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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, 2004
COMMISSION FILE REGISTRANT, STATE OF INCORPORATION OR I.R.S. EMPLOYER
NUMBER FORMATION, ADDRESS AND TELEPHONE NUMBER IDENTIFICATION NO.
- ---------------- --------------------------------------- ------------------
333-115009 TELEX COMMUNICATIONS 20-0406594
INTERMEDIATE HOLDINGS, LLC
(FORMED IN DELAWARE)
12000 PORTLAND AVENUE SOUTH
BURNSVILLE, MINNESOTA 55337
TELEPHONE: (952) 884-4051
333-112819 TELEX COMMUNICATIONS, INC. 11-3707780
(INCORPORATED IN DELAWARE)
12000 PORTLAND AVENUE SOUTH
BURNSVILLE, MINNESOTA 55337
TELEPHONE: (952) 884-4051
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether 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 common stock of each registrant is not publicly traded. Therefore, the
aggregate market value is not readily determinable.
As of February 28, 2005, Telex Communications, Inc. had outstanding 500
shares of Common Stock, $0.01 par value, all of which are owned beneficially and
of record by Telex Communications Intermediate Holdings, LLC. Telex
Communications Intermediate Holdings, LLC has one member interest outstanding,
which is owned by Telex Communications Holdings, Inc.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Telex Communications, Inc. and Telex Communications Intermediate Holdings,
LLC meet the conditions set forth in General Instruction (I)(1)(a) and (b) of
the Form 10-K and are therefore filing this Form 10-K with the reduced
disclosure format.
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TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 9
ITEM 3. LEGAL PROCEEDINGS 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES 10
ITEM 6. SELECTED FINANCIAL DATA 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 24
ITEM 9A. CONTROLS AND PROCEDURES 24
ITEM 9B. OTHER INFORMATION 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 26
ITEM 11. EXECUTIVE COMPENSATION 28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS 31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 33
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 33
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 35
2
FILING FORMAT
This Annual Report on Form 10-K is a combined report being filed by two
different registrants: Telex Communications Intermediate Holdings, LLC
("Intermediate") and Telex Communications, Inc., a wholly-owned subsidiary of
Intermediate ("Telex").
References in this report to "Intermediate," "Successor," "Company," "we,"
"our," or "us" and similar expressions refer to Telex Communications
Intermediate Holdings, LLC, a Delaware limited liability company and, except
where the context otherwise requires, its subsidiary, Telex, and predecessor
companies. We operate on a December fiscal year-end. Intermediate is a holding
company whose assets consist primarily of its investment in Telex. Telex is our
operating company.
PART I
ITEM 1. BUSINESS
OVERVIEW
We are a worldwide industry leader in the design, manufacture and
marketing of audio and communications products and systems to commercial,
professional and industrial customers. Our product lines include sophisticated
loudspeaker systems, wired and wireless intercom systems, mixing consoles,
digital audio duplication products, amplifiers, wired and wireless microphones,
military and aviation products, land mobile communications systems, wireless
assistive listening systems and other related products. We market over 30
product lines that span the professional audio and communications sectors. While
we face competition in many of our business lines, we focus on sectors in which
we believe we can be market leaders. As a result, we believe we have developed
solid brand value, which has become a significant barrier to competition.
We, through our predecessors, have been in operation since 1927 and
currently market our products in over 80 countries worldwide. By leveraging our
strong brand names, including Telex(R), Electro-Voice(R), RTS(TM), Dynacord(R),
Midas(R) and Klark-Teknik(R), and developing leading edge technologies, we have
created an international reputation for quality, reliability, innovative design
and overall value. Since our founding, we have developed a number of
technological innovations, which are now commonly used throughout the industry,
and we have received numerous industry awards, including Emmy Awards from the
National Academy of Television Arts and Sciences and other industry awards from
numerous trade associations and publications.
Telex is a wholly-owned subsidiary of Intermediate. Intermediate is a
wholly-owned subsidiary of Telex Communications Holdings, Inc. ("Old Telex" or
"Predecessor"), which is not a registrant. Telex and Intermediate were formed in
connection with the November 19, 2003 refinancing of Old Telex's debt
obligations and related corporate restructuring.
Immediately prior to the closing of the November 2003 refinancing Old
Telex transferred to Telex substantially all of Old Telex's assets and
liabilities except, principally, its 13% Senior Subordinated Discount Notes due
2006, in exchange for Telex's common stock. Old Telex then contributed Telex's
common stock to Intermediate, a new limited liability company, in exchange for
all of Intermediate's membership interests. Telex became a wholly-owned
subsidiary of Intermediate and Intermediate became a wholly-owned subsidiary of
Old Telex. The subsidiaries of Old Telex became Telex's subsidiaries as part of
the asset transfer. Upon the closing of the restructuring, Old Telex changed its
name to "Telex Communications Holdings, Inc." and Telex was renamed "Telex
Communications, Inc."
Intermediate and Telex were formed on October 21, 2003, 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
3
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 Intermediate'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 Audio and Audio and Wireless
Technology. Financial information for our two business segments for the year
ended December 31, 2004, the one-month period ended December 31, 2003, the
eleven-month period ended November 30, 2003 and the year ended December 31, 2002
is set forth in Note 12 to our consolidated financial statements included
elsewhere in this report.
PROFESSIONAL AUDIO
Professional Audio 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;
- Professional Communications Systems, 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
school sports teams as well as by utilities, aerospace and
industrial organizations.
- 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. The market for Fixed Installation products is generally
driven by new construction and upgrades of existing installations. We believe
that more dynamic sound and music, requiring more sophisticated audio products,
are increasingly being used in cinemas, religious services and sporting events.
For example, most professional sporting events now include musical performances
that require increased sound quality and amplification. We believe that
audiences have become increasingly accustomed to improved sound quality while
event producers and live musicians have become accustomed to more advanced
technology. Abroad, the development of infrastructure and the upgrading of
existing facilities, such as auditoriums, public places, theaters and sports
facilities, in emerging economies is also a source of increasing demand.
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.
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. Our Professional Music Retail products appeal to
performers seeking an improved level of sound system performance, reliability
and quality. 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.
4
A combination of the factors that determine growth in the Fixed
Installation and Professional Music Retail lines of business, drive demand,
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.
Professional Communications Systems. We produce a broad line of
professional communications equipment for end markets such as sports events,
news broadcasting, utilities, military, aerospace, and state and local
government agencies. 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. 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.
Our wired and wireless intercom products are also used in communication
systems during refueling of nuclear power plants to provide increased efficiency
and safety and in simulators and training systems for military and aerospace
applications.
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 extensive lines of wireless microphone, receiver, and
transmitter systems, including a wide variety of handheld, lapel, and guitar
microphone options. We offer microphones, including those with noise canceling
features, 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 five 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; and
- Audio and Wireless Education products for classroom and
computer based education 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. In addition, we produce a
unique cassette player sold under an exclusive five-year contract to the Library
of Congress (LOC) that is used in its Talking Book program for the blind and
physically handicapped. The Talking Book Players are 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.
5
Talking Book players have also been sold internationally under similar
programs in Canada, New Zealand, and Australia. There is also a Talking Book
line of products in digital format that has many of the same features and
benefits as the tape format with the added advantage of instant access to
specific pages and chapters. This line includes the Scholar(R), EzDaisy(R) and
the Professor(TM) disc-based Talking Book products.
Military/Aviation Communications. We design, manufacture, and market a
broad line of Federal Aviation Administration ("FAA") certified aviation
communication headsets, headphones, microphones, and intercoms to major
commercial and commuter airlines, and private pilots. Our products hold Type
Certification with major airframe manufacturers such as Boeing, Airbus, Cessna,
and Gulfstream. Our advanced digital Active Noise Reduction technology provides
us with a competitive advantage in several applications. In addition, we design,
manufacture, and market military certified microphones, earphones, headsets, and
acoustic components to military and original equipment manufacturer ("OEM")
customers for critical military, security, and heavy industrial communication
applications.
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 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 ("WLAN") 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 Communications. 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.
Audio and Wireless Education Products. 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 where there are
often 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.
INTERNATIONAL OPERATIONS
We market our products in approximately 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
twelve months ended December 31, 2004, approximately 50% 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, 2004, our total net sales into each of our
principal geographic regions were as follows:
United States - $148.8 million,
Europe - $84.7 million,
Asia - $41.5 million, and
Other regions - $21.8 million.
6
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.
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 year ended December 31, 2004, the one-month period ended December
31, 2003, the eleven-month period ended November 30, 2003 and the year ended
December 31, 2002, our engineering expenses for product development were $15.4
million, $1.2 million, $12.9 million, and $12.4 million, respectively.
MANUFACTURING
We manufacture most of the products we sell, including the active acoustic
components contained in those products, in our 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 surface mount and printed circuit
board assembly, plastic injection 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 large
plastic components.
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
and marketing operations in Japan, Hong Kong, and France.
COMPETITION
The markets within both the Professional Audio 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.
7
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 through
confidentiality procedures and contractual provisions that may afford more
limited legal protections.
We own several trademarks in the United States and various foreign
countries, including:
- - Audiocom(R) - Midas(R) - Klark-Teknik(R) - ClassMate(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 our trademarks in all foreign jurisdictions in
which we do business, although we believe that our most significant trademarks
have been registered in many foreign jurisdictions where sales of our products
under those trademarks are strong. We are aware that, in certain foreign
jurisdictions, unaffiliated third parties have applied for and/or obtained
registrations for marks that are similar to marks owned or used by us for
products similar to ours. In certain instances we have filed formal oppositions
to such applications for registration. In light of this and because many foreign
jurisdictions operate on a "first-to-file" basis for registrations of
intellectual property, we may be prohibited from registering our trademarks in
certain foreign countries and in some cases be prohibited from selling our
products in certain countries under the same trademarks, and our business may be
materially adversely affected by such prohibition.
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 patents relating to time division multiplex
digital matrix intercom systems and the design of our EVID surface-mount
loudspeakers, which expire in 2014 and 2016, respectively. We also own a number
of patents related to the design and manufacture of several of our other
products, including speakers, headsets, headphones, boom-mounted microphones,
various transducer devices, multiple-band directional antennas, and certain
intercom-related devices. We have not registered our patents in all foreign
jurisdictions in which we do business, and attempts at registration in such
foreign jurisdictions may not be possible or successful. We do not believe that
the expiration of any of our patents or absence of patent protection in foreign
jurisdictions will have a material adverse effect on our financial condition or
results of operations. We do not believe that any of our products currently
infringes upon the proprietary rights of third parties in any material respect.
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, 2004, we had a
backlog of approximately $31.0 million compared to approximately $27.8 million
as of December 31, 2003.
8
ENVIRONMENTAL MATTERS
Our 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.
Our site in Buchanan, Michigan, formerly owned by Mark IV Industries,
Inc., has been designated a Superfund site under the federal Comprehensive
Environmental Response, Compensation and Liability Act, and we are a responsible
party, under Tennessee law, at two other sites that we acquired from Mark IV.
Mark IV has agreed to indemnify us for specified contamination at the Michigan
site and for the future monitoring and remediation of soil and/or groundwater
required at the Tennessee sites. There may be currently unidentified areas of
contamination at the Buchanan site that are not covered by the Mark IV indemnity
and for which we would be financially responsible if remediation were required.
This site is currently being held for sale and not in use.
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, 2004, we had accrued approximately $2.0 million over the
life of the project for anticipated costs to be incurred for the Lincoln site
cleanup activities, of which approximately $1.7 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 provisions should
have no material adverse effect on our results of operations or financial
condition.
EMPLOYEES
As of December 31, 2004, we employed 1,838 persons worldwide, of which
1,768 were full-time employees.
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934 (Exchange Act). We therefore file periodic reports and
other information with the Securities and Exchange Commission (SEC). Such
reports may be obtained by visiting the Public Reference Room of the SEC at 450
Fifth Street NW, Washington D.C. 20549 or by calling the SEC at (800) SEC-0330.
In addition the SEC maintains a website (www.sec.gov) that contains reports,
proxy information statements and other information regarding issuers that file
electronically.
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.
9
SIZE
LOCATION OWNED/LEASED (SQUARE FEET) FACILITY TYPE(a)
-------- ------------ ------------- ----------------
UNITED STATES:
Blue Earth, Minnesota............. Owned 141,000 Manufacturing/Distribution
Burnsville, Minnesota............. Leased 114,100 Corporate Headquarters/Marketing/Administration/
Product Development/Sales
Glencoe, Minnesota................ Owned 135,000 Manufacturing/Distribution
Lincoln, Nebraska................. Owned 118,000 Manufacturing/Distribution/Product Development/
Sales
Morrilton, Arkansas............... Owned 148,000 Manufacturing/Distribution
INTERNATIONAL:
Hermosillo, Sonora, Mexico........ Leased 32,500 Manufacturing
Hohenwarth, Germany............... Leased 16,500 Manufacturing/Warehouse
Kidderminster, England............ Owned 35,800 Manufacturing/Sales/Marketing/Administration/
Product Development/Service
Kowloon, Hong Kong................ Leased 5,700 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 6,800 Sales/Distribution/Service
Straubing, Germany................ Owned 132,000 Manufacturing/Sales/Marketing/Administration/
Product Development/ Distribution/Service
Straubing, Germany................ Leased 11,000 Warehouse
Tokyo, Japan ..................... Leased 25,100 Sales/Marketing/Administration/Distribution/Service
(a) Our Morrilton, Arkansas, Kidderminster, England, and Hohenwarth, Germany
facilities are dedicated to the Professional Audio 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."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders of either
Intermediate or Telex during the fourth quarter of the fiscal year ended
December 31, 2004.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
There is no established public trading market for Intermediate's equity
interests or Telex's common stock. All of Intermediate's equity interests are
owned by Old Telex, and all of Telex's outstanding common stock is owned by
Intermediate.
As of March 14, 2005 there were 43 holders of record of Old Telex common
stock.
Old Telex has not paid cash dividends on its common stock and does not
anticipate paying any such dividends in the foreseeable future. Telex may from
time to time pay cash dividends on its common stock to permit Intermediate to
make required payments relating to its 13% senior subordinated discount notes
and to pay for other operating expenses of Intermediate.
10
ITEM 6. SELECTED FINANCIAL DATA
The table below sets forth selected historical consolidated financial,
operating and balance sheet data relating to Intermediate and Old Telex for each
of the five fiscal years or periods ended December 31, 2004. The selected
historical consolidated financial data as of December 31, 2004 and 2003 and for
the year ended December 31, 2004, the one month ended December 31, 2003, eleven
months ended November 30, 2003 and the year ended December 31, 2002 have been
derived from the audited consolidated financial statements and notes thereto of
Intermediate and Old Telex, appearing elsewhere in this report, which have been
audited by Ernst & Young LLP, independent registered public accountants. The
selected historical consolidated financial data as of December 31, 2000, 2001
and 2002 and the years ended December 31, 2000 and 2001 were derived from
audited consolidated financial statements and notes thereto not included herein.
You should read the information set forth below in conjunction with our
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the audited consolidated financial statements and related notes
included elsewhere in this report.
PREDECESSOR SUCCESSOR
----------------------------------------------------------- --------------------------------
ELEVEN MONTHS ONE MONTH FISCAL YEAR
ENDED ENDED ENDED
FISCAL YEAR ENDED DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31,
--------------------------------------- ------------- -------------- ----------------
2000 2001 2002 2003 2003 2004
------------ ------------ ----------- ------------- -------------- ----------------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net sales........................... $ 328,855 $ 284,459 $ 266,521 $ 243,106 $ 25,433 $ 296,828
Cost of sales....................... 204,113 185,051 155,832 140,863 14,957 163,206
--------- --------- ----------- ---------- ---------- -----------
Gross profit........................ 124,742 99,408 110,689 102,243 10,476 133,622
Engineering......................... 14,098 12,736 12,424 12,947 1,224 15,423
Selling, general and
administrative..................... 87,724 86,534 70,890 67,796 6,231 80,886
Restructuring charges............... 8,812(a) 11,475(a) 478 -- -- --
Goodwill and asset impairment
charges............................ -- -- -- -- -- 7,915(f)
Corporate charges................... 1,716 1,667 541 -- -- --
Amortization of
goodwill and other
intangibles........................ 2,223 2,156 120 20 1 13
Pension curtailment gain............ -- -- -- (2,414) -- --
--------- --------- ----------- ---------- ---------- -----------
Operating income (loss)............. 10,169 (15,160) 26,236 23,894 3,020 29,385
Interest expense.................... (38,374) (38,173) (26,563) (26,897) (2,589) (27,346)
Other income........................ 12,399(b) 1,111 2,727 529 85 1,124
Gain (loss) on early
extinguishment of debt............. -- 115,897(c) -- -- (1,186)(e) --
--------- --------- ----------- ---------- ---------- -----------
(Loss) income before
income taxes and cumulative
effect of accounting
change............................. (15,806) 63,675 2,400 (2,474) (670) 3,163
Provision for income taxes.......... 2,175 2,685 2,618 3,585 1,171 8,544
--------- --------- ----------- ---------- ---------- -----------
(Loss) income before cumulative
effect of accounting change........ (17,981) 60,990 (218) (6,059) (1,841) (5,381)
Cumulative effect of change
in accounting...................... -- -- (29,863)(d) -- -- --
--------- --------- ----------- ---------- ---------- -----------
Net (loss) income................... $ (17,981) $ 60,990 $ (30,081) $ (6,059) $ (1,841) $ (5,381)
========= ========= =========== ========== ========== ===========
FINANCIAL DATA:
EBITDA(g)........................... $ 23,624 $ (4,000) $ 32,716 $ 29,506 $ 3,502 $ 43,368
Capital expenditures................ $ 11,553 $ 6,121 $ 4,834 $ 5,165 $ 546 $ 7,722
Cash provided by (used in)
operating activities............... $ 11,853 $ (2,688) $ 18,964 $ 15,289 $ 5,631 $ 13,724
Cash used in investing activities... $ (8,321) $ (5,601) $ (42) $ (3,841) $ (546) $ (5,163)
Cash (used in) provided by
financing activities............... $ (3,525) $ 8,775 $ (18,888) $ (9,450) $ (4,274) $ (634)
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2001 2002 2003 2004
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Working capital............................... $ 7,448 $ 27,059 $ 42,851 $ 63,158 $ 79,769
Total assets.................................. 223,730 187,601 157,878 171,128 180,020
Long term debt, less current maturities....... 279,186 147,430 154,630 187,629 197,065
Member/Shareholder's deficit.................. (175,429) (39,974) (68,008) (68,374) (72,491)
NOTES TO SELECTED FINANCIAL DATA
(a) 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. The remaining restructuring
charge amounts of $4.5 million and $4.1 million for the years ended
December 31, 2000 and 2001, respectively, are for severance, lease
termination and other exit costs.
(b) Included in other income for 2000 is a $6.5 million one-time, up-front fee
in lieu of future royalties, $2.1 million of cash proceeds from an
insurance settlement, and a $1.0 million gain on the sale of a trademark.
11
(c) On November 21, 2001, Old Telex completed a debt restructuring, pursuant
to which $224.5 million, or 99.8 % of the total, of its 10 1/2% and 11%
senior subordinated notes were exchanged for senior subordinated discount
notes due 2006 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, all issued by Old
Telex. As part of this debt restructuring, Old Telex recorded $115.9
million of gain on early extinguishment of debt in its 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) 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.
(e) We recognized a $1.2 million loss in the one-month period ended December
31, 2003 from the write-off of deferred financing costs and discounts
associated with repaid debt instruments.
(f) We recognized a $7.9 million loss in 2004 from goodwill and asset
impairment charges associated with our Germany electronics operating unit
($7.6 million) and our idle Buchanan, Michigan manufacturing facility
($0.3 million).
(g) EBITDA for each period is defined as income (loss) before cumulative
effect of accounting change plus (i) income taxes, (ii) interest expense,
(iii) depreciation and amortization, (iv) loss on early extinguishment of
debt, (v) non-cash restructuring charges and (vi) goodwill and asset
impairment charges, minus (vii) other income and (viii) gain on early
extinguishment of debt. EBITDA is included because management believes it
provides one measure by which to evaluate our 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 our results of operations and
liquidity and should be considered in evaluating our 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.
The following table reconciles (loss) income before the cumulative effect
of an accounting change to EBITDA:
PREDECESSOR SUCCESSOR
----------------------------------------------------- --------------------------
ELEVEN
MONTHS ONE MONTH FISCAL YEAR
FISCAL YEAR ENDED DECEMBER 31, ENDED ENDED ENDED
-------------------------------------- NOVEMBER 30, DECEMBER 31, DECEMBER 31,
2000 2001 2002 2003 2003 2004
---------- ---------- ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
(Loss) income before cumulative effect of
accounting change........................... $ (17,981) $ 60,990 $ (218) $ (6,059) $ (1,841) $ (5,381)
Income taxes.................................. 2,175 2,685 2,618 3,585 1,171 8,544
Interest expense.............................. 38,374 38,173 26,563 26,897 2,589 27,346
Other income.................................. (12,399) (1,111) (2,727) (529) (85) (1,124)
(Gain) loss on early extinguishment of debt... -- (115,897) -- -- 1,186 --
Non-cash restructuring charges 4,848 7,356 -- -- -- --
Goodwill and asset impairment charges......... -- -- -- -- -- 7,915
Depreciation and amortization................. 13,455 11,160 6,480 5,612 482 6,068
---------- ---------- ------------ ---------- ---------- ----------
EBITDA...................................... $ 28,472 $ 3,356 $ 32,716 $ 29,506 $ 3,502 $ 43,368
========== ========== ============ ========== ========== ==========
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. 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.
12
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.
Management's Discussion and Analysis of Financial Condition and Results of
Operations are provided solely with respect to Telex and its subsidiaries since
substantially all of the Company's operations are conducted by Telex. However,
Intermediate has outstanding additional debt securities. Accordingly,
information with respect to interest expense of Intermediate is also provided
herein. The discussion of liquidity and capital resources pertains to Telex and
its consolidated subsidiaries. Telex and Intermediate were formed in connection
with the November 19, 2003 restructuring of Old Telex's debt obligations. The
term the "Company" throughout the remainder of this Management's Discussion and
Analysis of Financial Condition and Results of Operations refers to Predecessor
or New Telex for the relevant period(s).
Financial information in this Management's Discussion and Analysis of
Financial Condition and Results of Operations for the twelve month period ended
December 31, 2003 combines information for Telex for the one-month period ended
December 31, 2003 and information for Old Telex for the eleven-month period
ended November 30, 2003. Subsequent to November 2003, Old Telex is a holding
company and has no business operations. The financial information is combined to
provide a more meaningful presentation for the twelve-month period ended
December 31, 2003. Historical financial information for the year ended December
31, 2002 was derived from the consolidated financial statements of Old Telex.
The following discussion should be read in conjunction with our Consolidated
Financial Statements and Notes thereto contained elsewhere in this report.
DESCRIPTION OF BUSINESS
We are a worldwide industry leader in the design, manufacture, and
marketing of audio and communications products and systems to commercial,
professional, and industrial customers. Our product lines include sophisticated
loudspeaker systems, wired and wireless intercom systems, mixing consoles,
digital audio duplication products, amplifiers, wired and wireless microphones,
military and aviation products, land mobile communication systems, wireless
assistive listening systems and other related products. We have two business
segments: Professional Audio and Audio and Wireless Technology. Financial
information for our two business segments for the year ended December 31, 2004,
the one-month period ended December 31, 2003, the eleven-month period ended
November 30, 2003 and the year ended December 31, 2002 is set forth in Note 12
to our consolidated financial statements included elsewhere in this report.
Over 50% of our sales are made internationally, in approximately 80
countries. We conduct our foreign sales through our foreign subsidiaries in
Germany, the United Kingdom, Japan, Hong Kong, 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 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.
13
We report foreign exchange gains or losses on transactions as part of
other (income) expense. Gains and losses on translation of foreign currency
denominated balance sheets are classified as currency translation adjustments
and are included in "accumulated other comprehensive loss" as part of
shareholder's deficit.
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 consolidated 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 provided that persuasive evidence of a sales arrangement exists, the
price is fixed, title has transferred, collection of resulting receivables is
reasonably assured, there are no customer acceptance requirements and there are
no remaining significant obligations. 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 for known 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 technology changes and new
product introductions that could result in an increase in the amount of excess
and obsolete inventory quantities on hand. Additionally, our estimates of future
forecasted product demand is impacted by revisions, cancellations and
rescheduling of our order backlog. 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 45% of our
consolidated net sales for the year ended December 31, 2004, and 53% of our
consolidated assets and 23% of our consolidated liabilities at December 31,
2004.
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' financial statements from their respective local
currencies into United States dollars. This process results in translation gains
and losses that are included in shareholder's 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
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.
14
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.
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 ("SFAS") 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 perform annual impairment reviews at the beginning of our fourth
quarter. The annual review for 2004 did indicate an additional impairment of
goodwill in our Professional Audio business segment and a $7.6 million charge
was taken. Further information on this charge is set forth in Note 6 to our
consolidated financial statements included elsewhere in this report. The annual
review for 2003 and 2002 did not indicate any additional goodwill impairment.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain items in our consolidated statements of operations to
net sales. The 2003 period combines the results of Telex for the one-month
period ended December 31, 2003 and the results of Old Telex for the eleven-month
period ended November 30, 2003.
PERCENTAGE OF NET SALES
------------------------------
TWELVE-
MONTH
YEAR PERIOD YEAR
ENDED ENDED ENDED
DECEMBER DECEMBER DECEMBER
31, 31, 31,
2004 2003 2002
-------- -------- --------
Net Sales:
Professional Audio................................................ 81.0% 77.8% 75.6%
Audio and Wireless Technology..................................... 19.0 22.2 24.4
----- ----- -----
Total net sales..................................................... 100.0% 100.0% 100.0%
----- ----- -----
Total gross profit.................................................. 45.0% 42.0% 41.5%
Operating expenses.................................................. 35.1 31.9 31.7
----- ----- -----
Operating income.................................................... 9.9% 10.1% 9.8%
===== ===== =====
Income (loss) before cumulative effect of a change in accounting.... 1.8% (2.5)% (0.1)%
===== ===== =====
Cumulative effect of change in accounting........................... --% --% (11.2)%
===== ===== =====
Net income (loss)................................................... 1.8% (2.5)% (11.3)%
===== ===== =====
YEAR ENDED DECEMBER 31, 2004 COMPARED TO TWELVE-MONTH PERIOD ENDED DECEMBER 31,
2003
Net Sales. Our net sales increased 10.5%, or $28.3 million, from $268.5
million in 2003 to $296.8 million in 2004. Approximately $10.4 million, or 3.8%
of the 2004 increase resulted from stronger foreign currencies compared to the
U.S. dollar. Sales in our Professional Audio segment increased in 2004 while
sales in our Audio and Wireless Technology segment declined slightly. We
experienced higher sales in all of our geographic marketplaces as the
professional audio marketplace experienced increased customer purchasing
activity and new products we introduced in 2004 were well received. Sales in the
Audio and Wireless Technology segment declined principally due to lower sales of
our cassette products in the digital audio duplication marketplace.
Net sales in our Professional Audio segment increased $31.5 million, or
15.1%, from $209.0 million in 2003 to $240.5 million in 2004. The increase is
attributable primarily to new product sales and higher sales of consoles,
intercoms and speakers as customers continued to make upgrades to their
equipment.
Net sales in our Audio and Wireless Technology segment decreased $3.2
million, or 5.7%, from $59.5 million in 2003 to $56.3 million in 2004. The
decrease for 2004 compared to 2003 is primarily from lower digital duplication
product sales that were offset
15
somewhat by higher sales of products to the aviation and transportation
marketplaces and to governmental agencies as they are upgrading their
communications equipment.
Gross Profit. Our gross profit increased $20.9 million, or 18.5%, from
$112.7 million in 2003 to $133.6 million in 2003. As a percentage of sales, the
gross margin rate of 45.0% for 2004, an increase from 42.0% for 2003. Included
in the 2003 period are impairment charges of $1.4 million for inventories and
fixed assets associated with the discontinuance of our computer audio product
line. Excluding these charges, gross margin as a percentage of net sales for
2003 would have been 42.5%. The increase in the gross margin rate for 2004 over
2003, excluding the charges, is attributable mainly to increased sales of higher
margin products and improved manufacturing efficiencies.
The gross margin rate for our Professional Audio segment increased from
43.2% for 2003 to 45.1% for 2004. The increase in the gross margin rate for 2004
over 2003, excluding the impairment charges, is attributable primarily to the
sale of high-margin products and continued manufacturing efficiencies.
The gross margin rate for our Audio and Wireless Technology segment
increased from 37.6% in 2003 to 44.7% for 2004. The gross margin rate for 2003,
excluding impairment charges discussed previously, was 40.0%. The increase in
the gross margin rate for 2004 over the 2003 period is attributable primarily to
increased sales of higher-margin products.
Engineering. Our engineering expenses increased $1.2 million, or 8.5%,
from $14.2 million in 2003 to $15.4 million in 2004. We continue to invest in
new product development across all of our business segments and recently have
focused more effort in our Professional Audio segment.
Selling, General and Administrative. Selling, general and administrative
expenses increased $7.0 million, or 9.5%, from $73.9 million in 2003 to $80.9
million in 2004. Our 2004 expense increase over 2003 is primarily due to higher
selling and marketing expenses associated with the increased sales levels we
have experienced. We invested in additional sales and marketing personnel in
2004 to penetrate new markets and to introduce certain product offerings into
new geographic regions. In addition, some of the increase results from higher
expenses when the stronger foreign currencies are converted to U.S. dollars.
Goodwill and asset impairment charges. We recorded a goodwill impairment
charge of $7.6 million associated with our Germany electronics operating unit
within the Professional Audio segment, in accordance with SFAS 142, as part of
our annual impairment evaluation performed in the fourth quarter of 2004. This
impairment charge, which is non-deductible for income tax purposes, adjusted the
carrying value of the operating unit's goodwill to its implied fair value. In
2004, the operating unit experienced a decline in operating performance compared
to prior year results and budgeted 2004 results. Additionally, we have
forecasted similar operating results for 2005. No goodwill impairment was
indicated for other operating units.
We also recorded an asset impairment charge of $0.3 million, which
represents the amount by which the carrying value exceeds fair value, less cost
to sell. The charge is associated with an idle manufacturing facility in the
U.S. that we have been actively marketing and monitoring the recoverability of
the asset. In the fourth quarter of 2004, we updated our evaluation of the
recoverability of the asset and recorded an impairment charge in accordance with
SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS 144").
Pension Curtailment Gain. We recorded a pension curtailment gain of $2.4
million in 2003 resulting from our decision to freeze certain future pension
plan benefits effective June 30, 2003. Our decision resulted in recognition of
previously unrecognized prior service benefits in accordance with SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits" ("SFAS 88").
Interest Expense. Interest expense for Telex decreased from $28.3 million
in 2003 to $16.6 million in 2004. Interest expense decreased primarily because
of the November 2003 debt restructuring that resulted in Telex having lower
outstanding indebtedness compared to Old Telex. Components of 2004 interest
expense include $14.4 million associated with the $125 million of 11-1/2% Senior
Secured Notes issued in 2003, $1.4 million of amortization of deferred financing
costs and $0.8 million of foreign interest expense.
INTERMEDIATE INCREMENTAL INTEREST EXPENSE
Incremental interest expense was $10.7 million in 2004 and includes $9.8
million of pay-in-kind interest associated with our 13% Senior Subordinated
Discount Notes, $0.8 million of cash paid interest on the 13% Senior
Subordinated Discount Notes, and $0.1
16
million of amortization of deferred financing costs. Holders of the 13% Senior
Subordinated Discount Notes receive cash interest payments of 1% per annum, paid
semi-annually, on the accreted value of the notes, which accrete at a rate of
12% per annum. A significant portion of Intermediate interest expense for 2004
and 2003 was non-cash although this declined substantially in 2004. Non-cash
interest expense in 2004 was $9.8 million compared to $20.1 million in 2003.
Other Income. Other income increased from $0.6 million in 2003 to $1.1
million in 2004. The significant components of other income in 2004 were a $0.4
million gain on foreign exchange, a $0.3 million gain on the sale of our
Australian subsidiary and $0.4 million from amortization of deferred revenue for
a patent license fee, trademark license fee and non-compete agreement associated
with the sale of our hearing instrument product lines in 2002. The amortization
of the patent fee deferred revenue will continue in 2005. The significant
components of other income in 2003 were a gain of $0.3 million from the sale of
production assets related to the shutdown of certain manufacturing facilities
and $0.4 million of amortization of deferred revenue for a patent license fee,
trademark license fee, and non-compete agreement associated with the 2002 sale
of our hearing instrument product lines.
Loss on Early Extinguishment of Debt. We recorded a $1.2 million loss in
2003 resulting from early extinguishment of debt. We completed our debt
restructuring in November 2003 pursuant to which Telex issued $125.0 million of
11 1/2% Senior Secured Notes, with the proceeds used to repay existing debt of
Old Telex. The loss results primarily from the write-off of deferred financing
costs and discounts associated with the repaid debt instruments.
Income Taxes. Intermediate and Telex file a consolidated U.S. tax return
with Old Telex. The tax provision recorded by Telex is calculated on a separate
company basis under a tax sharing agreement with Old Telex. Income taxes were
$8.5 million in 2004, and our effective tax rate, excluding the non-deductible
goodwill and asset impairment charges, was 39.1%. Income taxes include a $0.4
million expense recognized for additional income taxes for our Germany
subsidiary related to an audit of the 2002 tax year. Income taxes were $4.8
million in 2003. The effective tax rate 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. The income
tax expense increase in 2004 compared to 2003 is associated with an increase in
both our U.S and foreign subsidiary taxable income.
As of December 31, 2004, we have a reserve of $3.7 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.
We have established a net deferred tax valuation allowance of $8.0 million
due to the uncertainty of the realization of future tax benefits. This amount
relates primarily to U.S. deferred tax assets because of uncertainty regarding
their realization. We have considered this factor in reaching our conclusion as
to the adequacy of the valuation allowance for financial reporting purposes.
TWELVE-MONTH PERIOD ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31,
2002
Net Sales. Our net sales increased 0.8%, or $2.0 million, from $266.5
million in 2002 to $268.5 million in 2003. Sales in our Professional Audio
segment increased in 2003 while sales in our Audio and Wireless Technology
segment declined. Our net sales strengthened in the last nine months of 2003
compared to the 2002 period as the U.S. professional audio marketplace
experienced higher spending and increased concert tour activity and the European
marketplaces experienced higher sales as customers resumed higher purchasing
activity after the first quarter of 2003. The overall increase is attributable
primarily to higher sales of Professional Audio electronics and loudspeaker
products while sales in the Audio and Wireless Technology segment declined due
to the discontinuance of sales of computer audio products, which occurred in the
second quarter of 2003, and continued sluggishness in the education and digital
duplication markets. Our net sales, excluding the impact of the discontinued
products, increased approximately 2% for 2003 compared to 2002.
Net sales in our Professional Audio segment increased $7.5 million, or
3.7%, from $201.5 million in 2002 to $209.0 million in 2003. The increase is
attributable primarily to higher sales of our loudspeaker and electronics
product lines that offset a decline in sales of our microphone products. U.S.
net sales increased starting with the second quarter of 2003 and continued
strong throughout the remainder of 2003 as the U.S. professional audio
marketplace rebounded from slow economic activity in the first quarter of 2003.
The Asian marketplace experienced higher sales in the second half of 2003 as the
SARS epidemic subsided. The European marketplace also had higher sales; however,
this increase was mainly driven by the strength of foreign currencies relative
to the US dollar.
17
Net sales for our Audio and Wireless Technology segment decreased $5.5
million, or 8.5%, from $65.0 million in 2002 to $59.5 million in 2003. Net
sales, excluding sales of computer audio products in both periods and
discontinued hearing instruments products in 2002, decreased approximately 4%.
The decline in net sales, after excluding the computer audio and hearing
instruments products, is attributable primarily to the slowdown in the education
and digital duplication markets, in part due to decreased government spending.
Gross Profit. Our gross profit increased $2.0 million, or 1.8%, from
$110.7 million in 2002 to $112.7 million in 2003. As a percentage of net sales,
the gross margin rate increased to 42.0% for 2003 compared to 41.5% for 2002.
Included in the 2003 period are impairment charges of $1.4 million for
inventories and fixed assets associated with the discontinuance of our computer
audio product line. Excluding these charges, gross margin as a percentage of net
sales increased to 42.5%. The increase in the gross margin rate for 2003 over
2002, excluding the charges, is attributable mainly to increased sales of
high-margin products, improved manufacturing efficiencies, and lower operating
costs resulting from restructuring measures implemented in 2001 and 2002.
The gross margin rate for our Professional Audio segment increased from
41.5% for 2002 to 43.2% for 2003. The increase in the gross margin rate for 2003
over 2002 is attributable primarily to increased sales of high-margin products
and the continued benefits of restructuring measures implemented in 2001 and
2002.
The gross margin rate for our Audio and Wireless Technology segment
decreased from 41.7% in 2002 to 37.6% for 2003. The gross margin rate for 2003,
excluding the impairment charges discussed above, was 40.0%. The decrease in the
gross margin rate for 2003 over the 2002 period is attributable primarily to
lower sales of high-margin products and to manufacturing inefficiencies.
Engineering. Our engineering expenses increased $1.8 million, or 14.5%,
from $12.4 million in 2002 to $14.2 million in 2003. The increase in spending
for the 2003 period compared to the 2002 period is attributed primarily to
spending associated with new product development in the Professional Audio
segment. New products associated with the increased spending were introduced
throughout 2003 and in the first quarter of 2004.
Selling, General and Administrative. Selling, general and administrative
expenses increased $3.0 million, or 4.2%, from $70.9 million in 2002 to $73.9
million in 2003. The increase in expenses in 2003 is attributed mainly to a
legal settlement and associated legal fees and to slightly higher selling and
marketing costs. We implemented cost controls in early 2003 as a result of the
slowdown in our sales in the first three months of 2003. The selling, general
and administrative expenses, as a percentage of net sales, declined in the last
nine months of 2003 when compared to the first three months of 2003 and were
similar to spending levels for the last nine months of 2002.
Corporate Charges. Corporate charges of $0.5 million were recorded for
2002. The charges represented fees incurred for consulting and management
services provided by GSCP(NJ), L.P. ("GSC") under a consulting and management
services agreement that expired in May 2002 and was not renewed.
Amortization of Other Intangibles. We recorded amortization expense of
approximately $21,000 and $120,000 for 2003 and 2002, respectively, related to
identifiable intangible assets having definite lives.
Restructuring Charges. In 2002, we recorded a pre-tax restructuring charge
of $0.5 million related to the costs of settlement and curtailment of our
pension obligations in accordance with 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.
Pension Curtailment Gain. We recorded a pension curtailment gain of $2.4
million in 2003 resulting from our decision to freeze certain future pension
plan benefits effective June 30, 2003. Our decision resulted in recognition of
previously unrecognized prior service benefits in accordance with SFAS 88.
Interest Expense. Interest expense increased from $26.6 million in 2002 to
$28.3 million in 2003. Included in interest expense is $19.0 million and $17.0
million of pay-in-kind interest expense for 2003 and 2002, respectively.
Interest expense increased primarily because of the higher pay-in-kind interest
expense that offset the benefits of lower average outstanding indebtedness and
lower average interest rates on non-pay-in-kind debt.
18
INCREMENTAL INTERMEDIATE INTEREST EXPENSE
Intermediate was formed in December 2003 and had incremental interest
expense of $1.2 million, comprised of $1.1 million of pay-in-kind interest
associated with our 13% Senior Subordinated Discount Notes and $0.1 million of
accrued interest on the 13% Senior Subordinated Discount Notes related to the
cash paid interest portion. Holders of the 13% Senior Subordinated Discount
Notes receive cash interest payments of 1% per annum, paid semi-annually, on the
accreted value of the notes, which accrete at a rate of 12% per annum.
Other Income. Other income decreased from $2.7 million in 2002 to $0.6
million in 2003. The significant components of other income in 2003 were a gain
of $0.3 million from the sale of production assets related to the shutdown of
certain manufacturing facilities and $0.4 million from amortization of deferred
revenue for a patent license fee, trademark license fee and non-compete
agreement associated with the sale of the hearing instrument product line 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 line, $0.4 million from
amortization of deferred revenue for a patent fee, trademark license fee and
non-compete agreement associated with the sale of the hearing instrument product
line, and a gain of $1.3 million from the sale of production assets related to
the shutdown of certain manufacturing facilities.
Loss on Early Extinguishment of Debt. We recorded a $1.2 million loss in
2003 resulting from early extinguishment of debt. We completed a debt
restructuring pursuant to which Telex issued $125.0 million of 11 1/2% Senior
Secured Notes, with the proceeds used to repay existing debt of Old Telex. The
loss results primarily from the write-off of deferred financing costs and
discounts associated with the repaid debt instruments.
Income Taxes. Our effective tax rate for the years 2003 and 2002 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 to $4.8 million in 2003 from
$2.6 million in 2002. The change was mainly associated with an increase in our
foreign subsidiary taxable income.
Cumulative Effect of a Change in Accounting. We recorded a charge of $29.9
million in 2002 related to the impairment of our Professional Audio segment
goodwill as a cumulative effect of a change in accounting in accordance with
SFAS 142.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion about liquidity and capital resources pertains to
Telex and its consolidated subsidiaries.
Our cash and cash equivalents balance of $15.0 million at December 31,
2004 was significantly higher than our balance of $6.7 million at December 31,
2003. Our cash provided from operations of $13.7 million and the $2.3 million
generated from the sale of our Australian subsidiary was offset principally by
$7.7 million of net cash used for capital expenditures in 2004 and $0.6 million
for financing activities. For the year ended December 31, 2003 our cash and cash
equivalents increased from $3.4 million at December 31, 2002 to $6.7 million at
December 31, 2003. Our cash provided from operations of $21.0 million and the
$1.2 million generated from the sales of idle production assets were offset
somewhat by $13.8 million of net cash used for financing activities and $5.7
million for capital expenditures in 2003.
Operating Activities. Our net cash provided by operating activities was
$13.7 million for 2004 compared to $21.0 million for 2003. The $7.3 million
decrease is mainly due to increases in our operating assets. In 2004, net cash
provided by operating activities was comprised of net loss of $5.4 million
adjusted for non-cash items of $15.7 million and net cash consumed from changes
in operating assets and liabilities of $7.4 million. Included in non-cash items
were $16.0 million of charges that reduced our net income, consisting mainly of
goodwill and asset impairment charges, depreciation and amortization, and
amortization of deferred financing costs. Offsetting the non-cash charges was a
$0.3 million gain from the sale of assets. Changes in net cash used in operating
assets and liabilities were mainly due to increases in inventories and accounts
receivable offset by an increase in other long-term assets and long-term
liabilities.
Our accounts receivable of $50.2 million as of December 31, 2004 increased
$2.7 million from $47.5 million at December 31, 2003. Excluding the impact of
foreign currency exchange rate movements and the sale of our Australian
subsidiary, our accounts receivable balance increased $2.3 million from December
31, 2003. Sales increased $5.2 million in the fourth quarter of 2004 compared to
the fourth quarter of 2003 which, when combined with strong collection activity,
contributed to the higher December 31, 2004 accounts receivable balance.
19
Our inventories of $52.6 million as of December 31, 2004 increased $6.2
million from $46.0 million at December 31, 2003. Excluding the impact of foreign
currency exchange rate movements and the sale of our Australian subsidiary, our
inventories increased $5.7 million from December 31, 2003. The increase was
principally from raw materials, which are $5.1 million higher than year ago
levels. We maintained similar levels of finished goods from year to year and
expect to reduce inventory levels in 2005 as we continue to concentrate on our
lean manufacturing and make to order initiatives.
Investing Activities. Our investing activities consist mainly of capital
expenditures to maintain facilities, acquire machinery and tooling, update
certain manufacturing processes, update information systems and improve
efficiency. Our net cash used for investing activities was $5.2 million for 2004
compared to $4.4 million for 2003. Cash was used during each period primarily
for capital expenditures, which amounted to $7.7 million and $5.7 million in
2004 and 2003, respectively. Capital expenditures in 2004 related primarily to
information technology investments. We are improving our global infrastructure
and our U.S. based operating system is being expanded to foreign locations. This
spending was partially offset by the receipt of $2.3 million in proceeds from
the sale of our Australian subsidiary. Capital expenditures in 2003 were largely
for information technology investments. This spending was partially offset by
the receipt of $1.2 million in proceeds from the sales of idle production
assets. We anticipate that our capital expenditures for 2005 will be in the
range of $9.0 million to $11.0 million.
Financing Activities. Net cash used in financing activities was $0.6
million and $13.7 million for 2004 and 2003, respectively. During the 2004
period, we repaid $0.4 million of long-term debt and borrowed $1.0 million on
our foreign working capital lines. In 2003 we repaid $131.8 million of revolving
lines of credit and long-term debt. We repaid this debt from net proceeds of the
issuance of $125.0 million principal amount of 11 -1/2% Senior Secured Notes and
cash generated from operating activities. In 2004 and 2003 we incurred deferred
financing costs of $0.3 million and $6.5 million, respectively. 2004 deferred
financing cost activity was necessary to complete the requirements under our
November 2003 debt restructuring. In 2004 and 2003 we paid dividends of $0.9
million and $0.5 million, respectively, to Intermediate.
Indebtedness. Our consolidated indebtedness was $127.6 million at December
31, 2004. The debt consists of $125.0 million of 11 1/2% Senior Secured Notes
("Senior Secured Notes") due October 2008 and $2.6 million of other debt in the
U.S., Germany and the United Kingdom. In conjunction with our restructuring we
established a $15.0 million senior secured credit facility, subject to certain
borrowing base limitations. The credit facility is secured by substantially all
of our and our domestic subsidiaries' current and future assets, and a pledge of
65% of the voting stock and 100% of the non-voting stock of our first-tier
foreign subsidiaries. The credit facility includes certain financial covenants.
The credit facility was undrawn at December 31, 2004 and 2003. In addition, we
have foreign working capital lines (with on demand repayment provisions),
subject to certain limitations, of $12.8 million. In certain instances the
foreign working capital lines are secured by a lien on foreign real property,
leaseholds, accounts receivable and inventory or are guaranteed by another
subsidiary.
At December 31, 2004 we had borrowings of $1.0 million outstanding under
our foreign working capital lines. The net availability, after deduction for
open letters of credit and borrowing base limitations, under the credit facility
and foreign working capital lines was $25.1 million. The effective interest rate
under these credit facilities for the year ended December 31, 2004 was 6.3%.
Pension Benefit Costs. We recorded pension income of approximately $0.5
million in 2004 primarily due to the decision to freeze future pension plan
benefits effective June 30, 2003. The annual interest cost on the accumulated
benefit obligations is less than the expected return on plan assets, which
created income for 2004. Pension expense is estimated to be $0.2 million in
2005. During 2004 we made employer contributions to the pension plan of
approximately $0.5 million and we expect to make contributions in 2005 and 2006
of approximately $1.2 million for the 2005 plan year.
Future Cash Needs. Our primary future cash needs will be to fund working
capital, capital expenditures and debt service obligations. Additionally, the
ability of our direct parent, Intermediate, to make semiannual interest payments
on its notes is dependent on our ability to generate sufficient cash flow to
fulfill this obligation. We believe that our existing cash and cash flows from
operations will be sufficient to meet our future cash needs. If we do not
generate sufficient cash from operations to meet our cash needs, we may need to
incur additional debt through borrowing under our senior secured credit facility
or otherwise. Our ability to fund working capital, capital expenditures and debt
service will depend on our ability to generate cash in the future, which is
subject to general economic, financial, competitive, legislative, regulatory and
other factors beyond our control. Our senior secured credit facility and the
indenture governing our notes impose, and any future indebtedness may impose,
various restrictions and covenants which could limit our ability to respond to
market conditions, to provide for unanticipated capital investments or to take
advantage of business opportunities.
20
DISCLOSURE OF CONTRACTUAL OBLIGATIONS
Telex's contractual obligations at December 31, 2004 consist of the
following (in thousands):
PAYMENT DUE BY PERIOD
------------------------------------------------------------
LESS THAN MORE THAN
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
-------- --------- --------- --------- ---------
Long-term debt .................... $126,558 $ 479 $ 878 $125,201 $ --
Capital lease obligations ......... --
Operating lease obligations ....... 11,026 2,978 4,338 2,795 915
Purchase obligations .............. --
Other long-term liabilities ....... 12,523 -- 70 299 12,154
-------- -------- -------- -------- --------
Total ............................. $150,107 $ 3,457 $ 5,286 $128,295 $ 13,069
======== ======== ======== ======== ========
Intermediate's $129.1 million of long-term debt matures in January 2009.
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2004 the lease of our headquarters facility is a
significant off-balance sheet arrangement. In 2000, we relocated our corporate
headquarters to a facility leased from DRF 12000 Portland LLC (the LLC), an
entity in which we have a 50% interest. We contributed cash of $0.6 million to
the LLC and the investment is accounted for under the equity method. Our
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, 2004, the remaining balance on the mortgage was $6.6 million.
Our annual lease payments to the LLC are $1.1 million for years 1 to 5 and
$1.2 million for years 6 to 10. We 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 we record the lease obligations as rent expense.
In January 2003 the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46).
This was an interpretation of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements" and addresses the consolidation of variable interest
entities by businesses. We used the guidelines in FIN 46 to analyze our
relationship with the LLC and concluded that the LLC is not a variable interest
entity to us. Therefore, the current method of consolidation remains
appropriate.
The LLC results of operations and our equity in earnings of the LLC were (in
thousands):
SUCCESSOR PREDECESSOR
----------------- -----------------
2004 2003 2003 2002
------ ------ ------ ------
Gross revenue ........................ $1,736 $ 144 $1,584 $1,784
Costs and expenses ................... 1,464 123 1,358 1,548
------ ------ ------ ------
Net income ........................... $ 272 $ 21 $ 226 $ 236
====== ====== ====== ======
Equity share in earnings of the LLC .. $ 136 $ 10 $ 113 $ 118
====== ====== ====== ======
Condensed balance sheet information for the LLC as of December 31 was (in
thousands):
2004 2003
-------- -------
Current assets $ 69 $ 150
Noncurrent assets 9,137 9,162
Current liabilities 357 360
Noncurrent liabilities 7,359 7,298
21
RISK FACTORS RELATING TO OUR BUSINESS
The following risk factors and other information included in this report
should be carefully considered. The risks and uncertainties described below are
not the only ones we face. Additional risks and uncertainties not currently
known to us or that our management currently deems immaterial also may impair
its business operations. If any of the risks described below were to occur, our
business, financial condition, operating results and cash flows would be
materially adversely affected.
WE OPERATE IN AN ENVIRONMENT IN WHICH PRODUCT INNOVATION AND CHANGING TECHNOLOGY
ARE CRITICAL.
Technological innovation and leadership are among the important factors in
competing successfully in the professional audio 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, research and 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 on our financial resources may adversely affect
our ability to develop and implement technological advances.
Moreover, to the extent the pace of product obsolescence increases,
disposing of inventories of obsolete products may result in reduced operating
margins and materially adversely affect our earnings and results of operations.
WE OPERATE IN A HIGHLY COMPETITIVE ENVIRONMENT.
The professional audio and audio and wireless technology markets are
highly competitive and fragmented, and we face meaningful competition in most of
our product categories and markets. While many of our current competitors are
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.
Competition could negatively affect our pricing and gross margins. As a result,
we may not be able to compete successfully in our current market or in new
markets.
WE FACE CURRENCY AND OTHER RISKS ATTENDANT ON 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 trademarks and
patents in all foreign jurisdictions in which we do business, and attempts at
registration in such foreign jurisdictions may not be possible or successful. We
are aware that, in certain foreign jurisdictions, unaffiliated third parties
have applied for and/or obtained registrations for trademarks that are identical
or similar to trademarks owned or used by us. In view of this and because many
foreign jurisdictions operate on a "first-to-file" basis for registrations of
intellectual property, we may be prohibited from registering our trademarks and
patents in certain foreign countries and in some cases we may be prohibited from
selling our products in certain countries, or at least from selling our products
under the same trademarks in certain countries.
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 the United States.
22
WE FACE RISKS ATTENDANT TO REGULATORY REQUIREMENTS.
Changes in regulatory requirements may adversely impact our gross margins
where we comply with such changes or reduce our ability to generate revenues if
we are unable to comply.
Our products must meet the requirements set by regulatory authorities in
the numerous jurisdictions in which we sell them. As regulations and local laws
change, we must modify our products to address those changes. Regulatory
restrictions may increase the costs to design and manufacture our products,
resulting in a decrease in demand for our products if the costs are passed along
or a decrease in our margins. Compliance with regulatory restrictions may
adversely affect the technical quality and capabilities of our products,
reducing their marketability.
WE FACE RISKS ASSOCIATED WITH INTELLECTUAL PROPERTY RIGHTS.
If we are unable to enforce or defend our ownership and use of our
intellectual property, our business may decline. We seek to protect our
intellectual property rights, but our actions may not adequately protect the
rights covered by our patents, patent applications, trademarks and other
proprietary rights, and prosecution of our claims could be time consuming and
costly. A number of our trademarks are important to our business and we are
dependent on two of our trademarks, namely the Telex(R) and Electro-Voice(R)
marks. In addition, the intellectual property laws of some foreign countries do
not protect our proprietary rights as do the laws of the U.S. Despite our
efforts to protect our intellectual property or proprietary information, third
parties may obtain, disclose or use our intellectual property or proprietary
information without our authorization, or claim we infringe their proprietary
rights, any of which could adversely affect our business. From time to time,
third parties have alleged that we infringe their proprietary rights. These
claims or similar future claims could subject us to significant liability for
damages, result in the invalidation of our proprietary rights, limit our ability
to use infringing intellectual property or force us to use alternative
trademarks or obtain licenses to third-party technology rather than dispute the
merits of any infringement claim. Even if we prevail, any associated litigation
could be time-consuming and expensive and could result in the diversion of our
time and resources.
WE MAY BE SUBJECT TO ENVIRONMENTAL LIABILITY.
We are subject to various foreign, federal, state and local environmental
protection, chemical control, and health and safety laws and regulations. We own
and lease real property, and some environmental laws hold current or previous
owners or operators of businesses and real property liable for contamination on
or originating from that property, even if they did not know of or were not
responsible for the contamination. The presence of hazardous substances on any
of our properties or the failure to meet environmental regulatory requirements
may materially adversely affect our ability to use the property as collateral
for borrowing and may cause us to incur substantial remediation or compliance
costs. If hazardous substances are released from or located on any of our
properties, we could incur substantial liabilities through a private party
personal injury or property damage claim or a claim by a governmental entity for
other damages. If we incur material costs or liabilities in the future under
environmental laws for any reason, our results of operations may be materially
adversely affected. We are indemnified by the former owner of certain sites
purchased by us against environmental liabilities that may result from these
sites. We cannot assure you that the former owner will fulfill its
indemnification obligations.
IF WE LOSE THE SERVICES OF KEY MEMBERS OF OUR MANAGEMENT, WE MAY NOT BE ABLE TO
MANAGE OUR OPERATIONS AND IMPLEMENT OUR GROWTH STRATEGY EFFECTIVELY.
Our future success depends, in large part, on the continued service of
several key members of our management team, and some of our other key executives
and officers and managers who possess significant expertise and knowledge of our
business and markets. We do not maintain key man insurance on any of our
officers or managers. Any loss or interruption of the services of these
individuals could reduce our ability to effectively manage our operations and
implement our strategy because we may not be able to find appropriate
replacements.
23
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 2004, we principally hedged
transactions involving certain intercompany balances related 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, 2004, we had outstanding foreign forward exchange
contracts with a notional amount of $15.2 million with a weighted average
maturity of 43 days.
At December 31, 2004, 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 $1.5 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, 2004, Telex had fixed rate debt of $125.7 million and an
interest-free loan of $0.8 million. Holding all other variables constant, such
as foreign exchange rates and debt levels, a one-percentage point decrease in
interest rates would increase the unrealized fair market value of these debts by
approximately $3.9 million. Intermediate had fixed rate debt of $71.0 million
and a one-percentage point decrease in interest rates would increase the
unrealized fair market value of this debt by approximately $2.6 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Registered Public Accounting Firm and
Consolidated Financial Statements and Supplementary Data required by this Item 8
are set forth immediately following the signatures page of this report and are
incorporated herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with our independent registered
public accounting firm on accounting or financial disclosure.
ITEM 9A. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of our management, including the Chief Executive Officer (CEO) and
Chief Financial Officer (CFO), of the effectiveness of the design and operation
of disclosure controls and procedures (as defined in Exchange Act Rules
13a-14(c) and 15d-14(c)) as of December 31, 2004. Based on that evaluation, our
management, including the CEO and CFO, concluded (i) that our disclosure
controls and procedures were effective as of the end of the period to ensure
that the information that we are required to disclose in the reports filed or
submitted under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Commission's rules and forms, and (ii)
that the information that is required to be reported is accumulated and
communicated to management, including our principal executive and financial
officers, as appropriate, to allow timely decisions regarding required
disclosure. There have been no significant changes in our internal controls or
in other factors that could significantly affect internal controls.
24
ITEM 9B. OTHER INFORMATION
None.
25
PART III
INFORMATION REQUIRED BY ITEMS 10-14 WITH RESPECT TO TELEX HAS BEEN OMITTED
PURSUANT TO GENERAL INSTRUCTION I OF FORM 10-K. INFORMATION REQUIRED BY ITEMS
10-14 WITH RESPECT TO INTERMEDIATE IS DESCRIBED BELOW.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and position of individuals
who are serving as directors and executive officers of Intermediate as of March
15, 2005. All officers and directors hold identical positions in Telex
Communications Holdings, Inc and Telex. Unless otherwise indicated below, all
dates refer to the dates when each officer and/or director was appointed or
elected to such position with Telex Communications Holdings, Inc. Each such
person was elected or appointed to the identical offices and/or directorships
with respect to both Intermediate and Telex on November 19, 2003 upon the
consummation of the debt restructuring. Intermediate is managed by a Board of
Managers. References below to "Director" also refer to the substantially similar
position of "Manager" at Intermediate.
NAME AGE POSITION
- ---- ---- ------------------------------------------
Raymond V. Malpocher...... 59 Chief Executive Officer and President,
Director
Gregory W. Richter........ 43 Vice President and Chief Financial Officer
Mathias von Heydekampf.... 42 President, Worldwide Professional Audio
Thomas J. Kulikowski...... 47 President, Audio and Wireless Technology
Ralph K. Strader.......... 51 President, Intercom Systems Group
Kathleen A. Curran........ 53 Vice President, Human Resources
Kristine L. Bruer......... 54 Vice President and General Counsel
Leigh P. Hart............. 44 Vice President, Finance
Terrence E. Martin........ 48 Vice President, North American Operations
Brian P. Friedman......... 49 Chairman of the Board, Director
Keith W. Abell............ 47 Director
Patrick J. Halloran....... 44 Director
Stuart B. Katz............ 50 Director
Edgar S. Woolard, Jr...... 70 Director
Raymond V. Malpocher. Mr. Malpocher was appointed Chief Executive Officer
and President in April 2003. Mr. Malpocher was most recently with Teleflex
Incorporated from 1999 until 2002, where he served as head of its
Marine/Industrial Division with the title of Group President. Prior to that,
from 1995 to 1998, he was head of the Qualitrol Division of the Danaher
Corporation with the title of Group Vice President.
Gregory W. Richter. 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 and Secretary in February 2002. Effective October
2003, his duties for International -- ROW were redistributed to other employees.
Mathias von Heydekampf. 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 Professional Audio.
Thomas J. Kulikowski. Mr. Kulikowski joined Telex in July 2003 as
President, Audio and Wireless Technology Group. Prior to joining us, he served
as Vice President of Marketing for the Marine/Industrial Division of Teleflex
Incorporated since 2000. He previously held various product management,
engineering management, and marketing roles with Air Products and Chemicals,
Inc. from 1996 to 2000.
Ralph K. Strader. Mr. Strader joined us in December 1993 as Engineering
Manager, Intercom Products Group. Mr. Strader has held various product
management positions and was promoted in October 2000 to the position of Vice
President, Intercom Products. In January 2005 Mr. Strader was promoted to his
current position of President, Intercom Systems Group.
26
Kathleen A. Curran. Ms. Curran joined us in February 1990 as Director,
Human Resources and was promoted in January 1995 to her current position of Vice
President, Human Resources.
Kristine L. Bruer. Ms. Bruer joined us in January 1999 as Vice President
and General Counsel.
Leigh P. Hart. Mr. Hart joined Telex in May 1999 as Director of
Operations, Planning & Analysis. He became Global Director of Operations
Planning & Analysis in April 2000 and was promoted in January 2003 to his
current position of Vice President, Finance. Prior to joining Telex, Mr. Hart
had served as Senior Director of Finance at Rollerblade, Inc. since 1996.
Terrence E. Martin. Mr. Martin joined us in October 1999 as Plant
Manager-Rochester (Minnesota). He was promoted in March 2002 to the position of
Vice President, Manufacturing Services. In September 2003, he was promoted to
his current position of Vice President, North American Operations.
Brian P. Friedman. Mr. Friedman became a director in November 2001, and he
was appointed Chairman of our Board of Directors in November 2003. He has been a
Managing Member of Jefferies Capital Partners since 1997. Jefferies Capital
Partners is the manager of several investment funds that, together, own a
significant portion of Old Telex's 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 Capital Partners. Mr.
Friedman also serves as a member of the board of directors of Iowa
Telecommunications Services Inc., Real Mex Restaurants, Inc. and K-Sea
Transportation Partners L.P.
Keith W. Abell. Mr. Abell became a director in December 1997. Mr. Abell is
the Vice Chairman and Co-Founder of GSCP (NJ), Inc., the general partner of GSC,
which he joined at its inception in 1994. GSC manages several entities that,
together, own a significant portion of Old Telex's common stock. Mr. Abell is
serving on the Board of Directors at the request of GSC.
Patrick J. Halloran. Mr. Halloran became a director in November 2001. He
became the co-founder and Managing Member of Wayzata Investment Partners LLC in
May 2004. Wayzata Investment Partners LLC is the manager of several investment
funds that own Old Telex's common stock. Prior thereto, he was a Vice President
and a member of the Board of Directors of CSFC Wayland Investment Advisers, Inc.
and had been a portfolio manager since 1990. Mr. Halloran is serving on the
Board of Directors at the request of Jefferies & Company, Inc.
Stuart B. Katz. Mr. Katz became a director in July 2002. He has been a
Managing Director at Jefferies Capital Partners since 2001. Prior to that he had
been employed as an investment banker by Furman Selz Incorporated and its
successors since 1985. Jefferies Capital Partners is the manager of several
investment funds, that, together, own a significant portion of Old Telex's
common stock. Mr. Katz is serving on the Board of Directors at the request of
Jefferies Capital Partners. Mr. Katz also serves as a member of the board of
directors of W&T Offshore, Inc. and Iowa Telecommunications Services, Inc.
Edgar S. Woolard, Jr. Mr. Woolard became a director in January 1998, and
he served as Chairman of our Board of Directors from March 2000 through November
2003. 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. He also serves as a member of the Board of Directors of The New York
Stock Exchange. Mr. Woolard is serving on the Board of Directors at the request
of GSC.
CODE OF BUSINESS CONDUCT AND ETHICS
We have a Code of Business Conduct and Ethics that applies to our
directors, officers and employees. A copy of the Code is filed as an exhibit to
this Annual Report on Form 10-K and is available free of charge upon written
request to the Corporate Secretary, Telex Communications, Inc., 12000 Portland
Avenue South, Burnsville, MN 55337.
AUDIT COMMITTEE FINANCIAL EXPERT
The board of directors of the Company does not maintain a separate audit
committee. Mr. Stuart B. Katz is an audit committee financial expert as defined
by the SEC rules and Mr. Katz is "independent," as the term is used in Item
7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934.
27
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.
Currently, Keith W. Abell is President of GSCP (NJ), Inc., the general
partner of GSC. We owed fees to GSC until January 2004, 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 $100,000 for the year ended
December 31, 2004 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-------------------
OTHER
ANNUAL
FISCAL COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) COMPENSATION ($)(1)
- --------------------------- ------ ---------- --------- ------------ -------------------
Raymond V. Malpocher ..................... 2004 $366,345 $320,458 $ -- $ 66,091(3)
Chief Executive Officer and President(2) 2003 230,560 100,000 -- 24,756
Mathias von Heydekampf ................... 2004 269,653 166,126 1,620(4) --
President, Worldwide Pro Audio 2003 268,708 94,500 -- 128,046
2002 244,332 306,000 -- --
Gregory W. Richter ....................... 2004 215,060 90,402 1,620(5) 6,500
Vice President and Chief Financial Officer 2003 202,345 50,673 -- 5,719
2002 182,642 130,000 -- 5,359
Thomas J. Kulikowski ..................... 2004 185,417 71,192 1,620(6) 27,457(7)
President, Audio and Wireless Technology 2003 75,933 36,869 -- 24,300
Ralph K. Strader ......................... 2004 143,150 94,000 540(8) 5,772
President, Intercom Systems Group 2003 136,676 48,052 -- 6,614
2002 132,016 90,000 -- 5,104
- ---------------
(1) Except as otherwise noted, represents Company matching contribution to the
401(k) plan.
(2) Mr. Malpocher was appointed as the Company's Chief Executive Officer in
April 2003. For a description of Mr. Malpocher's annual compensation, see
" -- Employment Agreements" below.
(3) Includes 401 (k) matching contribution of $6,500 and relocation expenses
of $59,591.
(4) Stock purchase discount of $1,620.
(5) Stock purchase discount of $1,620.
(6) Stock purchase discount of $1,620.
(7) Includes 401 (k) matching contribution of $6,198 and relocation expenses
of $21,259.
(8) Stock purchase discount of $540.
28
OPTION GRANTS IN FISCAL 2004
The following table sets forth information on the options to acquire Common
Stock of Old Telex granted to our Chief Executive Officer during Fiscal 2004 and
the potential realizable value of each grant. No other Named Executive Officer
was granted stock options. No stock appreciation rights have been granted under
any incentive plan.
% OF TOTAL
NUMBER OF OPTIONS
SHARES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE EXPIRATION GRANT
NAME OPTIONS GRANTED IN FISCAL 2004 PRICE DATE DATE VALUE
- -------------------- --------------- -------------- -------- ---------- ----------
Raymond V. Malpocher 100,000(a) 51.3% $15.00 09/30/2008 $32,700
(a) Consists of a nonqualified stock option that is immediately fully
exercisable, provides for early termination in the event of termination of
employment or sale or liquidation of Old Telex, and is nontransferable.
For additional provisions, see "--Employment Agreements - Raymond V.
Malpocher."
(b) There is no established public market for shares of Old Telex common
stock. Based on other purchases of Old Telex common stock at approximately
the same time, the value of a share of Old Telex common stock was
estimated to be $0.327 per share as of the grant date.
AGGREGATED STOCK OPTION EXERCISES IN FISCAL 2004 AND OPTION VALUE AT DECEMBER
31, 2004
The following table provides information with respect to our Chief Executive
Officer concerning stock options exercised during fiscal 2004 to acquire Common
Stock of Old Telex. No other Named Executive Officer exercised or held stock
options in 2004. No stock appreciation rights have been granted under any plan.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES VALUE OPTIONS OPTIONS
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE ($) UNEXERCISABLE UNEXERCISABLE($)(a)
- -------------------- ----------- -------- ---------------------- --------------------
Raymond V. Malpocher - - 100,000/0 $0/$0
(a) There is no established public market for shares of Old Telex common
stock. Based on customary corporate valuation techniques, including an
analysis of the discounted value of Old Telex's potential earnings and
cash flow and the valuation of comparable companies, the value of a share
of Old Telex common stock was estimated to be less than $15 as of December
31, 2004.
2004 STOCK OPTION PLAN
On October 29, 2004 Old Telex's Board of Directors adopted the 2004 Stock
Option Plan of Telex Communications Holdings, Inc. Under Old Telex's 2004 Option
Plan, Old Telex may grant options to purchase its common stock to (i) directors
of Old Telex or a subsidiary thereof, (ii) employees of Old Telex or a
subsidiary thereof, and (iii) consultants and independent contractors used by
Old Telex or a subsidiary thereof. Old Telex may issue options to purchase up to
an aggregate of 140,000 shares of its common stock under the plan. Options under
Old Telex's 2004 Option Plan will generally vest at the rate of 20% on and
after each of the first five anniversaries of the date of grant, provided that
the optionholder is still in the employ or service of Old Telex or a subsidiary
thereof on the applicable vesting date. Subject to certain exceptions, all or
any part of any option, to the extent unexercised, shall terminate
immediately(i) in the case of an employee, upon the cessation or termination for
any reason of the optionholder's employment by Old Telex and all subsidiaries
thereof, or (ii) in the case of a director, consultant or independent contractor
of Old Telex or a subsidiary thereof who is not also an employee of Old Telex or
a subsidiary thereof, upon the holder's ceasing to serve as a director,
consultant or independent contractor of Old Telex or a subsidiary thereof. None
of the Named Executive Officers has received any options under Old Telex's 2004
Option Plan.
ANNUAL BONUS PROGRAMS
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 2004 under this plan were paid in March 2005.
29
For a description of bonuses payable to Mr. Malpocher 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. Effective June 30, 2003, the pension plan was frozen, with no
future benefit credit for participants after this date.
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
Through 2003 the integration level was equal to one-half of the Social
Security taxable wage base for the year. For 2003 the integration level was
$43,500. For plan years through 2003, annual compensation taken into account for
purposes of calculating benefits is limited to $200,000.
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, nor greater than the interest rate used to determine lump sum
payments. With the plan frozen, participant accounts will continue to receive
interest credits.
The estimated projected annual single life annuity benefit for the Named
Executive Officers, assuming they continue with Telex to age 65, and their
compensation, the maximum recognizable compensation, and the integration level
do not change, would be as follows:
Mr. Richter....... $ 8,096
Mr. Strader....... $10,718
Messrs. Malpocher and Kulikowski were not eligible to participate in the
Pension Plan because they were not participants in the plan before the plan was
frozen effective June 30, 2003. Mr. von Heydekampf was not eligible to
participate in the Pension Plan because he is not a United States citizen.
EMPLOYMENT AGREEMENTS
Effective April 14, 2003, we entered into an employment agreement with Mr.
Malpocher, which was subsequently amended on January 14, 2004 and which
terminates on April 30, 2007. The agreement provides that Mr. Malpocher will
receive:
- An annual base salary of $350,000;
- An annual bonus payment based on the objectives and awards
established by the Board of Directors; and
- In the event his employment is terminated without cause, or he
terminates employment for good reason, one year's base annual
salary and an amount equal to his bonus earned prorated as of the
date of termination payable as and when paid to other eligible bonus
plan participants.
30
Pursuant to Mr. Malpocher's subscription and option agreement associated
with his amended employment agreement, he purchased 300,000 shares of Old Telex
common stock at a purchase price of $0.327 per share and was granted options to
purchase one hundred thousand shares of Old Telex common stock (at an exercise
price of $15 per share, exercisable until the earlier of September 30, 2008 or
upon the occurrance of certain specified events.
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, 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 authorized common stock of Telex as of March 14, 2005 consists of
1,000 shares of common stock, par value $.01 per share, of which 500 shares are
issued and outstanding. All of the Telex common stock is owned by its direct
parent, Intermediate, and all of Intermediate's limited liability company
interests are owned by Old Telex.
The following table sets forth information with respect to the beneficial
ownership of the common stock of Old Telex as of March 14, 2005 by
- each person who is known by us to beneficially own more than five
percent of Old Telex 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.
Number of Shares
Underlying PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES Options(a) CLASS
- ------------------------------------ ---------------- ---------------- -------------
GSCP Recovery, Inc.(b)(c)...................... 943,786 -- 13.7%
GSC Partners CDO Fund, Limited(b)(d)........... 468,497 -- 6.8
TCI Investment II, LLC(e)(f)................... 1,028,612 -- 14.9
ING Furman Selz Investors III, L.P.(g)(h)(j)... 1,140,616 -- 16.5
ING Barings U.S. Leveraged Equity Plan LLC
(g)(i)(j)..................................... 356,734 -- 5.2
Wayzata Investment Partners LLC.(k)(l)......... 401,535 -- 5.8
Brian P. Friedman(m)........................... 0 -- *
Keith W. Abell(n).............................. 0 -- *
Patrick J. Halloran(o)......................... 0 -- *
Stuart B. Katz (p)............................. 0 -- *
Edgar S. Woolard, Jr.(d)....................... 10,884 -- *
Raymond V. Malpocher(q)(r)..................... 300,000 100,000 5.9
Mathias von Heydekampf......................... 60,000 -- *
Gregory W. Richter............................. 60,000 -- *
Thomas J. Kulikowski........................... 60,000 -- *
Ralph K. Strader............................... 20,000 -- *
All directors and executive officers as a
group (14 persons)(d)(m)(n)(o)(p)(r).......... 550,884 100,000 9.6%
* Less than 1%.
31
(a) The shares listed include shares of Old Telex that may be acquired upon
exercise of presently exercisable options to acquire Old Telex common
stock, and all such options that will become exercisable with in 60 days
from the date on which such information is given.
(b) The address of GSCP Recovery, Inc. and GSC Partners CDO Fund, Limited is
c/o GSC, 500 Campus Drive, Suite 220, Florham Park, New Jersey 07932.
(c) Greenwich Street Capital Partners II, L.P., TRV Executive Fund, L.P.,
Greenwich Street Employees Fund, L.P., GSCP Offshore Fund, L.P. and
Greenwich Fund, L.P. are the controlling members of GSCP Recovery (US),
LLC. GSCP Recovery (US), LLC is the sole stockholder of GSCP Recovery,
Inc. Greenwich Street Investments II, L.L.C. is the general partner of
each of the controlling members of GSCP Recovery (US), LLC; GSC is the
manager of each of the controlling members of GSCP Recovery (US), LLC; and
GSCP (NJ), Inc. is the general partner of GSCP (NJ), L.P.
Keith W. Abell, one of our directors, is an executive officer and
stockholder of GSCP (NJ), Inc., a limited partner of GSCP (NJ), L.P. and a
managing member of Greenwich Street Investments II, L.L.C.
Each of the above entities and Mr. Abell disclaim beneficial ownership of
Old Telex's common stock except to the extent that each holds a pecuniary
interest in Old Telex's common stock.
(d) GSC is the collateral manager of GSC Partners CDO Fund, Limited and GSCP
(NJ), Inc. is the general partner of GSC.
Keith W. Abell is an executive officer and stockholder of GSCP (NJ), Inc.
and a limited partner of GSC. Each of the above entities and Mr. Abell
disclaims beneficial ownership of Old Telex's common stock except to the
extent that each holds a pecuniary interest in Old Telex's common stock.
(e) The address of TCI Investment II, LLC is c/o GSC, 500 Campus Drive, Suite
220, Florham Park, New Jersey 07932.
(f) The members of TCI Investment II, LLC are Greenwich Street Capital
Partners, L.P. and New Century Enterprises, Ltd. Greenwich Street
Investments, L.P. is the general partner of Greenwich Street Capital
Partners, L.P. Greenwich Street Investments, L.L.C. is the general partner
of Greenwich Street Investments, L.P. The Travelers Insurance Company is
the sole member of Greenwich Street Investments, L.L.C. GSC is the manager
of Greenwich Street Capital Partners, L.P. and GSCP (NJ), Inc. is the
general partner of GSC. Keith W. Abell is an executive officer and
stockholder of GSCP (NJ), Inc. and a limited partner of GSC. Edgar S.
Woolard, one of our directors, is the President and the owner of 92.7% of
the equity interest in New Century Enterprises, Ltd. Each of the above
entities and individuals disclaims beneficial ownership of Old Telex's
common stock except to the extent that each hold a pecuniary interest in
Old Telex's common stock.
(g) 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.
(h) Messrs. Katz and Friedman, a director and the Chairman of our Board of
Directors, respectively, 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.
(i) Messrs. Katz and Friedman, a director and the Chairman of our Board of
Directors, respectively, 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.
(j) 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 139,596 shares held by ING Barings Global Leveraged
Equity Plan Ltd. (such parties referred to, collectively, as the ING
Funds). Jefferies Capital Partners, controls the investment decisions of
the ING Funds in its
32
capacity as Manager of each of the funds. Messrs. Katz and Friedman
disclaim beneficial ownership of the shares owned by the ING Funds.
(k) The address of Wayzata Investment Partners LLC is 701 East Lake Street,
Suite 300, Wayzata, Minnesota 55391.
(l) Wayzata Investment Partners LLC 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 225,636 shares. Wayland Recovery Fund, LLC owns
145,571 shares. Wayland Investment Fund II, LLC owns 30,328 shares. Mr.
Halloran is the Managing Member of Wayzata Investment Partners LLC. Mr.
Halloran disclaims beneficial ownership of the shares owned by the Wayland
Funds.
(m) See notes (h), (i) and (j) above. Mr. Friedman disclaims beneficial
ownership of any shares which are directly or indirectly owned by any of
the foregoing.
(n) See notes (c), (d), and (f), above. Mr. Abell disclaims beneficial
ownership of any shares which are directly or indirectly owned by any of
the foregoing.
(o) See note (l) above. Mr. Halloran disclaims beneficial ownership of any
shares which are directly or indirectly owned by any of the foregoing.
(p) See notes (h), (i) and (j) above. Mr. Katz disclaims beneficial ownership
of any shares which are directly or indirectly owned by any of the
foregoing.
(q) Mr. Malpocher's address is 12000 Portland Avenue South, Burnsville,
Minnesota 55337.
(r) Includes 100,000 shares subject to a currently exercisable option.
The following table summarizes share and exercise price information about
Old Telex's equity compensation plans as of December 31, 2004:
EQUITY COMPENSATION PLAN INFORMATION
- ---------------------------- -------------------------- -------------------------- --------------------------
PLAN CATEGORY NUMBER OF SECURITIES TO WEIGHTED-AVERAGE NUMBER OF SECURITIES
BE ISSUED UPON EXERCISE EXERCISE PRICE OF REMAINING AVAILABLE FOR
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, FUTURE ISSUANCE UNDER
WARRANTS AND RIGHTS WARRANTS AND RIGHTS EQUITY COMPENSATION
PLANS (EXCLUDING
SECURITIES REFLECTED IN
COLUMN (a))
- ---------------------------- -------------------------- -------------------------- --------------------------
(a) (b) (c)
- ---------------------------- -------------------------- -------------------------- --------------------------
Equity compensation plans _ _ _
approved by security
holders
- ---------------------------- -------------------------- -------------------------- --------------------------
Equity compensation plans
not approved by security
holders (1)(2) 195,000 $10.62 45,000
- ---------------------------- -------------------------- -------------------------- --------------------------
Total 195,000 $10.62 45,000
- ---------------------------- -------------------------- -------------------------- --------------------------
(1) See Item 11--"Option Grants in Fiscal 2004" and footnote (a) thereto for a
description of Mr. Malpocher's nonqualified stock option plan.
(2) See Item 11--"2004 Stock Option Plan" for a description of Old Telex's
stock option plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DIRECTORS
Pursuant to a consulting agreement dated as of May 6, 1997, GSC, as
successor to Greenwich Street Capital Partners, Inc., provided certain business,
financial and managerial advisory services to Old Telex, including developing
and implementing corporate and business strategy and providing other consulting
and advisory services. In exchange for such services, GSC was entitled to
receive an aggregate annual fee of $1.7 million, payable semi-annually, plus its
reasonable out-of-pocket costs and expenses. In addition, we agreed to indemnify
GSC 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, Old Telex had been
prohibited under the terms of Old Telex's senior secured revolving credit
agreement from paying the advisory fee in cash. However, Old Telex agreed in
November 2001 that the outstanding advisory fee would accrue interest at the
rate of two percent per month, subject to applicable law. Our November 2003 debt
restructuring allowed us to pay the outstanding advisory fee. We paid $1.5
million in December 2003 and the remaining $1.4 million in January 2004.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table shows the fees billed by Ernst & Young LLP for the
fiscal years ended December 31, 2004 and 2003. The fiscal 2003 year is a
combined period and includes the fees for the Intermediate one-month period
ended December 31, 2003 and the Old Telex eleven-month period ended November 30,
2003.
33
2004 2003
-------- --------
Audit Fees $557,300 $579,800
Audit Related Fees 37,700 56,000
Tax Fees 110,800 179,300
-------- --------
Total $705,800 $815,100
======== ========
AUDIT FEES. This category includes fees for the audit of the Company's
annual financial statements and for the review of the Company's quarterly
interim financial statements included on Form 10-Q. Audit Fees also include
statutory audit filings in various foreign locations and work related to our
2003 debt restructuring and 2004 registration statements.
AUDIT RELATED FEES. This category includes assurance and related services
that are reasonably related to the performance of the annual audit, including
primarily benefit plan audits, consultation concerning financial accounting and
reporting standards and review of internal controls in connection with
Sarbanes-Oxley Section 404 implementation.
TAX FEES. This category consists of fees for tax compliance, tax advice
and tax planning services.
The Board of Directors approved the engagement of Ernst & Young LLP for
the purpose of performing audit, audit related and tax services for the Company
for Fiscal 2004.
34
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
PAGE
----
1. Financial Statements:
Report of Independent Registered Public Accounting Firm
............................................................. 39
TELEX COMMUNICATIONS INTERMEDIATE HOLDINGS, LLC
Consolidated Balance Sheets as of December 31, 2004 and
2003......................................................... 40
Consolidated Statements of Operations for the year ended
December 31, 2004, the one-month period ended December 31,
2003, the eleven-month period ended November 30, 2003 and
the year ended December 31, 2002............................. 41
Consolidated Statements of Member's/Shareholder's Deficit and
Comprehensive Income for the year ended December 31,
2004, the one-month period ended December 31, 2003, the
eleven-month period ended November 30, 2003 and the year
ended December 31, 2002...................................... 42
Consolidated Statements of Cash Flows for the year ended
December 31, 2004, the one-month period ended December 31,
2003, the eleven-month period ended November 30, 2003 and
the year ended December 31, 2002............................. 43
TELEX COMMUNICATIONS, INC.
Consolidated Balance Sheets as of December 31, 2004 and
2003......................................................... 44
Consolidated Statements of Operations for the year ended
December 31, 2004, the one-month period ended December 31,
2003, the eleven-month period ended November 30, 2003 and
the year ended December 31, 2002............................. 45
Consolidated Statements of Shareholder's Deficit and
Comprehensive Income for the year ended December 31,
2004, the one-month period ended December 31, 2003, the
eleven-month period ended November 30, 2003 and the year
ended December 31, 2002...................................... 46
Consolidated Statements of Cash Flows for the year ended
December 31, 2004, the one-month period ended December 31,
2003, the eleven-month period ended November 30, 2003 and
the year ended December 31, 2002............................. 47
Notes to Consolidated Financial Statements................... 48
2. Financial Statement Schedules:
35
TELEX COMMUNICATIONS, INC.
Condensed Consolidating Balance Sheets as of December 31,
2004 and 2003................................................ 67
Condensed Consolidating Statements of Operations for the
year ended December 31, 2004, the one-month period ended
December 31, 2003, the eleven-month period ended November
30, 2003 and the year ended December 31, 2002................ 69
Condensed Consolidating Statements of Cash Flows for the
year ended December 31, 2004, the one-month period ended
December 31, 2003, the eleven-month period ended November
30, 2003 and the year ended December 31, 2002................ 73
The following supplemental schedule is filed as part of this
report:
Schedule II - Valuation and Qualifying Accounts for the year
ended December 31, 2004, the one-month period ended
December 31, 2003, the eleven-month period ended
November 30, 2003 and the year ended December 31, 2002 78
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) 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.
(c) See Item 15(a)(2) above.
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, 2004. We have not sent any proxy material relating
to any annual or other meeting of security holders.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, each Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, as of the 24th day
of March, 2005.
TELEX COMMUNICATIONS INTERMEDIATE HOLDINGS, LLC
TELEX COMMUNICATIONS, INC.
By: /s/ Raymond V. Malpocher
-------------------------------
Raymond V. Malpocher
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 each
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Raymond V. Malpocher Chief Executive Officer, President and a
- ------------------------------ Director (principal executive officer) March 24, 2005
Raymond V. Malpocher
/s/ Gregory W. Richter Chief Financial Officer, Secretary and
- ------------------------------ Treasurer (principal financial and
Gregory W. Richter accounting officer) March 24, 2005
/s/ Brian P. Friedman Chairman of the Board of Directors March 24, 2005
- ------------------------------
Brian P. Friedman
/s/ Edgar S. Woolard, Jr. Director March 24, 2005
- ------------------------------
Edgar S. Woolard, Jr.
/s/ Keith W. Abell Director March 24, 2005
- ------------------------------
Keith W. Abell
Director
- ------------------------------
Patrick J. Halloran
/s/ Stuart B. Katz Director March 24, 2005
- ------------------------------
Stuart B. Katz
37
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Registered Public Accounting
firm.............................................. 39
TELEX COMMUNICATIONS INTERMEDIATE HOLDINGS, LLC AND
SUBSIDIARIES:
Consolidated Balance Sheets as of December 31, 2004
and 2003.......................................... 40
Consolidated Statements of Operations for the year ended
December 31, 2004, the one-month period ended
December 31, 2003, the eleven-month period ended
November 30, 2003 and the year ended December
31, 2002 ........................................... 41
Consolidated Statements of Member's/Shareholder's Deficit and
Comprehensive Income for the year ended
December 31, 2004, the one-month period ended December 31,
2003, the eleven-month period ended November 30, 2003 and
the year ended December 31, 2002.................... 42
Consolidated Statements of Cash Flows for the year
ended December 31, 2004, the one-month period
ended December 31, 2003, the eleven-month
period ended November 30, 2003 and the
year ended December 31, 2002........................ 43
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES:
Consolidated Balance Sheets as of December 31, 2004
and 2003.......................................... 44
Consolidated Statements of Operations for the
year ended December 31, 2004, the one-month period
ended December 31, 2003, the eleven-month
period ended 46 November 30, 2003 and the
year ended December 31, 2002........................ 45
Consolidated Statements of Shareholder's
Deficit and Comprehensive Income for the year ended
December 31, 2004, the one-month period
ended December 31, 2003, the eleven-month period
ended November 30, 2003 and
the year ended December 31, 2002.................... 46
Consolidated Statements of Cash Flows for the year
ended December 31, 2004, the one-month period ended
December 31, 2003, the eleven-month period ended
November 30, 2003 and the year ended December
31, 2002............................................ 47
Notes to Consolidated Financial Statements.......... 48
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
BOARD OF MANAGERS AND SOLE MEMBER
BOARD OF DIRECTORS AND SHAREHOLDER
TELEX COMMUNICATIONS INTERMEDIATE HOLDINGS, LLC AND TELEX COMMUNICATIONS, INC.
We have audited the accompanying consolidated balance sheets of Telex
Communications Intermediate Holdings, LLC and subsidiaries (Successor) and Telex
Communications, Inc. and subsidiaries (Successor) as of December 31, 2004 and
2003 and the related consolidated statements of operations,
member's/shareholder's deficit and comprehensive income, and cash flows for the
year ended December 31, 2004 and for the one-month period ended December 31,
2003. We also have audited the consolidated statements of operations,
shareholders' deficit and comprehensive income and cash flows for the
eleven-month period ended November 30, 2003 and the year ended December 31, 2002
of Telex Communications Holdings, Inc., formerly known as Telex Communications,
Inc., and subsidiaries (Predecessor). 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 the standards of the Public
Company Accounting Oversight Board (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. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, 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 consolidated financial position of Telex
Communications Intermediate Holdings, LLC and subsidiaries and Telex
Communications, Inc. and subsidiaries at December 31, 2004 and 2003 and the
related consolidated results of their operations and their cash flows for the
year ended December 31, 2004 and for the one-month period ended December 31,
2003 in conformity with U.S. generally accepted accounting principles. Also in
our opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated results of operations and cash flows of
Telex Communications Holdings, Inc. and subsidiaries for the eleven-month period
ended November 30, 2003 and for the year ended December 31, 2002 in conformity
with U.S. generally accepted accounting principles.
As discussed in Note 6 to the financial statements, effective January 1,
2002, Telex Communications Holdings, Inc. adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
ERNST & YOUNG LLP
Minneapolis, Minnesota
February 25, 2005
39
TELEX COMMUNICATIONS INTERMEDIATE HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
As of December 31
2004 2003
---------- ----------
ASSETS
Current Assets:
Cash and cash equivalents .............................................. $ 14,959 $ 6,698
Accounts receivable, net of allowance for doubtful accounts of $2,878 in
2004 and $3,139 in 2003 ............................................... 50,177 47,455
Inventories ............................................................ 52,573 45,967
Other current assets ................................................... 4,983 7,437
--------- ---------
Total current assets .................................................. 122,692 107,557
Property, plant and equipment, net ....................................... 32,025 29,951
Deferred financing costs, net ............................................ 6,162 7,286
Goodwill, net ............................................................ 15,845 23,353
Other assets ............................................................. 3,296 2,981
--------- ---------
$ 180,020 $ 171,128
========= =========
LIABILITIES AND MEMBER'S DEFICIT
Current Liabilities:
Revolving lines of credit .............................................. $ 1,011 $ --
Current maturities of long-term debt ................................... 479 446
Accounts payable ....................................................... 13,173 12,879
Accrued wages and benefits ............................................. 11,643 10,384
Other accrued liabilities .............................................. 11,069 11,644
Income taxes payable ................................................... 5,548 9,046
--------- ---------
Total current liabilities ............................................. 42,923 44,399
Long-term debt, net ...................................................... 197,065 187,629
Other long-term liabilities .............................................. 12,523 7,474
--------- ---------
Total liabilities ..................................................... 252,511 239,502
--------- ---------
Commitments and contingencies
Member's Deficit:
Member interest ........................................................ 83,946 83,946
Accumulated deficit .................................................... (154,441) (149,060)
Accumulated other comprehensive loss ................................... (1,996) (3,260)
--------- ---------
Total member's deficit ................................................ (72,491) (68,374)
--------- ---------
$ 180,020 $ 171,128
========= =========
See notes to consolidated financial statements.
40
TELEX COMMUNICATIONS INTERMEDIATE HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SUCCESSOR PREDECESSOR
-------------------------- ---------------------------
FOR THE YEAR ONE MONTH ELEVEN MONTHS FOR THE
ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, NOVEMBER 30, DECEMBER 31,
2004 2003 2003 2002
------------ ------------ ------------- ------------
(IN THOUSANDS)
Net sales .................................. $ 296,828 $ 25,433 $ 243,106 $ 266,521
Cost of sales .............................. 163,206 14,957 140,863 155,832
--------- -------- --------- ---------
Gross profit ............................. 133,622 10,476 102,243 110,689
Operating expenses:
Engineering .............................. 15,423 1,224 12,947 12,424
Selling, general and administrative ...... 80,899 6,232 67,816 71,010
Goodwill and asset impairment charges .... 7,915 -- -- --
Corporate charges ........................ -- -- -- 541
Restructuring charges .................... -- -- -- 478
Pension curtailment gain ................. -- -- (2,414) --
--------- -------- --------- ---------
104,237 7,456 78,349 84,453
--------- -------- --------- ---------
Operating income ........................... 29,385 3,020 23,894 26,236
Interest expense ........................... (27,346) (2,589) (26,897) (26,563)
Other income, net .......................... 1,124 85 529 2,727
Loss on early extinguishment of debt ....... -- (1,186) -- --
--------- -------- --------- ---------
Income (loss) before income taxes .......... 3,163 (670) (2,474) 2,400
Provision for income taxes ................. 8,544 1,171 3,585 2,618
--------- -------- --------- ---------
Loss before cumulative effect of a change in
accounting ............................... (5,381) (1,841) (6,059) (218)
Cumulative effect of change in accounting .. -- -- -- (29,863)
--------- -------- --------- ---------
Net loss ................................. $ (5,381) $ (1,841) $ (6,059) $ (30,081)
========= ======== ========= =========
See notes to consolidated financial statements.
41
TELEX COMMUNICATIONS INTERMEDIATE HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBER'S/SHAREHOLDER'S DEFICIT AND COMPREHENSIVE
INCOME
CAPITAL IN-
CAPITAL IN EXCESS OF
SERIES A SERIES B EXCESS OF PAR - ACCUMULATED
PREFERRED STOCK PREFERRED STOCK COMMON STOCK PAR - MEMBER OTHER
--------------- ----------------- ------------------ PREFERRED INTEREST/ ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT STOCK COMMON STOCK DEFICIT LOSS
-------- ------ ---------- ------ ---------- ------ --------- ------------ ----------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
PREDECESSOR
BALANCE, December 31, 2001 .. 2 $ -- 4,987,015 $ 50 110 $ -- $ 71,820 $ 8,310 $ (111,078) $(9,076)
Conversion of Series A and
Series B Preferred Stock to
Common Stock .............. (2) -- (4,987,015) (50) 4,987,017 50 (71,820) 71,820 -- --
Net loss ................... (30,081)
Other comprehensive loss --
Foreign currency
translation adjustments .. -- -- -- -- -- -- -- -- --
Minimum pension liability
adjustments .............. -- -- -- -- -- -- -- -- -- 4,599
Comprehensive net loss .... -- -- -- -- -- -- -- -- -- (2,552)
------- ------ ---------- ----- ---------- ----- -------- ------- ---------- -------
BALANCE, December 31, 2002 .. -- -- -- -- 4,987,127 50 -- 80,130 (141,159) (7,029)
Net loss ................... -- -- -- -- -- -- -- -- (6,059) --
Other comprehensive loss --
Foreign currency
translation adjustments .. -- -- -- -- -- -- -- -- -- 4,441
Minimum pension liability
adjustments .............. -- -- -- -- -- -- -- -- -- (5,078)
Comprehensive net loss .... -- -- -- -- -- -- -- -- -- --
------- ------ ---------- ----- ---------- ----- -------- ------- ---------- -------
BALANCE, November 30, 2003 .. -- -- -- -- 4,987,127 50 -- 80,130 (147,218) (7,666)
SUCCESSOR
Net contribution of assets
and liabilities from
Predecessor ................ -- -- -- -- -- -- -- 3,766 -- --
Share adjustment from
Predecessor Common Stock,
net ....................... -- -- -- -- (4,987,127) (50) -- 50 -- --
Dividend to Parent ......... -- -- -- -- -- -- -- -- (1) --
Net loss ................... -- -- -- -- -- -- -- -- (1,841) --
Other comprehensive income --
Foreign currency
translation adjustments .. -- -- -- -- -- -- -- -- -- 2,055
Minimum pension liability
adjustments .............. -- -- -- -- -- -- -- -- -- 2,351
Comprehensive net income .. -- -- -- -- -- -- -- -- -- --
------- ------ ---------- ----- ---------- ----- -------- ------- ---------- -------
BALANCE, December 31, 2003 .. -- -- -- -- -- -- -- 83,946 (149,060) (3,260)
Net loss ................... -- -- -- -- -- -- -- -- (5,381) --
Other comprehensive loss--
Foreign currency
translation adjustments .. -- -- -- -- -- -- -- -- -- 3,106
Minimum pension liability
adjustments .............. -- -- -- -- -- -- -- -- -- (1,842)
Comprehensive net loss .... -- -- -- -- -- -- -- -- -- --
------- ------ ---------- ----- ---------- ----- -------- ------- ---------- -------
BALANCE, December 31, 2004 .. -- $ -- -- $ -- -- $ -- $ -- $83,946 $ (154,441) $(1,996)
======= ====== ========== ===== ========== ===== ======== ======= ========== =======
MEMBER/
SHAREHOLDER'S
DEFICIT
-------------
PREDECESSOR
BALANCE, December 31, 2001 .. $(39,974)
Conversion of Series A and
Series B Preferred Stock to
Common Stock .............. --
Net loss ...................
Other comprehensive loss --
Foreign currency
translation adjustments .. --
Minimum pension liability
adjustments .............. --
Comprehensive net loss .... (28,034)
--------
BALANCE, December 31, 2002 .. (68,008)
Net loss ................... --
Other comprehensive loss --
Foreign currency
translation adjustments .. --
Minimum pension liability
adjustments .............. --
Comprehensive net loss .... (6,696)
--------
BALANCE, November 30, 2003 .. (74,704)
SUCCESSOR
Net contribution of assets
and liabilities from
Predecessor ................ 3,766
Share adjustment from
Predecessor Common Stock,
net ....................... --
Dividend to Parent ......... (1)
Net loss ................... --
Other comprehensive income --
Foreign currency
translation adjustments .. --
Minimum pension liability
adjustments .............. --
Comprehensive net income .. 2,565
--------
BALANCE, December 31, 2003 .. (68,374)
Net loss ................... --
Other comprehensive loss--
Foreign currency
translation adjustments .. --
Minimum pension liability
adjustments .............. --
Comprehensive net loss .... (4,117)
--------
BALANCE, December 31, 2004 .. $(72,491)
========
See notes to consolidated financial statements.
42
TELEX COMMUNICATIONS INTERMEDIATE HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
SUCCESSOR PREDECESSOR
---------------------------- -----------------------------
FOR THE YEAR ONE MONTH ELEVEN MONTHS FOR THE YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31 NOVEMBER 30, DECEMBER 31,
2004 2003 2003 2002
------------ ----------- ------------- -------------
OPERATING ACTIVITIES:
Net loss....................................................... $ (5,381) $ (1,841) $ (6,059) $ (30,081)
Adjustments to reconcile net loss to cash flows
from operations--
Cumulative effect of change in accounting.................... -- -- -- 29,863
Depreciation................................................. 6,055 481 5,592 6,360
Amortization of identifiable intangibles..................... 13 1 20 120
Amortization of deferred financing charges and
pay-in-kind interest charge................................ 11,390 1,233 21,017 19,076
Goodwill and asset impairment charges........................ 7,915 -- -- --
Provision for bad debts...................................... 828 (279) 869 240
Gain on sale of product lines and other assets............... (268) -- (319) (2,151)
Pension curtailment gain..................................... -- -- (2,414) --
Restructuring charges........................................ -- -- -- 478
Loss on early extinguishment of debt......................... -- 1,186 -- --
Deferred income taxes........................................ 367 (391) 18 (76)
Change in operating assets and liabilities:
Accounts receivable.......................................... (2,262) 2,589 (2,410) (1,448)
Inventories.................................................. (5,682) 1,404 3,800 5,706
Other current assets......................................... (1,077) 1,000 (2,210) 88
Accounts payable and accrued liabilities..................... 109 527 (1,761) (9,944)
Income taxes................................................. (869) 56 (1,840) (370)
Other long-term assets and long-term liabilities............. 1,785 (335) 986 1,103
--------- --------- --------- ---------
Net cash provided by operating activities.................. 12,923 5,631 15,289 18,964
--------- --------- --------- ---------
INVESTING ACTIVITIES:
Additions to property, plant and equipment..................... (7,722) (546) (5,165) (4,834)
Proceeds from sale of product lines and other assets........... 2,338 -- 1,158 4,570
Other.......................................................... 221 -- 166 222
--------- --------- --------- ---------
Net cash used in investing activities...................... (5,163) (546) (3,841) (42)
--------- --------- --------- ---------
FINANCING ACTIVITIES:
Borrowings (repayments) under revolving lines of credit,
Net.......................................................... 1,011 (12,107) (372) (9,235)
Proceeds from issuance of long-term debt....................... -- 125,000 -- 1,518
Repayment of long-term debt.................................... (443) (110,297) (9,078) (10,929)
Payments for deferred financing costs.......................... (401) (6,869) -- (242)
Dividends to shareholder....................................... -- (1) -- --
--------- --------- --------- ---------
Net cash provided by (used in) financing activities........ 167 (4,274) (9,450) (18,888)
--------- --------- --------- ---------
Effect of exchange rate changes on cash and cash
equivalents.................................................... 334 242 273 314
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS:
Net increase................................................... 8,261 1,053 2,271 348
Balance at beginning of period................................. 6,698 5,645 3,374 3,026
--------- --------- --------- ---------
Balance at end of period....................................... $ 14,959 $ 6,698 $ 5,645 $ 3,374
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH PAID FOR:
Interest....................................................... $ 14,878 $ 119 $ 5,322 $ 7,101
========= ========= ========= =========
Income taxes................................................... $ 6,547 $ 403 $ 5,419 $ 3,193
========= ========= ========= =========
Noncash financing activities related to debt restructuring -
Net contribution of assets and liabilities from Predecessor.. $ -- $ 3,766 $ -- $ --
See notes to consolidated financial statements.
43
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
As of December 31
2004 2003
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents........................................................ $ 14,959 $ 6,698
Accounts receivable, net of allowance for doubtful accounts of $2,878 in
2004 and $3,139 in 2003........................................................ 50,177 47,455
Inventories...................................................................... 52,573 45,967
Other current assets............................................................. 4,983 7,437
--------- ---------
Total current assets........................................................... 122,692 107,557
Property, plant and equipment, net................................................. 32,025 29,951
Deferred financing costs, net...................................................... 5,350 6,368
Goodwill, net...................................................................... 15,845 23,353
Other assets....................................................................... 3,296 2,981
--------- ---------
$ 179,208 $ 170,210
========= =========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current Liabilities:
Revolving lines of credit........................................................ $ 1,011 $ --
Current maturities of long-term debt............................................. 479 446
Accounts payable................................................................. 13,173 12,879
Accrued wages and benefits....................................................... 11,643 10,384
Other accrued liabilities........................................................ 10,966 11,557
Income taxes payable............................................................. 5,548 9,046
--------- ---------
Total current liabilities...................................................... 42,820 44,312
Long-term debt, net................................................................ 126,079 126,413
Other long-term liabilities........................................................ 12,523 7,474
--------- ---------
Total liabilities.............................................................. 181,422 178,199
--------- ---------
Commitments and contingencies
Shareholder's Deficit:
Common stock, $0.01 par value, 1,000 shares authorized; 500 shares issued
and outstanding -- 2004 and 2003............................................... -- --
Capital in excess of par -- common stock......................................... 143,029 143,029
Accumulated deficit.............................................................. (143,247) (147,758)
Accumulated other comprehensive loss............................................. (1,996) (3,260)
--------- ---------
Total shareholder's deficit.................................................... (2,214) (7,989)
--------- ---------
$ 179,208 $ 170,210
========= =========
See notes to consolidated financial statements.
44
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SUCCESSOR PREDECESSOR
---------------------------- -----------------------------
FOR THE YEAR ONE MONTH ELEVEN MONTHS FOR THE YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31 NOVEMBER 30, DECEMBER 31,
2004 2003 2003 2002
------------ ----------- ------------- -------------
(IN THOUSANDS)
Net sales........................................................... $ 296,828 $ 25,433 $ 243,106 $ 266,521
Cost of sales....................................................... 163,206 14,957 140,863 155,832
--------- --------- --------- ---------
Gross profit...................................................... 133,622 10,476 102,243 110,689
Operating expenses:
Engineering....................................................... 15,423 1,224 12,947 12,424
Selling, general and administrative............................... 80,865 6,117 67,816 71,010
Goodwill and asset impairment charges............................. 7,915 -- -- --
Corporate charges................................................. -- -- -- 541
Restructuring charges............................................. -- -- -- 478
Pension curtailment gain.......................................... -- -- (2,414) --
--------- --------- --------- ---------
104,203 7,341 78,349 84,453
--------- --------- --------- ---------
Operating income.................................................... 29,419 3,135 23,894 26,236
Interest expense.................................................... (16,605) (1,403) (26,897) (26,563)
Other income, net................................................... 1,124 85 529 2,727
Loss on early extinguishment of debt................................ -- (1,186) -- --
--------- --------- --------- ---------
Income (loss) before income taxes................................... 13,938 631 (2,474) 2,400
Provision for income taxes.......................................... 8,544 1,171 3,585 2,618
--------- --------- --------- ---------
Income (loss) before cumulative effect of a change in accounting.... 5,394 (540) (6,059) (218)
Cumulative effect of change in accounting........................... -- -- -- (29,863)
--------- --------- --------- ---------
Net income (loss)................................................. $ 5,394 $ (540) $ (6,059) $ (30,081)
========= ========= ========= =========
See notes to consolidated financial statements.
45
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S DEFICIT AND COMPREHENSIVE INCOME
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------------ -------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ---------- ----------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
PREDECESSOR
BALANCE, December 31, 2001................ 2 $ -- 4,987,015 $ 50 110 $ --
Conversion of Series A and Series B
Preferred Stock to Common Stock......... (2) -- (4,987,015) (50) 4,987,017 50
Net loss.................................
Other comprehensive loss--
Foreign currency translation
adjustments............................ -- -- -- -- -- --
Minimum pension liability adjustments... -- -- -- -- -- --
Comprehensive net loss.................. -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 2002................ -- -- -- -- 4,987,127 50
Net loss................................. -- -- -- -- -- --
Other comprehensive loss--
Foreign currency translation
adjustments............................ -- -- -- -- -- --
Minimum pension liability adjustments... -- -- -- -- -- --
Comprehensive net loss.................. -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, November 30, 2003................ -- -- -- -- 4,987,127 50
SUCCESSOR
Net contribution of assets and
liabilities from Predecessor............ -- -- -- -- -- --
Share adjustment from Predecessor
Common Stock, net....................... -- -- -- -- (4,986,627) (50)
Dividend to Parent....................... -- -- -- -- -- --
Net loss................................. -- -- -- -- -- --
Other comprehensive income--
Foreign currency translation
adjustments............................ -- -- -- -- -- --
Minimum pension liability adjustments... -- -- -- -- -- --
Comprehensive net income................ -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 2003................ -- -- -- -- 500 --
Dividend to Parent....................... -- -- -- -- -- --
Net income............................... -- -- -- -- -- --
Other comprehensive income--
Foreign currency translation
adjustments............................ -- -- -- -- -- --
Minimum pension liability adjustments... -- -- -- -- -- --
Comprehensive net income................ -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 2004................ -- $ -- -- $ -- 500 $ --
========== ========== ========== ========== ========== ==========
CAPITAL IN CAPITAL IN ACCUMULATED
EXCESS OF PAR - EXCESS OF PAR - OTHER
PREFERRED COMMON ACCUMULATED COMPREHENSIVE SHAREHOLDER'S
STOCK STOCK DEFICIT LOSS DEFICIT
-------------- --------------- ----------- ------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
PREDECESSOR
BALANCE, December 31, 2001................ $ 71,820 $ 8,310 $ (111,078) $ (9,076) $ (39,974)
Conversion of Series A and Series B
Preferred Stock to Common Stock......... (71,820) 71,820 -- -- --
Net loss................................. (30,081)
Other comprehensive loss--
Foreign currency translation
adjustments............................ -- -- -- --
Minimum pension liability adjustments... -- -- -- 4,599 --
Comprehensive net loss.................. -- -- -- (2,552) (28,034)
---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 2002................ -- 80,130 (141,159) (7,029) (68,008)
Net loss................................. -- -- (6,059) -- --
Other comprehensive loss--
Foreign currency translation
adjustments............................ -- -- -- 4,441 --
Minimum pension liability adjustments... -- -- -- (5,078) --
Comprehensive net loss.................. -- -- -- -- (6,696)
---------- ---------- ---------- ---------- ----------
BALANCE, November 30, 2003................ -- 80,130 (147,218) (7,666) (74,704)
SUCCESSOR
Net contribution of assets and
liabilities from Predecessor............ -- 63,315 -- -- 63,315
Share adjustment from Predecessor
Common Stock, net....................... -- 50 -- -- --
Dividend to Parent....................... -- (466) -- -- (466)
Net loss................................. -- -- (540) -- --
Other comprehensive income--
Foreign currency translation
adjustments............................ -- -- -- 2,055 --
Minimum pension liability adjustments... -- -- -- 2,351 --
Comprehensive net income................ -- -- -- -- 3,866
---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 2003................ -- 143,029 (147,758) (3,260) (7,989)
Dividend to Parent....................... -- -- (883) -- (883)
Net income............................... -- -- 5,394 -- --
Other comprehensive income--
Foreign currency translation
adjustments............................ -- -- -- 3,106 --
Minimum pension liability adjustments... -- -- -- (1,842) --
Comprehensive net income................ -- -- -- -- 6,658
---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 2004................ $ -- $ 143,029 $ (143,247) $ (1,996) $ (2,214)
========== ========== ========== ========== ==========
See notes to consolidated financial statements.
46
TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
SUCCESSOR PREDECESSOR
---------------------------- -----------------------------
FOR THE YEAR ONE MONTH ELEVEN MONTHS FOR THE YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31 NOVEMBER 30, DECEMBER 31,
2004 2003 2003 2002
------------ ----------- ------------- -------------
OPERATING ACTIVITIES:
Net income (loss).............................................. $ 5,394 $ (540) $ (6,059) $ (30,081)
Adjustments to reconcile net income (loss) to cash flows
from operations--
Cumulative effect of change in accounting.................... -- -- -- 29,863
Depreciation................................................. 6,055 481 5,592 6,360
Amortization of identifiable intangibles..................... 13 1 20 120
Amortization of deferred financing charges and
pay-in-kind interest charge................................ 1,432 134 21,017 19,076
Goodwill and asset impairment charges........................ 7,915 -- -- --
Provision for bad debts...................................... 828 (279) 869 240
Gain on sale of product lines and other assets............... (268) -- (319) (2,151)
Pension curtailment gain..................................... -- -- (2,414) --
Restructuring charges........................................ -- -- -- 478
Loss on early extinguishment of debt......................... -- 1,186 -- --
Deferred income taxes........................................ 367 (391) 18 (76)
Change in operating assets and liabilities:
Accounts receivable.......................................... (2,262) 2,589 (2,410) (1,448)
Inventories.................................................. (5,682) 1,404 3,800 5,706
Other current assets......................................... (1,076) 1,000 (2,210) 88
Accounts payable and accrued liabilities..................... 109 440 (1,761) (9,944)
Income taxes................................................. (886) 56 (1,840) (370)
Other long-term assets and long-term liabilities............. 1,785 (335) 986 1,103
--------- --------- --------- ---------
Net cash provided by operating activities.................. 13,724 5,746 15,289 18,964
--------- --------- --------- ---------
INVESTING ACTIVITIES:
Additions to property, plant and equipment..................... (7,722) (546) (5,165) (4,834)
Proceeds from sale of product lines and other assets........... 2,338 -- 1,158 4,570
Other.......................................................... 221 -- 166 222
--------- --------- --------- ---------
Net cash used in investing activities...................... (5,163) (546) (3,841) (42)
--------- --------- --------- ---------
FINANCING ACTIVITIES:
Borrowings (repayments) under revolving lines of credit,
Net.......................................................... 1,011 (12,107) (372) (9,235)
Proceeds from issuance of long-term debt....................... -- 125,000 -- 1,518
Repayment of long-term debt.................................... (443) (110,297) (9,078) (10,929)
Payments for deferred financing costs.......................... (319) (6,519) -- (242)
Dividends to shareholders...................................... (883) (466) -- --
--------- --------- --------- ---------
Net cash used in financing activities...................... (634) (4,389) (9,450) (18,888)
--------- --------- --------- ---------
Effect of exchange rate changes on cash and cash
equivalents.................................................... 334 242 273 314
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS:
Net increase................................................... 8,261 1,053 2,271 348
Balance at beginning of period................................. 6,698 5,645 3,374 3,026
--------- --------- --------- ---------
Balance at end of period....................................... $ 14,959 $ 6,698 $ 5,645 $ 3,374
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH PAID FOR:
Interest....................................................... $ 14,113 $ 119 $ 5,322 $ 7,101
========= ========= ========= =========
Income taxes................................................... $ 6,547 $ 403 $ 5,419 $ 3,193
========= ========= ========= =========
Noncash financing activities related to debt restructuring -
Net contribution of assets and liabilities from Predecessor.. $ -- $ 63,315 $ -- $ --
See notes to consolidated financial statements.
47
TELEX COMMUNICATIONS INTERMEDIATE HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY STRUCTURE
The consolidated financial statements included herein are:
a. Telex Communications Intermediate Holdings, LLC ("Intermediate" or
"Successor"), which consists of the accounts of Intermediate and
Telex Communications, Inc. ("Telex"). Intermediate is a holding
company whose assets consist of its investment in Telex and its
subsidiaries and some deferred financing costs related to
Intermediate's debt. Telex is where operating activities take place.
b. Telex, which consists of the accounts of Telex Communications, Inc.
and its wholly owned subsidiaries.
Intermediate is a wholly owned subsidiary of Telex Communications
Holdings, Inc. ("Old Telex" or "Predecessor"), which is not a registrant. Telex
and Intermediate were formed in connection with the November 19, 2003
refinancing of Old Telex's debt obligations and related corporate restructuring.
Reference to "the Company" throughout the remainder of these footnotes means
Predecessor and/or Successor for the relevant period(s).
Immediately prior to the closing of the November 2003 refinancing and
related corporate restructuring, Old Telex transferred to Telex substantially
all of Old Telex's assets and liabilities except, principally, its 13% Senior
Subordinated Discount Notes due 2006, in exchange for Telex's common stock. Old
Telex then contributed Telex's common stock to Intermediate, a new limited
liability company, in exchange for all of Intermediate's membership interests.
Telex became a wholly owned subsidiary of Intermediate and Intermediate became a
wholly owned subsidiary of Old Telex. The subsidiaries of Old Telex became
Telex's subsidiaries as part of the asset transfer. Upon the closing of the
restructuring, Old Telex changed its name and Telex was renamed.
As a result of the November 2003 debt refinancing, which was accounted
for as being effective November 30, and the formation of a new entity, the
consolidated financial statements for 2003 are split into two periods. The
eleven-month period ended November 30, 2003 reflects the results of Old Telex
and the one-month period ended December 31, 2003 reflects the results of
Intermediate. The following table shows the pro forma results of operations for
the year ended December 31, 2003 and 2002 as if the restructuring had occurred
at the beginning of 2002 (in thousands):
2003 2002
--------------- ---------------
Net sales............................................................................. $ 268,539 $ 266,521
Cost of sales......................................................................... 155,820 155,832
--------------- ---------------
Gross profit........................................................................ 112,719 110,689
Operating expenses.................................................................... 85,805 84,453
Operating income...................................................................... 26,914 26,236
Interest expense...................................................................... (28,854) (25,845)
Other income, net..................................................................... 614 2,727
Loss on early extinguishment of debt.................................................. (46) --
--------------- ---------------
(Loss) income before income taxes..................................................... (1,372) 3,118
Provision for income taxes............................................................ 4,718 2,618
--------------- ---------------
(Loss) income before cumulative effect of a change in accounting...................... (6,090) 500
Cumulative effect of change in accounting............................................. -- (29,863)
--------------- ---------------
Net loss............................................................................ $ (6,090) $ (29,363)
=============== ===============
48
The effects of the restructuring resulted in adjustments to the reported
amounts of interest expense, loss on early extinguishment of debt and provision
for income taxes when compared to the pro forma results.
DESCRIPTION OF BUSINESS
The Company is a worldwide industry leader in the design, manufacture and
marketing of audio and communications products and systems to commercial,
professional and industrial customers. The Company's product lines include
sophisticated loudspeaker systems, wired and wireless intercom systems, mixing
consoles, digital audio duplication products, amplifiers, wired and wireless
microphones, military and aviation products, land mobile communication systems,
wireless assistive listening systems and other related products. The Company
markets over 30 product lines that span the professional audio and communication
sectors. 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
substantial liquidity requirements for the Company.
On November 19, 2003, in connection with the refinancing of the debt
obligations of Old Telex and related corporate restructuring, Telex issued $125
million of 11 1/2% Senior Secured Notes due 2008. Substantially all of the
proceeds were used to repay Old Telex's existing senior secured debt that had
been transferred to Telex. Old Telex also conducted an exchange offer,
exchanging its 13% Senior Subordinated Discount Notes due 2009 for Old Telex's
13% Senior Subordinated Discount Notes due 2006. Holders exchanged Old Telex's
13% Senior Subordinated Discount Notes due 2006 having a book value of $60.1
million for Intermediate's 13% Senior Subordinated Discount Notes due 2009.
The Company's primary future cash needs will be to fund working capital,
capital expenditures and debt service obligations. Intermediate believes that
existing cash and cash flows from Telex's operations will be sufficient to meet
its future cash needs. If the Company does not generate sufficient cash from
operations to meet the cash needs, it may need to incur additional debt through
borrowing under its new senior secured credit facility or otherwise. The
Company's ability to fund working capital, capital expenditures and debt service
will depend on its ability to generate cash in the future, which is subject to
general economic, financial, competitive, legislative, regulatory and other
factors beyond the Company's control. The Company's senior secured credit
facility and the indenture governing its notes impose, and any future
indebtedness may impose, various restrictions and covenants which could limit
the Company's ability to respond to market conditions, to provide for
unanticipated capital investments or to take advantage of business
opportunities.
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.
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.
49
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, 2004 and 2003, total
accumulated software implementation costs of $12.6 million and $11.3 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.
Unamortized debt issuance costs are as follows:
2004 2003
-------- --------
Intermediate...................... $ 812 $ 918
Telex............................. 5,350 6,368
-------- --------
$ 6,162 $ 7,286
======== ========
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 $7.6
million in the year ended December 31, 2004. See note 6 for additional
disclosure.
LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment annually or more
frequently when events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. If impairment indicators are present
and the estimated future undiscounted cash flows are less than the carrying
value of the assets, the carrying value is reduced to the estimated fair value.
In the year ended December 31, 2004, the Company incurred an impairment
loss of $0.3 million related to its idle Buchanan, Michigan manufacturing
facility.
ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss are as follows (in
thousands):
2004 2003
------------- -------------
Foreign currency translation $ (6,271) $ (3,165)
Minimum pension liability 8,267 6,425
------------- -------------
$ 1,996 $ 3,260
============= =============
50
REVENUE RECOGNITION
Revenue from product sales is recognized at the time of shipment provided
that persuasive evidence of a sales arrangement exists, the price is fixed,
title has transferred, collection of resulting receivables is reasonably
assured, there are no customer acceptance requirements and there are no
remaining significant obligations. 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 we receive for
known pending returns. While such returns have historically been within the
Company's expectations and provisions established, the Company cannot guarantee
that its historical experience will continue.
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,
$0.1 million, $1.4 million, and $1.6 million for the year ended December 31,
2004, the one-month period ended December 31, 2003, the eleven-month period
ended November 30, 2003 and the year ended December 31, 2002, 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 year ended December 31, 2004, the one-month period ended December 31, 2003,
the eleven-month period ended November 30, 2003 and the year ended December 31,
2002 were $4.1 million, $0.3 million, $3.5 million and $4.0 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 year ended December 31, 2004, the one-month period ended December 31, 2003,
the eleven-month period ended November 30, 2003 and the year ended December 31,
2002 were $2.2 million, $0.1 million, $1.7 million and $0.8 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
year ended December 31, 2004, the one-month period ended December 31, 2003, the
eleven-month period ended November 30, 2003 and the year ended December 31, 2002
were $4.8 million, $0.4 million, $4.4 million and $5.5 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 provision for the year ended December 31, 2004
and for the one-month period ended December 31, 2003 was calculated on a
separate company basis under a tax sharing agreement with Old Telex. The
Company's taxable income is included with the consolidated federal income tax
return of Old Telex.
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.
51
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.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation under Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees" and related interpretations, using the intrinsic value method. In
addition, the Company has adopted the disclosure requirements related to its
stock plans according to SFAS No. 123 "Accounting for Stock-Based Compensation"
(SFAS 123), as amended by SFAS No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure" (SFAS 148).
The fair values of the stock options under the Old Telex stock option plan
and the subscription and option agreement with our chief executive officer were
estimated as of the grant date using the Black-Scholes option - pricing model.
The Black-Scholes model was originally developed for use in estimating the fair
value of traded options and requires the input of highly subjective assumptions
including expected stock price volatility. The Company's stock options have
characteristics significantly different from those of traded options, and
changes in the subjective input assumptions can materially affect the fair value
estimate. Calculated under SFAS 123, the per share fair values of stock options
granted in 2004 were zero. The Company considered the expected life of the
options and the risk-free interest rate at the time the options were granted. No
dividends were expected and the minimum value method does not consider
volatility.
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 the Company's
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 payment of taxes in jurisdictions that have higher tax
rates than the United States.
52
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, 2004, the Company had outstanding
foreign currency forward exchange contracts with a notional amount of $15.2
million and with an average maturity of 43 days. The fair value of these
contracts was not material at December 31, 2004.
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, 2004, 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 member's
deficit or net income (loss) as previously reported.
NEW ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
FASB Statement No. 123(R), "Share-Based Payment" (SFAS 123R), which is a
revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation."
SFAS 123R supersedes Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and amends FASB No. 95, "Statement
of Cash Flows." Generally, the approach in SFAS 123R is similar to the approach
described in Statement No. 123. However, SFAS 123R requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative.
SFAS 123R must be adopted no later than July 1, 2005. Intermediate expects
to adopt SFAS 123R on July 1, 2005. The Company plans to adopt SFAS 123R using
the prospective transition method. The "prospective transition" method is a
method in which compensation cost is recognized beginning with the effective
date based on the requirements of SFAS 123R for all share-based payments granted
after the effective date.
As permitted by Statement No. 123, the Company currently accounts for
share-based payments to employees using Opinion 25's intrinsic value method and,
as such, generally recognizes no compensation cost for employee stock options.
The impact of adopting SFAS 123R on future period earnings cannot be predicted
at this time because it will depend on levels of share-based payments granted in
the future.
In December 2003, the FASB issued revisions to SFAS No. 132, "Employer's
Disclosures about Pensions and Other Postretirement Benefits, an amendment of
FASB Statements No. 87, 88 and 106" (SFAS 132). SFAS 132 addresses additional
disclosure requirements on an annual and interim basis. SFAS 132 is effective
for fiscal years ending after December 15, 2003. Interim-period disclosure
requirements are effective for interim periods beginning after December 15,
2003. The Company has included the additional disclosures required under SFAS
132.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" (FIN 46). This was an
interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," and addresses the consolidation of variable interest entities by
businesses. The Company used the guidelines in FIN 46 to analyze the Company's
relationship with DRF 12000 Portland LLC (owner of its corporate headquarters
facility) and concluded that DRF 12000 Portland LLC is not a variable interest
entity to the Company, and therefore the current method of consolidation remains
appropriate.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" (SFAS 145). SFAS 145 addresses reporting gains and losses from
extinguishment of debt as well as other matters. SFAS 145 eliminates FASB
Statement No. 4 that requires that gains or losses from the extinguishment of
debt be reported as an extraordinary item. As a result, gains and losses from
extinguishment of debt should be classified as extraordinary items only if they
meet the criteria in Opinion 30. The one-month period ended December 31, 2003
loss on early extinguishment of debt did not meet the criteria in Opinion 30 to
be classified as an extraordinary item.
NOTE 2 - DISPOSITIONS
During the year ended December 31, 2004, the Company recognized a gain of
$0.3 million on cash proceeds of approximately $2.3 million related to the sale
of its Australian subsidiary.
During the eleven months ended November 30, 2003, the Company recognized a
gain of $0.3 million on cash proceeds of approximately $1.2 million related to
the sales of its idle facilities in Rochester, Minnesota and Newport, Tennessee.
53
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.
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.
The following table summarizes the status of the Company's business
restructuring reserve during the eleven months ended November 30, 2003 and the
year ended December 31, 2002 (in thousands):
EMPLOYEE LEASE TOTAL
SEPARATION TERMINATION OTHER EXIT RESTRUCTURING
COSTS OBLIGATIONS COSTS RESERVE
---------- ----------- ---------- -------------
Balance as of December 31,
2001.......................... $ 2,470 $ 246 $ 286 $ 3,002
Charges......................... 478 -- -- 478
Cash payments................... (2,428) (151) (43) (2,622)
Pension settlement and
curtailment................... (762) -- -- (762)
Reclassifications .............. 338 (95) (243) --
------- ----- ----- -------
Balance as of December 31,
2002.......................... $ 96 $ -- $ -- $ 96
Cash payments................... (96) -- -- (96)
------- ----- ----- -------
Balance as of November 30,
2003.......................... $ -- $ -- $ -- $ --
======= ===== ===== =======
NOTE 4 - INVENTORIES
Inventories consist of the following as of December 31 (in thousands):
2004 2003
-------- --------
Raw materials....................... $ 24,088 $ 18,941
Work in process..................... 8,006 6,150
Finished goods...................... 20,479 20,876
-------- --------
$ 52,573 $ 45,967
======== ========
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following as of December 31
(in thousands):
2004 2003
--------- ---------
Land and improvements........................ $ 2,094 $ 1,981
Buildings and improvements................... 26,182 24,717
Machinery and equipment...................... 115,304 107,889
Construction in progress..................... 2,327 1,592
--------- ---------
145,907 136,179
Less- Accumulated depreciation............... (113,882) (106,228)
--------- ---------
$ 32,025 $ 29,951
========= =========
54
NOTE 6 - GOODWILL
The Company adopted 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 Audio 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 required 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.
In 2004 the Company recorded a goodwill impairment charge of $7.6 million
based on the annual impairment evaluation. The charge is associated with the
Germany electronics operating unit within the Professional Audio segment. This
impairment charge, which is non-deductible for income tax purposes, adjusted the
carrying value of the operating unit's goodwill to its implied fair value. In
2004, the operating unit experienced a decline in operating performance compared
to prior year results and budgeted 2004 results. Additionally, we have
forecasted similar operating results for 2005. No goodwill impairment was
indicated for other operating units.
The changes in the carrying value of goodwill for the year ended December
31, 2004 and 2003, by operating segment are as follows:
AUDIO AND WIRELESS
PROFESSIONAL AUDIO TECHNOLOGY TOTAL
------------------ ------------------ -----------
Balance as of December 31, 2002................ $ 17,064 $ 6,090 $ 23,154
Foreign currency translation................... 142 -- 142
---------- -------- -----------
Balance as of November 30, 2003................ $ 17,206 $ 6,090 $ 23,296
Foreign currency translation................... 57 -- 57
---------- -------- -----------
Balance as of December 31, 2003................ $ 17,263 $ 6,090 $ 23,353
Goodwill impairment............................ (7,604) -- (7,604)
Foreign currency translation................... 96 -- 96
---------- -------- -----------
Balance as of December 31, 2004................ $ 9,755 $ 6,090 $ 15,845
========== ======== ===========
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 less than $0.1 million, net of accumulated amortization, as
of December 31, 2004 and 2003, respectively.
NOTE 7 - DEBT
REVOLVING LINES OF CREDIT
In November 2003, Telex entered into a $15.0 million senior credit
facility (the Facility) as part of Old Telex's debt restructuring. Under the
Facility, the Company may borrow up to $15.0 million, subject to a borrowing
base limitation. At December 31, 2004, the Company's borrowing base limited the
Company's borrowing capacity under the Facility to $13.9 million. Interest on
outstanding borrowings is calculated, at the Company's option, using the
lender's index rate plus 1.0% or LIBOR (3.10% at December 31, 2004) plus 2.5%.
At December 31, 2004, the Company had no borrowings under the Facility. The
revolving line of credit expires on July 12, 2008 unless earlier terminated. The
Facility requires an annual commitment fee of 0.5% of the unused portion of the
commitment. Borrowings are secured by substantially all domestic accounts
receivable and inventories. The Company had letters of credit outstanding of
$0.3 million as of December 31, 2004.
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 $12.8 million. At December
31, 2004, the Company had borrowings of $1.0 million and guarantees of $0.3
million under these facilities, leaving $11.5 million available. The interest
rates in effect on these facilities, as of December 31, 2004, ranged from 3.40%
to 6.75% 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.
55
LONG-TERM DEBT
Long-term debt consists of the following as of December 31 (in thousands):
2004 2003
----------- -----------
TELEX
Senior Secured Notes, due October 15, 2008, bearing interest of 11.5%
payable semiannually, secured by substantially all assets of the
Company and 65% of the voting stock of foreign subsidiaries owned by
the Company............................................................. $ 125,000 $ 125,000
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
$259 and $352).......................................................... 838 957
Other..................................................................... 720 902
----------- -----------
126,558 126,859
Less- Current portion..................................................... (479) (446)
----------- -----------
Total Telex long-term debt......................................... 126,079 126,413
INTERMEDIATE
Senior Subordinated Discount Notes, due January 15, 2009, with an
effective interest rate, exclusive of capitalized debt issuance costs,
of 15.4%, accreting at 12.0% on the deemed issue price of $60,139,
unsecured (net of unamortized discount of $58,130 and $67,900).......... 70,986 61,216
----------- -----------
Total long-term debt............................................ $ 197,065 $ 187,629
=========== ===========
On November 19, 2003, in connection with the refinancing of the debt
obligations of Old Telex and related corporate restructuring, Telex issued $125
million of 11 1/2% Senior Secured Notes due 2008. Substantially all of the
proceeds were used to repay Old Telex's existing senior secured debt that had
been transferred to Telex. The 13% Senior Subordinated Discount Notes due 2006
remained debt obligations of Old Telex. As a result of this repayment the
Company recorded a $1.2 million pretax loss from the write-off of deferred
financing costs and discounts associated with the repaid debt instruments.
The debt refinancing also included an exchange offer associated with Old
Telex's 13% Senior Subordinated Discount Notes due 2006. Holders of these notes
could consent to exchange them for new 13% Senior Subordinated Discount Notes
due 2009 issued by Intermediate, receiving a 1% premium on the then-current
accreted value of such notes and future cash interest payments of 1% per annum
on the accreted value of the notes (which accrete at a rate of 12% per annum) or
they could elect to retain their Old Telex 13% Senior Subordinated Discount
Notes due 2006. Holders of Old Telex's 13% Senior Subordinated Discount Notes
due 2006 with a book value of $60.1 million as of November 19, 2003 exchanged
their notes and holders of Old Telex 13% Senior Subordinated Discount Notes due
2006 with a book value of $1.8 million retained such notes.
The Senior Secured Notes and the Senior 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, 2004 and 2003.
Aggregate annual payments for maturities of long-term debt are as follows
for the years ended December 31 (in thousands):
2005................................................... $ 479
2006................................................... 495
2007................................................... 383
2008................................................... 125,212
2009................................................... 129,329
Thereafter............................................. 35
---------
Total at maturity value ............................... 255,933
---------
Less- unamortized discount and interest to be accrued.. (58,389)
---------
$ 197,544
=========
56
NOTE 8 - INCOME TAXES
The Company's pretax income (loss) before cumulative effect of change in
accounting for U.S. and foreign subsidiaries was as follows for the year ended
December 31, 2004, the one-month period ended December 31, 2003, the
eleven-month period ended November 30, 2003 and the year ended December 31, 2002
(in thousands):
SUCCESSOR PREDECESSOR
--------- -----------
2004 2003 2003 2002
---------- ------- ----------- ----------
United States........... $ (10,255) $ (524) $ (11,416) $ (8,431)
Foreign................. 13,418 (146) 8,942 10,831
---------- ------- ----------- ----------
Income (loss)........... $ 3,163 $ (670) $ (2,474) $ 2,400
========== ======= =========== ==========
Significant components of the provision for income taxes are as follows
for the year ended December 31, 2004, the one-month period ended December 31,
2003, the eleven-month period ended November 30, 2003 and the year ended
December 31, 2002 (in thousands):
SUCCESSOR PREDECESSOR
--------- -----------
2004 2003 2003 2002
--------- --------- --------- ---------
Current:
Federal............... $ 2,650 $ 796 $ -- $ (362)
State................. 113 56 90 --
Foreign............... 5,414 710 3,477 3,056
--------- --------- --------- ---------
8,177 1,562 3,567 2,694
Deferred................ 367 (391) 18 (76)
--------- --------- --------- ---------
$ 8,544 $ 1,171 $ 3,585 $ 2,618
========= ========= ========= =========
A reconciliation of the income taxes computed at the federal statutory
rate to the Company's income tax provision is as follows for the year ended
December 31, 2004, the one-month period ended December 31, 2003, the
eleven-month period ended November 30, 2003 and the year ended December 31, 2002
(in thousands):
SUCCESSOR PREDECESSOR
--------- -----------
2004 2003 2003 2002
---------- ---------- ---------- -----------
Federal tax (benefit) at statutory rate.......... $ 1,075 $ (228) $ (841) $ (9,338)
State tax (benefit), net of federal tax.......... 44 38 (316) (1,359)
Nondeductible goodwill impairment and
amortization................................... 2,691 -0- -- 10,770
Change in deferred tax asset valuation
allowance...................................... 1,706 (105) 4,003 1,853
Foreign tax rate differences..................... 1,219 369 421 (67)
Other............................................ 1,809 1,097 318 759
--------- --------- --------- ----------
$ 8,544 $ 1,171 $ 3,585 $ 2,618
========= ========= ========= ==========
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):
2004 2003
---------- ----------
Deferred tax liabilities:
Tax over book depreciation......................... $ 1,019 $ 983
Tax over book amortization......................... (21) (134)
Foreign related liability.......................... -- 503
Section 481(a) adjustment.......................... 582 776
---------- ----------
Total deferred tax liabilities.................. 1,580 2,128
---------- ----------
Deferred tax assets:
Nondeductibe Interest Expense at LLC............... 3,829 377
Pension accrual.................................... 2,719 2,949
Inventory reserves................................. 1,788 2,300
Bad debt reserves.................................. 410 499
57
Vacation accrual..................................... 678 674
Warranty reserves.................................... 924 770
Tax loss carryforward................................ 748 947
Other................................................ 2,444 3,364
---------- ----------
Total deferred tax assets......................... 13,540 11,880
Valuation allowance.................................... (11,812) (9,228)
---------- ----------
Deferred tax assets, net of valuation allowance... 1,728 2,652
---------- ----------
Net deferred tax assets................................ $ 148 $ 524
========== ==========
The total current deferred tax asset of $1,088,000 and $975,000 at
December 31, 2004 and 2003, respectively, is included in other current assets.
The total noncurrent deferred tax asset of $55,000 at December 31, 2003, is
included in other long-term assets. A noncurrent tax liability of $940,000 and
$506,000 at December 31, 2004 and 2003, respectively, is included in other
long-term liabilities.
The Company has established a net deferred tax valuation allowance of
$11.8 million due to the uncertainty of the realization of future tax benefits.
This amount relates primarily to U.S. deferred tax assets because of uncertainty
regarding their realization. Management has considered this factor in reaching
our conclusion as to the adequacy of the valuation allowance for financial
reporting purposes.
As of December 31, 2004, the Company has foreign net operating loss
carryforwards of $0.6 million, which expire between 2006 and 2012. As a result
of the November 2003 debt restructuring, the U.S. net operating loss
carryforward generated through November 2003 was retained by Old Telex.
Intermediate and Telex file a consolidated U.S. tax return with Old Telex. The
tax provisions recorded by Telex are calculated on a separate company basis
under a tax sharing agreement with Old Telex. Telex has a payable to Old Telex
of $3.3 million and $0.8 million as of December 31, 2004 and 2003, respectively,
included in other long-term liabilities
As of December 31, 2004, the Company has a reserve of $3.7 million
included in income taxes payable in accordance with a settlement with the
Internal Revenue Service (IRS) for the expected tax liability, penalties and
accrued interest (as of the settlement date) related to a dispute for taxable
years 1990 through 1995. The Company has agreed with the IRS on the final amount
of the tax liability to be paid and has been making monthly payments.
NOTE 9 - RELATED-PARTY TRANSACTIONS
For the year ended December 31, 2002 the Company recorded a charge to
operations of $0.5 million for management services provided by GSC , a related
party. The services include, but were not limited to, developing and
implementing corporate and business strategy and providing other consulting and
advisory services. This agreement expired in May 2002.
In December 2003, the Company paid $1.5 million of the outstanding
advisory fee balance. The remaining amount outstanding of $1.4 million was paid
in January 2004. The Company accrued the advisory fee, together with interest,
at the rate of 2 percent per month.
GSCP Recovery (US), LLC, an affiliate of GSC, purchased $9.8 million of
the $20.0 million principal Tranche A Senior Secured Notes in April 2001 and
$5.0 million of the $10.0 million principal Tranche B Senior Secured Notes in
November 2001. In 2002, GSCP Recovery (US), LLC sold their interest in these
notes. These notes were repaid with the proceeds from the Telex Senior Secured
Notes issued in the November 2003 debt restructuring.
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, 2004, the remaining balance on the mortgage was $6.6 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
were (in thousands):
58
SUCCESSOR PREDECESSOR
--------- -----------
2004 2003 2003 2002
--------- ------ --------- ---------
Gross revenue.................................... $ 1,736 $ 144 $ 1,584 $ 1,784
Costs and expenses............................... 1,464 123 1,358 1,548
--------- ------ --------- ---------
Net income....................................... $ 272 $ 21 $ 226 $ 236
========= ====== ========= =========
Equity share in earnings of the LLC.............. $ 136 $ 10 $ 113 $ 118
========= ====== ========= =========
Condensed balance sheet information for the LLC as of December 31 was (in
thousands):
2004 2003
--------- ---------
Current assets $ 69 $ 150
Noncurrent assets 9,137 9,162
Current liabilities 357 360
Noncurrent liabilities 7,359 7,298
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.
Through June 30, 2003, each active participant's account received a benefit
credit each year based on the participant's age, vesting service, and total
remuneration covered by the pension plan, consisting of base salary, commission,
overtime and bonuses paid to the participant. Each year the account balances are
increased by an interest credit based on the average six-month U.S. Treasury
bill rate for November 1 of the prior year, plus 1%. The interest credit for a
full calendar year will not be less than 5%, nor greater than the interest rate
used to determine lump sum payments. Effective June 30, 2003 the Company made a
decision to freeze future pension plan benefits. The decision resulted in
recognition of previously unrecognized prior service benefits in accordance with
SFAS No. 88. Plan participants will continue to receive interest credits, but
will no longer receive a benefit credit.
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 following table presents the funded status of the plans as of and for
the years ended December 31 (in thousands):
PENSION BENEFITS
2004 2003
-------- --------
Change in benefit obligation:
Benefit obligation at beginning of period......... $ 23,008 $ 24,389
Service cost...................................... -- 485
Interest cost..................................... 1,337 1,415
Actuarial loss (gain)............................. 1,847 1,033
Benefits paid..................................... (2,296) (2,307)
Effects of curtailment............................ -- (2,007)
-------- --------
Benefit obligation at end of period................. 23,896 23,008
-------- --------
Change in plan assets:
Fair value of plan assets at beginning of period.. 17,253 15,061
Actual return on plan assets...................... 1,827 2,621
Employer contribution............................. 467 1,878
Benefits paid..................................... (2,296) (2,307)
-------- --------
Fair value of plan assets at end of period.......... 17,251 17,253
-------- --------
Change in funded status:
Funded status..................................... (6,645) (5,755)
Unrecognized actuarial loss....................... 8,267 6,425
-------- --------
Net amount recognized............................... $ 1,622 $ 670
======== ========
Amounts recognized in the consolidated balance
sheets consist of:
Accrued benefit liability......................... $ (6,645) $ (5,755)
Accumulated other comprehensive loss.............. 8,267 6,425
-------- --------
Net amount recognized............................... $ 1,622 $ 670
======== ========
59
PENSION BENEFITS
SUCCESSOR PREDECESSOR
--------- -----------
YEAR ONE MONTH ELEVEN MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, NOVEMBER 30, DECEMBER 31,
2004 2003 2003 2002
------------ ------------ ------------- ------------
Weighted average assumptions used to
determine benefit
obligations at December 31:
Discount rate......................... 5.25% 6.0% 6.0% 6.5%
Rate of compensation
increase............................ N/A N/A N/A 4.5
Weighted average assumptions used
to determine net periodic
pension cost:
Discount rate......................... 6.0% 6.5% 6.5% 7.0%
Expected return on plan
assets.............................. 8.5 8.5 8.5 9.0
Rate of compensation
increase............................ N/A 4.5 4.5 4.5
Components of net periodic
benefit cost (income):
Service cost.......................... $ -- $ 40 $ 445 $ 1,198
Interest cost......................... 1,337 118 1,297 1,795
Expected return on plan
assets.............................. (1,822) (154) (1,695) (2,544)
Amortization of prior service
cost................................ -- (15) (159) (393)
Recognized actuarial gain............. -- -- -- (45)
Settlement/curtailment (gain)
loss................................ -- -- (2,414) 773
--------- --------- ------- --------
Net periodic benefit (income)
cost.................................. $ (485) $ (11) $(2,526) $ 784
========= ========= ======= ========
The expected rate of return on pension plan assets is based on the
weighting of the Company's asset allocations and the 30-year rolling historical
averages during the period 1926-2001. The expected return ranged from 7.3% to
10.1% with a midpoint of approximately 8.5%, the expected return on plan assets
rate selected by the Company.
The increase (decrease) in the minimum liability included in other
comprehensive loss was $1,841,000, ($2,351,000), $5,078,000 and $2,552,000 for
the year ended December 31, 2004, the one-month period ended December 31, 2003,
the eleven-month period ended November 30, 2003 and the year ended December 31,
2002, respectively.
The pension plan asset allocations at December 31, 2004 and 2003, by asset
category are as follows:
2004 2003
---- ----
Asset Category
Equity securities.. 64% 60%
Debt securities.... 14 20
Other.............. 22 20
--- ---
Total........... 100% 100%
=== ===
The Company's investment policy is to maintain equity securities in the
range of 40% to 70% of plan assets, debt securities in the range of 20% to 30%
and other assets in the range of 15% to 25%. Pension plan asset performance and
allocations are reviewed quarterly. The Company expects to make contributions
totaling less than $0.1 million in 2005 based on current actuarial data.
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 $0.8 million, $0.5 million,
$0.3 million and $0.7 million for the year ended December 31, 2004, the
one-month period ended December 31, 2003, and the eleven-month period ended
November 30, 2003 and the year ended December 31, 2002, respectively. The match
was suspended between April and October of 2003 with a retro contribution
accrued in December 2003.
The Company's Japanese subsidiary also has a retirement and termination
plan (the Retirement Plan), which provides benefits to employees in Japan upon
their termination of employment. The benefits are based upon a multiple of the
employee's monthly salary, with the multiple determined based upon the
employee's years of service. The multiple paid to employees who retire or are
involuntarily terminated is greater than the multiple paid to those who
voluntarily terminate their services. The Retirement Plan is unfunded, and the
accompanying consolidated balance sheet includes a liability of approximately
$1.0 million at December 31, 2004, 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 1.0% and 3.2%, respectively. The Company charged to
expense $0.2 million, $17,000, $0.2 million and $0.2 million, respectively, for
the year ended December 31, 2004, the one-month period ended December 31, 2003,
the eleven-month period ended November 30, 2003 and year ended December 31,
2002.
60
The benefits expected to be paid over the next ten years are as follows,
for the years ended December 31 (in thousands):
U.S. PLAN JAPAN PLAN
--------- ----------
2005................. $ 2,133 $ 49
2006................. 1,904 50
2007................. 1,863 97
2008................. 2,010 53
2009................. 1,818 451
2010-2014............ 8,854 269
The Company provides postretirement benefits of health and life insurance
to a limited number of its U.S. retirees. Contributions paid by the employees
toward the cost of the plan are a flat dollar amount per month in certain
instances or a range from 25% to 100% of the cost of the plan in other
instances. The accumulated postretirement benefit obligation recognized by the
Company was $122,000 and $191,000 as of December 31, 2004 and 2003,
respectively. The net periodic benefit (income) cost was $(69,000), $2,000,
$(322,000) and $18,000 for the year ended December 31, 2004, the one-month
period ended December 31, 2003, the eleven-month period ended November 30, 2003
and the year ended December 31, 2002, respectively. The eleven-month period
ended November 30, 2003 includes a benefit of $339,000 resulting from a
curtailment due to the exclusion of all nonunion participants as of June 30,
2003.
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 the Company 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 sold its audio products group to the Company in 1996.
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, 2004, the Company had accrued approximately $2.0 million
over the life of the project for anticipated costs to be incurred for the
Lincoln facility cleanup activities, of which approximately $1.7 million has
been paid.
61
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.
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.
The chief executive officer (CEO) entered into an employment agreement
with the Company effective April 14, 2003 which was subsequently amended on
January 14, 2004, pursuant to which the CEO will receive (i) an annual base
salary of $350,000; (ii) an annual bonus based on the objectives and awards
established by the Board of Directors, and (iii) in the event his employment is
terminated without cause, or he terminates his employment for good reason, the
Company will pay one year's base annual salary and an amount equal to his bonus
earned prorated as of the date of termination payable as and when paid to other
eligible bonus plan participants.
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)
an 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, 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, 2004, 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 $3.4 million, $0.3 million, $3.1 million and $3.2 million for the year ended
December 31, 2004, the one-month period ended December 31, 2003, the
eleven-month period ended November 30, 2003, and the year ended December 31,
2002, respectively.
Approximate future minimum rental commitments under all noncancelable
operating leases are as follows for the years ended December 31 (in thousands):
2005................................ $ 2,978
2006................................ 2,699
2007................................ 1,639
2008................................ 1,429
2009................................ 1,366
2010 and thereafter................. 915
--------
Total minimum lease commitments... $ 11,026
========
NOTE 12 - SEGMENT INFORMATION
The Company has two business segments: Professional Audio and Audio and
Wireless Technology.
PROFESSIONAL AUDIO
Professional Audio 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) professional communication
products, including advanced digital matrix intercoms, used by broadcasters
(including all major television networks) to control production communications
intercoms, headsets and wireless communications systems used by professional,
college and high school football teams and stadiums and other professional and
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 five principal product markets
including: (i) digital audio duplication products for the
62
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.
The following tables provide information by business segment (in
thousands):
AUDIO AND
PROFESSIONAL WIRELESS
AUDIO TECHNOLOGY CORPORATE CONSOLIDATED
------------ ---------- ----------- ------------
Net sales:
2004 -- Successor....................................... $ 240,521 $ 56,307 $ -- $ 296,828
2003 -- Successor one month............................. 19,774 5,659 -- 25,433
2003 -- Predecessor eleven months....................... 189,196 53,910 -- 243,106
2002 -- Predecessor..................................... 201,455 65,066 -- 266,521
Operating profit (loss):
2004 -- Successor....................................... 19,310 10,122 (47) 29,385
2003 -- Successor one month............................. 1,645 879 496 3,020
2003 -- Predecessor eleven months....................... 17,561 5,331 1,002 23,894
2002 -- Predecessor..................................... 17,540 10,574 (1,878) 26,236
Depreciation expense:
2004 -- Successor....................................... 4,904 354 797 6,055
2003 -- Successor one month............................. 401 19 61 481
2003 -- Predecessor eleven months....................... 4,635 347 610 5,592
2002 -- Predecessor..................................... 5,225 297 838 6,360
Capital expenditures:
2004 -- Successor....................................... 4,763 879 2,080 7,722
2003 -- Successor one month............................. 326 108 112 546
2003 -- Predecessor eleven months....................... 2,691 426 2,048 5,165
2002 -- Predecessor..................................... 3,877 414 543 4,834
Total assets:
2004.................................................... 122,557 36,077 21,386 180,020
2003.................................................... 119,547 37,792 13,789 171,128
2002 -- Predecessor..................................... 119,473 33,846 4,559 157,878
Corporate operating expenses include corporate engineering, selling,
general and administrative costs, corporate charges, amortization of other
intangibles, and restructuring charges. Corporate identifiable assets relate
principally to the Company's investment in information systems and corporate
facilities, as well as cash and deferred financing costs.
The Company's net sales into each of its principal geographic regions were
as follows for the year ended December 31, 2004, the one-month period ended
December 31, 2003, the eleven-month period ended November 30, 2003 and the year
ended December 31 2002 (in thousands):
SUCCESSOR PREDECESSOR
--------------------------------- --------------------------------
ONE MONTH ENDED ELEVEN MONTHS ENDED
2004 DECEMBER 31, 2003 NOVEMBER 30, 2003 2002
------------- ----------------- ------------------- -----------
United States....................................... $ 148,803 $ 12,830 $ 121,650 $ 140,430
Europe.............................................. 84,702 6,761 69,628 67,897
Asia................................................ 41,539 4,476 30,470 42,019
Other foreign countries............................. 21,784 1,366 21,358 16,175
------------- ---------- ----------- -----------
$ 296,828 $ 25,433 $ 243,106 $ 266,521
============= ========== =========== ===========
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):
63
2004 2003
---------- ----------
United States........ $ 43,352 $ 51,175
International........ 13,976 12,396
---------- ----------
Consolidated......... $ 57,328 $ 63,571
========== ==========
NOTE 13--EQUITY
Telex was created in October 2003 with 1,000 shares of common stock, par
value of $0.01 per share authorized. There are 500 shares issued and outstanding
as of December 31, 2004 and 2003. The shares are 100% owned by Intermediate.
Intermediate was created in October 2003 as a limited liability company
with its membership interest owned by Old Telex.
TELEX COMMUNICATIONS HOLDINGS, INC. (OLD TELEX OR PREDECESSOR)
PREFERRED STOCK
In the fourth quarter of 2001, Old Telex'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.
The Preferred stock could be converted into Common stock at the election
of Old Telex, and all the outstanding Series A and B Preferred stock was
converted, effective April 2002, into an equivalent share or fractional share of
Common stock.
COMMON STOCK
In the fourth quarter of 2001, prior to the November 2001 Debt
Restructuring, Old Telex's authorized shares of Common stock were increased from
1,000 shares to 10 million shares. In 2004 certain members of Telex management
purchased 540,000 shares of common stock of Old Telex at prices ranging from
$0.30 to $0.327 per share. Total shares issued and outstanding as of December
31, 2004 were 6,675,702.
WARRANTS
Warrants entitling the holders to purchase up to 1,666,155 shares (subject
to certain antidilution adjustments) of common stock were issued by Old Telex in
November 2001. In the November 2003 debt restructuring, Old Telex offered
holders of existing warrants the ability to exchange the warrants for common
stock of Old Telex at an exchange rate of 70% of the original warrant. The
exchange offer removed the requirement that Old Telex satisfy certain financial
performance targets prior to the warrant being exercisable. Holders of 1,640,821
warrants exchanged the warrants in 2003 for 1,148,575 shares of common stock of
Old Telex. There are 25,334 warrants outstanding as of December 31, 2004.
STOCK OPTIONS
The Company's CEO was granted 100,000 shares of Old Telex common stock in
the form of nonstatutory stock options under a subscription and option
agreement. The options vest immediately and provide for early termination in the
event of termination of employment, a sale or liquidation of Old Telex, and
expire on September 30, 2008.
In 2004, Old Telex adopted a stock option plan under which 140,000 shares
of common stock of Old Telex were reserved for the granting of nonstatutory
stock options at exercise prices not less than 100% of the fair market value of
the Old Telex common stock on the date of grant. As of December 31, 2004 stock
options for 95,000 shares had been granted under the plan, leaving 45,000 shares
available for future grants. Options granted under the stock plan generally vest
and expire over five to ten years.
Options granted and outstanding at December 31, 2004 include 100,000 at an
exercise price of $15.00 per share and 95,000 at an exercise price of $6.00 per
share. No options were exercised or cancelled in 2004.
64
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 2004 fair value of the Company's Senior Secured Notes and
Senior Subordinated Discount Notes is estimated at $137.5 million and $81.3
million, respectively, based on quoted market values for the notes. No quotes
were available for 2003. The estimates presented herein are not necessarily
indicative of amounts the Company could realize in a current market exchange.
NOTE 15 - QUARTERLY FINANCIAL DATA
The following table shows the unaudited quarterly financial data for
Intermediate for the years ended December 31, 2004 and 2003 (in thousands):
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER TOTAL
------------- -------------- ------------- -------------- -----------
2004
Net sales............................. $ 67,266 $ 77,729 $ 77,374 $ 74,459 $ 296,828
Operating income...................... 6,851 10,455 11,073 1,006 29,385
Net (loss) income..................... (1,356) 1,599 1,797 (7,421) (5,381)
PREDECESSOR SUCCESSOR
----------------------------------------------- ---------
FOURTH QUARTER
FIRST SECOND THIRD ----------------------
QUARTER QUARTER QUARTER TWO MONTHS ONE MONTH TOTAL
---------- --------- --------- ---------- --------- -----------
2003
Net sales............................. $ 60,875 $ 68,836 $ 69,587 $ 43,808 $ 25,433 $ 268,539
Operating income...................... 3,218 7,423 8,829 4,424 3,020 26,914
Net (loss) income..................... (4,721) (995) 523 (866) (1,841) (7,900)
The following table shows the unaudited quarterly financial data for Telex
for the years ended December 31, 2004 and 2003 (in thousands):
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER TOTAL
------------- -------------- ------------- -------------- -----------
2004
Net sales............................. $ 67,266 $ 77,729 $ 77,374 $ 74,459 $ 296,828
Operating profit...................... 6,861 10,469 11,078 1,011 29,419
Net income (loss)..................... 1,196 4,248 4,529 (4,579) 5,934
PREDECESSOR SUCCESSOR
----------------------------------------------- ---------
FOURTH QUARTER
FIRST SECOND THIRD ----------------------
QUARTER QUARTER QUARTER TWO MONTHS ONE MONTH TOTAL
---------- --------- --------- ---------- --------- -----------
2003
Net sales............................. $ 60,875 $ 68,836 $ 69,587 $ 43,808 $ 25,433 $ 268,539
Operating income...................... 3,218 7,423 8,829 4,424 3,135 27,029
Net (loss) income..................... (4,721) (995) 523 (866) (540) (6,599)
In the fourth quarter of 2004, Telex recorded goodwill and asset
impairment charges of $7.9 million.
In the second quarter of 2003, Telex recorded a pension curtailment gain
of $2.4 million, legal settlement costs of $1.0 million and a charge related to
discontinuance of sales of computer audio products of $1.5 million.
65
SUPPLEMENTARY FINANCIAL INFORMATION
In connection with the November 2003 debt restructuring, a wholly-owned
domestic subsidiary of Telex Communications International, Ltd. (Guarantor),
guarantees the $125.0 million 11 1/2% senior secured notes of Telex on a full,
unconditional and joint and several basis.
The guarantee is a secured obligation of the Guarantor and ranks senior in
the right of payment to all existing and future subordinated indebtedness of the
Guarantor and ranks equally in the right of payment with all other existing and
future senior indebtedness of the Guarantor. The following condensed
consolidating financial information includes the accounts of the Guarantor and
the combined accounts of the Guarantor's direct and indirect foreign
subsidiaries (Non-Guarantors).
The following tables present condensed consolidating balance sheets as of
December 31, 2004 and December 31, 2003, condensed consolidating statements of
operations for the for the year ended December 31, 2004, the one-month period
ended December 31, 2003, the eleven-month period ended November 30, 2003 and the
year ended December 31, 2002, and condensed consolidating statements of cash
flows for the for the year ended December 31, 2004, the one-month period ended
December 31, 2003, the eleven-month period ended November 30, 2003 and the year
ended December 31, 2002. Intermediate's 13% senior subordinated discount notes
are unsecured and are not guaranteed by any other party.
66
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2004
(IN THOUSANDS)
NON -
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
--------- --------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,593 $ 200 $ 6,166 $ - $ 14,959
Accounts receivable, net 22,370 - 27,807 - 50,177
Inventories 22,686 - 34,043 (4,156) 52,573
Other current assets 1,928 34,023 12,425 (43,393) 4,983
--------- --------- --------- ----------- -----------
Total current assets 55,577 34,223 80,441 (47,549) 122,692
Property, plant and equipment, net 21,328 - 10,697 - 32,025
Deferred financing costs, net 5,350 - - - 5,350
Goodwill, net 14,500 - 1,345 - 15,845
Other assets 1,362 - 1,934 - 3,296
Investment in subsidiaries 86,642 52,432 - (139,074) -
--------- --------- --------- ----------- -----------
$ 184,759 $ 86,655 $ 94,417 $ (186,623) $ 179,208
========= ========= ========= =========== ===========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Revolving lines of credit $ - $ - $ 1,011 $ - $ 1,011
Current maturities of long-term debt 212 - 267 - 479
Accounts payable 7,374 - 5,799 - 13,173
Accrued wages and benefits 5,276 - 6,367 - 11,643
Other accrued liabilities 29,094 - 25,387 (43,515) 10,966
Income taxes payable 4,454 - 1,094 - 5,548
--------- --------- --------- ----------- -----------
Total current liabilities 46,410 - 39,925 (43,515) 42,820
Long-term debt, net 125,626 - 453 - 126,079
Other long-term liabilities 10,903 13 1,607 - 12,523
--------- --------- --------- ----------- -----------
Total liabilities 182,939 13 41,985 (43,515) 181,422
--------- --------- --------- ----------- -----------
Shareholder's equity (deficit) 1,820 86,642 52,432 (143,108) (2,214)
--------- --------- --------- ----------- -----------
$ 184,759 $ 86,655 $ 94,417 $ (186,623) $ 179,208
========= ========= ========= =========== ===========
67
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2003
(IN THOUSANDS)
NON -
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
--------- --------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,699 $ - $ 4,999 $ - $ 6,698
Accounts receivable, net 22,194 - 25,261 - 47,455
Inventories 21,323 - 28,224 (3,580) 45,967
Other current assets 2,138 29,784 10,832 (35,317) 7,437
--------- -------- -------- --------- ---------
Total current assets 47,354 29,784 69,316 (38,897) 107,557
Property, plant and equipment, net 20,173 - 9,778 - 29,951
Deferred financing costs, net 6,368 - - - 6,368
Goodwill, net 22,105 - 1,248 - 23,353
Other assets 1,611 - 1,370 - 2,981
Investment in subsidiaries 73,120 43,336 - (116,456) -
--------- -------- -------- --------- ---------
$ 170,731 $ 73,120 $ 81,712 $(155,353) $ 170,210
========= ======== ======== ========= =========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Current maturities of long-term debt $ 212 $ - $ 234 $ - $ 446
Accounts payable 8,986 - 3,893 - 12,879
Accrued wages and benefits 5,215 - 5,169 - 10,384
Other accrued liabilities 24,114 - 22,812 (35,369) 11,557
Income taxes payable 4,821 - 4,225 - 9,046
--------- -------- -------- --------- ---------
Total current liabilities 43,348 - 36,333 (35,369) 44,312
Long-term debt, net 125,745 - 668 - 126,413
Other long-term liabilities 6,099 - 1,375 - 7,474
--------- -------- -------- --------- ---------
Total liabilities 175,192 - 38,376 (35,369) 178,199
--------- -------- -------- --------- ---------
Shareholder's (deficit) equity (4,461) 73,120 43,336 (119,984) (7,989)
--------- -------- -------- --------- ---------
$ 170,731 $ 73,120 $ 81,712 $(155,353) $ 170,210
========= ======== ======== ========= =========
68
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2004
(IN THOUSANDS)
NON -
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
--------- --------- ---------- ------------ ------------
Net sales $ 195,800 $ - $172,669 $ (71,641) $ 296,828
Cost of sales 116,163 - 117,787 (70,744) 163,206
--------- -------- -------- --------- ---------
Gross profit 79,637 - 54,882 (897) 133,622
--------- -------- -------- --------- ---------
Operating expenses:
Engineering 9,074 - 6,349 - 15,423
Selling, general and administrative 48,706 - 32,159 - 80,865
Goodwill and asset impairment charges 7,915 - - - 7,915
--------- -------- -------- --------- ---------
65,695 - 38,508 - 104,203
--------- -------- -------- --------- ---------
Operating income (loss) 13,942 - 16,374 (897) 29,419
Interest expense (16,478) 968 (1,095) - (16,605)
Other income (expense), net 966 1,124 (1,319) 353 1,124
Equity in earnings of subsidiaries 10,407 8,328 - (18,735) -
--------- -------- -------- --------- ---------
Income (loss) before income taxes 8,837 10,420 13,960 (19,279) 13,938
Provision for income taxes 2,899 13 5,632 - 8,544
--------- -------- -------- --------- ---------
Net income (loss) $ 5,938 $ 10,407 $ 8,328 $ (19,279) $ 5,394
========= ======== ======== ========= =========
69
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE ONE MONTH ENDED DECEMBER 31, 2003
(IN THOUSANDS)
NON -
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
--------- --------- ---------- ------------ ------------
Net sales $ 16,772 $ - $ 13,226 $ (4,565) $ 25,433
Cost of sales 9,987 - 9,940 (4,970) 14,957
--------- --------- --------- --------- ---------
Gross profit 6,785 - 3,286 405 10,476
--------- --------- --------- --------- ---------
Operating expenses:
Engineering 773 - 451 - 1,224
Selling, general and administrative 3,655 - 2,462 - 6,117
--------- --------- --------- --------- ---------
4,428 - 2,913 - 7,341
--------- --------- --------- --------- ---------
Operating income (loss) 2,357 - 373 405 3,135
Interest expense (1,385) 89 (107) - (1,403)
Other (expense) income, net 870 - (785) - 85
Loss on early extinguisment of debt (1,140) - (46) - (1,186)
Equity in earnings of subsidiaries (920) (1,009) - 1,929 -
--------- --------- --------- --------- ---------
(Loss) income before income taxes (218) (920) (565) 2,334 631
Provision for income taxes 727 - 444 - 1,171
--------- --------- --------- --------- ---------
Net (loss) income $ (945) $ (920) $ (1,009) $ 2,334 $ (540)
========= ========= ========= ========= =========
70
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE ELEVEN MONTHS ENDED NOVEMBER 30, 2003
(IN THOUSANDS)
NON -
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
--------- --------- ---------- ------------ ------------
Net sales $ 158,900 $ - $ 134,703 $ (50,497) $ 243,106
Cost of sales 97,837 - 92,494 (49,468) 140,863
--------- --------- --------- --------- ---------
Gross profit 61,063 - 42,209 (1,029) 102,243
--------- --------- --------- --------- ---------
Operating expenses:
Engineering 8,426 - 4,521 - 12,947
Selling, general and administrative 41,347 - 26,469 - 67,816
Pension curtailment gain (2,414) - - - (2,414)
--------- --------- --------- --------- ---------
47,359 - 30,990 - 78,349
--------- --------- --------- --------- ---------
Operating income (loss) 13,704 - 11,219 (1,029) 23,894
Interest expense (25,881) - (1,016) - (26,897)
Other income (expense), net 732 - (203) - 529
Equity in earnings of subsidiaries 6,682 6,682 - (13,364) -
--------- --------- --------- --------- ---------
(Loss) income before income taxes (4,763) 6,682 10,000 (14,393) (2,474)
Provision for income taxes 267 - 3,318 - 3,585
--------- --------- --------- --------- ---------
Net (loss) income $ (5,030) $ 6,682 $ 6,682 $ (14,393) $ (6,059)
========= ========= ========= ========= =========
71
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2002
(IN THOUSANDS)
NON -
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
--------- --------- ---------- ------------ ------------
Net sales $ 180,204 $ - $ 138,829 $ (52,512) $ 266,521
Cost of sales 111,948 - 96,469 (52,585) 155,832
--------- --------- --------- --------- ---------
Gross profit 68,256 - 42,360 73 110,689
--------- --------- --------- --------- ---------
Operating expenses:
Engineering 8,468 - 3,956 - 12,424
Selling, general and administrative 44,277 - 26,733 - 71,010
Restructuring charges 478 - - - 478
Corporate charges 541 - - - 541
--------- --------- --------- --------- ---------
53,764 - 30,689 - 84,453
--------- --------- --------- --------- ---------
Operating income (loss) 14,492 - 11,671 73 26,236
Interest expense (25,770) - (793) - (26,563)
Other income (expense), net 2,912 - (185) - 2,727
Equity in earnings of subsidiaries 7,655 7,655 - (15,310) -
--------- --------- --------- --------- ---------
(Loss) income before income taxes (711) 7,655 10,693 (15,237) 2,400
Provision for income taxes (420) - 3,038 - 2,618
--------- --------- --------- --------- ---------
(Loss) income before cumulative effect
of a change in accounting (291) 7,655 7,655 (15,237) (218)
Cumulative effect of change in accounting (29,863) - - - (29,863)
--------- --------- --------- --------- ---------
Net (loss) income $ (30,154) $ 7,655 $ 7,655 $ (15,237) $ (30,081)
========= ========= ========= ========= =========
72
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2004
(IN THOUSANDS)
NON -
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
--------- --------- ---------- ------------ ------------
TOTAL CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 13,705 $ (2,147) $ 2,205 $ (39) $ 13,724
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (5,570) - (2,152) - (7,722)
Proceeds from sale of product lines and other assets - 2,338 - - 2,338
Other 221 - - - 221
--------- --------- --------- --------- ---------
Net cash (used in) provided by investing activities (5,349) 2,338 (2,152) - (5,163)
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES:
Borrowings under revolving lines of credit, net - - 1,011 - 1,011
Repayment of long-term debt (212) - (231) - (443)
Payment of deferred financing costs (319) - - - (319)
Dividend to shareholder (883) - - - (883)
Change in intercompany receivable/payable (48) 9 - 39 -
--------- --------- --------- --------- ---------
Net cash (used in) provided by financing activities (1,462) 9 780 39 (634)
--------- --------- --------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS - - 334 - 334
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS:
Net increase 6,894 200 1,167 - 8,261
Balance at beginning of period 1,699 - 4,999 - 6,698
--------- --------- --------- --------- ---------
Balance at end of period $ 8,593 $ 200 $ 6,166 $ - $ 14,959
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH PAID FOR:
Interest $ 13,018 $ - $ 1,095 $ - $ 14,113
========= ========= ========= ========= =========
Income taxes $ 434 $ - $ 6,113 $ - $ 6,547
========= ========= ========= ========= =========
73
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE ONE MONTH ENDED DECEMBER 31, 2003
(IN THOUSANDS)
NON -
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
--------- --------- ---------- ------------ ------------
TOTAL CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $ (1,353) $ 5,313 $ 4,022 $ (2,236) $ 5,746
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (370) - (176) - (546)
--------- --------- --------- --------- ---------
Net cash (used in) provided by investing activities (370) - (176) - (546)
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES:
Borrowings under revolving lines of credit, net (10,439) - (1,668) - (12,107)
Proceeds from issuance of long-term debt 125,000 - - - 125,000
Repayment of long-term debt (109,626) - (671) - (110,297)
Payment of deferred financing costs (6,519) - - - (6,519)
Dividend to shareholder (466) - - - (466)
Change in intercompany receivable/payable 3,077 (5,313) - 2,236 -
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities 1,027 (5,313) (2,339) 2,236 (4,389)
--------- --------- --------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS - - 242 - 242
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS:
Net (decrease) increase (696) - 1,749 - 1,053
Balance at beginning of period 2,395 - 3,250 - 5,645
--------- --------- --------- --------- ---------
Balance at end of period $ 1,699 $ - $ 4,999 $ - $ 6,698
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH PAID FOR:
Interest $ 10 $ - $ 109 $ - $ 119
========= ========= ========= ========= =========
Income taxes $ 75 $ - $ 328 $ - $ 403
========= ========= ========= ========= =========
74
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE ELEVEN MONTHS ENDED NOVEMBER 30, 2003
(IN THOUSANDS)
NON -
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
--------- --------- ---------- ------------ ------------
TOTAL CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 18,463 $ (15,436) $ 3,295 $ 8,967 $ 15,289
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (3,933) - (1,232) - (5,165)
Proceeds from sale of product lines and other assets 1,130 - 28 - 1,158
Other 166 - - - 166
--------- --------- --------- --------- ---------
Net cash (used in) provided by investing activities (2,637) - (1,204) - (3,841)
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES:
Borrowings (repayments) under revolving lines of credit, net 1,876 - (2,248) - (372)
Repayment of long-term debt (8,898) - (180) - (9,078)
Change in intercompany receivable/payable (6,469) 15,436 - (8,967) -
--------- --------- --------- --------- ---------
Net cash (used in) provided by financing activities (13,491) 15,436 (2,428) (8,967) (9,450)
--------- --------- --------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS - - 273 - 273
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS:
Net increase 2,335 - (64) - 2,271
Balance at beginning of period 60 - 3,314 - 3,374
--------- --------- --------- --------- ---------
Balance at end of period $ 2,395 $ - $ 3,250 $ - $ 5,645
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH PAID FOR:
Interest $ 4,301 $ - $ 1,021 $ - $ 5,322
========= ========= ========= ========= =========
Income taxes $ 348 $ - $ 5,071 $ - $ 5,419
========= ========= ========= ========= =========
75
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002
(IN THOUSANDS)
NON -
ISSUER GUARANTOR GUARANTORS ELIMINATIONS CONSOLIDATED
--------- --------- ---------- ------------ ------------
TOTAL CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 16,101 $ (1,205) $ 3,032 $ 1,036 $ 18,964
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (2,203) - (2,631) - (4,834)
Proceeds from sale of product lines and other assets 4,542 - 28 - 4,570
Other 222 - - - 222
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing activities 2,561 - (2,603) - (42)
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES:
Repayments under revolving lines of credit, net (7,392) - (1,843) - (9,235)
Proceeds from issuance of long-term debt - - 1,518 - 1,518
Repayment of long-term debt (10,859) - (70) - (10,929)
Dividend to shareholder (242) - - - (242)
Change in intercompany receivable/payable (169) 1,205 - (1,036) -
--------- --------- --------- --------- ---------
Net cash (used in) provided by financing activities (18,662) 1,205 (395) (1,036) (18,888)
--------- --------- --------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS - - 314 - 314
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS:
Net increase - - 348 - 348
Balance at beginning of period 60 - 2,966 - 3,026
--------- --------- --------- --------- ---------
Balance at end of period $ 60 $ - $ 3,314 $ - $ 3,374
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH PAID FOR:
Interest $ 6,300 $ - $ 801 $ - $ 7,101
========= ========= ========= ========= =========
Income taxes $ 242 $ - $ 2,951 $ - $ 3,193
========= ========= ========= ========= =========
76
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
BOARD OF DIRECTORS AND SHAREHOLDER
BOARD OF MANAGERS AND SOLE MEMBER
TELEX COMMUNICATIONS INTERMEDIATE HOLDINGS, LLC AND TELEX COMMUNICATIONS, INC.
We have audited the consolidated financial statements of Telex Communications
Intermediate Holdings, LLC and subsidiaries (Successor) and Telex
Communications, Inc. and subsidiaries (Successor) as of December 31, 2004 and
2003, and for the year ended December 31, 2004 and for the one-month period
ended December 31, 2003. We have also audited the consolidated financial
statements of Telex Communications Holdings, Inc. and subsidiaries (Predecessor)
for the eleven-month period ended November 30, 2003 and the year ended December
31, 2002, and have issued our report thereon dated February 25, 2005 (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 audits.
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 25, 2005
77
SCHEDULE II
TELEX COMMUNICATIONS INTERMEDIATE HOLDINGS, LLC
TELEX COMMUNICATIONS, INC.
VALUATION AND QUALIFYING ACCOUNTS
COLUMN B COLUMN C COLUMN D COLUMN E
---------- ---------- ---------- ----------
BALANCE AT ADDITIONS DEDUCTIONS BALANCE AT
BEGINNING CHARGED TO FROM END OF
COLUMN A OF PERIOD EXPENSES RESERVES PERIOD
- ------------------------------------------- ---------- ---------- ---------- ----------
DESCRIPTION
PREDECESSOR
YEAR ENDED DECEMBER 31, 2002
Allowance for doubtful accounts ........... $ 4,973 $ 240 $ 1,851(a) $ 3,362
========= ======== ======= ==========
Restructuring accrual ..................... $ 3,002 $ 478 $ 3,384(b) $ 96
========= ======== ======= ==========
ELEVEN MONTH PERIOD ENDED NOVEMBER 30, 2003
Allowance for doubtful accounts ........... $ 3,362 $ 869 $ 673(a) $ 3,558
========= ======== ======= ==========
Restructuring accrual ..................... $ 96 $ - $ 96(b) $ -
========= ======== ======= ==========
SUCCESSOR
ONE MONTH PERIOD ENDED DECEMBER 31, 2003
Allowance for doubtful accounts ........... $ 3,558 $ (279) $ 140(a) $ 3,139
========= ======== ======= ==========
YEAR ENDED DECEMBER 31, 2004
Allowance for doubtful accounts ........... $ 3,139 $ 828 $ 1,089(a) $ 2,878
========= ======== ======= ==========
(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.
78
EXHIBIT INDEX
for
Form 10-K
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
ARTICLES OF INCORPORATION AND BY-LAWS
3.1(a) Certificate of Incorporation of Telex Communications, Inc. ("Telex"
or the "Company"), dated October 21, 2003 (incorporated by reference
to Exhibit 3.1(a) to Telex Registration Statement on Form S-4, filed
on February 13, 2004, File No. 333-112819 ("Telex Registration
Statement").
3.1(b) Certificate of Amendment to Certificate of Incorporation of Telex,
dated November 19, 2003 (incorporated by reference to Exhibit 3.1(b)
to Telex Registration Statement).
3.2(a) By-Laws of the Company dated October 30, 2003 (incorporated by
reference to Exhibit 3.2 to Telex Registration Statement).
3.3 Certificate of Formation of Telex Communications Intermediate
Holdings, LLC ("Intermediate Holdings"), dated October 21, 2003
(incorporated by reference to Exhibit 3.1 to Intermediate Holdings
Registration Statement on Form S-4, filed on April 29, 2004, File
No. 333-115009 ("Intermediate Holdings Registration Statement").
3.4 Limited Liability Company Agreement of Intermediate Holdings dated
as of November 19, 2003 (incorporated by reference to Exhibit 3.2 to
Intermediate Holdings Registration Statement).
INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES
4.1(a) Indenture (the "Indenture"), dated as of November 19, 2003, among
the Company, as Issuer, and BNY Midwest Trust Company ("BNY"), as
Trustee and Collateral Agent related to the 11 1/2% Senior Secured
Notes due 2008 of the Company(incorporated by reference to Exhibit
4.1(a) to Telex Registration Statement).
4.1(b) Pledge and Security Agreement (the "Pledge and Security Agreement"),
dated as of November 19, 2003, between the Company, Telex
Communications International, Ltd. ("International") and BNY, as
Collateral Agent (incorporated by reference to Exhibit 4.1(b) to
Telex Registration Statement).
4.2(a) Credit Agreement, dated as of November 19, 2003 (the "Credit
Agreement"), among the Company, Telex Communications Holdings, Inc.
("Holdings"), Intermediate Holdings, and International, as Credit
Parties, General Electric Capital Corporation ("GE"), as Agent, L/C
Issuer and a Lender and the other financial institutions parties
thereto, as Lenders (incorporated by reference to Exhibit 4.2(a) to
Telex Registration Statement).
4.2(b) Guaranty, dated as of November 19, 2003, between by and among
Holdings, Intermediate Holdings, the Company and International, as
Guarantors, and GE, as Agent (incorporated by reference to Exhibit
4.2(b) to Telex Registration Statement).
4.2(c) Security Agreement, dated as of November 19, 2003, by and among
Holdings, Intermediate Holdings, the Company, International and GE,
as Agent (incorporated by reference to Exhibit 4.2(c) to Telex
Registration Statement).
4.2(d) Pledge Agreement, dated as of November 19, 2003, by and among
Holdings, Intermediate Holdings, the Company and International, as
Pledgors, and GE, as Agent (incorporated by reference to Exhibit
4.2(d) to Telex Registration Statement).
4.3 Intercreditor Agreement, dated as of November 19, 2003, among GE, as
Agent, BNY, as trustee and collateral agent, and the Company,
Holdings, Intermediate Holdings and International (incorporated by
reference to Exhibit 4.3 to Telex Registration Statement).
4.4 Indenture (the "Indenture"), dated as of November 19, 2003, among
Intermediate Holdings, as Issuer, and BNY, as Trustee and Collateral
Agent related to the 13% Senior Subordinated Discount Notes due 2009
of Intermediate Holdings (incorporated by reference to Exhibit
4.1(a) to Intermediate Holdings Registration Statement).
4.5 Pledge Agreement (the "Pledge Agreement"), dated as of November 19,
2003, between Intermediate Holdings and BNY, as Trustee and
Collateral Agent under the Indenture (incorporated by reference to
Exhibit 4.1(b) to Intermediate Holdings Registration Statement).
MATERIAL CONTRACTS
10.1 Assignment and Assumption Agreement, dated November 19, 2003, made
by Holdings in favor of the Company (incorporated by reference to
Exhibit 10.1 to Telex Registration Statement).
10.2 Indemnification Agreement, dated as of May 6, 1997, by and between
GST Acquisition Corp. and Greenwich Street Capital Partners, Inc.
(incorporated by reference to Exhibit 10.2 to Telex Registration
Statement).
10.3(a) Member Control Agreement of DRF 12000 Portland LLC, dated as of
March 16, 2000, by and between Holdings and DRF TEL LLC
(incorporated by reference to Exhibit 10.3(a) to Telex Registration
Statement).
10.3(b) Lease, dated March 16, 2000, by and between Holdings and DRF 12000
Portland
79
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
LLC for the property located at 12000 Portland Avenue South,
Burnsville, Minnesota (incorporated by reference to Exhibit 10.3(b)
to Telex Registration Statement).
MANAGEMENT CONTRACTS AND COMPENSATORY PLANS AND ARRANGEMENTS
*10.4(a) Employment Agreement, dated as of April 14, 2003, between Raymond V.
Malpocher and Holdings (the "Malpocher Employment Agreement")
(incorporated by reference to Exhibit 10.4(a) to Telex Registration
Statement).
*10.4(b) Amendment to the Malpocher Employment Agreement dated as of January
14, 2004 (incorporated by reference to Exhibit 10.4(b) to Telex
Registration Statement).
*10.5 Subscription and Option Agreement, dated as of January 14, 2004,
between Holdings and Raymond V. Malpocher (incorporated by reference
to Exhibit 10.5 to Telex Registration Statement).
*10.6 Purchase Agreement, dated March 26, 2004 between Holdings and
Raymond V. Malpocher (incorporated by reference to Exhibit 10.1 to
the Company's Report on Form 10-Q for the quarter ended March 31,
2004, filed on April 28, 2004).
*10.7 Subscription and Option Agreement, dated March 28, 2004 between
Telex Communications Holdings, Inc. and Raymond V. Malpocher
(incorporated by reference to Exhibit 10.2 to the Company's Report
on Form 10-Q for the quarter ended March 31, 2004, filed on April
28, 2004).
*10.8(a) Employment Agreement, dated as of January 5, 2003, between Holdings
and Mathias Stieler von Heydekampf (incorporated by reference to
Exhibit 10.7(a) to Telex Registration Statement).
*10.8(b) Secondment Agreement, dated as of January 5, 2003, among EVI Audio
GmbH, Holdings and Mathias Stieler von Heydekampf (incorporated by
reference to Exhibit 10.7(b) to Telex Registration Statement).
*10.9(a) Service Agreement signed February 21, 1997 between EVI Audio GmbH
and Mathias von Heydekampf (the "Service Agreement") (incorporated
by reference to Exhibit 10.8(a) to Telex Registration Statement).
*10.9(b) Amendment dated January 5, 2003 to Service Agreement (incorporated
by reference to Exhibit 10.8(b) to Telex Registration Statement).
*10.10 Subscription Agreement, dated March 2, 2004 between Holdings and
Mathias Stieler von Heydekampf (incorporated by reference to Exhibit
10.3 to the Company's Report on Form 10-Q for the quarter ended June
30, 2004, filed on August 10, 2004).
*10.11 Subscription Agreement, dated March 2, 2004 between Holdings and
Gregory W. Richter (incorporated by reference to Exhibit 10.2 to the
Company's Report on Form 10-Q for the quarter ended June 30, 2004,
filed on August 10, 2004).
*10.12 Subscription Agreement, dated March 2, 2004 between Holdings and
Thomas J. Kulikowski (filed as an Exhibit herewith).
*10.13 Subscription Agreement, dated March 2, 2004 between Holdings and
Ralph K.Strader (filed as an Exhibit herewith).
*10.14 2004 Stock Option Plan of Holdings (filed as an Exhibit herewith).
OTHER
14 Code of Business Conduct and Ethics of the Company (filed as an
Exhibit herewith).
21.1 Subsidiaries of Intermediate Holdings (filed as an Exhibit
herewith).
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (filed as an Exhibit herewith).
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (filed as an Exhibit herewith).
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed as
an Exhibit herewith).
* Management contract or compensatory plan, contract, or arrangement required to
be filed as an exhibit to this report.
80