Note 7 - Notes Payable - Founders

6 Months Ended

Jun. 30, 2012

NOTE G – NOTES PAYABLE – FOUNDERS

To satisfy our short-term liquidity needs, the founding Levy family from time to time (prior to 2003) made loans to us. Jay Levy, our former director, Chairman of the Board, Treasurer and Assistant Secretary, and Jean Levy are/were the parents of Warren Levy and Ronald Levy, our former executive officers and directors. Total interest expense on all Levy loans was approximately $439,000 and $421,000 for the three months ended June 30, 2012 and 2011, respectively. Total interest expense on all Levy loans was approximately $881,000 and $833,000 for the six months ended June 30, 2012 and 2011, respectively. As of June 30, 2012, total accrued interest on all Levy loans was $8,115,065 and the principal amount of the outstanding loans by the Levys to us totaled $14,437,518, for an aggregate owed to them of $22,552,583. These loans are collateralized by secondary security interests in our equipment and certain of our patents.

On March 10, 2011, we entered into the Settlement and Release Agreement and Amendments (the “Settlement Agreement”) by and among the Company and the Estate of Jean Levy, The Jaynjean Levy Family Limited Partnership, Dr. Warren Levy, our former president, and Dr. Ronald S. Levy, our former executive vice president (collectively, the “Levy Parties”). Pursuant to the Settlement Agreement, the Company made the following payments in the six months ended June 30, 2011:

In March 2011, we paid (a) Dr. Warren Levy a lump-sum severance payment in the amount of $327,750; (b) Dr. Ronald Levy a lump-sum severance payment in the amount of $280,250; and (c) into escrow remaining severance payments in the aggregate amount of $303,996, $163,875 of which was released to Dr. Warren Levy and $140,125 of which was released to Dr. Ronald Levy, each in accordance with his respective employment agreement in monthly increments beginning September 2011 through February 2012;

2.	In March 2011, we paid (a) $151,268 to Dr. Warren Levy representing a portion of his vacation pay and (b) $136,736 to Dr. Ronald Levy representing a portion of his vacation pay;

3.	On October 11, 2012 and November 13, 2012, we are obligated to pay an aggregate of $162,296: $85,241 to Dr. Warren Levy and $77,055 to Dr. Ronald Levy, in full satisfaction of their respective vacation pay; and

On November 13, 2012 and December 11, 2012, we are obligated to pay an aggregate of $200,000 into Rabbi Trust Accounts, $100,000 into an account for the benefit of Dr. Warren Levy and $100,000 into an account for the benefit of Dr. Ronald Levy, in full satisfaction of our obligations to each of them under the deferred compensation program.

Loan payments under the amended notes of $500,000 previously due on November 10, 2010 and $250,000 due on May 10, 2011 have been postponed under the Settlement Agreement. The new payment schedule specifies five monthly payments of $150,000 from May 2012 through September 2012.

On May 29, 2012, the Company entered into a revised settlement agreement (the "Revised Settlement Agreement") with the Levy Parties and, for certain limited purposes, Victory Park Capital Advisors, LLC and several affiliated entities (collectively, the "Victory Park Parties"). Pursuant to the Revised Settlement Agreement, the Levy Parties have agreed that, except with respect to two $150,000 installments payable by the Company to the Levy Parties on May 29, 2012 and June 29, 2012, the obligations of the Company to make payments to the Levy Parties pursuant to the Settlement and Release Agreement dated as of March 10, 2011, between the Company and the Levy Parties have been deferred.

As part of the Revised Settlement Agreement, the Levy Parties have agreed to waive the payment obligations of the Company under the prior Settlement Agreement and to release various claims (the "Levy Released Claims"), subject to the Company's satisfaction of the following conditions on or before September 30, 2012: (1) payment to the Levy Parties of $8,000,000, less the amount of the Interim Payments; (2) timely payment of the Interim Payments; (3) issuance to the Levy Parties of 5,000,000 shares of the Company's common stock; and (4) execution and delivery of a registration rights agreement in the form of Exhibit B to the Revised Settlement Agreement. Furthermore, all representations and warranties of the Company must remain true and correct in all material respects as of the date such deliveries are made, unless such representations and warranties are as of a date certain. The representations and warranties include, without limitation, representations that: (w) the Company has timely made all SEC filings since March 15, 2012, such filings comply in all material respects with the Securities and Exchange Act of 1934 (the “Exchange Act”) and all SEC rules and regulations, are not materially misleading and no events have occurred that would require amendments or supplements to such filings; (x) as of the date of the Revised Settlement Agreement, the Company has not received any written third-party offers or expressions of interest to provide additional financing in excess of $30,000,000; (y) the Company has not received and does not have a reasonable basis to expect to receive any written offers or expressions of interest for any transaction for aggregate consideration in excess of $80,000,000; and (z) as of the date of the Revised Settlement Agreement, the Company has not received any written offers or expressions of interest to sell or license any material portion of its assets. In the event that such conditions precedent are met on or prior to September 30, 2012 and if, on or prior to September 30, 2012, the Company receives a written offer or expression of interest for a transaction involving consideration in excess of $80,000,000, then the Company is required to pay the Levy Parties at the time of consummation of such transaction ten percent of such consideration in excess of $80,000,000, but in no event more than $15,000,000 less the then current market value of the 5,000,000 shares of common stock delivered to the Levy Parties.

In the event that such conditions precedent are met and the Levy Released Claims are resolved, the Company and the Victory Park Parties will release, and receive releases from, the Levy Parties of all claims, except for certain expressly excluded claims.

If the Company fails to make the Interim Payments when due, its representations in the Revised Settlement Agreement shall be untrue in any material respect, or it receives prior to the funding date a written offer or expression of interest with respect to a transaction contemplating the purchase, sale, transfer or other disposition of all or a controlling portion of the Company’s equity securities or all or a material portion of the Company’s assets (whether by merger or otherwise) for aggregate consideration in excess of $80,000,000, the Levy Parties may terminate the Revised Settlement Agreement upon written notice to the Company.

The Company has not recorded any accounting adjustments related to the Revised Settlement Agreement as of June 30, 2012. The necessary adjustments will be recorded if and when the Company meets its remaining obligations prior to September 30, 2012. Currently, the Company does not have sufficient cash to make the final payment contemplated under the agreement with the Founders. In light of the recent EMA recommendation (see Note A), the expected financial impact on business operations and the ability of the Company to raise funds, the Company does not believe it will be in a position to fund the debt settlement with the Levy Parties. In the event that the Company does not fund the debt settlement, the Company will owe the Levy Parties a total of $23,000,000 in principal and accrued interest as of September 30, 2012.

- 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.

+ References+ Details