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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, 2002 COMMISSION FILE NO. 333-27341
TELEX COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 38-1853300
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
12000 PORTLAND AVENUE SOUTH, BURNSVILLE, MINNESOTA 55337
(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 reports), 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]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes[ ] No[ X ]
The aggregate market value of voting stock held by non-affiliates as of
June 30, 2002 is not possible to determine since the voting stock is not
publicly traded.
As of February 28, 2003, Telex Communications, Inc. had outstanding
4,987,127 shares of Common Stock, $0.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. CONTROLS AND PROCEDURES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
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PART I
ITEM 1. BUSINESS
References in this report to "Telex," "we," "our," or "us" are to Telex
Communications, Inc. With respect to the description of our business contained
in this report, such terms refer to Telex Communications, Inc. and our
subsidiaries.
OVERVIEW
Telex Communications, Inc. is a leader in the design, manufacture and
marketing of sophisticated audio and wireless communications equipment to
commercial, professional and industrial customers. Telex 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. We offer a comprehensive
range of products worldwide for professional audio systems as well as for audio
and wireless product markets, including wired and wireless microphones, wired
and wireless intercom systems, mixing consoles, signal processors, amplifiers,
loudspeaker systems, headphones and headsets, digital duplication products,
Talking Book Players, antennas, land mobile communication systems, personal
computer speech recognition and speech dictation microphone systems, and
wireless assistive listening systems. Our 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, airline pilots and the hearing impaired in
order to facilitate speech or communications.
Telex is a Delaware corporation, incorporated on July 12, 1969, with
principal executive offices located at 12000 Portland Avenue South, Burnsville,
Minnesota 55337. Our 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
that relate to our business objectives, plans, strategies, and expectations or
describe the potential markets for our 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 on information currently available to management, we cannot
assure you 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
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
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." We are
under no obligation to update any forward-looking statements to the extent we
become aware that they will not be achieved for any reason.
PRODUCTS AND SERVICES
We have two business segments: Professional Sound and Entertainment and
Audio and Wireless Technology (formerly known as Multimedia/Audio
Communications). Financial information for our two business segments for the
years ended December 31, 2002 2001, and 2000, is set forth in Note 12 to our
Consolidated Financial Statements included elsewhere in this report.
PROFESSIONAL SOUND AND ENTERTAINMENT
Professional Sound and Entertainment consists of five lines of business
within the overall professional audio market:
- Fixed Installation, or permanently installed sound
systems;
- Professional Music Retail, or sound products used by
professional musicians and sold principally through
retail channels;
- Concert/Recording/Broadcast, or sound products used in
professional concerts, recording projects, and radio and
television broadcast;
- Broadcast Communications Systems, including advanced
digital matrix intercoms used by broadcasters (including
all major television networks) to control production
communications, intercoms, headsets and wireless
communications
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systems used by professional, college, and high school
football teams and stadiums and other professional and
school sports teams; and
- Microphones, wired and wireless, 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 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
full-range output is not needed. 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 facilities, theaters, and sports facilities, are also sources 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.
Our Professional Music Retail products are sold through our 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. Our Concert/Recording/Broadcast lines of
business include sound systems for musical concerts and theater productions,
sound recording, and radio and television broadcast and production. Sales of
these products are generally made through distributors and retailers or directly
to touring companies. We believe 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. We produce a broad line of broadcast
communications equipment for end markets such as sports events and broadcasting.
Our 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 that they can communicate during an event or
performance. Our middle market offering, 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. Our 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 Super
Bowl.
We also provide wired and wireless communication systems and related
components to professional, college, and high school football teams and the
Canadian Football League. In 1996, we 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.
Microphones. Our wired and wireless microphones serve the professional
needs of sound contractors, entertainers, and speakers and are used in a variety
of settings such as theaters, stadiums, and hotels. We believe that we offer one
of the industry's most
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extensive lines of wireless microphone, receiver, and transmitter systems,
including a wide variety of handheld, lapel, and guitar microphone options. We
offer 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 our Posi-Phase(TM) true diversity
antenna circuitry, which produces a stronger signal for higher quality sound
over a longer distance without signal dropouts or switching noise common in
other systems. Some of our wireless microphones also incorporate an advanced
proprietary multi-crystal tuning system, Clean Scan(TM), 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.
AUDIO AND WIRELESS TECHNOLOGY
Our Audio and Wireless Technology segment consists of six businesses
targeting the following markets:
- Digital Audio Duplication products for the religious,
education and enterprise markets,
- Military/Aviation Communications Audio products for the
military and aviation markets,
- Wireless Networking products serving the original
equipment manufacturer (OEM), wireless internet service
provider (WISP), and medical telemetry markets,
- Land Mobile Communication products for the public safety,
military and industrial markets,
- Audio and Wireless Education products for classroom and
computer based education markets, and
- Teleconferencing products for the enterprise, education
and government markets.
Digital Audio Duplication. We offer CD and DVD duplicators primarily
for copying the spoken word in religious, education, training/seminar and
enterprise markets. The SpinWise(TM) CD Duplicator, available in desktop, tower,
and rack mount configurations, operates at 52x recording speed, can make one to
seven copies at once, and a robotic unit has a 50-disc capacity. Our cassette
duplicators and copiers primarily serve the same markets as our CD/DVD products.
We sell a line of high-speed audiocassette duplicators designed for
"in-cassette" copying of standard audiocassette tapes. We also produce 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 to incorporate special features for ease of use and to
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,
we entered into a contract with the LOC with a maximum term of five years. We
are currently negotiating with the LOC for another five-year production
contract. The Talking Book players have also been sold internationally under
similar programs in Canada, New Zealand, and Australia.
Military/Aviation Communications. We design, manufacture, and market a
broad line of aviation communication headsets, headphones, microphones, and
intercoms to major commercial and commuter airlines, private pilots, and major
airframe manufacturers such as Boeing, Airbus, Cessna, and Gulfstream. We use
our technologically advanced Digital ANR(TM), Active Noise Reduction, technology
to provide us with a competitive advantage in several applications. In addition,
we design, manufacture, and market sophisticated microphones and earphones to
military and OEM customers for critical military and heavy industrial
communication applications. Our aviation and military acoustic products are
known for their innovative design, rugged construction, technological strength,
and overall value.
Wireless Networking. We have been designing, manufacturing, and
marketing antenna products for the past 45 years and are a leading manufacturer
of antennas for Wi-Fi (802.11b, 802.11a, 802.11g) and ultra wide bands and other
microwave and satellite frequencies. We supply antenna products to numerous
market-leading OEMs including Cisco Systems, Proxim, General Electric, and
General Dynamics, WISPs as well as to government and military customers. Over
the past several years wireless local area networks (WLANs) have gained strong
popularity in a number of markets, including health care, education,
manufacturing, retail, and warehousing. The WLAN provides businesses with a
general-purpose connectivity alternative and/or an extension to existing wired
networks within a building or campus.
Land Mobile Communication. We produce a broad line of communication
products such as headsets, ear-microphones, remote control radio dispatch
consoles, voice-over-internet protocol (VoIP) dispatch consoles, audio
surveillance products, and microphones for the citizen's band (CB) radio market.
Primary customers include federal, state, and local public safety agencies,
military organizations, and other markets such as utilities, railroads, and
airlines. We believe we have an established reputation within these markets for
providing high quality, reliable communication products, which is a key
requirement for users.
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Audio and Wireless Education. We produce and distribute a broad line of
communication products that enhance student and teacher performance in the
classroom. Telex has developed a line of products that ensure clear, balanced
sound distribution throughout the classroom environment with high levels of
background noise and poor building acoustics. For individual students with mild
to profound hearing loss, Telex has developed a number of wireless assistive
listening systems, such as auditory trainers and personal assistive listening
devices that ensure that these students hear the instructor clearly. Auditory
trainers allow the user to hear directly from a sound source, such as a teacher,
via wireless FM transmitters. The advancement of technology has brought
audiocassettes, digital CDs, DVDs and interactive computer programs into the
classroom, requiring students to interact with multiple educational media and
audio sources. Through innovation Telex has developed headsets and headphones
that keep pace with technology, but remain practical for classroom use. We
produce high quality listening centers, stereo and mono-headphones and a line of
interactive headsets for use with software applications. All of these products
were designed to withstand the normal "wear and tear" of daily use in the
classroom.
Teleconferencing. We have developed a new business, which leverages our
expertise in audio processing, and have designed a line of easy to use,
affordable teleconferencing products. This business will focus on providing
teleconferencing solutions to the business, education and government markets,
all of whom we currently serve through existing Telex businesses.
INTERNATIONAL OPERATIONS
We market our products in over 80 countries worldwide, which reduces
our dependence on any single geographic market. We have substantial assets
located outside of the United States and a substantial portion of our sales and
earnings are attributable to operations conducted abroad. For the year ended
December 31, 2002, approximately 47% of our net revenue consisted of sales made
outside the United States, predominantly in Western Europe and Asia. Unlike many
of our competitors, which use independent foreign distributors that generally
sell a variety of competing products, the majority of our foreign sales efforts
are conducted through our foreign distribution subsidiaries. Although our
international operations have generally been profitable in the past, our 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 or regions where we are
doing business.
For the year ended December 31, 2002, our total net sales into each of
our principal geographic regions were as follows:
North America - $149.1 million,
Europe - $67.9 million,
Asia - $42.0 million, and
Other regions - $7.5 million.
See Note 12 to our Consolidated Financial Statements included elsewhere
in this report for further information regarding our international operations.
PRODUCT DEVELOPMENT
We believe that we are one of the most active developers of new
products in our industry. We have 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 are principally for
design maintenance or to achieve product enhancements that have been requested
by our customers. Both of these activities are important for sustaining our
product lines. Because we produce a comprehensive range of products, we believe
we have the capacity to integrate technologies from one product line into
another product line, which ultimately leads to new products that are often less
expensive, more feature rich, or otherwise more desirable.
We have a history of technological innovation and strong product
development and have 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. In our Audio and Wireless Technology segment we also have a strong
history of technological innovation and product development in a number of
technologies including digital active noise reduction (ANR), electret microphone
technology, voice-over-internet protocol and digital audio processing.
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We have also implemented a number of strategic initiatives to identify
new market opportunities and to reduce our product development cycle in order to
facilitate the timely introduction of new and enhanced products. We maintain
close relationships with our institutional customers to develop products that
meet their requirements. We believe this has enabled us to design new products
offering enhanced features, product quality and reliability, and lower product
costs.
For the years ended December 31, 2002, 2001, and 2000, our engineering
expenses for product development were $12.4 million, $12.7 million, and $14.1
million, respectively.
MANUFACTURING
We manufacture most of the products we sell and active acoustic
components contained in those products in facilities located in the United
States, Mexico, Germany and United Kingdom. Our manufacturing processes are
substantially integrated and, in addition to the assembly-only processes
typically found among our competitors, include die casting, fiberglass plastics
molding, transformer and coil winding, sheet metal stamping and forming, metal
machining, cabinet fabrication, and painting. We purchase certain electrical
components, magnets, wood products, and plastics.
We believe that our integrated manufacturing capabilities are important
factors in maintaining and improving the quality, performance, availability, and
cost of our products and decreasing the time to market of our new product
introductions. We also believe that we can respond more effectively to changing
customer delivery and product feature requirements by doing the majority of our
own manufacturing and that this gives us an advantage over many of our
competitors. We continuously assess our manufacturing operations to control or
reduce costs.
We also sell a limited number of outsourced finished products under our
brand names, including certain electronic products and loudspeaker systems,
where low cost is essential. In addition, certain other non-Telex branded
finished products are purchased to supplement the offerings of our distribution
operations in Japan, Hong Kong, Australia, and France.
COMPETITION
The markets within both the Professional Sound and Entertainment and
Audio and Wireless Technology segments are highly competitive and fragmented. We
face meaningful competition in both segments and in most of our product
categories and markets. We believe that the key factors necessary to maintain
our position in our markets are the recognition of our several key brand names,
superior distribution networks, large customer base, and large number of
products, together with our extensive experience in designing safe and reliable
products, dealing with regulatory agencies, and servicing and repairing our
products.
While many of our current competitors are generally smaller than we
are, certain of our competitors are substantially larger and have greater
financial resources. We believe that our major competitor in providing a full
line of professional audio products is Harman International Industries,
Incorporated, one of whose three segments competes in the professional audio
products market. Sony Corporation is our only significant competitor in the
digital audio duplication market.
PATENTS, TRADEMARKS AND LICENSES
Among our significant assets are our intellectual property rights. We
rely on a combination of copyright, trademark, and patent laws to protect these
assets and, to a significant degree, on protection of our trade secrets,
confidentiality procedures, and contractual provisions that may afford more
limited legal protections.
Telex owns several trademarks in the United States and various foreign
countries, including:
- - Audiocom(R) - Midas(R) - ProStar(R) - Klark-Teknik(R)
- - ClassMate(R) - Caramate(R) - SoundMate(R) - Manifold Technology(R)
- - Electro-Voice(R) - Dynacord(R) - EV(R) - Road King(R)
- - Telex(R)
A number of our trademarks are identified with and important to the
sale and marketing of our products in both of our business segments. Our
operations are not dependent upon any single trademark other than the Telex and
Electro-Voice trademarks.
We have not registered many of our significant trademarks in all
foreign jurisdictions in which we do business, although we
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believe that our most significant marks generally have been registered in the
jurisdictions where their sales are the strongest. We are 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 us. Use or registration of our trademarks by us in such jurisdictions
may be prohibited, and our business may be materially adversely affected by such
prohibition. We do not believe that any of our products currently infringe upon
the proprietary rights of third parties in any material respect.
Our operations are not dependent to any significant extent on any
single or related group of patents, licenses, franchises, or concessions. We
believe our most significant patents are four patents relating to high output
compression drivers, manifold technology products, variable intensity horns, and
time division multiplex digital matrix intercom systems, which expire in 2003,
2006, 2009, and 2014, respectively. We also own a number of patents related to
the design and manufacture of several of our other products, including headsets,
headphones, boom-mounted microphones, various transducer devices, multiple-band
directional antennas, and certain intercom-related devices. We do not believe
that the expiration of any of our patents will have a material adverse effect on
our financial condition or results of operations.
SUPPLIERS
Our extensive vertical integration enables us to manufacture many of
the parts for our products internally. We believe that this gives us a
competitive advantage in controlling quality and ensuring timely availability of
parts. We purchase raw materials, assemblies and components for our products
from a variety of suppliers and also purchase products from OEMs for resale. No
single supplier accounts for ten percent or more of our total cost of supplies.
We have several sole-source suppliers. Although we believe that with
adequate notice we can secure, if necessary, alternate suppliers, our inability
to do so could result in increased development costs and product shipment
delays.
BACKLOG
As is the case with other companies in our businesses, backlog is not
necessarily a meaningful indicator of the condition of the business since we
typically receive and ship orders representing a major portion of our quarterly
non-contract revenues in the current quarter. As of December 31, 2002, we had a
backlog of approximately $14.3 million compared to approximately $22.2 million
as of December 31, 2001.
ENVIRONMENTAL MATTERS
Telex 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, currently 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
disposal or release. Although we believe that our 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 our facilities or operations. We believe that compliance with U.S. federal,
state, local and foreign environmental protection laws and provisions should
have no material adverse effect on our results of operations or financial
condition.
Our site in Buchanan, Michigan, formerly owned by Mark IV Industries
(Mark IV), has been designated a Superfund site under U.S. federal environmental
laws, and we have agreed that we are a de minimis responsible party at two other
sites that we acquired from and were formerly owned by Mark IV. Mark IV has
agreed to fully indemnify us for environmental liabilities at the Superfund site
(excluding any liability for contamination that may exist within the
manufacturing facility) and the two other sites at which monitoring or
remediation may be necessary.
We are party to a 1988 Consent Decree with the Nebraska Department of
Environmental Quality (NDEQ) relating to the cleanup of hazardous waste at our
Lincoln, Nebraska facility. In December 1997, we entered into an Administrative
Order of Consent with the U.S. Environmental Protection Agency (U.S. EPA) under
the Resource Conservation and Recovery Act (RCRA) to further investigate and
remediate contaminants at the Lincoln facility and an adjacent property (Lincoln
site). We have reached agreement with the NDEQ on a remediation plan regarding
future monitoring and remediation of contamination at the Lincoln site and do
not believe that the costs related to our responsibilities will result in a
material adverse effect on our results of operations or financial condition.
Through December 31, 2002, we had accrued approximately $1.8 million
over the life of the project for anticipated costs to be
8
incurred for the Lincoln site cleanup activities, of which approximately $1.6
million has been paid. See Note 11 to our Consolidated Financial Statements
included elsewhere in this report.
We cannot assure you that our estimated environmental accruals, which
we believe to be reasonable, will cover in full the actual amounts of
environmental obligations we 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 us in currently unforeseen ways, or
that our present or future activities will not result in additional
environmentally related expenditures. However, we believe that compliance with
U.S. federal, state, local and foreign environmental protection laws and
regulations should have no material adverse effect on our results of operations
or financial condition.
EMPLOYEES
As of December 31, 2002, we employed 1,983 persons worldwide, of which
1,919 were full-time employees.
ITEM 2. PROPERTIES
Our principal manufacturing, sales, administrative, product
development, marketing, distribution, and service facilities are described in
the table below. In addition, we have other sales facilities throughout the
world. We believe that our plants and facilities are maintained in good
condition and, except as noted below, are suitable and adequate for our present
needs. Currently, our 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:
Blue Earth, Minnesota........ Owned 150,000 Manufacturing/Distribution
Burnsville, Minnesota........ Leased 114,100 Corporate Headquarters/Marketing/Administration/
Product Development/Sales
Glencoe, Minnesota........... Owned 100,000 Manufacturing/Distribution
Lincoln, Nebraska............ Owned 120,000 Manufacturing/Distribution/ProductDevelopment/Sales
Morrilton, Arkansas.......... Owned 202,000 Manufacturing/Distribution
INTERNATIONAL:
Hermosillo, Sonora, Mexico... Leased 32,500 Manufacturing
Hohenwarth, Germany.......... Leased 27,400 Manufacturing/warehouse
Kidderminster, England....... Owned 35,000 Manufacturing/Sales/Marketing/Administration/
Product Development/Service
Kowloon, Hong Kong........... Leased 7,600 Sales/Marketing/Administration/Distribution/Service
London, England.............. Leased 11,500 Sales/Marketing/Administration/Distribution/Service
Paris, France................ Leased 4,100 Sales/Marketing/Administration/Distribution/Service
Singapore.................... Leased 2,300 Sales/Distribution/Service
Straubing, Germany........... Owned 103,600 Manufacturing/Sales/Marketing/Administration/
Product Development/ Distribution/Service
Straubing, Germany........... Leased 13,100 Warehouse
Sydney, Australia............ Leased 8,000 Sales/Marketing/Administration/Distribution/Service
Tokyo, Japan................. Leased 25,200 Sales/Marketing/Administration/Distribution/Service
(a) Our Morrilton, Arkansas, Kidderminster, England, and Hohenwarth,
Germany facilities are dedicated to the Professional Sound and
Entertainment business segment. All other facilities are used for both
of our business segments.
Our Glencoe, Minnesota, Kidderminster, England, and Hermosillo, Sonora,
Mexico facilities have been certified under International Organization for
Standards (ISO) 9002, and our Straubing, Germany facility has been certified
under ISO 9001.
ITEM 3. LEGAL PROCEEDINGS
From time to time we are a party to various legal actions in the normal
course of business. We believe that we are not currently a party in any
litigation, which, if adversely determined, would have a material adverse effect
on our financial condition or results of operations.
For a discussion of certain environmental matters, see "Item 1.
Business--Environmental Matters."
9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders of Telex
during the fourth quarter of the fiscal year ended December 31, 2002.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There is no established public trading market for our common stock.
As of February 14, 2003 there were 21 holders of record of our common
stock.
We have not paid dividends on our common stock and our ability to pay
dividends is restricted under our senior secured credit facility, senior secured
notes, and the indenture governing our senior subordinated discount notes. We do
not plan to pay cash dividends in the foreseeable future and plan to use any
retained earnings for working capital purposes, capital expenditures, and debt
service.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data of Telex for
each of the five fiscal years or periods ended December 31, 2002. The statement
of operations and balance sheet data set forth below have been derived from and
should be read in conjunction with our audited consolidated financial statements
and notes thereto included elsewhere in this Form 10-K and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
selected financial data with respect to the fiscal year ended December 31, 2002
are derived from consolidated financial statements included elsewhere in this
report, which have been audited by Ernst & Young LLP, independent auditors. The
selected financial data with respect to the fiscal years ended December 31, 2001
and 2000 are derived from consolidated financial statements included elsewhere
in this report, which were audited by Arthur Andersen LLP, independent public
accountants, who have ceased operations. The selected financial data with
respect to the fiscal year ended December 31, 1999 and the nine-month period
ended December 31, 1998 are derived from audited consolidated financial
statements that are not included herein.
NINE MONTHS FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 (a) 1999 2000 2001 2002
------------ ------------ ------------- ------------ ------------
(IN MILLIONS)
STATEMENT OF OPERATIONS DATA:
Net sales....................... $ 248.0 $ 346.1 $ 328.9 $ 284.5 $ 266.5
Cost of sales................... 157.3 219.4 204.1 185.1 155.8
------- ------- ------- ------- --------
Gross profit.................... 90.7 126.7 124.8 99.4 110.7
Engineering..................... 11.2 14.9 14.1 12.7 12.4
Selling, general and
administrative................ 55.3 88.6 87.8 86.5 70.9
Restructuring charges........... -- (2.1) 8.8(b) 11.5(b) 0.5
Corporate charges............... 1.3 1.7 1.7 1.7 0.5
Amortization of goodwill and
other intangibles............. 2.1 12.0 2.2 2.2 0.1
------- ------- ------- ------- --------
Operating profit (loss)......... 20.8 11.6 10.2 (15.2) 26.3
Interest expense................ 27.3 36.7 38.4 38.2 26.6
Other income.................... (2.7) (6.7) (12.4) (1.2) (2.7)
------- ------- ------- ------- ---------
(Loss) income before income
taxes, extraordinary item and
cumulative effect of accounting
change........................ (3.8) (18.4) (15.8) (52.2) 2.4
Provision for income taxes...... 1.3 4.0 2.2 2.7 2.6
------- ------- ------- ------- --------
Loss before extraordinary item
and cumulative effect of
accounting change............. (5.1) (22.4) (18.0) (54.9) (0.2)
Extraordinary gain on
early extinguishment of debt.. -- -- -- 115.9(c) --
Cumulative effect of change in
accounting.................... -- -- -- -- (29.9)
------- ------- ------- ------- --------
Net (loss) income .............. $ (5.1) $ (22.4) $ (18.0) $ 61.0 $ (30.1)
======= ======= ======= ======= ========
10
FINANCIAL DATA:
EBITDA (d)...................... $ 29.7 $ 33.6 $ 23.6 $ (4.0) $ 32.7
EBITDA margin (e)............... 12.0% 9.7% 7.2% (1.4)% 12.3%
Adjusted EBITDA (f)............. $ 29.7 $ 33.6 $ 27.9(b) $ 3.4(b) $ 32.7
Adjusted EBITDA margin (g)...... 12.0% 9.7% 8.5% 1.2 % 12.3%
Capital expenditures............ $ 5.2 $ 8.4 $ 11.6 $ 6.1 $ 4.8
Cash provided by (used in)
operating activities.......... $ 22.4 $ (4.1) $ 11.9 $ (2.7) $ 19.0
Cash used in investing
activities.................... $ (3.5) $ (1.5) $ (8.3) $ (5.6) $ --
Cash (used in) provided by
financing activities.......... $ (16.9) $ 5.4 $ (3.5) $ 8.8 $ (18.9)
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1999 2000 2001 2002
------------ ------------ ------------- ------------ ------------
(IN MILLIONS)
BALANCE SHEET DATA:
Working capital................. $ 63.5 $ 51.1 $ 7.4 $ 27.1 $ 42.8
Total assets.................... 273.3 262.0 223.7 187.6 157.9
Long term debt, less current
maturities.................... 321.2 312.2 279.2 147.4 154.6
Shareholders' deficit........... (130.1) (154.5) (175.4) (40.0) (68.0)
NOTES TO SELECTED FINANCIAL DATA
(a) Effective December 31, 1998, Telex changed its fiscal year end from
March 31 to December 31; accordingly the financial results for the
period ended December 31, 1998 are for the nine-month period beginning
on April 1, 1998.
(b) Included in the restructuring charges for the year ended December 31,
2000 is a $4.3 million charge attributed to impairment of goodwill and
fixed assets and for the year ended December 31, 2001 is a $7.4 million
charge attributed to impairment of fixed assets.
(c) On November 21, 2001, we completed a debt restructuring, pursuant to
which $224.5 million, or 99.8 % of the total, of our 10 1/2% and 11%
senior subordinated notes were exchanged for senior subordinated
discount notes at a deemed issue price of $56.1 million, 5.0 million
shares of Series B preferred stock, and warrants to purchase 1.7
million shares of Series B preferred stock or common stock. As part of
this debt restructuring, we recorded $115.9 million of extraordinary
gain in our statement of operations and, for the senior subordinated
notes exchanged by related parties, recorded the related $52.7 million
of gain as contributed capital in the statement of shareholders'
deficit.
(d) EBITDA represents earnings (operating profit) before interest expense,
income taxes, and depreciation and amortization expense. 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 expense, 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 a measure of performance under generally
accepted accounting principles in the United States. Moreover, EBITDA
is not a standardized measure and may be calculated in a number of
ways.
(e) Represents EBITDA as a percentage of net sales.
(f) Adjusted EBITDA represents EBITDA further adjusted to exclude certain
non-cash restructuring charges explained in note (b), above. Adjusted
EBITDA is not a measure of performance under generally accepted
accounting principles in the United States. In addition, Adjusted
EBITDA is not a standardized measure and may be calculated in a number
of ways.
(g) Represents Adjusted 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 our plans, strategies, objectives, and expectations, that are based on
management's current opinions, beliefs, or expectations as to future results or
future events and are made pursuant to the "safe harbor" provisions of Section
27A of the Securities Act and Section 21E of the Securities Exchange Act.
11
Any such forward-looking statements involve known and unknown risks and
uncertainties and our actual results may differ materially from those
forward-looking statements. While made in good faith and with a reasonable basis
in information currently available to management, we cannot assure you that such
opinions or expectations will be achieved or accomplished. We do not undertake
to update, revise or correct any of the forward-looking information contained in
this report.
The following factors, in addition to those discussed elsewhere in this
report, are representative of those factors that could affect our future results
and could cause results to differ materially from those expressed in such
forward-looking statements:
- the timely development and market acceptance of new
products;
- the financial resources of competitors and the impact of
competitive products and pricing;
- changes in general and industry specific economic
conditions on a national, regional, or international
basis;
- changes in laws and regulations, including changes in
accounting standards;
- the timing and success of the implementation of changes
in our operations to effect cost savings;
- opportunities that may be presented to and pursued by us;
- our financial resources, including our ability to access
external sources of capital; and
- such risks and uncertainties as are detailed from time
to time in our reports and filings with the Securities
and Exchange Commission.
The following discussion should be read in conjunction with our
Consolidated Financial Statements and Notes thereto contained elsewhere in this
report.
OVERVIEW
Telex is a leader in the design, manufacture, and marketing of
sophisticated audio and wireless communications equipment to commercial,
professional, and industrial customers. Telex has two business segments:
Professional Sound and Entertainment and Audio and Wireless Technology (formerly
known as Multimedia/Audio Communications). Telex 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. Telex offers a comprehensive range of
products worldwide for professional audio systems as well as for audio and
wireless product markets, including wired and wireless microphones, wired and
wireless intercom systems, mixing consoles, signal processors, amplifiers,
loudspeaker systems, headphones and headsets, digital duplication products,
Talking Book Players, antennas, land mobile communication systems, personal
computer speech recognition and speech dictation microphone systems, and
wireless assistive listening systems.
Over 45% of our sales are made internationally, in over 80 countries.
We conduct our foreign sales through our foreign subsidiaries in Germany, the
United Kingdom, Japan, Hong Kong, Australia, Singapore, and France, and we
export products from our manufacturing locations in the United States, Germany,
the United Kingdom and Mexico for sales through our independent distributors and
dealers in other countries.
Overall, our business is not subject to significant seasonal
fluctuations. We do not believe that inflation has had a material impact on our
financial position or results of operations during the past three years. We have
generally been able to effect price increases equal to any inflationary increase
in costs.
We maintain assets and/or operations in a number of foreign
jurisdictions, the most significant of which are Germany, the United Kingdom,
Japan, Singapore, and Hong Kong. In addition, we conduct business in local
currency in many countries, the most significant of which are Germany, the
United Kingdom, Japan, Hong Kong, Singapore, Canada, Australia, and France.
Exposure to U.S. dollar/Euro and U.S. dollar/British pound exchange rate
volatility is mitigated to some extent by our ability to source our 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,
we have a direct and continuing exposure to both positive and negative foreign
currency movements.
We report foreign exchange gains or losses on transactions as part of
other (income) expense. Gains and losses on translation of foreign currency
denominated balance sheets are classified as currency translation adjustments
and are included in "accumulated other comprehensive loss" as part of
shareholders' deficit.
12
CRITICAL ACCOUNTING POLICIES
This Management's Discussion and Analysis of Financial Condition and
Results of Operations is based upon our Consolidated Financial Statements, which
have been prepared in accordance with the accounting principles generally
accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments, which we evaluate on an ongoing
basis, that affect the reported amounts of assets, liabilities, revenues, and
expenses, and related disclosure of contingent assets and liabilities. We base
our estimates on historical experience and on various other assumptions that we
believe are reasonable. Accordingly, actual results may differ from these
estimates under different assumptions or conditions.
We have identified several accounting policies, discussed below, that
are critical to our business operations and the understanding of our results of
operations. For further discussion of accounting policies, see Note 1 to our
Consolidated Financial Statements included elsewhere in this report.
Revenue Recognition. We recognize revenue from product sales at the
time of shipment and passage of title. We also offer customers certain rights to
return products. We continuously monitor and track such product returns and
record a provision for the estimated amount of such future returns, based on
historical experience and any notification we receive of pending returns. While
such returns have historically been within our expectations and provisions
established, we cannot guarantee that our historical experience will continue.
Allowance for Doubtful Accounts. We perform ongoing credit evaluations
of our customers and consider adjustments to credit limits based upon payment
history and the customer's current creditworthiness. We continuously monitor
collections from customers and maintain a provision for estimated credit losses
based on historical experience and any specifically identified collection
issues. However, we cannot guarantee that we can accurately predict the future
creditworthiness of our customers and, accordingly, accurately estimate credit
losses on our accounts receivable.
Inventories. Inventories are valued at lower-of-cost or market. We
regularly review inventory quantities on hand and record a provision, charged to
cost of sales, for excess and obsolete inventory based primarily on estimated
demand for product and for production requirements, generally for the next 12 to
24 months. Demand for certain of our products can fluctuate significantly. In
addition, some of our products are affected by rapid technological change,
frequent new product development and rapid product obsolescence that could
result in an increase in the amount of excess and obsolete inventory quantities
on hand. Additionally, our estimates of future product demand may prove to be
inaccurate. In that case, our provision for excess and obsolete inventory would
be misstated. Therefore, any unanticipated decline in future demand or
technological developments could have a significant impact on the value of our
inventory and reported operating results.
Determination of Functional Currencies for the Purpose of
Consolidation. We have several foreign subsidiaries for which the local currency
is the functional currency. These subsidiaries accounted for approximately 42%
of our consolidated net sales for the year ended December 31, 2002, and 45% of
our consolidated assets and 15% of our consolidated liabilities at December 31,
2002.
Under the relevant accounting standards, we have determined the
functional currency to be the local currency for all of our international
subsidiaries. In preparing our Consolidated Financial Statements, we are
required to translate the foreign subsidiaries' accounting records and financial
statements from their respective local currencies into United States dollars.
This process results in translation gains and losses that are included in
shareholders' deficit as a component of "accumulated other comprehensive loss."
The magnitude of the translation gains and losses is dependent upon the movement
in the exchange rates of the foreign currencies of our subsidiaries against the
United States dollar. The foreign currencies of our subsidiaries for which the
local currency is the functional currency include the Euro, the Great Britain
pound, the Japanese yen, the Australian dollar, the Singapore dollar, and the
Hong Kong dollar. Any future translation gains or losses could be higher than
those recorded in prior years because of the unpredictability of the movement in
exchange rates.
If a subsidiary were disposed of, any cumulative translation adjustment
would be realized in the statement of operations.
Valuation of Long-Lived and Intangible Assets and Goodwill. We have
identifiable intangibles and long-lived assets. We assess the impairment of
those assets annually or more frequently whenever events and circumstances
trigger an impairment review. We record impairment loss on these assets when the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amount of those assets. The cash flow estimates are based on
historical results adjusted to reflect the best estimate of future market and
operating conditions. Because of the unpredictability of future market and
operating conditions, there is no guarantee that we will not have to record
impairment charges in the future.
13
We have business unit level goodwill that we amortized until December
31, 2001. Effective with the beginning of 2002, we adopted Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142), and stopped amortizing our goodwill. We performed an initial
impairment review of our goodwill that was completed in the fourth quarter of
2002. The review resulted in an impairment loss of $29.9 million that has been
accounted for as a cumulative effect of change in accounting in accordance with
SFAS 142. We will perform an impairment review on an annual basis at the
beginning of our fourth quarter. The annual review for 2002 did not indicate any
additional goodwill impairment.
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, the percentage
relationship of certain items in our consolidated statements of operations to
net sales.
PERCENTAGE OF NET SALES
-------------------------------------
YEAR ENDED
-------------------------------------
2002 2001 2000
------ ------ ------
Net Sales:
Professional Sound and Entertainment........... 75.6% 69.2% 64.6%
Audio and Wireless Technology.................. 24.4 30.8 35.4
----- ----- -----
Total net sales.................................. 100.0% 100.0% 100.0%
----- ----- -----
Total gross profit............................... 41.5% 34.9% 37.9%
Operating expenses............................... 31.7 40.3 34.8
----- ----- -----
Operating income (loss).......................... 9.8% (5.4)% 3.1%
===== ===== =====
Loss before extraordinary item and cumulative
effect of a change in accounting................. (0.1)% (19.3)% (5.5)%
===== ===== =====
Extraordinary gain on early extinguishment
of debt.......................................... --% 40.7% --%
===== ===== =====
Cumulative effect of change in accounting........ (11.2)% --% --%
===== ===== =====
Net (loss) income................................ (11.3)% 21.4% (5.5)%
===== ===== =====
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Net Sales. Our net sales decreased 6.3%, or $18.0 million, from $284.5
million in 2001 to $266.5 million in 2002. Sales in our Professional Sound and
Entertainment segment increased slightly in 2002 while sales in our Audio and
Wireless Technology segment declined. The overall decline is attributable
primarily to lower sales of hearing instruments products, a business that we
exited in the first quarter of 2002, and to continued sluggishness in the
computer and telecommunications industries.
Net sales in our Professional Sound and Entertainment segment increased
$4.7 million, or 2.4%, from $196.8 million in 2001 to $201.5 million in 2002.
The increase is attributable primarily to new product sales and higher sales of
electronics products that offset a slight decline in sales of our speakers and
microphone products.
Net sales for our Audio and Wireless Technology segment decreased $22.7
million, or 25.9%, from $87.7 million in 2001 to $65.0 million in 2002. Net
sales, excluding sales of discontinued hearing instruments products in both
periods, decreased approximately 17%. The decline, after excluding the hearing
instruments products, is attributable primarily to the slowdown in the computer
and telecommunications industries.
Gross Profit. Our gross profit increased $11.3 million, or 11.3%, from
$99.4 million in 2001 to $110.7 million in 2002. As a percentage of sales, the
gross margin rate of 41.5% for 2002 increased from 34.9% for 2001. Gross profit
for 2001 included charges for impaired inventories, resulting primarily from the
significant slowdown of sales in 2001 and to our effort to better manage
inventories and manufacturing operations through SKU reductions. Excluding these
charges, the gross margin rate for 2001 was 37.4%. The increase in the gross
margin rate for 2002 over 2001, excluding the charges, is attributable mainly to
improved manufacturing efficiencies and lower operating costs resulting from
restructuring measures implemented in 2001 and continuing into 2002.
14
The gross margin rate for our Professional Sound and Entertainment
segment increased from 33.9% for 2001 to 41.5% for 2002. The gross margin rate
for 2001, excluding the charges for impaired inventories, was 36.1%. The
increase in the gross margin rate for 2002 over 2001, excluding the impairment
charges, is attributable primarily to improved manufacturing efficiencies as a
result of restructuring measures implemented in 2001 and continuing into 2002.
The gross margin rate for our Audio and Wireless Technology segment
increased from 37.3% in 2001 to 41.7% for 2002. The gross margin rate for 2001,
excluding charges for impaired inventories, was 40.5%. The increase in the gross
margin rate for 2002 over the 2001 period is attributable primarily to a
favorable product mix and improved manufacturing efficiencies.
Engineering. Our engineering expenses decreased $0.3 million, or 2.4%,
from $12.7 million in 2001 to $12.4 million in 2002. The decrease is
attributable primarily to the benefit from continued consolidation and
streamlining of our engineering operations that occurred in 2001 and to tighter
spending controls we implemented due to our sales slowdown.
Selling, General and Administrative. Selling, general and
administrative expenses decreased $15.6 million, or 18.0%, from $86.5 million in
2001 to $70.9 million in 2002. Our 2001 expenses included a charge of $2.8
million for bad debts we believed were potentially uncollectible and $3.3
million in professional fees incurred in connection with modifications to our
existing debt and with obtaining additional debt. Excluding the previously
mentioned expenses, selling, general and administrative expenses decreased $9.5
million in 2002 compared to 2001. The decrease is primarily attributed to
spending controls we implemented because of the slowdown in sales, lower
incentive compensation expense and lower compensation costs resulting from the
restructuring measures implemented in 2001 and continuing into 2002.
Corporate Charges. Corporate charges of $0.5 million for 2002 decreased
from $1.7 million for 2001. The charges represent fees to Greenwich Street
Capital Partners, Inc. for services provided under a consulting and management
services agreement. This agreement expired in May 2002 and we have no current
plans to renew the arrangement.
Amortization of Goodwill and Other Intangibles. In connection with the
adoption of SFAS 142 we discontinued amortization of goodwill in 2002 compared
to amortization expense of $2.0 million in 2001. Amortization of intangible
assets having definite lives was $0.1 million for each of 2002 and 2001.
Restructuring Charges. We recorded a pre-tax restructuring charge of
$0.5 million in 2002 related to the costs of settlement and curtailment of our
pension obligations in accordance with SFAS No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits" (SFAS 88). In 2002 lump sum cash payments were made to
former employees whose positions were terminated as part of the restructuring
measures announced in 2001. The payments resulted in a partial settlement under
SFAS 88 in 2002. The resulting charge could not be estimated as a cost in 2001
because the number of participants taking lump sum settlements could not be
measured.
We recorded a pre-tax restructuring charge of $11.5 million in 2001
attributed to the consolidation of certain U.S. manufacturing operations, to the
restructuring of our operations in Hong Kong, Canada, and Mexico, and to the
discontinuation of our hearing aid products. The restructurings resulted in a
reduction of approximately 450 employees, primarily in manufacturing and
distribution, with all employees terminated as of December 31, 2002. The
restructuring charges included $7.4 million of non-cash charges associated with
the writedown of fixed assets and $4.1 million of expected cash expenditures,
primarily for severance costs, of which $4.0 million had been paid as of
December 31, 2002 and the remaining $0.1 million will be paid in the first half
of 2003.
Interest Expense. Interest expense decreased from $38.2 million in 2001
to $26.6 million in 2002. Interest expense decreased primarily because of lower
outstanding average indebtedness resulting from the debt restructuring completed
in November 2001 and payments on our revolving credit facility and term loans,
offset by increased interest on our pay-in-kind debt instruments. Interest
expense includes $17.0 million and $4.3 million of pay-in-kind interest expense
for 2002 and 2001, respectively.
Other Income. Other income increased from $1.2 million in 2001 to $2.7
million in 2002. The significant components of other income in 2002 were a gain
of $0.9 million from the sale of the hearing instrument product lines, $0.4
million of income from amortization of deferred revenue for a patent fee,
trademark license fee and non-compete agreement associated with the sale of
hearing instrument product lines and a gain of $1.3 million from the sale of
production assets related to the shutdown of certain manufacturing facilities.
The significant components of other income in 2001 were $0.8 million from the
sale of branding rights, a $0.3 million gain on foreign exchange and $0.3
million of royalty income offset by a $0.2 million loss on the sale of certain
assets.
Income Taxes. Our effective tax rate for the years 2002 and 2001 is not
meaningful because a tax benefit has not been recorded on
15
the pretax loss in the United States. The tax provision recorded relates only to
the countries in which we are profitable. Income tax expense remained relatively
unchanged in 2002 compared to 2001, as our foreign subsidiary taxable income
increased, which increase was offset by a U.S. tax benefit related to prior
periods.
As of December 31, 2002, we have a reserve of $4.5 million included in
income taxes payable for tax liability, penalties, and accrued interest (as of
the settlement date) related to a dispute for taxable years 1990 through 1995.
We have agreed with the Internal Revenue Service on the final amount of the tax
liability to be paid and have been making monthly payments.
At December 31, 2002, we have $12.3 million of net operating loss
carryforwards. The U.S. operating loss carryforward is $9.1 million, of which
$0.5 million expires in 2021 and $8.6 million expires in 2022. We have
established a net deferred tax valuation allowance of $13.6 million due to the
uncertainty of the realization of future tax benefits. This amount relates
primarily to U.S. deferred tax assets as our realization of the future tax
benefits related to the deferred tax asset is dependent on our ability to
generate taxable income within the net operating loss carryforward period. We
have considered this factor in reaching our conclusion as to the adequacy of the
valuation allowance for financial reporting purposes.
We did not recognize any taxable income on the extraordinary gain on
early extinguishment of debt related to the debt restructuring completed on
November 21, 2001 due to certain provisions of the United States Internal
Revenue Code for taxpayers deemed insolvent. Those same provisions also provide
that any taxpayer not recognizing taxable income due to this insolvency
provision will reduce all tax attributes, as defined under the Internal Revenue
Code, to the extent of the unrecognized gain. Our portion of net operating loss
carryforwards in 2001 that were generated in the United States is the only tax
attribute to which this provision is applicable. As of December 31, 2001, we had
a deferred tax asset related to net operating losses of $32.2 million, of which
$31.0 million is related to the net operating losses generated in the United
States and $1.2 million is related to the net operating losses generated by
foreign subsidiaries. Therefore, on January 1, 2002, we eliminated the $31.0
million of the deferred tax asset related to the net operating losses in the
United States and also reduced our valuation allowance accordingly.
Extraordinary Gain on Early Extinguishment of Debt. Net income in 2001
included an extraordinary gain on early extinguishment of debt. On November 21,
2001 we completed a debt restructuring, pursuant to which $224.5 million, or
99.8%, of the total of our 10 1/2% and 11% senior subordinated notes were
exchanged for 13% senior subordinated discount notes at a deemed issue price of
$56.1 million, 5.0 million shares of Series B preferred stock, and warrants to
purchase 1.7 million shares of common stock. As part of the debt restructuring,
we recorded $115.9 million of extraordinary gain in the statement of operations.
An additional gain of $52.7 million resulting from senior subordinated notes
exchanged by related parties was recorded as contributed capital in the
statement of shareholders' deficit.
Cumulative Effect of a Change in Accounting. We recorded a charge of
$29.9 million in 2002 related to the impairment of our Professional Sound and
Entertainment segment goodwill as a cumulative effect of a change in accounting
in accordance with the guidance in SFAS 142.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Net Sales. Our net sales decreased 13.5%, or $44.4 million, from $328.9
million in 2000 to $284.5 million in 2001. Sales in both our Professional Sound
and Entertainment and Audio and Wireless Technology segments declined. The
decline is attributable primarily to the slowdown in the economy compounded by a
precipitous decline in the second half of 2001.
Net sales in our Professional Sound and Entertainment segment declined
$15.8 million, or 7.4%, from $212.6 million in 2000 to $196.8 million in 2001.
The decline is attributable primarily to the slowdown in the economy.
Net sales for our Audio and Wireless Technology segment decreased $28.6
million, or 24.6%, from $116.3 million in 2000 to $87.7 million in 2001. The
decline in net sales is attributable primarily to the slowdown in the economy,
which had a significant impact on the sales of our communication products, and
to the decline in sales of the hearing aid products due to our plans to
discontinue the product line.
Gross Profit. Our gross profit decreased $25.4 million, or 20.4%, from
$124.8 million in 2000 to $99.4 million in 2001. As a percentage of sales, the
gross margin rate of 34.9% for 2001 decreased from 37.9% for 2000. The decrease
in the gross margin rate for 2001 is attributable mainly to lower manufacturing
plant capacity utilization due to lower sales, write-offs for excess and
obsolete inventories due to lower sales, and startup inefficiencies of a new
manufacturing plant.
16
The gross margin rate for our Professional Sound and Entertainment
segment declined from 38.6% for 2000 to 33.9% for 2001. The decline is
attributable primarily to manufacturing inefficiencies during startup of a new
manufacturing facility and to the write-off of excess and obsolete inventories.
The gross margin rate for our Audio and Wireless Technology segment
increased from 36.8% in 2000 to 37.3% for 2001. The increase is attributable
primarily to a favorable product mix.
Engineering. Our engineering expenses decreased $1.4 million, or 9.9%,
from $14.1 million in 2000 to $12.7 million in 2001. The decrease is
attributable primarily to the spending restraints we implemented due to the
slowdown in sales.
Selling, General and Administrative. Selling, general and
administrative expenses decreased $1.3 million, or 1.5%, from $87.8 million in
2000 to $86.5 million in 2001. Both years contained certain unusual charges
described below. Excluding those charges, selling, general and administrative
expenses decreased $3.6 million in 2001 due to lower incentive compensation,
spending restraints, and the benefits of restructuring.
Selling, general and administrative expenses for 2001 included a
special charge of $2.8 million for an additional provision for bad debts based
on our assessment that collectibility from a number of customers was doubtful.
Selling, general and administrative expense for 2000 included a $0.4 million
charge attributed to the cost related to a lawsuit filed by our former
distributor in France.
Corporate Charges. Corporate charges of $1.7 million for 2001 remained
unchanged from 2000. The charges represent fees to Greenwich Street Capital
Partners, Inc. for services provided under a consulting and management services
agreement.
Amortization of Goodwill and Other Intangibles. Amortization of
goodwill and other intangibles of $2.2 million for 2001 remained relatively
unchanged from 2000.
Restructuring Charges. We recorded a pre-tax restructuring charge of
$11.5 million in 2001 attributed to the consolidation of certain U.S.
manufacturing operations, to the restructuring of our operations in Hong Kong,
Canada, and Mexico, and to the discontinuation of our hearing aid products. The
restructurings resulted in a reduction of approximately 450 employees, primarily
in manufacturing and distribution, with approximately 210 employees terminated
by December 31, 2001. The restructuring charges included $7.4 million of
non-cash charges associated with the writedown of fixed assets and $4.1 million
of expected cash expenditures, primarily for severance costs, of which $1.1
million had been paid as of December 31, 2001 and the remaining $3.0 million was
to be paid during 2002 and 2003.
Interest Expense. Interest expense decreased from $38.4 million in 2000
to $38.2 million in 2001. The decrease in interest expense is attributed to
lower outstanding average indebtedness offset partially by higher average
interest rates.
Other Income. Other income decreased from $12.4 million in 2000 to $1.2
million in 2001. The significant components of other income in 2001 were $0.8
million from the sale of branding rights, a $0.3 million gain on foreign
exchange, $0.3 million of royalty income, and a $0.2 million loss from the sale
of certain assets. The significant components of other income in 2000 were $6.5
million of income attributed to the restructuring of a license agreement to
provide for a one-time, up-front fee in lieu of future royalties, offset by $0.2
million of related expenses, interest income of $2.2 million associated with an
arbitration ruling related to a dispute arising out of our 1996 purchase of the
audio products group from Mark IV Industries, Inc., a $1.0 million gain on the
sale of a trademark, $2.1 million of proceeds from an insurance settlement
related to a lawsuit filed by our former CEO, a $0.2 million gain from the sale
of our former corporate headquarters, and a $0.3 million gain on foreign
exchange.
Income Taxes. Our effective tax rate for the years 2001 and 2000 is not
meaningful because a tax benefit has not been recorded on the pretax loss in the
United States. The tax provision recorded relates only to the countries in which
we are profitable. Income tax expense increased in 2001 compared to 2000, as a
result of increases in our foreign subsidiary taxable income and foreign tax
rates applied to this taxable income.
We did not recognize any taxable income on the extraordinary gain on
early extinguishment of debt related to the debt restructuring completed on
November 21, 2001 due to certain provisions of the United States Internal
Revenue Code for taxpayers deemed insolvent. Those same provisions also provide
that any taxpayer not recognizing taxable income due to this insolvency
provision will reduce all tax attributes, as defined under the Internal Revenue
Code, to the extent of the unrecognized gain. Our portion of net operating loss
carryforwards in 2001 that were generated in the United States is the only tax
attribute to which this provision is applicable. As of December 31, 2001, we had
a deferred tax asset related to net operating losses of $32.2 million, of
17
which $31.0 million was related to the net operating losses generated in the
United States and $1.2 million was related to the net operating losses generated
by foreign subsidiaries.
Extraordinary Gain on Early Extinguishment of Debt. On November 21,
2001 we completed a debt restructuring, pursuant to which $224.5 million, or
99.8%, of the total of our 10 1/2% and 11% senior subordinated notes were
exchanged for 13% senior subordinated discount notes at a deemed issue price of
$56.1 million, 5.0 million shares of Series B preferred stock, and warrants to
purchase 1.7 million shares of common stock. As part of the debt restructuring,
we recorded $115.9 million of extraordinary gain in the statement of operations.
An additional gain of $52.7 million resulting from senior subordinated notes
exchanged by related parties was recorded as contributed capital in the
statement of shareholders' deficit.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, we had cash and cash equivalents of $3.4 million
compared to $3.0 million at December 31, 2001. Our principal source of funds in
2002 was $19.0 million from operating activities. Our principal use of funds for
2002 was $18.9 million for debt repayment.
Our investing activities consist mainly of capital expenditures to
maintain facilities, acquire machines or tooling, update certain manufacturing
processes, and update information systems, all of which improve efficiency. Our
ability to make capital expenditures is subject to certain restrictions,
described below, under our senior secured credit facility, our senior secured
notes, and our senior subordinated discount notes.
Our consolidated indebtedness decreased $1.0 million, from $176.8
million at December 31, 2001 to $175.8 million at December 31, 2002. The change
is primarily a result of debt repayments of $18.9 million offset by a $17.0
million increase in our pay-in-kind debt instruments and $1.5 million from new
debt issuance.
We rely mainly on internally generated funds and, to the extent
necessary, borrowings under our revolving credit facility and foreign working
capital lines to meet our liquidity needs. Our liquidity needs arise primarily
from debt service, working capital needs, and capital expenditure requirements.
Our credit facilities as of December 31, 2002, include a senior secured
credit facility (expiring on April 30, 2004) consisting of a term loan facility
of $115.0 million, a revolving credit facility, subject to certain borrowing
base limitations, of $25.0 million, and foreign working capital facilities,
subject to certain limitations, of $10.0 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, 2002, $9.6 million of our $67.3 million outstanding
borrowings under the term loan facility is payable in the next 12 months, with
the balance payable as described below. In addition, we had outstanding
borrowings of $8.6 million under the revolving credit facility and borrowings of
$3.9 million under our foreign working capital lines. We have classified $7.3
million of the revolving credit facility as short-term debt based on our
anticipated ability to repay the debt in the next 12 months. The remaining $1.3
million is classified as long-term debt. The net availability, after deduction
for open letters of credit and borrowing base limitations, under the revolving
credit facility and the foreign working capital lines was $12.6 million at
December 31, 2002. Outstanding balances under substantially all of these credit
facilities bear interest at floating rates based upon the interest rate option
selected by us; therefore, our financial condition is and will continue to be
affected by changes in the prevailing interest rates. The effective interest
rate under these credit facilities for the year ended December 31, 2002 was
7.5%.
Pursuant to the term loan facility, we are required to make scheduled
permanent principal payments under:
- the $50.0 million Tranche A Term Loan Facility, $15.6
million of which was outstanding at December 31, 2002, of
$2.2 million and $13.4 million in 2003 and 2004,
respectively, with a final maturity date of April 30,
2004, and
- the $65.0 million Tranche B Term Loan Facility, $51.7
million of which was outstanding at December 31, 2002, of
$7.4 million and $44.3 million in 2003 and 2004,
respectively, with a final maturity date of April 30,
2004.
In addition, under the terms of the senior secured credit facility, we
are required to make mandatory prepayments from proceeds of the sale of assets
and an additional payment in 2003 and 2004 if our operating performance for 2002
and 2003 exceeds certain targets. We will be making an additional payment of
$0.5 million in 2003 related to our 2002 operating performance.
In addition to payments on our term loan facility, we are required to
make principal payments totaling $0.4 million in 2003
18
pursuant to our other US and foreign debt agreements.
In 2001, we had defaulted on certain covenants related to our senior
secured credit facility, our senior secured notes, and our senior subordinated
notes. We had to incur additional indebtedness to meet our liquidity needs and,
subsequently, we completed a debt restructuring. In 2002, our debt service
obligations declined due to the debt restructuring. We also improved our
operating performance due to the benefits from the 2001 restructurings, which
have been fully implemented. While we believe these actions will provide
adequate cash flow to meet our debt service obligations, capital expenditure
needs, and working capital requirements in 2003, we cannot give any assurance
that our cash flow will be adequate. Additionally, our future performance and
our ability to service our obligations will also be subject to future economic
conditions and to financial, business and other factors, many of which are
beyond our control.
Recent stock market results have lowered the historical returns on our
pension assets. As a result, we have reduced our discount rate and expected rate
of return for calculation of 2003 pension expenses. These rate changes along
with the amortization of additional actuarial losses will increase the amount of
pension expense that we will recognize in future periods. We anticipate our 2003
pension expense will be approximately $0.2 million. Telex was not required to
make an employer contribution to its pension plan in 2002. In 2003 we will need
to make contributions totaling approximately $1.9 million.
CERTAIN RISKS RELATED TO TELEX'S BUSINESS
The statements under this caption are intended to serve as cautionary
statements within the meaning of the Section 27A of the Securities Act and
Section 21E of the Securities Exchange Act and should be read in conjunction
with the forward-looking statements in this report. 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.
Substantial Leverage and Debt Service Obligations. We are highly
leveraged. In 2001 we defaulted on certain covenants related to our senior
secured credit facility, the Tranche A senior secured notes, and the senior
subordinated notes. We incurred additional indebtedness to meet our liquidity
needs and, subsequently, we completed a debt restructuring. Although we improved
our operating performance in 2002, including realizing the benefits from the
2001 restructurings, most of which were fully implemented in early 2002 and
improved our cash flow to meet our liquidity needs, our high degree of leverage
could have important consequences, including but not limited to the following:
- our ability to obtain additional financing for working
capital, capital expenditures, acquisitions, general
corporate purposes, or other purposes may be impaired in
the future;
- a substantial portion of our cash flow from operations
must be dedicated to debt service, thereby reducing the
funds available to us for other purposes, including
product development and marketing; and
- our flexibility to adjust to changing market conditions
and the ability to withstand competitive pressures could
be limited, and we may be more vulnerable to a downturn
in general economic conditions or our business, or may be
unable to carry out capital spending that is important to
our growth strategy.
Our ability to repay or to refinance our obligations with respect to
our indebtedness will depend on our 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 our
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. Our senior secured credit facility,
senior secured notes and the indenture governing our senior subordinated
discount notes contain a number of significant covenants that will restrict our
operations and the operation of our subsidiaries. Our ability to comply with
such covenants and other restrictions may be affected by events beyond our
control, including prevailing economic, financial, and industry conditions. The
breach of any such covenants or restrictions could result in a default under our
senior secured credit facility, senior secured notes, or the indenture governing
our senior subordinated discount notes that would permit the lenders to declare
all amounts outstanding to be immediately due and payable, together with accrued
and unpaid interest, and the commitments of the lenders under our revolving
credit facility to make further extensions of credit could be terminated. In the
event the lenders were to declare us in default, we may not be able to raise
sufficient cash to repay the lenders.
Control of Telex. Over 50% of the voting power of our outstanding
securities is held by GSCP Recovery, Inc., GSC Partners
19
CDO Fund, Limited, and a group of stockholders controlled by Jefferies Capital
Partners. Four of our directors are affiliated with one or more of these
holders. A fifth director is serving at the request of one of the holders, and
the sixth director is our chief executive officer.
New Products and Changing Technology. Technological innovation and
leadership are among the important factors in competing successfully in the
professional sound and entertainment and audio and wireless technology markets.
Our future results will depend, in part, upon our ability to make timely and
cost-effective enhancements and additions to our technology and to introduce new
products that meet customer demands, including products utilizing digital
technology, which are increasingly being introduced in many of our markets. 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 our
competitors, and market acceptance. Maintaining flexibility to respond to
technological and market dynamics may require substantial expenditures. We may
not be able to successfully identify and develop new products in a timely
manner. Products or technologies developed by others may render our products
obsolete or noncompetitive, and constraints in our financial resources may
adversely affect our ability to develop and implement technological advances.
Significant Competition. The markets within both the Professional Sound
and Entertainment and Audio and Wireless Technology segments are highly
competitive and fragmented, and we face meaningful competition in both segments
and in most of our product categories and markets. While many of our current
competitors are generally smaller than we are, some of our competitors are
substantially larger and have greater financial resources than we do. As we
develop new products and enter new markets we may encounter new competitors, and
other manufacturers and suppliers who currently do not offer competing products
may enter the markets in which we currently operate. Such new competitors may be
larger, offer broader product lines, and have substantially greater financial
and other resources than we do. Such competition could negatively affect our
pricing and gross margins. Although we have historically competed successfully
in our various markets, we may not be able to continue to do so or compete
successfully in new markets.
Currency and Other Risks Attendant to International Operations. Our
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 in which
our products are manufactured and/or sold. Although our international operations
have generally been profitable in the past, one or more of these factors could
have a material adverse effect on our financial position or results of
operations in the future. In addition, we have not registered our significant
trademarks in all foreign jurisdictions in which we do business, and attempts at
registration in such foreign jurisdictions may not be successful.
We have substantial assets located outside of the United States, and a
substantial portion of our sales and earnings are attributable to operations
conducted abroad and to export sales, predominantly in Western Europe and Asia
Pacific. Our international operations subject us to certain risks, including
increased exposure to currency exchange rate fluctuations. We hedge a portion of
our foreign currency exposure by incurring liabilities, including bank debt,
denominated in the local currencies of those countries where our subsidiaries
are located and manage our currency risk exposure on foreign currency
denominated intercompany balances through forward foreign exchange contracts.
Our international operations also subject us to certain other risks, including
adverse political or economic developments in the foreign countries in which we
conduct 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
We are exposed to various market risks, including changes in foreign
currency exchange rates and interest rates. Market risk is the potential loss
arising from adverse changes in market rates and prices, such as foreign
currency exchange and interest rates. The counterparties to our financial
instruments are major financial institutions.
We do not enter into derivatives or other financial instruments for
trading or speculative purposes.
EXCHANGE RATE SENSITIVITY ANALYSIS
We enter into forward exchange contracts principally to hedge the
currency fluctuations in transactions denominated in foreign currencies, thereby
limiting our exposure to changes in exchange rates. During 2002, we principally
hedged transactions involving
20
certain intercompany balances attributed primarily to intercompany sales. Gains
and losses on forward exchange contracts and the offsetting losses and gains on
the hedged transactions are reflected in our statement of operations.
At December 31, 2002, we had outstanding foreign forward exchange
contracts with a notional amount of $2.3 million with a weighted average
maturity of 96 days.
At December 31, 2002, the difference between the fair value of all
outstanding contracts, as estimated by the amount required to enter into
offsetting contracts with similar remaining maturities based on quoted prices,
and the contract amounts was immaterial. A 10% fluctuation in exchange rates for
these currencies would change the fair value by approximately $0.2 million.
However, since these contracts hedge foreign currency denominated transactions,
any change in the fair value of the contracts would be offset by changes in the
underlying value of the transaction being hedged.
INTEREST RATE AND DEBT SENSITIVITY ANALYSIS
For fixed rate debt, interest rate changes affect the fair market value
of the debt but do not impact our earnings or cash flows. Conversely, for
floating rate debt, interest rate changes generally do not affect the fair
market value of the debt but do impact our earnings and cash flows, assuming
other factors are held constant.
At December 31, 2002, we had fixed rate debt of $55.0 million, step-up,
pay-in-kind interest debt of $40.0 million, with a redemption value of $40.9
million at December 31, 2002, and an interest-free loan of $1.1 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 these debts by approximately $2.5 million.
At December 31, 2002, we had floating rate debt of $79.7 million. The
earnings and cash flow impact for the next twelve months resulting from a
one-percentage point increase in interest rates on this debt would be
approximately $0.8 million, holding all other variables constant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Auditors, Consolidated Financial Statements
and Supplementary Data required by this Item 8 are set forth immediately
following the chief financial officer certification page of this report and are
incorporated herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On June 10, 2002, management of Telex, after communications with its
Board of Directors, dismissed Arthur Andersen LLP ("Andersen") as Telex's
independent auditors, effective immediately, and engaged Ernst & Young LLP to
serve as Telex's independent auditors for the fiscal year ending December 31,
2002.
Andersen's reports on Telex's consolidated financial statements for
each of the years ended December 31, 2001 and 2000 did not contain an adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principles.
During the years ended December 31, 2001 and 2000 and through June 10,
2002, there were no disagreements with Andersen on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which, if not resolved to Andersen's satisfaction, would have caused
it to make reference to the subject matter of the disagreements in connection
with its report on Telex's consolidated financial statements for such years; and
there are no reportable events as defined in Item 304(a)(1)(v) of Regulation
S-K.
Telex provided Andersen with a copy of the foregoing disclosures.
Incorporated by reference is a copy of Andersen's letter, dated June 10, 2002,
stating its agreement with such statements, which was filed with Report on Form
8-K dated June 10, 2002.
During the years ended December 31, 2001 and 2000 and through June 10,
2002, Telex did not consult Ernst & Young LLP with respect to the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on Telex's consolidated
financial statements, or any other matters or reportable events as set forth in
Item 304(a)(2)(ii) of Regulation S-K.
21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position, as of March
15, 2003, of each of our executive officers and directors.
NAME AGE POSITION
---- --- --------
Ned C. Jackson................................. 67 Director, Chief Executive Officer and President
Gregory W. Richter............................. 41 Vice President, International ROW and Chief Financial Officer
Mathias von Heydekampf......................... 40 President, Worldwide Pro Audio
Joseph Vaughan................................. 38 President, Audio and Wireless Technology
Edgar S. Woolard, Jr........................... 68 Director, Chairman of the Board
Keith W. Abell................................. 46 Director
Brian Friedman................................. 47 Director
Patrick Halloran............................... 43 Director
Stuart Katz.................................... 48 Director
Mr. Jackson became a director and was appointed as Chief Executive
Officer and President in 1998. Prior to joining us, 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. Richter joined us in September 1998 as Vice President and
Treasurer. He became Vice President International -- ROW (Rest of World) in
November 2000. While retaining these responsibilities, he was promoted to Chief
Financial Officer in February 2002. Prior to joining us, Mr. Richter served as
Assistant Treasurer of Imation Corporation from 1996 to 1998.
Mr. von Heydekampf joined us in February 1997 as Managing Director,
Germany and for our subsidiary in France. From December 1999 to March 2001, he
was President, Electronics business unit and Managing Director for Europe. He
was promoted in March 2001 to the position of President, Worldwide
Electronics/Europe and ROW. He was promoted in May 2002 to the position of
President, Worldwide Pro Audio.
Mr. Vaughan joined us in 1992 as a Product Manager for our Land Mobile
Communications business unit and has served in numerous sales, marketing and
product management positions. Mr. Vaughan was Director of Sales and Marketing
for the Communications business unit from 1998 to 2000. He was promoted in 2000
to Vice President and General Manager of the Communications business unit. In
April 2002, he was promoted to President and General Manager of the Audio and
Wireless Technology segment.
Mr. Woolard was appointed Chairman of our Board of Directors in March
2000. He became a director 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 DuPont in 1995. Mr. Woolard is serving on the
Board of Directors at the request of the GSCP stockholders.
Mr. Abell became a director in December 1997. Mr. Abell is a
Co-President of GSCP (NJ), L.P., which he joined at its inception in 1994. GSCP
(NJ), L.P. is affiliated with several entities that, together, own a significant
portion of our common stock. Mr. Abell is serving on the Board of Directors at
the request of the GSCP stockholders.
Mr. Friedman became a director in November 2001. He has been a Managing
Member of Jefferies Capital Partners since 1997. Jefferies Capital Partners is
the manager of several entities, that, together, own a significant portion of
our common stock. Mr. Friedman is also the chairman of the executive committee
of Jefferies & Company, Inc. He is serving on the Board of Directors at the
request of Jefferies & Company, Inc.
Mr. Halloran became a director in November 2001. He is also a Vice
President and a member of the Board of Directors of CSFC Wayland Investment
Advisers, Inc., a wholly-owned subsidiary of Cargill Financial Services
Corporation, a wholly owned subsidiary of Cargill, Inc., and has been portfolio
manager since 1990. Mr. Halloran is serving on the Board of Directors at the
request of Jefferies & Company, Inc.
Mr. Katz became a director of the Company in July 2002. He has been an
officer at Jefferies Capital Partners since 2001. Prior to that he was employed
as an investment banker by Furman Selz Incorporated since 1985, including more
recently as a Managing Director in the Merger and Acquisition Investment Banking
Group at ABN Amro (2001) and ING Barings (1997-2000), each of which were
successors in interest to a portion of Furman Selz's investment banking
business. Jefferies Capital Partners is the manager of several entitles, that,
together, own a significant portion of our common stock. Mr. Katz is serving on
the Board of Directors at the request of Jefferies & Company, Inc.
22
ITEM 11. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
All of our directors are entitled to reimbursement of their reasonable
out-of-pocket expenses in connection with their travel to and attendance at
Board meetings and other business requiring their presence on our behalf.
By a resolution dated November 20, 2001, the Board of Directors
approved the payment of a salary of $180,000 per year to Edgar S. Woolard, Jr.,
Chairman of the Board, for the period from November 20, 2001 through December
31, 2002. Under this resolution, Mr. Woolard was paid $180,000 in 2002 and
$20,000 in 2001.
Currently, Keith Abell is an officer of GSCP (NJ), L.P., which is the
manager of Greenwich Street Capital Partners, Inc., to which we owe fees related
to consulting services. See "Certain Relationships and Related Transactions."
EXECUTIVE COMPENSATION
The following table sets forth information with respect to all
compensation paid for services rendered in all capacities during the last three
fiscal years by our Chief Executive Officer and the four most highly compensated
executive officers whose cash compensation exceeded $100,000 for the year ended
December 31, 2002 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-------------------
FISCAL SALARY BONUS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ($) ($) COMPENSATION($)(b)
--------------------------- ------ ------- ------- ------------------
Ned C. Jackson ........................... 2002 382,693 380,000 5,500
President and Chief Executive Officer 2001 358,076 100,000 5,100
2000 338,461 170,000 5,100
Mathias von Heydekampf ................... 2002 244,332 306,000 --
President, Worldwide Pro Audio 2001 193,000 50,000 --
2000 192,976 125,000 --
Gregory W. Richter ....................... 2002 182,980 130,000 5,021
Vice President and Chief Financial Officer 2001 140,937 50,000 3,029
2000 125,529 34,500 1,840
Joseph Vaughan ........................... 2002 147,115 54,250 5,500
President, Audio and Wireless 2001 110,999 50,000 4,556
Technology 2000 100,798 29,034 2,367
Mahedi Jiwani (a) ........................ 2002 144,375 55,000 4,331
Vice President, Finance 2001 140,938 16,250 2,408
2000 133,000 37,000 2,232
(a) Mr. Jiwani resigned his employment with the Company on January 10, 2003.
(b) Represents company matching contribution to the 401(k) plan.
OPTION GRANTS IN FISCAL 2002
No options were granted to the Named Executive Officers during 2002.
STOCK OPTION EXERCISES AND VALUE AT DECEMBER 31, 2002
There were no options exercised during fiscal 2002 and no options
outstanding at December 31, 2002.
ANNUAL BONUS PROGRAMS
23
We have an annual bonus plan for management employees. Participants in
the plan are eligible to receive annual bonuses of between 20% and 140% of base
salary depending on the level of achievement of the specified performance
targets. Bonuses earned in 2002 under this plan will be paid out in 2003.
For a description of bonuses payable to Mr. Jackson and Mr. von
Heydekampf, see "Employment Agreements."
PENSION PLAN
We maintain a defined benefit pension plan qualified under the Internal
Revenue Code that provides a benefit upon retirement to eligible employees.
Since July 1, 1999 the pension plan has been a cash balance pension plan. Under
the terms of the pension plan, accrued benefits are expressed as "account
balances" for each participant. Each active participant's account receives a
benefit credit each year based on the participant's age, vesting service, and
total remuneration covered by the pension plan, consisting of base salary,
commission, overtime and bonuses paid to the participant, as illustrated in the
following table.
BENEFIT CREDIT CHART
BENEFIT CREDIT AS A PERCENTAGE OF
--------------------------------------------------------------
AGE + YEARS OF PENSION EARNINGS FOR THE YEAR
VESTING SERVICE ON THAT ARE GREATER THAN
JANUARY 1 PENSION EARNINGS FOR THE YEAR THE INTEGRATION LEVEL
- ------------------ ----------------------------- -----------------------------
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 2003, the integration level is
$43,500. The integration level will change each year. For plan years through
2003, annual compensation taken into account for purposes of calculating
benefits is limited to $200,000. This amount will be 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 November 1 of the prior year,
plus one percent. The interest credit for a full calendar year will not be less
than 5 percent. However, beginning in 2003, the interest credit will not be
greater than the average annual interest on 30-year Treasury Securities for the
month of November of the prior year.
The estimated projected annual single life annuity benefit for the
Named Executive Officers, assuming they continue with Telex to age 65, or
December 31, 2003, if later, and their compensation, the maximum recognizable
compensation, and the integration level do not change, would be as follows:
Mr. Jackson $ 5,112
Mr. Richter $ 56,432
Mr. Vaughan $ 79,729
Mr. Jiwani $ 17,556
During 2002 Mr. von Heydekampf was not eligible to participate in the
Pension Plan because he was not a United States citizen or resident.
EMPLOYMENT AGREEMENTS
Effective December 16, 2002, we entered into an employment agreement
with Mr. Jackson, ending on December 31, 2003, pursuant to which he will
receive:
- a base salary of $450,000 for 2003;
- a guaranteed bonus of $225,000 payable on January 1,
2004, prorated if he does not work the full year, and
- $30,000 per month for twelve months to provide consulting
services in the event of his retirement or termination
without cause.
24
Effective January 5, 2003, we entered into an agreement with Mr. von
Heydekampf, pursuant to which he will receive:
- a base salary of $270,000 per year;
- a bonus payment of between 40% and 140% of his annual
base salary upon the achievement of certain specified
performance objectives, and
- in the event his employment is terminated without cause,
or he terminates his employment for good reason, we will
pay a lump-sum payment of 150% of his annual base salary
plus 150% of his annual target bonus (which target bonus
is 70% of his annual base salary).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The following table sets forth information with respect to the
beneficial ownership of our securities as of February 28, 2003 by
- each person who is known by us to beneficially own more
than five percent of our securities,
- each director,
- each Named Executive Officer as listed in the Summary
Compensation Table above, and
- all directors and executive officers as a group.
Except as otherwise indicated, each holder has sole voting and sole
investment power with respect to the securities shown.
PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES CLASS
------------------------------------ ---------------- -------------
GSCP Recovery, Inc.(a)(b)(c) ........................ 918,427 18.4%
GSC Partners CDO Fund, Limited(c)(d)(e) ............. 455,908 9.1
ING Furman Selz Investors III, L.P.(f)(g)(i) ........ 915,021 18.4
ING Barings U.S. Leveraged Equity Plan LLC (f)(h)(i). 278,267 5.6
CFSC Wayland Advisers, Inc. (j)(k)................... 390,746 7.8
Edgar S. Woolard, Jr.(c) ............................ 5,902 *
Ned C. Jackson(l) ................................... 3,541 *
Keith W. Abell(m) ................................... 0 *
Brian Friedman(n) ................................... 0 *
Patrick Halloran(o) ................................. 0 *
Stuart Katz (p) ..................................... 0 *
Mathias von Heydekampf .............................. 0 *
Gregory Richter ..................................... 0 *
Mahedi Jiwani ....................................... 0 *
Joseph Vaughan ...................................... 0 *
All directors and executive officers as a group (9
persons)(c))(l)(m)(n)(o)(p) ....................... 9,443 *
* Less than 1%.
(a) The address of GSCP Recovery, Inc. is c/o M&C Corporate Services Ltd., P.O.
Box 309, Ugland House, South Church Street, George Town, Grand Cayman,
Cayman Islands.
(b) Does not include 36,227 shares that GSCP Recovery, Inc. would be entitled to
purchase upon the exercise of warrants owned by it. Such warrants are not
currently exercisable. If such warrants had been exercisable in full as of
February 28, 2003, then GSCP Recovery, Inc. would be the beneficial owner of
an aggregate of 954,654 shares, representing approximately 14.3% of the
shares issued and outstanding or issuable upon exercise of all of the
warrants currently outstanding. GSCP Recovery, Inc. is a majority-owned
subsidiary of Greenwich Street Capital Partners II, L.P. Greenwich Street
Investments II, L.L.C. is the general partner of Greenwich Street Capital
Partners II, L.P. Keith Abell, one of our directors, is a managing member of
Greenwich Street Investments II, L.L.C. Mr. Abell disclaims beneficial
ownership of the shares owned by GSCP Recovery, Inc. and any shares which
GSCP Recovery, Inc. might be entitled to purchase upon exercise of such
warrants.
(c) Does not include 1,469,445 shares that TCI Investment II, LLC would be
entitled to purchase upon the exercise of warrants owned by it. Such
warrants are not currently exercisable. If such warrants had been
exercisable in full as of February 28, 2003, then TCI Investment II, LLC
would be the beneficial owner of approximately 22.1% of the shares issued
and outstanding or issuable upon exercise of all of the warrants currently
outstanding. The members of TCI Investment II, LLC are Greenwich Street
Capital Partners, L.P. and New Century Enterprises, Ltd. Mr. Abell is a
Managing Director of TCI Investment II, LLC. The
25
general partner of Greenwich Street Capital Partners, L.P. is Greenwich
Street Investments, Inc., and Mr. Abell is an Assistant Vice President of
Greenwich Street Investments, Inc. Edgar S. Woolard, the Chairman of our
Board of Directors, is the President of New Century Enterprises, Ltd. and is
the owner of 92.7% of the equity interest in New Century Enterprises, Ltd.
Messrs. Abell and Woolard disclaim beneficial ownership of the shares which
TCI Investment II, LLC might be entitled to purchase upon exercise of the
warrants owned by TCI Investment II, LLC.
(d) The address of GSC Partners CDO Fund, Limited is 500 Campus Drive, Suite
220, Florham Park, New Jersey 07932.
(e) Does not include 17,981 shares that GSC Partners CDO Fund, Limited would
be entitled to purchase upon the exercise of warrants owned by it. Such
warrants are not currently exercisable. If such warrants had been
exercisable in full as of February 28, 2003, then GSC Partners CDO Fund,
Limited would be the beneficial owner of an aggregate of 473,889 shares,
representing approximately 7.1% of the shares issued and outstanding or
issuable upon exercise of all of the warrants currently outstanding. Mr.
Abell is Co-President of GSCP (NJ), Inc., which is the general partner of
GSCP (NJ), L.P. GSCP (NJ), L.P. is the collateral manager of GSC Partners
CDO Fund, Limited. Mr. Abell disclaims beneficial ownership of the shares
owned by GSC Partners CDO Fund, Limited and the shares which GSC Partners
CDO Fund, Limited might be entitled to purchase upon exercise of the
warrants owned by GSC Partners CDO Fund, Limited.
(f) The address for ING Furman Selz Investors III, L.P. and ING Barings U.S.
Leveraged Equity Plan LLC is c/o Jefferies Capital Partners, 520 Madison
Avenue, New York, New York 10022.
(g) Does not include 36,093 shares that ING Furman Selz Investors III, L.P.
would be entitled to purchase upon the exercise of warrants owned by it.
Such warrants are not currently exercisable. If such warrants had been
exercisable in full as of February 28, 2003, then ING Furman Selz Investors
III, L.P. would be the beneficial owner of an aggregate of 951,114 shares,
representing approximately 19.1% of the shares issued and outstanding or
issuable upon exercise of all of the warrants currently outstanding. Mr.
Katz and Mr. Friedman, two of our directors, are an officer and the Managing
Member, respectively, of Jefferies Capital Partners, which controls the
investment decisions of ING Furman Selz Investors III, L.P. in its capacity
as Manager of the fund. Messrs. Katz and Friedman disclaim beneficial
ownership of the shares owned by ING Furman Selz Investors III, L.P. and the
shares that ING Furman Selz Investors III, L.P. might be entitled to
purchase upon exercise of the warrants owned by ING Furman Selz Investors
III, L.P.
(h) Does not include 10,976 shares that ING Barings U.S. Leveraged Equity Plan
LLC would be entitled to purchase upon the exercise of warrants owned by it.
Such warrants are not currently exercisable. If such warrants had been
exercisable in full as of February 28, 2003, then ING Barings U.S. Leveraged
Equity Plan LLC would be the beneficial owner of an aggregate of 289,243
shares, representing approximately 5.8% of the shares issued and outstanding
or issuable upon exercise of all of the warrants currently outstanding. Mr.
Katz and Mr. Friedman, two of our directors, are an officer and the Managing
Member, respectively, of Jefferies Capital Partners, which controls the
investment decisions of ING Barings U.S. Leveraged Equity Plan LLC in its
capacity as Manager of the fund. Messrs. Katz and Friedman disclaim
beneficial ownership of the shares owned by ING Barings U.S. Leveraged
Equity Plan LLC and the shares that ING Barings U.S. Leveraged Equity Plan
LLC might be entitled to purchase upon exercise of the warrants owned by ING
Barings U.S. Leveraged Equity Plan LLC.
(i) ING Furman Selz Investors III, L.P. and ING Barings U.S. Leveraged
Equity Plan LLC may be deemed to be beneficial owners of the securities held
by the other and of 119,897 shares and 4,729 warrants held by ING Barings
Global Leveraged Equity Plan Ltd. (collectively, the ING Funds). If the
warrants had been exercisable in full as of February 28, 2003, then the ING
Funds, collectively, would be the beneficial owner of an aggregate of
1,364,983 shares, representing approximately 20.6% of the shares issued and
outstanding or issuable upon exercise of all of the warrants currently
outstanding. Jefferies Capital Partners controls the investment decisions of
the ING Funds in its capacity as Manager of each of the funds. Messrs. Katz
and Friedman disclaim beneficial ownership of the shares owned by the ING
Funds, and the shares that the ING Funds might be entitled to purchase upon
exercise of the warrants owned by each fund.
(j) The address of CFSC Wayland Advisers, Inc. is 12700 Whitewater Drive,
Minnetonka, Minnesota 55343.
(k) CSFC Wayland Advisers, Inc. is the manager of Wayland Investment Fund,
LLC and Wayland Recovery Fund, LLC and is the investment adviser for Wayland
Investment Fund II, LLC (collectively, the Wayland Funds). Wayland
Investment Fund, LLC owns 219,573 shares and warrants to purchase 8,661
shares. Wayland Recovery Fund, LLC owns 141,660 shares and warrants to
purchase 5,587 shares. Wayland Investment Fund II, LLC owns 29,513 shares
and warrants to purchase 1,164 shares. Such warrants are not currently
exercisable. If such warrants had been exercisable in full as of February
28, 2003, then the Wayland Funds would be the beneficial owner of an
aggregate of 406,158 shares, representing approximately 6.1% of the shares
issued and outstanding or issuable upon exercise of all warrants currently
outstanding. Mr. Halloran is a vice president and a member of the board of
directors of CFSC Wayland Advisers, Inc. Mr. Halloran disclaims beneficial
ownership of the shares owned by the Wayland Funds and the shares which the
Wayland Funds might be entitled to purchase upon exercise of warrants owned
by the Wayland Funds.
(l) Does not include 3,541 shares owned by Mr. Jackson's wife, as to which Mr.
Jackson disclaims beneficial ownership. Does not include warrants to
purchase 140 shares owned by Mr. Jackson or warrants to purchase 140 shares
owned by Mr. Jackson's wife, as to which Mr. Jackson disclaims beneficial
ownership. Such warrants are not currently exercisable. If the warrants
owned by Mr. Jackson had been exercisable in full as of February 28, 2003,
then Mr. Jackson would be the beneficial owner of an aggregate of 3,681
shares.
(m) See notes (b), (c), and (e), above.
26
(n) See notes (g), (h) and (i) above.
(o) See note (k) above.
(p) See notes (g), (h) and (i) above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to a consulting agreement dated as of May 6, 1997, Greenwich
Street Capital Partners, Inc., provided certain business, financial and
managerial advisory services to us, including developing and implementing
corporate and business strategy and providing other consulting and advisory
services. In exchange for such services, Greenwich Street Capital Partners, Inc.
was entitled to receive an aggregate annual fee of $1.5 million, payable
semi-annually, plus its reasonable out-of-pocket costs and expenses. In
addition, we agreed to indemnify Greenwich Street Capital Partners, Inc. and
related or affiliated 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 consulting
agreement expired on May 6, 2002. Since January 1, 2001, we have been prohibited
under the terms of our senior secured credit agreement from paying the advisory
fee in cash. However, we agreed in November 2001 that the outstanding management
services fee will accrue interest at the rate of two percent per month, subject
to applicable law. We had a balance payable, inclusive of interest, to Greenwich
Street Capital Partners, Inc. of $2.5 million at December 31, 2002.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the filing of this Report on Form 10-K (the
"Evaluation Date"), an evaluation was performed under the supervision and with
the participation of our management, including the CEO and CFO, of the
effectiveness of the design and operation of Telex's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)). Based on
that evaluation, our management, including the CEO and CFO, concluded that (i)
our disclosure controls and procedures were effective as of the Evaluation Date
to ensure that the information that we are required to disclose in the reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Commission's rules and forms,
and that (ii) the information that is required to be reported is accumulated and
communicated to management, including our principal executive and financial
officers, as appropriate, to allow timely decisions regarding required
disclosure. There have been no significant changes in our internal controls or
in other factors that could significantly affect Telex's disclosure controls and
procedures subsequent to the Evaluation Date nor were any significant
deficiencies or material weaknesses in Telex's internal controls found.
27
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) The following documents are filed as part of this report:
PAGE
----
1. Financial Statements:
Report of Independent Auditors.................................. 34
Report of Independent Public Accountants........................ 35
Consolidated Balance Sheets as of December 31, 2002 and
2001............................................................ 36
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000................................ 37
Consolidated Statements of Shareholders' Deficit and
Comprehensive Income for the years ended December 31,
2002, 2001 and 2000............................................. 38
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000................................ 39
Notes to Consolidated Financial Statements...................... 40
2. Financial Statement Schedules:
The following supplemental schedule is filed as part of this
report:
Schedule II - Valuation and Qualifying Accounts for the years
ended December 31, 2002, 2001 and 2000.......................... 58
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 and included
immediately following the Consolidated Financial
Statements.
(b) Reports on Form 8-K:
A Report on Form 8-K/A, dated November 21, 2001, reporting under Items 1 and
7, was filed on November 13, 2002.
(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) See Item 15(a)(2) above.
28
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:
We intend to send to our security holders this Report on Form 10-K
covering the year ended December 31, 2002. We have not sent any proxy material
relating to any annual or other meeting of security holders.
29
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 28th day of
March, 2003.
TELEX COMMUNICATIONS, INC.
By: /s/ Ned C. Jackson
---------------------------
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 28, 2003
- ------------------------- --------------
Ned C. Jackson
/s/ Gregory W. Richter Vice President and Chief Financial March 28, 2003
- ------------------------- Officer (principal financial and --------------
Gregory W. Richter accounting officer)
/s/ Edgar S. Woolard, Jr. Chairman of the Board and Director March 28, 2003
- ------------------------- --------------
Edgar S. Woolard, Jr.
/s/ Keith W. Abell Director March 28, 2003
- ------------------------- --------------
Keith W. Abell
/s/ Brian Friedman Director March 28, 2003
- ------------------------- --------------
Brian Friedman
/s/ Patrick Halloran Director March 28, 2003
- ------------------------- --------------
Patrick Halloran
/s/ Stuart Katz Director March 28, 2003
- ------------------------- --------------
Stuart Katz
30
Certifications
I, Ned C. Jackson, President and Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Telex
Communications, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
registrant's board of directors:
a. all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 28, 2003
By: /s/ Ned. C. Jackson
--------------------------------
Ned C. Jackson
President and Chief Executive Officer
31
Certifications
I, Gregory W. Richter, Vice President and Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Telex
Communications, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
registrant's board of directors:
a. all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 28, 2003
By: /s/ Gregory W. Richter
----------------------------------
Gregory W. Richter
Vice President and Chief Financial Officer
32
TELEX COMMUNICATIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors ............................ 34
Report of Independent Public Accountants .................. 35
Consolidated Balance Sheets as of December 31, 2002
and 2001 ................................................ 36
Consolidated Statements of Operations for the years
ended December 31, 2002, 2001 and 2000................... 37
Consolidated Statements of Shareholders' Deficit and
Comprehensive Income for the years ended December 31,
2002, 2001 and 2000...................................... 38
Consolidated Statements of Cash Flows for the years
ended December 31, 2002, 2001 and 2000................... 39
Notes to Consolidated Financial Statements ................ 40
33
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND SHAREHOLDERS: TELEX COMMUNICATIONS, INC.
We have audited the accompanying balance sheet of Telex Communications,
Inc. and Subsidiaries as of December 31, 2002, and the related consolidated
statements of operations, shareholders' deficit and comprehensive income, and
cash flows for the year then ended. 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 audit. The consolidated
financial statements of Telex Communications, Inc. and Subsidiaries as of
December 31, 2001 and 2000, and for the two years then ended, were audited by
other auditors who have ceased operations and whose reports dated March 7, 2002
expressed an unqualified opinion on those statements.
We conducted our audit 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 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
audit provides a reasonable basis for our opinion.
In our opinion, the 2002 financial statements referred to above present
fairly, in all material respects, the financial position of Telex
Communications, Inc. and Subsidiaries as of December 31, 2002, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States.
As discussed in Note 6 to the financial statements, effective January
1, 2002, the Company adopted Statement of Financial Accounting Standards
(Statement) No. 142, "Goodwill and Other Intangible Assets."
As discussed above, the consolidated financial statements of Telex
Communications, Inc. and Subsidiaries as of December 31, 2001 and 2000, for the
two years then ended, were audited by other auditors who have ceased operations.
As described in Note 6, these consolidated financial statements have been
revised to include the transitional disclosures required by Statement No. 142
which was adopted as of January 1, 2002. We have audited the disclosures in Note
6 and, in our opinion, the disclosures for fiscal years 2001 and 2000 in Note 6
are appropriate. However, we were not engaged to audit, review, or apply any
procedures to the fiscal years 2001 and 2000 consolidated financial statements
of the Company other than with respect to such disclosures and, accordingly, we
do not express an opinion or any other form of assurance on the fiscal year 2001
and 2000 consolidated financial statements taken as a whole.
ERNST & YOUNG LLP
Minneapolis, Minnesota
February 28, 2003
34
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, 2001 and 2000, and the related consolidated statements of operations,
shareholders' deficit and comprehensive income and cash flows for the three
years in the period ended December 31, 2001. 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, 2001 and 2000, and the
results of their operations and their cash flows for the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of the
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states 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 7, 2002
NOTE: In accordance with Rule 2-02 of Regulation S-X, the report above is a
copy of a report previously issued by Arthur Andersen LLP ("Andersen"),
which report has not been reissued by Andersen. The Company has been
unable to obtain the consent of Andersen to the inclusion of this
report in this Form 10-K and in reliance upon Rule 437a under the
Securities Exchange Act of 1934, as amended (the "Securities Act") has
not filed such consent with this Form 10-K. Because we have not been
able to obtain Andersen's consent, you may not be able to recover
against Andersen under Section 11 of the Securities Act for any untrue
statements of a material fact contained in the Company's financial
statements audited by Andersen or any omission to state a material fact
required to be stated therein. Certain financial information for each
of the two years in the period ended December 31, 2001 was not reviewed
by Andersen and includes: (i) reclassifications to conform to our
fiscal 2002 financial statement presentation and (ii) reclassifications
and additional disclosures to conform with new accounting
pronouncements and SEC rules and regulations issued during such fiscal
year.
35
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
As of December 31
2002 2001
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 3,374 $ 3,026
Accounts receivable, net of allowance for doubtful
accounts of $3,362 in 2002 and $4,973 in 2001.............................. 44,644 40,765
Inventories................................................................... 47,686 50,785
Other current assets.......................................................... 4,710 3,879
---------- ----------
Total current assets....................................................... 100,414 98,455
PROPERTY, PLANT AND EQUIPMENT, net.............................................. 28,995 30,071
DEFERRED FINANCING COSTS, net................................................... 2,844 4,173
GOODWILL, net................................................................... 23,154 52,865
OTHER ASSETS.................................................................... 2,471 2,037
---------- ----------
$ 157,878 $ 187,601
========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Revolving lines of credit..................................................... $ 3,916 $ 21,159
Current maturities of long-term debt.......................................... 17,275 8,177
Accounts payable.............................................................. 10,954 13,901
Accrued wages and benefits.................................................... 9,562 7,118
Other accrued liabilities..................................................... 7,896 13,519
Income taxes payable.......................................................... 7,960 7,522
---------- ----------
Total current liabilities.................................................. 57,563 71,396
LONG-TERM DEBT, net............................................................. 154,630 147,430
OTHER LONG-TERM LIABILITIES..................................................... 13,693 8,749
---------- ----------
Total liabilities.......................................................... 225,886 227,575
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 1, 3, 10, and 11)
SHAREHOLDERS' DEFICIT:
Series A Preferred stock, $0.01 par value, 900 shares
authorized; 0 and 2 shares issued and outstanding, respectively............ - -
Series B Preferred stock, $0.01 par value, 5,000,000
shares authorized; 0 and 4,987,015 shares issued and -
outstanding, respectively.................................................. 50
Common stock, $0.01 par value, 10,000,000 shares
authorized; 4,987,127 and 110 shares issued and outstanding,
respectively .............................................................. 50 -
Capital in excess of par -- Preferred stock................................... - 71,820
Capital in excess of par -- Common stock...................................... 80,130 8,310
Accumulated deficit........................................................... (141,159) (111,078)
Accumulated other comprehensive loss.......................................... (7,029) (9,076)
---------- ----------
Total shareholders' deficit................................................ (68,008) (39,974)
---------- ----------
$ 157,878 $ 187,601
========== ==========
See notes to consolidated financial statements.
36
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
FOR THE YEARS ENDED DECEMBER 31
----------------------------------------------
2002 2001 2000
---------- ------------- --------------
Net sales....................................................................... $ 266,521 $ 284,459 $ 328,855
Cost of sales................................................................... 155,832 185,051 204,113
---------- ------------- --------------
Gross profit............................................................... 110,689 99,408 124,742
Operating expenses:
Engineering................................................................... 12,424 12,736 14,098
Selling, general and administrative........................................... 70,890 86,534 87,724
Corporate charges............................................................. 541 1,667 1,716
Amortization of goodwill and other intangibles................................ 120 2,156 2,223
Restructuring charges......................................................... 478 11,475 8,812
---------- ------------- --------------
84,453 114,568 114,573
---------- ------------- --------------
Operating income (loss)......................................................... 26,236 (15,160) 10,169
Interest expense................................................................ (26,563) (38,173) (38,374)
Other income.................................................................... 2,727 1,111 12,399
---------- ------------- --------------
Income (loss) before income taxes............................................... 2,400 (52,222) (15,806)
Provision for income taxes...................................................... 2,618 2,685 2,175
---------- ------------- --------------
Loss before extraordinary item and cumulative effect of a change in
accounting ................................................................... (218) (54,907) (17,981)
Extraordinary gain on early extinguishment of debt.............................. - 115,897 -
Cumulative effect of change in accounting....................................... (29,863) - -
---------- ------------- --------------
Net (loss) income.......................................................... $ (30,081) $ 60,990 $ (17,981)
========== ============= ==============
Net (loss) income per common share - basic and diluted:
Loss before extraordinary gain and cumulative effect of change in
Accounting............................................................ $ (0.06) $ (499,154.55) $ (163,463.64)
Extraordinary gain on early extinguishment of debt.................... - 1,053,609.10 -
Cumulative effect of change in accounting............................. (8.41) - -
---------- ------------- --------------
Net (loss) income..................................................... $ (8.47) $ 554,454,55 $ (163,463.64)
========== ============= ==============
Weighted average shares outstanding
Basic and diluted..................................................... 3,552,506 110 110
========== ============= ==============
See notes to consolidated financial statements.
37
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT AND COMPREHENSIVE INCOME
(In thousands, except share data)
SERIES A SERIES B CAPITAL IN
PREFERRED STOCK PREFERRED STOCK EXCESS OF PAR-
--------------- ----------------- COMMON STOCK PREFERRED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT STOCK
------ ------ ---------- ------ --------- ------ --------------
BALANCE, December 31, 1999.................... -- $ -- -- $ -- 110 $ -- $ --
Vesting of new options...................... -- -- -- -- -- -- --
Net loss.................................... -- -- -- -- -- -- --
Other comprehensive loss -
Foreign currency translation adjustments.. -- -- -- -- -- -- --
Minimum pension liability adjustment...... -- -- -- -- -- -- --
Comprehensive net loss...................... -- -- -- -- -- -- --
---- ---- ---------- ----- --------- ---- ---------
BALANCE, December 31, 2000.................... -- -- -- -- 110 -- --
Issuance of Series A Preferred stock in
debt extinguishment...................... 900 -- -- -- -- -- --
Tender of Series A Preferred stock in debt
extinguishment............................ (898) -- -- -- -- -- --
Issuance of Series B Preferred stock in
debt extinguishments...................... -- -- 4,987,015 50 -- -- 14,289
Issuance of stock warrants in debt
extinguishment............................ -- -- -- -- -- -- 4,827
Equity contribution from Former Parent...... -- -- -- -- -- --
Related-party gain on debt extinguishment... -- -- -- -- -- -- 52,704
Net income.................................. -- -- -- -- -- -- --
Other comprehensive income -
Foreign currency translation adjustments.. -- -- -- -- -- -- --
Minimum pension liability adjustment...... -- -- -- -- -- -- --
Comprehensive net income.................... -- -- -- -- -- -- --
---- ---- ---------- ----- --------- ---- ---------
BALANCE, December 31, 2001.................... 2 4,987,015 50 110 -- 71,820
Conversion of Series A and Series B
Preferred Stock to Common Stock........... (2) -- (4,987,015) (50) 4,987,017 50 (71,820)
Net loss....................................
Other comprehensive loss -
Foreign currency translation adjustments.. -- -- -- -- -- -- --
Minimum pension liability adjustments..... -- -- -- -- -- -- --
Comprehensive net loss.................... -- -- -- -- -- -- --
---- ---- ---------- ------ --------- ---- ---------
BALANCE, December 31, 2002.................... -- $ -- -- $ -- 4,987,127 $ 50 $ --
==== ==== ========== ====== ========= ==== =========
CAPITAL IN ACCUMULATED
EXCESS OF PAR- OTHER
COMMON ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
STOCK DEFICIT LOSS DEFICIT
-------------- ----------- ------------- -------------
BALANCE, December 31, 1999.................... $ 3,139 $ (154,087) $(3,509) $ (154,457)
Vesting of new options...................... 8 -- -- 8
Net loss.................................... -- (17,981) --
Other comprehensive loss -
Foreign currency translation adjustments.. -- -- (3,023)
Minimum pension liability adjustment...... -- -- 24
Comprehensive net loss...................... -- -- -- (20,980)
-------- ----------- ------- ----------
BALANCE, December 31, 2000.................... 3,147 (172,068) (6,508) (175,429)
Issuance of Series A Preferred stock in
debt extinguishment...................... -- -- -- --
Tender of Series A Preferred stock in debt
extinguishment............................ -- -- -- --
Issuance of Series B Preferred stock in
debt extinguishments...................... -- -- -- 14,339
Issuance of stock warrants in debt
extinguishment............................ -- -- -- 4,827
Equity contribution from Former Parent...... 5,163 -- -- 5,163
Related-party gain on debt extinguishment... -- -- -- 52,704
Net income.................................. -- 60,990 --
Other comprehensive income -
Foreign currency translation adjustments.. -- -- (1,422)
Minimum pension liability adjustment...... -- -- (1,146)
Comprehensive net income.................... -- -- -- 58,422
-------- ----------- ------- ----------
BALANCE, December 31, 2001.................... 8,310 (111,078) (9,076) (39,974)
Conversion of Series A and Series B
Preferred Stock to Common Stock........... 71,820 -- -- --
Net loss.................................... (30,081)
Other comprehensive loss -
Foreign currency translation adjustments.. -- -- 4,599 --
Minimum pension liability adjustments..... -- -- (2,552) --
Comprehensive net loss.................... -- -- -- (28,034)
-------- ----------- ------- ----------
BALANCE, December 31, 2002.................... $ 80,130 $ (141,159) $(7,029) $ (68,008)
======== =========== ======= ==========
See notes to consolidated financial statements.
38
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
FOR THE YEARS ENDED DECEMBER 31
---------------------------------------
2002 2001 2000
--------- ---------- ---------
OPERATING ACTIVITIES:
Net (loss) income............................................................. $ (30,081) $ 60,990 $ (17,981)
Adjustments to reconcile net (loss) income to cash flows from operations-
Depreciation................................................................ 6,360 9,004 11,232
Amortization of goodwill and intangibles.................................... 120 2,156 2,223
Amortization of deferred financing charges and pay-in-kind interest
charge.................................................................... 19,076 7,186 2,073
Provision for bad debts..................................................... 240 4,509 1,700
(Gain) loss on sale of businesses, product lines and other assets........... (2,151) 181 (753)
Restructuring charges....................................................... 478 11,475 8,812
Extraordinary gain on early extinguishment of debt.......................... -- (115,897) --
Cumulative effect of change in accounting................................... 29,863 -- --
Stock option compensation expense........................................... -- -- 8
Deferred income taxes....................................................... (76) (3) (50)
Change in operating assets and liabilities:
Accounts receivable....................................................... (1,448) (184) 9,326
Inventories............................................................... 5,706 7,824 4,403
Other current assets...................................................... 88 3,737 5,431
Accounts payable and accrued liabilities.................................. (9,944) 7,720 (17,541)
Income taxes.............................................................. (370) (1,661) 2,357
Other long-term liabilities............................................... 1,103 275 613
--------- ---------- ---------
Net cash provided by (used in) operating activities.................... 18,964 (2,688) 11,853
--------- ---------- ---------
INVESTING ACTIVITIES:
Additions to property, plant and equipment.................................... (4,834) (6,121) (11,553)
Proceeds from sale of businesses, product lines and other assets.............. 4,570 298 3,695
Other......................................................................... 222 222 (463)
--------- ---------- ---------
Net cash used in investing activities.................................. (42) (5,601) (8,321)
--------- ---------- ---------
FINANCING ACTIVITIES:
Repayments (borrowings) under revolving lines of credit, net.................. (9,235) (6,159) 5,079
Proceeds from issuance of long-term debt...................................... 1,518 28,200 939
Repayment of long-term debt................................................... (10,929) (8,705) (9,543)
Payments for deferred financing costs and capital issuance costs.............. (242) (4,561) --
--------- ---------- ---------
Net cash (used in) provided by financing activities.................... (18,888) 8,775 (3,525)
--------- ---------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS................................................................... 314 (161) (545)
--------- ---------- ---------
CASH AND CASH EQUIVALENTS:
Net increase (decrease)....................................................... 348 325 (538)
Beginning of year............................................................. 3,026 2,701 3,239
--------- ---------- ---------
End of year................................................................... $ 3,374 $ 3,026 $ 2,701
========= ========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the year for-
Interest.................................................................... $ 7,101 $ 21,907 $ 36,487
========= ========== =========
Income taxes................................................................ $ 3,193 $ 4,510 $ (490)
========= ========== =========
Noncash financing activities related to debt restructuring -
Retirement of 11.0% Senior Subordinated Notes............................... $ -- $ (99,950) $ --
Retirement of 10.5% Senior Subordinated Notes............................... -- (124,500) --
Issuance of Series B Preferred stock........................................ -- 14,600 --
Issuance of Warrants........................................................ -- 4,900 --
Issuance of 13.0% Senior Subordinated Discount Notes........................ -- 43,518 --
Equity contribution from Former Parent...................................... -- 5,163 --
See notes to consolidated financial statements.
39
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Telex Communications, Inc. (Telex or the Company), a Delaware
corporation, is a leader in the design, manufacture and marketing of
sophisticated audio and wireless 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 audio and
wireless product markets, including wired and wireless microphones, wired and
wireless intercom systems, mixing consoles, signal processors, amplifiers,
loudspeaker systems, headphones and headsets, digital duplication products,
Talking Book Players, antennas, land mobile communication systems, personal
computer speech recognition and speech dictation microphone systems, and
wireless assistive listening systems. 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.
LIQUIDITY AND FINANCING
The Company is highly leveraged and debt service obligations represent
significant liquidity requirements for the Company.
On November 21, 2001, the Company completed a debt restructuring
transaction (the Debt Restructuring), pursuant to which substantially all of its
then-existing Senior Subordinated Notes were exchanged for newly-issued Senior
Subordinated Discount Notes, Series B Preferred stock and Warrants to purchase
Series B Preferred stock. The Series B Preferred stock represented approximately
99.8% of the voting and economic interests in the Company. The Series B
Preferred stock was converted in April 2002 into an equal number of shares of
our Common stock. Prior to the Debt Restructuring, we were a wholly owned
subsidiary of Telex Communications Group, Inc. (Former Parent), a holding
company whose assets consisted primarily of its investment in Telex.
In connection with the Debt Restructuring, the lenders under the
Company's Senior Secured Credit Facility and the holders of its Senior Secured
Notes waived existing defaults, including defaults that existed at September 30,
2001, under the Senior Secured Credit Facility and the Senior Secured Notes and
agreed to the modification of certain covenants.
In 2002, the Company's debt service obligations declined due in part to
the Debt Restructuring, and the Company improved its operating performance due
in part to the benefits from the 2001 restructurings (see note 3), most of which
were fully implemented in early 2002. While the Company believes these actions
will provide adequate cash flow to meet its debt service obligations, capital
expenditure needs and working capital requirements in 2003, no assurance can be
given in this regard. 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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. Significant intercompany transactions
and balances have been eliminated in consolidation.
40
USE OF ESTIMATES
Preparation of the Company's consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts in the consolidated financial statements and accompanying notes.
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 carried at cost, which approximates fair value.
ACCOUNTS RECEIVABLE
The Company performs ongoing credit evaluations of its customers and
adjusts credit limits based upon payment history and the customer's current
creditworthiness. The Company continuously monitors collections from customers
and maintains a provision for estimated credit losses based on historical
experience and any specifically identified collection issues.
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 and are depreciated
primarily using the straight-line method over the estimated useful lives,
ranging from 5 to 31 years for buildings and improvements, and 1.5 to 12 years
for machinery and equipment.
The Company capitalizes certain software implementation costs in
accordance with Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." Direct internal and
all external implementation costs and purchased software have been capitalized
and depreciated using the straight-line method over estimated useful lives,
ranging from two to five years. As of December 31, 2002 and 2001, total
accumulated software implementation costs of $9.9 million and $9.7 million,
respectively, 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 debt and
obtain related amendments. These costs are being amortized over the terms of the
related debt.
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
Other intangibles.................... 3-5 years
GOODWILL
Goodwill represents the excess of the purchase price over the fair
value of identifiable net assets acquired in business combinations accounted for
as purchases. The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets" (SFAS 142) effective
January 1, 2002. Under SFAS 142, goodwill is no longer amortized, but is subject
to periodic testing for impairment. Goodwill of a reporting unit is tested for
impairment on an annual basis or between annual tests if an event occurs or
circumstances change that would reduce the fair value of a reporting unit below
its carrying amount. If the carrying amount of assets of a reporting unit,
including goodwill, exceeds its fair value, then the amount of the impairment
loss must be measured. The Company incurred a goodwill impairment loss of $29.9
million in the year ended December 31, 2002. See note 6 for additional
disclosure.
41
LONG-LIVED ASSETS
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 supersedes
previous guidance for financial accounting and reporting for the impairment or
disposal of long-lived assets and for segments of a business to be disposed of.
SFAS 144 was effective for the Company beginning on January 1, 2002. The
adoption of SFAS 144 did not have a material impact on the Company's results of
operations and financial position.
The Company followed the provisions of Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," for 2001 and
2000, which required impairment losses to be recorded on long-lived assets used
in operations when indicators of impairment were present and the undiscounted
cash flows estimated to be generated by those assets were less than the assets'
carrying amount. Impairment losses were 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. See notes 3 and 6 for additional
disclosure.
ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss are as follows
(in thousands):
2002 2001
-------- --------
Foreign currency translation $ 3,331 $ 7,930
Minimum pension liability 3,698 1,146
-------- --------
$ 7,029 $ 9,076
======== ========
REVENUE RECOGNITION
Revenue from product sales is recognized at the time of shipment and
passage of title. The Company also offers customers certain rights to return
products. The Company continuously monitors and tracks such product returns and
records a provision for the estimated amount of such future returns, based on
historical experience and any notification the Company receives of pending
returns.
SHIPPING AND HANDLING COSTS
The Company records shipping and handling costs billed to a customer in
a sales transaction as revenue. The amount included in revenue was $1.6 million,
$2.2 million and $3.0 million for the years ended December 31, 2002, 2001 and
2000, respectively. The costs associated with shipping and handling are included
as a component of selling, general and administrative expenses. Shipping and
handling costs for the years ended December 31, 2002, 2001 and 2000 were $4.0
million, $5.0 million and $4.2 million, respectively.
WARRANTY COSTS
The Company offers a warranty on certain of its products for
workmanship and performance for periods of generally up to one year. Warranty
costs are accrued at the time of sale and are based on expected average repair
costs and return rates developed by the Company using historical data. Warranty
costs for the years ended December 31, 2002, 2001 and 2000 were $0.8 million,
$1.1 million and $2.0 million, respectively.
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
years ended December 31, 2002, 2001 and 2000 were $5.5 million, $6.8 million and
$6.4 million, respectively.
INCOME TAXES
The Company accounts for income taxes utilizing the liability method of
accounting. Deferred income taxes are recorded to reflect the tax consequences
of differences between the tax and the financial reporting bases of assets and
liabilities. The Company's tax
42
provision is calculated on a separate company basis, and the Company's taxable
income was included with the consolidated federal income tax return of Former
Parent until the closing of the Debt Restructuring on November 21, 2001.
Pursuant to the Debt Restructuring (described above under "Liquidity and
Financing"), the Former Parent is no longer the parent of the Company.
Accordingly, for periods subsequent to November 21, 2001, the Company's income
will not be consolidated with the Former Parent and the federal income tax
return will be based only on the Company's income.
FOREIGN CURRENCY
The balance sheets and results of operations of the Company's
international subsidiaries are measured using local currencies as the functional
currency. Income statement accounts are translated at the average exchange rates
in effect during the year. Assets and liabilities are translated at the exchange
rates at the balance sheet date. The resulting balance sheet translation
adjustments are included in accumulated other comprehensive loss in
shareholders' deficit. Foreign exchange transaction gains and losses realized
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.
FINANCIAL INSTRUMENTS
The Company uses foreign currency forward exchange contracts to manage
and reduce risk to the Company by generating cash flows which offset cash flows
of certain transactions in foreign currencies. The Company's derivative
financial instruments are used as risk management tools and not for speculative
or trading purposes. Although not material, these derivatives represent assets
and liabilities and are classified as other current assets or other current
liabilities on the accompanying Consolidated Balance Sheets.
The Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133), as amended on January 1, 2001.
The Company has designated its forward contracts as fair value hedges and
recognizes the gains and losses on the changes in the fair values of the
Company's derivative instruments in other income. Historically, the gains and
losses on these transactions have not been significant.
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 portion of the Company's cash flow from
operations must be dedicated to debt service, 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.
Technological innovation and leadership are among the important factors
in competing successfully in the Company's business. 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 many of our markets. 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 hedges 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 manages
currency risk exposure to foreign currency-denominated intercompany balances
through forward foreign exchange contracts. 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
43
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, 2002, the Company had outstanding
foreign currency forward exchange contracts with a notional amount of $2.3
million and with an average maturity of 96 days. The fair value of these
contracts was not material at December 31, 2002.
The Company offers a range of 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, 2002, the Company believes it has no
significant customer or geographic concentration of accounts receivable that
could expose the Company to a material short-term financial impact.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation. These reclassifications had no effect on
shareholders' deficit or net (loss) income as previously reported.
NEW ACCOUNTING STANDARDS
In June 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS
146). SFAS 146 addresses financial accounting and reporting for costs associated
with exit or disposal activities. It nullifies Emerging Issues Task Force Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity." SFAS 146 requires that a liability be
recognized for costs associated with an exit or disposal activity only when the
liability is incurred. SFAS 146 also establishes fair value as the objective for
initial measurement of liabilities related to exit or disposal activities. SFAS
146 is effective for exit or disposal activities that are initiated after
December 31, 2002. The Company does not believe that SFAS 146 will have a
material impact on its results of operations and financial position.
NOTE 2 - DISPOSITIONS
During the year ended December 31, 2002, the Company recognized a gain
of $0.9 million on cash proceeds of approximately $2.7 million associated with
the sale of its hearing instrument products business. The Company recognized a
gain of $1.2 million on cash proceeds of approximately $1.7 million related to
the sale of its idle facility in Sevierville, Tennessee. The Company also had
other miscellaneous asset sales that resulted in recognition of a gain of $0.1
million on cash proceeds of approximately $0.2 million.
During the year ended December 31, 2001, the Company recognized a loss
of $0.3 million associated with the closure of its Canadian sales subsidiary.
The Company recognized a gain of $0.1 million on cash proceeds of approximately
$0.3 million related to the sale of its engineering facility in Buchanan,
Michigan.
During the year ended December 31, 2000, the Company sold its sales
subsidiary in Switzerland for approximately $1.0 million in cash. The Company
recognized a loss of $0.4 million associated with this transaction. The Company
also recognized a gain of $1.1 million on cash proceeds of approximately $2.7
million related to the sale of its previous Minnesota headquarters facility and
the Altec Lansing trademark.
NOTE 3 - RESTRUCTURING CHARGES
During 2002, the Company recorded pretax restructuring charges of $0.5
million related to the cost of settlement and curtailment in accordance with
SFAS No. 88 "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits" (SFAS 88). In 2002, lump sum
payments were made to former employees whose positions were terminated as part
of restructuring measures announced in 2001. The payments resulted in a partial
settlement under SFAS 88 in 2002. The resulting charge could not be estimated as
a cost in 2001 because the number of participants taking lump sum settlements
could not be measured.
During 2001, the Company recorded pretax restructuring charges of $11.5
million attributable to consolidation of certain of the
44
Company's manufacturing operations in the United States, to the restructuring of
operations in Hong Kong, Canada and Mexico, and to the discontinuation of its
hearing aid products. The restructuring resulted in a reduction of approximately
450 employees, primarily in manufacturing and distribution, with all employees
terminated as of December 31, 2002. The restructuring charges included expected
cash expenditures of $4.1 million, primarily for severance costs, with the
remaining $7.4 million of the restructuring charges representing noncash charges
associated with write-down of fixed assets. As of December 31, 2002, cash
expenditures of $0.1 million remain to be paid.
In 2000, the Company recorded pretax restructuring charges of $8.8
million attributable to the consolidation of certain of the Company's United
States manufacturing, engineering, distribution, marketing, service and
administrative operations to reduce costs, to better utilize available
manufacturing and operating capacity, and to enhance competitiveness. The
consolidation resulted in a reduction of approximately 500 employees, primarily
in manufacturing and distribution, with all employees terminated as of December
31, 2001. The restructuring charges included cash expenditures of $4.0 million,
primarily for severance costs, with the remaining $4.8 million representing
noncash charges associated with discontinued product lines. All cash
expenditures were made as of December 31, 2001.
The following table summarizes the status of the Company's business
restructuring reserve and other related expenses during the years ended December
31, 2000, 2001 and 2002 (in thousands):
RESTRUCTURING RESERVE TOTAL
EMPLOYEE LEASE TOTAL RESTRUCTURING
SEPARATION TERMINATION OTHER EXIT RESTRUCTURING ASSET RESERVE AND
COSTS OBLIGATIONS COSTS RESERVE IMPAIRMENTS RELATED EXPENSES
----- ----------- ----- ------- ----------- ----------------
Charges $ 3,396 $ 50 $ 518 $ 3,964 $ 4,848 $ 8,812
Cash payments (1,971) (50) (123) (2,144) -- (2,144)
Asset impairments -- -- -- -- (4,848) (4,848)
--------- -------- -------- ---------- ---------- ----------
Balance as of December 31, 2000 1,425 -- 395 1,820 -- 1,820
Charges 3,540 246 333 4,119 7,356 11,475
Cash payments (2,495) -- (442) (2,937) -- (2,937)
Asset impairments -- -- -- -- (7,356) (7,356)
--------- -------- -------- ---------- ---------- ----------
Balance as of December 31, 2001 2,470 246 286 3,002 -- 3,002
Charges 478 -- -- 478 -- 478
Cash payments (2,428) (151) (43) (2,622) -- (2,622)
Pension settlement and curtailment (762) -- -- (762) -- (762)
Reclassifications 338 (95) (243) -- -- --
--------- -------- -------- ---------- ---------- ----------
Balance as of December 31, 2002 $ 96 $ -- $ -- $ 96 $ -- $ 96
========= ======== ======== ========== ========== ==========
NOTE 4 - INVENTORIES
Inventories consist of the following as of December 31 (in thousands):
2002 2001
---------- ----------
Raw materials................................... $ 19,224 $ 24,709
Work in progress................................ 6,840 8,295
Finished goods.................................. 21,622 17,781
---------- ----------
$ 47,686 $ 50,785
========== ==========
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following as of December
31 (in thousands):
2002 2001
----------- -----------
Land and improvements........................... $ 1,724 $ 1,620
Buildings and improvements...................... 23,149 23,322
Machinery and equipment......................... 102,766 99,711
Construction in progress........................ 609 441
----------- -----------
128,248 125,094
Less- Accumulated depreciation.................. (99,253) (95,023)
----------- -----------
$ 28,995 $ 30,071
=========== ===========
NOTE 6 - GOODWILL AND INTANGIBLE ASSETS
45
The Company adopted SFAS No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142) on January 1, 2002 with respect to goodwill and intangible
assets acquired prior to July 1, 2001. Under SFAS 142, goodwill and other
indefinite-lived intangible assets are no longer amortized but are reviewed
annually (or more frequently if impairment indicators arise) for impairment. The
Company completed the initial review for impairment in the second quarter of
2002 and concluded that there was an indication of goodwill impairment for the
Professional Sound and Entertainment business segment, which had $46.7 million
of unamortized goodwill. As of December 31, 2002, the Company completed the
measurement of the impairment loss and wrote down the goodwill by $29.9 million.
The fair value of the businesses measured was based on a combination of market
and income (using discounted cash flows) approaches. SFAS 142 requires that the
impairment loss be recognized as a cumulative effect of change in accounting as
of January 1, 2002. The Company also has certain amounts of goodwill denominated
in foreign currencies that fluctuate with movement of exchange rates. The
following table presents a reconciliation of reported net (loss) income to
adjusted amounts assuming SFAS 142 was effective during the following periods
(in thousands, except per share data):
2002 2001 2000
----------- ------------ ------------
Reported net (loss) income $ (30,081) $ 60,990 $ (17,981)
Goodwill amortization -- 2,032 2,009
----------- ------------ ------------
Adjusted net (loss) income $ (30,081) $ 63,022 $ (15,972)
=========== ============ ============
Reported basic and diluted (loss) earnings per share $ (8.47) $ 554,454.55 $(163,463.64)
Goodwill amortization -- 18,472.73 18,263.64
----------- ------------ ------------
Adjusted basic and diluted (loss) earnings per share $ (8.47) $ 572,927.28 $(145,200.00)
=========== ============ ============
The changes in the carrying of goodwill for the year ended December 31, 2002, by
operating segment are as follows:
PROFESSIONAL SOUND AUDIO AND WIRELESS
AND ENTERTAINMENT TECHNOLOGY TOTAL
------------------ ---------- -----
Balance as of January 1, 2002 $ 46,775 $ 6,090 $ 52,865
Goodwill impairment (29,863) -- (29,863)
Foreign currency translation 152 -- 152
---------- --------- ----------
Balance as of December 31, 2002 $ 17,064 $ 6,090 $ 23,154
========== ========= ==========
In the year ended December 31, 2000, the Company determined that the
estimated future undiscounted cash flows for a certain product line were below
the carrying value of related long-lived intangible assets primarily due to
changed business conditions for the product line. Accordingly, the Company
recorded a charge of $0.2 million attributed to the impairment of long-lived
intangible assets.
Included in restructuring charges for 2000, as described in Note 3, is
a charge of $3.5 million for goodwill impairment and a charge of $0.8 million
for write-off of fixed assets attributed to the discontinued products lines.
Other intangible assets determined to have definite lives are amortized
over their remaining useful lives. The other intangible assets consist of dealer
and distributor lists, patents and engineering drawings and tradenames. These
assets are included on the consolidated balance sheet as a component of other
assets and totaled $0.1 million and $0.2 million, net of accumulated
amortization, as of December 31, 2002 and 2001, respectively. Amortization
expense for other intangible assets having definite lives was $0.1 million, $0.1
million and $0.2 million for the years ended December 31, 2002, 2001 and 2000,
respectively.
NOTE 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 limitation. At December 31, 2002, the Company's borrowing base limited the
Company's borrowing capacity under the Facility to $15.8 million. Interest on
outstanding borrowings is calculated, at the Company's option, using the bank's
prime rate or LIBOR (1.34% at December 31, 2002) plus specified margins. At
December 31, 2002, the Company's borrowings under this Facility were at LIBOR
plus five percentage points. The revolving line of credit expires on April 30,
2004. The Facility requires an annual commitment fee of 0.5% of the unused
portion of the commitment. Borrowings are secured by substantially all accounts
receivable and inventories. The Company had borrowings of $8.6 million and
letters of credit outstanding of $0.4 million as of December 31, 2002. The
borrowings are short-term (maturing between 30 to 180 days) and are renewed by
the Company as necessary based on cash flow from operating activities. The
Company has classified $7.3 million of the revolving credit facility as
short-term debt based on its anticipated ability to repay the debt in the next
12 months with the remaining
46
$1.3 million classified as long-term debt.
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 $10.0 million. At
December 31, 2002, the Company had borrowings of $3.9 million and guarantees of
$0.3 million under these facilities, leaving $5.8 million available. The
interest rates in effect on these facilities, as of December 31, 2002, ranged
from 5.25% to 7.95% and are generally subject to change based upon prevailing
local prime rates. In certain instances, the facilities are secured by a lien on
foreign real estate, leaseholds or accounts receivable and inventories, or are
guaranteed by another subsidiary of the Company. The foreign lines of credit are
payable on demand and classified as current liabilities.
LONG-TERM DEBT
Long-term debt consists of the following as of December 31 (in
thousands):
2002 2001
---------- ----------
Senior Secured Credit Facility (Revolving Credit Facility)................ $ 8,563 $ --
Senior Secured Credit Facility (Term Loan Facility):
Term Loan A, due in quarterly installments through April
30, 2004, bearing interest at LIBOR plus 5 percentage
points payable monthly, secured by substantially all
assets of the Company................................................ 15,606 18,084
Term Loan B, due in quarterly installments through April
30, 2004, bearing interest at LIBOR plus 5 percentage
points payable monthly, secured by substantially all
assets of the Company................................................ 51,655 59,858
Tranche A Senior Secured Notes, with step-up (18.0% to
25.0%), pay-in-kind interest (effective interest rate of
27.3% over the life of the notes), due July 31, 2004,
secured by substantially all assets of the Company (net of
unamortized discount of $583 and $943).................................. 27,692 21,951
Tranche B Senior Secured Notes, with step-up (19.5% to
25.0%), pay-in-kind interest (effective interest rate of
29.1% over the life of the notes), due July 31, 2004,
secured by substantially all assets of the Company (net of
unamortized discount of $357 and $576).................................. 12,268 9,647
Senior Subordinated Discount Notes, due November 15, 2006,
with an effective interest rate, exclusive of capitalized
debt issuance costs, of 18.5%, accreting at 13.0% on the
deemed issue price of $56,104, unsecured (net of
unamortized discount of $52,119 and $60,710)............................ 52,981 44,390
Senior Subordinated Notes, due May 1, 2007, bearing interest
of 10.5% payable semiannually, unsecured................................ 500 500
Senior Subordinated Notes, due March 15, 2007, bearing
interest of 11.0% payable semiannually, unsecured....................... 50 50
Interest-free loan, discounted at an effective interest rate
of 10.5%, due in monthly installments beginning March 2002
through February 2010, secured by Morrilton, Arkansas
building (net of unamortized discount of $458 and $573)................. 1,065 1,127
Other................................................................... 1,525 --
---------- ----------
171,905 155,607
Less- Current portion..................................................... (17,275) (8,177)
---------- ----------
Total long-term debt............................................... $ 154,630 $ 147,430
========== ==========
In April 2001, the Company issued Tranche A Senior Secured Notes in the
principal amount of $20.0 million (of which $9.8 million of the notes were
purchased by a related party) to increase its liquidity. The net proceeds to the
Company were $18.8 million after payment of commitment fees. The Tranche A
Senior Secured Notes are junior to the Senior Secured Credit Facility, but
senior to the Senior Subordinated Notes and the Senior Subordinated Discount
Notes. Interest on the principal amount of the Tranche A Senior Secured Notes
compounds quarterly at 18% per annum, increasing by 75 basis points each quarter
until the applicable interest rate is 25% per annum, and is payable at maturity.
On November 21, 2001, the Company completed a Debt Restructuring,
pursuant to which $224.5 million, or 99.8% of the total, of its then-existing
Senior Subordinated Notes were exchanged for newly-issued Senior Subordinated
Discount Notes at a deemed issue price of $56.1 million, 5.0 million shares of
Series B Preferred stock and warrants to purchase 1.7 million shares of Series B
Preferred stock. As part of this debt exchange, the Company recorded $115.9
million of extraordinary gain in the consolidated statement of operations. An
additional gain of $52.7 million resulting from Senior Subordinated Notes
exchanged by related parties was recorded
47
as contributed capital in the consolidated statement of shareholders' deficit
and comprehensive income. At the date of the Debt Restructuring, the Company
recorded the Series B Preferred stock, the Warrants and the Senior Subordinated
Discount Notes at their estimated fair market values of $14.6 million, $4.9
million and $43.5 million, respectively.
In connection with the Debt Restructuring, the Company issued Tranche B
Senior Secured Notes in the principal amount of $10.0 million (of which $5.0
million of the notes were purchased by a related party) for net proceeds of $9.4
million after payment of commitment fees. The Tranche B Senior Secured Notes are
identical to the Tranche A Senior Secured Notes, except that the initial
interest rate at which interest accrues on the Tranche B Senior Secured Notes is
19.5% per annum. Further, the lenders under the Company's Senior Secured Credit
Facility and the holders of its Tranche A Senior Secured Notes waived existing
defaults, including defaults that existed at September 30, 2001, and agreed to
the modification of certain covenants.
The Senior Subordinated Notes, the Senior Subordinated Discount Notes,
the Tranche A and B Senior Secured 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, consolidations, mergers and transfers of all or
substantially all of the Company's assets and capital expenditures, subject to
certain qualifications and exceptions. The Company was in compliance with all
covenants related to all debt agreements at December 31, 2002.
Aggregate annual payments for maturities of long-term debt are as
follows for the years ended December 31 (in thousands):
2003........................................................... $ 17,275
2004........................................................... 119,309
2005........................................................... 420
2006........................................................... 105,532
2007........................................................... 1,484
Thereafter..................................................... 460
------------
Total at maturity value........................................ 244,480
Less- unamortized discount and interest to be accrued.......... (72,575)
------------
$ 171,905
============
NOTE 8 - INCOME TAXES
The Company's pretax income (loss) before extraordinary item and
cumulative effect of change in accounting for U.S. and foreign subsidiaries was
as follows for the years ended December 31 (in thousands):
2002 2001 2000
---------- ---------- ----------
United States............ $ (8,431) $ (60,477) $ (20,923)
Foreign.................. 10,831 8,255 5,117
---------- ---------- ----------
Income (loss)............ $ 2,400 $ (52,222) $ (15,806)
========== ========== ==========
Significant components of the provision for income taxes are as follows
for the years ended December 31 (in thousands):
2002 2001 2000
--------- -------- --------
Current:
Federal.............. $ (362) $ -- $ --
State................ -- 12 105
Foreign.............. 3,056 2,676 2,120
--------- -------- --------
2,694 2,688 2,225
Deferred............... (76) (3) (50)
--------- -------- --------
$ 2,618 $ 2,685 $ 2,175
========= ======== ========
A reconciliation of the income taxes computed at the federal statutory
rate to the Company's income tax provision is as follows for the years ended
December 31 (in thousands):
2002 2001 2000
---------- ----------- ---------
Federal benefit at statutory rate................................. $ (9,338) $ (17,755) $ (5,374)
State benefit, net of federal tax................................. (1,359) (2,067) (645)
Nondeductible goodwill impairment and amortization................ 10,770 532 532
Change in deferred tax asset valuation allowance.................. 1,853 16,095 6,751
Nondeductible debt restructuring costs............................ -- 4,374 --
Foreign tax rate differences...................................... (67) 266 334
Other............................................................. 759 1,240 577
--------- ---------- ---------
$ 2,618 $ 2,685 $ 2,175
========= ========== =========
48
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
as of December 31 (in thousands):
2002 2001
------------ ------------
Deferred tax liabilities:
Tax over book depreciation.................................. $ 496 $ 306
Tax over book amortization.................................. 1,896 2,121
Section 481(a) adjustment................................... 1,551 1,747
------------ ------------
Total deferred tax liabilities......................... 3,943 4,174
------------ ------------
Deferred tax assets:
Compensation accruals....................................... 673 4,142
Pension accrual............................................. 2,799 1,544
Inventory reserves.......................................... 3,716 2,561
Bad debt reserves........................................... 627 1,296
Vacation accrual............................................ 624 728
Warranty reserves........................................... 698 1,062
Restructuring reserves...................................... 1,115 2,432
Tax loss carryforward....................................... 4,438 32,241
Other....................................................... 3,006 2,738
------------ ------------
Total deferred tax assets.............................. 17,696 48,744
Valuation allowance........................................... (13,630) (44,505)
------------ ------------
Deferred tax assets, net of valuation allowance........ 4,066 4,239
------------ ------------
Net deferred tax assets....................................... $ 123 $ 65
============ ============
The total current deferred tax asset of $1,193,000 and $380,000 at
December 31, 2002 and 2001, respectively, is included in other current assets.
The total noncurrent deferred tax liability of $1,070,000 and $315,000 at
December 31, 2002 and 2001, respectively, is included in other long-term
liabilities.
The Company has established a deferred tax valuation allowance of $13.6
million due to the uncertainty of the realization of future tax benefits. This
amount relates primarily to U.S. deferred tax assets as the realization of
future tax benefits related to the deferred tax asset is dependent on the
Company's ability to generate taxable income within the net operating loss
carryforward period. Management has considered this factor in reaching its
conclusion as to the adequacy of the valuation allowance for financial reporting
purposes.
The Company will not recognize any taxable income on the extraordinary
gain on early extinguishment of debt related to the Debt Restructuring completed
on November 21, 2001 due to certain provisions of the United States Internal
Revenue Code (the Code) for taxpayers deemed insolvent. Those same provisions
also provide that any taxpayer not recognizing taxable income due to this
insolvency provision will reduce all tax attributes, as defined under the Code,
to the extent of the unrecognized gain. The Company's portion of net operating
loss carryforwards that were generated in the United States is the only tax
attribute applicable to this provision. As of December 31, 2001, the Company had
a deferred tax asset related to net operating losses of $32.2 million, of which
$31.0 million is related to the net operating losses generated in the United
States and $1.2 million is related to the net operating losses generated by
foreign subsidiaries. Therefore on January 1, 2002, the Company eliminated the
$31.0 million of the deferred tax asset related to the net operating losses in
the United States and also reduced its valuation allowance accordingly.
The Company has foreign operating loss carryforwards of $3.2 million,
of which $0.7 million expire between 2006 and 2012 and $2.5 million have no
expiration date. The U.S. operating loss carryforward is $9.1 million, of which
$0.5 million expires in 2021 and $8.6 million expires in 2022.
As of December 31, 2002, the Company has a reserve of $4.5 million
included in income taxes payable in accordance with a settlement with the
Internal Revenue Service (IRS) for the expected liability, penalties and accrued
interest (as of the settlement date) related to a dispute for the period from
1990 to 1995. The Company has agreed with the IRS on the final amount of the tax
liability to be paid and is making monthly payments to the IRS.
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. As such, no U.S. taxes have been provided for such foreign
earnings.
NOTE 9 - RELATED-PARTY TRANSACTIONS
49
For the years ended December 31, 2002, 2001 and 2000, the Company
recorded a charge to operations of $0.5 million, $1.3 million and $1.7 million,
respectively, for management services provided by Greenwich Street Capital
Partners, L.P., a related party. The services include, but are not limited to,
developing and implementing corporate and business strategy and providing other
consulting and advisory services. This agreement expired in May 2002 with no
current plans to renew the agreement.
Under the terms of the Senior Secured Credit Facility, the Company is
prohibited from making any payment, in cash or other property, of the advisory
fee until the repayment in full of the loans outstanding under the Senior
Secured Credit Facility. The Company is accruing the advisory fee, together with
interest, at the rate of 2 percent per month. The Company had a balance payable,
inclusive of interest, of $2.5 million at December 31, 2002.
GSCP Recovery, Inc., a related party, purchased (in secondary
transactions) $9.8 million of the $20.0 million principal Tranche A Senior
Secured Notes (which were issued originally to GSCP Recovery (US), LLC in April
2001) and $5.0 million of the $10.0 million principal Tranche B Senior Secured
Notes (which were issued originally to GSCP Recovery (US), LLC in November
2001).
The Company recognized a gain of $52.7 million in November 2001 from
the early retirement of debt held by related parties. The gain was recorded as
contributed capital in the Company's consolidated statement of shareholders'
deficit and comprehensive income.
In 2001, the Former Parent made an equity contribution of $5.2 million
to the Company.
In 2000, the Company relocated its corporate headquarters to a facility
leased from DRF 12000 Portland LLC (the LLC), an entity in which the Company has
a 50% interest. The Company contributed cash of $0.6 million to the LLC and the
investment is accounted for under the equity method. The Company's allocable
share of the LLC income is included as a component of other income in the
accompanying consolidated statements of operations. The LLC financed the
purchase of the facility with a mortgage secured by the facility. At December
31, 2002, the remaining balance on the mortgage was $6.7 million. The annual
lease payments to the LLC are $1.1 million for years 1 to 5 and $1.2 million for
years 6 to 10. The Company may renew the lease at the end of the initial lease
for three renewal terms of five years each. The lease has been classified as an
operating lease and the Company records the lease obligations as rent expense.
The LLC results of operations and the Company's equity in earnings of
the LLC included (in thousands):
2002 2001 2000
---------- ---------- ----------
Gross revenue $ 1,784 $ 1,632 $ 1,709
Costs and expenses 1,548 1,375 1,052
---------- ---------- ----------
Net income $ 236 $ 257 $ 657
========== ========== ==========
Equity share in earnings of the LLC $ 118 $ 129 $ 608
========== ========== ==========
Net income for 2000 was not allocated in relation to ownership interest based on
provisions in the LLC ownership agreement.
Condensed balance sheet information for the LLC as of December 31 was
(in thousands):
2002 2001
---------- ----------
Current assets $ 69 $ 98
Noncurrent assets 9,676 9,750
Current liabilities 394 348
Noncurrent liabilities 7,345 7,394
NOTE 10 - PENSION AND POSTRETIREMENT BENEFITS
The Company has one noncontributory defined benefit cash balance
pension plan as a result of a merger in August 2000 of the Company's union
employee plan with its nonunion employee plan. Two benefit structures, union and
nonunion, are maintained under the merged plan. Under the terms of the cash
balance pension plan, accrued benefits are expressed as account balances for
each participant. Each year the account balances are increased by an interest
credit based on an interest rate indexed to the U.S. Treasury bills, with a
minimum interest rate of 5%, as well as a benefit credit based on the
participant's age, vesting service and covered remuneration. Pension costs are
funded annually, subject to limitations. The Company's funding policy is to make
annual contributions of not less than the minimum required by applicable
regulations.
The Company is obligated to provide health and life insurance benefits
to certain employees of its U.S. operations upon retirement.
50
Contributions required to be paid by the employees toward 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.
The following table presents the funded status of the plans as
recognized in the consolidated financial statements as of and for the years
ended December 31 (in thousands):
PENSION BENEFITS OTHER BENEFITS
2002 2001 2002 2001
----------- ----------- ----------- -----------
Change in benefit obligation:
Benefit obligation at beginning of period.................. $ 25,636 $ 27,073 $ 471 $ 659
Service cost............................................... 1,198 1,437 3 8
Interest cost.............................................. 1,795 1,921 30 32
Actuarial loss (gain)...................................... 479 (591) (90) (176)
Benefits paid.............................................. (4,585) (4,191) (25) (59)
Amendments................................................. -- 23 -- 7
Effects of curtailment..................................... (134) (36) 92 --
----------- ----------- ----------- -----------
Benefit obligation at end of period.......................... 24,389 25,636 481 471
----------- ----------- ----------- -----------
Change in plan assets:
Fair value of plan assets at beginning of period........... 19,626 30,511 -- --
Actual return on plan assets............................... 20 (6,832) -- --
Employer contribution...................................... - 138 -- --
Benefits paid.............................................. (4,585) (4,191) -- --
----------- ----------- ----------- -----------
Fair value of plan assets at end of period................... 15,061 19,626 -- --
----------- ----------- ----------- -----------
Change in funded status:
Funded status.............................................. (9,328) (6,010) (481) (471)
Unrecognized actuarial loss (gain)......................... 8,171 6,384 (29) (3)
Unrecognized prior service cost............................ (2,588) (3,335) (1) (43)
----------- ----------- ----------- -----------
Net amount recognized........................................ $ (3,745) $ (2,961) $ (511) $ (517)
=========== =========== =========== ===========
Amounts recognized in the consolidated balance sheets
consist of:
Accrued benefit liability.................................. $ (7,443) $ (4,107) $ (511) $ (517)
Minimum pension liability.................................. 3,698 1,146 -- --
----------- ----------- ----------- -----------
Net amount recognized........................................ $ (3,745) $ (2,961) $ (511) $ 517)
=========== =========== =========== ===========
PENSION BENEFITS OTHER BENEFITS
2002 2001 2000 2002 2001 2000
--------- --------- --------- --------- --------- -------
Weighted average assumptions:
Discount rate............................................. 6.5% 7.0% 7.25% 6.5% 7.0% 7.25%
Expected return on plan assets............................ 8.5 9.0 9.0
Rate of compensation increase............................. 4.5 4.5 4.5
Components of net periodic benefit cost (income):
Service cost.............................................. $ 1,198 $ 1,437 $ 1,662 $ 3 $ 8 $ 17
Interest cost............................................. 1,795 1,921 1,943 30 32 43
Expected return on plan assets............................ (2,544) (2,821) (2,740) -- -- --
Amortization of unrecognized net transition obligation.... - 9 40 -- -- --
Amortization of prior service cost........................ (393) (403) (435) (3) (6) (6)
Recognized actuarial loss (gain).......................... (45) (215) (275) (1) -- 4
Settlement/curtailment loss (gain)........................ 773 (81) (340) (11) -- --
--------- --------- --------- --------- --------- -------
Net periodic benefit cost (income).......................... $ 784 $ (153) $ (145) $ 18 $ 34 $ 58
========= ========= ========= ========= ========= =======
Pension plan assets consist primarily of equity and debt securities and
cash equivalents.
The assumed healthcare cost trend rate and ultimate rate used in
measuring the benefit obligation are 8.50% and 5.50%, respectively, for the year
ended December 31, 2002.
A one percentage point change in assumed healthcare cost trend rates
would have an immaterial effect on service and interest cost components.
The Company provides a 401(k) savings plan for U.S. employees. Employee
contributions of up to 6% of eligible compensation are matched 50% by the
Company. The Company's contributions amounted to $0.7 million, $1.0 million and
$1.1 million for the years ended December 31, 2002, 2001 and 2000, respectively.
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
51
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
$0.7 million at December 31, 2002, 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 1.4% and 3.2%, respectively. For the years ended
December 31, 2002, 2001 and 2000, the Company charged $0.2 million, $0.3 million
and $0.3 million, respectively, to expense for this plan.
NOTE 11 - 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 its financial condition or results of operations.
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,
currently 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 U.S. federal, state, local
and foreign environmental protection laws and provisions should have no material
adverse effect on its results of operations or financial condition.
The Company's site in Buchanan, Michigan, formerly owned by Mark IV
Industries (Mark IV), has been designated a Superfund site under U.S. federal
environmental laws, and the Company has agreed that it is a de minimis
responsible party at two other sites that it acquired from and were formerly
owned by Mark IV. Mark IV has agreed to fully indemnify the Company for
environmental liabilities at the Superfund site (excluding any liability for
contamination that may exist within the manufacturing facility) and the two
other sites at which monitoring or remediation may be necessary.
The Company is party to a 1988 consent decree with the Nebraska
Department of Environmental Quality (NDEQ) relating to the cleanup of hazardous
waste at the Company's Lincoln, Nebraska, facility. In December 1997, the
Company entered into an Administrative Order of 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 adjacent
property (Lincoln site). The Company has reached agreement with the NDEQ on a
remediation plan regarding future monitoring and remediation of contamination at
the Lincoln site and does not believe that the costs related to its
responsibilities will result in a material adverse effect on its results of
operations or financial condition.
Through December 31, 2002, the Company had accrued approximately $1.8
million over the life of the project for anticipated costs to be incurred for
the Lincoln facility cleanup activities, of which approximately $1.6 million has
been paid.
There can be no assurance that the Company's estimated environmental
expenditures, which it 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 will not result in
additional environmentally related expenditures. However, the Company believes
that compliance with U.S. federal, state, local and foreign environmental
protection laws and regulations should have no material adverse effect on its
results of operations or financial condition.
EMPLOYMENT CONTRACTS
The Company has employment contracts with certain key executives that
require the Company to make payments of up to 12 months' salary in the event
such executives are terminated without cause.
52
The chief executive officer (CEO) entered into an employment agreement
with the Company effective December 16, 2002 pursuant to which the CEO will
receive (i) annual base salary of $450,000; (ii) a guaranteed bonus of $225,000
payable on January 1, 2004, prorated if the CEO does not work the full year; and
(iii) $30,000 per month for twelve months to provide consulting services in the
event of the CEO's retirement or termination without cause.
The president of worldwide pro audio entered into an employment
agreement with the Company effective January 5, 2003 pursuant to which he will
receive (i) annual base salary of $270,000; (ii) a bonus payment of between 40%
and 140% of his annual base salary upon the achievement of certain specified
performance objectives, and (iii) in the event his employment is terminated
without cause or he terminates his employment for good reason, the Company will
pay a lump-sum payment of 150% of his annual base salary plus 150% of his annual
target bonus (which target bonus is 70% of his annual base salary).
LEASE COMMITMENTS
At December 31, 2002, the Company had various noncancelable operating
leases for corporate headquarters, manufacturing, distribution and office
buildings, warehouse space and equipment. Rental expense charged to operations
was $3.2 million, $3.4 million and $2.9 million for the years ended December 31,
2002, 2001 and 2000, respectively.
Approximate future minimum rental commitments under all noncancelable
operating leases are as follows for the years ended December 31 (in thousands):
2003........................................ $ 2,859
2004........................................ 2,664
2005........................................ 2,161
2006........................................ 1,402
2007........................................ 1,366
2008 and thereafter......................... 3,471
-----------
Total minimum lease commitments........... $ 13,923
===========
NOTE 12 - SEGMENT INFORMATION
The Company has two business segments: Professional Sound and
Entertainment and Audio and Wireless Technology (formerly known as
Multimedia/Audio Communications).
PROFESSIONAL SOUND AND ENTERTAINMENT
Professional Sound and Entertainment consists of five lines of business
within the overall professional audio market, including: (i) permanently
installed sound systems; (ii) sound products used by professional musicians and
sold principally through retail channels; (iii) sound products used in
professional concerts, recording projects and radio and television broadcast;
(iv) broadcast communication products, including advanced digital matrix
intercoms, used by broadcasters (including all major television networks) to
control production communications intercoms, headsets and wireless
communications systems used by professional, college and high school football
teams and stadiums and other professional and high school sports teams; and (v)
wired and wireless microphones used in the education, sports, broadcast, music
and religious markets.
AUDIO AND WIRELESS TECHNOLOGY
Audio and Wireless Technology targets six principal product markets
including: (i) digital audio duplication products for the religious, education
and enterprise markets; (ii) military/aviation communication products for the
military and aviation markets; (iii) wireless networking products serving the
original equipment manufacturer, wireless internet service provider and medical
telemetry markets; (iv) land mobile communication products for the public
safety, military and industrial markets; (v) audio and wireless education
products for classroom and computer based education markets; and (vi)
teleconferencing products for the enterprise, education and government markets.
The following tables provide information by business segment (in
thousands):
53
PROFESSIONAL AUDIO AND
SOUND AND WIRELESS
ENTERTAINMENT TECHNOLOGY CORPORATE CONSOLIDATED
------------- ---------- --------- ------------
Net sales:
2002.......................................... $ 201,455 $ 65,066 $ - $ 266,521
2001.......................................... 196,844 87,615 - 284,459
2000.......................................... 212,564 116,291 - 328,855
Operating profit (loss):
2002.......................................... 17,540 10,574 (1,878) 26,236
2001.......................................... 3,423 9,538 (28,121) (15,160)
2000.......................................... 14,575 16,824 (21,230) 10,169
Depreciation expense:
2002.......................................... 5,225 297 838 6,360
2001.......................................... 5,463 960 2,581 9,004
2000.......................................... 4,620 2,662 3,950 11,232
Capital expenditures:
2002.......................................... 3,877 414 543 4,834
2001.......................................... 4,600 927 594 6,121
2000.......................................... 7,533 1,063 2,957 11,553
Total assets:
2002.......................................... 119,473 33,846 4,459 157,878
2001.......................................... 141,436 39,955 6,210 187,601
2000.......................................... 154,400 45,701 23,629 223,730
Corporate operating expenses include unallocated corporate engineering,
selling, general and administrative costs, corporate charges, amortization of
goodwill and other intangibles, and restructuring charges. Corporate
identifiable assets relate principally to the Company's investment in
information systems and corporate facilities, as well as deferred financing
costs.
The Company's net sales into each of its principal geographic regions
were as follows for the years ended December 31 (in thousands):
2002 2001 2000
---------- ---------- ----------
United States................................... $ 140,430 $ 164,508 $ 192,649
Germany......................................... 22,607 22,431 28,055
Japan........................................... 15,151 15,101 20,627
United Kingdom.................................. 11,102 11,191 8,911
China........................................... 9,810 8,712 12,956
Other foreign countries......................... 67,421 62,516 65,657
---------- ---------- ----------
$ 266,521 $ 284,459 $ 328,855
========== ========== ==========
It is not practical for the Company to accurately disclose revenue by
product or service grouping for financial reporting purposes as the Company's
systems do not reliably compile this information.
Long-lived assets of the Company's U.S. and international operations
were as follows for the years ended December 31 (in thousands):
2002 2001 2000
--------- --------- ---------
United States................. $ 46,505 $ 79,841 $ 97,590
International................. 10,959 9,305 9,374
--------- --------- ---------
Consolidated.................. $ 57,464 $ 89,146 $ 106,964
========= ========= =========
NOTE 13 - EQUITY
PREFERRED STOCK
In the fourth quarter of 2001, prior to the Debt Restructuring, the
Company's certificate of incorporation was amended to authorize 900 shares of
Series A Preferred stock, par value of $0.01 per share, and 5 million shares of
Series B Preferred stock, par value of $0.01 per share.
Holders of Series A and Series B Preferred stock are entitled to
receive dividends and distributions that may be declared by the Board of
Directors from time to time. No dividends were declared in 2002 and 2001.
Holders of Series A and Series B Preferred stock have the same voting
rights as holders of the Common stock. The holders of Series A and Series B
Preferred stock have no preemptive, conversion, redemption, subscription or
similar rights and the Preferred stock can be converted into Common stock at the
election of the Company. The outstanding Series A and B Preferred stock was
54
converted, effective April 2002, into Common stock of the Company. Each share or
fractional share of the Series A and Series B Preferred stock was converted into
an equivalent share or fractional share of Common stock.
COMMON STOCK
In the fourth quarter of 2001, prior to the Debt Restructuring, the
Company's authorized shares of Common stock were increased from 1,000 shares to
10 million shares.
In February 2003 the Board of Directors of the Company determined that
the Company had overestimated the number of shares of Common stock necessary to
accomplish the Debt Restructuring and to effect other capital transactions. The
Board of Directors authorized and the Company has filed a corrective amendment
to its Certificate of Incorporation with the State of Delaware to reduce the
number of authorized shares from 25 million to 10 million retroactively to
November 2001.
WARRANTS
Warrants entitling the holders to purchase up to 1,666,155 shares
(subject to certain antidilution adjustments) of common stock were issued
pursuant to the Company's Debt Restructuring (see note 7) completed in November
2001. The warrants are exercisable at $0.01 per share and will expire on the
later of March 30, 2007 or 15 days after the Company shall have either furnished
to the holders of the warrants its audited annual financial statements for the
fiscal year ended December 31, 2006 or shall have filed an annual report on Form
10-K with respect to such fiscal year.
The number of warrants exercisable is subject to the Company satisfying
certain financial performance targets. There were no warrants exercisable at
December 31, 2002. The warrants are also exercisable upon the occurrence of
certain events, including the sale of all or substantially all of the Company's
assets, as set forth in the warrant agreement.
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable, foreign currency forward contracts and the revolving line of
credit approximates fair value because of the short maturity of these
instruments.
The carrying amount 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 and
Senior Subordinated Discount Notes for 2002 and 2001 is estimated based on book
values for the notes. No quotes were available for either year.
NOTE 15 - QUARTERLY FINANCIAL DATA
The following table shows the unaudited quarterly financial data for
the years ended December 31, 2002 and 2001 (in thousands, except per share
data):
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER TOTAL
------------- -------------- ------------- -------------- --------------
2002
Net sales.................................... $ 67,899 $ 68,029 $ 66,087 $ 64,506 $ 266,521
Operating profit............................. 6,328 7,348 7,096 5,464 26,236
Net loss..................................... (29,339) (211) (164) (367) (30,081)
Basic and diluted loss per share............. $ (266,718.18) $ (0.05) $ (0.03) $ (0.07) $ (8.47)
============== ============== ============== ============= =============
2001
Net sales.................................... $ 72,317 $ 76,127 $ 72,595 $ 63,420 $ 284,459
Operating (loss) profit...................... (39) 2,719 (4,259) (13,581) (15,160)
Net (loss) income............................ (9,754) (7,679) (15,289) 93,712 60,990
Basic and diluted income (loss) per share.... $ (88,672.73) $ (69,809.09) $ (138,990.91) $ 851,927.27 $ 554,454.55
============== ============== ============== ============= =============
For the year ended December 31, 2002, the summations of quarterly net
loss per share basic and diluted does not equate to the calculation for the year
as the Company converted its Series A and Series B Preferred stock to Common
stock in April 2002. Quarterly calculations are performed on a discrete basis.
In the fourth quarter of 2002, the Company completed its goodwill
impairment analysis which resulted in recording a cumulative effect of a change
in accounting of $29.9 million, which has been reflected in the first quarter of
2002 in accordance with SFAS 142.
In the fourth quarter of 2002, the Company recorded restructuring
charges of $0.5 million.
In the second quarter of 2001, the Company recorded restructuring
charges of $0.9 million.
55
In the third quarter of 2001, the Company recorded a special charge of
$2.8 million to provide a reserve for bad debts and a special charge of $4.2
million to provide a reserve for impaired inventories.
In the fourth quarter of 2001, the Company recorded restructuring
charges of $11.5 million and recorded an extraordinary gain of $115.9 million on
the early extinguishment of debt.
56
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND SHAREHOLDERS: TELEX COMMUNICATIONS, INC.
We have audited the consolidated financial statements of Telex Communications,
Inc. and subsidiaries as of December 31, 2002, and for the year then ended, and
have issued our report thereon dated February 28, 2003 (included elsewhere in
this Report). Our audit also included the financial statement schedule listed in
Item 15(a) of this Report. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Minneapolis, Minnesota
February 28, 2003
57
SCHEDULE II
TELEX COMMUNICATIONS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------------------- ---------- ---------- ---------- ----------
BALANCE AT ADDITIONS DEDUCTIONS BALANCE AT
BEGINNING CHARGED TO FROM END OF
DESCRIPTION OF YEAR INCOME RESERVES YEAR
----------- ---------- ---------- ---------- ----------
YEAR ENDED DECEMBER 31, 2000
Allowance for doubtful accounts...................... $ 2,178 $ 1,700 $ 1,100(a) $ 2,778
========= ========== ======== ========
Restructuring accrual................................ $ 90 $ 8,812 $ 7,082(b) $ 1,820
========= ========== ======== ========
YEAR ENDED DECEMBER 31, 2001
Allowance for doubtful accounts...................... $ 2,778 $ 4,509 $ 2,314(a) $ 4,973
========= ========== ======== ========
Restructuring accrual................................ $ 1,820 $ 11,475 $ 10,293(b) $ 3,002
========= ========== ======== ========
YEAR ENDED DECEMBER 31, 2002
Allowance for doubtful accounts...................... $ 4,973 $ 240 $ 1,851 $ 3,362
========= ========== ======== ========
Restructuring accrual................................ $ 3,002 $ 478 $ 3,384 $ 96
========= ========== ======== ========
(a) Uncollectible accounts written off and adjustments to the allowance.
(b) Adjustments to the accrual account reflect payments or non-cash charges
associated with the accrual.
58
EXHIBIT INDEX
for
Form 10-K
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
3.1(a) Restated Certificate of Incorporation of Telex Communications, Inc. (the
"Company"), dated November 20, 2001 (incorporated by reference to Exhibit
3.1(a) to the Company's Report on Form 10-Q/A for the quarter ended September
30, 2001), filed on March 20, 2002 (the "September 2001 10-Q/A")).
3.1(b) Amendment to Restated Certificate of Incorporation of the Company, dated
November 20, 2001 (incorporated by reference to Exhibit 3.1(b) to the
September 2001 10-Q/A).
3.1(c) Amendment to Restated Certificate of Incorporation of the Company, dated
November 21, 2001 (incorporated by reference to Exhibit 3.1(c) to the
September 2001 10-Q/A).
3.2(a) Amended and Restated By-Laws of the Company dated December 26, 1997
(incorporated by reference to Exhibit 3.2(a) to the September 2001 10-Q/A).
3.2(b) Amendments to Amended and Restated By-Laws dated November 20, 2001
(incorporated by reference to Exhibit 3.2(b) to the September 2001 10-Q/A).
4.1(a) Indenture ("EVI Indenture"), dated as of March 24, 1997, between EV
International, Inc. and The Bank of New York, as original Trustee, with Bank
One Trust Company as successor Trustee (incorporated by reference to Exhibit
4(a) to the Company's Registration Statement on Form S-4, filed on July 30,
1997, SEC No. 333-27341 ("Form S-4")).
4.1(b) First Supplemental Indenture, dated as of April 11, 2001, to the EVI Indenture
(incorporated by reference to Exhibit 4.1(b) to the Company's Report on Form
8-K dated April 12, 2001, filed on April 12, 2001 ("April 2001 8-K")).
4.1(c) Second Supplemental Indenture, dated as of November 21, 2001, to the EVI
Indenture (incorporated by reference to Exhibit 4.1(c) to the September 2001
10-Q/A).
4.2(a) Indenture (the "Telex Indenture"), dated as of May 6, 1997, among Telex
Communications, Inc. (prior to its merger with EV International, Inc. ("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, filed on
July 2, 1997, SEC No. 333-30679 ("Old Telex Registration Statement").
4.2(b) First Supplemental Indenture, dated as of May 6, 1997, to the Telex Indenture
(incorporated by reference to Exhibit 4(b) to Old Telex Registration
Statement).
4.2(c) Second Supplemental Indenture, dated as of February 2, 1998, to the Telex
Indenture (incorporated by reference to Exhibit 2 to Old Telex's Report on
Form 10-Q for the quarter ended December 31, 1997, filed on February 17, 1998
("Old Telex 10-Q")).
4.2(d) Third Supplemental Indenture, dated as of April 11, 2001, to the Telex
Indenture (incorporated by reference to Exhibit 4.2(d) to the April 2001 8-K).
4.2(e) Fourth Supplemental Indenture, dated as of November 21, 2001, to the Telex
Indenture (incorporated by reference to Exhibit 4.2(e) of the September 2001
10-Q/A).
4.3(a) Credit Agreement, dated as of 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 ("Chase"), as
administrative agent for such Senior Lenders ("Administrative Agent")
(incorporated by reference to Exhibit 4(d) to Old Telex Registration
Statement).
4.3(b) Amendment No. 1, dated as of January 29, 1998, to the Credit Agreement
(incorporated by reference to Exhibit 10 to Old Telex 10-Q).
4.3(c) Amendment No. 2, dated as of December 23, 1998, to the Credit Agreement
(incorporated by reference to Exhibit 10(a) to the Company's Report on Form
8-K dated December 28, 1998, filed on January 15, 1999).
4.3(d) Amendment No. 3, dated as of October 29, 1999, to the Credit
59
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
Agreement (incorporated by reference to Exhibit 10(b) to the Company's Report
on Form 10-Q for the quarter ended September 30, 1999, filed on November 15,
1999).
4.3(e) Waiver, Amendment No. 4, Agreement and Consent, dated as of April 11, 2001, to
the Credit Agreement (incorporated by reference to Exhibit 4.3(h) to the April
2001 8-K).
4.3(f) Waiver, Amendment No. 5, Agreement and Consent, dated as of November 21, 2001,
to the Credit Agreement (incorporated by reference to Exhibit 4.3(n) of the
10-Q/A).
4.3(g) Assignment and Assumption Agreement, dated May 6, 1997, made by Old Telex and
Telex Communications Group, Inc. ("Former Parent") in favor of the
Administrative Agent (incorporated by reference to Exhibit 4(e) to Old Telex
Registration Statement).
4.3(h) Guarantee and Collateral Agreement, dated as of May 6, 1997, made by Old Telex
and Former Parent in favor of the Administrative Agent and certain other
secured parties (the "Bank Guarantee and Collateral Agreement") (incorporated
by reference to Exhibit 4(f) to Old Telex Registration Statement).
4.3(i) Amendment No. 1, dated as of April 11, 2001, (incorporated by reference to
Exhibit 4.3(j) to the Report on Form 10-Q for the quarter ended March 31, 2001
(the "March 2001 10-Q")). 4.3(j) Guarantee and Collateral Amendment and
Confirmation, dated as of November 21, 2001, to the Bank Guarantee and
Collateral Agreement (incorporated by reference to Exhibit 4.3(p) to the
September 2001 10-Q/A).
4.3(j) Guarantee and Collateral Amendment and Confirmation, dated as of November 21,
2001, to the Bank Guarantee and Collateral Agreement (incorporated by reference
to Exhibit 4.3(p) to the September 2001 10-Q/A.
4.3(k) Patent and Trademark Security Agreement, dated as of May 6, 1997, made by Old
Telex in favor of the Administrative Agent (the "Bank Patent and Trademark
Security Agreement") (incorporated by reference to Exhibit 4(g) to Old Telex
Registration Statement).
4.3(l) Amendment No. 1, dated as of April 11, 2001, to the Bank Patent and Trademark
Security Agreement (incorporated by reference to Exhibit 4.3(k) to the March
2001 10-Q). 4.4(a) Note Purchase Agreement, dated as of April 11, 2001, among
the Company, TCI Investments LLC and GoldenTree, each as Co-Agent, and the
Purchasers parties thereto (incorporated by reference to Exhibit 4.4(a) to the
April 2001 8-K).
4.4(a) Note Purchase Agreement, dated as of April 11, 2001, among the Company, TCI
Investments LLC and Golden Tree, each as Co-Agent, and the Purchasers parties
thereto (incorporated by reference to Exhibit 4.4(a) to the April 2001 8-K).
4.4(b) Amended and Restated Note Purchase Agreement, dated as of November 21, 2001,
for the purchase of $30 million adjusted interest PIK senior secured notes,
among the Company, GSCP Recovery (US), LLC and GoldenTree, each as Co-Agent,
and the purchasers parties thereto ("Purchasers") (Exhibits B, C, and E to
this Agreement are filed as Exhibits 4.4(d), 4.4(f), and 4.5(b),
respectively.) (incorporated by reference to Exhibit 4.4(d) of the September
2001 10-Q/A). 4.4(c) Guarantee and Collateral Agreement, dated as of April 11,
2001, made by the Company, Former Parent and Telex Communications
International, Ltd. (the "Grantors"), in favor of TCI Investments LLC and
GoldenTree, ("Co-Agents for the Purchasers") (incorporated by reference to
Exhibit 4.3(h) to the March 2001 10-Q).
4.4(c) Guarantee and Collateral Agreement, dated as of April 11, 2001, made by the Company,
Former Parent and Telex Communications International, Ltd. (the "Grantors"), in
favor of TCI Investments LLC and GoldenTree, ("Co-Agents for the Purchasers")
(incorporated by reference to Exhibit 4.3(h) to the March 2001 10-Q).
4.4(d) Amended and Restated Guarantee and Collateral Agreement, dated as of November
21, 2001, made by the Grantors. In favor of the Co-Agents for the Purchasers
(Exhibit A to this Agreement is filed as Exhibit 4.5(b)), (incorporated by
reference to Exhibit 4.4(e) of the September 2001 10-Q/A).
4.4(e) Patent and Trademark Security Agreement, dated as of April 11, 2001, made by
the Company in favor of the Co-Agents for the Purchasers (incorporated by
reference to Exhibit 4.3(m) to the March 2001 10-Q).
4.4(f) Amended and Restated Patent and Trademark Security Agreement, dated as of
November 21, 2001, made by the Company in favor of the Co-Agents for the
Purchasers (incorporated by reference to Exhibit 4.4(f) of the September 2001
10-Q/A).
4.5(a) Intercreditor Agreement, dated as of April 11, 2001 (the "Intercreditor
Agreement"), among Chase, as administrative agent (in such capacity, together
with its successors and assigns in such capacity, the "Senior Agent") under
the Credit Agreement, TCI Investments LLC and GoldenTree High Yield
Opportunities I, L.P. ("GoldenTree"), as co-agents (in
60
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
such capacity, together with their successors and assigns, the "Junior
Agents"), and the Company (incorporated by reference to Exhibit 4.3(i) to the
April 2001 8-K).
4.5(b) Intercreditor Amendment, dated as of November 21, 2001, to the Intercreditor
Agreement, among Chase, the Senior Agent, the Junior Agents, Telex
Communications International, Ltd., and the Company (incorporated by reference
to Exhibit 4.3(o) to the September 2001 10-Q/A).
4.6 Indenture, dated as of November 21, 2001, between the Company and BNY Midwest
Trust Company, as Trustee, with respect to 13% Senior Subordinated Discount
Notes due 2006, and, when and if issued, the 13% Senior Subordinated Discount
Notes due 2006, Series A (incorporated by reference to Exhibit 4.5 to the
September 2001 10-Q/A).
4.7 Warrant Agreement, dated as of November 21, 2001, by and between the Company
and BNY Midwest Trust Company, as Warrant Agent (incorporated by reference to
Exhibit 4.6 to the September 2001 10-Q/A).
4.8(a) Exchange and Registration Rights Agreement, dated as of November 21, 2001, of
the Company for the benefit of the holders of the 13% Senior Subordinated
Discount Notes due 2006 (incorporated by reference to Exhibit 4.8(a) to the
Company's Registration Statement on Form S-4/A, filed on May 30, 2002, SEC
No. 333-88524 ("2002 Form S-4/A")).
4.8(b) Exchange and Registration Rights Agreement, dated as of November 21, 2001, of
the Company for the benefit of the holders of the Series B Preferred Stock, par
value $0.01 per share (incorporated by reference to Exhibit 4.8(b) to the 2002
Form S-4/A).
4.8(c) Exchange and Registration Rights Agreement, dated November 21, 2001, of the
Company for the benefit of the holders of the Warrants to purchase shares of the
Common Stock of the Company (incorporated by reference to Exhibit 4.8(c) to the
2002 Form S-4/A).
*10.1(a) Consulting Agreement, dated as of May 6, 1997, between Greenwich Street
Capital Partners, Inc. ("GSCP Inc.") and Former Parent (incorporated by
reference to Exhibit 10(c) to Old Telex Registration Statement).
*10.1(b) Form of Amendment, dated May 1, 1998, to the Consulting Agreement, dated May
6, 1997, between GSCP Inc. and Former Parent (incorporated by reference to
Exhibit 10(e) to the Company's Report on Form 10-K for the fiscal year ended
February 28, 1998, filed May 29, 1998, SEC No. 333-27341 ("1998 10-K")).
*10.2 Indemnification Agreement, dated as of May 6, 1997, between GSCP Inc. and
Former Parent (incorporated by reference to Exhibit 10(d) to Old Telex
Registration Statement).
10.3(a) Member Control Agreement of DRF 12000 Portland LLC, dated as of March 16,
2000, by and between the Company and DRF TEL LLC (incorporated by reference to
Exhibit 10.16(a) to the 1999 10-K).
10.3(b) Lease, dated March 16, 2000, by and between the Company and DRF 12000 Portland
LLC for the property located at 12000 Portland Avenue South, Burnsville,
Minnesota (incorporated by reference to Exhibit 10.16(b) to the 1999 10-K).
*10.4 Employment Agreement, dated as of October 25, 2002, between the Company and
Ned C. Jackson (filed as an Exhibit hereto).
*10.5 Employment Agreement, dated as of January 5, 2003, between the Company and
Mathias Stieler von Heydekampf (filed as an Exhibit hereto).
16 Letter from Arthur Andersen LLP to the Securities and Exchange Commission
dated June 10, 2002 (incorporated by reference to Exhibit 16 to the Company's
report on Form 8-K dated June 10, 2002, filed on June 11, 2002).
21 List of Subsidiaries (filed as an Exhibit hereto).
99.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbames-Oxley Act of 2002 (filed as an Exhibit hereto).
* Denotes management contract or compensatory plan or agreement.
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