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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 September 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 NOVEMBER 3, 2004, TELEX COMMUNICATIONS, INC. HAD OUTSTANDING 500 SHARES OF
COMMON STOCK, $0.01 PAR VALUE.
THIS DOCUMENT CONTAINS 29 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 September 30, 2004 and December 31,
2003 3
Condensed Consolidated Statements of Operations for the three and nine
month periods ended September 30, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows for the nine month periods ended
September 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)
SEPTEMBER 30, DECEMBER 31,
2004 2003
---- ----
(UNAUDITED) (SEE NOTE)
ASSETS
Current assets:
Cash and cash equivalents $ 13,400 $ 6,698
Accounts receivable, net 51,966 47,455
Inventories 53,788 45,967
Other current assets 6,019 7,437
--------- ---------
Total current assets 125,173 107,557
Property, plant and equipment, net 30,685 29,951
Deferred financing costs, net 5,690 6,368
Goodwill, net 23,342 23,353
Other assets 2,932 2,981
--------- ---------
$ 187,822 $ 170,210
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt $ 453 $ 446
Accounts payable 18,200 12,879
Accrued wages and benefits 11,247 10,384
Other accrued liabilities 15,943 11,557
Income taxes payable 5,406 9,046
--------- ---------
Total current liabilities 51,249 44,312
Long-term debt, net 126,135 126,413
Other long-term liabilities 8,944 7,474
--------- ---------
Total liabilities 186,328 178,199
--------- ---------
Shareholder's equity (deficit):
Common stock and capital in excess of par 143,029 143,029
Accumulated other comprehensive loss (3,270) (3,260)
Accumulated deficit (138,265) (147,758)
--------- ---------
Total shareholder's equity (deficit) 1,494 (7,989)
--------- ---------
$ 187,822 $ 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 NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net sales $ 77,374 $ 69,587 $ 222,369 $ 199,298
Cost of sales 41,585 39,837 121,288 115,543
--------- --------- --------- ---------
Gross profit 35,789 29,750 101,081 83,755
--------- --------- --------- ---------
Operating expenses:
Engineering 4,200 3,374 11,391 10,551
Selling, general and administrative 20,511 17,547 61,282 56,148
Pension curtailment gain - - - (2,414)
--------- --------- --------- ---------
24,711 20,921 72,673 64,285
--------- --------- --------- ---------
Operating income 11,078 8,829 28,408 19,470
Interest expense (4,200) (7,748) (12,433) (22,152)
Other income, net 284 327 424 523
--------- --------- --------- ---------
Income (loss) before income taxes 7,162 1,408 16,399 (2,159)
Provision for income taxes 2,633 885 6,426 3,034
--------- --------- --------- ---------
Net income (loss) $ 4,529 $ 523 $ 9,973 $ (5,193)
========= ========= ========= =========
See notes to condensed consolidated financial statements.
4
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SUCCESSOR PREDECESSOR
------------- -------------
NINE MONTHS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2004 2003
------------- -------------
OPERATING ACTIVITIES:
Net income (loss) $ 9,973 $ (5,193)
Adjustments to reconcile net income (loss) to cash flows from operations:
Depreciation and amortization 4,527 4,646
Amortization of finance charges and pay-in-kind interest charge 1,067 17,470
Gain on disposition of assets (269) (319)
Pension curtailment gain - (2,414)
Change in operating assets and liabilities (6,587) (3,963)
Change in long-term liabilities 1,352 (57)
Other, net 613 660
-------- --------
Net cash provided by operating activities 10,676 10,830
-------- --------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (5,310) (4,375)
Proceeds from disposition of assets 2,338 1,158
Other 166 166
-------- --------
Net cash used in investing activities (2,806) (3,051)
-------- --------
FINANCING ACTIVITIES:
Borrowings under revolving lines of credit, net - 1,118
Repayment of long-term debt (328) (9,007)
Payment of deferred financing costs (317) -
Dividend to parent (480) -
-------- --------
Net cash used in financing activities (1,125) (7,889)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (43) 203
-------- --------
CASH AND CASH EQUIVALENTS:
Net increase 6,702 93
Balance at beginning of period 6,698 3,374
-------- --------
Balance at end of period $ 13,400 $ 3,467
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH PAID FOR:
Interest $ 6,648 $ 4,339
======== ========
Income taxes $ 4,954 $ 5,065
======== ========
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
6
financial statements for the three and nine months September 30, 2004
reflect the results of Telex while the consolidated financial statements
for the three and nine months ended September 30, 2003 reflect the results
of Old Telex. The consolidated balance sheets as of September 30, 2004 and
December 31, 2003 reflect the results of Telex.
2. Inventories
Inventories consist of the following (in thousands):
September 30, December 31,
2004 2003
---- ----
Raw materials $22,765 $18,941
Work in process 8,548 6,150
Finished products 22,475 20,876
------- -------
$53,788 $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 September 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 (11) - (11)
-------- -------- --------
Balance as of September 30, 2004 $ 17,252 $ 6,090 $ 23,342
======== ======== ========
4. Debt
Long-term debt consists of the following (in thousands):
September 30, December 31,
2004 2003
---- ----
Senior Secured Notes $ 125,000 $ 125,000
Other debt 1,588 1,859
--------- ---------
126,588 126,859
Less - current portion (453) (446)
--------- ---------
Total long-term debt $ 126,135 $ 126,413
========= =========
5. Income Taxes
Consistent with the provisions of APB 28, "Interim Financial Reporting,"
the Company has provided an income tax provision based on its best
estimate of the consolidated effective tax rate applicable for the entire
year. Based on those estimates, the Company provided an income tax
provision at a consolidated effective rate of 36.8% and 39.2% for the
three and nine months
7
ended September 30, 2004, respectively. In the nine-month period ended
September 30, 2003, Old Telex generated a pretax loss in the United
States, thus the income tax provision does not provide for a meaningful
comparison. The Company recorded an income tax provision of $2.6 million
and $6.4 million on pre-tax income of $7.2 million and $16.4 million for
the three months and nine months ended September 30, 2004, respectively.
The Company recorded an income tax provision of $0.9 million and $3.0
million on pre-tax income of $1.4 million and a pre-tax loss of $2.2
million for the three months and nine months ended September 30, 2003.
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 $2.7 million to Old Telex based on the tax benefit
utilized by Telex. The company files its U.S. tax return on a consolidated
basis with Old Telex. Each foreign subsidiary files its tax return in its
respective foreign country.
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 September 30, Nine months ended September 30,
--------------------------------- -------------------------------
2004 2003 2004 2003
--------- -------- --------- -----------
Components of net periodic benefit cost (income):
Service cost $ - $ 121 $ - $ 363
Interest cost 334 354 1,003 1,062
Expected return on plan assets (456) (462) (1,368) (1,386)
Amortization of prior service cost - (43) (129)
Pension curtailment gain (2,414)
------- ------- ------- -------
Net periodic benefit cost (income) $ (122) $ (30) $ (365) $(2,504)
======= ======= ======= =======
The Company made employer contributions of $0.5 million through September
30, 2004 with no additional funding required in 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 $34,000 in the three
months ended September 30, 2003 and net periodic benefit income of
$325,000 for the nine months ended September 30, 2003. The 2003 nine-month
period includes a $339,000 curtailment gain recognized 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 September 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
September 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 September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
--------- ------------- ----------- ------------
Net income (loss) $ 4,529 $ 5239 $ 9,9733 $(5,193)
Other comprehensive income:
Foreign currency translation adjustment 467 781 (10) 3,088
Minimum pension liability - - - (5,078)
------- ------- --------- -------
Comprehensive income (loss) $ 4,996 $ 1,304 $ 9,963 $(7,183)
======= ======= ========= =======
The components of accumulated other comprehensive loss are as follows (in
thousands):
September 30, December 31,
2004 2003
---- ----
Foreign currency translation $ 3,155 $ 3,165
Minimum pension liability (6,425) (6,425)
-------- ---------
$ (3,270) $ (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 nine months ended September 30, 2004
and 2003 (in thousands):
10
Successor Predecessor Successor Predecessor
------------- ------------- ------------- -------------
Three months ended Nine months ended
-------------------------------- ---------------------------------
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net sales
Professional Audio $ 62,815 $ 54,749 $ 180,806 $ 155,235
Audio and Wireless Technology 14,559 14,838 41,563 44,063
--------- --------- --------- ---------
$ 77,374 $ 69,587 $ 222,369 $ 199,298
========= ========= ========= =========
Operating income (loss)
Professional Audio $ 8,102 $ 7,103 $ 21,715 $ 16,721
Audio and Wireless Technology 2,871 2,355 7,083 3,711
Corporate 105 (629) (390) (962)
--------- --------- --------- ---------
$ 11,078 $ 8,829 $ 28,408 $ 19,470
========= ========= ========= =========
Depreciation expense
Professional Audio $ 1,273 $ 1,184 $ 3,658 $ 3,815
Audio and Wireless Technology 85 85 265 315
Corporate 188 173 595 498
--------- --------- --------- ---------
$ 1,546 $ 1,442 $ 4,518 $ 4,628
========= ========= ========= =========
Capital expenditures
Professional Audio $ 1,233 $ 920 $ 3,533 $ 2,119
Audio and Wireless Technology 232 196 652 420
Corporate 527 685 1,125 1,836
--------- --------- --------- ---------
$ 1,992 $ 1,801 $ 5,310 $ 4,375
========= ========= ========= =========
Total assets
Professional Audio $ 135,705 $ 121,129
Audio and Wireless Technology 36,516 36,895
Corporate 15,601 6,380
--------- ---------
$ 187,822 $ 164,404
========= =========
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 Nine months ended
------------------------------ -------------------------------
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
------------- ------------- ------------- -------------
United States $ 40,018 $ 35,209 $112,261 $101,265
Europe 21,564 19,201 62,854 56,602
Asia 10,128 9,731 30,334 25,179
Other foreign countries 5,664 5,446 16,920 16,252
-------- -------- -------- --------
$ 77,374 $ 69,587 $222,369 $199,298
======== ======== ======== ========
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):
September 30, 2004 December 31, 2003
------------------- -----------------
United States $ 50,045 $ 50,262
International 12,604 12,391
---------------- -------------
$ 62,649 $ 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
September 30, 2004 and December 31, 2003, condensed consolidating
statements of operations for the three and nine-month periods ended
September 30, 2004 and 2003 and condensed consolidating statements of cash
flows for the nine months ended September 30, 2004 and 2003:
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2004
(IN THOUSANDS)
ISSUER GUARANTOR NON - GUARANTORS ELIMINATIONS CONSOLIDATED
------ --------- ---------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,331 $ 200 $ 7,869 $ - $ 13,400
Accounts receivable, net 24,918 - 27,048 - 51,966
Inventories 24,051 - 34,755 (5,018) 53,788
Other current assets 1,837 32,690 14,836 (43,344) 6,019
--------- --------- --------- --------- ---------
Total current assets 56,137 32,890 84,508 (48,362) 125,173
Property, plant and equipment, net 20,914 - 9,771 - 30,685
Deferred financing costs, net 5,690 - - - 5,690
Goodwill, net 22,105 - 1,237 - 23,342
Other assets 1,339 - 1,600 (7) 2,932
Investment in subsidiaries 81,540 48,664 - (130,204) -
--------- --------- --------- --------- ---------
$ 187,725 $ 81,554 $ 97,116 $(178,573) $ 187,822
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt $ 212 $ - $ 241 $ - $ 453
Accounts payable 9,956 - 8,244 - 18,200
Accrued wages and benefits 5,316 - 5,931 - 11,247
Other accrued liabilities 27,795 - 31,589 (43,441) 15,943
Income taxes payable 4,902 - 504 - 5,406
--------- --------- --------- --------- ---------
Total current liabilities 48,181 - 46,509 (43,441) 51,249
Long-term debt, net 125,656 - 479 - 126,135
Other long-term liabilities 7,466 14 1,464 - 8,944
--------- --------- --------- --------- ---------
Total liabilities 181,303 14 48,452 (43,441) 186,328
--------- --------- --------- --------- ---------
Shareholder's equity (deficit) 6,422 81,540 48,664 (135,132) 1,494
--------- --------- --------- --------- ---------
$ 187,725 $ 81,554 $ 97,116 $(178,573) $ 187,822
========= ========= ========= ========= =========
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:
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 SEPTEMBER 30, 2004
(IN THOUSANDS)
ISSUER GUARANTOR NON - GUARANTORS ELIMINATIONS CONSOLIDATED
------ --------- ---------------- ------------ ------------
Net sales $ 52,381 $ - $ 45,548 $(20,555) $ 77,374
Cost of sales 30,639 - 31,009 (20,063) 41,585
-------- -------- -------- -------- --------
Gross profit 21,742 - 14,539 (492) 35,789
-------- -------- -------- -------- --------
Operating expenses:
Engineering 2,535 - 1,665 - 4,200
Selling, general and administrative 12,395 - 8,116 - 20,511
-------- -------- -------- -------- --------
14,930 - 9,781 - 24,711
-------- -------- -------- -------- --------
Operating income (loss) 6,812 - 4,758 (492) 11,078
Interest expense (4,155) 237 (282) - (4,200)
Other income (expense), net 432 36 (537) 353 284
Equity in earnings of subsidiaries 2,963 2,705 - (5,668) -
-------- -------- -------- -------- --------
Income (loss) before income taxes 6,052 2,978 3,939 (5,807) 7,162
Provision for income taxes 1,384 15 1,234 - 2,633
-------- -------- -------- -------- --------
Net income (loss) $ 4,668 $ 2,963 $ 2,705 $ (5,807) $ 4,529
======== ======== ======== ======== ========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS)
ISSUER GUARANTOR NON - GUARANTORS ELIMINATIONS CONSOLIDATED
------ --------- ---------------- ------------ ------------
Net sales $ 45,406 $ - $ 37,849 $(13,668) $ 69,587
Cost of sales 27,128 - 26,293 (13,584) 39,837
-------- -------- -------- -------- --------
Gross profit 18,278 - 11,556 (84) 29,750
-------- -------- -------- -------- --------
Operating expenses:
Engineering 2,077 - 1,297 - 3,374
Selling, general and administrative 10,367 - 7,180 - 17,547
-------- -------- -------- -------- --------
12,444 - 8,477 - 20,921
-------- -------- -------- -------- --------
Operating income (loss) 5,834 - 3,079 (84) 8,829
Interest expense (7,616) 220 (352) - (7,748)
Other income (expense), net 357 - (30) - 327
Equity in earnings of subsidiaries 1,975 1,755 - (3,730) -
-------- -------- -------- -------- --------
(Loss) income before income taxes 550 1,975 2,697 (3,814) 1,408
Provision for income taxes (57) - 942 - 885
-------- -------- -------- -------- --------
Net (loss) income $ 607 $ 1,975 $ 1,755 $ (3,814) $ 523
======== ======== ======== ======== ========
14
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
(IN THOUSANDS)
ISSUER GUARANTOR NON - GUARANTORS ELIMINATIONS CONSOLIDATED
------ --------- ---------------- ------------ ------------
Net sales $ 149,860 $ - $ 130,718 $ (58,209) $ 222,369
Cost of sales 89,234 - 88,305 (56,251) 121,288
--------- --------- --------- --------- ---------
Gross profit 60,626 - 42,413 (1,958) 101,081
--------- --------- --------- --------- ---------
Operating expenses:
Engineering 6,702 - 4,689 - 11,391
Selling, general and administrative 37,100 - 24,182 - 61,282
--------- --------- --------- --------- ---------
43,802 - 28,871 - 72,673
--------- --------- --------- --------- ---------
Operating income (loss) 16,824 - 13,542 (1,958) 28,408
Interest expense (12,325) 711 (819) - (12,433)
Other income (expense), net 988 36 (953) 353 424
Equity in earnings of subsidiaries 8,582 7,850 - (16,432) -
--------- --------- --------- --------- ---------
Income (loss) before income taxes 14,069 8,597 11,770 (18,037) 16,399
Provision for income taxes 2,491 15 3,920 - 6,426
--------- --------- --------- --------- ---------
Net income (loss) $ 11,578 $ 8,582 $ 7,850 $ (18,037) $ 9,973
========= ========= ========= ========= =========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS)
ISSUER GUARANTOR NON - GUARANTORS ELIMINATIONS CONSOLIDATED
------ --------- ---------------- ------------ ------------
Net sales $ 131,999 $ - $ 110,029 $ (42,730) $ 199,298
Cost of sales 81,857 - 75,387 (41,701) 115,543
--------- --------- --------- --------- ---------
Gross profit 50,142 - 34,642 (1,029) 83,755
--------- --------- --------- --------- ---------
Operating expenses:
Engineering 6,987 - 3,564 - 10,551
Selling, general and administrative 34,830 - 21,318 - 56,148
Pension curtailment gain (2,414) - - - (2,414)
--------- --------- --------- --------- ---------
39,403 - 24,882 - 64,285
--------- --------- --------- --------- ---------
Operating income (loss) 10,739 - 9,760 (1,029) 19,470
Interest expense (21,760) 399 (791) - (22,152)
Other income (expense), net 714 - (191) - 523
Equity in earnings of subsidiaries 6,370 5,971 - (12,341) -
--------- --------- --------- --------- ---------
(Loss) income before income taxes (3,937) 6,370 8,778 (13,370) (2,159)
Provision for income taxes 227 - 2,807 - 3,034
--------- --------- --------- --------- ---------
Net (loss) income $ (4,164) $ 6,370 $ 5,971 $ (13,370) $ (5,193)
========= ========= ========= ========= =========
15
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
(IN THOUSANDS)
NON -
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
------ --------- ---------- ------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ 11,578 $ 8,582 $ 7,850 $(18,037) $ 9,973
Adjustments to reconcile net income (loss) to cash flows
from operations:
Depreciation and amortization 3,023 - 1,504 - 4,527
Amortization of finance charges and pay-in-kind
interest charge 1,067 - - - 1,067
(Gain) loss on disposition of assets - - 84 (353) (269)
Equity in earnings of subsidiaries (8,582) (7,850) - 16,432 -
Change in operating assets and liabilities (3,237) (128) (5,174) 1,952 (6,587)
Change in long-term liabilities 1,219 14 113 6 1,352
Other, net 353 - 260 - 613
-------- -------- -------- -------- --------
Net cash provided by operating activities 5,421 618 4,637 - 10,676
-------- -------- -------- -------- --------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (3,755) - (1,555) - (5,310)
Proceeds from disposition of assets - 2,338 - - 2,338
Other 166 - - - 166
-------- -------- -------- -------- --------
Net cash (used in) provided by investing activities (3,589) 2,338 (1,555) - (2,806)
-------- -------- -------- -------- --------
FINANCING ACTIVITIES:
Borrowings under revolving lines of credit, net - - - - -
Repayment of long-term debt (159) - (169) - (328)
Payment of deferred financing costs (317) - - - (317)
Dividend to parent (480) - - - (480)
Change in intercompany receivable/payable 2,756 (2,756) - - -
-------- -------- -------- -------- --------
Net cash provided by (used in) financing activities 1,800 (2,756) (169) - (1,125)
-------- -------- -------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS - - (43) - (43)
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS:
Net increase 3,632 200 2,870 - 6,702
Balance at beginning of period 1,699 - 4,999 - 6,698
-------- -------- -------- -------- --------
Balance at end of period $ 5,331 $ 200 $ 7,869 $ - $ 13,400
======== ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH PAID FOR:
Interest $ 5,830 $ - $ 818 $ - $ 6,648
======== ======== ======== ======== ========
Income taxes $ 271 $ - $ 4,683 $ - $ 4,954
======== ======== ======== ======== ========
16
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS)
ISSUER GUARANTOR NON - GUARANTORS ELIMINATIONS CONSOLIDATED
------ --------- ---------------- ------------ ------------
OPERATING ACTIVITIES:
Net (loss) income $ (4,164) $ 6,370 $ 5,971 $(13,370) $ (5,193)
Adjustments to reconcile net (loss) income to cash
flows from operations:
Depreciation and amortization 3,262 - 1,384 - 4,646
Amortization of finance charges and pay-in-kind
interest charge 17,470 - - - 17,470
(Gain) loss on disposition of assets (341) - 22 - (319)
Pension curtailment gain (2,414) - - - (2,414)
Equity in earnings of subsidiaries (6,370) (5,971) - 12,341 -
Change in operating assets and liabilities 3,931 (1,831) (5,028) (1,035) (3,963)
Change in long-term liabilities (671) - 161 453 (57)
Other, net 476 - 184 - 660
-------- -------- -------- -------- --------
Net cash provided by (used in) operating activities 11,179 (1,432) 2,694 (1,611) 10,830
-------- -------- -------- -------- --------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (3,517) - (858) - (4,375)
Proceeds from disposition of assets 1,130 - 28 - 1,158
Other 166 - - - 166
-------- -------- -------- -------- --------
Net cash used in investing activities (2,221) - (830) - (3,051)
-------- -------- -------- -------- --------
FINANCING ACTIVITIES:
Borrowings under revolving lines of credit, net 1,851 - (733) 1,118
Repayment of long-term debt (8,862) - (145) (9,007)
Change in intercompany receivable/payable (1,975) 1,432 (1,068) 1,611 -
-------- -------- -------- -------- --------
Net cash (used in) provided by financing activities (8,986) 1,432 (1,946) 1,611 (7,889)
-------- -------- -------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS - - 203 - 203
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS:
Net (decrease) increase (28) - 121 - 93
Balance at beginning of period 60 - 3,314 - 3,374
-------- -------- -------- -------- --------
Balance at end of period $ 32 $ - $ 3,435 $ - $ 3,467
======== ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH PAID FOR:
Interest $ 3,671 $ - $ 668 $ - $ 4,339
======== ======== ======== ======== ========
Income taxes $ 294 $ - $ 4,771 $ - $ 5,065
======== ======== ======== ======== ========
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 and natural or manmade disasters (including material acts of terrorism or
other hostilities that impact our markets) and (ix) 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 nine months ended September 30,
2004 reflect the results of Telex while the consolidated financial statements
for the three months and nine months ended September 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, Singapore,
Hong Kong, Canada and France. Exposure to U.S.
19
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 equity (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 (dollars in
thousands):
Successor Predecessor Successor Predecessor
-------------- ------------- ------------- -------------
Three months ended Nine months ended
---------------------------------------- ---------------------------------------
September 30, September 30, % September 30, September 30, %
2004 2003 Change 2004 2003 Change
---------------------------------------- ---------------------------------------
Net sales:
Professional Audio $ 62,815 $ 54,749 14.7% $ 180,806 $ 155,235 16.5%
Audio and Wireless Technology 14,559 14,838 -1.9% 41,563 44,063 -5.7%
-------- -------- ---- --------- --------- -----
Total net sales 77,374 69,587 11.2% 222,369 199,298 11.6%
-------- -------- ---- --------- --------- -----
Total gross profit 35,789 29,750 101,081 83,755
% of sales 46.3% 42.8% 45.5% 42.0%
Operating income $ 11,078 $ 8,829 $ 28,408 $ 19,470
======== ======== ========= =========
Net income (loss) $ 4,529 $ 523 $ 9,973 $ (5,193)
========= ======== ========== =========
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS
AND NINE MONTHS ENDED SEPTEMBER 30, 2003
Net sales. Net sales increased $7.8 million, or 11.2%, from $69.6 million for
the three months ended September 30, 2003 to $77.4 million for the three months
ended September 30, 2004. Since the second quarter of 2004 we have experienced
continued higher sales in the geographic marketplaces we serve. Net sales in the
Professional Audio segment increased substantially for the three months ended
September 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 nine-month net sales increased $23.1 million, or 11.6%, from $199.3 million
for the nine months ended September 30, 2003 to $222.4 million for the nine
months ended September 30,
20
2004. Approximately $8.0 million, or 4.1%, 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 products.
Net sales in the Professional Audio segment increased $8.0 million, or 14.7%,
from $54.8 million for the three months ended September 30, 2003 to $62.8
million for the three months ended September 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 intercom, consoles and speakers continue at
the high levels of the fourth quarter of 2003 and first half of 2004 as
customers continued to make purchases to upgrade their equipment. Nine-month net
sales increased $25.6 million, or 16.5%, from $155.2 million for the nine months
ended September 30, 2003 to $180.8 for the nine months ended September 30, 2004.
Net sales increases for the nine months of 2004 were achieved in all geographic
regions.
Net sales in the Audio and Wireless Technology segment decreased $0.2 million,
or 1.9%, from $14.8 million for the three months ended September 30, 2003 to
$14.6 million for the three months ended September 30, 2004. The decrease in net
sales is attributed primarily to lower sales of our duplication products.
Nine-month net sales decreased $2.5 million, or 5.7%, from $44.1 million for the
nine months ended September 30, 2003 to $41.6 million for the nine months ended
September 30, 2004. The decrease for the nine months of 2004 compared to the
nine months of 2003 is primarily from lower duplication product sales offset
somewhat by higher sales of products to the aviation and transportation
marketplaces and to governmental agencies as they are upgrading their
communications equipment.
Gross profit. Gross profit increased $6.0 million, or 20.3%, from $29.8 million
for the three months ended September 30, 2003 to $35.8 million for the three
months ended September 30, 2004. Gross profit increased $17.3 million, or 20.7%,
from $83.8 million for the nine months ended September 30, 2003 to $101.1
million for the nine months ended September 30, 2004. The gross margin rate
increased to 46.3% for the three months ended September 30, 2004 compared to a
gross margin rate of 42.8% for the three months ended September 30, 2003, and
the gross margin rate increased to 45.5% for the nine months ended September 30,
2004 compared to a gross margin rate of 42.0% for the nine months ended
September 30, 2003. Included in the nine-month period ended September 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 have been 42.8% for the nine-month period
ended September 30, 2003. The increase in the gross margin rate for 2004 from
the corresponding periods 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 43.0%
for the three months ended September 30, 2003 to 46.0% for the three months
ended September 30, 2004 and from 43.4% for the nine months ended September 30,
2003 to 45.8% for the nine months ended September 30, 2004. The increase in the
gross margin rate for 2004 from the corresponding periods in 2003 is attributed
primarily to the sales of high-margin products and continued manufacturing
efficiencies.
21
The gross margin rate for the Audio and Wireless Technology segment increased
from 41.9% for the three months ended September 30, 2003 to 47.4% for the three
months ended September 30, 2004, and from 37.3% for the nine months ended
September 30, 2003 to 43.9% for the nine months ended September 30, 2004. The
gross margin rate, excluding the impairment charges discussed previously, was
41.0% for the nine-month period ended September 30, 2003. The increase in the
gross margin rate for 2004 from the corresponding periods in 2003 is attributed
primarily to increased sales of higher-margin products.
Engineering. Engineering expenses increased $0.8 million, or 24.5%, from $3.4
million for the three months ended September 30, 2003 to $4.2 million for the
three months ended September 30, 2004. Engineering expenses increased $0.8
million, or 8.0%, from $10.6 million for the nine months ended September 30,
2003 to $11.4 million for the nine months ended September 30, 2004. 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 $3.0 million, or 16.9%, from $17.5 million for the three
months ended September 30, 2003 to $20.5 million for the three months ended
September 30, 2004. Selling, general and administrative expenses increased $5.2
million, or 9.2%, from $56.1 million for the nine months ended September 30,
2003 to $61.3 million for the nine months ended September 30, 2004. The increase
in expenses in 2004 is attributed to stronger foreign currencies compared to the
U.S. dollar and to higher variable expenses associated with the increased sales
levels. We expect these expenses, primarily selling and marketing expenses, to
decline in the 2004 fourth quarter, based on focused cost control efforts and
fewer available trade shows to attend.
Pension curtailment gain. We recorded a pension curtailment gain of $2.4 million
in the nine months ended September 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 $3.5 million from $7.7 million for
the three months ended September 30, 2003 to $4.2 million for the three months
ended September 30, 2004. Our interest expense decreased $9.8 million from $22.2
million for the nine months ended September 30, 2003 to $12.4 million for the
nine months ended September 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 $0.3 million for the three months ended
September 30, 2004 is principally from the gain on the sale of our Australian
subsidiary. Other income of $0.3 million for the three months ended September
30, 2003 is principally from the gain on the sale of an idle facility. For the
nine months ended September 30, 2004, other income of $0.4 million is
principally from the gain on the sale of our Australian subsidiary and 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 nine months ended September 30, 2003, other income of
$0.5 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
22
revenue for a patent fee, trademark license fee and non-compete agreement
associated with the 2002 sale of our hearing instrument product lines.
Income taxes. Income taxes in 2004 were $2.6 million and $6.4 million for the
three and nine months ended September 30, 2004, respectively. The effective tax
rate was 36.8% and 39.2% for the three and nine months ended September 30, 2004,
respectively. The nine-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 $0.9 million and $3.0 million for the three and nine months ended
September 30, 2003, respectively. Our effective tax rate for the three and nine
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 nine-month period compared to the 2003 nine-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 September 30, 2004, we have a reserve of $3.8 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.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2004, we had cash and cash equivalents of $13.4 million
compared to $6.7 million at December 31, 2003.
Our principal source of funds for the nine months ended September 30, 2004
consisted of $10.7 million of cash provided by operating activities. Our
principal use of funds was for capital expenditures of $5.3 million. Our
principal source of funds for the nine months ended September 30, 2003 was $10.8
million of cash provided by operating activities and $1.1 million of cash
proceeds from the sale of idle manufacturing facilities. Our principal uses of
funds for the nine months ended September 30, 2003 were $7.9 million for debt
retirement, net of borrowings, and $4.4 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.
Our accounts receivable balance of $52.0 million as of September 30, 2004
increased $4.5 million from $47.5 million at December 31, 2003. The increase is
mainly attributable to higher sales levels achieved in the third quarter of
2004, as compared to the fourth quarter of 2003. We are not aware of any
significant credit risks at September 30, 2004 that could impact future cash
receipts from customers.
Our inventories of $53.8 million as of September 30, 2004 increased $7.8 million
from $46.0 million at December 31, 2003. Of this increase $4.6 million was in
raw materials. Our inventories increased in the nine months as we built
additional inventories to meet the current
23
demand for new products. 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 decreased $0.3 million from $126.9 million at
December 31, 2003 to $126.6 million at September 30, 2004. Our debt consists of
$125.0 million of 11 1/2% Senior Secured Notes due October 2008 and $1.6 million
of other debt in the U.S. and Germany.
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 $11.8 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 September 30, 2004 we had no borrowings outstanding under our U.S. credit
facility and foreign working capital lines. The net availability under our
lines, after deduction for open letters of credit and borrowing base
limitations, was $26.3 million. The effective annual interest rate under these
facilities for amounts borrowed during the nine months ended September 30, 2004
was 8.02%.
As of September 30, 2004 we made employer contributions to the pension plan of
approximately $0.5 million. We are currently projecting 2005 employer
contributions totaling approximately $1.1 million to be made in 2005 and 2006.
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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
nine months ended September 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 September 30, 2004, we had outstanding forward exchange contracts with an
aggregate notional amount of $38.0 million and a weighted remaining maturity of
11 days.
At September 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 $3.8 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 September 30, 2004, we had fixed rate debt of $194.1 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 $6.8 million.
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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 September 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.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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
A Report on Form 8-K, dated July 23, 2004, reporting under Item 12, was
filed on July 23, 2004.
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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: November 3, 2004 By: /s/ Raymond V. Malpocher
-------------------------------------
Raymond V. Malpocher
President and Chief Executive Officer
TELEX COMMUNICATIONS, INC.
Dated: November 3, 2004 By: /s/ Gregory W. Richter
-------------------------------------
Gregory W. Richter
Vice President and Chief Financial Officer
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TELEX COMMUNICATIONS, INC.
FORM 10-Q
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
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