<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 November 30, 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 January 14, 1998, 110 shares of the Registrant's Common Stock, $0.01 par
value, were outstanding.
<PAGE> 2
EV INTERNATIONAL, INC.
FORM 10-Q
FOR THE NINE MONTHS ENDED NOVEMBER 30, 1997
INDEX
<TABLE>
<CAPTION>
<S> <C>
PART I. Financial Information:
Item 1 Financial Statements
Consolidated Balance Sheets as of November 30, 1997 and February 28, 1997 2
Consolidated Statements of Income for the Three Months Ended
November 30, 1997 and 1996 3
Consolidated Statements of Income for the Nine Months Ended
November 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the Nine Months Ended
November 30, 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
November 30, 1997 February 28, 1997
------------------ -------------------
<S> <C> <C>
Current Assets
Cash $ 8,865 $ 7,044
Accounts receivable, net of allowance 37,514 42,856
for doubtful accounts of $2,198
and 2,203, respectively
Inventories 49,324 51,141
Deferred tax assets 4,950 2,907
Other current assets 5,308 5,019
------------------ -------------------
Total Current Assets 105,961 108,967
Property, Plant and Equipment, net 30,734 31,411
Deferred Financing Costs 5,037 6,216
Cost in Excess of Net Assets Acquired 59,928 60,513
Other Assets 994 1,008
------------------ -------------------
TOTAL ASSETS $ 202,654 $ 208,115
================== ===================
LIABILITIES & STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable $ 16,016 $ 15,250
Current maturities of long-term debt 1,083 1,000
Compensation related liabilities 6,777 6,726
Accrued interest 2,915 581
Income taxes payable 862 997
Other accrued liabilities 7,924 6,875
------------------ -------------------
Total Current Liabilities 35,577 31,429
Long-term debt 111,917 109,000
Deferred Taxes and Other Liabilities 6,570 9,294
----------------- --------------------
Total Liabilities 154,064 149,723
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 (4,877) 841
Cumulative translation adjustment (4,133) (49)
----------------- --------------------
Total Stockholder's Equity 48,590 58,392
================= ====================
TOTAL LIABILITIES & STOCKHOLDER'S EQUITY $ 202,654 $ 208,115
================= ====================
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> (As Restated)
(New Basis (Predecessor Basis
of Accounting) of Accounting)
Three months ended Three months ended
November 30, 1997 November 30, 1996
------------------------- ------------------------
<S> <C> <C>
Net Sales $ 46,270 $ 47,026
Operating Costs:
Cost of products sold 32,777 33,249
Selling and administration 7,477 7,705
Research and development 1,675 1,304
Depreciation and amortization 1,585 1,353
------------------------- ------------------------
Total Operating Costs 43,514 43,611
------------------------- ------------------------
Operating Income 2,756 3,415
Interest Expense 3,398 -
Foreign Exchange Losses 507 -
------------------------- ------------------------
(Loss) Income before taxes (1,149) 3,415
(Benefit) Provision for Income Taxes (393) 1,176
------------------------- ------------------------
Net (Loss) Income $ (756) $ 2,239
========================= ========================
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> (As Restated)
(New Basis (Predecessor Basis
of Accounting) of Accounting)
Nine months ended Nine months ended
November 30, 1997 November 30, 1996
------------------------- ------------------------
<S> <C> <C>
Net Sales $ 136,810 $ 143,529
Operating Costs:
Cost of products sold 95,666 99,076
Selling and administration 21,803 22,748
Research and development 6,442 6,169
Depreciation and amortization 4,696 4,033
------------------------- ------------------------
Total Operating Costs 128,607 132,026
------------------------- ------------------------
Operating Income 8,203 11,503
Interest Expense 10,103 -
Write-off of Deferred Financing Costs 5,556 -
Foreign Exchange Losses 937 -
------------------------- ------------------------
(Loss) Income before taxes (8,393) 11,503
(Benefit) Provision for Income Taxes (2,675) 4,371
------------------------- ------------------------
Net (Loss) Income $ (5,718) $ 7,132
========================= ========================
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> (As Restated)
(New Basis (Predecessor Basis
of Accounting) of Accounting)
Nine months ended Nine months ended
November 30, 1997 November 30, 1996
------------------------ ------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ (5,718) $ 7,132
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization 4,696 4,033
Amortization and write-off of deferred financing fees 5,930 -
Deferred income taxes (4,691) -
Changes in assets and liabilities:
Accounts receivable 3,681 1,389
Inventories (163) 5,406
Other current assets (482) (681)
Accounts payable 1,357 2,055
Compensation related liabilities 311 (160)
Other accrued liabilities 3,553 476
Other, net 490 (1,334)
------------------------ ------------------------
Net cash provided by operating activities 8,963 18,316
Cash flows from investing activities:
Acquisition costs (1,140) -
Purchases of property and equipment (4,101) (3,441)
------------------------ ------------------------
Net cash used in investing activities (5,241) (3,441)
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 - (14,875)
------------------------ ------------------------
Net cash provided by financing activities (1,751) (14,875)
Effect of exchange rates on cash (150) -
------------------------ ------------------------
Net increase in cash 1,821 -
Cash at beginning of period 7,044 -
------------------------ ------------------------
Cash at end of period $ 8,865 $ -
======================== ========================
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 the nine months ended November 30, 1996 have been restated to appropriately
reflect certain adjustments made by the Company in the fourth quarter - fiscal
1997, which pertain to the nine months ended November 30, 1996. 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 $7.5
million in the nine month period ended November 30, 1997. The Company also made
cash income tax payments of approximately $1.2 million in the nine month period
ended November 30, 1997.
NOTE 3: INVENTORIES
Inventories consist of the following as of November 30, 1997 and February 28,
1997, respectively:
<TABLE>
<S> <C> <C>
Purchased materials and parts $19,125 $19,830
Work in process 6,851 7,104
Finished goods 23,348 24,207
------- -------
$49,324 $51,141
======= =======
</TABLE>
7
<PAGE> 9
NOTE 4: LONG-TERM DEBT AND FINANCING ARRANGEMENTS
Long-term debt consists of the following as of November 30, 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.
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 nine months ended
November 30, 1997 and 1996. For the period ended November 30, 1997, amounts are
presented as if the Notes had been issued on March 1, 1997. For the period ended
November 30, 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 nine months ended November 30,
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
Nine Months Ended Nine Months Ended
11/30/97 11/30/96
----------------- -----------------
<S> <C> <C>
Revenue $ 136,810 $ 143,529
Operating Income 8,203 10,562
Net (Loss) Income (1,686) 333
EBITDA 11,962 14,973
</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 nine months ended November 30,:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net sales to customers:
North America $ 89,304 $ 91,808
Europe 48,195 53,234
Asia and other foreign 28,730 31,420
Eliminations (29,419) (32,933)
---------- ---------
Total net sales to customers $ 136,810 $143,529
Operating income:
North America $ 6,828 $ 7,556
Europe 459 1,237
Asia and other foreign 916 2,710
--------- ---------
Total operating income $ 8,203 $ 11,503
</TABLE>
9
<PAGE> 11
<TABLE>
<S> <C>
Identifiable assets:
North America 137,411
Europe 40,385
Asia and other foreign 24,858
----------
Total identifiable assets 202,654
</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 nine
month periods ended November 30, 1997 and 1996, export sales from the United
States to unaffiliated customers were approximately $7,689 and $6,477,
respectively,
NOTE 7: SUBSEQUENT EVENT
On January 5, 1998, the Company and Telex Communications, Inc. announced the
intention to combine the companies in late January 1998. Both companies are
controlled by affiliates of Greenwich Street Capital Partners, Inc.
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 nine months ended November 30, 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 nine months ended November 30, 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 nine months ended
November 30, November 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 70.8% 70.7% 69.9% 69.0%
------------- ------------- ------------- -------------
Gross profit 29.2% 29.3% 30.1% 31.0%
Selling and administration 16.2% 16.4% 15.9% 15.8%
Research and development 3.6% 2.8% 4.7% 4.3%
Depreciation and amortization 3.4% 2.9% 3.4% 2.8%
------------- ------------- ------------- -------------
Operating income 6.0% 7.2% 6.1% 8.1%
Interest expense 7.3% -% 7.4% -%
Write-off of deferred financing costs -% -% 4.1% -%
Other income 1.1% -% 0.7% -%
------------- ------------- ------------- -------------
Income before income taxes (2.4%) 7.2% (6.1%) 8.1%
Income tax provision (benefit) (0.8%) 2.4% (2.0%) 3.1%
------------- ------------- ------------- -------------
Net income (loss) (1.6%) 4.8% (4.1%) 5.0%
============= ============= ============= =============
EBITDA (a) 8.3% 10.1% 8.3% 10.8%
============= ============= ============= =============
</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 NOVEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
NOVEMBER 30, 1996
Net Sales - Net sales decreased $0.7 million, or 1.5%, from $47.0 million for
the quarter ended November 30, 1996 to $46.3 million for the quarter ended
November 30, 1997. During the comparable period, net sales to customers in the
United States increased $1.4 million, or 6.9%, from $20.5 million to $21.9
million. Net sales to customers outside the United States decreased $3.0
million, or 10.9%, from $27.3 million to $24.3 million. The overall sales
decrease is primarily attributable to unfavorable movements in Asian currency
exchange rates, which reduced the translated value of foreign currency
denominated prices. Additionally, a general downturn in Asian Markets
contributed to the decrease. Improvement in net sales in Europe and
domestically partially offset these conditions.
11
<PAGE> 13
Gross Profit - Gross profit decreased $0.3 million, or 2.2%, from $13.8 million
for the quarter ended November 30, 1996 to $13.5 million for the quarter ended
November 30, 1997. As a percentage of net sales, gross profit increased from
31.5% to 31.8% during the comparable periods. The overall increase in gross
profit is primarily attributable to reductions in manufacturing costs and the
introduction of higher margin products. The improvement realized was partially
offset by unfavorable movements in Asian currency, the Company's aggressive
pricing strategy to maintain position in foreign markets, and unfavorable
inventory absorption costs resulting from reduction in inventory investment.
Selling and Administration - Selling and administration expenses decreased by
$0.2 million, or 11.2%, from $7.7 million for the quarter ended November 30,
1996 to $7.5 million for the quarter ended November 30, 1997. As a percentage
of net sales, selling and administration expenses decreased from 16.4% to
16.2% during the comparable period. The decrease is primarily attributable to
the Company's continued cost control efforts.
Research and Development - Research and development expenses increased by $0.4
million, or 30.8%, from $1.3 million for the quarter ended November 30, 1996 to
$1.7 million for the quarter ended November 30, 1997. As a percentage of net
sales, research and development expenses increased from 2.8% to 4.8% during the
comparable periods. The overall increase in research and development is
primarily to an adjustment recorded in the quarter ended November 30, 1996. To
adjust for the utilization of research and development resources by other
expense catagories.
Income Taxes - The Company's benefit for income taxes was $0.4 million, or 34.2%
of income before provision for taxes, for the quarter ended November 30, 1997.
By comparison, the Company's provision for income taxes was $1.2 million, or
34.4% of income before provision for taxes.
NINE MONTHS ENDED NOVEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED NOVEMBER 30,
1996
Net Sales - Net sales decreased $6.7 million, or 4.7%, from $143.5 million for
the nine months ended November 30, 1996 to $136.8 million for the nine months
ended November 30, 1997. During the comparable periods, net sales to customers
in the United States increased $1.9 million, or 3.0%, from $61.8 million to
$63.7 million, and net sales to customers outside the United States decreased
$8.7 million, or 10.6%, from $81.8 million to $73.1 million. The overall sales
decrease is primarily attributable to unfavorable movements in Asian
currencies and the dollar/mark exchange rate, 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 improvement in domestic EV sales and strong sales of Vega
products, both domestic entities.
Gross Profit - Gross profit decreased $3.3 million, or 7.4%, from $44.4 million
for the nine months ended November 30, 1996 to $41.1 million for the nine months
ended November 30, 1997. As a percentage of net sales, gross profit decreased
from 31.0% to 30.1% 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 and United Kingdom. Additional contributors to the decline were the
Company's aggressive pricing strategy employed to maintain foreign market
position, and the delay in the introduction of certain new products.
Selling and Administration - Selling and administration expenses decreased by
$0.9 million, or 3.9%, from $22.7 million for the nine months ended November 30,
1996 to $21.8 million for the nine months ended November 30, 1997. As a
percentage of net sales, selling and administration expenses increased from
15.8% to 15.9% during the comparable periods. The overall decrease is the result
of the continuing effort to lower expenses and streamline support 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 increased by $0.2
million, or 3.2% from $6.2 million for the nine months ended November 30, 1996
to $6.4 million for the nine months ended November 30, 1997. As a percentage of
net sales, research and development expenses increased from 4.3% to 5.1% during
the comparable periods.
Income Taxes - The Company's benefit for income taxes as a percentage of loss
before benefit for taxes was 31.9% for the nine months ended November 30. By
comparison, the Company's provision for income taxes as a percentage of income
before provision for taxes was 38.0% for the nine months ended November 30,
1996. The lower effective rate was principally due to the amortization of
nondeductible goodwill (which reduces the level of taxable loss) and taxes
payable in certain foreign jurisdictions.
12
<PAGE> 14
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
$4.1 million for the nine months ended November 30, 1997, representing a
$0.6 million increase from the nine month period ended November 30, 1996.
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 nine months ended November 30,
1997 was $8.9 million, as compared to net cash provided by operating activities
of $18.3 million for the nine months ended November 30, 1996.
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 November 30, 1997 was $14.3 million and availability under
the foreign working capital lines was $3.3 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.
A report of Form 8-K, filed January 6, 1998, regarding a news
release on January 5, 1998, announcing the Company's intent to
merge with Tenex Communications, Inc.
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: January 14, 1998 By: /s/ Roger H. Gaines
Roger H. Gaines
Co-Chief Executive Officer &
Vice President
Date: January 14, 1998 By: /s/ Marsha Chapman
Marsha Chapman
Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> NOV-30-1997
<CASH> 8,865
<SECURITIES> 0
<RECEIVABLES> 37,514
<ALLOWANCES> 2,198
<INVENTORY> 49,324
<CURRENT-ASSETS> 105,961
<PP&E> 30,734
<DEPRECIATION> 0
<TOTAL-ASSETS> 202,654
<CURRENT-LIABILITIES> 35,577
<BONDS> 100,000
0
0
<COMMON> 0
<OTHER-SE> 48,590
<TOTAL-LIABILITY-AND-EQUITY> 202,654
<SALES> 136,810
<TOTAL-REVENUES> 136,810
<CGS> 95,666
<TOTAL-COSTS> 128,607
<OTHER-EXPENSES> 937
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,103
<INCOME-PRETAX> (8,393)
<INCOME-TAX> (2,675)
<INCOME-CONTINUING> (5,718)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,718)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
