TELEX COMMUNICATIONS INC - 10-Q Quarterly Report

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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 Commission File
September 30, 2002 No. 333-88524

TELEX COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)

DELAWARE 38-1853300
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(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

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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
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AS OF OCTOBER 31, 2002, TELEX COMMUNICATIONS, INC. HAD OUTSTANDING 4,987,127
SHARES OF COMMON STOCK, $0.01 PAR VALUE.

THIS DOCUMENT CONTAINS 28 PAGES.

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PART I. --- FINANCIAL INFORMATION

Item 1. Financial Statements Page(s)
Included herein is the following unaudited financial information:
Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001 3
Condensed Consolidated Statements of Operations for the three and nine month periods ended
September 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows for the nine month periods ended
September 30, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 21

PART II. --- OTHER INFORMATION

Page(s)
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

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)

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)

The accompanying notes are an integral part of these condensed consolidated
financial statements.

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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):

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 September 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 Company

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has certain amounts of goodwill denominated in foreign currencies that
fluctuate with movement of exchange rates. The following table presents a
reconciliation of reported net income (loss) to adjusted amounts under
SFAS 142 (in thousands):

4. Debt

Long-term debt consists of the following (in thousands):

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 lines. The
restructuring resulted in a reduction of approximately 450 employees
(majority terminated as of September 30, 2002), primarily in manufacturing
and distribution. The sale and disposal of the owned facilities associated
with the restructuring are expected to be completed by mid-2003. The
facilities have a book value of $0.9 million and are classified in the
balance sheet as a component of other current assets (assets held for
sale).

The following table summarizes the activity associated with the
restructuring reserves for the nine months ended September 30, 2002 (in
thousands):

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In the nine month period ended September 30, 2002, the Company sold
certain of the assets of its hearing instrument business for a gain,
included in other (income) expense, of $0.9 million on proceeds of $2.1
million.

6. Income Taxes

The Company recorded an income tax provision of $0.8 million and $2.7
million on pre-tax income of $0.6 million and $2.8 million for the three
months and nine months ended September 30, 2002, respectively. The income
tax provision for the nine months ended September 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 $2.7 million attributed to income of certain foreign
subsidiaries.

The Company has a deferred tax asset of $16.3 million offset by a tax
valuation allowance of $16.3 million at September 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 conversion of the Preferred Stock was
at the election of the Company with each share or fractional share of the
Series A and Series B Preferred Stock convertible into one share or
equivalent fractional share of Common Stock.

The following table sets forth the denominator for the computation of
basic and diluted earnings per share:

8. Related-Party Transactions

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The Company recorded a charge to operations of $0.4 million for the three
months ended September 30, 2001 and $0.5 million and $1.3 million for the
nine months ended September 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. This agreement expired in May 2002 with
no current plans to renew the arrangement.

The Company is accruing interest, at the rate of 2 percent per month, on
the outstanding management services fee balance. 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 and the
accrued interest on the unpaid balance until repayment in full of the
loans outstanding under the Senior Secured Credit Facility. The Company
had a balance payable, inclusive of interest, of $2.4 million at September
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 loss was $0.1 million for the three
months ended September 30, 2002. Comprehensive income was $3.2 million for
the nine months ended September 30, 2002. Comprehensive loss was $13.6
million and $33.2 million for the three months and nine months ended
September 30, 2001, respectively.

10. Segment Information

The Company has two business segments: Professional Sound and
Entertainment and Audio and Wireless Technology (formerly known as
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 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 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.

Audio and Wireless Technology

The Audio and Wireless Technology segment (formerly known as
Multimedia/Audio Communications) has reorganized into six lines of
business, each targeting a set of markets, providing audio and/or wireless
technology products and solutions. The principal product markets are: (i)
digital duplication products such as cassette players, DVD, CD and
cassette duplication products serving the religious, training and seminar
and the blind and physically handicapped markets; (ii) retail audio
products for the personal computer and gaming

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markets; (iii) education products using wired or wireless technology that
enhance student performance with solutions that provide clear
communication of classroom teacher and/or computer based audio
instructions to students; (iv) aviation communications products serving
commercial aviation and private pilot markets as well as products for
military and industrial markets; (v) mission critical communication
products serving the public safety and industrial markets; and (vi)
wireless networking products serving the original equipment manufacturer
and wireless internet service provider markets.

The following tables provide information by business segment for the three
month and nine month periods ended September 30, 2002 and 2001 (in
thousands):

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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):

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):

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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 and could
cause such 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 Audio
and

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Wireless Technology (formerly known as 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
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 Audio and Wireless Technology segment has been reorganized into six lines of
business, each targeting a set of markets, providing audio and/or wireless
technology products and solutions. The principal product markets are: (i)
digital duplication products such as cassette players, DVD, CD and cassette
duplication products serving the religious, training and seminar and the blind
and physically handicapped markets; (ii) retail audio products for the personal
computer and gaming markets; (iii) education products using wired or wireless
technology that enhance student performance with solutions that provide clear
communication of classroom teacher and/or computer based audio instructions to
students; (iv) aviation communications products serving commercial aviation and
private pilot markets as well as products for military and industrial markets;
(v) mission critical communication products serving the public safety and
industrial markets; and (vi) wireless networking products serving the original
equipment manufacturer and wireless internet service provider markets.

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.

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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 AND NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS
AND NINE MONTHS ENDED SEPTEMBER 30, 2001

Net sales. Net sales decreased $6.5 million, or 9.0%, from $72.6 million for the
three months ended September 30, 2001 to $66.1 million for the three months
ended September 30, 2002. Net sales decreased $19.0 million, or 8.6%, from
$221.0 million for the nine months ended September 30, 2001 to $202.0 million
for the nine months ended September 30, 2002. Sales in the Professional Sound
and Entertainment segment were flat for the nine-month comparative periods while
sales in the Audio and Wireless Technology segment (formerly known as 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 $1.9
million, or 3.6%, from $51.9 million for the three months ended September 30,
2001 to $50.0 million for the three months ended September 30, 2002. Net sales
were about flat, changing from $151.8 million for the nine months ended
September 30, 2001 to $151.9 million for the nine months ended September 30,
2002. Sales of new products and higher sales of electronics products were offset
by lower sales of speaker products.

Net sales in the Audio and Wireless Technology segment decreased $4.7 million,
or 22.5%, from $20.7 million for the three months ended September 30, 2001 to
$16.0 million for the three months ended September 30, 2002. Net sales decreased
$19.2 million, or 27.7%, from $69.3 million for the nine months ended September
30, 2001 to $50.1 million for the six months ended September 30, 2002. Net
sales, excluding sales of discontinued hearing instruments products in

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both periods, decreased approximately 13% and 19% for the three and nine months
ended September 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.

Gross profit. Gross profit increased $7.0 million, or 33.1%, from $21.1 million
for the three months ended September 30, 2001 to $28.0 million for the three
months ended September 30, 2002. Gross profit increased $6.4 million, or 8.2%,
from $77.8 million for the nine months ended September 30, 2001 to $84.2 million
for the nine months ended September 30, 2002. As a percentage of net sales, the
gross margin rate increased to 42.4% for the three months ended September 30,
2002 compared to 29.0% for the three months ended September 30, 2001, and
increased to 41.7% for the nine months ended September 30, 2002 from 35.2% for
the nine months ended September 30, 2002. Included in the three month period
ended September 30, 2001 is a special charge of $4.2 million attributed to a
reserve for impaired inventories, resulting primarily from the slowdown in sales
and to Telex's effort to better manage its inventories and its manufacturing
operations through SKU reductions. Excluding this special charge, as a percent
of net sales, the gross margin rate is 34.8% and 37.1%, respectively, for the
three and nine month periods ended September 30, 2001. The increase in the gross
margin rate for 2002 over the corresponding periods in 2002, excluding the
special charge, 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 29.0% to 42.9% for the three months ended September 30, 2002. The
gross margin rate increased from 34.7% to 41.1% for the nine months ended
September 30, 2002. The gross margin rate for the three and nine month periods
ended September 30, 2001, excluding the special charge, was 33.3% and 36.2%,
respectively. The increase in the gross margin rate for 2002 over the
corresponding periods in 2001, excluding the special charge, 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 Audio and Wireless Technology segment increased
from 28.9% to 40.9% for the three months ended September 30, 2002. The gross
margin rate increased from 36.4% to 43.4% for the nine months ended September
30, 2002. The gross margin rate for the three and nine month periods ended
September 30, 2001, excluding the special charge, was 38.7% and 39.2%,
respectively. The increase in the gross margin rate for 2002 over the
corresponding periods in 2001, excluding the special charge, is attributed
primarily to increased sales of high-margin products, reduced sales of
low-margin products and improved manufacturing efficiencies.

Engineering. Engineering expenses increased $0.1 million, or 3.2%, from $3.0
million for the three months ended September 30, 2001 to $3.1 million for the
three months ended September 30, 2002. Engineering expenses for the nine months
ended September 30, 2002 decreased from $9.8 million to $9.1 million. The
decrease in spending for the nine-month period in 2002 from the corresponding
period 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 $3.6 million, or 16.8%, from $21.4 million for the three
months ended September 30, 2001 to $17.8

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million for the three months ended September 30, 2002. Selling, general and
administrative expenses declined $12.2 million, or 18.5%, from $65.9 million for
the nine months ended September 30, 2001 to $53.7 million for the nine months
ended September 30, 2002. Included in the three-month period ended September 30,
2001 is a special charge of $2.8 million for a reserve for bad debts attributed
to accounts Telex believed were potentially uncollectible. Excluding this
special charge for the three and nine month periods ended September 30, 2001,
selling, general and administrative expenses decreased $0.8 million, or 4.6%,
and $9.4 million, or 14.9%, respectively, from the corresponding periods in
2001. 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 $0.4 million for the three months ended
September 30, 2001 and of $0.5 million and $1.3 million for the nine months
ended September 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 nine months ended September 30, 2002 compared to $0.5
million and $1.4 million for the three and nine months ended September 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. Our initial review indicated that the goodwill for the
Professional Sound and Entertainment business segment is impaired. As of
September 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 $90,000 for the three months and nine months ended
September 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 nine months ended September 30, 2001. The charge was primarily
for severance costs, attributable to a reduction of 110 employees in the United
States and Canada. As of September 30, 2001, all 110 employees had been
terminated.

Interest expense. Interest expense decreased from $10.1 million for the three
months ended September 30, 2001 to $6.7 million for the three months ended
September 30, 2002. Interest expense decreased from $29.7 million for the nine
months ended September 30, 2001 to $19.3 million for the nine months ended
September 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
interest expense is $12.3 million and $2.0 million of pay-in-kind interest
expense for the nine months ended September 30, 2002 and 2001, respectively.

Other (income) expense. Other income of $0.3 million for the three months ended
September 30, 2002 is principally from foreign currency gains and the profit
from the sale of production assets

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related to shutdown of certain manufacturing facilities. Other expense of $0.1
million for the three months ended September 30, 2001 is principally from
foreign currency losses. For the nine months ended September 30, 2002, other
income of $1.3 million is principally from the sale of $2.1 million of assets
related to the hearing instrument products business. Other income of $0.4
million for the nine months ended September 30, 2001 includes one-time proceeds
of $0.2 million related to settlement of a patent infringement claim and foreign
currency gains of $0.2 million.

Income taxes. Income tax expense, excluding the income tax provision related to
the net deferred tax asset valuation allowance, was 59.0% of the pretax income
for the nine months ended September 30, 2002, compared with an income tax
benefit of 31.9% of the pretax loss for the nine months ended September 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. Additionally, net operating
losses of certain foreign subsidiaries were fully utilized in 2001 and now those
subsidiaries are in a taxable position.

As of September 30, 2002, we had provided $5.2 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 $16.3 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 September 30, 2002, we had cash and cash equivalents of $5.4 million compared
to $3.0 million at December 31, 2001.

Our principal sources of funds for the nine months ended September 30, 2002
consisted of $11.9 million of net cash generated from operating activities and
$2.2 million from the sale of assets of our hearing instruments product lines
and other miscellaneous assets. Our principal uses of funds were for debt
retirement of $8.1 million, net of borrowings, and $3.7 million for capital
expenditures. Our principal source of funds for the nine months ended September
30, 2001 was $11.6 million from financing activities. Our principal uses of
funds for the nine months ended September 30, 2001 were $5.2 million for
operating activities and $5.0 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 improve efficiency. We anticipate our capital
expenditures for 2002 to be in the range of $5.0 million to $6.0 million. Our
ability to make capital expenditures is subject to certain restrictions under
our senior secured credit facility, our senior secured notes, and our senior
subordinated

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discount notes.

Telex's accounts receivable of $47.8 million increased $7.0 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 September 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 $1.5 million to the translated
accounts receivable balance as of September 30, 2002.

Our inventories of $52.7 million increased $1.9 million from $50.8 million at
December 31, 2001. Excluding the impact of foreign currencies, our inventories
declined $0.4 million from December 31, 2001. The US dollar weakened against
certain foreign currencies, primarily the Euro and the Japanese Yen, adding
approximately $2.3 million to the translated inventory balance as of September
30, 2002. We expect the inventories to decline during the fourth quarter of 2002
as we continue to implement new and maintain appropriate existing strategies
aimed at reducing inventory levels.

Our consolidated indebtedness increased $4.8 million from $176.8 million at
December 31, 2001 to $181.6 million at September 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 increases in borrowings under our revolving credit facilities and
long-term debt issued at certain foreign locations. The senior secured notes
accreted by $6.0 million and the senior subordinated discount notes accreted by
$6.3 million, adding $12.3 million to our indebtedness. The additional
indebtedness is payable in cash at maturity, with the senior secured notes
subject to an acceleration clause based on our financial performance. Offsetting
the additional indebtedness were required loan payments, totaling $7.6 million,
made under our term loan facility and other existing loans.

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
(expiring on April 30, 2004), consisting of the term loan facility of $70.5
million, the revolving credit facility, subject to certain borrowing base
limitations, of $25.0 million, and foreign working capital lines (with on demand
repayment provisions), 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 September 30, 2002, $9.3 million of our $70.5 million term loan facility
is payable in the next 12 months, with the balance payable as described below.
As of September 30, 2002, we had total borrowings of $19.9 million under our
revolving credit facility and foreign working capital lines. The net
availability, after deduction for open letters of credit and allowing for
borrowing base limitations, was $7.7 million at September 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 nine months ended September 30, 2002 was 7.2%.

18

Pursuant to the term loan facility, we are required to make principal payments
under (i) the $50.0 million Tranche A Term Loan Facility ($16.4 million of which
was outstanding at September 30, 2002), of $0.5 million, $2.3 million and $13.6
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 ($54.1 million of which was outstanding at September 30, 2002), of $1.5
million, $7.5 million and $45.1 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 September 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, which are fully implemented through September 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 the
remainder of 2002, we cannot 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.

Telex has incurred minimal pension expense in 2002 as a result of past strong
returns on pension plan assets. However, given the performance of the stock
markets thus far in 2002, we anticipate that 2003 pension expense could be
approximately $0.5 million if the stock markets remain at September 2002 levels
during the remainder of the year. Telex was not required to make an employer
contribution to its pension plan in 2002 for the 2001 plan year. We will need to
fund $1.1 million by September 2003 for the 2002 plan year.

19

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
nine months ended September 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 September 30, 2002, we had outstanding forward exchange contracts with a
notional amount of $3.8 million and a weighted remaining maturity of 101 days.

At September 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 September 30, 2002, we had fixed rate debt of $52.4 million, step-up,
pay-in-kind interest debt of $37.6 million (redemption value of $38.7 million at
September 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 $2.6 million.

At September 30, 2002, we had floating rate debt of $90.5 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 $0.9
million, holding all other variables constant.

20

ITEM 4. CONTROLS AND PROCEDURES

Within 90 days prior to the filing of this 10-Q, an evaluation was performed
under the supervision and with the participation of our management, including
the CEO and CFO, of the effectiveness of the design and operation of Telex's
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c)
and 15d-14(c)). Based on that evaluation, our management, including the CEO and
CFO, concluded that our disclosure controls and procedures are effective to
ensure that material information relating to Telex would be made known to them
by others within Telex. There have been no significant changes in our internal
controls or in other factors that could significantly affect Telex's disclosure
controls and procedures subsequent to the date of our evaluation.

21

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

10.1 Service agreement signed February 21, 1997 between EVI Audio GmbH
and Mathias von Heydekampf.

99.1 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 July 1, 2002, reporting under Items 5 and 7,
was filed on July 8, 2002.

On November 13, 2002, the Registrant filed an amendment to its Report on
Form 8-K dated November 26, 2001. The amendment provided disclosure under
Items 1 and 7.

22

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: November 14, 2002 By: /s/ Ned C. Jackson
---------------------- ------------------------------------------
Ned C. Jackson
President and Chief Executive Officer

TELEX COMMUNICATIONS, INC.

Dated: November 14, 2002 By: /s/ Gregory W. Richter
---------------------- ------ -----------------------------------
Gregory W. Richter
Vice President and Chief Financial Officer

23

Section 302 Certification of Principal Executive Officer

I, Ned C. Jackson, President and Chief Executive Officer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Telex
Communications, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:

a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;

b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and

c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the
registrant's board of directors:

a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.

24

Date: November 14, 2002

By: /s/ Ned C. Jackson
-------------------------------------
Ned C. Jackson
President and Chief Executive Officer

25

Section 302 Certification of Principal Financial Officer

I, Gregory W. Richter, Vice President and Chief Financial Officer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Telex
Communications, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:

a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;

b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and

c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the
registrant's board of directors:

a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.

26

Date: November 14, 2002

By: /s/ Gregory W. Richter
----------------------------------
Gregory W. Richter
Vice President and Chief Financial
Officer

27

TELEX COMMUNICATIONS, INC.
FORM 10-Q

EXHIBIT INDEX