Telex to Wall Street:
“Give Me Just a Little MORE More Time…”
By Chris Doering, Marketing Partner
Dynamic Market Systems

“Give me just a little more time, and our love will surely grow,” the Chairmen of the Board pleaded over and over again in their one hit (#1 for a week in 1970). Top management may not be quite so confident at Telex HQ in Burnsville, MN or in Cherry Hill, NJ, where Greenwich Capital Partners is based. But on the premise that the fat lady is still in the dressing room squeezing into her corset, Telex has again extended the deadline on its Exchange Offer and Consent Solicitation. The original expiration date of Friday October 12th has now been postponed to Wednesday, November 7th.

So far, the most critical numbers have not changed: Telex revealed that it has received tenders for about $27.5 million of it 10.5% Senior Subordinated Notes along with $18.5 million of the 11% Senior Subordinated Notes. That’s $46 million: not enough “to significantly reduce Telex’s outstanding debt, increase its financial flexibility and improve its cash flow,” as successive press releases have hopefully described the plan.

Telex hopes to turn roughly $350 million in accumulated long and short term debt into: $56.25 million in new 13% notes due 2006 (the old long term notes carry 11% and 10.5% rates and aren’t due until 2007), plus “allocable portions” of shares representing “at least approximately 99%” of Telex, or 100% of a new corporate entity which may or may not be formed via a transfer of assets, plus warrants to buy up to 25% more share “subject to the satisfaction of specified EBITDA requirements.”

Earnings Before Interest, Taxes, Depreciation and Amortization is one way that financial analysts measure the “free cash flows” used in calculating the “net present value” (NPV) of an investment, such as trading in one’s 11% or 10.5% Senior Subordinated Notes for an “allocable portion” of the equity in a corporation. If the NPV is higher than the price you are paying, you may have a good deal. However, NPV is usually based on a spreadsheet predicting a certain rate of growth in profits over a period of five years, and a certain valuation of the business at the end of five years. Many investors have learned, to their cost, that spreadsheets are much better at repeatedly applying a fixed multiplier to today’s numbers than managers are at repeating past successes in the future.

As Telex is careful to point out, “EBITDA is not a measure of performance under generally accepted accounting principles ("GAAP") and it should not be considered in isolation or as a substitute for net income, cash flows from operating activities, or other income and cash flow statement data prepared in accordance with GAAP, or as a measure of profitability or liquidity. Moreover, EBITDA is not a standardized measure and may be calculated in a number of ways.” However, the latest (unaudited) financials released by Telex show an “Adjusted Operating EBITDA of $ 22,629 for the quarter ending September 30, and $ 33,095 for the first three quarters of 2001. Those numbers aren’t as good as last year’s ($ 28,634 for Q3 and $ 39,098 for Q 1 – 3), but they still indicate that Telex is making money: just not enough to meet all of its obligations, such as the interest payment “due on September 17, 2001 under its 11% Senior Subordinated Notes,” which Telex will not make. Nor will it “make the November 1, 2001 interest payment that is due on its 10-1/2% Senior Subordinated Notes,” as the latest announcement dutifully reminds the financial and business press.

There would seem to be plenty of adjustment in Telex’ EBITDA numbers, because it’s a bit hard to find bright spots elsewhere in the latest financial statements. Let’s see here… total liabilities of $423,656,000, up from $399,159,000 a year ago. Sales down 15.5% for the quarter and 13.2% for the first three quarters due to “lower speaker sales, lower sales of products to the computer industry, both in large part due to the slowdown of the economy in 2001, and to lower hearing instrument sales.” A net loss of $32,722 so far this year, nearly half ($15,289,000) in Q3. Net cash used by operations during the first three quarters of $5,233,000 (last year operations had contributed $7,810,000 to Telex’s cash position by the end of September). No wonder the banks don’t appear to be jumping at Telex’s offer. But for industry observers, the real question is, “Who’s the closing act on November 7th?” Will it be the Chambers Brothers doing “Time (has come today)” or the Stones with a special guest encore of “Time Is On My Side?”