Back to GetFilings.com
================================================================================
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 June 30, 2004 Commission File No. 333-112819
TELEX COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 11-3707780
-------- ----------
(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 AUGUST 4, 2004, TELEX COMMUNICATIONS, INC. HAD OUTSTANDING 500 SHARES OF
COMMON STOCK, $0.01 PAR VALUE.
THIS DOCUMENT CONTAINS 29 PAGES.
================================================================================
PART I. --- FINANCIAL INFORMATION
Page(s)
Item 1. Financial Statements
Included herein is the following unaudited financial information:
Condensed Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003 3
Condensed Consolidated Statements of Operations for the three and six month periods ended
June 30, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows for the six month periods ended
June 30, 2004 and 2003 5
Notes to Condensed Consolidated Financial Statements 6-17
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18-24
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 26
PART II. --- OTHER INFORMATION
Page(s)
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
Exhibit Index 29
Note: 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 this Form 10-Q means
Predecessor and/or Successor, as appropriate, for the relevant period(s).
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
2004 2003
--------- ------------
(UNAUDITED) (See Note)
ASSETS
Current assets:
Cash and cash equivalents $ 8,025 $ 6,698
Accounts receivable, net 51,482 47,455
Inventories 52,798 45,967
Other current assets 6,752 7,437
--------- ---------
Total current assets 119,057 107,557
Property, plant and equipment, net 30,156 29,951
Deferred financing costs, net 6,018 6,368
Goodwill, net 23,320 23,353
Other assets 2,704 2,981
--------- ---------
$ 181,255 $ 170,210
========= =========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Revolving lines of credit $ 1,648 $ -
Current maturities of long-term debt 445 446
Accounts payable 19,087 12,879
Accrued wages and benefits 10,372 10,384
Other accrued liabilities 11,845 11,557
Income taxes payable 6,012 9,046
--------- ---------
Total current liabilities 49,409 44,312
Long-term debt, net 126,215 126,413
Other long-term liabilities 9,090 7,474
--------- ---------
Total liabilities 184,714 178,199
--------- ---------
Shareholder's deficit:
Common stock and capital in excess of par 143,029 143,029
Accumulated other comprehensive loss (3,737) (3,260)
Accumulated deficit (142,751) (147,758)
--------- ---------
Total shareholder's deficit (3,459) (7,989)
--------- ---------
$ 181,255 $ 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 SUCCESSOR PREDECESSOR
------------- --------------- --------------- ----------------
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ ---------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2004 2003 2004 2003
------------ --------------- --------------- ----------------
Net sales $ 77,729 $ 68,836 $ 144,995 $ 129,711
Cost of sales 42,123 40,243 79,703 75,706
------------ --------------- --------------- ----------------
Gross profit 35,606 28,593 65,292 54,005
------------ --------------- --------------- ----------------
Operating expenses:
Engineering 3,722 3,597 7,191 7,177
Selling, general and administrative 21,412 19,984 40,765 38,586
Amortization of other intangibles 3 3 6 15
Pension curtailment gain - (2,414) - (2,414)
------------ --------------- --------------- ----------------
25,137 21,170 47,962 43,364
------------ --------------- --------------- ----------------
Operating income 10,469 7,423 17,330 10,641
Interest expense (4,083) (7,363) (8,233) (14,404)
Other income, net 182 113 140 196
------------ --------------- --------------- ----------------
Income (loss) before income taxes 6,568 173 9,237 (3,567)
Provision for income taxes 2,320 1,168 3,793 2,149
------------ --------------- --------------- ----------------
Net income (loss) $ 4,248 $ (995) $ 5,444 $ (5,716)
============ =============== =============== ================
See notes to condensed consolidated financial statements.
4
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SUCCESSOR PREDECESSOR
--------- -----------
SIX MONTHS ENDED
--------------------------
JUNE 30, JUNE 30,
2004 2003
--------- -----------
OPERATING ACTIVITIES:
Net income (loss) $ 5,444 $ (5,716)
Adjustments to reconcile net income (loss) to cash flows from operations:
Depreciation and amortization 2,978 3,201
Amortization of finance charges and pay-in-kind interest charge 701 11,261
Gain on disposition of assets - (98)
Pension curtailment gain - (2,414)
Change in operating assets and liabilities (6,205) (7,210)
Change in long-term liabilities 355 50
Other, net 521 505
-------- --------
Net cash provided by (used in) operating activities 3,794 (421)
-------- --------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (3,318) (2,574)
Proceeds from disposition of assets - 792
Other 111 111
-------- --------
Net cash used in investing activities (3,207) (1,671)
-------- --------
FINANCING ACTIVITIES:
Borrowings under revolving lines of credit, net 1,700 8,155
Repayment of long-term debt (218) (6,217)
Payment of deferred financing costs (302) -
Dividend to parent (437) -
-------- --------
Net cash provided by financing activities 743 1,938
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (3) 126
-------- --------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) 1,327 (28)
Balance at beginning of period 6,698 3,374
-------- --------
Balance at end of period $ 8,025 $ 3,346
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH PAID FOR:
Interest $ 6,366 $ 2,945
======== ========
Income taxes $ 3,040 $ 4,084
======== ========
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 the 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.
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 debt restructuring, which was accounted for as being
effective November 30, 2003 and the formation of a new entity, the
consolidated financial statements for the three and six months ended June
30, 2004 reflect the results of Telex while the consolidated
6
financial statements for the three and six months ended June 30, 2003
reflect the results of Old Telex. The consolidated balance sheets as of
June 30, 2004 and December 31, 2003 reflect the results of Telex.
2. Inventories
Inventories consist of the following (in thousands):
June 30, December 31,
2004 2003
-------- ------------
Raw materials
Work in process 8,006 6,150
Finished products 21,262 20,876
------- -------
$52,798 $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 June 30, 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 (33) - (33)
-------- -------- --------
Balance as of June 30, 2004 $ 17,230 $ 6,090 $ 23,320
======== ======== ========
4. Debt
Long-term debt consists of the following (in thousands):
June 30, December 31,
2004 2003
---------- -------------
Senior Secured Notes $ 125,000 $ 125,000
Other debt 1,660 1,859
---------- ----------
126,660 126,859
Less - current portion (445) (446)
---------- ----------
Total long-term debt $ 126,215 $ 126,413
========== ==========
5. Income Taxes
The Company recorded an income tax provision of $2.3 million and $3.8
million on pre-tax income of $6.6 million and $9.2 million for the three
months and six months ended June 30, 2004, respectively. The income tax
provision for the six months ended June 30, 2004 is comprised of a U.S.
Federal and state income tax provision of $1.0 million and an income tax
provision of $2.8 million attributed to income of certain foreign
subsidiaries. The Company recorded an income tax provision of $1.2 million
and $2.1 million on pre-tax income of $0.2
7
million and a pre-tax loss of $3.6 million for the three months and six
months ended June 30, 2003. The income tax provision for the six months
ended June 30, 2003 is comprised of a U.S. Federal and state income tax
benefit of $1.4 million, offset by a tax valuation allowance adjustment of
$1.4 million, and an income tax provision of $2.1 million attributed to
income of certain foreign subsidiaries.
The Company has a net deferred tax asset of $9.7 million offset by a tax
valuation allowance of $9.4 million at June 30, 2004 due to the
uncertainty of the future realization of tax benefits primarily in the
U.S.
The tax provision in the U.S. for 2004 is calculated on a separate company
basis under a tax sharing agreement with Old Telex. The Company has
recorded a payable of $1.7 million to Old Telex based on the tax benefit
utilized by Telex.
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 but 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 cost (income) for
each period (in thousands):
Successor Predecessor Successor Predecessor
-------------- ----------------- ----------------- -----------------
Three months ended March 31, Six months ended June 30,
----------------------------------- --------------------------------------
2004 2003 2004 2003
-------------- ----------------- ----------------- -----------------
Components of net periodic benefit
cost (income):
Service cost $ - $ 121 $ - $ 242
Interest cost 334 354 669 708
Expected return on plan assets (456) (462) (912) (924)
Amortization of prior service cost - (43) (86)
Pension curtailment gain (2,414) (2,414)
-------------- ----------------- ----------------- -----------------
Net periodic benefit cost (income) $ (122) $ (2,444) $ (243) $ (2,474)
============== ================= ================= =================
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 Company provided 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
Company recorded net periodic benefit income of $296,000 in the three
months ended June 30, 2003 and net periodic benefit income of $291,000 for
the six months ended June 30, 2003. Both of the 2003 periods include the
$300,000 curtailment gain recognized in June for the implemented benefit
curtailment.
8
7. Related-Party Transactions
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 June 30, 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
June 30, 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 Entities, an Interpretation of ARB No. 51" (FIN 46), pertaining
to the consolidation of variable interest entities and has determined that
the LLC is not a variable interest entity to the Company and that the
Company's 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 Successor Predecessor
----------------- ----------------- ----------------- -----------------
Three months ended June 30, Six months ended June 30,
-------------------------------------- --------------------------------------
2004 2003 2004 2003
----------------- ----------------- ----------------- -----------------
Net income (loss) $ 4,248 $ (995) $ 5,4445 $ (5,716)
Other comprehensive income:
Foreign currency translation adjustment (890) 1,753 (477) 2,307
Minimum pension liability - (5,078) - (5,078)
----------------- ----------------- ----------------- -----------------
Comprehensive income (loss) $ 3,358 $ (4,320) $ 4,967 $ (8,487)
================= ================= ================= =================
The components of accumulated other comprehensive loss are as follows (in
thousands):
June 30, December 31,
2004 2003
---- ----
Foreign currency translation $ 2,688 $ 3,165
Minimum pension liability (6,425) (6,425)
---------------- --------------
$ (3,737) $ (3,260)
================ ==============
9
9. Segment Information
The Company has two business segments: Professional Audio and Audio and
Wireless Technology.
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 and six months ended June 30, 2004 and
2003 (in thousands):
10
Successor Predecessor Successor Predecessor
---------- ------------- ---------- -----------
Three months ended Six months ended
----------------------------------------------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
---------- ------------- ---------- ---------
Net sales
Professional Audio $ 64,234 $ 53,369 $ 117,991 $ 100,486
Audio and Wireless Technology 13,495 15,467 27,004 29,225
---------- ------------- ---------- ---------
$ 77,729 $ 68,836 $ 144,995 $ 129,711
========== ============= ========== =========
Operating income (loss)
Professional Audio $ 8,728 $ 7,529 $ 13,613 $ 9,618
Audio and Wireless Technology 2,004 178 4,212 1,356
Corporate (263) (284) (495) (333)
---------- ------------- ---------- ---------
$ 10,469 $ 7,423 $ 17,330 $ 10,641
========== ============= ========== =========
Depreciation expense
Professional Audio $ 1,185 $ 1,326 $ 2,385 $ 2,631
Audio and Wireless Technology 99 182 180 230
Corporate 198 174 407 325
---------- ------------- ---------- ---------
$ 1,482 $ 1,682 $ 2,972 $ 3,186
========== ============= ========== =========
Capital expenditures
Professional Audio $ 990 $ 655 $ 2,300 $ 1,199
Audio and Wireless Technology 212 71 420 224
Corporate 160 566 598 1,151
---------- ------------- ---------- ---------
$ 1,362 $ 1,292 $ 3,318 $ 2,574
========== ============= ========== =========
Total assets
Professional Audio $ 127,607 $ 123,139
Audio and Wireless Technology 41,515 37,230
Corporate 12,133 7,574
---------- ---------
$ 181,255 $ 167,943
========== =========
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):
Three months ended Six months ended
----------------------------------------------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
- ---------------------------------------------- ------------- ---------- ---------
United States $ 38,593 $ 35,234 $ 72,243 $ 66,056
Europe 22,841 19,436 41,290 37,401
Asia 10,385 8,021 20,206 15,448
Other foreign countries 5,910 6,145 11,256 10,806
---------- ------------- ---------- ---------
$ 77,729 $ 68,836 $ 144,995 $ 129,711
========== ============= ========== =========
It is not practical for the Company to disclose revenue by product or service
grouping for financial reporting purposes as the Company's systems do not
reliably compile this information.
Long-lived assets of the Company's U.S. and International operations were as
follows (in thousands):
June 30, 2004 December 31, 2003
---------- -------------
United States $ 50,839 $ 50,262
International 11,359 12,391
---------- -------------
$ 62,198 $ 62,653
========== =============
10. Guarantor Subsidiary
In connection with the November 2003 debt restructuring our wholly-owned
domestic subsidiary (Guarantor) guarantees the $125.0 million of our 11
1/2% senior secured notes on a full, unconditional and joint and several
basis.
11
The guarantee is a secured obligation of the Guarantor and ranks senior in
the right of payment to all existing and future subordinated indebtedness
of the Guarantor and ranks equally in the right of payment with all other
existing and future senior indebtedness of the Guarantor. The following
condensed consolidating financial information includes the accounts of the
Guarantor and the combined accounts of the Guarantor's direct and indirect
foreign subsidiaries (Non-Guarantors).
The following tables present condensed consolidating balance sheets as of
June 30, 2004 and December 31, 2003, condensed consolidating statements of
operations for the three and six-month periods ended June 30, 2004 and
2003 and condensed consolidating statements of cash flows for the six
months ended June 30, 2004 and 2003:
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2004
(IN THOUSANDS)
ISSUER GUARANTOR NON - GUARANTOR ELIMINATIONS CONSOLIDATED
--------- --------- --------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,731 $ - $ 6,294 $ - $ 8,025
Accounts receivable, net 23,655 - 27,827 - 51,482
Inventories 23,927 - 33,475 (4,604) 52,798
Other current assets 2,278 29,862 14,689 (40,077) 6,752
--------- --------- --------- --------- ---------
Total current assets 51,591 29,862 82,285 (44,681) 119,057
Property, plant and equipment, net 20,477 - 9,679 - 30,156
Deferred financing costs, net 6,018 - - - 6,018
Goodwill, net 22,105 - 1,215 - 23,320
Other assets 1,242 - 1,469 (7) 2,704
Investment in subsidiaries 77,816 47,954 - (125,770) -
--------- --------- --------- --------- ---------
$ 179,249 $ 77,816 $ 94,648 $(170,458) $ 181,255
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Revolving lines of credit $ - $ - $ 1,648 $ - $ 1,648
Current maturities of long-term debt 212 - 233 - 445
Accounts payable 11,045 - 8,042 - 19,087
Accrued wages and benefits 4,767 - 5,605 - 10,372
Other accrued liabilities 23,916 - 27,922 (39,993) 11,845
Income taxes payable 4,729 - 1,283 - 6,012
--------- --------- --------- --------- ---------
Total current liabilities 44,669 - 44,733 (39,993) 49,409
Long-term debt, net 125,686 - 529 - 126,215
Other long-term liabilities 7,658 - 1,432 - 9,090
--------- --------- --------- --------- ---------
Total liabilities 178,013 - 46,694 (39,993) 184,714
--------- --------- --------- --------- ---------
Shareholder's equity (deficit) 1,236 77,816 47,954 (130,465) (3,459)
--------- --------- --------- --------- ---------
$ 179,249 $ 77,816 $ 94,648 $(170,458) $ 181,255
========= ========= ========= ========= =========
12
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2003
(IN THOUSANDS)
ISSUER GUARANTOR NON - GUARANTORS ELIMINATIONS CONSOLIDATED
--------- --------- ---------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,699 $ - $ 4,999 $ - $ 6,698
Accounts receivable, net 22,194 - 25,261 - 47,455
Inventories 21,323 - 28,224 (3,580) 45,967
Other current assets 2,138 29,784 10,832 (35,317) 7,437
--------- --------- --------- --------- ---------
Total current assets 47,354 29,784 69,316 (38,897) 107,557
Property, plant and equipment, net 20,173 - 9,778 - 29,951
Deferred financing costs, net 6,368 - - - 6,368
Goodwill, net 22,105 - 1,248 - 23,353
Other assets 1,620 - 1,370 (9) 2,981
Investment in subsidiaries 73,120 43,336 - (116,456) -
--------- --------- --------- --------- ---------
$ 170,740 $ 73,120 $ 81,712 $(155,362) $ 170,210
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Revolving lines of credit $ - $ - $ - $ - $ -
Current maturities of long-term debt 212 - 234 - 446
Accounts payable 8,986 - 3,893 - 12,879
Accrued wages and benefits 5,215 - 5,169 - 10,384
Other accrued liabilities 24,114 - 22,812 (35,369) 11,557
Income taxes payable 4,821 - 4,225 - 9,046
--------- --------- --------- --------- ---------
Total current liabilities 43,348 - 36,333 (35,369) 44,312
Long-term debt, net 125,745 - 668 - 126,413
Other long-term liabilities 6,099 - 1,375 - 7,474
--------- --------- --------- --------- ---------
Total liabilities 175,192 - 38,376 (35,369) 178,199
--------- --------- --------- --------- ---------
Shareholder's (deficit) equity (4,452) 73,120 43,336 (119,993) (7,989)
--------- --------- --------- --------- ---------
$ 170,740 $ 73,120 $ 81,712 $(155,362) $ 170,210
========= ========= ========= ========= =========
13
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2004
(IN THOUSANDS)
ISSUER GUARANTOR NON - GUARANTORS ELIMINATIONS CONSOLIDATED
-------- --------- ---------------- ------------ ------------
Net sales $ 50,852 $ - $ 45,617 $(18,740) $ 77,729
Cost of sales 30,054 - 30,587 (18,518) 42,123
-------- -------- -------- -------- --------
Gross profit 20,798 - 15,030 (222) 35,606
-------- -------- -------- -------- --------
Operating expenses:
Engineering 2,159 - 1,563 - 3,722
Selling, general and administrative 13,171 - 8,241 - 21,412
Amortization of other intangibles 3 - - - 3
-------- -------- -------- -------- --------
15,333 - 9,804 - 25,137
-------- -------- -------- -------- --------
Operating income (loss) 5,465 - 5,226 (222) 10,469
Interest expense (4,046) 235 (272) - (4,083)
Other income (expense), net 377 - (195) - 182
Equity in earnings of subsidiaries 3,536 3,301 - (6,837) -
-------- -------- -------- -------- --------
Income (loss) before income taxes 5,332 3,536 4,759 (7,059) 6,568
Provision for income taxes 862 - 1,458 - 2,320
-------- -------- -------- -------- --------
Net income (loss) $ 4,470 $ 3,536 $ 3,301 $ (7,059) $ 4,248
======== ======== ======== ======== ========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2003
(IN THOUSANDS)
ISSUER GUARANTOR NON - GUARANTORS ELIMINATIONS CONSOLIDATED
-------- --------- ---------------- ------------ ------------
Net sales $ 46,179 $ - $ 37,446 $(14,789) $ 68,836
Cost of sales 29,736 - 25,214 (14,707) 40,243
-------- -------- -------- -------- --------
Gross profit 16,443 - 12,232 (82) 28,593
-------- -------- -------- -------- --------
Operating expenses:
Engineering 2,377 - 1,220 - 3,597
Selling, general and administrative 12,811 - 7,173 - 19,984
Amortization of other intangibles 3 - - - 3
Pension curtailment gain (2,414) - - - (2,414)
-------- -------- -------- -------- --------
12,777 - 8,393 - 21,170
-------- -------- -------- -------- --------
Operating income (loss) 3,666 - 3,839 (82) 7,423
Interest expense (7,212) 92 (243) - (7,363)
Other income (expense), net 233 - (120) - 113
Equity in earnings of subsidiaries 2,436 2,344 - (4,780) -
-------- -------- -------- -------- --------
(Loss) income before income taxes (877) 2,436 3,476 (4,862) 173
Provision for income taxes 36 - 1,132 - 1,168
-------- -------- -------- -------- --------
Net (loss) income $ (913) $ 2,436 $ 2,344 $ (4,862) $ (995)
======== ======== ======== ======== ========
14
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2004
(IN THOUSANDS)
ISSUER GUARANTOR NON - GUARANTORS ELIMINATIONS CONSOLIDATED
-------- --------- ---------------- ------------ ------------
Net sales $ 97,479 $ - $ 85,170 $ (37,654) $ 144,995
Cost of sales 58,595 - 57,296 (36,188) 79,703
--------- --------- --------- --------- ---------
Gross profit 38,884 - 27,874 (1,466) 65,292
--------- --------- --------- --------- ---------
Operating expenses:
Engineering 4,167 - 3,024 - 7,191
Selling, general and administrative 24,699 - 16,066 - 40,765
Amortization of other intangibles 6 - - - 6
--------- --------- --------- --------- ---------
28,872 - 19,090 - 47,962
--------- --------- --------- --------- ---------
Operating income (loss) 10,012 - 8,784 (1,466) 17,330
Interest expense (8,170) 474 (537) - (8,233)
Other income (expense), net 556 - (416) - 140
Equity in earnings of subsidiaries 5,619 5,145 - (10,764) -
--------- --------- --------- --------- ---------
Income (loss) before income taxes 8,017 5,619 7,831 (12,230) 9,237
Provision for income taxes 1,107 - 2,686 - 3,793
--------- --------- --------- --------- ---------
Net income (loss) $ 6,910 $ 5,619 $ 5,145 $ (12,230) $ 5,444
========= ========= ========= ========= =========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(IN THOUSANDS)
ISSUER GUARANTOR NON - GUARANTORS ELIMINATIONS CONSOLIDATED
--------- --------- ---------------- ------------ ------------
Net sales $ 86,593 $ - $ 72,180 $ (29,062) $ 129,711
Cost of sales 54,729 - 49,094 (28,117) 75,706
--------- --------- --------- --------- ---------
Gross profit 31,864 - 23,086 (945) 54,005
--------- --------- --------- --------- ---------
Operating expenses:
Engineering 4,910 - 2,267 - 7,177
Selling, general and administrative 24,448 - 14,138 - 38,586
Amortization of other intangibles 15 - - - 15
Pension curtailment gain (2,414) - - - (2,414)
--------- --------- --------- --------- ---------
26,959 - 16,405 - 43,364
--------- --------- --------- --------- ---------
Operating income (loss) 4,905 - 6,681 (945) 10,641
Interest expense (14,144) 179 (439) - (14,404)
Other income (expense), net 357 - (161) - 196
Equity in earnings of subsidiaries 4,395 4,216 - (8,611) -
--------- --------- --------- --------- ---------
(Loss) income before income taxes (4,487) 4,395 6,081 (9,556) (3,567)
Provision for income taxes 284 - 1,865 - 2,149
--------- --------- --------- --------- ---------
Net (loss) income $ (4,771) $ 4,395 $ 4,216 $ (9,556) $ (5,716)
========= ========= ========= ========= =========
15
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004
(IN THOUSANDS)
NON -
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
-------- --------- ---------- ------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ 6,910 $ 5,619 $ 5,145 $(12,230) $ 5,444
Adjustments to reconcile net income (loss) to
cash flows from operations:
Depreciation and amortization 1,992 - 986 - 2,978
Amortization of finance charges and pay-in-kind interest charge 701 - - - 701
Equity in earnings of subsidiaries (5,619) (5,145) - 10,764 -
Change in operating assets and liabilities (1,944) (78) (5,634) 1,451 (6,205)
Change in long-term liabilities 270 - 70 15 355
Other, net 350 - 171 - 521
-------- -------- -------- -------- --------
Net cash provided by operating activities 2,660 396 738 - 3,794
-------- -------- -------- -------- --------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (2,290) - (1,028) - (3,318)
Proceeds from disposition of assets - - - - -
Other 111 - - - 111
-------- -------- -------- -------- --------
Net cash used in investing activities (2,179) - (1,028) - (3,207)
-------- -------- -------- -------- --------
FINANCING ACTIVITIES:
Borrowings under revolving lines of credit, net - - 1,700 - 1,700
Repayment of long-term debt (106) - (112) - (218)
Payment of deferred financing costs (302) - - - (302)
Dividend to parent (437) - - - (437)
Change in intercompany receivable/payable 396 (396) - - -
-------- -------- -------- -------- --------
Net cash (used in) provided by financing activities (449) (396) 1,588 - 743
-------- -------- -------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS - - (3) - (3)
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS:
Net increase 32 - 1,295 - 1,327
Balance at beginning of period 1,699 - 4,999 - 6,698
-------- -------- -------- -------- --------
Balance at end of period $ 1,731 $ - $ 6,294 $ - $ 8,025
-------- -------- -------- -------- --------
SUPPLEMENTAL DISCLOSURES OF CASH PAID FOR:
Interest $ 5,830 $ - $ 536 $ - $ 6,366
======== ======== ======== ======== ========
Income taxes $ 210 $ - $ 2,830 $ - $ 3,040
======== ======== ======== ======== ========
16
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(IN THOUSANDS)
NON -
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
-------- --------- ---------- ------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ (4,771) $ 4,395 $ 4,216 $ (9,556) $ (5,716)
Adjustments to reconcile net income (loss) to
cash flows from operations:
Depreciation and amortization 2,228 - 973 - 3,201
Amortization of finance charges and pay-in-kind interest 11,261 - - - 11,261
Gain on disposition of assets (120) - 22 - (98)
Pension curtailment gain (2,414) - - - (2,414)
Equity in earnings of subsidiaries (4,395) (4,216) - 8,611 -
Change in operating assets and liabilities (537) (1,095) (6,529) 951 (7,210)
Change in long-term liabilities 257 - 113 (320) 50
Other, net 499 - 6 - 505
-------- -------- -------- -------- --------
Net cash provided by (used in) operating activities 2,008 (916) (1,199) (314) (421)
-------- -------- -------- -------- --------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (2,047) - (527) - (2,574)
Proceeds from disposition of assets 764 - 28 - 792
Other 111 - - - 111
-------- -------- -------- -------- --------
Net cash (used in) provided by investing activities (1,172) - (499) - (1,671)
-------- -------- -------- -------- --------
FINANCING ACTIVITIES:
Borrowings under revolving lines of credit, net 5,620 - 2,540 (5) 8,155
Repayment of long-term debt (6,123) - (99) 5 (6,217)
Change in intercompany receivable/payable (347) 916 (883) 314 -
-------- -------- -------- -------- --------
Net cash (used in) provided by financing activities (850) 916 1,558 314 1,938
-------- -------- -------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS - - 126 - 126
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS:
Net decrease (14) - (14) - (28)
Balance at beginning of period 60 - 3,314 - 3,374
-------- -------- -------- -------- --------
Balance at end of period $ 46 $ - $ 3,300 $ - $ 3,346
======== ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH PAID FOR:
Interest $ 2,501 $ - $ 444 $ - $ 2,945
======== ======== ======== ======== ========
Income taxes $ 225 $ - $ 3,859 $ - $ 4,084
======== ======== ======== ======== ========
17
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 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 that 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.
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
18
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 debt restructuring, which was accounted for as being
effective November 30, 2003 and the formation of a new entity, the consolidated
financial statements for the three months and six months ended June 30, 2004
reflect the results of Telex while the consolidated financial statements for the
three months and six months ended June 30, 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
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
19
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
shareholder's 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 Successor Predecessor
------------ ------------- ------------- ------------
Three months ended Six months ended
------------ ---------------------------- ------------- ----------------------------
June 30, June 30, % June 30, June 30, %
2004 2003 Change 2004 2003 Change
------------ ------------- --------- ------------- ------------ ----------
Net sales:
Professional Audio $ 64,234 $ 53,369 20.4% $ 117,991 $ 100,486 17.4%
Audio and Wireless Technology 13,495 15,467 -12.7% 27,004 29,225 -7.6%
------------ ------------- ---- ------------- ------------ ----
Total net sales 77,729 68,836 12.9% 144,995 129,711 11.8%
------------ ------------- ---- ------------- ------------ ----
Total gross profit 35,606 28,593 65,292 54,005
% of sales 45.8% 41.5% 45.0% 41.6%
Operating profit $ 10,469 $ 7,423 $ 17,330 $ 10,641
============ ============= ============= ============
Net income (loss) $ 4,248 $ (995) $ 5,444 $ (5,716)
============ ============= ============= ============
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS AND SIX
MONTHS ENDED JUNE 30, 2003
Net sales. Net sales increased $8.9 million, or 12.9%, from $68.8 million for
the three months ended June 30, 2003 to $77.7 million for the three months ended
June 30, 2004. Our net sales increased over the levels in the second quarter of
2003 and the first quarter of 2004 as we experienced higher sales in all of our
geographic marketplaces. Net sales in the Professional Audio segment increased
substantially for the three months ended June 30, 2004 compared to the
corresponding period in 2003 because of sales associated with new products
introduced in 2004 and stronger customer purchasing activity. Sales in the Audio
and Wireless Technology segment declined principally due to lower sales of our
digital duplication products.
Our six-month net sales increased $15.3 million, or 11.8%, from $129.7 million
for the six
20
months ended June 30, 2003 to $145.0 million for the six months ended June 30,
2004. Approximately $5.7 million, or 4.4%, of the increase resulted from
stronger foreign currencies in 2004 compared to the U.S. dollar. Net sales in
the Professional Audio segment increased significantly while our Audio and
Wireless Technology product sales declined, principally from lower sales of
digital duplication products.
Net sales in the Professional Audio segment increased $10.8 million, or 20.4%,
from $53.4 million for the three months ended June 30, 2003 to $64.2 million for
the three months ended June 30, 2004. We generated increased net sales in all of
our geographic marketplaces as sales of new products introduced in the first
quarter of 2004 continued to generate strong customer orders and higher sales.
Sales of several products continue at the high levels of the fourth quarter of
2003 and first quarter of 2004 as customers continue to make purchases to
upgrade their equipment. Six-month net sales increased $17.5 million, or 17.4%,
from $100.5 million for the six months ended June 30, 2003 to $118.0 for the six
months ended June 30, 2004. Net sales increases for the six months of 2004 were
achieved in all geographic regions and sales were strong in our intercom,
consoles and speaker product areas.
Net sales in the Audio and Wireless Technology segment decreased $2.0 million,
or 12.7%, from $15.5 million for the three months ended June 30, 2003 to $13.5
million for the three months ended June 30, 2004. The decrease in net sales is
attributed primarily to lower sales of our duplication products. Six-month net
sales decreased $2.2 million, or 7.6%, from $29.2 million for the six months
ended June 30, 2003 to $27.0 million for the six months ended June 30, 2004. The
decrease for the six months of 2004 compared to the six months of 2003 is
primarily from lower duplication product sales offset somewhat by higher sales
of products to the aviation marketplace and to governmental agencies as they are
upgrading their communications equipment.
Gross profit. Gross profit increased $7.0 million, or 24.5%, from $28.6 million
for the three months ended June 30, 2003 to $35.6 million for the three months
ended June 30, 2004. Gross profit increased $11.3 million, or 20.9%, from $54.0
million for the six months ended June 30, 2003 to $65.3 million for the six
months ended June 30, 2004. The gross margin rate increased to 45.8% for the
three months ended June 30, 2004 compared to a gross margin rate of 41.5% for
the three months ended June 30, 2003 and the gross margin rate increased to
45.0% for the six months ended June 30, 2004 compared to a gross margin rate of
41.6% for the six months ended June 30, 2003. Included in the three and
six-month periods ended June 30, 2003 are impairment charges for inventories and
fixed assets, totaling $1.6 million, associated with exiting the computer audio
product line. Excluding these charges, the gross margin rate would be 43.9% and
42.9% for the three and six-month periods ended June 30, 2003, respectively. The
increase in the gross margin rate for 2004 from the corresponding periods in
2003 is attributed primarily to increased volumes, sales of higher margin
products and improved manufacturing efficiencies.
The gross margin rate for the Professional Audio segment increased from 44.7%
for the three months ended June 30, 2003 to 46.8% for the three months ended
June 30, 2004. The gross margin rate increased from 43.6% for the six months
ended June 30, 2003 to 45.7% for the six months ended June 30, 2004. The
increase in the gross margin rate for 2004 from the corresponding periods in
2003 is attributed primarily to the increased volumes, sales of high-margin
products and continued manufacturing efficiencies.
The gross margin rate for the Audio and Wireless Technology segment increased
from 30.5% for
21
the three months ended June 30, 2003 to 41.1% for the three months ended June
30, 2004. The gross margin rate increased from 35.0% for the six months ended
June 30, 2003 to 42.1% for the six months ended June 30, 2004. The gross margin
rate, excluding the impairment charges discussed previously, was 41.1% and 40.6%
for the three and six-month periods ended June 30, 2003, respectively. The
increase in the gross margin rate for 2004 from the corresponding six month
period in 2003 is attributed primarily to increased sales of high-margin
products.
Engineering. Engineering expenses increased $0.1 million, or 3.5%, from $3.6
million for the three months ended June 30, 2003 to $3.7 million for the three
months ended June 30, 2004. Engineering expenses were flat at $7.2 million for
the six month periods ended June 30, 2004 and 2003. We continue to invest in new
product development across all of our business segments and recently have
focused more effort in our Professional Audio segment.
Selling, general and administrative. Selling, general and administrative
expenses increased $1.4 million, or 7.1%, from $20.0 million for the three
months ended June 30, 2003 to $21.4 million for the three months ended June 30,
2004. Selling, general and administrative expenses increased $2.2 million, or
5.6%, from $38.6 million for the six months ended June 30, 2003 to $40.8 million
for the six months ended June 30, 2004. The increase in expenses in 2004 is
attributed mainly to stronger foreign currencies compared to the U.S. dollar. We
expect these expenses, primarily selling and marketing expenses, to decline
slightly in the second half of 2004, based on scheduled trade shows for the
markets we serve.
Pension curtailment gain. We recorded a pension curtailment gain of $2.4 million
in the three months ended June 30, 2003 resulting from our decision to freeze
future pension plan benefits effective June 30, 2003. This decision by Telex
resulted in recognition of previously unrecognized prior service costs in
accordance with SFAS No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits"
(SFAS 88).
Interest expense. Interest expense decreased $3.3 million from $7.4 million for
the three months ended June 30, 2003 to $4.1 million for the three months ended
June 30, 2004. Our interest expense decreased $6.2 million from $14.4 million
for the six months ended June 30, 2003 to $8.2 million for the six months ended
June 30, 2004. Interest expense for both 2004 periods compared to the
corresponding 2003 periods decreased because of the November 2003 debt
restructuring that resulted in Telex having lower outstanding indebtedness
compared to Old Telex.
Other income, net. Other income of $0.2 million for the three months ended June
30, 2004 is principally from the amortization of deferred revenue for a patent
fee, trademark license fee and non-compete agreement associated with the 2002
sale of our hearing instrument product lines and earnings in our joint venture
offset by foreign currency losses. Other income of $0.1 million for the three
months ended June 30, 2003 is principally from the gain on the sale of an idle
facility. For the six months ended June 30, 2004 other income of $0.1 million is
principally from the amortization of deferred revenue for a patent fee,
trademark license fee and non-compete agreement associated with the 2002 sale of
the hearing instrument product lines. Amortization of the deferred revenue items
will be substantially completed in 2004. For the six months ended June 30, 2003,
other income of $0.2 million is principally from the gain on the sale of
production assets related to a shutdown of certain manufacturing facilities in
2002 and from the amortization of deferred revenue for a patent fee, trademark
license fee and non-compete agreement associated
22
with the 2002 sale of our hearing instrument product lines.
Income taxes. Income taxes in 2004 were $2.3 million and $3.8 million for the
three and six months ended June 30, 2004, respectively. The effective tax rate
was 35.3% and 41.1% for the three and six months ended June 30, 2004,
respectively. The six-month rate includes a $0.4 million expense recognized for
additional taxes due in Germany related to an audit of 2002. Income taxes in
2003 were $1.2 million and $2.1 million for the three and six months ended June
30, 2003, respectively. Our effective tax rate for the three and six month
periods in 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 were profitable. The income tax expense increase for
the 2004 six-month period compared to the 2003 six-month period is due to
increased foreign taxable income in Japan and the United Kingdom as well as the
realization of taxable income in the U.S. 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 June 30, 2004, we have a reserve of $3.9 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 $9.7 million and have established a deferred
tax valuation allowance of $9.4 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. remains uncertain at June 30, 2004. We have considered this factor in
reaching our conclusion as to the adequacy of the valuation allowance for
financial reporting purposes.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2004, we had cash and cash equivalents of $8.0 million compared to
$6.7 million at December 31, 2003.
Our principal source of funds for the six months ended June 30, 2004 consisted
of $3.8 million of cash provided by operating activities. Our principal use of
funds was for capital expenditures of $3.3 million. Our principal source of
funds for the six months ended June 30, 2003 was $1.9 million of cash provided
by financing activities and $0.8 million of cash proceeds from the sale of an
idle manufacturing facility. Our principal uses of funds for the six months
ended June 30, 2003 were $2.6 million for capital expenditures and $0.4 million
for operating activities.
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 $51.5 million as of June 30, 2004 increased
$4.0 million from $47.5 million at December 31, 2003. The increase is mainly
attributable to higher sales levels achieved in the second quarter of 2004, as
compared to the fourth quarter of 2003. We are not aware of any significant
credit risks at June 30, 2004 that could impact future cash receipts from
customers.
23
Our inventories of $52.8 million as of June 30, 2004 increased $6.8 million from
$46.0 million at December 31, 2003. Of this increase $4.6 million was in raw
materials. Our inventories increased in the six months as we built additional
inventories to meet the current demand for new products and to augment our lower
German production levels that occur in the third quarter. We expect to reduce
our investment in inventories in the future as we make further progress on our
lean manufacturing processes and make to order concepts.
Our consolidated indebtedness increased $1.4 million from $126.9 million at
December 31, 2003 to $128.3 million at June 30, 2004. The increase is attributed
mainly to $1.6 million borrowed in Germany under a foreign working capital line.
Our debt consists of $125.0 million of 11 1/2% Senior Secured Notes due October
2008, $1.7 million of other debt in the U.S. and Germany and $1.6 million
borrowed on the German foreign working capital line.
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
interest payments, 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 $11.6 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 June 30, 2004 we had $1.6 million of borrowings under our Germany foreign
working capital line and no borrowings outstanding under our U.S. credit
facility. The net availability under our lines, after deduction for open letters
of credit and borrowing base limitations, was $24.4 million. The effective
annual interest rate under these facilities for amounts borrowed during the six
months ended June 30, 2004 was 7.04%.
As of June 30, 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.
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including changes in foreign currency
exchange rates and interest rates. Market risk is the potential loss arising
from adverse changes in market rates and prices, such as foreign exchange and
interest rates. We have entered into various financial instruments to manage
this risk. The counterparties to these transactions are major financial
institutions. We do not enter into derivatives or other financial instruments
for trading or speculative purposes.
EXCHANGE RATE SENSITIVITY ANALYSIS
We enter into forward exchange contracts principally to hedge the currency
fluctuations in transactions denominated in foreign currencies, thereby limiting
our risk that would otherwise result from changes in exchange rates. During the
six months ended June 30, 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 our statements of operations.
At June 30, 2004, we had outstanding forward exchange contracts with an
aggregate notional amount of $14.5 million and a weighted remaining maturity of
19 days.
At June 30, 2004, the difference between the fair value of all outstanding
contracts, estimated by determining the amount required to enter into offsetting
contracts with similar remaining maturities based on quoted prices, and the
contract amounts was immaterial. A 10% fluctuation in exchange rates for these
currencies would change the fair value by approximately $1.5 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 June 30, 2004, we had fixed rate debt of $125.8 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 this debt by
approximately $4.3 million.
25
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 June 30, 2004. Based on that evaluation, our management,
including the CEO and CFO, concluded (i) that 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 (ii) that
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.
26
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Subscription Agreement, dated March 2, 2004 between Telex
Communications Holdings, Inc. and Kathleen Curran.
10.2 Subscription Agreement, dated March 2, 2004 between Telex
Communications Holdings, Inc. and Gregory W. Richter.
10.3 Subscription Agreement, dated March 2, 2004, between Telex
Communications Holdings, Inc. and Mathias Stieler von Heydekampf.
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.
27
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
TELEX COMMUNICATIONS, INC.
Dated: August 10, 2004 By: /s/ Raymond V. Malpocher
------------------------------------
Raymond V. Malpocher
President and Chief Executive Officer
TELEX COMMUNICATIONS, INC.
Dated: August 10, 2004 By: /s/ Gregory W. Richter
-----------------------------------
Gregory W. Richter
Vice President and Chief Financial Officer
28
TELEX COMMUNICATIONS, INC.
FORM 10-Q
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
10.1 Subscription Agreement, dated March 2, 2004, between Telex
Communications Holdings, Inc. and Kathleen Curran.
10.2 Subscription Agreement, dated March 2, 2004 between Telex
Communications Holdings, Inc. and Gregory W. Richter.
10.3 Subscription Agreement, dated March 2, 2004, between Telex
Communications Holdings, Inc. and Mathias Stieler von Heydekampf.
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.
29