Whither Audio Research

[Another Johnson]

Rather than report on what I just read, I’m pointing out that there have been a LOT of documents added to the court case. I will report that it looks like much of what was reported in the Tracking Angle stories will turn out to be true.

 

[Nathanu]

The receiver filed a motion with the court for approval of the sale of certain assets of Audio Research to Acora Acoustics Corporation (Canada) for $1,088,818.18, free and clear of liens. The sale was completed on May 15, subject only to court approval. The sales proceeds are currently held in escrow pending the court’s approval. This would not have occurred without the consent of the secured lender, Minnesota Bank & Trust, which explains why the bank is pursuing a deficiency judgment against Trent Suggs. Although the proposed order to be considered by the court does not specify the assets sold, it is very likely that the assets sold include all furniture, fixtures, tools, parts, inventory, and tradenames, patents, logos, and other intellectual property (which would include the name Audio Research). With the apparent support of the bank since no sale would occur without a release of its lien, it would seem likely that the requested order will be approved and entered by the court at the next scheduled hearing.

 

[Another Johnson]

The receiver filed a motion with the court for approval of the sale of certain assets of Audio Research to Acora Acoustics Corporation (Canada) for $1,088,818.18, free and clear of liens. The sale was completed on May 15, subject only to court approval. The sales proceeds are currently held in escrow pending the court’s approval. This would not have occurred without the consent of the secured lender, Minnesota Bank & Trust, which explains why the bank is pursuing a deficiency judgment against Trent Suggs. Although the proposed order to be considered by the court does not specify the assets sold, it is very likely that the assets sold include all furniture, fixtures, tools, parts, inventory, and tradenames, patents, logos, and other intellectual property (which would include the name Audio Research). With the apparent support of the bank since no sale would occur without a release of its lien, it would seem likely that the requested order will be approved and entered by the court at the next scheduled hearing.

The list of assets sold is enumerated in the 16 page document identified as index 17. It’s pretty much everything except the cash and bank accounts.

 

[Nathanu]

The list of assets sold is enumerated in the 16 page document identified as index 17. It’s pretty much everything except the cash and bank accounts.

Thanks. That’s what happens when I check the docket instead of my paralegal.

 

[Another Johnson]

I never dreamed that this would be considered fair market value. If that was the best bid, a lot of people should be kicking themselves right now. Of course the assets don’t come without the need to fix the cash flow issues that led to the crisis.

At least it looks like Mr. Cora will have control soon and things will move forward. My heart goes out to Trent.

 

[Rt66indierock]

I never dreamed that this would be considered fair market value. If that was the best bid, a lot of people should be kicking themselves right now. Of course the assets don’t come without the need to fix the cash flow issues that led to the crisis.

At least it looks like Mr. Cora will have control soon and things will move forward. My heart goes out to Trent.

What caught my eye was the purchase price and finished goods inventory are about the same. There must be significant operating costs to run the company driving the purchase price down.

 

[Gregadd]

I don't want to rain on anyone's paradr,but I think it's all over but the shouting.

 

[Another Johnson]

I don't want to rain on anyone's paradr,but I think it's all over but the shouting.

No rain, hail, or thunder. Even the shouting is over. The documents filed look like it is on greased skids.

 

[Gregadd]

I would have thought just the name would have been a selling point.
I don't know much about business.it may be better to buy the skeleton after it clears bankruptcy.

 

[Another Johnson]

I would have thought just the name would have been a selling point.
I don't know much about business.it may be better to buy the skeleton after it clears bankruptcy.

Me too. I think there were 17 suitors, and this was the best of the lot. As I understand it, ARC does not own its building. Rent is one of the unsecured debts to be sorted, or so I’m told.

Good business is to buy low and sell high. The buy low point is in place.

According to the filings, there are about 50 employees. According to business data, annual revenues are in the tens of millions of dollars.

I wonder how long it’s been since they had a competent accountant. No wonder The McIntosh Group was willing to let them go.

 

[Lee]

Me too. I think there were 17 suitors, and this was the best of the lot. As I understand it, ARC does not own its building. Rent is one of the unsecured debts to be sorted, or so I’m told.

Good business is to buy low and sell high. The buy low point is in place.

According to the filings, there are about 50 employees. According to business data, annual revenues are in the tens of millions of dollars.

I wonder how long it’s been since they had a competent accountant. No wonder The McIntosh Group was willing to let them go.

As a former banker, I would caution a bit on revenue numbers from typical business data sources. Often they can be self-reported and based on a range of numbers.

 

[Another Johnson]

As a former banker, I would caution a bit on revenue numbers from typical business data sources. Often they can be self-reported and based on a range of numbers.

Yes. That’s why I said tens of millions. I’ve seen figures reported between $25M and $50M. Of course they could be wrong.

 

[Lee]

As a former banker, I would caution a bit on revenue numbers from typical business data sources. Often they can be self-reported and based on a range of numbers.

Yes. That’s why I said tens of millions. I’ve seen figures reported between $25M and $50M. Of course they could be wrong.

Both of those numbers seem extremely high to me but I have not seen their financials.

 

[Another Johnson]

Both of those numbers seem extremely high to me but I have not seen their financials.

I got into digging these data in the context of looking at CJ, ARC, and McIntosh …. In particular their relative size. As you point out, the data from privately held companies is hard to confirm. The 50 employee number came out of the court filing, and this surprised me too. I was thinking more like 25 full time equivalents.

As a practical matter, it’s none of my business. But I felt good about ARC’s relative size (between CJ and McIntosh). But this whole crisis blindsided me. And the sale price was a shocker.

Mr. Cora obviously has to turn this around and find a way to match the cash flow with the overhead. If there really are 50 employees, he’s going to probably have to figure out how many are essential to the mission. I am both optimistic and hopeful.

 

[Abbinormal]

I was a commercial lender for a top tier commercial Bank (top four to be exact) for 30 years. Companies of this size made up a large part of my $150 million portfolio. The covenants outlined in the Forbearance Agreement are a joke at best. The reporting requirements alone can generate an event of default very easily. Is it reasonable to require a Borrower to close out their books on the last day of the month just so you can get a management prepared statement the next day? How do you propose they close out their books considering they have not received their statements from your Bank. Requiring CPA prepared statements on a quarterly basis is a waste of the Borrower's money. The CPA will compile them and additionally will provide no assurances that they accurately reflect the financial condition of the company. They are no better than Management Prepared.

It has been my experience that small banks have a tendency to write loan agreements that can, without too much trouble, create events of default, which have to be addressed. I am not saying this agreement played any part in ARC's troubles but if the Bank is enforcing the covenants as they should be, they have just created a lot of work for themselves that really won't help them manage the risk in the credit.

I wish Val all the best and I hope he can pull this off. ARC is one of the true pioneers in this industry and is worth keeping around.

 

[Nathanu]

Having represented the workout department for two lenders, and after drafting many forbearance agreements in the course of that representation, I found that it is common for the bank to keep a distressed borrower on a very short leash. However, I don’t agree that banks are looking to create a ”gotcha“ situation for the borrower. The borrower is already in default and the bank could have foreclosed on its collateral without a forbearance agreement. The forbearance agreement is the borrower’s last chance. In this situation, I expect that the bank was only focused on the most important covenant: the due date for a capital infusion, sale, or refinancing to pay back the bank. When that deadline came and went, it was all over.

 

[Ron Resnick]

Fifty employees surprises me too! That headcount just does not make any sense.

I would've guessed 10 to 15 people, at the most.

 

[Ron Resnick]

No rain, hail, or thunder. Even the shouting is over. The documents filed look like it is on greased skids.

+1

 

[microstrip]

Fifty employees surprises me too! That headcount just does not make any sense.

I would've guessed 10 to 15 people, at the most.

10 to 15 people would never be able to design, manufacture and ship such line of products using hand soldered high quality boards and artisanal building methods. Aren't ARC people allowed to sleep and have holidays?

 

[Abbinormal]

Having represented the workout department for two lenders, and after drafting many forbearance agreements in the course of that representation, I found that it is common for the bank to keep a distressed borrower on a very short leash. However, I don’t agree that banks are looking to create a ”gotcha“ situation for the borrower. The borrower is already in default and the bank could have foreclosed on its collateral without a forbearance agreement. The forbearance agreement is the borrower’s last chance. In this situation, I expect that the bank was only focused on the most important covenant: the due date for a capital infusion, sale, or refinancing to pay back the bank. When that deadline came and went, it was all over.

My point is that you better be prepared to either put them in default of the foreberance agreement if they are even one day late with that monthly financial statement or formally waive the violation which has to be in writing Our lawyers told us not to put anything in any agreement unless you fully intended for its violation to trigger an event of default. Really, if the borrower is meeting all of the important covenants, are you really going to call a default over a poorly written reporting covenant. If not, then why is it in the agreement.

And yes Nathen, I am very aware how tight a leash banks like to keep a distressed borrower on. I never said that banks are looking to create a “‘gotcha” situation but I have seen many cases where that has happened particularly in smaller banks where covenants and their effect on the Borrower are not really thought through.

The final point is to concentrate on the important convents and don’t stick a bunch of poorly written reporting covenants in the document that can trigger a default just as easily as failing to meet the Important ones.