As Digital Lightwave Inc. (Nasdaq: DIGL) struggles to settle its debts and raise more capital, a company controlled by its chairman has stepped in to loan it money at a 10 percent interest rate.

The Clearwater, Florida-based test equipment maker has borrowed $450,000 from a company controlled by its chairman and majority shareholder Bryan Zwan, according the company's April 1 filing with the Securities and Exchange Commission (SEC). The Zwan-controlled entity, Optel LLC, has loaned Digital Lightwave about $1.9 million to date. Optel will make 10 percent interest on the loan, which is secured by "a first priority security interest in substantially all of the assets of Digital," the filing states.

The loan comes as the company is being put under pressure to make payments to creditors.

"Digital has insufficient short-term resources for the payment of its current liabilities," the filing also states. "Various creditors have contacted Digital in order to demand payment for outstanding liabilities owed to them. Digital is in discussions with such creditors and is seeking to restructure its outstanding liabilities."

To help Digital Lightwave out while it continues to try and raise funds, Zwan's Optel has provided the company with a non-binding letter offering a $10 million line of credit, which includes the $1.9 million already outstanding. Optel wouldn't get any warrants or other equity consideration for the credit line, but it would collect 10 percent interest per annum, due on the 18-month anniversary of the credit facility.

Digital Lightwave has also hired Raymond James & Associates Inc. to help the company figure out what alternatives are available to it. The SEC filings don't, however, spell out whether those alternatives include selling the company or declaring bankruptcy. The filing only notes that a failure to raise money soon or restructure its debt would have "a material adverse effect on Digital."

The company's net sales for calendar year 2002 fell to $18 million, a 78 percent drop from its full year 2001 sales of $82.8 million, according to the filing. The company's net loss for the year 2002 was about $62.6 million, or $2 per diluted share, compared with net income of about $2.8 million, or 9 cents per diluted share, during 2001.

Digital Lightwave's market capitalization, which reached $1.25 billion in January 2000, is down to around $25.4 million. Put another way, the company's shareholders have watched more than $1.2 billion in shareholder value disappear in just 28 months.

In the past, Zwan raised more than $300M in "forward sales contracts" of his Digital Lightwave stock (see DIGL Founder: $348M in Insider Sales and Zwan Responds on DIGL Stock Deals ).

A Digital Lightwave spokesman did not return calls, made today and yesterday, seeking comment.

— Phil Harvey, Senior Editor, Light Reading