<PAGE> 1
CONFORMED
- --------------------------------------------------------------------------------
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 nine months ended December 31, 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 JANUARY 31, 1997
THIS DOCUMENT CONTAINS 13 PAGES.
- --------------------------------------------------------------------------------
<PAGE> 2
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements Page No.
--------
Condensed Consolidated Statements of Operations 3
(Unaudited) for the three and nine months ended
December 31, 1996 and 1995
Condensed Consolidated Balance Sheets at 4
December 31, 1996 (Unaudited) and March 31, 1996
Condensed Consolidated Statements of Cash 5
Flows (Unaudited) for the nine months ended
December 31, 1996 and 1995
Notes to Condensed Consolidated Financial 6-7
Statements (Unaudited)
ITEM 2 Management's Discussion and Analysis of 8-12
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
nine months ended December 31, 1996
SIGNATURES 13
</TABLE>
2
<PAGE> 3
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
--------------------------------------------------------------
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net Sales $ 47,186 $ 39,283 $ 126,036 $ 105,203
Cost of sales 27,877 23,935 73,231 64,914
---------- ---------- --------- ---------
19,309 15,348 52,805 40,289
Operating expenses:
Engineering and development 1,898 1,632 5,289 5,014
Marketing 4,908 3,720 14,044 12,426
General and administrative 2,386 1,736 6,446 5,116
Amortization of goodwill and other intangibles 413 802 1,236 2,583
---------- ---------- --------- ---------
9,605 7,890 27,015 25,139
---------- ---------- --------- ---------
Operating profit 9,704 7,458 25,790 15,150
Interest expense (3,132) (3,145) (9,419) (9,387)
Other income 417 228 1,225 622
---------- ---------- --------- ---------
Income before income taxes 6,989 4,541 17,596 6,385
Provision for income taxes 2,725 1,817 6,861 2,555
---------- ---------- --------- ---------
Net income $ 4,264 $ 2,724 $ 10,735 $ 3,830
========== ========== ========= ==========
</TABLE>
See accompanying notes.
3
<PAGE> 4
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
December 31, March 31,
1996 1996
---- ----
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 35,147 $ 23,001
Accounts receivable, net of allowance 28,375 25,438
Inventories 23,456 21,711
Deferred income taxes 2,433 2,433
Other 1,406 1,057
----------- ---------
Total current assets 90,817 73,640
Property, plant and equipment, net of accumulated depreciation 19,994 17,616
Deferred financing costs 2,610 2,884
Deferred income taxes 4,629 4,629
Intangible assets, net of accumulated amortization 20,812 22,048
----------- ---------
$ 138,862 $ 120,817
=========== =========
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
<S> <C> <C>
Current liabilities:
Accounts payable $ 11,729 $ 9,091
Accrued wages and benefits 3,237 3,289
Taxes other than income taxes 493 717
Other accrued liabilities 6,759 6,329
Accrued interest 5,529 2,508
Income taxes 4,441 3,436
----------- ---------
Total current liabilities 32,188 25,370
Long-term debt 100,000 100,000
Due to parent 2,057 2,029
Pension accrual 1,844 1,207
Other accrued liabilities 113 280
Shareholder's equity (deficit):
Common stock and capital in excess of par 20,001 20,001
Cumulative translation adjustment (6) -
Retained earnings (accumulated deficit) (17,335) (28,070)
----------- ---------
Total shareholder's equity (deficit) 2,660 (8,069)
----------- ---------
$ 138,862 $ 120,817
============ =========
</TABLE>
See accompanying notes.
4
<PAGE> 5
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
December 31,
-----------------------------
OPERATING ACTIVITIES: 1996 1995
---- ----
<S> <C> <C>
Net income $ 10,735 $ 3,830
Adjustments to reconcile net income to cash
flows from operations:
Depreciation 2,953 4,230
Amortization of intangibles and deferred financing costs 1,510 2,861
Provision for bad debts 225 5
Change in operating assets and liabilities:
Receivables (3,162) (5,109)
Inventories (1,745) (1,220)
Other current assets (349) 242
Accounts payable and accrued expenses 3,956 (1,083)
Accrued interest 3,021 2,967
Income taxes payable 1,005 3,273
Change in non-current liabilities 498 (418)
----------- -----------
Net cash provided by operating activities 18,647 9,623
----------- -----------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (6,495) (2,648)
Acquisition of product line - (252)
----------- -----------
Net cash (used in) investing activities (6,495) (2,900)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (6) -
----------- -----------
CASH AND CASH EQUIVALENTS:
Net increase 12,146 6,723
Beginning of period 23,001 7,793
----------- -----------
End of period $ 35,147 $ 14,516
=========== ===========
</TABLE>
See accompanying notes.
5
<PAGE> 6
TELEX COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL 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 December 31, 1996, the
condensed consolidated statements of operations for the three and nine
months ended December 31, 1996 and 1995, and the condensed consolidated
statements of cash flows for the nine months ended December 31, 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
December 31, 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.
2. Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
---- ----
<S> <C> <C>
Raw materials and parts $ 16,049 $ 13,975
Work in process 3,302 2,827
Finished products 4,105 4,909
--------- ---------
$ 23,456 $ 21,711
========= =========
</TABLE>
6
<PAGE> 7
TELEX COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
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.
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 39.0 percent for both the quarter and nine months ended
December 31, 1996, respectively. The effective tax rate for the same
periods in Fiscal 1996 was 40.0 percent.
7
<PAGE> 8
TELEX COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 by strategic business unit (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales:
Professional Sound $ 14,635 $ 13,585 $ 43,353 $ 39,026
Multimedia/Audio Communications 19,491 12,984 45,534 31,892
RF/Communications 6,993 7,142 18,523 16,963
Hearing Instruments 6,067 5,572 18,626 17,322
----------- --------- ---------- ---------
Total net sales $ 47,186 $ 39,283 $ 126,036 $ 105,203
=========== ========= ========== =========
</TABLE>
8
<PAGE> 9
RESULTS OF OPERATIONS (CONTINUED)
Three and Nine Months Ended December 31, 1996 Compared to the Three and Nine
Months Ended December 31, 1995
Net sales increased $7,903,000 (20%) for the quarter ended December 31,
1996, as a result of increased shipments in the Professional Sound,
Multimedia/Audio Communications and Hearing Instruments segments. Net sales
increased $20,833,000 (19.8%) for the nine months ended December 31, 1996, due
to increased shipments in each of the four business segments.
Net sales of Professional Sound products increased $1,050,000 (7.7%) and
$4,327,000 (11.1%) for the quarter and nine months ended December 31, 1996,
respectively, due primarily to increased shipments of intercom systems,
partially offset by decreased shipments of microphone products. 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 $6,507,000
(50.1%) and $13,642,000 (42.8%) for the quarter and nine months ended December
31, 1996, respectively, primarily as a result of increased shipments of
computer audio, LCD projection and aircraft communications 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.
The aircraft communications increase was favorably impacted by a stronger
market in the aviation industry and a change in sales distribution channel
compared to the same periods in Fiscal 1996.
Net sales of RF/Communications products decreased $149,000 (2.1%) and
increased $1,560,000 (9.2%) for the quarter and nine months ended December 31,
1996, respectively. The decrease for the quarter was primarily due to reduced
shipments of military vehicular antennas, partially offset by increased
shipments of taking book players to the Library of Congress, CB microphones and
wireless LAN antenna products. The increase for the nine months ended December
31, 1996 was primarily due to increased shipments of talking book players to
the Library of Congress and wireless LAN antenna products, 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 periods last year. The talking book sales increase was proportionally
higher for the nine months ending December 31, 1996. 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. The Company does not expect to ship these products again in the
foreseeable future.
Net sales of Hearing Instruments products increased $495,000 (8.9%) and
$1,304,000 (7.5%) for the quarter and nine months ended December 31, 1996,
respectively. For the quarter, increased shipments of hearing aid products
were slightly offset by decreased shipments of auditory trainer products. The
increase for the nine months ended December 31, 1996 was due to increased
shipments of hearing aid and auditory trainer products.
9
<PAGE> 10
RESULTS OF OPERATIONS (CONTINUED)
Gross profit increased $3,961,000 (25.8%) and $12,516,000 (31.1%) for the
quarter and nine months ended December 31, 1996, respectively. 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 for the quarter and
nine months ended December 31, 1996 by approximately $221,000 and $1,126,000,
respectively, due to lower levels of depreciation expense. Gross margin
increased 1.8 and 3.6 percentage points to 40.9% and 41.9% for the quarter and
nine months ended December 31, 1996, respectively. The gross margin increase
was the result of higher margins in the Multimedia/Audio Communications and
RF/Communications segments. Gross margin in the Hearing Instruments segment was
down slightly during the quarter, but overall was higher for the nine months
ended December 31, 1996 as compared to the same periods last year.
Gross margin in the Professional Sound segment for both the quarter and
nine months ended December 31, 1996 was comparable to the same periods in the
prior fiscal year. Gross margin in the Multimedia/Audio Communications segment
improved primarily as a result of higher margins in computer audio, LCD
projection, and aircraft communications products. This increase continued to
be favorably impacted by increased shipments of higher margin products, lower
production costs and productivity improvements realized in the manufacturing
processes. In addition, aircraft communications margins were favorably
impacted from a change in the sales distribution channel. Gross margin
increased in the RF/Communications segment due to increased shipments of higher
margin commercial products and the absence of lower margin military vehicular
antenna shipments as noted above. In addition, gross margin for the nine
months ended December 31, 1996 increased from the new talking book player
contract as described above. Gross margin in the Hearing Instruments Group
decreased slightly during the quarter primarily due to a larger proportion of
sales into the European market at lower average selling prices. For the nine
months ended December 31, 1996, gross margin increased due to higher prices
and lower production costs of hearing aids.
During the quarter ended December 31, 1996, the Company realized lower
production costs associated with its manufacturing facility in Hermosillo,
Sonora, Mexico. The Company will be seeking to improve its gross margins over
the next several years by locating a portion of its manufacturing at this
facility.
10
<PAGE> 11
Operating expenses increased $1,715,000 (21.7%) and $1,876,000 (7.5%) for
the quarter and nine months ended December 31, 1996, respectively. Total
operating expenses represented 20.4% and 21.4% of net sales for the quarter and
nine months ended December 31, 1996, respectively, compared to 20.1% and 23.9%
of net sales for the same periods 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 for
the quarter and nine months ended December 31, 1996 of approximately $388,000
and $1,167,000, respectively. Engineering expenses increased by $266,000
(16.3%) and $275,000 (5.5%) for the quarter and nine months ended December 31,
1996, respectively, principally due to increased costs related to internal
product development. Marketing expenses increased $1,188,000 (31.9%) and
$1,618,000 (13.0%) for the quarter and nine months ended December 31, 1996,
respectively. The marketing expense increase was the result of higher
sales-related costs associated with the increased sales volume and an increase
in advertising costs. General and administrative expenses increased $650,000
(37.4%) and $1,330,000 (26.0%) for the quarter and nine months ended December
31, 1996, respectively, primarily as a result of increased compensation expense
and costs associated with the Company's new computer information systems
project.
Other income increased $189,000 (82.9%) and $603,000 (96.9%) for the
quarter and nine months ended December 31, 1996. This increase is principally
the result of interest income on higher average cash balances compared to the
same periods in Fiscal 1996.
The Company's effective tax rate was 39.0 percent for both the quarter and
nine months ended December 31, 1996, respectively. The effective tax rate for
the same periods last year was 40.0 percent.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had cash and cash equivalents of
$35,147,000 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 improved slightly to 4.0 for the twelve months
ended December 31, 1996, up from 3.9 for the fiscal year ended March 31, 1996.
The ratio of current assets to current liabilities decreased slightly to 2.8
to 1 at December 31, 1996 compared to 2.9 to 1 at March 31, 1996, due to
increased accounts payable and accrued interest balances.
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 nine months ended December 31, 1996, was
$18,647,000 versus $9,623,000 for the same period in Fiscal 1996. The
Company's capital expenditures were $6,495,000 for the nine months ended
December 31, 1996, compared to $2,648,000 for the same period in last year.
The increase in capital expenditures was anticipated, as the Company began the
implementation of a project in May 1996 to replace and upgrade the Company's
computer information systems. Fiscal 1997 capital expenditures for this
project are anticipated to be approximately $4,000,000. In addition, the
Company anticipates that capital expenditures to complete this project in
Fiscal 1998 will total approximately $1,300,000. 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.
11
<PAGE> 12
The Company's consolidated indebtedness at December 31, 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 December 31, 1996,
there were no borrowings outstanding and net availability under the credit
agreement (computed by deducting approximately $4,593,000 of letters of credit
outstanding) totaled approximately $20,407,000.
12
<PAGE> 13
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: February 14, 1997 By: /s/ John L. Hale
----------------- ---------------------------
John L. Hale
Chairman of the Board
(President and Chief Executive Officer)
TELEX COMMUNICATIONS, INC.
Dated: February 14, 1997 By: /s/ John T. Hislop
----------------- --------------------------
John T. Hislop
Vice President and Chief Financial
Officer, Treasurer and Assistant Secretary
(Principal Financial & Accounting
Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 35,147
<SECURITIES> 0
<RECEIVABLES> 28,375
<ALLOWANCES> 0
<INVENTORY> 23,456
<CURRENT-ASSETS> 90,817
<PP&E> 19,994
<DEPRECIATION> 0
<TOTAL-ASSETS> 138,862
<CURRENT-LIABILITIES> 32,188
<BONDS> 100,000
0
0
<COMMON> 20,001
<OTHER-SE> (17,341)
<TOTAL-LIABILITY-AND-EQUITY> 138,862
<SALES> 126,036
<TOTAL-REVENUES> 126,036
<CGS> 73,231
<TOTAL-COSTS> 73,231
<OTHER-EXPENSES> 27,015
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,419
<INCOME-PRETAX> 17,596
<INCOME-TAX> 6,861
<INCOME-CONTINUING> 10,735
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,735
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
