<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the period ended August 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from
to -----------------
----------------
Commission File Number 1-10006
EV International, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified on its charter)
Delaware 52-2011193
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
602 Cecil Street Buchanan, Michigan 49107
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
616-695-6831
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
None
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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
filing requirements for the past 90 days.
[X] Yes [ ] No
As of October 15, 1997, 110 shares of the Registrant's Common Stock, $0.01 par
value, were outstanding.
<PAGE> 2
EV INTERNATIONAL, INC.
FORM 10-Q
FOR THE SIX MONTHS ENDED AUGUST 31, 1997
INDEX
<TABLE>
<CAPTION>
<S> <C>
PART I. Financial Information:
Item 1 Financial Statements
Consolidated Balance Sheets as of August 31, 1997 and February 28, 1997 2
Consolidated Statements of Income for the Three Months Ended
August 31, 1997 and 1996 3
Consolidated Statements of Income for the Six Months Ended
August 31, 1997 and 1996 4
Consolidated Statements of Cash Flows for the Six Months Ended
August 31, 1997 and 1996 5
Notes to Unaudited Interim Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Results of Operations and
Financial Condition 11
PART II. Other Information:
Item 1 Legal Proceedings
Item 6 Exhibits and Reports on Form 8-K 14
SIGNATURE 14
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION:
ITEM 2 FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
EV INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands of dollars)
ASSETS
August 31, 1997 February 28, 1997
------------------ -------------------
<S> <C> <C>
Current Assets
Cash $ 11,756 $ 7,044
Accounts receivable, net of allowance 36,708 42,856
for doubtful accounts of $2,097
and 2,203, respectively
Inventories 48,095 51,141
Income taxes receivable 1,923 (997)
Deferred tax assets 3,865 2,907
Other current assets 6,875 5,019
------------------ -------------------
Total Current Assets 109,222 107,970
Property, Plant and Equipment, net 30,343 31,411
Deferred Financing Costs 5,171 6,216
Cost in Excess of Net Assets Acquired 60,534 60,513
Other Assets 4,644 1,008
------------------ -------------------
TOTAL ASSETS $ 209,914 $ 207,118
================== ===================
LIABILITIES & STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable $ 14,234 $ 15,250
Current maturities of long-term debt 1,083 1,000
Compensation related liabilities 6,140 6,726
Accrued interest 5,453 581
Other accrued liabilities 9,661 6,875
------------------ -------------------
Total Current Liabilities 36,571 30,432
Long-term debt 111,917 109,000
Deferred Taxes and Other Liabilities 9,296 9,294
----------------- --------------------
Total Liabilities 157,784 148,726
Stockholder's Equity
Common stock ($.01 par value - 1,000 shares - -
authorized, 110 shares issued
and outstanding)
Capital in excess of par value 57,600 57,600
Retained earnings (4,121) 841
Cumulative translation adjustment (1,349) (49)
----------------- --------------------
Total Stockholder's Equity 52,130 58,392
================= ====================
TOTAL LIABILITIES & STOCKHOLDER'S EQUITY $ 209,914 $ 207,118
================= ====================
The accompanying notes are an integral part of these consolidated balance sheets.
</TABLE>
2
<PAGE> 4
EV INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands of dollars)
<TABLE>
<CAPTION>
(New Basis (Predecessor Basis
of Accounting) of Accounting)
Three months ended Three months ended
August 31, 1997 August 31, 1996
------------------------- ------------------------
<S> <C> <C>
Net Sales $ 45,868 $ 50,415
Operating Costs:
Cost of products sold 31,800 34,297
Selling and administration 6,703 7,927
Research and development 2,317 2,410
Depreciation and amortization 1,556 1,345
------------------------- ------------------------
Total Operating Costs 42,376 45,979
------------------------- ------------------------
Operating Income 3,492 4,436
Interest Expense 3,238 -
Write-off of Deferred Financing Costs 687 -
Foreign Exchange Losses 225 -
------------------------- ------------------------
(Loss) Income before taxes (658) 4,436
(Benefit) Provision for Income Taxes 122 1,752
------------------------- ------------------------
Net (Loss) Income $ (780) $ 2,684
========================= ========================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
3
<PAGE> 5
EV INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands of dollars)
<TABLE>
<CAPTION>
(New Basis (Predecessor Basis
of Accounting) of Accounting)
Six months ended Six months ended
August 31, 1997 August 31, 1996
------------------------- ------------------------
<S> <C> <C>
Net Sales $ 90,540 $ 96,503
Operating Costs:
Cost of products sold 62,889 65,827
Selling and administration 14,326 15,043
Research and development 4,767 4,865
Depreciation and amortization 3,111 2,680
------------------------- ------------------------
Total Operating Costs 85,093 88,415
------------------------- ------------------------
Operating Income 5,447 8,088
Interest Expense 6,705 -
Write-off of Deferred Financing Costs 5,556 -
Foreign Exchange Losses 430 -
------------------------- ------------------------
(Loss) Income before taxes (7,244) 8,088
(Benefit) Provision for Income Taxes (2,282) 3,195
------------------------- ------------------------
Net (Loss) Income $ (4,962) $ 4,893
========================= ========================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
4
<PAGE> 6
EV INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands of dollars)
<TABLE>
<CAPTION>
(New Basis (Predecessor Basis
of Accounting) of Accounting)
Six months ended Six months ended
August 31, 1997 August 31, 1996
------------------------ ------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ (4,962) $ 4,893
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization 3,111 2,680
Amortization and write-off of deferred financing fees 5,796 -
Deferred income taxes (156) -
Changes in assets and liabilities:
Accounts receivable 6,148 (605)
Inventories 3,046 2,422
Other current assets (5,576) (5,182)
Accounts payable (1,016) 3,100
Compensation related liabilities (586) (1,323)
Other accrued liabilities 7,658 (952)
Other, net (4,469) (1,069)
------------------------ ------------------------
Net cash provided by operating activities 8,994 3,964
Cash flows from investing activities:
Acquisition costs (1,140) -
Purchases of property and equipment (1,278) (1,870)
------------------------ ------------------------
Net cash used in investing activities (2,418) (1,870)
Cash flows from financing activities:
Proceeds from issuance of Senior Subordinated Notes 100,000 -
Payment of Senior Subordinated Credit Facility (75,000) -
Payment of Term Loan (22,000) -
Payment of financing costs (4,751) -
Cash transferred to Parent - (2,094)
------------------------ ------------------------
Net cash provided by financing activities (1,751) (2,094)
Effect of exchange rates on cash (113) -
------------------------ ------------------------
Net increase in cash 4,712 -
Cash at beginning of period 7,044 -
------------------------ ------------------------
Cash at end of period $ 11,756 $ -
======================== ========================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
5
<PAGE> 7
EV INTERNATIONAL, INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
NOTE 1: ORGANIZATION
EV International, Inc., a Delaware corporation, and its subsidiaries (the
"Company" or "EVI") is a manufacturer and marketer of sound system products for
the professional audio market. The Company manufactures and markets a
comprehensive range of products worldwide for professional audio systems,
including microphones, mixing consoles, signal processors, amplifiers and
loudspeaker systems. The Company is a wholly owned subsidiary of EVI Audio
Holding, Inc. ("Holding"), a Delaware Corporation. Holding is a wholly owned
subsidiary of EVI Audio, LLC (the "Parent"). Holding and the Parent are newly
formed entities organized by Greenwich Street Capital Partners, L.P. and certain
affiliated investors (collectively "GSCP") to effect the acquisition described
below. Holding and the Parent are holding companies only. The primary assets in
each are comprised of investments in subsidiaries.
On February 10, 1997 (the "Acquisition Closing Date"), pursuant to a Purchase
Agreement dated December 12, 1996, an acquisition subsidiary wholly owned by
Holding acquired from Mark IV Industries, Inc. and Mark IV PLC (collectively,
the "Sellers") all of the issued and outstanding capital stock of Gulton
Industries, Inc. ("Gulton"), the former parent of Electro-Voice, Incorporated
(the "Predecessor Company"). The acquisition subsidiary subsequently merged with
and into Gulton, and Gulton then merged with and into the Predecessor Company,
with the Predecessor Company ultimately surviving. The Predecessor Company then
changed its name to EV International, Inc. The foregoing transactions are
referred to herein as the Acquisition.
As of the Acquisition Closing Date, the aggregate cash purchase price paid was
approximately $151,500, plus $4,900 in estimated adjustments paid on the
Acquisition Closing Date. This purchase price is subject to further adjustment
on the basis of (i) the audited working capital and audited cash flow of the
Predecessor Company as of and for the ten month period ended December 31, 1996,
as adjusted for certain contractual provisions and (ii) the net intercompany
transfers of cash, as defined, between the Sellers and their affiliates, on the
one hand, and the Predecessor Company and its subsidiaries, on the other hand,
during the period between December 31, 1996, and the Acquisition Closing Date.
The Sellers have submitted the audited financial statements, together with their
computations of the purchase price adjustments, and have requested a further
purchase price payment of $405.
The Acquisition was accounted for using the purchase method of accounting,
pursuant to which the purchase price was allocated among the acquired assets and
liabilities in accordance with estimates of fair market value on the Acquisition
Closing Date. The cost of the acquisition included the payment of $156,400 to
the Sellers, plus $3,900 of Acquisition related fees. The Acquisition was funded
with $57,600 of contributed capital and $110,000 of debt, including a bridge
loan facility and a term loan. Debt financing costs were approximately $6,500.
NOTE 2: BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying financial statements have been prepared by EVI, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. All
significant intercompany balances and transactions have been eliminated in the
accompanying consolidated financial statements.
The financial information presented herein reflects all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the results for the interim periods
presented. The interim financial statements and notes thereto should be read in
conjunction with the February 10, 1997, audited consolidated financial
statements of the Predecessor Company and the February 28, 1997 audited
consolidated financial statements of the Company. Certain prior period amounts
have been reclassified to conform with the current presentation. The results for
interim periods are not necessarily indicative of the results to be expected for
the full year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of assets, liabilities, income and expenses and
disclosures of contingencies. Future events could alter such estimates.
6
<PAGE> 8
For purposes of cash flows, the Company considers overnight investments as cash
equivalents. The Company made cash interest payments of approximately $2.0
million in the six month period ended August 31, 1997. The Company also made
cash income tax payments of approximately $1.1 million in the six month period
ended August 31, 1997.
As a result of the Acquisition and the related financing transactions, the
Company is highly leveraged. The Company's high degree of leverage could have
important consequences, including but not limited to the following: (i) the
Company's ability to obtain additional financing for working capital, capital
expenditures, acquisition, general corporate purposes or other purposes may be
impaired in the future; (ii) a substantial portion of the Company's cash flow
from operations must be dedicated to the payment of principal and interest on
its indebtedness, thereby reducing the funds available to the Company for other
purposes; and (iii) the Company's flexibility to adjust to changing market
conditions and ability to withstand competitive pressures could be limited, and
the Company may be more vulnerable to a downturn in general economic conditions
or in business or may be unable to carry out capital spending that is important
to its growth strategy.
Technological innovation and leadership are among the important factors in
competing successfully in the professional audio market. The Company's future
results will depend, in part, upon its ability to make timely and cost-effective
enhancements and additions to its technology and to introduce new products that
meet customer demands, including products utilizing digital technology, which
are increasingly being introduced in the professional audio industry. The
success of current and new product offerings is dependent on several factors,
including proper identification of customer needs, technological development,
cost, timely completion and introduction, differentiation from offerings of the
Company's competitors and market acceptance. Maintaining flexibility to respond
to technological and market dynamics may require substantial expenditures. There
can be no assurance that the Company will successfully identify and develop new
products in a timely manner, that products or technologies developed by others
will not render the Company's products obsolete or noncompetitive or that
constraints in the Company's financial resources will not adversely affect its
ability to develop and implement technological advances.
The Company's business strategy includes plans for pursuing growth in certain
foreign markets. The Company's international prospects could be adversely
affected by factors such as reversals or delays in the opening of foreign
markets, exchange controls and other trade regulation, currency and political
risks, taxation and economic and market conditions in targeted foreign markets.
The Company's business strategy also includes plans to pursue growth through
strategic acquisitions. The Senior Credit Facility prohibits making certain
acquisitions in an aggregate amount over $7,500 and incurring additional
indebtedness greater than 65% of the purchase price of any such acquisition. In
addition, acquisitions that the Company may make or enter into will involve
risk, including the successful integration and management of acquired
technology, operations and personnel. The integration of acquired businesses may
also lead to the loss of key employees of the acquired companies and diversion
of management attention from ongoing business concerns.
The Company has substantial assets located outside of the United States and a
substantial portion of the Company's sales and earnings are attributable to
operations conducted abroad and to export sales, predominantly in Western Europe
and Asia. The Company's international operations subject the Company to certain
risks, including increased exposure to currency exchange rate fluctuations. The
Company intends to hedge a portion of its foreign currency exposure by incurring
liabilities, including bank debt, denominated in the local currencies of those
countries where its subsidiaries are located and plans to develop systems to
manage and control its currency risk exposure. The Company's international
operations also subject it to certain other risks, include adverse political or
economic developments in the foreign countries in which it conducts business,
foreign government regulation, dividend restrictions, tariffs and potential
adverse tax consequences, including payment of taxes in jurisdictions that have
higher tax rates than does the United States.
The Company offers a range of audio products to a diverse customer base
throughout the world. Terms typically require payment within a short period of
time, however, the Company will offer extended payment terms to certain
qualified customers. As of August 31, 1997, the Company believes it has no
significant customer or geographic concentration of accounts receivable that
could expose the Company to adverse, near-term sever financial impacts.
NOTE 3: INVENTORIES
Inventories consist of the following as of August 31, 1997 and February 28,
1997, respectively:
<TABLE>
<S> <C> <C>
Purchased materials and parts $18,649 $19,830
Work in process 6,681 7,104
Finished goods 22,765 24,207
------- -------
$48,095 $51,141
======= =======
</TABLE>
7
<PAGE> 9
NOTE 4: LONG-TERM DEBT AND FINANCING ARRANGEMENTS
Long-term debt consists of the following as of August 31, 1997 and February 28,
1997, respectively:
<TABLE>
<S> <C> <C>
Senior subordinated notes $100,000 $ --
Senior subordinated credit facility -- 75,000
Term loan facility 13,000 35,000
-------- --------
113,000 110,000
Less: Current maturities of long-term debt 1,083 1,000
-------- --------
Long-term debt $111,917 $109,000
======== ========
</TABLE>
Senior Subordinated Notes
On March 24, 1997, the Company issued $100,000 of 11% Senior Subordinated notes
due 2007 (the "Notes"). Interest on the Notes is payable semi-annually on March
15 and September 15 of each year, commencing on September 15, 1997. The Notes
mature on March 15, 2007. The proceeds from the Notes issuance were used by the
Company to repay all amounts outstanding under the Bridge Loan Facility and
$17,000 of indebtedness outstanding under the Term Loan Facility. The balance of
such proceeds was used for working capital and general corporate purposes.
Deferred financing fees associated with the Notes of approximately $4,750 are
being amortized over the term of the Notes.
The Notes are redeemable, at the Company's option, in whole or in part and from
time to time on and after March 15, 2002 and prior to maturity, at the following
redemption prices (expressed as a percentage of principal amount), plus accrued
interest, if any, to the redemption date, if redeemed during the 12-month period
commencing on March 15 of the years set forth below:
<TABLE>
<CAPTION>
Period Redemption Price
------ ----------------
<S> <C>
2002.....................................105.500%
2003.....................................103.667%
2004.....................................101.833%
2005 and thereafter .....................100.000%
</TABLE>
In addition, at any time and from time to time prior to March 15, 2000, the
Company may redeem in the aggregate up to 33 1/3% of the original aggregate
principal amount of the Notes with the proceeds of one or more Public Equity
Offerings by the Company following which there is a Public Market, at a
redemption price (expressed as a percentage of principal amount thereof) of 111%
plus accrued interest, if any, to the redemption date (subject to the right of
Holders of record on the relevant record date to receive interest due on the
relevant interest payment date); provided however, that at least 66 2/3% of the
original aggregate principal amount of the Notes must remain outstanding
immediately after each such redemption.
The Notes are not subject to any sinking fund requirement. The Notes are
unsecured and are subordinated to all existing and future senior indebtedness
(as defined) of the Company and are effectively subordinated to all obligations
of the subsidiaries of the Company. The Notes rank pari passu with any future
senior subordinated indebtedness (as defined) of the Company and rank senior to
all other subordinated indebtedness (as defined) of the Company.
The Notes are unconditionally guaranteed on an unsecured, senior subordinated
basis by each subsidiary of the Company (other than foreign subsidiaries and
unrestricted subsidiaries, as defined) that is a significant subsidiary (as
defined) created or acquired after the date the Notes are issued.
The Notes have been designated for trading in the Private Offerings, Resales and
Trading through Automated Linkages ("PORTAL") market.
Senior Subordinated Credit Facility
The Company entered into a $75,000 Senior Subordinated Credit Facility (the
"Bridge Loan Facility"), dated as of the Acquisition Closing Date, with a group
of financial institutions, issued as interim financing for the Acquisition.
Pursuant to the Notes issuance, the Bridge Loan Facility and any related accrued
interest were repaid. During the period March 1, 1997, through the Notes
issuance, borrowings under the Bridge Loan Facility bore interest at 12.25% per
annum. Under the terms of the Bridge Loan Facility, the facility expires one
year from the Acquisition Closing Date. Unamortized deferred financing fees of
$3,892 associated with the Bridge Loan Facility remaining at the date of the
Notes issuance were written off.
8
<PAGE> 10
Senior Credit Facility
The Company entered into a Senior Credit Facility, dated as of the Acquisition
Closing Date, with a group of financial institutions, which provides for a Term
Loan Facility of $35,000 and a Revolving Credit Facility of $25,000.
On the Acquisition Closing Date, the Company borrowed the full amount available
under the Term Loan Facility and used the proceeds of $35,000, together with the
proceeds of the GSCP equity investment and the Bridge Loan Facility, for payment
of the purchase price of the Acquisition and related fees and expenses. On March
24, 1997, proceeds from the Notes issuance were used by the Company to repay
$17,000 of indebtedness outstanding under the Term Loan Facility, and the
related unamortized deferred financing costs of $978 were written off. On July
11, 1997, the Company utilized available cash on hand to repay $5,000 of
indebtedness outstanding under the Term Loan Facility, and the related
unamortized deferred financing costs of $687,000 were written off.
NOTE 5: PRO FORMA RESULTS OF OPERATIONS
Pro forma statements of income are presented below for the six months ended
August 31, 1997 and 1996. For the period ended August 31, 1997, amounts are
presented as if the Notes had been issued on March 1, 1997. For the period ended
August 31, 1996, amounts are presented as if the Acquisition of the Predecessor
Company and the Notes issuance had occurred on March 1, 1996. The Company's pro
forma statement of income for the six months ended August 31, 1996, is based on
the Predecessor Company's statement of income and adjustments giving effect to
the Acquisition under the purchase method of accounting. The Predecessor
Company's statement of income do not reflect any foreign exchange gains or
losses, nor any interest expense or income. The pro forma results are for
illustrative purposes only and do not purport to be indicative of the actual
results which would have occurred, nor are they indicative of future results of
operations.
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Six Months Ended Six Months Ended
8/31/97 8/31/96
------------------ ------------------
<S> <C> <C>
Revenue $ 90,540 $ 96,503
Operating Income 5,447 7,458
Net (Loss) Income (1,000) 353
EBITDA 8,558 10,390
</TABLE>
NOTE 6: DOMESTIC AND FOREIGN OPERATIONS
The Company operates in a single industry segment, the professional audio
market. The Company's customers are not concentrated in any specific geographic
region and no single customer accounts for a significant amount of the Company's
sales.
Information related to domestic and foreign operations is as follows as of and
for the six months ended August 31,:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net sales to customers:
North America $ 59,052 $ 61,346
Europe 30,686 35,903
Asia and other foreign 19,789 22,221
Eliminations (18,987) (22,967)
----------- -----------
Total net sales to customers $ 90,540 $ 96,503
Operating income:
North America $ 4,336 $ 5,313
Europe 127 870
Asia and other foreign 984 1,905
---------- ----------
Total operating income $ 5,447 $ 8,088
</TABLE>
9
<PAGE> 11
<TABLE>
<S> <C>
Identifiable assets:
North America $ 144,367
Europe 39,329
Asia and other foreign 26,218
----------
Total identifiable assets $ 209,914
</TABLE>
Net sales include sales among the Company's geographic operating units, which
are made at cost plus a proportionate share of operating profit. For the six
month periods ended August 31, 1997 and 1996, export sales from the United
States to unaffiliated customers were approximately $5,033 and $4,006,
respectively,
NOTE 7: COMMITMENTS AND CONTINGENCIES
From time to time the Company is a party to various legal actions in the normal
course of business. Gulton was sued by a company for infringement of a U.S.
patent that Gulton was using to produce products unrelated to the business of
the Company for a business line that was transferred out of Gulton prior to the
Acquisition. At trial, the plaintiff was awarded $3,024 in damages. The matter
was appealed and upheld with the issue of calculation of damages remanded to the
District Court. No decision has been made by the District Court on this issue.
The Sellers, which are prosecuting the claim on behalf of Gulton, have agreed to
indemnify the Company fully for any losses or liabilities arising from this
litigation. The Company believes that it is not currently party to any
litigation which, if adversely determined, would have a material adverse effect
on the liquidity or results of operations of the Company.
The Company and its operations are subject to extensive and changing U.S.
federal, state and local and foreign environmental laws and regulations,
including, but not limited to, laws and regulations that impose liability on
responsible parties to remediate, or contribute to the costs of remediating,
current or formerly owned or leased sites or other sites where solid or
hazardous wastes or substances were disposed of or released into the
environment. These remediation requirements may be imposed without regard to
fault or legality at the time of the disposal or release. The Company believes
that it currently conducts its operations, and in the past has operated its
business, in substantial compliance with applicable environmental laws and
regulations. From time to time, however, operations of the Company have
resulted, and may result in the future, in non-compliance or liability with
respect to such laws and regulations.
The Company (or, for certain sites, the Sellers, on behalf of the Company) has
undertaken or currently is undertaking remediation of contamination at certain
of its currently or formerly owned sites (some of which are unrelated to the
audio business) and the Company has agreed it is a de minimis responsible party
at a number of other such sites, which have been designated as Superfund sites
under U.S. environmental laws. The Company recently had Phase I Environmental
Site Assessments and Compliance Reviews conducted by a third-party environmental
consultant at all of its manufacturing sites and is aware of environmental
conditions at certain of such sites that require or may require remediation or
continued monitoring. In particular, the Company's site in Buchanan, Michigan
has been designated a Superfund site under U.S. environmental laws. The Sellers
have agreed to indemnify the Company fully for environmental liabilities
resulting from the Buchanan, Michigan Superfund site and certain of the other
sites at which the environmental consultant indicated monitoring or remediation
was necessary.
The Company estimates that it will incur, in fiscal year 1998, approximately
$150 for environmentally related capital expenditures. The Company does not
believe that the costs to the Company of environmental compliance under current
laws and regulations will have a material adverse effect on the financial
condition or results of operations of the Company.
There can be no assurance that the Company's estimated environmental
expenditures, which the Company believes to be reasonable, will cover in full
the actual amounts of environmental obligations the Company does incur, that the
Sellers will pay in full the indemnified environmental liabilities when they are
incurred, that new or existing environmental laws will not affect the Company in
currently unforeseen ways or that present or future activities undertaken by the
Company will not result in additional environmentally related expenditures.
However, the Company does not believe that the costs to the Company of the
environmental compliance under current laws and regulations will have a material
adverse effect on the financial condition or results of operations of the
Company.
10
<PAGE> 12
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The results of operations for the three and six months ended August 31, 1997
were prepared under the new basis of accounting, which includes adjustments
giving effect to the Acquisition under the purchase method of accounting. The
results of operations for the three and six months ended August 31, 1996 are
based the predecessor basis of accounting. As a result, the results of
operations for the aforementioned periods will not be comparable due to the
Company's significant new financing arrangements and as of result of the
Acquisition and the Notes issuance.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain income
statement data for the Company expressed as a percentage of net sales:
<TABLE>
<CAPTION>
For the three months ended For the six months ended
August 31, August 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 69.3% 68.0% 69.5% 68.2%
------------- ------------- ------------- -------------
Gross profit 30.7% 32.0% 30.5% 31.8%
Selling and administration 14.6% 15.7% 15.8% 15.6%
Research and development 5.1% 4.8% 5.3% 5.0%
Depreciation and amortization 3.4% 2.7% 3.4% 2.8%
------------- ------------- ------------- -------------
Operating income 7.6% 8.8% 6.0% 8.4%
Interest expense 7.0% -% 7.4% -%
Write-off of deferred financing costs 1.5% -% 6.1% -%
Other income 0.5% -% 0.5% -%
------------- ------------- ------------- -------------
Income before income taxes (1.4%) 8.8% (8.0%) 8.4%
Income tax provision (benefit) 0.3% 3.5% (2.5%) 3.3%
------------- ------------- ------------- -------------
Net income (loss) (1.7%) 5.3% (5.5%) 5.1%
============= ============= ============= =============
EBITDA (a) 11.0% 11.5% 9.5% 11.2%
============= ============= ============= =============
</TABLE>
--------------------
(a) EBITDA represents earnings before interest expense, the write-off of
deferred financing costs, other income, income taxes, depreciation
and amortization. EBITDA is included because management understands
that such information is considered by certain investors to be an
additional basis on which to evaluate the Company's ability to pay
interest, repay debt and make capital expenditures. Excluded from
EBITDA are interest, the write-off of deferred financing costs, other
income, income taxes, depreciation and amortization, each of which
can significantly affect the Company's results of operations and
liquidity and should be considered in evaluating the Company's
performance. EBITDA is not intended to represent and should not be
considered more meaningful than, or an alternative to, measures of
operating performance as determined in accordance with generally
accepted accounting principles.
THREE MONTHS ENDED AUGUST 31, 1997 COMPARED TO THREE MONTHS ENDED
AUGUST 31, 1996
Net Sales - Net sales decreased $4.5 million, or 9.0%, from $50.4 million for
the quarter ended August 31, 1996 to $45.9 million for the quarter ended August
31, 1997. During the comparable periods, net sales to customers in the United
States decreased $0.5 million, or 2.6%, from $20.3 million to $19.8 million, and
net sales to customers outside the United States decreased $4.0 million, or
13.4%, from $30.1 million to $26.1 million. Net intra-segment sales from the
United States to foreign affiliates decreased $1.6 million, or 18.9%, from $8.4
million to $6.8 million. The overall sales decrease is primarily attributable to
unfavorable movements in dollar/yen and the dollar/mark exchange rates, which
reduced the translated value of foreign currency denominated profits.
Domestically, net sales in the music industry segment were down, partially
offset by stronger revenue from cinema. Offsetting this in part were strong
sales in Hong Kong, as well as Gauss and Vega, both domestic entities.
11
<PAGE> 13
Gross Profit - Gross profit decreased $2.0 million, or 12.7%, from $16.1 million
for the quarter ended August 31, 1996 to $14.1 million for the quarter ended
August 31, 1997. As a percentage of net sales, gross profit decreased from 32.0%
to 30.7% during the comparable periods. The overall decrease in gross profit is
primarily attributable to unfavorable movements in dollar/yen and the
dollar/mark exchange rates, which reduced the translated value of foreign
currency denominated profits. Profit margins were adversely impacted in Japan
and Germany by the higher costs of goods that were produced in the United
States. Additionally, the Company's aggressive pricing strategy, which was
implemented to maintain foreign market position, and the delay in the
introduction of certain new products had unfavorable impacts. Lower sales volume
also depressed gross profit as fixed expenses become a higher percentage of net
sales.
Selling and Administration - Selling and administration expenses decreased by
$1.2 million, or 15.4%, from $7.9 million for the quarter ended August 31, 1996
to $6.7 million for the quarter ended August 31, 1997. As a percentage of net
sales, selling and administration expenses decreased from 15.7% to 14.6% during
the comparable periods. The overall decrease is in spite of the GSCP management
fee as well as general inflationary increases throughout the Company.
Additionally, the decrease in selling and administration, as a percentage of net
sales, reflects the impact of cost controls.
Research and Development - Research and development expenses during the quarter
ended August 31, 1997 were essentially flat versus the comparable period of
1996. As a percentage of net sales, research and development expenses increased
from 4.8% to 5.1% during the comparable periods as a result of the overall
decline in net sales.
Income Taxes - The Company's provision for income taxes was $0.1 million for
the quarter ended August 31, 1997. By comparison, the Company's provision for
income taxes as a percentage of income before provision for taxes was 39.5% for
the quarter ended August 31, 1996. The quarterly provision is the result of
adjustments to arrive at an effective tax rate of 31.5% for the six months
ended August 31, 1997. The lower effective tax rate was principally due to the
amortization of nondeductible goodwill (which reduces the level of taxable
loss) and taxes payable in certain foreign jurisdictions.
SIX MONTHS ENDED AUGUST 31, 1997 COMPARED TO SIX MONTHS ENDED AUGUST 31, 1996
Net Sales - Net sales decreased $6.0 million, or 6.2%, from $96.5 million for
the six months ended August 31, 1996 to $90.5 million for the six months ended
August 31, 1997. During the comparable periods, net sales to customers in the
United States decreased $0.4 million, or 1.0%, from $39.2 million to $38.8
million, and net sales to customers outside the United States decreased $5.6
million, or 9.8%, from $57.3 million to $51.7 million. Net intra-segment sales
from the United States to foreign affiliates decreased $2.6 million, or 16.4%,
from $15.9 million to $13.3 million. The overall sales decrease is primarily
attributable to unfavorable movements in dollar/yen and the dollar/mark exchange
rates, which reduced the translated value of foreign currency denominated
profits. Additionally, delays in the introduction of certain new products had an
unfavorable impact. Offsetting this in part were strong sales in Hong Kong, as
well as Gauss and Vega, both domestic entities.
Gross Profit - Gross profit decreased $3.0 million, or 9.9%, from $30.7 million
for the six months ended August 31, 1996 to $27.7 million for the six months
ended August 31, 1997. As a percentage of net sales, gross profit decreased from
31.8% to 30.5% during the comparable periods. The overall decrease in gross
profit is primarily attributable to unfavorable movements in dollar/yen and the
dollar/mark exchange rates, which reduced the translated value of foreign
currency denominated profits. Profit margins were adversely impacted in Japan
and Germany by the higher costs of goods that were produced in the United
States. Additionally, the Company's aggressive pricing strategy, which was
implemented to maintain foreign market position, and the delay in the
introduction of certain new products had unfavorable impacts.
Selling and Administration - Selling and administration expenses decreased by
$0.7 million, or 4.8%, from $15.0 million for the six months ended August 31,
1996 to $14.3 million for the six months ended August 31, 1997. As a percentage
of net sales, selling and administration expenses increased from 15.6% to 15.8%
during the comparable periods. The overall decrease is the result of the
continuing effort to lower expenses and streamline support functions, including
the consolidation of certain selling and administration functions. The decrease
is offset by the GSCP management fee. Additionally, a portion of the increase,
as a percentage of net sales, reflects the overall decline in net sales.
Research and Development - Research and development expenses during the six
months ended August 31, 1997 were essentially flat versus the comparable period
of 1996. As a percentage of net sales, research and development expenses
increased from 5.0% to 5.3% during the comparable periods as a result of the
overall decline in net sales.
Income Taxes - The Company's benefit for income taxes as a percentage of loss
before benefit for taxes was 31.5% for the six months ended August 31, 1997. By
comparison, the Company's provision for income taxes as a percentage of income
before provision for taxes was 39.5% for the six months ended August 31, 1996.
The lower effective rate was principally
12
<PAGE> 14
due to the amortization of nondeductible goodwill (which reduces the level of
taxable loss) and taxes payable in certain foreign jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise primarily from debt service on indebtedness
incurred in connection with the Acquisition and the Notes issuance, working
capital and capital expenditure requirements. The Company incurred substantial
indebtedness in connection with the Acquisition. Prior to the consummation of
the Acquisition, the Company operated as a division of Mark IV and substantially
all of its cash needs were historically funded through interest-free cash
requisitions from the Mark IV.
Principal and interest payments under the Senior Credit Facility and the Notes
represent significant liquidity requirements for the Company. Pursuant to the
Term Loan Facility and after giving effect to the Notes issuance and application
of proceeds therefrom, including the prepayment of $17.0 million with the
proceeds from the Notes issuance, and $5.0 million prepaid on July 11, 1997, the
Company will be required to make principal payments totaling approximately $0.7
million, $1.4 million, $2.2 million, $2.6 million, $3.1 million and $2.9 million
in each of the fiscal years 1998, 1999, 2000, 2001, 2001, 2002 and 2003. In
addition, under the terms of the Senior Credit Facility, the Company will be
required to make mandatory prepayments with (i) the debt portion of any payments
received from Mark IV pursuant to the purchase price adjustment (see Note 1),
(ii) non-ordinary asset sale proceeds, (iii) any additional indebtedness and
equity proceeds (with certain exceptions) and (iv) with 75% of the excess cash
flow of the Company and its subsidiaries for each fiscal year commencing on May
31, 1998 and each May 31 thereafter. Outstanding balances under the Senior
Credit Facility will bear interest at floating rates based upon an interest rate
option selected by the Company; therefore, the Company's financial condition is
and will continue to be affected by changes in the prevailing interest rates.
The Company's investing activities consist mainly of capital expenditures to
maintain facilities, to acquire machines or tooling, to update certain
manufacturing processes and to improve efficiency. Capital expenditures totaled
$1,278,000 for the six months ended August 31, 1997, representing a $600,000
decrease from the six month period ended August 31, 1996. This decrease is due
to the timing of capital spending and is not indicative of the trend for fiscal
1998. Management estimates that total capital spending for fiscal 1998 will be
approximately $5.5 million. This reflects an anticipated increase in the levels
of discretionary spending to increase capacity and initiate operating
efficiencies. Included in this amount, there is approximately $3.3 million that
management estimates is required for maintenance levels of capital expenditures.
The Company's ability to make capital expenditures is subject to certain
restrictions under the Senior Credit Facility.
Net cash provided by operating activities for the six months ended August 31,
1997 was $8.9 million, as compared to net cash provided by operating activities
of $4.0 million for the six months ended August 31, 1996. This overall increase
primarily reflects an enhanced focus on the credit and collection process for
trade receivables, as well as manufacturing and marketing programs focusing on
the reduction of inventory levels. This increase was offset by the decline in
operating income as described above.
The Company relies primarily on internally generated funds and, to the extent
necessary, borrowings under the Revolving Credit Facility and foreign working
capital lines to meet its liquidity needs. Availability under the Revolving
Credit Facility as of August 31, 1997 was $14.5 million and availability under
the foreign working capital lines was $4.5 million. Amounts available under the
Revolving Credit Facility are subject to borrowing base availability and may be
used for working capital and general corporate purposes, including letters of
credit, subject to certain limitations. In addition, the Senior Credit Facility
limits the Company from making acquisitions in an aggregate amount over $7.5
million and incurring significant additional debt to finance acquisitions.
Management believes that cash generated from operations, together with amounts
available under the Revolving Credit Facility and the working capital lines,
will be adequate to meet its debt service and principal payment requirements,
capital expenditure needs and working capital requirements for at least the next
three years. However, no assurance can be given in this regard and working
capital requirements may change. The Company's high degree of leverage could
have important consequences on its future operating performance. In addition,
the Company's ability to service or refinance the Notes and to extend or
refinance the Senior Credit Facility will be subject to future economic
conditions and financial, business and other factors, many of which are beyond
the Company's control.
13
<PAGE> 15
PART II. OTHER INFORMATION
ITEM I LEGAL PROCEEDINGS
From time to time the Company is a party to various legal actions in
the normal course of business. Gulton was sued by a company for
infringement of a U.S. patent that Gulton was using to produce products
unrelated to the business of the Company for a business line that was
transferred out of Gulton prior to the Acquisition. At trial, the
plaintiff was awarded $3,024 in damages. The matter was appealed and
upheld with the issue of calculation of damages remanded to the
District Court. No decision has been made by the District Court on this
issue. The Sellers, which are prosecuting the claim on behalf of
Gulton, have agreed to indemnify the Company fully for any losses or
liabilities arising from this litigation. The Company believes that it
is not currently party to any litigation which, if adversely
determined, would have a material adverse effect on the liquidity or
results of operations of the Company.
Please refer to Item 1, NOTE 7, for further discussion.
ITEM I EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Number Description Page Number
<S> <C> <C>
27 Financial Data Schedule 15
</TABLE>
(b) A report on Form 8-K, filed September 17, 1997, regarding a news
release on September 17, 1997, announcing the appointment of Dan
M. Dantzler to acting Chief Executive Officer.
14
<PAGE> 16
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.
EV INTERNATIONAL, INC.
Date: October 15, 1997 By: /s/ Roger H. Gaines
Roger H. Gaines
Co-Chief Executive Officer &
Vice President
Date: October 15, 1997 By: /s/ Marsha Chapman
Marsha Chapman
Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> AUG-31-1997
<CASH> 11,756
<SECURITIES> 0
<RECEIVABLES> 36,708
<ALLOWANCES> 2,097
<INVENTORY> 48,095
<CURRENT-ASSETS> 109,222
<PP&E> 30,343
<DEPRECIATION> 0
<TOTAL-ASSETS> 209,914
<CURRENT-LIABILITIES> 36,571
<BONDS> 100,000
0
0
<COMMON> 0
<OTHER-SE> 52,130
<TOTAL-LIABILITY-AND-EQUITY> 209,914
<SALES> 90,546
<TOTAL-REVENUES> 90,546
<CGS> 62,889
<TOTAL-COSTS> 85,093
<OTHER-EXPENSES> 430
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,705
<INCOME-PRETAX> (7,244)
<INCOME-TAX> (2,282)
<INCOME-CONTINUING> (4,962)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,962)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
