SUBSTANTIAL WORKING CAPITAL NEEDS; BANKRUPTCY OF PRINCIPAL FINANCIER.
Since its inception, the Company has depended principally on its stockholders, and in particular from 1989 until February 1995 on Mr. Benton and since 1989 on the Fund, to provide working capital for its operations. Throughout 1992, 1993, 1994 and, in the case of the Fund, through the first two quarters of 1995, Mr. Benton and the Fund have financed the Company's cash flow requirements through equity investments and loans (many of which were subsequently converted into equity). In February 1995, Mr. Benton filed for protection under Chapter 11 of the United States Bankruptcy Code. As a result, financing previously available to the Company under a line of credit from Mr. Benton was no longer available, and the Company could not continue to rely on Mr. Benton as a source of financing. Additionally, as a result of Mr. Benton's bankruptcy, the Company could no longer rely on the Fund to provide financing on terms previously available pursuant to funding arrangements by the Fund and Mr. Benton. During the first two quarters of 1995, the Company was unable to make required principal and interest payments totaling $7,910,000 on certain outstanding debt owed to Mr. Benton and the Fund, but neither Mr. Benton nor the Fund declared an event of default.
After Bankruptcy Court approval in the Benton bankruptcy case, the Fund, Mr. Benton and certain entities affiliated with Mr. Benton, BEA, seven investors advised by BEA and certain other parties consummated in September 1995 the Debt Conversion Agreement providing for (i) the conversion into equity of an aggregate of approximately $24,000,000 of the Company's outstanding debt held collectively by Mr. Benton, the Fund and BEA (as the holder by assignment of a note issued by the Company to Mr. Benton in 1992 in the original principal amount of $12,000,000) and (ii) a new loan facility between the Company and the Fund (the "New Fund Credit Facility") of $12,000,000. The New Fund Credit Facility included $3,000,000 available under a credit facility the Fund had provided to the Company in March 1995. In December 1995, additional outstanding debt of the Company held by Mr. Benton in the amount of approximately $2,700,000 was also converted into equity pursuant to the Debt Conversion Agreement. Based on the Company's capital resources as of September 30, 1996, including amounts available to it under the New Fund Credit Facility, and expected near term product revenues and operating costs, the Company expects to be able to fund its operations through at least 1997. However, there is no assurance that after that period the Company will be able to obtain financing, if required, to fund its operations on terms acceptable to the Company. If the Company's products gain significant market acceptance, the Company will have increased working capital requirements in connection with the manufacturing, production and sale in greater volumes of its FRAM and EDRAM products. If adequate financing acceptable to the Company is not available or revenues from the sale of products are inadequate to fund such expansion, the Company would not be able to implement its current business strategy and the Company's business and operating results could be adversely affected. |
