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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, 2004 Commission File No. 333-112819
TELEX COMMUNICATIONS, INC.
TELEX COMMUNICATIONS INTERNATIONAL, LTD.
(Exact name of Registrant as specified in its charter)
DELAWARE 11-3707780
DELAWARE 41-1869814
(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 [ ] NO [X]
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 28, 2004, TELEX COMMUNICATIONS, INC. HAD OUTSTANDING 500 SHARES OF
COMMON STOCK, $0.01 PAR VALUE.
THIS DOCUMENT CONTAINS 23 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, 2004 and December 31, 2003 3
Condensed Consolidated Statements of Operations for the three month periods ended
March 31, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows for the three month periods ended
March 31, 2004 and 2003 5
Notes to Condensed Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 20
PART II. -- OTHER INFORMATION
Page(s)
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Exhibit Index 23
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2004 2003
---------- -----------
(UNAUDITED) (SEE NOTE)
ASSETS
Current assets:
Cash and cash equivalents $ 9,888 $ 6,698
Accounts receivable, net 47,606 47,455
Inventories 49,751 45,967
Other current assets 6,306 7,437
--------- ---------
Total current assets 113,551 107,557
Property, plant and equipment, net 30,394 29,951
Deferred financing costs, net 6,227 6,368
Goodwill, net 23,332 23,353
Other assets 2,943 2,981
--------- ---------
$ 176,447 $ 170,210
========= =========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Current maturities of long-term debt $ 443 $ 446
Accounts payable 16,758 12,879
Accrued wages and benefits 8,760 10,384
Other accrued liabilities 13,928 11,557
Income taxes payable 8,190 9,046
--------- ---------
Total current liabilities 48,079 44,312
Long-term debt, net 126,310 126,413
Other long-term liabilities 8,448 7,474
--------- ---------
Total liabilities 182,837 178,199
--------- ---------
Shareholder's deficit:
Common stock and capital in excess of par 143,029 143,029
Accumulated other comprehensive loss (2,847) (3,260)
Accumulated deficit (146,572) (147,758)
--------- ---------
Total shareholder's deficit (6,390) (7,989)
--------- ---------
$ 176,447 $ 170,210
========= =========
See notes to condensed consolidated financial statements.
Note: The balance sheet at December 31, 2003 has been derived from the Company's
audited financial statements at that date.
3
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
SUCCESSOR PREDECESSOR
--------- -----------
THREE MONTHS ENDED
---------------------------
MARCH 31, MARCH 31,
2004 2003
-------- ---------
Net sales $ 67,266 $ 60,875
Cost of sales 37,580 35,463
-------- --------
Gross profit 29,686 25,412
-------- --------
Operating expenses:
Engineering 3,469 3,580
Selling, general and
administrative 19,353 18,602
Amortization of other intangibles 3 12
-------- --------
22,825 22,194
-------- --------
Operating profit 6,861 3,218
Interest expense (4,150) (7,041)
Other (loss) income, net (42) 83
-------- --------
Income (loss) before income taxes 2,669 (3,740)
Provision for income taxes 1,473 981
-------- --------
Net income (loss) $ 1,196 $ (4,721)
======== ========
See notes to condensed consolidated financial statements.
4
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SUCCESSOR PREDECESSOR
--------- -----------
THREE MONTHS ENDED
------------------------
MARCH 31, MARCH 31,
2004 2003
--------- -----------
OPERATING ACTIVITIES:
Net income (loss) $ 1,196 $(4,721)
Adjustments to reconcile net income (loss) to cash flows from operations:
Depreciation and amortization 1,493 1,516
Amortization of finance charges and pay-in-kind interest charge 348 5,426
Gain on disposition of assets - (12)
Change in operating assets and liabilities 2,394 (563)
Change in long-term liabilities (330) 58
Other, net 272 267
------- -------
Net cash provided by operating activities 5,373 1,971
------- -------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,956) (1,282)
Proceeds from disposition of assets - 12
Other 55 55
------- -------
Net cash used in investing activities (1,901) (1,215)
------- -------
FINANCING ACTIVITIES:
Borrowings (repayments) under revolving lines of credit, net - 1,683
Repayment of long-term debt (110) (2,974)
Payment of deferred financing costs (182) -
Dividend to parent (10) -
------- -------
Net cash used in financing activities (302) (1,291)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 20 34
------- -------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) 3,190 (501)
Balance at beginning of period 6,698 3,374
------- -------
Balance at end of period $ 9,888 $ 2,873
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH PAID FOR:
Interest $ 264 $ 1,456
======= =======
Income taxes $ 513 $ 1,503
======= =======
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 Registration
Statement on Form S-4, as amended, which includes audited consolidated
financial statements for the fiscal year ended December 31, 2003.
Certain 2003 amounts have been reclassified to conform to 2004
presentation.
COMPANY STRUCTURE
Telex Communications, Inc. (Telex or Successor), a Delaware corporation, is
a wholly owned subsidiary of Telex Communications Intermediate Holdings,
LLC (Intermediate). Intermediate is a wholly owned subsidiary of Telex
Communications Holdings, Inc. (Old Telex or Predecessor). Telex was formed
in connection with the November 19, 2003 restructuring of Old Telex's debt
obligations. Reference to "the Company" throughout the remainder of these
footnotes means Predecessor and/or Successor, as appropriate, for the
relevant period(s).
Immediately prior to the closing of the November 2003 restructuring, Old
Telex transferred to Successor substantially all of Old Telex's assets and
liabilities except, principally, its 13% Senior Subordinated Discount Notes
due 2006, in exchange for Successor's common stock. Old Telex then
contributed Successor's common stock to Intermediate, a new limited
liability company, in exchange for all of Intermediate's membership
interests. Successor became a wholly owned subsidiary of Intermediate and
Intermediate became a wholly owned subsidiary of Old Telex. The
subsidiaries of Old Telex became Successor's subsidiaries as part of the
asset transfer. Upon the closing of the restructuring, Old Telex changed
its name and Successor was renamed.
As a result of the November 2003 debt restructuring, which was accounted
for as being
6
effective November 30, and the formation of a new entity, the consolidated
financial statements for the three months ended March 31, 2004 reflect the
results of Telex while the consolidated financial statements for the three
months ended March 31, 2003 reflect the results of Old Telex.
2. Inventories
Inventories consist of the following (in thousands):
March 31, December 31,
2004 2003
---- ----
Raw materials $21,727 $18,941
Work in process 6,701 6,150
Finished products 21,323 20,876
------- -------
$49,751 $45,967
======= =======
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 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, 2004 (in thousands):
Audio and Wireless
Professional Audio Technology Total
------------------ ---------- -----
Balance as of December 31, 2003 $ 17,263 $ 6,090 $ 23,353
Foreign currency translation (21) - (21)
-------- ------- --------
Balance as of March 31, 2004 $ 17,242 $ 6,090 $ 23,332
======== ======= ========
4. Debt
Long-term debt consists of the following (in thousands):
March 31, December 31,
2004 2003
---- ----
Senior Secured Notes $ 125,000 $ 125,000
Other debt 1,753 1,859
--------- ---------
126,753 126,859
Less - current portion (443) (446)
--------- ---------
Total long-term debt $ 126,310 $ 126,413
========= =========
5. Income Taxes
The Company recorded an income tax provision of $1.5 million and $1.0
million on pre-tax income of $2.7 million and pre-tax loss of $3.7 million
for the three months ended March 31, 2004 and 2003, respectively. The
income tax provision for the three months ended March 31, 2004 is comprised
of a U.S. Federal and state income tax provision of $0.3 million, offset
7
by a tax valuation allowance adjustment of $0.2 million, and an income tax
provision of $1.4 million attributed to income of certain foreign
subsidiaries. The income tax provision for the three months ended March 31,
2003 is comprised of a U.S. Federal and state 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 Company has a deferred tax asset of $9.0 million offset by a tax
valuation allowance of $8.6 million at March 31, 2004 due to the
uncertainty of the realization of future tax benefits primarily in the U.S.
6. Pension and Postretirement Benefits
The Company has one noncontributory defined benefit cash balance pension
plan. Through June 30, 2003, each active participant's account received a
benefit credit each year based on the participant's age, vesting service,
and total remuneration covered by the pension plan, consisting of base
salary, commission, overtime and bonuses paid to the participant. Effective
June 30, 2003 the Company made a decision to freeze future pension plan
benefits. Plan participants will continue to receive interest credits and
will no longer receive a benefit credit based on the participant's age,
vesting service and total remuneration.
The following table presents the net periodic benefit (income) for each
period (in thousands):
Successor Predecessor
--------- -----------
Three months ended March 31,
----------------------------
2004 2003
--------- ----------
Components of net periodic benefit
cost (income):
Service cost $ - $ 121
Interest cost 334 354
Expected return on plan assets (456) (462)
Amortization of prior service cost - (43)
-------- --------
Net periodic benefit $ (122) $ (30)
======== ========
The Company made an employer contribution of $0.3 million in January 2004
and will make additional employer contributions totaling $0.2 million
during the remainder of 2004. The total employer contributions for 2004
decreased by $0.9 million from amounts previously disclosed as recently
enacted legislation reduced employer minimum contribution requirements.
The Company is obligated to provide health and life insurance benefits to a
limited number of employees of its U.S. operations upon retirement. The
benefits for a substantial portion of these employees were curtailed as of
June 30, 2003, thereby reducing the expense to a minimal amount for 2004.
The net periodic benefit cost for the three months ended March 31, 2003 was
$5,000.
7. Related-Party Transactions
In 2000, the Company relocated its corporate headquarters to a facility
leased from DRF 12000
8
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, 2004, the
remaining balance on the mortgage was $6.6 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 lease commenced in June 2000. 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, 2004. The investment in the
LLC is included in the condensed consolidated balance sheets as a component
of other assets.
Telex has reviewed FASB Interpretation No. 46, "Consolidation of Variable
Interest Entitites, an Interpretation of ARB No. 51" (FIN 46), pertaining
to the consolidation of variable interest entities and has concluded that
the LLC is not a variable interest entity to the Company and has determined
that the current method of accounting for this investment remains
appropriate.
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 and
minimum pension liability adjustments. Comprehensive loss is as follows (in
thousands):
Successor Predecessor
----------- --------------
Three months ended March 31,
----------------------------
2004 2003
----------- --------------
Net income (loss) $1,196 $(4,721)
Other comprehensive income:
Foreign currency translation adjustment 413 554
-------- ----------
Comprehensive income (loss) $1,609 $(4,167)
======== ==========
The components of accumulated other comprehensive loss are as follows (in
thousands):
March 31, December 31,
2004 2003
---------- ------------
Foreign currency translation $ 3,578 $ 3,165
Minimum pension liability (6,425) (6,425)
------- -------
$(2,847) $(3,260)
======= =======
9. Segment Information
The Company has two business segments: Professional Audio and Audio and
Wireless Technology.
9
Professional Audio
Professional Audio 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
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 and geographic
region for the three months ended March 31, 2004 and 2003 (in thousands):
10
Audio
Professional and Wireless
Audio Technology Corporate Consolidated
------------ ------------ --------- ------------
Net sales
2004 - Successor $ 53,757 $ 13,509 $ - $ 67,266
2003 - Predecessor 47,117 13,758 - 60,875
Operating profit (loss)
2004 - Successor $ 4,885 $ 2,208 $ (232) $ 6,861
2003 - Predecessor 2,089 1,178 (49) 3,218
Depreciation expense
2004 - Successor $ 1,200 $ 81 $ 209 $ 1,490
2003 - Predecessor 1,305 48 151 1,504
Capital expenditures
2004 - Successor $ 1,310 $ 208 $ 438 $ 1,956
2003 - Predecessor 544 153 585 1,282
Total assets
2004 - Successor $121,516 $ 38,887 $ 16,044 $ 176,447
2003 - Predecessor 116,557 36,733 8,526 161,816
Corporate operating expenses include unallocated corporate engineering, selling,
general and administrative costs, and amortization of other intangibles.
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):
Successor Predecessor
2004 2003
---------- ------------
United States $ 33,650 $ 30,822
Europe 18,449 17,965
Asia 9,821 7,427
Other foreign countries 5,346 4,661
-------- --------
$ 67,266 $ 60,875
======== ========
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, 2004 December 31, 2003
-------------- -----------------
United States $ 50,371 $ 50,262
International 12,525 12,391
--------- --------
$ 62,896 $ 62,653
========= ========
11
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.
OVERVIEW
COMPANY STRUCTURE
Telex Communications, Inc. ("Telex" or "Successor"), a Delaware corporation, is
a wholly-owned subsidiary of Telex Communications Intermediate Holdings, LLC
("Intermediate Holding Company"). Intermediate Holding Company is a wholly-owned
subsidiary of Telex Communications Holdings, Inc. ("Old Telex" or
"Predecessor"). Telex and Intermediate Holding Company were formed in connection
with the November 19, 2003 restructuring of Old Telex's debt obligations.
Reference to the "Company" throughout the remainder of this Management's
Discussion and Analysis of Financial Condition and Results of Operations means
Predecessor or Successor, as appropriate, for the relevant period(s).
12
Immediately prior to the closing of the November 2003 debt restructuring, Old
Telex transferred to Successor substantially all of Old Telex's assets and
liabilities except, principally, its 13% Senior Subordinated Discount Notes due
2006, in exchange for Successor's common stock. Old Telex then contributed
Successor's common stock to Intermediate Holding Company, a new limited
liability company, in exchange for all of Intermediate Holding Company's
membership interests. Successor became a wholly-owned subsidiary of Intermediate
Holding Company and Intermediate Holding Company became a wholly-owned
subsidiary of Old Telex. The subsidiaries of Old Telex became Successor's
subsidiaries as part of the asset transfer. Upon the closing of the
restructuring, Old Telex changed its name to "Telex Communications Holdings,
Inc." and Successor was renamed "Telex Communications, Inc."
As a result of the November 2003 debt restructuring, which was accounted for as
being effective November 30, and the formation of a new entity, the consolidated
financial statements for the three months ended March 31, 2004 reflect the
results of Telex while the consolidated financial statements for the three
months ended March 31, 2003 reflect the results of Old Telex.
DESCRIPTION OF BUSINESS
We are a leader in the design, manufacture and marketing of sophisticated audio
and wireless communications equipment to commercial, professional and industrial
customers. We provide high value-added communications products designed to meet
the specific needs of customers in commercial, professional and industrial
markets. 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 and radio on-air talent, airline pilots and the hearing impaired in
order to facilitate speech or communications.
We have two business segments: Professional Audio and Audio and Wireless
Technology. Professional Audio 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
13
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.
CRITICAL ACCOUNTING POLICIES
There has been no material change in our Critical Accounting Policies as
disclosed in our Registration Statement on Form S-4, as amended.
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:
Successor Predecessor
--------- -----------
Three months ended
------------------------------------------------
March 31, March 31, %
2004 2003 Change
--------- ---------- ------
Net sales:
Professional Audio $ 53,757 $ 47,117 14.1%
Audio and Wireless Technology 13,509 13,758 -1.8%
-------- -------- ----
Total net sales 67,266 60,875 10.5%
-------- -------- ----
Total gross profit 29,686 25,412
% of sales 44.1% 41.7%
Operating profit $ 6,861 $ 3,218
======== ========
Net income (loss) $ 1,196 $ (4,721)
======== ========
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
14
Net sales. Net sales increased $6.4 million, or 10.5%, from $60.9 million for
the three months ended March 31, 2003 to $67.3 million for the three months
ended March 31, 2004. Net sales strengthened in the first quarter of 2004
compared to the first quarter of 2003 as we experienced higher sales in our U.S.
and Asian marketplaces. Net sales in the Professional Audio segment increased
substantially for the three months ended March 31, 2004 compared to the
corresponding period ended March 31, 2003 because of sales associated with new
product introductions and stronger customer purchasing activity. Sales in the
Audio and Wireless Technology segment declined due to the discontinuance of
sales of computer audio products, which we exited in the second quarter of 2003.
Our net sales, excluding the impact of discontinued products, increased
approximately 11.3% for the three months ended March 31, 2004 compared to the
three months ended March 31, 2003.
Net sales in the Professional Audio segment increased $6.6 million, or 14.1%,
from $47.1 million for the three months ended March 31, 2003 to $53.7 million
for the three months ended March 31, 2004. We generated increased U.S. and Asian
net sales in the first quarter of 2004 as the professional audio marketplace
rebounded from a slow economic cycle in the first quarter of 2003 when the world
faced war concerns in Iraq and the Asian SARS epidemic. Sales of several
products continued at the high levels of the fourth quarter of 2003 as customers
continued to upgrade their equipment and technology. New products introduced in
the first quarter of 2004 also generated strong customer interest and resulted
in higher sales.
Net sales in the Audio and Wireless Technology segment decreased $0.2 million,
or 1.8%, from $13.7 million for the three months ended March 31, 2003 to $13.5
million for the three months ended March 31, 2004. Net sales, excluding sales of
computer audio products in both periods, increased approximately 1%. The
increase in net sales, after excluding discontinued products, is attributed
primarily to higher spending by governmental agencies on upgrades to their
communications equipment.
Gross profit. Gross profit increased $4.3 million, or 16.8%, from $25.4 million
for the three months ended March 31, 2003 to $29.7 million for the three months
ended March 31, 2004. The gross margin rate increased to 44.1% for the three
months ended March 31, 2004 compared to 41.7% for the three months ended March
31, 2003. The increase in the gross margin rate for 2004 from the corresponding
period in 2003 is attributed primarily to sales of higher margin products and
improved manufacturing efficiencies.
The gross margin rate for the Professional Audio segment increased from 42.3%
for the three months ended March 31, 2003 to 44.4% for the three months ended
March 31, 2004. The increase in the gross margin rate for 2004 from the
corresponding period in 2003 is attributed primarily to the increased sales of
high-margin products and continued manufacturing efficiencies.
The gross margin rate for the Audio and Wireless Technology segment increased
from 40.0% for the three months ended March 31, 2003 to 43.0% for the three
months ended March 31, 2004. The increase in the gross margin rate for 2004 from
the corresponding period in 2003 is attributed primarily to increased sales of
high-margin products.
Engineering. Engineering expenses decreased $0.1 million, or 3.1%, from $3.6
million for the three months ended March 31, 2003 to $3.5 million for the three
months ended March 31, 2004. The spending for the three-month periods in 2004
and 2003 were relatively flat as we continue to
15
invest in new product development, primarily in our Professional Audio segment.
Selling, general and administrative. Selling, general and administrative
expenses increased $0.8 million, or 4.0%, from $18.6 million for the three
months ended March 31, 2003 to $19.4 million for the three months ended March
31, 2004. The increase in expenses in 2004 is attributed mainly to higher
international selling and marketing costs. Our international selling, general
and administrative expenses increased in the 2004 period compared to the
corresponding 2003 period from stronger foreign currencies compared to the U.S.
dollar. We expect these expenses to remain relatively flat for the second
quarter of 2004 and decline slightly in the second half of 2004.
Amortization of other intangibles. We recorded amortization expense related to
identifiable intangible assets having definite lives of approximately $3,000 and
$12,000 for the three months ended March 31, 2004 and 2003, respectively.
Interest expense. Interest expense decreased from $7.0 million for the three
months ended March 31, 2003 to $4.2 million for the three months ended March 31,
2004. Interest expense decreased primarily because of the November 2003 debt
restructuring which resulted in Telex having lower outstanding indebtedness as
compared to Old Telex.
Other (loss) income, net. Other loss of $42,000 for the three months ended March
31, 2004 is principally from foreign currency losses offset by the amortization
of deferred revenue for a patent fee, trademark license fee and non-compete
agreement associated with the sale of the hearing instrument product lines in
2002. Other income of $83,000 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 the hearing
instrument product lines in 2002. Amortization of the deferred revenue items
will be substantially completed in 2004.
Income taxes. Our effective tax rate for the three-month period ended March 31,
2003, 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 to $1.5
million in the three months ended March 31, 2004 from $1.0 million in the three
months ended March 31, 2003. The change was mainly due to increased foreign
taxable income. Our tax provision in the U.S. for 2004 is calculated on a
separate company basis under a tax sharing agreement with Old Telex.
As of March 31, 2004, we have a reserve of $4.0 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.
We have a net deferred tax asset of $9.0 million and have established a deferred
tax valuation allowance of $8.6 million due to the uncertainty of the
realization of future tax benefits. The valuation allowance relates primarily to
the U.S. deferred tax asset as our realization of the future tax benefits in the
U.S. is uncertain at March 31, 2004. We have considered this factor in reaching
our conclusion as to the adequacy of the valuation allowance for financial
reporting purposes.
16
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004, we had cash and cash equivalents of $9.9 million compared to
$6.7 million at December 31, 2003.
Our principal source of funds for the three months ended March 31, 2004
consisted of $5.4 million of cash provided by operating activities. Our
principal use of funds was for capital expenditures of $2.0 million. Our
principal source of funds for the three months ended March 31, 2003 was $2.0
million of cash provided by operating activities. Our principal uses of funds
for the three months ended March 31, 2003 were for debt retirement of $1.3
million, net of borrowings, and $1.3 million for capital expenditures.
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 2004 will be in the range of $7.0 to $8.0 million.
Our accounts receivable balance of $47.6 million as of March 31, 2004 increased
$0.1 million from $47.5 million at December 31, 2003. The increase is in line
with Company projections for the first quarter based on revenues in the $66.0
million to $67.0 million range. No significant credit risks exist at March 31,
2004 that could impact future cash receipts from customers.
Our inventories of $49.8 million as of March 31, 2004 increased $3.8 million
from $46.0 million at December 31, 2003. Our inventories increased in the first
quarter as we built additional quantities of new product for introduction late
in the quarter and anticipated high demand. We expect to reduce our investment
in finished goods inventories in the future as we continue to focus on lean
manufacturing processes and make to order concepts.
Our consolidated indebtedness decreased $0.1 million from $126.9 million at
December 31, 2003 to $126.8 million at March 31, 2004. Our debt consists of
$125.0 million of 11-1/2% Senior Secured Notes due October 2008 and $1.8 million
of other debt in the U.S. and Germany. The decrease is attributed mainly to
monthly principal payments on our other debt.
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 a U.S. $15.0 million senior secured credit
facility entered into November 19, 2003 (expiring July 12, 2008), subject to
certain borrowing base limitations. The credit facility is secured by
substantially all of our and our domestic subsidiaries' current and future
assets. In addition, we have foreign working capital lines (with on demand
repayment provisions), subject to certain limitations, of $11.7 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.
At March 31, 2004 we had no borrowings outstanding under our U.S. credit
facility and foreign working capital lines. The net availability, after
deduction for open letters of credit and borrowing base limitations, was $24.5
million. The effective annual interest rate under these
17
facilities for amounts borrowed during the three months ended March 31, 2004 was
0.12%.
As of March 31, 2004 we made employer contributions to the pension plan of
approximately $0.3 million and we will be making additional employer
contributions totaling approximately $0.2 million during the next 12 months for
the 2003 plan year. There are no required contributions for the 2004 plan year.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including changes in foreign currency
exchange rates and interest rates. Market risk is the potential loss arising
from adverse changes in market rates and prices, such as foreign exchange and
interest rates. We have entered into various financial instruments to manage
this risk. The counterparties to these transactions are major financial
institutions. We do not enter into derivatives or other financial instruments
for trading or speculative purposes.
EXCHANGE RATE SENSITIVITY ANALYSIS
We enter into forward exchange contracts principally to hedge the currency
fluctuations in transactions denominated in foreign currencies, thereby limiting
our risk that would otherwise result from changes in exchange rates. During the
three months ended March 31, 2004, 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, 2004, we had outstanding forward exchange contracts with a notional
amount of $12.9 million and a weighted remaining maturity of 29 days.
At March 31, 2004, 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 $1.3 million.
However, since these contracts hedge foreign currency denominated transactions,
any change in the fair value of the contracts would be substantially 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, 2004, we had fixed rate debt of $125.9 million and an interest-free
loan of $0.9 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 $4.5 million.
19
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
our management, including the Chief Executive Officer (CEO) and Chief Financial
Officer (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)) as of March 31, 2004. Based on that evaluation, our management,
including the CEO and CFO, concluded that (i) our disclosure controls and
procedures were effective as of the end of the period 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 internal controls.
20
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Purchase Agreement, dated March 26, 2004 between Telex
Communications Holdings, Inc. and Raymond V. Malpocher.
10.2 Subscription and Option Agreement, dated March 28, 2004 between
Telex Communications Holdings, Inc. and Raymond V. Malpocher.
31.1 Certification of Telex's Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended.
31.2 Certification of Telex's Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended.
32.1 Certification of Telex's Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
None.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
TELEX COMMUNICATIONS, INC.
Dated: April 28, 2004 By: /s/ Raymond V. Malpocher
--------------------------------------
Raymond V. Malpocher
President and Chief Executive
Officer
TELEX COMMUNICATIONS, INC.
Dated: April 28, 2004 By: /s/ Gregory W. Richter
--------------------------------------
Gregory W. Richter
Vice President and Chief Financial
Officer
22
TELEX COMMUNICATIONS, INC.
FORM 10-Q
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
10.1 Purchase Agreement, dated March 26, 2004, between Telex Communications
Holdings, Inc. and Raymond V. Malpocher.
10.2 Subscription and Option Agreement, dated March 28, 2004 between Telex
Communications Holdings, Inc. and Raymond V. Malpocher.
31.1 Certification of Telex's Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended.
31.2 Certification of Telex's Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended.
32.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant
To Section 906 of the Sarbanes-Oxley Act of 2002.