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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER 333-27341
TELEX COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 38-1853300
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
9600 ALDRICH AVENUE SOUTH, BLOOMINGTON, MINNESOTA 55420
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (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
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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 report(s), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of Common Stock held by non-affiliates on
February 28, 2000 was $0.
As of February 28, 2000 there were 110 shares of Telex Communications, Inc.
Common Stock, $.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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TABLE OF CONTENTS
PAGE
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PART I ............................................................ 1
ITEM 1. BUSINESS.................................................... 1
ITEM 2. PROPERTIES.................................................. 9
ITEM 3. LEGAL PROCEEDINGS........................................... 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 10
PART II ............................................................ 11
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED 11
STOCKHOLDER MATTERS.........................................
ITEM 6. SELECTED FINANCIAL DATA..................................... 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 12
AND RESULTS OF OPERATIONS...................................
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET 22
RISK........................................................
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING 23
AND FINANCIAL DISCLOSURE....................................
PART III ............................................................ 24
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS............................ 24
ITEM 11. EXECUTIVE COMPENSATION...................................... 25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND 30
MANAGEMENT..................................................
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 32
PART IV ............................................................ 34
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 34
8-K.........................................................
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PART I
ITEM 1. BUSINESS
OVERVIEW:
Telex Communications, Inc. (together with its subsidiaries and, as the
context may require, any predecessor companies, "Telex" or the "Company") is a
leader in the design, manufacture and marketing of sophisticated audio, wireless
and multimedia communications equipment for 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 local area networks ("LAN") and
satellite-based mobile phone antennas ("SBA"), 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 is a
wholly owned subsidiary of Telex Communications Group, Inc. ("Holdings"), a
holding company whose assets consist primarily of its investment in the Company.
Unless otherwise indicated, all references in this Form 10-K to Fiscal 1999
are to the twelve months ended December 31, 1999 and all references to Fiscal
1998 are to the fiscal year ended March 31, 1998. Fiscal 1998, which resulted
from the Company's 1998 change in fiscal year end from the last day of February
to March 31, includes the results for the twelve months ended March 31, 1998.
Effective December 31, 1998, the Company changed its fiscal year end from March
31 to December 31. Due to this change, the Company reported audited financial
results for a short fiscal period beginning April 1, 1998 and ending on December
31, 1998. For further information concerning the Company's consolidated
financial statements and certain changes in the basis of presentation, see
"Selected Financial Data" and the Company's consolidated financial statements
and notes thereto that are included elsewhere herein.
The Company is a Delaware corporation, with principal executive offices
currently located at 9600 Aldrich Avenue South, Bloomington, Minnesota 55420.
The Company's telephone number is (952) 884-4051.
CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995:
This report contains forward-looking statements, such as statements which
relate to the Company's business objectives, plans, strategies, and expectations
or describe the potential markets for the Company's products, that are based on
management's current opinions, beliefs, or expectations as to future results or
future events. The words "believe," "anticipate," "project," "plan," "expect,"
"intend," "will likely result," "will continue," and similar expressions
identify 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, beliefs or expectations
will be achieved or accomplished. Various factors, including those described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this report, could cause actual results and events
to vary significantly from those expressed in any forward-looking statement.
Such types of statements are intended to be "forward-looking statements" for
purposes of the Private Securities Litigation Reform Act of 1995 and should be
read in conjunction with the cautionary statements set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Certain Risks Related to Telex's Business." The Company is under no
obligation to update any forward-looking statements to the extent it becomes
aware that they will not be achieved for any reason.
SEGMENT INFORMATION:
OVERVIEW
The Company has two business segments: Professional Sound and Entertainment
and Multimedia/Audio Communications. Financial information for the Company's two
business segments for the twelve months
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ended December 31, 1999, the nine-month period ended December 31, 1998, and
Fiscal 1998 (the period from April 1, 1997 through March 31, 1998) is set forth
in note 13 to the Consolidated Financial Statements of the Company included
elsewhere herein.
PROFESSIONAL SOUND AND ENTERTAINMENT
Professional Sound and Entertainment consists of five lines of business
within the overall professional audio market: (i) Fixed Installation, or
permanently installed sound systems; (ii) Professional Music Retail, or sound
products used by professional musicians and sold principally through retail
channels; (iii) Concert/ Recording/Broadcast, or sound products used in
professional concerts, recording projects and radio and television broadcast;
(iv) Broadcast Communications Systems, or 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 school sports teams; and (v) Sound Reinforcement or wired and
wireless microphones used in the education, sports, broadcast, music and
religious markets.
Fixed Installation. Fixed Installation encompasses permanently installed
sound systems in airports, sports arenas, theaters, concert halls, cinemas,
stadiums, convention centers, houses of worship and other venues where music or
speech is amplified. Within the Fixed Installation line of business there are
varying requirements, ranging from concert halls and theatres, which need the
highest quality of fidelity output and broad frequency response, to mass transit
facilities and office buildings, where sound communication is important but need
not be full-range output. The products sold for each type of installation vary
widely in characteristics and price and are sold through professional audio
contractors and distributors.
The market for Fixed Installation products is generally driven by new
construction and upgrades of existing installations. In the United States, new
uses of audio products are spurring growth. More dynamic sound and music,
requiring more sophisticated audio products, are increasingly being used in
cinemas, religious services and sporting events. Abroad, the development of
infrastructure and the upgrade of existing facilities, such as auditoriums,
public places, theaters and sports facilities in emerging economies, is also a
source of increasing demand.
Professional Music Retail. Professional Music Retail products are used
mainly by musicians for live performance, recording and reproduction of
recording material and are generally sold directly to end users through
specialized retail stores that market to musicians, bands and local
entertainment venues. Professional Music Retail products appeal to performers
seeking an improved level of sound system performance, reliability and quality.
The Company's Professional Music Retail products are sold through its sales
representatives and distributors through retail outlets to musicians.
The demand for Professional Music Retail products is driven primarily by an
increase in both the number of new users and the number of users upgrading to
take advantage of enhanced sound technology. Sales are also driven by demand for
smaller and lighter weight products that are easier to use and transport.
Concert/Recording/Broadcast. The Concert/Recording/Broadcast lines of
business include sound systems for musical concerts and theater productions,
sound recording and radio and television broadcast and production. The Company's
sales of these products are generally made through its distributors and
retailers or directly to touring companies. Management believes that sales in
the Concert/Recording/Broadcast line of business to established, high-profile
touring companies influence and stimulate purchases of products by smaller
groups and lesser known professional musicians.
Concert/Recording/Broadcast demand is driven by a combination of the
factors that determine growth in the Fixed Installation and Professional Music
Retail lines of business, including technological improvement and an increase in
product applications. For example, most professional sporting events now include
musical performances that require increased sound quality and amplification. The
demand for smaller, lighter weight products is another driver of growth as such
products reduce operating costs for touring applications. In addition, an
increase in popularity of remote electronic news gathering is driving the demand
for wired and wireless microphones as well as portable broadcast mixers.
Broadcast Communications Systems. The Company produces a broad line of
broadcast communications equipment for end markets such as sports and
broadcasting. The Company's smallest system, the Telex(R) Audiocom(R) modular
intercom system, is used by theaters, small sporting arenas, network affiliates
and independent cable channels for their communications needs. Typically, these
systems are used to link 20 to 30 people so they can communicate during an event
or performance. The Company's middle market offering,
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the RTS(TM) TW intercom system, is used by larger broadcast network affiliates,
larger sporting venues and production studios. This system is also used in
broadcast trucks as a remote, portable studio for news gathering or sporting
events, and typically provides communications links for 50 to 60 people at a
time. The Company's high-end product, the RTS(TM) ADAM(TM) (Advanced Digital
Audio Matrix) intercom system, is used by the major networks in order to cover
large events such as the Olympics and the Superbowl.
The Company also provides wired and wireless communication systems and
related components to the National Football League (the "NFL") as well as to
high school and college teams and the World and Canadian Football League. In
1996, the Company began providing professional, college and high school coaches
with an encrypted wireless intercom system, which allows the head coach to
communicate confidentially with offensive and defensive coordinators on the side
lines and in the booths above the fields.
Sound Reinforcement. Sound Reinforcement is divided into two main product
groups: (i) wired and wireless microphones, which serve the professional needs
of sound contractors, entertainers, and speakers, and are used in a variety of
settings such as theaters, stadiums and hotels; and (ii) wireless assistive
listening devices, used by the hearing impaired to diminish the effects of
background noise and poor building acoustics in theaters, stadiums, court rooms
and other facilities using public address systems.
The Company believes that it offers one of the industry's most extensive
lines of wireless microphone, receiver and transmitter systems, including a wide
variety of handheld, lapel and guitar microphone options. The Company offers
microphones (including noise canceling) with a wide variety of directional
patterns to meet the needs for general sound reinforcement as well as the
specific needs of users such as drummers, vocalists and public address
announcers. Many of these lines incorporate the Company's Posi-Phase(TM) true
diversity antenna circuitry which produces a stronger signal for higher quality
sound over a longer distance without the signal dropouts or the switching noise
common in other systems. Some of the Company's wireless microphones also
incorporate an advanced proprietary multi-crystal tuning system that allows any
specific frequency to be used within the operating limits of the receiver. The
crystal control and associated radio frequency filtering provide superior radio
frequency performance and maximum protection from interference.
The second product group in Sound Reinforcement is wireless assistive
listening devices, sold to arenas, theaters, churches, funeral homes, hotels and
other public facilities. The Company's principal product in this product group
is the Telex(R) SoundMate(R) wireless assistive listening system. Assistive
listening devices are now mandated by the Americans with Disabilities Act,
passed in 1994, which requires that assistive listening devices be provided to
all hearing impaired individuals free of charge at facilities using public
address systems.
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 LAN and SBA systems, (vi) talking book players, (vii) wireless
communications, (viii) hearing aids and (ix) wireless assistive listening
systems.
Customers for computer audio microphones include a number of computer
hardware and modem manufacturers, such as Compaq, Hewlett-Packard, IBM, Gateway
and 3Com. In addition, the Company sells its LCD projectors to corporate and
educational training specialists, while principal customers for the Company's
aircraft products are the major aircraft manufacturers and airlines, including
Boeing, American Airlines and Delta, as well as airport fixed base operators.
Within this segment, the Company also offers a broad line of acoustic
accessories and antennas for various communications needs and applications. The
Company markets such products to wireless LAN providers, public safety and law
enforcement groups (police, fire departments, emergency services, CIA, FBI and
the Secret Service), citizens band radio, land mobile radio, telephony and
various commercial, industrial and military markets. The Company also produces
audio products for the Library of Congress' Talking Book program as well as a
broad line of high value, technologically differentiated hearing aids and other
assistive listening devices for the hearing impaired including in-the-ear,
behind-the-ear and in-the-canal hearing aids, as well as FM wireless auditory
trainers and personal assistive listening devices. The Company's patented
Adaptive Compression(R) technology offers superior signal processing and
provides the user with superior intelligibility and understanding of speech in
the presence of background noise. The Company's hearing instruments business
dates back to 1936, making it one of the oldest hearing aid manufacturers in the
United States.
Computer Audio. The Company believes that it is the largest supplier of
microphones, headphones and headsets to the computer industry. The Company
currently sells to most of the major computer manufacturers, including Compaq,
Gateway, Hewlett-Packard and IBM, as well as dozens of other component and
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original equipment manufacturers (OEMs). In addition, the Company serves the
computer education market, selling a full line of headphones, headsets and group
listening centers for use in the classroom with computers, VCRs, CD-ROMs and
laserdisc players. The largest portion of the Company's revenue in the computer
audio market is generated from the sales of computer microphones for speech
recognition. Many of the Company's microphones are also sold to modem
manufacturers, such as 3Com, who then package these microphones with their
modems, to ensure compatibility of the application to the end-user.
Audio Duplication. The Company's cassette duplicators and copiers are
primarily used to copy the spoken word and serve two principal markets:
religious (houses of worship, missionaries and tape ministries) and training
programs/seminars (professional seminar presenters, self-improvement programs,
teachers, legal documentation and law enforcement). The Company produces a line
of high-speed audiocassette duplicators designed for "in-cassette" copying of
standard audiocassette tapes. The current product line is comprised of four
models: the Replica(R) and the Copyette(TM), simple portable units, the new
XGEN(TM) series, a duplicator that expands to sixty-seven copy positions with
adjustable volume controls, and the EDAT system, which allows the download of
information from a PC hard drive to produce analog cassette copies at high
speed. A complementary product, Zing(TM), is used to digitize multiple audio
channels from analog sources at high speed. These products offer high speed tape
handling, high frequency audio circuit designs and low vibration mechanical
drives at competitive prices within their respective categories.
Multimedia Presentation/Training. The Multimedia Presentation/Training
product group manufactures and markets projection products, such as the
Firefly(TM), a lightweight portable data/video projector, and Caramate(R) slide
projector products, which are used in many types of educational, training
institutions and presentation settings, primarily for corporate and educational
markets. The Company's LCD projector line also includes other lightweight and
boardroom data/video projectors. The Company is exiting the LCD projector
product line in 2000 because of significant decline in profitability due to
continued extreme downward price pressure.
Aviation Communications/Other Applications. The Company supplies a broad
line of aviation communications headsets, intercoms and microphones to major
commercial and commuter airlines and pilots as well as to airframe manufacturers
and private pilots. The Company's aviation communications products are known for
their design innovation, lightweight construction, technological strength and
product value. The Company uses its ANR(TM)(Active Noise Reduction) patented
technology in several of its designs. In addition, the Company produces
hand-held microphones and earphones for field and aircraft communications, both
military and civilian, and sells its components to original equipment
manufacturers for incorporation into their products.
Wireless LAN and SBA Systems. The Company entered the wireless LAN market
in 1994 to capitalize on the Company's antenna design and communications
technology expertise. End users include corporations, retailers, warehouses and
distribution centers. The Company's products are used by a wide variety of
companies to set up more efficient and cost-effective LAN and SBA systems
through wireless connections. As an example, Sears has installed the Company's
wireless LAN antennas to remotely connect its cash registers to the store's main
computer, which allows Sears to move the cash registers as needed to meet demand
without worrying about wires. In 1998 the Company entered the SBA market,
leveraging off its significant antenna expertise, to penetrate an emerging
market. The Company provides antennas to Telit, an Italy-based company, and to
Qualcomm, a U.S.-based company, two of the three companies manufacturing mobile
phones for the Globalstar consortium of low earth orbiting satellite
communications systems.
Talking Book Players. The Company produces a unique cassette player that
is sold to the Library of Congress ("LOC") for use in its talking book program
for the blind and physically handicapped. Under the Talking Book program, the
LOC distributes books on tape to the blind and physically handicapped, free of
charge, throughout the United States. The Talking Book players were designed
using special features for ease of use and facilitate playing the books back at
different speeds. A unique tape format ensures that these tapes cannot be played
on standard equipment. In April 1998, the Company entered into a new contract
with the LOC with a maximum term of five years. The Talking Book machines have
also been sold internationally to similar programs in Canada, New Zealand and
Australia.
Wireless Communications. The Company also produces a broad line of
wireless communications products such as headsets, microphones, antennas, and
rotors for three primary markets: public safety and law enforcement groups
(police, fire departments, emergency services, CIA, FBI and the Secret Service)
and commercial truck drivers. The Company believes that it has established a
reputation within these markets for providing reliable communications products,
which is the key requirement for most users. Many of the
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Company's products, such as the Ear-Mike(TM)microphone/receiver system and the
Road King(R) CB microphones, have high brand name recognition within their
respective markets. The Company's wireless technology is driven by acoustics and
antenna design capabilities developed for the military antenna business. The
Company distributes wireless communications products through over 1,100 dealers.
Hearing Aids. Hearing aid devices are generally segmented by ear
positioning and sound enhancement capabilities. Ear positioning takes two forms,
either in the ear or behind the ear. Sound enhancement is based on two types of
technologies, linear amplification, which only amplifies the sound, and
compression technology, which modifies the actual sound received by the user.
The Company believes that its patented compression technology, Adaptive
Compression(R), offers superior signal processing circuitry and provides the
user with superior intelligibility and understanding of speech in the presence
of noise. Its Threshold Compression(TM) (patent pending) has unique user volume
control and user selectable frequency abilities which, for example, allow the
user to increase the volume of conversations in the presence of background
noise. The Company distributes its hearing aids through 9,000 hearing instrument
dispensers throughout the United States.
The Company has recently created one of the smallest hearing aids available
in the marketplace, marketed under the Acapella(TM) name. The device fits
completely in the canal, making it essentially undetectable. The Acapella
hearing aids offer not only improved appearance, but the compression technology
and advanced design offer superior sound as well. The Company also offers a
significantly improved soft shell hearing aid. Sold under the SoftWear(TM) and
Sound Advantage(TM) names, these hearing aids are composed of a new material
that, due to its flexibility, is more comfortable than hard plastic based molds.
Wireless Assistive Listening Systems. The Company also produces and
distributes wireless assistive listening systems, such as auditory trainers and
personal assistive listening devices for the hearing impaired, which help the
user in environments with high levels of background noise and poor building
acoustics. Auditory trainers allow the user to hear directly from a sound
source, such as a teacher, via wireless FM transmitters. Personal assistive
listening devices amplify a certain source, such as a speaker. The Company
serves the educational and consumer marketplaces for wireless assistive
listening systems by providing cost-effective, technologically differentiated,
and functionally superior products maintained by excellent customer service. The
Company's principal focus is on the educational market, where many schools and a
number of large city (such as New York and Los Angeles) and county school
systems use the Company's products.
As with hearing aid products, the Company believes that it is able to
differentiate its products from its competitors' products through higher ease of
product use and technologically strong design. Its ClassMate(R) line of auditory
trainers offers state-of-the-art RF/wireless designs, compression technology and
synthesized frequency selection in a wireless FM behind-the-ear device, which is
specially designed for older students who have rejected other models based on
the appearance of body-worn auditory trainers.
INTERNATIONAL OPERATIONS
The Company's products are marketed in over 80 countries worldwide, which
reduces the Company's dependence on any single geographic market. The Company
has substantial assets located outside of the United States and a substantial
portion of the Company's sales and earnings are attributable to operations
conducted abroad. For the twelve months ended December 31, 1999, approximately
42% of the Company's net revenue consisted of sales made outside the United
States, predominantly in Western Europe and Asia. Unlike many of its
competitors, which use independent foreign distributors that generally sell a
variety of competing products, the majority of the Company's foreign sales
efforts are conducted through its foreign distribution subsidiaries. Although
the Company's international operations have generally been profitable in the
past, the Company's efforts to increase international sales may be adversely
affected by, among other things, changes in foreign import restrictions and
regulations, taxes, currency exchange rates, currency and monetary transfer
restrictions and regulations and economic and political changes in the foreign
nations to which the Company's products are exported.
For the twelve months ended December 31, 1999, the Company's total net
sales into each of its principal geographic regions were as follows: United
States--$199.9 million, Germany--$34.8 million, Japan--$19.2 million,
Canada--$12.9 million, China--$14.4 million, and other foreign countries--$62.4
million.
See note 13 to the Consolidated Financial Statements of the Company
included elsewhere herein for further information regarding the Company's
international operations.
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PRODUCT DEVELOPMENT
The Company believes that it is one of the most active developers of new
products in its industry. The Company has several product development projects
planned or currently in progress that are designed to yield new technological
developments, including numerous applications of digital technology, which are
intended to exploit the industry-wide transition from analog to digital
processing. Other engineering and development projects principally are for
design maintenance or to achieve product enhancements that have been requested
by customers, both of which are important activities in sustaining the Company's
product lines. Because the Company produces a comprehensive range of products,
management believes the Company has the capacity to integrate technologies from
one product line to another product line, which ultimately leads to new products
that are often less expensive, more feature rich or otherwise more desirable.
The Company has a history of technological innovation and strong product
development and has introduced numerous technologies that are used throughout
the audio industry, including constant directivity and variable intensity horns,
manifold technology in loudspeaker systems, the application of neodymium in
loudspeaker systems and microphone magnets and titanium in compression driver
diaphragms.
The Company has also implemented a number of strategic initiatives to
identify new market opportunities and to reduce its product development cycle in
order to facilitate the timely introduction of new and enhanced products. The
Company maintains close relationships with its institutional customers to
develop products that meet their requirements. The Company believes this has
enabled it to design new products offering enhanced features, product quality
and reliability, and lower product costs.
For the twelve months ended December 31, 1999, the nine-month period ended
December 31, 1998, and Fiscal 1998, engineering expenses for product development
were $14.9 million, $11.2 million, and $17.3 million, respectively.
MANUFACTURING
The Company manufactures most of the products it sells and most of the
active acoustic components that they contain in twelve facilities located in the
United States, Mexico, Germany and Great Britain. Manufacturing processes are
substantially integrated and, in addition to the assembly processes more
typically found among the Company's competitors, include die casting, fiberglass
plastics molding, transformer and coil winding, sheet metal stamping and
forming, metal machining, cabinet fabrication, painting and plating. The Company
purchases certain electrical components, magnets, lumber and plastics.
Management believes that the Company's integrated manufacturing
capabilities are important factors in maintaining and improving the quality,
performance, availability and cost of its products and decreasing the time to
market of new product introductions. Management also believes that the Company
can respond more effectively to changing customer delivery and product feature
requirements by doing the majority of its own manufacturing and that this gives
it an advantage over many of its competitors. The Company continuously assesses
its manufacturing operations to control or reduce costs.
The Company also sells under its brand names a limited number of finished
products purchased from outside suppliers, including certain electronic products
and loudspeaker systems, where low cost is an essential attribute of the
product. In addition, certain other finished products of non-Company brands are
purchased to supplement the offerings of the Company's distribution operations
in Japan, Hong Kong, Switzerland, Australia and France.
COMPETITION
The markets within the Professional Sound and Entertainment and
Multimedia/Audio Communications segments are both highly competitive and
fragmented and the Company faces meaningful competition in both segments and in
most of its product categories and markets. Management believes that it is one
of a few manufacturers that carry a comprehensive line of professional audio
products and that the key factors for the Company to maintain its position in
its various markets are the recognition of its various brand names, superior
distribution networks, large user base and large number of products, together
with its extensive experience in designing safe and reliable products, dealing
with regulatory agencies and servicing and repairing its products.
While many of the Company's current competitors are generally smaller than
the Company, certain of the Company's competitors are substantially larger than
the Company and have greater financial resources. The Company believes that its
major competitor in providing a full line of professional audio products is
Harmon International Industries, Incorporated, one of whose three segments
competes in the professional audio products
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market. In the LCD projection market, In-Focus Systems, Sharp Electronics and
Proxima/ASK are the current market leaders. Sony is the Company's only
significant competitor in the tape duplication market.
The Company believes the principal competitive factors within each of its
two business segments are the factors referred to above, as well as product
quality, product reliability, product features, reputation, distribution,
customer service and support, ability to meet delivery schedules, warranty terms
and price. The Company believes that it currently competes favorably overall
with respect to each of these principal competitive factors.
PATENTS, TRADEMARKS AND LICENSES
Among the Company's significant assets are its intellectual property
rights. The Company relies on a combination of copyright, trademark and patent
laws to protect these assets, and to a significant degree, on trade secrets,
confidentiality procedures and contractual provisions which may afford more
limited legal protections.
The Company owns several trademarks in the United States and various
foreign countries, including:
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- Adaptive Compression(R) - Midas(R)
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- Audiocom(R) - Caramate(R)
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- ClassMate(R) - Dynacord(R)
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- Electro-Voice(R) - Klark Teknik(R)
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- Klark-Teknik(R) - ProStar(R)
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- Manifold Technology(R) - SoundMate(R)
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- Road King(R) - University Sound(R)
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- Telex(R)
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A number of the Company's trademarks are identified with and important to
the sale and marketing of the Company's products in both of its business
segments. The Company's operations are not dependent upon any single trademark
other than the Telex and Electro-Voice trademarks.
The Company has not registered many of its significant trademarks in all
foreign jurisdictions in which it does business, although management believes
that the Company's most significant marks generally have been registered in the
jurisdictions where their sales are the strongest. The Company is aware that, in
certain foreign jurisdictions, unaffiliated third parties have applied for and
or obtained registrations for marks identical with or similar to marks owned or
used by the Company. Use or registration of the Company's trademarks by the
Company in such jurisdictions may be prohibited, and the Company's business may
be materially adversely affected thereby. The Company does not believe that any
of its products currently infringe upon the proprietary rights of third parties
in any material respect.
The Company's operations are not dependent to any significant extent on any
single or related group of patents, licenses, franchises or concessions. The
Company believes its most significant patents are four patents relating to high
output compression drivers, manifold technology products, variable intensity
horns and the time division multiplex digital matrix intercom system which
expire in 2003, 2006, 2009 and 2014, respectively. The Company also owns a
number of patents related to the design and manufacture of several of its
products, including headsets, headphones, boom-mounted microphones, various
transducer devices, multiple-band directional antennas, computer audio
microphones, adaptive compression circuitry for hearing aids and certain
intercom-related devices. The Company does not believe that the expiration of
any of its patents will have a material adverse effect on the Company's
financial condition or results of operations.
SUPPLIERS
The Company's extensive vertical integration enables it to manufacture many
of the parts for its products internally. Management believes this gives the
Company a competitive advantage in controlling quality and ensuring timely
availability of parts. The Company purchases raw materials, assemblies and
components for its products from a variety of suppliers and also purchases
products from original equipment manufacturers ("OEMs") for resale. No single
supplier accounts for 10% or more of the Company's total cost of supplies.
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One of the Company's largest suppliers has been a sole-source supplier for
parts used in the manufacture of hearing aids for over 30 years. This supplier
provides these components to over 90% of all hearing aid manufacturers in the
United States. Although the Company believes that with adequate notice it can
secure, if necessary, alternate sources for these hearing aid parts, its
inability to obtain sufficient parts would have a material adverse effect on the
Company's results of operations. The Company's purchases from this supplier in
the twelve months ended December 31, 1999 comprised 2.8% of the total supplies
purchased by the Company. The Company believes that it could locate alternative
sources of supply for these components. Doing so, however, could result in
increased development costs and product shipment delays.
The Company has several other sole-source suppliers, though none of the
suppliers accounts for a significant portion of Company's purchases. Although
the Company believes that with adequate notice it can secure, if necessary,
alternate suppliers, its inability to do so could result in increased
development costs and product shipments delays.
BACKLOG
As is the case with other companies in the Company's businesses, backlog is
not necessarily a meaningful indicator of the conditions of the business since
the Company typically receives and ships orders representing a major portion of
its quarterly non-contract revenues in the current quarter. As of December 31,
1999, the Company had a backlog of approximately $36.8 million compared to
approximately $39.4 million as of December 31, 1998.
ENVIRONMENTAL MATTERS
The Company and its operations are subject to extensive and changing U.S.
federal, state and local and foreign environmental laws and regulations,
including, but not limited to, laws and regulations that impose liability on
responsible parties to remediate, or contribute to the costs of remediating,
current or formerly owned or leased sites or other sites where solid or
hazardous wastes or substances were disposed of or released into the
environment. These remediation requirements may be imposed without regard to
fault or legality at the time of the disposal or release. Although management
believes that its current manufacturing operations comply in all material
respects with applicable environmental laws and regulations, environmental
legislation has been enacted and may in the future be enacted or interpreted to
create environmental liability with respect to the Company's facilities or
operations. The Company believes that compliance with federal, state and local
environmental protection laws and provisions should have no material adverse
effect on the Company's results of operations or financial condition.
The Company has had Phase I Environmental Site Assessment and Compliance
Reviews conducted by a third-party environmental consultant at a number of its
manufacturing sites and is aware of environmental conditions at such sites that
require or may require remediation or continued monitoring. The Company is
undertaking or is planning to undertake remediation or monitoring at these
sites. In particular, the Company's site in Buchanan, Michigan has been
designated a Superfund site under U.S. environmental laws and the Company has
agreed it is a de minimis responsible party at a number of other currently or
formerly owned or utilized sites which have been designated as Superfund sites.
Mark IV Industries, Inc. ("Mark IV") has agreed to fully indemnify the Company
for environmental liabilities resulting from the Buchanan, Michigan Superfund
site and certain of the other sites at which the environmental consultant
indicated monitoring or remediation was necessary.
The Company is party to a 1988 consent decree with the predecessor to the
Nebraska Department of Environmental Quality ("NDEQ") relating to the cleanup of
hazardous waste at the Company's Lincoln, Nebraska facility. In connection with
ongoing monitoring and cleanup activities at the site and on adjacent property,
the Company has received from the NDEQ notices of noncompliance. The Company is
in discussions with the NDEQ regarding future actions but does not believe that
the costs related to its responsibilities at the site will result in a material
adverse effect on the Company's results of operations or financial condition. In
December 1997, the Company entered into an Administrative Order on Consent with
the U.S. Environmental Protection Agency under the Resource Conservation and
Recovery Act to further investigate and remediate the Lincoln facility and an
adjoining property. The Company is not able at this time to determine the amount
of additional expenses, if any, that may be incurred by the Company as a result
of these actions.
Through December 31, 1999, the Company had accrued approximately $1.7
million over the life of the project for anticipated costs to be incurred for
the Lincoln, Nebraska cleanup activities, of which approximately $1.5 million
had been incurred. See note 12 to the Consolidated Financial Statements of the
Company included elsewhere herein.
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The Company estimates that it will incur, in Fiscal 2000, approximately
$150,000 of environmental related capital expenditures in addition to those
costs associated with the Lincoln, Nebraska cleanup activities described above.
The Company also incurs approximately $30,000 per year of expenses associated
with the disposal of hazardous materials generated in conjunction with its
manufacturing processes.
There can be no assurance that the Company's estimated environmental
expenditures, which the Company believes to be reasonable, will cover in full
the actual amounts of environmental obligations the Company does incur, that
Mark IV will pay in full the indemnified environmental liabilities when they are
incurred, that new or existing environmental laws will not affect the Company in
currently unforeseen ways, or that present or future activities undertaken by
the Company will not result in additional environmentally related expenditures.
However, the Company believes that compliance with federal, state and local
environmental protection laws and provisions should have no material adverse
effect on the Company's results of operations or financial condition.
EMPLOYEES
As of December 31, 1999, the Company employed 2,978 persons worldwide, of
which 2,899 were full-time employees.
Employees at the Company's manufacturing facilities in Newport, Tennessee,
Sevierville, Tennessee, and Buchanan, Michigan are covered by collective
bargaining agreements that expire in June 2000, July 2000, and June 2000,
respectively. There are no material grievances pending with respect to any union
employees. The Company has not experienced any work stoppages in recent years
and believes that its relationship with its employees has been good.
ITEM 2. PROPERTIES
The Company's principal manufacturing, sales, administrative, product
development, marketing, distribution and service facilities are described in the
table below. In addition the Company has other sales facilities throughout the
world. Management believes that the Company's plants and facilities are
maintained in good condition and, except as noted below, are suitable and
adequate for its present needs. Currently, the Company's manufacturing plants
are operating at an average of 75% of capacity based on a single shift.
SIZE
LOCATION OWNED/LEASED (SQUARE-FEET) FACILITY TYPE(A)
- - -------- ------------ ------------- ----------------
UNITED STATES:
Bloomington,
Minnesota(b)........ Owned 50,000 Corporate Headquarters/Marketing/
Administration/Product Development/Sales
Blue Earth,
Minnesota........... Owned 150,000 Manufacturing/Distribution
Buchanan, Michigan.... Owned 28,500 Product Development
Buchanan, Michigan.... Owned 144,000 Manufacturing/Sales/Marketing/Administration
Distribution/Service
Glencoe, Minnesota.... Owned 100,000 Manufacturing
Lincoln, Nebraska..... Owned 120,000 Manufacturing/Distribution/Product
Development/Sales
Newport, Tennessee.... Owned 49,000 Manufacturing
Rochester,
Minnesota........... Owned 30,000 Manufacturing/Distribution
Sevierville,
Tennessee........... Owned 44,000 Manufacturing
Austin, Texas(c)...... Leased 95,000 Manufacturing/Distribution
Burbank, California... Leased 2,500 Sales
Newport, Tennessee.... Leased 40,000 Distribution
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SIZE
LOCATION OWNED/LEASED (SQUARE-FEET) FACILITY TYPE(A)
- - -------- ------------ ------------- ----------------
INTERNATIONAL:
Kidderminster,
England............. Owned 35,000 Manufacturing/Sales/Marketing/Administration/Product
Development/Service
Straubing, Germany.... Owned 95,000 Manufacturing/Sales/Marketing/Administration/Product
Development/Distribution/Service
Hertfordshire,
England............. Leased 700 Sales
Hermosillo, Sonora,
Mexico.............. Leased 32,500 Manufacturing
Hohenwarth, Germany... Leased 7,600 Manufacturing
Ipsach, Switzerland... Leased 3,400 Sales/Marketing/Administration/Distribution/Service
Kowloon, Hong Kong.... Leased 18,300 Sales/Marketing/Administration/Distribution/Service
London, England....... Leased 11,500 Sales/Marketing/Administration/Distribution/Service
Nagoya, Japan......... Leased 500 Sales/Marketing
Osaka, Japan.......... Leased 1,200 Sales/Marketing
Paris, France......... Leased 3,500 Sales/Marketing/Administration/Distribution/Service
Singapore............. Leased 2,300 Sales/Distribution/Service
Straubing, Germany.... Leased 10,700 Warehouse
Sydney, Australia..... Leased 8,000 Sales/Marketing/Administration/Distribution/Service
Tokyo, Japan.......... Leased 14,800 Sales/Marketing/Administration/Distribution/Service
Toronto, Ontario,
Canada.............. Leased 4,000 Sales/Distribution
- - ---------------
(a) The Rochester, Minnesota facility is dedicated to the Multimedia/Audio
Communications business segment. The Austin, Texas, the Burbank, California,
the Hohenwarth, Germany, the two Buchanan, Michigan, and the two Newport,
Tennessee facilities are dedicated to the Professional Sound and
Entertainment business segment. All other facilities are used for both of
the Company's business segments.
(b) In March 2000, the Company entered into a ten-year operating lease
commitment, with three five-year renewal options, for its new Corporate
Headquarters in Burnsville, Minnesota, with a limited liability company in
which the Company has a 50% interest (see note 17 to the Consolidated
Financial Statements of the Company included elsewhere herein). The Company
anticipates selling its existing Corporate Headquarters by June 2000.
(c) The Company has given notice of its intention to terminate this lease
effective as of August 31, 2000. The Company intends to relocate the
production from this facility to a 202,000 square foot facility, acquired in
March 2000, in Morrilton, Arkansas (see note 17 to the Consolidated
Financial Statements of the Company included elsewhere herein).
The Company is committed to achieving ISO 9000 Certification at all its
principal manufacturing facilities. The Sevierville, Tennessee, the Glencoe,
Minnesota, the Kidderminster, England and the Hermosillo, Sonora, Mexico
facilities have been certified under ISO 9002 and the Rochester, Minnesota and
the Straubing, Germany facilities have been certified under ISO 9001.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is a party to various legal actions in the
normal course of business. The Company believes that it is not currently a party
in any litigation which, if adversely determined, would have a material adverse
effect on the financial condition of the Company.
For a discussion of certain environmental matters, see "--Environmental
Matters."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders of the
Company during the fourth quarter of the fiscal year ended December 31, 1999.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
All of the Company's outstanding common stock is held by Holdings. There is
no established public trading market for the Common Stock of the Company or
Holdings.
Holdings has not paid dividends on its Common Stock and the ability of
Holdings and the Company to pay dividends on their respective common stock is
restricted under the Company's Senior Secured Credit Facility (as defined
herein) and the indentures governing the 11% Senior Subordinated Notes due March
15, 2007 (the "EVI Notes") and the 10 1/2% Senior Subordinated Notes due May 1,
2007 (the "Telex Notes"). Holdings and the Company plan to use any retained
earnings for working capital purposes and to make payments under the agreements
governing the Company's indebtedness.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of December 31, 1999 and for the
twelve months ended December 31, 1999, the nine-month period ended December 31,
1998, and the fiscal year ended March 31, 1998, have been derived from the
Company's consolidated financial statements included elsewhere herein, which
have been audited by Arthur Andersen LLP, independent public accountants, and
should be read in conjunction with such consolidated financial statements and
notes thereto and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The selected financial data with respect
to Fiscal 1996, for the period March 1, 1996 through February 10, 1997 and for
the period from February 11, 1997 through March 31, 1997 are derived from
audited consolidated financial statements of the Company which are not included
herein. The Merger (as defined herein) has been accounted for essentially as a
pooling of interests from May 6, 1997, the date on which Old EVI (as defined
herein) and Old Telex (as defined herein) came under common control, and the
selected historical financial data below for the fiscal year ended March 31,
1998 accordingly includes the results of operations of Old Telex from May 6,
1997. The results of operations and balance sheet data of Old Telex are not
reflected in the data for periods prior to May 6, 1997.
PREDECESSOR BASIS OF
ACCOUNTING (A) NEW BASIS OF ACCOUNTING (B)
--------------------------- ---------------------------------------------------------
PERIOD FROM PERIOD FROM
MARCH 1, FEBRUARY 11,
FISCAL YEAR 1996, 1997, FISCAL YEAR NINE-MONTH TWELVE MONTHS
ENDED THROUGH THROUGH ENDED PERIOD ENDED ENDED
FEBRUARY 29, FEBRUARY 10, MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1997 1997 1998(C) 1998 1999
------------ ------------ ------------ ----------- ------------ -------------
(IN MILLIONS) (IN MILLIONS)
STATEMENT OF OPERATIONS DATA:
Net sales............................... $195.5 $177.1 $28.3 $333.0 $246.3 $343.7
Cost of sales........................... 123.9 112.1 18.0 205.7 157.2 219.4
------ ------ ----- ------ ------ ------
Gross profit............................ 71.6 65.0 10.3 127.3 89.1 124.3
Engineering............................. 8.5 8.0 1.3 17.3 11.2 14.9
Selling, general and administrative..... 44.4 41.6 6.4 81.7 53.7 86.2
Restructuring charges................... -- -- -- 6.2 -- (2.1)
Corporate charges....................... -- -- 0.1 2.2 1.3 1.7
Amortization of goodwill and other
intangibles........................... 1.0 0.9 0.2 5.4 2.1 12.0
------ ------ ----- ------ ------ ------
Operating profit........................ 17.7 14.5 2.3 14.5 20.8 11.6
Interest expense........................ -- -- 5.0 37.9 27.3 36.7
Recapitalization expense................ -- -- -- 6.7 -- --
Other (income) expense.................. (0.4) -- 0.1 0.1 (2.7) (6.7)
------ ------ ----- ------ ------ ------
Income (loss) before income taxes and
extraordinary item.................... 18.1 14.5 (2.8) (30.2) (3.8) (18.4)
Provision (benefit) for income taxes.... 7.1 6.2 (1.1) 0.1 1.3 4.0
------ ------ ----- ------ ------ ------
Income (loss) before extraordinary
item.................................. 11.0 8.3 (1.7) (30.3) (5.1) (22.4)
Extraordinary loss from early retirement
of debt............................... -- -- -- 20.6 -- --
------ ------ ----- ------ ------ ------
Net income (loss)....................... $ 11.0 $ 8.3 $(1.7) $(50.9) $ (5.1) $(22.4)
====== ====== ===== ====== ====== ======
FINANCIAL DATA:
EBITDA (d).............................. $ 23.2 $ 19.6 $ 3.2 $ 26.2(e) $ 32.4(f) $ 42.8(g)
EBITDA margin (h)....................... 11.9% 11.1% 11.3% 7.9% 13.2% 12.5%
Capital expenditures.................... $ 3.7 $ 3.3 $ 0.4 $ 8.5 $ 5.2 $ 8.4
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NEW BASIS OF ACCOUNTING(B)
------------------------------------------------------
AS OF
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
--------- --------- ------------ ------------
BALANCE SHEET DATA:
Working capital............................ $ 83.9 $ 69.9 $ 63.5 $ 49.1
Total assets............................... 210.8 300.3 273.3 262.0
Total debt................................. 118.7 353.3 337.7 343.9
Shareholder's equity (deficit)............. 55.1 (125.8) (130.1) (154.5)
NOTES TO SELECTED HISTORICAL FINANCIAL DATA
(a) Certain previously reported amounts have been reclassified to conform to
1999 presentation. These reclassifications had no impact on the previously
reported operating profit, net income (loss), EBITDA or shareholder's
deficit. Variable selling costs, such as freight and commissions paid to
sales representatives, previously included in cost of sales, are now
included in selling, general and administrative expenses. Additionally,
depreciation expense, previously combined with and reported as a separate
line item on the Statement of Operations as "depreciation and amortization,"
is now allocated to cost of sales, engineering expense, and selling, general
and administrative expense.
(b) The Statement of Operations and Financial Data for the periods after
February 10, 1997 were prepared under the new basis of accounting, which
includes adjustments giving effect to the Acquisition (as defined herein)
under the purchase method of accounting.
(c) The financial data for Fiscal 1998 consists of the full year results of
operations for Old EVI and the results of operations of Old Telex for the
period from May 6, 1997 (the date on which both entities came under common
control) through March 31, 1998.
(d) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. EBITDA is included because management
understands that such information is considered by certain investors to be
an additional basis on which to evaluate the Company's ability to pay
interest, repay debt and make capital expenditures. Excluded from EBITDA are
interest expense, income taxes, depreciation and amortization, each of which
can significantly affect the Company's results of operations and liquidity
and should be considered in evaluating the Company's financial performance.
EBITDA is not intended to represent and should not be considered more
meaningful than, or an alternative to, measures of operating performance as
determined in accordance with generally accepted accounting principles.
(e) The Fiscal 1998 EBITDA, as presented, includes non-cash compensation charges
for stock options associated with the Recapitalization (as defined herein),
non-recurring charges for management cash bonus, and restructuring charges
and excludes the charge for the non-cash impairment loss included in
amortization expenses.
(f) The nine-month period ended December 31, 1998 EBITDA includes merger-related
charges, severance charges for the former CEO and gain on the sale of the
Gauss business.
(g) The twelve months ended December 31, 1999 EBITDA includes merger-related
charges, the loss on the sale of discontinued product lines, revenue
attributed to past due royalty fees from a licensee for the use of the Altec
Lansing trademark and reversal of excess restructuring charges and excludes
the non-cash goodwill write-off attributed to the sale of certain product
lines and the non-cash impairment loss included in amortization expense.
(h) Represents EBITDA as a percentage of net sales.
ITEM 7. 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
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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 Securities and Exchange Commission.
The Company's consolidated financial statements for periods prior to May 6,
1997, the date on which EV International, Inc. (together with its subsidiaries
and any predecessor companies in respect of periods prior to the Merger (as
defined herein), "Old EVI") and Telex Communications, Inc. (together with its
subsidiaries and any predecessor companies in respect of periods prior to the
Merger, "Old Telex") came under common control, reflect the financial position,
results of operations and cash flows of Old EVI. The Merger has been accounted
for essentially as a pooling of interests from May 6, 1997, and the financial
statements of the Company for subsequent periods accordingly include the results
of Old Telex. In connection with the Merger, the Company previously changed its
fiscal year end, effective as of March 31, 1998, from the last day of February
to March 31, the year historically used by Holdings. The results of operations
for the resulting one month transition period of March 1997 are included in the
Company's financial statements for Fiscal 1997. This change in fiscal year end
did not have a material impact on the comparability of the results of operations
of Fiscal 1998 with Fiscal 1997. In addition, the Company's consolidated
financial statements for periods after February 10, 1997 were prepared under a
new basis of accounting, which includes adjustments giving effect to the
Acquisition (as defined below) under the purchase method of accounting. The
Company's financial statements for periods prior to February 10, 1997, reflect
the financial position, results of operations and cash flows of the operations
transferred to Old EVI from Mark IV in the Acquisition and were prepared under
the predecessor's basis of accounting.
Unless otherwise indicated, all references in this Form 10-K to Fiscal 1996
are to the fiscal year ended on the last day of February 1996, and all
references to Fiscal 1997 are for the period beginning March 1, 1996 and ending
on February 10, 1997. In connection with the Merger, the Company changed its
fiscal year end, effective as of March 31, 1998, from the last day of February
to March 31; accordingly, unless otherwise indicated, all references to Fiscal
1998 are for the twelve months ended March 31, 1998. Effective December 31,
1998, the Company changed its fiscal year end from March 31 to December 31;
accordingly the financial results for the transition period are for the period
beginning on April 1, 1998 and ending on December 31, 1998. For further
information concerning the Company's consolidated financial statements and
certain changes in the basis of presentation, see "Selected Financial Data" and
the Company's consolidated financial statements and notes thereto that are
included elsewhere herein. The following discussion should be read in
conjunction with the consolidated financial statements and notes thereto
contained elsewhere herein.
THE TRANSACTIONS
The Acquisition. On February 10, 1997 (the "Acquisition Closing Date"), a
subsidiary wholly owned by Greenwich Street Capital Partners, L.P. ("GSCP") and
certain affiliated investors acquired from Mark IV and one of its subsidiaries
all of the issued and outstanding capital stock of the former parent of Old EVI
and each of its subsidiaries (the "Acquisition") for an initial cash purchase
price of $151.5 million, plus $4.9 million in estimated adjustments paid on the
closing date, which aggregate amount was subject to further post-closing
adjustments based on (i) the audited working capital and audited cash flow of
Old EVI as of and for the 10-month period ended December 31, 1996 and (ii) the
net intercompany transfers of cash between Mark IV and its affiliates (other
than Old EVI and its subsidiaries), on the one hand, and Old EVI and its
subsidiaries, on the other hand, during the period between December 31, 1996 and
the Acquisition Closing Date. Based on these provisions Mark IV requested a
purchase price increase of approximately $138,000, which amount the Company is
currently disputing pursuant to the applicable provisions of the purchase
agreement.
Financing for the Acquisition, and the related fees and expenses, consisted
of (i) $57.6 million of equity capital provided by GSCP and certain affiliated
investors, (ii) a $60.0 million senior credit facility (consisting of a term
loan and a revolving credit facility), and (iii) a $75.0 million senior
subordinated credit facility issued as interim financing by the initial
purchasers of the EVI Existing Notes (as defined herein), and certain
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other lenders. Of these amounts, $156.4 million was used for the purchase price
for the Acquisition and $10.4 million was used for financing and transaction
fees and expenses.
On March 24, 1997, Old EVI issued 11% Senior Subordinated Notes due 2007 in
an aggregate principal amount of $100.0 million (the "EVI Existing Notes"), all
of which were subsequently exchanged in September 1997 for a like principal
amount of new 11% Senior Subordinated Notes due 2007, Series A (together with
the EVI Existing Notes, the "EVI Notes"), in an offering registered under the
Securities Act of 1933, as amended (the "Securities Act"). The proceeds from the
EVI Notes were used to repay the $75.0 million of indebtedness under the interim
financing in its entirety and a portion of EVI's term loan. The foregoing
transactions, including the issuance of the EVI Notes, are referred to herein as
the "Acquisition Transactions." The Acquisition was accounted for using the
purchase method of accounting pursuant to which the purchase price was allocated
among the acquired assets and liabilities in accordance with estimates of fair
market value on the Acquisition Closing Date.
The Recapitalization. On May 6, 1997 (the "Recapitalization Closing
Date"), Old Telex completed a recapitalization (the "Recapitalization") pursuant
to an agreement (the "Recapitalization Agreement") among Old Telex, Greenwich
II, LLC ("G-II"), a Delaware limited liability company formed by GSCP and
certain other investors, and GST Acquisition Corp. ("GST"), a Delaware
corporation and a wholly owned subsidiary of G-II. In connection with the
Recapitalization, all of the shares of common stock of Holdings ("Holdings
Common Stock") and all options and warrants to acquire Holdings Common Stock
(other than certain shares of Holdings Common Stock and certain options to
acquire Holdings Common Stock owned by certain members of management of Old
Telex) were converted into the right to receive an aggregate amount of cash (the
"Recapitalization Consideration") equal to approximately $253.9 million. In
addition, in connection with the Recapitalization Agreement, certain shares of
Holdings Common Stock held by management of Old Telex (such shares, the
"Rollover Shares") and certain options to acquire additional shares of Holdings
Common Stock (the "Rollover Options"), with an aggregate value of approximately
$21.2 million (which represented approximately 14% of the equity of Holdings on
a non-diluted basis and approximately 20% on a diluted basis) were retained by
such managers. In connection with the Recapitalization, Old Telex completed (i)
a tender offer (the "Tender Offer") to repurchase all of Old Telex's then
outstanding 12% Senior Notes due 2004, in aggregate principal amount of $100.0
million, for $118.3 million (including premium and consent fees along with
accrued interest), and (ii) a solicitation of consents with respect to certain
amendments to the indenture pursuant to which such notes were issued. The
Recapitalization, the financing thereof (including the issuance by Old Telex of
10 1/2% Senior Subordinated Notes due 2007 (the "Existing Telex Notes") to Chase
Securities, Inc., Morgan Stanley & Co. Incorporated and Smith Barney, Inc.), the
Tender Offer and the payment of the related fees and expenses are herein
referred to as the "Recapitalization Transaction."
The Recapitalization was financed by (i) $108.4 million of new equity
provided by GSCP and certain other co-investors, (ii) the Rollover Shares and
Rollover Options valued at $21.2 million, (iii) a $140.0 million senior secured
credit facility (as amended, the "Senior Secured Credit Facility") with The
Chase Manhattan Bank, Morgan Stanley Senior Funding, Inc. and certain other
lenders, consisting of (a) a $115.0 million term loan facility (the "Term Loan
Facility"), and (b) a $25.0 million revolving credit facility (the "Revolving
Credit Facility"), (iv) $125.0 million of Existing Telex Notes and (v) $36.5
million of available cash of Old Telex. Of the $108.4 million of new equity
contributed by GSCP and certain other co-investors, $25.2 million consisted of
proceeds from the issuance by GST (a predecessor of Holdings) of Deferred Pay
Subordinated Debentures due 2009 (the "GST Subordinated Debentures").
Pursuant to the Recapitalization of Old Telex on May 6, 1997, the
historical basis of all assets and liabilities was retained for financial
reporting purposes, and the repurchases of existing Holdings Common Stock and
issuance of new Holdings Common Stock have been accounted for as equity
transactions.
In October 1997, Old Telex completed an exchange offer of $125 million
aggregate principal amount of new 10 1/2% Senior Subordinated Notes Due 2007,
Series A (the "New Telex Notes"), which were registered under the Securities
Act, for a like principal amount of the Existing Telex Notes (together with the
New Telex Notes, the "Telex Notes"). All of the Existing Telex Notes were
tendered and accepted for exchange.
The Merger. On February 2, 1998, Old EVI merged with Old Telex, a wholly
owned subsidiary of Holdings and an affiliate of GSCP, with Old EVI surviving.
In the Merger, Old EVI changed its corporate name to "Telex Communications,
Inc." The Merger was effected pursuant to an agreement and plan of merger, dated
January 29, 1998 under which Greenwich I, LLC ("G-I"), a subsidiary wholly owned
by GSCP and certain affiliated investors, exchanged all of the issued and
outstanding common and preferred
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stock of EVI Holdings, the former parent of Old EVI, for 1,397,400 shares of
Holdings' Common Stock, and 13,000 shares of Holdings' Series A Pay-in-Kind
Preferred Stock, respectively, and EVI Holdings was merged with and into
Holdings, with Holdings continuing as the surviving corporation. The Merger has
been accounted for essentially as a pooling of interests from May 6, 1997, the
date on which Old EVI and Old Telex came under common control, and the financial
statements of the Company for Fiscal 1998 accordingly include the results of Old
Telex from May 6, 1997. Immediately prior to the Merger, approximately $12.7
million of indebtedness outstanding under Old EVI's senior credit facility was
paid in full and Old EVI's senior credit facility was terminated. Such
indebtedness, together with $0.4 million of certain fees and expenses associated
with the Merger, was repaid by utilizing free cash at closing from Old EVI of
$3.8 million and by borrowings under Old Telex's Revolving Credit Facility of
approximately $9.3 million. Total fees and expenses incurred as a result of the
Merger were $1.7 million, including the $0.4 million paid at closing. The EVI
Notes remain outstanding following the Merger.
The Acquisition Transactions, the Recapitalization Transaction, and the
Merger are referred to herein collectively as the "Transactions."
OVERVIEW
The Company, formed as a result of the February 2, 1998 merger of Old Telex
and Old EVI (see "The Merger"), 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.
Subsequent to the Merger, the Company has reorganized its business into two
business segments: Professional Sound and Entertainment and Multimedia/Audio
Communications. The Merger contributed $154.3 million to Fiscal 1998 reported
sales, approximately 28% of which is attributable to the Professional Sound and
Entertainment business segment and approximately 72% of which is attributable to
the Multimedia/Audio Communications business segment.
Over 40% of the Company's sales are made internationally, in over 80
countries. The Company conducts its foreign sales through its foreign
subsidiaries in Germany, Japan, Hong Kong, the United Kingdom, Canada,
Australia, Switzerland, Singapore, Mexico and France, and exports products from
its manufacturing locations in the U.S., Germany, the United Kingdom and Mexico
for sales through its independent distributors and dealers in other countries.
Overall, the Company's business is not subject to significant seasonal
fluctuations. Management does not believe that inflation has had a material
impact on its financial position or results of operations during the periods
covered by the Consolidated Financial Statements included elsewhere herein. The
Company has generally been able to effect price increases equal to any
inflationary increase in costs.
The Company maintains assets and/or operations in a number of foreign
jurisdictions, the most significant of which are Germany, the United Kingdom,
Japan, Singapore, and Hong Kong. In addition, the Company conducts business in
local currency in many countries, the most significant of which are Germany, the
United Kingdom, Japan, Singapore, Hong Kong, Canada, Australia, Switzerland and
France. Exposure to U.S. dollar/German mark and U.S. dollar/British pound
exchange rate volatility is mitigated to some extent by the Company's ability to
source its production needs with existing manufacturing capacity in Germany and
Great Britain, and the exposure to 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 as part of shareholder's deficit The Company's
predecessor financial statements (i.e., Old EVI's financial statements) excluded
realized foreign currency
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transaction gains and losses since these were viewed as an integral part of Mark
IV's consolidated risk management.
RESULTS OF OPERATIONS
TWELVE MONTHS AND NINE-MONTH PERIOD ENDED DECEMBER 31, 1999 COMPARED TO
NINE-MONTH PERIOD ENDED DECEMBER 31, 1998
Effective December 31, 1998, the Company changed its fiscal year end from
March 31 to December 31. Due to this change, the Company reported audited
consolidated financial results for a short fiscal period beginning April 1, 1998
and ending on December 31, 1998. The management's discussion and analysis that
follows compares the audited results for the twelve months ended December 31,
1999 and, where appropriate, the unaudited results for the nine-month period
ended December 31, 1999 to the audited results for the nine-month period ended
December 31, 1998.
Net Sales. The Company's net sales increased $97.4 million from $246.3
million for the nine-month period ended December 31, 1998 to $343.7 million for
the twelve months ended December 31, 1999. The Company's net sales increased
$17.9 million, or 7.3 percent, from $246.3 million for the nine-month period
ended December 31, 1998 to $264.2 million for the nine-month period ended
December 31, 1999. Both the Professional Sound and Entertainment and the
Multimedia/Audio Communication business segments contributed to the sales
increase.
Net sales in the Company's Professional Sound and Entertainment segment
increased $4.5 million, or 2.9 percent, from $152.8 million for the nine-month
period ended December 31, 1998 to $157.3 million for the nine-month period ended
December 31, 1999. Net sales for the Multimedia/Audio Communication business
segment increased $13.4 million, or 14.3 percent, from $93.5 million for the
nine-month period ended December 31, 1998 to $106.9 million for the nine-month
period ended December 31, 1999. The sales increase in both the segments is
attributed primarily to new products introduced in 1999, offset to some extent
by phased-out products, and to improving economies in many of the geographic
regions.
Gross Profit. The Company's gross profit increased $35.2 million from
$89.1 million for the nine-month period ended December 31, 1998 to $124.3
million for the twelve months ended December 31, 1999. The Company's gross
profit increased $6.5 million, or 7.3 percent, from $89.1 million for the
nine-month period ended December 31, 1998 to $95.6 million for the nine-month
period ended December 31, 1999. As a percentage of sales, the gross margin rate
of 36.2 percent for the twelve months ended December 31, 1999 remained unchanged
from the nine-month period ended December 31, 1998. The Company achieved
significant manufacturing cost reductions in 1999, which were offset by lower
gross margins on phased-out products and promotional pricing on certain newly
introduced products.
Engineering. The Company's engineering expenses increased $3.7 million
from $11.2 million for the nine-month period ended December 31, 1998 to $14.9
million for the twelve months ended December 31, 1999. The Company's engineering
expenses of $11.2 million for the nine-month period ended December 31, 1999
remained relatively flat compared with $11.2 million for the nine-month period
ended December 31, 1998. The Company continues to benefit from the restructuring
implemented in Fiscal 1998.
Selling, General and Administrative. The Company's selling, general and
administrative expenses increased $32.5 million from $53.7 million for the
nine-month period ended December 31, 1998 to $86.2 million for the twelve months
ended December 31, 1999. The Company's selling, general and administrative
expenses increased $14.1 million, or 26.3 percent, from $53.7 million for the
nine-month period ended December 31, 1998 to $67.8 million for the nine-month
period ended December 31, 1999. The increase is attributed to certain charges
described below, to general inflation, to spending on information technology,
primarily to enhance the information reporting for business decisions, and to
increases in salary and incentive compensation.
Included in the selling, general and administrative expenses for the
nine-month period ended December 31, 1999 are charges of $5.5 million related to
legal fees and settlement costs attributed to a lawsuit filed by the Company's
former CEO and $0.5 million of additional depreciation attributed to the write
off of certain fixed assets. Included in the selling, general and administrative
expenses for the nine-month period ended December 31, 1998 are net credits of
$0.6 million due primarily to the reversal of previously accrued
Recapitalization Transaction expenses related to certain employees no longer
with the Company, a $1.7 million charge for severance pay related to the former
CEO, and an estimated $1.0 million of charges for legal and audit fees related
to the Merger.
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Corporate Charges. Corporate charges of $1.7 million for the twelve months
ended December 31, 1999 represent fees to GSCP for consulting and management
services provided under a management and services agreement. New covenants with
lenders were signed in October 1999 that require the Company to suspend payment
of the management fees until certain financial conditions are met. When these
financial conditions are met, all current payments and payments in arrears are
due. The Company is recording a liability for such future payments.
Amortization of Goodwill and Other Intangibles. Included in amortization
of goodwill and other intangibles for the twelve months ended December 1999 are
a $2.9 million charge for write-off of goodwill attributed to certain
discontinued products, and a $6.3 million charge attributed to impairment loss
on certain long-lived assets (see note 6 to the Consolidated Financial
Statements of the Company included elsewhere herein).
Restructuring Charges. In the fourth quarter of 1999, the Company reversed
an excess of $2.1 million of the previously provided $6.2 million restructuring
reserve, retaining a reserve of $0.1 million related to future estimated costs
to be incurred for environmental and employee related transactions (see note 3
to the Consolidated Financial Statements of the Company included elsewhere
herein).
Other (income) expense. The Company recorded $6.7 million of other income
in the twelve months ended December 31, 1999. The significant components of
other income were $0.9 million of income attributed to the Company's insurance
claim for business interruption related to a facility destroyed in a fire, $7.0
million attributed to royalty income, of which $6.0 million is attributed to the
estimated shortfall of past royalty fees due to the Company (see note 17 to the
Consolidated Financial Statements of the Company included elsewhere herein),
$0.5 million loss on foreign exchange and $0.3 million loss attributed to the
sale of certain product lines and facilities.
Interest (income) expense. The Company's interest expense increased $9.4
million from $27.3 million for the nine-month period ended December 31, 1999 to
$36.7 million for the twelve months ended December 31, 1999. Interest expense
was relatively unchanged for the nine-month periods, increasing from $27.3
million for the nine-month period ended December 31, 1998 to $27.6 million for
the nine-month period ended December 31, 1999. The increase in interest expense
is attributed to the increase in amortization of deferred finance charges
incurred for amendment of the Senior Secured Credit facility.
Income Taxes. The Company's income tax benefit, excluding the income tax
provision related to the net deferred tax asset valuation allowance and $2.0
million attributed to a provision for a currently unsettled dispute with the
IRS, was 13.3% of the pretax loss for the twelve months ended December 31, 1999,
compared with 34.8% for the nine-month period ended December 31, 1998. The
decrease in the effective tax rate is principally due to the nondeductibility of
certain costs related to the write-off of goodwill and other intangible assets.
As of December 31, 1999, the Company has provided a reserve of $6.8 million for
tax liability, penalties, and accrued interest related to the unsettled dispute
with the IRS for taxable years 1990 through 1995. (See note 8 to the
Consolidated Financial Statements of the Company included elsewhere herein).
The Company has established a net deferred tax valuation allowance of $23.4
million 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 carry forward period. Management considered
these factors in reaching its conclusion as to the adequacy of the valuation
allowance for financial reporting purposes.
NINE-MONTH PERIOD ENDED DECEMBER 31, 1998 COMPARED TO NINE MONTHS AND FISCAL
YEAR ENDED MARCH 31, 1998
Effective December 31, 1998, the Company changed its fiscal year end from
March 31 to December 31. Due to this change, the Company reported audited
consolidated financial results for a short fiscal period beginning April 1, 1998
and ending on December 31, 1998. The management's discussion and analysis that
follows compares the audited results for the nine-month period ended December
31, 1998 to the audited results for the twelve month fiscal year ended March 31,
1998 and the unaudited results for the nine-month period beginning July 1, 1997
and ending March 31, 1998, which are not materially affected by seasonal
fluctuations. The results of Old Telex are included for the entire nine months
in the Company's consolidated results for the nine months ended March 31, 1998,
while for the nine months ended December 31, 1997, the results of Old Telex are
included from May 6, 1997, the date on which Old EVI and Old Telex came under
common control. Therefore, the Company believes that for purposes of
management's discussion and analysis, a comparison of the financial results for
the nine-month period ended December 31, 1998 with the results for the nine
months
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ended March 31, 1998 is more meaningful than a comparison with the results for
the nine months ended December 31, 1997, a similar prior year calendar period.
Net Sales. The Company's net sales decreased $86.7 million from $333.0
million for the twelve-month year ended March 31, 1998 to $246.3 million for the
nine-month period ended December 31, 1998. The Company's net sales decreased
$13.2 million, or 5.1%, from $259.5 million for the nine months ended March 31,
1998 to $246.3 million for the nine-month period ended December 31, 1998. The
decrease in net sales is attributed primarily to the weakness in North America
and in the Asia/Pacific regions. The decrease in sales in North America is
attributed to declining sales of certain phased-out products, a delay in the
introduction of certain replacement products and slower-than-anticipated sales
of such products, and loss of revenue due to the sale of the Gauss business. The
decrease in sales in the Asia/Pacific region is attributed primarily to the weak
economies in Japan, Korea, and certain other countries in that region.
Net sales in the Company's Professional Sound and Entertainment segment
decreased $4.1 million, or 2.6%, from $156.9 million for the nine months ended
March 31, 1998 to $152.8 million for the nine-month period ended December 1998.
This decrease is attributed primarily to the declining sales of certain
phased-out products and to the weak economies in the Asia/Pacific region. Net
sales in the Company's Multimedia/ Audio Communications segment decreased $9.1
million, or 8.9%, from $102.6 million for the nine months ended March 31, 1998
to $93.5 million for the nine-month period ended December 31, 1998. This
decrease is attributed primarily to declining sales of certain phased-out
products, a delay in the introduction of certain new products and
slower-than-anticipated sales of such products, and lower average prices for
certain computer audio products.
Gross Profit. The Company's gross profit decreased $38.2 million from
$127.3 million for the twelve-month year ended March 31, 1998 to $89.1 million
for the nine-month period ended December 31, 1998. The Company's gross profit
decreased $10.8 million, or 10.8%, from $99.9 million for the nine months ended
March 31, 1998 to $89.1 million for the nine-month period ended December 1998.
As a percentage of sales, the gross margin rate decreased from 38.5% for the
nine months ended March 31, 1998 to 36.2% for the nine-month period ended
December 1998. The decline in gross margin rate is attributed mainly to the
unfavorable movement in exchange rates on sales of U.S.-manufactured products in
certain foreign countries, lower average selling prices on certain products that
are being phased out and a delay in the introduction of certain new products and
slower-than-anticipated sales of such products.
Engineering. The Company's engineering expenses decreased $6.1 million
from $17.3 million for the twelve-month year ended March 31, 1998 to $11.2
million for the nine-month period ended December 31, 1998. The Company's
engineering expenses decreased $2.0 million, or 15.2%, from $13.2 million for
the nine months ended March 31, 1998 to $11.2 million for the nine-month period
ended December 1998. The decrease is attributed primarily to the benefits of
Merger-related restructuring implemented late in Fiscal 1998.
Selling, General and Administrative. The Company's selling, general and
administrative expenses decreased $28.0 million from $81.7 million for the
twelve-month year ended March 31, 1998 to $53.7 million for the nine-month
period ended December 31, 1998. The Company's selling, general and
administrative expenses decreased $2.3 million, or 4.1%, from $56.0 million for
the nine months ended March 31, 1998 to $53.7 million for the nine-month period
ended December 1998. Included in selling, general and administrative expenses
for the nine-month period ended December 1998 are net credits of $0.6 million
due primarily to the reversal of previously accrued Recapitalization Transaction
expenses related to certain employees no longer with the Company, a $1.7 million
charge for severance pay related to the former CEO and an estimated $1.0 million
of charges for legal and audit fees related to the Merger. Included in selling,
general and administrative expenses for the nine months ended March 31, 1998 is
a charge of $3.6 million for management options and bonuses related to the
Recapitalization Transaction.
Corporate Charges. Corporate charges of $1.3 million for the nine-month
period ended December 31, 1998 represent fees to GSCP for consulting and
management services provided under a management and services agreement. These
charges were $2.2 million and $1.8 million, respectively, for the twelve-month
year ended March 31, 1998 and for the nine months ended March 31, 1998.
Other (income) expense. The significant components of other (income)
expense for the nine-month period ended December 31, 1998 were royalty income of
$1.0 million, gain on foreign exchange of $0.1 million, and gain on sale of the
Gauss business of $0.9 million.
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Interest (income) expense. Interest expense decreased $10.6 million from
$37.9 million for the twelve-month year ended March 31, 1998 to $27.3 million
for the nine-month period ended December 31, 1998. Interest expense decreased
from $29.0 million for the nine months ended March 31, 1998 to $27.3 million for
the nine-month period ended December 31, 1998 as a result of a decrease in
outstanding debt and because the former period contained certain Merger-related
bank charges.
Income Taxes. The Company's income tax benefit, excluding the income tax
provision related to the net deferred tax asset valuation allowance, was 34.8%
of the pretax loss for the nine-month period ended December 31, 1998 compared
with 30.8% for the twelve-month year ended March 31, 1998. The increase in
effective tax rate is principally due to the nondeductibility, for the
twelve-month year ended March 31, 1998, of certain costs related to the
Recapitalization Transaction and the Merger which reduced the effective tax loss
rate, and due to a reduction, for the nine-month period ended December 31, 1998,
in dividends from foreign subsidiaries which increased the effective tax loss
rate.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999 the Company had cash and cash equivalents of $3.2
million compared to $3.4 million at December 31, 1998. The Company's principal
sources of funds for the twelve months ended December 31, 1999 consisted of $6.9
million of proceeds from the sale of businesses and facilities, and $17.1
million of net borrowings under revolving credit lines. The Company's principal
uses of funds for the twelve months ended December 31, 1999 consisted of $4.1
million for operating activities, $8.4 million for capital expenditures and
$10.8 million for retirement of debt.
The Company's investing activities consist mainly of capital expenditures
to maintain facilities, to acquire machines or tooling, to update certain
manufacturing processes, to update information systems and to improve
efficiency. The Company's ability to make capital expenditures is subject to
certain restrictions under its Senior Secured Credit Facility.
The Company's consolidated indebtedness increased $6.2 million from $337.7
million at December 31, 1998 to $343.9 million at December 31, 1999. Increases
in borrowings under the Revolving Credit Facility were partially offset by a
reduction of $10.8 million in consolidated Term Loan indebtedness mandated by
the terms of the Senior Secured Credit 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 incurred in connection with the
Transactions, working capital needs and capital expenditure requirements. The
Company incurred substantial indebtedness in connection with the Acquisition
Transaction and the Recapitalization Transaction. As a result, debt service
obligations represent significant liquidity requirements for the Company.
The Company's current credit facilities include the Senior Secured Credit
Facility consisting of the Term Loan Facility of $115.0 million and the
Revolving Credit Facility, subject to certain borrowing base limitations, of
$25.0 million, and foreign working capital lines, subject to certain
limitations, of $6.0 million. In certain instances the foreign working capital
lines are secured by a lien on foreign real property, leaseholds, accounts
receivable and inventory or are guaranteed by another subsidiary.
As of December 31, 1999, $9.0 million of the Company's $96.2 million
remaining under the Term Loan Facility is payable in the next 12 months, with
the balance payable as described below. In addition, the Company had $19.5
million outstanding under the Revolving Credit Facility, and $3.2 million
outstanding under the foreign working capital lines. Net availability at
December 31, 1999 under the Revolving Credit Facility, computed by deducting
approximately $3.6 million of open letters of credit and applying applicable
borrowing base limitations, totaled $1.9 million. Net availability at December
31, 1999 under such foreign working capital lines totaled $2.8 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 Company is in
compliance with all covenants related to the indentures governing the EVI Notes
and the Telex Notes and the revised covenants of the Senior Secured Credit
Facility, as recently amended. The effective interest rate under these credit
facilities in the twelve months ended December 31, 1999 was 8.6%.
Pursuant to the Term Loan Facility, the Company is required to make
scheduled permanent principal payments under (i) the $50.0 million Tranche A
Term Loan Facility ($34.5 million of which was outstanding at December 31,
1999), of $8.5 million, $11.0 million, and $15.0 million in 2000, 2001, and 2002
(with a final
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maturity date of November 6, 2002), respectively, and (ii) the $65.0 million
Tranche B Term Loan Facility ($61.7 million of which was outstanding at December
31, 1999), of $0.5 million, $0.5 million, $0.5 million, $24.1 million, and $36.1
million in 2000, 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 generally 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.
The Company's ability to fund its liquidity requirements in 1999 was
partially facilitated by its receipt of a portion of the proceeds associated
with a royalty fee agreement related to the Altec Lansing trademark described in
note 17 to the Consolidated Financial Statements of the Company included
elsewhere herein. The Company also expects to receive $11.8 million, in varying
amounts through March 2005, in connection with the royalty fee agreement and the
sale of the trademark. Because the Company has limited unused availability under
its working capital facilities, the Company is particularly reliant on cash flow
from operations, the above noted one-time royalty fees and cash flow
enhancements, as described below, to fund its liquidity needs in 2000.
The Company has incurred substantial indebtedness in connection with a
series of leveraged transactions (see note 2 to the Consolidated Financial
Statements of the Company included elsewhere herein). 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.
YEAR 2000
In preparation for Year 2000, the Company conducted an internal inventory
and assessment of Year 2000 readiness of its computer hardware and software and
its non-information technology and replaced, modified or upgraded its
information systems with Year 2000 ready systems. In addition to internal
remediation activities, the Company contacted key third parties, including key
suppliers and customers, to determine the extent to which their systems, their
products, or their electronic data interchange with the Company, were vulnerable
to Year 2000 issues.
To date, the Company has not experienced any problems related to Year 2000
readiness, but there can be no assurance that problems may not arise in the
future. The Company believes that the most likely scenario would be temporary
disruptions in the Company's acceptance and processing of orders and billing,
and in its ability to secure raw materials for production from suppliers. At
this time the Company does not believe that such temporary disruptions, if they
were to happen, would have a material adverse effect on its financial position
or results of operations.
The Company does not separately track internal costs incurred for its Year
2000 program, which costs are principally related to payroll costs for its
information systems group. The costs of the Year 2000 program were funded
through operating cash flow and were expensed as incurred or capitalized as
appropriate.
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CERTAIN RISKS RELATED TO TELEX'S BUSINESS
The statements under this caption are intended to serve as cautionary
statements within the meaning of the Private Securities Litigation Reform Act of
1995 and should be read in conjunction with the forward-looking statements in
this report as well as statements presented elsewhere by management of the
Company. Various factors, including those described in this section and
elsewhere in this report, could cause actual results and events to vary
significantly from those expressed in any forward-looking statement. The
following information is not intended to limit in any way the characterization
of other statements or information in this Report as cautionary statements for
such purpose.
New Products and Changing Technology. Technological innovation and
leadership are among the important factors in competing successfully in the
professional sound and entertainment and multimedia/communications markets. The
Company's future results will depend, in part, upon its ability to make timely
and cost-effective enhancements and additions to its technology and to introduce
new products that meet customer demands, including products utilizing digital
technology, which are increasingly being introduced in the professional audio
industry. The success of current and new product offerings is dependent on
several factors, including proper identification of customer needs,
technological development, cost, timely completion and introduction,
differentiation from offerings of the Company's competitors and market
acceptance. Maintaining flexibility to respond to technological and market
dynamics may require substantial expenditures. There can be no assurance that
the Company will successfully identify and develop new products in a timely
manner, that products or technologies developed by others will not render the
Company's products obsolete or noncompetitive, or that constraints in the
Company's financial resources will not adversely affect its ability to develop
and implement technological advances.
Significant Competition. The markets within the Professional Sound and
Entertainment and Multimedia/Audio Communications segments are both highly
competitive and fragmented and the Company faces meaningful competition in both
segments and in most of its product categories and markets. While many of the
Company's current competitors are generally smaller than the Company, certain of
the Company's competitors are substantially larger than the Company and have
greater financial resources. As the Company develops new products and enters new
markets it may encounter new competitors, and other manufacturers and suppliers
who currently do not offer competing products may enter the markets in which the
Company currently operates. Such new competitors may be larger, offer broader
product lines and have substantially greater financial and other resources than
the Company. Such competition could negatively affect pricing and gross margins.
Although the Company has historically competed successfully in its various
markets, there can be no assurance that it will be able to continue to do so or
that the Company will be able to compete successfully in new markets.
Currency and Other Risks Attendant to International Operations. The
Company's efforts to increase international sales may be adversely affected by,
among other things, changes in foreign import restrictions and regulations,
taxes, currency exchange rates, currency and monetary transfer restrictions and
regulations and economic and political changes in the foreign nations to which
the Company's products are exported. Although the Company's international
operations have generally been profitable in the past, there can be no assurance
that one or more of these factors will not have a material adverse effect on the
Company's financial position or results of operations in the future. In
addition, the Company has not registered its significant trademarks in all
foreign jurisdictions in which it does business and there can be no assurance
that attempts at registration in such foreign jurisdictions would be successful.
The Company has substantial assets located outside of the United States,
and a substantial portion of the Company's sales and earnings are attributable
to operations conducted abroad and to export sales, predominantly in Western
Europe and Asia Pacific. The Company's international operations subject the
Company to certain risks, including increased exposure to currency exchange rate
fluctuations. The Company intends to hedge a portion of its foreign currency
exposure by incurring liabilities, including bank debt, denominated in the local
currencies of those countries where its subsidiaries are located, and plans to
develop systems to manage and control its currency risk exposure. The Company's
international operations also subject it to certain other risks, including
adverse political or economic developments in the foreign countries in which it
conducts business, foreign governmental regulation, dividend restrictions,
tariffs and potential adverse tax consequences, including payment of taxes in
jurisdictions that have higher tax rates than does the United States.
Substantial Leverage and Debt Service Obligations. The Company is highly
leveraged. The Company's high degree of leverage could have important
consequences, including but not limited to the following: (i) the
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Company's ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes may be
impaired in the future; (ii) a substantial portion of the Company's cash flow
from operations must be dedicated to the payment of principal and interest on
its indebtedness, thereby reducing the funds available to the Company for other
purposes; and (iii) the Company's flexibility to adjust to changing market
conditions and the ability to withstand competitive pressures could be limited,
and the Company may be more vulnerable to a downturn in general economic
conditions or its business, or may be unable to carry out capital spending that
is important to its growth strategy. The Company's ability to repay or to
refinance its obligations with respect to its indebtedness will depend on its
financial and operating performance, which, in turn, is subject to prevailing
economic and competitive conditions and to certain financial, business and other
factors, many of which are beyond the Company's control. These factors could
include operating difficulties, increased operating costs, product prices, the
response of competitors, regulatory developments, and delays in implementing
strategic projects.
Restrictive Financing Covenants. The Senior Secured Credit Facility and
indentures governing the EVI Notes and the Telex Notes contain a number of
significant covenants that will restrict the operations of the Company and its
subsidiaries. Under the Senior Secured Credit Facility, the Company is required
to comply with specified financial ratios and tests, including minimum fixed
charge coverage ratios, maximum leverage ratios and minimum EBITDA requirements.
There can be no assurance that the Company will be able to comply with such
covenants or restrictions in the future. The Company's ability to comply with
such covenants and other restrictions may be affected by events beyond its
control, including prevailing economic, financial and industry conditions. The
breach of any such covenants or restrictions could result in a default under the
Senior Secured Credit Facility that would permit the lenders thereto to declare
all amounts outstanding thereunder to be immediately due and payable, together
with accrued and unpaid interest, and the commitments of the lenders under the
Revolving Credit Facility to make further extensions of credit thereunder could
be terminated.
Control of the Company. G-I and G-II, which are owned by GSCP and certain
other investors, own approximately 91% of the issued and outstanding common
stock of Holdings on a diluted basis, which in turn owns all of the common stock
of the Company. Accordingly, GSCP controls the Company and has the power to
elect all of the Company's directors, appoint new management and approve any
action requiring the approval of the holders of the Company's common stock,
including adopting amendments to the Company's certificate of incorporation and
approving mergers or sales of substantially all of the Company's assets. The
general partner of GSCP's general partner is a wholly-owned subsidiary of
Citigroup Inc. From time to time, GSCP considers possible combinations or
dispositions of its portfolio companies as a means of optimizing investment
value.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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
currency 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 1999, the principal transactions hedged were certain intercompany
balances attributed primarily to intercompany sales. Gains and losses on forward
exchange contracts and the offsetting losses and gains on the hedged
transactions are reflected in the income statement.
At December 31, 1999, the Company had $9.0 million outstanding forward
exchange contracts, with a weighted average maturity of 66 days.
At December 31, 1999, the difference between the fair value of all
outstanding contracts, as estimated by the amount required to enter into
offsetting contracts with similar remaining maturities based on quoted prices,
and the contract amounts was immaterial. A 10% fluctuation in exchange rates for
these currencies would change the fair value by approximately $0.9 million.
However, since these contracts hedge foreign
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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 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 December 31, 1999, the Company had fixed rate debt of $225.0 million and
floating rate debt of $118.9 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 $8.1 million. The earnings and cash
flow impact for the next year resulting from a one percentage point increase in
interest rates on the $118.9 million floating rate debt would be approximately
$1.2 million, holding all other variables constant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Reports of Independent Public Accountants, Consolidated Financial
Statements and Supplementary Data required by Item 8 are set forth immediately
following the signature page of this report and are hereby incorporated herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with the Company's independent
public accountants on accounting or financial disclosure.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position, as of March 15,
2000, of each of the executive officers and directors of the Company.
NAME AGE POSITION
- - ---- --- ------------------------------------------------------
Ned C. Jackson*............ 64 Director, Chief Executive Officer and President
Richard J. Pearson......... 48 Vice President, Chief Financial Officer
John A. Palleschi*......... 49 Group Vice President and President, Speakers and
Microphones Group and Corporate Secretary
Joseph P. Winebarger....... 51 Vice President and Chief Technical and Environmental
Officer
Glen E. Cavanaugh.......... 56 Group Vice President and President, Multimedia/Audio
Communications Group
Roger H. Gaines............ 57 Vice President, Manufacturing Special Projects
Scott Myers................ 53 Vice President, Worldwide Operations/International ROW
Mathias von Heydekampf..... 37 President, Electronics Group and Managing Director,
Europe
Edgar S. Woolard, Jr....... 65 Director, Chairman of the Board
Christopher P. Forester.... 49 Director
Keith W. Abell............. 43 Director
Joseph J. Plumeri II....... 56 Director
Barry Hamerling............ 54 Director
- - ---------------
* Executive is also an executive officer of Holdings.
Mr. Jackson became a director of the Company and was appointed as Chief
Executive Officer and President in 1998. Prior to joining the Company, Mr.
Jackson was with DuPont for 37 years, most recently as Vice President and
General Manager of DuPont's DACRON(R) and Specialty Chemicals units.
Mr. Pearson joined the Company in April 1999 as Vice President and Chief
Financial Officer. Prior to joining the Company, Mr. Pearson was a consultant to
various companies. From September 1991 to November 1998 Mr. Pearson was
Executive Vice President Finance and Chief Financial Officer of Harmon Glass, a
subsidiary of Apogee Enterprises, Inc.
Mr. Palleschi is Group Vice President, President of the Speakers and
Microphones Group, and Secretary of the Company. Prior to his December 1998
appointment as Group Vice President and President of the Company's Speakers and
Microphones Group, Mr. Palleschi was Vice President, Corporate Development,
General Counsel and Secretary of the Company, having served Old Telex in such
capacity since January 1995. Prior to January 1995, Mr. Palleschi was Vice
President, Administration, General Counsel and Secretary of Old Telex and served
in such capacity since June 1989.
Mr. Winebarger is Vice President and Chief Technical and Environmental
Officer responsible for developing strategic technology plans and product
development processes and corporate oversight on environmental matters. Prior to
his January 1999 appointment as Vice President and Chief Technical and
Environmental Officer, Mr. Winebarger was responsible for Old Telex's
Information Systems since January 1995 and for Old Telex's Engineering Services,
Quality Assurance and Sales Administration operations since April 1993.
Mr. Cavanaugh is Group Vice President and President of the Multimedia/Audio
Communications Group of the Company. Mr. Cavanaugh joined Telex in April 1993 as
Vice President and General Manager of Old Telex's Multimedia/Audio
Communications Group and was appointed president of the Group in May 1994. Prior
to joining Old Telex, Mr. Cavanaugh was Senior Vice President, Sales and
Marketing of Applied Voice Technology, Inc., which he joined in 1990.
Mr. Gaines is Vice President, Manufacturing Special Projects of the
Company. Prior to this position, he served as Vice President, Manufacturing from
1997 until December 1999. From May 1997 to February 1998, Mr. Gaines also served
as Acting Co-Chief Executive Officer of EVI. He joined Electro-Voice,
Incorporated, a predecessor of EVI, in 1981. In 1991, he was appointed Vice
President of Manufacturing of Mark IV Audio, Inc.
Mr. Myers is Vice President, Worldwide Operations/International ROW
responsible for worldwide manufacturing and international sales to the rest of
the world (ROW). He joined the Company in
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January 1999 as Chief Information Officer and Vice President, Planning and
Supply Chain and in June 1999 he also assumed responsibility for International
ROW sales, which positions he held until his appointment as Vice President,
Worldwide Operations/International ROW. From 1997 to 1998, he was Vice President
of Operations Services for Viasystems Group, Inc., the world's largest printed
circuit board manufacturer. From 1993 to 1997, Mr. Myers was Director of
Information Systems for Mills & Partners, Inc. and Director of Information
Systems for Berg Electronics Inc., a Mills & Partners Company. Prior to joining
Mills & Partners in 1993, Mr. Myers held a number of management positions during
20 years with DuPont in corporate planning, acquisitions and joint ventures,
business management, purchasing and transportation, information systems and
manufacturing.
Mr. von Heydekampf was promoted to the position of President, Electronics
Group and Managing Director for Europe in December 1999. He joined the Company
in February 1997 as Managing Director, Straubing, Germany and for the Company's
subsidiaries in France and Switzerland. Prior to joining the Company, Mr. von
Heydekampf was General Manager of Harmon France Division Grand Public from
February 1995 to October 1996.
Mr. Woolard was appointed Chairman of the Board of Directors in March 2000.
He became a director of the Company in January 1998. Mr. Woolard is the former
Chairman of the Board of Directors of DuPont. He joined DuPont in 1957 and held
a variety of engineering, manufacturing and management positions before being
elected President and Chief Operating Officer in 1987, and Chairman and Chief
Executive Officer in 1989. He retired from the company in 1995. Mr. Woolard is
also a director of Citigroup, Inc. and Apple Computer, Inc.
Mr. Forester became a director in December 1997. Mr. Forester has been a
director of Cyber Dialogue, Inc. and a partner of eCom Partners LLC since 1999.
eCom Partners is a venture capital firm specializing in internet and e-commerce
related investments. Mr. Forester was retired from 1996 through 1998. From 1994
to 1995, Mr. Forester was Managing Director of the technology industry group of
Merrill Lynch & Co. From 1977 to 1993, Mr. Forester worked in the Corporate
Finance Department, Investment Banking Division of Goldman, Sachs & Co. where he
was a General Partner from 1988 to 1993.
Mr. Abell became a director of the Company in December 1997. Mr. Abell
joined GSCP at its inception in 1994 and has been an officer of GSCP, Inc. since
June 1998. From 1990 to 1994, Mr. Abell was with the Blackstone Group, most
recently as a Managing Director.
Mr. Plumeri became a director of the Company in March 2000. From 1998 to
1999, Mr. Plumeri served as the Chief Executive Officer of Citibanking North
America, where he was responsible for the integration of the merged consumer
businesses of Citibank and Travelers Group Inc. From 1994 to 1998, Mr. Plumeri
served as the Chairman of the Board of Directors and Chief Executive Officer of
Primerica Financial Services, an affiliate of Travelers Group Inc. From 1992 to
1994, Mr. Plumeri was the President of Smith Barney Shearson. Mr. Plumeri also
serves as a board member and advisor to many organizations, including The
Council on Foreign Relations, The United Negro College Fund and The College of
William & Mary.
Mr. Hamerling became a director of the Company in March 2000. Mr. Hamerling
has been the managing partner of Premium Desserts of America, Inc. from October
1998 to the present. He was the President of AYCO Co. L.P., a large financial
and tax counseling firm, from January 1992 until September 1998. Mr. Hamerling
has been the President of the AYCO Charitable Foundation for the last four
years.
ITEM 11. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
Directors who are not employees of the Company or GSCP are paid $1,500 for
each Board meeting attended. Directors who are employees of the Company or GSCP
receive no separate compensation for their services as directors. All of the
Company's directors are entitled to reimbursement of their reasonable
out-of-pocket expenses in connection with their travel to and attendance at
meetings of the Board. Currently one of the Company's directors is an employee
of GSCP, to which the Company pays fees for management and financial consulting
services. See Item 13, "Certain Relationships and Related Transactions."
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EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation with
respect to all compensation paid or accrued by the Company during the last three
fiscal years for services rendered in all capacities by its Chief Executive
Officer and the four most highly compensated executive officers whose cash
compensation exceeded $100,000 for the twelve months ended December 31, 1999.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM
(A) COMPENSATION
------------------- ------------------
SALARY BONUS NUMBER OF SHARES
NAME AND PRINCIPAL POSITION YEAR ($)(B) ($)(C) UNDERLYING OPTIONS
--------------------------- ----------------- -------- -------- ------------------
Ned C. Jackson(f)....................... Fiscal 1999 305,769 300,000 250,000
President and Chief Executive Officer Transition Period 70,385 75,000 --
Fiscal 1998 -- -- --
Glen E. Cavanaugh....................... Fiscal 1999 170,308 14,139 40,934(e)
Group Vice President and President, Transition Period 161,692 81,351 --
Multimedia/Audio Communications Fiscal 1998 150,601 81,351 8,240
Dan M. Dantzler(d)...................... Fiscal 1999 162,465 24,843 41,778(e)
Group Vice President and President, Transition Period 140,304 120,632 --
Electronics Group Fiscal 1998 129,808 120,632 12,000
John A. Palleschi....................... Fiscal 1999 157,800 32,176 44,292(e)
Group Vice President and President, Transition Period 145,331 241,634 --
Speakers and Microphones Group, Fiscal 1998 137,286 241,634 26,240
Corporate Secretary
Richard J. Pearson(f)................... Fiscal 1999 113,232 56,000 30,000
Vice President and Transition Period -- -- --
Chief Financial Officer Fiscal 1998 -- -- --
Joseph P. Winebarger.................... Fiscal 1999 141,680 30,636 37,608(e)
Vice President and Chief Technical Transition Period 138,483 132,172 --
and Environmental Officer Fiscal 1998 131,308 132,172 12,720
- - ---------------
(a) Amounts reported for Fiscal 1999 are for the fiscal year ended December 31,
1999. In connection with the change in the Company's fiscal year from March
31 to December 31, executive compensation is reported for the twelve-month
period from January 1, 1998 to December 31, 1998 (the "Transition Period").
Amounts reported for Fiscal 1998 are for the fiscal year ended March 31,
1998.
(b) Amounts shown include cash compensation earned and received, amounts earned
but deferred, and amounts earned but deferred and paid in the subsequent
fiscal year.
(c) Amounts shown for each period represent awards earned in such period and
paid in the subsequent fiscal year under applicable bonus plans.
Distributions under the plans are made within 30 days following the
completion of the audit for the fiscal year in which such compensation is
earned. Except with respect to Mr. Jackson and Mr. Pearson, amounts shown
for Fiscal 1999, the Transition Period and Fiscal 1998 represent the special
bonuses paid under the annual bonus programs, adopted effective as of May 6,
1997. See "The Annual Bonus Programs." Amounts reported for Mr. Jackson
include bonuses payable pursuant to Mr. Jackson's employment agreement. See
"Employment Agreements." Amounts reported as Bonus for Mr. Pearson include a
one-time special bonus paid with respect to Mr. Pearson's employment with
the Company. Except with respect to Mr. Jackson, bonuses reported by the
Company for Fiscal 1998 were earned during the twelve month period ended
March 31, 1998 and paid in the nine-month period ended December 31, 1998.
(d) Mr. Dantzler resigned his employment with the Company on December 17, 1999.
(e) This amount reflects amendments to the 1997 Amended and Restated Stock
Option Plan.
(f) Mr. Jackson joined the company in October 1998, and Mr. Pearson joined the
Company in April 1999.
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OPTION GRANTS IN FISCAL 1999
The following table sets forth information on the options to acquire Common
Stock of Holdings granted to the Named Executive Officers during Fiscal 1999 and
the potential realizable value of each grant:
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SHARES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM (C)
OPTIONS EMPLOYEES EXERCISE EXPIRATION ----------------------
NAME GRANTED IN FISCAL 1999 PRICE DATE 5% 10%
- - ---- ---------- -------------- -------- ---------- --------- ----------
Ned C. Jackson.................... 250,000(a) 27.1% $ .01 10/05/08 $ 1,572 $ 3,984
Glen E. Cavanaugh................. 35,000(a) 3.8% $ .01 01/28/08 220 558
5,934(b) 0.6% $7.98 03/08/09 29,780 75,469
Dan M. Dantzler................... 35,000(a) 3.8% $0.01 01/28/08 220 558
6,778(b) 0.7% $7.98 03/08/09 34,016 86,203
John A. Palleschi................. 35,000(a) 3.8% $ .01 01/28/08 220 558
9,292(b) 1.0% $7.98 03/08/09 46,633 118,176
Richard J. Pearson................ 30,000(a) 3.3% $ .01 04/20/09 189 478
Joseph P. Winebarger.............. 30,000(a) 3.3% $ .01 01/28/08 189 478
7,608(b) 0.8% $7.98 03/08/09 38,181 96,759
- - ---------------
(a) Represents options granted under the Amended and Restated 1998 Performance
Stock Option Plan. None of the options granted under the Amended and
Restated 1998 Performance Stock Option Plan are exercisable unless and until
(a) an "Exit Event" has occurred, as such item is defined in the Amended and
Restated 1998 Stock Option Plan, and (b) GSCP's Internal Rate of Return
("IRR") is greater than 20%. As GSCP's IRR increases from a percentage that
is greater than 20%, and up to the point where the IRR is 30%, the number of
options that are exercisable increases from 10% of such options (if GSCP's
IRR is equal to or greater than 20%) to 100% of such options (if GSCP's IRR
is equal to or greater than 30%). A vesting schedule is also applied in
cases where an option grantee's employment with the Company is terminated.
Options have a term of ten years, subject to earlier expiration upon
termination of employment and are not transferable.
(b) Represents options granted under the 1997 Amended and Restated Stock Option
Plan. Options vest immediately and expire ten years after the date of grant,
subject to earlier expiration upon termination of employment and are not
transferable.
(c) The hypothetical potential appreciation shown in these columns reflects the
required calculations at annual rates of 5% and 10% set by the Securities
and Exchange Commission and, therefore, is not intended to represent either
historical appreciation or anticipated future appreciation of the Company's
Common Stock price.
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STOCK OPTION EXERCISES AND VALUE AT DECEMBER 31, 1999
The following table provides information with respect to the Named
Executive Officers of the Company concerning stock options exercised during the
twelve months ended December 31, 1999 to acquire Common Stock of Holdings. No
stock appreciation rights have been granted under any incentive plan.
AGGREGATED OPTIONS EXERCISED IN LAST FISCAL YEAR
AND OPTION VALUES AT DECEMBER 31, 1999
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
NUMBER OF UNDERLYING-UNEXERCISED IN-THE-MONEY
SHARES VALUE OPTIONS OPTIONS
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE ($)(A) UNEXERCISABLE UNEXERCISABLE($)(B)
- - ---- ----------- -------- ---------------------- -------------------
Ned C. Jackson......................... -- -- 0/250,000(c) $0/$0
Glen E. Cavanaugh...................... 24,740 $0 0/35,000(c) 0/0
13,258/916(d) 0/0
Dan M. Dantzler........................ -- -- 0/35,000(c) 0/0
17,108/0(d) 0/0
John A. Palleschi...................... -- -- 0/35,000(c) 0/0
32,616/2,916(d)
Richard J. Pearson..................... -- -- 0/30,000(c) 0/0
Joseph J. Winebarger................... 12,200 $0 0/30,000(c) 0/0
18,915/1,413(d) 0/0
- - ---------------
(a) The per share value of the underlying securities at exercise date was $0.
(b) Value of unexercised in-the-money options granted under the 1997 Amended and
Restated Stock Option Plan and the Amended and Restated 1998 Performance
Stock Option Plan is based on per share value determined as of December 31,
1999 in accordance with a formula set forth in the Stockholders'
Registration and Rights Agreement, dated May 6, 1997.
(c) None of the options granted under the Amended and Restated 1998 Performance
Stock Option Plan are exercisable unless and until (a) an "Exit Event" has
occurred, as such term is defined in the Amended and Restated 1998
Performance Stock Option Plan, and (b) GSCP's Internal Rate of Return
("IRR") is greater than 20%. As GSCP's IRR increases from a percentage that
is greater than 20%, and up to the point where the IRR is 30%, the number of
options that are exercisable increases from 10% of such options (if GSCP's
IRR is equal to or greater than 20%) to 100% of such options (if GSCP's IRR
is equal to or greater than 30%). A vesting schedule is also applied in
cases where an option grantee's employment with the Company is terminated.
(d) Amounts reflect options granted under the 1997 Amended and Restated Stock
Option Plan. They include Initial Option Grants, which vest over a 3 year
period beginning on the date of grant, and Special Service Option Grants
which vest upon grant.
THE ANNUAL BONUS PROGRAMS
The Company has an annual bonus plan for management employees that provides
that participants in such plan are entitled to an annual bonus based on
achieving certain annual projected earnings performance targets. Under the terms
of the plan, participants are eligible to receive an annual bonus of between 25%
and 100% of base salary depending on the level of achievement of the performance
targets. The Company has also adopted an additional annual cash bonus plan
whereby Messrs. Cavanaugh, Palleschi and Winebarger may receive additional
annual incentive awards in each of the first five years following the
Recapitalization Closing Date up to a maximum award of $71,000, $160,880 and
$153,180, respectively, if certain annual performance targets are achieved. In
total, the Company may incur aggregate total cash compensation charges in
connection with this additional cash bonus plan for the executive officers named
above as well as all other covered executives and employees of approximately
$0.27 million in Fiscal 2000 and 2001. For a description of bonuses payable to
Mr. Jackson, see "Employment Agreements".
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PENSION PLAN
The Company maintains a defined benefit pension plan (the "Pension Plan")
qualified under the Internal Revenue Code that provides a benefit upon
retirement to the Company's eligible employees. Since July 1, 1999 the Pension
Plan has been a cash balance pension plan. Under the terms of the Pension Plan,
"account balances" are maintained for each participant. For individuals
participating in the plan as of June 30, 1999, an opening account balance was
created equal to the present value of the benefit accrued as of June 30, 1999
under the plan benefit formula prior to the change to the cash balance plan. The
Company credits each active participant's account with a benefit credit each
year determined based on the participant's age, vesting service, and total
remuneration covered by the plan (consisting of base salary, commission,
overtime and bonuses paid to the participant), as illustrated in the following
table.
BENEFIT CREDIT CHART
BENEFIT CREDIT AS A PERCENTAGE OF
--------------------------------------------------------------
PENSION EARNINGS FOR THE YEAR
AGE + YEARS OF VESTING SERVICE ON THAT ARE GREATER THAN
JANUARY 1 PENSION EARNINGS FOR THE YEAR THE INTEGRATION
--------------------------------- ----------------------------- -----------------------------
Under 40...................... 1.5% 1.5%
40-49...................... 2.0% 2.0%
50-59...................... 2.6% 2.6%
60-69...................... 3.2% 3.2%
70-79...................... 4.2% 4.2%
80-89...................... 5.4% 5.4%
90 and above.................... 6.8% 5.4%
The Integration Level each year is equal to one-half of the Social Security
taxable wage base for the year. For 2000 the Integration Level is $38,100. The
Integration Level will change each year. For plan years beginning in 1999 and
later, annual compensation taken into account for purposes of calculating
benefits is limited to $160,000 ($170,000 for 2000, and adjusted in future years
to reflect inflation).
The accounts are also credited with an interest credit, which is based on
the average six month Treasury bill rate for the November 1 of the prior year,
plus 1%. The Interest Credit for a full calendar year will not be less than 5%.
The total estimated projected annual single life annuity benefit for the
Named Executive Officers, assuming they continue with Telex Communications, Inc.
to normal retirement age (age 65), and their compensation, the maximum
recognizable compensation and the Integration Level do not change, would be as
follows:
Mr. Jackson, $1,071
Mr. Palleschi, $58,193
Mr. Cavanaugh, $23,207
Mr. Winebarger, $59, 919
Mr. Dantzler, $40,256
Mr. Pearson, $23,849
EMPLOYMENT AGREEMENTS
Ned C. Jackson entered into an employment agreement with Holdings (an
"Employment Agreement," and together with other Employment Agreements described
herein, the "Employment Agreements"), for the period ended December 31, 1999,
which is automatically renewed for successive annual periods thereafter.
Pursuant to such Employment Agreement, Mr. Jackson will receive (i) a base
annual salary of $300,000, (ii) annual bonuses of $300,000 (prorated for any
partial year of employment) for each of calendar 1998 and 1999, and thereafter
an aggregate annual incentive award of up to approximately $300,000 if certain
performance objectives are achieved, and (iii) a special one-time bonus of $1.0
million upon achievement of specified performance objectives, with additional
incremental bonuses payable upon achievement of certain increases in specified
performance measures thereafter. In addition, Mr. Jackson is entitled to receive
certain perquisites and has received options to purchase 250,000 shares of
Holdings Common Stock pursuant to the Amended and Restated 1998 Performance
Stock Option Plan adopted by Holdings. Mr. Jackson's employment is terminable by
the Company on 30 days' written notice (or immediately for cause) or by Mr.
Jackson on 60 days' written notice. Upon termination, including due to Mr.
Jackson's death or disability, Mr. Jackson
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will be entitled to receive all compensation, benefits and perquisites
accrued under his Employment Agreement through the effective date of his
termination of employment.
Mr. Jackson and Holdings entered into an Incentive Compensation Agreement
on March 14, 2000 ("Incentive Agreement"). The Incentive Agreement provides that
Mr. Jackson is entitled to certain cash compensation upon the occurrence of a
"Triggering Event," which includes any of the following events: (a) a merger or
consolidation of Holdings resulting in the holders of Holdings Common Stock
ceasing to own more than 80% of Holdings Common Stock immediately after such
merger or consolidation, (b) a sale of all or substantially all of the assets of
Holdings, including a sale by Holdings of more than 80% of the Common Stock of
the Company, (c) a sale or transfer by G-I and/or G-II (other than transfers to
a Permitted Assignee), together with sales and transfers by Permitted Assignees,
of more than 50% of Holdings Common Stock, or (d) a recapitalization of Holdings
resulting in a distribution of cash or property to the holders of Holdings
Common Stock in which the consideration received by G-I and G-II exceeds $141.0
million plus an allocable portion of the amount of the incentive payment paid
pursuant to the Incentive Agreement upon the occurrence of a Triggering Event.
In the event a Triggering Event occurs, Mr. Jackson is entitled to receive up to
2 percent of the proceeds G-I and G-II receive in excess of $141.0 million.
John A. Palleschi has entered into a five-year employment agreement with
GST effective as of May 6, 1997 (an "Employment Agreement"), which automatically
extends for successive annual periods. Pursuant to such Employment Agreement,
Mr. Palleschi will receive a base annual salary of $129,000 (as adjusted from
time to time, as provided in such Employment Agreement) and a special bonus of
$32,176 on June 6, 2000 and on June 6, 2001, provided that on such date GSCP or
its affiliates control 50% or more of the voting power of the outstanding voting
securities of Holdings and the Company and there has not occurred an initial
public offering of Holdings Common Stock. In addition, he is entitled to receive
certain perquisites and participate in a management incentive compensation plan,
pursuant to which he may be awarded up to 100% of his base annual salary if
certain performance objectives are achieved. Mr. Palleschi's Employment
Agreement is terminable by the Company on 30 days' written notice (or
immediately for cause). If Mr. Palleschi's employment is terminated by the
Company for any reason other than for cause or by reason of his death or
disability, or if his employment is terminated by him for Good Reason (as
defined in the Employment Agreement) during the period of employment but prior
to a Change in Control (as defined in the Employment Agreement), the Company
shall pay to Mr. Palleschi (x) all compensation, benefits and perquisites
accrued under his Employment Agreement through the effective date of his
termination of employment, (y) a severance allowance equal to the sum of (1) one
year's base salary at the rate being paid at the time of termination of Mr.
Palleschi's employment, (2) two times the most recent fiscal year's incentive
bonus compensation plan, and (3) a pro rata portion of the highest incentive
bonus payable under the management incentive compensation plan in the three most
recent fiscal years, and (z) the remaining installments of the special bonus
payable only to the extent and at such times Mr. Palleschi would otherwise be
entitled to the special bonus. Mr. Palleschi may terminate his employment under
his Employment Agreement at any time during the period of employment upon 60
days' written notice to the Company, and, without regard to whether such
termination occurs prior to a Change in Control, he shall be paid (1) all
compensation, benefits and perquisites accrued under his Employment Agreement
through the effective date of his termination of employment, plus (2) the
remaining installments of the special bonus payable only to the extent and at
such times as Mr. Palleschi would otherwise be entitled to such special bonus.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The authorized common stock of the Company as of March 15, 2000 consists of
1,000 shares of common stock, par value $.01 per share, of which 110 shares are
issued and outstanding and all of which are owned by Holdings. The authorized
Common Stock of Holdings as of March 15, 2000 consists of 7,000,000 shares of
Common Stock, par value $.0005 per share, of which 4,237,580 shares are issued
and outstanding.
30
33
The following table sets forth information with respect to the beneficial
ownership of Holdings Common Stock and options to purchase such stock as of
March 15, 2000 by (i) each person who is known by the Company to beneficially
own more than 5% of Holdings Common Stock, (ii) each director of the Company,
(iii) each named executive officer of the Company listed in the Summary
Compensation Table above and (iv) by all directors and executive officers as a
group. Except as otherwise indicated, beneficial ownership includes both voting
and investment power with respect to the Holdings Common Stock shown.
NUMBER OF SHARES
UNDERLYING PERCENTAGE OF
NAME OF BENEFICIAL OWNER NUMBER OF SHARES OPTIONS (A) CLASS
- - ------------------------ ---------------- ---------------- -------------
Greenwich II, LLC(b)......................... 2,605,060 -- 59.1%
Greenwich I, LLC(b).......................... 1,397,400 -- 31.7%
Ned C. Jackson............................... -- -- --
Glen E. Cavanaugh............................ 46,220 14,174 1.4%
Dan M. Dantzler.............................. 37,740 31,528 1.6%
John A. Palleschi............................ 48,880 55,692 2.4%
Richard J. Pearson........................... -- -- --
Joseph P. Winebarger......................... 58,740 20,328 1.8%
Edgar S. Woolard, Jr.(d)..................... -- 10,783 *
Christopher P. Forester...................... -- 5,484 *
Keith W. Abell (c)........................... -- -- --
Joseph J. Plumeri II......................... -- -- --
Barry Hamerling.............................. -- -- --
All directors and officers as a group
(13 persons) (b)(c)........................ 191,580 137,989 7.5%
- - ---------------
* Indicates amount less than 1.0%
(a) The shares listed include shares of Holdings Common Stock that may be
acquired upon exercise of presently exercisable options to acquire Holdings
Common Stock, and all such options that will become exercisable within 60
days from the date on which such information is given.
(b) See the table that follows for information concerning the ownership of
limited liability company interests of Greenwich I, LLC and Greenwich II,
LLC.
(c) Does not include any of the 4,002,460 shares of Holdings Common Stock
beneficially owned by Greenwich I, LLC and Greenwich II, LLC, which Mr.
Abell may be deemed to beneficially own by virtue of his affiliation with
GSCP. Mr. Abell disclaims any such beneficial ownership.
(d) Does not include up to a maximum of 444,938.93 shares of Holdings Common
Stock that may be acquired by Mr. Woolard upon the exercise of warrants
granted to him pursuant to the Warrant, dated March 14, 2000 (the
"Warrant"), a vested portion of which warrants are exercisable only upon
the occurrence of a Triggering Event (as defined in the Warrant), which may
occur at any time. See Item 13, "Certain Relationships and Related
Transactions," for a description of the terms of the Warrant.
The following table sets forth the beneficial ownership of the limited
liability company interests, as a percentage, of each of Greenwich I, LLC and
Greenwich II, LLC, each of which is affiliated with GSCP, except for New Century
Enterprises, Ltd.
NAME AND ADDRESS PERCENT OF INTEREST
- - ---------------- -------------------
GSCP(a)(b).................................................. 65.2%
TRV Employees Fund, L.P.(c)(b).............................. 15.9%
Greenwich Street Capital Offshore Fund, Ltd. (d)(b)......... 4.0%
The Travelers Insurance Company (e)(b)...................... 3.3%
The Travelers Life and Annuity Company (e)(b)............... 1.6%
New Century Enterprises, Ltd. (f)........................... 10.0%
(a) The address for this person is 388 Greenwich Street, 36th Fl., New York,
N.Y. 10013. The general partner of this person is Greenwich Street
Investments, L.P., the general partner of which is a wholly-owned
subsidiary of Citigroup Inc. ("Citigroup").
31
34
(b) By virtue of the relationships set forth in notes (a), (c), (d) and (e),
Citigroup may be deemed to share beneficial ownership of the securities
held of record by this person and may be deemed to share power to vote, or
to direct the voting of, and power to dispose of, or direct the disposition
of, the securities held of record by such person.
(c) The address for this person is 388 Greenwich Street, 36th Fl., New York,
N.Y. 10013. The general partner of this person is a wholly-owned subsidiary
of Citigroup.
(d) The address for this person is c/o Rawlinson & Hunter, Woodbourne Hall, P.O.
Box 3162, Road Town Tortola, British Virgin Islands. All the voting
securities of this person are owned by the general partner of GSCP, whose
managing general partner is a wholly-owned subsidiary of Citigroup.
(e) The address for this person is 1 Tower Square, Hartford, Connecticut
06183-2030. This person is an indirect wholly-owned subsidiary of
Citigroup.
(f) Mr. Woolard has a 92.7% interest in New Century Enterprises, Ltd. The
address of this person is 16952 Passage Island South, Jupiter, Florida
33477.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
GSCP is a private direct equity investment fund organized in 1994 to
provide long-term capital for and make acquisitions in companies in a variety of
industries. GSCP invests in management buyouts, leveraged acquisitions,
international investment opportunities and minority investments. The general
partner of GSCP is Greenwich Street Investments, L.P., the general partner of
which is a wholly-owned subsidiary of Citigroup. Mr. Abell is a principal of
GSCP and a director of Holdings and of the Company. See Item 10. "Directors an
Executive Officers."
The Company has engaged Greenwich Street Capital Partners, Inc.
("Greenwich"), to provide it with certain business, financial and managerial
advisory services, including developing and implementing corporate and business
strategy and providing other consulting and advisory services. In exchange for
such services, the Company has agreed to pay Greenwich an aggregate annual fee
of $1,715,000 ("Management Fee"), prepaid semi-annually, plus Greenwich's
reasonable out-of-pocket costs and expenses. This engagement will be in effect
until the earlier to occur of the fifth anniversary of the Acquisition Closing
Date or the date on which GSCP no longer owns, directly or indirectly, any
shares of the capital stock of G-II, and may be earlier terminated by Greenwich
in its discretion. In October 1999, Greenwich agreed to defer collection of the
Management Fee for periods when a certain financial ratio of the Company is
below a threshold amount as required under the October 1999 Amendment to the
Senior Secured Credit Facility. When the financial ratio is met, all current
payments and payments in arrears are due.
In addition, Holdings, the Company and their subsidiaries have agreed to
indemnify Greenwich, GSCP, and their respective directors, officers, partners,
employees, agents, representatives and control persons against certain
liabilities arising under the federal securities laws, liabilities arising out
of the performance of the consulting agreement and certain other claims and
liabilities. The Company has indemnified Mr. Abell and certain other principals
of GSCP for the costs associated with the settlement of certain litigation
commenced against such parties by the Company's former CEO, as permitted by
Delaware law and the By-Laws of the Company. The cost of settlement indemnified
and the cost of the related legal fees incurred by the Company was $5.5 million.
Mr. Woolard received a warrant from Holdings dated March 14, 2000 (the
"Warrant"), which entitles him to purchase up to a maximum of 444,938.93 shares
of Common Stock of Holdings upon the occurrence of a Triggering Event. The
Warrant is immediately vested with respect to one-third of the underlying
shares, and the remainder vests in 24 monthly installments beginning in April 1,
2001, subject to certain adjustments in the event of Mr. Woolard's death or
removal as Chairman of the Board of Directors because of his disability, his
resignation as Chairman of the Board of Directors, or his removal as Chairman of
the Board of Directors for cause (as such term is defined in the Warrant). In
the event that a Triggering Event occurs prior to any of these events, the
Warrant becomes 100% vested. A Triggering Event occurs upon the (a) merger or
consolidation of Holdings resulting in the holders of Holdings Common Stock
ceasing to own more than 80% of Holdings Common Stock immediately after such
merger or consolidation, (b) a sale of all or substantially all of the assets of
Holdings, including a sale by Holdings of more than 80% of the Common Stock of
the Company, or (c) a sale or transfer by G-I and/or G-II (other than transfers
to a Permitted Assignee), together with sales and transfers by Permitted
Assignees, of more than 50% of Holdings Common Stock. The Warrant entitles
Woolard to purchase a number of shares of Holdings Common Stock determined by
reference to a formula based on the Triggering Event valuation multiplied by the
percentage of vested
32
35
Warrants. If the valuation is $550 million or less, the maximum number of shares
of Holdings Common Stock that may be issued is 187,451.13; if the valuation is
between $550 million and $700 million, the number of shares that may be issued
will be a minimum of 187,452.75, and a maximum of 444,937.12; and in the event
if the valuation is greater than $700 million, the maximum number of shares that
may be issued is 444,938.93. The Triggering Event valuation is based upon a
formula that takes into account prior distributions to Holdings' shareholders,
the purchase price paid for the Holdings Common Stock in connection with the
Triggering Event, and any debt of Holdings assumed by the purchaser. The number
of shares issuable upon exercise of the Warrant is to be adjusted for dividends
on the outstanding Common Stock payable in shares of Common Stock, stock splits
or combinations, and mergers or consolidations of Holdings with or into another
entity (other than a merger or consolidation which is a Triggering Event)
entitling the holders of Common Stock to receive shares of stock and other
securities or property receivable upon such consolidation or merger.
33
36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
PAGE
----
(a) The following documents are filed as part of this
report:
1. Financial Statements:
Report of Independent Accountants................ 37
Consolidated Balance Sheets as of December 31,
1999 and 1998...................................... 38
Consolidated Statements of Operations for the
twelve months ended December 31, 1999, the
nine-month period ended December 31, 1998 and the
fiscal year ended March 31, 1998................... 39
Consolidated Statements of Shareholders' Deficit
for the twelve months ended December 31, 1999, the
nine-month period ended December 31, 1998 and the
fiscal year ended March 31, 1998................... 40
Consolidated Statements of Cash Flows for the
twelve months ended December 31, 1999, the
nine-month period ended December 31, 1998 and the
fiscal year ended March 31, 1998................... 41
Notes to Consolidated Financial Statements....... 42
2. Financial Statement Schedules:
The following supplemental schedule is filed as
part of this report:
Valuation and Qualifying Accounts................ 66
All other schedules are omitted because they are inapplicable, not
required, or the information is in the consolidated financial statements
or related notes.
3. Exhibits:
The Exhibits are listed in the Exhibit Index required by Item 601 of the
Regulation S-K at Item (c) below and included immediately following the
Consolidated Financial Statements. The Exhibit Index is incorporated by
reference.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter ended December
31, 1999.
(c) The Exhibit Index and required Exhibits are included following the
Consolidated Financial Statements. The Company will furnish to any security
holder, upon written request, any exhibit listed in the accompanying
Exhibit Index upon payment by such security holder of the Company's
reasonable expenses in furnishing any such exhibit.
(d) Not applicable.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT:
The Company has not sent to its security holders an annual report covering
the twelve months ended December 31, 1999 nor any proxy material relating to any
annual or other meeting of security holders. The indentures governing the EVI
Notes and Telex Notes require the Company to provide the holders of such notes
with such annual reports and such information, documents and other reports as
are specified in Section 13 and 15(d) of the Securities Exchange Act of 1934, as
amended.
34
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, as of the 30th day of
March, 2000.
TELEX COMMUNICATIONS, INC.
/s/ Ned C. Jackson
By:
--------------------------------------
Ned C. Jackson
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Ned C. Jackson Chief Executive Officer and Director March 30, 2000
- - ---------------------------------------------
Ned C. Jackson
/s/ Richard J. Pearson Vice President and Chief Financial March 30, 2000
- - --------------------------------------------- Officer
Richard J. Pearson
/s/ Edgar S. Woolard, Jr. Chairman of the Board and Director March 30, 2000
- - ---------------------------------------------
Edgar S. Woolard, Jr.
/s/ Christopher P. Forester Director March 30, 2000
- - ---------------------------------------------
Christopher P. Forester
/s/ Keith W. Abell Director March 30, 2000
- - ---------------------------------------------
Keith W. Abell
/s/ Joseph J. Plumeri II Director March 30, 2000
- - ---------------------------------------------
Joseph J. Plumeri II
/s/ Barry Hamerling Director March 30, 2000
- - ---------------------------------------------
Barry Hamerling
35
38
TELEX COMMUNICATIONS, INC.
PAGE
----
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants.................... 37
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... 38
Consolidated Statements of Operations for the twelve months
ended December 31, 1999, the nine-month period ended
December 31, 1998 and the fiscal year ended March 31,
1998........................................................ 39
Consolidated Statements of Shareholders' Deficit for the
twelve months ended December 31, 1999, the nine-month period
ended December 31, 1998 and the fiscal year ended March 31,
1998........................................................ 40
Consolidated Statements of Cash Flows for the twelve months
ended December 31, 1999, the nine-month period ended
December 31, 1998 and the fiscal year ended March 31,
1998........................................................ 41
Notes to Consolidated Financial Statements.................. 42
36
39
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Telex Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Telex
Communications, Inc. (a Delaware corporation) and Subsidiaries as of December
31, 1999 and December 31, 1998, and the related consolidated statements of
operations, shareholder's deficit and cash flows for the year ended December 31,
1999, the nine-month period ended December 31, 1998 and the year ended March 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Telex Communications, Inc.
and Subsidiaries as of December 31, 1999 and 1998, the results of their
operations and their cash flows for the year ended December 31, 1999, the
nine-month period ended December 31, 1998 and the year ended March 31, 1998, in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 3, 2000,
Except for Note 17, as to which the date is March 30, 2000
37
40
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Per Share Data)
As of December 31
1999 1998
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,239 $ 3,431
Accounts receivable, net of allowance for doubtful
accounts of $2,178 and $2,925.......................... 59,438 53,926
Inventories, net.......................................... 66,573 67,758
Other current assets...................................... 14,665 10,822
--------- ---------
Total current assets................................... 143,915 135,937
PROPERTY, PLANT AND EQUIPMENT, net.......................... 45,048 48,275
DEFERRED FINANCING COSTS, net............................... 10,476 11,586
INTANGIBLE ASSETS, net...................................... 62,559 77,478
--------- ---------
$ 261,998 $ 273,276
========= =========
LIABILITIES AND SHAREHOLDER'S DEFICIT
CURRENT LIABILITIES:
Revolving lines of credit................................. $ 22,688 $ 5,703
Current maturities of long-term debt...................... 8,982 10,811
Accounts payable.......................................... 20,817 20,920
Accrued wages and benefits................................ 10,708 9,156
Accrued interest.......................................... 5,898 6,416
Other accrued liabilities................................. 16,750 14,158
Income taxes payable...................................... 8,935 5,200
--------- ---------
Total current liabilities.............................. 94,778 72,364
LONG-TERM DEBT.............................................. 312,207 321,189
OTHER LONG-TERM LIABILITIES................................. 9,470 9,810
--------- ---------
Total liabilities...................................... 416,455 403,363
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 1, 2, 3 and 12)
SHAREHOLDER'S DEFICIT:
Common stock, $.01 par value, 1,000 shares authorized; 110
shares issued and outstanding.......................... -- --
Capital in excess of par.................................. 3,139 2,980
Accumulated deficit....................................... (154,087) (131,667)
Accumulated other comprehensive loss...................... (3,509) (1,400)
--------- ---------
Total shareholder's deficit............................ (154,457) (130,087)
--------- ---------
$ 261,998 $ 273,276
========= =========
The accompanying notes are an integral part of these consolidated balance
sheets.
38
41
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
NINE-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
------------ ------------ ----------
NET SALES............................................ $343,659 $246,342 $332,964
COST OF SALES........................................ 219,399 157,266 205,624
-------- -------- --------
Gross profit.................................... 124,260 89,076 127,340
-------- -------- --------
OPERATING EXPENSES:
Engineering........................................ 14,872 11,214 17,278
Selling, general and administrative................ 86,165 53,678 81,695
Corporate charges.................................. 1,716 1,287 2,203
Amortization of goodwill and other intangibles..... 11,972 2,118 5,438
Restructuring charges.............................. (2,124) -- 6,232
-------- -------- --------
112,601 68,297 112,846
-------- -------- --------
OPERATING PROFIT..................................... 11,659 20,779 14,494
INTEREST EXPENSE..................................... 36,689 27,328 37,938
RECAPITALIZATION EXPENSE............................. -- -- 6,710
OTHER (INCOME) EXPENSE............................... (6,674) (2,719) 43
-------- -------- --------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM...... (18,356) (3,830) (30,197)
PROVISION FOR INCOME TAXES........................... 4,064 1,222 103
-------- -------- --------
LOSS BEFORE EXTRAORDINARY ITEM....................... (22,420) (5,052) (30,300)
EXTRAORDINARY LOSS FROM EARLY
RETIREMENT OF DEBT................................... -- -- 20,579
Net loss........................................ $(22,420) $ (5,052) $(50,879)
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
39
42
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S DEFICIT
(In Thousands, Except Share Data)
ACCUMULATED
COMMON STOCK OTHER
--------------- CAPITAL IN EXCESS OF ACCUMULATED COMPREHENSIVE SHAREHOLDER'S
SHARES AMOUNT PAR DEFICIT LOSS DEFICIT
------ ------ -------------------- ----------- ------------- -------------
BALANCE, March 31, 1997.......... 110 $ -- $ 57,600 $ (1,737) $ (804) $ 55,059
Equity from Merger (Note 2).... -- -- 20,001 (13,156) 6,845
Equity contribution............ -- -- 108,353 -- -- 108,353
Change in terms of
Rollover Options............ -- -- 7,410 (309) -- 7,101
Repurchase of common stock and
outstanding options......... -- -- (193,364) (60,534) -- (253,898)
Vesting of new options......... -- -- 3,156 -- -- 3,156
Net loss....................... -- -- -- (50,879) --
Other comprehensive loss, net
of tax-
Foreign currency translation
adjustments............... -- -- -- -- (1,493)
Minimum pension liability
adjustment................ -- -- -- -- (92)
Comprehensive net loss......... -- -- -- -- (52,464)
--- ---- --------- --------- ------- ---------
BALANCE, March 31, 1998.......... 110 -- 3,156 (126,615) (2,389) (125,848)
Vesting of new options......... -- -- (176) -- -- (176)
Net loss....................... -- -- -- (5,052) --
Other comprehensive loss, net
of tax-
Foreign currency translation
adjustments............... -- -- -- -- 1,120
Minimum pension liability
adjustment................ -- -- -- -- (131)
Comprehensive net loss......... -- -- -- -- -- (4,063)
--- ---- --------- --------- ------- ---------
BALANCE, December 31, 1998....... 110 -- 2,980 (131,667) (1,400) (130,087)
Vesting of new options......... -- -- 159 -- -- 159
Net loss....................... -- -- -- (22,420) --
Other comprehensive loss, net
of tax-
Foreign currency translation
adjustments............... -- -- -- -- (2,308)
Minimum pension liability
adjustment................ -- -- -- -- 199
Comprehensive net loss......... -- -- -- -- -- (24,529)
--- ---- --------- --------- ------- ---------
BALANCE, December 31, 1999....... 110 $ -- $ 3,139 $(154,087) $(3,509) $(154,457)
=== ==== ========= ========= ======= =========
The accompanying notes are an integral part of these consolidated financial
statements.
40
43
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
YEAR NINE-MONTH YEAR
ENDED PERIOD ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
------------ ------------ ---------
OPERATING ACTIVITIES:
Net loss.................................................. $(22,420) $(5,052) $(50,879)
Adjustments to reconcile net loss to cash flows from
operations-
Depreciation............................................ 10,048 6,784 8,585
Amortization of intangibles and deferred financing
costs................................................. 14,012 2,619 7,087
Provision for bad debts................................. 858 382 980
(Gain) loss on sale of business......................... 360 (946) --
Write-off of deferred financing costs................... -- -- 1,674
Recapitalization costs incurred......................... -- -- 6,710
Restructuring and special charges....................... (2,124) -- 6,232
Extraordinary loss on early retirement of debt.......... -- -- 20,579
Stock option compensation expense....................... 159 (176) 10,566
Deferred income taxes................................... (128) 794 5,609
Change in operating assets and liabilities:
Income taxes.......................................... 4,232 7,442 (5,621)
Accounts receivable................................... (7,169) 9,694 4,769
Inventories........................................... 4 12,383 (5,832)
Other current assets.................................. (8,827) 742 2,260
Accounts payable and accrued liabilities.............. 6,389 (11,606) 1,572
Other long-term liabilities........................... 552 (637) (1,502)
-------- ------- --------
Net cash provided by (used in) operating
activities........................................ (4,054) 22,423 12,789
-------- ------- --------
INVESTING ACTIVITIES:
Additions to property, plant and equipment, net........... (8,441) (5,060) (8,096)
Proceeds from sale of business............................ 6,905 1,990 --
Other..................................................... -- (381) (372)
-------- ------- --------
Net cash used in investing activities............... (1,536) (3,451) (8,468)
-------- ------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.................. -- -- 240,000
Borrowings (repayments) under revolving lines of credit,
net..................................................... 17,137 (9,964) 14,414
Repayment of long-term debt and payment of fees........... (10,811) (6,125) (134,968)
Proceeds from equity contribution......................... -- -- 108,353
Cash balance of Old Telex at date of Merger............... -- -- 34,753
Repurchase of common stock and outstanding options........ -- -- (253,898)
Payments for deferred financing costs..................... (885) (784) (12,312)
Recapitalization costs incurred........................... -- -- (6,710)
Other..................................................... -- -- (309)
-------- ------- --------
Net cash provided by (used in) financing
activities........................................ 5,441 (16,873) (10,677)
-------- ------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................... (43) (892) (1,686)
-------- ------- --------
CASH AND CASH EQUIVALENTS:
Net increase (decrease)................................... (192) 1,207 (8,042)
Beginning of period....................................... 3,431 2,224 10,266
-------- ------- --------
End of period............................................. $ 3,239 $ 3,431 $ 2,224
======== ======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the period for-
Interest................................................ $ 35,710 $27,896 $ 26,167
======== ======= ========
Income taxes, net....................................... $ 511 $(7,017) $ 866
======== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
41
44
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS
Telex Communications, Inc., ("Telex" or the "Company"), a Delaware
corporation, is a wholly owned subsidiary of Telex Communications Group, Inc.
("Holdings"). As used in these consolidated financial statements, unless
otherwise indicated or the context otherwise requires, references to (i)
"Holdings" shall mean Telex Communications Group, Inc., a Delaware corporation
and the corporate parent of the Company; (ii) "Old Telex" shall refer to the
Delaware corporation formerly named Telex Communications, Inc., a wholly owned
subsidiary of Holdings, and its subsidiaries with respect to periods prior to
the Merger (as defined in Note 2); (iii) the "Company" shall mean Telex
Communications, Inc., a Delaware corporation formerly named EV International,
Inc. (EVI) and successor by merger to Old Telex, and its subsidiaries and
includes, as the context may require, predecessor and successor companies; (iv)
"Old EVI" shall mean EV International, Inc. and its subsidiaries with respect to
periods prior to the Merger and includes any predecessor companies; and (v) "EV
Holdings" shall refer to EVI Audio Holding, Inc., the direct parent company of
EVI prior to the Merger.
The Company, formed as a result of the February 2, 1998 merger of Old Telex
and Old EVI, 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 electronic 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
satellite-based mobile phone antennas, 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 incurred substantial indebtedness in connection with a
series of leveraged transactions (see Note 2). 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 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 2000, no
assurance can be given in this regard.
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PRINCIPLES OF CONSOLIDATION
The Company's financial statements are prepared on a consolidated basis in
accordance with generally accepted accounting principles. All significant
intercompany balances and transactions have been eliminated in the accompanying
consolidated financial statements.
SEGMENT REPORTING
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures
about Segments of an Enterprise and Related Information," is effective for
fiscal years beginning after December 14, 1997. SFAS No. 131 requires disclosure
of business and geographic segments in the consolidated financial statements of
the Company. The Company adopted SFAS No. 131 in the nine-month period ended
December 31, 1998.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Ultimate results could differ from those estimates.
CASH AND CASH EQUIVALENTS
All temporary investments with original maturities of three months or less
at the time of purchase are considered cash equivalents. These investments are
considered available for sale and are carried at cost, which approximates fair
value.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
and include amounts for materials, labor and overhead.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost, net of accumulated
depreciation. The cost of property, plant and equipment retired or otherwise
disposed of, and the accumulated depreciation thereon, are eliminated from the
asset and related accumulated depreciation accounts, and any resulting gain or
loss is reflected in operations. Depreciation of property, plant and equipment
is computed principally by the straight-line method over the estimated useful
lives of the assets as follows:
Buildings and improvements........................... 5-31 years
Machinery and equipment.............................. 1.5-12 years
Beginning in the fiscal year ended March 31, 1998 (Fiscal 1998), the
Company capitalized certain software implementation costs in accordance with
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." Prior to Fiscal 1998, such costs were
not significant. Direct internal and all external implementation costs and
purchased software have been capitalized and depreciated using the straight-line
method over the estimated useful lives, ranging from two to five years. As of
December 31, 1999, software implementation costs of $8.8 million have been
capitalized and are included in equipment and construction in progress. The
Company expenses reengineering costs as incurred.
DEFERRED FINANCING COSTS
Deferred financing costs represent costs incurred to issue the EVI 11%
Senior Subordinated Notes, the Telex 10.5% Senior Subordinated Notes (together,
the "Senior Subordinated Notes"), the Senior Secured Credit Facility and the
amendments to the Senior Secured Credit Facility (see Note 7) and are being
amortized over the terms of the related debt.
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INTANGIBLE ASSETS
Intangible assets are amortized on a straight-line basis over their
estimated useful lives, as follows:
Patents and engineering drawings..................... 5-10 years
Dealer and distributor lists......................... 15 years
Goodwill............................................. 40 years
Other intangibles.................................... 3-5 years
LONG-LIVED ASSETS
The Company follows the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Impairment losses are measured by comparing the fair value of
the assets, as determined by discounting the future cash flows at a market rate
of interest, to their carrying amount.
REVENUE RECOGNITION
Revenue from product sales is recognized at the time of shipment. Revenue
from the sale of hearing instrument extended warranty contracts is recognized
ratably over the lives of the contracts.
WARRANTY COSTS
The Company warrants certain of its products for workmanship and
performance for periods of generally up to one year. The accrual for warranty
costs is based on expected average repair costs and return rates developed by
the Company using historical data.
PRODUCT DEVELOPMENT COSTS
Engineering costs associated with the development of new products and
changes to existing products are charged to operations as incurred.
ADVERTISING COSTS
Advertising costs are expensed when incurred. Advertising costs for the
year ended December 31, 1999, the nine-month period ended December 31, 1998 and
the year ended March 31, 1998 were $7.3 million, $5.3 million and $8.9 million,
respectively.
INCOME TAXES
The Company accounts for income taxes utilizing the liability method of
accounting. Deferred income taxes are primarily recorded to reflect the tax
consequences of differences between the tax and the financial reporting bases of
assets and liabilities. The Company's tax provision is calculated on a separate
company basis, and the Company's taxable income is included in the consolidated
federal income tax return of Holdings.
FOREIGN CURRENCY
Foreign subsidiaries' operations accounts are translated at the average
exchange rates in effect during the period, while assets and liabilities are
translated at the rates of exchange at the balance sheet date. The resulting
balance sheet translation adjustments are charged or credited directly to
shareholder's deficit. Foreign exchange transaction gains and losses realized
during the year ended December 31, 1999, the nine-month period ended December
31, 1998 and the year ended March 31, 1998, and those attributable to exchange
rate movements on intercompany receivables and payables not deemed to be of a
long-term investment nature are recorded in other (income) expense.
CONCENTRATIONS, RISKS AND UNCERTAINTIES
The Company is highly leveraged. The Company's high degree of leverage
could have important consequences, including but not limited to the following:
(i) the Company's ability to obtain additional financing for working capital,
capital expenditures, acquisitions, general corporate purposes or other purposes
may be impaired in the future; (ii) a substantial portion of the Company's cash
flow from operations must be dedicated to the payment of principal and interest
on its indebtedness, thereby reducing the funds available to the Company for
other purposes; and (iii) the Company's flexibility to adjust to changing market
conditions
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and the ability to withstand competitive pressures could be limited, and the
Company may be more vulnerable to a downturn in general economic conditions or
its business, or may be unable to carry out capital spending that is important
to its growth strategy.
Technological innovation and leadership are among the important factors in
competing successfully in the professional sound and entertainment market. The
Company's future results in this segment will depend, in part, upon its ability
to make timely and cost-effective enhancements and additions to its technology
and to introduce new products that meet customer demands, including products
utilizing digital technology, which are increasingly being introduced in the
professional audio industry. The success of current and new product offerings is
dependent on several factors, including proper identification of customer needs,
technological development, cost, timely completion and introduction,
differentiation from offerings of the Company's competitors and market
acceptance. Maintaining flexibility to respond to technological and market
dynamics may require substantial expenditures. There can be no assurance that
the Company will successfully identify and develop new products in a timely
manner, that products or technologies developed by others will not render the
Company's products obsolete or noncompetitive, or that constraints in the
Company's financial resources will not adversely affect its ability to develop
and implement technological advances.
The Company has substantial assets located outside of the United States,
and a substantial portion of the Company's sales and earnings are attributable
to operations conducted abroad and to export sales, predominantly in Western
Europe and Asia Pacific. The Company's international operations subject the
Company to certain risks, including increased exposure to currency exchange rate
fluctuations. The Company intends to hedge a portion of its foreign currency
exposure by incurring liabilities, including bank debt, denominated in the local
currencies of those countries where its subsidiaries are located, and plans to
develop systems to manage and control its currency risk exposure. The Company's
international operations also subject it to certain other risks, including
adverse political or economic developments in the foreign countries in which it
conducts business, foreign governmental regulation, dividend restrictions,
tariffs and potential adverse tax consequences, including payment of taxes in
jurisdictions that have higher tax rates than the United States.
From time to time, the Company enters into forward exchange contracts
primarily to hedge intercompany balances attributed to intercompany sales. It
does not engage in currency speculation. The Company's foreign exchange
contracts do not subject the Company to risk due to exchange rate movements
because gains and losses on these contracts offset losses and gains on the
inventory purchase commitments. These foreign exchange contracts typically have
maturity dates which do not exceed one year and require the Company to exchange
U.S. dollars for foreign currencies at maturity, at rates agreed to at the
inception of the contracts. As of December 31, 1999, the Company had $9.0
million of outstanding foreign currency forward exchange contracts, with an
average maturity of 66 days.
The Company offers a range of audio products to a diverse customer base
throughout the world. Terms typically require payment within a short period of
time; however, the Company periodically offers extended payment terms to certain
qualified customers. As of December 31, 1999, the Company believes it has no
significant customer or geographic concentration of accounts receivable that
could expose the Company to an adverse, near-term severe financial impact.
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. SFAS No. 133 requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and 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 and has not yet determined the timing or method of
adoption.
2. TRANSACTIONS:
ACQUISITION
On February 10, 1997 (the "Acquisition Closing Date"), pursuant to a
purchase agreement dated December 12, 1996 (the "Purchase Agreement"), an
acquisition subsidiary wholly owned by Greenwich
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Street Capital Partners, L.P. ("GSCP") and certain affiliated investors acquired
from Mark IV Industries, Inc. ("Mark IV") and one of its subsidiaries all of the
issued and outstanding capital stock of Gulton Industries, Inc. ("Gulton"), the
former parent of Old EVI, and each of its subsidiaries for an initial cash
purchase price of $151.5 million, plus $4.9 million in estimated adjustments
paid on the closing date, with this aggregate amount subject to further
postclosing adjustments as described herein. The acquisition subsidiary
subsequently merged with and into the parent of Old EVI, and the parent then
merged with and into Old EVI, with Old EVI ultimately surviving (the
"Acquisition"). Prior to the Acquisition Closing Date, (i) EVI Audio LLC, a
subsidiary wholly owned by GSCP and certain affiliated investors, purchased all
of the issued and outstanding shares of common stock and pay-in-kind preferred
stock of EV Holdings for an aggregate amount of $57.6 million and (ii) EV
Holdings, a Delaware corporation organized by GSCP to hold all of the issued and
outstanding stock of EVI, contributed $57.6 million to the Company.
Financing for the Acquisition and the related fees and expenses consisted
of (i) $57.6 million of equity capital provided by GSCP and certain affiliated
investors, (ii) a $60.0 million senior credit facility (consisting of a term
loan and a revolving credit facility), and (iii) a $75.0 million senior
subordinated credit facility issued as interim financing by Chase Securities
Inc. and Smith Barney Inc., the initial purchasers of the EVI Existing Notes (as
defined herein), and certain other lenders. Of these amounts, $156.4 million was
used for the purchase price for the Acquisition and $10.4 million was used for
financing and transaction fees and expenses. Under the Purchase Agreement, the
purchase price was subject to adjustment on the basis of (i) the audited working
capital and audited cash flow of the Company as of and for the ten-month period
ended December 31, 1996, and (ii) the net intercompany transfers of cash between
Mark IV and its affiliates (other than the Company and its subsidiaries), on the
one hand, and the Company and its subsidiaries, on the other hand, during the
period between December 31, 1996 and the Acquisition Closing Date. Based on
these provisions, Mark IV has requested a purchase price increase of
approximately $138,000, which the Company is currently disputing pursuant to the
applicable provisions of the Purchase Agreement.
On March 24, 1997, Old EVI issued 11% Senior Subordinated Notes due in
2007, in an aggregate principal amount of $100 million (the "EVI Existing
Notes"), all of which were subsequently exchanged in September 1997 for a like
principal amount of new 11% Senior Subordinated notes due in 2007, Series A
(together with the EVI Existing Notes, the "EVI Notes"), in an offering
registered under the Securities Act of 1933, as amended (the "Securities Act").
The proceeds from the EVI Notes were used to repay the $75.0 million of
indebtedness under the interim financing in its entirety and a portion of EVI's
term loan. The foregoing transactions, including the issuance of the EVI Notes,
are referred to herein as the "Acquisition Transactions." The Acquisition was
accounted for using the purchase method of accounting, which established a new
basis of accounting pursuant to which the purchase price was allocated among the
acquired assets and liabilities in accordance with estimates of fair market
value on February 10, 1997.
In connection with the Acquisition, Mark IV and the Company entered into a
transition services agreement pursuant to which Mark IV agreed to provide
certain services, including accounting, tax planning, foreign currency hedging,
cash management and administering certain pension plan assets pending their
transfer to the Company, for a period not to exceed 12 months following the
Acquisition Closing Date. In Fiscal 1998, the Company paid an aggregate of
approximately $41,000 in fees for services provided pursuant to such transition
services agreement, which terminated on January 31, 1998. In addition, Mark IV
and the Company entered into a sublease agreement with respect to certain
premises located in Austin, Texas, and a nonexclusive, royalty-free license to
use certain names which incorporate the "Mark IV" name, including related
tooling and sales and marketing materials, and to sell products incorporating
such names for periods ranging from 18 to 36 months after the Acquisition
Closing Date.
RECAPITALIZATION
On May 6, 1997 (the "Recapitalization Closing Date"), Old Telex completed a
recapitalization (the "Recapitalization") pursuant to an agreement (the
"Recapitalization Agreement") among Old Telex, Greenwich II, LLC ("G-II"), a
Delaware limited liability company formed by GSCP and certain other investors,
and GST Acquisition Corp. ("GST"), a Delaware corporation and a wholly owned
subsidiary of G-II. In connection with the Recapitalization, all of the shares
of common stock of Holdings ("Holdings Common Stock") and all options and
warrants to acquire Holdings Common Stock (other than certain shares of Holdings
Common Stock and certain options to acquire Holdings Common Stock owned by
certain members of management of Old Telex) were converted into the right to
receive an aggregate amount of cash (the "Recapitalization Consideration") equal
to approximately $253.9 million. In addition, in connection with the
Recapitalization Agreement, certain shares of Holdings Common Stock held by
management of Old Telex
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(the "Rollover Shares") and certain options to acquire additional shares of
Holdings Common Stock (the "Rollover Options"), with an aggregate value of
approximately $21.2 million (which represented approximately 14% of the equity
of Holdings on a nondiluted basis and approximately 20% on a diluted basis),
were retained by such managers. In connection with the Recapitalization, Old
Telex completed (i) a tender offer (the "Tender Offer") to repurchase all of Old
Telex's then outstanding 12% Senior Notes due in 2004, in aggregate principal
amount of $100.0 million, for $118.3 million (including premium and consent fees
along with accrued interest), and (ii) a solicitation of consents with respect
to certain amendments to the indenture pursuant to which such notes were issued.
The Recapitalization, the financing thereof (including the issuance by Old Telex
of 10.5% Senior Subordinated Notes due in 2007 (the "Existing Telex Notes") to
Chase Securities, Inc., Morgan Stanley & Co. Incorporated and Smith Barney,
Inc.), the Tender Offer and the payment of the related fees and expenses are
herein referred to as the "Recapitalization Transaction."
Costs associated with terminating Old Telex's 12% Senior Notes, including
write-off of deferred financing costs of $2.5 million, bond premium fees of
$13.6 million, bond tender fees of $0.5 million and consent fees of $1.0
million, are included in extraordinary loss from early retirement of debt in the
consolidated statements of operations.
The Recapitalization was financed by (i) $108.4 million of new equity
provided by GSCP and certain other co-investors; (ii) the Rollover Shares and
Rollover Options valued at $21.2 million; (iii) a $140.0 million senior secured
credit facility (the "Senior Secured Credit Facility") with The Chase Manhattan
Bank, Morgan Stanley Senior Funding, Inc. and certain other lenders consisting
of (a) a $115.0 million term loan facility (the "Term Loan Facility"), and (b) a
$25.0 million revolving credit facility (the "Revolving Credit Facility"); (iv)
$125.0 million of Existing Telex Notes; and (v) $36.5 million of available cash
of Old Telex. Of the $108.4 million of new equity contributed by GSCP and
certain other co-investors, $25.2 million consisted of proceeds from the
issuance by GST (a predecessor of Holdings) of Deferred Pay Subordinated
Debentures due in 2009 (the "GST Subordinated Debentures").
Pursuant to the Recapitalization, the historical basis of all assets and
liabilities was retained for financial reporting purposes, and the repurchases
of existing Holdings Common Stock and issuance of new Holdings Common Stock have
been accounted for as equity transactions.
In October 1997, Old Telex completed an exchange offer of a $125 million
aggregate principal amount of new 10.5% Senior Subordinated Notes due in 2007,
Series A (the "New Telex Notes"), which were registered under the Securities
Act, for a like principal amount of the Existing Telex Notes (together with the
New Telex Notes, the "Telex Notes"). All of the Existing Telex Notes were
tendered and accepted for exchange.
THE MERGER
On February 2, 1998, Old EVI merged with Old Telex, a wholly owned
subsidiary of Holdings and an affiliate of GSCP, with Old EVI surviving (the
"Merger"). In the Merger, Old EVI changed its corporate name to "Telex
Communications, Inc." The Merger was effected pursuant to an agreement and plan
of merger dated January 29, 1998, under which Greenwich I LLC ("G-I"), a
subsidiary wholly owned by GSCP and certain affiliated investors, exchanged all
of the issued and outstanding common and preferred stock of EVI Holdings, the
former parent of Old EVI, for 1,397,400 shares of Holdings' Common Stock, and
13,000 shares of Holdings' Series A pay-in-kind preferred stock, respectively,
and EVI Holdings was merged with and into Holdings, with Holdings continuing as
the surviving corporation. The Merger has been accounted for essentially as a
pooling of interests from May 6, 1997, the date on which Old EVI and Old Telex
came under common control, and the consolidated financial statements of the
Company for Fiscal 1998 include the results of Old Telex from May 6, 1997.
Immediately prior to the Merger, approximately $12.7 million of indebtedness
outstanding under Old EVI's senior credit facility was paid in full and Old
EVI's senior credit facility was terminated. Such indebtedness, together with
$0.4 million of certain fees and expenses associated with the Merger, was repaid
by utilizing free cash at closing from Old EVI of $3.8 million and by borrowings
under the Company's Revolving Credit Facility of approximately $9.3 million.
Total fees and expenses incurred as a result of the Merger were $1.7 million,
including the $0.4 million paid at closing. The EVI Notes remain outstanding
following the Merger.
As a result of the Merger, deferred financing costs of $2.9 million
associated with Old EVI's senior credit facility were written off and are
included in extraordinary loss from early retirement of debt in the consolidated
statements of operations.
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PRO FORMA RESULTS OF TRANSACTIONS (UNAUDITED)
Pro forma information is presented below for the year ended March 31, 1998,
as if the Acquisition of Old EVI, the offering by Old EVI of the EVI Notes, the
Recapitalization of Old Telex (including the offering by Old Telex of the Telex
Notes) and the Merger of Old Telex with and into Old EVI had occurred at the
beginning of Fiscal 1998. The pro forma results are for illustrative purposes
only and do not purport to be indicative of the actual results which occurred,
nor are they indicative of future results of operations for the year ended March
31, 1998 as adjusted (in thousands):
Net sales............................................... $345,775
Operating income(a)..................................... 24,088
Net loss(a)............................................. (14,145)
- - ---------------
(a) Included in the year ended March 31, 1998 operating income and net loss, as
presented, are noncash compensation charges for stock options associated
with the Recapitalization, nonrecurring charges for management cash bonuses,
restructuring charges and a noncash impairment loss described in Note 6.
DISPOSITIONS
During the year ended December 31, 1999, the Company sold the VEGA business
and facility for approximately $3.2 million, of which $2.8 million in cash was
received at the closing on October 15, 1999, and the remaining $0.4 million,
held in escrow subject to closing balance sheet adjustments and other customary
conditions, is to be received in installments extending to March 31, 2001 as
conditions are satisfied. The Company recognized a loss of $1.1 million
associated with this transaction. The Company also recorded a gain of $0.8
million on cash proceeds of approximately $4.1 million related to the sales of
certain vacated facilities and certain product lines. In the nine-month period
ended December 31, 1998, the Company sold the Gauss business and facility for
$2.0 million on which it recognized a gain of $0.9 million.
3. RESTRUCTURING CHARGES:
During the year ended March 31, 1998, the Company recorded a restructuring
charge of $6.2 million attributable to the Merger-related consolidation of
certain product lines, and the consolidation of certain of its worldwide
manufacturing, engineering, distribution, marketing, service and administrative
operations to reduce costs, to better utilize the available manufacturing and
operating capacity and to enhance competitiveness. 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, and the sale and disposal of the owned
facilities and equipment related to those operations in 2000.
As of December 31, 1999, the Company has charged to the restructuring
reserve $4.0 million, consisting of $1.6 million of cash expenditures and $2.4
million of noncash charges. The Company reversed $2.1 million of the reserve in
1999, retaining approximately $0.1 million related to future estimated costs to
be incurred for environmental and employee-related transactions.
4. INVENTORIES:
Inventories consist of the following as of December 31 (in thousands):
1999 1998
------- -------
Raw materials............................................... $31,848 $32,667
Work in progress............................................ 9,852 10,690
Finished goods.............................................. 24,873 24,401
------- -------
$66,573 $67,758
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5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following as of December 31
(in thousands):
1999 1998
-------- --------
Land........................................................ $ 2,193 $ 2,841
Buildings and improvements.................................. 23,053 23,777
Machinery and equipment..................................... 92,894 88,570
Construction in progress.................................... 343 1,821
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118,483 117,009
Less- Accumulated depreciation.............................. (73,435) (68,734)
-------- --------
$ 45,048 $ 48,275
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6. INTANGIBLE ASSETS:
In the year ended December 31, 1999, the Company determined that the
estimated future undiscounted cash flows for certain product lines were below
the carrying value of related long-lived intangible assets primarily due to
changes in related product technologies. In addition, goodwill associated with
discontinued products was written off, and goodwill associated with the sale of
certain product lines was charged against the proceeds (included in other
income) from the sale. Accordingly, in 1999 the Company recorded a $6.3 million
charge attributed to the impairment of long-lived intangible assets, a $4.9
million charge for a goodwill write-off (of which $2.0 million was charged
against the proceeds from the sale of product lines), and a $0.5 million charge
for write-off of fixed assets attributed to the discontinued products.
In the fiscal year ended March 31, 1998, the Company recognized a noncash
impairment loss of $2.2 million against operating income for certain intangible
assets, including dealer and distributor lists, patents and engineering
drawings, and goodwill as a result of changed business conditions for certain
product lines.
Intangible assets consist of the following as of December 31 (in
thousands):
1999 1998
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Goodwill.................................................... $77,009 $83,300
Dealer and distributor lists................................ 5,626 5,626
Patents and engineering drawings............................ 5,888 5,888
Other intangibles........................................... 3,681 3,540
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92,204 98,354
Less- Accumulated amortization.............................. (29,645) (20,876)
------- -------
$62,559 $77,478
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7. DEBT:
REVOLVING LINES OF CREDIT
In May 1997, the Company entered into the Revolving Credit Facility (the
"Facility"), as part of the Senior Secured Credit Facility. Under the Facility,
the Company may borrow up to $25.0 million, subject to a borrowing base
calculation. Interest on outstanding borrowings is calculated, at the Company's
option, using the bank's prime rate or LIBOR plus specified margins. The
revolving line of credit expires November 6, 2002. The Facility requires an
annual commitment fee of 0.5% of the unused portion of the commitment.
Borrowings are secured by accounts receivable and inventories. The Company had
borrowings of $19.5 million and letters of credit outstanding in the amount of
$3.6 million as of December 31, 1999, reducing the availability under the
Facility to $1.9 million.
Certain foreign subsidiaries of the Company have entered into agreements
with banks to provide for local working capital needs. Under these agreements,
the Company may make aggregate borrowings of up to $6.0 million. At December 31,
1999, the Company had borrowings of $3.2 million under these facilities,
reducing the amount available to $2.8 million. The rates of interest in effect
on these facilities as of December 31, 1999, ranged from 1.9% to 9.0%, and are
generally subject to change based upon prevailing local
49
52
prime rates. In certain instances, the facilities are secured by a lien on
foreign real estate property, leaseholds or accounts receivable and inventories,
or guaranteed by another subsidiary of the Company.
LONG-TERM DEBT
Long-term debt consists of the following as of December 31 (in thousands):
1999 1998
-------- --------
Senior Subordinated Notes, due May 1, 2007, bearing interest
of 10.5% payable semiannually, unsecured.................. $125,000 $125,000
Senior Subordinated Notes, due March 15, 2007, bearing
interest of 11% payable semiannually, unsecured........... 100,000 100,000
Senior Secured Credit Facility (Term Loan Facility):
Term Loan A, due in quarterly installments through
November 6, 2002, bearing interest at LIBOR plus 3.25%
(9.72% at December 31, 1999) payable semiannually,
secured by substantially all assets of the Company..... 34,500 42,500
Term Loan B, due in quarterly installments through
November 6, 2004, bearing interest at LIBOR plus 3.75%
(10.22% at December 31, 1999) payable semiannually,
secured by substantially all assets of the Company..... 61,689 64,500
-------- --------
321,189 332,000
Less- Current portion....................................... (8,982) (10,811)
-------- --------
$312,207 $321,189
======== ========
The Senior Subordinated Notes and the Senior Secured Credit Facility
contain certain financial and nonfinancial restrictive covenants, including
limitations on additional indebtedness, payment of dividends, certain
investments, sale of assets, and consolidations, mergers and transfers of all or
substantially all of the Company's assets and capital expenditures, subject to
certain qualifications and exceptions. Certain financial covenants related to
the Senior Secured Credit Facility were renegotiated in October 1999. The
Company was in compliance with all covenants related to the Senior Subordinated
Notes and the Senior Secured Credit Facility at December 31, 1999.
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 and the Senior Subordinated 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.
50
53
Aggregate annual maturities of long-term debt are as follows for the years
ended December 31 (in thousands):
2000.................................................... $ 8,982
2001.................................................... 11,482
2002.................................................... 15,482
2003.................................................... 24,097
2004.................................................... 36,146
Thereafter.............................................. 225,000
--------
$321,189
========
8. INCOME TAXES:
Significant components of the provision for income taxes attributable to
income (loss), including the extraordinary item, are as follows (in thousands):
NINE-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
------------ ------------ ----------
Current:
Federal............................................ $2,000 $ 37 $(5,709)
State.............................................. 116 125 --
Foreign............................................ 2,076 266 203
------ ------ -------
4,192 428 (5,506)
Deferred............................................. (128) 794 5,609
------ ------ -------
$4,064 $1,222 $ 103
====== ====== =======
A reconciliation of the income taxes computed at the federal statutory rate
to the Company's income tax provision including the extraordinary item is as
follows (in thousands):
NINE-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
------------ ------------ ----------
Federal benefit at statutory rate.................... $(6,244) $(1,341) $(17,262)
State benefit, net of federal tax.................... (629) 27 (1,668)
Amortization and write-off of goodwill............... 2,271 200 1,450
Change in deferred tax asset valuation allowance and
other income tax accruals.......................... 5,022 2,597 15,739
Recapitalization costs............................... -- -- 2,522
Foreign tax rate differences......................... 1,843 (171) (741)
Other................................................ 1,801 (90) 63
------- ------- --------
$ 4,064 $ 1,222 $ 103
======= ======= ========
51
54
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows for the years
ended December 31 (in thousands):
1999 1998
-------- --------
Deferred tax liabilities:
Tax over book depreciation................................ $ 6,245 $ 6,876
-------- --------
Deferred tax assets:
Compensation accruals..................................... 4,325 3,957
Book over tax amortization................................ 4,525 2,656
Pension accrual........................................... 946 920
Inventory reserves........................................ 2,348 3,034
Foreign tax credits....................................... 2,440 2,440
Vacation accrual.......................................... 1,109 1,029
Warranty reserves......................................... 1,114 1,020
Restructuring reserves.................................... 613 1,650
Tax loss carryforward..................................... 10,804 5,643
Other..................................................... 1,380 2,680
-------- --------
Total deferred tax assets.............................. 29,604 25,029
Valuation allowance......................................... (23,359) (18,337)
-------- --------
Net deferred tax assets................................ 6,245 6,692
-------- --------
Net deferred tax assets (liabilities)....................... $ -- $ (184)
======== ========
The Company has established a net deferred tax valuation allowance of $23.4
million 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.
In addition, the Company has not recognized any income tax benefit related
to the excess of the market price over the exercise price of the exercised stock
options of $27.6 million for financial reporting purposes. The income tax
benefit, once realized, will be credited to shareholder's deficit.
Prior to the merger of Old Telex and Old EVI, Old Telex received a
settlement offer from the Internal Revenue Service (the "IRS") principally with
respect to the amortization of certain intangibles for the taxable years 1990
through 1995. The Company subsequently rejected the offer. As of December 31,
1999, the Company has provided a reserve of $6.8 million for the tax liability,
penalties and accrued interest related to the unsettled dispute. Management
believes any additional taxes which may ultimately result from these audits or
any other state or local agencies' audits would not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
Accumulated and current unremitted earnings of the Company's foreign
subsidiaries are deemed to be reinvested in each country and are not expected to
be remitted.
9. RELATED-PARTY TRANSACTIONS:
Holdings' principal asset is its investment in the Company and, therefore,
Holdings is dependent on the operations of the Company for its cash flow needs;
however, there are no agreements between the Company and Holdings requiring the
transfer of funds from the Company to Holdings. The Senior Subordinated Notes
and the provisions of the indenture agreements pursuant to which the Senior
Subordinated Notes were issued restrict Telex's payment of dividends, loans or
advances to its affiliates.
Prior to October 1999, the Company paid fees to Holdings' majority
shareholder for management services in the amount of $1.7 million annually. New
covenants with lenders signed in October 1999 require the Company to suspend
payment of the fees until certain financial conditions are met. When these
financial conditions are met, all current payments and payments in arrears are
due. The Company is recording a liability for such future payments. For the year
ended December 31, 1999, the nine-month period ended December 31, 1998 and the
year ended March 31, 1998, the Company recorded a charge to operations for
corporate charges of $1.7 million, $1.3 million and $2.2 million, respectively,
for such fees.
52
55
Income taxes payable and receivable include tax benefits related to
Holdings as the Company makes all tax payments for the consolidated group.
10. RETIREMENT PLANS:
The Company has two noncontributory defined benefit pension plans. One plan
covers union employees in the U.S. The benefit formula provisions of this plan
are based on years of service multiplied by a benefit level. The second plan,
amended effective July 1, 1999, covers substantially all non-union employees in
the U.S. Since July 1, 1999, this plan has been a cash balance pension plan.
Under the terms of the plan, account balances are maintained for each
participant. For individuals participating in the plan as of June 30, 1999, an
opening account balance was created equal to the present value of the benefit
accrued as of June 30, 1999 under the then plan benefit formula. The Company
credits each active participant's account with a benefit credit each year
determined based on the participant's age, vesting service and total
remuneration covered by the plan. The amendment resulted in a decrease of
approximately $4.9 million in benefit obligation for the year ended December 31,
1999. Pension costs are funded annually, subject to limitations.
The following table presents the funded status of the above plans as
recognized in the consolidated balance sheets (in thousands):
NINE-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
------------ ------------ ----------
Change in benefit obligation:
Benefit obligation at beginning of period.......... $32,187 $27,931 $ 19
Service cost....................................... 1,771 1,350 520
Interest cost...................................... 1,817 1,494 187
Merger............................................. -- -- 27,212
Actuarial (gain) loss.............................. (4,726) 2,750 277
Benefits paid...................................... (1,536) (1,338) (292)
Amendments......................................... (4,893)
Effects of curtailment............................. -- -- 8
------- ------- -------
Benefit obligation at end of period.................. 24,620 32,187 27,931
------- ------- -------
Change in plan assets:
Fair value of plan assets at beginning of period... 26,695 23,155 --
Merger............................................. -- -- 22,414
Actual return on plan assets....................... 7,643 3,680 866
Employer contribution.............................. 996 1,263 212
Noninvestment related expenses..................... (262) (65) (45)
Benefits paid...................................... (1,536) (1,338) (292)
------- ------- -------
Fair value of plan assets at end of period........... 33,536 26,695 23,155
------- ------- -------
Funded status........................................ 8,916 (5,492) (4,776)
Unrecognized actuarial (gain) loss................... (8,781) 1,102 570
Unrecognized net transition obligation............... 50 89 119
Unrecognized prior service cost...................... (4,563) 5 8
------- ------- -------
Net amount recognized................................ $(4,378) $(4,296) $(4,079)
======= ======= =======
Amounts recognized in the consolidated balance sheets
consist of:
Accrued benefit liability.......................... $(4,402) $(4,519) $(4,171)
Accumulated other comprehensive loss............... 24 223 92
------- ------- -------
Net amount recognized................................ $(4,378) $(4,296) $(4,079)
======= ======= =======
Weighted average assumptions:
Discount rate...................................... 7.75% 6.5% 7.0%
Expected return on plan assets..................... 9.0 9.0 9.0
Rate of compensation increase...................... 4.5 4.5 4.5
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56
NINE-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
------------ ------------ ----------
Components of net periodic benefit cost:
Service cost....................................... $ 1,771 $ 1,350 $ 187
Interest cost...................................... 1,817 1,494 520
Expected return on plan assets..................... (2,243) (1,416) (147)
Amortization of unrecognized net transition
obligation...................................... 40 30 3
Amortization of prior service cost................. (326) 3 --
Recognized actuarial loss.......................... 19 18 14
------- ------- -------
Net periodic benefit cost............................ $ 1,078 $ 1,479 $ 577
======= ======= =======
Plan assets consist primarily of equity and debt securities and cash
equivalents.
As of the Acquisition Closing Date, the Company ceased withholding 401(k)
contributions from employees' payroll until the time the Company could establish
its own defined contribution plan. Pursuant to the Purchase Agreement, the
assets of the defined contribution plan of Mark IV Industries, Inc. and Mark IV
PLC (the "Sellers") that relate to the Company's employees were transferred into
the Company's plan, and, at that time, employee payroll withholding for 401(k)
contributions into the Company's defined contribution plan resumed. Effective
July 1, 1999, the Company merged the Employee's Investment Plan into the Savings
and Retirement Plan. Under the new Plan, the Company matches 50% of the first 6%
contributed by U.S. employees.
The Company's Japanese subsidiary also has a retirement and termination
plan (the "Retirement Plan"), which provides benefits to employees in Japan upon
their termination of employment. The benefits are based upon a multiple of the
employee's monthly salary, with the multiple determined based upon the
employee's years of service. The multiple paid to employees who retire or are
involuntarily terminated is greater than the multiple paid to those who
voluntarily terminate their services. The Retirement Plan is unfunded, and the
accompanying consolidated balance sheet includes a liability of approximately
$1.1 million at December 31, 1999, which represents the actuarially determined
estimated present value of the Company's liability as of this date. In
developing this estimate, the actuary used discount and compensation growth
rates prevailing in Japan of 1.7% and 2.8%, respectively. For the year ended
December 31, 1999, the nine-month period ended December 31, 1998 and the year
ended March 31, 1998, the Company charged $0.4 million, $0.1 million and $0.3
million, respectively, to expense for this plan.
11. POSTRETIREMENT BENEFITS:
The Company is obligated to provide health and life insurance benefits to
certain employees of its U.S. operations upon retirement. Contributions required
to be paid by the employees towards the cost of such plans are a flat dollar
amount per month in certain instances, or a range from 25% to 100% of the cost
of such plans in other instances.
54
57
The following table presents the status of the above plans as recognized in
the consolidated financial statements (in thousands):
NINE-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
------------ ------------ ----------
Change in benefit obligation:
Benefit obligation at beginning of period.......... $ 585 $ 513 $ 415
Service cost....................................... 30 18 23
Interest cost...................................... 40 28 36
Actuarial (gain) loss.............................. (65) 29 39
Benefits paid...................................... (18) (3) --
----- ----- -----
Benefit obligation at end of period.................. 572 585 513
----- ----- -----
Fair value of plan assets at end of period........... -- -- --
----- ----- -----
Funded status........................................ (572) (585) (513)
Unrecognized actuarial loss.......................... 61 132 106
Unrecognized prior service cost...................... -- -- --
----- ----- -----
Net amount recognized................................ $(511) $(453) $(407)
===== ===== =====
Amounts recognized in the consolidated balance sheets
consist of:
Prepaid benefit cost............................... $ -- $ -- $ --
Accrued benefit liability.......................... (511) (453) (407)
Intangible asset................................... -- -- --
Accumulated other comprehensive income............. -- -- --
----- ----- -----
Net amount recognized................................ $(511) $(453) $(407)
===== ===== =====
Weighted average assumptions:
Discount rate...................................... 7.75% 6.5% 7.0%
The assumed healthcare cost trend rate used in measuring the benefit
obligation is 6% for the year ended December 31, 1999, declining at a rate of
1.0% per year to an ultimate rate of 5.0% in 2000.
The net periodic benefit cost included the following components (in
thousands):
NINE-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
------------ ------------ ----------
Components of net periodic benefit cost:
Service cost....................................... $30 $18 $24
Interest cost...................................... 40 28 36
Amortization of unrecognized net actuarial loss.... 5 3 2
--- --- ---
Net periodic benefit cost............................ $75 $49 $62
=== === ===
A one-percentage-point change in assumed healthcare cost trend rates would
have an immaterial effect on service and interest cost components.
The Company does not provide any postemployment benefits which would
require accrual under SFAS No. 112, "Employers' Accounting for Postemployment
Benefits."
12. COMMITMENTS AND CONTINGENCIES:
LITIGATION
From time to time the Company is a party to various legal actions in the
normal course of business. The Company believes that it is not currently a party
in any litigation which, if adversely determined, would have a material adverse
effect on the financial condition of the Company.
55
58
ENVIRONMENTAL MATTERS
The Company and its operations are subject to extensive and changing U.S.
federal, state, local and foreign environmental laws and regulations, including,
but not limited to, laws and regulations that impose liability on responsible
parties to remediate, or contribute to the costs of remediating, current or
formerly owned or leased sites or other sites where solid or hazardous wastes or
substances were disposed of or released into the environment. These remediation
requirements may be imposed without regard to fault or legality at the time of
the disposal or release. Although management believes that its current
manufacturing operations comply in all material respects with applicable
environmental laws and regulations, environmental legislation has been enacted
and may in the future be enacted or interpreted to create environmental
liability with respect to the Company's facilities or operations.
The Company (or, for certain sites, Mark IV, on behalf of the Company) has
undertaken or is currently undertaking remediation of contamination at certain
of its currently or formerly owned sites (some of which are unrelated to the
audio business), and the Company has agreed that it is a de minimis responsible
party at a number of other such sites, which have been designated as Superfund
sites under U.S. environmental laws. The Company has had Phase I Environmental
Site Assessments and Compliance Reviews conducted by a third-party environmental
consultant at all of its manufacturing sites and is aware of environmental
conditions at certain of such sites that require or may require remediation or
continued monitoring. In particular, the Company's site in Buchanan, Michigan,
has been designated a Superfund site under U.S. environmental laws. Mark IV has
agreed to indemnify the Company fully for environmental liabilities resulting
from the Buchanan, Michigan, Superfund site and certain of the other sites at
which the environmental consultant indicated monitoring or remediation was
necessary.
The Company is party to a 1988 consent decree with the predecessor to the
Nebraska Department of Environmental Quality (NDEQ) relating to the cleanup of
hazardous waste at the Company's Lincoln, Nebraska, facility. In connection with
ongoing monitoring and cleanup activities at the site and on adjacent property,
the Company has received from the NDEQ notices of noncompliance. The Company is
in discussions with the NDEQ regarding future actions, but it does not believe
that the costs related to its responsibilities at the site will result in
material adverse effect on the Company's results of operations or financial
condition. In December 1997, the Company entered into an Administrative Order on
Consent with the U.S. Environmental Protection Agency under the Resource
Conservation and Recovery Act to further investigate and remediate the Lincoln
facility and an adjoining property. The Company is not able at this time to
determine the amount of additional expenses, if any, that may be incurred by the
Company as a result of these actions.
Through December 31, 1999, the Company had accrued approximately $1.7
million over the life of the project for anticipated costs to be incurred for
the Lincoln facility cleanup activities, of which approximately $1.5 million had
been incurred.
The Company's environmentally related expenditures for the year ended
December 31, 1999, the nine-month period ended December 31, 1998 and the year
ended March 31, 1998 were not material. The Company estimates that it will incur
in 2000 approximately $150,000 of environmentally related capital expenditures
in addition to those costs associated with the Lincoln facility cleanup
activities described above. The Company also incurs approximately $30,000 per
year of expenses associated with the disposal of hazardous materials generated
in connection with its manufacturing processes.
There can be no assurance that the Company's estimated environmental
expenditures, which the Company believes to be reasonable, will cover in full
the actual amounts of environmental obligations the Company does incur, that
Mark IV will pay in full the indemnified environmental liabilities when they are
incurred, that new or existing environmental laws will not affect the Company in
currently unforeseen ways, or that present or future activities undertaken by
the Company will not result in additional environmentally related expenditures.
However, the Company believes that compliance with federal, state and local
environmental protection laws and provisions should have no material adverse
effect on the Company's results of operations or financial condition.
EMPLOYMENT CONTRACTS
The Company has employment contracts with certain key executives that
require the Company to pay severance or salary continuance pay equal to amounts
ranging from 9 to 12 months' salary in the event such executives are terminated
without cause.
56
59
The Chief Executive Officer (CEO) entered into an employment agreement with
Holdings for the period ended December 31, 1999, which is automatically renewed
for successive annual periods thereafter. Pursuant to such Employment Agreement,
the CEO will receive (i) a base annual salary of $300,000; (ii) annual bonuses
of $300,000 (prorated for any partial year of employment) for each of the 1998
and 1999 calendar years, and thereafter an aggregate annual incentive award of
up to approximately $300,000 if certain performance objectives are achieved; and
(iii) a special one-time bonus of $1.0 million upon achievement of specified
performance objectives, with additional incremental bonuses payable upon
achievement of certain increases in specified performance measures thereafter.
In addition, the CEO is entitled to receive certain perquisites and has received
options to purchase 250,000 shares of Holdings Common Stock pursuant to the 1998
Amended and Restated Performance Stock Option Plan adopted by Holdings. The
CEO's employment is terminable by the Company on 30 days' written notice (or
immediately for cause) or by the CEO on 60 days' written notice. Upon
termination, including due to the CEO's death or disability, the CEO will be
entitled to receive all compensation, benefits and perquisites accrued under his
employment agreement through the effective date of his termination of
employment.
LEASE COMMITMENTS
At December 31, 1999, the Company had various noncancelable operating
leases for manufacturing, distribution and office buildings, warehouse space and
equipment.
Approximate future minimum rental commitments under all noncancelable
operating leases are as follows for the years ended December 31 (in thousands):
2000...................................................... $2,685
2001...................................................... 1,277
2002...................................................... 731
2003.................................................... 437
2004...................................................... 274
2005 and thereafter....................................... 1,481
------
Total minimum lease commitments........................... $6,885
======
13. SEGMENT INFORMATION:
Subsequent to the Merger, the Company reorganized what had been classified
as Old Telex's four strategic business units and Old EVI's four principal lines
of business into the following two business segments:
PROFESSIONAL SOUND AND ENTERTAINMENT
Professional Sound and Entertainment includes Old EVI's three principal
lines of business within the overall professional audio market: (i) Fixed
Installation; (ii) Professional Music Retail; and (iii) Concert/
Recording/Broadcast and Old Telex's Broadcast Communications Systems and Sound
Reinforcement product groups (these businesses were previously part of Old
Telex's Professional Sound and Entertainment Group).
MULTIMEDIA/AUDIO COMMUNICATIONS
Multimedia/Audio Communications includes all of Old Telex's
Multimedia/Audio Communications, RF/Communications and Hearing Instruments
Groups, the Tape Duplication product group from Old Telex's Professional Sound
and Entertainment Group, and Old EVI's Other Applications line of business,
consisting of handheld microphones and earphones for field and aircraft
communications, both military and civilian, equipment for high-speed duplication
of audio tapes, and components marketed to original equipment manufacturers for
incorporation into their products.
The amounts in the following tables have been presented to coincide with
the new business segments.
57
60
SEGMENT INFORMATION
As of and for the Year Ended December 31, 1999
(In Thousands)
PROFESSIONAL MULTIMEDIA/
SOUND AND AUDIO
ENTERTAINMENT COMMUNICATIONS CORPORATE TOTAL
------------- -------------- --------- --------
Net sales............................. $206,914 $136,745 $ -- $343,659
Cost of sales......................... 125,347 94,052 -- 219,399
-------- -------- --------- --------
Gross profit..................... 81,567 42,693 124,260
Operating expenses:
Engineering......................... -- -- 14,872 14,872
Selling, general and
administrative................... -- -- 86,165 86,165
Corporate charges................... -- -- 1,716 1,716
Amortization of goodwill and other
intangibles...................... -- -- 11,972 11,972
Restructuring charges............... -- -- (2,124) (2,124)
-------- -------- --------- --------
-- -- 112,601 112,601
-------- -------- --------- --------
Operating profit (loss)............... 81,567 42,693 (112,601) 11,659
Interest expense...................... -- -- 36,689 36,689
Other income.......................... -- -- (6,674) (6,674)
Provision for income taxes............ -- -- 4,064 4,064
-------- -------- --------- --------
Net income (loss)................ $ 81,567 $ 42,693 $(146,680) $(22,420)
======== ======== ========= ========
Depreciation expense.................. $ 2,158 $ 2,364 $ 5,526 $ 10,048
======== ======== ========= ========
Capital expenditures.................. $ 3,752 $ 2,882 $ 1,807 $ 8,441
======== ======== ========= ========
Total assets.......................... $107,762 $ 58,013 $ 96,223 $261,998
======== ======== ========= ========
UNITED
STATES GERMANY JAPAN CANADA CHINA OTHERS TOTAL
-------- ------- ------- ------- ------- ------- --------
Net sales..................... $199,929 $34,815 $19,212 $12,948 $14,369 $62,386 $343,659
======== ======= ======= ======= ======= ======= ========
Long-lived assets by
country..................... $108,047 $ 4,551 $ 1,357 $ 52 $ 76 $ 4,000 $118,083
======== ======= ======= ======= ======= ======= ========
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61
SEGMENT INFORMATION
As of and for the Nine-Month Period Ended December 31, 1998
(In Thousands)
PROFESSIONAL MULTIMEDIA/
SOUND AND AUDIO
ENTERTAINMENT COMMUNICATIONS CORPORATE TOTAL
------------- -------------- --------- --------
Net sales.............................. $152,822 $93,520 $ -- $246,342
Cost of sales.......................... 97,711 59,555 -- 157,266
-------- ------- -------- --------
Gross profit...................... 55,111 33,965 -- 89,076
Operating expenses:
Engineering.......................... -- -- 11,214 11,214
Selling, general and
administrative.................... -- -- 53,678 53,678
Corporate charges.................... -- -- 1,287 1,287
Amortization of goodwill and other
intangibles....................... -- -- 2,118 2,118
-------- ------- -------- --------
-- -- 68,297 68,297
-------- ------- -------- --------
Operating profit (loss)................ 55,111 33,965 (68,297) 20,779
Interest expense....................... -- -- 27,328 27,328
Other income........................... -- -- (2,719) (2,719)
Provision for income taxes............. -- -- 1,222 1,222
-------- ------- -------- --------
Net income (loss)................. $ 55,111 $33,965 $(94,128) $ (5,052)
======== ======= ======== ========
Depreciation expense................... $ 2,346 $ 1,788 $ 2,650 $ 6,784
======== ======= ======== ========
Capital expenditures................... $ 1,734 $ 892 $ 2,560 $ 5,186
======== ======= ======== ========
Total assets........................... $115,402 $52,491 $105,383 $273,276
======== ======= ======== ========
UNITED
STATES GERMANY JAPAN CANADA CHINA OTHERS TOTAL
-------- ------- ------- ------- ------- ------- --------
Net sales..................... $148,454 $22,923 $12,244 $10,888 $ 9,970 $41,863 $246,342
======== ======= ======= ======= ======= ======= ========
Long-lived assets by
country..................... $126,277 $ 5,564 $ 1,533 $ -- $ 93 $ 3,872 $137,339
======== ======= ======= ======= ======= ======= ========
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62
SEGMENT INFORMATION
As of and for the Year Ended March 31, 1998
(In Thousands)
PROFESSIONAL MULTIMEDIA/
SOUND AND AUDIO
ENTERTAINMENT COMMUNICATIONS CORPORATE TOTAL
------------- -------------- --------- --------
Net sales............................. $207,618 $125,346 $ -- $332,964
Cost of sales......................... 125,593 80,031 -- 205,624
-------- -------- --------- --------
Gross profit..................... 82,025 45,315 -- 127,340
Operating expenses:
Engineering......................... -- -- 17,278 17,278
Selling, general and
administrative................... -- -- 81,695 81,695
Corporate charges................... -- -- 2,203 2,203
Amortization of goodwill and other
intangibles...................... -- -- 5,438 5,438
Restructuring charges............... -- -- 6,232 6,232
-------- -------- --------- --------
-- -- 112,846 112,846
-------- -------- --------- --------
Operating profit (loss)............... 82,025 45,315 (112,846) 14,494
Interest expense...................... -- -- 37,938 37,938
Recapitalization expense.............. -- -- 6,710 6,710
Other expense......................... -- -- 43 43
Provision for income taxes............ -- -- 103 103
Extraordinary loss.................... -- -- 20,579 20,579
-------- -------- --------- --------
Net income (loss)................ $ 82,025 $ 45,315 $(178,219) $(50,879)
======== ======== ========= ========
Depreciation expense.................. $ 4,281 $ 2,366 $ 1,938 $ 8,585
======== ======== ========= ========
Capital expenditures.................. $ 4,028 $ 1,720 $ 2,720 $ 8,468
======== ======== ========= ========
Total assets.......................... $141,709 $ 47,598 $ 110,945 $300,252
======== ======== ========= ========
UNITED
STATES GERMANY JAPAN CANADA CHINA OTHERS TOTAL
-------- ------- ------- ------- ------- ------- --------
Net sales..................... $188,211 $22,904 $19,397 $12,033 $15,817 $74,602 $332,964
Long-lived assets by
country..................... $131,185 $ 5,186 $ 690 $ 142 $ 121 $ 3,820 $141,144
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The net sales to unaffiliated customers in each geographic region may
include both the sales from the Company's operating unit in the region and sales
made in the region by an operating unit from another region. Net sales to the
unaffiliated customers in the geographic regions for the year ended December 31,
1999 were as follows: United States $199.9 million, Germany--$34.8, Japan--$19.2
million, Canada--$12.9 million, China--$14.4 million, and other foreign
countries--$62.4 million. Net sales to the unaffiliated customers in the
geographic regions for the nine-month period ended December 31, 1998 were as
follows: United States--$148.5 million, Germany--$22.9 million, Japan--$12.2
million, Canada--$10.9 million, China--$10.0 million, and other foreign
countries--$41.9 million. Net sales to the unaffiliated customers in the
geographic regions for the year ended March 31, 1998 were as follows: United
States--$188.2 million, Germany--$22.9 million, Japan--$19.4 million,
Canada--$12.0 million, China--$15.8 million, and other foreign countries--$74.6
million. Export sales from the United States to unaffiliated customers were
approximately $32.4 million, $52.4 million and $44.3 million for the year ended
December 31, 1999, the nine-month period ended December 31, 1998 and the year
ended March 31, 1998, respectively. Sales from the Company's foreign
subsidiaries accounted for approximately 73%, 74% and 75% of the total
international sales for the year ended December 31, 1999, the nine-month period
ended December 31, 1998 and the year ended March 31, 1998, respectively.
Corporate identifiable assets relate principally to the Company's
investment in information systems and corporate facilities, as well as cost in
excess of net assets acquired included in intangible assets and deferred
financing costs.
14. EQUITY:
STOCK SPLIT
On June 25, 1997, Holdings' board of directors approved a 20-for-1 stock
split of all Holdings' outstanding Common Stock. All common stock options for
the purchase of Holdings Common Stock described below reflect the Common Stock
split.
STOCK COMPENSATION PLANS
The 1997 Amended and Restated Stock Option Plan authorizes the issuance of
up to 267,728 shares of Holdings Common Stock, of which 237,216 have been
granted and 76,432 have been canceled. The exercise price of these options is
$7.98. These nonqualified options may be granted to certain key employees,
directors and independent contractors of the Company or Holdings.
The Amended and Restated 1998 Performance Stock Option Plan authorizes the
issuance of up to 880,732 shares of Holdings Common Stock, of which 837,500 have
been granted and 45,000 have been canceled. The exercise price of these options
is $0.01. These nonqualified options may be granted to certain key employees of
the Company or Holdings.
A summary of the Company's stock option activity and related information
for the period from May 6, 1997 (the date on which both entities came under
common control) through December 31, 1999 is as follows:
NINE-MONTH PERIOD
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 MARCH 31, 1998
-------------------- ------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- -------- -------- ------- --------
Beginning of period................. 479,985 $6.91 780,560 $10.61 242,000 $ 1.27
Granted........................... 921,007 0.73 1,700 12.91 557,020 14.80
Exercised......................... (43,120) 0.08 -- -- (873) 7.98
Canceled.......................... (292,661) 9.02 (302,275) 16.49 (17,587) 17.63
--------- -------- -------
End of period....................... 1,065,211 1.08 479,985 6.91 780,560 10.61
========= ======== =======
Exercisable at end of period........ 208,535 3.97 353,735 3.39 289,500 2.37
========= ======== =======
Available for future grants......... 199,024 453,537 212,440
========= ======== =======
Exercise prices for options outstanding as of December 31, 1999 range from
$0.01 to $7.98. The weighted average remaining contractual life of those options
is 8.3 years as of December 31, 1999. Compensation
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expense has been recognized for options granted below fair market value as of
the date of grant over their respective vesting periods.
The Company accounts for its stock-based compensation plans under APB
Opinion No. 25, under which compensation cost of $159,000, $0 and $3,156,000 was
recorded in the year ended December 31, 1999, the nine-month period ended
December 31, 1998 and the year ended March 31, 1998, respectively. Had
compensation expense been recorded at fair value consistent with the methodology
prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net loss would have been recorded at the following pro forma amounts:
NINE-MONTH YEAR
YEAR ENDED PERIOD ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
------------ ------------ ---------
Net loss (in thousands):
As reported............................................... $22,420 $5,052 $50,879
Pro forma................................................. 23,257 6,025 51,849
The fair value of each award under the Option Plan is estimated on the date
of grant using the Black-Scholes minimum value theory options pricing model. The
following assumptions were used to estimate the fair value of options:
NINE-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1998
------------ ------------ ------------
Risk-free interest rate..... 6.75% 6.75% 4.5%
Expected life............... 7.0 5.0 5.0
The weighted average fair values at the grant dates are as follows:
December 31, 1999........... $(14.79)
December 31, 1998........... (11.01)
March 31, 1998.............. --
The effects of applying the fair value method of measuring compensation
expense for the periods presented is not likely to be representative of the
effects of future years, in part because the fair value method was applied only
to stock options granted after March 31, 1995.
WARRANTS
Certain directors of the Company have warrants representing the right to
purchase up to 27,235 shares of Holdings Common Stock at an exercise price of
$31.93 per share. A portion of these warrants became exercisable on the date of
grant, whereas the remainder will become exercisable through 2000, provided in
each case that the holder of the warrant is a director of the Company on the
date of exercise.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practical to estimate
fair value.
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND REVOLVING
LINE OF CREDIT
The carrying amount approximates fair value because of the short maturity
of these instruments.
LONG-TERM DEBT
The fair value of the Company's long-term debt approximates fair value
because of the variability of the interest cost associated with these
instruments. The fair value of the Company's Senior Subordinated Notes is
estimated based on quoted market values for the notes.
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65
The estimated fair values of the Company's financial instruments are as
follows as of December 31 (in thousands):
1999 1998
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
Cash and cash equivalents............................. $ 3,239 $ 3,239 $ 3,431 $ 3,431
Accounts receivable................................... 59,438 59,438 53,926 53,926
Accounts payable...................................... 20,817 20,817 20,920 20,920
Revolving line of credit.............................. 22,688 22,688 5,703 5,703
Long-term debt, excluding Senior Subordinated Notes... 96,189 96,189 107,000 107,000
Senior Subordinated Notes............................. 225,000 155,000 225,000 200,000
16. QUARTERLY FINANCIAL DATA:
The following table shows the unaudited quarterly financial data (in
thousands):
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
--------- -------- ------------- ------------
Net sales.......................................... $79,410 $86,761 $88,411 $ 89,077
Operating profit (loss)............................ 5,448 7,967 6,841 (8,597)
Net loss........................................... (2,357) (1,290) (1,506) (17,267)
JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998
-------- ------------- ------------
Net sales................................................... $78,888 $87,392 $80,062
Operating profit............................................ 6,319 9,089 5,371
Net income (loss)........................................... (3,162) 1,280 (3,170)
The results for the quarter ended March 31, 1998 contained certain
Merger-related costs and expenses, some of which are not easily quantifiable.
Therefore, the Company believes that comparing the financial results for the
quarter ended March 31, 1998 with the quarter ended March 31, 1999 is not
meaningful and has excluded that quarter.
17. SUBSEQUENT EVENTS:
ROYALTY FEE AGREEMENT AND SALE OF TRADEMARK
In March 2000, the Company reached a final agreement for payment of $6.0
million of past due royalty fees from a licensee for the use of the Altec
Lansing trademark. In addition, the Company restructured the license agreement
to provide for a one-time, up-front fee of $6.5 million in lieu of future
royalties. The Company received $1.7 million in cash in 1999. The remaining
$10.8 million will be received in varying amounts through March 2005.
Subsequent to entering into the Royalty Fee Agreement with the licensee of
the Altec Lansing trademark, the Company sold the Altec Lansing trademark to the
licensee for $1.0 million. In consideration, the Company will receive a $1.0
million promissory note payable March 2004.
LEASE COMMITMENT ON NEW CORPORATE HEADQUARTERS
In March 2000, the Company entered into a ten-year operating lease
commitment, with three five-year renewal options, for its new corporate
headquarters in Burnsville, Minnesota, with a limited liability company in which
the Company has a 50% interest. The remaining 50% interest is owned by a
previously unrelated party. The lease becomes effective on the date of purchase
of the new corporate headquarters by the limited liability company. The annual
minimum lease payments are expected to be $1.1 million for years one to five and
$1.2 million for years six to ten. The Company anticipates selling its existing
corporate headquarters by June 2000.
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CLOSING OF THE AUSTIN, TEXAS, MANUFACTURING FACILITY AND ACQUISITION OF A NEW
MANUFACTURING FACILITY
The Company has given notice of its intention not to renew the lease on its
Austin, Texas, manufacturing facility at its expiration on August 31, 2000. The
Company intends to relocate the production from this facility to a 202,000
square-foot facility, acquired in March 2000, in Morrilton, Arkansas.
The Company will recognize restructuring costs related to the closure of
the Austin, Texas, facility in the second quarter ended June 30, 2000, when
plans are expected to be finalized.
The Company acquired the Morrilton, Arkansas, facility for $1.8 million.
The Company financed the acquisition, in part, with a $1.7 million ten-year,
interest-free loan, with no principal repayments in the first two years, from
the Arkansas Department of Economic Development. The Company estimates that it
will incur approximately $1.6 million of expenditures to renovate the facility.
In addition, the state of Arkansas, through its Create Rebate Program, has
offered the Company certain rebates on payroll expenses based on the number of
new full-time, permanent jobs created at the facility.
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67
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of Telex
Communications, Inc. and Subsidiaries' included in this Form 10-K, and have
issued our report thereon dated March 3, 2000, except for note 17, as to which
the date is March 30, 2000.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Schedule II -- Valuation and
Qualifying Accounts of Registrant are the responsibility of the company's
management and are presented for purposes of complying with the Securities and
Exchange Commissions rules and are not part of the basic financial statements.
These schedules have been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
March 3, 2000
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SCHEDULE II
TELEX COMMUNICATIONS, INC.
VALUATION AND QUALIFYING ACCOUNTS
for the twelve months ended December 31, 1999, the nine-month period
ended December 31, 1998 and the fiscal year ended March 31, 1998
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- - ---------------------------------- ---------- ---------------------- ---------- ----------
ADDITIONS
----------------------
BALANCE AT CHARGED DEDUCTIONS BALANCE AT
BEGINNING CHARGED TO TO OTHER FROM END OF
DESCRIPTION OF YEAR INCOME ACCOUNTS RESERVES YEAR
- - ----------- ---------- ---------- -------- ---------- ----------
Fiscal Year Ended March 31, 1998
Valuation account deducted from
assets to which it applies--
Allowance for doubtful
accounts........................ $1,849 $980 $ 1,639(a) $ 485(b) $3,983
====== ==== ======== ====== ======
Nine-Month Period Ended December
31, 1998
Valuation account deducted from
assets to which it applies--
Allowance for doubtful
accounts........................ $3,983 $382 $1,440(b) $2,925
====== ==== ====== ======
Twelve Months Ended December 31,
1999
Valuation account deducted from
assets to which it applies--
Allowance for doubtful
accounts........................ $2,925 $858 $1,605(b) $2,178
====== ==== ====== ======
- - ---------------
(a) Includes Old Telex balance as of February 2, 1998 when Old EVI and Old Telex
merged.
(b) Uncollectible accounts written off and adjustments to the allowance.
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69
EXHIBIT INDEX
for
Form 10-K
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
2.1 -- Exchange Agreement and Plan of Merger, dated as of January
29, 1998, among Greenwich I LLC, Greenwich II LLC, EVI Audio
Holdings, Inc., Telex Communications Group, Inc.
("Holdings"), Telex Communications, Inc. and EV
International, Inc. (incorporated by reference to Exhibit 2
to Old Telex's Quarterly Report on Form 10-Q for the nine
months ended December 31, 1997, filed with the Commission on
February 17, 1998, File No. 333-30679).
2.2(a) -- Recapitalization Agreement and Plan of Merger, dated March
4, 1997, among Greenwich 11 LLC ("G-11"), GST Acquisition
Corp. ("GST") and Old Telex (incorporated by reference to
Exhibit 2(a) to the Old Telex's Registration Statement on
Form S-4, filed with the Commission on September 5, 1997,
Registration No. 333-30679).
2.2(b) -- Amendment No. 1 to the Recapitalization Agreement and Plan
of Merger, dated as of April 17, 1997 (incorporated by
reference to Exhibit 2(b) to Old Telex's Registration
Statement on Form S-4, Registration No. 333-30679).
2.2(c) -- Amendment No. 2 to the Recapitalization Agreement and Plan
of Merger, dated as of April 25, 1997 (incorporated by
reference to Exhibit 2(c) to Old Telex's Registration
Statement on Form S-4, Registration No. 333-30679).
3.1 -- Amended and Restated Certificate of Incorporation of Telex
Communications, Inc., dated February 2, 1998 (incorporated
by reference to Exhibit 3 (a) to the Company's Annual Report
on Form 10-K for the fiscal year ended February 28, 1998,
filed with the Commission on May 29, 1998, File No.
333-27341).
3.2 -- By-Laws of the Company, as amended (incorporated by
reference to Exhibit 3(b) to Old Telex's Registration
Statement on Form S-4, Registration No. 333-30679).
4.1(a) -- Indenture, dated March 24, 1997, between Old EVI and The
Bank of New York, as Trustee (incorporated by reference to
Exhibit 4(a) to the Registrant's Registration Statement on
Form S-4, filed with the Commission on July 30, 1997,
Registration No. 333-27341).
4.1(b) -- The First Supplemental Indenture, dated May 6, 1997, to the
Telex Indenture (incorporated by reference to Exhibit 4(b)
to Old Telex's Registration Statement on Form S-4,
Registration No. 333-30679).
4.1(c) -- Second Supplemental Indenture, dated as of February 2, 1998,
made by Old EVI in favor of Manufacturers and Traders Trust
Company, as Trustee (incorporated by reference to Exhibit 2
to Old Telex's Quarterly Report on Form 10-Q for the nine
months ended December 31, 1997, filed with the Commission on
February 17, 1998, File No. 333-30679).
4.2 -- Indenture (the "Telex Indenture"), dated as of May 6, 1997,
among Old Telex and Manufacturers and Traders Trust Company
(incorporated by reference to Exhibit 4(a) to Old Telex's
Registration Statement on Form S-4, Registration No.
333-30679).
4.3(a) -- Credit Agreement, dated May 6, 1997 (as amended, the "Credit
Agreement"), among Old Telex, the lenders named on the
signature pages thereof (the "Senior Lenders") and The Chase
Manhattan Bank, a New York banking corporation ("Chase"), as
administrative agent for such Senior Lenders (the
"Administrative Agent") (incorporated by reference to
Exhibit 4(d) to Old Telex's Registration Statement on Form
S-4, Registration No. 333-30679).
4.3(b) -- The Assignment and Assumption Agreement, dated May 6, 1997,
made by Old Telex, and Telex Communications Group, Inc. in
favor of the Administrative Agent for the benefit of the
Senior Lenders (incorporated by reference to Exhibit 4(e) to
Old Telex's Registration Statement on Form S-4, Registration
No. 333-30679).
4.3(c) -- Guarantee and Collateral Agreement, dated May 6, 1997, made
by Old Telex and Telex Communications Group, Inc. in favor
of the Administrative Agent for the benefit of the Senior
Lenders and certain other secured parties (incorporated by
reference to Exhibit 4(f) to Old Telex's Registration
Statement on Form S-4, Registration No. 33330679).
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70
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
4.3(d) -- Patent and Trademark Security Agreement, dated March 6,
1997, made by Old Telex in favor of the Administrative Agent
for the benefit of the Senior Lenders under the Credit
Agreement (incorporated by reference to Exhibit 4(g) to Old
Telex's Registration Statement on Form S-4, Registration No.
333-30679).
4.3(e) -- Amendment No. 1, dated as of January 29, 1998, to the Credit
Agreement, among Telex Communications, Inc., The Chase
Manhattan Bank, as Administrative Agent, Morgan Stanley
Senior Funding, Inc. and the several banks and other
financial institutions from time to time party thereto
(incorporated by reference to Exhibit 2 to Old Telex's
Quarterly Report on Form 10-Q for the nine months ended
December 31, 1997, filed with the Commission on February 17,
1998, File No. 333-30679).
4.3(f) -- Amendment No. 2, dated as of December 23, 1998, to the
Credit Agreement, among the Company, The Chase Manhattan
Bank, as Administrative Agent, Morgan Stanley Senior
Funding, Inc., as Documentation Agent, and the several banks
and other financial institutions from time to time party
thereto (incorporated by reference to Exhibit 10(a) to the
Company's Report on Form 8-K, filed with the Commission on
January 15, 1999, File No 33327341).
4.3(g) -- Amendment No. 3, dated as of October 29, 1999, to the Credit
Agreement, among the Company, the Lenders, Morgan Stanley
Senior Funding, Inc. as Documentation Agent for the Lenders,
and The Chase Manhattan Bank, as Administrative Agent for
the Lenders (incorporated by reference to Exhibit (10(b) to
the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999, filed with the
Commission on November 15, 1999, Registration No.
333-27341).
10.1 -- Amended and Restated Stockholders Agreement, dated March 4,
1997, among Old Telex, G-11 and the Stockholders set forth
on Schedule A thereto (incorporated by reference to Exhibit
10(a) to Old Telex's Registration Statement on Form S-4,
Registration No. 333-30679).
*10.2(a) -- Consulting Agreement, dated May 6, 1997, between Greenwich
Street Capital Partners, Inc. ("GSCP Inc."), Holdings and
G-11 (incorporated by reference to Exhibit 10(c) to Old
Telex's Registration Statement on Form S-4, Registration No.
333-30679).
*10.2(b) -- Form of Amendment, dated May 1, 1998, to the Consulting
Agreement, dated May 6, 1997, between GSCP Inc., Holdings
and G-11 (incorporated by reference to Exhibit 10(e) to the
Company's Annual Report on Form 10-K for the fiscal year
ended February 28, 1998, filed with the Commission on May
29, 1998, File No. 333-27341).
*10.3 -- Indemnification Agreement, dated May 6, 1997, between GSCP
Inc., Holdings and G-11 (incorporated by reference to
Exhibit 10(d) to Old Telex's Registration Statement on Form
S-4, Registration No. 333-30679).
*10.4 -- Fee Agreement, dated May 6, 1997, between GSCP Inc. and
Holdings (incorporated by reference to Exhibit 10(e) to Old
Telex's Registration Statement on Form S-4, Registration No.
333-30679).
*10.5(a) -- Employment Agreement, dated as of August 26, 1998 between
Ned C. Jackson and Telex Communications Group, Inc.
(incorporated by reference to Exhibit 10(g) to the Company's
Annual Report on Form 10-K for the Transition Period from
April 1, 1998 to December 31, 1998, filed with the
Commission on March 31, 1999, File No 333-27341).
*10.5(b) -- Incentive Compensation Agreement, dated as of March 15, 2000
between Ned C. Jackson and Telex Communications Group, Inc.
(filed as an exhibit hereto).
*10.6(a) -- 1997 Telex Communications Group, Inc. Stock Option Plan
(incorporated by reference to Exhibits 10(h), 10(i) and 100)
to Old Telex's Registration Statement on Form S-4,
Registration No. 333-30679).
*10.6(b) -- 1997 Telex Communications Group, Inc. Amended and Restated
Stock Option Plan (incorporated by reference to Exhibit
10(h) to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1999, filed with the
Commission on August 16, 1999, Registration No. 333-27341).
*10.7 -- Telex Communications Group, Inc. Cash Bonus Plan
(incorporated by reference to Exhibits 10(h), 10(i) and 100)
to Old Telex's Registration Statement on Form S-4,
Registration No. 333-30679).
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71
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
*10.8 -- Telex Communications Group, Inc. Management Cash
Compensation Plan (incorporated by reference to Exhibits
10(f), 10(g) and 10(h) to Old Telex's Registration Statement
on Form S-4, Registration No 333-30679).
*10.9 -- Warrant, dated April 7, 1998, issued by Holdings to Jeffrey
Rosen, and form of amendment thereto (incorporated by
reference to Exhibit 10(q) to the Company's Annual Report on
Form 10-K for the fiscal year ended February 28, 1998, filed
with the Commission on May 29, 1998, File No. 333-27341).
*10.10 -- Warrant, dated April 7, 1998, issued by Holdings to
Christopher Forester, and form of amendment thereto
(incorporated by reference to Exhibit 10(r) to the Company's
Annual Report on Form 10-K for the fiscal year ended
February 28, 1998, filed with the Commission on May 29,
1998, File No. 333-27341).
*10.11(a) -- Warrant, dated April 7, 1998, issued by Holdings to Edgar S.
Woolard, Jr., and form of amendment thereto (incorporated by
reference to Exhibit 10(s) to the Company's Annual Report on
Form 10-K for the fiscal year ended February 28, 1998, filed
with the Commission on May 29, 1998, File No. 333-27341).
*10.11(b) -- Warrant, dated March 14, 2000, issued by Holdings to Edgar
S. Woolard, Jr. (filed as an exhibit hereto).
*10.12 -- Warrant, dated April 7, 1998, issued by Holdings to Evan
Marks, and form of amendment thereto (incorporated by
reference to Exhibit 10(t) to the Company's Annual Report on
Form 10-K for the fiscal year ended February 28, 1998, filed
with the Commission on May 29, 1998, File No. 333-27341).
10.13 -- Tradename and Trademark License Agreement, dated February
10, 1997, between Gulton Industries, Inc. and Mark IV
Industries, Inc. (incorporated by reference to Exhibit 10
(e) to the Registrant's Registration Statement on Form S-4,
filed with the Commission on July 30, 1997, Registration No.
333-27341).
10.14 -- Software License Agreement, dated February 10, 1997, between
Gulton Industries, Inc. and Mark IV Industries, Inc.
(incorporated by reference to Exhibit 10(g) to the
Registrant's Registration Statement on Form S-4, filed with
the Commission on July 30, 1997, Registration No 333-
27341).
*10.15 -- Amended and Restated 1998 Telex Communications Group, Inc.
Performance Stock Option Plan (incorporated by reference to
Exhibit 10(ee) to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1999, filed
with the Commission on August 16, 1999, Registration No.
333-27341).
10.16(a) -- Member Control Agreement of DRF 12000 Portland LLC, dated
March 16, 2000, by and between Telex Communications, Inc.
and DRF TEL LLC, a Minnesota limited liability company
(filed as an exhibit hereto).
10.16(b) -- Lease, dated March 16, 2000, by and between Telex
Communications, Inc. and DRF 12000 Portland LLC, a Minnesota
limited liability company, for the property located at 12000
Portland Avenue South, Burnsville, Minnesota (filed as an
exhibit hereto).
10.17 -- Real Estate Purchase Agreement dated January 31, 2000, by
and between Joseph H. Baldiga, Chapter 7 Trustee of Arrow
Automotive Industries, Inc. ("Seller") and Telex
Communications, Inc. ("Buyer") for the purchase of property
located at One Arrow Drive, Morrilton, Arkansas 72110 (filed
as an exhibit hereto).
21 -- List of Subsidiaries (filed as an exhibit hereto).
27 -- Financial Data Schedules (filed as an exhibit hereto).
- - ---------------
* Denotes management contract, executive compensation plan, or arrangement.
69