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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
COMMISSION FILE REGISTRANT, STATE OF INCORPORATION OR I.R.S. EMPLOYER
NUMBER FORMATION, ADDRESS AND TELEPHONE NUMBER IDENTIFICATION NO.
- --------------- --------------------------------------- ------------------
333-115009 TELEX COMMUNICATIONS 20-0406594
INTERMEDIATE HOLDINGS, LLC
(FORMED IN DELAWARE)
12000 PORTLAND AVENUE SOUTH
BURNSVILLE, MINNESOTA 55337
TELEPHONE: (952) 884-4051
333-112819 TELEX COMMUNICATIONS, INC. 11-3707780
(INCORPORATED IN DELAWARE)
12000 PORTLAND AVENUE SOUTH
BURNSVILLE, MINNESOTA 55337
TELEPHONE: (952) 884-4051
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether each 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 any of the registrants is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
As of May 6, 2005, Telex Communications, Inc. had outstanding 500
shares of Common Stock, $0.01 par value, all of which are owned beneficially and
of record by Telex Communications Intermediate Holdings, LLC. Telex
Communications Intermediate Holdings, LLC has one member interest outstanding,
which is owned by Telex Communications Holdings, Inc.
This Quarterly Report on Form 10-Q is a combined report being filed by two
different registrants: Telex Communications Intermediate Holdings, LLC and Telex
Communications, Inc. (a wholly-owned subsidiary of Telex Communications
Intermediate Holdings, LLC). The information contained herein relating to each
individual registrant is filed by such registrant on its own behalf. No
registrant makes any representation as to information relating to any other
registrant.
Telex Communications Intermediate Holdings, LLC and Telex Communications,
Inc. meet the conditions set forth in General Instructions (H)(1)(a) and (b) of
the Form 10-Q and are therefore filing this Form 10-Q with the reduced
disclosure format.
THIS DOCUMENT CONTAINS 33 PAGES.
2
PART I.-- FINANCIAL INFORMATION
Page(s)
Item 1. Financial Statements Included herein is the following unaudited financial information:
TELEX COMMUNICATIONS INTERMEDIATE HOLDINGS, LLC
Condensed Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004 4
Condensed Consolidated Statements of Operations for the three month periods ended
March 31, 2005 and 2004 5
Condensed Consolidated Statements of Cash Flows for the three month periods ended
March 31, 2005 and 2004 6
TELEX COMMUNICATIONS, INC.
Condensed Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004 7
Condensed Consolidated Statements of Operations for the three month periods ended
March 31, 2005 and 2004 8
Condensed Consolidated Statements of Cash Flows for the three month periods ended
March 31, 2005 and 2004 9
Notes to Condensed Consolidated Financial Statements 10-22
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 23-28
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
Item 4. Controls and Procedures 30
PART II. -- OTHER INFORMATION
Page(s)
Item 6. Exhibits 31
Signatures 32
Exhibit Index 33
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELEX COMMUNICATIONS INTERMEDIATE HOLDINGS, LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2005 2004
----------- ------------
(UNAUDITED) (SEE NOTE)
ASSETS
Current assets:
Cash and cash equivalents $ 16,019 $ 14,959
Accounts receivable, net 50,365 50,177
Inventories 53,783 52,573
Other current assets 5,242 4,983
----------- ------------
Total current assets 125,409 122,692
Property, plant and equipment, net 33,226 32,025
Deferred financing costs, net 5,770 6,162
Goodwill, net 15,789 15,845
Other assets 3,539 3,296
----------- ------------
$ 183,733 $ 180,020
=========== ============
LIABILITIES AND MEMBER'S DEFICIT
Current liabilities:
Revolving lines of credit $ - $ 1,011
Current maturities of long-term debt 471 479
Accounts payable 17,204 13,173
Accrued wages and benefits 10,322 11,643
Other accrued liabilities 13,789 11,069
Income taxes payable 3,546 5,548
----------- ------------
Total current liabilities 45,332 42,923
Long-term debt, net 199,620 197,065
Other long-term liabilities 12,970 12,523
----------- ------------
Total liabilities 257,922 252,511
----------- ------------
Member's deficit:
Member interest 83,946 83,946
Accumulated other comprehensive loss (3,426) (1,996)
Accumulated deficit (154,709) (154,441)
----------- ------------
Total member's deficit (74,189) (72,491)
----------- ------------
$ 183,733 $ 180,020
=========== ============
See notes to condensed consolidated financial statements.
Note: The balance sheet at December 31, 2004 has been derived from the Company's
audited financial statements at that date.
4
TELEX COMMUNICATIONS INTERMEDIATE HOLDINGS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
----------------------------
MARCH 31, MARCH 31,
2005 2004
--------- ---------
Net sales $ 73,888 $ 67,266
Cost of sales 41,275 37,580
--------- ---------
Gross profit 32,613 29,686
--------- ---------
Operating expenses:
Engineering 4,292 3,469
Selling, general and administrative 21,220 19,366
--------- ---------
25,512 22,835
--------- ---------
Operating income 7,101 6,851
Interest expense (7,050) (6,692)
Other income (loss), net 771 (42)
--------- ---------
Income before income taxes 822 117
Provision for income taxes 1,090 1,473
--------- ---------
Net loss $ (268) $ (1,356)
========= =========
See notes to condensed consolidated financial statements.
5
TELEX COMMUNICATIONS INTERMEDIATE HOLDINGS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
----------------------
MARCH 31, MARCH 31,
2005 2004
--------- ---------
OPERATING ACTIVITIES:
Net loss $ (268) $ (1,356)
Adjustments to reconcile net loss to cash flows from operations:
Depreciation and amortization 1,684 1,493
Amortization of deferred financing costs and pay-in-kind interest charge 3,038 2,703
Change in operating assets and liabilities 428 2,581
Change in long-term liabilities 519 (330)
Other, net 256 272
--------- ---------
Net cash provided by operating activities 5,657 5,363
--------- ---------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (3,241) (1,956)
Other 55 55
--------- ---------
Net cash used in investing activities (3,186) (1,901)
--------- ---------
FINANCING ACTIVITIES:
Borrowings (repayments) under revolving lines of credit, net (1,011) -
Repayment of long-term debt (116) (110)
Payment of deferred financing costs - (182)
--------- ---------
Net cash used in financing activities (1,127) (292)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (284) 20
--------- ---------
CASH AND CASH EQUIVALENTS:
Net increase 1,060 3,190
Balance at beginning of period 14,959 6,698
--------- ---------
Balance at end of period $ 16,019 $ 9,888
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH PAID FOR:
Interest $ 202 $ 264
========= =========
Income taxes $ 1,743 $ 513
========= =========
See notes to condensed consolidated financial statements.
6
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2005 2004
----------- ------------
(UNAUDITED) (SEE NOTE)
ASSETS
Current assets:
Cash and cash equivalents $ 16,019 $ 14,959
Accounts receivable, net 50,365 50,177
Inventories 53,783 52,573
Other current assets 5,242 4,983
----------- ------------
Total current assets 125,409 122,692
Property, plant and equipment, net 33,226 32,025
Deferred financing costs, net 5,008 5,350
Goodwill, net 15,789 15,845
Other assets 3,539 3,296
----------- ------------
$ 182,971 $ 179,208
=========== ============
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Revolving lines of credit $ - $ 1,011
Current maturities of long-term debt 471 479
Accounts payable 17,204 13,173
Accrued wages and benefits 10,322 11,643
Other accrued liabilities 13,474 10,966
Income taxes payable 3,546 5,548
----------- ------------
Total current liabilities 45,017 42,820
Long-term debt, net 125,960 126,079
Other long-term liabilities 12,970 12,523
----------- ------------
Total liabilities 183,947 181,422
----------- ------------
Shareholder's deficit:
Common stock and capital in excess of par 143,029 143,029
Accumulated other comprehensive loss (3,426) (1,996)
Accumulated deficit (140,579) (143,247)
----------- ------------
Total shareholder's deficit (976) (2,214)
----------- ------------
$ 182,971 $ 179,208
=========== ============
See notes to condensed consolidated financial statements.
Note: The balance sheet at December 31, 2004 has been derived from the Company's
audited financial statements at that date.
7
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
------------------------------
MARCH 31, MARCH 31,
2005 2004
--------- --------
Net sales $ 73,888 $ 67,266
Cost of sales 41,275 37,580
--------- --------
Gross profit 32,613 29,686
--------- --------
Operating expenses:
Engineering 4,292 3,469
Selling, general and administrative 21,197 19,356
--------- --------
25,489 22,825
--------- --------
Operating income 7,124 6,861
Interest expense (4,115) (4,150)
Other income (loss), net 771 (42)
--------- --------
Income before income taxes 3,780 2,669
Provision for income taxes 1,090 1,473
--------- --------
Net income $ 2,690 $ 1,196
========= ========
See notes to condensed consolidated financial statements.
8
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
----------------------
MARCH 31, MARCH 31,
2005 2004
--------- ---------
OPERATING ACTIVITIES:
Net Income $ 2,690 $ 1,196
Adjustments to reconcile net income to cash flows from operations:
Depreciation and amortization 1,684 1,493
Amortization of deferred financing costs 364 348
Change in operating assets and liabilities 166 2,394
Change in long-term liabilities 519 (330)
Other, net 256 272
--------- ---------
Net cash provided by operating activities 5,679 5,373
--------- ---------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (3,241) (1,956)
Other 55 55
--------- ---------
Net cash used in investing activities (3,186) (1,901)
--------- ---------
FINANCING ACTIVITIES:
Borrowings (repayments) under revolving lines of credit, net (1,011) -
Repayment of long-term debt (116) (110)
Payment of deferred financing costs - (182)
Dividend to parent (22) (10)
--------- ---------
Net cash used in financing activities (1,149) (302)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (284) 20
--------- ---------
CASH AND CASH EQUIVALENTS:
Net increase 1,060 3,190
Balance at beginning of period 14,959 6,698
--------- ---------
Balance at end of period $ 16,019 $ 9,888
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH PAID FOR:
Interest $ 202 $ 264
========= =========
Income taxes $ 1,743 $ 513
========= =========
See notes to condensed consolidated financial statements.
9
TELEX COMMUNICATIONS INTERMEDIATE HOLDINGS, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
COMPANY STRUCTURE
The consolidated financial statements included herein are:
a. Telex Communications Intermediate Holdings, LLC ("Intermediate"),
which consists of the accounts of Intermediate and Telex
Communications, Inc. ("Telex"). Intermediate is a holding company
whose assets consist of its investment in Telex and its subsidiaries
and some additional deferred financing costs related to incremental
debt of Intermediate. Telex is the operating entity.
b. Telex, which consists of the accounts of Telex Communications, Inc.
and its wholly owned subsidiaries.
Intermediate is a wholly owned subsidiary of Telex Communications
Holdings, Inc. ("Old Telex"), which is not a registrant. Telex and
Intermediate were formed in connection with the November 19, 2003
refinancing of Old Telex's debt obligations and related corporate
restructuring.
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 Intermediate's and Telex'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. These financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Annual Report on Form 10-K for the fiscal
year ended December 31, 2004 for Telex and Intermediate.
Certain 2004 amounts have been reclassified to conform to the 2005
presentation.
10
NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory
Costs - an amendment of ARB No. 43" (SFAS 151), which is the result of its
efforts to converge U.S. accounting standards for inventories with
International Accounting Standards. SFAS 151 requires idle facility
expenses, freight, handling costs, and wasted material (spoilage) costs to
be recognized as current-periodic charges. It also requires the allocation
of fixed production overheads to the cost of conversion based on the
normal capacity of the production facilities. SFAS 151 will be effective
for inventory costs incurred during fiscal years beginning after June 15,
2005. Telex is evaluating the impact of this standard and currently does
not expect it to have a significant impact on its consolidated financial
statements.
2. Inventories
Inventories consist of the following (in thousands):
March 31, December 31,
2005 2004
--------- ------------
Raw materials $ 26,292 $ 24,088
Work in process 5,476 8,006
Finished products 22,015 20,479
--------- ------------
$ 53,783 $ 52,573
========= ============
3. Goodwill
Effective January 1, 2002, Telex adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). Telex performs annual impairment reviews at
the beginning of the fourth quarter or at any time there is an indicator
of impairment. There was no indicator of impairment for the quarter ended
March 31, 2005. Telex has certain amounts of goodwill denominated in
foreign currencies that fluctuate with movement of exchange rates.
The following table presents the changes in carrying value of goodwill by
business segment as of March 31, 2005 (in thousands):
Audio and Wireless
Professional Audio Technology Total
------------------ ------------------ --------
Balance as of December 31, 2004 $ 9,755 $ 6,090 $ 15,845
Foreign currency translation (56) - (56)
------------------ ------------------ --------
Balance as of March 31, 2005 $ 9,699 $ 6,090 $ 15,789
================== ================== ========
11
4. Debt
Long-term debt consists of the following (in thousands):
March 31, December 31,
2005 2004
--------- ------------
TELEX
11.5 % Senior Secured Notes, due October 2008 $ 125,000 $ 125,000
Other debt 1,431 1,558
--------- ------------
126,431 126,558
Less - current portion (471) (479)
--------- ------------
Total Telex long-term debt 125,960 126,079
INTERMEDIATE
13% Senior Subordinated Discount Notes, due January 2009 73,660 70,986
--------- ------------
Total long-term debt $ 199,620 $ 197,065
========= ============
5. Income Taxes
Consistent with the provisions of APB No. 28, "Interim Financial
Reporting," Telex has provided an income tax provision based on its best
estimate of the effective tax rate applicable for the entire year. Telex
recorded an income tax provision of $1.1 million on pre-tax income of $3.8
million for the three months ended March 31, 2005. Telex recorded an
income tax provision of $1.5 million on pre-tax income of $2.7 million for
the three months ended March 31, 2004. The income tax rate was 28.8% and
55.2% for the three months ended March 31, 2005 and 2004, respectively.
The three months ended March 31, 2005 included a previously unrecognized
$0.3 million R&D tax credit in the U.S. The effective rate, excluding the
R&D credit, was 36.5%. The three months ended March 31, 2004 included $0.3
million of additional expense for our German subsidiary related to an
audit of the 2002 tax year. The effective rate, excluding the prior year
expense, was 42.9%.
Intermediate's income tax provision is the same as Telex's income tax
provision because Intermediate is generating losses. The tax benefit
derived from the losses is reduced by a valuation allowance since it is
more likely than not that some portion, or all, of the deferred tax asset
will not be realized.
Intermediate and Telex file a consolidated U.S. tax return with Old Telex.
The tax provisions recorded by Telex are calculated on a separate company
basis under a tax sharing agreement with Old Telex. Telex had a payable to
Old Telex of $3.7 million, $3.3 million, and $0.9 million as of March 31,
2005, December 31, 2004, and March 31, 2004, respectively, included in
other long-term liabilities. Each foreign subsidiary of Telex files its
tax return in its respective foreign country.
6. Pension and Postretirement Benefits
Telex 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, Telex made a decision to freeze future pension
plan benefits. Plan participants continue to receive interest credits but
no longer receive a benefit credit based on the participant's age, vesting
service, and total remuneration.
12
The following table presents the net periodic benefit cost (income) for
each period (in thousands):
Three months ended March 31,
----------------------------
2005 2004
------ ------
Components of net periodic benefit cost (income):
Interest cost $ 301 $ 341
Expected return on plan assets (368) (456)
Amortization of prior service cost 106 -
------ ------
Net periodic benefit cost (income) $ 39 $ (122)
====== ======
Telex made employer contributions of $12,000 in April 2005 with no
additional funding required in the remainder of 2005.
7. Related-Party Transactions
In 2000, Telex relocated its corporate headquarters to a facility leased
from DRF 12000 Portland LLC (the LLC), an entity in which Telex has a 50%
interest. Telex contributed cash of $0.6 million to the LLC and the
investment is accounted for under the equity method. Telex's allocable
share of the LLC income is included as a component of other income in the
condensed consolidated statements of operations. The LLC financed the
purchase of the facility with a mortgage secured by the facility. At March
31, 2005, 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.
Telex 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 lease payments are recorded as rent expense.
Telex's exposure to loss associated with the LLC is its investment in the
LLC, which totaled $0.7 million at March 31, 2005. 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 Telex and that the current
method of accounting for this investment remains appropriate.
8. Comprehensive Loss
Comprehensive loss reflects the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. For Intermediate, 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):
13
Telex Intermediate
Three months ended March 31, Three months ended March 31,
---------------------------- ----------------------------
2005 2004 2005 2004
------- ------ -------- ---------
Net income (loss) $ 2,690 $1,196 $ (268) $ (1,356)
Other comprehensive income:
Foreign currency translation adjustment (1,430) 413 (1,430) 413
Minimum pension liability - - - -
------- ------ -------- ---------
Comprehensive income (loss) $ 1,260 $1,609 $ (1,698) $ (943)
======= ====== ======== =========
The components of accumulated other comprehensive loss for both
Intermediate and Telex are as follows (in thousands):
March 31, December 31,
2005 2004
--------- ------------
Foreign currency translation $ 4,840 $ 6,270
Minimum pension liability (8,266) (8,266)
--------- ------------
$ (3,426) $ (1,996)
========= ============
9. Segment Information
Telex 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) professional 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, as well as by utilities, aerospace and
industrial organizations; 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) talking books products for the
blind and reading disabled markets.
The following tables provide information for Telex, and Intermediate where
relevant, by business segment and geographic region for the three months
ended March 31, 2005 and
14
2004 (in thousands):
Audio
Professional and Wireless
Audio Technology Corporate Consolidated
------------ ------------ --------- ------------
Net sales
2005 $ 57,547 $ 16,341 $ - $ 73,888
2004 53,757 13,509 - 67,266
Operating profit (loss) (1)
2005 $ 4,465 $ 2,717 $ (81) $ 7,101
2004 4,885 2,208 (242) 6,851
Depreciation expense
2005 $ 1,353 $ 92 $ 236 $ 1,681
2004 1,200 81 209 1,490
Capital expenditures
2005 $ 1,542 $ 273 $ 1,426 $ 3,241
2004 1,310 208 438 1,956
Total assets (2)
2005 $ 125,682 $ 38,698 $ 19,353 $ 183,733
2004 121,516 38,887 16,917 177,320
(1) These results include operating expense for Intermediate of $23,000 and
$10,000 for the quarted ended March 31, 2005 and 2004, respectively.
(2) Total assets include deferred financing costs for Intermediate of $762,000
and $873,000 as of March 31, 2005 and 2004, respectively.
Corporate operating expenses include unallocated corporate engineering, selling,
general and administrative costs, and amortization of other intangibles.
Corporate identifiable assets relate principally to the investment in
information systems and corporate facilities, as well as cash and deferred
financing costs.
Telex's net sales into each of its principal geographic regions were as follows
(in thousands):
2005 2004
-------- --------
United States $ 37,424 $ 33,650
Europe 20,942 18,449
Asia 11,583 9,821
Other foreign countries 3,939 5,346
-------- --------
$ 73,888 $ 67,266
======== ========
It is not practical for Telex 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 Intermediate's United States and international operations
were as follow (in thousands):
March 31, 2005 December 31, 2004
-------------- -----------------
United States $ 44,131 $ 43,352
International 14,193 13,976
-------- --------
$ 58,324 $ 57,328
======== ========
15
10. Guarantor Subsidiary
In connection with the November 2003 debt restructuring, a wholly-owned
domestic subsidiary of Telex, Telex Communications International, Ltd.
(Guarantor), guarantees the $125.0 million 11-1/2% senior secured notes of
Telex on a full, unconditional and joint and several basis.
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
March 31, 2005 and December 31, 2004, condensed consolidating statements of
operations for the quarter ended March 31, 2005 and the quarter ended March 31,
2004, and condensed consolidating statements of cash flows for the quarter ended
March 31, 2005 and the quarter ended March 31, 2004. Intermediate's 13% senior
subordinated discount notes are unsecured and are not guaranteed by any other
party.
16
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2005
(IN THOUSANDS)
ISSUER GUARANTOR NON - GUARANTORS ELIMINATIONS CONSOLIDATED
---------- --------- ---------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,147 $ - $ 8,872 $ - $ 16,019
Accounts receivable, net 23,149 - 27,216 - 50,365
Inventories 22,958 - 34,995 (4,170) 53,783
Other current assets 1,618 33,796 6,161 (36,333) 5,242
---------- --------- --------- -------- ----------
Total current assets 54,872 33,796 77,244 (40,503) 125,409
Property, plant and equipment, net 22,773 - 10,453 - 33,226
Deferred financing costs, net 5,008 - - - 5,008
Goodwill, net 14,500 - 5,174 (3,885) 15,789
Other assets 1,296 - 2,251 (8) 3,539
Investment in subsidiaries 87,788 54,005 - (141,793) -
---------- --------- --------- --------- ----------
$ 186,237 $ 87,801 $ 95,122 $(186,189) $ 182,971
========== ========= ========= ========= ==========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Current maturities of long-term debt $ 212 $ - $ 259 $ - $ 471
Accounts payable 9,914 - 7,290 - 17,204
Accrued wages and benefits 2,619 - 7,703 - 10,322
Other accrued liabilities 28,908 - 23,724 (39,158) 13,474
Income taxes payable 3,349 - 197 - 3,546
---------- --------- --------- --------- ----------
Total current liabilities 45,002 - 39,173 (39,158) 45,017
Long-term debt, net 125,593 - 367 - 125,960
Other long-term liabilities 11,380 13 1,577 - 12,970
---------- --------- --------- --------- ----------
Total liabilities 181,975 13 41,117 (39,158) 183,947
---------- --------- --------- --------- ----------
Shareholder's equity (deficit) 4,262 87,788 54,005 (147,031) (976)
---------- --------- --------- --------- ----------
$ 186,237 $ 87,801 $ 95,122 $(186,189) $ 182,971
========== ========= ========= ========= ==========
17
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2004
(IN THOUSANDS)
ISSUER GUARANTOR NON - GUARANTORS ELIMINATIONS CONSOLIDATED
---------- --------- ---------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,593 $ 200 $ 6,166 $ - $ 14,959
Accounts receivable, net 22,370 - 27,807 - 50,177
Inventories 22,686 - 34,043 (4,156) 52,573
Other current assets 1,928 34,023 12,425 (43,393) 4,983
---------- --------- --------- ----------- -----------
Total current assets 55,577 34,223 80,441 (47,549) 122,692
Property, plant and equipment, net 21,328 - 10,697 - 32,025
Deferred financing costs, net 5,350 - - - 5,350
Goodwill, net 14,500 - 1,345 - 15,845
Other assets 1,362 - 1,934 - 3,296
Investment in subsidiaries 86,642 52,432 - (139,074) -
---------- --------- --------- ----------- -----------
$ 184,759 $ 86,655 $ 94,417 $ (186,623) $ 179,208
========== ========= ========= =========== ===========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Revolving lines of credit $ - $ - $ 1,011 $ - $ 1,011
Current maturities of long-term debt 212 - 267 - 479
Accounts payable 7,374 - 5,799 - 13,173
Accrued wages and benefits 5,276 - 6,367 - 11,643
Other accrued liabilities 29,094 - 25,387 (43,515) 10,966
Income taxes payable 4,454 - 1,094 - 5,548
---------- --------- --------- ----------- -----------
Total current liabilities 46,410 - 39,925 (43,515) 42,820
Long-term debt, net 125,626 - 453 - 126,079
Other long-term liabilities 10,903 13 1,607 - 12,523
---------- --------- --------- ----------- -----------
Total liabilities 182,939 13 41,985 (43,515) 181,422
---------- --------- --------- ----------- -----------
Shareholder's equity (deficit) 1,820 86,642 52,432 (143,108) (2,214)
---------- --------- --------- ----------- -----------
$ 184,759 $ 86,655 $ 94,417 $ (186,623) $ 179,208
========== ========= ========= =========== ===========
18
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2005
(IN THOUSANDS)
ISSUER GUARANTOR NON - GUARANTORS ELIMINATIONS CONSOLIDATED
------ --------- ---------------- ------------ ------------
Net sales $ 49,075 $ - $ 43,080 $(18,267) $ 73,888
Cost of sales 29,765 - 29,326 (17,816) 41,275
-------- -------- -------- -------- --------
Gross profit 19,310 - 13,754 (451) 32,613
-------- -------- -------- -------- --------
Operating expenses:
Engineering 2,489 - 1,803 - 4,292
Selling, general and
administrative 12,568 - 8,629 - 21,197
-------- -------- -------- -------- --------
15,057 - 10,432 - 25,489
-------- -------- -------- -------- --------
Operating income (loss) 4,253 - 3,322 (451) 7,124
Interest expense (4,062) 149 (202) - (4,115)
Other income (expense), net 832 - (61) - 771
Equity in earnings of subsidiaries 2,204 2,055 - (4,259) -
-------- -------- -------- -------- --------
Income (loss) before income taxes 3,227 2,204 3,059 (4,710) 3,780
Provision for income taxes 86 - 1,004 - 1,090
-------- -------- -------- -------- --------
Net income (loss) $ 3,141 $ 2,204 $ 2,055 $ (4,710) $ 2,690
======== ======== ======== ======== ========
19
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2004
(IN THOUSANDS)
ISSUER GUARANTOR NON - GUARANTORS ELIMINATIONS CONSOLIDATED
------ --------- ---------------- ------------ ------------
Net sales $ 46,627 $ - $ 39,553 $(18,914) $ 67,266
Cost of sales 28,552 - 26,698 (17,670) 37,580
-------- -------- -------- -------- --------
Gross profit 18,075 - 12,855 (1,244) 29,686
-------- -------- -------- -------- --------
Operating expenses:
Engineering 2,008 - 1,461 - 3,469
Selling, general and
administrative 11,531 - 7,825 - 19,356
-------- -------- -------- -------- --------
13,539 - 9,286 - 22,825
-------- -------- -------- -------- --------
Operating income (loss) 4,536 - 3,569 (1,244) 6,861
Interest expense (4,126) 241 (265) - (4,150)
Other income (expense), net 170 - (212) - (42)
Equity in earnings of subsidiaries 2,105 1,864 - (3,969) -
-------- -------- -------- -------- --------
Income (loss) before income taxes 2,685 2,105 3,092 (5,213) 2,669
Provision for income taxes 245 - 1,228 - 1,473
-------- -------- -------- -------- --------
Net income (loss) $ 2,440 $ 2,105 $ 1,864 $ (5,213) $ 1,196
======== ======== ======== ======== ========
20
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2005
(IN THOUSANDS)
ISSUER GUARANTOR NON - GUARANTORS ELIMINATIONS CONSOLIDATED
------ --------- ---------------- ------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ 3,141 $ 2,204 $ 2,055 $ (4,710) $ 2,690
Adjustments to reconcile net income
(loss) to cash flows from operations:
Depreciation and amortization 1,118 - 566 - 1,684
Amortization of deferred finance costs 364 - - - 364
Equity in earnings of subsidiaries (2,204) (2,055) - 4,259 -
Change in operating assets and liabilities (1,982) (349) 2,072 425 166.07
Change in long-term liabilities 475 - 18 26 519
Other, net 222 - 34 - 256
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities 1,134 (200) 4,745 (0) 5,679
-------- -------- -------- -------- --------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (2,560) - (681) - (3,241)
Other 55 - - - 55
-------- -------- -------- -------- --------
Net cash used in investing activities (2,505) - (681) - (3,186)
-------- -------- -------- -------- --------
FINANCING ACTIVITIES:
Borrowings under revolving lines of credit, net - - (1,011) - (1,011)
Repayment of long-term debt (53) - (63) - (116)
Dividend to parent (22) - - - (22)
-------- -------- -------- -------- --------
Net cash used in financing activities (75) - (1,074) - (1,149)
-------- -------- -------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS - - (284) - (284)
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS:
Net (decrease) increase (1,446) (200) 2,706 (0) 1,060
Balance at beginning of period 8,593 200 6,166 - 14,959
-------- -------- -------- -------- --------
Balance at end of period $ 7,147 $ - $ 8,872 $ (0) $ 16,019
======== ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH PAID FOR:
Interest $ - $ - $ 202 $ - $ 202
======== ======== ======== ======== ========
Income taxes $ 110 $ - $ 1,633 $ - $ 1,743
======== ======== ======== ======== ========
21
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004
(IN THOUSANDS)
ISSUER GUARANTOR NON - GUARANTORS ELIMINATIONS CONSOLIDATED
------ --------- ---------------- ------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ 2,440 $ 2,105 $ 1,864 $(5,213) $ 1,196
Adjustments to reconcile net income (loss) to
cash flows from operations:
Depreciation and amortization 975 - 518 - 1,493
Amortization of finance charges and pay-in-kind
interest charge 348 - - - 348
Equity in earnings of subsidiaries (2,105) (1,864) - 3,969 -
Change in operating assets and liabilities 1,764 (241) (362) 1,233 2,394
Change in long-term liabilities (373) - 32 11 (330)
Other, net 205 - 67 - 272
-------- -------- ------- ------- -------
Net cash provided by operating activities 3,254 - 2,119 - 5,373
-------- -------- ------- ------- -------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,268) - (688) - (1,956)
Other 55 - - - 55
-------- -------- ------- ------- -------
Net cash used in investing activities (1,213) - (688) - (1,901)
-------- -------- ------- ------- -------
FINANCING ACTIVITIES:
Repayment of long-term debt (52) - (58) - (110)
Payment of deferred financing costs (182) - - - (182)
Dividend to parent (10) - - - (10)
-------- -------- ------- ------- -------
Net cash used in financing activities (244) - (58) - (302)
-------- -------- ------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS - - 20 - 20
-------- -------- ------- ------- -------
CASH AND CASH EQUIVALENTS:
Net increase 1,797 - 1,393 - 3,190
Balance at beginning of period 1,699 - 4,999 - 6,698
-------- -------- ------- ------- -------
Balance at end of period $ 3,496 $ - $ 6,392 $ - $ 9,888
======== ======== ======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH PAID FOR:
Interest $ - $ - $ 264 $ - $ 264
======== ======== ======= ======= =======
Income taxes $ 203 $ - $ 310 $ - $ 513
======== ======== ======= ======= =======
22
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.
Management's Discussion and Analysis of Financial Condition and Results of
Operations is provided solely with respect to Telex and its subsidiaries since
substantially all of the Company's operations are conducted by Telex. However,
Intermediate has outstanding additional debt securities. Accordingly,
information with respect to interest expense of Intermediate is also provided
herein. The discussion of liquidity and capital resources pertains to Telex and
its consolidated subsidiaries. Telex and Intermediate were formed in connection
with the November 2003 restructuring of Old Telex's debt obligations and related
corporate restructuring.
OVERVIEW
DESCRIPTION OF BUSINESS
We are a worldwide industry leader in the design, manufacture, and marketing of
audio and communications products and systems to commercial, professional, and
industrial customers. Our product lines include sophisticated loudspeaker
systems, wired and wireless intercom systems, mixing consoles, digital audio
duplication products, amplifiers, wired and wireless microphones, military and
aviation products, land mobile communication systems, wireless assistive
listening systems and other related products.
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,
23
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) professional 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 as well as by utilities, aerospace and industrial organizations; 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) talking
book products for the blind and reading disabled 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. 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 Annual Report on Form 10-K for the year ended December 31,
2004.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information regarding
certain items in Telex's condensed consolidated statements of operations
(dollars in thousands):
24
Three months ended
----------------------------------------
March 31, March 31, %
2005 2004 Change
------------ ----------- ---------
Net sales:
Professional Audio $57,547 $53,757 7.1%
Audio and Wireless Technology 16,341 13,509 21.0%
------- ------- ----
Total net sales 73,888 67,266 9.8%
------- ------- ----
Total gross profit 32,613 29,686
% of sales 44.1% 44.1%
Operating income $ 7,124 $ 6,861
======= =======
Net income $ 2,690 $ 1,196
======= =======
THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31, 2004
Net sales. Net sales increased $6.6 million, or 9.8%, from $67.3 million for the
three months ended March 31, 2004 to $73.9 million for the three months ended
March 31, 2005. We have experienced continued higher sales in all our geographic
marketplaces. Net sales in the Audio and Wireless Technology segment increased
substantially for the three months ended March 31, 2005 compared to the
corresponding period in 2004 because of sales associated with our Landmobile
products. Net sales in the Professional Audio segment increased due primarily to
stronger Speaker product sales.
Net sales in the Professional Audio segment increased $3.8 million, or 7.1%,
from $53.7 million for the three months ended March 31, 2004 to $57.5 million
for the three months ended March 31, 2005. The Pro Audio group saw a moderate
increase in sales across most product groups in the first quarter of 2005, led
by Speaker products, which was partially offset by a decrease in Intercom sales.
Net sales in the Audio and Wireless Technology segment increased $2.8 million,
or 21.0%, from $13.5 million for the three months ended March 31, 2004 to $16.3
million for the three months ended March 31, 2005. The increase in net sales is
attributed primarily to higher sales of our Landmobile products.
Gross profit. Gross profit increased $2.9 million, or 9.9%, from $29.7 million
for the three months ended March 31, 2004 to $32.6 million for the three months
ended March 31, 2005. The gross margin rate for both the three months ended
March 31, 2005 and the three months ended March 31, 2004 was 44.1%.
The gross margin rate for the Professional Audio segment decreased slightly from
44.4% for the three months ended March 31, 2004 to 44.1% for the three months
ended March 31, 2005. The decrease in the gross margin rate for 2005 from the
corresponding period in 2004 is attributed primarily to the lower sales of our
Intercom products and some manufacturing inefficiencies.
The gross margin rate for the Audio and Wireless Technology segment increased
slightly from 43.0% for the three months ended March 31, 2004 to 44.2% for the
three months ended March 31, 2004. The increase in the gross margin rate for
2005 from the corresponding period in 2004
25
is attributed primarily to increased sales of higher-margin products.
Engineering. Engineering expenses increased $0.8 million, or 23.7%, from $3.5
million for the three months ended March 31, 2004 to $4.3 million for the three
months ended March 31, 2005. The spending for the three-month period in 2005
increased in both of our business segments as we continue to invest in new
product development.
Selling, general and administrative. Selling, general and administrative
expenses increased $1.8 million, or 9.5%, from $19.4 million for the three
months ended March 31, 2004 to $21.2 million for the three months ended March
31, 2005. The increase in expenses in 2005 is attributed mainly to higher U.S.
selling and marketing costs. We expect total selling, general and administrative
expenses to remain relatively flat for the remaining quarters of 2005.
Interest expense. Interest expense consists of (in millions):
Three months ended March 31, 2005 Telex Intermediate
- --------------------------------- ----- ------------
Cash interest
11.5 % Senior Secured Notes $ 3.6 $ 3.6
13.0% Senior Subordinated Discount Notes - 0.2
Other 0.2 0.2
------ ------
Total cash interest 3.8 4.0
Non-cash interest:
Amortization of deferred financing costs 0.3 0.4
Amortization of debt issuance discount - 2.7
------ ------
Total non-cash interest 0.3 3.1
------ ------
Total interest expense $ 4.1 $ 7.1
------ ------
Three months ended March 31, 2004 Telex Intermediate
- --------------------------------- ----- ------------
Cash interest
11.5 % Senior Secured Notes $ 3.6 $ 3.6
13.0% Senior Subordinated Discount Notes - 0.2
Other 0.3 0.3
------ ------
Total cash interest 3.9 4.1
Non-cash interest:
Amortization of deferred financing costs 0.3 0.3
Amortization of debt issuance discount - 2.3
------ ------
Total non-cash interest 0.3 2.6
------ ------
Total interest expense $ 4.2 $ 6.7
------ ------
(Decrease) increase in interest expense $ (0.1) $ 0.4
====== ======
Telex interest expense decreased due to lower outstanding foreign debt during
the 2005 quarter. Intermediate expense increased due to higher amortization of
debt issuance discount.
Other income, net. Other income of $0.8 million for the three months ended March
31, 2005 is mainly interest income received from the Internal Revenue Service
("IRS") on an R&D tax credit and adjustment of previously recognized interest on
amounts owed, in the U.S., to the IRS. Other loss of $42,000 for the three
months ended March 31, 2004 is principally from foreign currency losses offset
by the amortization of deferred revenue for a patent fee, trademark license fee
and non-compete agreement associated with the sale of the hearing instrument
product lines in 2002.
26
Income taxes. Telex recorded an income tax provision of $1.1 million previously
unrecognized on pre-tax income of $3.8 million for the three months ended March
31, 2005. Telex recorded an income tax provision of $1.5 million on pre-tax
income of $2.7 million for the three months ended March 31, 2004. The income tax
rate was 28.8% and 55.2% for the three months ended March 31, 2005 and 2004,
respectively. The three months ended March 31, 2005 included a previously
unrecognized $0.3 million R&D tax credit in the U.S. The effective rate,
excluding the R&D credit, was 36.5%. The three months ended March 31, 2004
included $0.3 million of additional expense for our German subsidiary related to
an audit of the 2002 tax year. The effective rate, excluding the prior year
expense, was 42.9%.
Intermediate's income tax provision is the same as Telex's income tax provision
because Intermediate is generating losses. The tax benefit derived from the
losses is reduced by a valuation allowance since it is more likely than not that
some portion, or all, of the deferred tax asset will not be realized.
Intermediate and Telex file a consolidated U.S. tax return with Old Telex. The
tax provision recorded by Telex is calculated on a separate company basis under
a tax sharing agreement with Old Telex.
As of March 31, 2005, we have a reserve of $2.7 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
The following discussion about liquidity and capital resources pertains to Telex
and its consolidated subsidiaries.
At March 31, 2005, we had cash and cash equivalents of $16.0 million compared to
$15.0 million at December 31, 2004.
Our principal source of funds for the three months ended March 31, 2005
consisted of $5.7 million of cash provided by operating activities. Our
principal use of funds was for capital expenditures of $3.2 million and
financing activities of $1.1 million. Our principal source of funds for the
three months ended March 31, 2004 was $5.4 million of cash provided by operating
activities. Our principal uses of funds for the three months ended March 31,
2004 were $2.0 million for capital expenditures.
Our investing activities consist mainly of capital expenditures to maintain
facilities, acquire machines and tooling, update certain manufacturing
processes, update information systems and improve efficiency. Capital
expenditures in 2005 are primarily for the expansion of our U.S. based operating
system to foreign locations.
Our accounts receivable balance of $50.4 million as of March 31, 2005 increased
$0.2 million from $50.2 million at December 31, 2004. Excluding the impact of
foreign currency rate movements, our accounts receivable increased $1.1 million
from December 31, 2004. The increase is mainly the result of lower cash
collections in the first quarter of 2005 as sales in the 2005 first quarter were
at the same level as the fourth quarter of 2004. We are not aware of any
27
significant credit risks at March 31, 2005 that could impact future cash
receipts from customers.
Our inventories of $53.8 million as of March 31, 2005 increased $1.2 million
from $52.6 million at December 31, 2004. Excluding the impact of foreign
currency rate movements, our inventory increased $2.4 million from December 31,
2004. We increased our finished goods inventories by $1.5 million. We have made
some progress with our lean manufacturing process transition, but this effort
has been offset somewhat by increased inventory for new product introductions.
We will continue to focus on this area in the remainder of 2005.
Our consolidated indebtedness decreased $1.2 million from $127.6 million at
December 31, 2004 to $126.4 million at March 31, 2005. Our debt consists of
$125.0 million of 11-1/2% Senior Secured Notes due October 2008 and $1.4 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 $12.3 million. In
certain instances the foreign working capital lines are secured by a lien on
foreign real property, leaseholds, accounts receivable and inventory or are
guaranteed by another subsidiary.
At March 31, 2005 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 $25.1 million. The effective annual interest rate under these
facilities for amounts borrowed during the three months ended March 31, 2005 was
8.2%.
As of March 31, 2005 we had not made any employer contributions to our U.S.
pension plan. In April 2005 we made our minimum required 2005 calendar year
employer contribution of $12,000. The remaining contribution of $0.9 million for
the 2005 plan year will be paid in 2006.
28
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 exposure to changes in exchange rates. During the three months ended March
31, 2005, 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 statement of operations.
At March 31, 2005, we had outstanding foreign forward exchange contracts with a
notional amount of $24.0 million with a weighted average maturity of 76 days.
At March 31, 2005, the difference between the fair value of all outstanding
contracts, as estimated by the amount required to enter into offsetting
contracts with similar remaining maturities based on quoted prices, and the
contract amounts was immaterial. A 10% fluctuation in exchange rates for these
currencies would change the fair value by approximately $2.4 million. However,
since these contracts hedge foreign currency denominated transactions, any
change in the fair value of the contracts would be 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 earnings and cash flows, assuming other factors are held constant.
At March 31, 2005, Telex had fixed rate debt of $125.6 million and an
interest-free loan of $0.8 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 $3.7 million. Intermediate had fixed rate debt of $73.7 million
and a one-percentage point decrease in interest rates would increase the
unrealized fair market value of this debt by approximately $2.5 million.
29
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
our management, including the Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), of the effectiveness of the design and operation of Telex's
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c)
and 15d-14(c)) as of March 31, 2005. 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.
INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting which
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting. The Company is in the process of implementing
its U.S. based, world wide information technology application globally. Our
England subsidiary went live on the system in the first quarter of 2005.
Management does not currently believe that this implementation will adversely
affect the Company's internal control over financial reporting.
30
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
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.
31
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 INTERMEDIATE HOLDINGS, LLC
TELEX COMMUNICATIONS, INC.
Dated: May 6, 2005 By: /s/ Raymond V. Malpocher
----------------------------------
Raymond V. Malpocher
President and Chief Executive
Officer
Dated: May 6, 2005 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.
33