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Telex To Restructure
Buys Time by Putting $20 Million on "Corporate Credit Card"by Christian Doering, Marketing Partner, Dynamic Market Systems
Earlier this year, Burnsville, MN-based Telex Communications filed form 8-K with the Securities & Exchange Commission, notifying the SEC that it is asking holders of its corporate bonds to allow it to issue an additional $20 million in "Senior Subordinated Notes." Telex is paying as much interest as a college student would pay for a MasterCard: the rate starts at 18% and rises by .75% each quarter until it reaches 25%, and Telex can decide not to pay the interest due but to compound it and add it to the principal, where it accrues additional interest, just the way you can with your VISA balance. This appears to be a "bridge loan" designed to give Telex Communications Group time to sell off "certain businesses and assets" in order to become profitable and to make scheduled payments on its Senior Credit Facility.
Borrowing money to pay interest on money you've already borrowed is not unusual in big time finance. Once you owe enough money, you've got a certain amount of leverage with the bankers who decided that your business was a good credit risk, and they will often lend you more if they can be convinced that things will get better. The bank's alternative is to shut the company down, liquidate its assets, write off the remaining balance of the loans as bad debts; and admit they made a mistake, which is not a good thing in the career of a high-ranking loan officer.
There are three groups of lenders who could shut Telex down: the holders of the 11% notes, represented by Manufacturers & Traders Trust of Buffalo, NY, the 10.5% note holders, represented by Bank One Trust of Columbus, OH, and the "senior lenders" who put up the original capital used by Greenwich Street to acquire EVI from Mark IV. When people lend you lots of money, you can get a lower interest rate by agreeing to "financial convenants" that are designed to reduce the risk to the lender. Telex and its predecessors agreed to make a "Minimum Consolidated EBITDA", otherwise known as an operating profit (EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization). They also agreed to "Maintenance of Consolidated Fixed Charges Ratio" and "Maintenance of Leveraging Ratios" convenants. Both of these limit the amount of money Telex can borrow relative to its short and long term assets. In order to stay in business, Telex "has requested that the lenders under its existing Senior Credit Facility (i) waive the Technical Defaults, (ii) reduce the Minimum Consolidated EBITDA requirements, and eliminate the covenants pertaining to "Maintenance of Consolidated Fixed Charges Ratio" and "Maintenance of Leveraging Ratios", for future periods, and (iii) consent to the issuance of the New Indebtedness." In plain(er) English, don't call the original loan, accept the fact that we were overly optimistic when we told you how much money the company was going to make, and allow us to keep borrowing until we can turn parts of the existing business into great huge lumps of cash.
That's a pretty big giveback, and the senior lenders are requiring some hefty compensation. Telex will have to pay off the original loan (the senior debt) on October 31, 2002, earlier than originally agreed. In addition, Telex will prepay $20 million in term loans by December 31, 2001. But wait: over $12 million of the $20 million they're borrowing now is committed to interest payments on the second and third rounds of debt financing. Where is Telex going to get $12 mil by the end of this year? According to the 8-K, by selling "certain businesses and assets of the company."
So the next question is which businesses and assets are on the block? It's not easy to tell from the consolidated financial statements the company is required to make public. "The Company offers a comprehensive range of products worldwide for professional audio systems as well as for multimedia and other communications product markets, including wired and wireless microphones, wired and wireless intercom systems, mixing consoles, signal processors, amplifiers, loudspeaker systems, headphones and headsets, tape duplication products, Talking Book Players, wireless LAN and SBA systems, personal computer speech recognition and speech dictation microphone systems and hearing aids and wireless assistive listening devices," say the Managers & Directors in their overview. Here are the numbers those segments of the current business, which loosely correlate to Old Telex and EVI, posted for the last two years.
Key Data From Telex's 8-K SEC Filing
| |
|
2000 |
1999 |
| Net Sales |
|
$328,855 |
$346,057 |
| |
Pro Sound & Entertainment |
64.60% |
61.40% |
| |
|
$212,440 |
$212,479 |
| |
Multimedia/Audio Comm |
35.40% |
38.60% |
| |
|
$116,415 |
$133,578 |
| Total net sales |
|
100% |
100% |
| Cost of Sales |
|
$204,113 |
$219,399 |
| |
Pro Sound & Entertainment |
80.50% |
74.00% |
| Pro |
|
$164,290 |
$162,322 |
| |
Multimedia/Audio Comm |
34.50% |
42.50% |
| Comm |
|
$70,510 |
$93,301 |
| Gross profit |
|
$124,742 |
$126,658 |
| |
Pro Sound & Entertainment |
38.60% |
39.60% |
| |
|
$48,150 |
$50,157 |
| |
Multimedia/Audio Comm |
36.80% |
31.80% |
| |
|
$45,905 |
$40,277 |
| Total gross profit |
|
37.90% |
36.60% |
| Operating expenses |
|
34.80% |
33.20% |
| Operating income |
|
3.10% |
3.40% |
| Interest expense, net |
|
$36,019 |
$36,689 |
| |
|
11.00% |
10.60% |
| Net Loss |
|
-5.50% |
-6.50% |
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There are some items in between Interest Expense and Net Loss, principally a tax refund, which make the loss smaller. This is one of the attractions of debt financing: it reduces profits and therefore taxes. Of course, if you're paying over $3 million a month in interest, it's hard to make any profit, even on sales of more than $300 million a year.
Of the two segments listed above, Multimedia & Audio Communications is smaller but growing in profitability. Now that the low-margin "electronic imaging product line" is no longer a part of it, Multimedia etc. could be the business equivalent of that Ozzie babe who crushes a giant can of lager on her forehead before moving from the bar to the dinner table: a keeper, as the TV ad says. On the other hand, does anyone see much growth ahead in Talking Book players and tape duplication? Perhaps that part of the biz is more like those woman of a certain age who act out the benefits of estrogen supplements: lean, tough, more than capable of defending themselves (can anyone tell me why they're always practicing martial arts?), but with a definitely limited life span and some severe health issues waiting in the wings. However, the Pro Audio part (aka EVI) had flat sales and rising costs, related to the closing down of Buchanan, MI and the learning curve at the new manufacturing plant in MN, says the 8-K. Does that make EVI the business equivalent of the middle-aged guy who can't get his cholesterol down without sacrificing his liver to the ravages of modern biopharmacology?
Telex Communications may not be divided along historical lines anyway. Geography (Dynacord, anyone? Going once…) and brand/product lines (Midas/K-T independent again? Hmm…) are more likely possibilities. At least whatever business units are sold off won't labor under the $1.7 million management fee that Telex pays to Greenwich Street Capital Partners each year. But how do they cut up the $55 million in "intangible assets" still recorded on the corporate balance sheet?
Like so many corporate documents, the Telex 8-K builds to a brave conclusion: "Öthe Company believes, based on current expectations regarding the business of the Company, as described below, that it will (i) have sufficient cash flows and liquidity to fund its working capital needs and to make scheduled principal and interest payments under its existing Senior Credit Facility and the Notes for the foreseeable future, and (ii) be able to meet the modified ''Minimum Consolidated EBITDA' requirements under its existing Senior Credit Facility." Translation: the most attractive businesses will be sold off in measured haste to raise cash, and the remainder will have to milk as much profit as possible out of some aging cash cows. The bright side is that some still strong audio brands could soon end up back in the hands of audio people, who are more likely to grow them than the Wall Street bankers who've been running the show for the last five years.
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