<PAGE> 1
CONFORMED
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 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 JUNE 30, 2000 THERE WERE 110 SHARES OF TELEX COMMUNICATIONS, INC., $0.01
PAR VALUE, OUTSTANDING.
THIS DOCUMENT CONTAINS 24 PAGES.
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PART I. --- FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements Page(s)
Included herein is the following unaudited financial information:
Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations for the three and six month periods ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the six month periods ended June 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
</TABLE>
PART II. --- OTHER INFORMATION
<TABLE>
<CAPTION>
Page(s)
<S> <C>
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------------------- --------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,450 $ 3,239
Accounts receivable, net 60,326 59,438
Inventories 70,356 66,573
Other current assets 13,764 14,665
-------------- --------------
Total current assets 147,896 143,915
Property, plant and equipment, net 43,837 45,048
Deferred financing costs, net 9,490 10,476
Intangible and other assets, net 60,400 62,559
-------------- --------------
$ 261,623 $ 261,998
============== ==============
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Revolving lines of credit $ 25,648 $ 22,688
Current maturities of long-term debt 9,482 8,982
Accounts payable 23,947 20,817
Accrued wages and benefits 9,543 10,708
Accrued interest 5,815 5,898
Other accrued liabilities 18,514 16,750
Income taxes payable 10,920 8,935
------------- -------------
Total current liabilities 103,869 94,778
Long-term debt 308,431 312,207
Other long-term liabilities 10,120 9,470
------------- -------------
Total liabilities 422,420 416,455
------------- -------------
Shareholder's deficit:
Common stock and capital in excess of par 3,147 3,139
Accumulated other comprehensive loss (5,317) (3,508)
Accumulated deficit (158,627) (154,088)
------------- -------------
Total shareholder's deficit (160,797) (154,457)
------------- -------------
$ 261,623 $ 261,998
============= =============
</TABLE>
See accompanying notes.
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TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
================================ ===============================
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
============== ============== ============== ==============
<S> <C> <C> <C> <C>
Net sales $ 84,511 $ 86,761 $ 167,238 $ 166,171
Cost of sales 51,623 54,190 102,827 104,970
------------ ------------ ------------ ------------
Gross profit 32,888 32,571 64,411 61,201
------------ ------------ ------------ ------------
Operating expenses:
Engineering 3,560 3,672 7,033 7,410
Selling, general and administrative 21,415 19,800 41,446 38,124
Corporate charges 429 429 858 858
Amortization of goodwill and other intangibles 515 703 1,030 1,394
Restructuring charges 9,703 - 9,703 -
------------ ------------ ------------ ------------
35,622 24,604 60,070 47,786
------------ ------------ ------------ ------------
Operating profit (loss) (2,734) 7,967 4,341 13,415
Interest expense 8,178 9,012 17,689 18,130
Other income (2,879) (521) (10,190) (2,052)
------------ ------------ ------------ ------------
Loss before provision for income taxes (8,033) (524) (3,158) (2,663)
Provision for income taxes 482 766 1,381 984
------------ ------------ ------------ ------------
Net loss $ (8,515) $ (1,290) $ (4,539) $ (3,647)
============ ============ ============ ============
</TABLE>
See accompanying notes.
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TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
==============================================
JUNE 30, JUNE 30,
2000 1999
===================== ======================
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (4,539) $ (3,647)
Adjustments to reconcile net income (loss) to cash flows from operations:
Depreciation, amortization and provision for bad debts 7,149 7,371
Gain on sale of facilities, product lines and intangible assets (973) (234)
Stock option compensation expense 8 109
Restructuring charge 9,703 -
Equity in earnings of joint venture (573) -
Change in operating assets and liabilities (5,510) (9,096)
Change in long-term liabilities 586 76
--------------------- ----------------------
Net cash provided by (used in) operating activities 5,851 (5,421)
--------------------- ----------------------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (5,923) (5,280)
Proceeds from sale of facilities, product lines and intangible assets 1,000 2,248
Investment in joint venture (550) -
--------------------- ----------------------
Net cash used in investing activities (5,473) (3,032)
--------------------- ----------------------
FINANCING ACTIVITIES:
Borrowings under revolving lines of credit, net 3,153 15,455
Repayment of long-term debt (4,240) (6,691)
Borrowings of other long-term debt 964 -
--------------------- ----------------------
Net cash provided by (used in) financing activities (123) 8,764
--------------------- ----------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS: (44) (260)
--------------------- ----------------------
CASH AND CASH EQUIVALENTS:
Net increase 211 51
Beginning of period 3,239 3,431
--------------------- ----------------------
End of period $ 3,450 $ 3,482
===================== ======================
SUPPLEMENTAL DISCLOSURES OF CASH PAID FOR:
Interest $ 18,174 $ 17,187
===================== ======================
Income taxes (refunds), net $ (433) $ 653
===================== ======================
</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 June 30, 2000 and
December 31, 1999, the condensed consolidated statements of operations for
the quarters and six months ended June 30, 2000 and June 30, 1999, and the
condensed consolidated statements of cash flows for the six months ended
June 30, 2000 and June 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
June 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>
June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Raw materials and parts $ 27,868 $ 31,848
Work in process 12,461 9,852
Finished products 30,027 24,873
------------ ------------
$ 70,356 $ 66,573
============ ============
</TABLE>
3. The Company recorded an income tax provision of $0.5 million and $1.4
million on pre-tax losses of $8.0 million and $3.2 million for the quarter
and six months ended June 30, 2000, respectively. The income tax provision
for the six months ended June 30, 2000 is comprised of a U.S. Federal
income tax benefit of $0.2 million, which is offset by a deferred tax
valuation allowance adjustment of $0.2 million, and an income tax provision
of $1.4 million attributed to income of certain foreign subsidiaries for
the six months ended June 30, 2000.
The Company has a deferred tax asset of $23.2 million offset by a deferred
tax valuation allowance of $23.2 million at June 30, 2000 due to the
uncertainty of the realization of future tax benefits. 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.
6
<PAGE> 7
4. 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 $9.2 million and $6.3
million for the quarter and six months ended June 30, 2000, respectively.
Comprehensive net loss was $2.2 million and $6.6 million for the quarter
and six months ended June 30, 1999, respectively.
5. In May 2000, the Company received $9.6 million of cash from Altec Lansing
for settlement of previously issued interest-bearing notes related to past
due royalty fees, a one-time, up-front fee on future royalties and the sale
of the Altec Lansing trademark. The original agreement called for the notes
to mature in varying amounts through March 2005. Income associated with
these transactions was recognized in the fourth quarter ended December 31,
1999 and the first quarter ended March 31, 2000.
6. 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):
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FOR THE QUARTER ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Professional Multimedia/
Sound and Audio
Entertain- Communi-
ment cations Corporate Total
---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales $ 56,129 $ 28,382 $ - $ 84,511
Cost of sales 34,496 17,127 - 51,623
---------- ----------- ----------- ---------
Gross profit 21,633 11,255 - 32,888
---------- ----------- ----------- ---------
Operating expenses:
Engineering - - 3,560 3,560
Selling, general and administrative - - 21,415 21,415
Corporate charges - - 429 429
Amortization of goodwill and other intangibles - - 515 515
Restructuring charges - - 9,703 9,703
---------- ----------- ----------- ---------
- - 35,622 35,622
---------- ----------- ----------- ---------
Operating profit (loss) 21,633 11,255 (35,622) (2,734)
Interest expense - - 8,178 8,178
Other income - - (2,879) (2,879)
Provision for income taxes - - 482 482
---------- ----------- ----------- ---------
Net income (loss) $ 21,633 $ 11,255 $ (41,403) $ (8,515)
========== =========== =========== =========
Depreciation expense $ 2,158 $ 907 $ 233 $ 3,298
========== =========== =========== =========
Capital expenditures $ 2,847 $ 402 $ 212 $ 3,461
========== =========== =========== =========
United
States Germany Other Total
---------- ----------- ----------- ---------
Net sales $ 51,132 $ 7,108 $ 26,271 $ 84,511
========== =========== =========== =========
</TABLE>
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AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Professional Multimedia/
Sound and Audio
Entertain- Communi-
ment cations Corporate Total
------------ ----------- --------- ----------
<S> <C> <C> <C> <C>
Net sales $ 108,009 $ 59,229 $ - $ 167,238
Cost of sales 65,640 37,187 - 102,827
------------ ----------- --------- ----------
Gross profit 42,369 22,042 - 64,411
------------ ----------- --------- ----------
Operating expenses:
Engineering - - 7,033 7,033
Selling, general and administrative - - 41,446 41,446
Corporate charges - - 858 858
Amortization of goodwill and other intangibles - - 1,030 1,030
Restructuring charges 9,703 9,703
------------ ----------- --------- ----------
- - 60,070 60,070
------------ ----------- --------- ----------
Operating profit (loss) 42,369 22,042 (60,070) 4,341
Interest expense - - 17,689 17,689
Other income - - (10,190) (10,190)
Provision for income taxes - - 1,381 1,381
------------ ----------- --------- ----------
Net income (loss) $ 42,369 $ 22,042 $ (68,950) $ (4,539)
============ =========== ========= ==========
Depreciation expense $ 3,744 $ 1,510 $ 440 $ 5,694
============ =========== ========= ==========
Capital expenditures $ 4,518 $ 700 $ 705 $ 5,923
============ =========== ========= ==========
Total assets $ 122,550 $ 48,258 $ 90,815 $ 261,623
============ =========== ========= ==========
United
States Germany Other Total
------------ ----------- --------- ----------
Net sales $ 104,881 $ 19,154 $ 43,203 $ 167,238
============ =========== ========= ==========
Long-lived assets $ 104,270 $ 4,327 $ 5,130 $ 113,727
============ =========== ========= ==========
</TABLE>
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FOR THE QUARTER ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Professional Multimedia/
Sound and Audio
Entertain- Communi-
ment cations Corporate Total
------------ ----------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 53,771 $ 32,990 $ - $ 86,761
Cost of sales 31,344 22,846 - 54,190
------------ ----------- --------- ---------
Gross profit 22,427 10,144 - 32,571
------------ ----------- --------- ---------
Operating expenses:
Engineering - - 3,672 3,672
Selling, general and administrative - - 19,800 19,800
Corporate charges - - 429 429
Amortization of goodwill and other intangibles - - 703 703
------------ ----------- --------- ---------
- - 24,604 24,604
------------ ----------- --------- ---------
Operating profit (loss) 22,427 10,144 (24,604) 7,967
Interest expense - - 9,012 9,012
Other income - - (521) (521)
Provision for income taxes - - 766 766
------------ ----------- --------- ---------
Net income (loss) $ 22,427 $ 10,144 $ (33,861) $ (1,290)
============ =========== ========= =========
Depreciation expense $ 655 $ 781 $ 1,003 $ 2,439
============ =========== ========= =========
Capital expenditures $ 1,378 $ 752 $ 1,190 $ 3,320
============ =========== ========= =========
United
States Germany Other Total
------------ ----------- --------- ---------
Net sales $ 55,769 $ 12,521 $ 18,471 $ 86,761
============ =========== ========= =========
</TABLE>
10
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AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Professional Multimedia/
Sound and Audio
Entertain- Communi-
ment cations Corporate Total
------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net sales $ 103,370 $ 62,801 $ - $ 166,171
Cost of sales 61,540 43,430 - 104,970
------------ ---------- ---------- -----------
Gross profit 41,830 19,371 - 61,201
------------ ---------- ---------- -----------
Operating expenses:
Engineering - - 7,410 7,410
Selling, general and administrative - - 38,124 38,124
Corporate charges - - 858 858
Amortization of goodwill and other intangibles - - 1,394 1,394
------------ ---------- ---------- -----------
- - 47,786 47,786
------------ ---------- ---------- -----------
Operating profit (loss) 41,830 19,371 (47,786) 13,415
Interest expense - - 18,130 18,130
Other income - - (2,052) (2,052)
Provision for income taxes - - 984 984
------------ ---------- ---------- -----------
Net income (loss) $ 41,830 $ 19,371 $ (64,848) $ (3,647)
============ ========== ========== ===========
Depreciation expense $ 1,422 $ 1,195 $ 2,170 $ 4,787
============ ========== ========== ===========
Capital expenditures $ 2,317 $ 1,335 $ 1,628 $ 5,280
============ ========== ========== ===========
Total assets $ 137,182 $ 46,687 $ 98,602 $ 282,471
============ ========== ========== ===========
United
States Germany Other Total
------------ ---------- ---------- -----------
Net sales $ 98,156 $ 18,679 $ 49,336 $ 166,171
============ ========== ========== ===========
Long-lived assets $ 124,656 $ 4,785 $ 5,440 $ 134,881
============ ========== ========== ===========
</TABLE>
11
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7. During the second quarter ended June 30, 2000, the Company recorded
pre-tax restructuring charges 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. Included in the restructuring charges are
expected cash expenditures of $4.9 million, of which $4.3 million is for
severance pay, substantially all of which is payable over the next twelve
months, and $0.6 million is for other miscellaneous costs. The remaining
$4.8 million of the restructuring charge represents non-cash charges
associated with discontinued product lines, of which $3.5 million is for
writedown of goodwill, $0.8 million is for writedown of fixed assets and
$0.5 million is for writedown of inventory.
8. 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.
9. 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 July 2000 the Company received $6.1 million of cash from Mark IV. 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 arbitration-related professional services' expenses of $0.9 million
and reduced prepaid expenses of $3.4 million associated with the
arbitration.
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.
10. In the second quarter ended June 30, 2000 the Company recorded other income
of $2.1 million from an insurance settlement related to a lawsuit filed by
the Company's former CEO.
11. 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 liquidate 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 year 2000 operating plan
includes strategies to significantly improve operating results by reducing
purchased material costs through more
12
<PAGE> 13
effective supply chain management, increasing selling prices on selective
products, managing other operating costs to planned levels, reducing
inventory through the use of consigned inventory from certain vendors and
by consolidating overseas warehouses, and improving the accounts receivable
collection experience. In the event the Company is unable to achieve the
necessary operating improvements, it could be in default under the terms of
its Senior Secured Credit Facility, the EVI Notes and the Telex Notes. In
the event 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 in year 2000,
no assurance can be given in this regard.
12. SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as revised by SFAS No. 137, must be adopted by Telex no later
than January 1, 2001. 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 a 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 impact of adopting SFAS No. 133.
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
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<PAGE> 15
(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 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 Six months ended
------------------------------- -----------------------------------
June 30, June 30, % June 30, June 30, %
2000 1999 Change 2000 1999 Change
---------------------- ------ ----------------------- ------
<S> <C> <C> <C> <C> <C> <C>
Net sales:
Professional Sound and Entertainment $ 56,129 $ 53,771 4.4% $ 108,009 $ 103,370 4.5%
Multimedia/Audio Communications 28,382 32,990 -14.0% 59,229 62,801 -5.7%
---------------------- ------ ----------------------- ------
Total net sales 84,511 86,761 -2.6% 167,238 166,171 0.6%
---------------------- ------ ----------------------- ------
Gross profit:
Professional Sound and Entertainment 21,633 22,427 42,369 41,830
% of sales 38.5% 41.7% 39.2% 40.5%
Multimedia/Audio Communications 11,255 10,144 22,042 19,371
% of sales 39.7% 30.7% 37.2% 30.8%
---------------------- -----------------------
Total gross profit 32,888 32,571 64,411 61,201
% of sales 38.9% 37.5% 38.5% 36.8%
---------------------- -----------------------
Operating profit (loss) $ (2,734) $ 7,967 $ 4,341 $ 13,415
====================== =======================
Net loss $ (8,515) $ (1,290) $ (4,539) $ (3,647)
====================== =======================
</TABLE>
QUARTER AND SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO QUARTER AND SIX MONTHS
ENDED JUNE 30, 1999
Net sales. The Company's net sales decreased $2.3 million, or 2.6%, from $86.8
million in the quarter ended June 30, 1999 to $84.5 million in the quarter ended
June 30, 2000. Net sales increased $1.0 million, or 0.6%, from $166.2 million
for the six months ended June 30, 1999 to
15
<PAGE> 16
$167.2 million for the six months ended June 30, 2000. The Company discontinued
several product lines throughout 1999 and early 2000. The Company's net sales,
excluding sales of discontinued products, increased approximately 3% and 7% for
the quarter and six months ended June 30, 2000, respectively. The increase in
net sales, in both the Professional Sound and Entertainment and the
Multimedia/Audio Communications segments, is attributed to new products.
Net sales in the Company's Professional Sound and Entertainment segment
increased $2.3 million, or 4.4%, from $53.8 million in the quarter ended June
30, 1999 to $56.1 million in the quarter ended June 30, 2000. Net sales
increased $4.6 million, or 4.5%, from $103.4 million for the six months ended
June 30, 1999 to $108.0 million for the six months ended June 30, 2000. Net
sales, excluding sales of discontinued products in both periods, increased
approximately 7% for the quarter and six month periods ended June 30, 2000,
respectively. The growth is attributed primarily to newly introduced speakers,
amplifiers and consoles, in the last year.
Net sales in the Company's Multimedia/Audio Communications segment decreased
$4.6 million, or 14.0%, from $33.0 million in the quarter ended June 30, 2000 to
$28.4 million in the quarter ended June 30, 2000. Net sales decreased $3.6
million, or 5.7%, from $62.8 million for the six months ended June 30, 1999 to
$59.2 million for the six months ended June 30, 2000. Net sales, excluding sales
of discontinued products in both periods and one-time revenue in the second
quarter of last year, were about flat for the quarter and increased
approximately 8% for the six month period. The growth is attributed primarily to
newly introduced computer audio products in the last year.
Gross profit. The Company's gross profit increased $0.3 million, or 0.9%, from
$32.6 million in the quarter ended June 30, 1999 to $32.9 million in the quarter
ended June 30, 2000. Gross profit increased $3.2 million, or 5.2% from $61.2
million for the six months ended June 30, 1999 to $64.4 million for the six
months ended June 30, 2000. As a percentage of sales, the gross margin rate
increased from 37.5% in the quarter ended June 30, 1999 to 38.9% in the quarter
ended June 30, 2000, and increased from 36.8% for the six months ended June 30,
1999 to 38.5% for the six months ended June 30, 2000. The increase in the gross
margin rate for the quarter and for the six months ended June 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 remained about flat, decreasing
$0.1 million, or 2.8% from $3.7 million in the quarter ended June 30, 1999 to
$3.6 million in the quarter ended June 30, 2000. Engineering expenses for the
six months ended June 30, 2000 decreased slightly to $7.0 million from $7.4
million for the six months ended June 30, 1999.
Selling, general and administrative. The Company's selling, general and
administrative expenses increased $1.6 million, or 8.1%, from $19.8 million in
the quarter ended June 30, 1999 to $21.4 million in the quarter ended June 30,
2000. Selling, general and administrative expenses increased $3.3 million, or
8.7%, from $38.1 million for the six months ended June 30, 1999 to $41.4 million
for the six months ended June 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 June
30, 2000 and
16
<PAGE> 17
1999, and $0.9 million for the six months ended June 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 second quarter ended June 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 7 to the financial statements).
The consolidation will include the closure of some facilities and will also
include 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 Fiscal 2001, and
expects to complete the sale and disposal of the owned facilities and equipment
related to those operations by early Fiscal 2002.
Other income. The Company's other income for the quarter ended June 30, 2000
includes income of $2.1 million from an insurance settlement related to a
lawsuit filed by the Company's former CEO. For the six months ended June 2000,
other income 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. The Company's royalty income of $0.5 million was the main
contributor to other income for the quarter ended June 30, 1999. In the six
months ended June 30, 1999, the Company's other income totaled $2.1 million,
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 $0.8 million and a gain of $0.2 million on $2.2 million
of proceeds on the sales of certain vacated facilities and certain product
lines.
Interest expense. The Company's net interest expense decreased from $9.0 million
in the quarter ended June 30, 1999 to $8.2 million in the quarter ended June 30,
2000. The net interest expense decreased from $18.1 million for the six months
ended June 30, 1999 to $17.7 million for the six months ended June 30, 2000. The
decrease was primarily due to $1.4 million of interest income recognized in the
second quarter ended June 30, 2000 associated with an arbitration ruling in June
2000 (see note 9 to the financial statements). Interest expense increased $0.6
million and $1.0 million for the quarter and six months ended June 30, 2000,
respectively. 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 June 30, 2000, the Company had cash and cash equivalents of $3.5 million
compared to $3.2 million at December 31, 1999. The Company's principal source of
funds in the six months ended June 30, 2000 consisted of cash generated from
operating activities. Net cash provided by operating activities was $5.9
million. Net cash used in investing activities was $5.5 million and net cash
used in financing activities was $0.1 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 $5.9 million for
the six months ended June 30, 2000 compared to $5.3 million for the six months
ended June 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 increased from $66.6 million at December 31, 1999 to
$70.4 million at June 30, 2000. The increase is attributed primarily to
safety-stock build up while production is being transferred to the new
manufacturing facility in Morrilton, Arkansas. The Company expects inventory to
decline to normal levels by December 31, 2000.
The Company's consolidated indebtedness decreased $0.3 million from $343.9
million at December 31, 1999 to $343.6 million at June 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 $91.9 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
$5.1 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 June 30, 2000, $9.5 million of the Company's $94.1 million Term Loan
Facility is payable in the next 12 months. In addition, the Company had $22.0
million outstanding under the Revolving Credit Facility and $3.6 million
outstanding under the foreign working capital lines. Net availability at June
30, 2000 under the Revolving Credit Facility, computed by deducting $2.0 million
of open letters of credit and applying applicable borrowing limitations, totaled
$1.0 million. Net availability at June 30, 2000 under foreign working lines
totaled $1.5 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 six months
ended June 30, 2000 was 9.7%.
18
<PAGE> 19
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
($30.5 million outstanding at June 30, 2000), in the amount of $4.5 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 ($61.4 million outstanding at June 30,
2000), in the amount of $0.2 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.
In the second half of the year the Company expects to generate cash from
operations, primarily from improvements in gross margin, increase in sales,
reduction of inventory and improvement in the receivable collection experience.
The Company believes that in the second half of the year, cash from operations,
together with availability from the Revolving Credit Facility, should be
sufficient to fund the planned capital expenditures, the $4.7 million of
principal payments required under the Term Loan Facility, and the cash
expenditures related to the restructuring.
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 liquidate 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 year 2000 operating plan includes strategies to
significantly improve operating results by reducing purchased material costs
through more effective supply chain management, increasing selling prices on
selective products, managing other operating costs to planned levels, reducing
inventory through the use of consigned inventory from certain vendors and by
consolidating overseas warehouses, and improving the accounts receivable
collection experience. In the event the Company is unable to achieve the
necessary operating improvements, it could be in default under the terms of its
Senior Secured Credit Facility, the EVI Notes and the Telex Notes. In the event
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 in year 2000, no
assurance can be given in this regard.
19
<PAGE> 20
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
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
revised by SFAS No. 137, must be adopted by Telex no later than January 1, 2001.
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. The Company has not quantified the impact
of adopting SFAS No. 133.
20
<PAGE> 21
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 June 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 June 30, 2000, the Company had $3.8 million in outstanding forward exchange
contracts, with a weighted remaining maturity of 116 days.
At June 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 $0.4 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 June 30, 2000, the Company had fixed rate debt of $225.0 million and floating
rate debt of $117.6 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 $11.0 million. The earnings and cash
flow impact for the next twelve months resulting from a one-percentage point
increase in interest rates on the $117.6 million floating rate debt would be
approximately $1.2 million, holding all other variables constant.
21
<PAGE> 22
PART II. OTHER INFORMATION
ITEMS 1 - 5. NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
*10.1 (a) Restated and Amended Settlement Agreement, dated March
29, 2000, by and between Telex Communications, Inc. and
Altec Lansing Technologies, Inc.
*10.1 (b) Amendment to Restated and Amended Settlement Agreement,
dated April 28, 2000, by and between Telex
Communications, Inc. and Altec Lansing Technologies,
Inc.
10.1 (c) Second Amendment to Restated and Amended Settlement
Agreement, dated May 15, 2000, by and between Telex
Communications, Inc. and Altec Lansing Technologies,
Inc.
*10.2 (a) Restated and Amended Purchase and Sale Agreement, dated
March 30, 2000, by and between Telex Communications,
Inc. and Altec Lansing Technologies, Inc.
*10.2 (b) Amendment to Restated and Amended Purchase and Sale
Agreement, dated April 28, 2000, by and between Telex
Communications, Inc. and Altec Lansing Technologies,
Inc.
10.2 (c) Second Amendment to Restated and Amended Purchase and
Sale Agreement, dated May 15, 2000, by and between Telex
Communications, Inc. and Altec Lansing Technologies,
Inc.
27.1 Financial Data Schedule
-------------------
* Denotes that Exhibit was filed with Form 10-Q for the period ended March 31,
2000.
(b) Reports on Form 8-K
On June 5, 2000 the Company filed a Form 8-K reporting, under Item 5, a
preliminary $7.7 million arbitration ruling, receipt of cash payment for
outstanding receivables related to Altec Lansing royalty fees and the sale
of the trademark and restructuring of operations.
22
<PAGE> 23
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
TELEX COMMUNICATIONS, INC.
Dated: August 9, 2000 By: /s/ Ned C. Jackson
--------------------------------- ---------------------------------
Ned C. Jackson
President and Chief Executive Officer
TELEX COMMUNICATIONS, INC.
Dated: August 9, 2000 By: /s/ Richard J. Pearson
--------------------------------- ---------------------------------
Richard J. Pearson
Vice President and Chief Financial
Officer
23
<PAGE> 24
TELEX COMMUNICATIONS, INC.
FORM 10-Q
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
*10.1 (a) Restated and Amended Settlement Agreement, dated March
29, 2000, by and between Telex Communications, Inc. and
Altec Lansing Technologies, Inc.
*10.1 (b) Amendment to Restated and Amended Settlement Agreement,
dated April 28, 2000, by and between Telex
Communications, Inc. and Altec Lansing Technologies,
Inc.
10.1 (c) Second Amendment to Restated and Amended Settlement
Agreement, dated May 15, 2000, by and between Telex
Communications, Inc. and Altec Lansing Technologies,
Inc.
*10.2 (a) Restated and Amended Purchase and Sale Agreement, dated
March 30, 2000, by and between Telex Communications,
Inc. and Altec Lansing Technologies, Inc.
*10.2 (b) Amendment to Restated and Amended Purchase and Sale
Agreement, dated April 28, 2000, by and between Telex
Communications, Inc. and Altec Lansing Technologies,
Inc.
10.2 (c) Second Amendment to Restated and Amended Purchase and
Sale Agreement, dated May 15, 2000, by and between Telex
Communications, Inc. and Altec Lansing Technologies,
Inc.
27.1 Financial Data Schedule
-------------------
* Denotes that Exhibit was filed with Form 10-Q for the period ended March 31,
2000.
24
