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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002 Commission File No. 333-88524
TELEX COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 38-1853300
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12000 PORTLAND AVENUE SOUTH, BURNSVILLE, MINNESOTA 55337
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code: (952) 884-4051
--------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- ---------
AS OF JULY 31, 2002, TELEX COMMUNICATIONS, INC. HAD OUTSTANDING 4,987,127 SHARES
OF COMMON STOCK, $0.01 PAR VALUE.
THIS DOCUMENT CONTAINS 20 PAGES.
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PART I. --- FINANCIAL INFORMATION
Page(s)
Item 1. Financial Statements
Included herein is the following unaudited financial information:
Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001 3
Condensed Consolidated Statements of Operations for the three and six month periods ended
June 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows for the six month periods ended
June 30, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. --- OTHER INFORMATION
Page(s)
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
2002 2001
----------- ------------
(UNAUDITED) (SEE NOTE)
ASSETS
Current assets:
Cash and cash equivalents $ 1,979 $ 3,026
Accounts receivable, net 50,082 40,765
Inventories 52,304 50,785
Other current assets 6,155 3,879
--------- ---------
Total current assets 110,520 98,455
Property, plant and equipment, net 28,474 30,071
Deferred financing costs, net 3,668 4,173
Goodwill, net 52,959 52,865
Intangibles and other assets 1,907 2,037
--------- ---------
$ 197,528 $ 187,601
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Revolving lines of credit $ 23,126 $ 21,159
Current maturities of long-term debt 9,047 8,177
Accounts payable 14,747 13,901
Accrued wages and benefits 9,105 7,118
Accrued interest 131 87
Other accrued liabilities 9,422 13,432
Income taxes payable 7,336 7,522
--------- ---------
Total current liabilities 72,914 71,396
Long-term debt 149,100 147,430
Other long-term liabilities 12,144 8,749
--------- ---------
Total liabilities 234,158 227,575
--------- ---------
Shareholders' deficit:
Preferred stock and capital in excess of par - preferred stock -- 71,870
Common stock and capital in excess of par - common stock 80,180 8,310
Accumulated other comprehensive loss (6,045) (9,076)
Accumulated deficit (110,765) (111,078)
--------- ---------
Total shareholders' deficit (36,630) (39,974)
--------- ---------
$ 197,528 $ 187,601
========= =========
The balance sheet at December 31, 2001 has been derived from the
Company's audited financial statements at that date.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- ---------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales $ 68,029 $ 76,127 $ 135,928 $ 148,444
Cost of sales 39,078 46,492 79,770 91,684
----------- ----------- ----------- -----------
Gross profit 28,951 29,635 56,158 56,760
----------- ----------- ----------- -----------
Operating expenses:
Engineering 3,082 3,289 6,009 6,797
Selling, general and administrative 18,337 21,783 35,872 44,503
Corporate charges 154 429 541 858
Amortization of goodwill and other intangibles 30 500 60 1,007
Restructuring charges -- 915 -- 915
----------- ----------- ----------- -----------
21,603 26,916 42,482 54,080
----------- ----------- ----------- -----------
Operating profit 7,348 2,719 13,676 2,680
Interest expense, net 6,375 10,085 12,519 19,493
Other expense (income) 131 (306) (1,036) (516)
----------- ----------- ----------- -----------
Income (loss) before income taxes 842 (7,060) 2,193 (16,297)
Provision for income taxes 1,053 619 1,880 1,136
----------- ----------- ----------- -----------
Net (loss) income $ (211) $ (7,679) $ 313 $ (17,433)
=========== =========== =========== ===========
Net (loss) income per common share
Basic $ (0.05) $ (69,809) $ 0.15 $ (158,482)
=========== =========== =========== ===========
Diluted $ (0.05) $ (69,809) $ 0.06 $ (158,482)
=========== =========== =========== ===========
Weighted average shares outstanding
Basic 4,165,091 110 2,094,106 110
=========== =========== =========== ===========
Diluted 4,165,091 110 4,987,127 110
=========== =========== =========== ===========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
---------------------
JUNE 30, JUNE 30,
2002 2001
-------- --------
OPERATING ACTIVITIES:
Net income (loss) $ 313 $(17,433)
Adjustments to reconcile net income (loss) to cash flows from operations:
Depreciation and amortization 3,492 6,591
Amortization of finance charges and pay-in-kind interest charge 8,941 1,492
Gain on disposition of assets (1,001) (80)
Restructuring charges -- 915
Change in operating assets and liabilities (10,305) (232)
Change in long-term liabilities 1,026 33
Other, net 371 612
-------- --------
Net cash provided by (used in) operating activities 2,837 (8,102)
-------- --------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,946) (3,912)
Proceeds from disposition of assets 2,197 --
Other 110 191
-------- --------
Net cash provided by (used in) investing activities 361 (3,721)
-------- --------
FINANCING ACTIVITIES:
Borrowings (repayments) under revolving lines of credit, net 1,288 (1,313)
Repayment of long-term debt (5,432) (5,366)
Borrowings of long-term debt -- 18,800
Payments of deferred financing costs (242) (1,349)
-------- --------
Net cash (used in) provided by financing activities (4,386) 10,772
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 141 (31)
-------- --------
Net decrease in cash and cash equivalents (1,047) (1,082)
Cash and cash equivalents at beginning of period 3,026 2,701
-------- --------
Cash and cash equivalents at end of period $ 1,979 $ 1,619
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH PAID FOR:
Interest $ 3,552 $ 16,914
======== ========
Income taxes $ 1,918 $ 354
======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
TELEX COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted
in the United States (U.S.) for interim financial information, and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
accounting principles generally accepted in the U.S. for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the interim periods are not
necessarily indicative of the results that may be expected for the full
year.
Preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the U.S. requires management to
make estimates and assumptions that affect the reported amounts in the
financial statements and accompanying notes. Actual results could differ
from those estimates. For further information, refer to the consolidated
financial statements and footnotes included in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 2001.
Certain 2001 amounts have been reclassified to conform to 2002
presentation.
2. Inventories
Inventories consist of the following (in thousands):
June 30, December 31,
2002 2001
-------- ------------
Raw materials $23,218 $24,709
Work in process 8,109 8,295
Finished products 20,977 17,781
------- -------
$52,304 $50,785
======= =======
3. Goodwill and Intangibles
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142) on January 1, 2002 with respect to goodwill and intangible
assets acquired prior to July 1, 2001. Under SFAS 142, goodwill and other
indefinite-lived intangible assets are no longer amortized but are reviewed
annually (or more frequently if impairment indicators arise) for
impairment. The Company completed the initial review for impairment in the
second quarter of 2002 and has concluded that there is an indication of
goodwill impairment for the Professional Sound and Entertainment business
segment. As of June 30, 2002, the Company had $46.7 million of goodwill for
the Professional Sound and Entertainment business segment. The Company
expects to complete the measurement of the impairment loss in the fourth
quarter of 2002. SFAS 142 requires that the impairment loss be recognized
as a cumulative effect of change in accounting principle as of January 1,
2002. The following table presents a reconciliation of reported net income
(loss) to adjusted amounts under SFAS 142 (in thousands):
6
Three months ended Six months ended
---------------------------- -----------------------------
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
Reported net (loss) income $ (211) $ (7,679) $ 313 $(17,433)
Goodwill amortization -- 470 -- 943
-------- -------- -------- --------
Adjusted net (loss) income $ (211) $ (7,209) $ 313 $(16,490)
======== ======== ======== ========
4. Debt
Long-term debt consists of the following (in thousands):
June 30, December 31,
2002 2001
--------- ------------
Senior Secured Credit Facility (Term Loan Facility):
Term Loan A $ 16,840 $ 18,084
Term Loan B 55,741 59,858
Tranche A Senior Secured Notes 24,564 21,951
Tranche B Senior Secured Notes 10,842 9,647
Senior Subordinated Discount Notes, due November 15, 2006 48,496 44,390
Senior Subordinated Notes, due May 1, 2007 500 500
Senior Subordinated Notes, due March 15, 2007 50 50
Interest-free loan 1,114 1,127
--------- ---------
158,147 155,607
Less - current portion (9,047) (8,177)
--------- ---------
Total long-term debt $ 149,100 $ 147,430
========= =========
5. Restructuring Charges
During the year ended December 31, 2001, the Company recorded pre-tax
restructuring charges of $11.5 million attributable to consolidation of
certain of the Company's manufacturing operations in the United States, to
the restructuring of operations in Hong Kong, Canada and Mexico, and to the
discontinuation of its hearing instrument product line. The restructuring
resulted in a reduction of approximately 450 employees (majority terminated
as of June 30, 2002), primarily in manufacturing and distribution. The sale
and disposal of the owned facilities associated with the restructuring
charges is expected to be completed by mid 2003.
The following table summarizes the activity associated with the
restructuring reserves for the six months ended June 30, 2002 (in
thousands):
Balance at Balance at
January 1, 2002 Cash Payments June 30, 2002
--------------- ------------- -------------
Severance accrual $2,470 $2,193 $ 277
Other restructuring reserves 532 507 25
------ ------ ------
$3,002 $2,700 $ 302
====== ====== ======
In the six month period ended June 30, 2002, the Company sold certain of
the assets of its hearing instrument business for proceeds of $2.1 million
and recognized a gain of $0.9 million on the sale of these assets included
in other expense (income).
7
6. Income Taxes
The Company recorded an income tax provision of $1.1 million and $1.9
million on pre-tax income of $0.8 million and $2.2 million for the three
months and six months ended June 30, 2002, respectively. The income tax
provision for the six months ended June 30, 2002 is comprised of a U.S.
Federal income tax benefit of $0.7 million, offset by a tax valuation
allowance adjustment of $0.7 million, and an income tax provision of $1.9
million attributed to income of certain foreign subsidiaries.
The Company has a deferred tax asset of $13.7 million offset by a tax
valuation allowance of $13.7 million at June 30, 2002 due to the
uncertainty of the realization of future tax benefits. The realization of
the future tax benefits related to the deferred tax asset is dependent on
many factors, including the Company's ability to generate sufficient
taxable income within the net operating loss carryforward period.
Management has considered these factors in reaching its conclusion as to
the adequacy of the valuation allowance for financial reporting purposes.
7. Earnings Per Share Data
Effective April 16, 2002, the Company converted all of its outstanding
Series A Preferred Stock and Series B Preferred Stock into an equal number
of shares of its Common Stock.
The following table sets forth the denominator for the computation of basic
and diluted earnings per share:
Three months ended Six months ended
------------------------------- ------------------------------
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
Basic weighted-average shares outstanding 4,165,091 110 2,094,106 110
Net effect of dilutive preferred stock -- -- 2,893,021 --
--------- --------- --------- ---------
Diluted weighted-average shares outstanding 4,165,091 110 4,987,127 110
========= ========= ========= =========
8. Related-Party Transactions
The Company recorded a charge to operations of $0.2 million and $0.4
million for the three months ended June 30, 2002 and 2001, respectively,
and $0.5 million and $0.9 million for the six months ended June 30, 2002
and 2001, respectively, for management services provided by Greenwich
Street Capital Partners, Inc., a related party. The services include, but
are not limited to, developing and implementing corporate and business
strategy, and providing other consulting and advisory services.
Under the terms of the Senior Secured Credit Facility, the Company is
prohibited from making any payment, in cash or other property, of the
management services fee until repayment in full of the loans outstanding
under the Senior Secured Credit Facility. The Company is accruing the
management services fee, together with a late fee, at the rate of 2 percent
per month on the outstanding balance. The Company had a balance payable,
inclusive of late fees, of $2.3 million at June 30, 2002.
9. Comprehensive Income (Loss)
Comprehensive income (loss) reflects the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from non-owner sources. For the Company, comprehensive net
income or loss represents net income or loss adjusted for foreign currency
translation adjustments. Comprehensive income was $3.3 million for the
three months and six months ended June 30, 2002. Comprehensive loss was
$7.9 million and $19.6 million for the three months and six months ended
June 30, 2001, respectively.
8
10. Segment Information
The Company has two business segments: Professional Sound and Entertainment
and Multimedia/Audio Communications.
Professional Sound and Entertainment
Professional Sound and Entertainment consists of five lines of business
within the overall professional audio market, including: (i) permanently
installed sound systems; (ii) sound products used by musicians and sold
principally through retail channels; (iii) sound professional concerts,
recording projects and radio and television broadcasts; (iv) advanced
digital matrix intercoms used by broadcasters, including all major
television networks, to control production communications, intercoms,
headsets and wireless communications systems used by professional, college
and high school football teams and stadiums and other professional and high
school sports teams; and (v) wired and wireless microphones used in the
education, sports, broadcast, music and religious markets.
Multimedia/Audio Communications
The Multimedia/Audio Communications segment targets seven principal product
markets including: (i) microphones, headphones and headsets to the computer
industry; (ii) cassette duplicators and copiers to copy the spoken word and
serving two principal markets: religious and training programs/seminars;
(iii) aviation communications headsets, intercoms and microphones to major
commercial and commuter airlines and pilots and to airframe manufacturers
and private pilots; (iv) wireless local area networks and satellite-based
mobile phone antenna systems, supplying mobile phone manufacturers,
corporations, retailers, warehouses and distribution centers; (v) Talking
Book Players, a unique cassette player for the blind and physically
handicapped; (vi) Wireless Communications, wireless communications products
such as headsets, microphones, antennas and rotors for three primary
markets: public safety, law enforcement groups, and commercial truck
drivers; and (vii) wireless assistive listening systems, products such as
auditory trainers and personal assistive listening devices for the hearing
impaired, focusing on the educational market where many schools use the
Company's products.
The following tables provide information by business segment for the three
month and six month periods ended June 30, 2002 and 2001 (in thousands):
9
Three months ended Six months ended
--------------------------- ---------------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Net sales
Professional Sound and Entertainment $ 53,098 $ 53,485 $ 101,862 $ 99,864
Multimedia/Audio Communications 14,931 22,642 34,066 48,580
--------- --------- --------- ---------
$ 68,029 $ 76,127 $ 135,928 $ 148,444
========= ========= ========= =========
Operating profit (loss)
Professional Sound and Entertainment $ 4,810 $ 2,131 $ 8,105 $ 1,750
Multimedia/Audio Communications 2,906 3,325 6,689 6,553
Corporate (368) (2,737) (1,118) (5,623)
--------- --------- --------- ---------
$ 7,348 $ 2,719 $ 13,676 $ 2,680
========= ========= ========= =========
Depreciation expense
Professional Sound and Entertainment $ 1,357 $ 1,280 $ 2,731 $ 3,222
Multimedia/Audio Communications 80 224 191 596
Corporate 234 547 510 1,766
--------- --------- --------- ---------
$ 1,671 $ 2,051 $ 3,432 $ 5,584
========= ========= ========= =========
Capital expenditures
Professional Sound and Entertainment $ 934 $ 1,097 $ 1,555 $ 2,902
Multimedia/Audio Communications 107 171 208 354
Corporate 162 203 183 656
--------- --------- --------- ---------
$ 1,203 $ 1,471 $ 1,946 $ 3,912
========= ========= ========= =========
Total assets
Professional Sound and Entertainment $ 106,085 $ 109,383
Multimedia/Audio Communications 29,390 38,104
Corporate 62,053 75,258
--------- ---------
$ 197,528 $ 222,745
========= =========
Corporate operating expenses include unallocated corporate engineering, selling,
general and administrative costs, corporate charges and amortization of goodwill
and other intangibles, and restructuring charges. Corporate identifiable assets
relate principally to the Company's investment in information systems and
corporate facilities, as well as costs in excess of net assets acquired included
in goodwill and intangible assets and deferred financing costs.
The Company's net sales into each of its principal geographic regions were as
follows (in thousands):
Three months ended Six months ended
------------------------- ------------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
- ---------------------------------------- -------- -------- --------
United States $ 34,104 $ 45,520 $ 72,222 $ 88,318
Germany 5,779 5,625 10,783 11,399
Japan 3,761 3,588 7,068 7,316
United Kingdom 2,840 3,198 5,600 6,163
China 2,878 2,345 5,241 4,201
Other foreign countries 18,667 15,851 35,014 31,047
-------- -------- -------- --------
$ 68,029 $ 76,127 $135,928 $148,444
======== ======== ======== ========
It is not practical for the Company to disclose revenue by product or service
grouping for financial reporting purposes as the Company's systems do not
reliably compile this information.
Long-lived assets of the Company's U.S. and International operations were as
follows (in thousands):
June 30, 2002 December 31, 2001
------------- -----------------
United States $78,329 $81,349
International 8,679 7,797
------- -------
$87,008 $89,146
======= =======
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations, as well as other sections of this report, contains forward-looking
statements, including, without limitation, statements relating to our plans,
strategies, objectives and expectations, that are based on management's current
opinions, beliefs, or expectations as to future results or future events and are
made pursuant to the "safe harbor" provisions of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act. Any such forward-looking
statements involve known and unknown risks and uncertainties and our actual
results may differ materially from those forward-looking statements. While made
in good faith and with a reasonable basis based on information currently
available to management, we cannot assure you that such opinions or expectations
will be achieved or accomplished. We do not undertake to update, revise or
correct any of the forward-looking information contained in this report. The
following factors, in addition to those discussed elsewhere in this report, are
representative of those factors that could affect our future results could cause
results to differ materially from those expressed in such forward-looking
statements: (i) the timely development and market acceptance of new products;
(ii) the financial resources of competitors and the impact of competitive
products and pricing; (iii) changes in general and industry specific economic
conditions on a national, regional or international basis; (iv) changes in laws
and regulations, including changes in accounting standards; (v) the timing of
the implementation of changes in operations to effect cost savings; (vi)
opportunities that may be presented to and pursued by us; (vii) our ability to
access external sources of capital; and (viii) such risks and uncertainties as
are detailed from time to time in our reports and filings with the Securities
and Exchange Commission.
In this report, "Company", "we", "our", "us" and "Telex" refer to Telex
Communications, Inc. With respect to the descriptions of our business contained
in this report, such terms refer to Telex Communications, Inc. and our
subsidiaries.
OVERVIEW
The Company is a leader in the design, manufacture and marketing of
sophisticated audio, wireless and multimedia communications equipment to
commercial, professional and industrial customers. Telex provides high
value-added communications products designed to meet the specific needs of
customers in commercial, professional and industrial markets, and, to a lesser
extent, in the retail consumer electronics market. We offer 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,
audio duplication products, Talking Book Players, antennas, land mobile
communication systems, personal computer speech recognition and speech dictation
microphone systems and wireless assistive listening systems. Our products are
used in airports, theaters, sports arenas, concert halls, cinemas, stadiums,
convention centers, television and radio broadcast studios, houses of worship
and other venues where music or speech is amplified or transmitted, and by
professional entertainers, television and radio on-air talent, presenters,
airline pilots and the hearing impaired in order to facilitate speech or
communications.
Telex has two business segments: Professional Sound and Entertainment and
Multimedia/Audio Communications. Professional Sound and Entertainment consists
of five lines of business within the overall professional audio market,
including: (i) permanently installed sound systems; (ii) sound products used by
musicians and sold principally through retail channels; (iii) sound products
used in professional concerts, recording projects and radio and television
broadcasts; (iv) advanced digital matrix intercoms used by broadcasters,
including all major television networks, to control production communications,
intercoms, headsets and wireless
11
communications systems used by professional, college and high school football
teams and stadiums and other professional and high school sports teams; and (v)
wired and wireless microphones used in the education, sports, broadcast, music
and religious markets.
The Multimedia/Audio Communications segment targets seven principal product
markets, including: (i) microphones, headphones and headsets to the computer
industry; (ii) cassette duplicators and copiers to copy the spoken word and
serving two principal markets: religious and training programs/seminars; (iii)
aviation communications headsets, intercoms and microphones to major commercial
and commuter airlines and pilots and to airframe manufacturers and private
pilots; (iv) wireless local area networks and satellite-based mobile phone
antenna systems, supplying mobile phone manufacturers, corporations, retailers,
warehouses and distribution centers; (v) Talking Book Players, a unique cassette
player for the blind and physically handicapped; (vi) Wireless Communications,
wireless communications products such as headsets, microphones, antennas and
rotors for three primary markets: public safety, law enforcement groups, and
commercial truck drivers; and (vii) wireless assistive listening systems,
products such as auditory trainers and personal assistive listening devices for
the hearing impaired, focusing on the educational market where many schools use
our products.
We maintain assets and/or operations in a number of foreign jurisdictions, the
most significant of which are Germany, the United Kingdom, Japan, Singapore, and
Hong Kong. In addition, we conduct business in local currency in many countries,
the most significant of which are Germany, the United Kingdom, Japan, Singapore,
Hong Kong, Australia and France. Exposure to U.S. dollar/German mark and U.S.
dollar/British pound exchange rate volatility is mitigated to some extent by our
ability to source production needs with existing manufacturing capacity in
Germany and Great Britain, and the exposure to the U.S. dollar/Japanese yen
exchange rate volatility is to some extent mitigated by sourcing products
denominated in yen from Japan or through contractual provisions in sales
agreements with certain customers. Nevertheless, we have a direct and continuing
exposure to both positive and negative foreign currency movements.
Telex reports the foreign exchange gains or losses on transactions as part of
other income. Gains and losses on translation of foreign currency denominated
balance sheets are classified as currency translation adjustments and are
included in "accumulated other comprehensive loss" as part of shareholders'
deficit.
12
CRITICAL ACCOUNTING POLICIES
There has been no material change in our Critical Accounting Policies, as
disclosed in our Annual Report on Form 10-K, for the year ended December 31,
2001.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items in our
condensed consolidated statements of operations, in thousands:
Three months ended Six months ended
--------------------------------- ---------------------------------
June 30, June 30, % June 30, June 30, %
2002 2001 Change 2002 2001 Change
-------- -------- ------ -------- -------- ------
Net sales:
Professional Sound and Entertainment $ 53,098 $ 53,485 -0.7% $101,862 $ 99,864 2.0%
Multimedia/Audio Communications 14,931 22,642 -34.1% 34,066 48,580 -29.9%
-------- -------- ----- -------- -------- -----
Total net sales 68,029 76,127 -10.6% 135,928 148,444 -8.4%
-------- -------- ----- -------- -------- -----
Gross profit:
Professional Sound and Entertainment 22,020 20,327 40,965 37,552
% of sales 41.5% 38.0% 40.2% 37.6%
Multimedia/Audio Communications 6,931 9,308 15,193 19,208
% of sales 46.4% 41.1% 44.6% 39.5%
-------- -------- -------- --------
Total gross profit 28,951 29,635 56,158 56,760
% of sales 42.6% 38.9% 41.3% 38.2%
-------- -------- -------- --------
Operating profit $ 7,348 $ 2,719 $ 13,676 $ 2,680
======== ======== ======== ========
Net (loss) income $ (211) $ (7,679) $ 313 $(17,433)
======== ======== ======== ========
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS AND SIX
MONTHS ENDED JUNE 30, 2001
Net sales. Net sales decreased $8.1 million, or 10.6%, from $76.1 million for
the three months ended June 30, 2001 to $68.0 million for the three months ended
June 30, 2002. Net sales decreased $12.5 million, or 8.4%, from $148.4 million
for the six months ended June 30, 2001 to $135.9 million for the six months
ended June 30, 2002. Sales in the Professional Sound and Entertainment segment
increased while sales in the Multimedia/Audio Communications segment declined
primarily due to lower sales of hearing instruments products, which we exited in
the first quarter of 2002, and due to continued sluggishness in the computer and
telecommunications industries.
Net sales in the Professional Sound and Entertainment segment decreased $0.4
million, or 0.7%, from $53.5 million for the three months ended June 30, 2001 to
$53.1 million for the three months ended June 30, 2002. Net sales increased $2.0
million, or 2.0%, from $99.9 million for the six months ended June 30, 2001 to
$101.9 million for the six months ended June 30, 2002. The increase is
attributed primarily to higher sales on the strength of new products and higher
sales of electronics products.
Net sales in the Multimedia/Audio Communications segment decreased $7.7 million,
or 34.1%, from $22.6 million for the three months ended June 30, 2001 to $14.9
million for the three months ended June 30, 2002. Net sales decreased $14.5
million, or 29.9%, from $48.6 million for the six months ended June 30, 2001 to
$34.1 million for the six months ended June 30, 2002. Net sales, excluding sales
of discontinued products in both periods, decreased approximately 24% and 22%
for the three and six months ended June 30, 2002, respectively. The decline in
net sales for both periods is attributed primarily to lower sales of products to
the computer and telecommunications industries, in large part due to the
continued sluggishness of the economy, and to lower sales of hearing instrument
products, which we exited in the first quarter of 2002.
Gross profit. Gross profit decreased $0.7 million, or 2.4%, from $29.6 million
for the three
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months ended June 30, 2001 to $28.9 million for the three months ended June 30,
2002. Gross profit decreased $0.6 million, or 1.1%, from $56.8 million for the
six months ended June 30, 2001 to $56.2 million for the six months ended June
30, 2002. As a percentage of net sales, the gross margin rate increased to 42.6%
for the three months ended June 30, 2002 compared to 38.9% for the three months
ended June 30, 2001, and increased to 41.3% for the six months ended June 30,
2002 from 38.2% for the six months ended June 30, 2002. The increase in the
gross margin rate is attributed primarily to improved manufacturing efficiencies
and lower operating costs resulting from restructuring measures implemented in
2001 and 2002.
The gross margin rate for the Professional Sound and Entertainment segment
increased from 38.0% to 41.5% for the three months ended June 30, 2002. The
gross margin rate increased from 37.6% to 40.2% for the six months ended June
30, 2002. The increase is attributed primarily to improved manufacturing
efficiencies as a result of benefits of restructuring measures implemented in
2001 and 2002 and to increased sales of high-margin products.
The gross margin rate for the Multimedia/Audio Communications segment increased
from 41.1% to 46.4% for the three months ended June 30, 2002. The gross margin
rate increased from 39.5% to 44.6% for the six months ended June 30, 2002. The
increase is attributed primarily to increased sales of high-margin products,
reduced sales of low-margin products and improved manufacturing efficiencies.
Engineering. Engineering expenses decreased $0.2 million, or 6.3%, from $3.3
million for the three months ended June 30, 2001 to $3.1 million for the three
months ended June 30, 2002. Engineering expenses for the six months ended June
30, 2002 decreased from $6.8 million to $6.0 million. The decrease in spending
for the three and six month periods in 2002 from the corresponding periods in
2001 is attributed primarily to the benefit from continued consolidation and
streamlining of our engineering operations that occurred in 2001.
Selling, general and administrative. Selling, general and administrative
expenses decreased $3.4 million, or 15.8%, from $21.8 million for the three
months ended June 30, 2001 to $18.4 million for the three months ended June 30,
2002. Selling, general and administrative expenses declined $8.6 million, or
19.3%, from $44.5 million for the six months ended June 30, 2001 to $35.9
million for the six months ended June 30, 2002. The decrease in expense in 2002
is attributed mainly to spending controls we implemented in light of the
slowdown in sales and to professional fees and other costs we incurred in 2001
in connection with amendments to our existing debt agreements and with obtaining
additional debt.
Corporate charges. Corporate charges of $0.2 million and $0.4 million for the
three months ended June 30, 2002 and 2001, respectively, and of $0.5 million and
$0.9 million for the six months ended June 30, 2002 and 2001, respectively,
represent fees accrued for consulting and management services provided by
Greenwich Street Capital Partners, Inc. under a consulting and management
services agreement. This agreement expired in May 2002 with no current plans to
renew the arrangement.
Amortization of goodwill and other intangibles. We recorded no amortization of
goodwill in the three and six months ended June 30, 2002 compared to $0.5
million and $0.9 million for the three and six months ended June 30, 2001,
respectively. We implemented a new accounting standard on January 1, 2002
pursuant to which we no longer amortize goodwill. Under this accounting standard
we are required to perform an analysis of impairment of goodwill in 2002 and
annually thereafter. An initial review indicates that the goodwill for the
Professional Sound and Entertainment business segment is impaired. As of June
30, 2002, there was $46.7 million of goodwill for the Professional Sound and
Entertainment business segment. We expect to complete the measurement of the
impairment loss in the fourth quarter of 2002 and will record the impairment
loss as a cumulative effect of change in accounting principle as of January 1,
2002. Amortization of other identifiable intangibles was approximately $30,000
and $60,000 for
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the three months and six months ended June 30, 2002 and 2001, respectively.
These intangibles will continue to be amortized unless an analysis indicates an
impairment has occurred.
Restructuring charges. We recorded a pre-tax restructuring charge of $0.9
million for the three and six months ended June 30, 2001. The charge was
primarily for severance costs, attributable to a reduction of 110 employees in
the United States and Canada. As of June 30, 2002 all 110 employees have been
terminated.
Other (expense) income. Other expense of $0.1 million for the three months ended
June 30, 2002 is principally from foreign currency losses offset by the profit
from the sale of production assets related to shutdown of certain manufacturing
facilities. Other income of $0.3 million for the three months ended June 30,
2001 is principally from foreign currency gains. For the six months ended June
30, 2002, other income of $1.0 million is principally from the sale of $2.1
million of assets related to the hearing instrument products business. Other
income of $0.5 million for the six months ended June 30, 2001 includes one-time
proceeds related to settlement of a patent infringement claim and foreign
currency gains.
Interest expense. Net interest expense decreased from $10.1 million for the
three months ended June 30, 2001 to $6.4 million for the three months ended June
30, 2002. Net interest expense decreased from $19.5 million for the six months
ended June 30, 2001 to $12.5 million for the six months ended June 30, 2002.
Interest expense decreased primarily because of lower average outstanding
indebtedness due to the debt restructuring completed in November 2001, offset
slightly by higher average interest rates. Included in net interest expense is
$7.9 million and $0.9 million of pay-in-kind interest expense for the six months
ended June 30, 2002 and 2001, respectively.
Income taxes. Income tax expense, excluding the income tax provision related to
the net deferred tax asset valuation allowance, was 61.7% of the pretax income
for the six months ended June 30, 2002, compared with an income tax benefit of
36.3% of the pretax loss for the six months ended June 30, 2001. The increase in
the effective tax rate is principally due to an increase of $1.3 million in
taxable income over book income related to differences in the treatment of the
sales of the hearing instrument products business and in the recognition of
foreign deemed dividends in the US.
As of June 30, 2002, we had provided $5.5 million for tax liability, penalties,
and accrued interest related to an unsettled dispute with the IRS for taxable
years 1990 through 1995. We have agreed with the IRS on the final amount of the
tax liability to be paid and are making monthly payments.
We have established a net deferred tax valuation allowance of $13.7 million due
to the uncertainty of the realization of future tax benefits. Our realization of
the future tax benefits related to the deferred tax asset is dependent on many
factors, including our ability to generate sufficient taxable income within the
net operating loss carryforward period. Management has considered these factors
in reaching our conclusion as to the adequacy of the valuation allowance for
financial reporting purposes.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, we had cash and cash equivalents of $2.0 million compared to
$3.0 million at December 31, 2001.
Our principal sources of funds for the six months ended June 30, 2002 consisted
of $2.8 million of net cash generated from investing activities and $2.1 million
from the sale of assets of our hearing instruments product line. Our principal
uses of funds were for debt retirement of $4.1
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million, net of borrowings, and $1.9 million for capital expenditures. Our
principal source of funds for the six months ended June 30, 2001 was $10.8
million from financing activities. Our principal uses of funds for the six
months ended June 30, 2001 were $8.1 million for operating activities and $3.9
million for capital expenditures.
Our investing activities consist mainly of capital expenditures to maintain
facilities, acquire machines or tooling, update certain manufacturing processes,
to update information systems and to improve efficiency. We anticipate our
capital expenditures for 2002 to be in the range of $7.0 million to $8.0
million. Our ability to make capital expenditures is subject to certain
restrictions, described below, under our senior secured credit facility, our
senior secured notes, and our senior subordinated discount notes.
Telex's accounts receivable of $50.1 million increased $9.3 million from $40.8
million at December 31, 2001. The increase is primarily a result of an increase
in our net sales in the three months ended June 30, 2002 compared to the three
months ended December 31, 2001 and a result of movement in exchange rates. The
US dollar weakened against certain foreign currencies, primarily the Euro and
the Japanese Yen, adding approximately $1.8 million to the translated accounts
receivable balance as of June 30, 2002.
Our inventories of $52.3 million increased $1.5 million from $50.8 million at
December 31, 2001. We expect the inventories to decline during the second half
of 2002 as we implement and maintain strategies aimed at reducing inventory
levels. Excluding the impact of foreign currencies, our inventories declined
$0.7 million from December 31, 2001. The US dollar weakened against certain
foreign currencies, primarily the Euro and the Japanese Yen, adding
approximately $2.2 million to the translated inventory balance as of June 30,
2002.
Our consolidated indebtedness increased $4.5 million from $176.8 million at
December 31, 2001 to $181.3 million at June 30, 2002. The increase is attributed
mainly to our senior secured notes and the senior subordinated discount notes
for which interest expense accrues as additional indebtedness, and to increase
in borrowings under our revolving credit facilities. The accretion of these
notes added $7.9 million to our indebtedness. The senior secured notes accreted
by $3.8 million and the senior subordinated discount notes accreted by $4.1
million. Offsetting the additional indebtedness were required payments, totaling
$5.4 million, made under our term loan facility.
We rely mainly on internally generated funds and, to the extent necessary,
borrowings under the revolving credit facility and foreign working capital lines
to meet our liquidity needs. Our liquidity needs arise primarily from debt
service, working capital needs and capital expenditure requirements.
Our current credit facilities include the senior secured credit facility,
consisting of the term loan facility of $72.6 million, the revolving credit
facility, subject to certain borrowing base limitations, of $25.0 million, and
foreign working capital lines, subject to certain limitations, of $9.4 million.
In certain instances the foreign working capital lines are secured by a lien on
foreign real property, leaseholds, accounts receivable and inventory.
As of June 30, 2002, $8.8 million of our $72.6 million term loan facility is
payable in the next 12 months, with the balance payable as described below. As
of June 30, 2002, we had total borrowings of $23.1 million under our revolving
credit facility and foreign working capital lines. The net availability, after
deduction for open letters of credit and borrowing base limitations, was $2.8
million at June 30, 2002. Outstanding balances under substantially all of these
credit facilities bear interest at floating rates based upon the interest rate
option selected by us; therefore, our financial condition is and will continue
to be affected by changes in the prevailing interest rates. The effective
interest rate under these credit facilities for the six months ended June 30,
2002 was 7.0%.
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Pursuant to the term loan facility, we are required to make principal payments
under (i) the $50.0 million Tranche A Term Loan Facility ($16.9 million of which
was outstanding at June 30, 2002), of $0.9 million, $2.3 million and $13.7
million in the remainder of 2002, 2003 and 2004 (with a final maturity date of
April 30, 2004), respectively, and (ii) the $65.0 million Tranche B Term Loan
Facility ($55.7 million of which was outstanding at June 30, 2002), of $3.0
million, $7.5 million and $45.2 million in the remainder of 2002, 2003 and 2004
(with a final maturity date of April 30, 2004), respectively. In addition, under
the terms of the senior secured credit facility, we are generally required to
make mandatory prepayments from proceeds of the sale of assets.
We have incurred substantial indebtedness in connection with a series of
leveraged transactions. As a result, debt service obligations represent
significant liquidity requirements for us. We were in compliance with all
covenants related to all debt agreements at June 30, 2002.
In 2001 we had defaulted on certain covenants related to our senior secured
credit facility, our senior secured notes and our senior subordinated notes, we
had to incur additional indebtedness to meet our liquidity needs, and
subsequently we completed a debt restructuring. In 2002, our debt service
obligations have declined due to the debt restructuring. We also have seen an
improvement in our operating performance due to the benefits from the 2001
restructurings, most of which are fully implemented through June 30, 2002. While
we believe these actions will provide adequate cash flow to meet our debt
service requirements, capital expenditure needs and working capital requirements
in 2002, we can not give any assurance that our cash flow will be adequate.
Additionally, our future performance and our ability to service our obligations
will also be subject to future economic conditions and to financial, business
and other factors, many of which are beyond our control. If we are not able to
generate sufficient cash to meet our obligations, we may be forced to pursue
other options including the sale of a portion of our assets.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including changes in foreign currency
exchange rates and interest rates. Market risk is the potential loss arising
from adverse changes in market rates and prices, such as foreign exchange and
interest rates. We have entered into various financial instruments to manage
this risk. The counterparties to these transactions are major financial
institutions. We do not enter into derivatives or other financial instruments
for trading or speculative purposes.
EXCHANGE RATE SENSITIVITY ANALYSIS
We enter into forward exchange contracts principally to hedge the currency
fluctuations in transactions denominated in foreign currencies, thereby limiting
our risk that would otherwise result from changes in exchange rates. During the
six months ended June 30, 2002, the principal transactions hedged were certain
intercompany balances attributed primarily to intercompany sales. Gains and
losses on forward exchange contracts and the offsetting losses and gains on the
hedged transactions are reflected in the condensed consolidated statements of
operations.
At June 30, 2002, we had outstanding forward exchange contracts with a notional
amount of $4.0 million and a weighted remaining maturity of 90 days.
At June 30, 2002, the difference between the fair value of all outstanding
contracts, as estimated by the amount required to enter into offsetting
contracts with similar remaining maturities based on quoted prices, and the
contract amounts was immaterial. A 10 percent fluctuation in exchange rates for
these currencies would change the fair value by approximately $0.4 million.
However, since these contracts hedge foreign currency denominated transactions,
any change in the fair value of the contracts would be about offset by changes
in the underlying value of the transaction being hedged.
INTEREST RATE AND DEBT SENSITIVITY ANALYSIS
For fixed rate debt, interest rate changes affect the fair market value but do
not impact our earnings or cash flows. Conversely, for floating rate debt,
interest rate changes generally do not affect the fair market value but do
impact our future earnings and cash flows, assuming other factors are held
constant.
At June 30, 2002, we had fixed rate debt of $49.0 million, step-up, pay-in-kind
interest debt of $35.4 million (redemption value of $36.6 million at June 30,
2002), and an interest-free loan of $1.1 million. Holding all other variables
constant (such as foreign exchange rates and debt levels), a one-percentage
point decrease in interest rates would increase the unrealized fair market value
of these debts by approximately $2.7 million.
At June 30, 2002, we had floating rate debt of $95.7 million. The earnings and
cash flow impact for the next twelve months resulting from a one-percentage
point increase in interest rates on this debt would be approximately $1.0
million, holding all other variables constant.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
A Report on Form 8-K, dated June 10, 2002, reporting under Items 4 and 7,
was filed on June 11, 2002.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
TELEX COMMUNICATIONS, INC.
Dated: August 9, 2002 By: /s/ Ned C. Jackson
------------------- ------------------------------------
Ned C. Jackson
President and Chief Executive Officer
TELEX COMMUNICATIONS, INC.
Dated: August 9, 2002 By: /s/ Gregory W. Richter
------------------- --------------------------------------
Gregory W. Richter
Vice President and Chief Financial Officer
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TELEX COMMUNICATIONS, INC.
FORM 10-Q
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
99.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002.
21