<PAGE> 1
CONFORMED
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the three months ended June 30, 1996 Commission File No. 33-78806
TELEX COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3521030
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9600 ALDRICH AVENUE SOUTH, MINNEAPOLIS, MINNESOTA 55420
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code: (612) 884-4051
--------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
500 COMMON SHARES WERE OUTSTANDING AS OF JULY 31, 1996
THIS DOCUMENT CONTAINS 11 PAGES.
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1
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TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements Page No.
--------
<S> <C> <C>
Condensed Consolidated Statements of Operations 3
(Unaudited) for the three months ended June 30,
1996 and 1995
Condensed Consolidated Balance Sheets at 4
June 30, 1996 (Unaudited) and March 31, 1996
Condensed Consolidated Statements of Cash 5
Flows (Unaudited) for the three months ended
June 30, 1996 and 1995
Notes to Condensed Consolidated Financial 6-7
Statements (Unaudited)
ITEM 2 Management's Discussion and Analysis of 8-10
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) There were no reports on Form 8-K for the
three months ended June 30, 1996
SIGNATURES 11
</TABLE>
2
<PAGE> 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-----------------------------------
1996 1995
------- -------
<S> <C> <C>
Net sales $37,204 $32,007
Cost of sales 21,333 20,075
------- -------
15,871 11,932
Operating expenses:
Engineering and development 1,728 1,811
Marketing 4,333 4,599
General and administrative 1,980 1,574
Amortization of goodwill and other intangibles 412 902
------- -------
8,453 8,886
------- -------
Operating profit 7,418 3,046
Interest expense (3,152) (3,112)
Other income 390 235
------- -------
Income before income taxes 4,656 169
Provision for income taxes 1,713 69
------- -------
Net income $ 2,943 $ 100
======= =======
</TABLE>
See accompanying notes.
3
<PAGE> 4
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1996 1996
----------- --------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 26,442 $ 23,001
Accounts receivable, net of allowance 23,692 25,438
Inventories 24,608 21,711
Deferred income taxes 2,433 2,433
Other 1,244 1,057
-------- --------
Total current assets 78,419 73,640
Property, plant and equipment, net of accumulated depreciation 17,374 17,616
Deferred financing costs 2,792 2,884
Deferred income taxes 4,629 4,629
Intangible assets, net of accumulated amortization 21,636 22,048
-------- --------
$124,850 $120,817
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 6,094 $ 9,091
Accrued wages and benefits 2,590 3,289
Taxes other than income taxes 535 717
Other accrued liabilities 6,120 6,329
Accrued interest 5,508 2,508
Income taxes 4,943 3,436
-------- --------
Total current liabilities 25,790 25,370
Long-term debt 100,000 100,000
Due to parent 2,159 2,029
Pension accrual 1,844 1,207
Other accrued liabilities 183 280
Shareholder's equity (deficit):
Common stock and capital in excess of par 20,001 20,001
Retained earnings (accumulated deficit) (25,127) (28,070)
-------- --------
Total shareholder's equity (deficit) (5,126) (8,069)
-------- --------
$124,850 $120,817
======== =========
</TABLE>
See accompanying notes.
4
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TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------------
1996 1995
------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,943 $ 100
Adjustments to reconcile net income to cash
flows from operations:
Depreciation 1,027 1,383
Amortization of intangibles and deferred financing costs 504 994
Provision for bad debts 75 -
Change in operating assets and liabilities:
Receivables 1,671 1,848
Inventories (2,897) (2,298)
Other current assets (187) 128
Accounts payable and accrued expenses (2,631) (2,424)
Accrued interest 3,000 2,971
Income taxes payable 1,507 11
Change in non-current liabilities 670 474
------- -------
Net cash provided by operating activities 5,682 3,187
------- -------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (2,241) (1,121)
Acquisition of product line - (252)
------- -------
Net cash (used in) investing activities (2,241) (1,373)
------- -------
CASH AND CASH EQUIVALENTS:
Net increase 3,441 1,814
Beginning of period 23,001 7,793
------- -------
End of period $26,442 $ 9,607
======= =======
</TABLE>
5
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TELEX COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
1. Telex Communications, Inc. ("Telex" or the "Company"), a Delaware
corporation, is a wholly owned subsidiary of Telex Communications Group,
Inc. ("TCG").
The condensed consolidated balance sheet as of June 30, 1996 and the
condensed consolidated statements of operations and cash flows for the
three months ended June 30, 1996 and 1995, have been prepared by the
Company without being audited.
In the opinion of management, these financial statements reflect all
adjustments (which include only normal recurring accruals) necessary to
present fairly the financial position of Telex Communications, Inc. at
June 30, 1996 and the results of its operations and cash flows for all
periods presented.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. Therefore, these
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Form 10-K as filed
with the SEC on June 28, 1996. The condensed consolidated balance sheet
at March 31, 1996 is derived from the audited consolidated balance sheet
as of that date.
The results of operations for interim periods are not necessarily
indicative of results which will be realized for the full fiscal year.
Certain prior-year amounts have been reclassified to conform to the June
30, 1996 presentation.
2. Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1996 1996
------- ---------
<S> <C> <C>
Raw materials and parts $17,345 $13,975
Work in process 3,354 2,827
Finished products 3,909 4,909
------- -------
$24,608 $21,711
======= =======
</TABLE>
3. Telex's tax provision is calculated on a separate company basis, and
Telex's taxable income is included in the consolidated federal income tax
returns of TCG. The amount listed as "Due to parent" represents the tax
benefit Telex received from TCG.
6
<PAGE> 7
TELEX COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED STATEMENTS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
4. The Company calculated its income tax provision for interim periods by
estimating its annual effective tax rate and applying this rate to the
income before income taxes for the interim period. The effective tax rate
applied was 36.8 and 40.8 percent for the three months ended June 30, 1996
and 1995, respectively.
7
<PAGE> 8
TELEX COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
FORWARD LOOKING STATEMENTS
The statements in Part I of this Form 10-Q that are forward looking are
based on current expectations, and actual results may differ materially.
Forward looking statements involve numerous risks and uncertainties that could
cause actual results to differ materially, including, but not limited to: the
timely development and market acceptance of new products; the impact of
competitive products and pricing; the effect of changing general and industry
specific economic conditions; the Company's ability to access external sources
of capital; and such risks and uncertainties detailed from time-to-time in the
Company's Securities and Exchange Commission reports and filings.
RESULTS OF OPERATIONS
General. Telex Communications, Inc. ("Telex" or the "Company"), a
Delaware corporation, is a wholly owned subsidiary of Telex Communications
Group, Inc. ("TCG"). TCG has no operations, and its principal asset is its
investment in the Company.
The following tables set forth, for the periods indicated, the Company's
net sales in thousands:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
1996 1995
------- -------
<S> <C> <C>
Net Sales:
Professional Sound $13,683 $12,628
Multimedia/Audio Communications 11,790 8,434
RF/Communications 5,768 5,156
Hearing Instruments 5,963 5,789
------- -------
Total net sales $37,204 $32,007
======= =======
</TABLE>
Three Months Ended June 30, 1996 Compared to the Three Months Ended June 30,
1995
Net sales increased $5,197,000 (16.2%), over the same period last year due
to increased shipments in each of the four business segments.
Net sales of Professional Sound products increased $1,055,000 (8.4%) for
the quarter ended June 30, 1996, primarily due to increased shipments of
intercom systems, slightly offset by decreased shipments of microphones. The
increased sales of intercom systems were in part due to continued growth in
sales of new products introduced last year and an increase in broadcast
equipment demand related to the 1996 Olympics.
Net sales of Multimedia/Audio Communications products increased $3,356,000
(39.8%) for the quarter ended June 30, 1996, primarily as a result of increased
shipments of computer audio and LCD projection products. The increase in sales
volume of computer audio and LCD projection products resulted from the
continued growth of computer audio and multimedia applications use.
8
<PAGE> 9
Net sales of RF/Communications products increased $612,000 (11.9%) for the
quarter ended June 30, 1996, as a result of increased shipments of talking book
players to the Library of Congress, partially offset by reduced shipments of
military vehicular antennas. The increase in sales of talking book players is
the result of a higher unit volume and selling price associated with the
current contract compared to the previous contract in the same period last
year. Shipments of military vehicular antennas ended as the last shipments
under the remaining contract with the United States Department of Defense were
made in the fourth quarter of Fiscal 1996. Sales under the military vehicular
antenna contract accounted for 4.0% of net sales for the quarter ended June 30,
1995. The Company does not expect to ship these products again in the
foreseeable future.
Net sales of Hearing Instruments products increased $174,000 (3.0%) for
the quarter ended June 30, 1996. This improvement is due to higher unit
volumes of the Company's hearing aid and auditory trainer products.
Gross profit for the quarter ended June 30, 1996 increased $3,939,000
(33.0%). The impact from the Company's adoption of and accounting for
impairment of long-lived assets in the fourth quarter of Fiscal 1996 increased
gross profit in the first quarter by approximately $349,000 due to lower levels
of depreciation expense. Gross margin increased 5.4% percentage points from
37.3% for the quarter ended June 30, 1995 to 42.7% for the quarter ended June
30, 1996. The rate increase was the result of higher gross margins in the
Multimedia/Audio Communications, RF/Communications and Hearing Instruments
segments. The gross margin rate in the Professional Sound segment remained
unchanged. The increase in Multimedia/Audio Communications gross margin is in
part due to increased shipments of higher margin products combined with lower
production costs and productivity improvements realized in the manufacturing
processes. In addition, gross margin for LCD projection products increased
from the recent introduction of the next generation LCD projection products.
The increase in gross margin in the RF/Communications segment was due
principally to (i) the new talking book player contract and (ii) the absence of
military vehicular antenna shipments as noted above, which resulted in
increased gross margins due to the fact that gross margins for military
vehicular antennas were significantly lower than the segment's other product
lines. The increase in gross margin in the Hearing Instruments segment was
primarily the result of increased prices and lower production costs. During
the quarter ended June 30, 1996, the Company opened a 32,500 square foot leased
manufacturing facility in Hermosillo, Sonora, Mexico and will be seeking to
improve its gross margins over the next several years by locating a portion of
its manufacturing at such facility.
Operating expenses decreased $433,000 (4.9%), and represented 22.7% of net
sales for the quarter ended June 30, 1996, compared to 27.8% of net sales for
the same period in Fiscal 1996. The impact from the Company's adoption of and
accounting for impairment of long-lived assets in the fourth quarter of Fiscal
1996 resulted in decreased amortization expense in the first quarter related to
intangible assets of approximately $390,000. Engineering expenses decreased
slightly by $83,000 (4.6%), primarily due to decreased outside development
costs. Marketing expenses decreased $266,000 (5.8%), primarily due to a
decrease in advertising, promotional programs and related marketing and
development costs as compared to the same period last year. General and
administrative expenses increased $406,000 (25.8%), as a result of increased
wages, outside service costs, and increased incentive compensation resulting
from the higher sales volume and profitability during the quarter.
9
<PAGE> 10
The Company's effective tax rate for the quarter ended June 30, 1996 was
36.8 percent compared to 40.8 percent for the same period in the prior fiscal
year. The decrease in the effective tax rate was primarily the result of
decreased levels of non-deductible goodwill amortization.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had cash and cash equivalents of $26,442,000
compared to $23,001,000 at March 31, 1996. The increase in cash and cash
equivalents relates principally to an increase in income from operations.
Inventory turns decreased to 3.7 for the period ended June 30, 1996 compared to
3.9 at Fiscal 1996 year end. The ratio of current assets to current
liabilities increased to 3.0 to 1 at June 30, 1996 compared to 2.9 to 1 at
March 31, 1996, due to increased cash and inventories.
The Company's principal source of funds has consisted of cash generated
from operating activities. Historically, the Company's principal non-operating
uses of cash have been for interest expense, repayments of long-term debt,
capital expenditures, and certain repurchases of TCG securities. Net cash
provided from operations for the three months ended June 30, 1996, was
$5,682,000 versus $3,187,000 for the comparable period in Fiscal 1996. The
Company's capital expenditures were $2,241,000 for the three months ended June
30, 1996, compared to $1,121,000 for the same period in Fiscal 1996. The
increase in first quarter capital expenditures was anticipated, as the Company
began the implementation in May 1996 of a project to replace and upgrade the
Company's computer information systems. Fiscal 1997 capital expenditures for
this project are anticipated to be approximately $3,000,000. In addition, the
Company anticipates that capital expenditures to complete this project in
Fiscal 1998 and 1999 will total approximately $1,500,000 per year. The Company
anticipates capital expenditures for Fiscal 1997, other than for the new
computer information systems project, will continue at, or exceed, the level
experienced in Fiscal 1996.
The Company's consolidated indebtedness at June 30, 1996 was $100,000,000.
The degree to which the Company is leveraged could have important
consequences, including the following: (i) the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may be impaired;
(ii) a substantial portion of the Company's cash flow from operations must be
dedicated to the payment of interest on the Company's long-term debt and its
other existing indebtedness; (iii) the agreements governing the Company's
long-term indebtedness contain certain restrictive financial and operating
covenants; (iv) the Company is substantially more leveraged than certain of
its competitors, which might place the Company at a competitive disadvantage;
(v) the Company may be hindered in its ability to adjust rapidly to changing
market conditions; and (vi) the Company's substantial degree of leverage could
make it more vulnerable in the event of a downturn in general economic
conditions or its business.
The Company has a revolving credit agreement with a commitment of
$25,000,000, subject to a borrowing base calculation. As of June 30, 1996,
there were no borrowings outstanding and net availability under the credit
agreement (computed by deducting approximately $5,731,000 of letters of credit
outstanding) totaled approximately $19,269,000.
10
<PAGE> 11
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
TELEX COMMUNICATIONS, INC.
Dated: August 13, 1996 By: /s/ John L. Hale
--------------- --------------------------------------
John L. Hale
Chairman of the Board
(President and Chief Executive Officer)
TELEX COMMUNICATIONS, INC.
Dated: August 13, 1996 By: /s/ John T. Hislop
--------------- ---------------------------------------
John T. Hislop
Vice President and Chief Financial
Officer, Treasurer and Assistant
Secretary
(Principal Financial & Accounting
Officer)
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 26,442
<SECURITIES> 0
<RECEIVABLES> 23,692
<ALLOWANCES> 0
<INVENTORY> 24,608
<CURRENT-ASSETS> 78,419
<PP&E> 17,374
<DEPRECIATION> 0
<TOTAL-ASSETS> 124,850
<CURRENT-LIABILITIES> 25,790
<BONDS> 100,000
0
0
<COMMON> 20,001
<OTHER-SE> (25,127)
<TOTAL-LIABILITY-AND-EQUITY> 124,850
<SALES> 37,204
<TOTAL-REVENUES> 37,204
<CGS> 21,333
<TOTAL-COSTS> 21,333
<OTHER-EXPENSES> 8,453
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,152
<INCOME-PRETAX> 4,656
<INCOME-TAX> 1,713
<INCOME-CONTINUING> 2,943
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,943
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
