<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 September 30, 2000 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.)
12000 PORTLAND AVENUE SOUTH, MINNEAPOLIS, MINNESOTA 55337
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code: (952) 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 SEPTEMBER 30, 2000 THERE WERE 110 SHARES OF TELEX COMMUNICATIONS, INC.,
$0.01 PAR VALUE, OUTSTANDING.
THIS DOCUMENT CONTAINS 24 PAGES.
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<PAGE> 2
<TABLE>
<S><C>
PART I. --- FINANCIAL INFORMATION
Item 1. Financial Statements Page(s)
Included herein is the following unaudited financial information:
Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations for the three and nine month periods ended
September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the nine month periods ended
September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6-13
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14-20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II. --- OTHER INFORMATION
Page(s)
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,609 $ 3,239
Accounts receivable, net 60,023 59,438
Inventories 66,613 66,573
Other current assets 7,557 14,665
---------- ----------
Total current assets 137,802 143,915
Property, plant and equipment, net 41,820 45,048
Deferred financing costs, net 8,983 10,476
Intangible and other assets, net 60,413 62,559
---------- ----------
$ 249,018 $ 261,998
========== ==========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Revolving lines of credit $ 27,209 $ 22,688
Current maturities of long-term debt 10,482 8,982
Accounts payable 17,522 20,817
Accrued wages and benefits 9,820 10,708
Accrued interest 6,395 5,898
Other accrued liabilities 17,906 16,750
Income taxes payable 11,202 8,935
---------- ----------
Total current liabilities 100,536 94,778
Long-term debt 305,086 312,207
Other long-term liabilities 10,334 9,470
---------- ----------
Total liabilities 415,956 416,455
---------- ----------
Shareholder's deficit:
Common stock and capital in excess of par 3,147 3,139
Accumulated other comprehensive loss (7,179) (3,508)
Accumulated deficit (162,906) (154,088)
---------- ----------
Total shareholder's deficit (166,938) (154,457)
---------- ----------
$ 249,018 $ 261,998
========== =========
</TABLE>
See accompanying notes.
3
<PAGE> 4
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
--------------------------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
--------------- --------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Net sales $ 85,030 $ 88,411 $ 252,268 $ 254,582
Cost of sales 53,674 55,781 156,501 160,751
--------- --------- --------- ---------
Gross profit 31,356 32,630 95,767 93,831
--------- --------- --------- ---------
Operating expenses:
Engineering 3,489 3,759 10,522 11,169
Selling, general and administrative 20,988 20,909 62,434 59,033
Corporate charges 429 429 1,287 1,287
Amortization of goodwill and other intangibles 514 692 1,544 2,086
Restructuring charges -- -- 9,703 --
--------- --------- --------- ---------
25,420 25,789 85,490 73,575
--------- --------- --------- ---------
Operating profit 5,936 6,841 10,277 20,256
Interest expense 9,659 9,213 27,348 27,343
Other income (143) (1,049) (10,333) (3,101)
--------- --------- --------- ---------
Loss before provision for income taxes (3,580) (1,323) (6,738) (3,986)
Provision for income taxes 699 183 2,080 1,167
--------- --------- --------- ---------
Net loss $ (4,279) $ (1,506) $ (8,818) $ (5,153)
========= ========= ========= =========
</TABLE>
See accompanying notes.
4
<PAGE> 5
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------------ ----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (8,818) $ (5,153)
Adjustments to reconcile net loss to cash flows from operations:
Depreciation and amortization 10,737 10,482
Gain on sale of facilities, product lines and intangible assets (1,140) (766)
Stock option compensation expense 8 141
Restructuring charge 9,703 --
Change in operating assets and liabilities (3,891) (10,536)
Change in long-term liabilities 922 222
Other, net 239 634
-------- --------
Net cash provided by (used in) operating activities 7,760 (4,976)
-------- --------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (8,771) (7,648)
Proceeds from sale of facilities, product lines and intangible assets 2,699 3,384
Investment in joint venture (550) --
-------- --------
Net cash used in investing activities (6,622) (4,264)
-------- --------
FINANCING ACTIVITIES:
Borrowings under revolving lines of credit, net 4,992 17,093
Repayment of long-term debt (6,610) (8,691)
Borrowings of other long-term debt 989 --
-------- --------
Net cash provided by (used in) financing activities (629) 8,402
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS: (139) 7
-------- --------
CASH AND CASH EQUIVALENTS:
Net increase 370 (831)
Beginning of period 3,239 3,431
-------- --------
End of period $ 3,609 $ 2,600
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH PAID FOR:
Interest $ 26,780 $ 25,648
======== ========
Income taxes (refunds), net $ (445) $ 697
======== ========
</TABLE>
See accompanying notes.
5
<PAGE> 6
TELEX COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Telex Communications, Inc. ("Telex" or the "Company"), a Delaware
corporation, is a wholly owned subsidiary of Telex Communications Group,
Inc. ("Holdings"), a Delaware corporation and the corporate parent of the
Company. The condensed consolidated balance sheet as of September 30, 2000
and December 31, 1999, the condensed consolidated statements of operations
for the quarters and nine months ended September 30, 2000 and September 30,
1999, and the condensed consolidated statements of cash flows for the nine
months ended September 30, 2000 and September 30, 1999 have been prepared
by the Company without being audited, pursuant to the rules and regulations
of the Securities and Exchange Commission ("SEC"). In the opinion of
management, these financial statements reflect all adjustments (which
include normal recurring accruals) necessary to present fairly the
financial position of Telex at September 30, 2000 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 conformity with accounting principles generally accepted in the United
States 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 Form
10-K for the fiscal year ended December 31, 1999 filed by Telex with the
SEC on March 30, 2000 (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 that will be realized for the full fiscal year.
2. Inventories consist of the following, in thousands:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Raw materials and parts $ 28,218 $ 31,848
Work in process 11,575 9,852
Finished products 26,820 24,873
-------- --------
$ 66,613 $ 66,573
======== ========
</TABLE>
3. The Company recorded an income tax provision of $0.7 million and $2.1
million on pre-tax losses of $3.6 million and $6.7 million for the quarter
and nine months ended September 30, 2000, respectively. The income tax
provision for the nine months ended September 30, 2000 is comprised of a
U.S. Federal income tax benefit of $4.2 million, which is offset by a
deferred tax valuation allowance adjustment of $4.2 million, an income tax
provision of $2.0 million attributed to income of certain foreign
subsidiaries, and a state income tax provision of $0.1 million attributed
to income in certain states.
The Company has a deferred tax asset of $25.4 million offset, due to the
uncertainty of the realization of future tax benefits, by a deferred tax
valuation allowance of $25.4 million at September 30, 2000. The realization
of the future tax benefits related to the deferred tax asset 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.
4. Effective April 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive
6
<PAGE> 7
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 $6.1 million and $12.5 million for the quarter
and nine months ended September 30, 2000, respectively. Comprehensive net
income was $0.1 million for the quarter ended September 30, 1999.
Comprehensive net loss was $6.5 million for the nine months ended September
30, 1999.
5. Segment Information:
The Company has two business segments: Professional Sound and Entertainment
and Multimedia/Audio Communications.
Professional Sound and Entertainment
Professional Sound and Entertainment consists of five lines of business
within the overall professional audio market: (i) Fixed Installation; (ii)
Professional Music Retail; (iii) Concert/Recording/Broadcast; (iv)
Broadcast Communications Systems; and (v) Sound Reinforcement.
Multimedia/Audio Communications
Multimedia/Audio Communications segment targets nine principal product
markets: (i) Computer Audio; (ii) Audio Duplication; (iii) Multimedia
Presentation/Training; (iv) Aviation Communications/Other Applications; (v)
Wireless Local Area Networks ("LAN") and Satellite-based Mobile Phone
Antennas ("SBA") Systems; (vi) Talking Book Players; (vii) Wireless
Communications; (viii) Hearing Aids; and (ix) Wireless Assistive Listening
Systems.
The following tables provide information by business segment (amounts in
thousands):
7
<PAGE> 8
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Professional Multimedia/
Sound and Audio
Entertain- Communi-
ment cations Corporate Total
------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales $ 54,629 $ 30,401 $ -- $ 85,030
Cost of sales 34,598 19,076 -- 53,674
-------- -------- -------- --------
Gross profit 20,031 11,325 -- 31,356
-------- -------- -------- --------
Operating expenses:
Engineering 2,213 1,053 223 3,489
Selling, general and administrative 13,361 5,120 2,507 20,988
Corporate charges -- -- 429 429
Amortization of goodwill and other intangibles -- -- 514 514
Restructuring charges -- -- -- --
-------- -------- -------- --------
15,574 6,173 3,673 25,420
-------- -------- -------- --------
Operating profit (loss) $ 4,457 $ 5,152 $ (3,673) $ 5,936
Interest expense -- -- 9,659 9,659
Other income -- -- (143) (143)
Provision for income taxes -- -- 699 699
-------- -------- -------- --------
Net income (loss) $ 4,457 $ 5,152 $(13,888) $ (4,279)
======== ======== ======== ========
Depreciation expense $ 1,102 $ 694 $ 1,047 $ 2,843
======== ======== ======== ========
Capital expenditures $ 1,078 $ 176 $ 1,594 $ 2,848
======== ======== ======== ========
<CAPTION>
United
States Germany Other Total
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 51,556 $ 6,540 $ 26,934 $ 85,030
======== ======== ======== ========
</TABLE>
8
<PAGE> 9
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Professional Multimedia/
Sound and Audio
Entertain- Communi-
ment cations Corporate Total
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 162,638 $ 89,630 $ - $ 252,268
Cost of sales 100,238 56,263 - 156,501
-------------- -------------- -------------- --------------
Gross profit 62,400 33,367 - 95,767
-------------- -------------- -------------- --------------
Operating expenses:
Engineering 6,682 3,484 356 10,522
Selling, general and administrative 40,377 15,259 6,798 62,434
Corporate charges - - 1,287 1,287
Amortization of goodwill and other intangibles - - 1,544 1,544
Restructuring charges - - 9,703 9,703
-------------- -------------- -------------- --------------
47,059 18,743 19,688 85,490
-------------- -------------- -------------- --------------
Operating profit (loss) 15,341 14,624 (19,688) 10,277
Interest expense - - 27,348 27,348
Other income - - $ (10,333) (10,333)
Provision for income taxes - - $ 2,080 2,080
-------------- -------------- -------------- --------------
Net income (loss) $ 15,341 $ 14,624 $ (38,783) $ (8,818)
============== ============== ============== ==============
Depreciation expense $ 3,280 $ 1,800 $ 2,644 $ 7,724
============== ============== ============== ==============
Capital expenditures $ 5,596 $ 876 $ 2,299 $ 8,771
============== ============== ============== ==============
Total assets $ 117,038 $ 44,823 $ 87,157 $ 249,018
============== ============== ============== ==============
<CAPTION>
United
States Germany Other Total
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 156,437 $ 25,694 $ 70,137 $ 252,268
============== ============== ============== ==============
Long-lived assets $ 102,113 $ 4,181 $ 4,922 $ 111,216
============== ============== ============== ==============
</TABLE>
9
<PAGE> 10
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Professional Multimedia/
Sound and Audio
Entertain- Communi-
ment cations Corporate Total
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 53,897 $ 34,514 $ - $ 88,411
Cost of sales 32,962 22,819 - 55,781
--------------- --------------- -------------- --------------
Gross profit 20,935 11,695 - 32,630
--------------- --------------- -------------- --------------
Operating expenses:
Engineering 2,377 1,355 27 3,759
Selling, general and administrative 13,629 5,633 1,647 20,909
Corporate charges - - 429 429
Amortization of goodwill and other intangibles - - 692 692
--------------- --------------- -------------- --------------
16,006 6,988 2,795 25,789
--------------- --------------- -------------- --------------
Operating profit (loss) 4,929 4,707 (2,795) 6,841
Interest expense - - 9,213 9,213
Other income - - (1,049) (1,049)
Provision for income taxes - - 183 183
--------------- --------------- -------------- --------------
Net income (loss) $ 4,929 $ 4,707 $(11,142) $ (1,506)
=============== =============== ============== ==============
Depreciation expense $ 1,115 $ 582 $ 840 $ 2,537
=============== =============== ============== ==============
Capital expenditures $ 962 $ 1,302 $ 104 $ 2,368
=============== =============== ============== ==============
<CAPTION>
United
States Germany Other Total
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 52,849 $ 7,506 $ 28,056 $ 88,411
=============== =============== ============== ==============
</TABLE>
10
<PAGE> 11
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Professional Multimedia/
Sound and Audio
Entertain- Communi-
ment cations Corporate Total
--------------- --------------- -------------- -----------
<S> <C> <C> <C> <C>
Net sales $157,267 $97,315 $ -- $ 254,582
Cost of sales 94,503 66,248 -- 160,751
-------- ------- --------- ---------
Gross profit 62,764 31,067 -- 93,831
-------- ------- --------- ---------
Operating expenses:
Engineering 6,959 4,115 95 11,169
Selling, general and administrative 38,359 16,568 4,106 59,033
Corporate charges -- -- 1,287 1,287
Amortization of goodwill and other intangibles -- -- 2,086 2,086
-------- ------- --------- ---------
45,318 20,683 7,574 73,575
-------- ------- --------- ---------
Operating profit (loss) 17,446 10,384 (7,574) 20,256
Interest expense -- -- 27,343 27,343
Other income -- -- (3,101) (3,101)
Provision for income taxes -- -- 1,167 1,167
-------- ------- --------- ---------
Net income (loss) $ 17,446 $10,384 $ (32,983) $ (5,153)
======== ======= ========= =========
Depreciation expense $ 3,137 $ 1,777 $ 2,410 $ 7,324
======== ======= ========= =========
Capital expenditures $ 3,279 $ 2,637 $ 1,732 $ 7,648
======== ======= ========= =========
Total assets $140,175 $48,019 $ 100,016 $ 288,210
======== ======= ========= =========
<CAPTION>
United
States Germany Other Total
-------- ------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $146,531 $21,276 $ 86,775 $ 254,582
======== ======= ========= =========
Long-lived assets $123,307 $ 4,968 $ 5,776 $ 134,051
======== ======= ========= =========
</TABLE>
11
<PAGE> 12
6. During the second quarter ended June 30, 2000, the Company recorded a
pre-tax restructuring charge of $9.7 million attributable to the
consolidation of certain of its United States manufacturing, engineering,
distribution, marketing, service and administrative operations to reduce
costs, to better utilize available manufacturing and operating capacity and
to enhance competitiveness. The following table summarizes the activity
associated with this restructuring charge for the nine months ended
September 30, 2000, in thousands:
<TABLE>
<CAPTION>
Balance at Charged to Cash Writeoffs/ Balance at
January 1, 2000 Income Payments Disposals September 30, 2000
--------------- ------ -------- ---------- ------------------
<S> <C> <C> <C> <C> <C>
Severance costs $ - $ 4,277 $ 387 $ - $ 3,890
Other restructuring costs - 578 67 - 511
Inventories - 540 - 317 223
Property, plant and equipment, net - 813 - 813 -
Goodwill - 3,495 - 3,495 -
-------- ------- ----- ------- -------
$ - $ 9,703 $ 454 $ 4,625 $ 4,624
======== ======= ===== ======= =======
</TABLE>
7. In May 2000, the Company relocated its corporate headquarters to
Burnsville, Minnesota, a facility leased from a limited liability joint
venture in which the Company has a 50% interest. The Company contributed
equity of $0.6 million to the joint venture formed in March 2000. The
Company's investment is accounted for under the equity method. Telex's
allocable share of the joint venture income is included as a component of
other income in the accompanying consolidated statements of operations.
The annual lease payments are $1.1 million for years one to five and $1.2
million for years six to ten. In accordance with SFAS No. 13 "Accounting
for Leases," the Company records the lease obligations as an operating
lease.
8. In June 2000, the Company received an arbitration ruling entitling the
Company to a payment of $9.2 million, inclusive of interest of $2.1
million, in connection with a dispute arising out of the Company's purchase
of Mark IV Industries, Inc. ("Mark IV") Audio Products Group in December
1996.
In the second quarter ended June 30, 2000, the Company recorded a
receivable from Mark IV of $6.1 million, recognized interest income of $1.4
million, reduced goodwill attributed to the purchase transaction by $0.4
million, accrued $0.9 million for arbitration-related professional
services' expenses and reduced prepaid expenses of $3.4 million associated
with the arbitration. In the third quarter ended September 30, 2000, the
Company received $6.1 million of cash from Mark IV and increased goodwill
by $0.5 million for arbitration-related professional services' expenses.
Mark IV filed a notice of petition in July 2000 with the Supreme Court of
the State of New York to vacate the remaining $3.1 million of the award.
The Company has opposed Mark IV's petition and filed a cross motion to
confirm the arbitrator's award.
9. The Company has incurred substantial indebtedness in connection with a
series of leveraged transactions. As a result, debt service obligations
represent significant liquidity requirements for the Company. The Company
intends to improve operations and has liquidated nonproductive assets in
part to meet the liquidity needs of the debt service and to satisfy the
requirements of the debt covenants. The Company's operating plan includes
strategies to improve operating results by reducing purchased material
costs through more effective supply chain management, increasing selling
prices on selective products, managing other operating costs, reducing
inventory through the use of consigned inventory from certain vendors and
by consolidating overseas warehouses, and improving the accounts receivable
collection experience. The Company could be in default under the terms of
its Senior Secured Credit Facility, the EVI Notes and the Telex Notes if it
is unable to achieve the necessary operating improvements. If the operating
improvements are not realized,
12
<PAGE> 13
management would consider other strategic alternatives, including the
renegotiation of the debt covenants and the sale of certain operating
assets and certain product lines. There can be no assurance that the
Company will be successful in achieving the planned operating improvements
or executing alternative strategies on terms acceptable to the Company or
that the Company will be able to renegotiate the debt covenants.
Additionally, 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. While the Company believes that the cash flow
enhancements described above, together with the Company's Revolving Credit
Facility and cash from operations, will be adequate to meet its debt
service and principal payment requirements, capital expenditure needs, and
working capital requirements for the next twelve months, no assurance can
be given in this regard.
10. SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 137 and SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities," must be
adopted by Telex no later than January 1, 2001. These standards establish
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 a
liability measured at its fair value. These standards require 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. Had the Company adopted these standards on
September 30, 2000, the impact on the Company's financial position and
results of operations would not have been material.
13
<PAGE> 14
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 report, contains 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 report, are representative of those factors that 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; (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 reports and filings with the SEC.
OVERVIEW
The Company 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, to a lesser
extent, in the 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, wireless LAN and SBA systems,
personal computer speech recognition and speech dictation microphone systems,
and hearing aids and wireless assistive listening devices. Its products are used
in airports, theaters, sports arenas, concert halls, cinemas, stadiums,
convention centers, television and radio broadcast studios, houses of worship
and other venues where music or speech is amplified or transmitted, and by
professional entertainers, television and radio on-air talent, presenters,
airline pilots and the hearing impaired in order to facilitate speech or
communications.
The Company has two business segments: Professional Sound and Entertainment and
Multimedia/Audio Communications. Professional Sound and Entertainment consists
of five lines of business within the overall professional audio market: (i)
Fixed Installation; (ii) Professional Music Retail; (iii)
Concert/Recording/Broadcast; (iv) Broadcast Communications Systems; and (v)
Sound Reinforcement. Multimedia/Audio Communications segment targets nine
principal product markets: (i) Computer Audio; (ii) Audio Duplication; (iii)
Multimedia Presentation/Training; (iv) Aviation Communications/Other
Applications; (v) Wireless LAN and SBA Systems; (vi) Talking Book Players; (vii)
Wireless Communications; (viii) Hearing Aids; and (ix) Wireless Assistive
Listening Systems.
The Company maintains assets and/or operations in a number of foreign
jurisdictions, the most
14
<PAGE> 15
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 the United Kingdom,
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) expense. Gains and losses on translation of foreign currency
denominated balance sheets are classified as currency translation adjustments
and are included in shareholder's deficit as a component of accumulated other
comprehensive loss.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items in the
Company's condensed consolidated statements of operations, in thousands:
<TABLE>
<CAPTION>
Quarter ended Nine months ended
----------------------------------------- ---------------------------------------------
September 30, September 30, % September 30, September 30, %
2000 1999 Change 2000 1999 Change
------------------------------ --------- -------------------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales:
Professional Sound and Entertainment $ 54,629 $ 53,897 1.4% $162,638 $ 157,267 3.4%
Multimedia/Audio Communications 30,401 34,514 -11.9% 89,630 97,315 -7.9%
------------------------------ --------- -------------------------------- ------------
Total net sales 85,030 88,411 -3.8% 252,268 254,582 -0.9%
------------------------------ --------- -------------------------------- ------------
Gross profit:
Professional Sound and Entertainment 20,031 20,935 62,400 62,764
% of sales 36.7% 38.8% 38.4% 39.9%
Multimedia/Audio Communications 11,325 11,695 33,367 31,067
% of sales 37.3% 33.9% 37.2% 31.9%
------------------------------ --------------------------------
Total gross profit 31,356 32,630 95,767 93,831
% of sales 36.9% 36.9% 38.0% 36.9%
------------------------------ --------------------------------
Operating profit $ 5,936 $ 6,841 $ 10,277 $ 20,256
============================== ================================
Net loss $ (4,279) $ (1,506) $ (8,818) $ (5,153)
============================== ================================
</TABLE>
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO QUARTER AND NINE
MONTHS ENDED SEPTEMBER 30, 1999
Net sales. The Company's net sales decreased $3.4 million, or 3.8%, from $88.4
million in the quarter ended September 30, 1999 to $85.0 million in the quarter
ended September 30, 2000. Net sales decreased $2.3 million, or 0.9%, from $254.6
million for the nine months ended September 30, 1999 to $252.3 million for the
nine months ended September 30, 2000. The stronger U.S. dollar, primarily
against certain European currencies, compared to the exchange rate in the prior
year period, reduced translated sales by approximately $2.6 million and $5.4
million, respectively, for the quarter and nine months ended September 30, 2000.
The Company discontinued several product lines throughout 1999 and early 2000.
The Company's net sales, excluding sales of discontinued products and one-time
revenue from the sale last year of advertising rights to the National Football
League, increased approximately 2% and 5% for the quarter and nine months ended
September 30, 2000, respectively.
Net sales in the Company's Professional Sound and Entertainment segment
increased $0.7 million, or 1.4%, from $53.9 million in the quarter ended
September 30, 1999 to $54.6 million in
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<PAGE> 16
the quarter ended September 30, 2000. Net sales increased $5.4 million, or 3.4%,
from $157.3 million for the nine months ended September 30, 1999 to $162.7
million for the nine months ended September 30, 2000. Net sales, excluding sales
of discontinued products in both years and one-time revenue from the sale last
year of advertising rights to the National Football League, increased
approximately 4% and 7% for the quarter and nine month periods ended September
30, 2000, respectively. The growth is attributed primarily to newly introduced
consoles in the last year and intercom revenue generated from the 2000 Olympic
Games.
Net sales in the Company's Multimedia/Audio Communications segment decreased
$4.1 million, or 11.9%, from $34.5 million in the quarter ended September 30,
1999 to $30.4 million in the quarter ended September 30, 2000. Net sales
decreased $7.7 million, or 7.9%, from $97.3 million for the nine months ended
September 30, 1999 to $89.6 million for the nine months ended September 30,
2000. Net sales, excluding sales of discontinued products in both years,
decreased approximately 3% for the quarter and increased approximately 3% for
the nine month period. The growth for the nine month period is attributed
primarily to wireless LAN products.
Gross profit. The Company's gross profit decreased $1.3 million, or 4.0%, from
$32.6 million in the quarter ended September 30, 1999 to $31.3 million in the
quarter ended September 30, 2000. Gross profit increased $1.9 million, or 2.0%
from $93.8 million for the nine months ended September 30, 1999 to $95.7 million
for the nine months ended September 30, 2000. As a percentage of sales, the
gross margin rate remained flat at 36.9% for the quarters ended September 30,
2000 and 1999, respectively. The gross margin rate increased from 36.9% for the
nine months ended September 30, 1999 to 38.0% for the nine months ended
September 30, 2000. The increase in the gross margin rate for the nine months
ended September 30, 2000 is attributed mainly to increased sales of high-margin
products, discontinuation of low margin products, selective selling price
increases and product cost reductions.
Engineering. The Company's engineering expenses for the quarter ended September
30, 2000 decreased slightly to $3.5 million from $3.8 million for the quarter
ended September 30, 1999. Engineering expenses for the nine months ended
September 30, 2000 decreased slightly to $10.5 million from $11.2 million for
the nine months ended September 30, 1999. The Company closely monitors these
expenses while continuing to invest in new product development activities.
Selling, general and administrative. The Company's selling, general and
administrative expenses remained about flat, increasing $0.1 million, or 0.4%,
from $20.9 million in the quarter ended September 30, 1999 to $21.0 million in
the quarter ended September 30, 2000. Selling, general and administrative
expenses increased $3.4 million, or 5.8%, from $59.0 million for the nine months
ended September 30, 1999 to $62.4 million for the nine months ended September
30, 2000. The increase in spending is attributed mainly to inflationary
increases, to increased spending for information technology and advertising and
promotion, and to increases in salary and incentive compensation.
Corporate charges. Corporate charges of $0.4 million for the quarters ended
September 30, 2000 and 1999, respectively, and $1.3 million for the nine months
ended September 30, 2000 and 1999, respectively, represent fees for consulting
and management services provided by Greenwich Street Capital Partners, L.P.
("GSCP") under a management and services agreement.
Restructuring charges. In the nine months ended September 30, 2000 the Company
recorded pre-tax restructuring charges of $9.7 million attributable to
consolidation of certain of its United States manufacturing, engineering,
marketing, service and administrative operations to reduce costs and to increase
operating efficiencies. Included in the restructuring charges are $4.9 million
of expected cash expenditures, primarily related to severance pay expected to be
paid over the next twelve months and $4.8 million of non-cash charges, primarily
related to discontinued product lines (see note 6 to the financial statements).
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<PAGE> 17
The consolidation includes the closure of some facilities and also includes the
transfer of a portion of the work from certain facilities to the Company's
remaining locations. The Company expects to complete substantially all of the
restructuring of the operations by the second quarter of 2001, and expects to
complete the sale and disposal of the owned facilities and equipment related to
those operations by early 2002.
Other income. The Company's other income for the quarter ended September 30,
2000 includes a gain of $0.2 million on $1.7 million of proceeds from the sale
of its former corporate headquarters. For the nine months ended September 30,
2000, other income also includes $6.5 million attributed to the restructuring of
a license agreement to provide for a one-time, up-front fee in lieu of future
royalties and to $1.0 million for the sale of a trademark, offset by $0.2
million of applicable expenses and income of $2.1 million from an insurance
settlement related to a lawsuit filed by the Company's former CEO. The Company's
royalty income of $0.8 million was the main contributor to other income for the
quarter ended September 30, 1999. In the nine months ended September 30, 1999,
the Company's other income of $3.1 million, was comprised principally of a
business interruption insurance benefit of $1.0 million related to the Company's
Mishawaka, IN facility destroyed by a fire in 1998, royalty income of $1.6
million and a gain of $0.8 million on $3.4 million of proceeds on the sales of
certain vacated facilities and certain product lines.
Interest expense. The Company's net interest expense increased from $9.2 million
in the quarter ended September 30, 1999 to $9.7 million in the quarter ended
September 30, 2000. The net interest expense remained about flat at $27.3
million for the nine months ended September 30, 2000 and 1999, respectively.
Interest expense for the nine-month period ended September 30, 2000 is offset by
interest income of $1.4 million associated with an arbitration ruling related to
a dispute arising out of the Company's purchase of Mark IV's Audio Product Group
in December 1996 (see note 8 to the financial statements). Interest expense
increased $0.5 million and $1.4 million for the quarter and nine months ended
September 30, 2000, respectively compared with the corresponding periods last
year. The increase in interest expense is attributable to higher interest rates
and higher average outstanding indebtedness associated with the Company's Senior
Secured Credit Facility.
17
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company had cash and cash equivalents of $3.6 million
compared to $3.2 million at December 31, 1999. The Company's principal source of
funds in the nine months ended September 30, 2000 consisted of cash generated
from operating activities, including, as described below, cash generated from
the restructuring of a license agreement and the sale of a trademark. Net cash
provided by operating activities was $7.8 million. Net cash used in investing
activities was $6.6 million and net cash used in financing activities was $0.6
million.
In March 2000, the Company reached a final agreement with a licensee for the
payment of $6.0 million of royalty fees due from prior years and for the
restructuring of the license agreement to provide a one-time, up-front fee of
$6.5 million in lieu of future royalties. Subsequent to entering into this
agreement, the Company sold the related trademark to the licensee for $1.0
million. The Company received $1.7 million of cash related to these transactions
in 1999 and the remaining $11.8 million of cash in 2000.
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 $8.8 million for
the nine months ended September 30, 2000 compared to $7.6 million for the nine
months ended September 30, 1999. The Company's ability to make capital
expenditures is subject to certain restrictions under its Senior Secured Credit
Facility.
The Company's inventories of $66.6 million remained flat at September 30, 2000
compared to December 31, 1999. The inventory levels increased earlier in the
year primarily due to the safety stock needed to facilitate the transition of
production to a new facility in Morrilton, Arkansas. Inventories declined during
the quarter ended September 30, 2000. The Company expects the inventories to
continue to decline in the fourth quarter as the safety stock is sold.
The Company's consolidated indebtedness decreased $1.1 million from $343.9
million at December 31, 1999 to $342.8 million at September 30, 2000. The
decrease in the Company's Term Loan Facility was substantially offset by
increased borrowings under the Company's Revolving Credit Facility and $1.0
million of new debt associated with the acquisition of the Morrilton, Arkansas
facility.
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 liquidity needs arise
primarily from debt service on indebtedness, working capital needs and capital
expenditure requirements.
The Company's current credit facilities include the Senior Secured Credit
Facility consisting of the Term Loan Facility of $89.6 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
$4.7 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 September 30, 2000, $10.5 million of the Company's $89.6 million Term Loan
Facility is payable in the next 12 months. In addition, the Company had $23.6
million outstanding under the Revolving Credit Facility and $3.6 million
outstanding under the foreign working capital lines. Net availability at
September 30, 2000 under the Revolving Credit Facility, computed by deducting
$0.7 million of open letters of credit and applying applicable borrowing
limitations, totaled $0.7 million. Net availability at September 30, 2000 under
foreign working lines totaled $1.1 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
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<PAGE> 19
interest rates. The effective interest rate under these credit facilities in the
nine months ended September 30, 2000 was 9.9%.
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
($28.3 million outstanding at September 30, 2000), in the amount of $2.3 million
in the remainder of 2000 and $11.0 million and $15.0 million in 2001 and 2002
(with a final maturity date of November 6, 2002), respectively, and (ii) the
$65.0 million Tranche B Term Loan Facility ($61.3 million outstanding at
September 30, 2000), in the amount of $0.1 million in the remainder of 2000 and
$0.5 million, $0.5 million, $24.1 million and $36.1 million in 2001, 2002, 2003
and 2004 (with 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) certain 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 commencing on April 1, 1997, and each fiscal year
thereafter. In 2000 the Company will not make any payment under the excess cash
flow requirements of the Senior Secured Credit Facility.
For the remainder of the year the Company expects to generate cash from
operations, including from reduction of inventory and improvement in the
receivable collection experience. The Company believes that in the fourth
quarter, cash from operations, together with availability from the Revolving
Credit Facility, should be sufficient to fund planned capital expenditures, to
fund the $2.4 million of principal payments required under the Term Loan
Facility, and to fund restructuring related cash expenditures.
The Company has incurred substantial indebtedness in connection with a series of
leveraged transactions. As a result, debt service obligations represent
significant liquidity requirements for the Company. The Company intends to
improve operations and has liquidated nonproductive assets in part to meet the
liquidity needs of the debt service and to satisfy the requirements of the debt
covenants. The Company's operating plan includes strategies to improve operating
results by reducing purchased material costs through more effective supply chain
management, increasing selling prices on selective products, managing other
operating costs, reducing inventory through the use of consigned inventory from
certain vendors and by consolidating overseas warehouses, and improving the
accounts receivable collection experience. The Company could be in default under
the terms of its Senior Secured Credit Facility, the EVI Notes and the Telex
Notes if it is unable to achieve the necessary operating improvements. If the
operating improvements are not realized, management would consider other
strategic alternatives, including the renegotiation of the debt covenants and
the sale of certain operating assets and certain product lines. There can be no
assurance that the Company will be successful in achieving the planned operating
improvements or executing alternative strategies on terms acceptable to the
Company or that the Company will be able to renegotiate the debt covenants.
Additionally, 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.
While the Company believes that the cash flow enhancements described above,
together with the Company's Revolving Credit Facility and cash from operations,
will be adequate to meet its debt service and principal payment requirements,
capital expenditure needs, and working capital requirements for the next twelve
months, no assurance can be given in this regard.
ENVIRONMENTAL MATTERS
The Company is a party in a number of environmental enforcement matters and
related claims that have arisen in the ordinary course of business. Certain
environmental matters are indemnified by Mark IV Industries, Inc. Based upon
reliance on this indemnification, the Company believes that such matters and
claims, if finally determined in a manner adverse to the Company, whether
19
<PAGE> 20
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.
NEW ACCOUNTING STANDARDS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 137 and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," must be adopted by Telex no later
than January 1, 2001. These standards establish 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 a liability measured at its fair value. These
standards require 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. Had the Company adopted these standards on
September 30, 2000, the impact on the Company's financial position and results
of operations would not have been material.
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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 September 30, 2000, 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 September 30, 2000, the Company had $5.9 million in outstanding forward
exchange contracts, with a weighted remaining maturity of 86 days.
At September 30, 2000, 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 $0.6 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 SENSITIVITY 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 September 30, 2000, the Company had fixed rate debt of $225.0 million and
floating rate debt of $116.8 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 $10.7 million. The earnings and cash
flow impact for the next twelve months resulting from a one-percentage point
increase in interest rates on the $116.8 million floating rate debt would be
approximately $1.2 million, holding all other variables constant.
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PART II. OTHER INFORMATION
ITEMS 1 - 5. NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
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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: November 13, 2000 By: /s/ Ned C. Jackson
-------------------- ------------------
Ned C. Jackson
President and Chief Executive Officer
TELEX COMMUNICATIONS, INC.
Dated: November 13, 2000 By: /s/ Richard J. Pearson
------------------- ----------------------
Richard J. Pearson
Vice President and Chief Financial Officer
23
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TELEX COMMUNICATIONS, INC.
FORM 10-Q
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
27.1 Financial Data Schedule
24
