Will Syntax-Brillian Survive?

It is probably an understatement to say that Syntax-Brillian (BRLC), makers of the Olevia televisions, is now in deep financial trouble. The stock has fallen about 78% from $3.12 at the beginning of the year to a low of 70 cents. The most recent sell off was prompted by the company or rather the company’s creditors forcing the company to disclose they were in default over 19 covenants of their loan in an 8-K. I have been highly critical of the $250 million financing obtained by Syntax-Brillian back in November in a previous article. The main reason was the terms of the loan had interest rates between 11% to 13% at the time and required the company to issue 5 million warrants, exercisable at 1 penny per share, for Syntax-Brillian common stock.

Now, the terms of the loan have become even worse under an amended agreement that took place on February 14, 2007. The new agreement sets the minimum interest rate at 15.5% for prime rate based loans and 13.5% for Libor rate based loans. The company’s line of credit has been reduced from $250 million to $120 million. Since the company borrowed $137 million, they would have to pay down $17 million. In addition, the company is also required to pay immediately the amount of around $8 million in interest and fees to their lenders. The revised agreement also imposed many mandates onto Syntax-Brillian. Many of them had a deadline of February 19, 2008, which the company failed to meet.

In the Schedule A of the 8-K, it lists the 19 defaults of the company. The most concerning one is that the company failure to prepay the loan down to $120 million and other payments as required by the amendment. The company also failed to notify their lenders they would be in default, failed to provide projections, cash budgets, and reports to their lenders, and failed in meeting many other obligations of the loan. There are also some minor issues like insuring James Li, president and CEO, for a $100 million minimum policy that the company wasn’t able to perform.

The lenders agreed to give the company until February 29, 2008 before taking further action in the forbearance agreement made on February 21, 2008. Although each day the company is in default, they are required to pay a default rate which translates to even higher interest. However, the actions by the lenders in the amended agreement do not signal they have a lot of hope in the company. Rather, it appears they are doing what they can in order to protect their money. They have cut off the company’s credit, required the company to have their approval before utilizing cash, forced the company to submit budgets to them every week, and assigned an “Operation Advisor” to oversee the operations for the company. The “Operation Advisor” though would definitely be looking out for the interest of the creditors rather then the shareholders. On top of it all, the creditors are also taking title to inventory purchased outside of the US and required Syntax-Brillian to dissolve Vivitar Japan, pledge 65% of Vivitar France, Vivitar Asia, and either dissolve or pledge 65% of Vivitar UK as collateral.

It also appears that some Wall Street analyst has given up on Syntax-Brillian. CIBC World Markets and Brean Murray had both discontinued their coverage on the company. Not too long ago they both had some of the most bullish analysts on Syntax-Brillian. They once both had price targets of $15 at one time, which of course never came close. Although when they had those price targets, they helped co-manage Syntax-Brillian’s secondary offering for around $140 million back in May of 2007. I have also been critical of that issue back in an article in May.

Now, it remains to be seen if the company can further renegotiate with their lenders, obtain other financing, find some other way to repay the loan, or be forced into Chapter 11. If the company manages to stay afloat with the current crisis, things are not looking too bright in the future. With the unreasonably high interest rates at a minimum of 13.3% to 15.5% on the current loan, it would greatly hurt the profitability of the company if they can even stay profitable. If the company were able to obtain another loan to pay down the current one, it would be hard to get a much lower interest rate given the financial distress the company is in. In addition, recent reports suggest that growth for flat-screen television appears to have peaked out in the United States. Companies may have to further discount their televisions in order to attract buyers.

The company is also still unable to report their earnings for the quarter ended December 31, 2007 after issuing a delay on February 11, 2008. As a result, the company received a Notice of Delisting from Nasdaq on February 22 that they were not in compliance with Rule 4310 which the company disclosed on February 28. Syntax-Brillian is currently delinquent under Rule 4350 too, which requires a majority of independent directors. After failing to meet the requirement since October 22, 2007, the company still has not publicly announced the appointment of a new independent director.

Disclosure: Author has a short position in BRLC

Comments

[Carson Allen:]

Samuel, I see from your bio that you are employed as an analyst for a hedge fund and, as you've done in the past, you've disclosed that you have a short position in BRLC.

I've asked before that you provide more complete disclosure. There are still questions that you've refused to answer:

1. Your responses to comments on your 12/4/07 article on BRLC revealed that the hedge fund your work for is also short BRLC. Is this still the case?

2. The firm you work for also had a long position in Amtran, a major shareholder and manufacturer for Visio, a major competitor to BRLC. Is this still the case?

3. Will you disclose the name of your employer?

4. Is your employer aware of articles you've posted on Seeking Alpha?

5. Does your employer review or in any sense approve these articles in advance?

We all realize that authors who post articles on Seeking Alpha have a specific point of view, which is as it should be.

Those that read your posts should realize that you are not only biased by your own position in BRLC but it may, in fact, be part of your job to write negative articles about BRLC.

Please take the time to provide more complete disclosure, so the content of your article can be judged fairly.

2008 Feb 29 07:56 AM

[beyondtheverge:]

I think the credit facility was reduced from $150 mln to $120 mln. Not from $250 mln. That is just $30 mln reduction.
Also right now the company might be in a financial stress, but that won't be the case if they continue to operate and collect the outstanding AR and sell the TVs. If that happens, they will be in OK financially and will be able to refinance on much better terms.

This article sure looks like the shorts want to scare people into selling at this low prices by implying the BK is imminent. That is simply not true: I think the BK can be avoided.

2008 Feb 29 08:13 AM

[RC Martin:]

Samuel,

Do you know Andrew Left? Any affiliations with stocklemon.com or Citronresearch.com?

Samuel, do you think the new Director joined just to be embarrassed by a bankruptcy on his watch?

2008 Feb 29 09:43 AM

[ct_programmer:]

SOS. Does this guy get a bonus if he drives it all the way to zero? I mean, if he's short BRLC hasn't he made a ton already and should be moving on to greener [or should that be browner] pastures? Does BRLC have bad management and extremely poor timing? Sure. I'm glad because I bought in during one of those knee-jerk drops in pricing when quarterly results were delayed.

I love how this guy says "In addition, recent reports suggest that growth for flat-screen television appears to have peaked out in the United States. Companies may have to further discount their televisions in order to attract buyers." A month ago, everyone was going on about the growth in demand for LCD's, and companies like GLW were running up on a strong outlook. I guess LCD demand has dropped off a cliff in a month's time and suddenly no one is buying TV's. Certainly not the billions of emerging middle classmen in China.

I'm holding on BRLC. If they drop off the cliff, there's not much farther to go anyway. But if they turn this thing around it will be a different story. It would, however, be nice once in a while to see a blog link for BRLC that doesn't link to someone with a short position trying to drive them into the ground.

2008 Feb 29 10:46 AM

[Samuel:]

Carson: The firm I work for actively trade hundreds of stocks in both the US and Asian markets. My employer has a short position in BRLC as of last week. As for Amtran when I disclosed my firm had a position, it was a short term long position which was closed out later. Amtran and also Kolin and TECO are some of the many stocks my firm actively trades in the Taiwan market and I perform some regular analysis on. Depeding on which day you ask, my firm may or may not have a position in the stock.

My employer could care less about what I do in my spare time away from work which includes blogging as long as I do not disclose publicly research from reports we purchased or information from our research not availible to the public yet.

beyondtheverge: The orginal line of credit was for $250 million: phx.corporate-ir.net/p...=

RC Martin: I do not know Andrew Left or any individual from stock lemon. In some cases he is off about the shady pratices of some companies but in other cases he is dead on.

Some inviduals believe I shorted BRLC one time and have not covered any shares since. That is not the case. I disclose I have been covering and reshorting BRLC many times already since last May. My current short position is much smaller then it has been in the past. I personally start taking some profits when I am up over 50% on a short position.

I did not say that Chapter 11 is imminent for the company. I am just saying the conditions just don't look too optimistic. Again, I am not recommending anyone to sell, short or buy the stock. I am merely presenting a source of information. Individuals are smart enogh to judge what I present and what others are presenting on the company and make a choice for themselves.

Although, an individual that have read one of my articles in the past and made a choice to either sell, not buy, or short would have been better off financially.

I have been critical of many problems with the company in the past. This includes their secondary, selling in China instead of focusing in North America, the overbullish analysts who have investment banking relations with the company, their $250 line of credit with Silver Point, competition from Vizio, and the price difference compression between name and value brands. A lot of the issues I raised ended up being as I anticipated and in some cases worse.

2008 Feb 29 02:32 PM

[Richie Rich:]

Even if the company goes chapter 11, I don't think there is enough debt for the equity holders to get wiped out. In fact, the equity holders might even end up doing better if they were diluted by new equity. Regardless, this company's cash management is problematic. That's why I'm scared of China. I think the author is somewhat nuts to be short at these levels though.

2008 Feb 29 02:45 PM

[Samuel:]

Richie, I am not shorting at these "current" levels. I have been shorting, covering and reshorting BRLC since the $6-$7 range last May. I still have some shares left that I haven't covered and therefore I have disclosed I am still short in the article. I am not worried since my last short was around the $2.50 range and even if the stock triples from the current price, I would still in the green.

I am simply summarizing the events and terms of the agreement as from what I read in other blogs, some retail investors do not simply comprehend what was disclosed in the 8-K and how bad it is. I do not know if it is the legalese or simply some people are too "in love" with a stock and can see nothing bad about the company.

2008 Feb 29 05:19 PM

[nullpointer:]

this is a perfect example of seeking alpha "analysis" - someone with an agenda using factual information, then drawing conclusions that only serve to support their position.

the antithesis of objective analysis.

author, the only people reading this know exactly who you are, and know your history...why do you even bother?

2008 Feb 29 07:14 PM

[Samuel:]

I am merely presenting my side of the arguement of why I have been bearish on the company. It is just like the other authors here who are bullish on the stock and have been telling others to buy from $8 to $1 have done in the past. Obviously they saw a company with a good business business model and bright future while I saw a company with a flawed model and dim outlook.

People can read the information availible to them and make a judgement to whether or not Syntax-Brillian is a good company.

People that know my history know that I have merit in criticizing this company. This includes the dilutive secondary, criticism of their management, focusing on China instead of North America, competition from Vizio, price pressure from the name brands, the management quasi shaffle,the $250 million loan, and not to trust the analysts with $15 price targets on BRLC who also have investment banking relations with them.

This stock is a perfect example of a classic value trap for retail investors. Some people see they are in the LCD industry, have a decent product, believe the managements claims, the analysts' expectations and think the stock price will greatly appreciate in the future. I have been warning individuals to stay away from the company and notifying others of a good shorting oppurtunity since last May when the price was around $6. Anyone that have read the information I presented in the past and decided to either sell, not buy, or short the stock would have been better off financially. Anyone that listened to the bullish analysts who all had buy and strong buy targets at one time would of been worse off.

I seen many problems with the company when I first started shorting it and as time went by, new availible data and information I gathered through research caused me to become even more bearish. This includes either the management's ineptitude or their disregard for shareholder's wealth. Hence, I have continued to short the stock. It is no different then when investors are bullish on a stock and continue to accumulate more and more shares.

I can understand why some individuals refuse to believe anything negative written about a company. Retail investors often make the mistake of falling in love with a stock and cannot see nothing bad about a company while they would believe anything postive said about the company.

2008 Feb 29 09:43 PM

[win:]

Sam,
I appreciate your article and your comments. Please keep up the good work.
-Nitin

2008 Mar 01 08:36 AM

[Lucky?:]

It always amazes me how an ego can get in the way of facts. Your short of BRLC worked for none of the reasons you believe were more apparent to yourself than lessor investors or analysts. BRLC's sole problem is/was collecting those China receiveables. If they come in on time none the share price would be working on 6 dollars and you would be deciding your acceptable level of pain. No one inside the company believed the money would not be coming in. Even their CEO was buying shares just a couple months back. Congratulations on your short, I'm always for people making money. But don't confuse being lucky with good. BTW, I see BK as a very remote possiblity at this point. How is Siverfund suppose to collect 15% interest going forward if they drive BRLC to file BK? They also wouldn't be able to use their inside knowledge to make trades if all their actions have to pass through a BK judge. In addition they were limited by their loan agreement to only fund 25% of SCHOT A/R's. If they broke this it's not lised in the amended agreement.

2008 Mar 01 02:51 PM

[mike2008:]

tech.chinatimes.com/20......
Another Great News From Taiwan!

Syntax-Brilliant 恐下市 歌林營運衝擊大
杜蕙蓉／台北報導

　歌林（1606）與東元（1504）轉投資的... 由於財報未能如期出爐，目前在那斯達克（Nasdaq）股價已跌破一美元，面臨下市之虞。法人預期，歌林因北美銷售幾 乎全靠新泰輝煌，營運面較受打壓，東元則因與該...

　歌林與其持股八％的美國新泰輝煌公司合作，以... TV），通路包括Office Depot、Sears、Circuit City、QVC、Best Buy等大型電器通路連鎖店。由於去年歌林液晶... 衝擊，歌林將首當其衝。

　不過，歌林高階主管指出，以那斯達克上市掛牌... ，目前新泰輝煌已提出申請聽證會通過，並趕製財報，且美國時間廿九日晚間就會提出獨立董事人選。由於聽證會的舉行有六 次機會，時間長達六個月，只要公司能在這段期間... 輝煌不會下市。

　歌林高階主管並強調，液晶電視產業景氣看漲，... 和資金面的問題，都將在最快時間內解決，應該不會有下市疑慮，今年歌林的液晶電視銷售量依舊樂觀，仍以一百五十萬台為 目標。

　至於新泰輝煌未能順利交出季報的主因，在於公... 單，但因該批產品未能符合播放標準，還要拉回台灣和美國銷售，造成運費、人工成本和運費的損失。另外，由於會計師將該 公司約一億多美元的液晶電視模具由短期資產轉為... 。

　東元總經理邱純枝則表示，投資新泰輝煌是基於... 價損失，但如果新泰輝煌未來股價沒有起色，東元將在第一季反應，而以該股目前股價落在○．八美元以下計算，推估東元潛 在損失已超過新台幣五億元。

　東元是在去年八月斥資二千萬美元，以每股六．... 影響，至去年最後一個交易日時，收盤價僅剩三．○八美元，近期則是跌破一美元，週四股價已跌至○．七三元。

Kolin senior management believes BRLC will NOT be delisted due to the following:
1. They expect the earnings to be released soon once the accounting details (long/short term tooling deposits) are sorted out.
2. They expect the hearings with NASDAQ to go well as BRLC have six months to make their case.
3. If stock price stays under $1 for more than a month, it would trigger automatic delisting. They do not expect it to happen
4."Olympic" TVs are being recalled because they do not meet certain standard.
5. Tooling deposit will be filed as long term asset.

2008 Mar 01 08:55 PM

[mike2008:]

2-26-2008 taiwan news Also Great!
news.chinatimes.com/.....
1) Syntax will be not delisted
2) TECO/Kolin stated
that the business will not be affected.
****3)bank in Taiwan will supply
finance *********
4)During last quarter, Syntax hold 4.5% of Market, No.8 on the list.
5)Due to the subprime mortgage, most of the retailer's
AR changed from 60 days to above 100 days.
That Is all Promblem Start.
6) The new independent director will report to the company shortly.
*********they already did that friday 2-29***********
7) kohli made 1.2 milliom lcd last year
This year will be 1.5 milliom.

2008 Mar 01 08:59 PM

[Matic:]

Hey Samuel, Can you please e-mail me at [e-mail] and let me know what your opinion is on Visa "V" IPO which will be out soon? I'd also like to know what you think about BRK-B (BERKSHIRE HATH HLD B).
Thank you,

2008 Mar 01 09:16 PM

[Ben Around:]

I am waiting to hear your take on today's activity.

In case you missed it, up 35% on 6.2 million shares.

2008 Mar 03 08:47 PM