.10 to 1.00 for the nine months then ended and on a trailing twelve-month basis beginning with the period ending March 30, 2014, and each quarter thereafter.

•

The interest rate spread on our Revolving Loan and Term Loan increased 100 basis points for both PNC Base Rate loans and PNC LIBOR Rate loans. We are not eligible to borrow under PNC LIBOR Rate loans until certain Interest Rate Reduction conditions are met as set forth in the amendment. If these Interest Rate Reduction conditions are met, we will also be able to remove the 100 basis point increase for both PNC Base Rate loans and PNC LIBOR Rate loans. The earliest the Interest Rate Reduction conditions could be met is January 31, 2014.


•	A prepayment penalty will be assessed at 3% during the first year of the third amendment to our Credit Agreement, 2% during the second year and 1% during the third year.

We have taken decisive steps to improve our operational execution and profitability in 2013. Our strategic initiatives span all aspects of our business, including our retail stores, regional recycling centers, corporate office and AAP joint venture. We have engaged Alliance Management to assist us with strategy development and execution through the first half of 2013. We are executing several restructuring activities that include lease terminations, job eliminations and contract renegotiations. During the fourth quarter of 2012, we terminated two leases and recorded a $174 lease termination charge. The leases expire in October 2013 and January 2019. The annualized savings from the two lease terminations is approximately $407. During the first quarter of 2013, we completed a corporate staff restructuring and job eliminations that resulted in annualized savings of approximately $749 and recorded a severance liability of $106. Additionally, we are executing several other cost reduction initiatives throughout 2013.

We anticipate that our existing capital resources and operating plan for 2013, including the restructuring activities mentioned above, will be sufficient to fund our operations for at least the next twelve months. There can be no assurances that our strategies and operational execution will not result in another “event of default” with our lender that may limit our available borrowings or accelerate the obligations. There is also no assurance that we will have access to capital should PNC accelerate our obligations in the “event of default” within the next twelve months.