<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY - PERIOD
ENDED September 30, 2000 OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROM ________TO __________
Commission file number 333-40076
Knowles Electronics Holdings, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 36-2270096
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1151 Maplewood Drive
Itasca, Illinois 60143
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code:
(630) 250-5100
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Operations for the three and nine months
ended September 30, 2000 and 1999 ................................. 1
Consolidated Balance Sheets as of September 30, 2000 and 1999 ... 2
Consolidated Statements of Cash Flows for the three and nine months
ended September 30, 2000 and 1999 ................................. 3
Notes to the Consolidated Financial Statements .................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .......................................... 13
Item 3. Qualitative and Quantitative Disclosures about Market Risk ..... 21
PART II - OTHER INFORMATION
None
</TABLE>
<PAGE> 3
KNOWLES ELECTRONICS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
--------- --------- --------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales $ 56,375 $ 54,359 $ 176,948 $ 168,471
Cost of sales 32,653 33,764 101,773 103,026
--------- --------- --------- ---------
Gross margin 23,722 20,595 75,175 65,445
Selling expenses 3,146 2,865 9,153 8,843
General and administrative expenses 6,133 5,702 18,938 17,350
Research and development expenses 2,360 2,470 7,163 7,600
Recapitalization expenses -- -- -- 10,674
Restructuring expenses (296) -- 19,798 --
--------- --------- --------- ---------
Operating Income 12,379 9,558 20,123 20,978
Other income (expense):
Interest income 171 143 717 639
Interest expense (10,662) (12,837) (32,283) (12,866)
Miscellaneous, net -- (233) -- (314)
--------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes 1,888 (3,369) (11,443) 8,437
Income taxes (3,226) (1,685) (5,378) 304
--------- --------- --------- ---------
Income (loss) from continuing operations (1,338) (5,054) (16,821) 8,741
Income from discontinued operations less
applicable income taxes of $39 for nine
months ended September, 1999 -- -- -- 2,556
--------- --------- --------- ---------
Net income (loss) $ (1,338) $ (5,054) $ (16,821) $ 11,297
========= ========= ========= =========
</TABLE>
<PAGE> 4
KNOWLES ELECTRONICS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30 DECEMBER 31
2000 1999
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 25,473 $ 22,332
Accounts receivable 42,344 43,412
Inventories 42,603 45,906
Prepaid expenses and other 3,386 3,414
------------ -----------
Total current assets 113,806 115,064
Property, plant and equipment, at cost:
Land 6,950 6,975
Building and improvements 26,793 27,840
Machinery and equipment 65,150 73,298
Furniture and fixtures 22,668 22,082
Construction in progress 8,199 3,393
------------ -----------
Subtotal 129,760 133,588
Accumulated depreciation (74,962) (74,943)
------------ -----------
Net 54,798 58,645
Patents, trademarks and licenses, net 2,213 244
Other assets, net 2,829 1,756
Deferred finance costs, net 9,928 10,797
------------ -----------
Total assets $ 183,574 $ 186,506
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 5,761 $ 8,237
Accrued compensation and employee benefits 8,827 7,708
Accrued interest payable 13,384 8,370
Accrued warranty and rebates 9,393 8,192
Accrued restructuring costs 13,978 --
Accrued recapitalization costs 1,031 2,886
Other liabilities 6,795 3,694
Income taxes 3,256 1,541
Deferred income taxes 2,399 3,099
Current portion of notes payable 8,750 3,250
------------ -----------
Total current liabilities 73,574 46,977
Accrued pension liability 11,363 9,231
Other noncurrent liabilities 1,196 2,024
Notes payable 341,604 346,884
Preferred stock mandatorily redeemable in 2019 including
accumulating dividends of: $9,250 December, 1999;
$23,588 September, 2000 208,588 194,250
Stockholders' equity (deficit):
Common stock, Class A, $0.001 par value, 1,052,632 shares
authorized, outstanding: 981,667 September, 2000;
971,667 December, 1999 -- --
Common stock, Class B, $0.001 par value, 52,632 shares
authorized, none ever issued -- --
Capital in excess of par value 17,213 15,223
Retained earnings (accumulated deficit) (464,025) (424,550)
Accumulated other comprehensive income -
translation adjustment (5,939) (3,533)
------------ -----------
Total stockholders' equity (deficit) (452,751) (412,860)
------------ -----------
Total liabilities and stockholders' equity (deficit) $ 183,574 $ 186,506
============ ===========
</TABLE>
<PAGE> 5
KNOWLES ELECTRONICS HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDING NINE MONTHS ENDING
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
--------- --------- --------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Income (loss) from continuing operations $( 1,339) $( 5,050) $( 16,821) $ 8,741
Adjustments to reconcile income (loss) from
continuing operations to net cash provided
by operating activities:
Depreciation and amortization 2,806 3,234 9,031 9,460
Restructuring costs (296) -- 19,798 --
Amortization of deferred financing fees
and debt discount 690 4,043 1,981 4,043
Inventory obsolescence provision 55 -- 471 2,956
Write off of fixed assets 1,310 -- 1,310 --
Change in assets and liabilities:
Accounts receivable (68) 3,288 1,068 1,065
Inventories 2,665 (824) 2,832 (2,902)
Other current assets 1,490 (5,678) (1,014) (5,561)
Deferred income taxes -- 2,205 (700) --
Accounts payable (2,644) (679) (2,476) (1,042)
Accrued restructuring costs (4,002) -- (5,820) --
Accrued interest payable 5,125 3,337 5,014 3,337
Other current liabilities 2,564 (8,022) 4,256 (688)
Other noncurrent liabilities (1,466) 1,686 304 (5,982)
Income taxes payable 530 (457) 1,715 (2,143)
Net cash provided by discontinued operating activities -- -- -- 30,048
--------- --------- --------- ---------
Net cash provided by operating activities 7,420 (2,917) 20,949 41,332
INVESTING ACTIVITIES
Purchases of property, plant, and equipment, net (3,170) (2,387) (10,618) (10,135)
Proceeds from sales of equipment 513 -- 513 --
--------- --------- --------- ---------
Net cash used in investing activities (2,657) (2,387) (10,105) (10,135)
FINANCING ACTIVITIES
Dividends paid -- -- -- (24,811)
Issuance of preferred stock and common stock -- -- 700 190,594
Costs associated with equity transaction -- 586 -- (11,042)
Debt proceeds (payments) -- -- -- 350,000
Purchase of treasury stock -- -- -- (508,315)
Price adjustment on previously purchased treasury stock -- -- (8,316) --
Payment of accrued deferred finance fees -- (1,076) -- (10,246)
Costs associated with debt -- -- (892) --
Repurchase common stock (50) -- (400) --
--------- --------- --------- ---------
Net cash used in financing activities (50) (490) (8,908) (13,820)
Effect of exchange rate changes on cash 1,313 154 1,205 (226)
--------- --------- --------- ---------
Net increase in cash and cash equivalents 6,026 (5,640) 3,141 17,151
Cash and cash equivalents at beginning of period 19,447 28,385 22,332 5,594
--------- --------- --------- ---------
Cash and cash equivalents at end of period $ 25,473 $ 22,745 $ 25,473 $ 22,745
========= ========= ========= =========
</TABLE>
<PAGE> 6
Knowles Electronics Holdings, Inc.
Notes to Consolidated Financial Statements
(In Thousands, Except Share Data)
September 30, 2000 and 1999
(unaudited)
1. BASIS OF RECAPITALIZATION AND PRESENTATION
On June 23, 1999, the Company entered into a recapitalization agreement with Key
Acquisition L.L.C., (the Investor) and the preexisting common stockholders' of
the Company. The recapitalization transaction (the Recapitalization) closed on
June 30, 1999.
On June 29, 1999 the Company distributed the equipment financing business and
certain real estate of the Company to certain preexisting stockholders in
exchange for 10% of the common stock. On June 30, 1999 the Company used the
proceeds from the sale of the preferred and common stock in addition to funds
obtained from a senior credit facility and bridge notes to finance the purchase
of 90% of the remaining 90% of the preexisting stockholders' common shares.
The Recapitalization has been treated as a leveraged recapitalization in which
the issuance of the debt has been accounted for as a financing transaction, the
sales and purchases of the Company's stock have been accounted for as capital
transactions at amounts paid or received, and no changes were made to the
carrying values of the Company's assets and liabilities.
The amount payable to our preexisting stockholders for the repurchase of their
common stock in the Recapitalization was subject to a post-closing adjustment.
As a result, the Company paid the preexisting stockholders approximately $8.3
million, plus $0.7 million in interest. The price adjustment was recorded as a
reduction to stockholders' equity.
During the nine months ended September 30, 2000 and 1999, total comprehensive
income (loss) amounted to ($19,227) and $9,951, respectively. For the three
months ended September 30, 2000 and 1999, total comprehensive (loss) amounted to
($2,525) and ($4,442), respectively. The difference between net income (loss)
and comprehensive income (loss) is related primarily to the Company's foreign
currency translation.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of our management, all adjustments,
consisting of normal recurring accruals and an accrual for Restructuring
expenses described in Note 5, necessary for a fair presentation have been
included. Certain prior year amounts have been reclassified
<PAGE> 7
to conform to current year presentation. The results for the period ended
September 30, 2000 do not necessarily indicate the results that may be expected
for the full year ending December 31, 2000. For further information, refer to
the Company's consolidated financial statements and notes thereto on the
Company's Form S-4 Registration Statement dated September 1, 2000.
2. INVENTORY
Inventories are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------- -------
<S> <C> <C>
Raw materials $30,872 $29,013
Work in process 11,000 15,829
Finished goods 12,788 15,537
------- -------
54,660 60,379
Less allowances for:
Adjustment to LIFO 1,277 2,362
Obsolescence and net realizable value 10,780 12,111
------- -------
$42,603 $45,906
======= =======
</TABLE>
Approximately 41% and 52% of inventory is valued on the LIFO method at September
30, 2000 and December 31, 1999 respectively.
3. NOTES PAYABLE
As part of the Recapitalization transaction, the Company entered into a senior
credit agreement dated June 28, 1999 and amended and restated as of July 21,
1999, December 23, 1999 and April 10, 2000, with certain lenders ("Senior Credit
Agreement"). The credit agreement consists of $250,000, which provides for
revolving loans of $50,000 (Revolving Credit Facility) for a period of seven
years, a Term A Facility of $50,000 (Term A Facility), which has a maturity of
seven years, and a Term B Facility of $150,000 (Term B Facility), which has a
maturity of eight years. The Term A Facility and the Revolving Credit facility
bear interest, at the Company's option, at either (1) one-, two-, three-, or six
month LIBOR plus 2.50% or (2) the greater of the prime rate, a base certificate
of deposit rate plus 1.00%, or the federal funds effective rate plus 0.50% (the
Alternate Base Rate), in each case plus an initial margin of 1.50%. The Term B
Facility bears interest, at the Company's option, at either (1) one-, two-,
three-, or six-month LIBOR plus 3.00% or (2) Alternate Base Rate plus an initial
margin on 2.00%. The amendment to the Senior Credit Agreement dated April 10,
2000, increased the interest rate spread for each of the Term A Facility,
Revolving Credit Facility and Term B
<PAGE> 8
Facility by 0.25%. At September 30, 2000, the weighted average interest rate was
9.5% for the Term A Facility and 9.875% for the Term B Facility.
The balance under the Term A Facility, Term B Facility and the Senior
Subordinated Notes ("Notes") is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------- ---------
<S> <C> <C>
Term A facility $ 50,000 $ 50,000
Term B facility 150,000 150,000
Senior Subordinated Notes 153,200 153,200
Discount on Senior Subordinated Notes (2,846) (3,066)
--------- ---------
350,354 350,134
Less: Current portion 8,750 3,250
--------- ---------
Total Long-term notes payable $ 341,604 $ 346,884
========= =========
</TABLE>
The Notes were issued in a private placement on October 1, 1999 and are due
October 15, 2009 with interest payable semiannually at 13 1/8% commencing April
15, 2000. The Company subsequently exchanged all of the privately placed Notes
for a like amount of identical Notes registered with the Securities and Exchange
Commission on October 20, 2000. The Notes rank equally with all other unsecured
senior subordinated indebtedness of the Company. The Notes are junior to all of
the Company's current and future indebtedness, except indebtedness which is
expressly not senior to the Notes.
The Company's Senior Credit Agreement requires that the Company comply with
certain covenants and restrictions, including specific financial ratios that
must be maintained. Certain covenants and restrictions were modified in
accordance with the amendment to the Senior Credit Agreement dated April 10,
2000 ('the Amendment") whereby the Company is in compliance with all its debt
covenants through the date of the Amendment. As security for the obligations
under the Senior Credit Agreement the Company has pledged all of the shares of
its U.S. subsidiaries and 65% of the shares of its non-U.S. subsidiaries and has
granted the lenders a security interest in substantially all of its assets and
the assets of its U.S. subsidiaries.
The Notes are unconditionally guaranteed, on a joint and several basis, by the
following wholly owned U.S. subsidiaries of the Company: Knowles Electronics
LLC, Knowles Intermediate Holding, Inc., Emkay Innovative Products, Inc.,
Knowles Manufacturing Ltd., and Synchro-Start Products, Inc. The following
tables present summarized balance
<PAGE> 9
sheet information of the Company as of September 30, 2000 and December 31, 1999,
and summarized income statement information for the three and nine months ended
September 30, 2000 and 1999. The column labeled "Parent Company" represents the
holding company for each of the Company's direct subsidiaries which are
guarantors of the Notes, all of which are wholly owned by the parent company;
and the column labeled "Nonguarantors" represents wholly owned subsidiaries of
the Guarantors which are not guarantors of the Notes. Pursuant to a contribution
agreement effective August 30, 1999, Knowles Electronics, Inc., recognized in
prior periods as the parent company, contributed substantially all of its
operating assets and liabilities (other than the capital stock of Knowles
Intermediate Holding Company, Inc. and certain foreign subsidiaries and Knowles
Electronics, Inc.'s liabilities under the Senior Credit Agreement and
Subordinated Notes) to Knowles Electronics, LLC, a newly created Delaware
limited liability company. As a result of this reorganization, Knowles
Electronics, Inc., which changed its name to Knowles Electronics Holdings, Inc.,
is now a holding company that does not conduct any significant operations.
Therefore, the September 30, 2000 presentation of summarized income statement
information reflects the current structure which is not comparable to the
September 30, 1999 presentation as some of the amounts included in the Parent
Company column in 1999 are now included in the Guarantors column in 2000. The
Company believes that separate financial statements and other disclosures
regarding the Guarantors, except as otherwise required under Regulation S-X, are
not material to investors.
Summarized information as of September 30, 2000 and December 31, 1999 and for
the three and nine months ended September 30, 2000 and 1999 is as follows:
<PAGE> 10
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
----------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Continuing operations:
Current assets $ 20,565 $ 63,726 $ 91,170 $ (61,655) $ 113,806
Investments in and advances
to subsidiaries 96,317 (31,371) 6,815 (71,761) --
Noncurrent assets 9,928 26,963 34,704 (1,827) 69,768
----------------------------------------------------------------------
$ 126,810 $ 59,318 $ 132,689 $ (135,243) $ 183,574
======================================================================
LIABILITIES AND EQUITY
Current liabilities $ 22,618 $ 52,451 $ 59,594 $( 61,089) $ 73,574
Noncurrent liabilities 550,192 9,965 2,924 (330) 562,751
Investments by and advances
from parent 47,479 (29,292) 55,692 (73,879) --
Stockholders' equity (deficit) (493,479) 26,194 14,479 55 (452,751)
----------------------------------------------------------------------
$ 126,810 $ 59,318 $ 132,689 $(135,243) $ 183,574
======================================================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Continuing operations:
Current assets $ 6,224 $ 68,373 $ 89,773 $ (49,306) $ 115,064
Investments in and advances
to subsidiaries 96,318 (38,802) -- (57,516) --
Noncurrent assets 10,798 28,908 32,203 (467) 71,442
----------------------------------------------------------------------
$ 113,340 $ 58,479 $ 121,976 $ (107,289) $ 186,506
======================================================================
LIABILITIES AND EQUITY
Current liabilities $ 14,326 $ 42,018 $ 37,624 $ (46,991) $ 46,977
Noncurrent liabilities 541,135 7,252 4,182 (180) 552,389
Investments by and advances
from parent 2,552 1,698 21,137 (25,387) --
Stockholders' equity (deficit) (444,673) 7,511 59,033 (34,731) (412,860)
----------------------------------------------------------------------
$ 113,340 $ 58,479 $ 121,976 $ (107,289) $ 186,506
======================================================================
</TABLE>
<PAGE> 11
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 2000
----------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ - $ 46,088 $ 51,643 $ (41,356) $ 56,375
Cost and expenses - (38,873) (51,760) 43,411 (47,222)
Net interest (expense) income (10,391) 225 (282) (43) (10,491)
----------------------------------------------------------------------
Net income (loss) $ (10,391) $ 7,440 $ (399) $ 2,012 $ (1,338)
======================================================================
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1999
----------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 31,797 $ 8,256 $ 39,992 $ (25,686) $ 54,359
Cost and expenses (31,779) (7,890) (37,466) 30,416 (46,719)
Net interest (expense) income (8,634) 244 (241) (4,063) (12,694)
----------------------------------------------------------------------
Net income (loss)
$ (8,616) $ 610 $ 2,285 $ 667 $ (5,054)
======================================================================
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2000
----------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ - $ 133,590 $ 148,923 $ (105,565) $ 176,948
Cost and expenses (102) (118,357) (150,059) 106,315 (162,203)
Net interest (expense) income (31,850) 1,173 (764) (125) (31,566)
----------------------------------------------------------------------
Net income (loss) $ (31,952) $ 16,406 $ (1,900) $ 625 $ (16,821)
======================================================================
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
----------------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 102,039 $ 25,280 $ 125,569 $ (84,417) $ 168,471
Cost and expenses (94,017) (24,607) (116,950) 88,071 (147,503)
Net interest (expense) income (7,586) 111 (659) (4,093) (12,227)
----------------------------------------------------------------------
Income (loss) from continuing
operations 436 784 7,960 (439) 8,741
Income from discontinued
operations 2,556 - - - 2,556
----------------------------------------------------------------------
Net income (loss) $ 2,992 $ 784 $ 7,960 $ (439) $ 11,297
======================================================================
</TABLE>
<PAGE> 12
4. SEGMENTS AND GEOGRAPHICAL INFORMATION
The Company's continuing business consists of three operating segments: hearing
aid components, acoustic and infrared technology, and automotive components.
These three operating segments were determined based on the applications and
markets for the Company's products.
The hearing aid components operating segment utilizes the Company's acoustic
technologies to design, manufacture, and market transducers and other components
for hearing aids. The acoustic and infrared technology operating segment
utilizes the Company's acoustic and infrared technologies to design,
manufacture, and market products for high growth markets, including voice
recognition, computer telephony integration and video conferencing. The
automotive component operating segment designs, manufactures, and markets diesel
engine solenoids, electronic governors, and position sensors primarily for use
in automobiles and trucks.
The Company uses the following financial information presented below to assess
performance and make resource allocation decisions:
<TABLE>
<CAPTION>
ACOUSTIC AND
HEARING AID INFRARED AUTOMOTIVE
COMPONENTS TECHNOLOGY COMPONENTS TOTAL
---------- ---------- ---------- -----
<S> <C> <C> <C> <C>
THREE MONTHS ENDING SEPTEMBER 30, 2000
Revenues from external customers $ 34,096 $ 8,389 $ 13,890 $ 56,375
Operating income (loss) 12,953 (191) 288 13,050
Operating income (loss) excluding
restructuring expenses 12,775 (195) 174 12,754
THREE MONTHS ENDING SEPTEMBER 30, 1999
Revenues from external customers $ 32,056 $ 7,738 $ 14,565 $ 54,359
Operating income (loss) 9,406 1,137 (467) 10,076
NINE MONTHS ENDING SEPTEMBER 30, 2000
Revenues from external customers $ 105,976 $ 24,034 $ 46,938 $ 176,948
Operating income (loss) 29,181 729 (3,250) 26,660
Operating income excluding
restructuring expenses 38,990 844 3,187 43,021
NINE MONTHS ENDING SEPTEMBER 30, 1999
Revenues from external customers $ 98,901 $ 22,424 $ 47,146 $ 168,471
Operating income 31,624 1,713 381 33,718
</TABLE>
<PAGE> 13
The hearing aid components operating segment and the acoustic and infrared
technology operating segment utilize the same assets. The total assets of the
hearing aid components operating segment and the acoustic and infrared
technology operating segment as of September 30, 2000 and December 31, 1999 were
$108,215 and $116,177, respectively. The Company uses the specific
identification of costs and expenses. However, due to the joint use of assets
between the hearing aid components operating segment and the acoustic and
infrared technology operating segment, allocations of various costs and expenses
between these two segments are also made based on their respective revenues. The
total assets of the automotive components business unit were $44,866 and $47,009
at September 30, 2000 and December 31, 1999, respectively.
The following is a reconciliation of segment operating income to the Company's
consolidated totals:
<TABLE>
<CAPTION>
THREE MONTHS ENDING NINE MONTHS ENDING
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
PROFIT OR LOSS
Total operating income for reportable segments $ 13,050 $ 10,076 $ 26,660 $ 33,718
Unallocated amount - corporate overhead (671) (518) (6,537) (2,066)
Recapitalization expenses - - - (10,674)
---------------------- ----------------------
Total consolidated operating income 12,379 9,558 20,123 20,978
Other expense (10,491) (12,927) (31,566) (12,541)
---------------------- ----------------------
Income (loss) from continuing operations
before income taxes $ 1,888 $ (3,369) $ (11,443) $ 8,437
====================== ======================
GEOGRAPHIC INFORMATION
Revenues (based on billing location of product
shipment)
United States $ 31,508 $ 31,972 $ 99,390 $ 99,700
Germany 5,122 6,819 18,757 22,994
Other geographic areas 19,745 15,568 58,801 45,777
---------------------- ----------------------
$ 56,375 $ 54,359 $ 176,948 $ 168,471
====================== ======================
</TABLE>
5. RESTRUCTURING EXPENSES
The Company announced a major restructuring in March 2000, resulting in a first
quarter charge of $20.1 million. Under the restructuring plan, the Company is
consolidating its worldwide manufacturing operations by ending production at
five manufacturing facilities and either outsourcing component production or
moving final assembly to lower cost locations in Malaysia, China and Hungary.
The restructuring charge consists almost entirely of severance payments to
terminated employees and outplacement expenses. Through September 30, 2000, 514
positions have been eliminated of the 1,047 total positions that will be
eliminated in the restructuring and $5.7 million has been spent on severance
and outplacement costs of the $20.1 million that was accrued.
<PAGE> 14
At the five facilities where production is being eliminated, the number of
positions being eliminated at each facility and the final production dates at
each facility are as follows: (1) Burgess Hill, United Kingdom; 148 positions;
June 2000, (2) Itasca, Illinois; 248 positions; September 2000, (3) Taipei,
Taiwan; 216 positions; March 2001, (4) Rolling Meadows, Illinois; 26 positions;
March 2001, (5) Hohenkirchen, Germany; 270 positions; September 2001. Through
September 2001, these actions will reduce our global workforce by about 20%.
6. RECENTLY ISSUED ACCOUNTING GUIDANCE
In December 1999 the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which among other guidance clarifies certain conditions to be met
in order to recognize revenue. The Company does not expect the impact of this
new pronouncement to be material. The effect of any change will be reflected by
a cumulative effect of an accounting change as of January 1, 2000. In May 2000,
the SEC deferred the required effective date for implementation of SAB No. 101
until the fourth quarter of 2000.
<PAGE> 15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
CONSOLIDATED RESULTS OF OPERATIONS
The table below shows the principal line items from our consolidated income
statements, as a percentage of our net sales, for each of the periods discussed
below.
CONSOLIDATED INCOME STATEMENT LINE ITEMS - PERCENT OF NET SALES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 2000 1999 2000
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 62.1% 57.9% 61.2% 57.5%
Selling and administrative expense 15.8% 16.5% 15.5% 15.9%
Recapitalization expense - - 6.3% -
Restructuring expense - -0.5% - 11.2%
Research and development 4.5% 4.2% 4.5% 4.0%
----- ----- ----- -----
Operating income 17.6% 22.0% 12.5% 11.4%
EBITDA 23.5% 26.9% 18.1% 16.5%
</TABLE>
Operating income and EBITDA, as a percentage of net sales, as reported, were
22.0% and 26.9%, respectively, for the three months ending September 30, 2000.
Operating income and EBITDA, as a percentage of net sales, excluding the
restructuring charges announced in March 2000, were 21.5% and 26.4%,
respectively, for the three months ending September 30, 2000. Operating
income and EBITDA, as a percentage of net sales, as reported, were 11.4% and
16.5%, respectively, for the nine months ended September 30, 2000. Operating
income and EBITDA, as a percentage of net sales, excluding expenses relating to
our restructuring announced in March 2000, were 22.6% and 27.7%, respectively,
for the nine months ended September 30, 2000.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
The following table sets forth net sales by segment, and segment net sales as a
percent of total net sales.
<PAGE> 16
<TABLE>
<CAPTION>
NET SALES PERCENT OF TOTAL SALES
-------------------- ----------------------
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------
Segment 1999 2000 1999 2000
------- -------- -------- -------- --------
(in millions, except percentages)
<S> <C> <C> <C> <C>
KE $ 32.1 $ 34.1 59.0% 60.5%
Emkay 7.7 8.4 14.2% 14.9%
Automotive Components 14.6 13.9 26.8% 24.6%
-------- -------- ----- -----
Total $ 54.4 $ 56.4 100.0% 100.0%
======== ======== ===== =====
</TABLE>
Overall, net sales increased 4% in the third quarter of 2000 compared to the
third quarter of 1999. KE's net sales increased 6% in the third quarter of this
year as compared to the same period last year. The third quarter's growth was
much weaker than the first and second quarters, as a result of normal seasonal
variations and not a change in overall market trends. Within KE, sales of
Deltek non-transducer products increased at a higher rate than the division,
but on a much smaller sales base. Transducer unit volume increased about 10% in
the third quarter of this year, but reduced pricing offset approximately half
the unit volume increase. Emkay's net sales increased 8% in the third quarter
of 2000 as compared to the same period last year. Component product sales
accounted for the entire Emkay increase. Infrared product sales increased,
notwithstanding the unfavorable U.S. dollar to German Deutschemark exchange
rate changes year-over-year, and finished goods product sales declined an
offsetting amount compared with the same period last year. Automotive
Components' net sales declined by 5% in the third quarter of 2000 as compared
to the third quarter of 1999. SSPI diesel solenoid net sales increased 10% in
the quarter. Ruf net sales decreased 21% in the quarter, primarily due to
unfavorable U.S. dollar to German Deutschemark exchange rate changes. However,
Ruf's net sales declined 4% on a constant currency basis, due to lower sales of
a specific diesel throttle position sensor to Ruf's largest customer.
The following table sets forth cost of sales by segment, and segment cost of
sales as a percentage of segment net sales.
<TABLE>
<CAPTION>
COST OF SALES PERCENT OF SEGMENT SALES
-------------------- ------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ------------------------
Segment 1999 2000 1999 2000
------- -------- -------- -------- --------
(in millions, except percentages)
<S> <C> <C> <C> <C>
KE $ 18.5 $ 16.9 57.6% 49.6%
Emkay 4.5 5.5 58.4% 65.5%
Automotive Components 10.8 10.3 74.0% 74.1%
-------- --------
Total $ 33.8 $ 32.7 62.1% 57.9%
======== ========
</TABLE>
Consolidated cost of sales decreased by 4.2 percentage points as a percent of
sales in the third quarter of 2000 as compared to the same period in the prior
year. KE's cost of sales declined by 8.0 percentage points, partly due to higher
sales volume, but primarily due to savings associated with product transfers
initiated the past eighteen months and a change in allocations between KE
and Emkay, which together more than offset the write off of certain assets
related to production that has been outsourced.
<PAGE> 17
Emkay's cost of sales increased 7.1 percentage points, primarily due to
a change in year to date allocations between KE and Emkay impacting the third
quarter of this year. Automotive Components' cost of sales increased by 0.1
percentage points, with the improvement at SSPI effectively offsetting lower
margins at Ruf.
General and administrative expenses were higher in the third quarter of 2000
compared to the same period the prior year, primarily due to no bonus accrual
being provided in the third quarter of last year. Selling expenses were higher
the third quarter of 2000 due to higher headcount in the Emkay division compared
to the third quarter last year. Research and development expenses were slightly
lower the third quarter of 2000 compared to the third quarter of 1999.
The following table sets forth operating income by segment, and operating income
as a percentage of net sales, for the third quarter of 2000 compared to the same
period of 1999.
<TABLE>
<CAPTION>
OPERATING INCOME PERCENT OF SALES
-------------------- --------------------
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
Segment 1999 2000 1999 2000
------- -------- -------- -------- --------
(in millions, except percentages)
<S> <C> <C> <C> <C>
KE $ 9.4 $ 13.0 29.3% 38.1%
Emkay 1.2 (0.2) 15.6% -2.4%
Automotive Components (0.5) 0.3 -3.4% 2.2%
Unallocated amount - corporate overhead (0.5) (0.7)
--------------------
Total $ 9.6 $ 12.4 17.6% 22.0%
==================== ====================
</TABLE>
The following table sets forth operating income by segment, and operating income
as a percentage of net sales, excluding restructuring expenses, for the three
months ended September 30, 1999 and September 30, 2000.
<TABLE>
<CAPTION>
OPERATING INCOME PERCENT OF SALES
-------------------- --------------------
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
Segment 1999 2000 1999 2000
------- -------- -------- -------- --------
(in millions, except percentages)
<S> <C> <C> <C> <C>
KE $ 9.4 $ 12.8 29.3% 37.5%
Emkay 1.2 (0.2) 15.6% -2.4%
Automotive Components (0.5) 0.2 -3.4% 1.4%
Unallocated amount - corporate overhead (0.5) (0.7)
--------------------
Total (excluding 2000 restructuring expenses) $ 9.6 $ 12.1 17.6% 21.5%
==================== ====================
</TABLE>
<PAGE> 18
Excluding the restructuring charge this year, we had adjusted operating income
of $12.1 million in the third quarter of this year as compared to $9.6 million
in the third quarter of last year. On an adjusted basis our operating income
increased by $2.5 million, or 26%, in the third quarter of this year as compared
to the same period last year.
In connection with our recapitalization, we incurred $200 million of senior
debt and $153 million of senior subordinated debt. As a result, interest
expense was substantial during the third quarter of this year and last year.
However, it was lower the third quarter of this year due to the amortization of
finance costs associated with the bridge loan in the third quarter of last
year, which was replaced by the senior subordinated notes in the fourth quarter
last year. Income tax expense was significantly higher in the third quarter of
this year, at $3.2 million, as compared to a $1.7 million expense in the third
quarter of last year. The difference is due to higher foreign sourcetaxable
income this year as compared to last year.
As a result of the significant interest expense and taxes, we reported a loss of
$1.3 million in the third quarter of this year as compared to a loss of $5.1
million in the same period last year.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
The following table sets forth net sales by segment, and segment net sales as a
percent of total net sales.
<TABLE>
<CAPTION>
NET SALES PERCENT OF TOTAL SALES
-------------------- ----------------------
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------
Segment 1999 2000 1999 2000
------- -------- -------- -------- --------
(in millions, except percentages)
<S> <C> <C> <C> <C>
KE $ 98.9 $ 106.0 58.7% 59.9%
Emkay 22.4 24.0 13.3% 13.6%
Automotive Components 47.2 46.9 28.0% 26.5%
-------- -------- ----- -----
Total $ 168.5 $ 176.9 100.0% 100.0%
======== ======== ===== =====
</TABLE>
Overall, net sales increased 5% in the first nine months of 2000 compared to the
first nine months of 1999. KE's net sales increased 7% in the first nine months
of this year as compared to the same period last year. Within KE, sales of
Deltek non-transducer products increased at a higher rate than the division, but
on a much smaller sales base. Transducer unit volume increased about 15% in the
first nine months of this year, but reduced pricing offset approximately half
the unit volume increase. Emkay's net sales increased 7% in the first nine
months of 2000 as compared to the same period last year. Finished goods,
component and infrared product sales all increased year over year. Infrared
product sales increased despite unfavorable U.S. dollar to German Deutschemark
exchange rate changes. Automotive Components' net sales decreased slightly in
the first nine months of 2000 compared to the first nine months of 1999. SSPI
diesel solenoid net sales increased 16%, primarily due to large replacement
parts orders
<PAGE> 19
from SSPI's largest customer. Ruf net sales decreased 17%, primarily due to
unfavorable U.S. dollar to German Deutschemark exchange rate changes. However,
Ruf's net sales declined 5% on a constant currency basis, due to lower sales of
a specific diesel throttle position sensor to Ruf's largest customer.
The following table sets forth cost of sales by segment, and segment cost of
sales as a percentage of segment net sales.
<TABLE>
<CAPTION>
COST OF SALES PERCENT OF SEGMENT SALES
-------------------- ------------------------
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ------------------------
Segment 1999 2000 1999 2000
------- -------- -------- -------- --------
(in millions, except percentages)
<S> <C> <C> <C> <C>
KE $ 54.8 $ 53.3 55.4% 50.3%
Emkay 14.0 15.1 62.5% 62.9%
Automotive Components 34.2 33.4 72.5% 71.2%
-------- --------
Total $ 103.0 $ 101.8 61.2% 57.5%
======== ========
</TABLE>
Consolidated cost of sales decreased by 3.7 percentage points as a percent of
sales in the first nine months of 2000 as compared to the same period in the
prior year. KE's cost of sales declined by 5.1 percentage points, partly due to
higher sales volume, but primarily due to savings associated with product
transfers during the last eighteen months. Emkay's cost of sales increased by
0.4 percentage points. Emkay cost of sales increased this year due to
allocation changes between KE and Emkay, but these were mostly offset due to a
smaller provision for slow moving and obsolete inventory this year as compared
to last year. Automotive Components' cost of sales declined by 1.3 percentage
points, primarily due to lower Ruf costs as a result of the start of a
shift in production from Germany to Hungary.
General and administrative expenses were higher in the first nine of 2000
compared to the same period in the prior year, primarily due to increased
professional fees related to patent and other legal activities, but also due to
increased pension costs realized as part of our analysis of the closing of
production operations in Taiwan. Selling and research and development expenses
were little changed in the first nine months of 2000 as compared to the first
half of 1999.
The following table sets forth operating income by segment, and operating income
as a percentage of net sales, for the nine months ended September 30, 1999 and
2000.
<PAGE> 20
<TABLE>
<CAPTION>
OPERATING INCOME PERCENT OF SALES
-------------------- --------------------
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
Segment 1999 2000 1999 2000
------- -------- -------- -------- --------
(in millions, except percentages)
<S> <C> <C> <C> <C>
KE $ 31.7 $ 29.2 32.1% 27.5%
Emkay 1.7 0.7 7.6% 2.9%
Automotive Components 0.4 (3.3) 0.8% -7.0%
Recapitalization expenses (10.7) -
Unallocated amount - corporate overhead (2.1) (6.5)
--------------------
Total $ 21.0 $ 20.1 12.5% 11.4%
==================== ====================
</TABLE>
The following table sets forth operating income by segment, and operating income
as a percentage of net sales, excluding recapitalization expenses for the nine
months ended September 30,1999 and restructuring expenses for the nine months
ended September 30, 2000.
<TABLE>
<CAPTION>
OPERATING INCOME PERCENT OF SALES
-------------------- --------------------
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
Segment 1999 2000 1999 2000
------- -------- -------- -------- --------
(in millions, except percentages)
<S> <C> <C> <C> <C>
KE $ 31.7 $ 39.0 32.1% 36.8%
Emkay 1.7 0.8 7.6% 3.3%
Automotive Components 0.4 3.2 0.8% 6.8%
Unallocated amount - corporate overhead (2.1) (3.1)
--------------------
Total (excluding 1999 recapitalization
and 2000 restructuring expenses) $ 31.7 $ 39.9 18.8% 22.6%
==================== ================
</TABLE>
During the second quarter of 1999, we recognized non-recurring expenses related
to our recapitalization of $10.7 million. These recapitalization expenses
consisted primarily of bonuses, special one-time recognition payments to
employees, termination costs of a supplemental executive retirement plan and
legal, accounting, public relations and other professional fees.
We announced a major restructuring in March 2000, resulting in a first quarter
charge of $20.1 million. Under the restructuring plan, we are consolidating our
worldwide manufacturing operations by ending production at five manufacturing
facilities and either outsourcing component production or moving final assembly
to lower cost locations in Malaysia, China and Hungary. The restructuring charge
consists almost entirely of severance payments to terminated employees and
outplacements expenses. Through September 30, 2000, 514 positions have been
eliminated of the 1,047 total positions that will be eliminated in the
restructuring and $5.7 million has been spent on severance and outplacement
costs of the $20.1 million that was accrued. We expect that a total of
approximately 700 positions will be eliminated and approximately $9 million of
the restructuring charge will be spent by December 31, 2000. We expect that the
remaining 400 positions will be eliminated and approximately $10 million of the
remaining $11
<PAGE> 21
million of the restructuring charge will be spent by December 31, 2001, largely
during the first half of 2001.
We expect that the savings from the restructuring will be $15 to $20 million
annually. Although some benefits will begin to accrue as early as the third and
fourth quarters of this year, the full impact of the benefits will not be
experienced until 2002. These benefits will be reduced in part by increases in
payments to our remaining employees. In addition, over the next six to twelve
months, we expect to divest the Ruf position sensor business.
Including the restructuring charge in the first nine months of this year and the
recapitalization charge in the first nine months of last year, we reported
operating income of $20.1 million in the first nine months of 2000 as compared
to operating income of $21.0 million in the first nine months of 1999. Excluding
the restructuring charge this year and the recapitalization charge last year, we
had adjusted operating income of $39.9 million in the first nine months of this
year as compared to $31.7 million in the first nine months of last year. On an
adjusted basis our operating income increased by $8.2 million, or 26%, in the
first nine months of this year as compared to the same period last year.
In connection with our recapitalization, we incurred $200 million of senior debt
and $153 million of senior subordinated debt. As a result, interest expense was
substantial during the first nine months of this year compared to a much smaller
amount in the same period last year. Income tax expense was significantly higher
in the first nine months of this year, at $5.4 million, as compared to a $0.3
million benefit in the first nine months of last year. The difference is due to
the higher foreign source taxable income this year as compared to last year. As
a result of the interest expense and taxes (and recapitalization and
restructuring charges), we reported a loss from continuing operations of $16.8
million in the first nine months of this year as compared to income from
continuing operations of $8.7 million in the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
We have historically used available funds for dividend payments, capital
expenditures, inventory, accounts receivable and acquisitions. Prior to June
30,1999, we also used available funds to finance our equipment lease lending
operation which was discontinued. These funds have been obtained from operating
activities and from lines of credit. In the future, we will continue to have
these funding needs (other than dividends and lending operation receivables),
and we will also need to fund repayments of principal under our term loans ($3.3
million in 2000, $7.8 million in 2001, $9.0 million in 2002, and additional
amounts thereafter). We also will have substantial interest expense of
approximately $42 million each year. We expect to satisfy these needs with cash
from
<PAGE> 22
operating activities. We also have available under our Revolving Facility
borrowings of up to $50 million, subject to certain conditions. We are a holding
company. Our subsidiaries conduct substantially all of our consolidated
operations and own substantially all of our consolidated assets.
Consequently, our cash flow and our ability to meet our debt service obligations
depends substantially upon the cash flow of our subsidiaries and the payment of
funds by our subsidiaries to us in the form of loans, dividends or otherwise.
The amount payable to our preexisting stockholders for the repurchase of their
common stock in our recapitalization was subject to a post-closing adjustment.
As a result, the Company paid approximately $8.3 million plus approximately
$0.7 million in interest. The purchase price adjustment was recorded as a
reduction to stockholders' equity in the second quarter of 2000.
Net cash provided by operating activities was $20.9 million the first nine
months of 2000 compared to $41.3 million for the same period in 1999. These
amounts include $30.0 million of net cash provided by discontinued operating
activities in 1999. Net cash provided by continuing operations was $20.9 million
and $11.3 million, respectively, in the first nine months of 2000 and 1999.
Income from continuing operations was a loss of $16.8 million in the first nine
months of 2000 compared to income of $8.7 million in the first nine months of
1999. The 2000 results reflect charges for interest expense and restructuring
expenses of $32.3 million and $19.8 million, respectively. The 1999 results
reflect charges for interest expense and recapitalization expenses of $12.9
million and $10.7 million, respectively. Accounts receivable decreased by $1.1
million, we believe due to normal business fluctuations. Inventory decreased by
$2.8 million, due to the reduction of some of the mid year increases in
inventory to support production moves and more attention to inventory reduction
efforts. Other current assets and deferred income taxes increased $1.7
million. Accounts payable and other current liabilities decreased $1.0 million.
Other noncurrent liabilities and income tax payable decreased by $2.0 million
due primarily to repatriated foreign earnings.
Net cash used in investing activities was $10.1 million the first nine months of
2000 and the same amount for the first nine months of 1999. Even though the
amounts were similar a greater amount was spent the first nine months of 2000 on
buildings and less on capital equipment.
Net cash used in financing activities was $8.9 million the first nine months of
2000 compared to $13.8 million the first nine months of 1999. The purchase
price adjustment of $ 8.3 million was paid in 2000. The issuance of preferred
and common stock of $190.6 million and the debt proceeds of $350.0 million
funded the purchase of common stock and the related recapitalization costs in
1999. Dividends paid were $24.8 million in 1999. In the future, cash used in
financing activities will consist mostly of repayments of principal beginning
in September 2000 of our credit facilities and the Notes.
We expect capital expenditures of $15.0 million in 2000. Approximately $3.5
million of our capital expenditures during 2000 was used to build a new
facility for the expansion of our manufacturing operations in Hungary. We may
also pursue acquisitions or joint ventures in lower wage locations, which would
require additional capital resources. The amount and timing of actual capital
expenditures may be different than our current expectations.
<PAGE> 23
Item 3. Qualitative and Quantitative Disclosures about Market Risk
The Company is exposed to market risk from changes in foreign exchange rates and
interest rates.
We do not hedge our foreign currency exchange rate exposure. Therefore, we are
exposed to foreign currency exchange rate risks. Our revenues are primarily
denominated in the U.S. dollar and the German Deutschemark (which is now tied to
the euro). During the first nine months of 2000, approximately 70% of our
revenue was denominated in U.S. dollars, approximately 20% of our revenue was
denominated in German Deutschemarks, and the balance was denominated in other
foreign currencies. During the first nine months of 2000, the German
Deutschemark lost slightly more than 15% of its value relative to the U.S.
dollar, and as a result our reported revenue for the first nine months of 2000
is about $4.3 million less than it would have been at last year's exchange rate.
Our expenses are principally denominated in the same currencies, in which we
have sales, allowing us to essentially hedge through offsetting revenue and
expense exposures. As a result, during the first nine months of 2000, our
operating income and margins were not significantly affected by the change in
the German Deutschemark exchange rate. Some of our expenses are denominated in
the local currencies of Austria, the United Kingdom, Hungary, China, Japan,
Malaysia and Taiwan, some of which are closely tied to the U.S. dollar and
German Deutschemark. As we move more production out of Europe to Asia, we could
become more exposed to changes in the value of the euro in relation to the U.S.
dollar and major Asian currencies.
We do not invest in speculative or derivative financial instruments. We have
significant amounts of debt that are subject to interest rate fluctuation risk.
The amounts outstanding under the term loans of the Credit Agreement have
variable interest rates and, therefore, adjust to market conditions. An increase
of 1 percentage point in the interest rate of the loans under the Credit
Agreement would increase annual interest expense by $2 million. The amount
outstanding under the existing notes accrues interest at a fixed rate of
13.125%, plus an additional 0.5% from April 28, 2000 through October 19, 2000.
We have estimated the fair value of the notes as of September 30, 2000 to be
$142.5 million based on current market prices, and as of November 13, 2000
we estimate the fair value of the notes to be $142.5 million.
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000, to be signed on its behalf by the undersigned
thereunto duly authorized.
Knowles Electronics Holdings, Inc.
Date: November 14, 2000 By /s/ James F. Brace
--------------------------------------
James F. Brace, Executive Vice
President & CFO, (As duly authorized
officer and as the principal financial
and accounting officer)
