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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003 Commission File No. 333-27341
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) (ZIP CODE)
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
AS OF APRIL 30, 2003, TELEX COMMUNICATIONS, INC. HAD OUTSTANDING 4,987,127
SHARES OF COMMON STOCK, $0.01 PAR VALUE.
THIS DOCUMENT CONTAINS 25 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 March 31, 2003 and December 31, 2002 3
Condensed Consolidated Statements of Operations for the three month periods ended
March 31, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows for the three month periods ended
March 31, 2003 and 2002 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
Item 4. Controls and Procedures 19
PART II. --- OTHER INFORMATION
Page(s)
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Certifications 22-23
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2003 2002
----------- ------------
(UNAUDITED) (SEE NOTE)
ASSETS
Current assets:
Cash and cash equivalents $ 2,873 $ 3,374
Accounts receivable, net 44,873 44,644
Inventories 49,031 47,686
Other current assets 7,978 4,710
--------- ---------
Total current assets 104,755 100,414
Property, plant and equipment, net 28,943 28,995
Deferred financing costs, net 2,256 2,659
Goodwill 23,255 23,154
Other assets 2,607 2,656
--------- ---------
$ 161,816 $ 157,878
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Revolving lines of credit $ 5,931 $ 3,916
Current maturities of long-term debt 17,068 17,275
Accounts payable 14,377 10,954
Accrued wages and benefits 11,383 9,562
Other accrued liabilities 8,070 7,896
Income taxes payable 7,590 7,960
--------- ---------
Total current liabilities 64,419 57,563
Long-term debt 156,704 154,630
Other long-term liabilities 12,868 13,693
--------- ---------
Total liabilities 233,991 225,886
--------- ---------
Shareholders' deficit:
Preferred stock and capital in excess of par - preferred stock -- --
Common stock and capital in excess of par - common stock 80,180 80,180
Accumulated other comprehensive loss (6,475) (7,029)
Accumulated deficit (145,880) (141,159)
--------- ---------
Total shareholders' deficit (72,175) (68,008)
--------- ---------
$ 161,816 $ 157,878
========= =========
See notes to 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
-------------------------------
MARCH 31, MARCH 31,
2003 2002
----------- ------------
Net sales $ 60,875 $ 67,899
Cost of sales 35,463 40,692
----------- ------------
Gross profit 25,412 27,207
----------- ------------
Operating expenses:
Engineering 3,580 2,927
Selling, general and administrative 18,602 17,535
Corporate charges -- 387
Amortization of other intangibles 12 30
----------- ------------
22,194 20,879
----------- ------------
Operating profit 3,218 6,328
Interest expense 7,041 6,150
Other income, net (83) (1,173)
----------- ------------
(Loss) income before income taxes (3,740) 1,351
Provision for income taxes 981 827
----------- ------------
(Loss) income before cumulative effect of a change in accounting (4,721) 524
Cumulative effect of change in accounting -- (29,863)
----------- ------------
Net loss $ (4,721) $ (29,339)
=========== ============
Basic (loss) income per common share
(Loss) income before cumulative effect of change in accounting $ (0.95) $ 4,763.64
Cumulative effect of change in accounting -- (271,481.82)
----------- ------------
Net loss $ (0.95) $(266,718.18)
=========== ============
Diluted (loss) income per common share
(Loss) income before cumulative effect of change in accounting $ (0.95) $ 0.11
Cumulative effect of change in accounting -- (5.99)
----------- ------------
Net loss $ (0.95) $ (5.88)
=========== ============
Weighted average shares outstanding
Basic 4,987,127 110
=========== ============
Diluted 4,987,127 4,987,127
=========== ============
See notes to condensed consolidated financial statements.
4
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
-------------------------
MARCH 31, MARCH 31,
2003 2002
--------- ---------
OPERATING ACTIVITIES:
Net loss $(4,721) $(29,339)
Adjustments to reconcile net loss to cash flows from operations:
Depreciation and amortization 1,516 1,791
Amortization of finance charges and pay-in-kind interest charge 5,426 4,331
Gain on disposition of assets (12) (898)
Cumulative effect of change in accounting -- 29,863
Change in operating assets and liabilities (563) (6,222)
Change in long-term liabilities 58 478
Other, net 267 178
------- --------
Net cash provided by operating activities 1,971 182
------- --------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,282) (743)
Proceeds from disposition of assets 12 2,094
Other 55 55
------- --------
Net cash (used in) provided by investing activities (1,215) 1,406
------- --------
FINANCING ACTIVITIES:
Borrowings under revolving lines of credit, net 1,683 1,300
Repayment of long-term debt (2,974) (3,415)
------- --------
Net cash used in financing activities (1,291) (2,115)
------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 34 (17)
------- --------
CASH AND CASH EQUIVALENTS:
Net decrease (501) (544)
Balance at beginning of period 3,374 3,026
------- --------
Balance at end of period $ 2,873 $ 2,482
======= ========
SUPPLEMENTAL DISCLOSURES OF CASH PAID FOR:
Interest $ 1,456 $ 1,680
======= ========
Income taxes $ 1,503 $ 477
======= ========
See notes to 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, 2002.
Certain 2002 amounts have been reclassified to conform to 2003
presentation.
2. Inventories
Inventories consist of the following (in thousands):
March 31, December 31,
2003 2002
--------- ------------
Raw materials $19,050 $19,224
Work in process 6,990 6,840
Finished products 22,991 21,622
------- -------
$49,031 $47,686
======= =======
3. Goodwill
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142). The Company completed an initial impairment review of
goodwill in the fourth quarter of 2002. The review resulted in an
impairment loss of $29.9 million related to the Professional Sound and
Entertainment business segment that has been accounted for as a
cumulative effect of change in accounting in accordance with SFAS 142
and is reflected in the results of operations for the three months
ended March 31, 2002. The Company has certain amounts of goodwill
denominated in foreign currencies that fluctuate with movement of
exchange rates.
The following table presents the changes in carrying value of goodwill
by business segment as of March 31, 2003 (in thousands):
Professional Sound Audio and Wireless
and Entertainment Technology Total
------------------ ------------------ -------------
Balance as of December 31, 2002 $ 17,064 $ 6,090 $ 23,154
Foreign currency translation 101 -- 101
-------- ------- --------
Balance as of March 31, 2003 $ 17,165 $ 6,090 $ 23,255
======== ======= ========
4. Debt
Long-term debt consists of the following (in thousands):
6
March 31, December 31,
2003 2002
--------- ------------
Senior Secured Credit Facility (Revolving Credit Facility) $ 8,415 $ 8,563
Senior Secured Credit Facility (Term Loan Facility):
Term Loan A 14,940 15,606
Term Loan B 49,448 51,655
Tranche A Senior Secured Notes 29,424 27,692
Tranche B Senior Secured Notes 13,057 12,268
Senior Subordinated Discount Notes 55,383 52,981
Senior Subordinated Notes 550 550
Other debt 2,555 2,590
--------- ---------
173,772 171,905
Less - current portion (17,068) (17,275)
--------- ---------
Total long-term debt $ 156,704 $ 154,630
========= =========
5. Income Taxes
The Company recorded an income tax provision of $1.0 million and $0.8
million on pre-tax loss of $3.7 million and pre-tax income of $1.4
million for the three months ended March 31, 2003 and 2002,
respectively. The income tax provision for the three months ended
March 31, 2003 is comprised of a U.S. Federal income tax benefit of
$0.9 million, offset by a tax valuation allowance adjustment of $0.9
million, and an income tax provision of $1.0 million attributed to
income of certain foreign subsidiaries. The income tax provision for
the three months ended March 31, 2002 is comprised of a U.S. Federal
income tax benefit of $1.1 million, offset by a tax valuation
allowance adjustment of $1.1 million, and an income tax provision of
$0.8 million attributed to income of certain foreign subsidiaries.
The Company has a deferred tax asset of $14.7 million offset by a tax
valuation allowance of $14.6 million at March 31, 2003 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.
6. Earnings Per Share Data
Effective April 16, 2002, the Company converted all of its outstanding
Series A Preferred Stock and Series B Preferred Stock, totaling
4,987,017 shares, 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. Information presented for the three months
ended March 31, 2002 includes the effect of the conversion on a
diluted basis.
7. Related-Party Transactions
The Company recorded a charge to operations of $0.4 million for the
three months ended March 31, 2002 for management services provided by
Greenwich Street Capital Partners,
7
L.P., a related party. The services included, but were not limited to,
developing and implementing corporate and business strategy and
providing other consulting and advisory services. The agreement
expired in May 2002.
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 $2.6 million at March 31, 2003 that is included on the
condensed consolidated balance sheet as a component of other long-term
liabilities.
In 2000, the Company relocated its corporate headquarters to a
facility leased from DRF 12000 Portland LLC (the LLC), an entity in
which the Company has a 50% interest. The Company contributed cash of
$0.6 million to the LLC and the investment is accounted for under the
equity method. The Company's allocable share of the LLC income is
included as a component of other income in the condensed consolidated
statements of operations. The LLC financed the purchase of the
facility with a mortgage secured by the facility. At March 31, 2003,
the remaining balance on the mortgage was $6.7 million. The annual
lease payments to the LLC are $1.1 million for years one to five and
$1.2 million for years six to ten. The Company may renew the lease at
the end of the initial lease term for three renewal terms of five
years each. The lease has been classified as an operating lease and
the Company records the lease payments as rent expense. The Company's
exposure to loss associated with the LLC is its investment in the LLC
which totaled $0.8 million at March 31, 2003. The investment in the
LLC is included in the condensed consolidated balance sheet as a
component of other assets.
8. Comprehensive Loss
Comprehensive 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 loss represents net income or loss adjusted for foreign currency
translation adjustments. Comprehensive loss was $4.2 million and $29.8
million for the three months ended March 31, 2003 and March 31, 2002,
respectively.
9. Segment Information
The Company has two business segments: Professional Sound and
Entertainment and Audio and Wireless Technology.
Professional Sound and Entertainment
Professional Sound and Entertainment consists of five product lines
within the overall professional audio market, including: (i)
permanently installed sound systems; (ii) sound products used by
professional musicians and sold principally through retail channels;
(iii) sound products used in professional concerts, recording projects
and radio and television broadcasts; (iv) broadcast communication
products, including 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,
8
sports, broadcast, music and religious markets.
Audio and Wireless Technology
Audio and Wireless Technology targets six principal product markets
including: (i) digital audio duplication products for the religious,
education and enterprise markets; (ii) military/aviation communication
products for the military and aviation markets; (iii) wireless
networking products serving the original equipment manufacturer,
wireless internet service provider and medical telemetry markets; (iv)
land mobile communication products for the public safety, military and
industrial markets; (v) audio and wireless education products for
classroom and computer based education markets; and (vi)
teleconferencing products for the enterprise, education and government
markets.
The following tables provide information by business segment for the
three-month periods ended March 31, 2003 and 2002 (in thousands):
9
Professional Audio
Sound and and Wireless
Entertainment Technology Corporate Consolidated
------------- ------------ --------- ------------
Net sales
2003 $ 47,117 $ 13,758 $ -- $ 60,875
2002 48,764 19,135 -- 67,899
Operating profit (loss)
2003 $ 2,826 $ 1,174 $ (782) $ 3,218
2002 3,295 3,783 (750) 6,328
Depreciation expense
2003 $ 1,305 $ 48 $ 151 $ 1,504
2002 1,374 111 276 1,761
Capital expenditures
2003 $ 544 $ 153 $ 585 $ 1,282
2002 621 101 21 743
Total assets
2003 $111,870 $36,733 $13,213 $161,816
2002 108,110 37,258 18,139 163,507
Corporate operating expenses include unallocated corporate
engineering, selling, general and administrative costs, corporate
charges, 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 deferred financing costs.
The Company's net sales into each of its principal geographic regions
were as follows (in thousands):
2003 2002
------- -------
North America $33,012 $40,094
Europe 17,965 15,718
Asia 7,427 10,331
Other foreign countries 2,471 1,756
------- -------
$60,875 $67,899
======= =======
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 United States and international
operations were as follow:
March 31, 2003 December 31, 2002
-------------- -----------------
United States $46,132 $46,505
International 10,929 10,959
------- -------
$57,061 $57,464
======= =======
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 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 and success of the implementation of
changes in our operations to effect cost savings; (vi) opportunities that may
be presented to and pursued by us; (vii) our financial resources, including our
ability to access external sources of capital; (viii) war; (ix) natural or
manmade disasters (including material acts of terrorism or other hostilities
which impact our markets) and (x) such risks and uncertainties as are detailed
from time to time in our reports and filings with the Securities and Exchange
Commission.
The following discussion should be read in conjunction with our condensed
consolidated financial statements and notes thereto contained elsewhere in this
report.
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
Telex is a leader in the design, manufacture and marketing of sophisticated
audio and wireless 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 audio and wireless product markets,
including wired and wireless microphones, wired and wireless intercom systems,
mixing consoles, signal processors, amplifiers, loudspeaker systems, headphones
and headsets, digital audio duplication products, antennas, land mobile
communication 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
11
and radio on-air talent, 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 Wireless Technology. Professional Sound and Entertainment consists of five
product lines within the overall professional audio market, including: (i)
permanently installed sound systems; (ii) sound products used by professional
musicians and sold principally through retail channels; (iii) sound products
used in professional concerts, recording projects and radio and television
broadcasts; (iv) broadcast communication products, including 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 targets six principal product markets including:
(i) digital audio duplication products for the religious, education and
enterprise markets; (ii) military/aviation communication products for the
military and aviation markets; (iii) wireless networking products serving the
original equipment manufacturer, wireless internet service provider and medical
telemetry markets; (iv) land mobile communication products for the public
safety, military and industrial markets; (v) audio and wireless education
products for classroom and computer based education markets; and (vi)
teleconferencing products for the enterprise, education and government 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, Hong Kong, Singapore, Canada, Australia and France. Exposure to U.S.
dollar/Euro 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.
We report foreign exchange gains or losses on transactions as part of other
(income) expense. 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,
2002.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information
regarding certain items in our condensed consolidated statements of operations,
in thousands:
Three months ended
-------------------------------------
March 31, March 31, %
2003 2002 Change
--------- --------- ------
Net sales:
Professional Sound and Entertainment $ 47,117 $ 48,764 -3.4%
Audio and Wireless Technology 13,758 19,135 -28.1%
----------------------- ------
Total net sales 60,875 67,899 -10.3%
----------------------- ------
Total gross profit 25,412 27,207
% of sales 41.7% 40.1%
-----------------------
Operating profit $ 3,218 $ 6,328
=======================
(Loss) income before cumulative effect of
change in accounting $ (4,721) $ 524
Cumulative effect of change in accounting $ -- $(29,863)
-----------------------
Net loss $ (4,721) $(29,339)
=======================
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
Net sales. Net sales decreased $7.0 million, or 10.3%, from $67.9 million for
the three months ended March 31, 2002 to $60.9 million for the three months
ended March 31, 2003. Sales in the Professional Sound and Entertainment segment
decreased slightly for the three-month comparative periods due to lower
intercom product sales while sales in the Audio and Wireless Technology segment
declined significantly due to continued sluggishness in the computer and
telecommunications industries and to the discontinuance of sales of hearing
instruments products, which we exited in the first quarter of 2002.
Net sales in the Professional Sound and Entertainment segment decreased $1.7
million, or 3.5%, from $48.8 million for the three months ended March 31, 2002
to $47.1 million for the three months ended March 31, 2003. Higher sales of
electronics products were offset by lower sales of intercom and microphone
products.
Net sales in the Audio and Wireless Technology segment decreased $5.3 million,
or 27.7%, from $19.1 million for the three months ended March 31, 2002 to $13.8
million for the three months ended March 31, 2003. Net sales, excluding sales
of discontinued hearing instruments products in the three months ended March
31, 2002, decreased approximately 22%. The decline in net
13
sales 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 decreased $1.8 million, or 6.6%, from $27.2 million
for the three months ended March 31, 2002 to $25.4 million for the three months
ended March 31, 2003. As a percentage of net sales, the gross margin rate
increased to 41.7% for the three months ended March 31, 2003 compared to 40.1%
for the three months ended March 31, 2002. The increase in the gross margin
rate for 2003 from the corresponding period in 2002 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 38.9% to 42.3% for the three months ended March 31, 2003. The
increase in the gross margin rate for 2003 from the corresponding period in
2002 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 decreased
from 43.2% to 40.0% for the three months ended March 31, 2003. The decrease in
the gross margin rate for 2003 from the corresponding period in 2002 is
attributed primarily to lower sales of high-margin products.
Engineering. Engineering expenses increased $0.7 million, or 24.1%, from $2.9
million for the three months ended March 31, 2002 to $3.6 million for the three
months ended March 31, 2003. The increase in spending for the three-month
period in 2003 from the corresponding period in 2002 is attributed primarily to
spending associated with new product development in the Professional Sound and
Entertainment segment.
Selling, general and administrative. Selling, general and administrative
expenses increased $1.1 million, or 6.3%, from $17.5 million for the three
months ended March 31, 2002 to $18.6 million for the three months ended March
31, 2003. The increase in expense in 2003 is attributed mainly to higher
international selling and marketing spending costs offset by lower general and
administrative expenses. International selling, general and administrative
expenses increased in the 2003 period compared to the 2002 period mainly from
strengthening foreign currencies compared to the U.S. dollar. We have
implemented cost controls in light of the slowdown in sales and anticipate that
expenses, as a percentage of net sales, will decline in future periods.
Corporate charges. There were no corporate charges in the three months ended
March 31, 2003. Corporate charges of $0.4 million for the three months ended
March 31, 2002 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.
Amortization of other intangibles. We recorded amortization expense related to
other identifiable intangibles of approximately $12,000 and $30,000 for the
three months ended March 31, 2003 and 2002, respectively. These intangibles
will continue to be amortized unless an analysis indicates an impairment has
occurred.
Interest expense. Interest expense increased from $6.2 million for the three
months ended March
14
31, 2002 to $7.0 million for the three months ended March 31, 2003. Interest
expense includes $4.9 million and $3.9 million of pay-in-kind interest expense
for 2003 and 2002, respectively. Interest expense increased primarily because
of the higher pay-in-kind interest expense that offset the benefits of lower
average outstanding indebtedness and lower average interest rates on non
pay-in-kind debt.
Other income. Other income of $0.1 million for the three months ended March 31,
2003 is principally from amortization of deferred revenue for a patent fee,
trademark license fee and non-compete agreement associated with the sale of
hearing instrument product lines. Other income of $1.2 million for the three
months ended March 31, 2002 is primarily a gain from the sale of assets related
to the hearing instrument product lines.
Income taxes. Our effective tax rate for the three-month periods ended March
31, 2003 and 2002 is not meaningful because a tax benefit has not been recorded
on the pretax loss in the United States. The tax provision recorded relates
only to the countries in which we are profitable. Income tax expense increased
in 2003 compared to 2002, as foreign subsidiary taxable income increased.
As of March 31, 2003, we have a reserve of $4.4 million included in income
taxes payable for tax liability, penalties, and accrued interest (as of the
settlement date) related to a dispute for taxable years 1990 through 1995. We
have agreed with the Internal Revenue Service on the final amount of the tax
liability to be paid and have been making monthly payments.
At March 31, 2003, we have $15.2 million of net operating loss carryforwards.
The U.S. operating loss carryforward is $12.1 million, of which $0.5 million
expires in 2021, $9.0 million expires in 2022 and $2.6 million expires in 2023.
We have established a net deferred tax valuation allowance of $14.6 million due
to the uncertainty of the realization of future tax benefits. This amount
relates primarily to the U.S. deferred tax assets as our realization of the
future tax benefits related to the deferred tax asset is dependent on our
ability to generate taxable income within the net operating loss carryforward
period. We have considered this factor in reaching our conclusion as to the
adequacy of the valuation allowance for financial reporting purposes.
Cumulative effect of a change in accounting. We recorded a charge of $29.9
million in 2002 related to the impairment of goodwill related to our
Professional Sound and Entertainment segment in accordance with the guidance in
SFAS 142.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, we had cash and cash equivalents of $2.9 million compared to
$3.4 million at December 31, 2002.
Our principal source of funds for the three months ended March 31, 2003
consisted of $2.0 million of net cash provided by operating activities. Our
principal uses of funds were debt retirement of $1.3 million, net of
borrowings, and $1.3 million for capital expenditures. Our principal source of
funds for the three months ended March 31, 2002 was $2.1 million of cash
proceeds from the sale of our hearing instrument product lines. Our principal
uses of funds for the three months ended March 31, 2002 were debt retirement of
$2.1 million, net of borrowings, and $0.8 million for capital expenditures.
15
Our investing activities consist mainly of capital expenditures to maintain
facilities, acquire machines or tooling, update certain manufacturing
processes, update information systems and improve efficiency. We anticipate our
capital expenditures for 2003 to be approximately $8.0 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
discount notes.
Telex's accounts receivable of $44.9 million increased $0.3 million from $44.6
million at December 31, 2002. The increase is primarily a result of higher
receivables at our European international locations resulting from the Euro to
U.S. dollar exchange rate movement.
Our inventories of $49.0 million increased $1.3 million from $47.7 million at
December 31, 2002. Excluding the impact of foreign currencies exchange rate
movements, our inventories increased $0.9 million from December 31, 2002.
Our consolidated indebtedness increased $3.9 million from $175.8 million at
December 31, 2002 to $179.7 million at March 31, 2003. 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. The
senior secured notes accreted by $2.5 million and the senior subordinated
discount notes accreted by $2.4 million, adding $4.9 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 $3.0 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 U.S. 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 $64.4
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 $10.3 million.
In certain instances the foreign working capital lines are secured by a lien on
foreign real property, leaseholds, accounts receivable and inventory or are
guaranteed by another subsidiary.
As of March 31, 2003, $9.5 million of our $64.4 million term loan facility is
payable in the next 12 months, with the balance payable as described below. In
addition we had outstanding borrowings of $8.4 million under the revolving
credit facility and outstanding borrowings of $5.9 million under our foreign
working capital lines. We have classified $7.1 million of the revolving credit
facility as short-term debt based on our anticipated ability to repay the debt
in the next 12 months. The remaining $1.3 million is classified as long-term
debt. The net availability, after deduction for open letters of credit and
allowing for borrowing base limitations, was $12.3 million at March 31, 2003.
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.
16
The effective interest rate under these credit facilities for the three months
ended March 31, 2003 was 6.6%.
Pursuant to the term loan facility, we are required to make principal payments
under (i) the $50.0 million Tranche A Term Loan Facility ($14.9 million of
which was outstanding at March 31, 2003), of $1.6 million and $13.3 million in
the remainder of 2003 and 2004, respectively, with a final maturity date of
April 30, 2004 and (ii) the $65.0 million Tranche B Term Loan Facility ($49.4
million of which was outstanding at March 31, 2003), of $5.5 million and $43.9
million in the remainder of 2003 and 2004, respectively, with a final maturity
date of April 30, 2004. In addition, under the terms of the senior secured
credit facility, we are required to make mandatory prepayments from proceeds of
the sale of assets and an additional payment in 2003 and 2004 if our operating
performance for 2002 and 2003 exceeds certain targets. In the three months
ended March 31, 2003, we made an additional payment of $0.5 million related to
our 2002 operating performance.
In addition to payments on our term loan facility, we are required to make
principal payments totaling $0.4 million in the next 12 months pursuant to our
other U.S. and foreign debt agreements.
We have incurred substantial indebtedness in connection with a series of
leveraged transactions and subsequently completed a debt restructuring in
November 2001. As a result, debt service obligations represent significant
liquidity constraints for us. We were in compliance with all covenants related
to all debt agreements at March 31, 2003.
Telex will incur a pension expense of approximately $0.2 million in 2003
primarily due to amortization of actuarial losses resulting from lower than
expected investment returns on pension plan assets in recent years. Telex was
not required to make an employer contribution to its pension plan in 2002 for
the 2001 plan year. We will be making employer contributions to the pension
plan of approximately $2.1 million in the next 12 months for the 2002 and 2003
plan years.
17
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 three months ended March 31, 2003, 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 March 31, 2003, we had outstanding forward exchange contracts with a
notional amount of $7.6 million and a weighted remaining maturity of 49 days.
At March 31, 2003, 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 $0.8 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 March 31, 2003, we had fixed rate debt of $57.5 million, step-up,
pay-in-kind interest debt of $42.5 million (redemption value of $43.3 million
at March 31, 2003), and an interest-free loan of $1.0 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 $2.4 million.
At March 31, 2003, we had floating rate debt of $78.7 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 $0.8
million, holding all other variables constant.
18
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the filing of this Report on Form 10-Q (the "Evaluation
Date"), 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 (i)
our disclosure controls and procedures were effective as of the Evaluation Date
to ensure that the information that we are required to disclose in the reports
filed or submitted under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the Commission's rules and
forms, and that (ii) the information that is required to be reported is
accumulated and communicated to management, including our principal executive
and financial officers, as appropriate, to allow timely decisions regarding
required disclosure. 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 Evaluation Date nor were any
significant deficiencies or material weaknesses in Telex's internal controls
found.
19
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.5 Employment Agreement, dated as of January 5, 2003, between
the Company and Mathias Stieler von Heydekampf (incorporated
by reference to Exhibit 10.5 to the Company's Report on Form
10-K for the fiscal year ended December 31, 2002, filed March
28, 2003, SEC No. 333-27341).
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
None.
20
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: April 30, 2003 By: /s/ Ned C. Jackson
------------------ ----------------------------------------
Ned C. Jackson
President and Chief Executive Officer
TELEX COMMUNICATIONS, INC.
Dated: April 30, 2003 By: /s/ Gregory W. Richter
------------------ ----------------------------------------
Gregory W. Richter
Vice President and Chief Financial
Officer
21
Certification
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.
Date: April 30, 2003
By: /s/ Ned C. Jackson
----------------------------------------
Ned C. Jackson
President and Chief Executive Officer
22
Certification
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.
Date: April 30, 2003
By: /s/ Gregory W. Richter
----------------------------------------
Gregory W. Richter
Vice President and Chief Financial
Officer
23
TELEX COMMUNICATIONS, INC.
FORM 10-Q
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
10.5 Employment Agreement, dated as of January 5, 2003, between the
Company and Mathias Stieler von Heydekampf (incorporated by
reference to Exhibit 10.5 to the Company's Report on Form 10-K
for the fiscal year ended December 31, 2002, filed March 28,
2003, SEC No. 333-27341).
99.1 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002.
24