Why Equity, not Debt?
JDN wrote: <<<(Wednesday, Dec 3 1997 5:23AM EST) To begin with I still find it hard to believe they couldn't have borrowed necessary funds, now I see they, in my opinion, got ripped off on the costs of the offering.>>>
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From the October 17, S-3:
Subsequent to June 30, 1997, $2,685,048 of 9% Convertible Debentures was converted to Common Stock, leaving a principal balance of $2,015,000 for that debt. Repayment of the principal balance of 9% Convertible Debentures remaining unconverted will commence on March 1, 1999. With regard to the other debt obligations, $2,151,000 is scheduled to mature prior to June 30, 1998. This significant indebtedness could have important consequences to the holders of Common Stock by restricting the Company's ability to obtain additional financing for working capital, acquisitions or other purposes in the future and by creating the risk that violation of a covenant or other term of the loan agreement could cause the outstanding balance of the loan to become due, putting all of its assets at risk. The Company's ability to make scheduled payments of principal or interest on, or to refinance, the Debentures and bank debt will depend on future operating performance and cash flow, which are subject to prevailing economic conditions and financial, competitive and other factors beyond its control. The terms of the Debentures impose substantial conditions on the Company's ability to redeem or prepay the Debentures. The loan agreements pursuant to which these Debentures were issued contain numerous financial, operating and general covenants and require the Company and its subsidiaries to meet certain financial ratios and tests. Until January 1, 1998, the minimum financial standards under the Debentures are as follows: debt to equity ratio, as defined in the Debenture Loan Agreement, no greater than three to one; current ratio no less than one to one; tangible net worth not less than negative $1,500,000. EBITDA to interest expense shall be no less than .25 to one through September 30, 1997 and .75 to one thereafter until January 1, 1998. Thereafter, the minimum financial standards revert to the following: debt to equity ratio not greater than 3.6 to one; minimum tangible net worth of $1,000,000; and EBITDA times interest expense of not less than 1.5 to one. A failure to comply with the loan agreement covenants could result in an event of default which could permit acceleration of the debt. The obligations of the Company under the loan agreements are secured by a pledge of all of the capital stock of ACT, VHC and ACS and by a first priority security interest in substantially all of the assets of Topro and its subsidiaries. If the Company becomes insolvent or is liquidated, or if payment under the loan agreement is accelerated, the investor would be entitled to exercise remedies available to secured creditors under applicable law and pursuant to the loan agreement. Accordingly, the Debenture holders will have a prior claim on the assets of the Company and its subsidiaries. In addition to the Debentures, the Company and its subsidiaries have other outstanding credit facilities for which assets of the subsidiaries are pledged as collateral. If the Company is not successful in refinancing these credit facilities, its overall liquidity would be negatively impacted and default could result in acceleration of other obligations, including the Debentures.
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The issuance of more debt was probably not an option, because, as the working capital from the debt issue was used, it would put the company in danger of violating the terms of the previous covenants and having up to 4.8 million in debenture debt suddely called. While A/R from PlantY2KOne sales contributes to net worth at this time, the most conservative posture was to do the PP, which dilutes equity on a per share basis but increases Tangible Net Worth. Also any further debt issuance would necessarily be subordinate to the currrent debt and would come at a high cost if it could be placed.
I agree that 8% is high for a PP, but time is of the essence here, and many profitable companies have been killed by cash flow crunches just as the business starts to take off. I often say to my fellow small business owners, "If you think your employees are loyal, try skipping one payroll and see how long you stay in business."
I was hoping the PlantY2KOne revenue would fill in this low point in cash flow also, but it didn't. Probably another 60 days out with the CD and this deal would not have been necessary. I'm NOT losing sleep over this.
Patience,
Zebra |
