10-Q 1 c97078e10vq.txt FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005 COMMISSION FILE REGISTRANT, STATE OF INCORPORATION OR I.R.S. EMPLOYER NUMBER FORMATION, ADDRESS AND TELEPHONE NUMBER IDENTIFICATION NO. --------------- --------------------------------------- ------------------ 333-115009 TELEX COMMUNICATIONS 20-0406594 INTERMEDIATE HOLDINGS, LLC (FORMED IN DELAWARE) 12000 PORTLAND AVENUE SOUTH BURNSVILLE, MINNESOTA 55337 TELEPHONE: (952) 884-4051 333-112819 TELEX COMMUNICATIONS, INC. 11-3707780 (INCORPORATED IN DELAWARE) 12000 PORTLAND AVENUE SOUTH BURNSVILLE, MINNESOTA 55337 TELEPHONE: (952) 884-4051 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether each 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 [ ] Indicate by check mark whether any of the registrants is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X] As of July 21, 2005, Telex Communications, Inc. had outstanding 500 shares of Common Stock, $0.01 par value, all of which are owned beneficially and of record by Telex Communications Intermediate Holdings, LLC. Telex Communications Intermediate Holdings, LLC has one member interest outstanding, which is owned by Telex Communications Holdings, Inc. This Quarterly Report on Form 10-Q is a combined report being filed by two different registrants: Telex Communications Intermediate Holdings, LLC and Telex Communications, Inc. (a wholly-owned subsidiary of Telex Communications Intermediate Holdings, LLC). The information contained herein relating to each individual registrant is filed by such registrant on its own behalf. No registrant makes any representation as to information relating to any other registrant. Telex Communications Intermediate Holdings, LLC and Telex Communications, Inc. meet the conditions set forth in General Instructions (H)(1)(a) and (b) of the Form 10-Q and are therefore filing this Form 10-Q with the reduced disclosure format. THIS DOCUMENT CONTAINS 35 PAGES. ============================================================================== 2 PART I. --- FINANCIAL INFORMATION

PART II. --- OTHER INFORMATION

3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TELEX COMMUNICATIONS INTERMEDIATE HOLDINGS, LLC CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)

See notes to condensed consolidated financial statements. Note: The balance sheet at December 31, 2004 has been derived from the Company's audited financial statements at that date. 4 TELEX COMMUNICATIONS INTERMEDIATE HOLDINGS, LLC CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) (UNAUDITED)

See notes to condensed consolidated financial statements. 5 TELEX COMMUNICATIONS INTERMEDIATE HOLDINGS, LLC CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)

See notes to condensed consolidated financial statements. 6 TELEX COMMUNICATIONS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)

See notes to condensed consolidated financial statements. Note: The balance sheet at December 31, 2004 has been derived from the Company's audited financial statements at that date. 7 TELEX COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) (UNAUDITED)

See notes to condensed consolidated financial statements. 8 TELEX COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)

See notes to condensed consolidated financial statements. 9 TELEX COMMUNICATIONS INTERMEDIATE HOLDINGS, LLC TELEX COMMUNICATIONS, INC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation COMPANY STRUCTURE The consolidated financial statements included herein are: a. Telex Communications Intermediate Holdings, LLC ("Intermediate"), which consists of the accounts of Intermediate and Telex Communications, Inc. ("Telex"). Intermediate is a holding company whose assets consist of its investment in Telex and its subsidiaries and some additional deferred financing costs related to incremental debt of Intermediate. Telex is the operating entity. b. Telex, which consists of the accounts of Telex Communications, Inc. and its wholly owned subsidiaries. Intermediate is a wholly owned subsidiary of Telex Communications Holdings, Inc. ("Old Telex"), which is not a registrant. Intermediate and Telex were formed in connection with the November 19, 2003 refinancing of Old Telex's debt obligations and related corporate restructuring. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States (U.S.) generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year. Preparation of Intermediate's and Telex's financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2004 for Intermediate and Telex. Certain 2004 amounts have been reclassified to conform to the 2005 presentation. 10 NEW ACCOUNTING PRONOUNCEMENTS In November 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory Costs - an amendment of ARB No. 43" (SFAS 151), which is the result of its efforts to converge U.S. accounting standards for inventories with International Accounting Standards. SFAS 151 requires idle facility expenses, freight, handling costs, and wasted material (spoilage) costs to be recognized as current-periodic charges. It also requires the allocation of fixed production overheads to the cost of conversion based on the normal capacity of the production facilities. SFAS 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Telex is evaluating the impact of this standard and currently does not expect it to have a significant impact on its consolidated financial statements. 2. Inventories Inventories consist of the following (in thousands):

3. Goodwill Effective January 1, 2002, Telex adopted SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). Telex performs annual impairment reviews at the beginning of the fourth quarter or at any time there is an indicator of impairment. There was no indicator of impairment for the quarter ended June 30, 2005. Telex has certain amounts of goodwill denominated in foreign currencies that fluctuate with movement of exchange rates. The following table presents the changes in carrying value of goodwill by business segment as of June 30, 2005 (in thousands):

11 4. Debt Long-term debt consists of the following (in thousands):

5. Income Taxes Consistent with the provisions of APB No. 28, "Interim Financial Reporting," Telex has provided an income tax provision based on its best estimate of the effective tax rate applicable for the entire year. Telex recorded an income tax provision of $3.9 million on pre-tax income of $10.6 million for the six months ended June 30, 2005. Telex recorded an income tax provision of $3.8 million on pre-tax income of $9.2 million for the six months ended June 30, 2004. The income tax rate was 36.4% and 41.1% for the six months ended June 30, 2005 and 2004, respectively. The six months ended June 30, 2004 included $0.3 million of additional expense for our German subsidiary related to an audit of the 2002 tax year. The effective rate, excluding the prior year expense, was 37.8%. Intermediate's income tax provision is the same as Telex's because the incremental interest expense at Intermediate is non-deductible. Intermediate and Telex file a consolidated U.S. tax return with Old Telex. The tax provisions recorded by Telex are calculated on a separate company basis under a tax sharing agreement with Old Telex. Telex had a payable to Old Telex of $5.0 million, $3.3 million, and $1.7 million as of June 30, 2005, December 31, 2004, and June 30, 2004, respectively, included in other long-term liabilities. Each foreign subsidiary of Telex files its tax return in its respective foreign country. 6. Pension and Postretirement Benefits Telex has one noncontributory defined benefit cash balance pension plan. Through June 30, 2003, each active participant's account received a benefit credit each year based on the participant's age, vesting service, and total remuneration covered by the pension plan, consisting of base salary, commission, overtime and bonuses paid to the participant. Effective June 30, 2003, Telex made a decision to freeze future pension plan benefits. Plan participants 12 continue to receive interest credits but no longer receive a benefit credit based on the participant's age, vesting service, and total remuneration. The following table presents the net periodic benefit cost (income) for each period (in thousands):

Telex made employer contributions of $12,000 in April 2005 with no additional funding required in the remainder of 2005. 7. Related-Party Transactions In 2000, Telex relocated its corporate headquarters to a facility leased from DRF 12000 Portland LLC (the LLC), an entity in which Telex has a 50% interest. Telex contributed cash of $0.6 million to the LLC and the investment is accounted for under the equity method. Telex's allocable share of the LLC income is included as a component of other income in the condensed consolidated statements of operations. The LLC financed the purchase of the facility with a mortgage secured by the facility. At June 30, 2005, the remaining balance on the mortgage was $6.6 million. The annual lease payments to the LLC are $1.1 million for years one to five and $1.2 million for years six to ten. The lease commenced in June 2000. Telex may renew the lease at the end of the initial lease term for three renewal terms of five years each. The lease has been classified as an operating lease and the lease payments are recorded as rent expense. Telex's exposure to loss associated with the LLC is its investment in the LLC, which totaled $0.8 million at June 30, 2005. The investment in the LLC is included in the condensed consolidated balance sheets as a component of other assets. Telex has reviewed FASB Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" (FIN 46), pertaining to the consolidation of variable interest entities and has determined that the LLC is not a variable interest entity to Telex and that the current method of accounting for this investment remains appropriate. 8. Comprehensive Loss Comprehensive loss reflects the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. For Intermediate, comprehensive net loss represents net income or loss adjusted for foreign currency translation adjustments and minimum pension liability adjustments. Comprehensive loss is as follows (in thousands): 13

The components of accumulated other comprehensive loss for both Intermediate and Telex are as follows (in thousands):

9. Segment Information Telex has two business segments: Professional Audio and Advanced Communication Technologies. Professional Audio Professional Audio consists of five product lines within the overall professional audio market, including: (i) permanently installed sound systems; (ii) sound products used by professional musicians and sold principally through retail channels; (iii) sound products used in professional concerts, recording projects and radio and television broadcasts; (iv) professional communication products, including advanced digital matrix intercoms, used by broadcasters (including all major television networks) to control production communications, intercoms, headsets and wireless communications systems used by professional, college and high school football teams and stadiums and other professional and high school sports teams, as well as by utilities, aerospace and industrial organizations; and (v) wired and wireless microphones used in the education, sports, broadcast, music and religious markets. Advanced Communication Technologies Advanced Communication Technologies (formerly known as Audio and Wireless Technology) targets six principal product markets including: (i) digital audio duplication 14 products for the religious, education and enterprise markets; (ii) military/aviation communication products for the military and aviation markets; (iii) wireless networking products serving the original equipment manufacturer, wireless internet service provider and medical telemetry markets; (iv) land mobile communication products for the public safety, military and industrial markets; (v) audio and wireless education products for classroom and computer based education markets; and (vi) talking books products for the blind and reading disabled markets. The following tables provide information for Telex, and Intermediate where relevant, by business segment and geographic region for the three and six months ended June 30, 2005 and 2004 (in thousands): 15

(1) These results include corporate operating expenses for Intermediate of $13,000 and $14,000 for the quarter ended June 30, 2005 and 2004, respectively, and $36,000 and $24,000 for the six months ended June 30, 2005 and 2004 respectively. (2) Total assets include deferred financing costs for Intermediate of $712,000 and $871,000 as of June 30, 2005 and 2004, respectively. Corporate operating expenses include unallocated corporate engineering, selling, general and administrative costs and amortization of other intangibles. Corporate identifiable assets relate principally to the Company's investment in information systems and corporate facilities, as well as cash and deferred financing costs. The Company's net sales into each of its principal geographic regions were as follows (in thousands):

It is not practical for the Company to disclose revenue by product or service grouping for financial reporting purposes as the Company's systems do not reliably compile this information. Long-lived assets of the Company's U.S. and International operations were as follows (in thousands):

16 10. Guarantor Subsidiary In connection with the November 2003 debt restructuring, a wholly-owned domestic subsidiary of Telex, Telex Communications International, Ltd. (Guarantor), guarantees the $125.0 million 11 1/2% senior secured notes of Telex on a full, unconditional and joint and several basis. The guarantee is a secured obligation of the Guarantor and ranks senior in the right of payment to all existing and future subordinated indebtedness of the Guarantor and ranks equally in the right of payment with all other existing and future senior indebtedness of the Guarantor. The following condensed consolidating financial information includes the accounts of the Guarantor and the combined accounts of the Guarantor's direct and indirect foreign subsidiaries (Non-Guarantors). The following tables present condensed consolidating balance sheets as of June 30, 2005 and December 31, 2004, condensed consolidating statements of operations for the three and six months ended June 30, 2005 and 2004, and condensed consolidating statements of cash flows for the six months ended June 30, 2005 and 2004. Intermediate's 13% senior subordinated discount notes are unsecured and are not guaranteed by any other party. 17 TELEX COMMUNICATIONS, INC. CONDENSED CONSOLIDATING BALANCE SHEET JUNE 30, 2005 (IN THOUSANDS)

18 TELEX COMMUNICATIONS, INC. CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2004 (IN THOUSANDS)

19 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2005 (IN THOUSANDS)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2004 (IN THOUSANDS)

20 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2005 (IN THOUSANDS)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2004 (IN THOUSANDS)

21 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2005 (IN THOUSANDS)

22 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2004 (IN THOUSANDS)

23 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 our 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 Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. Any such forward-looking statements involve known and unknown risks and uncertainties and our actual results may differ materially from those forward-looking statements. While made in good faith based on information currently available to management, we cannot assure you that such opinions or expectations will be achieved or accomplished. We do not undertake to update, revise or correct any of the forward-looking information contained in this report. The following factors, in addition to those discussed elsewhere in this report, are representative of those factors that could affect our future results and could cause such 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 and success of the implementation of changes in our operations to effect cost savings; (vi) opportunities that may be presented to and pursued by us; (vii) our financial resources, including our ability to access external sources of capital; and (viii) such other risks and uncertainties as are detailed from time to time in our reports and filings with the Securities and Exchange Commission. Management's Discussion and Analysis of Financial Condition and Results of Operations is provided solely with respect to Telex and its subsidiaries since substantially all of the Company's operations are conducted by Telex. However, Intermediate has outstanding debt securities. Accordingly, information with respect to interest expense of Intermediate is also provided herein. The discussion of liquidity and capital resources pertains to Telex and its consolidated subsidiaries. Telex and Intermediate were formed in connection with the November 2003 restructuring of Old Telex's debt obligations and related corporate restructuring. OVERVIEW DESCRIPTION OF BUSINESS We are a worldwide industry leader in the design, manufacture, and marketing of audio and communications products and systems to commercial, professional, and industrial customers. Our product lines include sophisticated loudspeaker systems, wired and wireless intercom systems, mixing consoles, digital audio duplication products, amplifiers, wired and wireless microphones, military and aviation products, land mobile communication systems, wireless assistive listening systems and other related products. We have two business segments: Professional Audio and Advanced Communication Technologies (formerly known as Audio and Wireless Technology). Professional Audio consists of five product lines within the overall professional audio market, including: (i) permanently 24 installed sound systems; (ii) sound products used by professional musicians and sold principally through retail channels; (iii) sound products used in professional concerts, recording projects and radio and television broadcasts; (iv) professional communication products, including advanced digital matrix intercoms used by broadcasters (including all major television networks) to control production communications, intercoms, headsets and wireless communications systems used by professional, college and high school football teams and stadiums and other professional and high school sports teams as well as by utilities, aerospace and industrial organizations; and (v) wired and wireless microphones used in the education, sports, broadcast, music and religious markets. Advanced Communication Technologies targets six principal product markets including: (i) digital audio duplication products for the religious, education and enterprise markets; (ii) military/aviation communication products for the military and aviation markets; (iii) wireless networking products serving the original equipment manufacturer, wireless internet service provider and medical telemetry markets; (iv) land mobile communication products for the public safety, military and industrial markets; (v) audio and wireless education products for classroom and computer based education markets; and (vi) talking book products for the blind and reading disabled markets. We maintain 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, we conduct business in local currency in many countries, the most significant of which are Germany, the United Kingdom, Japan, Singapore, Hong Kong, Canada and France. Exposure to U.S. dollar/Euro and U.S. dollar/British pound exchange rate volatility is mitigated to some extent by our ability to source production needs with existing manufacturing capacity in Germany and Great Britain, and the exposure to the U.S. dollar/Japanese yen exchange rate volatility is to some extent mitigated by sourcing products denominated in yen from Japan or through contractual provisions in sales agreements with certain customers. Nevertheless, we have a direct and continuing exposure to both positive and negative foreign currency movements. We report 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 "accumulated other comprehensive loss" as part of shareholder's equity. CRITICAL ACCOUNTING POLICIES There has been no material change in our Critical Accounting Policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2004. 25 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, information regarding certain items in Telex's condensed consolidated statements of operations (dollars in thousands):

THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2004 Net sales. Net sales increased $2.7 million, or 3.4%, from $77.7 million for the three months ended June 30, 2004 to $80.4 million for the three months ended June 30, 2005. We experienced higher sales in our Americas and European marketplaces with lower sales in Asian markets. Net sales increased in both the Professional Audio and the Advanced Communication Technologies segment. Our six-month net sales increased $9.2 million, or 6.4%, from $145.0 million for the six months ended June 30, 2004 to $154.2 million for the six months ended June 30, 2005. Net sales increased in both the Professional Audio segment and Advanced Communication Technologies segment led by solid growth in speaker, landmobile, and systems electronics products. Net sales in the Professional Audio segment increased $1.3 million, or 2.0%, from $64.2 million for the three months ended June 30, 2004 to $65.5 million for the three months ended June 30, 2005. The Professional Audio group saw a moderate increase in sales across most catagories in the second quarter of 2005, led by speaker products, which was partially offset by a decrease in console and other electronic products. Six-month net sales increased $5.0 million, or 4.3%, from $118.0 million for the six months ended June 30, 2004 to $123.0 million for the six months ended June 30, 2005. Net sales increases for the six months of 2005 were achieved geographically in the Americas and Europe, partially offset by a decline in Asia. The speaker products saw the most significant increase in sales compared to the same period last year. Net sales in the Advanced Communication Technologies segment increased $1.4 million, or 10.1%, from $13.5 million for the three months ended June 30, 2004 to $14.9 million for the three months ended June 30, 2005. The increase in net sales is attributed primarily to higher sales of our wireless networking products. Six-month net sales increased $4.2 million, or 15.6%, from $27.0 million for the six months ended June 30, 2004 to $31.2 million for the six months ended June 30, 2005. The increase for the six months of 2005 compared to the six months of 26 2004 is primarily from sales of our landmobile and wireless networking products. Gross profit. Gross profit increased $1.4 million, or 4.0%, from $35.6 million for the three months ended June 30, 2004 to $37.0 million for the three months ended June 30, 2005. Gross profit increased $4.3 million, or 6.7%, from $65.3 million for the six months ended June 30, 2004 to $69.6 million for the six months ended June 30, 2005. The gross margin rate increased to 46.1% for the three months ended June 30, 2005 compared to a gross margin rate of 45.8% for the three months ended June 30, 2004 and the gross margin rate increased to 45.2% for the six months ended June 30, 2005 compared to a gross margin rate of 45.0% for the six months ended June 30, 2004. The slightly higher margins are a result of higher European margins offset by a decline in Asia. The gross margin rate for the Professional Audio segment decreased slightly from 46.8% for the three months ended June 30, 2004 to 46.7% for the three months ended June 30, 2005. The gross margin rate also decreased slightly from 45.7% for the six months ended June 30, 2004 to 45.5% for the six months ended June 30, 2005. The decrease in the gross margin rate for 2005 from the corresponding periods in 2004 is attributed primarily to the lower sales of our intercom products. The gross margin rate for the Advanced Communication Technologies segment increased from 41.1% for the three months ended June 30, 2004 to 43.3% for the three months ended June 30, 2004. The gross margin rate increased from 42.1% for the six months ended June 30, 2004 to 43.8% for the six months ended June 30, 2005. The increase in the gross margin rate for 2005 from the corresponding periods in 2004 is attributed primarily to increased sales of landmobile products. Engineering. Engineering expenses increased $0.5 million, or 11.8%, from $3.7 million for the three months ended June 30, 2004 to $4.2 million for the three months ended June 30, 2005. Engineering expenses increased $1.3 million, or 17.6%, from $7.2 million for the six months ended June 30, 2004 to $8.5 million for the six months ended June 30, 2005. We continue to invest in new product development across all of our business segments. Selling, general and administrative. Selling, general and administrative expenses increased $0.8 million, or 3.5%, from $21.4 million for the three months ended June 30, 2004 to $22.2 million for the three months ended June 30, 2005. Selling, general and administrative expenses increased $2.6 million, or 6.3%, from $40.8 million for the six months ended June 30, 2004 to $43.4 million for the six months ended June 30, 2005. The increase is mainly from higher U.S. and European selling and marketing activities. We expect our selling, general and administrative expenses to remain at the second quarter 2005 levels in the second half of the year. 27 Interest expense. Interest expense consists of (in thousands):

Telex interest expense is relatively constant quarter to quarter because of fixed interest rates. Intermediate interest expense increased due to higher amortization of debt issuance discount. Other income, net. Other income of $0.2 million for the three months ended June 30, 2005 is principally from foreign currency gains. Other income of $0.2 million for the three months ended June 30, 2004 is principally from the amortization of deferred revenue for a patent fee, trademark license fee and non-compete agreement associated with the 2002 sale of our hearing instrument product lines and earnings in our joint venture offset by foreign currency losses. For the six months ended June 30, 2005, other income of $1.0 million is principally from interest income received from the Internal Revenue Service ("IRS") on an R&D tax credit and adjustment of previously recognized interest on amounts owed to the IRS. For the six months ended June 30, 2004, other income of $0.1 million is principally from the amortization of deferred revenue for a patent fee, trademark license fee and non-compete agreement associated with the 2002 sale of the hearing instrument product lines. Amortization of the deferred revenue items was substantially completed in 2004. Income taxes. Telex recorded an income tax provision of $3.9 million on pre-tax income of $10.6 million for the six months ended June 30, 2005. Telex recorded an income tax provision of $3.8 million on pre-tax income of $9.2 million for the six months ended June 30, 2004. The 28 income tax rate was 36.4% and 41.1% for the six months ended June 30, 2005 and 2004, respectively. The six months ended June 30, 2004 included $0.3 million of additional expense for our German subsidiary related to an audit of the 2002 tax year. The effective rate, excluding the prior year expense, was 37.8%. Intermediate's income tax provision is the same as Telex's because the incremental interest expense at Intermediate is non-deductible. Intermediate and Telex file a consolidated U.S. tax return with Old Telex. The tax provision recorded by Telex is calculated on a separate company basis under a tax sharing agreement with Old Telex. As of June 30, 2005, we have a liability of $2.6 million included in income taxes payable for tax liability, penalties, and accrued interest (as of the settlement date) related to a dispute for taxable years 1990 through 1995. We have agreed with the Internal Revenue Service on the final amount of the tax liability to be paid and have been making small monthly payments. We anticipate a final payment will be made in the next two or three months. LIQUIDITY AND CAPITAL RESOURCES The following discussion about liquidity and capital resources pertains to Telex and its consolidated subsidiaries. At June 30, 2005, we had cash and cash equivalents of $8.4 million compared to $15.0 million at December 31, 2004. Our principal source of funds for the six months ended June 30, 2005 consisted of our beginning cash balance and $1.9 million of cash provided by operating activities. Our principal use of funds was for capital expenditures of $6.5 million and financing activities of $1.7 million. Our principal source of funds for the six months ended June 30, 2004 consisted of $3.8 million of cash provided by operating activities. Our principal use of funds was for capital expenditures of $3.3 million. Our investing activities consist mainly of capital expenditures to maintain facilities, acquire machines and tooling, update certain manufacturing processes, update information systems and improve efficiency. Capital expenditures in 2005 are primarily for the expansion of our U.S. based operating system to foreign locations. Our accounts receivable balance of $56.9 million as of June 30, 2005 increased $6.7 million from $50.2 million at December 31, 2004. Excluding the impact of foreign currency rate movements, our accounts receivable increased $9.2 million from December 31, 2004. The increase is mainly the result of the strong sales in June 2005 with some additional increases in past due accounts. We are not aware of any significant credit risks at June 30, 2005 that could negatively impact future cash receipts from customers. Our inventories of $54.9 million as of June 30, 2005 increased $2.3 million from $52.6 million at 29 December 31, 2004. Excluding the impact of foreign currency rate movements, our inventory increased $5.2 million from December 31, 2004. We increased our finished goods inventories by $4.4 million to meet current demand of new product introductions. We continue to make progress with our lean manufacturing process transition and will focus on this strategy for the remainder of 2005. Our consolidated indebtedness decreased $1.3 million from $127.6 million at December 31, 2004 to $126.3 million at June 30, 2005. Our debt consists of $125.0 million of 11-1/2% Senior Secured Notes due October 2008 and $1.3 million of other debt in the U.S. and Germany. We rely mainly on internally generated funds and, to the extent necessary, borrowings under the U.S. revolving credit facility and foreign working capital lines to meet our liquidity needs. Our liquidity needs arise primarily from interest payments, working capital needs and capital expenditure requirements. In addition we anticipate a final payment of our U.S. tax liability in the next quarter. Our current credit facilities include a U.S. $15.0 million senior secured credit facility entered into November 19, 2003 (expiring July 12, 2008), subject to certain borrowing base limitations. The credit facility is secured by substantially all of our and our domestic subsidiaries' current and future assets. In addition, we have foreign working capital lines (with on demand repayment provisions), subject to certain limitations, of $11.5 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. At June 30, 2005 we had no borrowings outstanding under our U.S. credit facility and foreign working capital lines. The net availability under our lines, after deduction for open letters of credit and borrowing base limitations, was $25.9 million. As of June 30, 2005 we had made our minimum required 2005 calendar year employer contribution of $12,000 to our U.S. pension plan. The remaining contribution of $0.9 million for the 2005 plan year will be paid in 2006. 30 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are 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. We have entered into various financial instruments to manage this risk. The counterparties to these transactions are major financial institutions. We do not enter into derivatives or other financial instruments for trading or speculative purposes. EXCHANGE RATE SENSITIVITY ANALYSIS We enter into forward exchange contracts principally to hedge the currency fluctuations in transactions denominated in foreign currencies, thereby limiting our exposure to changes in exchange rates. During the six months ended June 30, 2005, 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 our statement of operations. At June 30, 2005, we had outstanding foreign forward exchange contracts with a notional amount of $32.4 million with a weighted average maturity of 44 days. At June 30, 2005, 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 $3.2 million. However, since these contracts hedge foreign currency denominated transactions, any change in the fair value of the contracts would be offset by changes in the underlying value of the transaction being hedged. INTEREST RATE AND DEBT SENSITIVITY ANALYSIS For fixed rate debt, interest rate changes affect the fair market value but do not impact our earnings or cash flows. Conversely, for floating rate debt, interest rate changes generally do not affect the fair market value but do impact our earnings and cash flows, assuming other factors are held constant. At June 30, 2005, Telex had fixed rate debt of $125.5 million and an interest-free loan of $0.8 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 this debt by approximately $3.5 million. Intermediate had incremental fixed rate debt of $76.4 million and a one-percentage point decrease in interest rates would increase the unrealized fair market value of this debt by approximately $2.5 million. 31 ITEM 4. CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of Telex's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of June 30, 2005. Based on that evaluation, our management, including the CEO and CFO, concluded (i) that our disclosure controls and procedures were effective as of the end of the period to ensure that the information that we are required to disclose in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms, and (ii) that the information that is required to be reported is accumulated and communicated to management, including our principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure. INTERNAL CONTROL OVER FINANCIAL REPORTING There were no changes in our internal control over financial reporting which materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The Company is in the process of implementing its U.S. based, worldwide information technology application globally. Our England subsidiary went live on the system in the first quarter of 2005. Management does not currently believe that this implementation will adversely affect the Company's internal control over financial reporting. 32 PART II. OTHER INFORMATION ITEM 6. EXHIBITS Exhibits 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended. 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended. 32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 33 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 INTERMEDIATE HOLDINGS, LLC TELEX COMMUNICATIONS, INC. Dated: July 29, 2005 By: /s/ Raymond V. Malpocher -------------------------------------- Raymond V. Malpocher President and Chief Executive Officer Dated: July 29, 2005 By: /s/ Gregory W. Richter -------------------------------------- Gregory W. Richter Vice President and Chief Financial Officer 34 TELEX COMMUNICATIONS INTERMEDIATE HOLDINGS, LLC TELEX COMMUNICATIONS, INC. FORM 10-Q EXHIBIT INDEX

TELEX COMMUNICATIONS INTERMEDIATE HOLDINGS LLC 10-Q