Creditors Left Hanging in Sonic Frontiers Buyout?
If you are owed money by Sonic Frontiers, get in line. You may have to wait a very long time for payment. Sonic Frontiers went into receivership last summer after a proposed takeover by the Lenbrook Group fell through. Lenbrook owns or distributes the NAD, PSB, Home Systems Plus, Marantz, and Bang & Olufsen brands in Canada.
"Receivership means basically a company's value has reached zero," said a source close to the whole affair, "and a court-appointed administrator steps in to try to salvage some value for creditors." In Canada, as in the US, secured creditors---such as banks and other financial institutions that have kept a company afloat---are given preference over unsecured creditors, such as parts suppliers, assembly subcontractors, marketing agencies, and magazines.
"Sonic Frontiers the name brand will continue to exist, but Sonic Frontiers the company is gone, along with the debt it incurred," said our source, speaking on condition of anonymity. "Paradigm acquired Sonic Frontiers' name, its designs, its marketing network, some of its employees, and what remained of its physical assets. Essential vendors will be taken care of, but unsecured creditors have been left out in the cold." It should be noted that the founders, Chris Johnson and Chris Jensen, are now minor shareholders and employees of Sonic Frontiers of which Paradigm is the majority shareholder.
The deal between SF and Paradigm was officially inked September 1, twenty five days after SF called in the receiver. The new parent company has spent the past six weeks becoming operational---including re-establishing relationships with its suppliers. One West Coast hardware subcontractor has reportedly agreed to accept a 20% premium added to its invoices until a backlog in excess of hundreds of thousands of dollars is cleared.
The background: Sonic Frontiers was founded in December 1987 and began manufacturing its own products in 1991---many of which were favorably reviewed in Stereophile. With only three products in its lineup, SF did approximately $750,000 in sales that year, a figure that its founders claimed had doubled annually for the subsequent three years. Sales growth continued through 1997---primarily in the international high-end markets, where distributors typically pay for products in advance.
Last year, Sonic Frontiers announced that it would attempt to enter the home-theater market with a multichannel amplifier, a clear departure from its traditional strength. To do so would require financial resources well outside its capability, and SF began looking for a partner. Sonic's President, Chris Johnson, promoted his company as "marketing-driven with expert engineering," despite the fact that design and subassembly of most SF digital products takes place in Silicon Valley. (The new Transport 3 and Processor 3, favorably reviewed in the October Stereophile, are said to be mostly designed and manufactured in Toronto.)
Lenbrook stepped in. With a strong portfolio of mid-to-upper-end brand names and a solid, efficient organization, the larger company would be able to offer Sonic Frontiers all the support it needed to venture into the larger market, and SF would lend it access to the High End, one market segment missing from the Lenbrook empire. Last spring, Lenbrook proceeded to court SF as a potential family member on the basis of its "very good engineering and R&D." Initially, the probing---"due diligence"---went amicably, and news stories emerged about the pending takeover.
All that came to a halt during the first three days of June, in which both companies announced that the deal had been called off. Lenbrook was reticent to give reasons, other than to say that "the numbers hadn't worked out," but allowed that an extensive examination in May of Sonic Frontiers' records had revealed "financial problems and overly optimistic estimates." The desire to proceed was still there, but the evidence against doing so was overwhelming, and Lenbrook decide to back out, figuring that it was better to lose the money invested to that point than to risk even more.
Sonic Frontiers blamed their faltering sales on the protracted due-diligence process, and claimed that the Lenbrook courtship had caused them to rapidly drop from a break-even to a negative cash flow. A state of mutual animosity and reciprocal blame emerged---like the classic tale of a betrothed couple growing ever more doubtful as the wedding day approaches. Sonic Frontiers' bank moved in to close the company down only three weeks after the Lenbrook deal collapsed, and Paradigm was able to buy the remains at a "fire-sale price."
The situation has engendered much resentment in the normally close-knit high-end community. On October 9, J.B. Stanton Communications issued the following tersely worded statement: "Effective immediately, J.B. Stanton Communications will no longer represent the Sonic Frontiers and Anthem product lines for public relations." Stanton handles PR for some of the most respected companies in high-end audio.
More on this story will be appearing next week.