DEFAULT OF CREDIT AGREEMENT ADDS TO FRISBY’S MONEY
WOES – COMPANY MIGHT HAVE TO FILE FOR BANKRUPTCY
PROTECTION
By Kristi E. Swartz JOURNAL REPORTER
November 22, 2002
Publication: Winston-Salem Journal (NC)
Page: 1
Word Count: 555
Frisby Technologies Inc.’s financial troubles continue to mount, with the company
reporting that it defaulted on its loan agreement with two creditors. If the company
does not meet the requirements of the loan or renegotiate the terms by Dec. 18, it might
file for bankruptcy protection, Frisby said yesterday.
Frisby, a cash-strapped technology company based in Winston-Salem, has not met the net-worth
requirements on a $1.25 million line of credit it began receiving in January from two lenders based
in Switzerland.
DAMAD Holdings AG and Bluwat AG arranged for Frisby to receive the line of credit over three
years.
The terms of the deal required Frisby to maintain a tangible net worth of no less than $1.25 million
at the end of each fiscal quarter.
At the end of Frisby’s third quarter, ending Sept. 30, the company had a negative net worth of
$663,402.
The company said that it had not missed a payment on the line of credit.
DAMAD and Bluwat formally notified Frisby of its default on Nov. 18. The company has 30 days to
meet the net-worth requirements or change the terms of the loan.
The company said yesterday that it does not expect to meet those requirements within the
proposed time limit.
Should the waivers be granted, Frisby does not expect them to last longer than 12 months, according to a Nov. 14 filing with the U.S. Securities and Exchange Commission.
If there is no waiver and if the terms are not renegotiated, the outstanding balance and accrued
interest would be due Dec. 18. Also, DAMAD and Bluwat would be allowed to increase the loan’s
interest rate.
DAMAD and Bluwat could also make the accrued interest and any outstanding fees part of the
principle balance of the line of credit, with the interest to increase daily until the entire amount is
paid off.
The creditors could also foreclose on nearly all the security assets that they have in the company,
Frisby said.
Frisby also has not met certain terms of a loan from two other long-term investors, according to
last week’s filing.
In July, the company received $600,000 in revolving credit from MUSI Investments SA, a
Luxembourg company, and from Finpart International SA, which is based in Italy.
The filing said that Frisby is also asking for a waiver on these requirements.
Frisby went public in 1998 and has never reported a profit. Its third-quarter net losses were more
than double what they were a year ago, despite steps to reduce operating expenses and increase
sales.
The company makes temperate-control material for a number of industries, including apparel,
which has suffered under the slow
Comments:
Covenants in loan covenants can have at least two purposes.
The first purpose is to prevent management from taking actions that would disadvantage the lender. An
example might be a covenant that limits dividends. Without the limit on dividends, management would be
able to borrow heavily, pay the cash out as a dividend and leave the company an empty shell for the lender.
A limit on dividends prevents this.
The second purpose is to provide lenders an opportunity to stop the loan ahead of the scheduled maturity in
the event of deterioration of the company. Companies can deteriorate because of shocks that management
has no control over. If these shocks reduce the ability to repay the debt, covenants that capture the risk of
non-payment can allow the lender to call the debt before the risk of non-payment gets too severe.
Covenants can provide the lender with an early out.
Problem Statement:
Required:
1. What is a minimum tangible net worth covenant, and what purpose does it serve in the Frisby loan agreements?
2. Why might lenders be reluctant to waive covenant violation?
3. Among the options available to Frisbys lenders is foreclosure: shuttering the company and selling off all the
assets. Why might the lenders prefer to avoid this action?
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