<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 quarterly period ended March 31, 1999 Commission File No. 333-27341
TELEX COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 38-1853300
(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
--- ---
AS OF MARCH 31, 1999 THERE WERE 110 SHARES OF TELEX COMMUNICATIONS, INC., $0.01
PAR VALUE, OUTSTANDING.
THIS DOCUMENT CONTAINS 21 PAGES.
================================================================================
1
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------------- -------------------
(UNAUDITED)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 3,708 $ 3,431
Accounts receivable, net 59,235 53,926
Inventories 66,248 67,758
Other current assets 9,831 10,822
----------------- ----------------
Total current assets 139,022 135,937
Property, plant and equipment, net 47,346 48,275
Deferred financing costs, net 11,267 11,586
Intangible and other assets, net 76,821 77,478
----------------- ----------------
$ 274,456 $ 273,276
================= ================
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Revolving lines of credit $ 13,537 $ 5,703
Current maturities of long-term debt 6,627 10,811
Accounts payable 23,394 20,920
Accrued wages and benefits 11,679 9,156
Accrued interest 7,034 6,416
Other accrued liabilities 13,122 14,158
Income taxes payable 5,123 5,200
----------------- ----------------
Total current liabilities 80,516 72,364
Long-term debt 319,069 321,189
Other long-term liabilities 9,322 9,810
----------------- ----------------
Total liabilities 408,907 403,363
----------------- ----------------
Shareholder's deficit:
Common stock and capital in excess of par 3,043 2,980
Accumulated other comprehensive loss (3,460) (1,400)
Accumulated deficit (134,034) (131,667)
----------------- ----------------
Total shareholder's deficit (134,451) (130,087)
----------------- ----------------
$ 274,456 $ 273,276
================= ================
</TABLE>
See accompanying notes.
2
<PAGE> 3
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter ended
-----------------------------------------
March 31, June 30,
1999 1998
-------------------- -------------------
<S> <C> <C>
Net sales $ 79,410 $ 78,888
Cost of Sales 50,780 49,232
----------------- ----------------
Gross profit 28,630 29,656
----------------- ----------------
Operating expenses:
Engineering 3,738 3,806
Selling, general and administrative 18,324 18,425
Corporate charges 429 429
Amortization of goodwill and other intangibles 691 677
----------------- ----------------
23,182 23,337
----------------- ----------------
Operating profit 5,448 6,319
Interest expense 9,118 9,299
Other income (1,531) (163)
----------------- ----------------
Loss before taxes (2,139) (2,817)
Provision for income taxes 218 342
----------------- ----------------
Net loss $ (2,357) $ (3,159)
================= ================
</TABLE>
See accompanying notes.
3
<PAGE> 4
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter ended
----------------------------------------------
March 31, June 30,
1999 1998
---------------------- ---------------------
Operating activities:
<S> <C> <C>
Net loss $ (2,357) $ (3,159)
Adjustments to reconcile net loss to cash flows from operations:
Depreciation, amortization and provision for bad debts 3,408 3,629
Gain on sale of facilities and business (322) (114)
Stock option compensation expense and special charges 63 379
Deferred income taxes (269) -
Change in operating assets and liabilities (1,854) 2,322
Change in long-term liabilities (15) 139
------------------- ------------------
Net cash provided by (used in) operating activities (1,346) 3,196
------------------- ------------------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,960) (1,369)
Other - (83)
------------------- ------------------
Net cash used in investing activities (1,960) (1,452)
------------------- ------------------
FINANCING ACTIVITIES:
Borrowings (payments) under revolving lines of credit, net 8,136 (245)
Repayment of long-term debt (6,304) (1,875)
Proceeds from sale of facilities and business 1,960 538
------------------- ------------------
Net cash used in financing activities 3,792 (1,582)
------------------- ------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS: (209) 103
------------------- ------------------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) 277 265
Beginning of period 3,431 2,224
------------------- ------------------
End of period $ 3,708 $ 2,489
=================== ==================
SUPPLEMENTAL DISCLOSURES OF CASH PAID FOR:
Interest $ 8,111 $ 10,904
=================== ==================
Income taxes (refunds), net $ 516 $ (7,177)
=================== ==================
</TABLE>
See accompanying notes.
4
<PAGE> 5
TELEX COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Telex Communications, Inc., formerly known as EV International, Inc.
("Telex" or the "Company"), a Delaware corporation, is a wholly owned
subsidiary of Telex Communications Group, Inc. ("Holdings"). As used in
these consolidated financial statements, unless otherwise indicated or the
context otherwise requires, references to (i) "Holdings" shall mean Telex
Communications Group, Inc., a Delaware corporation and the corporate parent
of the Company; (ii) "Old Telex" shall refer to the Delaware corporation
formerly named Telex Communications, Inc., a wholly owned subsidiary of
Holdings, and its subsidiaries with respect to periods prior to the Mergers
(as defined in Item 2); (iii) the "Company" or "Telex" shall mean Telex
Communications, Inc., a Delaware corporation formerly named EV
International, Inc. ("EVI") and successor by merger to Old Telex, and its
subsidiaries and includes, as the context may require, predecessor and
successor companies; and (iv) "Old EVI" shall mean EVI and its subsidiaries
with respect to periods prior to the Mergers and includes any predecessor
companies.
The condensed consolidated balance sheet as of March 31, 1999 and the
condensed consolidated statements of operations and cash flows for the
quarters ended March 31, 1999 and June 30, 1998 have been prepared by the
Company without being audited, pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). The Company has presented the
quarter ended June 30, 1998 as the comparable period because the results
for the quarter ended March 31, 1998 contained certain Merger-related costs
and expenses, some of which are not easily quantifiable. Therefore, the
Company believes that comparing the financial results for the quarter ended
March 31, 1999 with the quarter ended June 30, 1998 is more meaningful than
comparing the financial results for the quarter ended March 31, 1999 with
the quarter ended March 31, 1998.
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 at March 31, 1999 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 more detailed information, risk
factors and financial statements, including the related notes, included in
the Registration Statements on Form S-4 filed by Old Telex and Old EVI with
the SEC on September 5, 1997 and July 30, 1997, respectively, and the Form
10-K for the fiscal year ended December 31, 1998 filed by Telex with the
SEC on March 31, 1999 (the "Form 10-K"). Unless otherwise defined herein,
capitalized terms shall have the meaning set forth in the Form 10-K.
The results of operations for interim periods are not necessarily
indicative of results which will be realized for the full fiscal year.
5
<PAGE> 6
2. Inventories consist of the following, in thousands:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Raw materials and parts $ 33,974 $ 32,667
Work in process 10,882 10,690
Finished products 21,392 24,401
--------------- ---------------
$ 66,248 $ 67,758
=============== ===============
</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
return of Holdings. The Company has recorded a liability to Holdings for
the tax benefit Telex received from Holdings, which is included in other
long-term liabilities.
4. The Company recorded an income tax provision of $0.2 million on pre-tax
loss of $2.1 million for the quarter ended March 31, 1999. The income tax
provision is comprised of a U.S. Federal income tax benefit of $1.0 million
which is offset by a deferred tax valuation allowance of $1.0 million and
an income tax provision of $0.2 million attributed to income of certain
foreign subsidiaries for the quarter ended March 31, 1999.
The Company has a net deferred tax valuation allowance of $18.9 million at
March 31, 1999 due to the uncertainty of the realization of future tax
benefits. Included in this valuation allowance is $0.6 million charged to
income tax provision for the quarter ended March 31, 1999. The realization
of the future tax benefits related to the deferred tax assets is dependent
on many factors, including the Company's ability to generate taxable income
within the net operating loss carryforward period. Management has
considered these factors in reaching its conclusion as to the adequacy of
the valuation allowance for financial reporting purposes.
5. Effective April 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement established standards for reporting
and display of comprehensive income and its components. Comprehensive
income reflects the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner
sources. For the Company, comprehensive net loss represents net loss
adjusted for foreign currency translation adjustments and minimum pension
liability adjustment. Comprehensive net loss was $4.4 million for the
quarter ended March 31, 1999 and $4.2 million for the quarter ended June
30, 1998, respectively.
6. Segment Information:
Subsequent to the Mergers, the Company reorganized what had been classified
as Old Telex's four strategic business units and Old EVI's four principal
lines of business into the following two business segments:
Professional Sound and Entertainment
Professional Sound and Entertainment includes Old EVI's three principal
lines of business within the overall professional audio market: (i) Fixed
Installation; (ii) Professional Music Retail; and (iii)
Concert/Recording/Broadcast, and Old Telex's Broadcast Communications
6
<PAGE> 7
Systems and Sound Reinforcement product groups (these businesses were
previously part of Old Telex's Professional Sound and Entertainment Group).
Multimedia/Audio Communications
Multimedia/Audio Communications includes all of Old Telex's
Multimedia/Audio Communications, RF/Communications and Hearing Instruments
Groups, the Tape Duplication product group from Old Telex's Professional
Sound and Entertainment Group, and Old EVI's Other Applications line of
business, consisting of handheld microphones and earphones for field and
aircraft communications, both military and civilian, equipment for
high-speed duplication of audio tapes, and components marketed to original
equipment manufacturers for incorporation into their products.
The amounts in the following tables have been presented to coincide with
the new business segments (in thousands).
AS OF AND FOR THE QUARTER ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Professional Multimedia/
Sound and Audio
Entertain- Communi-
ment cations Corporate Total
----------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 49,599 $ 29,811 $ - $ 79,410
Cost of sales 29,621 21,159 - 50,780
----------------------------------------------------------
Gross profit 19,978 8,652 - 28,630
Operating expenses:
Engineering - - 3,738 3,738
Selling, general and administrative - - 18,324 18,324
Corporate charges - - 429 429
Amortization of intangibles - - 691 691
----------------------------------------------------------
- - 23,182 23,182
----------------------------------------------------------
Operating profit (loss) 19,978 8,652 (23,182) 5,448
Interest expense - - 9,118 9,118
Other income - - (1,531) (1,531)
Provision for income taxes - - 218 218
----------------------------------------------------------
Net income (loss) $ 19,978 $ 8,652 $ (30,987) $ (2,357)
==========================================================
Depreciation expense $ 767 $ 414 $ 1,167 $ 2,348
==========================================================
Capital expenditures $ 939 $ 583 $ 438 $ 1,960
==========================================================
Total assets $ 197,126 $ 46,687 $ 30,643 $ 274,456
==========================================================
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
United
States Germany Japan Canada China Others Total
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 42,387 $ 6,158 $ 4,719 $ 4,535 $ 3,592 $ 18,019 $ 79,410
==================================================================================
Long-lived assets $ 126,182 $ 5,024 $ 1,465 $ 138 $ 574 $ 2,051 $ 135,434
==================================================================================
</TABLE>
AS OF AND FOR THE QUARTER ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Professional Multimedia/
Sound and Audio
Entertain- Communi-
ment cations Corporate Total
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 50,103 $ 28,785 $ - $ 78,888
Cost of sales 24,156 25,076 - 49,232
-----------------------------------------------------------
Gross profit 25,947 3,709 - 29,656
Operating expenses:
Engineering - - 3,806 3,806
Selling, general and administrative - - 18,425 18,425
Corporate charges - - 429 429
Amortization of intangibles - - 677 677
-----------------------------------------------------------
- - 23,337 23,337
-----------------------------------------------------------
Operating profit (loss) 25,947 3,709 (23,337) 6,319
Interest expense - - 9,299 9,299
Other income - - (163) (163)
Provision for income taxes - - 342 342
-----------------------------------------------------------
Net income (loss) $ 25,947 $ 3,709 $ (32,815) $ (3,159)
===========================================================
Depreciation expense $ 1,025 $ 480 $ 683 $ 2,188
===========================================================
Capital expenditures $ 554 $ 474 $ 341 $ 1,369
===========================================================
Total assets $ 213,099 $ 49,067 $ 27,609 $ 289,775
===========================================================
</TABLE>
<TABLE>
<CAPTION>
United
States Germany Japan Canada China Others Total
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 47,150 $ 7,246 $ 2,843 $ 3,419 $ 2,468 $ 15,762 $ 78,888
==================================================================================
Long-lived assets $ 128,863 $ 5,196 $ 662 $ 40 $ 115 $ 3,981 $ 138,857
==================================================================================
</TABLE>
8
<PAGE> 9
7. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for fiscal years beginning
after June 15, 1999. SFAS No. 133 establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded on the
balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge criteria are met.
Special accounting for qualifying hedges allows a derivative's gains or
losses to offset related results on the hedged item in the income statement
and requires that a company must formally document, designate and assess
the effectiveness of transactions that receive hedge accounting. The
Company has not quantified the impacts of adopting SFAS No. 133 and has not
yet determined the timing or method of adoption.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations, as well as other sections of this Form 10-Q, may contain
forward-looking statements, including, without limitation, statements relating
to the Company's plans, strategies, objectives and expectations, that are based
on management's current opinions, beliefs, or expectations as to future results
or future events and are made pursuant to the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. Any such forward-looking
statements involve known and unknown risks and uncertainties and the Company's
actual results may differ materially from those forward-looking statements.
While made in good faith and with a reasonable basis based on information
currently available to the Company's management, there is no assurance that such
opinions or expectations will be achieved or accomplished. The Company does not
undertake to update, revise or correct any of the forward-looking information
contained in this document. The following factors, in addition to those
discussed elsewhere in this Form 10-Q, could affect the future results of the
Company, and could cause results to differ materially from those expressed in
such forward-looking statements: (i) the timely development and market
acceptance of new products; (ii) the financial resources of competitors and the
impact of competitive products and pricing; (iii) changes in general and
industry specific economic conditions on a national, regional or international
basis; (iv) changes in laws and regulations, including changes in accounting
standards; (v) the timing of the implementation of changes in operations to
effect cost savings; (vi) opportunities that may be presented to and pursued by
the Company following the Mergers; (vii) the Company's ability to access
external sources of capital; and (viii) such risks and uncertainties as are
detailed from time to time in the Company's Commission reports and filings.
GENERAL
The following discussion and analysis of the financial condition and results of
operations covers periods after completion of the Transactions (as defined
herein). As a result of the Transactions, the Company has entered into new
financing arrangements and has a different capital structure than its
predecessors, Old EVI and Old Telex. Pursuant to the Recapitalization of Old
Telex on May 6, 1997, the historical basis of all assets and liabilities was
retained for financial reporting purposes, and the repurchase of existing
Holdings Common Stock and issuance of new Holding Common Stock have been
accounted for as equity transactions. The Mergers have been accounted for
essentially as a pooling of interests from May 6, 1997, the date on which Old
EVI and Old Telex came under common control.
Effective December 31, 1998 the Company changed its fiscal year end to December
31 from March 31. The management's discussion and analysis that follows compares
the results, which are not materially affected by seasonal fluctuations, for the
first quarter ended March 31, 1999 with the prior year's first fiscal quarter
ended June 30, 1998. The results for prior year calendar quarter ended March 31,
1998 contain certain Merger-related costs and expenses, some of which are not
easily quantifiable. Therefore, the Company believes that for purposes of
management's discussion and analysis, a comparison of the financial results for
the first quarter ended March 31, 1999 with the results for the first fiscal
quarter ended June 30, 1998 is more meaningful than a comparison with the
results for the quarter ended March 31, 1998, a similar calendar period from two
prior fiscal years ago.
10
<PAGE> 11
THE TRANSACTIONS
The Acquisition. On February 10, 1997 (the "Acquisition Closing Date"), pursuant
to a purchase agreement dated December 12, 1996, (as amended, the "Purchase
Agreement") an acquisition subsidiary wholly owned by Greenwich Street Capital
Partners, L.P. ("GSCP") and certain affiliated investors acquired from Mark IV
Industries ("Mark IV") and one of its subsidiaries all of the issued and
outstanding capital stock of Gulton Industries, Inc. ("Gulton"), the former
parent of Old EVI, and each of its subsidiaries for an initial cash purchase
price of $151.5 million, plus $4.9 million in estimated adjustments paid on the
closing date, which aggregate amount is subject to further post-closing
adjustments (the "Acquisition"). Mark IV has requested a purchase price increase
of $0.1 million, which amount the Company is currently disputing pursuant to the
applicable provisions of the Purchase Agreement.
Financing for the Acquisition, and the related fees and expenses, consisted of
(i) $57.6 million of equity capital provided by GSCP and certain affiliated
investors, (ii) a $60.0 million senior credit facility (consisting of a term
loan and a revolving credit facility), and (iii) a $75.0 million senior
subordinated credit facility issued as interim financing by Chase Securities
Inc. and Smith Barney Inc., the initial purchasers of the EVI Existing Notes (as
defined herein), and certain other lenders. Of these amounts, $156.4 million was
used for the purchase price for the Acquisition and $10.4 million was used for
financing and transaction fees and expenses.
On March 24, 1997, Old EVI issued 11% Senior Subordinated Notes due 2007 in an
aggregate principal amount of $100.0 million (the "EVI Existing Notes"), all of
which were subsequently exchanged in September, 1997 for a like principal amount
of new 11% Senior Subordinated Notes due 2007, Series A (together with the EVI
Existing Notes, the "EVI Notes"), in an offering registered under the Securities
Act of 1933, as amended (the "Securities Act"). The proceeds from the EVI Notes
were used to repay the $75.0 million of indebtedness under the interim financing
in its entirety and a portion of Old EVI's term loan. The foregoing
transactions, including the issuance of the EVI Notes, are referred to herein as
the "Acquisition Transactions." The Acquisition was accounted for using the
purchase method of accounting pursuant to which the purchase price was allocated
among the acquired assets and liabilities in accordance with estimates of fair
market value on February 10, 1997 (i.e., the Acquisition Closing Date).
The Recapitalization. On May 6, 1997 (the "Recapitalization Closing Date"), Old
Telex completed a recapitalization (the "Recapitalization") pursuant to an
Agreement (the "Recapitalization Agreement") among Old Telex, Greenwich II, LLC
("G-II"), a Delaware limited liability company formed by GSCP and certain other
investors, and GST Acquisition Corp. ("GST"), a Delaware corporation and a
wholly owned subsidiary of G-II. In connection with the Recapitalization, all of
the shares of common stock of Holdings ("Holdings Common Stock") and all options
and warrants to acquire Holdings Common Stock (other than certain shares of
Holdings Common Stock and certain options to acquire Holdings Common Stock owned
by certain members of management of Old Telex) were converted into the right to
receive an aggregate amount of cash (the "Recapitalization Consideration") equal
to $253.9 million. In addition, in connection with the Recapitalization
Agreement, certain shares of Holdings Common Stock held by management of Old
Telex (such shares, the "Rollover Shares") and certain options to acquire
additional shares of Holdings Common Stock (the "Rollover Options"), with an
aggregate value of $21.2 million (which represented 14% of the equity of
Holdings on a non-diluted basis and 20% on a fully diluted basis) were retained
by such
11
<PAGE> 12
managers. In connection with the Recapitalization, Old Telex completed (i) a
tender offer (the "Tender Offer") to repurchase all of Old Telex's then
outstanding 12% Senior Notes due 2004, in aggregate principal amount of $100.0
million, for $118.3 million (including premium and consent fees along with
accrued interest), and (ii) a solicitation of consents with respect to certain
amendments to the indenture pursuant to which such notes were issued. The
Recapitalization, the financing thereof (including the issuance by Old Telex of
10 1/2 % Senior Subordinated Notes due 2007 (the "Existing Telex Notes") to
Chase Securities, Inc., Morgan Stanley & Co. Incorporated and Smith Barney,
Inc.), the Tender Offer and the payment of the related fees and expenses are
herein referred to as the "Recapitalization Transaction."
The Recapitalization was financed by (i) $108.4 million of new equity provided
by GSCP and certain other co-investors, (ii) the Rollover Shares and Rollover
Options valued at $21.2 million, (iii) a $140.0 million senior secured credit
facility (the "Senior Secured Credit Facility") with The Chase Manhattan Bank,
Morgan Stanley Senior Funding, Inc. and certain other lenders, consisting of (a)
a $115.0 million term loan facility (the "Term Loan Facility"), and (b) a $25.0
million revolving credit facility (the "Revolving Credit Facility"), (iv) $125.0
million of Existing Telex Notes and (v) $36.5 of available cash of Old Telex. Of
the $108.4 million of new equity contributed by GSCP and certain other
co-investors, $25.2 million consisted of proceeds from the issuance by GST (a
predecessor of Holdings) of Deferred Pay Subordinated Debentures due 2009 (the
"GST Subordinated Debentures").
Pursuant to the Recapitalization of Old Telex on May 6, 1997, the historical
basis of all assets and liabilities was retained for financial reporting
purposes, and the repurchases of existing Holdings Common Stock and issuance of
new Holdings Common Stock have been accounted for as equity transactions.
In October 1997, Old Telex completed an exchange offer of $125.0 million
aggregate principal amount of new 10 1/2 % Senior Subordinated Notes Due 2007,
Series A (the "New Telex Notes"), which were registerED under the Securities
Act, for a like principal amount of the Existing Telex Notes (together with the
New Telex Notes, the "Telex Notes"). All of the Existing Telex Notes were
tendered and accepted for exchange.
The Mergers. On February 2, 1998 Old EVI merged with Old Telex, with Old EVI
surviving and changing its corporate name to "Telex Communications, Inc." (the
"Mergers"). The Merger was effected pursuant to an agreement and plan of merger,
dated January 29, 1998 under which Greenwich I LLC ("G-I"), a subsidiary wholly
owned by GSCP and certain affiliated investors, exchanged all of the issued and
outstanding common and preferred stock of EVI Audio Holdings ("EVI Holdings"),
the former parent of Old EVI, for 1,397,400 shares of Holdings Common Stock, and
13,000 shares of Holdings' Series A Pay-in-Kind Preferred Stock, respectively,
and EVI Holdings was merged with and into Holdings, with Holdings continuing as
the surviving corporation (the "Parent Merger" and together with the Merger, the
"Mergers"). The Mergers have been accounted for essentially as a pooling of
interests from May 6, 1997, the date on which Old EVI and Old Telex came under
common control, and the financial statements of the Company for Fiscal 1998
accordingly include the results of Old Telex from May 6, 1997. Immediately prior
to the Mergers, $12.7 million of indebtedness outstanding under Old EVI's senior
credit facility was paid in full and Old EVI's senior credit facility was
terminated. Such indebtedness, together with $0.4 million of certain fees and
expenses associated with the Mergers, was repaid by utilizing free cash at
closing from Old EVI of $3.8 million and by
12
<PAGE> 13
borrowings under Old Telex's Revolving Credit Facility of $9.3 million. Total
fees and expenses incurred as a result of the Mergers were $1.7 million,
including the $0.4 million paid at closing. The EVI Notes remain outstanding
following the Mergers.
The Acquisition Transactions, the Recapitalization Transaction, and the Mergers
are referred to herein collectively as the "Transactions."
OVERVIEW
The Company, formed as a result of the February 2, 1998 merger of Old Telex and
Old EVI (see "The Mergers"), is a leader in the design, manufacture and
marketing of sophisticated audio, wireless and multimedia communications
equipment to commercial, professional and industrial customers. The Company
provides high value-added communications products designed to meet the specific
needs of customers in commercial, professional and industrial markets, and does
not participate in the competitive retail consumer electronics market. The
Company offers a comprehensive range of products worldwide for professional
audio systems as well as for multimedia and other communications product
markets, including wired and wireless microphones, wired and wireless intercom
systems, mixing consoles, signal processors, amplifiers, loudspeaker systems,
headphones and headsets, tape duplication products, talking book players, LCD
projectors, wireless LAN and PCS antennas, hearing aids and wireless assistive
listening devices.
Subsequent to the Mergers, the Company has reorganized its business into two
business segments: Professional Sound and Entertainment and Multimedia/Audio
Communications. Prior to the Mergers, essentially all of the Company's business
consisted of Old EVI's three principal lines of business within the overall
professional audio market: Fixed Installation, Professional Music Retail and
Concert/Recording/Broadcast. These businesses now comprise a part of the
Company's Professional Sound and Entertainment business segment. In addition, as
a result of the Mergers, the Multimedia/Audio Communications business segment
(consisting mostly of businesses of Old Telex) accounts for a significant
proportion of the Company's business.
The Company maintains assets and/or operations in a number of foreign
jurisdictions, the most significant of which are Germany, the United Kingdom,
Japan, Singapore, and Hong Kong. In addition, the Company conducts business in
local currency in many countries, the most significant of which are Germany, the
United Kingdom, Japan, Singapore, Hong Kong, Canada, Australia, Switzerland and
France. Exposure to U.S. dollar/German mark and U.S. dollar/British pound
exchange rate volatility is mitigated to some extent by the Company's ability to
source its production needs with existing manufacturing capacity in Germany and
Great Britain, and the exposure to the U.S. dollar/Japanese yen exchange rate
volatility is to some extent mitigated by sourcing products denominated in yen
from Japan or through contractual provisions in sales agreements with certain
customers. Nevertheless, the Company has a direct and continuing exposure to
both positive and negative foreign currency movements.
The Company reports the foreign exchange gains or losses on transactions as part
of other income. Gains and losses on translation of foreign currency denominated
balance sheets are classified as currency translation adjustments and are
included as part of shareholder's deficit.
13
<PAGE> 14
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, the Company's net
sales, in thousands:
<TABLE>
<CAPTION>
Quarter ended
----------------------------------
March 31, June 30,
1999 1998
----------------------------------
Net Sales:
<S> <C> <C>
Professional Sound and Entertainment $ 49,599 $ 50,103
Multimedia/Communications 29,811 28,785
------------ -------------
$ 79,410 $ 78,888
============ =============
</TABLE>
QUARTER ENDED MARCH 31, 1999 COMPARED TO QUARTER ENDED JUNE 30, 1998
Net Sales. The Company's net sales increased $0.5 million, or 0.6%, from $78.9
million in the quarter ended June 30, 1998 to $79.4 million in the quarter ended
March 31, 1999. A slight decrease in the Professional Sound and Entertainment
segment's net sales was more than offset by an increase in the Multimedia/Audio
Communications segment's net sales.
Net sales in the Company's Professional Sound and Entertainment segment
decreased $0.5 million, or 1.0%, from $50.1 million in the quarter ended June
30, 1998 to $49.6 million in the quarter ended March 31, 1999. The decrease in
net sales for the quarter ended March 31, 1999 was attributed primarily to the
discontinuation of certain product lines, the sale of the Gauss business, and to
the destruction by fire of the Company's Mishawaka, IN factory in December 1998.
This decrease was offset to a large extent by sales from new products late in
the quarter ended March 31, 1999. The Company has now found alternate suppliers
of product components previously manufactured at the Mishawaka, IN factory.
Net sales in the Company's Multimedia/Audio Communications segment increased
$1.0, or 3.5%, from $28.8 million in the quarter ended June 30, 1998 to $29.8
million in the quarter ended March 31, 1999. The increase in net sales for the
quarter ended March 31, 1999 was attributed primarily to an increase in new
electronic imaging product sales.
Gross Profit. The Company's gross profit decreased $1.1 million, or 3.7%, from
$29.7 million in the quarter ended June 30, 1998 to $28.6 million in the quarter
ended March 31, 1999. As a percentage of sales, the gross margin rate in the
respective periods decreased from 37.6% to 36.1%. The decrease in the gross
margin rate for the quarter ended March 31, 1999 was attributed mainly to
discounting and promotions on initial sales of certain new products.
Engineering. The Company's engineering expenses remained about flat, decreasing
$0.1 million, or 2.6%, from $3.8 million in the quarter ended June 30, 1998 to
$3.7 million in the quarter ended March 31, 1999.
Selling, General and Administrative. The Company's selling, general and
administrative expenses remained about flat, decreasing $0.1 million, or 0.5%,
from $18.4 million in the quarter ended June 30, 1998 to $18.3 million in the
quarter ended March 31, 1999.
14
<PAGE> 15
Corporate Charges. Corporate charges of $0.4 million in the quarter ended March
31, 1999 and $0.4 million in the quarter ended June 30, 1998, respectively,
represent fees for consulting and management services provided by GCSP under a
management and services agreement.
Other income. The Company's royalty income, together with gains on the sales of
certain of its facilities vacated in 1998 due to merger-related restructuring
and the expected business interruption insurance benefit resulting from a fire
that destroyed the Company's Mishawaka, IN facility, exceeded the foreign
exchange loss and other expenses in the quarter ended March 31, 1999.
In the quarter ended March 31, 1999, the Company recorded a gain of $0.3 million
on $2.0 million of proceeds on the sales of certain vacated facilities.
The Company's Mishawaka, IN facility was destroyed by fire in 1998. The Company
has recognized the expected business interruption insurance benefit of $1.0
million in the quarter ended March 31, 1999.
Interest expense. Interest expense decreased from $9.3 million in the quarter
ended June 30, 1998 to $9.1 million in the quarter ended March 31, 1999. The
decrease was primarily due to the reduction in outstanding indebtedness,
partially offset by slightly higher interest rates on the Company's Senior
Secured Credit Facility.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999 the Company had cash and cash equivalents of $3.7 million
compared to $3.4 million at December 31, 1998. The Company's principal source of
funds in the quarter ended March 31, 1999 consisted of cash generated from
financing activities. Net cash provided by financing activities was $3.8
million, including $2.0 million proceeds from the sales of certain vacated
facilities, while net cash used in operations was $1.3 million and net cash used
in investing activities was $2.0 million.
The Company's investing activities consisted mainly of capital expenditures to
maintain facilities, acquire machines or tooling, update certain manufacturing
processes and improve efficiency. Capital expenditures totaled $2.0 million for
the quarter ended March 31, 1999 compared with $1.4 million for the quarter
ended June 30, 1998. The Company's ability to make capital expenditures is
subject to certain restrictions under its Senior Secured Credit Facility.
The Company's consolidated indebtedness increased $1.5 million from $337.7
million at December 31, 1998 to $339.2 million at March 31, 1999. The increase
in indebtedness is comprised of increased borrowings under the Company's
Revolving Credit Facility, which were partially offset by scheduled and
accelerated principal reductions on the Company's Term Loan Facility.
The Company's liquidity needs arise primarily from debt service on indebtedness
incurred in connection with the Transactions, working capital needs and capital
expenditure requirements. The Company incurred substantial indebtedness in
connection with the Acquisition Transactions and the Recapitalization
Transaction. As a result, debt service represents significant liquidity
requirements for the Company.
15
<PAGE> 16
The Company relies mainly on internally generated funds, and, to the extent
necessary, borrowings under the Revolving Credit Facility and foreign working
capital lines to meet its liquidity needs.
The Company's current credit facilities include the Senior Secured Credit
Facility consisting of the Term Loan Facility of $100.7 million, the Revolving
Credit Facility, subject to certain borrowing base limitations, of $25.0
million, and foreign working capital lines, subject to certain limitations, of
$6.0 million. In certain instances the foreign working capital lines are secured
by a lien on foreign real property, leaseholds, accounts receivable and
inventory or are guaranteed by another subsidiary.
As of March 31, 1999, $6.6 million of the Company's $100.7 million Term Loan
Facility is payable in the next 12 months. In addition, the Company had $9.5
million outstanding under the Revolving Credit Facility, and $4.0 million
outstanding under the foreign working capital lines. Net availability at March
31, 1999 under the Revolving Credit Facility, computed by deducting $7.2 million
of open letters of credit and applying applicable borrowing limitations, totaled
$8.3 million. Net availability at March 31, 1999 under foreign working lines
totaled $2.0 million. Outstanding balances under substantially all of these
credit facilities bear interest at floating rates based upon the interest rate
option selected by the Company; therefore, the Company's financial condition is
and will continue to be affected by changes in the prevailing interest rates.
The effective interest rate under these credit facilities in the quarter ended
March 31, 1999 was 8.8%.
Pursuant to the Term Loan Facility, the Company is required to make permanent
principal payments under (i) the $50.0 million Tranche A Term Loan Facility
($38.9 million outstanding at March 31, 1999), $4.4 million in the remainder of
1999 and $8.5 million, $11.0 million and $15.0 million of which is payable in
each of 2000, 2001 and 2002 (which has a final maturity date of November 6,
2002), respectively, and (ii) the $65.0 million Tranche B Term Loan Facility
($61.8 million outstanding at March 31, 1999), $0.1 million in the remainder of
1999 and $0.5 million, $0.5 million, $0.5 million, $24.1 million and $36.1
million of which is payable in each of 2000, 2001, 2002, 2003 and 2004 (which
has a final maturity date of November 6, 2004), respectively. In addition, under
the terms of the Senior Secured Credit Facility, the Company is required to make
mandatory prepayments with (i) non-ordinary asset sale proceeds, (ii) any
additional indebtedness and equity proceeds (with certain exceptions) and (iii)
with 75% of the Excess Cash Flow of the Company and its subsidiaries for each
fiscal year. During the quarter ended March 31, 1999, the Company made a
mandatory prepayment, equal to 75% of the Company's Excess Cash Flow, of $4.2
million.
The Company expects to generate additional cash flows from operations and has
arranged a $4.0 million intercompany line of credit with Holdings. In addition,
the Company is actively implementing plans to reduce inventory, improve accounts
receivable collection, and sell the remaining vacated property and vacant land.
16
<PAGE> 17
The Company believes that these additional sources of funds, together with the
Company's Revolving Credit Facility and cash from operations will be adequate to
meet its debt service and principle payment requirements, capital expenditure
needs, and working capital requirements. However, no assurance can be given in
this regard, because working capital requirements and other circumstances may
change. The Company's future performance and its ability to service its
obligations will also be subject to future economic conditions and to financial,
business and other factors, many of which are beyond the Company's control.
ENVIRONMENTAL MATTERS
The Company is a party in a number of environmental enforcement matters and
related claims which have arisen in the ordinary course of business. The Company
believes that such matters and claims, if finally determined in a manner adverse
to the Company, whether considered separately or in the aggregate, would not
have a material adverse effect on the operating results or financial condition
of the Company. The Company believes that compliance with current federal, state
and local environmental protection laws and provisions should not have a
material adverse effect on the operating income or financial condition of the
Company. The assessment of materiality of such environmental matters and claims
is based on a gross determination of such charges that could occur and does not
give effect to possible third party recoveries.
YEAR 2000
Some companies' computer systems used today may be unable to interpret or
process data correctly after December 31, 1999 because they allow only two
digits to indicate the year in a date. The Company uses computer systems for
various operations, including financial reporting, billing, order processing,
purchasing, inventory management and certain manufacturing operations. In
addition, certain manufacturing systems, plant and facilities systems may
contain date-related functionality, software or embedded microprocessors that
could malfunction if they are not Year 2000 ready.
Most of the Company's products do not contain date-related functionality,
software or embedded microprocessors and therefore are not subject to Year 2000
issues. The Company believes all its currently-produced products are Year 2000
ready. The Company is completing programs to identify non-Year 2000 ready
products and is developing strategies to address problems, if any, for customers
who own such products.
The Company has completed an internal inventory and assessment of Year 2000
readiness of its computer hardware and software and it's non-information
technology and has in recent years replaced, modified or upgraded more than 80%
of its information systems in recent years with Year 2000 ready systems. The
replacement, upgrade and changes to the Company's remaining critical non-ready
systems, and the testing of all of the Company's systems will be completed by
July 1999.
In addition to internal remediation activities, the Company is in the process of
initiating communications with key third parties, including suppliers and
customers, to determine the extent to which their systems, their products, or
their electronic data interchange with the Company, are vulnerable to Year 2000
issues. The Company has not yet received sufficient information from such
parties to fully assess the risks relating to non-timely compliance by third
parties.
17
<PAGE> 18
The Company is in the process of developing contingency plans in the event that
the Company or any of its key suppliers is not Year 2000 ready by the required
dates. The Company's target for finalizing such contingency planning is
September 1999.
If the systems of the Company or its key suppliers are not Year 2000 ready in a
timely fashion, the Company believes that the most likely scenario would include
temporary disruptions in the Company's acceptance and processing of orders and
billing and in its ability to secure raw materials for production from
suppliers. The Company is in the process of assessing such risks and its ability
to mitigate them through contingency planning; however, at this time the Company
does not believe that such temporary disruptions, if they were to happen, would
have a material adverse effect on its financial position or results of
operations.
The Company believes that the replacement, upgrade and changes to the remaining
non-ready critical systems to address Year 2000 issues will require incremental
future expenditures of less than $1.0 million. The Company does not separately
track internal costs incurred for its Year 2000 program, which costs are
principally related to payroll costs for its information systems group. The
costs of the Year 2000 program are being funded through operating cash flows and
are expensed as incurred or capitalized as appropriate.
Although the Company expects its critical systems to be ready by the fourth
quarter of 1999, there can be no assurance that its Year 2000 program will be
effective or that estimates about timing and cost will be accurate. Special
factors that might cause such material differences include, but are not limited
to, the availability and cost of Year 2000 personnel, the ability to locate and
correct relevant computer source codes and embedded technology, testing results
and the timeliness and effectiveness of third parties' compliance.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" effective for fiscal years beginning after
June 15, 1999. SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments embedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. SFAS No. 133 requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge criteria are met. Special accounting for qualifying hedges
allow a derivative's gains or losses to offset related results on the hedged
item in the income statement and requires that a company must formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting. The Company has not quantified the impacts of adopting SFAS No. 133
and has not yet determined the timing or method of adoption.
18
<PAGE> 19
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks, including changes in foreign
currency exchange rates and interest rates. Market risk is the potential loss
arising from adverse changes in market rates and prices, such as foreign
exchange and interest rates. The Company does not enter into derivatives or
other financial instruments for trading or speculative purposes. The
counterparties to these transactions are major financial institutions.
EXCHANGE RATE SENSITIVITY ANALYSIS
The Company enters into forward exchange contracts principally to hedge the
currency fluctuations in transactions denominated in foreign currencies, thereby
limiting the Company's risk that would otherwise result from changes in exchange
rates. During the quarter ended March 31, 1999, the principal transactions
hedged were certain intercompany balances attributed primarily to intercompany
sales. Gains and losses on forward exchange contracts and the offsetting losses
and gains on the hedged transactions are reflected in the consolidated statement
of operations.
At March 31, 1999, the Company had $2.1 million outstanding forward exchange
contracts, with a weighted remaining maturity of 146 days.
At March 31, 1999, the difference between the fair value of all outstanding
contracts, as estimated by the amount required to enter into offsetting
contracts with similar remaining maturities based on quoted prices, and the
contract amounts was immaterial. A 10% fluctuation in exchange rates for these
currencies would change the fair value by approximately $0.2 million. However,
since these contracts hedge foreign currency denominated transactions, any
change in the fair value of the contracts would be offset by changes in the
underlying value of the transactions being hedged.
INTEREST RATE AND DEBT SENSITIVE ANALYSIS
For fixed rate debt, interest rate changes affect the fair market value but do
not impact earnings or cash flows. Conversely, for floating rate debt, interest
rate changes generally do not affect the fair market value but do impact future
earnings and cash flows, assuming other factors are held constant.
At March 31, 1999, the Company had fixed rate debt of $225.0 million and
floating rate debt of $114.2 million. Holding all other variables constant (such
as foreign exchange rates and debt levels), a one percentage point decrease in
interest rates would increase the unrealized fair market value of the $225.0
million fixed rate debt by approximately $9.1 million. The earnings and cash
flow impact for the next twelve months resulting from a one percentage point
increase in interest rates on the $114.2 million floating rate debt would be
approximately $1.1 million, holding all other variables constant.
19
<PAGE> 20
PART II. OTHER INFORMATION
ITEM 5 OTHER INFORMATION
In April 1999, the Company appointed Richard J. Pearson as Vice President and
Chief Financial Officer. Prior to his appointment, Mr. Pearson served as
Executive Vice President and Chief Financial Officer of the Harmon Glass
Division of Apogee Enterprises, Inc. for over five years. In April 1999, Gregory
W. Richter was appointed to serve as Vice President and Treasurer. Mr. Richter
has served as Vice President Treasury with the Company since September 1998.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial data schedule
(b) Reports on Form 8-K
None.
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.
<TABLE>
<CAPTION>
TELEX COMMUNICATIONS, INC.
<S> <C>
Dated: April 30, 1999 By: /s/ Ned C. Jackson
-------------------------------------- --------------------------
Ned C. Jackson
President and Chief Executive Officer
TELEX COMMUNICATIONS, INC.
Dated: April 30, 1999 By: /s/ Richard J. Pearson
-------------------------------------- --------------------------
Richard J. Pearson
Vice President and Chief Financial
Officer
</TABLE>
20
<PAGE> 21
TELEX COMMUNICATIONS, INC.
FORM 10-Q
EXHIBIT INDEX
27 Financial Data Schedule
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,708
<SECURITIES> 0
<RECEIVABLES> 59,235
<ALLOWANCES> 0
<INVENTORY> 66,248
<CURRENT-ASSETS> 139,022
<PP&E> 47,346
<DEPRECIATION> 0
<TOTAL-ASSETS> 274,456
<CURRENT-LIABILITIES> 80,516
<BONDS> 319,069
0
0
<COMMON> 0
<OTHER-SE> (134,451)
<TOTAL-LIABILITY-AND-EQUITY> 274,456
<SALES> 79,410
<TOTAL-REVENUES> 79,410
<CGS> 50,780
<TOTAL-COSTS> 23,182
<OTHER-EXPENSES> (1,531)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,118
<INCOME-PRETAX> (2,139)
<INCOME-TAX> 218
<INCOME-CONTINUING> (2,357)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,357)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
