<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 5, 1997
REGISTRATION NO. 333-30679
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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TELEX COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3669 13-3521030
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
9600 ALDRICH AVENUE SOUTH
BLOOMINGTON, MINNESOTA 55420
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JOHN A. PALLESCHI, ESQ.
TELEX COMMUNICATIONS, INC.
9600 ALDRICH AVENUE SOUTH
BLOOMINGTON, MINNESOTA 55420
(612) 887-5542
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPY TO:
ANDREW L. SOMMER
DEBEVOISE & PLIMPTON
875 THIRD AVENUE
NEW YORK, NEW YORK 10022
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this
Registration Statement becomes effective.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
------------------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f) under the Securities Act of 1933, as amended.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 5, 1997
PROSPECTUS
TELEX COMMUNICATIONS, INC.
OFFER TO EXCHANGE
10 1/2% SENIOR SUBORDINATED NOTES DUE 2007,
SERIES A FOR ANY AND ALL EXISTING NOTES (AS DEFINED BELOW)
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 PM, NEW YORK CITY TIME, ON OCTOBER 8,
1997, UNLESS EXTENDED.
Telex Communications, Inc., a Delaware corporation (the "Company"), hereby
offers (the "Exchange Offer"), upon the terms and subject to the conditions set
forth in this Prospectus (this "Prospectus") and the accompanying Letter of
Transmittal (the "Letter of Transmittal") to exchange up to $125,000,000
aggregate principal amount of its 10 1/2% Senior Subordinated Notes due 2007,
Series A (the "New Notes"), which have been registered under the Securities Act
of 1933, as amended (the "Securities Act") pursuant to a Registration Statement
of which this Prospectus is a part, for a like principal amount of its issued
and outstanding 10 1/2% Senior Subordinated Notes due 2007 (the "Existing
Notes"). The New Notes and the Existing Notes, as the case may be, are referred
to herein as the "Notes". The Existing Notes were originally issued and sold in
a transaction that was exempt from registration under the Securities Act (the
"Offering") and resold to certain qualified institutional buyers in reliance on,
and subject to the restrictions imposed pursuant to, Rule 144A under the
Securities Act ("Rule 144A"). The terms of the New Notes are identical in all
material respects to the terms of the Existing Notes for which they may be
exchanged pursuant to the Exchange Offer, except that the New Notes will have
been registered under the Securities Act, and thus will not bear restrictive
legends restricting their transfer pursuant to the Securities Act.
Interest on each New Note issued pursuant to the Exchange Offer will accrue
from the last interest payment date on which interest was paid on the Existing
Notes surrendered in exchange therefor or, if no interest has been paid, from
the original date of issuance of the Existing Notes.
Interest on the Notes will be payable semi-annually on May 1 and November 1
of each year, commencing on November 1, 1997. The Notes will mature on May 1,
2007. Except as described below, the Company may not redeem the Notes prior to
May 1, 2002. On or after such date, the Company may redeem the Notes, in whole
or in part, at any time at the redemption prices set forth herein together with
accrued and unpaid interest, if any, to the date of redemption. In addition, at
any time and from time to time on or prior to May 1, 2000, the Company may
redeem up to 33 1/3% of the original aggregate principal amount of the Notes
with the Net Cash Proceeds (as defined) of one or more Public Equity Offerings
(as defined) at a redemption price equal to 110.5% of the principal amount to be
redeemed, together with accrued and unpaid interest, if any, to the date of
redemption, provided that at least 66 2/3% of the original aggregate principal
amount of the Notes remains outstanding after each such redemption. The Notes
will not be subject to any sinking fund requirement. Upon the occurrence of a
Change of Control (as defined), (i) the Company will have the option prior to
May 1, 2002, to redeem the Notes, in whole, at a redemption price equal to 100%
of the principal amount thereof plus the Applicable Premium (as defined),
together with accrued and unpaid interest, if any, to the date of redemption,
and (ii) if the Company does not redeem the Notes, or if such Change of Control
occurs on or after May 1, 2002, the Company will be required to make an offer to
repurchase the Notes at a price equal to 101% of the principal amount thereof,
together with accrued and unpaid interest, if any, to the date of repurchase.
See "Description of Notes."
The Notes will be unsecured and will be subordinated in right of payment to
all existing and future Senior Indebtedness (as defined) of the Company and will
be effectively subordinated to all obligations of the subsidiaries of the
Company. The Notes will rank pari passu with any future Senior Subordinated
Indebtedness (as defined) of the Company and will rank senior to all other
Subordinated Indebtedness (as defined) of the Company. The Notes will be
unconditionally guaranteed on an unsecured, senior subordinated basis by each
Subsidiary (as defined) of the Company (other than Foreign Subsidiaries (as
defined) and Unrestricted Subsidiaries (as defined)) that is a Significant
Subsidiary (as defined) created or acquired after the Issue Date (as defined).
As of the date hereof, none of the Company's Subsidiaries have guaranteed the
Notes. The Indenture (as defined) permits the Company to incur additional
indebtedness, including Senior Indebtedness, subject to certain limitations. As
of March 31, 1997, on a pro forma basis after giving effect to the Transactions
(as defined), the Company would have had outstanding $246.9 million (exclusive
of unused commitments) in aggregate amount of Senior Indebtedness (all of which
is secured) and no Senior Subordinated Indebtedness other than the indebtedness
represented by the Notes. See "Description of Notes -- Ranking."
The Exchange Offer is not conditioned upon any minimum number of Existing
Notes tendered. The Exchange Offer will expire at 5:00 p.m., New York City time,
on October 8, 1997, unless extended by the Company (such date as it may be so
extended, the "Expiration Date"). The date of acceptance for exchange of the
Existing Notes (the "Exchange Date") will be the first business day following
the Expiration Date, upon surrender of the Existing Notes. Existing Notes
tendered pursuant to the Exchange Offer may be withdrawn at any time prior to
the Expiration Date; otherwise such tenders are irrevocable. New Notes to be
issued in exchange for properly tendered Existing Notes will be delivered
through the facilities of The Depository Trust Company by the Exchange Agent (as
defined) promptly after the acceptance thereof.
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 18 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------
The date of this Prospectus is September 5, 1997.
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<PAGE> 4
The Existing Notes were originally issued and sold in a transaction that
was exempt from registration under the Securities Act (the "Offering") and
resold to certain qualified institutional buyers in reliance on, and subject to
the restrictions imposed pursuant to, Rule 144A under the Securities Act ("Rule
144A"). Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission") as set forth in no-action letters issued to third
parties (including Exxon Capital Holdings Corporation (available May 13, 1988),
Morgan Stanley & Co. Incorporated (available June 5, 1991), K-III Communications
Corporation (available May 14, 1993) and Shearman & Sterling (available July 2,
1993)), the Company believes that New Notes issued pursuant to the Exchange
Offer in exchange for the Existing Notes may be offered for resale, resold and
otherwise transferred by holders thereof (other than any such holder which is
(i) an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act, (ii) a broker-dealer who acquired Existing Notes directly from
the Company or (iii) a broker-dealer who acquired Existing Notes as a result of
market-making or other trading activities) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that (a) such New Notes are acquired in the ordinary course of such holder's
business, (b) at the time of the commencement of the Exchange Offer such holder
has no arrangement or understanding with any person to participate in a
distribution of the New Notes and (c) such holder is not engaged in, and does
not intend to engage in, a distribution of the New Notes. Holders of the
Existing Notes which, at the time of the commencement of the Exchange Offer, are
engaged in, intend to engage in, or have an arrangement to engage in, a
distribution of the New Notes may not rely on the applicable interpretations of
the Staff of the Commission and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any secondary
resale transaction. In addition, since the Commission has not considered the
Exchange Offer in the context of a no-action letter and, there can be no
assurance that the Staff of the Commission would make a similar determination
with respect to the Exchange Offer as in such other circumstances. Each holder
of Existing Notes that desires to participate in the Exchange Offer will be
required to make certain representations described in "The Exchange
Offer -- Terms of the Exchange Offer."
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer in exchange for Existing Notes, where such Existing Notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities must acknowledge that it will deliver a prospectus
meeting the requirements of the Securities Act and that it has not entered into
any arrangement or understanding with the Company or an affiliate of the Company
to distribute the New Notes in connection with any resale of such New Notes. A
broker-dealer that acquired Existing Notes in a transaction other than as part
of its market-making activities or other trading activities will not be able to
participate in the Exchange Offer. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of New Notes received in
exchange for Existing Notes where such Existing Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 90 days after the
Expiration Date (as defined herein), it will make this Prospectus available to
any broker-dealer for use in connection with any such resale. Any holder that
cannot rely upon such interpretations by the Staff of the Commission as set
forth in such no-action letters must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction. See "The Exchange Offer" and "Plan of Distribution."
The New Notes will be represented by one or more Global Securities (as
defined) registered in the name of a nominee of The Depository Trust Company, as
Depositary. Beneficial interest in the Global Securities will be shown on, and
transfers will be effected only through, records maintained by the Depositary
and its participants. See "Description of New Notes -- Book-Entry, Delivery and
Form."
There has not previously been any public market for the New Notes. The
Company does not intend to list the New Notes on any securities exchange or to
seek approval for quotation through any automated quotation system. There can be
no assurance that an active market for the New Notes will develop. Moreover, to
the extent that Existing Notes are tendered and accepted in the Exchange Offer,
a holder's ability to sell
3
<PAGE> 5
untendered, and tendered but unaccepted, Existing Notes could be adversely
affected. See "Risk Factors -- Lack of Established Market for the Existing
Notes."
The Company will not receive any proceeds from the Exchange Offer. The
Company has agreed to pay the expenses of the Exchange Offer. No dealer manager
is being utilized in connection with the Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE, NOR WILL THE COMPANY ACCEPT SURRENDER
FOR EXCHANGE FROM HOLDERS OF EXISTING NOTES, IN ANY JURISDICTION IN WHICH THE
EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES AND BLUE SKY LAWS OF SUCH JURISDICTION.
------------------------
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement (which
term includes any amendments thereto, the "Registration Statement") on Form S-4
under the Securities Act, with respect to the New Notes offered hereby. As
permitted by the rules and regulations of the Commission, this Prospectus does
not contain all of the information included in the Registration Statement and
the exhibits and schedules thereto. Statements contained in this Prospectus as
to the contents of any contract or other document referred to herein or therein
and filed as an exhibit to the Registration Statement are not necessarily
complete and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. For further
information with respect to the Company and the New Notes, reference is hereby
made to the Registration Statement and the exhibits and schedules thereto.
The Company is not currently subject to the periodic reporting and other
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Pursuant to the Indenture, the Company has agreed to file
with the Commission and provide to the holders of the Notes annual reports and
the information, documents and other reports that are specified in Sections 13
and 15(d) of the Exchange Act. Reports, proxy statements and other information
may be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549 and at the regional offices of the Commission located at 7 World
Trade Center, 13th Floor, New York, New York 10048 and Suite 1400, Northwestern
Atrium Center, 14th Floor, 500 West Madison Street, Chicago, Illinois 60661.
Copies of such material can also be obtained at prescribed rates by writing to
the Commission, Public Reference Section, 450 Fifth Street, N.W., Washington,
D.C. 20549 and such material is contained on the worldwide web site maintained
by the Commission at http://www.sec.gov.
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<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information, risk factors and financial
statements, including the related notes, appearing elsewhere in this Prospectus.
Unless otherwise indicated herein or the context otherwise requires, references
to (i) "Holdings" shall mean Telex Communications Group, Inc., a Delaware
corporation and the corporate parent of the Company and (ii) the "Company" or
"Telex" shall mean Telex Communications, Inc., a Delaware corporation, and its
subsidiaries and includes, as the context may require, predecessor companies.
Unless otherwise indicated, all references to fiscal years in this Prospectus
are to the fiscal years ending on March 31 of each year (e.g., Fiscal 1997
refers to the fiscal year ended March 31, 1997). In addition, all references in
this Prospectus to shares and per share data relating to Holdings have been
adjusted to reflect a 20-for-1 stock split of the Common Stock of Holdings, par
value $.0005 per share ("Holdings Common Stock"), effective as of June 25, 1997.
Capitalized terms used herein are defined in this Summary or elsewhere in this
Prospectus. Telex(R), Hy-Gain(R), Road King(R), MagnaByte(R), Audiocom(R),
Caramate(R), ProStar(R), ClassMate(R), SoundMate(R) and Adaptive Compression(R)
are registered trademarks of the Company and Voice Commander(TM), ADAM(TM),
Firefly(TM), Ear-Mike(TM), Sound Advantage(TM), RTS(TM), Posi-Phase(TM),
Acapella(TM), SoftWear(TM), Copyette(TM), ACC Series(TM), and 6120 Series(TM)
are trademarks of the Company.
THE COMPANY
COMPANY OVERVIEW
Telex is a leader in the design, manufacture and marketing of sophisticated
audio, wireless and multimedia communications equipment to commercial,
professional and industrial customers. Telex meets the needs of a diverse
customer base by offering a broad product line that includes advanced intercom
systems, wired and wireless microphones, headphones, headsets, hearing aids,
radio frequency ("RF") transmission devices, LCD projectors and antennas. Some
of the Company's products are very visible -- such as the coaches'
communications systems used by all thirty National Football League
teams -- while other products perform behind the scenes, such as the Telex(R)
RTS(TM) Digital Matrix Intercom broadcast production equipment used by all major
television networks to produce shows such as the network news programs as well
as major events such as the Olympics and the Super Bowl. The Company provides
high value-added communications products designed to meet the specific needs of
customers in commercial, professional and industrial markets, and does not
participate in the competitive retail consumer electronics market.
Under the leadership of John L. Hale, who joined Telex as Chairman,
President and Chief Executive Officer in October 1991, the Company has
reorganized its business from a manufacturing orientation to a market
orientation by creating four strategic business units that are organized around
the end markets in which the Company's products are sold. As part of this
reorganization, the Company realigned its manufacturing to directly serve the
specific requirements of its strategic business units, re-coordinated its
product development to bring products to market more quickly and bolstered its
product development efforts to focus on technologies where the Company felt it
had opportunities to achieve strong sales and high margins. From Fiscal 1992,
the first year of operations under the current management team, to Fiscal 1997,
the Company's net sales and EBITDA have increased from $112.1 million to $170.9
million and from $19.3 million to $40.0 million, respectively, representing
compound annual growth rates of 8.8% and 15.7%, respectively.
The Company serves its customers through four strategic business units,
which are:
Professional Sound and Entertainment Group. The Professional Sound and
Entertainment Group provides 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; wired and wireless microphones used in the
education, sports, broadcast, music and religious markets; and high-speed tape
duplicators used primarily by houses of worship and training programs.
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Multimedia/Audio Communications Group. The Multi-media/Audio
Communications Group supplies computer audio microphones, headsets and
headphones used to facilitate voice communications between computers and their
users; LCD video and data projectors used to make multimedia presentations; and
aircraft intercoms, microphones and headsets (including active noise reduction
headsets) for use in high-noise environments such as the cockpits of airplanes
and helicopters. Customers for computer audio microphones include a number of
computer hardware and modem manufacturers, such as Compaq, Hewlett-Packard, IBM
and U.S. Robotics. In addition, the Company sells its LCD projectors to
corporate and educational training specialists, while principal customers for
the Company's aircraft products are the major aircraft manufacturers and
airlines, including Boeing, American Airlines and Delta, as well as airport
fixed base operators.
RF/Communications Group. The RF/Communications Group offers a broad line
of acoustic accessories and antennas for various communications needs and
applications. The Company markets its products to wireless local area network
providers, public safety and law enforcement groups (police, fire departments,
emergency services, CIA, FBI and the Secret Service), amateur radio, citizens
band radio, land mobile radio, telephony and various commercial, industrial and
military markets. The RF/Communications Group also produces audio products for
the Library of Congress' talking book program.
Hearing Instruments Group. The Hearing Instruments Group markets a broad
line of high value, technologically differentiated hearing aids and other
assistive listening devices for the hearing impaired including in-the-ear,
behind-the-ear and in-the-canal hearing aids, as well as FM wireless auditory
trainers and personal assistive listening devices. The Company's patented
Adaptive Compression(R) technology offers superior signal processing and
provides the user with superior intelligibility and understanding of speech in
the presence of background noise. The Company's hearing instruments business
dates back to 1936, making it one of the oldest hearing aid manufacturers in the
United States.
COMPETITIVE STRENGTHS
The Company believes that the following competitive strengths have
contributed significantly to its historical growth and operating profitability
and serve as a foundation for continued future growth:
Brand Name Recognition and Reputation for Quality. The Company markets
quality products under a number of well respected brand names that are highly
recognized in their respective markets. These products include Telex(R)headsets,
microphones and hearing aids; RTS(TM) intercom systems; Hy-Gain(R) antenna
products; Road King(R) CB microphones; Firefly(TM) LCD projectors; and the
Adaptive Compression(R) circuitry incorporated in hearing aid products. The
Company believes its reputation for superior quality and value gives it the
ability to quickly and effectively introduce new products to its end markets.
Product Development Expertise. The Company has established a reputation
for product development expertise based on the Company's experience in the
application of: (i) acoustic transducer technology incorporated in many audio
and sound communication products such as headsets, headphones, microphones and
hearing aids; (ii) RF wireless communications technology used throughout the
Company's commercial lines as well as in its various wireless microphone,
antenna, intercom and assistive listening devices product lines; and (iii)
electromechanical engineering required in the manufacture of audio tape
duplication products and talking book players. This product development
expertise has been a contributing factor in enabling the Company to derive
approximately 45.1% of its sales in Fiscal 1997 from new and enhanced products
developed within the last five years.
Shared Product Technologies and Platforms. Many of the Company's products
utilize similar technologies and platforms derived from the Company's expertise
in acoustic transducer technology, RF wireless communications technology and
electromechanical engineering. The Company's ability to effectively serve its
numerous end markets is facilitated by these similar technologies and platforms,
as well as its cost-effective, vertically integrated manufacturing, allowing the
Company to leverage its product development, manufacturing and marketing across
a wide variety of applications and end markets. The Company believes that this
ability to leverage its core strengths across multiple end markets gives it a
distinct competitive advantage by enabling it to establish and maintain strong
market positions for its products.
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<PAGE> 8
Flexible Cost-Effective Manufacturing. The Company's vertically integrated
manufacturing processes and well-educated non-union workforce enable it to
respond quickly and cost-effectively to changing markets and customer
requirements. The Company believes that its average U.S. direct labor wage rate
is significantly below the U.S. average. In addition, the Company has recently
opened a manufacturing facility in Mexico and begun to shift labor intensive
manufacturing to this facility, thereby further increasing manufacturing and
operating efficiencies.
Extensive Distribution Network. The Company maintains distribution
relationships with over 10,000 distributors, dealers, manufacturers'
representatives and hearing aid dispensers in the United States and
internationally. The Company believes that it is the largest vendor in many of
its product markets and that its size enables it to command strong sales support
from its distribution network. Due to its extensive and supportive distribution
network, along with the Company's strong product introduction capabilities, the
Company believes it has the ability to quickly and effectively introduce new
products to worldwide markets.
Proven and Incentivized Management Team. The Company's senior management
team, led by Mr. Hale, has an average of 23 years of experience in the
communications equipment industry and has extensive technical, marketing and
management experience in the industry. Under the current senior management team,
the Company has experienced significant growth in revenues and EBITDA and strong
productivity improvement due to its focus on production efficiencies and
continuous productivity improvements throughout its entire organization.
Reflecting this focus, the Company's revenue per employee has grown from
approximately $85,000 in Fiscal 1994 to approximately $116,000 in Fiscal 1997.
The management of the Company currently owns approximately 20% of the fully
diluted equity of Holdings (giving effect to the Rollover Options, but without
giving effect to any of the options which were granted to management under a new
option plan adopted by the Company on the Recapitalization Closing Date). See
"Management -- 1997 Stock Option Plan."
BUSINESS STRATEGY
The Company's strategy is to further increase revenues and improve
operating margins by (i) continuing to focus on the introduction of new
products, (ii) increasing operating efficiencies, (iii) expanding its
international presence and (iv) pursuing strategic acquisitions.
Introduce New Products. The Company has implemented a number of strategic
initiatives to identify new market opportunities and to facilitate the timely
introduction of new and enhanced products. For example, the Company has formed
certain product development groups, such as the Acoustics Group, which leverages
its experience in the design and manufacture of headsets used in a variety of
markets such as aviation, education and professional audio equipment. In
addition, the Company has expanded its marketing efforts to sell computer audio
microphones, headsets and headphones to the computer and modem manufacturers and
computer-user markets and expects to offer more products to these markets in the
future. Management believes that this increased focus on product development
initiatives will enable the Company to design new products that address
developing markets and offer advantages over existing products in terms of
features, quality, reliability and cost. In connection with these initiatives,
the Company has also increased its investment in engineering and technology from
$5.0 million in Fiscal 1992 to $7.6 million in Fiscal 1997 and plans to continue
increasing such investments in the future. This increased investment in
engineering and technology has enabled the Company to implement programs in
several core technologies such as digital signal processing, wireless
communications, application specific integrated circuit design and active noise
reduction and to design new products that address developing markets and offer
advantages over existing products in terms of features, quality, reliability and
cost.
Increase Operating Efficiencies. Management believes opportunities exist
to further reduce the Company's manufacturing costs and to increase its
operating efficiencies. For example, the Company opened a new manufacturing
facility in Mexico in June 1996 to which it has begun to shift labor intensive
manufacturing, such as the manufacture of microphones, cable assemblies and
subassemblies. Management plans to continue this shift in the future by
transferring the manufacture of a number of its other higher volume products to
the Mexico facility. In addition, the Company is in the process of implementing
a $6.4 million capital expenditure
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<PAGE> 9
project, expected to be completed in Fiscal 1998, to replace and upgrade its
computer information systems. Management estimates that these measures will
result in cost savings of approximately $4.0 million in Fiscal 1998.
Expand International Presence. The Company currently has 195 international
distributors and over 1,000 international dealers in nearly 70 countries. In
Fiscal 1997, international sales represented approximately 23.6% of net sales.
It is the Company's goal to significantly increase its percentage of
international revenue by upgrading its existing distribution channels, adding
new distributors in Asia, Australia and Eastern Europe and continuing its recent
initiative to design and manufacture new products that better meet international
standards and requirements. Towards this goal, in July 1996, the Company hired a
new vice president of international operations and recently opened additional
international sales offices (i) in Amsterdam and Paris to provide improved
support of, and to upgrade the quality of, the existing distribution channels to
the Company's established Western European markets, and (ii) in Prague to open
new distribution channels to the emerging Eastern European markets.
Pursue Strategic Acquisitions. Many of the industries in which the Company
competes are highly fragmented, which management believes present acquisition
opportunities. Subject to market conditions and the availability of financing,
the Company plans to pursue acquisition opportunities that complement and expand
its core businesses or that enable the Company to enter related or complementary
markets. Management believes that it can leverage the Company's superior
manufacturing, distribution and administrative capabilities to generate
significant incremental revenue and cash flow through strategic acquisitions.
Since 1989, the Company has successfully integrated five business acquisitions
into its existing operations.
THE TRANSACTIONS
On May 6, 1997, (the "Recapitalization Closing Date"), the Company
completed a recapitalization (the "Recapitalization") pursuant to an Agreement
(the "Recapitalization Agreement") among the Company, Greenwich II, LLC ("GII"),
a Delaware limited liability company formed by Greenwich Street Capital
Partners, L.P. ("GSCP") and certain other investors, and GST Acquisition Corp.
("GST"), a Delaware corporation and a wholly owned subsidiary of G-II. In
connection with the Recapitalization, all of the shares of common stock of
Holdings ("Holdings Common Stock") and all options and warrants to acquire
Holdings Common Stock (other than certain shares of Holdings Common Stock and
certain options to acquire Holdings Common Stock owned by certain members of
management of the Company) were converted into the right to receive an aggregate
amount of cash (the "Recapitalization Consideration") equal to approximately
$253.9 million. In addition, in connection with the Recapitalization Agreement,
certain shares of Holdings Common Stock held by management of the Company (such
shares, the "Rollover Shares") and certain options to acquire additional shares
of Holdings Common Stock (the "Rollover Options" and, together with the Rollover
Shares, the "Management Equity Rollover"), with an aggregate value of
approximately $21.2 million (approximately 20% of the fully diluted equity of
Holdings, giving effect to the Rollover Options) were retained by such managers.
In connection with the Recapitalization, the Company completed (i) a tender
offer (the "Tender Offer") to repurchase all of the $100.0 million aggregate
outstanding principal amount of the 12% Senior Notes due 2004 of the Company
(the "Telex Notes") and (ii) a solicitation (the "Solicitation") of consents
with respect to certain amendments to the Indenture pursuant to which the Telex
Notes were issued. The Recapitalization, the financing thereof (including the
Offering), the Tender Offer and the payment of the related fees and expenses are
herein referred to as the "Transactions." See "The Recapitalization" and
"Interests of Certain Persons."
The Transactions were financed by (i) (a) $108.4 million of new capital
(the "GST Equity Investment") provided as equity to the Company and (b) the
$21.2 million Management Equity Rollover, (ii) a $140.0 million senior secured
credit facility (the "Senior Secured Credit Facility"), consisting of (a) a
$115.0 million term loan facility (the "Term Loan Facility"), and (b) a $25.0
million revolving credit facility (the "Revolving Credit Facility"), of which
$7.3 million would have been drawn down on the Recapitalization Closing Date had
all of the related fees and expenses been paid on such date (and of which $5.2
million was drawn down as of June 30, 1997), (iii) $125.0 million of Existing
Notes pursuant to the Offering, and (iv) $36.5 million of available cash of the
Company. Immediately after giving effect to the foregoing, the Company's unused
availability under the Revolving Credit Facility would have been approximately
$11.8
8
<PAGE> 10
million (subject to borrowing base availability). See "Capitalization" and
"Description of Senior Secured Credit Facility."
The following table sets forth the sources and uses of funds for the
Transactions. See "The Recapitalization."
<TABLE>
<CAPTION>
SOURCES (DOLLARS IN MILLIONS)
----------------------------------------------------------- ---------------------
<S> <C>
Senior Secured Credit Facility:
Revolving Credit Facility(a)............................. $ 7.3
Term Loan Facility(b).................................... 115.0
The Notes.................................................. 125.0
GST Equity Investment(c)................................... 108.4
Management Equity Rollover................................. 21.2
Closing Cash............................................... 36.5
------
Total Sources.................................... $ 413.4
======
Uses:
Purchase of Holdings Common Stock.......................... $ 253.9
Management Equity Rollover................................. 21.2
Telex Notes................................................ 100.0
Tender Offer Premium and Consent Fee(d).................... 18.3
Fees and Expenses.......................................... 20.0
------
Total Uses....................................... $ 413.4
======
</TABLE>
- ---------------
(a) In addition to amounts outstanding under the Revolving Credit Facility in
connection with the Recapitalization, $5.9 million of letters of credit were
issued under the Revolving Credit Facility on the Recapitalization Closing
Date.
(b) The Term Loan Facility consists of a Tranche A Term Loan Facility in the
aggregate principal amount of $50.0 million, which matures in 2002 and
requires quarterly principal payments by the Company until maturity, and a
Tranche B Term Loan Facility in the aggregate principal amount of $65.0
million, which matures in 2004 and requires quarterly principal payments by
the Company until maturity.
(c) Represents $83.2 million of equity of GST purchased by GSCP and certain
co-investors and $25.2 million of proceeds associated with the issuance of
the Deferred Pay Subordinated Debentures due 2009 (the "GST Subordinated
Debentures"), all of which was contributed by GST to the Company as common
equity in connection with the Transactions. See "The
Recapitalization -- Capitalization of GST."
(d) Includes the accrued interest that was paid on the Telex Notes on the
Recapitalization Closing Date.
USE OF PROCEEDS OF THE OFFERING
The Company will not receive any proceeds from the Exchange Offer. As
described above under "The Transactions", the net proceeds from the Offering,
together with other sources of financing were used to (i) repurchase the Telex
Notes, (ii) pay the Tender Offer premium and consent fee of $18.3 million,
including accrued interest on the Telex Notes, (iii) pay $253.9 million of
Recapitalization Consideration and (iv) pay approximately $20.0 million of
transaction fees and expenses.
OWNERSHIP
GSCP is a private direct equity investment fund organized in 1994 to
provide long-term capital for and make acquisitions in companies in a variety of
industries. GSCP invests in management buyouts, leveraged acquisitions,
international investment opportunities and minority investments. GSCP's
significant portfolio investments include EV International, Inc., Marcus Cable
Company, L.P., Rifkin Acquisition Partners,
9
<PAGE> 11
L.L.L.P., Mercury Radio Communications, L.P., Seguros Comercial America, S.A. de
C.V and Telegroup, Inc. GSCP and its co-investors are the owners, indirectly, of
80% of the fully diluted equity of Holdings (giving effect to the Rollover
Options), with the balance of such equity owned by certain members of management
of the Company.
THE EXCHANGE OFFERING
Registration Agreement..... The Existing Notes were issued on May 6, 1997 to
Chase Securities Inc., Morgan Stanley & Co.
Incorporated and Smith Barney Inc. (collectively,
the "Initial Purchasers"). The Initial Purchasers
resold the Existing Notes to certain qualified
institutional buyers in reliance on, and subject to
the restrictions imposed pursuant to, Rule 144A of
the Securities Act. In connection therewith, the
Company and the Initial Purchasers entered into the
Exchange and Registration Rights Agreement, dated
as of May 6, 1997 (the "Exchange and Registration
Rights Agreement"), providing, among other things,
for the Exchange Offer. See "The Exchange Offer."
The Exchange Offer......... New Notes are being offered in exchange for an
equal principal amount of Existing Notes. As of the
date hereof, $125,000,000 aggregate principal
amount of Existing Notes is outstanding. Existing
Notes may be tendered only in integral multiples of
$1,000.
Resale of New Notes........ Based on interpretations by the Staff of the
Commission as set forth in no-action letters issued
to third parties (including Exxon Capital Holdings
Corporation (available May 13, 1988), Morgan
Stanley & Co. Incorporated (available June 5,
1991), K-III Communications Corporation (available
May 14, 1993) and Shearman & Sterling (available
July 2, 1993)), the Company believes that the New
Notes issued pursuant to the Exchange Offer may be
offered for resale, resold or otherwise transferred
by any holder thereof (other than any such holder
that is a broker-dealer or an "affiliate" of the
Company within the meaning of Rule 405 under the
Securities Act) without compliance with the
registration and prospectus delivery provisions of
the Securities Act, provided that (i) such New
Notes are acquired in the ordinary course of
business, (ii) at the time of the commencement of
the Exchange Offer such holder has no arrangement
or understanding with any person to participate in
a distribution of the New Notes and (iii) such
holder is not engaged in, and does not intend to
engage in, a distribution of the New Notes. By
tendering Existing Notes in exchange for New Notes,
each holder will represent to the Company that: (i)
it is not such an affiliate of the Company, (ii)
any New Notes to be received by it will be acquired
in the ordinary course of business and (iii) at the
time of the commencement of the Exchange Offer it
had no arrangement or understanding with any person
to participate in a distribution of the New Notes
and, if such holder is not a broker-dealer, it is
not engaged in, and does not intend to engage in, a
distribution of New Notes. If a holder of Existing
Notes is unable to make the foregoing
representations, such holder may not rely on such
interpretations by the Staff of the Commission as
set forth in such no-action letters, and must
comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with any secondary resale transaction.
10
<PAGE> 12
Each broker-dealer that receives New Notes for its
own account pursuant to the Exchange Offer in
exchange for Existing Notes, where such Existing
Notes were acquired by such broker-dealer as a
result of market-making activities or other trading
activities, must acknowledge that it will deliver a
prospectus meeting the requirements of the
Securities Act and that it has not entered into any
arrangement or understanding with the Company or an
affiliate of the Company to distribute the New
Notes in connection with any resale of such New
Notes. A broker-dealer that acquired Existing Notes
in a transaction other than as part of its
market-making activities or other trading
activities will not be able to participate in the
Exchange Offer. The Letter of Transmittal states
that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to
time, may be used by a broker-dealer in connection
with resales of New Notes where such Existing Notes
were acquired by such broker-dealer as a result of
market-making activities or other trading
activities. The Company has agreed that, starting
on the Expiration Date, and ending on the close of
business 90 days after the Expiration Date, it will
make this Prospectus available to any participating
broker-dealer for use in connection with any such
resale. See "Plan of Distribution."
To comply with the securities laws of certain
jurisdictions, it may be necessary to qualify for
sale or register the New Notes prior to offering or
selling such New Notes. The Company has agreed,
pursuant to the Registration Agreement and subject
to certain specified limitations therein, to
register or qualify the New Notes for offer or sale
under the securities or "blue sky" laws of such
jurisdictions as may be necessary to permit the
holders of New Notes to trade the New Notes without
any material restrictions or limitations under the
securities laws of the several states of the United
States.
Consequences of Failure to
Exchange Existing
Notes.................... Upon consummation of the Exchange Offer, subject to
certain limited exceptions, holders of Existing
Notes who do not exchange their Existing Notes for
New Notes in the Exchange Offer will no longer be
entitled to registration rights and will not be
able to offer or sell their Existing Notes, unless
such Existing Notes are subsequently registered
under the Securities Act (which, subject to certain
limited exceptions, the Company will have no
obligation to do), except pursuant to an exemption
from, or in a transaction not subject to, the
Securities Act and applicable state securities
laws. See "The Exchange Offer -- Terms of the
Exchange Offer" and "-- Consequences of Failure to
Exchange."
Expiration Date............ 5:00 p.m., New York City time, on October 8, 1997
(30 calendar days following the commencement of the
Exchange Offer), unless the Exchange Offer is
extended, in which case the term "Expiration Date"
means the latest date and time to which the
Exchange Offer is extended.
Interest on the New
Notes...................... The New Notes will accrue interest at a rate of
10 1/2% per annum from May 6, 1997, the issue date
of the Existing Notes. Interest on the New Notes is
payable on May 1 and November 1 of each year,
commencing on November 1, 1997.
11
<PAGE> 13
Conditions to the Exchange
Offer.................... The Exchange Offer is not conditioned upon any
minimum principal amount of Existing Notes being
tendered for exchange. However, the Exchange Offer
is subject to certain customary conditions, which
may be waived by the Company. See "The Exchange
Offer -- Conditions." Except for the requirements
of applicable federal and state securities laws,
there are no federal or state regulatory
requirements to be complied with or obtained by the
Company in connection with the Exchange Offer.
Procedures for Tendering
Existing Notes........... Each holder of Existing Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together
with any other required documentation to the
Exchange Agent (as defined herein) at the address
set forth herein and effect a tender of Existing
Notes pursuant to the procedures for book-entry
transfer as provided for herein. See "The Exchange
Offer -- Procedures for Tendering" and "-- Book
Entry Transfer."
Guaranteed Delivery
Procedures............... Holders of Existing Notes who wish to tender their
Existing Notes and who cannot deliver their
Existing Notes and a properly completed Letter of
Transmittal or any other documents required by the
Letter of Transmittal to the Exchange Agent prior
to the Expiration Date may tender their Existing
Notes according to the guaranteed delivery
procedures set forth in "The Exchange
Offer -- Guaranteed Delivery Procedures."
Withdrawal Rights.......... Tenders of Existing Notes may be withdrawn to any
time prior to 5:00 p.m., New York City time, on the
Expiration Date. To withdraw a tender of Existing
Notes, a written or facsimile transmission notice
of withdrawal must be received by the Exchange
Agent at its address set forth herein under "The
Exchange Offer -- Exchange Agent" prior to 5:00
p.m., New York City time, on the Expiration Date.
Acceptance of Existing
Notes and Delivery of New
Notes.................... Subject to certain conditions, any and all Existing
Notes that are properly tendered in the Exchange
Offer prior to 5:00 p.m., New York City time, on
the Expiration Date will be accepted for exchange.
The New Notes issued pursuant to the Exchange Offer
will be delivered promptly following the Expiration
Date. See "The Exchange Offer -- Terms of the
Exchange Offer."
Certain U.S. Tax
Consequences............. The exchange of Existing Notes for New Notes should
not constitute a taxable exchange for U.S. federal
income tax purposes. See "Certain Federal Income
Tax Considerations."
Exchange Agent/Trustee..... Manufacturers and Traders Trust Company is serving
as exchange agent (the "Exchange Agent" and the
"Trustee") in connection with the Exchange Offer.
Fees and Expenses.......... All expenses incident to the Company's consummation
of the Exchange Offer and compliance with the
Registration Agreement will be borne by the
Company. See "The Exchange Offer -- Fees and
Expenses."
12
<PAGE> 14
Use of Proceeds............ The Company will not receive any proceeds from the
Exchange Offer. The net proceeds from the Offering,
together with certain other sources of financing
were used to (i) repurchase the Telex Notes, (ii)
pay the Tender Offer premium and consent fee of
$18.3 million, including accrued interest on the
Telex Notes, (iii) pay $253.9 million of
Recapitalization Consideration and (iv) pay
approximately $20.0 million of transaction fees and
expenses. See "Use of Proceeds."
SUMMARY OF TERMS OF NEW NOTES
The Exchange Offer relates to the exchange of up to $125,000,000 aggregate
principal amount of Existing Notes for an equal aggregate principal amount of
New Notes. New Notes will be entitled to the benefits of the same Indenture (as
defined therein) that governs the Existing Notes and will govern the New Notes.
The form and terms of the New Notes are identical in all material respects to
the form and terms of the Existing Notes, except that the New Notes will have
been registered under the Securities Act, and thus will not bear restrictive
legends restricting their transfer pursuant to the Securities Act. See
"Description of Notes."
Maturity................... May 1, 2007.
Interest Payment Dates..... May 1 and November 1 of each year, commencing
November 1, 1997.
Sinking Fund............... None.
Optional Redemption........ Except as described below, the Company may not
redeem the Notes prior to May 1, 2002. On or after
such date, the Company may redeem the Notes, in
whole or in part, at the redemption prices set
forth herein together with accrued and unpaid
interest, if any, to the date of redemption. In
addition, at any time and from time to time on or
prior to May 1, 2000, the Company may redeem up to
33 1/3% of the original aggregate principal amount
of the Notes with the Net Cash Proceeds (as
defined) of one or more Public Equity Offerings (as
defined) at a redemption price equal to 110.5% of
the principal amount to be redeemed, together with
accrued and unpaid interest, if any, to the date of
redemption, provided that at least 66 2/3% of the
original aggregate principal amount of the Notes
remains outstanding after each such redemption. See
"Description of Notes -- Optional Redemption."
Change of Control.......... Upon the occurrence of a Change of Control (as
defined), (i) the Company will have the option,
prior to May 1, 2002, to redeem the Notes, in
whole, at a redemption price equal to 100% of the
principal amount thereof plus the Applicable
Premium (as defined), together with accrued and
unpaid interest, if any, to the date of redemption,
and (ii) if the Company does not redeem the Notes,
or if such Change of Control occurs on or after May
1, 2002, the Company will be required to make an
offer to repurchase the Notes at a price equal to
101% of the principal amount thereof, together with
accrued and unpaid interest, if any, to the date of
repurchase. See "Description of Notes -- Change of
Control."
Subsidiary Guarantees...... The Notes will be unconditionally guaranteed on an
unsecured, senior subordinated basis by each
Subsidiary (as defined) of the Company (other than
Foreign Subsidiaries (as defined) and Unrestricted
Subsidiaries (as defined)) that is a Significant
Subsidiary (as defined) created or acquired after
the Issue Date (as defined). As of the date hereof,
none of the Company's Subsidiaries have guaranteed
the Notes. See "Description of Notes -- Note
Guarantees."
13
<PAGE> 15
Ranking.................... The Notes will be unsecured and will be
subordinated in right of payment to all existing
and future Senior Indebtedness (as defined) of the
Company and will be effectively subordinated to all
obligations of the subsidiaries of the Company. The
Notes will rank pari passu with any future Senior
Subordinated Indebtedness (as defined) of the
Company and will rank senior to all other
Subordinated Indebtedness (as defined) of the
Company. The Indenture (as defined) permits the
Company to incur additional indebtedness, including
Senior Indebtedness, subject to certain
limitations. As of June 30, 1997, the Company had
outstanding $245.2 million (exclusive of unused
commitments) in aggregate amount of Senior
Indebtedness (all of which is secured) and no
Senior Subordinated Indebtedness other than the
indebtedness represented by the Existing Notes. See
"Description of Notes -- Ranking."
Restrictive Covenants...... The indenture under which the Notes will be issued
(the "Indenture") will limit: (i) the incurrence of
additional indebtedness by the Company and its
Restricted Subsidiaries (as defined); (ii) the
layering of indebtedness; (iii) the payment of
dividends on, and redemption of, capital stock of
the Company and its Restricted Subsidiaries and the
redemption of certain subordinated obligations of
the Company and its Restricted Subsidiaries; (iv)
investments; (v) sales of assets and Restricted
Subsidiary stock; (vi) certain transactions with
affiliates; (vii) the sale or issuance of preferred
stock of Restricted Subsidiaries; (viii) the
creation and existence of liens; (ix) the types of
businesses that the Company and its Restricted
Subsidiaries may operate; and (x) consolidations,
mergers and transfers of all or substantially all
of the Company's assets. The Indenture will also
prohibit certain restrictions on distributions from
Restricted Subsidiaries. However, all of these
limitations and prohibitions are subject to a
number of important qualifications and exceptions.
See "Description of Notes -- Certain Covenants" and
"Description of Notes -- Merger and Consolidation."
RISK FACTORS
Prospective investors should carefully consider all of the information set
forth in this Prospectus and, in particular, should evaluate the specific
factors set forth under "Risk Factors" for risks involved with an investment in
the Notes, including: (i) Substantial Leverage and Debt Service Obligations;
(ii) Impact of Subordination of Notes; (iii) Impact of Security under Senior
Secured Credit Facility; (iv) Impact of Restrictive Financing Covenants; (v)
Impact of Change of Control; (vi)Fraudulent Transfer Considerations; (vii) Risks
Relating to the Company's Strategy; (viii) Patents, Trademarks and Licenses;
(ix) Impact of Significant Competition; (x) Control of the Company; (xi)
Relationship with the Library of Congress; (xii) Environmental Matters; (xiii)
Income Tax Audit; (xiv) Reliance on Single Source Suppliers; (xv) Dependence on
Key Personnel; and (xvi) Absence of Public Market; Restrictions on Transfer.
14
<PAGE> 16
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following table sets forth summary financial data of the Company for
each of the five fiscal years during the period ended March 31, 1997 and the
three month's ended June 30, 1996 and 1997. The summary financial data set forth
below with respect to fiscal years ended March 31, 1995, 1996 and 1997, are
derived from the consolidated financial statements included elsewhere in this
Prospectus, which have been audited by Ernst & Young LLP, independent auditors.
The summary financial data with respect to the fiscal years ended March 31, 1993
and 1994 are derived from the consolidated financial statements of the Company
that are not included in this Prospectus. The data presented for the three
months ended June 30, 1996 and 1997 are derived from the unaudited consolidated
financial statements included elsewhere in this Prospectus and include, in the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the data for such periods. The pro
forma financial data have been derived from the Unaudited Pro Forma Consolidated
Financial Information and the related notes thereto included elsewhere in this
Prospectus. The pro forma information does not purport to represent what the
Company's results would have actually been if the Transactions had occurred on
the dates indicated nor does such information purport to project the results of
the Company for any future period. The summary financial data below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Unaudited Pro Forma Consolidated
Financial Information," "Selected Historical and Pro Forma Financial
Information" and the consolidated financial statements and notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31, THREE MONTHS ENDED JUNE 30,
--------------------------------------------------------------- -----------------------------
PRO PRO
FORMA FORMA
1993 1994 1995 1996 1997 1997(h) 1996 1997(I) 1997(H)
-------- -------- -------- -------- -------- -------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................ $122,827 $132,389 $141,572 $145,348 $170,881 $170,881 $37,204 $ 39,544 $ 39,544
Gross profit..................... 45,055 47,148 52,024 55,228 71,257 71,257 15,871 16,059 16,059
Engineering and development...... 4,357 5,378 6,138 6,756 7,645 7,645 1,728 2,429 2,429
Marketing........................ 15,251 15,080 15,865 16,678 18,628 18,628 4,333 5,670 5,670
General and administrative....... 6,385 7,477 7,545 7,510 8,917 16,528 1,980 11,251 3,841
Other operating expenses(a)...... 4,558 4,308 6,286 3,385 1,648 3,368 412 794 962
Special charges(b)............... -- -- -- 13,785 -- -- -- -- --
Operating profit (loss).......... 14,504 14,905 16,190 7,114 34,419 25,088 7,418 (4,085) 3,157
Interest expense................. 11,079 10,120 12,490 12,517 12,513 24,988 3,152 7,043 6,224
Extraordinary loss, net of
tax(c)......................... -- -- (3,239) -- -- -- -- (10,553) --
Net income (loss)................ 3,257 3,914 68 (4,104) 14,325 148 2,943 (23,900) (1,724)
OTHER FINANCIAL DATA:
EBITDA(d)........................ 22,412 23,035 25,134 16,691 40,045 30,714 8,857 (2,454) 4,788
EBITDA margin(e)................. 18.2% 17.4% 17.8% 11.5% 23.4% 18.0% 23.8% (6.2)% 12.1%
Depreciation and amortization.... 7,908 8,130 8,944 9,577 5,626 5,626 1,439 1,631 1,631
Capital expenditures............. 2,697 4,377 3,596 3,320 8,685 8,685 2,241 1,092 1,092
Cash interest expense............ 23,601 4,195
Cash flow provided by
operations..................... 10,892 14,967 10,867 18,528 21,426 -- 5,682 296 --
Cash flow used by investing
activities..................... (2,697) (4,377) (3,596) (3,320) (8,685) -- (2,241) (1,092) --
Cash flow used by financing
activities..................... (16,631) (1,750) (12,317) -- -- -- -- (34,800) --
Ratio of EBITDA to cash interest
expense........................ 1.3x 1.1x
Ratio of earnings to fixed
charges(f)..................... 1.4x 1.5x 1.3x --(g) 2.9x 1.0x 2.5x --(g) --(g)
</TABLE>
<TABLE>
<CAPTION>
AS OF
MARCH 31, AS OF
1997 JUNE 30, 1997
------------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................ $ 35,742 $ 146
Working capital...................................................................... 64,123 32,264
Total assets......................................................................... 140,816 130,792
Total debt........................................................................... 100,000 245,200
Shareholder's equity (deficit)....................................................... 6,256 (143,483)
</TABLE>
See Notes to Summary Historical and Pro Forma Financial Information
15
<PAGE> 17
NOTES TO SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
(a) Other operating expenses consist of corporate charges and amortization of
goodwill and other intangibles.
(b) Special charges for Fiscal 1996 consist primarily of write-offs associated
with the Company's adoption of Statement of Financial Accounting Standards
(SFAS) No. 121 "Accounting for Impairment of Long Lived Assets and Assets to
be Disposed Of" in the fourth quarter of Fiscal 1996 ($13,345,000) -- all of
which was non-cash, a loss associated with the closing of a manufacturing
facility ($239,000) and the accrual of severance benefit payable to
employees at such facility ($201,000). Excluding these charges, historical
operating profit and net income for Fiscal 1996 would have been $20,899,000
and $7,329,000, respectively. For further discussion, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Fiscal 1996 compared to Fiscal 1995" and Notes 1 and 2 to the
Consolidated Financial Statements included elsewhere herein.
(c) Extraordinary losses of $3,239,000 and $10,553,000, net of tax, in Fiscal
1995 and for the three months ended June 30, 1997, respectively associated
with the early retirement of debt.
(d) "EBITDA," as presented, represents earnings before interest expense, other
income, income taxes, depreciation and amortization. EBITDA is included
because management understands that such information is considered by
certain investors to be an additional basis on which to evaluate the
Company's ability to pay interest, repay debt and make capital expenditures.
Excluded from EBITDA are interest expense, other income, income taxes,
depreciation and amortization, each of which can significantly affect the
Company's results of operations and liquidity and should be considered in
evaluating the Company's financial performance. In addition, Fiscal 1996
EDITDA has not been adjusted for the special, non-recurring charges of
$13,345,000 described in Note (b) above. Had EBITDA been adjusted for these
special charges, EBITDA in Fiscal 1996 would have been $30,036,000. EBITDA
is not intended to represent and should not be considered more meaningful
than, or an alternative to, measures of operating performance as determined
in accordance with generally accepted accounting principles. A substantial
portion of the Company's EBITDA will be required to service the Company's
payment obligations under the Senior Secured Credit Facility and the Notes.
See "Risk Factors -- Substantial Leverage and Debt Service Obligations." In
addition, the Company's use of all remaining EBITDA (after making such
required debt service payments) will be limited by the applicable
restrictive covenants in the Senior Secured Credit Facility and the
Indenture.
(e) EBITDA margin represents EBITDA as percentages of net sales.
(f) The ratio of earnings to fixed charges has been calculated by dividing
income before income taxes and fixed charges (excluding capitalized
interest) by fixed charges. Fixed charges for this purpose include interest
expense, capitalized interest, amortization of deferred financing costs and
one third of operating lease payments which are deemed to be representative
of the interest factor.
(g) Earnings for Fiscal 1996, the three months ended June 30, 1997, and the
three months ended June 30, 1997 on a pro forma basis were inadequate to
cover fixed charges by $4,284,000, $17,777,000 and $2,928,000, respectively.
Excluding the $13,785,000 special charges set forth in Note (b) above, the
ratio of earnings to fixed charges for Fiscal 1996 would have been 1.75.
Excluding the charges and expenses set forth in Note (i) below, the ratio of
earnings to fixed charges for the three months ended June 30, 1997 on a
historical basis would have been 1.0. Excluding the charges and expenses set
forth in Note (i) below, earnings for the three months ended June 30, 1997
on a pro forma basis were inadequate to cover fixed charges by $1,095,000.
(h) The pro forma statements of operations data for the fiscal year ended March
31, 1997, and the three month period ended June 30, 1997 gives effect to the
Transactions as though each had occurred as of April 1, 1996 and April 1,
1997, respectively. The pro forma data do not purport to be indicative of
the Company's financial condition or the results that would have actually
been obtained had such transactions been consummated as of the assumed dates
and for the periods presented, nor are they indicative of the Company's
results of the operations or financial condition for any future period or
date.
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<PAGE> 18
(i) Net loss for the quarter ended June 30, 1997 includes pre-tax charges and
expenses totalling $35,477,000 relating to (1) an extraordinary loss of
$17,588,000 ($10,553,000, net of tax) associated with the retirement of
debt; (2) write off of $1,674,000 of debt financing fees for the bridge loan
commitment (recorded as interest expense); (3) $8,669,000 of compensation
charges for stock options associated with the Transactions; (4) management
cash bonus of $574,000 and (5) $6,952,000 of expenses associated with the
Transactions. Excluding these charges, operating profit and net income for
the quarter ended June 30, 1997 would have been $5,158,000 and $69,000,
respectively. See Note 4 to the Condensed Consolidated Financial Statements
included elsewhere herein.
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<PAGE> 19
RISK FACTORS
In addition to the other information contained in this Prospectus, before
tendering their Existing Notes for New Notes, holders of Existing Notes should
consider carefully the following factors, which are generally applicable to the
Existing Notes and the New Notes.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS
As a result of the Transactions, the Company is highly leveraged, with
indebtedness that is substantial in relation to its shareholder's equity
(deficit). The Company's aggregate outstanding indebtedness and shareholders'
equity (deficit) as of June 30, 1997 were $245.2 million and $(143.5) million,
respectively. The Senior Secured Credit Facility and the Indenture will permit
the Company to incur or guarantee certain additional indebtedness, subject to
certain limitations. See "Selected Historical and Pro Forma Financial
Information" and "Description of Senior Secured Credit Facility."
The Company's high degree of leverage could have important consequences,
including, but not limited to, the following: (i) the Company's ability to
obtain additional financing for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may be impaired in
the future; (ii) a substantial portion of the Company's cash flow from
operations must be dedicated to the payment of principal and interest on its
indebtedness, thereby reducing the funds available to the Company for other
purposes; (iii) the Company is substantially more leveraged than certain of its
competitors, which might place the Company at a competitive disadvantage; (iv)
the Company may be hindered in its ability to adjust rapidly to changing market
conditions; and (v) the Company's substantial degree of leverage could make it
more vulnerable in the event of a downturn in general economic conditions or its
business.
The Company's ability to repay or to refinance its obligations with respect
to its indebtedness will depend on its financial and operating performance,
which, in turn, is subject to prevailing economic and competitive conditions and
to certain financial, business and other factors, many of which are beyond the
Company's control. These factors could include operating difficulties, increased
operating costs, product prices, the response of competitors, regulatory
developments, and delays in implementing strategic projects. The Company's
ability to meet its debt service and other obligations may depend in significant
part on the extent to which the Company can implement successfully its business
strategy. There can be no assurance that the Company will be able to implement
its strategy fully or that the anticipated results of its strategy will be
realized. See "Business -- Business Strategy."
If the Company's cash flow and capital resources are insufficient to fund
its debt service obligations, the Company may be forced to reduce or delay
capital expenditures, sell assets, or seek to obtain additional equity capital,
or to restructure its debt. There can be no assurance that the Company's cash
flow and capital resources will be sufficient for payment of principal of and
interest on its indebtedness in the future, or that any such alternative
measures would be successful or would permit the Company to meet its scheduled
debt service obligations. In addition, because the Company's obligations under
the Senior Secured Credit Facility will bear interest at floating rates, an
increase in interest rates could adversely affect, among other things, the
Company's ability to meet its debt service obligations.
IMPACT OF SUBORDINATION OF NOTES
The payment of principal of and interest on, and any premium or other
amounts owing in respect of, the Notes will be subordinated to the prior payment
in full of all existing and future Senior Indebtedness (as defined) of the
Company, including all amounts owing or guaranteed under the Senior Secured
Credit Facility. Consequently, in the event of a bankruptcy, liquidation,
dissolution, reorganization or similar proceeding with respect to the Company,
assets of the Company will be available to pay obligations on the Notes only
after all Senior Indebtedness of the Company has been paid in full, and there
can be no assurance that there will be sufficient assets to pay amounts due on
any or all of the Notes. See "Description of Notes -- Ranking."
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<PAGE> 20
IMPACT OF SECURITY UNDER SENIOR SECURED CREDIT FACILITY
The Indenture will permit the Company to incur or have outstanding certain
secured indebtedness, including indebtedness under the Senior Secured Credit
Facility, which is secured by pledges of all the capital stock of the Company
and each direct or indirect domestic subsidiary of the Company formed in the
future and 65% of the capital stock of each direct or indirect international
subsidiary of the Company and security interests in, or liens on, substantially
all other tangible and intangible assets located in the United States of the
Company and its domestic subsidiaries. Accordingly, if an event of default
occurs under the Senior Secured Credit Facility, the lenders thereunder will
have a prior right to the assets of the Company and such subsidiaries, and may
foreclose upon such collateral to the exclusion of the holders of the Notes,
notwithstanding the existence of an event of default with respect thereto. In
such event, such assets would first be used to repay in full amounts outstanding
under the Senior Secured Credit Facility, resulting in all or a portion of the
Company's assets and such subsidiaries' assets being unavailable to satisfy the
claims of the holders of the Notes and other unsecured indebtedness.
IMPACT OF RESTRICTIVE FINANCING COVENANTS
The Senior Secured Credit Facility and the Indenture contain a number of
significant covenants that will restrict the operations of the Company and its
subsidiaries. Under the Senior Secured Credit Facility, the Company is required
to comply with specified financial ratios and tests, including minimum fixed
charge coverage ratios, maximum leverage ratios and minimum EBITDA requirements.
There can be no assurance that the Company will be able to comply with such
covenants or restrictions in the future. The Company's ability to comply with
such covenants and other restrictions may be affected by events beyond its
control, including prevailing economic, financial and industry conditions. The
breach of any such covenants or restrictions could result in a default under the
Senior Secured Credit Facility that would permit the lenders thereto to declare
all amounts outstanding thereunder to be immediately due and payable, together
with accrued and unpaid interest, and the commitments of the lenders under the
Revolving Credit Facility to make further extensions of credit thereunder could
be terminated.
The Indenture contains a number of significant covenants that limit the
discretion of the Company's management with respect to certain business matters.
These covenants place significant restrictions on, among other things, the
ability of the Company to incur additional indebtedness, incur liens, make
investments, pay dividends or make certain other restricted payments, consummate
certain asset sales, consolidate with any other person or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of the
assets of the Company. See "Description of Notes -- Certain Covenants." In this
regard, the Indenture provides that the Company may incur additional
indebtedness for a variety of purposes, including, (i) indebtedness up to the
greater of (a) $10.0 million and (b) 10% of Consolidated Tangible Assets (as
defined in the Indenture) to finance the working capital needs of Foreign
Subsidiaries (as defined in the Indenture), (ii) indebtedness up to the greater
of (a) $7.0 million and (b) the amount equal to 7% of Consolidated Tangible
Assets to finance the purchase price of certain newly acquired property and
(iii) indebtedness up to the greater of (a) $7.0 million and (b) the amount
equal to 7% of Consolidated Tangible Assets to finance other corporate purposes.
See "Description of Notes -- Certain Covenants." The Indenture also provides
that the failure by the Company or its subsidiaries to pay when due, upon
acceleration, $5.0 million or more of other indebtedness (including indebtedness
under the Senior Credit Facility) will result in an event of default under the
Indenture. See "Description of Notes -- Defaults." In addition, the GST
Subordinated Debentures contain covenants relating to the Company are
substantially identical to the covenants in the Indenture.
IMPACT OF CHANGE OF CONTROL
The occurrence of certain of the events that would constitute a Change of
Control (as defined) may result in a default, or otherwise require repayment of
indebtedness, under both the Notes and the Senior Secured Credit Facility. In
addition, the Senior Secured Credit Facility prohibits the repayment of
indebtedness of the Notes by the Company in such an event, unless and until such
time as the indebtedness under the Senior Secured Credit Facility is repaid in
full. The Company's failure to make such repayments in such instances would
result in a default under both the Notes and the Senior Secured Credit Facility.
The
19
<PAGE> 21
inability to repay the indebtedness under the Senior Secured Credit Facility, if
accelerated, would also constitute an event of default under the Indenture,
which could have materially adverse consequences to the Company and to the
holders of the Notes. Future indebtedness of the Company may also contain
restrictions or repayment requirements with respect to certain events or
transactions that could constitute a Change of Control. In the event of a Change
of Control, there can be no assurance that the Company would have sufficient
assets to satisfy all of its obligations under the Notes or the Senior Secured
Credit Facility. See "Description of Notes -- Change of Control."
FRAUDULENT TRANSFER CONSIDERATIONS
The incurrence of indebtedness by the Company, such as the Notes, may be
subject to review under federal bankruptcy law or relevant state fraudulent
conveyance laws if a bankruptcy case or lawsuit is commenced by or on behalf of
unpaid creditors of the Company. Under these laws, if, in a bankruptcy or
reorganization case or a lawsuit by or on behalf of unpaid creditors of the
Company, a court were to find that, at the time the Company incurred
indebtedness, including indebtedness under the Notes, (i) the Company incurred
such indebtedness with the intent of hindering, delaying or defrauding current
or future creditors or (ii) (a) the Company received less than reasonably
equivalent value or fair consideration for incurring such indebtedness and (b)
the Company (1) was insolvent or was rendered insolvent by reason of any of the
Transactions, (2) was engaged, or about to engage, in a business or transaction
for which its assets constituted unreasonably small capital, (3) intended to
incur, or believed that it would incur, debts beyond its ability to pay as such
debts matured (as all of the foregoing terms are defined in or interpreted under
the relevant fraudulent transfer or conveyance statutes) or (4) was a defendant
in an action for money damages, or had a judgment for money damages docketed
against it (if, in either case, after final judgment the judgment is
unsatisfied), then such court could avoid or subordinate the amounts owing under
the Notes to presently existing and future indebtedness of the Company and take
other actions detrimental to the holders of the Notes.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the law of the jurisdiction that is being applied in any
such proceeding. Generally, however, the Company would be considered insolvent
if, at the time it incurred the indebtedness, either (i) the sum of its debts
(including contingent liabilities) is greater than its assets, at a fair
valuation, or (ii) the present fair saleable value of its assets is less than
the amount required to pay the probable liability on its total existing debts
and liabilities (including contingent liabilities) as they become absolute and
matured. There can be no assurance as to what standards a court would use to
determine whether the Company was solvent at the relevant time, or whether,
whatever standard was used, the Notes would not be avoided or further
subordinated on another of the grounds set forth above. In rendering their
opinions in connection with the initial borrowings, counsel for the Company and
counsel for the lenders will not express any opinion as to the applicability of
federal or state fraudulent transfer and conveyance laws.
The Company believes that at the time the indebtedness constituting the
Existing Notes were issued by the Company, the Company (i) was (a) neither
insolvent nor rendered insolvent thereby, (b) in possession of sufficient
capital to run its businesses effectively and (c) incurring debts within its
ability to pay as the same mature or become due and (ii) had sufficient assets
to satisfy any probable money judgment against it in any pending action. The
Company believes that at the time the indebtedness constituting the New Notes
will be incurred initially by the Company, the Company (i) will be (a) neither
insolvent nor rendered insolvent thereby, (b) in possession of sufficient
capital to run its businesses effectively and (c) incurring debts within its
ability to pay as the same mature or become due and (ii) will have sufficient
assets to satisfy any probable money judgment against it in any pending action.
In reaching the foregoing conclusions, the Company has relied upon its analyses
of internal cash flow projections and estimated values of assets and liabilities
of the Company. There can be no assurance, however, that a court passing on such
questions would reach the same conclusions.
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<PAGE> 22
RISKS RELATING TO THE COMPANY'S STRATEGY
There can be no assurance as to the extent, if at all, that the Company's
strategy will be successful.
New Product Introduction. The success of new product introductions is
dependent on several factors, including proper new product selection, timely
completion and introduction of new product designs, quality of new products and
market acceptance. It also may require substantial expenditures. There can be no
assurances that constraints on the Company's financial resources will not
adversely affect its ability to develop and market new products. In addition,
although the Company attempts to determine the specific needs of new markets,
there can be no assurance that the identified markets will in fact materialize
or that the Company's future products designed for these markets will gain
substantial market acceptance. See "Business -- Business Strategy."
International Operations. The Company's efforts to increase international
sales may be adversely affected by, among other things, changes in foreign
import restrictions and regulations, taxes, currency exchange rates, currency
and monetary transfer restrictions and regulations and economic and political
changes in the foreign nations to which the Company's products are exported.
Although the Company's international operations have generally been profitable
in the past, there can be no assurance that one or more of these factors will
not have a material adverse effect on the Company's financial position or
results of operations in the future. In addition, the Company has not registered
its significant trademarks in all foreign jurisdictions in which it does
business and there can be no assurance that attempts at registration in such
foreign jurisdictions would be successful.
Acquisitions. The Senior Secured Credit Facility limits the Company's
ability to make acquisitions and to incur indebtedness in connection with
acquisitions. In addition, any acquisitions that the Company may make would
involve risks, including the successful integration and management of acquired
technology, operations and personnel. The integration of acquired businesses may
also lead to the loss of key employees of the acquired companies and diversion
of management attention from ongoing business concerns. There can be no
assurance that any acquisition will be made, that the Company will be able to
obtain additional financing needed to finance such transactions and, if any
acquisitions are so made or formed, that they will be successful.
PATENTS, TRADEMARKS AND LICENSES
The Company relies on a combination of copyright, trademark and patent laws
to protect its intellectual property rights, and to a significant degree, on
trade secrets, confidentiality procedures and contractual provisions, which may
afford more limited legal protections. In addition, the laws of some foreign
jurisdictions may provide less protection than the laws of the United States for
the Company's proprietary rights.
Many of the Company's products are sold under the Telex(R) trademark.
Memorex Telex Corporation ("MT") has granted the Company the right to use the
Telex(R) trademark pursuant to a perpetual royalty-free license. On October 15,
1996, MT filed a voluntary petition under Chapter 11 of the United States
Bankruptcy Code. While the Company's ability to enforce such license could be
adversely affected by such filing, the Company does not believe that its rights
under such license will be materially impaired by such filing. The Company
believes, however, that if its rights to such trademark were determined to be
impaired or unenforceable, there would be a material adverse effect on the
Company's business. See "Business -- Patents, Trademarks and Licenses."
IMPACT OF SIGNIFICANT COMPETITION
Most of the markets in which the Company competes are highly competitive
and fragmented, with many of the Company's current competitors being generally
smaller than the Company. However, certain of the Company's competitors are
substantially larger than the Company and have greater financial resources. The
Company faces meaningful competition in most of its major product categories or
markets. See "Business -- Strategic Business Units." As the Company develops new
products and enters new markets it may encounter new competitors, and other
manufacturers and suppliers who currently do not offer competing products may
enter the markets in which the Company currently operates. Such new competitors
may be larger, offer
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<PAGE> 23
broader product lines and have substantially greater financial and other
resources than the Company. Such competition could negatively affect pricing and
gross margins. Although the Company has historically competed successfully in
its various markets, there can be no assurance that it will be able to continue
to do so or that the Company will be able to compete successfully in new
markets.
CONTROL OF THE COMPANY
Upon the occurrence of the Recapitalization, G-II, which is a wholly owned
subsidiary of GSCP and certain coinvestors, became the owner of approximately
80% of the issued and outstanding common stock of Holdings on a fully diluted
basis (giving effect to the Rollover Options), which in turn owns all of the
common stock of the Company. Accordingly, GSCP controls the Company and has the
power to elect all of the Company's directors, appoint new management and
approve any action requiring the approval of the holders of the Company's common
stock, including adopting amendments to the Company's certificate of
incorporation and approving mergers or sales of substantially all of the
Company's assets. GSCP is an affiliate of Travelers Group Inc., which wholly
owns the general partner of GSCP's general partner. From time to time, GSCP
considers possible combinations or dispositions of its portfolio companies as a
means of optimizing investment value. See "Management" and "Ownership of Capital
Stock."
On February 10, 1997, a wholly owned subsidiary of GSCP acquired EV
International, Inc. ("EVI"). EVI manufactures and markets a comprehensive range
of products worldwide for professional audio systems, including microphones,
mixing consoles, signal processors, amplifiers and loud speakers. The Company
and EVI do not currently have a business relationship, and although it is
possible that they, together with GSCP, may explore building such a relationship
or combining their businesses, there are no current plans or other arrangements
to do so.
RELATIONSHIP WITH THE LIBRARY OF CONGRESS
The Company has provided talking book players to the Library of Congress
for over 20 years and has historically generated a substantial portion of its
revenue from sales to the Library of Congress. During Fiscal 1997, approximately
9.5% of the Company's net sales were derived from a contract with the Library of
Congress for the provision of talking book tape players. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
Company expects to ship the last installment of talking book tape players under
its current contract with the Library of Congress in Fiscal 1998. While the
Company believes that the Library of Congress will award additional contracts to
purchase tape players based on the talking book technology for the foreseeable
future, there can be no assurance that this will be the case. In addition, the
Library of Congress' contract provides for termination of the contract at its
convenience. As a result, the Company's sales could be adversely affected by
changes in the Library of Congress' policy. The Library of Congress' contract
also has complex, legally mandated accounting and other procedural requirements,
violations of which could result in prospective suspension or debarment from
federal contracts as well as other sanctions. See "Business -- Strategic
Business Units -- RF/Communications Group."
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state, local and foreign
environmental laws and regulations including those governing the use, discharge
and disposal of hazardous substances in the ordinary course of its manufacturing
process. Although management believes that its current manufacturing operations
comply in all material respects with applicable environmental laws and
regulations, environmental legislation has been enacted and may in the future be
enacted or interpreted to create environmental liability with respect to the
Company's facilities or operations.
The Company is party to a 1988 consent decree with the predecessor to the
Nebraska Department of Environmental Quality ("NDEQ") relating to the cleanup of
hazardous waste at the Company's Lincoln, Nebraska facility. In connection with
ongoing monitoring and cleanup activities at the site and on adjacent property,
the Company has received from the NDEQ three notices of noncompliance (all of
which related to the same underlying matter). The Company is in discussions with
the NDEQ regarding future actions but
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<PAGE> 24
does not believe that the costs related to its responsibilities at the site will
result in a material adverse effect on the Company's operating income or
financial condition. NDEQ and the U.S. Environmental Protection Agency also have
requested the Company to take action in connection with a post-closure permit
and possibly to perform additional remediation at the site. The Company is not
able at this time to determine the amount of additional expenses, if any, that
may be incurred by the Company as a result of these actions.
The Company believes that compliance with current federal, state and local
environmental protection laws and provisions should not have a material adverse
effect on the operating income or financial condition of the Company. No
assurance can be given, however, that additional environmental issues relating
to presently known matters or identified sites or to other matters or sites will
not require additional, currently unanticipated investigation, assessment or
expenditures. See "Business -- Environmental Matters."
INCOME TAX AUDIT
The Internal Revenue Service (the "IRS") has conducted an audit of Holdings
and its subsidiaries with respect to taxable years 1990, 1991 and 1992. The IRS
has proposed several substantial adjustments related primarily to: (a) the
amortization of acquired intangible assets acquired in 1989 and 1990, (b)
amortization of financing costs incurred in connection with a Fiscal 1990
acquisition, and (c) deduction of fees paid for management services rendered by
a former shareholder. If the IRS positions are upheld, the Company will owe
additional income taxes (including the carryover impact of the adjustment on
subsequent years) and interest totaling approximately $14.8 million as of March
31, 1997. The Company based its intangible asset amortization deductions on
market values and useful lives determined by independent appraisal firms. During
the course of the IRS' audit, the IRS offered to settle the intangible asset
amortization issues based on the terms of its National Settlement Offer Program
which the IRS introduced in an attempt to resolve its outstanding intangible
amortization disputes. Because the Company believes that its calculation of its
amortization deduction is in accordance with the tax laws in existence at the
time of the acquisitions and that the IRS' settlement offer was inadequate, the
Company declined to accept the IRS' offer. The Company further believes that the
accounting under Statement of Financial Accounting Standards No. 109 resulting
from any likely adjustment imposed by the IRS relating to the proposed IRS
adjustments would not result in a material adjustment to current earnings,
because it would be recorded principally as an adjustment to goodwill. The IRS
is also currently conducting an audit of Holdings and its subsidiaries with
respect to taxable years 1993, 1994 and 1995.
RELIANCE ON SINGLE SOURCE SUPPLIERS
The Company's manufacturing operations primarily consist of assembly of
components and subassemblies that it manufactures or purchases from a variety of
sources. Although most components and subassemblies that the Company uses are
obtained, or are reasonably available, from numerous sources, certain of its
products and components, such as certain components used in hearing aids,
specialized tape decks for talking book players, certain magnetic heads for tape
duplication equipment, and certain other electronic components, are currently
obtained only from single suppliers. The Company currently purchases such
components on a purchase order basis in order to meet its anticipated demand,
generally for a three to six month period. The Company has to date experienced
only minor interruptions in the supply of these components, none of which has
adversely affected its operations in a material way. The Company generally
receives adequate notice of any potential disruption in the supply of sole
sourced components to ensure sufficient time to procure alternative sourcing. An
interruption in supply from any of the Company's single source suppliers in the
future, however, could result in the Company's inability to deliver products on
a timely basis, which in turn could adversely affect its operations. See
"Business -- Suppliers."
DEPENDENCE ON KEY PERSONNEL
The success of the Company depends in large part on the Company's senior
management and its ability to attract and retain other highly qualified
management personnel. There can be no assurance that the Company will be
successful in hiring or retaining key personnel. The Company has entered into
employment agreements with certain of its senior managers in connection with the
Transactions. See "Management -- Employment Agreements."
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ABSENCE OF PUBLIC MARKET; RESTRICTIONS ON TRANSFER
To the extent that Existing Notes are tendered and accepted in the Exchange
Offer, the trading market for the remaining untendered or tendered but not
accepted Existing Notes could be adversely affected. Because the Company
anticipates that most holders of the Existing Notes will elect to exchange such
Existing Notes for New Notes due to the absence of restrictions on the resale of
New Notes under the Securities Act, the Company anticipates that the liquidity
of the market for any Existing Notes remaining after the consummation of the
Exchange Offer may be substantially limited. The New Notes are new securities
for which there presently is no established market. Although the Initial
Purchasers have informed the Company that they currently intend to make a market
in the New Notes, the Initial Purchasers are not obligated to do so and any such
market making may be discontinued at any time without notice. Accordingly, there
can be no assurance as to the development or liquidity of any market for the New
Notes. The Company does not intend to apply for listing of the New Notes on any
securities exchange or for quotation of the New Notes through the National
Association of Securities Dealers Automated Quotation System. See "Transfer
Restrictions" and "Plan of Distribution."
The liquidity of, and trading market for, the New Notes also may be
adversely affected by general declines in the market or by declines in the
market for similar securities. Such declines may adversely affect such liquidity
and trading markets independent of the financial performance of, and prospects
for, the Company.
USE OF PROCEEDS
There will be no cash proceeds payable to the Company from the issuance of
the New Notes pursuant to the Exchange Offer. The proceeds of the Offering,
together with the GST Equity Investment, approximately $122.3 million of the
aggregate proceeds under the Senior Secured Credit Facility and the cash and
cash equivalents of the Company as of immediately prior to the Effective Time
("Closing Cash"), were used to (i) repurchase the Telex Notes, (ii) pay the
Tender Offer premium and consent fee of $18.3 million, including accrued
interest on the Telex Notes, (iii) pay approximately $253.9 million of
Recapitalization Consideration and (iv) pay approximately $20.0 million of
transaction fees and expenses.
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<PAGE> 26
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1997 and June 30, 1997. This table should be read in conjunction with
"Use of Proceeds," "Unaudited Pro Forma Consolidated Financial Information,"
"Selected Historical and Pro Forma Financial Information," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and the notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997 JUNE 30, 1997
-------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................ $ 35,742 $ 146
======== =========
Long-term debt (including current portion):
Telex Notes......................................... 100,000 --
Revolving Credit Facility(a)........................ -- 5,200
Term Loan Facility(b)............................... -- 115,000
The Notes........................................... -- 125,000
-------- ---------
Total long-term debt........................... 100,000 245,200
Total common shareholder's equity (deficit).............. 6,256 (143,483)
-------- ---------
Total capitalization..................................... $106,256 $ 101,717
======== =========
</TABLE>
- ---------------
(a) Borrowings of up to $25.0 million under the Revolving Credit Facility are
available for working capital and general corporate purposes, including up
to $10.0 million for letters of credit. As of June 30, 1997, the Company's
unused availability under the Revolving Credit Facility was approximately
$15.3 million, subject to borrowing base limitations. See "Description of
Senior Secured Credit Facility."
(b) The Term Loan Facility consists of the Tranche A Term Loan Facility and the
Tranche B Term Loan Facility. The Tranche A Term Loan Facility matures in
2002, and requires quarterly principal payments by the Company until
maturity. The Tranche B Term Loan Facility matures in 2004, and requires
quarterly principal payments by the Company until maturity. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," "Use of Proceeds" and
"Description of Senior Secured Credit Facility."
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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following Unaudited Pro Forma Consolidated Statements of Operations of
the Company for the year ended March 31, 1997 and the three months ended June
30, 1997 have been prepared to reflect the consummation of the Transactions. The
Unaudited Pro Forma Consolidated Statements of Operations for the year ended
March 31, 1997 and the three months ended June 30, 1997 have been prepared as if
such Transactions occurred as of April 1, 1996 and April 1, 1997, respectively.
The Pro Forma Consolidated Financial Information is unaudited and not
necessarily indicative of the results that would have actually occurred if the
Transactions had been consummated on such dates, or results which may be
obtained in the future. The pro forma adjustments, as described in the Notes to
the Consolidated Unaudited Pro Forma Consolidated Statements of Operations, are
based on available information and upon certain assumptions that the Company
believes are reasonable. The Pro Forma Consolidated Financial Information should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and related
notes thereto, included elsewhere in this Prospectus.
The pro forma financial data have been derived by the application of pro
forma adjustments to the Company's historical consolidated financial statements
for the periods noted. The Transactions have been accounted for as a
recapitalization which will have no impact on the historical basis of assets and
liabilities. The pro forma financial data reflects the fact that (i) there were
no dissenting shareholders to the Transactions and (ii) all of the Telex Notes
were repurchased in the Tender Offer.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS(a) PRO FORMA
---------- -------------- ---------
<S> <C> <C> <C>
Net sales............................................... $ 170,881 $ $ 170,881
Cost of goods sold...................................... 99,624 99,624
-------- -------- --------
71,257 71,257
Operating expenses:
Engineering and development........................... 7,645 7,645
Marketing............................................. 18,628 18,628
General and administrative............................ 8,917 7,611(b) 16,528
Corporate charges..................................... -- 1,720(b) 1,720
Amortization of goodwill and other intangibles........ 1,648 1,648
-------- -------- --------
36,838 9,331 46,169
-------- -------- --------
Operating profit........................................ 34,419 (9,331) 25,088
Interest expense........................................ (12,513) (12,475)(c) (24,988)
Other income............................................ 1,671 (1,435)(d) 236
-------- -------- --------
Income before taxes..................................... 23,577 (23,241) 336
Provision for income taxes.............................. 9,252 (9,064)(f) 188
-------- -------- --------
Net income............................................ $ 14,325 $(14,177) $ 148
======== ======== ========
Other data:
EBITDA(g)............................................. $ 40,045 $ 30,714
EBITDA margin(h)...................................... 23.4% 18.0%
</TABLE>
26
<PAGE> 28
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- -------------- ---------
<S> <C> <C> <C>
Net sales............................................... $ 39,544 $ $ 39,544
Cost of goods sold...................................... 23,485 23,485
-------- -------- --------
16,059 16,059
Operating expenses:
Engineering and development........................... 2,429 2,429
Marketing............................................. 5,670 5,670
General and administrative............................ 11,251 (7,410)(a) 3,841
Corporate charges..................................... 262 168(b) 430
Amortization of goodwill and other intangibles........ 532 532
-------- -------- --------
20,144 (7,242) 12,902
-------- -------- --------
Operating profit (loss)................................. (4,085) 7,242 3,157
Interest expense........................................ (7,043) 819(c) (6,224)
Other income............................................ 303 (164)(d) 139
Transactions expense.................................... (6,952) 6,952(e) --
-------- -------- --------
Loss before taxes....................................... (17,777) 14,849 (2,928)
Benefit from income taxes............................... (4,430) 3,226(f) (1,204)
-------- -------- --------
Net loss before extraordinary item...................... (13,347) 11,623 (1,724)
Extraordinary loss on early retirement of debt, net of
tax................................................... (10,553) 10,553(a) --
-------- -------- --------
Net loss.............................................. $ (23,900) $ 22,176 $ (1,724)
======== ======== ========
Other data:
EBITDA(g)............................................. $ (2,454) $ 4,788
--------- ---------
EBITDA margin(h)...................................... (6.2)% 12.1%
--------- ---------
</TABLE>
27
<PAGE> 29
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(a) The pro forma adjustments for the period ended March 31, 1997 exclude the
extraordinary loss related to the early retirement of debt ($10,553,000, net
of tax), the Transactions expenses and the non-cash compensation charge of
$7,410,000 associated with the change in vesting terms of the Rollover
Options. Such amounts have been recorded in the historical Consolidated
Statement of Operations for the three month period ended June 30, 1997, and
as a result, are included in the pro forma adjustments for that period.
(b) Reflects management fees charged to the Company by GSCP, management bonuses
that will be incurred by the Company under its new incentive program and
non-cash compensation charges that will be incurred by the Company related
to a new option plan adopted by the Company on the Recapitalization Closing
Date (see "Management -- 1997 Stock Option Plan") (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
MARCH 31, JUNE 30,
1997 1997
---------- ------------
<S> <C> <C>
Management fee charged to the Company.................. $ 1,720 $ 168
======== ========
Estimated costs under management incentive program..... 280 --*
Non-cash compensation charge under a new option
program.............................................. 5,041 --*
Cash compensation bonus program........................ 2,290 --*
-------- --------
Additional selling, general and
administrative expenses.................... $ 7,611 $ --
======== ========
</TABLE>
* The Fiscal 1998 management incentive, new option and cash compensation bonus
programs are based upon the achievement of Fiscal 1998 performance targets.
As such, the Company has reflected a full quarter of expenses related to
these items in the historical June 30, 1997 statement of operations.
(c) Reflects net pro forma interest expense adjustment associated with the
issuance of the following securities and transactions (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
MARCH 31, JUNE 30,
1997 1997
---------- ------------
<S> <C> <C>
Elimination of interest on the Telex Notes............. $(11,967) $ (1,200)
Elimination of amortization of deferred financing costs
related to the Telex Notes........................... (359) (28)
Elimination of the write off of deferred financing
costs related to the bridge loan commitment.......... -- (1,674)
Interest expense with respect to the Senior Secured
Credit Facility and the Notes at a weighted average
interest rate of 9.49% and 9.52%, respectively....... 23,433 1,968
Amortization of deferred financing costs related to the
Transactions......................................... 1,368 115
-------- --------
Total pro forma interest expense
adjustment................................. $ 12,475 $ (819)
======== ========
</TABLE>
A 0.5% increase or decrease in the assumed weighted average interest rate
on the Senior Secured Credit Facility would change pro forma interest
expense by $609,000 for the year ended March 31, 1997 and by $152,000 for
the three months ended June 30, 1997.
(d) Reflects historical interest income that would not have been earned by the
Company had the Company's cash been used to finance the Transactions.
(e) Reflects the expenses associated with the Transactions.
28
<PAGE> 30
(f) Reflects the pro forma income tax provision (benefit) associated with pro
forma adjustments at an assumed tax rate of 39% for the year ended March 31,
1997 and 22% for the quarter ended June 30, 1997. No tax benefit for book
purposes has been provided for the tax compensation expense, resulting from
the exercise of management options, as the tax benefit is recorded directly
in equity.
(g) EBITDA, as presented, represents earnings before interest expense, other
income, income taxes, depreciation and amortization. EBITDA is included
because management understands that such information is considered by
certain investors to be an additional basis on which to evaluate the
Company's ability to pay interest expense, repay debt and make capital
expenditures. Excluded from EBITDA are interest, other income, income taxes,
depreciation and amortization, each of which can significantly affect the
Company's results of operations and liquidity and should be considered in
evaluating the Company's financial performance. EBITDA is not intended to
represent and should not be considered more meaningful than, or an
alternative to, measures of operating performance as determined in
accordance with generally accepted accounting principles. A substantial
portion of the Company's EBITDA will be required to service the Company's
payment obligations under the Senior Secured Credit Facility and the Notes.
See "Risk Factors -- Substantial Leverage and Debt Service Obligations." In
addition, the Company's use of all remaining EBITDA (after making such
required debt service payments) will be limited by the applicable
restrictive covenants in the Senior Secured Credit Facility and the
Indenture.
(h) EBITDA margin represents EBITDA as percentages of net sales.
29
<PAGE> 31
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following table sets forth selected historical financial data of the
Company for each of the five fiscal years during the period ended March 31, 1997
and the three months ended June 30, 1996 and 1997. The selected historical
financial data set forth below with respect to fiscal years ended March 31,
1995, 1996 and 1997, are derived from the consolidated financial statements
included elsewhere in this Prospectus, which have been audited by Ernst & Young
LLP, independent auditors. The selected historical financial data with respect
to the fiscal years ended March 31, 1993 and 1994 are derived from the
consolidated financial statements of the Company that are not included in this
Prospectus. The data presented for the three months ended June 30, 1996 and 1997
are derived from the unaudited consolidated financial statements included
elsewhere in this prospectus and include, in the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the data for such periods. The pro forma financial data have been
derived from the Unaudited Pro Forma Consolidated Financial Information and the
related notes thereto included elsewhere in this Prospectus. The pro forma
information does not purport to represent what the Company's results would have
actually been if the Transactions had occurred on the dates indicated nor does
such information purport to project the results of the Company for any future
period. The summary financial data below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Unaudited Pro Forma Consolidated Financial Information," "Selected
Historical and Pro Forma Financial Information" and the consolidated financial
statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31, THREE MONTHS ENDED JUNE 30,
-------------------------------------------------------------------- ------------------------------
PRO Pro
FORMA Forma
1993 1994 1995 1996 1997 1997(h) 1996 1997(i) 1997(h)
-------- -------- -------- -------- -------- -------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................. $122,827 $132,389 $141,572 $145,348 $170,881 $170,881 $37,204 $ 39,544 $39,544
Gross profit.............. 45,055 47,148 52,024 55,228 71,257 71,257 15,871 16,059 16,059
Engineering and
development............. 4,357 5,378 6,138 6,756 7,645 7,645 1,728 2,429 2,429
Marketing................. 15,251 15,080 15,865 16,678 18,628 18,628 4,333 5,670 5,670
General and
administrative.......... 6,385 7,477 7,545 7,510 8,917 16,528 1,980 11,251 3,841
Other operating
expenses(a)............. 4,558 4,308 6,286 3,385 1,648 3,368 412 794 962
Special charges(b)........ -- -- -- 13,785 -- -- -- -- --
Operating profit (loss)... 14,504 14,905 16,190 7,114 34,419 25,088 7,418 (4,085) 3,157
Interest expense.......... 11,079 10,120 12,490 12,517 12,513 24,988 3,152 7,043 6,224
Extraordinary loss, net of
tax(c).................. -- -- (3,239) -- -- -- -- (10,553) --
Net income (loss)......... 3,257 3,914 68 (4,104) 14,325 148 2,943 (23,900) (1,724)
OTHER FINANCIAL DATA:
EBITDA(d)................. 22,412 23,035 25,134 16,691 40,045 30,714 8,857 (2,454) 4,788
EBITDA margin(e).......... 18.2% 17.4% 17.8% 11.5% 23.4% 18.0% 23.8% (6.2)% 12.1%
Depreciation and
amortization............ 7,908 8,130 8,944 9,577 5,626 5,626 1,439 1,631 1,631
Capital expenditures...... 2,697 4,377 3,596 3,320 8,685 8,685 2,241 1,092 1,092
Cash interest expense..... 23,601 4,195
Cash flow provided by
operations.............. 10,892 14,967 10,867 18,528 21,426 -- 5,682 296 --
Cash flow used by
investing activities.... (2,697) (4,377) (3,596) (3,320) (8,685) -- (2,241) (1,092) --
Cash flow used by
financing activities.... (16,631) (1,750) (12,317) -- -- -- -- (34,800) --
Ratio of EBITDA to cash
interest expense........ 1.3x 1.1x
Ratio of earnings to fixed
charges(f).............. 1.4x 1.5x 1.3x --(g) 2.9x 1.0x 2.5x --(g) --(g)
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, 1997 JUNE 30, 1997
-------------- -------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................................ $ 35,742 $ 146
Working capital.................................................................................. 64,123 32,264
Total assets..................................................................................... 140,816 130,792
Total debt....................................................................................... 100,000 245,200
Shareholder's equity (deficit)................................................................... 6,256 (143,483)
</TABLE>
See Notes to Selected Historical and Pro Forma Financial Information
30
<PAGE> 32
NOTES TO SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
(a) Other operating expenses consist of corporate charges and amortization of
goodwill and other intangibles.
(b) Special charges for Fiscal 1996 consist primarily of write-offs associated
with the Company's adoption of Statement of Financial Accounting Standards
(SFAS) No. 121 "Accounting for Impairment of Long Lived Assets and Assets to
be Disposed Of" in the fourth quarter of Fiscal 1996 ($13,345,000) -- all of
which was non-cash, a loss associated with the closing of a manufacturing
facility ($239,000) and the accrual of severance benefit payable to
employees at such facility ($201,000). Excluding these charges, historical
operating profit and net income for Fiscal 1996 would have been $20,899,000
and $7,329,000, respectively. For further discussion, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Fiscal 1996 compared to Fiscal 1995" and Notes 1 and 2 to the
Consolidated Financial Statements included elsewhere herein.
(c) Extraordinary losses of $3,239,000 and $10,553,000, net of tax, in Fiscal
1995 and for the three months ended June 30, 1997, respectively associated
with the early retirement of debt.
(d) "EBITDA," as presented, represents earnings before interest expense, other
income, income taxes, depreciation and amortization. EBITDA is included
because management understands that such information is considered by
certain investors to be an additional basis on which to evaluate the
Company's ability to pay interest, repay debt and make capital expenditures.
Excluded from EBITDA are interest expense, other income, income taxes,
depreciation and amortization, each of which can significantly affect the
Company's results of operations and liquidity and should be considered in
evaluating the Company's financial performance. In addition, Fiscal 1996
EBITDA has not been adjusted for the special, non-recurring charges of
$13,345,000 described in Note (b) above. Had EBITDA been adjusted for these
special charges, EBITDA in Fiscal 1996 would have been $30,036,000. EBITDA
is not intended to represent and should not be considered more meaningful
than, or an alternative to, measures of operating performance as determined
in accordance with generally accepted accounting principles. A substantial
portion of the Company's EBITDA will be required to service the Company's
payment obligations under the Senior Secured Credit Facility and the Notes.
See "Risk Factors -- Substantial Leverage and Debt Service Obligations." In
addition, the Company's use of all remaining EBITDA (after making such
required debt service payments) will be limited by the applicable
restrictive covenants in the Senior Secured Credit Facility and the
Indenture.
(e) EBITDA margin represents EBITDA as percentages of net sales.
(f) The ratio of earnings to fixed charges has been calculated by dividing
income before income taxes and fixed charges (excluding capitalized
interest) by fixed charges. Fixed charges for this purpose include interest
expense, capitalized interest, amortization of deferred financing costs and
one third of operating lease payments which are deemed to be representative
of the interest factor.
(g) Earnings for Fiscal 1996, the three months ended June 30, 1997, and the
three months ended June 30, 1997 on a pro forma basis were inadequate to
cover fixed charges by $4,284,000, $17,777,000 and $2,928,000, respectively.
Excluding the $13,785,000 special charges set forth in Note (b) above, the
ratio of earnings to fixed charges for Fiscal 1996 would have been 1.75.
Excluding the charges and expenses set forth in Note (i) below, the ratio of
earnings to fixed charges for the three months ended June 30, 1997 on a
historical basis would have been 1.0. Excluding the charges and expenses set
forth in Note (i) below, earnings for the three months ended June 30, 1997
on a pro forma basis were inadequate to cover fixed charges by $1,095,000.
(h) The pro forma statements of operations data for the fiscal year ended March
31, 1997, and the three month period ended June 30, 1997 gives effect to the
Transactions as though each had occurred as of April 1, 1996 and April 1,
1997, respectively. The pro forma data do not purport to be indicative of
the Company's financial condition or the results that would have actually
been obtained had such transactions been consummated as of the assumed dates
and for the periods presented, nor are they indicative of the Company's
results of the operations or financial condition for any future period or
date.
31
<PAGE> 33
(i) Net loss for the quarter ended June 30, 1997 includes pre-tax charges and
expenses totalling $35,477,000 relating to (1) an extraordinary loss of
$17,588,000 ($10,553,000, net of tax) associated with the retirement of
debt; (2) write off of $1,674,000 of debt financing fees for the bridge loan
commitment (recorded as interest expense); (3) $8,669,000 of compensation
charges for stock options associated with the Transactions; (4) management
cash bonus of $574,000 and (5) $6,952,000 of expenses associated with the
Transactions. Excluding these charges, operating profit and net income for
the quarter ended June 30, 1997 would have been $5,158,000 and $69,000,
respectively. See Note 4 to the Condensed Consolidated Financial Statements
included elsewhere herein.
32
<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations covers periods before completion of the Transactions. As a
result of the Transactions, the Company has entered into new financing
arrangements and has a different capital structure. Accordingly, the results of
operations for the three months ended June 30, 1997 are not comparable to the
three months ended June 30, 1996. See "The Recapitalization," "Capitalization"
and "Description of Senior Secured Credit Facility." For further discussion
relating to the impact that the Transactions may have had on the Company, see
"Risk Factors," "Selected Historical and Pro Forma Financial Information," "Pro
Forma Consolidated Financial Information," "The Recapitalization" and the
Consolidated Financial Statements and notes thereto included elsewhere in this
Prospectus.
OVERVIEW
The Company is a wholly-owned subsidiary of Holdings. Holdings has no
operations and its principal asset is its investment in the Company. The Company
designs, manufactures and markets sophisticated audio, visual and multimedia
communications equipment for commercial, professional and industrial customers.
The Company offers a broad product line that includes advanced intercom systems,
wired and wireless microphones, headsets, multimedia presentation products,
audio cassette duplicators and hearing aids. The Company focuses on commercial,
professional and industrial markets.
The predecessor company of the Company was founded in 1936 as a
manufacturer and distributor of hearing aid products and from 1973 to 1988,
operated as a wholly owned subsidiary of the Telex Corporation. In 1988, the
Telex Corporation was purchased by Memorex Telex N.V. ("Memorex"). In May 1989,
Memorex sold the assets that comprised the Company's business to Holdings and
the Company in a leveraged transaction (the "1989 Transaction"). See "-- Fiscal
1995 Compared to Fiscal 1994."
Pursuant to the Recapitalization Agreement, all of the outstanding shares
of Holdings Common Stock and options and warrants to acquire Holdings Common
Stock (other than the Rollover Shares and Rollover Options) were converted into
the right to receive an aggregate amount of cash equal to approximately $253.9
million. The Rollover Shares and Rollover Options have an aggregate value of
$21.2 million, which represents an approximate 14.3% equity interest in Holdings
on a non-diluted basis and 20.6% on a fully diluted basis.
In connection with the Transactions, Holdings completed the tender offer to
repurchase all the Company's $100.0 million aggregate outstanding principal
amount of the Telex Note including premium and consent fees along with accrued
interest for $118.3 million. The Company recorded the bond premium, consent and
tender fees along with the write-off of deferred financing costs, which totalled
$17.6 million ($10.6 million net of income taxes) in the first quarter of Fiscal
1998 as an extraordinary loss on the early retirement of debt.
The Transactions were financed by (i) $108.4 million of new equity provided
by GSCP and certain other co-investors, (ii) the Rollover Shares and Rollover
Options valued at $21.2 million, (iii) the issuance of a $140.0 million Senior
Secured Credit Facility consisting of (a) a $115.0 million Term Loan Facility,
all of which was drawn at closing and (b) a $25.0 million Revolving Credit
Facility, of which $5.0 million was drawn at closing, (iv) $125.0 million of
Notes, and (v) $36.5 million of available cash of the Company.
Pursuant to the Transactions, the basis of all assets and liabilities will
be retained for financial reporting purposes, and the repurchases of existing
Holdings Common Stock and issuance of new Holdings Common Stock have been
accounted for as equity transactions.
Compensation expense of $7.4 million related to the extension of terms on
the Rollover Options was recognized in the first quarter of Fiscal 1998. In
addition, as part of the Transactions, the Company granted options to purchase
shares of Holdings' Common Stock at a discount from fair value to certain
management employees. Included in these option grants are 198,200 options which
have certain performance requirements for vesting to occur. The total discount
of $9.4 million will be recognized as compensation expense over the vesting or
performance period of the options, generally three to five years. During the
first quarter of Fiscal
33
<PAGE> 35
1998, the Company recognized $1.3 million of compensation expense related to
these option grants. The number of shares reflects a 20-for-1 stock split that
became effective June 25, 1997.
As a result of the Transactions, the Company's consolidated indebtedness at
June 30, 1997 increased to $245.2 million, compared to $100.0 million at March
31, 1997. See "Description of Notes" and "Description of Senior Secured Credit
Facility."
Principal and interest payments under the Senior Secured Credit Facility
and the Notes represent significant liquidity requirements for the Company.
Pursuant to the Term Loan Facility, the Company is required to make permanent
principal payments under (i) the $50.0 million Tranche A Term Loan Facility,
$3.5 million, $8.0 million, $8.0 million, $9.0 million, $13.0 million and $8.5
million of which is payable in each of Fiscal 1998, 1999, 2000, 2001, 2002 and
2003 (which has a final maturity date of November 6, 2002), respectively, and
(ii) the $65.0 million Tranche B Term Loan Facility, $0.3 million, $0.5 million,
$0.5 million, $0.5 million, $0.5 million, $12.8 million, $31.3 million and $18.8
million of which is payable in each of Fiscal 1998, 1999, 2000, 2001, 2002,
2003, 2004 and 2005 (which has a final maturity date of November 6, 2004),
respectively. In addition, under the terms of the Senior Secured Credit
Facility, the Company is required to make mandatory prepayments with (i)
non-ordinary asset sale proceeds, (ii) any additional indebtedness and equity
proceeds (with certain exceptions) and (iii) with 75% of the excess cash flow of
the Company and its subsidiaries for each fiscal year commencing on April 1,
1997 and each fiscal year thereafter. Outstanding balances under the Senior
Secured Credit Facility will bear interest at floating rates based upon the
interest rate option selected by the Company; therefore, the Company's financial
condition is and will continue to be affected by changes in prevailing interest
rates.
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
121 "Accounting for Impairment of LongLived Assets and Assets to be Disposed Of"
in the fourth quarter of Fiscal 1996. During Fiscal 1996, several business
conditions changed for the Company including the discontinuance of a number of
product lines and the closing of one of the Company's manufacturing facilities
which was intended to provide the Company with a greater level of manufacturing
efficiency. These changing business conditions had a potential impact on the
realizability of virtually all of the Company's long-lived assets, including
property, plant, equipment, identifiable intangible assets, and the goodwill
that was allocable to these assets. Accordingly, the Company evaluated the
ongoing value of each of these asset categories which related to all of the
Company's operating segments. Assets were grouped and evaluated for impairment
at the lowest level for which there are identifiable cash flows that are largely
independent of the cash flows of other groups of assets. Based on this
evaluation, the Company determined that assets to be held with a carrying value
of $18.4 million were impaired and wrote them down by $13.3 million to their
fair value. Fair value was generally based on estimated future cash flows
associated with each of the assets, discounted at a market rate of interest. As
a result of the reduced carrying amount of these assets, depreciation and
amortization expense was reduced by approximately $2.8 million in Fiscal 1997.
This charge resulted primarily from a change in the Company's accounting
policy for evaluating and measuring impairment. Under the Company's previous
accounting policy, each of the Company's operating segments' long-lived assets
to be held and used in the business were evaluated for impairment if the segment
was incurring operating losses or was expected to incur operating losses in the
future. Because of strong operating profit history and favorable prospects for
each segment, no impairment evaluation had been required in Fiscal 1995.
Considerable management judgment is necessary to estimate future discounted cash
flows. Accordingly, it is reasonably possible that the estimated discounted
future cash flows may change in the near term resulting in the need to write
these assets down further. The discounted market rate of interest used in
determining the fair value of assets written down in Fiscal 1996 under SFAS 121
was 18%. The basis for the Company's discount rate is represented by its cost of
capital, adjusted for the risk associated with the expected rate of return. The
discount rate for Fiscal 1997 remained unchanged at 18% and was approximately
16% for the quarter ended June 30, 1997. There was no identified impairment
during Fiscal 1997 or the quarter ended June 30, 1997.
The Company also plans to sell its manufacturing facility in LeSueur,
Minnesota and has recorded a loss of $0.2 million, representing the estimated
sales value, less the carrying value of the assets and related selling
34
<PAGE> 36
costs. The Company also accrued $0.2 million in Fiscal 1996 for severance
benefits payable to employees at the facility, substantially all of which was
paid in Fiscal 1997. See "Business -- Production and Facilities."
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, the Company's
net sales in thousands of dollars and statement of operations, expressed as a
percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED MARCH 31, JUNE 30,
-------------------------------- ------------------
1997 1996 1995 1997 1996
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Sales:
Professional Sound and
Entertainment................ $ 58,870 $ 52,637 $ 49,673 $13,985 $13,683
Multimedia/Audio
Communications............... 61,897 45,031 37,198 13,543 11,790
RF/Communications............... 25,320 25,000 33,052 5,508 5,768
Hearing Instruments............. 24,794 22,680 21,649 6,508 5,963
-------- -------- -------- -------- --------
Total net sales......... $170,881 $145,348 $141,572 $39,544 $37,204
======== ======== ======== ======== ========
Net Sales:
Professional Sound and
Entertainment................ 34.5% 36.2% 35.1% 35.4% 36.8%
Multimedia/Audio
Communications............... 36.2 31.0 26.3 34.2 31.7
RF/Communications............... 14.8 17.2 23.3 13.9 15.5
Hearing Instruments............. 14.5 15.6 15.3 16.5 16.0
-------- -------- -------- -------- --------
Total net sales......... 100.0 100.0 100.0 100.0 100.0
Cost of sales..................... 58.3 62.0 63.3 59.4 57.3
-------- -------- -------- -------- --------
Gross profit...................... 41.7 38.0 36.7 40.6 42.7
-------- -------- -------- -------- --------
Engineering and development....... 4.5 4.6 4.4 6.1 4.6
Marketing......................... 10.9 11.5 11.2 14.3 11.7
General and administrative........ 5.2 5.2 5.3 28.5 5.3
Amortization of goodwill and
intangibles..................... 1.0 2.3 2.5 1.3 1.1
Corporate charges................. -- -- 1.9 .7 --
Special charges................... -- 9.5 -- -- --
-------- -------- -------- -------- --------
Total operating expense........... 21.6 33.1 25.3 50.9 22.7
-------- -------- -------- -------- --------
Operating profit (loss)........... 20.1 4.9 11.4 (10.3) 20.0
Interest expense.................. (7.3) (8.6) (8.8) (17.8) (8.5)
Other income (expense)............ 1.0 0.8 0.3 0.7 1.0
Transactions expense.............. -- -- -- (17.6) --
-------- -------- -------- -------- --------
Income (loss) before income
taxes........................... 13.8 (2.9) 2.9 (45.0) 12.5
Provision (benefit) for income
taxes........................... 5.4 (0.1) 0.6 (11.2) 4.6
-------- -------- -------- -------- --------
Income (loss) before extraordinary
item............................ 8.4 (2.8) 2.3 (33.8) 7.9
Extraordinary loss on early
retirement of debt, net of
income taxes.................... -- -- (2.3) (26.7) --
-------- -------- -------- -------- --------
Net income (loss)................. 8.4% (2.8)% 0.1% (60.5)% 7.9%
======== ======== ======== ======== ========
</TABLE>
35
<PAGE> 37
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1996
Net sales increased $2.3 million (6.3%) over the same period last year due
to increased shipments in three of the Company's four business units.
Net sales of Professional Sound and Entertainment products increased $0.3
million (2.2%) for the quarter ended June 30, 1997, primarily due to increased
shipments of wireless microphone products and wired intercom systems. The
increase in wireless microphone shipments was primarily the result of new
products introduced in the fourth quarter of Fiscal 1997. The increase in
intercom shipments was principally due to growing market acceptance of the prior
years' new product introductions.
Net sales of Multimedia/Audio Communications products increased $1.8
million (14.9%) for the quarter ended June 30, 1997, primarily as a result of
increased shipments of LCD projection and aircraft communications products. The
increase in sales volume of LCD projection products resulted primarily from
increased sales of recently introduced products and the continued growth in
multimedia applications use. Sales of aircraft communication products continued
to be favorably impacted by increased demand in the aviation industry and
changes in the sales distribution channel compared to the same period last year.
Net sales of RF/Communications products decreased $0.3 million (4.5%) for
the quarter ended June 30, 1997, as a result of decreased shipments of talking
book players to the Library of Congress, partially offset by sales from a new
PCS antenna development contract.
Net sales of Hearing Instruments products increased $0.5 million (9.1%) for
the quarter ended June 30, 1997, primarily due to increased shipments of hearing
aid and auditory trainer products.
Gross profit for the quarter ended June 30, 1997 increased $0.2 million
(1.2%). Gross margin decreased 2.1 percentage points from 42.7% for the quarter
ended June 30, 1996 to 40.6% for the quarter ended June 30, 1997. The decrease
was the result of lower gross margins in the Professional Sound and
Entertainment, Multimedia/Audio Communications and Hearing Instruments segments,
partially offset by increased gross margins in the RF/Communications segment.
The decrease in the Professional Sound and Entertainment margins was due to
increased shipments of lower margin intercom systems. The decrease in
Multimedia/Audio Communications gross margin is primarily due to lower average
selling prices of LCD projection and computer audio products. The decrease in
gross margin in the Hearing Instruments unit was primarily the result of lower
margins on auditory trainer products. The gross margin in the RF/Communications
segment improved as a result of higher average selling prices on antenna
shipments and a favorable mix of higher margin product sales compared to the
same period last year.
Operating expenses (not including costs related to the Transactions of $9.5
million) increased $2.1 million (24.4%), and represented 26.6% of net sales for
the quarter ended June 30, 1997, compared to 22.7% of net sales for the same
period in Fiscal 1997. Engineering expenses increased by $0.7 million (40.6%),
primarily due to increased outside development costs incurred to accelerate new
product development. Marketing expenses increased $1.3 million (30.9%),
primarily due to increased advertising and marketing development costs
associated with new products, travel and commission expenses. Marketing expenses
represented 14.3% of sales for the quarter ended June 30, 1997, compared with
11.7% of sales for the same period last year. However, the Company expects
future marketing expenses, as a percentage of sales, to be consistent with prior
year levels. Excluding the Transactions (see "Liquidity and Capital Resources"),
general and administrative expenses were consistent with the same period in
Fiscal 1997, increasing by $28,000 (1.4%). Included in general and
administrative expenses was an annual management bonus of $0.5 million and
non-cash compensation charges of $8.7 million associated with changes in the
terms of the Rollover Options and the new option grants. Corporate charges
include fees in the amount of $0.3 million for consulting and management
services provided by GSCP under a management and services agreement.
Interest expense increased by $3.9 million (123.4%) for the quarter ended
June 30, 1997 compared to the same period last year. The increase was due to
$1.7 million of loan fees paid in connection with a bridge loan commitment
related to the Transactions and an increase in the average outstanding debt
balances.
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<PAGE> 38
The Company calculated its income tax provision (benefit) for interim
periods by estimating its annual effective tax (benefit) rate and applying this
rate to the income (loss) before income taxes for the interim period. The
effective tax (benefit) rate applied was (24.9%) and 36.8% for the three months
ended June 30, 1997 and 1996, respectively.
The Company recorded an extraordinary loss on the early retirement of debt
consisting of the bond premium, consent and tender fees, along with the
write-off of deferred financing costs associated with the repurchase and early
retirement of the Company's $100.0 million Senior Notes, which totalled $17.6
million ($10.6 million net of income taxes) in the first quarter of Fiscal 1998.
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales increased $25.5 million (17.6%), due to increased shipments in
each of the four business segments.
Net sales of Professional Sound and Entertainment products increased $6.2
million (11.8%), primarily due to increased shipments of intercom systems,
partially offset by decreased unit sales of microphone products. The increased
sales of intercom systems were in part due to continued growth in sales of new
products introduced in Fiscal 1996 and an increase in broadcast equipment
demand.
Net sales of Multimedia/Audio Communications products increased $16.9
million (37.5%), primarily as a result of increased shipments of computer audio,
LCD projection and aircraft communication products, partially offset by
decreased unit sales of slide projectors. The increase in sales volume of
computer audio and LCD projection products resulted from the continued growth of
computer audio and multimedia applications use. The aircraft communications
increase was favorably impacted by a stronger market in the aviation industry
and a change in the sales distribution channel compared to the same period in
Fiscal 1996.
Net sales of RF/Communications products increased $0.3 million (1.3%),
primarily due to increased shipments of talking book players to the Library of
Congress and wireless LAN antenna products, partially offset by reduced
shipments of military vehicular antennas. The increase in sales of talking book
players is the result of a higher unit volume and the selling price associated
with the current contract compared to the previous contract in Fiscal 1996.
Shipments of military vehicular antennas ended as the last shipments under the
remaining contract with the United States Department of Defense were made in the
fourth quarter of Fiscal 1996. The Company does not expect to ship these
products again in the foreseeable future.
Net sales of Hearing Instrument products increased $2.1 million (9.3%)
primarily due to increased shipments of hearing aid and auditory trainer
products.
Gross profit increased $16.0 million (29.0%) during Fiscal 1997. The impact
from the Company's adoption of and accounting for impairment of long-lived
assets in the fourth quarter of Fiscal 1996 increased gross profit in Fiscal
1997 by approximately $1.2 million due to lower levels of depreciation expense.
Gross margin increased 3.7 percentage points to 41.7%, compared to 38.0% in
Fiscal 1996. The gross margin increase was the result of higher margins in each
of the four business segments. The gross margin in the Professional Sound and
Entertainment segment increased slightly, primarily due to a favorable product
mix of higher margin intercom systems. The gross margin in the Multimedia/Audio
Communications segment improved, primarily due to higher margins in computer
audio, LCD projection and aircraft communications products. This increase
continued to be favorably impacted by lower production costs and productivity
improvements realized in the manufacturing processes. The gross margin in the
RF/Communications segment increased, primarily as a result of shipments under
the new talking book contract at higher prices. In addition, increased shipments
of higher margin commercial products and the absence of lower margin military
vehicular antenna shipments (as noted above) also contributed to the improved
gross margin for the RF/Communications business segment. The gross margin in the
Hearing Instruments segment increased, primarily as a result of higher selling
prices and decreased production costs of hearing aids.
During the first quarter of Fiscal 1997, the Company began initial
production at its manufacturing plant in Hermosillo, Sonora, Mexico and will be
seeking to improve its gross margins over the next several years by locating
additional portions of its manufacturing at such plant.
37
<PAGE> 39
Operating expenses increased $2.5 million (7.3%). Total operating expenses
represented 21.6% of sales for Fiscal 1997, compared with 23.6% of sales for
Fiscal 1996. The impact from the Company's adoption of and accounting for
impairment of long-lived assets in the fourth quarter of Fiscal 1996 resulted in
decreased amortization expense for Fiscal 1997 of approximately $1.6 million.
Engineering expenses increased $0.9 million (13.2%), primarily due to increased
levels of outside services and project supplies incurred in order to accelerate
new product development. Marketing expenses increased by $2.0 million (11.7%),
due to increased commissions, warranty and sales support costs related to the
increased sales volume. However, marketing expenses represented 10.9% of sales
for Fiscal 1997, compared with 11.5% of sales for Fiscal 1996. General and
administrative expenses increased $1.4 million (18.7%), primarily as a result of
increased compensation expense and costs associated with the Company's new
computer information systems project.
Other income increased $0.6 million (49.3%), primarily as a result of
increases in interest income on higher average cash balances compared to the
same period in Fiscal 1996.
The Company's effective tax rate for Fiscal 1997 was 39.2%. The Fiscal 1996
effective tax rate was not meaningful, as the Company recorded a tax benefit of
only $0.2 million despite a net loss of $4.3 million due primarily to the
nondeductible nature of amortization and impairment write-offs of goodwill.
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales increased $3.8 million (2.7%), primarily due to increased
shipments and moderate price increases in the Professional Sound and
Entertainment, Multimedia/Audio Communications and Hearing Instrument segments,
partially offset by decreased shipments in the RF/Communications segment.
Net sales of Professional Sound and Entertainment products increased $3.0
million (6.0%), primarily due to increased shipments of intercom systems and
audio cassette duplication products. Microphone sales have increased due to the
introduction of new and improved wireless products and certain price increases.
Net sales of Multimedia/Audio Communications products increased $7.8
million (21.1%), primarily as a result of increased shipments of computer audio
and LCD projection products, partially offset by decreased unit sales of audio
headsets. The increase in sales volume of computer audio products resulted from
the continued growth of computer audio and multimedia applications use.
Net sales of RF/Communications products decreased $8.1 million (24.4%),
primarily as a result of reduced shipments of talking book players to the
Library of Congress and reduced shipments of military vehicular antennas. The
decrease in sales volume of talking book players is the result of (i) a contract
which expired in the fourth quarter of Fiscal 1995 to deliver certain players
which the Company does not anticipate will be purchased by the Library of
Congress in the future; (ii) the expiration of the then most-recent contract in
July 1995; and (iii) a delay in the award of the next contract by the Library of
Congress. On August 15, 1995, the Library of Congress awarded a single contract
to the Company for furnishing talking book players valued at approximately $11.8
million (subject to certain price adjustments for foreign currency fluctuations)
to be delivered over the next 12 months, with two options each for up to 100% of
the original order. The Company began shipping under this new contract during
September 1995. On October 12, 1995, the Company was notified by the General
Accounting Office ("GAO") that a disappointed bidder had filed a protest of the
contract award. On February 9, 1996, the GAO denied the protest. On March 29,
1996, the Library of Congress exercised the first of the two options under the
current contract valued at approximately $11.6 million (subject to certain price
adjustments for foreign currency fluctuations) to be delivered in Fiscal 1997.
The Company made the last shipments of military vehicular antennas under its
remaining United States Department of Defense contract in the fourth quarter of
Fiscal 1996 and does not expect to ship these products again. Sales under the
military vehicular antenna contract accounted for 3.3% of net sales for Fiscal
1996 compared to 3.4% for Fiscal 1995.
Net sales of Hearing Instrument products increased $1.0 million (4.8%), as
a result of increased shipments of hearing aids. The increase in hearing aid
shipments is primarily due to an overall increase in volume of the Company's "in
the ear" hearing aid business, slightly offset by decreased shipments of
auditory trainer products.
38
<PAGE> 40
Gross profit increased $3.2 million (6.2%) and gross margin increased from
36.7% to 38.0%. The rate increase was the result of higher gross margins in the
Multimedia/Audio Communications, RF/Communications and Hearing Instrument
segments, partially offset by lower gross margins in the Professional Sound and
Entertainment segment, and the recording of an additional $0.5 million of
depreciation related to a shortening of lives of certain property, plant and
equipment. See Notes 1 and 2 to the Consolidated Financial Statements included
elsewhere herein. The gross margin in the Multimedia/Audio Communications
segment improved, primarily as a result of increased shipments of higher margin
computer audio products combined with lower production costs and productivity
improvements realized in manufacturing processes. The gross margin in the
Professional Sound and Entertainment segment decreased, primarily as a result of
higher than anticipated production costs for certain products and unfavorable
product mix. The gross margin in the RF/Communications segment increased,
primarily as a result of shipments under the new talking book contract at higher
prices. The gross margin in the Hearing Instruments segment increased, primarily
as a result of increased prices and decreased production costs.
Operating expenses (excluding special charges) decreased $1.5 million
(4.2%), primarily as a result of the one-time payment of $2.7 million made in
Fiscal 1995 in connection with the termination of a management consulting
agreement. Excluding the special charges recorded in Fiscal 1996, and excluding
all payments associated with a management consulting agreement in Fiscal 1995,
operating expenses represented 23.6% of net sales for Fiscal 1996, compared to
23.4% of net sales for Fiscal 1995. Engineering expenses increased $0.6 million
(10.1%), principally to accelerate new product development, and included
increases in personnel and training costs and related depreciation on new
capital equipment. Marketing expenses increased by $0.8 million (5.1%), due to
increased commissions, warranty and sales support costs related to the increased
sales volume. Marketing expenses represented 11.5% of sales for Fiscal 1996,
compared with 11.2% of sales for Fiscal 1995. General and administrative
expenses remained constant compared to the prior year.
The Company recorded a tax benefit of only $0.2 million despite a net loss
before income taxes of $4.3 million due primarily to the non-deductible nature
of amortization and impairment write-offs of goodwill. The Fiscal 1995 effective
tax rate of 20% was lower than the federal statutory rate of 34% due primarily
to a reduction in deferred tax asset valuation reserves. The Company has a net
deferred tax asset of $7.1 million at March 31, 1996. The Company will be
required to generate approximately $18.0 million of future taxable income in
order to fully realize this net asset. The Company believes that it is probable
that it will generate sufficient levels of future taxable income to realize the
net asset, based on historical taxable income levels and continued strength of
its operations. As a result of these factors, the Company reduced its valuation
reserve on deferred tax assets from $2.6 million at March 31, 1995 to zero at
March 31, 1996. Approximately $1.0 million of this adjustment was recorded as a
reduction in goodwill. See Note 7 to the Consolidated Financial Statements of
the Company included elsewhere herein.
SEASONALITY OF BUSINESS
The Company's business is not considered seasonal. Revenues between
quarters of the fiscal year are relatively stable.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a $25.0 million commitment under the Revolving Credit
Facility, subject to a borrowing base calculation. As of June 30, 1997, there
was $5.2 million outstanding and net availability under the Revolving Credit
Facility (computed by deducting approximately $4.5 million of letters of credit
outstanding) totaled $15.3 million, subject to certain borrowing base
limitations. The effective interest rate under the Company's Senior Secured
Credit Facility for the quarter ended June 30, 1997 was approximately 8.5%.
At June 30, 1997, the Company had cash and cash equivalents of $0.1 million
compared to $35.7 million at March 31, 1997. The ratio of current assets to
current liabilities decreased to 2.0 to 1 at June 30, 1997, compared to 3.2 to 1
at March 31, 1997 and 2.9 to 1 at March 31, 1996. The decrease in cash and cash
equivalents and the ratio of current assets to current liabilities was the
result of the Transactions, which
39
<PAGE> 41
utilized $36.5 million of available cash. Inventory turns decreased to 4.1 for
the period ended June 30, 1997, compared to 4.4 and 3.9 for Fiscal 1997 and
1996, respectively. The increase in Fiscal 1997 inventory turns was primarily
due to increased sales volume. As the Company introduces new products, the
potential for inventory obsolescence is addressed by coordinating the phase out
of products nearing the end of their salable lives, conducting reviews for
obsolescence and related liquidation measures, and providing monthly provisions
to ensure an adequate reserve is maintained.
The Company's principal source of funds has consisted of cash generated
from operating activities. Historically, the Company's principal non-operating
uses of cash have been for interest expense, repayments of long-term debt,
capital expenditures, and certain repurchases of Holdings' securities. Net cash
provided by operations for the three months ended June 30, 1997, was $0.3
million versus $5.7 million for the comparable period in Fiscal 1997. The
decrease in cash provided by operations was primarily the result of lower
operating profit and the recording of the Transactions. Net cash used in
financing activities for the three months ended June 30, 1997, was $34.8
million, versus zero for the comparable period in 1997. The net cash used in
financing activities was for stock acquisition fees of $6.9 million, which were
charged to non-operating expense, deferred debt financing fees of $12.4 million
and bond premium, consent and tender fees paid on the early retirement of debt
of $15.1 million. Net cash provided from operations in Fiscal 1997, 1996 and
1995 amounted to $21.4 million, $18.5 million, and $10.9 million, respectively.
The increase in Fiscal 1997 was primarily due to increased sales volume and
gross margins. The increase in Fiscal 1996 was primarily due to an increase in
cash provided by operations.
The Company's capital expenditures were $1.1 million for the three months
ended June 30, 1997, compared to $2.2 million for the same period in Fiscal
1997. Capital expenditures in Fiscal 1997 were $8.7 million compared to $3.3
million in Fiscal 1996 and $3.6 million in Fiscal 1995. The increase in Fiscal
1997 capital expenditures was anticipated, as the Company began the
implementation of a project in May 1996 to replace and upgrade the Company's
computer information systems. The Fiscal 1997 capital expenditures directly
associated with this project were approximately $4.6 million. In addition, $1.0
million of capital expenditures were used to upgrade the Company's wide area
network (WAN) infrastructure and related client server hardware, in part related
to the new computer information systems project. The Company anticipates that
capital expenditures to complete this project in Fiscal 1998 will total
approximately $1.8 million. The Company anticipates total capital expenditures
for Fiscal 1998 will be approximately $4.5 million. This amount includes
approximately $2.7 million that management estimates is required for maintenance
levels of capital expenditures.
The Company will rely mainly on internally generated funds and, to the
extent necessary, borrowings under the Revolving Credit Facility, to meet its
liquidity needs. At the Recapitalization Closing Date the Company had
approximately $14.1 million available to it under the Revolving Credit Facility,
subject to borrowing base limitations, net of $5.0 million drawn under the
Revolving Credit Facility on the Recapitalization Closing Date and $5.9 million
of letters of credit outstanding under the Revolving Credit Facility. Had the
Company paid all fees and expenses related to the Transactions on the
Recapitalization Closing Date, the Company would have had approximately $11.8
million available to it under the Revolving Credit Facility, subject to
borrowing base limitations. Amounts available under the Revolving Credit
Facility will be subject to borrowing base availability and may be used for
working capital and general corporate purposes, including letters of credit,
subject to certain limitations. See "Description of Senior Secured Credit
Facility."
As a result of the Transactions, the Company's consolidated indebtedness at
June 30, 1997 increased to $245.2 million, compared to $100.0 million at March
31, 1997. The degree to which the Company is leveraged could have important
consequences, including the following: (i) the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may be impaired; (ii)
a substantial portion of the Company's cash flow from operations must be
dedicated to the payment of interest on the Company's long-term debt and its
other existing indebtedness; (iii) the agreements governing the Company's
long-term indebtedness contain certain restrictive financial and operating
covenants; (iv) the Company is substantially more leveraged than certain of its
competitors, which might place the Company at a competitive disadvantage; (v)
the Company may be hindered in its ability to
40
<PAGE> 42
adjust rapidly to changing market conditions; and (vi) the Company's substantial
degree of leverage could make it more vulnerable in the event of a downturn in
general economic conditions or its business.
Management believes that cash generated from operations, together with
amounts available under the Revolving Credit Facility, will be adequate to meet
its debt service and principal payment requirements, capital expenditure needs
and working capital requirements. However, no assurance can be given in this
regard and working capital requirements may change. The Company's future
operating performance and its ability to service its obligations under the Notes
and the Senior Secured Credit Facility will be subject to future economic
conditions and to financial, business and other factors, many of which are
beyond the Company's control. See "Risk Factors -- Substantial Leverage and Debt
Service Obligations" and "Risk Factors -- Risk Relating to the Company's
Strategy."
MANAGEMENT OF FOREIGN CURRENCY RISK
The Company enters into forward exchange contracts to hedge inventory
purchases denominated in Japanese yen on a continuing basis for periods
consistent with its inventory purchase commitments. 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 maturities which do not exceed
one year and require the Company to exchange U.S. dollars for Japanese yen at
maturity, at rates agreed to at the inception of the contracts. As of March 31,
1997, the Company had no foreign exchange contracts outstanding.
ENVIRONMENTAL MATTERS
The Company is a party in a number of environmental enforcement matters and
related claims which have arisen in the ordinary course of business. The Company
believes that such matters and claims, if finally determined in a manner adverse
to the Company, whether considered separately or in the aggregate, would not
have a material adverse effect on the operating results or financial condition
of the Company. The Company believes that compliance with current federal, state
and local environmental protection laws and provisions should not have a
material adverse effect on the operating income or financial condition of the
Company. The assessment of materiality of such environmental matters and claims
is based on a gross determination of such charges that could occur and does not
give effect to possible third party recoveries. See "Business -- Environmental
Matters."
41
<PAGE> 43
BUSINESS
GENERAL
Telex is a leader in the design, manufacture and marketing of sophisticated
audio, wireless and multimedia communications equipment to commercial,
professional and industrial customers. Telex meets the needs of a diverse
customer base by offering a broad product line that includes advanced intercom
systems, wired and wireless microphones, headphones, headsets, hearing aids, RF
transmission devices, LCD projectors and antennas. Some of the Company's
products are very visible -- such as the coaches' communications systems used by
all thirty National Football League teams -- while other products perform behind
the scenes, such as the Telex(R) RTS(TM) Digital Matrix Intercom broadcast
production equipment used by all major television networks to produce shows such
as the network news programs as well as major events such as the Olympics and
the Super Bowl. The Company provides high value-added communications products
designed to meet the specific needs of customers in commercial, professional and
industrial markets, and does not participate in the competitive retail consumer
electronics market.
Under the leadership of John L. Hale, who joined Telex as Chairman,
President and Chief Executive Officer in October 1991, the Company has
reorganized its business from a manufacturing orientation to a market
orientation by creating four strategic business units that are organized around
the end markets in which the Company's products are sold. As part of this
reorganization, the Company realigned its manufacturing to directly serve the
specific requirements of its strategic business units, re-coordinated its
product development to bring products to market more quickly and bolstered its
product development efforts to focus on technologies where the Company felt it
had opportunities to achieve strong sales and high margins. From Fiscal 1992,
the first year of operations under the current management team, to Fiscal 1997,
the Company's net sales and EBITDA have increased from $112.1 million to $170.9
million and from $19.3 million to $40.0 million, respectively, representing
compound annual growth rates of 8.8% and 15.7%, respectively.
The Company serves its customers through four strategic business units,
which are:
Professional Sound and Entertainment Group. The Professional Sound and
Entertainment Group provides 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; wired and wireless microphones used in the
education, sports, broadcast, music and religious markets; and high-speed tape
duplicators used primarily by houses of worship and training programs. The
Professional Sound and Entertainment Group had net sales of $58.9 million in
Fiscal 1997, which represented 34.5% of total net sales of the Company. See
"-- Strategic Business Units -- Professional Sound and Entertainment Group."
Multimedia/Audio Communications Group. The Multimedia/Audio Communications
Group supplies computer audio microphones, headsets and headphones used to
facilitate voice communications between computers and their users; LCD video and
data projectors used to make multimedia presentations; and aircraft intercoms,
microphones and headsets (including active noise reduction headsets) for use in
high-noise environments such as the cockpits of airplanes and helicopters.
Customers for computer audio microphones include a number of computer hardware
and modem manufacturers, such as Compaq, Hewlett-Packard, IBM and U.S. Robotics.
In addition, the Company sells its LCD projectors to corporate and educational
training specialists, while principal customers for the Company's aircraft
products are the major aircraft manufacturers and airlines, including Boeing,
American Airlines and Delta, as well as airport fixed base operators. The
Multimedia/Audio Communications Group had net sales of $61.9 million in Fiscal
1997, which represented 36.2% of total net sales of the Company. See
"-- Strategic Business Units -- Multimedia/Audio Communications Group."
RF/Communications Group. The RF/Communications Group offers a broad line
of acoustic accessories and antennas for various communications needs and
applications. The Company markets its products to wireless local area network
providers, public safety and law enforcement groups (police, fire departments,
42
<PAGE> 44
emergency services, CIA, FBI and the Secret Service) amateur radio, citizens
band radio, land mobile radio, telephony and various commercial, industrial and
military markets. The RF/Communications Group also produces audio products for
the Library of Congress' talking book program. The RF/Communications Group had
net sales of $25.3 million in Fiscal 1997, which represented 14.8% of total net
sales of the Company. See "-- Strategic Business Units -- RF/Communications
Group."
Hearing Instruments Group. The Hearing Instruments Group markets a broad
line of high value, technologically differentiated hearing aids and other
assistive listening devices for the hearing impaired including in-the-ear,
behind-the-ear and in-the-canal hearing aids, as well as FM wireless auditory
trainers and personal assistive listening devices. The Company's patented
Adaptive Compression(R) technology offers superior signal processing service and
provides the user with superior intelligibility and understanding of speech in
the presence of background noise. The Company's hearing instruments business
dates back to 1936, making it one of the oldest hearing aid manufacturers in the
United States. The Hearing Instruments Group had net sales of $24.8 million in
Fiscal 1997, which represented 14.5% of total net sales of the Company. See
"-- Strategic Business Units -- Hearing Instruments Group."
The Company's principal executive office is currently located at 9600
Aldrich Avenue South, Bloomington, Minnesota 55420. The Company's telephone
number is (612) 884-4051.
COMPETITIVE STRENGTHS
The Company believes that the following competitive strengths have
contributed significantly to its historical growth and operating profitability
and serve as a foundation for continued future growth:
Brand Name Recognition and Reputation for Quality. The Company markets
quality products under a number of well respected brand names that are highly
recognized in their respective markets. These products include Telex(R)
headsets, microphones and hearing aids; RTS(TM) intercom systems; Hy-Gain(R)
antenna products; Road King(R) CB microphones; Firefly(TM) LCD projectors; and
the Adaptive Compression(R) circuitry incorporated in hearing aid products. The
Company believes its reputation for superior quality and value gives it the
ability to quickly and effectively introduce new products to its end markets.
Product Development Expertise. The Company has established a reputation
for product development expertise based on the Company's experience in the
application of: (i) acoustic transducer technology incorporated in many audio
and sound communication products such as headsets, headphones, microphones and
hearing aids; (ii) RF wireless communications technology used throughout the
Company's commercial lines as well as in its various wireless microphone,
antenna, intercom and assistive listening devices product lines; and (iii)
electromechanical engineering required in the manufacture of audio tape
duplication products and talking book players. This product development
expertise has been a contributing factor in enabling the Company to derive
approximately 45.1% of its sales in Fiscal 1997 from new and enhanced products
developed within the last five years.
Shared Product Technologies and Platforms. Many of the Company's products
utilize similar technologies and platforms derived from the Company's expertise
in acoustic transducer technology, RF wireless communications technology and
electromechanical engineering. The Company's ability to effectively serve its
numerous end markets is facilitated by these similar technologies and platforms,
as well as its cost-effective, vertically integrated manufacturing, allowing the
Company to leverage its product development, manufacturing and marketing across
a wide variety of applications and end markets. The Company believes that this
ability to leverage its core strengths across multiple end markets gives it a
distinct competitive advantage by enabling it to establish and maintain strong
market positions for its products.
Flexible Cost-Effective Manufacturing. The Company's vertically integrated
manufacturing processes and well-educated non-union workforce enable it to
respond quickly and cost-effectively to changing markets and customer
requirements. The Company believes that its average U.S. direct labor wage rate
is significantly below the U.S. average. In addition, the Company has recently
opened a manufacturing facility in Mexico and begun to shift labor intensive
manufacturing to this facility, thereby further increasing manufacturing and
operating efficiencies.
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Extensive Distribution Network. The Company maintains distribution
relationships with over 10,000 distributors, dealers, manufacturers'
representatives and hearing aid dispensers in the United States and
internationally. The Company believes that it is the largest vendor in many of
its product markets and that its size enables it to command strong sales support
from its distribution network. Due to its extensive and supportive distribution
network, along with the Company's strong product introduction capabilities, the
Company believes it has the ability to quickly and effectively introduce new
products to worldwide markets.
Proven and Incentivized Management Team. The Company's senior management
team, led by Mr. Hale, has an average of 23 years of experience in the
communications equipment industry and has extensive technical, marketing and
management experience in the industry. Under the current senior management team,
the Company has experienced significant growth in revenues and EBITDA and strong
productivity improvement due to its focus on production efficiencies and
continuous productivity improvements throughout its entire organization.
Reflecting this focus, the Company's revenue per employee has grown from
approximately $85,000 in Fiscal 1994 to approximately $116,000 in Fiscal 1997.
The management of the Company currently owns approximately 20% of the fully
diluted equity of Holdings (giving effect to the Rollover Options, but without
giving effect to any options granted to management under a new option plan
adopted by the Company on the Recapitalization Closing Date). See
"Management -- 1997 Stock Option Plan."
BUSINESS STRATEGY
The Company's strategy is to further increase revenues and improve
operating margins by (i) continuing to focus on the introduction of new
products, (ii) increasing operating efficiencies, (iii) expanding its
international presence and (iv) pursuing strategic acquisitions.
Introduce New Products. The Company has implemented a number of strategic
initiatives to identify new market opportunities and to facilitate the timely
introduction of new and enhanced products. For example, the Company has formed
certain product development groups, such as the Acoustics Group, which leverages
its experience in the design and manufacture of headsets used in a variety of
markets such as aviation, education and professional audio equipment. In
addition, the Company has expanded its marketing efforts to sell computer audio
microphones, headsets and headphones to the computer and modem manufacturers and
computer-user markets and expects to offer more products to these markets in the
future. Management believes that this increased focus on product development
initiatives will enable the Company to design new products that address
developing markets and offer advantages over existing products in terms of
features, quality, reliability and cost. In connection with these initiatives,
the Company has also increased its investment in engineering and technology from
$5.0 million in Fiscal 1992 to $7.6 million in Fiscal 1997 and plans to continue
increasing such investments in the future. This increased investment in
engineering and technology has enabled the Company to implement programs in
several core technologies such as digital signal processing, wireless
communications, application specific integrated circuit design and active noise
reduction and to design new products that address developing markets and offer
advantages over existing products in terms of features, quality, reliability and
cost.
Increase Operating Efficiencies. Management believes opportunities exist
to further reduce the Company's manufacturing costs and to increase its
operating efficiencies. For example, the Company opened a new manufacturing
facility in Mexico in June 1996 to which it has begun to shift labor intensive
manufacturing, such as the manufacture of microphones, cable assemblies and
subassemblies. Management plans to continue this shift in the future by
transferring the manufacture of a number of its other higher volume products to
the Mexico facility. In addition, the Company is in the process of implementing
a $6.4 million capital expenditure project, expected to be completed in Fiscal
1998, to replace and upgrade its computer information systems. Management
estimates that these measures will result in cost savings of approximately $4.0
million in Fiscal 1998.
Expand International Presence. The Company currently has 195 international
distributors and over 1,000 international dealers in nearly 70 countries. In
Fiscal 1997, international sales represented approximately 23.6% of net sales.
It is the Company's goal to significantly increase its percentage of
international revenue by
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upgrading its existing distribution channels, adding new distributors in Asia,
Australia and Eastern Europe and continuing its recent initiative to design and
manufacture new products that better meet international standards and
requirements. Towards this goal, in July 1996, the Company hired a new vice
president of international operations and recently opened additional
international sales offices (i) in Amsterdam and Paris to provide improved
support of, and to upgrade the quality of, the existing distribution channels to
the Company's established Western European markets, and (ii) in Prague to open
new distribution channels to the emerging Eastern European markets.
Pursue Strategic Acquisitions. Many of the industries in which the Company
competes are highly fragmented, which management believes present acquisition
opportunities. Subject to market conditions and the availability of financing,
the Company plans to pursue acquisition opportunities that complement and expand
its core businesses or that enable the Company to enter related or complementary
markets. Management believes that it can leverage the Company's superior
manufacturing, distribution and administrative capabilities to generate
significant incremental revenue and cash flow through strategic acquisitions.
Since 1989, the Company has successfully integrated five business acquisitions
into its existing operations.
MARKET GROWTH DRIVERS
The Company seeks to achieve revenue and earnings growth by identifying and
capitalizing on favorable trends in the markets it serves. The Company believes
that a number of current trends, principally driven by changing technologies and
demographic shifts in the Company's core markets, provide attractive
opportunities for growth.
Computer multimedia. The Company believes that the burgeoning demand for
computer multimedia products, from new applications in portable and desktop
computing, the Internet, computer integrated telephony and voice activated
command and control systems, will increase demand for the Company's computer
audio and multimedia products.
Wireless communications. There is an increasing demand for wireless
communication throughout the world, which is expanding in a number of areas from
cellular phones to a variety of voice and data communications applications. The
Company expects these developments to drive demand for the Company's headsets,
microphones, antennas and other RF transmitter and receiver products.
Television programming. The Company believes that in the United States and
throughout the world, there is increasing demand for additional programming and
channels, which is being driven by the desire for special interest or thematic
programming. As cable and satellite channels convert to digital technology, the
Company expects the number of channels offered to increase significantly,
driving sales in a number of the Company's microphone, headset and intercom
products.
Aging of America. As America's "baby-boom" generation ages, the 55-59 year
old age group is expected to grow more rapidly than the general population. This
is the age at which hearing problems typically develop. Accordingly, over the
next ten years, the hearing impaired population is expected to grow five times
faster than the general population, driving demand for Telex's hearing aid
products.
Increasing air travel. The Company believes that increasing demand for air
travel, airframe production and the improving profits of the airlines will drive
demand for Telex's aviation communications products.
STRATEGIC BUSINESS UNITS
PROFESSIONAL SOUND AND ENTERTAINMENT GROUP
The Professional Sound and Entertainment Group provides 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; wired and
wireless microphones used in the education, sports, broadcast, music and
religious markets; and high-speed tape duplicators used primarily by houses of
worship and training programs. The Professional Sound and Entertainment Group
targets three
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principal product groups: (i) broadcast communications systems, (ii) sound
reinforcement and (iii) tape duplication. The Professional Sound and
Entertainment Group had net sales of $58.9 million in Fiscal 1997, which
represented 34.5% of total net sales of the Company.
Broadcast Communications Systems. Telex is a leader in broadcast
communications equipment for end markets such as sports and broadcasting. The
Company produces a broad line of broadcast communications equipment. The
Company's smallest system, the Telex(R) Audiocom(R) modular intercom system, is
used by theaters, small sporting arenas, network affiliates and independent
cable channels for their communications needs. Typically, these systems are used
to link 20 to 30 people so they can communicate during an event or performance.
The Company's middle market offering, the RTS(TM) intercom system, is used by
larger broadcast network affiliates, larger sporting venues and production
studios. This system is also used in broadcast trucks as a remote, portable
studio for news gathering or sporting events, and typically provides
communications links for 50 to 60 people at a time. The Company's high-end
product, the ADAM(TM) intercom system, is used by the major networks in order to
cover large events such as the Olympics and the Superbowl. The ADAM(TM) system
allowed NBC to provide communications in any combination between 400 separate
individuals -- from person-to-person to one person to all four hundred at a
touch of a button -- for its 1996 Summer Olympics coverage. This system was also
used by networks from Australia, Finland, Canada, Japan, Korea and other
countries for their Olympics' coverage.
Telex also provides wired and wireless communication systems and related
components to the National Football League (the "NFL") as well as high school
and college teams and World, Canadian and Arena Football Leagues. The Company's
products are visible as the Telex name is displayed on the communications
systems used by all of the coaches in the NFL. In 1996, the Company began
providing the NFL coaches with an encrypted wireless intercom system, which
allows the head coach to communicate confidentially with their offensive and
defensive coordinators on the side lines and in the booths above the fields. The
Company's principal competitors for broadcast communications equipment are
Clearcom and Philip Drake Electronics.
Sound Reinforcement. Sound Reinforcement is divided into two main product
groups: (i) wired and wireless microphones, which serve the professional needs
of sound contractors, entertainers, and speakers, and are used in a variety of
settings such as theaters, stadiums and hotels; and (ii) wireless assistive
listening devices, used by the hearing impaired to diminish the effects of
background noise and poor building acoustics in theaters, stadiums, court rooms
and other facilities using public address systems.
Telex believes that it introduced the first cost-effective wireless
microphones in 1978. Today, the Company believes that it offers one of the
industry's most extensive lines of wireless microphone, receiver and transmitter
systems, including a wide variety of hand-held, lapel microphone and guitar
options. Telex offers microphones (including noise canceling) with a wide
variety of directional patterns to meet the needs for general sound
reinforcement as well as the specific needs of users such as drummers, vocalists
and public address announcers. These lines incorporate Telex's Posi-Phase(TM)
true diversity antenna circuitry which produces a stronger signal for higher
quality sound over a longer distance without the signal dropouts or the
switching noise common in other systems. Some of the Company's wireless
microphones also incorporate an advanced proprietary multi-crystal tuning system
that allows any specific frequency to be used within the operating limits of the
receiver. The crystal control and associated radio frequency filtering provide
superior radio frequency performance and maximum protection from interference.
Principal competitors in this product group are Shure, Samson Technologies,
Nady, Azden and Sennheiser.
The second product group in Sound Reinforcement is wireless assistive
listening devices, sold to arenas, theaters, churches, funeral homes, hotels and
other public facilities. The Company's principal product in this product group
is the SoundMate(R) wireless assistive listening systems. Assistive listening
devices are now mandated by the Americans with Disabilities Act, passed in 1994,
which requires that assistive listening devices be provided to all hearing
impaired individuals free of charge at facilities using public address systems.
The Company believes that continued implementation of this law and the aging of
America's population should generate continued growth in this market. Williams
Sound and PhonicEar are the Company's primary competitors in this product group.
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Tape Duplication. Telex's cassette duplicators and copiers are primarily
used to copy the spoken word and serve two principal markets: religious (houses
of worship, missionaries and tape ministries) and training programs/seminars
(professional seminar presenters, self-improvement programs, teachers, legal
documentation and law enforcement). The Company produces a line of high-speed
audio cassette duplicators designed for "in-cassette" copying of standard audio
cassette tapes. This is in contrast to the high volume music cassette
duplication market, where bulk audio tape is copied before it is loaded into the
cassette cartridge. The current product line is comprised of four models: the
Replica(TM) and the Copyette(TM), simple portable units, the ACC Series(TM), a
duplicator that is expandable and capable of adjusting copy quality, and the
6120 Series(TM), which is capable of duplicating open-reel and cassette tapes
and meets the needs of the professional recorder. These products offer high
speed tape handling, high frequency audio circuit designs and low vibration
mechanical drives at competitive prices within their respective categories. Sony
is the Company's only significant competitor in this market. In the past three
fiscal years, the tape duplication product line has accounted for the following
percentages of the Company's net sales: Fiscal 1997 -- 10.2%; Fiscal 1996 --
11.5%; and Fiscal 1995 -- 11.5%.
MULTIMEDIA/AUDIO COMMUNICATIONS GROUP
The Multimedia/Audio Communications Group supplies computer audio
microphones, headsets and headphones used to facilitate voice communications
between computers and their users; LCD video and data projectors used to make
multimedia presentations; and aircraft intercoms, microphones and headsets
(including active noise reduction headsets) for use in high-noise environments
such as the cockpits of airplanes and helicopters. Customers for computer audio
microphones include a number of computer hardware and modem manufacturers, such
as Compaq, Hewlett-Packard, IBM and U.S. Robotics. In addition, the Company
sells its LCD projectors to corporate and educational training specialists,
while principal customers for the Company's aircraft products are the major
aircraft manufacturers and airlines, including Boeing, American Airlines and
Delta, as well as airport fixed base operators. The Multimedia/Audio
Communications Group targets three principal product markets: (i) computer
audio, (ii) multimedia presentation/training and (iii) aviation communications.
The Multimedia/Audio Communications Group had net sales of $61.9 million in
Fiscal 1997, which represented 36.2% of total net sales of the Company.
Computer Audio. The Company believes that it is the largest supplier of
microphones, headphones and headsets to the computer industry, selling a full
line of headphones, headsets and group listening centers for use in the
classroom with computers, VCRs, CD-ROMs and laserdisc players. The Company
currently sells to most of the major computer manufacturers, with whom it enjoys
close working relationships, including Compaq, Hewlett-Packard and IBM, as well
as dozens of other component and OEM manufacturers. In addition, the Company
serves the computer education market. The largest portion of the Company's
revenues are generated from the sales of computer microphones for sound and
speech recognition. Many of the Company's microphones are also sold to modem
manufacturers, such as U.S. Robotics, who then package these microphones with
their modems, to ensure compatibility of the application to the end-user. In the
past three fiscal years, the computer audio microphone product line has
accounted for the following percentages of the Company's net sales: Fiscal
1997 -- 15.4%; Fiscal 1996 -- 11.5%; and Fiscal 1995 -- 6.9%.
Multimedia Presentation/Training. The Multimedia Presentation/Training
product group also manufactures and markets projection products, such as the
Firefly(TM), a lightweight portable data/video projector, and Caramate(R) slide
projector products, which are used in many types of educational, training
institutions and presentation settings, primarily for the corporate and
educational markets. The Company's LCD projector line also includes other
lightweight and boardroom data/video projectors.
The Company believes that it has been on the technological forefront in
projector design with several patented innovations. In designing its products,
the Company has focused on the needs of its end-users. For example, in June
1996, the Company developed a revolutionary portable projector, called the
Firefly(TM) LCD Notebook Projector(TM) (patent pending). The Company believes
that the Firefly(TM) serves a significant unmet demand in the marketplace: the
increasing need for portability by the corporate user, especially from outside
salespersons, field sales offices and consultants. The Firefly(TM), which fits
in a briefcase, is the industry's smallest projector but is equal in power to
standard-sized projectors.
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The multimedia/audio communications product market is highly competitive.
Eastman Kodak is the major provider in the slide projector market (Eastman Kodak
is also the Company's largest customer of its slide projectors). In the LCD
projection market, In-Focus Systems, Sharp Electronics and Proxima are the
current market leaders.
Aviation Communications. The Company supplies a broad line of aviation
communications headsets, intercoms and microphones to major commercial and
commuter airlines and pilots as well as to airframe manufacturers. The Company's
aviation communications products are known for their design innovation,
lightweight build, technological strength and product value. The Company uses
its ANR(R) (Active Noise Reduction) patented technology in several of its
designs. David Clark is the Company's principal competitor in this market.
RF/COMMUNICATIONS GROUP
The RF/Communications Group offers a broad line of acoustic accessories and
antennas for various communications needs and applications. The Company markets
its products to wireless local area network providers, public safety and law
enforcement groups (police, fire departments, emergency services, CIA, FBI and
the Secret Service) amateur radio, citizens band radio, land mobile radio,
telephony and various commercial, industrial and military markets. The
RF/Communications Group also produces audio products for the Library of
Congress' talking book program. The RF/Communications Group targets three
principal product markets: (i) wireless LAN and PCS antennas, (ii) talking book
players and (iii) wireless communications. The Company has also historically
targeted the government and military antenna markets, but has recently made the
decision to exit these low margin markets and intends to focus its resources on
the high growth wireless LAN and PCS antenna markets. The RF/Communications
Group had net sales of $25.3 million in Fiscal 1997, which represented 14.8% of
total net sales of the Company.
Wireless LAN and PCS Antennas. At the end of 1994, Telex entered the
wireless local area networks ("LAN") and personal communication systems ("PCS")
antenna markets to capitalize on the Company's antenna design and communications
technology expertise. The Company believes that wireless LAN and PCS technology
has broad-based applications in today's business arenas. End users include
corporations, retailers, warehouses and distribution centers. The Company's
products are used by a wide variety of companies to set up more efficient and
cost-effective LAN and PCS systems through wireless connections. As an example,
Sears has installed the Company's wireless LAN antennas to remotely connect its
cash registers to the store's main computer, which allows Sears to move the cash
registers as needed to meet demand without worrying about wires.
Talking Book. The Company produces a unique cassette player that is sold
to the Library of Congress ("LOC") for use in their talking book program for the
blind and physically handicapped. Under the talking book program, the LOC
distributes books on tape to the blind and physically handicapped, free of
charge, throughout the United States. The talking book players were designed
using special features for ease of use and facilitate playing the books back at
different speeds. A unique tape format ensures that these tapes cannot be played
on standard equipment. Telex has been providing talking book players to the LOC
since 1969. While the revenue from this program in recent years has been
relatively stable, the program supplies a steady source of cash flow, which is
expected to increase as the Company shifts the manufacturing of certain
components or sub-assemblies for this product to its Mexico facility this year.
Telex plans to introduce a new cassette player that uses the talking book format
in the first quarter of Fiscal 1998 and intends to market the product
commercially. The talking book machines have also been sold internationally to
similar programs in Canada, New Zealand and Australia.
Wireless Communications. The Company also produces a broad line of
wireless communications products such as headsets, microphones, antennas, and
rotors for three primary markets: public safety and law enforcement groups
(police, fire departments, emergency services, CIA, FBI and the Secret Service),
commercial truck drivers and amateur radio operators. The Company believes that
it has established a reputation within these markets for providing reliable
communications, which is the key requirement of most of its users. Many of the
Company's products, such as the Ear-Mike(TM) microphone/receiver system and the
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Road King(R) CB microphones, have high brand name recognition within their
respective markets. The Company's wireless technology is driven by its strengths
in acoustics and antenna design capabilities developed over its 25 year history
in the military antenna business. The Company distributes its products through
over 1,100 dealers.
Government and Military Antennas. Telex has been a leader in the
government and military antenna business since the 1960's over which period the
Company has gained significant expertise in the design and manufacture of
antennas. The Company has decided to exit this business, however, due to a
decrease in demand from the decline in government military spending, as well as
from low realizable margins associated with the bidding system of awarding
contracts. The Company delivered the last shipments of military vehicular
antennas under its remaining U.S. Department of Defense contract in the fourth
quarter of Fiscal 1996.
HEARING INSTRUMENTS GROUP
The Hearing Instruments Group markets a broad line of high value,
technologically differentiated hearing aids and other assistive listening
devices for the hearing impaired including in-the-ear, behind-the-ear and in-
the-canal hearing aids, as well as FM wireless auditory trainers and personal
assistive listening devices. The Company's patented Adaptive Compression(R)
technology offers superior signal processing service and provides the user with
superior intelligibility and understanding of speech in the presence of
background noise. The Company's hearing instruments business dates back to 1936,
making it one of the oldest hearing aid manufacturers in the United States. The
Hearing Instruments Group targets two principal product markets: (i) hearing
aids and (ii) wireless assistive listening devices. The Hearing Instruments
Group had net sales of $24.8 million in Fiscal 1997, which represented 14.5% of
total net sales of the Company.
Hearing Aids. Hearing aid devices are generally segmented by ear
positioning and sound enhancement capabilities. Ear positioning takes two forms,
either in-the-ear or behind-the-ear. Sound enhancement is based on two types of
technologies, linear amplification, which only amplifies the sound, and
compression technology, which modifies the actual sound received by the user.
In its product development, Telex has addressed the needs of the hearing
impaired marketplace and developed the technology around these needs, focusing
on providing products based on strong technological features. The Company
believes that its patented compression technology, Adaptive Compression(R),
offers superior signal processing circuitry and provides the user with superior
intelligibility and understanding of speech in the presence of noise. In October
1996, the Company introduced Threshold Compression(TM) (patent pending), which
has unique user volume control and user selectable frequency abilities which,
for example, allow the user to increase the volume of conversations in the
presence of background noise.
The Company has recently created one of the smallest hearing aids available
in the marketplace, marketed under the Acapella(TM) name. The device fits
completely in-the-canal, making it essentially undetectable. The Acapella
hearing aids offer not only improved appearance but its compression technology
and advanced design offer superior sound as well. In addition, in October 1996,
the Company introduced a significantly improved soft shell hearing aid which has
met with significant success. Sold under the SoftWear(TM) and Sound
Advantage(TM) names, these hearing aids are composed of a new material that, due
to its flexibility, is more comfortable than hard plastic based molds.
The Company distributes its hearing aids through 9,000 hearing instrument
dispensers, giving it excellent coverage throughout the United States. The
dispensers are serviced by approximately 16 regional sales managers. Major
competitors in this market are: Starkey Laboratories, Oticon, Miracle Ear,
Beltone, ReSound and GN Donavox.
Wireless Assistive Listening Systems. The Company also produces and
distributes wireless assistive listening systems, such as auditory trainers and
personal assistive listening devices for the hearing impaired, which help the
user in environments with high levels of background noise and poor building
acoustics. Auditory trainers allow the user to hear directly from a sound
source, such as a teacher, via wireless FM transmitters. Personal assistive
listening devices amplify a certain source, such as a speaker. The Company
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serves the educational and consumer marketplaces for wireless assistive
listening systems by providing cost effective, technologically differentiated,
and functionally superior products maintained by excellent customer service.
Telex's principal focus is on the educational market, where many schools use the
Company's products, including a number of large city (such as New York and Los
Angeles) and county school systems.
As with hearing aid products, the Company believes that it is able to
differentiate its products from its competitors' products through higher ease of
product use and technologically strong design. Its ClassMate(R) line of auditory
trainers offers state-of-the-art RF/wireless designs, compression technology and
synthesized frequency selection in a wireless FM behind-the-ear device, which is
specially designed for older students who have rejected other models based on
the appearance of body-worn auditory trainers. Principal competitors are Phonic
Ear and AVR.
INTERNATIONAL OPERATIONS
The Company currently has 195 international distributors and over 1,000
international dealers in nearly 70 countries. In Fiscal 1997 and the quarter
ended June 30, 1997, international sales represented approximately 23.6% and
26.1% of net sales, respectively. It is the Company's goal to significantly
increase its international sales as a percentage of total net sales through a
variety of methods, including the upgrading of the quality of its existing
distribution channels, the addition of new distributors in Asia, Australia and
Eastern Europe and the continuation of its recent initiative to design and
manufacture new products that better meet international standards and
requirements. Towards this goal, in July 1996, the Company hired a new vice
president of international operations and recently opened sales offices (i) in
Amsterdam and Paris to provide improved support of, and to upgrade the quality
of, the existing distribution channels to the Company's established Western
European markets, and (ii) in Prague to open new distribution channels to the
emerging Eastern European markets.
The Company had international sales of $40.4 million in Fiscal 1997, a
$10.6 million (35.6%) increase over Fiscal 1996. For the fiscal year ended March
31, 1997, the Company had European sales of $17.7 million, Canadian sales of
$5.2 million, Asian Pacific sales of $12.0 million, Latin American sales of $3.8
million and other foreign sales of $1.7 million. Export sales accounted for
approximately 79.7%, 76.5% and 81.1% of the total international sales for the
years ended March 31, 1997, 1996 and 1995, respectively. Sales from the
Company's Canada and Singapore subsidiaries accounted for approximately 20.3%,
23.5% and 8.9% of the total international sales for the years ended March 31,
1997, 1996 and 1995, respectively. Substantially all of the Company's
international sales are transacted in United States dollars. The Company's
operating profit margin on export sales is comparable to that realized on
domestic sales.
PRODUCT ENGINEERING
The Company has a history of technological innovation and strong product
development. The Company believes its strong engineering team has enhanced its
position as an industry leader. In Fiscal 1997, approximately 45.1% of sales
were derived from new or enhanced products developed within the last five years.
The Company believes that it is one of the most active developers of new
products in the industry. Currently, the Company has over 48 new product
introductions planned or in progress. Recent new product innovations include the
world's smallest portable overhead projector, which is marketed under the
Firefly(TM) name. In addition to development of new products, over 11.0% of the
Company's current product development efforts are directed toward incremental
enhancements of existing products. In the future, the Company intends to both
enhance its existing products and to develop new products and expand the
Company's product offerings to new markets.
The Company has recently implemented a number of strategic initiatives to
identify new market opportunities and to reduce its product development cycle in
order to facilitate the timely introduction of new and enhanced products. The
Company maintains close relationships with its institutional customers to
develop products that meet their requirements. For example, the Company's
computer audio microphone line was developed with product specification input
from Microsoft and Compaq. In connection with these initiatives, the Company
increased its investment in engineering and technology and has implemented
programs in several core technologies in such areas as digital signal
processing, wireless communications, application
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specific integrated circuit design and active noise reduction technologies. This
increased investment in engineering and technology has enabled the Company to
design new products in terms of features, quality, reliability and costs.
In Fiscal 1997, Telex hired 6 additional members for its product
engineering team, increasing its staff to 80 engineers. The Company's product
engineering expenditures grew from $5.0 million in Fiscal 1992 to $7.6 million
in Fiscal 1997. Such expenditures are expected to remain at their current level
over the next two years.
COMPETITION
Most of the markets in which the Company competes are highly competitive
and fragmented, with many of the Company's current competitors being generally
smaller than the Company. However, certain of the Company's competitors are
substantially larger than the Company and have greater financial resources. The
Company faces meaningful competition in most of its major product categories or
markets. See "-- Strategic Business Units." The Company believes the principal
competitive factors in each of its four business units are product reliability,
product features, reputation, distribution, customer service and support,
ability to meet delivery schedules, warranty terms and price. The Company
believes that the key factors for the Company to maintain its position are its
brand name recognition, superior distribution network, large user base and large
number of products, together with its extensive experience in designing safe and
reliable products, dealing with regulatory agencies and servicing and repairing
its products.
PATENTS, TRADEMARKS AND LICENSES
The Company owns a number of patents related to the design and manufacture
of several of its products, including headsets, headphones, boom-mounted
microphones, various transducer devices, multiple-band directional antennas,
multimedia projectors, computer audio microphones, adaptive compression
circuitry for hearing aids and certain intercom-related devices. The Company
owns several trademarks in the United States and various foreign countries,
including MagnaByte(R), Hy-Gain(R), Road King(R), Audiocom(R), Adaptive
Compression(R), ProStar(R), ClassMate(R), SoundMate(R) and Caramate(R).
Substantially all products sold by the Company are sold under the Telex(R)
trademark pursuant to a royalty-free license granted to the Company by MT. See
"Risk Factors -- Patents, Trademarks and Licenses."
SUPPLIERS
The Company's extensive vertical integration enables it to manufacture many
of the parts for its products internally. Management believes this gives the
Company a competitive advantage in controlling quality and ensuring timely
availability of parts. The Company also purchases raw materials, assemblies and
components for its products from a variety of suppliers. Total purchases of such
items were approximately $49.2 million in Fiscal 1996, $63.1 million in Fiscal
1997.
The Company's five largest suppliers in Fiscal 1997 accounted for 33.7%, of
the total supplies purchased by the Company. One of the Company's largest
suppliers has been a sole source supplier for parts used in the manufacture of
hearing aids for over 30 years. This supplier provides these components to over
90.0% of all hearing aid manufacturers in the United States. Although the
Company believes that with adequate notice it can secure, if necessary,
alternate sources for these hearing aid parts, its inability to obtain
sufficient parts would have a material adverse effect on the Company's results
of operation. The Company's purchases from this supplier in Fiscal 1997
comprised 3.9% of the total supplies purchased by the Company.
The Company's largest single supplier provides the Company with parts for
its talking book program products as well as components and supplies for various
headsets and microphone products. These supplies comprised 15.2% of the total
cost of supplies purchased by the Company in Fiscal 1997. This increase reflects
the Company's decision to concentrate the sourcing of the components for some of
its audio products with this supplier, due to pricing considerations. This
percentage is expected to decrease in Fiscal 1998 as the Company begins to
manufacture in its Mexico facility some of the headset products historically
purchased from this supplier. The Company has purchased products from this
supplier for 15 years. One of the Company's largest suppliers provides parts and
components used in certain products in the Company's LCD projector products.
51
<PAGE> 53
The Company purchased parts from this supplier, which constituted 9.6% of the
total cost of supplies purchased by the Company for Fiscal 1997. The Company
believes that it could locate alternative sources of supply for these
components. Doing so, however, could result in increased development costs and
product shipment delays. See "Risk Factors -- Reliance on Single Source
Suppliers."
BACKLOG
As is the case with other companies in Telex's businesses, backlog is not
necessarily a meaningful indicator of the conditions of the business since the
Company typically receives and ships orders representing a major portion of its
quarterly non-contract revenues in the current quarter. As of June 30, 1997, the
Company had a backlog of approximately $28.4 million compared to $33.7 million
as of June 30, 1996. See "Risk Factors -- Relationship with the Library of
Congress."
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state, local and foreign
environmental laws and regulations including those governing the use, discharge
and disposal of hazardous substances in the ordinary course of its manufacturing
process. Although management believes that its current manufacturing operations
comply in all material respects with applicable environmental laws and
regulations, environmental legislation has been enacted and may in the future be
enacted or interpreted to create environmental liability with respect to the
Company's facilities or operations. The Company believes that compliance with
current federal, state and local environmental protection laws and provisions
should have no material adverse effect on the operating income or financial
condition of the Company.
The Company is party to a 1988 consent decree with the predecessor to the
Nebraska Department of Environmental Quality ("NDEQ") relating to the cleanup of
hazardous waste at the Company's Lincoln, Nebraska facility. In connection with
ongoing monitoring and cleanup activities at the site and on adjacent property,
the Company has received from the NDEQ three notices of noncompliance (all of
which related to the same underlying matter). The Company is in discussions with
the NDEQ regarding future actions but does not believe that the costs related to
its responsibilities at the site will result in a material adverse effect on the
Company's operating income or financial condition. NDEQ and the U.S.
Environmental Protection Agency also have requested the Company to take action
in connection with a post-closure permit and possibly to perform additional
remediation at the site. The Company is not able at this time to determine the
amount of additional expenses, if any, that may be incurred by the Company as a
result of these actions.
As of March 31, 1997, the Company had accrued approximately $1.6 for
anticipated costs to be incurred for the Lincoln, Nebraska cleanup activities,
of which approximately $1.3 million had been incurred by the Company as of March
31, 1997. See Note 10 to the Consolidated Financial Statements of the Company
included elsewhere in this Prospectus.
Capital expenditures of the Company for environmental control facilities
are estimated to be approximately $15,000 per year, in addition to those costs
associated with the Lincoln, Nebraska clean-up activities described above. The
Company also incurs approximately $30,000 per year of expenses associated with
the disposal of hazardous materials generated in conjunction with its
manufacturing processes.
EMPLOYEES
As of June 30, 1997, the Company employed 1,588 employees, of whom 1,327
were in manufacturing, 79 in engineering, 118 in sales and marketing and 64 in
general and administration. The Company's work force is not unionized.
Management considers its employee relations to be good.
52
<PAGE> 54
PRODUCTION AND FACILITIES
The Company operates the manufacturing plants and facilities described in
the table below. Management believes that the Company's plants and facilities
are maintained in good condition and are suitable and adequate for its present
needs. Currently, the Company's manufacturing plants are operating at an average
of 75% of capacity based on a single shift.
<TABLE>
<CAPTION>
SIZE
LOCATION OWNED/LEASED (SQUARE FEET) FACILITY TYPE
- ------------------------------- ------------ ------------- -------------------------------
<S> <C> <C> <C>
Blue Earth, Minnesota.......... Owned 150,000 Manufacturing
Lincoln, Nebraska.............. Owned 120,000 Manufacturing, Product
Development and Sales Office
Glencoe, Minnesota............. Owned 100,000 Manufacturing
Le Sueur, Minnesota(a)......... Owned 52,000 Manufacturing
Bloomington, Minnesota......... Owned 50,000 Corporate Headquarters, Product
Development and Sales Office
Hermosillo, Sonora,
Mexico(b).................... Leased 32,500 Manufacturing
Rochester, Minnesota........... Owned 30,000 Manufacturing
Toronto, Canada................ Leased 4,000 Sales Office, Distribution
Burbank, California............ Leased 2,500 Sales Office
Singapore...................... Leased 2,300 Sales Office, Distribution and
Service
London, England................ Leased 200 Sales Office
Burnsville, Minnesota.......... Owned 14 acres Vacant land
</TABLE>
- ---------------
(a) The Company closed this facility in the second quarter of Fiscal 1997; all
manufacturing operations at this facility were transferred to the Company's
other facilities and to outside suppliers.
(b) Subject to a five-year lease, scheduled to expire in 2001 if the Company
does not exercise its renewal option.
At its Glencoe, Minnesota facility, the Company manufactures headsets,
intercoms, microphones, and many of the piece parts used in the manufacture and
assembly of the products produced at the Company's other manufacturing
facilities. The Blue Earth facility engages in electronic assembly and the
production of tape duplicators, intercoms, slide projectors, language labs and
tape players for the Library of Congress. Wireless microphones, intercoms and
antenna products are manufactured at the Company's facility in Lincoln,
Nebraska. At its Rochester, Minnesota facility, the Company manufactures hearing
aids and auditory trainers. The Company is currently manufacturing microphones,
cable assemblies and sub-assemblies at its Hermosillo, Sonora, Mexico facility.
The Company's recently opened sales offices in Amsterdam, Paris and Prague are
currently staffed by independent contractors.
Each of the Glencoe, Blue Earth and Lincoln facilities was designed to
employ approximately 500 people. Rochester can employ 250 people working one
shift and up to 500 with two or three shifts. The Company believes that
increases in manufacturing needs could be accommodated readily by the addition
of second or third shifts.
The city of Bloomington, Minnesota has declared the Company's current
headquarters location to be an urban development zone. However, the city of
Bloomington has not notified the Company of any near-term need for the Company
to consider moving from its current site. Should the Company be required to move
in the future, the Company believes adequate rental facilities would be readily
available in the area.
LEGAL PROCEEDINGS
The Company is a defendant in a number of lawsuits that have arisen in the
ordinary course of business. The Company believes that such litigation,
considered separately or in the aggregate, will not have a material adverse
effect on the financial condition of the Company. The Company believes that the
ultimate resolution of the disputes will not have a material impact on its
financial position, but could be material to the net income of a particular
quarter (or year), if resolved unfavorably. Management believes that the
Company's products have proper agency approvals where required.
For a discussion of certain environmental matters, see "-- Environmental
Matters."
53
<PAGE> 55
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the name, age and position of each of the
executive officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- --- -------------------------------------------
<S> <C> <C>
John L. Hale*.............................. 57 Chairman of the Board of Directors (the
"Board"), President and Chief Executive
Officer
John T. Hislop*............................ 56 Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
John A. Palleschi*......................... 46 Vice President, Corporate Development,
General Counsel and Secretary
Joseph P. Winebarger....................... 48 Vice President, Engineering, Customer
Services and Information Systems
Dan M. Dantzler............................ 48 Vice President and President,
RF/Communications Group
Glen E. Cavanaugh.......................... 53 Vice President and President,
Multimedia/Audio Communications Group
Neil A. Levy............................... 50 Vice President and President, Hearing
Instruments Group
Daniel G. Wright........................... 51 Vice President and President, Professional
Sound and Entertainment Group
Lodwrick M. Cook........................... 69 Director
Alfred C. Eckert III....................... 49 Director
Nicholas E. Somers......................... 35 Director
</TABLE>
- ---------------
* Executive holds same position with Holdings
Mr. Hale joined the Company as Chairman of the Board, President and Chief
Executive Officer in October 1991. Prior to October 1991, he served as
President, Chief Executive Officer and a director of Fibronics International
Inc., a provider of fiber optic and other communication products and services.
From June 1985 to November 1986, Mr. Hale was President and Chief Executive
Officer of Intelogic Trace, Inc., a computer and communications service company.
From September 1980 to March 1985, Mr. Hale served as President and Chief
Executive Officer of Inforex, Inc., a world-wide supplier of computer systems
and local area networks. From February 1978 to September 1980, and from
September 1982 to June 1985, Mr. Hale was, respectively, a Vice President and
Executive Vice President at Datapoint Corporation, the parent of Inforex, Inc.,
a manufacturer of computers and telecommunications equipment.
Mr. Hislop joined the Company in May 1993 as Vice President, Chief
Financial Officer, Treasurer and Assistant Secretary. Prior to joining the
Company, Mr. Hislop was with Fibronics International Inc., where he served as
Joint Chief Executive Officer from 1992 to 1993 and as Corporate Vice President
and Chief Financial Officer from 1989 through 1991. From 1987 to 1989, Mr.
Hislop served as a partner of Management Resources Inc., a management consulting
group. From 1985 to 1987, Mr. Hislop was Vice President, Chief Financial Officer
and Treasurer of Intelogic Trace, Inc. From 1973 to 1985, he served as a Vice
President and Controller of Datapoint Corporation.
Mr. Palleschi has been Vice President, Corporate Development, General
Counsel and Secretary of the Company since January 1995. Prior to January 1995,
Mr. Palleschi was Vice President, Administration, General Counsel and Secretary
of the Company and served in such capacity since June 1989. Prior to joining the
Company, Mr. Palleschi was Director of Corporate Development for Memorex from
March 1988 to June 1989. From June 1984 to March 1988, Mr. Palleschi was
International Counsel, Telex Computer Products, Inc., a subsidiary of Telex
Corp. From 1981 to 1984, Mr. Palleschi also served as an attorney with Digital
Equipment Corporation and Raytheon Corporation.
54
<PAGE> 56
Mr. Winebarger has been Vice President responsible for Telex's Information
Systems since January 1995 and for Telex's Engineering Services, Le Sueur
manufacturing facility, Quality Assurance and Sales Administration operations
since April 1993. Prior to April 1993, Mr. Winebarger was Vice President,
Engineering of Telex and served in such capacity with Telex and Old TCI since
September 1987. From January to September 1987, he was corporate Director of
Advanced Development, Telex Computer Products, Inc. Prior to 1987, Mr.
Winebarger was Acting Vice President, Engineering, then Vice President,
Engineering for Telex Data Systems, a division of Telex Computer Products, Inc.
Mr. Dantzler has served as Vice President and General Manager of Telex's
RF/Communications Group since May 1994. Prior to May 1994, Mr. Dantzler was Vice
President and General Manager of Telex's Professional Sound and Entertainment
Group. From February 1992 to April 1993, he served as Staff Vice President.
Prior to February 1992, Mr. Dantzler was Vice President, Sales for Telex. From
1983 to 1989, Mr. Dantzler served as General Manager of the Hy-Gain Division of
Old TCI where he was responsible for the design and production of antennas and
wireless microphones. From 1967 to 1982, Mr. Dantzler held various engineering
positions with Old TCI and Hy-Gain.
Mr. Cavanaugh joined Telex in April 1993 as Vice President and President of
Telex's Multimedia/Audio Communications Group and was appointed president of the
Group in May 1994. Prior to joining Telex, Mr. Cavanaugh was Senior Vice
President, Sales and Marketing of Applied Voice Technology, Inc., which he
joined in 1990. From 1988 to 1990, he was a principal at Columbia Management
Consulting. Mr. Cavanaugh also served as Senior Vice President, Marketing for
Applied Communications, Inc. from 1987 to 1988, and, from 1983 to 1987, as Vice
President, Marketing at ISC Systems Corporation. From 1981 to 1983, he served as
Vice President and General Manager of Evans and Sutherland Computer Corporation.
From 1976 to 1981, Mr. Cavanaugh was Vice President, Marketing for Datapoint
Corporation.
Mr. Levy has served as Vice President and President of the Hearing
Instruments Group since October 1992. Prior to joining Telex, Mr. Levy served as
Vice President and General Manager for Doubleday Book Shops from 1990 to 1991.
From 1987 to 1990 he was Executive Vice President for Eye Care Centers of
America, Inc. Prior to 1987, Mr. Levy held several executive positions with
Touche Ross and Company, Genesco, Inc. and Walden Books.
Mr. Wright joined Telex in May 1994 as Vice President and President of
Telex's Professional Sound and Entertainment Group. From September 1990 to July
1993, he served as President and Chief Executive Officer of Carlton
International Corporations' Abekas Video Systems and IMMIX operations. From
January 1988 to September 1990, Mr. Wright served as Vice President of Tektronix
Corporation and as President of Grass Valley Group, a wholly owned subsidiary of
Tektronix. From 1975 to 1988, Mr. Wright also served in various capacities with
Tektronix and Grass Valley ranging from Manufacturing Engineering Manager to
Executive Vice President.
Mr. Cook became a director of the Company on the Recapitalization Closing
Date. Mr. Cook began his career at Atlantic Richfield Company ("ARCO") in 1956
as an engineer trainee. He went on to hold various management positions,
becoming President and Chief Executive Officer in 1985 and Chairman of the Board
of Directors and Chief Executive Officer in 1986. He retired as Chief Executive
Officer in June 1994 and as ARCO's Chairman in 1995. Mr. Cook is a member of the
Board of Directors of ARCO, Castle & Cook, Inc. and Bank One Louisiana.
Mr. Eckert became a director of the Company on the Recapitalization Closing
Date. Mr. Eckert has been the President of GSCP since January 1994. Since 1991,
Mr. Eckert has been a general partner of Greycliff Partners. From 1984 to 1991,
Mr. Eckert was a general partner of Goldman, Sachs & Co. He is a director of EV
International, Inc., Georgia Gulf Corporation and HBO & Company.
Mr. Somers became a director of the Company on the Recapitalization Closing
Date. Mr. Somers has been a Managing Director of GSCP since December 1993. Prior
to that, he worked at Morgan Stanley & Co. Incorporated in the Mergers &
Acquisitions and Corporate Finance Departments from June 1988 to June 1993. Mr.
Somers is a director of EV International, Inc.
55
<PAGE> 57
DIRECTOR COMPENSATION
With the exception of Lodwick M. Cook, the current directors of the Company
receive no compensation. For his services as a director, the Company intends to
pay Mr. Cook compensation of $20,000 annually and an additional $1,500 for each
meeting of the Board he attends. In addition, it is intended that Mr. Cook will
be granted a warrant representing the right to purchase 3,135 shares of common
stock of Holdings subject to certain anti-dilution protections, at an exercise
price of $31.93 per share. The option will become exercisable for 1,045 shares
each on May 6, 1998, May 6, 1999, and May 6, 2000, respectively, provided in
each case that Mr. Cook is a director of the Company on such date. All of the
directors are entitled to reimbursement of their reasonable out-of-pocket
expenses in connection with their travel to and attendance at meetings of the
Board.
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation with
respect to all compensation paid or accrued by the Company for services rendered
in all capacities for the fiscal year ended March 31, 1997 by its Chief
Executive Officer and each of the other four most highly compensated executive
officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION(a) NUMBER OF
------------------------------- SHARES ALL OTHER
FISCAL SALARY BONUS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(b) ($)(C) OPTIONS(d) ($)(e)
- ------------------------------------ ------ ------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
John L. Hale........................ 1997 312,006 212,456 -- --
Chairman of the Board, 1996 297,115 175,407 160,000 --
President and Chief Executive 1995 286,000 175,000 -- 8,104
Officer
John T. Hislop...................... 1997 149,865 100,267 -- --
Vice President and Chief 1996 140,742 83,637 -- --
Financial Officer 1995 140,000 79,287 -- --
Glen E. Cavanaugh................... 1997 142,846 86,478
Vice President and President, 1996 133,237 72,385 -- --
Multimedia/Audio Communications 1995 130,000 64,878 -- 19,179
Group
Daniel G. Wright.................... 1997 144,348 77,783
Vice President and President, 1996 137,212 61,671 -- --
Professional Sound and 1995 116,427 76,064 150,000 31,103
Entertainment Group
John A. Palleschi................... 1997 129,536 87,843
Vice President, Corporate 1996 119,993 73,439 16,000 --
Development, General Counsel and 1995 115,000 67,950 -- --
Secretary
</TABLE>
- ---------------
(a) For Fiscal 1997, the only type of Other Annual Compensation for each of the
named executive officers was in the form of perquisites and was less than
the level required for reporting.
(b) Amounts shown include cash compensation earned and received, amounts earned
but deferred, and amounts earned but deferred and paid in the subsequent
fiscal year.
(c) Amounts shown represent bonuses under the Fiscal 1995, 1996 and 1997
management incentive plan. The plan is open to the executive officers and
other key employees designated by the President and Chief Executive Officer
and approved by the Board. Under the plan, individual awards are based upon
performance measured by established Telex and individual objectives and on a
discretionary evaluation by the President and Chief Executive Officer for
awards other than the objectives and on a discretionary evaluation by the
President and Chief Executive Officer for awards other than the President
and Chief Executive Officer's. Distributions under the plan are made within
30 days following the completion of the audit for the fiscal year in which
such compensation is earned. The plan provides for a bonus target of 50.0%
of base salary, although maximum awards can exceed such targets. The maximum
award for Fiscal 1997 or the named executive officers was 75.0% of base
salary for Fiscal 1997. Amounts shown for each fiscal year are awards under
the plan that were earned in such fiscal year and paid in the subsequent
fiscal
56
<PAGE> 58
year. Effective on the Recapitalization Closing Date, bonuses will be paid
pursuant to new bonus programs. See "The Annual Bonus Programs."
(d) There were no grants made during Fiscal 1997 by the Company of Options to
purchase securities to the executives named in the Summary Compensation
Table above.
(e) All Other Compensation for Mr. Hale, Mr. Cavanaugh and Mr. Wright for each
applicable fiscal year consist of nonrecurring cash compensation received in
connection with the reimbursement of relocation expenses.
STOCK OPTION GRANTS
There were no grants made during Fiscal 1997 of any options to purchase
securities to any of the executive officers named in the Summary Compensation
Table above.
STOCK OPTION EXERCISES
The following table provides information with respect to the executive
officers of the Company listed in the Summary Compensation Table above
concerning stock options exercised in Fiscal 1997 and options to acquire common
stock of Holdings held as of March 31, 1997. No stock appreciation rights have
been granted under any incentive plan.
AGGREGATED OPTION EXERCISES IN FISCAL 1997 AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
VALUE OPTIONS AT FISCAL FISCAL YEAR-END
NUMBER OF SHARES REALIZED YEAR-END EXERCISABLE/ EXERCISABLE/
NAME ACQUIRED ON EXERCISE ($)(a) UNEXERCISABLE(b) UNEXERCISABLE($)(b)
- --------------------- -------------------- --------- ---------------------- -----------------------
<S> <C> <C> <C> <C>
John L. Hale......... 140,000 1,471,680 114,000/120,000 3,523,393/3,495,540
John T. Hislop....... -- -- 114,900/60,000 3,660,082/1,911,270
Glen E. Cavanaugh.... -- -- 40,000/40,000 1,274,180/1,274,180
Daniel G. Wright..... -- -- 35,000/70,000 1,091,283/2,182,565
John A. Palleschi.... -- -- 44,000/12,000 1,390,698/349,554
</TABLE>
- ---------------
(a) The per share value of the underlying securities at exercise date minus the
exercise or base price of "in the money" options. Per share value is based
upon the value determined in accordance with Company practice.
(b) Per share value is based on $31.93 per share less exercise prices.
1997 STOCK OPTION PLAN
Effective on the Recapitalization Closing Date, key employees of the
Company, including the executive officers named in the Summary Compensation
Table, participate in a new option plan (the "Option Plan"). See "The
Recapitalization -- Treatment of Options and Warrants" for treatment of options
outstanding on the Recapitalization Closing Date.
General Terms. Under the Option Plan, key employees (other than the Chief
Executive Officer) selected by the Chief Executive Officer and approved by the
Board of Directors of Holdings (the "Holdings Board") will receive non-qualified
options to purchase shares of Holdings Common Stock. The Chief Executive
Officer's participation will be determined by Holdings Board. Holdings Board
will be responsible for administering the Plan. The maximum number of shares of
Holdings Common Stock that may be issued under the Option Plan is 19% of the
outstanding common stock of Holdings on the Recapitalization Closing Date, on a
fully diluted basis and taking into account the issuance of all shares of common
stock issuable under the Option Plan, but excluding certain shares that may be
granted upon exercise of certain warrants. Upon the occurrence of certain
events, such as a stock dividend or a stock split, appropriate adjustments will
be made in the number of shares that may be issued under the Option Plan in the
future and in the number of shares and price per share under all outstanding
grants made before the event. If any grant is for any reason canceled,
terminated or otherwise settled without the issuance of some or all of the
shares of common stock subject to the grant, such shares will be available for
future grants.
57
<PAGE> 59
Holdings Board may terminate, suspend or amend the Option Plan but such
termination, suspension or amendment may not adversely affect any stock options
then outstanding under the Option Plan without the consent of the recipients
thereof. Unless terminated by action of Holdings Board, the Option Plan will
continue in effect until the tenth anniversary of the Recapitalization Closing
Date, but stock options granted prior to such date shall continue in effect
until they expire in accordance with their terms.
Stock Option Grants. Under the Option Plan, Holdings Board may grant
non-qualified options that vest over a three-year period, commencing on the
grant date, at an exercise price equal to 25% of the Recapitalization
Consideration (the "Initial Option Grants"), performance-based options that vest
over a five-year period on the achievement of certain annual performance
objectives at an exercise price equal to 25% of the Recapitalization
Consideration (the "Performance Option Grants"), or performance-based options
that vest on the fifth anniversary of the grant date or upon a Change in Control
(as defined in the Option Plan) on the achievement of certain long-term
performance objectives, at an exercise price equal to the Recapitalization
Consideration (the "Super Performance Grants"). Notwithstanding the satisfaction
of any performance goals, all performance options will vest on the seventh
anniversary of their grant date.
To exercise an option, the grantee may pay the exercise price in cash or,
if permitted by Holdings Board, by delivering on the date of exercise other
shares of common stock of Holdings having an aggregate fair market value equal
to the exercise price of the option. The term of each option will be fixed by
Holdings Board but may not be more than ten years from its date of grant.
Termination of Employment. In the event of termination of employment of a
grantee by reason of disability, death, retirement at or after age 65 or
termination for good reason (as defined in the Stockholders Agreement), any
options exercisable at the date of such termination will remain exercisable
until the tenth anniversary of the grant date. Any options not then exercisable
will be forfeited. In the event of a termination of employment of a grantee for
cause, any outstanding options, whether exercisable or unexercisable, will be
forfeited. In the event of a termination of employment of a grantee for any
reason other than death, disability, retirement for good reason or cause, any
options exercisable at the date of such termination will remain exercisable for
a period of 90 days (or if earlier the expiration of the options).
Change in Control. Upon a Change in Control (as defined in the Option
Plan), each outstanding option will be cancelled for a cash payment equal to the
excess, if any, of the Change in Control Price (as defined in the Option Plan)
over the exercise price for the option unless the Holdings Board determines in
good faith that alternative options having substantially equivalent or better
rights, terms, conditions and economic value will be awarded to grantees, and
such alternative options provide that if the grantee is involuntarily terminated
within two years following a Change in Control, all restrictions on the
alternative options will lapse.
Grants to Executives. On the Recapitalization Closing Date, (i) Mr. Hale
was granted 107,100 shares, 106,060 shares and 86,160 shares under the Initial
Option Grant, the Performance Option Grant and the Super Performance Option
Grant, respectively, (ii) Mr. Hislop was granted 18,700 shares, 29,380 shares
and 21,260 shares under the Initial Option Grant, the Performance Option Grant
and the Super Performance Option Grant, respectively, (iii) Mr. Cavanaugh was
granted 8,240 shares, 8,340 shares and 5,540 shares under the Initial Option
Grant, the Performance Option Grant and the Super Performance Option Grant,
respectively, (iv) Mr. Wright was granted 6,360 shares, 6,840 shares and 5,260
shares under the Initial Option Grant, the Performance Option Grant and the
Super Performance Option Grant, respectively, and (v) Mr. Palleschi was granted
26,240 shares, 31,120 shares and 25,260 shares under the Initial Option Grant,
the Performance Option Grant and the Super Performance Option Grant,
respectively. The number of shares reflect the 20-for-1 stock split that became
effective as of June 25, 1997.
As a result of the new option plan arrangements for the executive officers
named above as well as all other covered executives and employees, the Company
will incur estimated non-cash compensation charges of $5.0 million, $2.5
million, $1.3 million, $0.4 million and $0.2 million in Fiscal 1998, 1999, 2000,
2001 and 2002, respectively. See the Unaudited Pro Forma Consolidated Financial
Information.
THE ANNUAL BONUS PROGRAMS
The Company has adopted an annual bonus plan for the Company's management
employees that provides that participants in such plan are entitled to an annual
bonus based on achieving certain annual
58
<PAGE> 60
projected earnings performance targets. Under the terms of the plan,
participants are eligible to receive an annual bonus of between 25% and 100% of
base salary depending on the level of achievement of the performance targets.
The Company has also adopted an additional annual cash bonus plan whereby
Messrs. Hale, Hislop, Cavanaugh, Wright and Palleschi may receive additional
annual incentive awards in each of the first five years following the
Recapitalization Closing Date if certain annual performance targets are
achieved. The maximum aggregate awards Messrs. Hale, Hislop, Cavanaugh, Wright
and Palleschi may receive over such five year period under the additional plan
is up to $1.7 million, $0.4 million, $0.1 million, $0.1 million and $0.5
million, respectively. In total, the Company may incur estimated total cash
compensation charges in connection with this additional cash bonus plan for the
executive officers named above as well as all other covered executives and
employees of $2.3 million, $0.4 million, $0.2 million, $0.1 million and $0.1
million, in Fiscal 1998, 1999, 2000, 2001 and 2002, respectively. See the
Unaudited Pro Forma Consolidated Financial Information.
SEVERANCE PROGRAM
The Company has approved a severance program which will provide that a
severance benefit equal to the sum of (i) one times base salary plus the most
recent annual bonus and (ii) a pro rata portion of the highest bonus payable
over the three most recent fiscal years, will be payable to certain management
employees, including Messrs. Cavanaugh and Wright if their employment is
terminated without cause or for good reason within 24 months following the
Recapitalization Closing Date or the employee is required to relocate within 12
months following the Recapitalization Closing Date. Payment of any severance
amounts will be made in equal biweekly installments. The amount of any severance
payments will be reduced to avoid the payment being deemed an "excess parachute
payment" within the meaning of Section 280G of the Code. Outplacement services
and continued health benefits will also be available under the program. The
employees will be subject to non-compete agreements for the 12 month period
following termination of employment and non-disclosure of trade secrets
restrictions.
RETIREMENT BENEFITS
The Company maintains a defined benefit pension plan (the "Pension Plan")
qualified under the Code that provides a defined benefit upon retirement to the
Company's eligible employees. Under the terms of the Pension Plan, benefits are
determined by the average earnings during the highest five consecutive years of
the final ten consecutive years of service with the total remuneration covered
by the plan consisting of base salary, commission, overtime and bonuses paid to
each participant. The formula provides benefits in the form of a straight-life
annuity equal to a percentage of such average annual earnings times years of
benefit service plus a percentage of the excess of the average annual earnings
over the social security wage base (as determined at age 65) times years of
benefit service.
The following table lists annual benefits under the Pension Plan for the
average annual earnings and years of credited service shown for a participant
retiring at the normal retirement age of 65. A participant does not accrue
additional benefits under the Pension Plan after 35 years of credited service.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------------------------------------------------
REMUNERATION 15 20 25 30 35
- ------------------------------ ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
$125,000...................... $26,057 $34,742 $43,428 $52,114 $ 60,799
150,000...................... 31,682 42,242 52,803 63,364 73,924
175,000...................... 36,182 48,618 60,753 73,753 85,924
200,000...................... 40,680 54,992 69,303 83,613 97,924
225,000...................... 44,142 59,895 75,647 91,399 107,151
250,000...................... 44,142 59,895 75,647 91,399 107,151
300,000...................... 44,142 59,895 75,647 91,399 107,151
400,000...................... 44,142 59,895 75,647 91,399 107,151
500,000...................... 44,142 59,895 75,647 91,399 107,151
</TABLE>
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<PAGE> 61
The full years of credited service as of March 31, 1997 for the executive
officers named in the Summary Compensation Table above are as follows: Mr. Hale,
5; Mr. Hislop, 3; Mr. Cavanaugh, 3; Mr. Wright, 2; and Mr. Palleschi, 12. Mr.
Hale is also entitled to an additional benefit from the Company upon termination
of employment based upon the formula for benefits under the Pension Plan.
Benefits shown on the table are not subject to reduction for social
security benefits or other offset amounts. For plan years beginning in 1995 and
thereafter, annual compensation taken into account for purposes of calculating
benefits is limited to $150,000 (as adjusted in future years to reflect
inflation); however, prior years' compensation taken into account may exceed
that amount. The examples of benefits payable in the above table are supplied
for illustration only. Under the Pension Plan the maximum annual benefits
payable for 1996 are $120,000 in accordance with Section 415(b)(1) of the Code
unless the accrued benefit with respect to a participant exceeded that amount as
of December 31, 1982, in which case the maximum annual benefit payable is
$136,425.
EMPLOYMENT AGREEMENTS
John L. Hale, John T. Hislop and John A. Palleschi have each entered into
five-year employment agreements with GST effective at the Recapitalization
Closing Date (each an "Employment Agreement" and collectively, the "Employment
Agreements"), which automatically extend for successive annual periods. Pursuant
to such Employment Agreements, each officer will receive (i) a base annual
salary of $312,000, $150,000 and $129,000, respectively, and (ii) a special
bonus of $160,405, $11,506 and $32,176, respectively, thirty days after the
Recapitalization Closing Date and on each of the next four anniversaries of the
date of the initial payment, provided that on the date such special bonus is due
GSCP or its affiliates control 50% or more of the voting power of the Company's
outstanding voting securities and there has not occurred an initial public
offering of Holdings Common Stock. In addition, each officer will be entitled to
receive certain perquisites and to participate in (a) a management incentive
compensation plan, pursuant to which each executive may be awarded up to 100% of
his base annual salary, if certain performance objectives are achieved and (b) a
cash bonus plan, as described above under "-- The Annual Bonus Program,"
pursuant to which Mr. Hale, Mr. Hislop and Mr. Palleschi may receive an
aggregate incentive award of up to approximately $2.1 million, $0.5 million and
$0.6 million, respectively, during the first five years following the
Recapitalization Closing Date, in each case if certain performance objectives
are achieved. Mr. Hale's Employment Agreement is terminable by the Company on 30
days' written notice (or immediately for cause) and on 60 days' written notice
by Mr. Hale, whereupon the Company shall pay to Mr. Hale (1) all compensation,
benefits and perquisites accrued under his Employment Agreement through the
effective date of his termination of employment, (2) the remaining installments
of the special bonus provided for in clause (ii) above, payable only to the
extent and at such times as Mr. Hale would otherwise be entitled to such special
bonus in accordance with the terms of such clause and (3) three times the base
salary provided for in clause (i) above, at the rate being paid at the date of
termination, plus three times the most recent fiscal year's incentive bonus
compensation provided for in clause (a) above, plus a pro rata portion of the
highest incentive bonus payable under clause (a) above in the three most recent
fiscal years. Each of Mr. Hislop's and Mr. Palleschi's Employment Agreements are
terminable by the Company on 30 days' written notice (or immediately for cause).
If Mr. Hislop's or Mr. Palleschi's employment is terminated by the Company for
any reason other than for cause or the death or disability of the executive or
if the executive's employment is terminated by him for Good Reason (as defined
in the Employment Agreements) during the period of employment but prior to a
Change in Control (as defined in the Employment Agreements), the Company shall
pay the executive (x) all compensation, benefits and perquisites accrued under
the applicable Employment Agreement through the effective date of his
termination of employment, (y) a severance allowance equal to the sum of (1) two
times the base salary provided for in clause (i) above, at the rate being paid
at the date of termination if the termination occurs prior to the second
anniversary of the Recapitalization Closing Date and one year's base salary at
the rate being paid at the time of the termination of the executive's employment
if the termination occurs after the second anniversary of the Recapitalization
Closing Date, (2) two times the most recent fiscal year's incentive bonus
compensation provided for in clause (a) above and (3) a pro rata portion of the
highest incentive bonus payable under clause (a) above in the three most recent
fiscal years and (z) the remaining installments of the special bonus provided
for in clause (ii) above payable only to the extent and at such times
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<PAGE> 62
as the executive would otherwise be entitled to the special bonus in accordance
with such clause. The executive may terminate his employment under his
Employment Agreement at any time during the period of employment upon 60 days'
written notice to the Company, and, without regard to whether such termination
occurs prior to a Change in Control, and the executive shall be paid (1) all
compensation, benefits and perquisites accrued under his Employment Agreement
through the effective date of his termination of employment plus (2) the
remaining installments of the special bonus provided for in clause (ii) above,
payable only to the extent and at such times as the executive would otherwise be
entitled to such special bonus under such clause. The Employment Agreements also
contain standard restrictive covenants relating to competition and
confidentiality.
OWNERSHIP OF CAPITAL STOCK
The authorized common stock of the Company consists of 1,000 shares of
common stock, par value $.01 per share, of which 500 shares are issued and
outstanding on a fully diluted basis and all of which are owned by Holdings. The
authorized common stock of Holdings consists of 5,000,000 shares of common
stock, par value $.0005 per share, of which 3,038,300 shares are issued and
outstanding, after giving effect to the 20-for-1 stock split effected by the
Company effective as of June 25, 1997.
The following table sets forth the beneficial ownership of the limited
liability company interests of G-II.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NAME AND ADDRESS INTERESTS CLASS
--------------------------------------------------------------- --------- ----------
<S> <C> <C>
GSCP(a)(b)..................................................... 72.42 72.42%
TRV Employees Fund, L.P.(c)(b)................................. 17.69 17.69%
Greenwich Street Capital Offshore Fund, Ltd.(d)(b)............. 4.41 4.41%
The Travelers Insurance Company(e)(b).......................... 3.67 3.67%
The Travelers Life and Annuity Company(e)(b)................... 1.81 1.81%
------ ------
100.00 100.00%
====== ======
</TABLE>
- ---------------
(a) The address for this person is 388 Greenwich Street, 36th Fl., New York, NY
10013. The managing general partner of the general partner of this person is
a wholly owned subsidiary of Travelers Group Inc. ("Travelers"). The manager
of this person is Greenwich Street Capital Partners, Inc. ("GSCP, Inc."),
which is also a wholly owned subsidiary of Travelers.
(b) By virtue of the relationships set forth in notes (a), (c) and (d),
Travelers may be deemed to share beneficial ownership of the securities held
of record by this person and may be deemed to share power to vote, or to
direct the voting of, and power to dispose of, or direct the disposition of,
the securities held of record by such person.
(c) The address for this person is 388 Greenwich Street, 36th Fl., New York, NY
10013. The general partner of this person and the manager of this person,
GSCP, Inc., are both wholly owned subsidiaries of Travelers.
(d) The address for this person is c/o Rawlinson & Hunter, Woodbourne Hall, P.O.
Box 3162, Road Town Tortola, British Virgin Islands. This person is managed
by GSCP, Inc. and all the voting securities of this person are owned by the
general partner of GSCP, whose managing general partner is a wholly owned
subsidiary of Travelers.
(e) The address for this person is 1 Tower Square, Hartford, CT. 06183-2030. The
person is an indirect wholly owned subsidiary of Travelers.
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<PAGE> 63
THE RECAPITALIZATION
The following is a summary of the structure of the Recapitalization and
certain provisions of the Recapitalization Agreement. This summary does not
purport to be complete and is qualified in its entirety by reference to the
Recapitalization Agreement, a copy of which is available upon request from the
Company.
On the Recapitalization Closing Date, the Company completed the
Recapitalization pursuant to the Recapitalization Agreement. In connection with
the Recapitalization, all of the shares of Holdings Common Stock and all options
and warrants to acquire Holdings Common Stock (other than certain shares of
Holdings Common Stock and certain options to acquire Holdings Common Stock owned
by certain members of management of the Company) were converted into the right
to receive Recapitalization Consideration equal to approximately $253.9 million.
In addition, in connection with the Recapitalization Agreement, the Rollover
Shares and the Rollover Options, with an aggregate value of approximately $21.2
million (approximately 20% of the fully diluted equity of Holdings, give effect
to the Rollover Options) were retained by certain members of management of the
Company. In connection with the Recapitalization, the Company completed (i) the
Tender Offer to repurchase all of the $100.0 million aggregate outstanding
principal amount of the Telex Notes and (ii) the Solicitation of consents with
respect to certain amendments to the Indenture pursuant to which the Telex Notes
were issued.
CAPITALIZATION OF GST
GST was capitalized by $83.2 million of equity provided by GSCP and certain
co-investors and $25.2 million of proceeds provided by the issuance of the GST
Subordinated Debentures. The GST Subordinated Debentures will mature in 2009,
bear non-cash interest at a rate of 15% compounded quarterly, and are redeemable
at the option of the issuer with various premiums up to maturity. If the GST
Subordinated Debentures are redeemed or repaid following the fifth anniversary
of their issuance, a portion of the redemption/repayment amount will be payable
in warrants to purchase Holdings Common Stock. The terms pursuant to which the
GST Subordinated Debentures were issued contain a number of negative covenants
that, among other things, restrict the ability of the Company to dispose of
assets; incur additional indebtedness (including preferred stock); guarantee
obligations; create liens; merge, consolidate, liquidate or dissolve; lease
property; pay dividends or make distributions in respect of capital stock;
create liens on assets; enter into sale and leaseback transactions; conduct
transactions with affiliates; and make investments, loans or advances.
STOCKHOLDERS AND REGISTRATION RIGHTS AGREEMENT
In connection with the Recapitalization, all members of the Company's
senior management who own any Rollover Shares or Rollover Options (the
"Management Stockholders") entered into a Stockholders and Registration Rights
Agreement (the "Stockholders Agreement"), under which such Management
Stockholder agreed that he or she shall not, without the prior written consent
of Holdings, directly or indirectly, sell, pledge, mortgage, hypothecate, give,
transfer, create a security interest in or lien on, place in trust (voting or
otherwise), assign or in any other way encumber or dispose of any shares of
Holdings Common Stock now or hereafter beneficially owned by such Management
Stockholder. In addition, under the Stockholders Agreement, if a Management
Stockholder's employment is terminated, such Management Stockholder shall have
the right to sell, and Holdings shall also have the right to purchase all of the
shares of Holdings Common Stock owned by such Management Stockholder, and all of
the options to acquire Holding Common Stock owned by such Management
Stockholder, at prices calculated in accordance with, and subject to certain
other terms and conditions set forth in, the terms of the Stockholders
Agreement. The Stockholders Agreement also creates certain conventional "drag"
and "tag" rights with respect to the shares of Holdings Common Stock owned by
the Management Stockholders. The Stockholders Agreement also provides that at
any time after the Effective Time, G-II shall have the right to make up to four
requests that Holdings effect a public offering under the Securities Act
pursuant to a Stockholder Registration Statement of any of the shares of
Holdings Common Stock owned by G-II with certain limitations and that Holdings
shall pay all registration expenses in connection with each registration of
shares of Holdings Common Stock pursuant to the Stockholders Agreement.
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<PAGE> 64
INTEREST OF CERTAIN PERSONS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of Holdings Common Stock and Options as of May 15, 1997, by (i) each
person who is known by the Company to beneficially own more than 5% of Holdings
Common Stock, (ii) each director of the Company, (iii) each officer of the
Company listed in the Summary Compensation Table above and (iv) by all directors
and executive officers as a group. Except as otherwise indicated, beneficial
ownership includes both voting and investment power with respect to the Holdings
Common Stock shown.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NUMBER OF SHARES UNDERLYING OPTIONS PERCENT OF CLASS
NAME OF BENEFICIAL OWNER(a) BENEFICIALLY OWNED BENEFICIALLY OWNED(a) (FULLY DILUTED)
- ---------------------------------------- ------------------- --------------------- -----------------
<S> <C> <C> <C>
Greenwich II, LLC(b).................... 2,605,060 -- 78.2%
John L. Hale............................ 243,680 103,930 11.1%
John T. Hislop.......................... 17,480 50,080 2.2%
Glen E. Cavanaugh....................... 21,480 26,110 1.6%
Daniel G. Wright........................ 12,080 32,290 1.4%
John A. Palleschi....................... 48,880 24,530 2.4%
Lodwrick M. Cook........................ 0 0 0%
Alfred C. Eckert III(c)................. 0 0 0%
Nicholas E. Somers(c)................... 0 0 0%
All directors and officers as a group 427,880 267,640 21.0%
(11) persons(b)(c)....................
</TABLE>
- ---------------
(a) The shares listed include shares of Holdings Common Stock that may be
acquired upon exercise of presently exercisable options to acquire Holdings
Common Stock, and all such options that will become exercisable within 60
days from the date on which such information is given.
(b) See "Ownership of Capital Stock" for information concerning the ownership of
limited liability company interests of Greenwich II, LLC.
(c) Does not include any of the 2,605,060 shares of Holdings Common Stock
beneficially owned by Greenwich II LLC, which Mr. Eckert and Mr. Somers may
be deemed to beneficially own by virtue of their affiliation with GSCP. Mr.
Eckert and Mr. Somers disclaim any such beneficial ownership.
In connection with the Transactions, an aggregate of 811,520, 175,540,
113,780, 106,680 and 168,960 of the shares of Holdings Common Stock and options
to acquire shares of Holdings Common Stock held by Messrs. Hale, Hislop,
Cavanaugh, Wright and Palleschi, respectively, were converted into the right to
receive an aggregate of $25.6 million, $5.5 million, $3.6 million, $3.3 million
and $5.4 million in cash, respectively. In addition, in connection with the
Transactions, an aggregate of 329,760, 64,460, 46,220, 43,320 and 69,040 of the
shares of Holdings Common Stock and options to acquire shares of Holdings Common
Stock held by Messrs. Hale, Hislop, Cavanaugh, Wright and Palleschi,
respectively, were retained by such individuals.
RELATED TRANSACTIONS
The Company has also engaged Greenwich Street Capital Partners, Inc.
("Greenwich"), the manager of GSCP, to provide it with certain business,
financial and managerial advisory services, including developing and
implementing corporate and business strategy and providing other consulting and
advisory services. In exchange for such services, the Company has agreed to pay
Greenwich an annual fee of $1.7 million, payable quarterly in arrears, plus
Greenwich's reasonable out-of-pocket costs and expenses. This engagement will be
in effect until the earlier to occur of the tenth anniversary of
Recapitalization Closing Date and the date on which GSCP no longer owns,
directly or indirectly, any shares of the capital stock of G-II, and may be
earlier terminated by Greenwich in its discretion.
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<PAGE> 65
In addition, on the Recapitalization Closing Date, Greenwich received $2.5
million in fees for providing services relating to the structuring and
management of the Recapitalization and reimbursement for its reasonable
out-of-pocket costs and expenses relating to its provision of such services.
RELATIONSHIPS BETWEEN GSCP AND THE INITIAL PURCHASERS
GSCP and Smith Barney Inc. are both affiliated companies of Travelers Group
Inc. An affiliate of Chase Securities Inc. ("CSI") is a limited partner in GSCP.
Princes Gate Investors II, L.P. ("Princes Gate"), an investment fund affiliated
with Morgan Stanley & Co. Incorporated, together with certain affiliated
investors, will be the owners of the GST Subordinated Debentures.
DESCRIPTION OF SENIOR SECURED CREDIT FACILITY
General. The Company entered into the Senior Secured Credit Facility, on
the Recapitalization Closing Date with the banks, financial institutions and
other entities selected in the syndication effort (the "Lenders"), Chase, as
administrative agent, syndication agent and lender, and Morgan Stanley Senior
Funding, Inc., as documentation agent, and lender, which provides for the Term
Loan Facility of $115.0 million and the Revolving Credit Facility of $25.0
million, which includes a $10.0 million letter of credit facility. The following
is a summary of the principal terms of the credit agreement governing the Senior
Secured Credit Facility and related loan documents (the "Credit Documentation")
and is subject to and qualified in its entirety by reference to the Credit
Documentation, which is filed as an Exhibit to the Registration Statement of
which this Prospectus forms a part. Copies of the Credit Documentation are
available upon request from the Company.
Use of Facility. Upon consummation of the Recapitalization, the Company
had $115.0 million outstanding under the Term Loan Facility and would have had
$7.3 million outstanding under the Revolving Credit Facility had all related
fees and expenses been paid on such date. On such date, the Company also had
$5.9 million of letters of credit outstanding under the Revolving Credit
Facility. The remainder of the Revolving Credit Facility, $11.8 million, would
have been available (subject to borrowing base availability) to service the
working capital requirements of the Company and for its general corporate
purposes.
Security, Guarantees. The obligations of the Company under the Credit
Documentation are unconditionally guaranteed, jointly and severally, by each
domestic subsidiary of the Company and will also be guaranteed by each
subsequently acquired or organized direct and indirect domestic subsidiary of
the Company. The obligations under the Senior Secured Credit Facility and the
guarantees thereof are secured by a first priority security interest in
substantially all of the Company's tangible and intangible assets, including,
without limitation, intellectual property, owned U.S. real property, all of the
capital stock of the Company and each of its existing and subsequently acquired
or organized direct and indirect domestic subsidiaries, and 65% of the capital
stock of each of its existing and subsequently acquired or organized direct
foreign subsidiaries.
Borrowing Base. Loans under the Revolving Credit Facility are subject to
maintenance by the Company of a borrowing base (the "Borrowing Base"). At any
time, amounts borrowed under the Revolving Credit Facility may not exceed the
sum of 80% of the eligible accounts receivable and 50% of the eligible inventory
of the Company, provided that the portion of the borrowing base represented by
eligible inventory shall not be more than 50%. The borrowing base will be
computed at least monthly by the Company.
Amortization, Interest. The Tranche A Facility is repayable in consecutive
quarterly installments over five and one-half years and matures on November 6,
2002 and the Tranche B Facility is repayable in consecutive quarterly
installments over seven and one-half years and matures on November 6, 2004. The
Term Loan Facility initially bears interest at a rate per annum equal (at the
Company's option) to (i) an Alternate Base Rate (equal to the highest of (a)
Chase's prime rate, (b) the secondary market rate for certificates of deposit
plus 1% and (c) the federal funds effective rate plus 0.5% (the "ABR")) plus
1.50% (the "ABR Applicable Margin"), in the case of the Tranche A Term Loan
Facility, and, in the case of the Tranche B Term Loan Facility, 2.00% or (ii)
the Eurodollar Rate (the rate at which Eurodollar deposits for one, two, three
or six months (at the Company's option) are offered to Chase in the interbank
Eurodollar market) in the approximate amount of Chase's share of the relevant
loan (the "Eurodollar Rate") plus 2.50% (the "Eurodollar Applicable Margin"), in
the case of the Tranche A Term Loan Facility, and, in the case of
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<PAGE> 66
the Tranche B Term Loan Facility, 3.00%. The Revolving Credit Facility is
available on a revolving and matures on November 6, 2002. The Revolving Credit
Facility initially bears interest at a rate per annum equal (at the Company's
option) to (i) the ABR plus the ABR Applicable Margin or (ii) the Eurodollar
Rate plus the Eurodollar Applicable Margin.
Prepayments and Reduction of Commitments. The Senior Secured Credit
Facility permits the Company to prepay loans and to permanently reduce revolving
credit-commitments in minimum amounts equal to $1.0 million or a whole multiple
of $500,000 in excess thereof. In addition, the Company is required to make
mandatory prepayments with (i) non-ordinary asset sale proceeds, (ii) equity and
debt proceeds (with certain exceptions) and (iii) with 75% of the excess cash
flow of the Company and its subsidiaries for each fiscal year commencing on
April 1, 1997 and each fiscal year thereafter. All such amounts shall be
applied, first, to the prepayment of the Term Loan Facility and, second, to the
permanent reduction of the Revolving Credit Facility (other than prepayments
with excess cash flow). The Revolving Credit Facility must be prepaid and, when
there are no loans outstanding under the Revolving Credit Facility, all
outstanding letters of credit must be cash collateralized to the extent
aggregate outstandings at any time exceed the lesser of the amount of the
Revolving Credit Facility or the Borrowing Base.
Fees. The Company has agreed to pay to the lenders the following fees: (i)
an annual administration fee of $100,000 for the first year, which will be paid
on the Recapitalization Closing Date, and $75,000 for each subsequent year,
which will be payable in advance of each subsequent anniversary of the
Recapitalization Closing Date prior to the maturity or early termination of the
Senior Secured Credit Facility and the payment in full of all amounts owing
thereunder and (ii) a commitment fee equal to 0.50% per annum, payable
quarterly, on the average daily unused portion of the Senior Secured Credit
Facility. The Company will also pay a commission on the face amount of all
outstanding letters of credit at a per annum rate equal to the Eurodollar
Applicable Margin under the Revolving Credit Facility then in effect plus a
fronting fee equal to 0.25% per annum, payable quarterly, on the face amount of
each letter of credit. In addition, the Company will be required to pay to the
issuing lender customary administrative, issuance, amendment, payment and
negotiation charges.
Covenants. The Senior Secured Credit Facility contains a number of
negative covenants that, among other things, restrict the ability of the Company
to dispose of assets; incur additional indebtedness (including preferred stock);
guarantee obligations; merge, consolidate, liquidate or dissolve; lease
property; pay dividends or make distributions in respect of capital stock;
create liens on assets; enter into sale and leaseback transactions; make
investments, loans or advances (including in or to subsidiaries the current
assets of which are not included in the borrowing base calculation); make
optional payments and modifications of the Notes; change the business conducted
by the Company or its subsidiaries; make capital expenditures; engage in certain
transactions with affiliates; agree to negative pledge clauses; or cause changes
in its fiscal year. The Senior Secured Credit Facility also contains affirmative
covenants that require the Company (i) to provide certain information to Chase;
(ii) to continue its business and maintain its material rights and privileges;
(iii) to comply with laws and its material contractual obligations; (iv) to
maintain its property and adequate insurance; (v) to maintain certain books and
records; (vi) to allow the Lenders to inspect its property and books and conduct
field audits of its accounts receivable and inventory; and (vii) to agree to
grant security interests in after-acquired property.
The Company is also required to comply with specified financial covenants
and ratios, including (i) a minimum consolidated EBITDA requirement, (ii) a
maximum consolidated debt to consolidated EBITDA ratio, and (iii) a minimum
consolidated EBITDA to consolidated fixed charges ratio.
Events of Default. The Senior Secured Credit Facility contains customary
events of default, including defaults relating to non-payment, material breach
of a representation, warranty or covenant contained therein, cross-default and
acceleration, bankruptcy, certain ERISA events, material judgements, actual or
asserted invalidity of any guarantee or security document, subordination
provisions or security interest, and a change of control.
Expenses and Indemnification. Under the Senior Secured Credit Facility,
the Company has agreed to pay (i) all reasonable out-of-pocket expenses of Chase
and the Lenders associated with the preparation,
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<PAGE> 67
execution, delivery, and administration of the Credit Documentation and any
amendment or waiver with respect thereto (including the reasonable fees and
disbursements and other charges of counsel) and (ii) all out-of-pocket expenses
of Chase and the Lenders in connection with the enforcement thereof (including
the reasonable fees and disbursements and other charges of counsel). In
addition, the Company will agree to indemnify Chase, the Lenders and related
parties against any loss, liability, cost or expense incurred in respect of the
financing or the use or the proposed use of proceeds thereof, except for losses,
liability, costs or expenses resulting from the gross negligence or willful
misconduct of the indemnified party or any or its respective directors,
officers, employees and agents.
THE EXCHANGE OFFER
The summary herein of certain provisions of the Exchange and Registration
Rights Agreement does not purport to be complete and reference is made to the
provisions of the Exchange and Registration Rights Agreement, which has been
filed as an exhibit to the Registration Statement and a copy of which is
available as set forth under the heading "Available Information."
TERMS OF THE EXCHANGE OFFER
General
In connection with the issuance of the Existing Notes pursuant to a
Purchase Agreement, dated as of April 29, 1997 between the Company and the
Initial Purchasers, the Initial Purchasers and their respective assignees became
entitled to the benefits of the Exchange and Registration Rights Agreement.
Under the Exchange and Registration Rights Agreement, the Company has
agreed (i) to file with the Commission within 60 days after May 6, 1997, the
date the Existing Notes were issued (the "Issue Date"), the Registration
Statement of which this Prospectus is a part with respect to a registered offer
to exchange the Existing Notes for the New Notes, (ii) to use its reasonable
best efforts to cause the Registration Statement to be declared effective under
the Securities Act within 150 days after the Issue Date and (iii) to use its
reasonable best efforts to consummate the Exchange Offer within 165 calendar
days after the Issue Date. The Company will keep the Exchange Offer open for not
less than 30 days after the date notice of the Exchange Offer is mailed to
holders of the Existing Notes. The Exchange Offer being made hereby, if
commenced and consummated within the time periods described in this paragraph,
will satisfy those requirements under the Exchange and Registration Rights
Agreement.
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, all Existing Notes validly tendered and not
withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date will be
accepted for exchange. New Notes will be issued in exchange for an equal
principal amount of outstanding Existing Notes accepted in the Exchange Offer.
Existing Notes may be tendered only in integral multiples of $1,000. This
Prospectus, together with the Letter of Transmittal, is being sent to all
registered holders as of September 8, 1997. The Exchange Offer is not
conditioned upon any minimum principal amount of Existing Notes being tendered
for exchange. However, the obligation to accept Existing Notes for exchange
pursuant to the Exchange Offer is subject to certain conditions as set forth
herein under "-- Conditions."
Existing Notes shall be deemed to have been accepted as validly tendered
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Existing Notes for the purposes of receiving the New Notes and delivering New
Notes to such holders.
Based on interpretations by the Staff of the Commission as set forth in
no-action letters issued to third parties (including Exxon Capital Holdings
Corporation (available May 13, 1988), Morgan Stanley & Co. Incorporated
(available June 5, 1991), K-III Communications Corporation (available May 14,
1993) and Shearman & Sterling (available July 2, 1993)), the Company believes
that the New Notes issued pursuant to the Exchange Offer may be offered for
resale, resold and otherwise transferred by any holder thereof (other than any
such holder that is a broker-dealer or an "affiliate" of the Company within the
meaning of Rule 405
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<PAGE> 68
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that (i) such New
Notes are acquired in the ordinary course of business, (ii) at the time of the
commencement of the Exchange Offer such holder has no arrangement or
understanding with any person to participate in a distribution of such New Notes
and (iii) such holder is not engaged in, and does not intend to engage in, a
distribution of such New Notes. The Company has not sought, and does not intend
to seek, a no-action letter from the Commission with respect to the effects of
the Exchange Offer, and there can be no assurance that the Staff would make a
similar determination with respect to the New Notes as it has in such no-action
letters.
By tendering Existing Notes in exchange for New Notes and executing the
Letter of Transmittal, each holder will represent to the Company that: (i) it is
not an affiliate of the Company, (ii) any New Notes to be received by it will be
acquired in the ordinary course of business and (iii) at the time of the
commencement of the Exchange Offer it had no arrangement or understanding with
any person to participate in a distribution of the New Notes and, if such holder
is not a broker-dealer, it is not engaged in, and does not intend to engage in,
a distribution of New Notes. If a holder of Existing Notes is unable to make the
foregoing representations, such holder may not rely on the applicable
interpretations of the Staff of the Commission and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transaction unless such sale is made
pursuant to an exemption from such requirements.
Each broker-dealer that receives New Notes for its own account in exchange
for Existing Notes where such Existing Notes were acquired by such broker-dealer
as a result of market-making or other trading activities, must acknowledge that
it will deliver a prospectus meeting the requirements of the Securities Act and
that it has not entered into any arrangement or understanding with the Company
or an affiliate of the Company to distribute the New Notes in connection with
any resale of such New Notes. See "Plan of Distribution."
Upon consummation of the Exchange Offer, subject to certain limited
exceptions, holders of Existing Notes who do not exchange their Existing Notes
for New Notes in the Exchange Offer will no longer be entitled to registration
rights and will not be able to offer or sell their Existing Notes, unless such
Existing Notes are subsequently registered under the Securities Act (which,
subject to certain limited exceptions, the Company will have no obligation to
do), except pursuant to an exemption from, or in a transaction not subject to,
the Securities Act and applicable state securities laws.
Expiration Date; Extensions; Amendments; Termination
The term "Expiration Date" shall mean October 8, 1997 (30 calendar days
following the commencement of the Exchange Offer), unless the Company, in its
sole discretion, extends the Exchange Offer, in which case the term "Expiration
Date" shall mean the latest date to which the Exchange Offer is extended.
Notwithstanding any extension of the Exchange Offer, if the Exchange Offer is
not consummated by October 18, 1997, the Company must pay liquidated damages to
each holder of Existing Notes in an amount equal to $0.192 per week per $1,000
principal amount of the Existing Notes held by such holder until the Exchange
Offer is consummated.
To extend the Expiration Date, the Company will notify the Exchange Agent
of any extension by oral or written notice and will notify the holders of the
Existing Notes by means of a press release or other public announcement prior to
9:00 A.M., New York City time, on the next business day after the previously
scheduled Expiration Date. Such announcement may state that the Company is
extending the Exchange Offer for a specified period of time.
The Company reserves the right (i) to delay acceptance of any Existing
Notes, to extend the Exchange Offer or to terminate the Exchange Offer and not
permit acceptance of Existing Notes not previously accepted if any of the
conditions set forth herein under "-- Conditions" shall have occurred and shall
not have been waived by the Company prior to the Expiration Date, by giving oral
or written notice of such delay, extension or termination to the Exchange Agent,
or (ii) to amend the terms of the Exchange Offer in any manner deemed by it to
be advantageous to the holders of the Existing Notes. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by oral or written notice
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<PAGE> 69
thereof to the Exchange Agent. If the Exchange Offer is amended in a manner
determined by the Company to constitute a material change, the Company will
promptly disclose such amendment in a manner reasonably calculated to inform the
holders of the Existing Notes of such amendment.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligations to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to an appropriate news agency.
INTEREST ON THE NEW NOTES
The New Notes will accrue interest at the rate of 10 1/2% per annum from
the Issue Date of the Existing Notes. Interest on the New Notes are payable on
May 1 and November 1 of each year, commencing November 1, 1997.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with any other
required documents, to the Exchange Agent prior to 5:00 p.m., New York City
time, on the Expiration Date. In addition, either (i) a timely confirmation of a
book-entry transfer (a "Book-Entry Confirmation") of such Existing Notes into
the Exchange Agent's account at The Depository Trust Company (the "Book-Entry
Transfer Facility") pursuant to the procedure for book-entry transfer described
below, must be received by the Exchange Agent prior to the Expiration Date or
(ii) the holder must comply with the guaranteed delivery procedures described
below. THE METHOD OF DELIVERY OF LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED
DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY
MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OTHER REQUIRED DOCUMENTS
SHOULD BE SENT TO THE COMPANY. Delivery of all documents must be made to the
Exchange Agent at its address set forth below. Holders may also request their
respective brokers, dealers, commercial banks, trust companies or nominees to
effect such tender for such holders.
The tender by a holder of Existing Notes will constitute an agreement
between such holder and the Company in accordance with the terms and subject to
the conditions set forth herein and in the Letter of Transmittal. Any beneficial
owner whose Existing Notes are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and who wishes to tender should
contact such registered holder promptly and instruct such registered holder to
tender on his behalf.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by any member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor" institution within the meaning of Rule
17Ad-15 under the Exchange Act (each an "Eligible Institution") unless the
Existing Notes tendered pursuant thereto is tendered for the account of an
Eligible Institution.
If the Letter of Transmittal is signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such person should so indicate
when signing, and unless waived by the Company, evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and withdrawal of the tendered Existing Notes will be determined by the
Company in its sole discretion, which determination will be final and binding.
The Company reserves the absolute right to reject any and all Existing Notes not
properly tendered or any Existing Notes which, if accepted, would, in the
opinion of counsel for the Company, be
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<PAGE> 70
unlawful. The Company also reserves the absolute right to waive any
irregularities or conditions of tender as to particular Existing Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Existing Notes must be cured within such time as the
Company shall determine. Neither the Company, the Exchange Agent nor any other
person shall be under any duty to give notification of defects or irregularities
with respect to tenders of Existing Notes, nor shall any of them incur any
liability for failure to give such notification. Tenders of Existing Notes will
not be deemed to have been made until such irregularities have been cured or
waived. Any Existing Notes received by the Exchange Agent that is not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned without cost to such holder by the Exchange Agent,
unless otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In addition, the Company reserves the right in its sole discretion, subject
to the provisions of the Indenture, (i) to purchase or make offers for any
Existing Notes that remains outstanding subsequent to the Expiration Date or, as
set forth under "-- Conditions", (ii) to terminate the Exchange Offer in
accordance with the terms of the Exchange and Registration Rights Agreement,
(iii) to redeem Existing Notes as a whole or in part at any time and from time
to time, as set forth under "Description of Notes -- Optional Redemption" and
(iv) to the extent permitted by applicable law, to purchase Existing Notes in
the open market, in privately negotiated transactions or otherwise. The terms of
any such purchases or offers could differ from the terms of the Exchange Offer.
ACCEPTANCE OF EXISTING NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
all Existing Notes properly tendered will be accepted promptly after the
Expiration Date, and the New Notes will be issued promptly after acceptance of
the Existing Notes. See "-- Conditions." For purposes of the Exchange Offer,
Existing Notes shall be deemed to have been accepted as validly tendered for
exchange when, as and if the Company has given oral or written notice thereof to
the Exchange Agent.
In all cases, issuance of New Notes for Existing Notes that are accepted
for exchange pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of a Book-Entry Confirmation of such Existing
Notes into the Exchange Agent's account at the Book-Entry Transfer Facility, a
properly completed and duly executed Letter of Transmittal and all other
required documents. If any tendered Existing Notes are not accepted for any
reason set forth in the terms and conditions of the Exchange Offer, such
unaccepted or such nonexchanged Existing Notes will be credited to an account
maintained with such Book-Entry Transfer Facility as promptly as practicable
after the expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Existing Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus. Any
financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Existing Notes by causing the
Book-Entry Transfer Facility to transfer such Existing Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, the Letter of
Transmittal or facsimile thereof with any required signature guarantees and any
other required documents must, in any case, be transmitted to and received by
the Exchange Agent at one of the addresses set forth below under "-- Exchange
Agent" on or prior to the Expiration Date or the guaranteed delivery procedures
described below must be complied with.
EXCHANGING BOOK-ENTRY NOTES
The Exchange Agent and the Book Entry Transfer Facility have confirmed that
any financial institution that is a participant in the Book Entry Transfer
Facility may utilize the Book-Entry Transfer Facility Automated Tender Offer
Program ("ATOP") procedures to tender Existing Notes.
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<PAGE> 71
Any participant in the Book Entry Transfer Facility may make book-entry
delivery of Existing Notes by causing the Book Entry Transfer Facility to
transfer such Existing Notes into the Exchange Agent's account in accordance
with the Book Entry Transfer Facility's ATOP procedures for transfer. However,
the exchange for the Existing Notes so tendered will only be made after a
Book-Entry Confirmation of such book-entry transfer of Existing Notes into the
Exchange Agent's account, and timely receipt by the Exchange Agent of an Agent's
Message (as such term is defined in the next sentence) and any other documents
required by the Letter of Transmittal. The term "Agent's Message" means a
message, transmitted by the Book Entry Transfer Facility and received by the
Exchange Agent and forming part of a Book-Entry Confirmation, which states that
the Book Entry Transfer Facility has received an express acknowledgment from a
participant tendering Existing Notes that are the subject of such Book-Entry
Confirmation that such participant has received and agrees to be bound by the
terms of the Letter of Transmittal, and that the Company may enforce such
agreement against such participant.
GUARANTEED DELIVERY PROCEDURES
If the procedures for book-entry transfer cannot be completed on a timely
basis, a tender may be effected if (i) the tender is made through an Eligible
Institution, (ii) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Letter of
Transmittal (or a facsimile thereof) and Notice of Guaranteed Delivery,
substantially in the form provided by the Company (by facsimile transmission,
mail or hand delivery), setting forth the name and address of the holder of
Existing Notes and the amount of Existing Notes tendered, stating that the
tender is being made thereby and guaranteeing that within three New York Stock
Exchange ("NYSE") trading days after the date of execution of the Notice of
Guaranteed Delivery, a Book-Entry Confirmation and any other documents required
by the Letter of Transmittal will be deposited by the Eligible Institution with
the Exchange Agent and (iii) a Book-Entry Confirmation and all other documents
required by the Letter of Transmittal are received by the Exchange Agent within
three NYSE trading days after the date of execution of the Notice of Guaranteed
Delivery.
WITHDRAWAL OF TENDERS
Tenders of Existing Notes may be withdrawn at any time prior to 5:00 p.m.,
New York City time on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent prior to 5:00 p.m., New York City time on the
Expiration Date at one of the addresses set forth below under "-- Exchange
Agent." Any such notice of withdrawal must specify the name and number of the
account at the Book-Entry Transfer Facility from which the Existing Notes was
tendered, identify the principal amount of the Existing Notes to be withdrawn,
and specify the name and number of the account at the Book-Entry Transfer
Facility to be credited with the withdrawn Existing Notes and otherwise comply
with the procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notice will be determined by the
Company, whose determination shall be final and binding on all parties. Any
Existing Notes so withdrawn will be deemed not be have been validly tendered for
exchange for purposes of the Exchange Offer. Any Existing Notes which have been
tendered for exchange but which are not exchanged for any reason will be
credited to an account maintained with such Book-Entry Transfer Facility for the
Existing Notes as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Existing Notes may be
retendered by following one of the procedures described under "-- Procedures for
Tendering" and "-- Book-Entry Transfer" above at any time on or prior to the
Expiration Date.
CONDITIONS
The Company has no obligation to consummate the Exchange Offer if the New
Notes to be received by such holder or holders of Existing Notes in the Exchange
Offer, upon receipt, will not be tradable by such holder without restriction
under the Securities Act and the Exchange Act and without material restrictions
under the "blue sky" or securities laws of the several states of the United
States. All conditions to the Exchange Offer (with the exception of certain
necessary governmental approvals) must be satisfied or waived prior to the
Expiration Date.
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EXCHANGE AGENT
Manufacturers Traders and Trust Company has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance and requests
for additional copies of this Prospectus or of the Letter of Transmittal should
be directed to the Exchange Agent addressed as follows:
<TABLE>
<S> <C> <C>
By Mail: By Hand to 4:30 pm:
One M&T Plaza
7th Floor Telephone:
Buffalo, New York 14203 716 842-5602 Attention: Russell Whitley
Attention: Russell Whitley
Assistant Vice Facsimile:
President 716 842-4474
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail; however, additional solicitations may be
made by telegraph, telephone, telecopy or in person by officers and regular
employees of the Company.
The Company will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
the Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith. The Company may also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of the Prospectus and related documents to the beneficial
owners of the Existing Notes, and in handling or forwarding tenders for
exchange.
The expenses to be incurred in connection with the Exchange Offer will be
paid by the Company, including fees and expenses of the Exchange Agent and
Trustee and accounting, legal, printing and related fees and expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Existing Notes pursuant to the Exchange Offer. If, however, New Notes or
Existing Notes for principal amounts not tendered or accepted for exchange are
to be registered or issued in the name of any person other than the registered
holder of the Existing Notes tendered, or if tendered Existing Notes are
registered in the name of any person other than the person signing the Letter of
Transmittal, or if a transfer tax is imposed for any reason other than the
exchange of Existing Notes pursuant to the Exchange Offer, then the amount of
any such transfer taxes (whether imposed on the registered holder or any other
persons) will be payable by the tendering holder. If satisfactory evidence of
payment of such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Existing Notes who do not exchange their Existing Notes for New
Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Existing Notes as set forth in the legend
thereon as a consequence of the issuance of the Existing Notes pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Existing Notes may not be offered or sold, unless registered under
the Securities Act, except pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable state securities laws. The
Company does not currently anticipate that it will register the Existing Notes
under the Securities Act. To the extent that Existing Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Existing Notes could be adversely affected.
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DESCRIPTION OF NOTES
GENERAL
The Existing Notes were issued, and the New Notes offered hereby will be
issued, under an Indenture, to be dated as of May 6, 1997 (the "Indenture"),
between the Company and Manufacturers and Traders Trust Company, as Trustee (the
"Trustee"), a copy of which is available upon request to the Company.
The following summary of certain provisions of the Indenture and the Notes
is a description of such provisions after giving effect to the consummation of
the Transactions. Such summary does not purport to be complete and is subject
to, and is qualified in its entirety by reference to, all the provisions of the
Indenture, including the definitions of certain terms therein and those terms to
be made a part thereof by the Trust Indenture Act of 1939, as amended ("TIA").
The Indenture is filed as an Exhibit to the Registration Statement of which this
Prospectus forms a part and is available, upon request, from the Company. The
term "Company" and the other capitalized terms defined in "-- Certain
Definitions" below are used in this "Description of Notes" as so defined.
Principal of, and premium, if any, and interest on, the Notes will be
payable, and the Notes may be exchanged or transferred, at the office or agency
of the Company in the Borough of Manhattan, The City of New York (which
initially shall be the principal corporate trust office of the Trustee, at 50
Broadway, 7th Floor, New York, New York), except that, at the option of the
Company, payment of interest may be made by check mailed to the address of the
registered holders of the Notes as such address appears in the Note Register.
The Notes will be unsecured obligations of the Company, ranking subordinate
in right of payment to all Senior Indebtedness of the Company.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
TERMS OF THE NOTES
The Notes will be limited to $125.0 million aggregate principal amount, and
will mature on May 1, 2007. Each Note will bear interest at a rate per annum
shown on the front cover of this Prospectus from the date of issuance, or from
the most recent date to which interest has been paid or provided for, payable
semiannually in cash to Holders of record at the close of business on the April
15 or October 15 immediately preceding the interest payment date on May 1 and
November 1 of each year, commencing November 1, 1997.
OPTIONAL REDEMPTION
The Notes will be redeemable, at the Company's option, in whole or in part,
and from time to time on and after May 1, 2002 and prior to maturity, upon not
less than 30 nor more than 60 days' prior notice mailed by first-class mail to
each Holder's registered address, at the following redemption prices (expressed
as a percentage of principal amount), plus accrued interest, if any, to the
redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date), if
redeemed during the 12-month period commencing on May 1 of the years set forth
below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
-------------------------------------------------- ----------
<S> <C>
2002.............................................. 105.250%
2003.............................................. 103.500%
2004.............................................. 101.750%
2005 and thereafter............................... 100.000%
</TABLE>
In addition, at any time and from time to time prior to May 1, 2000, the
Company may redeem in the aggregate up to 33 1/3% of the original aggregate
principal amount of the Notes with the proceeds of one or more Public Equity
Offerings by the Company following which there is a Public Market, at a
redemption price (expressed as a percentage of principal amount thereof) of
110.5% plus accrued interest, if any, to the
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<PAGE> 74
redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date);
provided, however,that at least 66 2/3% of the original aggregate principal
amount of the Notes must remain outstanding after each such redemption.
At any time on or prior to May 1, 2002, the Notes may also be redeemed as a
whole at the option of the Company upon the occurrence of a Change of Control,
upon not less than 30 nor more than 60 days' prior notice (but in no event more
than 180 days after the occurrence of such Change of Control) mailed by first-
class mail to each Holder's registered address, at a redemption price equal to
100% of the principal amount thereof plus the Applicable Premium as of, and
accrued but unpaid interest, if any, to, the date of redemption (the "Redemption
Date") (subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date).
In addition, as more fully described under "Change of Control," each Holder
will have the right to require the Company to repurchase all or any part of such
Holder's Notes following a Change of Control at a purchase price in cash equal
to 101% of the principal amount thereof, plus accrued and unpaid interest, if
any, to the date of repurchase.
SELECTION
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in original principal amount or less
will be redeemed in part. If any Note is to be redeemed in part only, the notice
of redemption relating to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note.
RANKING
The indebtedness evidenced by the Notes will be unsecured Senior
Subordinated Indebtedness of the Company, will be subordinated in right of
payment, as set forth in the Indenture, to the payment when due of all existing
and future Senior Indebtedness of the Company, including the Company's
obligations under the Senior Credit Facility, will rank pari passu in right of
payment with all existing and future Senior Subordinated Indebtedness of the
Company and will be senior in right of payment to all existing and future
Subordinated Obligations of the Company. The Notes will also be effectively
subordinated to any Secured Indebtedness of the Company and its Subsidiaries to
the extent of the value of the assets securing such Indebtedness. However,
payment from the money or the proceeds of U.S. Government Obligations held in
any defeasance trust described under "-- Defeasance" below is not subordinated
to any Senior Indebtedness or subject to the restrictions described herein.
At March 31, 1997, on a pro forma basis after giving effect to the
Transactions, the outstanding Senior Indebtedness of the Company would have been
approximately $120.0 million (exclusive of unused commitments), all of which
would have been Secured Indebtedness and no Senior Subordinated Indebtedness
(other than the indebtedness represented by the Notes). Although the Indenture
contains limitations on the amount of additional Indebtedness which the Company
may Incur, under certain circumstances the amount of such Indebtedness could be
substantial and, in any case, such Indebtedness may be Senior Indebtedness or
Secured Indebtedness. See "-- Certain Covenants -- Limitation on Indebtedness"
below.
Certain of the operations of the Company are conducted through its
Subsidiaries. Claims of creditors of such Subsidiaries, including trade
creditors, and claims of preferred shareholders (if any) of such Subsidiaries
will have priority with respect to the assets and earnings of such Subsidiaries
over the claims of creditors of the Company, including holders of the Notes. The
Notes, therefore, will be effectively subordinated to creditors (including trade
creditors) and preferred shareholders (if any) of Subsidiaries of the Company,
other than any such Subsidiary that may become a Note Guarantor in the future.
See "-- Note Guarantees" below. Although the Indenture limits the incurrence of
Indebtedness and preferred stock by certain of the Company's Subsidiaries, such
limitation is subject to a number of significant qualifications.
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<PAGE> 75
"Senior Indebtedness" means the following obligations, whether outstanding
on the date of the Indenture or thereafter issued, without duplication: (i) all
obligations consisting of Bank Indebtedness; and (ii) all obligations consisting
of the principal of and premium, if any, and accrued and unpaid interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company regardless of whether
post-filing interest is allowed in such proceeding) on, and fees and other
amounts owing in respect of, all other Indebtedness of the Company, unless, in
the instrument creating or evidencing the same or pursuant to which the same is
outstanding, it is expressly provided that the obligations in respect of such
Indebtedness are not senior in right of payment to the Notes; provided, however,
that Senior Indebtedness shall not include (1) any obligation of the Company to
any Subsidiary, (2) any liability for Federal, state, foreign, local or other
taxes owed or owing by the Company, (3) any accounts payable or other liability
to trade creditors arising in the ordinary course of business (including
Guarantees thereof or instruments evidencing such liabilities), (4) any
Indebtedness of the Company (or Guarantee by the Company of any Indebtedness)
that is expressly subordinate in right of payment to any other Indebtedness of
the Company (or Guarantee by the Company of any Indebtedness) or (5) any Capital
Stock. If any Designated Senior Indebtedness is disallowed, avoided or
subordinated pursuant to the provisions of Section 548 of Title 11 of the United
States Code or any applicable state fraudulent conveyance law, such Designated
Senior Indebtedness nevertheless will constitute Senior Indebtedness.
Only Indebtedness of the Company that is Senior Indebtedness will rank
senior to the Notes in accordance with the provisions of the Indenture. The
Notes will in all respects rank pari passu with all other Senior Subordinated
Indebtedness of the Company. The Company has agreed in the Indenture that it
will not Incur, directly or indirectly, any Indebtedness that is expressly
subordinate in right of payment to Senior Indebtedness unless such Indebtedness
is Senior Subordinated Indebtedness or is expressly subordinated in right of
payment to Senior Subordinated Indebtedness. Unsecured Indebtedness is not
deemed to be subordinate or junior to Secured Indebtedness merely because it is
unsecured, and Indebtedness that is not guaranteed by a particular Person is not
deemed to be subordinate or junior to Indebtedness that is so guaranteed merely
because it is not so guaranteed.
The Company may not pay principal of, or premium (if any) or interest on,
the Notes or make any deposit pursuant to the provisions described under
"Defeasance" below and may not otherwise purchase, redeem or otherwise retire
any Notes (collectively, "pay the Notes") if (i) any Senior Indebtedness is not
paid when due in cash or Cash Equivalents or (ii) any other default on Senior
Indebtedness occurs and the maturity of such Senior Indebtedness is accelerated
in accordance with its terms unless, in either case, (x) the default has been
cured or waived and any such acceleration has been rescinded in writing or (y)
such Senior Indebtedness has been paid in full in cash or Cash Equivalents.
However, the Company may pay the Notes without regard to the foregoing if the
Company and the Trustee receive written notice approving such payment from the
Representative of each Designated Senior Indebtedness with respect to which
either of the events set forth in clause (i) or (ii) of the immediately
preceding sentence has occurred and is continuing.
In addition, during the continuance of any default (other than a default
described in clause (i) or (ii) of the first sentence of the immediately
preceding paragraph) with respect to any Designated Senior Indebtedness pursuant
to which the maturity thereof may be accelerated immediately without further
notice (except such notice as may be required to effect such acceleration) or
the expiration of any applicable grace periods, the Company may not pay the
Notes for a period (a "Payment Blockage Period") commencing upon the receipt by
the Trustee (with a copy to the Company) of written notice (a "Blockage Notice")
of such default from the Representative of each Designated Senior Indebtedness
specifying an election to effect a Payment Blockage Period and ending 179 days
thereafter (or earlier if such Payment Blockage Period is terminated (i) by
written notice to the Trustee and the Company from the Person or Persons who
gave such Blockage Notice, (ii) because such Designated Senior Indebtedness has
been repaid in full or (iii) because the default giving rise to such Blockage
Notice is no longer continuing). Notwithstanding the provisions described in the
immediately preceding sentence (but subject to the provisions contained in the
first sentence of the immediately preceding paragraph), unless the holders of
such Designated Senior Indebtedness or the Representative of such holders have
accelerated the maturity of such Designated Senior Indebtedness, the Company may
resume payments on the Notes after the end of such Payment Blockage Period. Not
more than
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one Blockage Notice may be given in any consecutive 360-day period, irrespective
of the number of defaults with respect to Designated Senior Indebtedness during
such period. However, if any Blockage Notice within such 360-day period is given
by or on behalf of any holders of Designated Senior Indebtedness other than Bank
Indebtedness, a Representative of Bank Indebtedness may give another Blockage
Notice within such period. In no event, however, may the total number of days
during which any Payment Blockage Period or Periods is in effect exceed 179 days
in the aggregate during any 360 consecutive day period.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation or dissolution or reorganization of or similar proceeding
relating to the Company or its property, or in a bankruptcy, insolvency,
receivership or similar proceeding relating to the Company or its property, the
holders of Senior Indebtedness will be entitled to receive payment in full of
the Senior Indebtedness before the Noteholders are entitled to receive any
payment and until the Senior Indebtedness is paid in full, any payment or
distribution to which Noteholders would be entitled but for the subordination
provisions of the Indenture will be made to holders of the Senior Indebtedness
as their interests may appear. If a distribution is made to Noteholders that due
to the subordination provisions should not have been made to them, such
Noteholders are required to hold it in trust for the holders of Senior
Indebtedness and pay it over to them as their interests may appear.
If payment of the Notes is accelerated because of an Event of Default, the
Company or the Trustee shall promptly notify the holders of the Designated
Senior Indebtedness or the Representative of such holders of the acceleration.
The Company may not pay the Notes until five Business Days after such holders or
the Representative of each Designated Senior Indebtedness receive notice of such
acceleration and, thereafter, may pay the Notes only if the subordination
provisions of the Indenture otherwise permit payment at that time.
By reason of such subordination provisions contained in the Indenture, in
the event of insolvency, creditors of the Company who are holders of Senior
Indebtedness may recover more, ratably, than the Noteholders, and trade
creditors of the Company who are not holders of Senior Indebtedness or of Senior
Subordinated Indebtedness (including the Notes) may recover less, ratably, than
holders of Senior Indebtedness and may recover more, ratably, than the holders
of Senior Subordinated Indebtedness. In addition, as described above, the Notes
will be effectively subordinated to the claims of creditors of the Company's
Subsidiaries.
NOTE GUARANTEES
After the Issue Date, the Company may cause any Restricted Subsidiary, and
will cause each newly acquired or created Domestic Subsidiary that is a
Significant Subsidiary (each, a "Note Guarantor"), to execute and deliver to the
Trustee a supplemental indenture pursuant to which such Subsidiary will
guarantee (each, a "Note Guarantee") payment of the Notes. Each such Note
Guarantor as primary obligor and not merely as surety, will jointly and
severally, irrevocably and fully and unconditionally Guarantee, on a senior
subordinated basis, the performance and punctual payment when due, whether at
Stated Maturity, by acceleration or otherwise, of all obligations of the Company
under the Indenture and the Notes, whether for principal of or interest on the
Notes, expenses, indemnification or otherwise (all such obligations guaranteed
by such Note Guarantors being herein called the "Guaranteed Obligations"). Such
Note Guarantors will agree to pay, in addition to the amount stated above, any
and all expenses (including reasonable counsel fees and expenses) incurred by
the Trustee or the Holders in enforcing any rights under the Note Guarantees.
The obligations of each Note Guarantor will be limited to the maximum
amount, as will, after giving effect to all other contingent and fixed
liabilities of such Note Guarantor, result in the obligations of such Note
Guarantor under the Note Guarantee not constituting a fraudulent conveyance or
fraudulent transfer under federal or state law.
Each such Note Guarantee shall be a continuing Guarantee and shall (i)
remain in full force and effect until payment in full of the principal amount of
all outstanding Notes (whether by payment at maturity, purchase, redemption,
defeasance, retirement or other acquisition) and all other Guaranteed
Obligations then due and owing, unless earlier terminated as described below,
(ii) be binding upon such Note Guarantor and
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(iii) inure to the benefit of and be enforceable by the Trustee, the Holders and
their successors, transferees and assigns.
The Indenture provides that, subject to the provisions described in the
next succeeding paragraph, no Note Guarantor may consolidate or merge with or
into (whether or not such Note Guarantor is the surviving Person) another Person
unless (i) the Person formed by or surviving any such consolidation or merger
(if other than a Note Guarantor or the Company) assumes all the obligations of
such Note Guarantor under the Note Guarantee and the Indenture pursuant to a
supplemental indenture, in form reasonably satisfactory to the Trustee, and (ii)
if such merger or consolidation is with a Person other than the Company or a
Restricted Subsidiary, (x) immediately after such transaction, no Default or
Event of Default exists and (y) the Company will, at the time of such
transaction after giving pro forma effect thereto, be permitted to incur at
least $1.00 of additional Indebtedness pursuant to paragraph (a) under "Certain
Covenants -- Limitation on Indebtedness."
Notwithstanding the preceding paragraph, concurrently with any sale or
disposition (by merger or otherwise) of any Note Guarantor in accordance with
the terms of the Indenture (including the covenant described under "-- Certain
Covenants -- Limitation on Sales of Assets") by the Company or a Restricted
Subsidiary to any Person that is not an Affiliate of the Company, such Note
Guarantor will automatically and unconditionally be released from all
obligations under its Note Guarantee; provided, however, that any such release
shall occur only to the extent that all obligations of such Note Guarantor
under, and all of its guarantees of, and all of its pledges of assets or other
security interests which secure, any Bank Indebtedness of the Company shall also
terminate upon such release, sale or transfer (other than with respect to any
such Indebtedness that is assumed by any Person that is not an Affiliate of the
Company).
In addition, any Note Guarantee of any Note Guarantor will be automatically
and unconditionally released and discharged upon the merger or consolidation of
such Note Guarantor with and into the Company or another Note Guarantor that is
the surviving Person in such merger or consolidation.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder will have the right to require the Company to repurchase
all or any part of such Holder's Notes at a purchase price in cash equal to 101%
of the principal amount thereof, plus accrued and unpaid interest, if any, to
the date of repurchase (subject to the right of Holders of record on the
relevant record date to receive interest due on the relevant interest payment
date); provided, however, that notwithstanding the occurrence of a Change of
Control, the Company shall not be obligated to purchase the Notes pursuant to
this covenant in the event that it has exercised its right to redeem all of the
Notes as described under "Optional Redemption":
(i) prior to the first public offering of Voting Stock of the Company,
either (x) Permitted Holders cease to be the "beneficial owner" or
"beneficial owners" (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act), directly or indirectly, of more than 35% of the total voting power of
the Voting Stock of the Company, or (y) Permitted Holders cease to be
entitled by voting power, contract or otherwise to elect or cause the
election of directors of the Company having a majority of the total voting
power of the Board of Directors, in each case, whether as a result of
issuance of securities of the Company, any merger, consolidation,
liquidation or dissolution of the Company, any direct or indirect transfer
of securities by any Permitted Holder or otherwise (for purposes of this
clause (i) and clause (ii) below, Permitted Holders shall be deemed to
beneficially own any Voting Stock of an entity (the "specified entity" held
by any other entity (the "parent entity") so long as the Permitted Holders
beneficially own (as so defined), directly or indirectly, a majority of the
Voting Stock of the parent entity);
(ii) following the first public offering of Voting Stock of the
Company, any "Person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than one or more Permitted Holders, is or becomes
the beneficial owner (as defined in clause (i) above, except that a Person
shall be deemed to have "beneficial ownership" of all shares that any such
Person has the right to acquire within one year), directly or indirectly,
of more than 35% of the Voting Stock of the Company, provided that the
Permitted Holders beneficially own (as defined in clause (i) above),
directly or indirectly, in the aggregate a lesser
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percentage of the Voting Stock of the Company than such other Person and do
not have the right or ability by voting power, contract or otherwise to
elect or designate for election a majority of the Board of Directors; or
(iii) during any period of two consecutive years, individuals who at
the beginning of such period constituted the Board of Directors (together
with any new directors whose election by such Board of Directors or whose
nomination for election by the shareholders of the Company was approved by
a vote of a majority of the directors of the Company then still in office
who were either directors at the beginning of such period or whose election
or nomination for election was previously so approved) cease for any reason
to constitute a majority of the Board of Directors then in office.
In the event that at the time of such Change of Control the terms of the
Bank Indebtedness restrict or prohibit the repurchase of Notes pursuant to this
covenant, then prior to the mailing of the notice to Holders provided for in the
immediately following paragraph but in any event within 30 days following any
Change of Control (unless the Company has exercised its right to redeem all the
Notes as described under "Optional Redemption"), the Company shall (i) repay in
full all Bank Indebtedness or offer to repay in full all Bank Indebtedness and
repay the Bank Indebtedness of each lender who has accepted such offer or (ii)
obtain the requisite consent under the agreements governing the Bank
Indebtedness to permit the repurchase of the Notes as provided for in the
immediately following paragraph.
Unless the Company has exercised its right to redeem all the Notes as
described under "Optional Redemption," the Company shall, within 30 days
following any Change of Control (or at the Company's option, prior to such
Change of Control but after the public announcement thereof), mail a notice to
each Holder with a copy to the Trustee stating: (1) that a Change of Control has
occurred or will occur and that such Holder has (or upon such occurrence will
have) the right to require the Company to purchase such Holder's Notes at a
purchase price in cash equal to 101% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of purchase (subject to the
right of Holders of record on a record date to receive interest on the relevant
interest payment date); (2) the circumstances and relevant facts and financial
information regarding such Change of Control; (3) the repurchase date (which
shall be no earlier than 30 days nor later than 60 days from the date such
notice is mailed); (4) the instructions determined by the Company, consistent
with this covenant, that a Holder must follow in order to have its Notes
purchased; and (5) that, if such Offer is made prior to such Change of Control,
payment is conditioned on the occurrence of such Change of Control.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of this covenant, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under this paragraph by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchasers. The Company has no present plans to
engage in a transaction involving a Change of Control, although it is possible
that the Company would decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into certain
transactions, including acquisitions, refinancings or recapitalizations, that
would not constitute a Change of Control under the Indenture, but that could
increase the amount of indebtedness outstanding at such time or otherwise affect
the Company's capital structure or credit ratings.
The occurrence of a Change of Control would constitute a default under the
Senior Credit Agreement. Future Senior Indebtedness of the Company may contain
prohibitions of certain events which would constitute a Change of Control or
require such Senior Indebtedness to be repurchased upon a Change of Control.
Moreover, the exercise by the Holders of their right to require the Company to
repurchase the Notes could cause a default under such Senior Indebtedness, even
if the Change of Control itself does not, due to the financial effect of such
repurchase on the Company. Finally, the Company's ability to pay cash to the
Holders upon a repurchase may be limited by the Company's then existing
financial resources. There can be no assurance that sufficient funds will be
available when necessary to make any required repurchases. As
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described above under "Optional Redemption," the Company also has the right to
redeem the Notes at specified prices, in whole but not in part, upon a Change of
Control.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
Limitation on Indebtedness. (a) The Company will not, and will not permit
any Restricted Subsidiary to, Incur any Indebtedness; provided, however, that
the Company and the Note Guarantors may Incur Indebtedness if on the date of the
Incurrence of such Indebtedness the Consolidated Coverage Ratio would be greater
than (i) 2.00:1.00, if such Indebtedness is Incurred on or prior to the second
anniversary of the Issue Date, and (ii) 2.25:1.00 if such Indebtedness is
Incurred thereafter.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness:
(i) Indebtedness Incurred pursuant to the Senior Credit Facility in a
maximum principal amount not to exceed at any time
(A) an aggregate principal amount of $115.0 million under the Term
Loan Facility less the aggregate amount of all scheduled repayments of
principal, or mandatory prepayments of principal with Net Available Cash
from Asset Dispositions, applied to permanently reduce the Indebtedness
outstanding under the Term Loan Facility, plus (in the case of any
refinancing thereof) the aggregate amount of fees, underwriting
discounts, premiums and other costs and expenses incurred in connection
with such refinancing, and
(B) an aggregate principal amount outstanding at any time under the
Revolving Credit Facility not to exceed the greater of (x) $25.0 million
less the amount of all mandatory prepayments of principal with Net
Available Cash from Asset Dispositions, applied to permanently reduce
the commitments under the Revolving Credit Facility plus (in the case of
any refinancing thereof) the aggregate amount of fees, underwriting
discounts, premiums and other costs and expenses incurred in connection
with such refinancing, and (y) the Borrowing Base;
(ii) Indebtedness of Foreign Subsidiaries for working capital purposes
and any Guarantees in respect thereof, the aggregate principal amount of
which Indebtedness outstanding at any time does not exceed, as to all such
Foreign Subsidiaries, the greater of (the "Foreign Subsidiary Amount") (A)
$10.0 million and (B) an amount equal to 10% of Consolidated Tangible
Assets; provided, however, that the principal amount of such Indebtedness
may exceed the Foreign Subsidiary Amount by an amount not to exceed the
amount of debt permitted to be Incurred by clause (i)(B) as of such date
but the principal amount of Indebtedness permitted to be Incurred by clause
(i)(B) above shall be reduced by the amount by which such Indebtedness
exceeds the Foreign Subsidiary Amount;
(iii) Indebtedness (A) of the Company to any Restricted Subsidiary and
(B) of any Wholly Owned Subsidiary to the Company or any Restricted
Subsidiary; provided, however, that any subsequent issuance or transfer of
any Capital Stock or any other event that results in any such Wholly Owned
Subsidiary ceasing to be a Wholly Owned Subsidiary or any other subsequent
transfer of any such Indebtedness (except to the Company or a Wholly Owned
Subsidiary) will be deemed, in each case, an Incurrence of Indebtedness by
the Company or such Restricted Subsidiary, as the case may be;
(iv) Indebtedness represented by the Notes, any Indebtedness (other
than the Indebtedness described in clause (i), (ii) or (iii) above)
outstanding on the date of the Indenture and any Refinancing Indebtedness
Incurred in respect of any Indebtedness described in this clause (iv) or
paragraph (a);
(v) Indebtedness of the Company or any Restricted Subsidiary to
finance or refinance the deferred purchase price of newly acquired property
of the Company and its Subsidiaries used in the ordinary course of business
of the Company and its Subsidiaries (provided such purchase money financing
is entered into within six months of the acquisition of such property), and
any Refinancing Indebtedness with respect thereto, in an amount (based on
the remaining balance of the obligations therefor on the
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books of the Company and its Restricted Subsidiaries) which shall not
exceed the greater of (A) $7.0 million and (B) an amount equal to 7% of
Consolidated Tangible Assets in the aggregate at any one time outstanding;
(vi) Indebtedness of the Company or any Restricted Subsidiary (which
may comprise Bank Indebtedness) in an aggregate principal amount at any one
time outstanding not in excess of the greater of (A) $7.0 million and (B)
an amount equal to 7% of Consolidated Tangible Assets;
(vii) Indebtedness of the Company or any Restricted Subsidiary in the
form of Capitalized Lease Obligations or Attributable Debt, and any
Refinancing Indebtedness with respect thereto, in an aggregate amount not
in excess of the greater of (A) $7.0 million and (B) an amount equal to 7%
of Consolidated Tangible Assets at any one time outstanding; provided,
however, that all Indebtedness Incurred by one or more Restricted
Subsidiaries that are not Note Guarantors pursuant to clause (v) or (vi)
above or this clause (vii) shall not exceed the greater of (A) $7.0 million
and (B) an amount equal to 7% of Consolidated Tangible Assets in aggregate
principal amount at any one time outstanding;
(viii) Indebtedness represented by the Note Guarantees and Guarantees
of Indebtedness Incurred pursuant to clause (i) or (iii) above;
(ix) Guarantees (A) by any Note Guarantor of Senior Indebtedness, (B)
by the Company or any Note Guarantor of Guarantor Senior Indebtedness or
(C) by any Wholly Owned Subsidiary that is not a Note Guarantor of
Indebtedness of any Wholly Owned Subsidiary that is not a Note Guarantor;
(x) Indebtedness (A) arising by reason of any Lien created or
permitted to exist in compliance with the covenant described under
"-- Limitations on Liens," including any Indebtedness of any Note Guarantor
arising by reason of any Lien granted by such Person to secure Senior
Indebtedness, or of the Company or any Note Guarantor arising by reason of
any Lien granted by such Person to secure Guarantor Senior Indebtedness, or
(B) of any Restricted Subsidiary that is not a Note Guarantor arising by
reason of any Lien granted by such Person to secure Indebtedness of any
Restricted Subsidiary that is not a Note Guarantor;
(xi) Indebtedness of the Company or any Restricted Subsidiary arising
from the honoring of a check, draft or similar instrument of such Person
drawn against insufficient funds, provided that such Indebtedness is
extinguished within five Business Days of its incurrence;
(xii) Indebtedness of the Company or any Restricted Subsidiary
consisting of guarantees, indemnities, or obligations in respect of
purchase price adjustments, in connection with the acquisition or
disposition of assets, including pursuant to the Recapitalization;
(xiii) Indebtedness in respect of (A) commercial letters of credit, or
other letters of credit or other similar instruments or obligations, issued
in connection with liabilities incurred in the ordinary course of business
(including those issued to governmental entities in connection with
self-insurance under applicable workers' compensation statutes), or (B)
surety, judgment, appeal, performance and other similar bonds, instruments
or obligations provided in the ordinary course of business;
(xiv) Indebtedness under Hedging Obligations; provided, however, that
such Hedging Obligations are entered into for bona fide hedging purposes of
the Company or any Restricted Subsidiary and are in the ordinary course of
business;
(xv) Indebtedness (A) of the Company consisting of Guarantees of up to
an aggregate principal amount of $4.0 million of borrowings by Management
Investors in connection with the purchase of Capital Stock of the Company,
Holdings or G-II by such Management Investors or (B) of the Company or any
Restricted Subsidiary consisting of guarantees in respect of loans or
advances made to officers or employees of Holdings, the Company or any
Restricted Subsidiary, or guarantees otherwise made on their behalf, (1) in
respect of travel, entertainment and moving-related expenses incurred in
the ordinary course of business, or (2) in the ordinary course of business
not exceeding $500,000 in the aggregate outstanding at any time;
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(xvi) Indebtedness of any Restricted Subsidiary that is Indebtedness
of another Person assumed by such Restricted Subsidiary in connection with
its acquisition of assets from such Person (other than Indebtedness
Incurred in connection with, or in contemplation of, such acquisition) and
any Refinancing Indebtedness with respect thereto; provided, however, that
at the time of such acquisition of assets the Company shall have been able
to Incur at least an additional $1.00 of Indebtedness under paragraph (a)
above after giving effect to such acquisition; and
(xvii) Indebtedness of a Restricted Subsidiary issued and outstanding
on or prior to the date on which such Restricted Subsidiary was acquired by
the Company (other than Indebtedness Incurred (A) as consideration in, or
to provide all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant to
which such Restricted Subsidiary became a Restricted Subsidiary or was
acquired by the Company or (B) otherwise in connection with, or in
contemplation of, such acquisition) and any Refinancing Indebtedness with
respect thereto; provided, however, that on the date of any such
acquisition the Company shall have been able to Incur at least $1.00 of
Indebtedness under paragraph (a) above after giving effect to such
acquisition.
(c) Notwithstanding the foregoing, the Company will not Incur any
Indebtedness pursuant to any provision of the foregoing paragraph (b) that
permits Refinancing Indebtedness in respect of Indebtedness constituting
Subordinated Obligations, if the proceeds of such Refinancing Indebtedness are
used, directly or indirectly, to refinance such Subordinated Obligations, unless
such Refinancing Indebtedness will be subordinated to the Notes to at least the
same extent as such Subordinated Obligations.
(d) For purposes of determining compliance with, and the outstanding
principal amount of any particular Indebtedness Incurred pursuant to and in
compliance with, this covenant, (i) any other obligation of the obligor on such
Indebtedness arising under any Guarantee, Lien or letter of credit supporting
such Indebtedness shall be disregarded to the extent that such Guarantee, Lien
or letter of credit secures the principal amount of such Indebtedness; (ii) in
the event that Indebtedness meets the criteria of more than one of the types of
Indebtedness described in paragraph (b) above, the Company, in its sole
discretion, shall classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of such clauses; and
(iii) the amount of Indebtedness issued at a price that is less than the
principal amount thereof shall be equal to the amount of the liability in
respect thereof determined in accordance with GAAP.
(e) For purposes of determining compliance with any Dollar-denominated
restriction on the Incurrence of Indebtedness denominated in a foreign currency,
the Dollar-equivalent principal amount of such Indebtedness Incurred pursuant
thereto shall be calculated based on the relevant currency exchange rate in
effect on the date that such Indebtedness was Incurred, in the case of term
debt, or first committed, in the case of revolving credit debt, provided that
(x) the Dollar-equivalent principal amount of any such Indebtedness outstanding
on the Issue Date shall be calculated based on the relevant currency exchange
rate in effect on the Issue Date and (y) if such Indebtedness is Incurred to
refinance other Indebtedness denominated in a foreign currency, and such
refinancing would cause the applicable Dollar-denominated restriction to be
exceeded if calculated at the relevant currency exchange rate in effect on the
date of such refinancing, such Dollar-denominated restriction shall be deemed
not to have been exceeded so long as the principal amount of such refinancing
Indebtedness does not exceed the principal amount of such Indebtedness being
refinanced. The principal amount of any Indebtedness Incurred to refinance other
Indebtedness, if Incurred in a different currency from the Indebtedness being
refinanced, shall be calculated based on the currency exchange rate applicable
to the currencies in which such respective Indebtedness is denominated that is
in effect on the date of such refinancing.
Limitation on Layering. The Company shall not incur any Indebtedness if
such Indebtedness is expressly subordinate in right of payment to any Senior
Indebtedness unless such Indebtedness is Senior Subordinated Indebtedness or is
contractually subordinated in right of payment to Senior Subordinated
Indebtedness. No Note Guarantor shall incur any Indebtedness if such
Indebtedness is expressly subordinate in right of payment to any Guarantor
Senior Indebtedness of such Note Guarantor unless such Indebtedness is Guarantor
Senior Subordinated Indebtedness of such Note Guarantor or is contractually
subordinated in right
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of payment to Guarantor Senior Subordinated Indebtedness of such Note Guarantor.
Unsecured Indebtedness is not deemed to be subordinate or junior to Secured
Indebtedness merely because it is unsecured, and Indebtedness that is not
guaranteed by a particular Person is not deemed to be subordinate or junior to
Indebtedness that is so guaranteed merely because it is not so guaranteed.
Limitation on Restricted Payments. (a) The Company shall not, and shall
not permit any Restricted Subsidiary, directly or indirectly, to (i) declare or
pay any dividend or make any distribution on or in respect of its Capital Stock
(including any payment in connection with any merger or consolidation involving
the Company) except (x) dividends or distributions payable solely in its Capital
Stock (other than Disqualified Stock) and (y) dividends or distributions payable
to the Company or any Restricted Subsidiary (and, if the Restricted Subsidiary
making such dividend or distribution is not a Wholly Owned Subsidiary, to its
other shareholders on no more than a pro rata basis, measured by value), (ii)
purchase, redeem, retire or otherwise acquire for value any Capital Stock of the
Company held by Persons other than the Company or another Restricted Subsidiary,
(iii) purchase, repurchase, redeem, defease or otherwise acquire or retire for
value, prior to scheduled maturity, scheduled repayment or scheduled sinking
fund payment, any Subordinated Obligations (other than the purchase, repurchase,
redemption or other acquisition of Subordinated Obligations in anticipation of
satisfying a sinking fund obligation, principal installment or final maturity,
in each case due within one year of the date of acquisition) or (iv) make any
Investment (other than a Permitted Investment) in any Person (any such dividend,
distribution, purchase, redemption, repurchase, defeasance, other acquisition,
retirement or Investment being herein referred to as a "Restricted Payment") if
at the time the Company or such Restricted Subsidiary makes such Restricted
Payment:
(1) a Default shall have occurred and be continuing (or would result
therefrom);
(2) the Company could not incur at least an additional $1.00 of
Indebtedness under paragraph (a) of the covenant described under
"-- Limitation on Indebtedness"; or
(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments (the amount so expended, if other than in cash, to be
determined in good faith by the Company's Board of Directors whose
determination shall be conclusive and evidenced by a resolution of the
Company's Board of Directors) declared or made subsequent to the date of
the Indenture would exceed the sum of:
(A) 50% of the Consolidated Net Income accrued during the period
(treated as one accounting period) from the end of the most recent
fiscal quarter ending prior to the Issue Date to the end of the most
recent fiscal quarter ending prior to the date of such Restricted
Payment for which consolidated financial statements of the Company are
available (or, in case such Consolidated Net Income shall be a deficit,
minus 100% of such deficit);
(B) the aggregate Net Cash Proceeds received by the Company either
(x) as capital contributions to the Company after the Issue Date or (y)
from the issuance or sale of its Capital Stock (other than Disqualified
Stock) subsequent to the Issue Date (other than an issuance or sale to a
Restricted Subsidiary of the Company), provided that in the event such
issuance or sale is to an employee stock ownership plan or other trust
established by the Company or any of its Subsidiaries for the benefit of
their employees, to the extent the purchase by such plan or trust is
financed by Indebtedness of such plan or trust for which the Company is
liable as Guarantor or otherwise, such aggregate amount of Net Cash
Proceeds shall be limited to the aggregate amount of principal payments
made by such plan or trust with respect to such Indebtedness;
(C) the amount by which Indebtedness of the Company is reduced on
the Company's balance sheet upon the conversion or exchange (other than
by a Restricted Subsidiary of the Company) subsequent to the Issue Date,
of any Indebtedness of the Company or its Restricted Subsidiaries
convertible or exchangeable for Capital Stock (other than Disqualified
Stock) of the Company (less the amount of any cash, or other property
(other than Capital Stock), distributed by the Company upon such
conversion or exchange), plus the amount of any cash or other property
received by the Company or any Restricted Subsidiary upon such
conversion or exchange;
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(D) the amount equal to the net reduction in Investments in
Unrestricted Subsidiaries resulting from (i) repayments of the principal
of loans or advances or other transfers of assets to the Company or any
Restricted Subsidiary from any Unrestricted Subsidiary or (ii) the
redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries
(valued in each case as provided in the definition of "Investment"), not
to exceed in the case of any such Unrestricted Subsidiary the aggregate
amount of Investments (other than Permitted Investments) made by the
Company or any Restricted Subsidiary in such Unrestricted Subsidiary
after the Issue Date; and
(E) in the case of disposition or repayment of any Investment
constituting a Restricted Payment (without duplication of any amount
deducted in calculating the amount of Investments at any time
outstanding included in the amount of Restricted Payments), an amount
equal to the lesser of the return of capital or repayment with respect
to such Investment and the initial amount of such Investment, in either
case, less the cost of the disposition of such Investment.
(b) The provisions of the foregoing paragraph (a) will not prohibit:
(i) any purchase, redemption, repurchase, defeasance, retirement or
other acquisition of Capital Stock of the Company or Subordinated
Obligations made by exchange (including any such exchange pursuant to the
exercise of a conversion right or privilege in connection with which cash
is paid in lieu of the issuance of fractional shares) for, or out of the
proceeds of the substantially concurrent sale of, Capital Stock of the
Company (other than Disqualified Stock and other than Capital Stock issued
or sold to a Subsidiary or an employee stock ownership plan or other trust
established by the Company or any of its Subsidiaries) or a substantially
concurrent capital contribution to the Company; provided, however, that (A)
such purchase, redemption, repurchase, defeasance, retirement or other
acquisition shall be excluded in subsequent calculations of the amount of
Restricted Payments and (B) the Net Cash Proceeds from such sale or capital
contribution shall be excluded in subsequent calculations under clause (B)
of paragraph (a);
(ii) any purchase, redemption, repurchase, defeasance, retirement or
other acquisition of Subordinated Obligations made by exchange for, or out
of the proceeds of the substantially concurrent sale of, Subordinated
Obligations of the Company that is permitted to be Incurred pursuant to the
covenant described under "Limitation on Indebtedness"; provided, however,
that such purchase, redemption, repurchase, defeasance, retirement or other
acquisition shall be excluded in subsequent calculations of the amount of
Restricted Payments;
(iii) any purchase, redemption, repurchase, defeasance, retirement or
other acquisition of Subordinated Obligations from Net Available Cash to
the extent permitted by the covenant described under "-- Limitation on
Sales of Assets"; provided, however, that such purchase, redemption,
repurchase, defeasance, retirement or other acquisition shall be excluded
in subsequent calculations of the amount of Restricted Payments;
(iv) any purchase, redemption, repurchase, defeasance, retirement or
other acquisition of Subordinated Obligations upon a Change of Control to
the extent required by the agreement governing such Subordinated
Obligations but only if the Company shall have complied with the covenant
described under "-- Change of Control" and purchased all Notes tendered
pursuant to the offer to repurchase all the Notes required thereby, prior
to purchasing or repaying such Subordinated Obligations; provided, however,
that (A) the purchase price (stated as a percentage of principal amount or
issue price plus accrued original issue discount, if less) of such
Subordinated Obligations shall not be greater than the price (stated as a
percentage of principal amount) of the Notes pursuant to any such offer to
repurchase the Notes in the event of a Change of Control, and (B) any such
purchase, redemption, repurchase, defeasance, retirement or other
acquisition shall be included in subsequent calculations of the amount of
Restricted Payments;
(v) dividends paid within 60 days after the date of declaration
thereof if at such date of declaration such dividend would have complied
with paragraph (a); provided, however, that such dividends shall be
included in subsequent calculations of the amount of Restricted Payments;
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(vi) loans, advances, dividends or distributions by the Company to
Holdings or G-II to permit Holdings or G-II, as the case may be, to
repurchase or otherwise acquire its Capital Stock or options, warrants or
other rights in respect thereof, or payments by the Company to repurchase
or otherwise acquire Capital Stock or options, warrants or other rights in
respect thereof, in each case from Management Investors, such payments,
loans, advances, dividends or distributions not to exceed an amount (net of
repayments of any such loans or advances) equal to $500,000 in any fiscal
year and $2.0 million in the aggregate (plus the Net Cash Proceeds received
by the Company since the Issue Date as a capital contribution from the sale
to Management Investors of Capital Stock or options, warrants or other
rights in respect thereof); provided, however, that such payments, loans,
advances, dividends or distributions will be included in subsequent
calculations of the amount of Restricted Payments;
(vii) loans, advances, dividends or distributions by the Company or
any Restricted Subsidiary to Holdings or G-II not to exceed an amount
necessary to permit Holdings or G-II to (A) pay its costs (including all
professional fees and expenses) incurred to comply with its reporting
obligations under federal or state laws or under the Indenture, including
any reports filed with respect to the Securities Act, Exchange Act or the
respective rules and regulations promulgated thereunder, (B) make payments
in respect of its indemnification obligations owing to directors, officers,
employees or other Persons under its charter or by-laws or pursuant to
written agreements with any such Person, to the extent such payments relate
to the Company and its Subsidiaries, (C) pay all reasonable fees and
expenses payable by it in connection with the Transactions, or (D) pay its
other operational expenses (other than taxes) incurred in the ordinary
course of business and not exceeding $500,000 in any fiscal year; provided,
however, that such loans, advances, dividends or distributions will be
excluded in subsequent calculations of the amount of Restricted Payments;
(viii) payments by the Company or any Restricted Subsidiary to
Holdings (A) to satisfy or permit Holdings to satisfy its obligations under
the Management Agreements, (B) pursuant to the Tax Sharing Agreement, (C)
to pay or permit Holdings to pay any taxes, charges or assessments,
including but not limited to sales, use, transfer, rental, ad valorem,
value-added, stamp, property, consumption, franchise, license, capital, net
worth, gross receipts, excise, occupancy, intangibles or similar taxes,
charges or assessments (other than federal, state or local taxes measured
by income and federal, state or local withholding imposed on payments made
by Holdings), required to be paid by Holdings by virtue of its being
incorporated or having capital stock outstanding (but not by virtue of
owning stock of any corporation other than the Company or any of its
Subsidiaries), or being a holding company parent of the Company or
receiving dividends from or other distributions in respect of the stock of
the Company, or having guaranteed any obligations of the Company or any
Subsidiary thereof, or having made any payment in respect of any of the
items for which the Company is permitted to make payments to Holdings
pursuant to this covenant, or (D) to pay or permit Holdings to pay any
other federal, state, foreign, provincial or local taxes measured by income
for which Holdings is liable up to an amount not to exceed with respect to
such federal taxes the amount of any such taxes which the Company would
have been required to pay on a separate company basis or on a consolidated
basis if the Company had filed a consolidated return on behalf of an
affiliated group (as defined in Section 1504 of the Internal Revenue Code
of 1986, as amended, or an analogous provision of state, local or foreign
law) of which it were the common parent, or with respect to state and local
taxes, on a combined basis if the Company had filed a combined return on
behalf of an affiliated group consisting only of the Company and its
Subsidiaries; provided, however, that such payments will be excluded in
subsequent calculations of the amount of Restricted Payments;
(ix) the payment by the Company of, or loans, advances, dividends or
distributions by the Company to Holdings or G-II to pay, dividends on the
common stock of the Company, Holdings or G-II, as applicable, following an
initial public offering of such common stock, in an amount not to exceed in
any fiscal year 6% of the net proceeds received by the Company, in or from
such public offering; provided, however, that such payments, loans,
advances, dividends or distributions will be included in subsequent
calculations of the amount of Restricted Payments; and
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(x) loans, advances, dividends or distributions by the Company or any
Restricted Subsidiary in an aggregate amount not to exceed $10.0 million;
provided, however, that (A) the Company or any
Restricted Subsidiary shall not be permitted to make Restricted Payments
under this clause (x) unless, after giving effect thereto (including the
Incurrence of any Indebtedness to fund such Restricted Payment), the
Consolidated Coverage Ratio of the Company would be at least equal to
2.25:1.00 and (B) such loans, advances, dividends or distributions will be
included in subsequent calculations of the amount of Restricted Payments;
and
provided, further, that in the case of clauses (vii), (ix) and (x) no Default or
Event of Default shall have occurred or be continuing at the time of such
payment after giving effect thereto.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions on its Capital
Stock or pay any Indebtedness or other obligations owed to the Company, (ii)
make any loans or advances to the Company or (iii) transfer any of its property
or assets to the Company, except:
(1) any encumbrance or restriction pursuant to an agreement in effect
at or entered into on the date of the Indenture (including, without
limitation, the Senior Credit Facility);
(2) any encumbrance or restriction with respect to a Restricted
Subsidiary (x) pursuant to an agreement relating to any Indebtedness
Incurred by a Restricted Subsidiary prior to the date on which such
Restricted Subsidiary was acquired by the Company, or of another Person
that is assumed by the Company or a Restricted Subsidiary in connection
with the acquisition of assets from, or merger or consolidation with, such
Person (other than Indebtedness Incurred as consideration in, or to provide
all or any portion of the funds or credit support utilized to consummate,
the transaction or series of related transactions pursuant to which such
Restricted Subsidiary became a Restricted Subsidiary or was acquired by the
Company, or such acquisition of assets, merger or consolidation) and
outstanding on the date of such acquisition, merger or consolidation or (y)
pursuant to any agreement (not relating to any Indebtedness) in existence
when a Person becomes a Subsidiary of the Company or when such agreement is
acquired by the Company or any Subsidiary thereof, that is not created in
contemplation of such Person becoming such a Subsidiary or such acquisition
(for purposes of this clause (2), if another Person is the Successor
Company, any Subsidiary or agreement thereof shall be deemed acquired or
assumed, as the case may be, by the Company when such Person becomes the
Successor Company);
(3) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement (a "Refinancing Agreement") effecting a
refinancing of Indebtedness Incurred pursuant to, or that otherwise
extends, renews, refinances or replaces, an agreement referred to in clause
(1) or (2) of this covenant or this clause (3) (an "Initial Agreement") or
contained in any amendment to an Initial Agreement; provided, however, that
the encumbrances and restrictions contained in any such Refinancing
Agreement or amendment are no less favorable to the Holders of the Notes
taken as a whole than encumbrances and restrictions contained in the
Initial Agreement or Initial Agreements to which such Refinancing Agreement
or amendment relates (as conclusively determined in good faith by the Board
of Directors);
(4) any encumbrance or restriction (A) that restricts in a customary
manner the subletting, assignment or transfer of any property or asset that
is subject to a lease, license or similar contract, or the assignment or
transfer of any lease, license or other contract, (B) by virtue of any
transfer of, agreement to transfer, option or right with respect to, or
Lien on, any property or assets of the Company or any Restricted Subsidiary
not otherwise prohibited by the Indenture, (C) contained in mortgages,
pledges or other security agreements securing Indebtedness of a Restricted
Subsidiary to the extent such encumbrance or restrictions restrict the
transfer of the property subject to such mortgages, pledges or other
security agreements or (D) pursuant to customary provisions restricting
dispositions of real property interests set forth in any reciprocal
easement agreements of the Company or any Restricted Subsidiary;
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(5) any restriction with respect to a Restricted Subsidiary (or any of
its property or assets) imposed pursuant to an agreement entered into for
the direct or indirect sale or disposition of all or substantially all the
Capital Stock or assets of such Restricted Subsidiary (or the property or
assets that are subject to such restriction) pending the closing of such
sale or disposition;
(6) any encumbrance or restriction on the transfer of property or
assets required by any regulatory authority having jurisdiction over the
Company or any Restricted Subsidiary or any of their businesses; and
(7) any encumbrance or restriction pursuant to an agreement relating
to any Indebtedness incurred, or any sale of receivables, by a Foreign
Subsidiary.
Limitation on Sales of Assets. (a) The Company will not, and will not
permit any Restricted Subsidiary to, make any Asset Disposition unless
(i) the Company or such Restricted Subsidiary receives consideration
(including by way of relief from, or by any other Person assuming
responsibility for, any liabilities, contingent or otherwise) at the time
of such Asset Disposition at least equal to the fair market value of the
shares and assets subject to such Asset Disposition, as such fair market
value may be determined (and shall be determined, to the extent such Asset
Disposition or any series of related Asset Dispositions involves aggregate
consideration in excess of $1.0 million) in good faith by the Board of
Directors, whose determination shall be conclusive (including as to the
value of all noncash consideration),
(ii) at least 80% of the consideration therefor (excluding, in the
case of an Asset Disposition of assets, any consideration by way of relief
from, or by any other Person assuming responsibility for, any liabilities,
contingent or otherwise, which are not Indebtedness) received by the
Company or such Restricted Subsidiary is in the form of cash, and
(iii) an amount equal to 100% of the Net Available Cash from such
Asset Disposition is applied by the Company (or such Restricted Subsidiary,
as the case may be) as follows:
(A) first, to the extent the Company elects (or is required by the
terms of any Senior Indebtedness or Indebtedness (other than Preferred
Stock) of a Restricted Subsidiary), to prepay, repay or purchase Senior
Indebtedness or such Indebtedness of a Restricted Subsidiary (in each
case other than Indebtedness owed to the Company or a Restricted
Subsidiary) within 365 days after the date of such Asset Disposition;
(B) second, to the extent of the balance of Net Available Cash
after application in accordance with clause (A), to the extent the
Company or such Restricted Subsidiary elects, to reinvest in Additional
Assets (including by means of an Investment in Additional Assets by a
Restricted Subsidiary with Net Available Cash received by the Company or
another Restricted Subsidiary) within 365 days from the date of such
Asset Disposition, or, if such reinvestment in Additional Assets is a
project authorized by the Board of Directors that will take longer than
such 365 days to complete, the period of time necessary to complete such
project;
(C) third, to the extent of the balance of such Net Available Cash
after application in accordance with clauses (A) and (B) (such balance,
the "Excess Proceeds"), to make an offer to purchase Notes and (to the
extent required by the terms thereof) any other Senior Subordinated
Indebtedness, pursuant and subject to the conditions of the Indenture
and the agreements governing such other Indebtedness, at a purchase
price of 100% of the principal amount thereof (or accreted value, as
applicable) plus accrued and unpaid interest to the purchase date; and
(D) fourth, to the extent of the balance of such Net Available Cash
after application in accordance with clauses (A), (B) and (C) above, to
fund (to the extent consistent with any other applicable provision of
the Indenture) any general corporate purpose (including the repayment of
any Subordinated Obligations);
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provided, however, that in connection with any prepayment, repayment or purchase
of Indebtedness pursuant to clause (A) or (C) above, the Company or such
Restricted Subsidiary will retire such Indebtedness and will cause the related
loan commitment (if any) to be permanently reduced in an amount equal to the
principal amount so prepaid, repaid or purchased. Notwithstanding the foregoing
provisions of this covenant, the Company and the Restricted Subsidiaries shall
not be required to apply any Net Available Cash in accordance with this covenant
except to the extent that the aggregate Net Available Cash from all Asset
Dispositions that is not applied in accordance with this covenant exceeds $5.0
million. If the aggregate principal amount (or accreted value, as applicable) of
Notes and Senior Subordinated Indebtedness validly tendered and not withdrawn in
connection with an offer pursuant to clause (C) above exceeds the Excess
Proceeds, the Excess Proceeds will be apportioned between the Notes and such
Senior Subordinated Indebtedness, with the portion of the Excess Proceeds
payable in respect of the Notes to equal the lesser of (x) the Excess Proceeds
amount multiplied by a fraction, the numerator of which is the outstanding
principal amount of the Notes and the denominator of which is the sum of the
outstanding principal amount of the Notes and the outstanding principal amount
(or accreted value, as applicable) of the relevant Senior Subordinated
Indebtedness, and (y) the aggregate principal amount of Notes validly tendered
and not withdrawn.
For the purposes of this covenant, the following are deemed to be cash: (v)
Cash Equivalents, (w) the assumption of Indebtedness of the Company (other than
Disqualified Stock of the Company) or any Restricted Subsidiary and the release
of the Company or such Restricted Subsidiary from all liability on such
Indebtedness in connection with such Asset Disposition, (x) Indebtedness of any
Restricted Subsidiary that is no longer a Restricted Subsidiary as a result of
such Asset Disposition, to the extent that the Company and each other Restricted
Subsidiary is released from any Guarantee of such Indebtedness in connection
with such Asset Disposition, (y) securities received by the Company or any
Restricted Subsidiary from the transferee that are promptly converted by the
Company or such Restricted Subsidiary into cash, and (z) consideration
consisting of Indebtedness of the Company or any Restricted Subsidiary.
(b) In the event of an Asset Disposition that requires the purchase of
Notes pursuant to clause (a)(iii)(C) above, the Company will be required to
purchase Notes tendered pursuant to an offer by the Company for the Notes (the
"Offer") at a purchase price of 100% of their principal amount plus accrued and
unpaid interest to the Purchase Date in accordance with the procedures
(including prorating in the event of oversubscription) set forth in the
Indenture. If the aggregate purchase price of the Notes tendered pursuant to the
Offer is less than the Net Available Cash allotted to the purchase of Notes, the
remaining Net Available Cash will be available to the Company for use in
accordance with clause (a)(iii)(C) (to repay Senior Subordinated Indebtedness)
or clause (a)(iii)(D) above. The Company shall not be required to make an Offer
for Notes pursuant to this covenant if the Net Available Cash available therefor
(after application of the proceeds as provided in clauses (a)(iii)(A) and
(a)(iii)(B) above) is less than $5.0 million for any particular Asset
Disposition (which lesser amounts shall be carried forward for purposes of
determining whether an Offer is required with respect to the Net Available Cash
from any subsequent Asset Disposition).
(c) The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under this covenant by virtue thereof.
Limitation on Transactions with Affiliates. (a) The Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, enter into
or conduct any transaction or series of transactions (including the purchase,
sale, lease or exchange of any property or the rendering of any service) with
any Affiliate of the Company (an "Affiliate Transaction") on terms (i) that
taken as a whole are less favorable to the Company or such Restricted
Subsidiary, as the case may be, than those that could be obtained at the time of
such transaction in arm's-length dealings with a Person who is not such an
Affiliate and (ii) that, in the event such Affiliate Transaction involves an
aggregate amount in excess of $1.0 million, are not in writing and have not been
approved by a majority of the members of the Board of Directors having no
material personal financial interest in such Affiliate Transaction, or in the
event there are no such members, as to which the Company has not obtained a
Fairness Opinion (as hereinafter defined). In addition, any transaction
involving
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aggregate payments or other transfers by the Company and its Restricted
Subsidiaries in excess of $10.0 million will also require an opinion (a
"Fairness Opinion") from an independent investment banking firm or appraiser, as
appropriate, of national prominence, to the effect that the terms of such
transaction taken as a whole are either (i) no less favorable to the Company or
such Restricted Subsidiary, as the case may be, than those that could be
obtained at the time of such transaction in arm's-length dealings with a Person
who is not an Affiliate or (ii) fair to the Company or such Restricted
Subsidiary, as the case may be, from a financial point of view.
(b) The provisions of the foregoing paragraph (a) shall not prohibit (i)
any Restricted Payment permitted by the covenant described under "-- Limitation
on Restricted Payments," any Permitted Investment, or any other transaction
specifically excluded from the definition of the term "Restricted Payment," (ii)
the performance of the Company's or Restricted Subsidiary's obligations under
any employment contract, collective bargaining agreement, employee benefit plan,
related trust agreement or any other similar arrangement heretofore or hereafter
entered into in the ordinary course of business, (iii) payment of compensation,
performance of indemnification or contribution obligations, or any issuance,
grant or award of stock, options or other securities, to employees, officers or
directors in the ordinary course of business, (iv) maintenance in the ordinary
course of business of benefit programs or arrangements for employees, officers
or directors, including vacation plans, health and the insurance plans, deferred
compensation plans, and retirement or savings plans and similar plans, (v) any
transaction between the Company and a Restricted Subsidiary or between
Restricted Subsidiaries, (vi) loans or advances made to directors, officers or
employees of Holdings, the Company or any Restricted Subsidiary, or guarantees
in respect thereof or otherwise made on their behalf (including any payments
under such guarantees), (A) in respect of travel, entertainment or
moving-related expenses incurred in the ordinary course of business, or (B) in
the ordinary course of business not exceeding $500,000 in the aggregate
outstanding at any time, (vii) guarantees of borrowings by Management Investors
in connection with the purchase of Capital Stock of the Company, Holdings or
G-II by such Management Investors, which guarantees are permitted under the
covenant described under "-- Limitation on Indebtedness," and payments
thereunder, (viii) the Transactions and the incurrence and payment of all fees
and expenses payable in connection therewith, (ix) any other transaction arising
out of agreements in existence on the Issue Date, (x) execution, delivery and
performance of the Tax Sharing Agreement and the Management Agreements,
including the initial payment of a fee of $2.5 million to GSCP and the ongoing
payment of fees to GSCP of up to $1.75 million per year plus reasonable out of
pocket expenses, (xi) any commercial or other business transaction in the
ordinary course of business with any Permitted Holder or any Affiliate thereof,
on terms that taken as a whole are no less favorable to the Company and its
Restricted Subsidiaries than those that could be obtained at the time in
arm's-length dealings with a Person who is not an Affiliate of the Company and
(xii) any transaction in the ordinary course of business, or approved by a
majority of the members of the Board of Directors having no material personal
financial interest in such transaction, between the Company or any Restricted
Subsidiary and any Affiliate of the Company controlled by the Company that is a
joint venture or similar entity primarily engaged in a Related Business.
Limitation on the Sale or Issuance of Preferred Stock of Restricted
Subsidiaries. The Company will not sell any shares of Preferred Stock of a
Restricted Subsidiary, and will not permit any Restricted Subsidiary, directly
or indirectly, to issue or sell any shares of its Preferred Stock to any Person
(other than to the Company or a Restricted Subsidiary, or to directors as
directors' qualifying shares, or (in the case of any Foreign Subsidiary) to the
extent required by applicable law); provided, however, that (a) the Company or
any Restricted Subsidiary is permitted to sell Preferred Stock of a Subsidiary
in compliance with the terms of the covenant described under "-- Limitation on
Sales of Assets," and (b) any such Preferred Stock may be issued or sold if
Incurred by any Restricted Subsidiary in compliance with the covenant described
under "-- Limitation on Indebtedness."
Limitation on Liens. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, create or permit to exist any
Lien (other than Permitted Liens) on any of its property or assets (including
Capital Stock of any other Person), whether owned on the date of the Indenture
or thereafter acquired, securing any Indebtedness that is not Senior
Indebtedness or Guarantor Senior Indebtedness (the "Initial Lien"), unless
contemporaneously therewith effective provision is made to secure the
Indebtedness
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due under the Indenture and the Notes or, in respect of Liens on any Restricted
Subsidiary's property or assets, any Note Guarantee of such Restricted
Subsidiary, equally and ratably with such obligation for so long as such
obligation is so secured by such Initial Lien. Any such Lien thereby created in
favor of the Notes or any such Note Guarantee will be automatically and
unconditionally released and discharged upon (i) the release and discharge of
the Initial Lien to which it relates, or (ii) any sale, exchange or transfer to
any Person not an Affiliate of the Company of the property or assets secured by
such Initial Lien, or of all of the Capital Stock held by the Company or any
Restricted Subsidiary in, or all or substantially all the assets of, any
Restricted Subsidiary creating such Lien.
SEC Reports. Notwithstanding that the Company may not be required to be or
remain subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act, the Company will file (if then permitted to do so) with the SEC
and provide (whether or not so filed with the SEC) the Trustee and Noteholders
and prospective Noteholders (upon request) with the annual reports and the
information, documents and other reports, which are specified in Sections 13 and
15(d) of the Exchange Act. The Company also will comply with the other
provisions of TIA sec. 314(a).
Additional Note Guarantors. The Indenture will provide that if the Company
or any of its Domestic Subsidiaries shall acquire or create another Domestic
Subsidiary that is a Significant Subsidiary, then the Company, the Trustee and
such newly acquired or created Domestic Subsidiary shall execute and deliver a
supplemental indenture evidencing such Note Guarantee and deliver an opinion of
counsel, in accordance with the terms of the Indenture. The Company will also
have the right to cause any Restricted Subsidiary so to become a Note Guarantor.
Each Note Guarantee will be limited to an amount not to exceed the maximum
amount that can be Guaranteed by that Subsidiary without rendering the Note
Guarantee, as it relates to such Subsidiary, voidable under applicable law
relating to fraudulent conveyance or fraudulent transfer or similar laws
affecting the rights of creditors generally. See "-- Note Guarantees."
MERGER AND CONSOLIDATION
The Company will not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (the "Successor Company") will
be a Person organized and existing under the laws of the United States of
America, any State thereof or the District of Columbia and the Successor Company
(if not the Company) will expressly assume, by an indenture supplemental hereto,
executed and delivered to the Trustee, in form reasonably satisfactory to the
Trustee, all the obligations of the Company under the Notes and the Indenture;
(ii) immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Company or any
Restricted Subsidiary as a result of such transaction as having been Incurred by
the Successor Company or such Restricted Subsidiary at the time of such
transaction), no Default will have occurred and be continuing; (iii) immediately
after giving effect to such transaction, the Consolidated Coverage Ratio of the
Successor Company would be at least equal to the greater of (A) 1.75:1.00 and
(B) a ratio equal to 75% of the actual Consolidated Coverage Ratio of the
Company as of such date of determination; (iv) each Note Guarantor (other than
any party to any such merger) shall have delivered a written instrument in form
and substance reasonably satisfactory to the Trustee confirming its Note
Guarantee; and (v) the Company will have delivered to the Trustee an Officer's
Certificate and an Opinion of Counsel, each to the effect that such
consolidation, merger or transfer and such supplemental indenture (if any)
comply with the Indenture, provided that (x) in giving such opinion such counsel
may rely on such officer's certificate as to any matters of fact (including
without limitation as to compliance with the foregoing clauses (ii) and (iii)),
and (y) no Opinion of Counsel will be required for a consolidation, merger or
transfer described in the last paragraph of this covenant. Any Indebtedness that
becomes an obligation of the Company or any Restricted Subsidiary (or that is
deemed to be Incurred by any Restricted Subsidiary that becomes a Restricted
Subsidiary) as a result of such transaction undertaken in compliance with this
covenant, and any Refinancing Indebtedness with respect thereto, shall be deemed
to have been Incurred in compliance with the covenant described under "Certain
Covenants -- Limitation on Indebtedness."
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture, and
thereafter the predecessor Company shall be relieved of all
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obligations and covenants under this Agreement, except that, in the case of a
conveyance, transfer or lease of all or substantially all its assets, the
predecessor Company will not be released from the obligation to pay the
principal of and interest on the Notes.
Notwithstanding the foregoing clauses (ii) and (iii), (1) any Restricted
Subsidiary may consolidate with, merge into or transfer all or part of its
properties and assets to the Company and (2) the Company may merge with an
Affiliate incorporated or organized for the purpose of reincorporating or
reorganizing the Company in another jurisdiction to realize tax or other
benefits.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in any
payment of interest on any Note when due, continued for 30 days, (ii) a default
in the payment of principal of any Note when due at its Stated Maturity, upon
optional redemption, upon required repurchase, upon declaration or otherwise,
whether or not such payment is prohibited by the provisions described under
"-- Ranking" above, (iii) the failure by the Company to comply with its
obligations under the covenant described under "-- Merger and Consolidation"
above, (iv) the failure by the Company to comply for 30 days after notice with
any of its obligations under the covenants described under "Change of Control"
or "-- Certain Covenants" above (in each case, other than a failure to purchase
Notes), (v) the failure by the Company to comply for 60 days after notice with
its other agreements contained in the Notes or the Indenture, (vi) the failure
by any Note Guarantor to comply with its obligations under any Note Guarantee to
which such Note Guarantor is a party, after any applicable grace period, (vii)
the failure by the Company or any Significant Subsidiary to pay any Indebtedness
within any applicable grace period after final maturity or the acceleration of
any such Indebtedness by the holders thereof because of a default if the total
amount of such Indebtedness unpaid or accelerated exceeds $5.0 million or its
foreign currency equivalent (the "cross acceleration provision"), (viii) certain
events of bankruptcy, insolvency or reorganization of the Company or a
Significant Subsidiary (the "bankruptcy provisions"), (ix) the rendering of any
judgment or decree for the payment of money in an amount (net of any insurance
or indemnity payments actually received in respect thereof prior to or within 90
days from the entry thereof, or to be received in respect thereof in the event
any appeal thereof shall be unsuccessful) in excess of $5.0 million or its
foreign currency equivalent against the Company or a Significant Subsidiary that
is not discharged, or bonded or insured by a third Person, if (A) an enforcement
proceeding thereon is commenced or (B) such judgment or decree remains
outstanding for a period of 90 days following such judgment or decree and is not
discharged, waived or stayed (the "judgment default provision") or (x) the
failure of any Note Guarantee by a Note Guarantor which is a Significant
Subsidiary to be in full force and effect (except as contemplated by the terms
thereof or of the Indenture) or the denial or disaffirmation in writing by any
such Note Guarantor of its obligations under the Indenture or any Note Guarantee
if such Default continues for 10 days.
The foregoing will constitute Events of Default whatever the reason for any
such Event Of Default and whether it is voluntary or involuntary or is effected
by operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body.
However, a Default under clause (iv) or (v) will not constitute an Event of
Default until the Trustee or the Holders of at least 25% in principal amount of
the outstanding Notes notify the Company of the Default and the Company does not
cure such Default within the time specified in clauses (iv) and (v) hereof after
receipt of such notice.
If an Event of Default (other than a Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company) occurs and is
continuing, the Trustee by notice to the Company, or the Holders of at least a
majority in principal amount of the outstanding Notes by notice to the Company
and the Trustee, may declare the principal of and accrued but unpaid interest on
all the Notes to be due and payable. Upon such a declaration, such principal and
interest will be due and payable immediately. If an Event of Default relating to
certain events of bankruptcy, insolvency or reorganization of the Company occurs
and is continuing, the principal of and interest on all the Notes will become
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holders. Under certain circumstances, the
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Holders of a majority in principal amount of the outstanding Notes may rescind
any such acceleration with respect to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
have offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no Holder may pursue any
remedy with respect to the Indenture or the Notes unless (i) such Holder has
previously given the Trustee notice that an Event of Default is continuing, (ii)
Holders of at least 25% in principal amount of the outstanding Notes have
requested the Trustee to pursue the remedy, (iii) such Holders have offered the
Trustee reasonable security or indemnity against any loss, liability or expense,
(iv) the Trustee has not complied with such request within 60 days after the
receipt of the request and the offer of security or indemnity and (v) the
Holders of a majority in principal amount of the outstanding Notes have not
given the Trustee a direction inconsistent with such request within such 60-day
period. Subject to certain restrictions, the Holders of a majority in principal
amount of the outstanding Notes are given the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or of exercising any trust or power conferred on the Trustee. The Trustee,
however, may refuse to follow any direction that conflicts with law or the
Indenture or that the Trustee determines is unduly prejudicial to the rights of
any other Holder or that would involve the Trustee in personal liability. Prior
to taking any action under the Indenture, the Trustee will be entitled to
indemnification satisfactory to it in its sole discretion against all losses and
expenses caused by taking or not taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder notice of the Default
within 90 days after it occurs. Except in the case of a Default in the payment
of principal of, or premium (if any) or interest on, any Note, the Trustee may
withhold notice if and so long as a committee of its Trust Officers in good
faith determines that withholding notice is in the interests of the Noteholders.
In addition, the Company is required to deliver to the Trustee, within 120 days
after the end of each fiscal year, a certificate indicating whether the signers
thereof know of any Default that occurred during the previous year. The Company
also is required to deliver to the Trustee, within 30 days after the occurrence
thereof, written notice of any event which would constitute certain Defaults,
their status and what action the Company is taking or proposes to take in
respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the
consent of the Holders of a majority in principal amount of the Notes then
outstanding and any past default or compliance with any provisions may be waived
with the consent of the Holders of a majority in principal amount of the Notes
then outstanding. However, without the consent of each Holder of an outstanding
Note affected, no amendment may, among other things, (i) reduce the principal
amount of Notes whose Holders must consent to an amendment, (ii) reduce the rate
of or extend the time for payment of interest on any Note, (iii) reduce the
principal of or extend the Stated Maturity of any Note, (iv) reduce the premium
payable upon the redemption of any Note or change the time at which any Note may
be redeemed as described under "Optional Redemption" above, (v) make any Note
payable in money other than that stated in the Note, (vi) make any change to the
subordination provisions of the Indenture that adversely affects the rights of
any Holder, (vii) impair the right of any Holder to receive payment of principal
of and interest on such Holder's Notes on or after the due dates therefor or to
institute suit for the enforcement of any payment on or with respect to such
Holder's Notes or (viii) make any change in the amendment provisions that
require each Holder's consent or in the waiver provisions. In addition, without
the consent of the Holders of 90% in principal amount of the Notes then
outstanding, no amendment may release any Note Guarantor that is a Significant
Subsidiary from any of its obligations under its Note Guarantee or the
Indenture, except in compliance with the terms thereof or of the Indenture.
Without the consent of any Holder, the Company and Trustee may amend the
Indenture to cure any ambiguity, omission, defect or inconsistency, to provide
for the assumption by a successor of the obligations of
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the Company under the Indenture, to provide for uncertificated Notes in addition
to or in place of certificated Notes (provided, however, that the uncertificated
Notes are issued in registered form for purposes of Section 163(f) of the Code,
or in a manner such that the uncertificated Notes are described in Section
163(f)(2)(B) of the Code), to add Guarantees with respect to the Notes, to
secure the Notes, to add to the covenants of the Company for the benefit of the
Noteholders or to surrender any right or power conferred upon the Company, to
provide that any Indebtedness that becomes or will become an obligation of the
Successor Company pursuant to a transaction governed by the provisions described
under "-- Merger and Consolidation" (and that is not a Subordinated Obligation)
is Senior Subordinated Indebtedness for purposes of this Indenture, to make any
change that does not adversely affect the rights of any Holder or to comply with
any requirement of the SEC in connection with the qualification of the Indenture
under the TIA. However, no amendment may be made to the subordination provisions
of the Indenture that adversely affects the rights of any holder of Senior
Indebtedness then outstanding unless the holders of such Senior Indebtedness (or
any group or representative thereof authorized to give a consent) consent to
such change.
The consent of the Noteholders is not necessary under the Indenture to
approve the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment. After an amendment
under the Indenture becomes effective, the Company is required to mail to
Noteholders a notice briefly describing such amendment. However, the failure to
give such notice to all Noteholders, or any defect therein, will not impair or
affect the validity of the amendment.
DEFEASANCE
The Company at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Company at any time may terminate its obligations under the covenants
described under "-- Certain Covenants," the operation of the cross acceleration
provision, the bankruptcy provisions with respect to Subsidiaries and the
judgment default provision described under "-- Defaults" above and the
limitations contained in clause (iii) under "-- Merger and Consolidation" above
("covenant defeasance"). If the Company exercises its legal defeasance option or
its covenant defeasance option, each Note Guarantor will be released from all of
its obligations with respect to its Note Guarantee.
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If the Company exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (iv), (vi), (vii), (viii) (but only with
respect to certain bankruptcy events of a Significant Subsidiary), (ix) or (x)
under "Defaults" above or because of the failure of the Company to comply with
clause (iii) under "-- Merger and Consolidation" above.
Either defeasance option may be exercised to any redemption date or to the
maturity date for the Notes. In order to exercise either defeasance option, the
Company must irrevocably deposit in trust (the "defeasance trust") with the
Trustee money or U.S. Government Obligations, or a combination thereof, for the
payment of principal of, and premium (if any) and interest on, the Notes to
redemption or maturity, as the case may be, and must comply with certain other
conditions, including delivery to the Trustee of an Opinion of Counsel to the
effect that holders of the Notes will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and defeasance and will
be subject to Federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law since the date of the Indenture).
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CONCERNING THE TRUSTEE
The Manufacturers and Traders Trust Company is to be the Trustee under the
Indenture and has been appointed by the Company as Registrar and Paying Agent
with regard to the Notes.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) to be used by the Company or a Restricted
Subsidiary in a Related Business; (ii) the Capital Stock of a Person that
becomes a Restricted Subsidiary as a result of the acquisition of such Capital
Stock by the Company or another Restricted Subsidiary; or (iii) Capital Stock of
any Person that at such time is a Restricted Subsidiary, acquired from a third
party; provided, however, that, in the case of clauses (ii) and (iii), such
Restricted Subsidiary is primarily engaged in a Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Applicable Premium" means, with respect to a Note at any Redemption Date,
the greater of (i) 1.0% of the then outstanding principal amount of such Note
and (ii) the excess of (A) the present value of all remaining required interest
and principal payments due on such Note, computed using a discount rate equal to
the Treasury Rate plus 75 basis points, over (B) the then-outstanding principal
amount of such Note.
"Asset Disposition" means any sale, lease, transfer or other disposition of
shares of Capital Stock of a Restricted Subsidiary (other than directors'
qualifying shares, or (in the case of a Foreign Subsidiary) to the extent
required by applicable law), property or other assets (each referred to for the
purposes of this definition as a "disposition") by the Company or any of its
Restricted Subsidiaries (including any disposition by means of a merger,
consolidation or similar transaction) other than (i) a disposition by a
Restricted Subsidiary to the Company or by the Company or a Restricted
Subsidiary to a Restricted Subsidiary, (ii) a disposition of inventory,
equipment, obsolete assets or surplus personal property in the ordinary course
of business, (iii) the sale of Temporary Cash Investments or Cash Equivalents in
the ordinary course of business, (iv) dispositions with a fair market value not
exceeding $500,000 in the aggregate in any fiscal year, (v) the sale or discount
(with or without recourse, and on commercially reasonable terms) of accounts
receivable or notes receivable arising in the ordinary course of business, or
the conversion or exchange of accounts receivable for notes receivable, (vi) the
licensing of intellectual property in the ordinary course of business, (vii) for
purposes of the covenant described under "-- Certain Covenants -- Limitation on
Sales of Assets" only, a disposition subject to the covenant described under
"-- Certain Covenants -- Limitation on Restricted Payments" or (viii) a
disposition of property or assets that is governed by the provisions described
under "-- Merger and Consolidation."
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
assumed in making calculations in accordance with FAS 13) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
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redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Bank Indebtedness" means any and all amounts, whether outstanding on the
Issue Date or thereafter incurred, payable under or in respect of the Senior
Credit Facility, including without limitation principal, premium (if any),
interest (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company or any Restricted
Subsidiary whether or not a claim for post-filing interest is allowed in such
proceedings), fees, charges, expenses, reimbursement obligations, guarantees,
other monetary obligations of any nature and all other amounts payable
thereunder or in respect thereof.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Borrowing Base" means, at any time of determination, the Borrowing Base as
defined in the Senior Credit Agreement.
"Business Day" means a day other than a Saturday, Sunday or other day on
which commercial banking institutions are authorized or required by law to close
in New York City.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease.
"Cash Equivalents" means any of the following: (a) securities issued or
fully guaranteed or insured by the United States Government or any agency or
instrumentality thereof, (b) time deposits, certificates of deposit or bankers'
acceptances of (i) any lender under the Senior Credit Agreement or (ii) any
commercial bank having capital and surplus in excess of $500,000,000 and the
commercial paper of the holding company of which is rated at least A-1 or the
equivalent thereof by S&P or at least P-1 or the equivalent thereof by Moody's
(or if at such time neither is issuing ratings, then a comparable rating of
another nationally recognized rating agency), (c) commercial paper rated at
least A-1 or the equivalent thereof by S&P or at least P-1 or the equivalent
thereof by Moody's (or if at such time neither is issuing ratings, then a
comparable rating of another nationally recognized rating agency) and (d)
investments in money market funds complying with the risk limiting conditions of
Rule 2a-7 or any successor rule of the Securities and Exchange Commission under
the Investment Company Act.
"Chase" means The Chase Manhattan Bank.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means Telex Communications, Inc., a Delaware corporation and the
primary obligor on the Notes, and any successor thereto.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA of the Company and its Restricted
Subsidiaries for the period of the most recent four consecutive fiscal quarters
ending prior to the date of such determination for which consolidated financial
statements of the Company are available to (ii) Consolidated Interest Expense
for such four fiscal quarters (in each case, determined, for each fiscal quarter
(or portion thereof) of the four fiscal quarters ending prior to the Issue Date,
on a pro forma basis to give effect to the Recapitalization as if it had
occurred at the beginning of such four-quarter period); provided, however, that:
(1) if the Company or any Restricted Subsidiary (x) has Incurred any
Indebtedness since the beginning of such period that remains outstanding on
such date of determination or if the transaction giving rise to the need to
calculate the Consolidated Coverage Ratio is an Incurrence of Indebtedness,
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EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving effect on a pro forma basis to such Indebtedness as
if such Indebtedness had been Incurred on the first day of such period
(except that in making such computation, the amount of Indebtedness under
any revolving credit facility outstanding on the date of such calculation
shall be computed based on (A) the average daily balance of such
Indebtedness during such four fiscal quarters or such shorter period for
which such facility was outstanding or (B) if such facility was created
after the end of such four fiscal quarters, the average daily balance of
such Indebtedness during the period from the date of creation of such
facility to the date of such calculation) and the discharge of any other
Indebtedness repaid, repurchased, defeased or otherwise discharged with the
proceeds of such new Indebtedness as if such discharge had occurred on the
first day of such period, or (y) has repaid, repurchased, defeased or
otherwise discharged any Indebtedness since the beginning of the period
that is no longer outstanding on such date of determination, or if the
transaction giving rise to the need to calculate the Consolidated Coverage
Ratio involves a discharge of Indebtedness (in each case other than
Indebtedness Incurred under any revolving credit facility unless such
Indebtedness has been permanently repaid), EBITDA and Consolidated Interest
Expense for such period shall be calculated after giving effect on a pro
forma basis to such discharge of such Indebtedness, including with the
proceeds of such new Indebtedness, as if such discharge had occurred on the
first day of such period,
(2) if since the beginning of such period the Company or any
Restricted Subsidiary shall have made any Asset Disposition of any company
or any business or any group of assets constituting an operating unit of a
business, the EBITDA for such period shall be reduced by an amount equal to
the EBITDA (if positive) directly attributable to the assets that are the
subject of such Asset Disposition for such period or increased by an amount
equal to the EBITDA (if negative) directly attributable thereto for such
period and Consolidated Interest Expense for such period shall be reduced
by an amount equal to the Consolidated Interest Expense directly
attributable to any Indebtedness of the Company or any Restricted
Subsidiary repaid, repurchased, defeased or otherwise discharged with
respect to the Company and is continuing Restricted Subsidiaries in
connection with such Asset Disposition for such period (and, if the Capital
Stock of any Restricted Subsidiary is sold, the Consolidated Interest
Expense for such period directly attributable to the Indebtedness of such
Restricted Subsidiary to the extent the Company and its continuing
Restricted Subsidiaries are no longer liable for such Indebtedness after
such sale),
(3) if since the beginning of such period the Company or any
Restricted Subsidiary (by merger or otherwise) shall have made an
Investment in any Person that thereby becomes a Restricted Subsidiary, or
otherwise acquired any company or any business or any group of assets
constituting an operating unit of a business, including any such
acquisition of assets occurring in connection with a transaction causing a
calculation to be made hereunder, EBITDA and Consolidated Interest Expense
for such period shall be calculated after giving pro forma effect thereto
(including the Incurrence of any Indebtedness) as if such Investment or
acquisition occurred on the first day of such period, and
(4) if since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into the
Company or any Restricted Subsidiary since the beginning of such period)
shall have made any Asset Disposition or any Investment or acquisition of
assets that would have required an adjustment pursuant to clause (2) or (3)
above if made by the Company or a Restricted Subsidiary during such period,
EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect thereto as if such Asset
Disposition, Investment or acquisition of assets occurred on the first day
of such period.
For purposes of this definition, whenever pro forma effect is to be given
to an Asset Disposition, Investment or acquisition of assets, or any transaction
governed by the provisions described under "-- Merger and Consolidation", or the
amount of income or earnings relating thereto and the amount of Consolidated
Interest Expense associated with any Indebtedness Incurred or repaid,
repurchased, defeased or otherwise discharged in connection therewith, the pro
forma calculations in respect thereof shall be as determined in good faith by a
responsible financial or accounting Officer of the Company, based on reasonable
assumptions. If any Indebtedness bears a floating rate of interest and is being
given pro forma effect, the interest expense on such Indebtedness shall be
calculated as if the rate in effect on the date of determination had been the
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applicable rate for the entire period (taking into account any Interest Rate
Agreement applicable to such Indebtedness if such Interest Rate Agreement has a
remaining term as at the date of determination in excess of 12 months). If any
Indebtedness bears, at the option of the Company or a Restricted Subsidiary, a
fixed or floating rate of interest and is being given pro forma effect, the
interest expense on such Indebtedness shall be computed by applying, at the
option of the Company or such Restricted Subsidiary, either a fixed or floating
rate. If any Indebtedness which is being given pro forma effect was Incurred
under a revolving credit facility, the interest expense on such Indebtedness
shall be computed based upon the average daily balance of such Indebtedness
during the applicable period.
"Consolidated Interest Expense" means, for any period, the total
consolidated interest expense of the Company and its Restricted Subsidiaries,
the Company and its consolidated Restricted Subsidiaries, determined in
accordance with GAAP, minus, to the extent included in such interest expense,
amortization or write-off of financing costs, and plus, to the extent incurred
by the Company and its Restricted Subsidiaries in such period but not included
in such interest expense, without duplication, (i) interest expense attributable
to Capitalized Lease Obligations and the interest component of rent expense
associated with Attributable Debt in respect of the relevant lease giving rise
thereto, determined as if such lease were a capitalized lease, in accordance
with GAAP, (ii) amortization of debt discount, (iii) interest in respect of
Indebtedness of any other Person that has been Guaranteed by the Company or any
Restricted Subsidiary, but only to the extent that such interest is actually
paid by the Company or any Restricted Subsidiary, (iv) non-cash interest
expense, (v) net costs associated with Hedging Obligations, (vi) the product of
(A) Preferred Stock dividends in respect of all Preferred Stock of Domestic
Subsidiaries of the Company and Disqualified Stock of the Company held by
Persons other than the Company or a Restricted Subsidiary multiplied by (B) a
fraction, the numerator of which is one and the denominator of which is one
minus the then current combined federal, state and local statutory tax rate of
the Company, expressed as a decimal, in each case, determined on a consolidated
basis in accordance with GAAP; and (vii) the cash contributions to any employee
stock ownership plan or similar trust to the extent such contributions are used
by such plan or trust to pay interest to any Person (other than the Company or
any Restricted Subsidiary) on Indebtedness Incurred by such plan or trust;
provided, however, that there shall be excluded therefrom any such interest
expense of any Unrestricted Subsidiary to the extent the related Indebtedness is
not Guaranteed or paid by the Company or any Restricted Subsidiary. For purposes
of the foregoing, gross interest expense shall be determined after giving effect
to any net payments made or received by the Company and its Subsidiaries with
respect to Interest Rate Agreements.
"Consolidated Net Income" means, for any period, the consolidated net
income (loss) of the Company and its Restricted Subsidiaries, determined in
accordance with GAAP; provided, however, that there shall not be included in
such Consolidated Net Income:
(i) any net income (loss) of any Person if such Person is not a
Restricted Subsidiary, except that (A) subject to the limitations contained
in clause (iv) below, the Company's equity in the net income of any such
Person for such period shall be included in such Consolidated Net Income up
to the aggregate amount of cash actually distributed by such Person during
such period to the Company or a Restricted Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other
distribution to a Restricted Subsidiary, to the limitations contained in
clause (iii) below) and (B) the Company's equity in the net loss of such
Person shall be included to the extent of the aggregate Investment of the
Company or any of its Restricted Subsidiaries in such Person,
(ii) any net income (loss) of any Person acquired by the Company or a
Restricted Subsidiary in a pooling of interests transaction for any period
prior to the date of such acquisition,
(iii) any net income (loss) of any Restricted Subsidiary if such
Restricted Subsidiary is subject to restrictions, directly or indirectly,
on the payment of dividends or the making of distributions by such
Restricted Subsidiary, directly or indirectly, to the Company, except that
(A) subject to the limitations contained in clause (iv) below, the
Company's equity in the net income of any such Restricted Subsidiary for
such period shall be included in such Consolidated Net Income up to the
aggregate amount of cash that could have been distributed by such
Restricted Subsidiary during such period to the Company or
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another Restricted Subsidiary as a dividend (subject, in the case of a
dividend that could have been made to another Restricted Subsidiary, to the
limitation contained in this clause) and (B) the net loss of such
Restricted Subsidiary shall be included to the extent of the aggregate
Investment of the Company or any of its other Restricted Subsidiaries in
such Restricted Subsidiary,
(iv) any gain or loss realized upon the sale or other disposition of
any asset of the Company or its consolidated Restricted Subsidiaries
(including pursuant to any Sale/Leaseback Transaction) that is not sold or
otherwise disposed of in the ordinary course of business,
(v) any extraordinary gain or loss, and
(vi) the cumulative effect of a change in accounting principles.
"Consolidated Tangible Assets" means, as of any date of determination, the
total assets, less goodwill and other intangibles (other than patents,
trademarks, copyrights, licenses and other intellectual property) shown on the
balance sheet of the Company and its Restricted Subsidiaries as of the most
recent date for which such a balance sheet is available, determined on a
consolidated basis in accordance with GAAP. At March 31, 1997, on a pro forma
basis giving effect to the Transactions, the Consolidated Tangible Assets of the
Company was $100.4 million.
"Consolidation" means the consolidation of the accounts of each of the
Restricted Subsidiaries with those of the Company in accordance with GAAP;
provided, however, that "Consolidation" will not include consolidation of the
accounts of any Unrestricted Subsidiary, but the interest of the Company or any
Unrestricted Subsidiary will be accounted for as an investment. The term
"Consolidated" has a correlative meaning.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement or arrangements
(including derivative agreements or arrangements) as to which such Person is a
party or a beneficiary.
"Default" means any event or condition that is, or after notice or passage
of time or both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) the Bank Indebtedness and (ii)
any other Senior Indebtedness which, at the date of determination, has an
aggregate principal amount to or under which, at the date of determination, the
holders thereof are committed to lend up to, at least $10.0 million and is
specifically designated by the Company in the instrument evidencing or governing
such Senior Indebtedness as "Designated Senior Indebtedness" for purposes of the
Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
(other than Management Stock) that by its terms (or by the terms of any security
into which it is convertible or for which it is exchangeable or exercisable) or
upon the happening of any event (i) matures or is mandatorily redeemable
pursuant to a sinking fund obligation or otherwise, (ii) is convertible or
exchangeable for Indebtedness or Disqualified Stock or (iii) is redeemable at
the option of the holder thereof, in whole or in part, in each case on or prior
to the 91st day after the Stated Maturity of the Notes.
"Domestic Subsidiary" means any Restricted Subsidiary of the Company other
than a Foreign Subsidiary.
"EBITDA" means, for any period, the Consolidated Net Income for such
period, plus the following to the extent deducted in calculating such
Consolidated Net Income: (i) income tax expense, (ii) Consolidated Interest
Expense, (iii) depreciation expense and (iv) amortization of intangibles and
other non-cash charges or non-cash losses.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Foreign Subsidiary" means (a) any Restricted Subsidiary of the Company
that is not organized under the laws of the United States of America or any
state thereof or the District of Columbia and (b) any
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Restricted Subsidiary of the Company that has no material assets other than
securities of one or more Foreign Subsidiaries, and other assets relating to an
ownership interest in any such securities or Subsidiaries.
"G-II" means Greenwich II, LLC, a Delaware limited liability company, and
any successor in interest thereto.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect on the Issue Date (for purposes of the definitions of
the terms "Consolidated Coverage Ratio," "Consolidated Interest Expense,"
"Consolidated Net Income" and "EBITDA," all defined terms in the Indenture to
the extent used in or relating to any of the foregoing definitions, and all
ratios and computations based on any of the foregoing definitions) and as in
effect from time to time (for all other purposes of the Indenture), including
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession all ratios and computations based on GAAP contained in the
Indenture shall be computed in conformity with GAAP.
"GST" means GST Acquisition Corp., a Delaware corporation, and any
successor thereto.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other nonfinancial
obligation of any other Person, including any such obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness or
such other obligation of such other Person (whether arising by virtue of
partnership arrangements, or by agreement to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Indebtedness or other obligation of
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); provided, however, that the term "Guarantee" shall not
include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning.
"Guarantor Senior Indebtedness" means the following obligations, whether
outstanding on the date of the Indenture or thereafter issued, without
duplication: (i) any Guarantee of the Bank Indebtedness by such Note Guarantor
and all other Guarantees by such Note Guarantor of Senior Indebtedness of the
Company or Guarantor Senior Indebtedness for any other Note Guarantor; and (ii)
all obligations consisting of the principal of and premium, if any, and accrued
and unpaid interest (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Note Guarantor
regardless of whether postfiling interest is allowed in such proceeding) on, and
fees and other amount owing in respect of, all other Indebtedness of the Note
Guarantor, unless, in the instrument creating or evidencing the same or pursuant
to which the same is outstanding, it is expressly provided that the obligations
in respect of such Indebtedness are not senior in right of payment to the
obligations of such Note Guarantor under the Note Guarantee; provided, however,
that Guarantor Senior Indebtedness shall not include (1) any obligations of such
Note Guarantor to the Note Guarantor or any other Subsidiary of the Note
Guarantor, (2) any liability for Federal, state, local, foreign or other taxes
owed or owing by such Note Guarantor, (3) any accounts payable or other
liability to trade creditors arising in the ordinary course of business
(including Guarantees thereof or instruments evidencing such liabilities), (4)
any Indebtedness of such Note Guarantor that is expressly subordinate in right
of payment to any of the Indebtedness of such Note Guarantor, including any
Guarantor Senior Subordinated Indebtedness and Guarantor Subordinated
Obligations of such Note Guarantor or (5) any Capital Stock.
"Guarantor Senior Subordinated Indebtedness" means, with respect to a Note
Guarantor, the obligations of such Note Guarantor under the Note Guarantee and
any other Indebtedness of such Note Guarantor that specifically provides that
such Indebtedness is to rank pari passu in right of payment with the obligations
of such Note Guarantor under the Note Guarantee and is not expressly
subordinated by its terms in right of payment to any Indebtedness of such Note
Guarantor which is not Guarantor Senior Indebtedness of such Note Guarantor.
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"Guarantor Subordinated Obligation" means, with respect to a Note
Guarantor, any Indebtedness of such Note Guarantor (whether outstanding on the
Issue Date or thereafter Incurred) which is expressly subordinate in right of
payment to the obligations of such Note Guarantor under the Note Guarantee
pursuant to a written agreement.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered in the Register.
"Holdings" means Holdings Acquisition Corp., a Delaware corporation, and
any successor thereto.
"Holdings" means Telex Communications Group, Inc., a Delaware corporation,
and any successor in interest thereto.
"Incur" means issue, assume, enter into any Guarantee of, incur or
otherwise become liable for; provided, however, that any Indebtedness or Capital
Stock of a Person existing at the time such Person becomes a Subsidiary (whether
by merger, consolidation, acquisition or otherwise) shall be deemed to be
Incurred by such Subsidiary at the time it becomes a Subsidiary. Any
Indebtedness issued at a discount (including Indebtedness on which interest is
payable through the issuance of additional Indebtedness) shall be deemed
incurred at the time of original issuance of the Indebtedness at the initial
accreted amount thereof.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication):
(i) the principal of indebtedness of such Person for borrowed money,
(ii) the principal of obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments,
(iii) all reimbursement obligations of such Person (including
reimbursement obligations) in respect of letters of credit or other similar
instruments (the amount of such obligations being equal at any time to the
aggregate then undrawn and unexpired amount of such letters of credit or
other instruments plus the aggregate amount of drawings thereunder that
have not then been reimbursed),
(iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services (except Trade Payables), which
purchase price is due more than one year after the date of placing such
property in final service or taking final delivery and title thereto or the
completion of such services,
(v) all Capitalized Lease Obligations and Attributable Debt of such
Person,
(vi) the redemption, repayment or other repurchase amount of such
Person with respect to any Disqualified Stock or (if such Person is a
Subsidiary of the Company) any Preferred Stock of such Subsidiary, but
excluding, in each case, any accrued dividends (the amount of such
obligation to be equal at any time to the maximum fixed involuntary
redemption, repayment or repurchase price for such Capital Stock, or if
such Capital Stock has no such fixed price, to the involuntary redemption,
repayment or repurchase price therefor calculated in accordance with the
terms thereof as if then redeemed, repaid or repurchased, and if such price
is based upon or measured by the fair market value of such Capital Stock,
such fair market value shall be as determined in good faith by the Board of
Directors or the board of directors of the issuer of such Capital Stock),
(vii) all Indebtedness of other Persons secured by a Lien on any asset
of such Person, whether or not such Indebtedness is assumed by such Person;
provided, however, that the amount of Indebtedness of such Person shall be
the lesser of (A) the fair market value of such asset at such date of
determination and (B) the amount of such Indebtedness of such other
Persons,
(viii) all Indebtedness of other Persons to the extent Guaranteed by
such Person, and
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(ix) to the extent not otherwise included in this definition, net
Hedging Obligations of such Person (the amount of any such obligation to be
equal at any time to the termination value of such agreement or arrangement
giving rise to such Hedging Obligation that would be payable by such Person
at such time).
The amount of Indebtedness of any Person at any date shall be determined as
set forth above or otherwise provided in this Indenture, or otherwise in
accordance with GAAP.
"Interest Rate Agreement" means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement (including derivative agreements or arrangements) as to which
such Person is party or a beneficiary.
"Investment" in any Person by any other Person means any direct or indirect
advance, loan or other extension of credit (other than to customers, directors,
officers or employees of any Person in the ordinary course of business) or
capital contribution (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of others)
to, or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by, such Person. For purposes of the definition of
"Unrestricted Subsidiary" and the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments," (i) "Investment" shall include
the portion (proportionate to the Company's equity interest in such Subsidiary)
of the fair market value of the net assets of any Subsidiary of the Company at
the time that such Subsidiary is designated an Unrestricted Subsidiary;
provided, however, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the Company shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary in an amount (if positive) equal to
(x) the Company's "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time of such redesignation; and (ii) any property transferred
to or from an Unrestricted Subsidiary shall be valued at its fair market value
at the time of such transfer, in each case as determined in good faith by the
Board of Directors.
"Investors" means Greenwich Street Capital Partners, L.P., Greenwich Street
Capital Offshore Fund, Ltd., The Travelers Insurance Company, The Travelers Life
and Annuity Company, TRV Employees Fund, L.P. and the other parties that
purchased equity interests in G-II on the date of the Recapitalization.
"Issue Date" means the date on which the Notes are originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Management Agreements" means, collectively, the Consulting Agreement, the
Fee Agreement and the Indemnification Agreement, each between the Company and
Greenwich Street Capital Partners, L.P. (and its permitted successors and
assigns thereunder), as each may be amended, supplemented, waived or otherwise
modified from time to time in accordance with the terms thereof and of the
Indenture.
"Management Investors" means the officers, directors, employees and other
members of the management of Holdings, the Company or any of their respective
Subsidiaries, or family members or relatives thereof, or trusts for the benefit
of any of the foregoing, or any of their heirs, executors, successors and legal
representatives, who at any date beneficially own or have the right to acquire,
directly or indirectly, Capital Stock of the Company, Holdings or G-II.
"Management Stock" means Capital Stock of the Company, Holdings or G-II, or
options, warrants or other rights in respect thereof, held by any of the
Management Investors.
"Moody's" means Moody's Investors Service, Inc., and its successors.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and when
received, but excluding any other consideration received in the form of
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assumption by the acquiring person of Indebtedness or other obligations relating
to the properties or assets that are the subject of such Asset Disposition or
received in any other noncash form) therefrom, in each case net of (i) all
legal, title and recording tax expenses, commissions and other fees and expenses
incurred, and all Federal, state, provincial, foreign and local taxes required
to be paid or accrued as a liability under GAAP, as a consequence of such Asset
Disposition, (ii) all payments made, and all installment payments required to be
made, on any Indebtedness that is secured by any assets subject to such Asset
Disposition, in accordance with the terms of any Lien upon such assets, or that
must by its terms, or in order to obtain a necessary consent to such Asset
Disposition, or by applicable law, be repaid out of the proceeds from such Asset
Disposition, (iii) all distributions and other payments required to be made to
minority interest holders in Subsidiaries or joint ventures as a result of such
Asset Disposition, or to any other Person (other than the Company or a
Restricted Subsidiary) owning a beneficial interest in the assets disposed of in
such Asset Disposition and (iv) appropriate amounts to be provided as a reserve,
in accordance with GAAP, against any liabilities associated with the assets
disposed of in such Asset Disposition and retained by the Company or any
Restricted Subsidiary after such Asset Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of any securities
of the Company or any Subsidiary by the Company or any Subsidiary, or any
capital contribution, means the cash proceeds of such issuance, sale or
contribution net of attorneys' fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees actually incurred in connection with such issuance, sale or
contribution and net of taxes paid or payable as a result thereof.
"Note Guarantee" means any guarantee that may from time to time be executed
and delivered by a Subsidiary of the Company pursuant to the covenant described
under "-- Certain Covenants -- Additional Note Guarantors."
"Note Guarantor" means any Subsidiary that has issued a Note Guarantee.
"Officer" means the President, Chief Financial Officer, any Vice President,
Controller or Treasurer of the Company.
"Officer's Certificate" means a certificate signed by one Officer.
"Opinion of Counsel" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company or the Trustee.
"Permitted Holder" means any of the following: (i) any of the Investors,
Smith Barney Holdings Inc. and their respective Affiliates; (ii) any investment
fund or vehicle managed, sponsored or advised by Greenwich Street Capital
Partners, Inc., The Travelers Insurance Company, The Travelers Life and Annuity
Company, Smith Barney Holdings Inc. or any of their respective Affiliates; (iii)
any limited or general partners of, or other investors in, any of the Investors
and their respective Affiliates, or any such investment fund or vehicle; and
(iv) any Person acting in the capacity of an underwriter in connection with a
public or private offering of Capital Stock of the Company, Holdings or G-II.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in, or consisting of, any of the following:
(i) a Restricted Subsidiary, the Company or a Person that will, upon
the making of such Investment, become a Restricted Subsidiary;
(ii) another Person if as a result of such Investment such other
Person is merged or consolidated with or into, or transfers or conveys all
or substantially all its assets to, the Company or a Restricted Subsidiary;
(iii) Temporary Cash Investments or Cash Equivalents;
(iv) receivables owing to the Company or any Restricted Subsidiary, if
created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; provided, however,
that such trade terms may include such concessionary trade terms as the
Company or any such Restricted Subsidiary deems reasonable under the
circumstances;
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(v) securities or other Investments received as consideration in sales
or other dispositions of property or assets, including Asset Dispositions
made in compliance with the covenant described under "-- Certain
Covenants -- Limitation on Sales of Assets;"
(vi) securities or other Investments received in settlement of debts
created in the ordinary course of business and owing to the Company or any
Restricted Subsidiary, or as a result of foreclosure, perfection or
enforcement of any Lien, or in satisfaction of judgments, including in
connection with any bankruptcy proceeding or other reorganization of
another Person;
(vii) Investments in existence or made pursuant to legally binding
written commitments in existence on the Issue Date;
(viii) Currency Agreements, Interest Rate Agreements and related
Hedging Obligations, which obligations are Incurred in compliance with the
covenant described under "-- Certain Covenants -- Limitation on
Indebtedness;"
(ix) pledges or deposits (x) with respect to leases or utilities
provided to third parties in the ordinary course of business or (y)
otherwise described in the definition of "Permitted Liens"; and
(x) other Investments in an aggregate amount outstanding at any time
not to exceed the greater of (A) $7,000,000 and (B) 7% of Consolidated
Tangible Assets.
"Permitted Liens" means:
(a) Liens for taxes, assessments or other governmental charges not yet
delinquent or the nonpayment of which in the aggregate would not reasonably
be expected to have a material adverse effect on the Company and its
Restricted Subsidiaries, or that are being contested in good faith and by
appropriate proceedings if adequate reserves with respect thereto are
maintained on the books of the Company or a Subsidiary thereof, as the case
may be, in accordance with GAAP;
(b) carriers', warehousemen's, mechanics', landlords', materialmen's,
repairmen's or other like Liens arising in the ordinary course of business
in respect of obligations that are not overdue for a period of more than 60
days, or that are bonded or that are being contested in good faith and by
appropriate proceedings;
(c) pledges, deposits or Liens in connection with workers'
compensation, unemployment insurance and other social security and other
similar legislation or other insurance related obligations (including,
without limitation, pledges or deposits securing liability to insurance
carriers under insurance or self-insurance arrangements);
(d) pledges, deposits or Liens to secure the performance of bids,
tenders, trade, government or other contracts (other than for borrowed
money), obligations for utilities, leases, licenses, statutory obligations,
surety, judgment and appeal bonds, performance bonds and other obligations
of a like nature incurred in the ordinary course of business;
(e) easements (including reciprocal easement agreements),
rights-of-way, building, zoning and similar restrictions, utility
agreements, covenants, reservations, restrictions, encroachments, changes,
and other similar encumbrances or title defects incurred, or leases or
subleases granted to others, in the ordinary course of business, which do
not in the aggregate materially interfere with the ordinary conduct of the
business of the Company and its Subsidiaries, taken as a whole;
(f) Liens existing on, or provided for under written arrangements
existing on, the Issue Date, or (in the case of any such Liens securing
Indebtedness of the Company or any of its Subsidiaries existing or arising
under written arrangements existing on the Issue Date) securing any
Refinancing Indebtedness in respect of such Indebtedness so long as the
Lien securing such Refinancing Indebtedness is limited to all or part of
the same property or assets (plus improvements, accessions, proceeds or
dividends or distributions in respect thereof) that secured (or under such
written arrangements could secure) the original Indebtedness;
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(g) (i) mortgages, liens, security interests, restrictions,
encumbrances or any other matters of record that have been placed by any
developer, landlord or other third party on property over which the Company
or any Restricted Subsidiary of the Company has easement rights or on any
leased property and subordination or similar agreements relating thereto
and (ii) any condemnation or eminent domain proceedings affecting any real
property;
(h) Liens securing Hedging Obligations Incurred in compliance with the
covenant described under "-- Certain Covenants -- Limitation on
Indebtedness;"
(i) Liens arising out of judgments, decrees, orders or awards in
respect of which the Company shall in good faith be prosecuting an appeal
or proceedings for review, which appeal or proceedings shall not have been
finally terminated, or if the period within which such appeal or
proceedings may be initiated shall not have expired;
(j) leases, subleases, licenses or sublicenses to third parties;
(k) Liens securing (x) Indebtedness Incurred in compliance with clause
(b)(i), (b)(ii), (b)(v) or (b)(vii) of the covenant described under
"Certain Covenants -- Limitation on Indebtedness", or clause (b)(iv)
thereof (other than Refinancing Indebtedness Incurred in respect of
Indebtedness described in paragraph (a) thereof) or (y) Bank Indebtedness;
(l) Liens securing commercial bank indebtedness;
(m) Liens on properties or assets (1) of the Company or any Note
Guarantor securing Senior Indebtedness or Guarantor Senior Indebtedness,
(2) of any Wholly Owned Subsidiary that is not a Note Guarantor securing
Indebtedness of any Wholly Owned Subsidiary that is not a Note Guarantor or
(3) of any Restricted Subsidiary that is not a Note Guarantor securing its
Indebtedness;
(n) Liens existing on property or assets of a Person at the time such
Person becomes a Subsidiary of the Company (or at the time the Company or a
Restricted Subsidiary acquires such property or assets); provided, however,
that such Liens are not created in connection with, or in contemplation of,
such other Person becoming such a Subsidiary (or such acquisition of such
property or assets), and that such Liens are limited to all or part of the
same property or assets (plus improvements, accessions, proceeds or
dividends or distributions in respect thereof) that secured (or, under the
written arrangements under which such Liens arose, could secure) the
obligations to which such Liens relate;
(o) Liens on Capital Stock of an Unrestricted Subsidiary that secure
Indebtedness or other obligations of such Unrestricted Subsidiary;
(p) any encumbrance or restriction (including, but not limited to, put
and call agreements) with respect to Capital Stock of any joint venture or
similar arrangement pursuant to any joint venture or similar agreement;
(q) Liens securing the Notes; and
(r) Liens securing Refinancing Indebtedness Incurred in respect of any
Indebtedness secured by, or securing any refinancing, refunding, extension,
renewal or replacement (in whole or in part) of any other obligation
secured by, any other Permitted Liens, provided that any such new Lien is
limited to all or part of the same property or assets (plus improvements,
accessions, proceeds or dividends or distributions in respect thereof) that
secured (or, under the written arrangements under which the original Lien
arose, could secure) the obligations to which such Liens relate.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Preferred Stock" as applied to the Capital Stock of any corporation means
Capital Stock of any class or classes (however designated) that is preferred as
to the payment of dividends, or as to the distribution of assets
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upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"Public Equity Offering" means an underwritten primary public offering of
common stock of the Company, Holdings or G-II pursuant to an effective
registration statement under the Securities Act (whether alone or in conjunction
with any secondary public offering), the proceeds of which, if issued by
Holdings or G-II, are contributed to the Company.
"Public Market" means any time after a Public Equity Offering has been
consummated and either (x) at least 10% of the total issued and outstanding
common stock (or equivalent equity interests) of the Company, Holdings or G-II
has been distributed by means of an effective registration statement under the
Securities Act or (y) an established public trading market otherwise exists for
any such common stock or equivalent equity interests.
"Recapitalization" means the recapitalization of Holdings pursuant to the
Recapitalization Agreement.
"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, renew, repay or extend (including pursuant to any defeasance
or discharge mechanism) (collectively, "refinances," "refinanced" and
"refinancing" as used in the Indenture shall have a correlative meaning) any
Indebtedness existing on the date of the Indenture or Incurred in compliance
with the Indenture (including Indebtedness of the Company that refinances
Indebtedness of any Restricted Subsidiary (to the extent permitted in the
Indenture) and Indebtedness of any Restricted Subsidiary that refinances
Indebtedness of another Restricted Subsidiary) including Indebtedness that
refinances Refinancing Indebtedness; provided, however, that (i) the Refinancing
Indebtedness has a Stated Maturity no earlier than the Stated Maturity of the
Indebtedness being refinanced, (ii) the Refinancing Indebtedness has an Average
Life at the time such Refinancing Indebtedness is Incurred that is equal to or
greater than the Average Life of the Indebtedness being refinanced and (iii)
such Refinancing Indebtedness is Incurred in an aggregate principal amount (or
if issued with original issue discount, an aggregate issue price) that is equal
to or less than the sum of (x) the aggregate principal amount (or if issued with
original issue discount, the aggregate accreted value) then outstanding of the
Indebtedness being refinanced, plus (y) fees, underwriting discounts, premiums
and other costs and expenses incurred in connection with such Refinancing
Indebtedness; provided further, however, that Refinancing Indebtedness shall not
include (x) Indebtedness of a Restricted Subsidiary that is not a Note Guarantor
that refinances Indebtedness of the Company or (y) Indebtedness of the Company
or a Restricted Subsidiary that refinances Indebtedness of an Unrestricted
Subsidiary.
"Related Business" means those businesses in which the Company or any of
its Subsidiaries is engaged on the date of the Indenture, or that are reasonably
related, complementary or incidental thereto.
"Representative" means the trustee, agent or representative (if any) for an
issue of Senior Indebtedness.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Revolving Credit Facility" means the revolving credit facility under the
Senior Credit Facility (which may include any swing line or letter of credit
facility or subfacility thereunder).
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired by the Company or a Restricted Subsidiary whereby
the Company or such Restricted Subsidiary transfers such property to a Person
and the Company or such Restricted Subsidiary leases it from such Person, other
than leases (x) between the Company and a Restricted Subsidiary or between or
(y) required to be classified and accounted for as capitalized leases for
financial reporting purposes in accordance with GAAP.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien.
"Senior Credit Agreement" means the credit agreement dated as of May 6,
1997, among the Company (after giving effect to the Transactions), the banks and
other financial institutions party thereto from time to time, Morgan Stanley
Senior Funding, Inc., as documentation agent, and Chase as administrative agent,
as such agreement may be assumed by any successor in interest, and as such
agreement may be amended,
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supplemented, waived or otherwise modified from time to time, or refunded,
refinanced, restructured, replaced, renewed, repaid, increased or extended from
time to time (whether in whole or in part, whether with the original agent and
lenders or other agents and lenders or otherwise, and whether provided under the
original Senior Credit Agreement or otherwise).
"Senior Credit Facility" means the collective reference to the Senior
Credit Agreement, any Loan Documents (as defined therein), any notes and letters
of credit issued pursuant thereto and any guarantee and collateral agreement,
patent and trademark security agreement, mortgages, letter of credit
applications and other security agreements and collateral documents, and other
instruments and documents, executed and delivered pursuant to or in connection
with any of the foregoing, in each case as the same may be amended,
supplemented, waived or otherwise modified from time to time, or refunded,
refinanced, restructured, replaced, renewed, repaid, increased or extended from
time to time (whether in whole or in part, whether with the original agent and
lenders or other agents and lenders or otherwise, and whether provided under the
original Senior Credit Agreement or otherwise). Without limiting the generality
of the foregoing, the term "Senior Credit Facility" shall include any agreement
(i) changing the maturity of any Indebtedness incurred thereunder or
contemplated thereby, (ii) adding Subsidiaries of the Company as additional
borrowers or guarantors thereunder, (iii) increasing the amount of Indebtedness
incurred thereunder or available to be borrowed thereunder or (iv) otherwise
altering the terms and conditions thereof.
"Senior Subordinated Indebtedness" means the Notes and any other
Indebtedness of the Company that (i) specifically provides that such
Indebtedness is to rank pari passu with the Notes or is otherwise entitled
"Senior Subordinated" Indebtedness and (ii) is not expressly subordinated by its
terms in right of payment to any Indebtedness of the Company that is not Senior
Indebtedness.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC, as in effect on the Issue Date.
"S&P" means Standard & Poor's Ratings Service, a division of The
McGraw-Hill Companies, Inc., and its successors.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the date of the Indenture or thereafter Incurred) which is
expressly subordinate in right of payment to the Notes pursuant to a written
agreement.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other equity interests (including partnership
interests) entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by (i) such person or (ii) one or
more Subsidiaries of such Person.
"Successor Company" shall have the meaning assigned thereto in clause (i)
under "-- Merger and Consolidation."
"Tax Sharing Agreement" means the Tax Sharing Agreement between the Company
and Holdings, as the same may be amended, supplemented, waived or otherwise
modified from time to time in accordance with the terms thereof and of the
Indenture.
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations (x) of the United States of America or any agency thereof
or obligations Guaranteed by the United States of America or any agency thereof
or (y) of any foreign country recognized by the United States of America rated
at least "A" by S&P or "A1" by Moody's, (ii) investments in time deposit
accounts, certificates of deposit and
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money market deposits maturing within 180 days of the date of acquisition
thereof issued by a bank or trust company that is organized under the laws of
the United States of America, any state thereof or any foreign country
recognized by the United States of America having capital and surplus
aggregating in excess of $250 million (or the foreign currency equivalent
thereof) and whose long-term debt is rated "A" by S&P or "A-1" by Moody's, (iii)
repurchase obligations with a term of not more than 30 days for underlying
securities of the types described in clause (i) or (ii) above entered into with
a bank meeting the qualifications described in clause (ii) above, (iv)
Investments in commercial paper, maturing not more than 270 days after the date
of acquisition, issued by a corporation (other than an Affiliate of the Company)
organized and in existence under the laws of the United States of America or any
foreign country recognized by the United States of America with a rating at the
time as of which any Investment therein is made of "P-1" (or higher) according
to Moody's or "A-1" (or higher) according to S&P, (v) Investments in securities
with maturities of six months or less from the date of acquisition issued or
fully guaranteed by any state, commonwealth or territory of the United States of
America, or by any political subdivision or taxing authority thereof, and rated
at least "A" by S&P or "A" by Moody's, (vi) any money market deposit accounts
issued or offered by a domestic commercial bank or a commercial bank organized
and located in a country recognized by the United States of America, in each
case, having capital and surplus in excess of $250 million (or the foreign
currency equivalent thereof), or investments in money market funds complying
with the risk limiting conditions of Rule 2a-7 or any short-term successor rule)
of the SEC, under the Investment Company Act of 1940, as amended, and (vii)
similar short-term investments approved by the Board of Directors in the
ordinary course of business.
"Term Loan Facility" means the term loan facilities provided under the
Senior Credit Facility.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. sec.sec.
77aaa-77bbbb) as in effect on the date of the Indenture.
"Trade Payables" means, with respect to any Person, any accounts payable or
any indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by such Person arising in the ordinary course of business in
connection with the acquisition of goods or services.
"Transactions" means, collectively, the Recapitalization, the initial
equity investment by the Investors, the Offering, the initial borrowings under
the Senior Credit Facility, and all other transactions relating to the
Recapitalization or the financing thereof.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15(519) which
has become publicly available at least two Business Days prior to the Redemption
Date (or, if such Statistical Release is no longer published, any publicly
available source or similar market data)) most nearly equal to the period from
the Redemption Date to the Stated Maturity; provided, however, that if the
period from the Redemption Date to the Stated Maturity is not equal to the
constant maturity of a United States Treasury security for which a weekly
average yield is given, the Treasury Rate shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of a year) from the weekly
average yields of United States Treasury securities for which such yields are
given, except that if the period from the Redemption Date to the Stated Maturity
is less than one year, the weekly average yield on actually traded United States
Treasury securities adjusted to a constant maturity of one year shall be used.
"Trustee" means the party named as such in the Indenture until a successor
replaces it and, thereafter, means the successor.
"Trust Officer" means the Chairman of the Board, the President or any other
officer or assistant officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its
Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, the Company or any other Subsidiary of the Company that
is not a
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Subsidiary of the Subsidiary to be so designated; provided, however, that either
(A) the Subsidiary to be so designated has total consolidated assets of $1,000
or less or (B) if such Subsidiary has consolidated assets greater than $1,000,
then such designation would be permitted under "-- Certain
Covenants -- Limitation on Restricted Payments." The Board of Directors may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided,
however, that immediately after giving effect to such designation (x) the
Company could incur at least $1.00 of additional Indebtedness under paragraph
(a) in the covenant described under "-- Certain Covenants -- Limitation on
Indebtedness" and (y) no Default shall have occurred and be continuing. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the resolution of the Company's Board
of Directors giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
"Voting Stock" of an entity means all classes of Capital Stock of such
entity then outstanding and normally entitled to vote in the election of
directors or all interests in such entity with the ability to control the
management or actions of such entity.
"Wholly Owned Subsidiary" means a Restricted Subsidiary of the Company all
the Capital Stock of which (other than directors' qualifying shares, or (in the
case of any Foreign Subsidiary) to the extent required by applicable law) is
owned by the Company or another Wholly Owned Subsidiary.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain United States federal
income tax consequences of the purchase, ownership and disposition of the New
Notes. This summary applies only to a beneficial owner of a Note who acquires a
New Note at the initial offering thereof. This discussion is based on currently
existing provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), existing and proposed Treasury regulations promulgated thereunder, and
administrative and judicial interpretations thereof, all as in effect or
proposed on the date hereof and all of which are subject to change, possibly
with retroactive effect, or different interpretations. This discussion does not
address the tax consequences to subsequent purchasers of New Notes, and is
limited to investors who hold the New Notes as capital assets. Moreover, this
discussion is for general information only, and does not address all of the tax
consequences that may be relevant to particular investors in light of their
personal circumstances, or to certain types of investors (such as certain
financial institutions, insurance companies, tax-exempt entities, dealers in
securities, persons who have acquired New Notes as part of a straddle, hedge,
conversion transaction or other integrated investment or persons whose
functional currency is not the U.S. Dollar).
PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION
OF THE NEW NOTES, INCLUDING THE APPLICABILITY OF ANY FEDERAL ESTATE OR GIFT TAX
LAWS OR ANY STATE, LOCAL OR FOREIGN TAX LAWS, ANY CHANGES IN APPLICABLE TAX LAWS
AND ANY PENDING OR PROPOSED LEGISLATION OR REGULATIONS.
EXCHANGE OFFER
The exchange of an Existing Note for a New Note should not constitute a
taxable exchange of an Existing Note, in which case a Holder would not recognize
taxable gain or loss upon receipt of a New Note, a Holder's holding period for a
New Note would generally include the holding period for the Existing Note so
exchanged and such holder's adjusted tax basis in a New Note would generally be
the same as such holder's adjusted tax basis in the Note so exchanged. The
following discussion assumes that the exchange of Existing Notes for New Notes
pursuant to the Exchange Offer will not be treated as an exchange for federal
income tax purposes, and that the Existing Notes and the New Notes will be
treated as the same security for federal income tax purposes.
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UNITED STATES TAXATION OF UNITED STATES HOLDERS
As used herein, the term "United States Holder" means a beneficial owner of
a New Note that is, for United States federal income tax purposes, (i) a citizen
or resident of the United States, (ii) a corporation or partnership created or
organized in or under the laws of the United States or of any political
subdivision thereof, (iii) an estate the income of which is subject to United
States federal income taxation regardless of its source or (iv) a trust that is
subject to the supervision of a court within the United States and the control
of one or more United States fiduciaries as described in section 7701(a)(3) of
the Code.
Payment of Stated Interest on New Notes. Subject to the discussion below
under "Payments on Registration Default", in general, (i) interest paid or
payable on a New Note will be taxable to a United States Holder as ordinary
interest income as received or accrued, in accordance with such holder's method
of accounting for federal income tax purposes, and (ii) assuming that original
issue discount on the Existing Note is less than a de minimis amount equal to
0.25% of its stated principal amount multiplied by the number of complete years
to its maturity, any such discount will be deemed to be equal to zero, and a
holder will not be required to accrue a portion of such discount as income in
each taxable year.
Payments on Registration Default. Because the Existing Notes provided for
the payment of liquidated damages under the Exchange and Registration Rights
Agreement, the Existing Notes will be subject to the Treasury Regulations that
apply to debt instruments that provide for one or more contingent payments.
Under those Regulations, however, a payment is not a contingent payment merely
because of a contingency that, as of the issue date, is either "remote" or
"incidental". The Company intends to take the position that, solely for these
purposes, the payment of such liquidated damages is a remote or incidental
contingency, in which case the possibility of such payment would not, as of the
issue date, cause the Existing Notes to be treated as having been issued with
original issue discount, and the rules described above under "Payment of Stated
Interest on Notes" would apply. The Company's determination that such payments
are a remote or incidental contingency for these purposes is binding on a
holder, unless such holder discloses in the proper manner to the IRS that it is
taking a different position.
If the Existing Notes (or New Notes received in exchange thereof pursuant
to the Exchange Offer) were treated as having been issued with original issue
discount, a United States Holder could be required to accrue all payments on the
New Notes (including amounts that would otherwise constitute de minimis original
issue discount and projected payments of liquidated damages) on a constant yield
basis (including holders who otherwise use a cash method of accounting for
federal income tax purposes), and in certain circumstances to include market
discount in income sooner than otherwise required and to treat as interest
income any gain recognized on the disposition of the debt instrument (rather
than as capital gain).
Prospective investors should consult their tax advisors as to the tax
considerations relating to the payment of such liquidated damages, in particular
in connection with the possible application of the regulations relating to
contingent payment instruments.
Sale, Exchange or Retirement of the Notes. Upon the sale, exchange,
redemption, retirement at maturity or other disposition of a New Note, a United
States Holder will generally recognize taxable gain or loss equal to the
difference between the sum of cash plus the fair market value of all other
property received on such disposition (except to the extent such cash or
property is attributable to accrued interest, which will be taxable as ordinary
income) and such holder's adjusted tax basis in the New Note. Gain or loss
recognized on the disposition of a New Note generally will be capital gain or
loss and will be long-term capital gain or loss if, at the time of such
disposition, the United States Holder's holding period for the New Note is more
than one year. Under current law, in the case of United States Holders who are
individuals, net long-term capital gains are taxed at a lower rate than ordinary
income and capital losses are subject to certain limitations.
Backup Withholding and Information Reporting. In general, a United States
Holder of a New Note will be subject to backup withholding at the rate of 31%
with respect to interest, principal and premium, if any, paid on a New Note,
unless the holder (a) is an entity (including corporations, tax-exempt
organizations and certain qualified nominees) that is exempt from withholding
and, when required, demonstrates this fact, or (b) provides the Company with its
Taxpayer Identification Number ("TIN") (which for an individual would
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be the holder's Social Security number), certifies that the TIN provided to the
Company is correct and that the holder has not been notified by the IRS that it
is subject to backup withholding due to underreporting of interest or dividends,
and otherwise complies with applicable requirements of the backup withholding
rules. In addition, such payments of principal, premium and interest to United
States Holders that are not corporations, tax-exempt organizations or qualified
nominees will generally be subject to information reporting requirements.
The amount of any backup withholding from a payment to a United States
Holder will be allowed as a credit against such holder's federal income tax
liability and may entitle such holder to a refund, provided that the required
information is furnished to the IRS.
UNITED STATES TAXATION OF FOREIGN HOLDERS
Payment of Interest on New Notes. In general, payments of interest
received by any beneficial owner of a New Note that is not a United States
Holder (a "Foreign Holder") will not be subject to a United States federal
withholding tax, provided that (i)(a) the Foreign Holder does not actually or
constructively own 10% or more of the total combined voting power of all classes
of stock of the Company entitled to vote within the meaning of Section 871(h)(3)
of the Code and the Treasury Regulations thereunder, (b) the Foreign Holder is
not a controlled foreign corporation that is related to the Company actually or
constructively through stock ownership, (c) the Foreign Holder is not a bank
whose receipt of interest on a New Note is described in section 881(c)(3)(A) of
the Code and (d) either (x) the beneficial owner of the New Note, under
penalties of perjury, provides the Company or its agent with the beneficial
owner's name and address and certifies that it is not a United States Holder on
IRS Form W-8 (or a suitable substitute or successor form) or (y) a securities
clearing organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business (a "financial
institution") holds the New Note and certifies to the Company or its agent under
penalties of perjury that such a Form W-8 (or suitable substitute or successor
form) has been received by it from the beneficial owner or qualifying
intermediary and furnishes the payor a copy thereof; (ii) the Foreign Holder is
subject to United States federal income tax with respect to the New Note on a
net basis because payments received with respect to the New Note are effectively
connected with a U.S. trade or business of the Foreign Holder (in which case the
Foreign Holder may also be subject to "branch profits tax" under section 884 of
the Code) and provides the Company with a properly executed IRS Form 4224 or
successor form; or (iii) the Foreign Holder is entitled to the benefits of an
income tax treaty under which the interest is exempt from United States
withholding tax, and the Foreign Holder or such Holder's agent provides a
properly executed IRS Form 1001 or successor form claiming the exemption.
Payments of interest not exempt from U.S. federal withholding tax as described
above will be subject to such withholding tax at the rate of 30% (subject to
reduction under an applicable income tax treaty).
Sales, Exchange or Retirement of the New Notes. A Foreign Holder generally
will not be subject to United States federal income tax (and generally no tax
will be withheld) with respect to gain realized on the sale, exchange,
redemption, retirement at maturity or other disposition of a New Note, unless
(i) the gain is effectively connected with a United States trade or business
conducted by the Foreign Holder or (ii) the Foreign Holder is an individual who
is present in the United States for a period or periods aggregating 183 or more
days in the taxable year of the disposition and certain other conditions are
met.
Backup Withholding and Reporting. Under current Treasury regulations,
backup withholding and information reporting on IRS Form 1099 do not apply to
payments made by the Company or a paying agent to Foreign Holders if the
certification described under "United States Taxation of Foreign
Holders -- Payment of Interest on New Notes" is received, provided that the
payor does not have actual knowledge that the holder is a United States Holder.
If any payments of principal, premium (if any) and interest are made to the
beneficial owner of a New Note by or through the foreign office of a foreign
custodian, foreign nominee or other foreign agent of such beneficial owner, or
if the foreign office of a foreign "broker" (as defined in applicable United
States Treasury Department regulations) pays the proceeds of the sale of a New
Note to the seller thereof, backup withholding and information reporting will
not apply. Information reporting requirements (but not backup withholding) will
apply, however, to any such payments by a foreign office of a broker that is,
for United States federal income tax purposes, a United States person, or a
foreign person that derives
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50% or more of its gross income for certain periods from the conduct of a trade
or business in the United States, or a "controlled foreign corporation"
(generally, a foreign corporation controlled by United States shareholders) with
respect to the United States, unless the broker has documentary evidence in its
records that the holder is a Foreign Holder and certain other conditions are
met, or the holder otherwise establishes an exemption. Any such payments by a
United States office of a custodian, nominee or agent or by a United States
office of a broker are subject to both backup withholding at a rate of 31% and
information reporting unless the holder certifies under penalties of perjury
that it is a Foreign Holder and the payor does not have actual knowledge that
the beneficial owner is a United States person or otherwise establishes an
exemption. A Foreign Holder may obtain a refund or a credit against such
Holder's U.S. federal income tax liability of any amounts withheld under the
backup withholding rules, provided the required information is furnished to the
IRS.
In addition, in certain circumstances, interest on a New Note owned by a
Foreign Holder will be required to be reported annually on IRS Form 1042S, in
which case such form will be filed with the IRS and furnished to the Foreign
Holder.
PROPOSED REGULATIONS
In April 1996, the IRS issued proposed regulations that would change
certain of the certification and other procedures described under "United States
Taxation of Foreign Holders" ("1996 Proposed Regulations"). For example, under
the 1996 Proposed Regulations, a Foreign Holder claiming an exemption from
withholding because it is subject to U.S. tax on a net income basis or claiming
the benefit of an income tax treaty as described in clauses (ii) and (iii)
respectively, of the paragraph under " -- United States Taxation of Foreign
Holders -- Payment of Interest on Notes" (but not a Foreign Holder claiming the
portfolio interest exemption described in clause (i)) would be required to
provide its TIN to the payor. The 1996 Proposed Regulations would apply to
payments of interest made after December 31, 1997. There can be no assurance,
however, that the 1996 Proposed Regulations will be adopted without change in
final form.
BOOK-ENTRY; DELIVERY AND FORM
GLOBAL NOTES
The Notes will initially be issued in the form of one or more registered
Notes in global form without coupons (each a "Global Note"). Each Global Note
will be deposited with, or on behalf of, the Depository Trust Company ("DTC")
and registered in the name of Cede & Co., as nominee of DTC, or will remain in
the custody of the Trustee pursuant to the FAST Balance Certificate Agreement
between DTC and the Trustee.
DTC has advised the Company that it is (i) a limited purpose trust company
organized under the laws of the State of New York, (ii) a "banking organization"
within the meaning of the New York banking law, (iii) a member of the Federal
Reserve System, (iv) a "clearing corporation" within the meaning of the Uniform
Commercial Code, as amended, and (v) a "Clearing Agency" registered pursuant to
Section 17A of the Exchange Act. DTC was created to hold securities for its
participants (collectively, the "Participants") and facilitates the clearance
and settlement of securities transactions between Participants through
electronic book-entry changes to the accounts of its Participants, thereby
eliminating the need for physical transfer and delivery of certificates.
Participants include securities brokers and dealers (including the Initial
Purchasers), banks and trust companies, clearing corporations and certain other
organizations. Indirect access to DTC's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants") that clear through or maintain a custodial relationship
with a Participant, either directly or indirectly.
The Company expects that pursuant to procedures established by DTC (i) upon
deposit of the Global Notes, DTC will credit the accounts of Participants
designated by the Initial Purchasers with an interest in the Global Note and
(ii) ownership of beneficial interests in the Global Notes will be shown on, and
the transfer of beneficial ownership therein will be effected only through,
records maintained by DTC (with respect to the
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interest of the Participants), the Participants and the Indirect Participants.
The laws of some states require that certain persons take physical delivery in
definitive form of securities that they own and that security interests in
negotiable instruments can only be perfected by delivery of certificates
representing the instruments. Consequently, the ability to transfer Notes or to
pledge the Notes as collateral to persons in such states will be limited to such
extent.
So long as DTC or its nominee is the registered owner of a Global Note, DTC
or such nominee, as the case may be, will be considered the sole owner or holder
of the Notes represented by the Global Note for all purposes under the Indenture
and the Notes. Except as provided below, owners of beneficial interests in a
Global Note will not be entitled to have Notes represented by such Global Note
registered in their names, will not receive or be entitled to receive physical
delivery of Certificated Securities, and will not be considered the owners or
holders thereof under the Indenture for any purpose, including with respect to
giving of any directions, instruction or approval to the Trustee thereunder. As
a result, the ability of a person having a beneficial interest in Notes
represented by a Global Note to pledge or transfer such interest to persons or
entities that do not participate in DTC's system or to otherwise take action
with respect to such interest, may be affected by the lack of a physical
certificate evidencing such interest.
Payments with respect to the principal of, premium, if any, and interest
on, any Notes represented by a Global Note registered in the name of DTC or its
nominee on the applicable record date will be payable by the Trustee to or at
the direction of DTC or its nominee in its capacity as the registered holder of
the Global Note representing such Notes under the Indenture. Under the terms of
the Indenture, the Company and the Trustee may treat the persons in whose names
the Notes, including the Global Notes, are registered as the owners thereof for
the purpose of receiving such payment and for any and all other purposes
whatsoever. Consequently, neither the Company nor the Trustee has or will have
any responsibility or liability for the payment of such amounts to beneficial
owners of interest in the Global Note (including principal, premium, if any, and
interest), or to immediately credit the accounts of the relevant Participants
with such payment, in amounts proportionate to their respective holdings in
principal amount of beneficial interest in the Global Note as shown on the
records of DTC. The Company expects that payments by the Participants and the
Indirect Participants to the beneficial owners of interests in the Global Note
will be governed by standing instructions and customary practice and will be the
responsibility of the Participants or the Indirect Participants and DTC.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources the Company believes to be reliable.
CERTIFICATED SECURITIES
If (i) the Company notifies the Trustee in writing that DTC is no longer
willing or able to act as a depository or DTC ceases to be registered as a
clearing agency under the Exchange Act and the Company is unable to locate a
qualified successor within 90 days, (ii) the Company, at its option, notifies
the Trustee in writing that it elects to cause the issuance of Notes in
definitive form under the Indenture or (iii) upon the occurrence of certain
other events, then, upon surrender by DTC of its Global Notes, then Certificated
Securities will be issued to each person that DTC identifies as the beneficial
owner of the Notes represented by the Global Note. In addition, subject to
certain conditions, any person having a beneficial interests in a Global Note
may, upon request to the Trustee, exchange such beneficial interest for
Certificated Securities. Upon any such issuance, the Trustee is required to
register such Certificated Securities in the name of such person or persons (or
the nominee of any thereof), and cause the same to be delivered thereto.
Neither the Company nor the Trustee shall be liable for any delay by DTC or
any Participant or Indirect Participant in identifying the beneficial owners of
the related Notes and each such person may conclusively rely on, and shall be
protected in relying on, instructions from DTC for all purposes (including with
respect to the registration and delivery, and the respective principal amounts,
of the Notes to be issued).
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PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Existing Notes
where such Existing Notes were acquired as a result of market-making activities
or other trading activities. The Company has agreed that, for a period of 90
days after the Expiration Date, it will make this Prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any such
resale. In addition, until December 8, 1997, all dealers effecting transactions
in the New Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit or any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 90 days after the Expiration Date the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the Letter
of Transmittal. The Company has agreed to pay all expenses incident to the
Exchange Offer (including the expenses of one counsel for the Holders of the
Existing Notes) other than commissions or concessions of any brokers-dealers and
will indemnify the Holders of the Existing Notes (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act.
CSI is an affiliate of Chase, which is the administrative agent and a
lender to the Company under the Senior Secured Credit Facility. Chase has
received customary fees in connection with the Senior Secured Credit Facility.
CSI acted as a Dealer Manager in connection with the Tender Offer. In addition,
CSI and Chase, or their affiliates, participate from time to time in various
general financing and banking transactions for GSCP and its affiliates. An
affiliate of CSI is a limited partner in GSCP.
GSCP and Smith Barney Inc. are both affiliated companies of Travelers Group
Inc. Princes Gate, an investment fund affiliated with Morgan Stanley & Co.
Incorporated, together with certain affiliated investors, will be the owners of
the GST Subordinated Debentures.
LEGAL MATTERS
The validity of the Notes will be passed upon for the Company by Debevoise
& Plimpton, New York, New York.
EXPERTS
The Consolidated Financial Statements of Telex Communications, Inc. as of
March 31, 1997 and March 31, 1996 and for the three years ended March 31, 1997
and schedule audited by Ernst & Young LLP have been included in this Prospectus
in reliance on their report given on their authority as experts in accounting
and auditing.
111
<PAGE> 113
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Audited Consolidated Financial Statements
Report of Independent Auditors...................................................... F-2
Consolidated Balance Sheets as of March 31, 1997 and 1996........................... F-3
Consolidated Statements of Operations for the years ended March 31, 1997, 1996 and
1995.............................................................................. F-4
Consolidated Statements of Shareholder's Equity (Deficit) for the years ended March
31, 1997, 1996 and 1995........................................................... F-5
Consolidated Statements of Cash Flows for the years ended March 31, 1997, 1996 and
1995.............................................................................. F-6
Notes to Consolidated Financial Statements.......................................... F-7
Schedule II -- Valuation and Qualifying Accounts.................................... F-21
Unaudited Interim Consolidated Financial Statements
Condensed Consolidated Statements of Operations (Unaudited) for the three months
ended June 30, 1997 and 1996...................................................... F-22
Condensed Consolidated Balance Sheets at June 30, 1997 (Unaudited) and March 31,
1997.............................................................................. F-23
Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months
ended June 30, 1997 and 1996...................................................... F-24
Notes to Unaudited Interim Consolidated Financial Statements........................ F-25
</TABLE>
F-1
<PAGE> 114
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholder
Telex Communications, Inc.
We have audited the accompanying consolidated balance sheets of Telex
Communications, Inc. as of March 31, 1997 and 1996, and the related consolidated
statements of operations, shareholder's equity (deficit), and cash flows for
each of the three years in the period ended March 31, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Telex Communications, Inc. at March 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended March 31, 1997, in conformity with generally accepted accounting
principles.
Minneapolis, Minnesota
June 2, 1997
F-2
<PAGE> 115
TELEX COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 35,742 $ 23,001
Accounts receivable, net of allowance for doubtful accounts
(1997 -- $641; 1996 -- $533)...................................... 29,459 25,438
Inventories.......................................................... 23,495 21,711
Deferred income taxes................................................ 2,813 2,433
Other................................................................ 1,525 1,057
-------- --------
Total current assets......................................... 93,034 73,640
Property, plant and equipment, net of accumulated depreciation......... 20,867 17,616
Deferred financing costs............................................... 2,525 2,884
Deferred income taxes.................................................. 3,990 4,629
Intangible assets, net of accumulated amortization..................... 20,400 22,048
-------- --------
$140,816 $120,817
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable..................................................... $ 12,224 $ 9,091
Accrued wages and benefits........................................... 3,813 3,289
Taxes other than income taxes........................................ 470 717
Pension accrual...................................................... 1,535 1,969
Other accrued liabilities............................................ 5,374 4,360
Accrued interest..................................................... 2,504 2,508
Income taxes......................................................... 2,991 3,436
-------- --------
Total current liabilities.................................... 28,911 25,370
Long-term debt......................................................... 100,000 100,000
Due to parent.......................................................... 3,502 2,029
Pension accrual........................................................ 1,844 1,207
Other accrued liabilities.............................................. 303 280
-------- --------
Total liabilities............................................ 134,560 128,886
-------- --------
Commitments and contingencies.......................................... -- --
Shareholder's equity (deficit):
Common stock, $.01 par value, 1,000 shares authorized, 500 shares
issued............................................................ -- --
Capital in excess of par............................................. 20,001 20,001
Retained earnings (deficit).......................................... (13,745) (28,070)
-------- --------
Total shareholder's equity (deficit)......................... 6,256 (8,069)
-------- --------
$140,816 $120,817
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 116
TELEX COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net sales.................................................. $170,881 $145,348 $141,572
Cost of sales.............................................. 99,624 90,120 89,548
-------- -------- --------
Gross profit............................................. 71,257 55,228 52,024
-------- -------- --------
Operating expenses:
Engineering and development.............................. 7,645 6,756 6,138
Marketing................................................ 18,628 16,678 15,865
General and administrative............................... 8,917 7,510 7,545
Amortization of goodwill and other intangibles........... 1,648 3,385 3,536
Corporate charges........................................ -- -- 2,750
Special charges.......................................... -- 13,785 --
-------- -------- --------
36,838 48,114 35,834
-------- -------- --------
Operating profit........................................... 34,419 7,114 16,190
Interest expense........................................... (12,513) (12,517) (12,490)
Other income............................................... 1,671 1,119 433
-------- -------- --------
Income (loss) before income taxes.......................... 23,577 (4,284) 4,133
Provision (benefit) for income taxes....................... 9,252 (180) 826
-------- -------- --------
Income (loss) before extraordinary item.................... 14,325 (4,104) 3,307
Extraordinary loss from early retirement of debt, net of
income taxes............................................. -- -- (3,239)
-------- -------- --------
Net income (loss).......................................... $ 14,325 $ (4,104) $ 68
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 117
TELEX COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
TOTAL
CAPITAL RETAINED SHAREHOLDER'S
NUMBER COMMON IN EXCESS EARNINGS EQUITY
OF SHARES STOCK OF PAR (DEFICIT) (DEFICIT)
--------- ------- --------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1994............ 500 $ -- $20,001 $ 12,734 $ 32,735
Net income......................... -- -- -- 68 68
Cash dividend declared and paid on
common stock.................... -- -- -- (36,768) (36,768)
--- ------- ------- -------- --------
Balance at March 31, 1995............ 500 -- 20,001 (23,966) (3,965)
Net (loss)......................... -- -- -- (4,104) (4,104)
--- ------- ------- -------- --------
Balance at March 31, 1996............ 500 -- 20,001 (28,070) (8,069)
Net income......................... -- -- -- 14,325 14,325
--- ------- ------- -------- --------
Balance at March 31, 1997............ 500 $ -- $20,001 $(13,745) $ 6,256
=== ======= ======= ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 118
TELEX COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).......................................... $14,325 $(4,104) $ 68
Adjustments to reconcile net income (loss) to cash flows
from operations:
Extraordinary loss on early retirement of debt.......... -- -- 3,239
Non-cash special charges................................ -- 13,345 --
Depreciation............................................ 3,978 6,192 5,408
Amortization of intangibles and deferred financing
costs................................................. 2,007 3,755 4,293
Provision for bad debts................................. 300 98 303
Deferred income taxes................................... 259 (3,359) (36)
Change in operating assets and liabilities:
Receivables........................................... (4,321) (4,472) (577)
Inventories........................................... (1,784) 3,035 (3,709)
Other current assets.................................. (468) 228 100
Accounts payable and accrued expenses................. 5,446 2,393 1,288
Accrued interest...................................... (4) (32) (207)
Income taxes payable.................................... (445) 2,067 780
Change in non-current liabilities....................... 2,133 (618) (83)
------- ------- --------
Net cash provided by operating activities.......... 21,426 18,528 10,867
------- ------- --------
INVESTING ACTIVITIES:
Additions to property, plant and equipment................. (8,685) (3,320) (3,596)
------- ------- --------
Net cash (used in) investing activities.................... (8,685) (3,320) (3,596)
------- ------- --------
FINANCING ACTIVITIES:
Early retirement of long-term debt......................... -- -- (72,049)
Deferred financing costs................................... -- -- (3,500)
Cash dividends paid........................................ -- -- (36,768)
Proceeds from issuance of long-term debt................... -- -- 100,000
------- ------- --------
Net cash (used in) financing activities.................... -- -- (12,317)
------- ------- --------
Cash and cash equivalents:
Net increase (decrease).................................... 12,741 15,208 (5,046)
Beginning of period........................................ 23,001 7,793 12,839
------- ------- --------
End of period.............................................. $35,742 $23,001 $ 7,793
======= ======= ========
Supplemental disclosures:
Interest paid.............................................. $12,154 $12,159 $ 12,043
======= ======= ========
Income taxes paid, net..................................... $ 7,975 $ 2,062 $ 85
======= ======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 119
TELEX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
1. SUMMARY OF SIGNIFICANT POLICIES
ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS
Telex Communications, Inc. ("Telex" or the "Company"), a Delaware
corporation, is a wholly-owned subsidiary of Telex Communications Group, Inc.
("TCG"). The assets of TCG consist primarily of its investment in Telex. The
Company designs, manufactures and markets sophisticated audio, visual and
multimedia communications equipment for commercial, professional and industrial
customers. The Company offers a broad product line that includes advanced
intercom systems, wired and wireless microphones, headsets, multimedia
presentation products, audio cassette duplicators and hearing aids. The Company
focuses on commercial, professional and industrial markets.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Telex and its
wholly-owned subsidiaries.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
All temporary investments with a maturity of three months or less at the
time of purchase are considered cash equivalents. These investments are
considered available for sale and carried at cost, which approximates market
value.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Depreciation of
property, plant and equipment is computed principally by the straight-line
method over the estimated useful lives of the assets; leasehold improvements are
amortized over the lesser of their estimated useful lives or the lease terms
using the straight-line method.
The carrying value of property, plant and equipment is assessed when
factors indicating impairment are present. If impairment indicators are present
and the estimated future undiscounted cash flows are less than the carrying
value of the assets and any related goodwill, the carrying value is reduced to
estimated fair value of the assets.
Beginning in 1997, the Company capitalized certain software implementation
costs. Prior to 1997, such costs were not significant. Implementation costs are
expensed until the Company has determined that the software will result in
probable future economic benefits and management has committed to funding the
project. Thereafter, certain internal and all external implementation costs and
purchased software costs are capitalized and depreciated using the straight-line
method over the remaining estimated useful lives, not exceeding five years. As
of March 31, 1997 software implementation costs of $4.5 million have been
capitalized and are included in equipment and construction in progress.
F-7
<PAGE> 120
TELEX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In conjunction with the Company's 1996 review for asset impairment (see
Note 2 -- Special Charges), a review of useful lives for assets not impaired was
also conducted in light of changing business conditions. As a result of this
review, the Company shortened its estimated useful lives on specific
manufacturing assets to better reflect current estimates of use. The change in
useful lives resulted in the recording of additional depreciation expense of
$0.5 million in Fiscal 1996.
INTANGIBLE ASSETS
Intangible assets are recorded at their estimated fair values at date of
acquisition and are amortized on a straight-line basis over their estimated
useful lives, as follows:
<TABLE>
<S> <C>
Patents and engineering drawings................................ 5-10 years
Dealer and distributor lists.................................... 15 years
Goodwill........................................................ 40 years
</TABLE>
The carrying value of identifiable intangible assets is assessed when
factors indicating impairment are present. If impairment indicators are present
and the estimated future undiscounted cash flows are less than the carrying
value of the assets and any related goodwill, the carrying value is reduced to
the estimated fair value as measured by the discounted cash flows. Goodwill that
is not associated with specific assets that are impaired is assessed for
impairment when impairment indicators are present and reduced to its associated
estimated undiscounted cash flows if less than its carrying value.
DEFERRED FINANCING COSTS
Deferred financing costs represent costs incurred by the Company to issue
the senior notes and to secure the revolving credit agreement and are being
amortized over the term of the related borrowings. Unamortized deferred
financing costs of $2.5 million at March 31, 1997 will be written off in the
first quarter of Fiscal 1998 as a result of the retirement of the senior notes
and revolving credit agreement as described in Note 15 -- Subsequent event.
WARRANTY COSTS
The Company warrants certain of its products as to workmanship and
performance for periods of generally up to one year. The accrual for warranty
costs is based on expected average repair costs and return rates developed by
the Company using historical data.
REVENUE RECOGNITION
Revenue from product sales is recognized at the time of shipment. Revenue
from the sale of hearing instrument extended warranty contracts is recognized
ratably over the life of the contracts.
INCOME TAXES
The Company accounts for income taxes utilizing the liability method.
Deferred income taxes are primarily recorded to reflect the tax consequences of
differences between the tax and the financial reporting bases of assets and
liabilities. Telex's tax provision is calculated on a separate company basis,
and Telex's taxable income is included in the consolidated federal income tax
returns of TCG.
PRODUCT DEVELOPMENT COSTS
Costs associated with the development of new products and changes to
existing products are charged to operations as incurred ($5.7 million, $4.9
million and $4.6 million, for the years ended March 31, 1997, 1996 and 1995,
respectively).
F-8
<PAGE> 121
TELEX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FORWARD EXCHANGE CONTRACT GAINS AND LOSSES
Gains and losses due to changes in market value on foreign currency
contracts used to hedge firm inventory purchase commitments are deferred and
recognized in earnings when the future sale of inventory occurs.
ADVERTISING EXPENSES
Advertising costs are expensed when incurred. Advertising costs for the
Fiscal years ended 1997, 1996, and 1995 were $3.3 million, $3.1 million and $2.7
million, respectively.
PRESENTATION
Certain prior-year amounts have been reclassified to conform to the Fiscal
1997 presentation.
2. SPECIAL CHARGES
The Company adopted Statement of Financial Accounting Standards No. 121
"Accounting for Impairment of Long-Lived Assets and Assets to Be Disposed Of" in
the fourth quarter of Fiscal 1996. During Fiscal 1996, several business
conditions changed for the Company including the discontinuance of a number of
product lines and the closing of one of the Company's manufacturing facilities
which was intended to provide the Company with a greater level of manufacturing
efficiency. These changing business conditions had a potential impact on the
realizability of virtually all of the Company's long-lived assets, including
property, plant, equipment, identifiable intangible assets, and the goodwill
that was allocable to these assets. Accordingly, the Company evaluated the
ongoing value of each of these asset categories which related to all of the
Company's operating segments. Based on this evaluation, the Company determined
that assets to be held with a carrying value of $18.4 million were impaired and
wrote them down by $13.3 million to their fair value. These write downs are
included in special charges. Fair value was generally based on estimated future
cash flows associated with each of the assets, discounted at a market rate of
interest.
This charge resulted primarily from a change in the Company's accounting
policy for evaluating and measuring impairment. Under the Company's previous
accounting policy, each of the Company's operating segments' long-lived assets
to be held and used in the business were evaluated for impairment if the segment
was incurring operating losses or was expected to incur operating losses in the
future. Because of strong operating profit history and favorable prospects for
each segment, no impairment evaluation had been required in Fiscal 1995.
Considerable management judgment is necessary to estimate discounted future
cash flows. Accordingly, it is reasonably possible that the estimated discounted
future cash flows may change in the near term resulting in the need to write
these assets down further. The carrying value prior to write-down and associated
write down of the specific assets is as follows (in thousands):
<TABLE>
<CAPTION>
CARRYING VALUE WRITE DOWN
-------------- ----------
<S> <C> <C>
Property, plant and equipment...................... $ 2,300 $ 2,022
Intangible assets:
Dealer and distributor listed products........... 1,822 1,096
Patents and engineering drawings................. 3,653 2,587
Goodwill......................................... 10,644 7,640
------- -------
$ 18,419 $ 13,345
======= =======
</TABLE>
F-9
<PAGE> 122
TELEX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The write down includes $8.3 million, $2.7 million, $1.4 million, and $0.9
million associated with the Professional Sound and Entertainment,
Multimedia/Audio Communications, RF/Communications, and Hearing Instruments
business segments, respectively.
The Company plans to sell one of its manufacturing facilities related
primarily to the Professional Sound and Entertainment business segment and has
recorded a loss in Fiscal 1996 of $239,000 representing the estimated sales
value, less the carrying value of the assets and related selling costs. The
Company expects to have completed the sale in Fiscal 1998. The Company also
accrued $201,000 in Fiscal 1996 for severance benefits payable to employees at
the facility, all of which was paid in Fiscal 1997. These charges are also
included in special charges.
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1997 1996
------- -------
<S> <C> <C>
Raw materials and parts.................................. $15,097 $13,975
Work in process.......................................... 2,954 2,827
Finished goods........................................... 5,444 4,909
------- -------
$23,495 $21,711
======= =======
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment (see also Note 2 -- Special charges) consist
of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1997 1996
------- -------
<S> <C> <C>
Land..................................................... $ 1,591 $ 1,591
Building................................................. 9,858 9,700
Equipment................................................ 29,580 23,056
Construction in progress................................. 2,102 1,555
------- -------
43,131 35,902
Less accumulated depreciation............................ 22,264 18,286
------- -------
$20,867 $17,616
======= =======
</TABLE>
F-10
<PAGE> 123
TELEX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INTANGIBLE ASSETS
Intangible assets (see also Note 2 -- Special charges) consist of the
following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1997 1996
------- -------
<S> <C> <C>
Dealer and distributor lists............................. $ 7,894 $ 7,894
Patents and engineering drawings......................... 5,999 5,999
Goodwill................................................. 21,253 21,253
Other intangibles........................................ 2,804 2,804
------- -------
37,950 37,950
Less accumulated amortization............................ 17,550 15,902
------- -------
$20,400 $22,048
======= =======
</TABLE>
6. LONG-TERM DEBT AND EXTRAORDINARY ITEM
In July 1994, the Company completed a refinancing of its debt that included
an offering of $100.0 million of senior unsecured notes due 2004, the redemption
and repayment of substantially all of the Company's existing indebtedness and a
dividend to TCG of $32.0 million which was used by TCG to repay substantially
all of its existing indebtedness and to purchase the Debt Warrants.
As a result of the July 1994 debt refinancing, the Company has recorded an
extraordinary loss of $4.6 million ($3.2 million net of taxes) for the year
ended March 31, 1995 consisting of redemption premiums and prepayment penalties
of $2.5 million and the write-off of deferred financing costs related to the
early retirement of debt of $2.1 million.
The senior unsecured notes bear interest at 12% and pay interest
semi-annually. There were $100 million of such notes outstanding at both March
31, 1997 and 1996. The fair value of the senior fixed rate notes at March 31,
1997 was approximately $113.6 million as determined by its quoted market value.
The notes are redeemable, at the option of the Company, in whole or in part, at
any time on or after July 15, 1999, at 106% of their principal amount, declining
to 100% of such principal amount on or after July 15, 2001, in each case, plus
accrued interest. In addition, prior to July 15, 1997, up to 35% of the original
principal amount of the notes may be redeemable, at the option of the Company,
from the proceeds of one or more public equity offerings at 110% of their
principal amount, plus accrued interest.
The agreement contains certain financial covenants and other covenants
which limit the ability of the Company and certain of its subsidiaries to incur
additional indebtedness, to pay dividends on or to redeem capital stock of the
Company and certain of its subsidiaries, to make investments in unrestricted
subsidiaries, to make distributions from certain subsidiaries, to dispose of
assets and subsidiary stock, to make certain transactions with affiliates, to
create liens, and to sell and leaseback assets. The agreement also restricts the
Company's ability to consolidate or merge with other entities.
In July 1994, the Company also entered into a new revolving credit
agreement that replaced an existing revolving credit agreement. The commitment
under the new facility is $25 million, subject to a borrowing base calculation.
Interest on outstanding borrowings is calculated, at the Company's option, using
the bank's prime rate or LIBOR plus specified margins. These margins are based
upon the quarterly measurement of the Company's adjusted interest coverage
ratio, as defined. The credit agreement expires July 20, 1998. The Company may
terminate the agreement prior to the expiration date without a prepayment
penalty. The credit agreement requires an annual commitment fee of 0.375% of the
unused portion of the commitment. The commitment fee percentage is based upon
the quarterly measurement of the Company's adjusted interest coverage ratio, as
defined. Borrowings under the facility are secured by accounts receivable and
inventory. The
F-11
<PAGE> 124
TELEX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company had letters of credit outstanding at March 31, 1997 and 1996 in the
amount of $2.9 million and $3.8 million, respectively, reducing the amount of
availability under the credit agreement. There were no borrowings outstanding
under this revolving credit agreement at March 31, 1997 or 1996, respectively.
Subsequent to March 31, 1997, the Company refinanced the senior unsecured
notes and revolving credit agreement (see Note 15 -- Subsequent event).
7. INCOME TAXES
Significant components of the provision for income taxes attributable to
income (loss) before extraordinary item are as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
---------------------------
1997 1996 1995
------ ------- ----
<S> <C> <C> <C>
Current:
Federal................................................. $7,852 $ 3,030 $630
State................................................... 1,118 149 289
Foreign................................................. 23 -- (57)
------ ------- ----
8,993 3,179 862
Deferred.................................................. 259 (3,359) (36)
------ ------- ----
$9,252 $ (180) $826
====== ======= ====
</TABLE>
A tax benefit in the amount of $1.4 million has been allocated to the
extraordinary loss from early retirement of debt in Fiscal 1995.
A reconciliation of the income taxes computed at the federal statutory rate
to the Company's income tax expense (benefit) before extraordinary loss is as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------
1997 1996 1995
------ ------- ------
<S> <C> <C> <C>
Expense (benefit) at statutory rate..................... $8,252 $(1,457) $1,405
State income taxes, net of federal tax benefit.......... 740 106 132
Amortization and write-off of goodwill.................. 188 2,760 241
FSC benefits............................................ (387) (256) (223)
Change in deferred tax asset valuation reserve and other
income tax accruals(1)................................ 340 (1,438) (756)
Other................................................... 119 105 27
------ ------- ------
$9,252 $ (180) $ 826
====== ======= ======
</TABLE>
- ---------------
(1) Net of the change in the valuation reserve relating to tax benefit of tax
identifiable intangibles in the amount of $1.0 million and $0.2 million for
the Fiscal years ended March 31, 1996 and 1995, respectively, which were
recorded as a reduction to goodwill.
F-12
<PAGE> 125
TELEX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1997 1996
------ ------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation....................................... $1,718 $1,188
------ ------
Total deferred tax liabilities........................... 1,718 1,188
Deferred tax assets:
Book over tax amortization....................................... 1,983 2,373
Pension.......................................................... 944 600
Inventory reserves............................................... 1,097 814
Accounts receivable allowance.................................... 245 196
Deferred revenue................................................. 264 371
Vacation accrual................................................. 432 370
Warranty reserves................................................ 414 333
Tax benefit of identifiable intangibles.......................... 1,771 1,883
Accrued plant closing costs and impairment writedown............. 837 903
Other............................................................ 534 407
------ ------
Total deferred tax assets................................ 8,521 8,250
Valuation allowance for deferred tax assets...................... -- --
------ ------
Net deferred tax assets.................................. 8,521 8,250
------ ------
Net deferred tax assets.......................................... $6,803 $7,062
====== ======
</TABLE>
The Company has a net deferred tax asset of $6.8 million at March 31, 1997.
The Company will be required to generate approximately $17.0 million of future
taxable income in order to fully realize this net asset. The Company believes
that it is probable that it will generate sufficient levels of future taxable
income to realize the net asset, based on historical taxable income levels and
continued strength of its operations. As a result of these factors the Company
has recorded no valuation allowance at March 31, 1997.
The Company received a settlement offer from the IRS with respect to the
amortization of its intangibles for the taxable years 1990, 1991 and 1992. The
Company has reviewed the IRS settlement offer and determined not to accept it.
The accounting under Statement of Financial Accounting Standards No. 109
resulting from any adjustment imposed by the IRS relating to the intangible
assets would not likely result in a material adjustment to current earnings,
because it would be recorded principally as an adjustment to goodwill.
8. RELATED PARTY TRANSACTIONS
The Company paid management fees of approximately $2.8 million to a TCG
shareholder for the year ended March 31, 1995, which is presented in the
consolidated statements of operations as corporate charges. The amount paid in
Fiscal 1995 satisfied all remaining obligations under the consulting agreement
and was paid at the completion of the debt refinancing.
TCG had 107,177 warrants outstanding at March 31, 1997. Each warrant
entitled the owner to receive one share of common stock at a price of $.01 per
share. The warrants expire on May 31, 2004.
F-13
<PAGE> 126
TELEX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TCG's principal asset is its investment in Telex and, therefore, TCG is
dependent on the operations of Telex for its cash flow needs. However, there are
no agreements between Telex and TCG requiring the transfer of funds from Telex
to TCG. The senior notes and the provisions of the indenture agreements pursuant
to which the senior notes were issued restrict Telex's payment of dividends,
loans or advances to its affiliates.
Accrued income taxes and recoverable income taxes include tax benefits
related to TCG as the Company makes all tax payments for the consolidated group.
The amount recorded as "Due to Parent" represents the tax benefit recorded
related to TCG's activities.
In July 1995, the Company distributed to TCG approximately $32.0 million in
the form of a dividend to repay existing TCG debt. An additional $4.8 million
was distributed to TCG in February 1995 in form of a dividend to purchase 75,511
shares of TCG common stock.
9. RETIREMENT PLAN
The Company has a noncontributory defined benefit pension plan.
Eligibility, vesting and benefit formula provisions of the plan are based on
years of service and average final compensation. Pension costs are funded
annually subject to limitations.
The components of pension cost are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Service cost for benefits earned during the year...... $ 1,047 $ 981 $ 1,023
Interest cost on projected benefit obligation......... 1,663 1,638 1,555
Actual return on plan assets.......................... (1,486) (3,069) (1,068)
Net amortization and deferral......................... 298 1,937 201
------- ------- -------
Net pension cost...................................... $ 1,522 $ 1,487 $ 1,711
======= ======= =======
</TABLE>
The following table presents the funded status of the above plan as
recognized in the consolidated balance sheet (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits.............................................. $(17,759) $(16,275)
Nonvested benefits........................................... (509) (400)
-------- --------
Accumulated benefit obligation................................. (18,268) (16,675)
Effect of projected pay increases.............................. (4,428) (4,515)
-------- --------
Projected benefit obligation................................... (22,696) (21,190)
Plan assets at market value.................................... 16,990 15,736
-------- --------
Projected benefit obligation in excess of plan assets.......... (5,706) (5,454)
Unrecognized net loss.......................................... 2,159 2,083
Unrecognized net transition obligation......................... 158 198
Unrecognized prior service cost................................ 10 12
-------- --------
Pension liability accrued...................................... $ (3,379) $ (3,161)
======== ========
</TABLE>
F-14
<PAGE> 127
TELEX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Assumptions used in the accounting for the defined benefit plan as of March
31 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate................................. 7.75% 7.75% 8.25%
Rate of increase in future compensation levels................. 4.50% 4.50% 4.50%
Expected long-term rate of return on plan assets............... 9.00% 9.00% 9.00%
</TABLE>
Plan assets consist primarily of equity and debt securities and cash
equivalents.
10. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is a defendant in a number of lawsuits that have arisen in the
ordinary course of business. The Company believes such litigation, considered
separately or in the aggregate, will not have a material adverse effect on the
financial condition of the Company. The Company believes that the ultimate
resolution of the disputes will not have a material impact on its financial
position, but could be material to the net income of a particular quarter (or
year), if resolved unfavorably.
ENVIRONMENTAL MATTERS
In connection with the consent decree with the Nebraska Department of
Environmental Control relating to the clean-up of the improper disposal of
hazardous waste, the Company has outstanding, as of March 31, 1997 and 1996, a
letter of credit for $0.2 million pending future post-closing monitoring of the
disposal site.
The Company has accrued $0.3 million as of March 31, 1997, for the probable
exposure with respect to costs incurred in cleaning up the hazardous waste. The
Company does not expect to incur costs that are materially higher than those
accrued for March 31, 1997 based upon the information currently available. The
Company believes that compliance with current federal, state and local
environmental protection laws and provisions should not have a material adverse
effect on the operating income or financial condition of the Company. The
assessment of materiality of such environmental matters and claims is based on a
gross determination of such charges that could occur and does not give effect to
possible third party recoveries.
EMPLOYMENT CONTRACTS
The Company has employment contracts with certain key executives that
require the Company to pay severance or salary continuance pay equal to amounts
ranging from nine to twelve months' salary in the event such executives are
terminated without cause.
LETTERS OF CREDIT
The Company had outstanding letters of credit securing various vendor
supply and other arrangements of approximately $2.9 million and $3.8 million at
March 31, 1997 and 1996, respectively.
F-15
<PAGE> 128
TELEX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SEGMENT INFORMATION
Summarized financial information by business segment is as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net sales:
Professional Sound and Entertainment............. $ 58,870 $ 52,637 $ 49,673
Multimedia/Audio Communications.................. 61,897 45,031 37,198
RF/Communications................................ 25,320 25,000 33,052
Hearing Instruments.............................. 24,794 22,680 21,649
-------- -------- --------
$170,881 $145,348 $141,572
======== ======== ========
Operating earnings:
Professional Sound and Entertainment............. $ 12,260 $ 832 $ 10,163
Multimedia/Audio Communications.................. 14,321 5,701 4,599
RF/Communications................................ 7,157 1,278 4,241
Hearing Instruments.............................. 1,560 (314) 199
Corporate........................................ (879) (383) (3,012)
-------- -------- --------
$ 34,419 $ 7,114 $ 16,190
======== ======== ========
Depreciation and amortization:
Professional Sound and Entertainment............. $ 1,338 $ 3,209 $ 3,064
Multimedia/Audio Communications.................. 2,022 2,672 2,270
RF/Communications................................ 944 1,590 1,683
Hearing Instruments.............................. 485 1,025 975
Corporate........................................ 837 1,081 638
-------- -------- --------
$ 5,626 $ 9,577 $ 8,630
======== ======== ========
Assets:
Professional Sound and Entertainment............. $ 41,781 $ 40,507 $ 42,298
Multimedia/Audio Communications.................. 43,475 33,707 31,328
RF/Communications................................ 17,241 20,075 23,169
Hearing Instruments.............................. 12,082 12,937 13,480
Corporate........................................ 26,237 13,591 8,843
-------- -------- --------
$140,816 $120,817 $119,118
======== ======== ========
Capital expenditures:
Professional Sound and Entertainment............. $ 1,083 $ 1,362 $ 1,280
Multimedia/Audio Communications.................. 1,072 881 949
RF/Communications................................ 412 549 703
Hearing Instruments.............................. 330 353 408
Corporate........................................ 5,788 175 256
-------- -------- --------
$ 8,685 $ 3,320 $ 3,596
======== ======== ========
</TABLE>
Corporate assets and expenditures relate principally to the Company's
investment in information systems and corporate facilities, as well as deferred
income taxes and deferred financing costs.
F-16
<PAGE> 129
TELEX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Export sales accounted for approximately 79.7%, 76.5% and 81.1% of the
total international sales for the years ended March 31, 1997, 1996 and 1995,
respectively. Sales from the Company's Canada and Singapore subsidiaries
accounted for approximately 20.3%, 23.5% and 18.9% of the total international
sales for the years ended March 31, 1997, 1996 and 1995, respectively.
Substantially all of the Company's international sales are transacted in United
States dollars. The Company's operating profits on export sales are comparable
to those realized on domestic sales. A summary of these sales by geographic area
is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
European Sales........................................ $17,700 $ 9,800 $ 8,300
Asia Pacific Sales.................................... 12,000 11,700 10,600
Canadian Sales........................................ 5,200 3,700 3,000
Latin America Sales................................... 3,800 3,100 3,300
Other Foreign Sales................................... 1,700 1,500 1,400
------- ------- -------
$40,400 $29,800 $26,600
======= ======= =======
</TABLE>
12. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
Accounts receivable are generally unsecured; however, concentrations of credit
risk with respect to these accounts receivable are limited due to the large
number of customers and their dispersion across many different geographic areas.
As of March 31, 1997, the Company had no significant concentrations of credit
risk.
13. STOCK OPTION PLANS
In Fiscal 1992 TCG granted options to purchase up to 41,064 shares of TCG
common stock at an exercise price of $0.10 per share to the new Chairman,
President and Chief Executive Officer of the Company. These options will expire
on October 25, 1998 and contain certain call and put provisions. Options
exercised in Fiscal 1997, 1996 and 1995 were 7,000, 1,500 and 15,399,
respectively. As of March 31, 1997, 700 options were exercisable in the future.
In Fiscal 1993, TCG and the Company adopted a non-qualified stock option
plan under which 72,000 shares of TCG common stock are available to be granted.
In Fiscal 1995, TCG and the Company authorized an additional 7,500 shares of TCG
common stock to be granted. In Fiscal 1995, TCG and the Company adopted a
non-qualified stock option plan under which options to receive 9,000 shares of
TCG common stock were granted to certain members of its Board of Directors. In
Fiscal 1996, TCG and the Company amended the plan and authorized an additional
9,800 shares of TCG common stock. Non-qualified options are granted to certain
key employees, directors and independent contractors of the Company or TCG.
F-17
<PAGE> 130
TELEX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Company's stock option activity, and related information
for the years ended March 31 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Beginning of year............... 56,545 $13.38 59,750 $ 5.12 56,000 $ 1.50
Granted......................... -- -- 9,800 56.00 16,500 15.00
Exercised....................... (750) 1.50 (12,005) 3.47 (12,750) 2.03
Cancelled....................... (500) 1.50 (1,000) 56.00 -- --
------ ----- ------- ----- ------- -----
End of year..................... 55,295 $13.65 56,545 $13.38 59,750 $ 5.12
====== ===== ======= ===== ======= =====
Exercisable at end of year...... 37,945 $ 7.68 20,745 $ 4.43 16,000 $ 3.40
====== ===== ======= ===== ======= =====
Available for future grants..... 16,000 16,000 16,000
====== ======= =======
</TABLE>
Exercise prices for options outstanding as of March 31, 1997 range from
$1.50 to $56.00. The weighted average remaining contractual life of those
options is 6.7 years at March 31, 1997.
Options are generally granted with an exercise price equal to the fair
value of the stock at the date of the grant. However, in Fiscal 1995 options to
purchase 9,000 shares of TCG common stock were granted to members of the Board
of Directors with the fair market value exceeding the option exercise price.
Additionally, 500 shares of TCG common stock were granted to a member of the
Board of Directors, resulting in the recording of $28,000 of compensation
expense for these transactions, representing the excess of the fair value over
the grant price of the options and the shares.
In accordance with the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation", the Company has
chosen to continue to apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock option plans, and, accordingly, recognizes compensation
expense to the extent that the market price of the common stock exceeds the
option price on the date of grant.
The fair value of each option granted is estimated as of the date of grant
using the Black-Scholes single option-pricing model. Had compensation expense
for stock options been determined based on the fair value method (instead of the
intrinsic value method) at the grant dates for awards, the Company's 1997 and
1996 net income would have decreased by less than 1%. The effects of applying
the fair value method of measuring compensation expense for 1997 and 1996 is
likely not representative of the effects of future years in part because the
fair value method was applied only to stock options granted after March 31,
1995.
14. USE OF FOREIGN CURRENCY FORWARD CONTRACTS
The Company enters into foreign currency forward exchange contracts to
hedge certain firm purchase commitments denominated in yen. The purpose of the
Company's foreign currency hedging activities is to protect the Company from the
risk that the eventual dollar cash flows resulting from the purchase of
inventory from international vendors will be adversely affected by changes in
exchange rates. At March 31, 1997 and 1996 the Company had no foreign currency
forward exchange contracts to exchange yen for U.S. dollars outstanding.
15. SUBSEQUENT EVENT
On May 6, 1997, Telex Communications Group, Inc. ("TCG"), completed a
recapitalization among TCG, Greenwich Street Capital Partners, L.P. ("GSCP") and
certain other co-investors. Under the
F-18
<PAGE> 131
TELEX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recapitalization agreement, all of the outstanding shares of common stock of TCG
and options and warrants to acquire TCG common stock (other than certain shares
of TCG common stock and certain options to acquire TCG common stock owned by
certain members of management of the Company), were converted into the right to
receive an aggregate amount of cash equal to approximately $253.9 million. Under
the recapitalization agreement, certain members of management have retained
certain shares of TCG and certain options to acquire additional shares of TCG
common stock, with an aggregate value of $21.2 million, representing
approximately 14.3% equity interest on a non-diluted basis and 20.6% on a fully
diluted basis.
In connection with the recapitalization, TCG completed the tender offer to
repurchase all the Company's $100.0 million aggregate outstanding principal
amount of the 12% Senior Notes due 2004 including redemption and consent fees
along with accrued interest for $118.3 million.
These transactions were financed by (i) $108.4 million of new equity
provided by GSCP and certain other co-investors, (ii) the rollover of certain
shares and options owned by existing management with a transaction value of
$21.2 million, (iii) the issuance of $140.0 million senior secured credit
facility due November 6, 2002 consisting of (a) a $115.0 million term loan
facility, all of which was drawn at closing and (b) a $25.0 million revolving
credit facility, of which $5.0 million was drawn at closing, (iv) $125.0 million
of senior subordinated notes (due 2007, bearing interest at 10 1/2%), and (v)
$36.5 million of available cash of the Company.
The transaction will be accounted for as a leveraged recapitalization.
Accordingly, the basis of all assets and liabilities will be retained for
financial reporting purposes, and the repurchases of existing common stock and
issuance of new common stock will be accounted for as equity transactions.
Unamortized deferred financing costs associated with the retired debt of
$2.5 million as of March 31, 1997 will be written-off in the first quarter of
Fiscal 1998. Also compensation expense of $7.4 million related to the extension
of terms on the 242,000 management rollover options will be recognized in the
first quarter of Fiscal 1998. In addition, as part of the transaction, the
Company granted 394,540 options at a 75% discount from fair value to certain
management employees. Included in these option grants are 198,200 options which
have certain performance requirements for vesting to occur. The total discount
of $9.4 million will be recognized as compensation expense ratably over the
vesting or performance period of the options, generally three to five years.
The following table presents the capitalization of the Company as of March
31, 1997 as reported and on a pro forma basis assuming the Recapitalization had
occurred on that date (in millions):
<TABLE>
<CAPTION>
MARCH 31, 1997
PRO FORMA PRO FORMA
AS REPORTED ADJUSTMENTS (UNAUDITED)
----------- -------------- -----------
<S> <C> <C> <C>
Cash and cash equivalents....................... 35.7 (35.7)(a) --
Revolving Credit Facility....................... -- 6.9(b) 6.9
12% Senior Notes................................ 100.0 (100.0)(c) --
Term Loan....................................... -- 115.0(d) 115.0
Notes........................................... -- 125.0(e) 125.0
Stockholder's equity (deficit).................. 6.3 (154.6)(f) (148.3)
</TABLE>
- ---------------
(a) Reflects use of the Company's cash at closing.
(b) The Company entered into a $25.0 million Revolving Credit Facility for
working capital and general corporate purposes of which $6.9 million would
be drawn at closing.
(c) Reflects the redemption of the Telex Notes.
(d) Represents borrowings under the Term Loan Facility.
F-19
<PAGE> 132
TELEX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(e) Represents the gross proceeds of $125.0 million from the sale of the Notes.
(f) The pro forma adjustments to reflect the recording of the Transactions on
Shareholder's equity (deficit) reflects the following (in millions):
<TABLE>
<S> <C>
Convert stock and stock equivalents to cash................................ $(253.9)
GST Equity Investment...................................................... 108.4
Tender Offer premium and consent fee....................................... (15.1)
Write off of deferred financing costs associated with the Notes and the
bridge loan commitment................................................... (4.1)
Fees and expenses associated with the Transactions......................... (6.9)
Compensation expense related to the change in terms of stock options....... (7.4)
Tax effect of (i) Tender Offer premium and consent fee, (ii) the write-off
of the unamortized deferred financing costs related to the Notes, (iii)
the compensation expense associated with the exercise of options and
change in vesting terms of the Rollover Options (iv) the compensation
expense associated with the change in terms of stock options, and (v)
certain fees and expenses................................................ 24.4
-------
$(154.6)
=======
</TABLE>
F-20
<PAGE> 133
SCHEDULE II
TELEX COMMUNICATIONS, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 1997, 1996, AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
APRIL 1, 1996 EXPENSE DEDUCTIONS MARCH 31, 1997
------------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts......... $ 533 $ 300 $ 192(A) $ 641
Reserve for inventory obsolescence...... 2,217 804 $ 190(B) 2,831
Warranty reserve........................ 906 3,539 $3,362(C) 1,083
Medical claims accrual.................. 700 2,916 $2,923(D) 693
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
APRIL 1, 1995 EXPENSE DEDUCTIONS MARCH 31, 1996
------------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts......... $ 631 $ 98 $ 196(A) $ 533
Reserve for inventory obsolescence...... 1,878 757 418(B) 2,217
Warranty reserve........................ 886 3,195 3,175(C) 906
Medical claims accrual.................. 911 3,188 3,399(D) 700
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
APRIL 1, 1994 EXPENSE DEDUCTIONS MARCH 31, 1995
------------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts......... $ 677 $ 303 $ 349(A) $ 631
Reserve for inventory obsolescence...... 1,427 1,567 1,116(B) 1,878
Warranty reserve........................ 814 3,344 3,272(C) 886
Medical claims accrual.................. 661 2,880 2,630(D) 911
</TABLE>
- ---------------
(A) Represents amounts charged off, net of bad debt recoveries.
(B) Represents inventory that was scrapped.
(C) Represents warranty repair work incurred during the period.
(D) Represents payments made against the accrual.
F-21
<PAGE> 134
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------
1997 1996
-------- -------
<S> <C> <C>
Net Sales............................................................... $ 39,544 $37,204
Cost of sales........................................................... 23,485 21,333
-------- -------
16,059 15,871
Operating expenses:
Engineering and development........................................... 2,429 1,728
Marketing............................................................. 5,670 4,333
General and administrative............................................ 11,251 1,980
Corporate charges..................................................... 262 --
Amortization of goodwill and other intangibles........................ 532 412
-------- -------
20,144 8,453
-------- -------
Operating profit (loss)................................................. (4,085) 7,418
Interest expense........................................................ (7,043) (3,152)
Other income............................................................ 303 390
Transactions expense.................................................... (6,952) --
-------- -------
Income (loss) before income taxes and extraordinary loss................ (17,777) 4,656
Provision (benefit) for income taxes.................................... (4,430) 1,713
-------- -------
Income (loss) before extraordinary loss................................. (13,347) 2,943
Extraordinary loss on early retirement of debt, net of income taxes..... (10,553) --
-------- -------
Net income (loss)....................................................... $(23,900) $ 2,943
======== =======
</TABLE>
See accompanying notes.
F-22
<PAGE> 135
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
1997
JUNE 30, ---------
1997
-----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 146 $ 35,742
Accounts receivable, net of allowance............................... 26,495 29,459
Recoverable income taxes............................................ 7,976 --
Inventories......................................................... 25,157 23,495
Deferred income taxes............................................... 2,813 2,813
Other............................................................... 2,018 1,525
----------- ---------
Total current assets........................................ 64,605 93,034
Property, plant and equipment, net of accumulated depreciation........ 20,860 20,867
Deferred financing costs.............................................. 10,506 2,525
Deferred income taxes................................................. 14,954 3,990
Intangible assets, net of accumulated amortization.................... 19,867 20,400
----------- ---------
$ 130,792 $ 140,816
========= ========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................................... $ 9,608 $ 12,224
Revolving line of credit............................................ 5,200 --
Accrued wages and benefits.......................................... 4,231 3,813
Pension accrual..................................................... 1,612 1,535
Taxes other than income taxes....................................... 214 470
Other accrued liabilities........................................... 4,837 5,374
Accrued interest.................................................... 2,889 2,504
Income taxes........................................................ -- 2,991
Current maturities of long-term debt................................ 3,750 --
----------- ---------
Total current liabilities................................... 32,341 28,911
Long-term debt........................................................ 236,250 100,000
Due to parent......................................................... 3,487 3,502
Pension accrual....................................................... 1,844 1,844
Other accrued liabilities............................................. 353 303
Shareholder's equity (deficit):
Common stock and capital in excess of par........................... 1,260 20,001
Cumulative translation adjustment................................... (27) --
Accumulated deficit................................................. (144,716) (13,745)
----------- ---------
Total shareholder's equity (deficit)........................ (143,483) 6,256
----------- ---------
$ 130,792 $ 140,816
========= ========
</TABLE>
See accompanying notes.
F-23
<PAGE> 136
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
---------------------
1997 1996
--------- -------
<S> <C> <C>
Operating activities:
Net income (loss).................................................... $ (23,900) $ 2,943
Adjustments to reconcile net income (loss) to cash flows from
operations:
Depreciation...................................................... 1,099 1,027
Amortization of intangibles and deferred financing costs.......... 791 504
Provision for bad debts........................................... 76 75
Write-off of deferred financing costs............................. 4,171 --
Transactions expense.............................................. 6,952 --
Bond premium, consent and tender fees paid on early retirement of
debt............................................................. 15,093
Non-cash compensation expense from stock options.................. 8,669 --
Deferred income taxes............................................. (2,964) --
Change in operating assets and liabilities:
Income taxes.................................................... (7,930) 1,507
Receivables..................................................... 2,888 1,671
Inventories..................................................... (1,662) (2,897)
Other current assets............................................ (493) (187)
Accounts payable and accrued expenses........................... (2,914) (2,631)
Accrued interest................................................ 385 3,000
Change in non-current liabilities................................. 35 670
--------- -------
Net cash provided by operating activities............................ 296 5,682
--------- -------
Investing activities:
Additions to property, plant and equipment........................... (1,092) (2,241)
--------- -------
Net cash (used in) investing activities.............................. (1,092) (2,241)
--------- -------
Financing activities:
Proceeds from issuance of long-term debt............................. 115,000 --
Proceeds from issuance of 10.5% Notes................................ 125,000 --
Change in revolving line of credit, net.............................. 5,200 --
Retirement of 12% Notes.............................................. (100,000) --
Bond premium, consent and tender fees paid on early retirement of
debt.............................................................. (15,093) --
Equity contribution from parent...................................... 108,353 --
Repurchase common stock and outstanding options...................... (253,898) --
Deferred financing costs............................................. (12,410) --
Transactions expense................................................. (6,952) --
--------- -------
Net cash (used in) financing activities.............................. (34,800) --
--------- -------
Cash and cash equivalents:
Net increase (decrease).............................................. (35,596) 3,441
Beginning of period.................................................. 35,742 23,001
--------- -------
End of period........................................................ $ 146 $26,442
========= =======
</TABLE>
See accompanying notes.
F-24
<PAGE> 137
TELEX COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
1. Telex Communications, Inc. ("Telex" or the "Company"), a Delaware
corporation, is a wholly owned subsidiary of Telex Communications Group, Inc.
("TCG").
The condensed consolidated balance sheet as of June 30, 1997 and the
condensed consolidated statements of operations and cash flows for the three
months ended June 30, 1997 and 1996, have been prepared by the Company without
being audited.
In the opinion of management, these financial statements reflect all
adjustments (which include only normal recurring accruals) necessary to present
fairly the financial position of Telex Communications, Inc. at June 30, 1997 and
the results of its operations and cash flows for all periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. Therefore, these statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in this registration statement. The condensed consolidated balance
sheet at March 31, 1997 is derived from the audited consolidated balance sheet
as of that date.
The results of operations for interim periods are not necessarily
indicative of results which will be realized for the full fiscal year.
Certain prior-year amounts have been reclassified to conform to the June
30, 1997 presentation.
2. Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1997 1997
-------- ---------
<S> <C> <C>
Raw materials and parts................................. $ 16,097 $15,097
Work in process......................................... 3,176 2,954
Finished products....................................... 5,884 5,444
------- --------
$ 25,157 $23,495
======= ========
</TABLE>
3. Telex's tax provision is calculated on a separate company basis, and
Telex's taxable income is included in the consolidated federal income tax
returns of TCG. The amount listed as "Due to parent" represents the tax benefit
Telex received from TCG.
The Company calculated its income tax provision for interim periods by
estimating its annual effective tax rate and applying this rate to the income
before income taxes for the interim period. The effective tax rate applied was
24.9% and 36.8% for the three months ended June 30, 1997 and 1996, respectively.
4. On May 6, 1997, Telex Communications Group, Inc., completed a
recapitalization among TCG, Greenwich Street Capital Partners, L.P. ("GSCP") and
certain other co-investors. Under the recapitalization agreement, all of the
outstanding shares of common stock of TCG and options and warrants to acquire
TCG common Stock (other than certain shares of TCG common stock and certain
options to acquire TCG common stock owned by certain members of management of
the Company), were converted into the right to receive an aggregate amount of
cash equal to approximately $253.9 million. Under the recapitalization
agreement, certain members of management will retain certain shares of TCG and
certain options to acquire additional shares of TCG common stock, with an
aggregate value of $21.2 million, representing approximately 14.3% equity
interest on a non-diluted basis and 20.6% on a fully diluted basis.
In connection with the recapitalization, TCG completed the tender offer to
repurchase all the Company's $100.0 million aggregate outstanding principal
amount of the 12% Senior Notes due 2004 including redemption and consent fees
along with accrued interest for $118.3 million. The Company recorded the bond
F-25
<PAGE> 138
TELEX COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
premium, consent and tender fees along with the write-off of deferred financing
costs, which totalled $17.6 million ($10.6 million net of income taxes) in the
first quarter of Fiscal 1998 as an extraordinary loss on the early retirement of
debt. In addition, the Company incurred loan fees of $1.7 million associated
with a bridge loan commitment related to the Transactions.
These transactions were financed by (i) $108.4 million of new equity
provided by GSCP and certain other co-investors, (ii) the rollover of certain
shares and options owned by existing management with a transaction value of
$21.2 million, (iii) the issuance of a $140.0 million senior secured credit
facility due November 6, 2002 consisting of (a) a $115.0 million term loan
facility, all of which was drawn at closing and (b) a $25.0 million revolving
credit facility, of which $5.0 million was drawn at closing, (iv) $125.0 million
of senior subordinated notes (due 2007, bearing interest at 10.5%), and (v)
$36.5 million of available cash of the Company.
The transaction has been accounted for as a leveraged recapitalization.
Accordingly, the basis of all assets and liabilities will be retained for
financial reporting purposes, and the repurchases of existing common stock and
issuance of new common stock have been accounted for as equity transactions.
Compensation expense of $7.4 million related to the extension of terms on
the 242,000 management rollover options was recognized in the first quarter of
Fiscal 1998. In addition, as part of the transactions, the Company granted
options to purchase 394,540 shares of TCG common stock at a 75% discount from
fair value to certain management employees. Included in these option grants are
198,200 options which have certain performance requirements for vesting to
occur. The total discount of $9.4 million will be recognized as compensation
expense over the vesting or performance period of the options, generally three
to five years. During the first quarter of Fiscal 1998, the Company recognized
$1.3 million of compensation expense related to these option grants. The number
of shares reflects a 20-for-1 stock split that became effective June 25, 1997.
The following table represents the capitalization of the Company as of May
6, 1997 the date of the Recapitalization (in millions):
<TABLE>
<CAPTION>
MAY 6, 1997
----------------------------------------------------------
PRIOR TO RECAPITALIZATION SUBSEQUENT TO
RECAPITALIZATION ADJUSTMENTS RECAPITALIZATION
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash and cash equivalents............... $ 35.7 $(35.7)(a) $ --
Revolving credit facility............... -- 7.2(b) 7.2
12% Senior Notes........................ 100.0 (100.0)(c) --
Term Loan............................... -- 115.0(d) 115.0
Notes................................... -- 125.0(e) 125.0
Stockholder's equity (deficit).......... 6.3 (154.6)(f) (148.3)
</TABLE>
- ---------------
(a) Reflects use of the Company's cash at closing.
(b) The Company entered into a $25.0 million Revolving Credit Facility for
working capital and general corporate purposes of which $7.2 million
would have been drawn at closing if all closing and transaction related
costs were paid at that time.
(c) Reflects the redemption of the Telex Notes.
(d) Represents borrowings under the Term Loan Facility.
(e) Represents the gross proceeds of $125.0 million from the sale of the
Notes.
F-26
<PAGE> 139
TELEX COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
(f) The recapitalization adjustments to reflect the recording of the
Transactions on Shareholder's equity (deficit) reflect the following
(in millions):
<TABLE>
<S> <C>
Convert stock and stock equivalents to cash........................ $(253.9)
GST Equity Investment.............................................. 108.4
Tender Offer premium, consent and tender fees...................... (15.1)
Write off of deferred financing costs associated with the Notes and
the bridge loan commitment....................................... (4.1)
Fees and expenses associated with the Transactions................. (6.9)
Compensation expense related to the change in terms of stock
options.......................................................... (7.4)
Tax effect of (i) Tender Offer premium and consent fee, (ii) the
write-off of the unamortized deferred financing costs related to
the Notes, (iii) the compensation expense associated with the
exercise of options, (iv) the compensation expense associated
with the change in terms of stock options and (v) certain fees
and expenses..................................................... 24.4
-------
$(154.6)
=======
</TABLE>
F-27
<PAGE> 140
(THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY.)
<PAGE> 141
=========================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND THE
ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. NEITHER THIS
PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL, OR BOTH TOGETHER,
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE ACCOMPANYING LETTER OF
TRANSMITTAL, OR BOTH TOGETHER, NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................... 4
Prospectus Summary...................... 5
Risk Factors............................ 18
Use of Proceeds......................... 24
Capitalization.......................... 25
Unaudited Pro Forma Consolidated
Financial Information................. 26
Selected Historical And Pro Forma
Financial Information................. 30
Management's Discussion And Analysis of
Financial Condition And Results of
Operations............................ 33
Business................................ 42
Management.............................. 54
Ownership of Capital Stock.............. 61
The Recapitalization.................... 62
Interest of Certain Persons............. 63
Related Transactions.................... 63
Description of Senior Secured Credit
Facility.............................. 64
The Exchange Offer...................... 66
Description of Notes.................... 72
Certain Federal Income Tax
Considerations........................ 106
Book-entry; Delivery and Form........... 109
Plan of Distribution.................... 111
Legal Matters........................... 111
Experts................................. 111
Index to Financial Statements........... F-1
</TABLE>
UNTIL DECEMBER 8, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
=========================================================
=========================================================
TELEX COMMUNICATIONS, INC.
OFFER TO EXCHANGE
10 1/2% SENIOR SUBORDINATED NOTES,
SERIES A
DUE 2007, WHICH HAVE BEEN
REGISTERED UNDER THE
SECURITIES ACT OF 1933
AS AMENDED, FOR ANY AND ALL
OUTSTANDING 10 1/2% SENIOR
SUBORDINATED NOTES DUE 2007.
--------------------
PROSPECTUS
--------------------
September 5, 1997
=========================================================
<PAGE> 142
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware Corporation Law, as amended, provides in
regards to indemnification of directors and officers as follows:
"145 INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS;
INSURANCE. -- (a) A corporation shall have power to indemnify any person
who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in
the right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be in
or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had reasonable cause to believe that
his conduct was unlawful.
(b) A corporation shall have power to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending
or completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by the person in connection with the defense or
settlement of such action or suit if the person acted in good faith and in
a manner the person reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the
extent that the Court of Chancery or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, such person
is fairly and reasonably entitled to indemnity for such expenses which the
Court of Chancery or such other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsections (a) and (b) of
this section, or in defense of any claim, issue or matter therein, he shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification
of the director, officer, employee or agent is proper in the circumstances
because the person has met the applicable standard of conduct set forth in
subsections (a) and (b) of this section. Such determination shall be made
(1) by a majority vote of the directors who are not parties to such action,
suit or proceeding, even though less than a quorum, or (2) if there are no
such directors, or if such directors so direct, by independent legal
counsel in a written opinion, or (3) by the stockholders.
(e) Expenses (including attorney's fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in
II-1
<PAGE> 143
advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such director or officer to
repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the corporation as authorized in this
section. Such expenses (including attorneys' fees) incurred by other
employees and agents may be so paid upon such terms and conditions, if any,
as the board of directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to the other subsections of this section shall not be
deemed exclusive of any other rights to which those seeking indemnification
or advancement of expenses may be entitled under any by-law, agreement,
vote of stockholders or disinterested directors or otherwise, both as to
action in his official capacity and as to action in another capacity while
holding such office.
(g) A corporation shall have power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability
under this section.
(h) For purposes of this section, references to "the corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers,
and employees or agents, so that any person who is or was a director,
officer, employee or agent of such constituent corporation, or is or was
serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, shall stand in the same position under
this section with respect to the resulting or surviving corporation as he
would have with respect to such constituent corporation if its separate
existence had continued.
(i) For purposes of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include
any excise taxes assessed on a person with respect to any employee benefit
plan; and references to "serving at the request of the corporation" shall
include any service as a director, officer, employee or agent of the
corporation which imposes duties on, or involves services by, such
director, officer, employee, or agent with respect to an employee benefit
plan, its participants or beneficiaries; and a person who acted in good
faith and in a manner he reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall be deemed
to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person."
The Certificate of Incorporation and Article IX of the By-Laws of the
Company authorize indemnification of officers and directors to the full extent
permitted under Delaware law, including a provision eliminating (except under
certain enumerated circumstances) the liability of directors for duty of care
violations.
The indemnification provided for the Delaware General Corporation Law is
not exclusive of any other rights of indemnification, and a corporation may
maintain insurance against liabilities for which indemnification is not
expressly provided by the Delaware General Corporation Law.
II-2
<PAGE> 144
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) LIST OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- -------------------------------------------------------------------------------
<S> <C> <C>
*2(a) -- Recapitalization Agreement and Plan of Merger, dated March 4, 1997, among
Greenwich II LLC ("G-II"), GST Acquisition Corp. ("GST") and Telex
Communications, Inc. (the "Company").
*2(b) -- Amendment No. 1 to the Recapitalization Agreement and Plan of Merger, dated as
of April 17, 1997.
*2(c) -- Amendment No. 2 to the Recapitalization Agreement and Plan of Merger, dated as
of April 25, 1997.
*3(a) -- Certificate of Incorporation of the Company, as amended.
*3(b) -- By-laws of the Company, as amended.
*4(a) -- Indenture (the "Indenture"), dated as of May 6, 1997, among the Company and
Manufacturers and Traders Trust Company (the "Trustee"), governing the rights
of the securities being registered.
*4(b) -- The First Supplemental Indenture, dated May 6, 1997, to the Indenture among the
Company and the Trustee.
*4(c) -- Purchase Agreement, dated April 29, 1997, among GST, the Company, Chase
Securities Inc., Morgan Stanley & Co. Incorporated and Smith Barney
(collectively, the "Initial Purchasers").
*4(d) -- Credit Agreement (the "Credit Agreement"), dated May 6, 1997, among the
Company, the lenders named on the signature pages thereof (the "Senior
Lenders") and The Chase Manhattan Bank, a New York banking corporation
("Chase"), as administrative agent for such Senior Lenders (the "Administrative
Agent").
*4(e) -- The Assignment and Assumption Agreement, dated May 6, 1997, made by the Company
and Telex Communications Group, Inc. ("Holdings") in favor of the
Administrative Agent for the benefit of the Senior Lenders.
*4(f) -- Guarantee and Collateral Agreement, dated May 6, 1997, made by the Company and
Holdings in favor of the Administrative Agent for the benefit of the Senior
Lenders and certain other secured parties.
*4(g) -- Patent and Trademark Security Agreement, dated March 6, 1997, made by the
Company in favor of the Administrative Agent for the benefit of the Senior
Lenders under the Credit Agreement.
**5 -- Opinion of Debevoise & Plimpton regarding the legality of the New Notes being
registered.
*10(a) -- Amended and Restated Stockholders Agreement, dated March 4, 1997, among
Holdings G-II and the Stockholders set forth on Schedule A thereto.
*10(b) -- Trademark License Agreement, dated May 25, 1989, by and between MT Corp. and
the Company, relating to the "Telex" name.
*10(c) -- Consulting Agreement, dated May 6, 1997, between Greenwich Street Capital
Partners, Inc. ("GSCP Inc."), Group and G-II.
*10(d) -- Indemnification Agreement, dated May 6, 1997, between GSCP Inc., Holdings and
G-II.
*10(e) -- Fee Agreement, dated May 6, 1997, between GSCP Inc. and Holdings.
*10(f) -- Employment Agreement, dated March 4, 1997, between Holdings, the Company and
John L. Hale.
</TABLE>
II-3
<PAGE> 145
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- -------------------------------------------------------------------------------
<S> <C> <C>
*10(g) -- Employment Agreement, dated March 4, 1997, between Holdings, the Company and
John A. Palleschi.
*10(h) -- Employment Agreement, dated March 4, 1997, between Holdings, the Company and
John T. Hislop.
*10(i) -- Mortgage (or deed of trust), dated May 6, 1997, from the Company, as Mortgagor,
to the Administrative Agent, with respect to Bloomington, Minnesota.
*10(j) -- Mortgage (or deed of trust), dated May 6, 1997, from the Company, as Mortgagor,
to the Administrative Agent, with respect to Blue Earth, Minnesota.
*10(k) -- Mortgage (or deed of trust), dated May 6, 1997, from the Company, as Mortgagor,
to the Administrative Agent, with respect to Glen Cove, Minnesota.
*10(l) -- Mortgage (or deed of trust), dated May 6, 1997, from the Company, as Mortgagor,
to the Administrative Agent, with respect to Rochester, Minnesota.
*10(m) -- Mortgage (or deed of trust), dated May 6, 1997, from the Company, as Mortgagor,
to the Administrative Agent, with respect to Lincoln, Nebraska.
*10(n) -- 1997 Telex Communications Group, Inc. Stock Option Plan (included in Exhibits
filed as Exhibits 10(h), 10(i) and 10(j)).
*10(o) -- Telex Communications Group, Inc. Cash Bonus Plan (included in Exhibits filed as
Exhibits 10(h), 10(i) and 10(j)).
*10(p) -- Telex Communications Group, Inc. Management Cash Compensation Plan (included in
Exhibits filed as Exhibits 10(h), 10(i) and 10(j)).
*12(a) -- Computation of Ratio of Earnings to Fixed Charges.
***12(b) -- Computation of EBITDA to Interest Expense.
*21 -- List of Subsidiaries of the Registrant.
**23(a) -- Consent of Ernst & Young LLP
**23(b) -- Consent of Debevoise & Plimpton (included in Exhibit filed as Exhibit 5).
*24 -- Powers of Attorney (included on signature pages to this Registration Statement
on Form S-4).
*25 -- State of Eligibility and Qualification Under the Trust Indenture Act of 1939
(Form T-1) of Manufacturers and Traders Trust Company.
***99(a) -- Form of Letter of Transmittal.
***99(b) -- Form of Notice of Guaranteed Delivery.
**99(c) -- Form of Exchange Agreement between the Company and the Exchange Agent.
</TABLE>
- ---------------
* Filed previously.
** Filed herewith.
*** Amended copy filed herewith.
(b) FINANCIAL STATEMENT SCHEDULES.
Financial statement schedules of the Company for which provision is made in
the applicable accounting regulations of the Commissions are not required, are
inapplicable or have been disclosed in the notes to the financial statements and
therefore have been omitted.
II-4
<PAGE> 146
ITEM 22. UNDERTAKINGS.
The Registrant hereby undertakes
(1) To file, during any period in which officers or sales are being
made, a post-effective amendment to this registration statement: (i) to
include any prospectus required by section 10(a)(3) of the Securities Act
of 1933; (ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; (iii) to include any material information
with respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement by any person or party who is deemed to be an underwriter within
the meaning of Rule 145 (c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
(5) That every prospectus (i) that is filed pursuant to paragraph(4)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415 will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offering therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(6) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers, and controlling
persons of the Registrants pursuant to the foregoing provisions or
otherwise, the Registrants have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrants of expenses incurred or paid by
a director, officer or controlling person of the Registrants in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrants will, unless in the opinion of their
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Securities Act and will
be governed by the final adjudication of such issue.
II-5
<PAGE> 147
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Telex
Communications, Inc. has caused this Amendment No. 2 to its Registration
Statement on Form S-4 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Bloomington, State of Minnesota, on the 4th day
of September, 1997.
TELEX COMMUNICATIONS, INC.
By: /s/ JOHN L. HALE
------------------------------------
Name: John L. Hale
Title: President and Chief Executive
Officer
Pursuant to the requirements of this Securities Act of 1933, this Amendment
No. 2 to its Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ JOHN L. HALE Chairman of the Board, September 4, 1997
- ------------------------------------------ President and Chief Executive
John L. Hale Officer
PRINCIPAL ACCOUNTING OFFICER:
/s/ JOHN T. HISLOP Vice President and Chief September 4, 1997
- ------------------------------------------ Financial Officer
John T. Hislop
PRINCIPAL FINANCIAL OFFICER:
/s/ JOHN T. HISLOP Vice President and Chief September 4, 1997
- ------------------------------------------ Financial Officer
John T. Hislop
</TABLE>
II-6
<PAGE> 148
<TABLE>
<S> <C> <C>
DIRECTORS:
* Director September 4, 1997
- ------------------------------------------
Lodwrick M. Cook
* Director September 4, 1997
- ------------------------------------------
Alfred C. Eckert III
* Director September 4, 1997
- ------------------------------------------
Nicholas E. Somers
*By: /s/ JOHN A. PALLESCHI
- ------------------------------------------
Attorney-in Fact
</TABLE>
II-7
<PAGE> 149
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------- -------------------------------------------------------------------- ------------
<C> <S> <C> <C>
*2(a) -- Recapitalization Agreement and Plan of Merger, dated March 4, 1997,
among Greenwich II LLC ("G-II"), GST Acquisition Corp. ("GST") and
Telex Communications, Inc. (the "Company").
*2(b) -- Amendment No. 1 to the Recapitalization Agreement and Plan of
Merger, dated as of April 17, 1997.
*2(c) -- Amendment No. 2 to the Recapitalization Agreement and Plan of
Merger, dated as of April 25, 1997.
*3(a) -- Certificate of Incorporation of the Company, as amended.
*3(b) -- By-laws of the Company, as amended.
*4(a) -- Indenture (the "Indenture"), dated as of May 6, 1997, among the
Company and Manufacturers and Traders Trust Company ("Trustee"),
governing the rights of the securities being registered.
*4(b) -- The First Supplemental Indenture, dated May 6, 1997, to the
Indenture among the Company and the Trustee.
*4(c) -- Purchase Agreement, dated April 29, 1997, among GST, the Company,
Chase Securities Inc., Morgan Stanley & Co. Incorporated and Smith
Barney (collectively, the "Initial Purchasers").
*4(d) -- Credit Agreement (the "Credit Agreement"), dated May 6, 1997, among
the Company, the lenders named on the signature pages thereof (the
"Senior Lenders") and The Chase Manhattan Bank, a New York banking
corporation ("Chase"), as administrative agent for such Senior
Lenders (the "Administrative Agent").
*4(e) -- The Assignment and Assumption Agreement, dated May 6, 1997, made by
the Company and Telex Communications Group, Inc. ("Holdings") in
favor of the Administrative Agent for the benefit of the Senior
Lenders.
*4(f) -- Guarantee and Collateral Agreement, dated May 6, 1997, made by the
Company and Holdings in favor of the Administrative Agent for the
benefit of the Senior Lenders and certain other secured parties.
*4(g) -- Patent and Trademark Security Agreement, dated March 6, 1997, made
by the Company in favor of the Administrative Agent for the benefit
of the Senior Lenders under the Credit Agreement.
**5 -- Opinion of Debevoise & Plimpton regarding the legality of the New
Notes being registered.
*10(a) -- Amended and Restated Stockholders Agreement, dated March 4, 1997,
among Holdings, G-II and the Stockholders set forth on Schedule A
thereto.
*10(b) -- Trademark License Agreement, dated May 25, 1989, by and between MT
Corp. and the Company, relating to the "Telex" name.
*10(c) -- Consulting Agreement, dated May 6, 1997, between Greenwich Street
Capital Partners, Inc. ("GSCP Inc."), Holdings and G-II.
*10(d) -- Indemnification Agreement, dated May 6, 1997, between GSCP Inc.,
Holdings and G-II.
*10(e) -- Fee Agreement, dated May 6, 1997, between GSCP Inc. and Holdings.
</TABLE>
II-8
<PAGE> 150
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------- -------------------------------------------------------------------- ------------
<C> <S> <C> <C>
*10(f) -- Employment Agreement, dated March 4, 1997, between Holdings, the
Company and John L. Hale.
*10(g) -- Employment Agreement, dated March 4, 1997, between Holdings, the
Company and John A. Palleschi.
*10(h) -- Employment Agreement, dated March 4, 1997, between Holdings, the
Company and John T. Hislop.
*10(i) -- Mortgage (or deed of trust), dated May 6, 1997, from the Company, as
Mortgagor, to the Administrative Agent, with respect to Bloomington,
Minnesota.
*10(j) -- Mortgage (or deed of trust), dated May 6, 1997, from the Company, as
Mortgagor, to the Administrative Agent, with respect to Blue Earth,
Minnesota.
*10(k) -- Mortgage (or deed of trust), dated May 6, 1997, from the Company, as
Mortgagor, to the Administrative Agent, with respect to Glen Cove,
Minnesota.
*10(l) -- Mortgage (or deed of trust), dated May 6, 1997, from the Company, as
Mortgagor, to the Administrative Agent, with respect to Rochester,
Minnesota.
*10(m) -- Mortgage (or deed of trust), dated May 6, 1997, from the Company, as
Mortgagor, to the Administrative Agent, with respect to Lincoln,
Nebraska.
*10(n) -- 1997 Telex Communications Group, Inc. Stock Option Plan (included in
Exhibits filed as Exhibits 10(h), 10(i) and 10(j)).
*10(o) -- Telex Communications Group, Inc. Cash Bonus Plan (included in
Exhibits filed as Exhibits 10(h), 10(i) and 10(j)).
*10(p) -- Telex Communications Group, Inc. Management Cash Compensation Plan
(included in Exhibits filed as Exhibits 10(h), 10(i) and 10(j)).
*12(a) -- Computation of Ratio of Earnings to Fixed Charges.
***12(b) -- Computation of EBITDA to Interest Expense.
*21 -- List of Subsidiaries of the Registrant.
**23(a) -- Consent of Ernst & Young LLP
**23(b) -- Consent of Debevoise & Plimpton (included in Exhibit filed as
Exhibit 5).
*24 -- Powers of Attorney (included on signature pages to this Registration
Statement on Form S-4).
*25 -- State of Eligibility and Qualification Under the Trust Indenture Act
of 1939 (Form T-1) of Manufacturers and Traders Trust Company.
***99(a) -- Form of Letter of Transmittal.
***99(b) -- Form of Notice of Guaranteed Delivery.
**99(c) -- Form of Exchange Agreement between the Company and the Exchange
Agent.
</TABLE>
- ---------------
* Filed previously.
** Filed herewith.
*** Amended copy filed herewith.
II-9
<PAGE> 1
EXHIBIT 5
[DEBEVOISE & PLIMPTON LETTERHEAD]
September 4, 1997
Telex Communications, Inc.
9600 Aldrich Avenue South
Bloomington, Minnesota 55420
Registration Statement on Form S-4
of Telex Communications, Inc.
(Registration Number 333-30679)
----------------------------------
Ladies and Gentlemen:
We have acted as special counsel to Telex Communications, Inc., a
Delaware corporation (the "Company"), in connection with the preparation and
filing with the Securities and Exchange Commission (the "Commission") under
the Securities Act of 1933, as amended (the "Act"), of a Registration
Statement on Form S-4 (as amended, the "Registration Statement"), which
includes a form of prospectus (the "Prospectus") relating to the proposed
exchange by the Company of $125,000,000 aggregate principal amount of its
10 1/2% Senior Subordinated Notes due 2007, (the "Existing Notes") for
$125,000,000 aggregate principal amount of its 10 1/2% Senior Subordinated
Notes due 2007, Series A (the "New Notes"), which are to be registered under
the Act.
In so acting, we have examined and relied upon originals, or copies
certified or otherwise identified to our satisfaction, of such records,
documents, certificates and other instruments as in our judgment are necessary
or appropriate to enable us to render the opinion expressed below.
We are of the opinion that the New Notes to be offered pursuant to the
Registration Statement will be validly issued and will be legal, valid and
binding obligations of the Company, enforceable against the Company in
accordance with their terms, except as may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to or affecting
creditors' rights generally or by general principles of equity (regardless of
whether such enforceability is considered in an action at law or in equity).
We express no opinion as to the effect of any Federal or state laws
regarding fraudulent transfers or conveyances.
We express no opinion as to the laws of any jurisdiction other than the
Federal laws of the United States, the laws of the State of New York and the
General Corporation Law of the State of Delaware.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the headings "Legal
Matters" in the Prospectus. In giving such consent, we do not hereby concede
that we are within the category of persons whose consent is required under
Section 7 of the Act or the rules and regulations of the Commission thereunder.
Very truly yours,
/s/ Debevoise & Plimpton
<PAGE> 1
EXHIBIT 12(b)
TELEX COMMUNICATIONS, INC.
COMPUTATION OF EBITDA TO INTEREST EXPENSE
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
EBITDA........................................ $40,045 $16,691(1) $25,134 $23,035 $22,412
Interest expense.............................. 12,513 12,517 12,490 10,120 11,079
------- ------- ------- ------- -------
Ratio of EBITDA to interest expense........... 3.20 1.33 2.01 2.28 2.02
======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Depreciation and amortization excludes $13,345 of impairment write-off of
property, plant and equipment and intangible assets.
<PAGE> 1
Exhibit 23(a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Summary Historical
and Pro Forma Financial Information" and "Experts" and to the use of our report
dated June 2, 1997, in the Registration Statement (Amendment No. 2 to Form S-4
No. 333-30679) and related Prospectus of Telex Communications, Inc. for the
registration of $125,000,000 Senior Subordinated Notes.
Our audits also included the financial statement schedule of Telex
Communications, Inc. included in the Registration Statement (Amendment No. 2 to
Form S-4 No. 333-30679). 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.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
September 4, 1997
<PAGE> 1
EXHIBIT 99(a)
[FORM OF LETTER OF TRANSMITTAL]
TELEX COMMUNICATIONS, INC.
OFFER TO EXCHANGE ITS 10 1/2% SENIOR SUBORDINATED NOTES
DUE 2007, SERIES A, ("NEW NOTES"), WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT, FOR ANY AND ALL OUTSTANDING 10 1/2% SENIOR
SUBORDINATED NOTES DUE 2007 ("EXISTING NOTES"), PURSUANT TO THE
PROSPECTUS DATED SEPTEMBER 5, 1997
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
OCTOBER 9, 1997 OR SUCH LATER DATE AND TIME TO WHICH THE EXCHANGE OFFER
MAY BE EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY BE WITHDRAWN PRIOR TO
THE EXPIRATION DATE.
To: Manufacturers and Traders Trust Company, Exchange Agent
<TABLE>
<S> <C>
By Mail: One M & T Plaza By Facsimile: 716 842-4474
7th Floor
Buffalo, NY 14203 (For Eligible Institutions Only)
Attention: Russell Whitley By Hand to 4:30 p.m.:
By Overnight Courier or
By Hand after 4:30 p.m.: Attention: Russell Whitley
Attention: Russell Whitley
</TABLE>
For Information Call:
716 842-5602
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER
THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING ANY BOX BELOW
------------------------
List below the Existing Notes to which this Letter of Transmittal relates.
If the space provided below is inadequate, the certificate number(s) and
principal amount of Existing Notes should be listed on a separate signed
schedule affixed hereto.
<TABLE>
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF EXISTING NOTES TENDERED
------------------------------------------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OR REGISTERED HOLDER(S) (1) (2) (3) (4)
------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT OF
AGGREGATE EXISTING NOTES
AGGREGATE PRINCIPAL TENDERED IN
PRINCIPAL AMOUNT OF EXCHANGE FOR
CERTIFICATE AMOUNT OF EXISTING NOTES CERTIFICATED
NUMBER(S)* EXISTING NOTES TENDERED** NEW NOTES***
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
* Need not be completed by book-entry holders.
** Unless otherwise indicated in this column, the holder will be deemed to have tendered the full aggregate principal amount
represented by such
Existing Notes.
*** Unless otherwise indicated, the holder will be deemed to have tendered Existing Notes in exchange for a beneficial interest
in one or more fully
registered global notes, which will be deposited with, or on behalf of, The Depository Trust Company ("DTC") and registered
in the name of
Cede & Co., its nominee.
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 2
The undersigned acknowledges that he, she or it has received and reviewed
the Prospectus, dated September 5, 1997 (the "Prospectus"), of Telex
Communications, Inc. a Delaware corporation ("Telex"), and this Letter of
Transmittal (the "Letter of Transmittal"), which together constitute Telex's
offer (the "Exchange Offer") to exchange up to $125,000,000 aggregate principal
amount of its New Notes, which have been registered under the Securities Act of
1933, for a like principal amount of its outstanding Existing Notes. The New
Notes and the Existing Notes are collectively referred to as the "Notes."
Capitalized terms used but not defined herein have the meanings ascribed to them
in the Prospectus.
The undersigned has completed the appropriate boxes above and below and
signed this Letter of Transmittal to indicate the action the undersigned desires
to take with respect to the Exchange Offer.
This Letter of Transmittal is to be used either if certificates of Existing
Notes are to be forwarded herewith or if delivery of Existing Notes is to be
made by book-entry transfer to an account maintained by the Exchange Agent at
DTC, pursuant to the procedures set forth in "The Exchange Offer -- Procedures
for Tendering" in the Prospectus. Delivery of this Letter of Transmittal and any
other required documents should be made to the Exchange Agent. Delivery of
documents to a book-entry transfer facility does not constitute delivery to the
Exchange Agent.
Holders whose Existing Notes are not immediately available or who cannot
deliver their Existing Notes and all other documents required hereby to the
Exchange Agent on or prior to the Expiration Date must tender their Existing
Notes according to the guaranteed delivery procedure set forth in the Prospectus
under the caption "The Exchange Offer -- Procedures for Tendering." See
Instruction 1. Holders of Existing Notes that are tendering by book-entry
transfer to the Exchange Agent's account at DTC can execute the tender through
the DTC Automated Tender Offer Program ("ATOP") for which the transaction will
be eligible. DTC participants should transmit their acceptance to DTC, which
will verify the acceptance and execute a book-entry delivery to the Exchange
Agent's account at DTC. DTC will then send an Agent's Message (as defined in the
Prospectus) to the Exchange Agent for its acceptance. DTC participants may also
accept the Exchange Offer by submitting a notice of guaranteed delivery through
ATOP.
The undersigned must complete the appropriate boxes above and below and
sign this Letter of Transmittal to indicate the action the undersigned desires
to take with respect to the Exchange Offer.
[ ] CHECK HERE IF TENDERED EXISTING NOTES ARE BEING DELIVERED TO THE EXCHANGE
AGENT IN EXCHANGE FOR CERTIFICATED NEW NOTES.
Unless the undersigned (i) has completed item (4) in the box entitled
"Description of Existing Notes Tendered" and (ii) has checked the box above, the
undersigned will be deemed to have tendered Existing Notes in exchange for a
beneficial interest in one or more fully registered global certificates, which
will be deposited with, or on behalf of, DTC and registered in the name of Cede
& Co., its nominee. Beneficial interests in such registered global certificates
will be shown on, and transfers thereof will be effected only through, records
maintained by DTC and its participants. See "Book-Entry, Delivery and Form" as
set forth in the Prospectus.
[ ] CHECK HERE IF TENDERED EXISTING NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO AN ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH A BOOK-
ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution __ [ ] The Depository Trust Company
Account Number
-------------------------------------------------------------------
Transaction Code Number
-------------------------------------------------------------
[ ] CHECK HERE IF TENDERED EXISTING NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND
COMPLETE THE FOLLOWING:
Name of Registered Holder(s)
---------------------------------------------------------
Window Ticket Number (if any)
--------------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery
-------------------------------------------
Name of Eligible Institution that Guaranteed Delivery
------------------------------------------
If delivered by book-entry transfer:
Account Number Transaction Code Number
- ------------------------------
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER MAKING A MARKET IN EXISTING NOTES
WITH TELEX'S PRIOR WRITTEN CONSENT AND WISH TO RECEIVE 10 ADDITIONAL COPIES
OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS MADE
THERETO WITHIN 90 DAYS AFTER THE EXPIRATION DATE:
Name --------------------------------------------------------------------------
Address-------------------------------------------------------------------------
<PAGE> 3
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to conditions of the Exchange Offer, the
undersigned hereby tenders to Telex the aggregate principal amount of Existing
Notes indicated above. Subject to, and effective upon, the acceptance for
exchange of Existing Notes tendered hereby, the undersigned hereby sells,
assigns and transfers to, or upon the order of, the Exchange Agent, as agent of
Telex, all right, title and interest in and to such Existing Notes as are being
tendered hereby, and irrevocably constitutes and appoints the Exchange Agent as
the agent and attorney-in-fact of the undersigned to cause the Existing Notes
tendered hereby to be transferred and exchanged.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, exchange, sell, assign and transfer the
Existing Notes tendered hereby and to acquire the New Notes issuable upon the
exchange of such tendered Existing Notes, and that the Exchange Agent, as agent
of Telex, will acquire good and unencumbered title thereto, free and clear of
all liens, restrictions, charges and encumbrances and not subject to any adverse
claim when the same are accepted by the Exchange Agent, as agent of Telex. The
undersigned will, upon request, execute and deliver any additional documents
deemed by Telex or the Exchange Agent to be necessary or desirable to complete
the exchange, sale, assignment and transfer of the Existing Notes tendered
hereby.
The undersigned also acknowledges that this Exchange Offer is being made in
reliance on the interpretation of the staff of the Securities and Exchange
Commission (the "SEC"), as set forth in no-action letters issued to third
parties (including Exxon Capital Holdings Corporation (available May 13, 1988),
Morgan Stanley & Co. Incorporated (available June 5, 1991), K-III Communications
Corporation (available May 14, 1993) and Shearman & Sterling (available July 2,
1993)). Based on such interpretation of the staff of the SEC set forth in such
no-action letters, Telex believes that the New Notes issued in exchange for the
Existing Notes pursuant to the Exchange Offer may be offered for resale, resold
and otherwise transferred by a holder thereof (other than any such holder that
is an "affiliate" of Telex within the meaning of Rule 405 under the Securities
Act of 1933, as amended (the "Securities Act")) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that (i) such New Notes are acquired in the ordinary course of such holder's
business, (ii) at the time of the commencement of the Exchange Offer such holder
has no arrangement with any person to participate in a distribution of the New
Notes and (iii) such holder is not engaged in, and does not intend to engage, in
a distribution of the New Notes. By tendering Existing Notes in exchange for New
Notes, each holder will represent to Telex that: (i) it is not such an affiliate
of Telex, (ii) any New Notes to be received by it will be acquired in the
ordinary course of business and (iii) at the time of the commencement of the
Exchange Offer it had no arrangement with any person to participate in a
distribution of the New Notes. If the undersigned is not a broker-dealer or is a
broker-dealer but will not receive New Notes for its own account in exchange for
Existing Notes, the undersigned represents that it is not engaged in, and does
not intend to engage in, a distribution of New Notes.
If the undersigned is a broker-dealer that will receive New Notes for its
own account in exchange for Existing Notes, where such Existing Notes were
acquired as a result of market-making activities or other trading activities, it
acknowledges that it will deliver a prospectus meeting the requirements of the
Securities Act and it has not entered into any arrangement or understanding with
Telex or an affiliate of Telex in connection with any resale of such New Notes;
however, by so acknowledging and by delivering a prospectus, the undersigned
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. The SEC has taken the position that such broker-dealers may
fulfill their prospectus delivery requirements with respect to the New Notes
(other than a resale of New Notes received in exchange for an unsold allotment
from the original sale of the Existing Notes) with the Prospectus. The
Prospectus, as it may be amended or supplemented from time to time, may be used
by such broker-dealers for a period of time, starting on the Expiration Date and
ending on the close of business 90 days after the Expiration date in connection
with the sale or transfer of such New Notes. Telex has agreed that, for such
period of time, it will make the Prospectus (as it may be amended or
supplemented) available to a broker-dealer which, with Telex's prior written
consent, makes a market in the Existing Notes and receives New Notes pursuant to
the Exchange Offer (each a "Participating Broker-Dealer") for use in connection
with any resale of such New Notes. By acceptance of the Exchange Offer, each
broker-dealer that receives New Notes pursuant to the Exchange Offer hereby
acknowledges and agrees to notify Telex prior to using the Prospectus in
connection with the sale or transfer of New Notes and that, upon receipt of
notice from Telex of the happening of any event which makes any statement in the
Prospectus untrue in any material respect or which requires the making of any
changes in the Prospectus in order to make the statements therein not
misleading, such broker-dealer will suspend use of the Prospectus until (i)
Telex has amended or supplemented the Prospectus to correct such misstatement or
omission and (ii) either Telex has furnished copies of the amended or
supplemented Prospectus to such broker-dealer or, if Telex has not otherwise
agreed to furnish such copies and declines to do so after such broker-dealer so
requests, such broker-dealer has obtained a copy of such amended or supplemented
Prospectus as filed with the SEC. Telex agrees to deliver such notice and such
amended or supplemented Prospectus promptly to any Participating Broker-Dealer
that has so notified Telex. Except as described above, the Prospectus may not be
used for or in connection with an offer to resell, a resale or any other
retransfer of New Notes. A broker-dealer that acquired Existing Notes in a
transaction other than as part of its market-making activities or other trading
activities will not be able to participate in the Exchange Offer.
<PAGE> 4
The undersigned represents that (i) the New Notes acquired pursuant to the
Exchange Offer are being obtained in the ordinary course of such holder's
business, (ii) such holder has no arrangement or understanding with any person
to participate in the distribution of such New Notes or, if such holder intends
to participate in the Exchange Offer for the purpose of distributing the New
Notes, such holder will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable, and (iii) (x) such
holder is not (a) a broker-dealer that will receive New Notes for its own
account in exchange for Existing Notes that were acquired as a result of
market-making activities or other trading activities, or (b) an "affiliate," as
defined in Rule 405 under the Securities Act, of Telex or (y) if such holder is
such a broker-dealer or an affiliate, such holder will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable.
The undersigned, if a California resident, hereby further represents and
warrants that the undersigned (or the beneficial owner of the Existing Notes
tendered hereby, if not the undersigned) (i) is a bank, savings and loan
association, trust company, insurance company, investment company registered
under the Investment Company Act of 1940, pension or profit-sharing trust (other
than a pension or profit-sharing trust of Telex, a self-employed individual
retirement plan, or individual retirement account), a corporation which has a
net worth on a consolidated basis according to its most recent audited financial
statements of not less than $14,000,000, or a wholly owned subsidiary of any of
the foregoing, and (ii) is acquiring the New Notes for its own account for
investment purposes (or for the account of the beneficial owner of such New
Notes for investment purposes).
All authority conferred or agreed to be conferred in this Letter of
Transmittal and every obligation of the undersigned hereunder shall be binding
upon the successors, assigns, heirs, executors, administrators, trustees in
bankruptcy and legal representatives of the undersigned and shall not be
affected by, and shall survive, the death or incapacity of the undersigned. This
tender may be withdrawn only in accordance with the procedures set forth in the
instructions contained in this Letter of Transmittal.
The undersigned understands that tenders of the Existing Notes pursuant to
any one of the procedures described under "The Exchange Offer -- Procedures for
Tendering" in the Prospectus and in the instructions hereto will constitute a
binding agreement between the undersigned and Telex in accordance with the terms
and subject to the conditions of the Exchange Offer.
The undersigned understands that if its Existing Notes are accepted for
exchange, interest on the New Notes will accrue from the last interest payment
date on which interest was paid on the Existing Notes surrendered in exchange
thereof, or if no interest has been paid, from the original date of issuance of
the Existing Notes.
The undersigned recognizes that unless the holder of Existing Notes (i)
completes item (4) of the Box entitled "Description of Existing Notes Tendered"
above and (ii) checks the box entitled "Check here if tendered shares of
Existing Notes are being delivered to the Exchange Agent in exchange for
certificated New Notes" above, such holder, when tendering such Existing Notes,
will be deemed to have tendered such Existing Notes in exchange for a beneficial
interest in one or more fully registered global certificates, which will be
deposited with, or on behalf of, DTC and registered in the name of Cede & Co.,
its nominee. Beneficial interests in such registered global certificates will be
shown on, and transfers thereof will be effected only through, records
maintained by DTC and its participants. See "Book-Entry; Delivery and Form" in
the Prospectus.
The undersigned recognizes that, under certain circumstances set forth in
the Prospectus under "The Exchange Offer -- Conditions," Telex may not be
required to accept for exchange any of the Existing Notes tendered. Existing
Notes not accepted for exchange or withdrawn will be returned to the undersigned
at the address set forth below unless otherwise indicated under "Special
Delivery Instructions" below.
The undersigned acknowledges that by tendering the Existing Notes pursuant
to any one of the procedures described under "The Exchange Offer -- Procedures
for Tendering" in the Prospectus and in the instructions hereto, the undersigned
agrees that once the Exchange Offer is consummated, Telex shall not be obligated
to file or prepare a Shelf Registration Statement (as defined in the Exchange
and Registration Rights Agreement, dated May 6, 1997 (the "Exchange and
Registration Rights Agreement"), among Telex and the Initial Purchasers), or
take any other action provided in Sections 2 or 3 of the Exchange and
Registration Rights Agreement with respect to a Shelf Registration Statement,
and the undersigned hereby waives any requirement of the Exchange and
Registration Rights Agreement that Telex files, prepares or takes any other
action relating to a Shelf Registration Statement once the Exchange Offer is
consummated.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptability of any tender will be determined by Telex, in its
sole discretion, and such determination will be final and binding. Unless waived
by Telex, irregularities and defects must be cured by the Expiration Date. Telex
shall not be obligated to give notice of any defects or irregularities in
tenders and shall not incur any liability for failure to give any such notice.
<PAGE> 5
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, the undersigned hereby requests that the New Notes (and, if
applicable, substitute certificates representing Existing Notes for any Existing
Notes not exchanged) be issued in the name of the undersigned. Similarly, unless
otherwise indicated under the box entitled "Special Delivery Instructions"
below, the undersigned hereby requests that the New Notes (and, if applicable,
substitute certificates representing Existing Notes for any Existing Notes not
exchanged) be sent to the undersigned at the address shown above in the box
entitled "Description of Existing Notes Tendered."
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF EXISTING
NOTES TENDERED" ABOVE AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED
THE EXISTING NOTES AS SET FORTH IN SUCH BOX(ES) ABOVE.
<PAGE> 6
<TABLE>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
(Complete Accompanying Substitute Form W-9)
X
---------------------------------------------------- ----------------------------------------------------
X
---------------------------------------------------- ----------------------------------------------------
Signature(s) of Owner(s) Date
Area Code and Telephone Number
----------------------------------------------------------------------------
If a holder is tendering any Existing Notes, this Letter of Transmittal must be signed by the registered
holder(s) as the name(s) appear(s) on the certificate(s) for the Existing Notes or by any person(s)
authorized to become registered holder(s) by endorsements and documents transmitted herewith. If signature
is by a trustee, executor, administrator, guardian, officer or other person acting in a fiduciary or
representative capacity, please set forth full title below. See Instruction 3.
Name(s):
----------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
(Please Type or Print)
Capacity:
---------------------------------------------------------------------------------------------------------
Address:
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
(Include Zip Code)
SIGNATURE GUARANTEE
(If required by Instruction 3)
Signature(s) Guaranteed by
an Eligible Institution:
------------------------------------------------------------------------------
(Authorized Signature)
---------------------------------------------------------------------------------------------------------
(Title)
---------------------------------------------------------------------------------------------------------
(Name of Firm)
Dated:
--------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
- ------------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if New Notes (and, if
applicable, substitute certificates representing
Existing Notes for any Existing Notes not
exchanged) are to be issued in the name of and
sent to someone other than the person or persons
whose signature(s) appear(s) on this Letter of
Transmittal above.
Issue New Notes to:
Name(s):
--------------------------------------------
--------------------------------------------
(Please Type or Print)
Address:
----------------------------------------------
----------------------------------------------
----------------------------------------------
(Zip Code)
========================================================
(COMPLETE SUBSTITUTE FORM W-9)
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if certificates for New
Notes (and, if applicable, substitute
certificates representing Existing Notes for any
Existing Notes not exchanged) are to be sent to
someone other than the person or persons whose
signature(s) appear(s) on this Letter of
Transmittal above or to such person or persons
at an address other than shown in the box
entitled "Description of Existing Notes
Tendered" on this Letter of Transmittal above.
Mail New Notes to:
Name(s):
--------------------------------------------
(Please Type or Print)
Address:
--------------------------------------------
--------------------------------------------
(Zip Code)
- --------------------------------------------------------
</TABLE>
IMPORTANT: UNLESS GUARANTEED DELIVERY PROCEDURES ARE COMPLIED WITH, THIS
LETTER OF TRANSMITTAL OR A FACSIMILE HEREOF (TOGETHER WITH THE CERTIFICATE(S)
FOR EXISTING NOTES OR A CONFIRMATION OF BOOK-ENTRY TRANSFER OF SUCH EXISTING
NOTES AND ALL OTHER REQUIRED DOCUMENTS) MUST BE RECEIVED BY THE EXCHANGE AGENT
PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
<PAGE> 7
TO BE COMPLETED BY ALL TENDERING HOLDERS
(SEE INSTRUCTION 5)
<TABLE>
<C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------
PAYOR'S NAME: TELEX COMMUNICATIONS, INC.
===================================================================================================================
SUBSTITUTE PART I -- Taxpayer Identification Number
FORM W-9 ----------------------------------------
DEPARTMENT OF THE TREASURY Enter your taxpayer identification number Social Security Number
INTERNAL REVENUE SERVICE in the appropriate box. For most or
individuals, this is your social security
number. If you do not have a number, see ----------------------------------------
how to obtain a "TIN" in the enclosed Employer Identification Number
Social Security Number Guidelines.
NOTE: If the account is in more than one
name, see the chart on page 2 of the
enclosed Guidelines to determine what
number to give.
- -------------------------------------------------------------------------------------------------------------------
PAYOR'S REQUEST FOR TAXPAYER
IDENTIFICATION NUMBER (TIN) PART II -- For Payees Exempt from Backup Withholding (See Enclosed Guidelines)
AND CERTIFICATION
- -------------------------------------------------------------------------------------------------------------------
CERTIFICATION -- Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a number to be
issued to me), and
(2) I am not subject to backup withholding either because I have not been notified by the Internal Revenue Service
(the "IRS") that I am subject to backup withholding as a result of a failure to report all interest or
dividends or the IRS has notified me that I am no longer subject to backup withholding.
- -------------------------------------------------------------------------------------------------------------------
SIGNATURE DATE: ________________
- -------------------------------------------------------------------------------------------------------------------
CERTIFICATION GUIDELINES -- You must cross out item (2) of the above certification if you have been notified by
the IRS that you are subject to backup withholding because of underreporting of interest or dividends on your tax
return. However, if after being notified by the IRS that you were subject to backup withholding you received
another notification from the IRS that you are no longer subject to backup withholding, do not cross out item (2).
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
CERTIFICATION OF PAYEE AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify, under penalties of perjury, that a Taxpayer Identification
Number has not been issued to me, and that I mailed or delivered an application
to receive a Taxpayer Identification Number to the appropriate Internal Revenue
Service Center or Social Security Administration Office (or I intend to mail or
deliver an application in the near future). I understand that if I do not
provide a Taxpayer Identification Number to the payer, 31 percent of all
payments made to me on account of the New Preferred Stock shall be retained
until I provide a Taxpayer Identification Number to the payer and that, if I do
not provide my Taxpayer Identification Number within sixty (60) days, such
retained amounts shall be remitted to the Internal Revenue Service as backup
withholding and 31 percent of all reportable payments made to me thereafter will
be withheld and remitted to the Internal Revenue Service until I provide a
Taxpayer Identification Number.
<TABLE>
<S> <C>
SIGNATURE DATE
---------------------------------- -------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU ON ACCOUNT OF THE NEW NOTES. PLEASE
REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
<PAGE> 8
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND EXISTING NOTES; GUARANTEED
DELIVERY PROCEDURE
The Letter of Transmittal is to be used to forward, and must accompany, all
certificates representing Existing Notes tendered pursuant to the Exchange
Offer. Certificates representing the Existing Notes in proper form for transfer
(or a confirmation of book-entry transfer of such Existing Notes into the
Exchange Agent's account at the book-entry transfer facility) as well as a
properly completed and duly executed copy of this Letter of Transmittal and all
other documents required by this Letter of Transmittal, must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City
time, on the Expiration Date. Existing Notes tendered must be in integral
multiples of $1000.
The method of delivery of this Letter of Transmittal, the Existing Notes
and all other required documents, including delivery through DTC and any
acceptance of an Agent's Message delivered through ATOP is at the election and
risk of the tendering holders, but the delivery will be deemed made only when
actually received or confirmed by the Exchange Agent. If such delivery is by
mail, it is recommended that registered or certified mail properly insured, with
return receipt requested, be used. In all cases, sufficient time should be
allowed to permit timely delivery.
If a holder desires to tender Existing Notes and such holder's Existing
Notes are not immediately available or time will not permit such holder's Letter
of Transmittal, Existing Notes (or a confirmation of book-entry transfer of
Existing Notes into the Exchange Agent's account at the book-entry transfer
facility) or other required documents to reach the Exchange Agent prior to 5:00
p.m., New York City time, on the Expiration Date, or such holder cannot complete
the procedure of book-entry transfer on a timely basis, such holder may
nevertheless tender Existing Notes if:
(a) such tender is made by or through an Eligible Institution (as
defined below);
(b) the Exchange Agent has received from such Eligible Institution
prior to 5:00 p.m., New York City time, on the Expiration Date, a properly
completed and duly executed Letter of Transmittal (of facsimile thereof)
and Notice of Guaranteed Delivery, substantially in the form provided by
Telex (by facsimile transmission, mail or hand delivery), or an Agent's
Message with respect to guaranteed delivery that is accepted by Telex,
setting forth the name and address of the holder of such Existing Notes and
the principal amount of Existing Notes tendered, stating that the tender is
being made thereby and guaranteeing that, within three New York Stock
Exchange ("NYSE") trading days after the execution of the Notice of
Guaranteed Delivery, a Book-Entry Confirmation and any other documents
required by this Letter of Transmittal and the instructions hereto, will be
deposited by such Eligible Institution with the Exchange Agent; and
(c) a Book-Entry Confirmation and all other required documents
required by the Letter of Transmittal are received by the Exchange Agent
within three NYSE trading days after the Notice of Guaranteed Delivery.
A tender will be deemed to have been received as of the date when the
tendering holder's duly signed Letter of Transmittal accompanied by Existing
Notes (or a timely confirmation of a book-entry transfer of Existing Notes into
the Exchange Agent's account at the book-entry transfer facility) or a Notice of
Guaranteed Delivery from an Eligible Institution is received by the Exchange
Agent.
See "The Exchange Offer" in the Prospectus.
2. WITHDRAWALS
Any holder may withdraw a tender of Existing Notes prior to 5:00 p.m., New
York City time on the Expiration Date. For a withdrawal to be effective, a
written notice of withdrawal must be received by the Exchange Agent prior to
5:00 p.m., New York City time on the Expiration Date at one of its addresses set
forth herein. Any such notice of withdrawal must specify the name and number of
the account at the Book-Entry Transfer Facility from which the Existing Notes
were tendered, identify the aggregate liquidation preference of the Existing
Notes to be withdrawn, and specify the name and number of the account at the
Book-Entry Transfer Facility to be credited with the withdrawn Existing Notes
and otherwise comply with the procedures of such facility. The Exchange Agent
will return properly withdrawn Existing Notes as soon as practicable following
receipt of notice of withdrawal. All questions as to the validity (including
time of receipt) of notices of withdrawals will be determined by Telex, in its
sole discretion, and such determination will be final and binding on all
parties. See "The Exchange Offer -- Withdrawal of Tenders" in the Prospectus. If
Existing Notes have been tendered pursuant to the procedures for book-entry
transfer, any notice of withdrawal must specify the name and number of the
participant's account at DTC to be credited with the withdrawn Existing Notes or
otherwise comply with DTC's procedures. See "The Exchange Offer -- Withdrawal of
Tenders" in the Prospectus.
3. SIGNATURES ON THIS LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS;
GUARANTEE OF SIGNATURES
If this Letter of Transmittal is signed by the registered holder of the
Existing Notes tendered hereby, the signature must correspond exactly with the
name as written on the face of the certificates without any change whatsoever.
<PAGE> 9
If any tendered Existing Notes are owned of record by two or more joint
owners, all such owners must sign this Letter of Transmittal.
If any tendered Existing Notes are registered in different names on several
certificates, it will be necessary to complete, sign and submit as many separate
copies of this Letter of Transmittal as there are different registrations of
certificates.
If this Letter of Transmittal or any Existing Notes or powers of attorney
are signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should indicate when signing, and unless waived by Telex,
proper evidence satisfactory to Telex of their authority so to act must be
submitted.
The signatures on this Letter of Transmittal or a notice of withdrawal, as
the case may be, must be guaranteed unless the Existing Notes surrendered for
exchange pursuant thereto are tendered (i) by a registered holder of the
Existing Notes who has not completed the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" in this Letter of Transmittal
or (ii) for the account of an Eligible Institution. In the event that the
signatures in this Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, such guarantees must be by a firm which
is a member of a registered national securities exchange or a member of the
National Association of Securities Dealers, Inc., or by a commercial bank or
trust company having an office or correspondent in the United States, or an
"eligible institution" within the meaning of Rule 17Ad-15 of the Securities
Exchange Act of 1934, as amended (each an "Eligible Institution"). If Existing
Notes are registered in the name of a person other than the signer of this
Letter of Transmittal, the Existing Notes surrendered for exchange must be
endorsed by, or be accompanied by a written instrument or instruments of
transfer or exchange, in satisfactory form as determined by Telex in its sole
discretion, duly executed by the registered holder with the signature thereon
guaranteed by an Eligible Institution.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS
Tendering holders of Existing Notes should indicate in the applicable box
the name and address to which New Notes issued pursuant to the Exchange Offer
are to be issued or sent, if different from the name or address of the person
signing this Letter of Transmittal. In the case of issuance in a different name,
the employer identification or social security number of the person named must
also be indicated. If no such instructions are given, any New Notes will be
issued in the name of, and delivered to, the name or address of the person
signing this Letter of Transmittal and any Existing Notes not accepted for
exchange will be returned to the name or address of the person signing this
Letter of Transmittal.
5. BACKUP FEDERAL INCOME TAX WITHHOLDING AND SUBSTITUTE FORM W-9
Under the federal income tax laws, payments that may be made by Telex on
account of New Notes issued pursuant to the Exchange Offer may be subject to
backup withholding at the rate of 31%. In order to avoid such backup
withholding, each tendering holder should complete and sign the Substitute Form
W-9 included in this Letter of Transmittal and either (a) provide the correct
taxpayer identification number ("TIN") and certify, under penalties of perjury,
that the TIN provided is correct and that (i) the holder has not been notified
by the Internal Revenue Service (the "IRS") that the holder is subject to backup
withholding as a result of failure to report all interest or dividends or (ii)
the IRS has notified the holder that the holder is no longer subject to backup
withholding; or (b) provide an adequate basis for exemption. If the tendering
holder has not been issued a TIN and has applied for one, or intends to apply
for one in the near future, such holder should write "Applied For" in the space
provided for the TIN in Part I of the Substitute Form W-9, sign and date the
Substitute Form W-9 and sign the Certificate of Payee Awaiting Taxpayer
Identification Number. If "Applied For" is written in Part I, Telex (or the
Exchange Agent with respect to the New Notes or a broker or custodian) may still
withhold 31% of the amount of any payments made on account of the New Notes
until the holder furnishes Telex or the Exchange Agent with respect to the New
Notes, broker or custodian with its TIN. In general, if a holder is an
individual, the taxpayer identification number is the Social Security number of
such individual. If the Exchange Agent or Telex is not provided with the correct
TIN, the holder may be subject to a $50 penalty imposed by the IRS. Certain
holders (including, among others, all corporations and certain foreign
individuals) are not subject to these backup withholding and reporting
requirements. In order for a foreign individual to qualify as an exempt
recipient, such holder must submit a statement (generally, IRS Form W-8), signed
under penalties of perjury, attesting to that individual's exempt status. Such
statements can be obtained from the Exchange Agent. For further information
concerning backup withholding and instructions for completing the Substitute
Form W-9 (including how to obtain a taxpayer identification number if you do not
have one and how to complete the Substitute Form W-9 if Existing Notes are
registered in more than one name), consult the enclosed Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9.
<PAGE> 10
Failure to complete the Substitute Form W-9 will not, by itself, cause
Existing Notes to be deemed invalidly tendered, but may require Telex or the
Exchange Agent with respect to the New Notes, broker or custodian to withhold
31% of the amount of any payments made on account of the New Notes. Backup
withholding is not an additional federal income tax. Rather, the federal income
tax liability of a person subject to backup withholding will be reduced by the
amount of tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained from the IRS.
6. TRANSFER TAXES
Telex will pay all transfer taxes, if any, applicable to the transfer of
Existing Notes to it or its order pursuant to the Exchange Offer. If, however,
New Notes and/or substitute Existing Notes not exchanged are to be delivered to,
or are to be registered or issued in the name of, any person other than the
registered holder of the Existing Notes tendered hereby, or if tendered Existing
Notes are registered in the name of any person other than the person signing
this Letter of Transmittal, or if a transfer tax is imposed for any reason other
than the transfer of Existing Notes to Telex or its order pursuant to the
Exchange Offer, the amount of any such transfer taxes (whether imposed on the
registered holder or any other person) will be payable by the tendering holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted herewith, the amount of such transfer taxes will be billed directly to
such tendering holder.
Except as provided in this Instruction 6, it will not be necessary for
transfer tax stamps to be affixed to the Existing Notes specified in this Letter
of Transmittal.
7. WAIVER OF CONDITIONS
Telex reserves the absolute right to waive satisfaction of any or all
conditions enumerated in the Prospectus.
8. NO CONDITIONAL TENDERS
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders of Existing Notes, by execution of this Letter
of Transmittal, shall waive any right to receive notice of the acceptance of
their Existing Notes for exchange.
Neither Telex nor any other person is obligated to give notice of defects
or irregularities in any tender, nor shall any of them incur any liability for
failure to give any such notice.
9. INADEQUATE SPACE
If the space provided herein is inadequate, the aggregate principal amount
of Existing Notes being tendered and the certificate number or numbers (if
available) should be listed on a separate schedule attached hereto and
separately signed by all parties required to sign this Letter of Transmittal.
10. MUTILATED, LOST, STOLEN OR DESTROYED EXISTING NOTES
Any holder whose Existing Notes have been mutilated, lost, stolen or
destroyed should contact the Exchange Agent at the address indicated above for
further instructions.
11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES
Questions relating to the procedure for tendering, as well as requests for
additional copies of the Prospectus and this Letter of Transmittal, may be
directed to the Exchange Agent at the address and telephone number indicated
above.
<PAGE> 1
EXHIBIT 99(b)
NOTICE OF GUARANTEED DELIVERY
WITH RESPECT TO
TELEX COMMUNICATIONS, INC.
10 1/2% SENIOR SUBORDINATED NOTES DUE 2007
This form must be used by a holder of the 10 1/2% Senior Subordinated Notes
due 2007 (the "Existing Notes") of Telex Communications, Inc. a Delaware
corporation ("Telex"), that wishes to tender Existing Notes to the Exchange
Agent pursuant to the guaranteed delivery procedures described in "The Exchange
Offer -- Procedures for Tendering" of the Prospectus dated September 5, 1997
(the "Prospectus") and in Instruction 1 to the accompanying Letter of
Transmittal. Any holder that wishes to tender Existing Notes pursuant to such
guaranteed delivery procedures must ensure that the Exchange Agent receives this
Notice of Guaranteed Delivery prior to 5:00 p.m., New York City time, on the
Expiration Date of the Exchange Offer. Capitalized terms not defined herein have
the meaning ascribed to them in the Prospectus or the Letter of Transmittal.
To: Manufacturer and Traders Trust Company, Exchange Agent
<TABLE>
<S> <C>
By Mail: By Facsimile:
One M&T Plaza (716) 842-4474
7th Floor (For Eligible Institutions Only)
Buffalo, NY 14203
Attention: Russell Whitley
</TABLE>
By Overnight Courier or By Hand:
One M&T Plaza
7th Floor
Buffalo, NY 14203
Attention: Russell Whitley
For Information Call:
(716) 842-5602
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE OR TRANSMISSION VIA A FACSIMILE NUMBER OTHER THAN AS SET FORTH
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
Please read the accompanying instructions carefully.
<PAGE> 2
Ladies and Gentlemen:
The undersigned hereby tenders to Telex, upon the terms and subject to the
conditions set forth in the Prospectus and the related Letter of Transmittal,
receipt of which is hereby acknowledged, the principal amount of Existing Notes
specified below pursuant to the guaranteed delivery procedures set forth in the
Prospectus and in Instruction 1 of the Letter of Transmittal. The undersigned
hereby tenders the Existing Notes listed below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
CERTIFICATE NUMBER(S) (IF
KNOWN) OF
EXISTING NOTES OR ACCOUNT
NUMBER AT AGGREGATE PRINCIPAL AMOUNT AGGREGATE PRINCIPAL AMOUNT
THE BOOK-ENTRY FACILITY REPRESENTED TENDERED
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
=============================================================================================
- ---------------------------------------------------------------------------------------------
</TABLE>
All authority herein conferred or agreed to be conferred shall survive the
death or incapacity of the undersigned and every obligation of the undersigned
hereunder shall be binding upon the heirs, personal representatives, successors
and assigns of the undersigned.
SIGN HERE
Name of Registered or Acting Holder:
- -----------------------------------------------------------------
Signature(s):
- --------------------------------------------------------------------------------
Name(s) (please print):
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
Telephone Number:
- --------------------------------------------------------------------------------
Date:
- --------------------------------------------------------------------------------
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
THE UNDERSIGNED, A FIRM THAT IS A MEMBER OF A REGISTERED NATIONAL
SECURITIES EXCHANGE OR OF THE NATIONAL ASSOCIATES OF SECURITIES DEALERS, INC.,
OR IS A COMMERCIAL BANK OR TRUST COMPANY HAVING AN OFFICE OR CORRESPONDENT IN
THE UNITED STATES, OR IS OTHERWISE AN "ELIGIBLE GUARANTOR INSTITUTION" WITHIN
THE MEANING OF RULE 17Ad-15 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, GUARANTEES DEPOSIT WITH THE EXCHANGE AGENT OF THE LETTER OF TRANSMITTAL
(OR FACSIMILE THEREOF), TOGETHER WITH THE EXISTING NOTES TENDERED HEREBY IN
PROPER FORM FOR TRANSFER (OR CONFIRMATION OF THE BOOK-ENTRY TRANSFERS OF SUCH
EXISTING NOTES INTO THE EXCHANGE AGENT'S ACCOUNT AT THE BOOK-ENTRY TRANSFER
FACILITY DESCRIBED IN THE PROSPECTUS UNDER THE CAPTION "THE EXCHANGE
OFFER -- PROCEDURES FOR TENDERING" AND IN THE LETTER OF TRANSMITTAL) AND ANY
OTHER REQUIRED DOCUMENTS, WITHIN THREE NEW YORK STOCK EXCHANGE TRADING DAYS
AFTER THE DATE OF EXECUTION OF THE NOTICE OF GUARANTEED DELIVERY.
2
<PAGE> 3
SIGN HERE
Name of firm:
- --------------------------------------------------------------------------------
Authorized Signature:
- --------------------------------------------------------------------------------
Name (please print):
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
Telephone Number:
- --------------------------------------------------------------------------------
Date:
- --------------------------------------------------------------------------------
DO NOT SEND EXISTING NOTES WITH THIS FORM. ACTUAL SURRENDER OF
EXISTING NOTES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY,
AN EXECUTED LETTER OF TRANSMITTAL.
INSTRUCTIONS FOR NOTICE OF GUARANTEED DELIVERY
1. Delivery of this Notice of Guaranteed Delivery. A properly completed
and duly executed copy of this Notice of Guaranteed Delivery and any other
documents required by this Notice of Guaranteed Delivery must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City
time, on the Expiration Date. The method of delivery of this Notice of
Guaranteed Delivery and any other required documents to the Exchange Agent is at
the election and risk of the holder and the delivery will be deemed made only
when actually received by the Exchange Agent. If delivery is by mail, registered
or certified mail properly insured, with return receipt requested, is
recommended. In all cases sufficient time should be allowed to assure timely
delivery. For a description of the guaranteed delivery procedure, see
Instruction 1 of the Letter of Transmittal.
2. Signatures on this Notice of Guaranteed Delivery. If this Notice of
Guaranteed Delivery is signed by the registered holder(s) of the Existing Notes
referred to herein, the signature must correspond with the name(s) written on
the face of the Existing Notes without alteration, enlargement, or any change
whatsoever. If this Notice of Guaranteed Delivery is signed by a participant of
the book-entry transfer facility whose name appears on a security position
listing as the owner of Existing Notes, the signature must correspond with the
name shown on the security position listing as the owner of the Existing Notes.
If this Notice of Guaranteed Delivery is signed by a person other than the
registered holder(s) of any Existing Notes listed or a participant of the
book-entry transfer facility, this Notice of Guaranteed Delivery must be
accompanied by appropriate bond powers, signed as the name of the registered
holder(s) appears on the Existing Notes or signed as the name of the participant
shown on the book-entry transfer facility's security position listing.
If this Notice of Guaranteed Delivery is signed by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation, or other
person acting in a fiduciary or representative capacity, such person should so
indicate when signing.
3. Requests for Assistance or Additional Copies. Questions and requests
for assistance and requests for additional copies of the Prospectus may be
directed to the Exchange Agent at the address specified in the Prospectus.
Holders may also contact their broker, dealer, commercial bank, trust company,
or other nominee for assistance concerning the Exchange Offer.
3
<PAGE> 1
EXHIBIT 99(c)
September 4, 1997
FORM OF EXCHANGE AGENT AGREEMENT
Manufacturer and Traders Trust Company
One M&T Plaza
Seventh Floor
Buffalo, New York 14203
Ladies and Gentlemen:
Telex Communications, Inc. (the "Company") proposes to make an offer (the
"Exchange Offer") to exchange up to $125,000,000 aggregate principal amount of
its 10 1/2% Senior Subordinated Notes due 2007 (the "Existing Notes") for a like
principal amount of its 10 1/2% Senior Subordinated Notes due 2007, Series A
(the "New Notes") which will be registered under the Securities Act of 1933,
pursuant to a Registration Statement. The terms and conditions of the Exchange
Offer as currently contemplated are set forth in a prospectus, dated September
5, 1997 (the "Prospectus"), proposed to be distributed to all record holders of
the Existing Notes. The Existing Notes and the New Notes are collectively
referred to herein as the "Notes."
The Company hereby appoints Manufacturers and Traders Trust Company to act
as exchange agent (the "Exchange Agent") in connection with the Exchange Offer.
References hereinafter to "you" shall refer to Manufacturers and Traders Trust
Company.
The Exchange Offer is expected to be commenced by the Company on or about
September 8, 1997 (the "Commencement Date"). The Letter of Transmittal
accompanying the Prospectus (or in the case of book entry securities, the ATOP
system) is to be used by the holders of the Existing Notes to accept the
Exchange Offer and contains instructions with respect to the delivery of
certificates for Existing Notes tendered in connection therewith.
The Exchange Offer shall expire at 5:00 P.M., New York City time, thirty
days after the Commencement Date or on such later date or time to which the
Company may extend the Exchange Offer (the "Expiration Date"). Subject to the
terms and conditions set forth in the Prospectus, the Company expressly reserves
the right to extend the Exchange Offer from time to time and may extend the
Exchange Offer by giving oral (confirmed in writing) or written notice to you
before 9:00 A.M., New York City time, on the business day following the
previously scheduled Expiration Date.
The Company expressly reserves the right to delay acceptance of any
Existing Notes, to amend the Exchange Offer, or to extend or terminate the
Exchange Offer and not to accept for exchange any Existing Notes not previously
accepted for exchange, upon the occurrence of any of the conditions of the
Exchange Offer specified in the Prospectus under the caption "The Exchange
Offer -- Conditions." The Company will give oral (confirmed in writing) or
written notice to you, as promptly as practicable, of any amendment, termination
or nonacceptance.
In carrying out your duties as Exchange Agent, you are to act in accordance
with the following instructions:
1. You will perform such duties and only such duties as are
specifically set forth in the section of the Prospectus captioned "The
Exchange Offer" or as specifically set forth herein; provided, however,
that in no way will your general duty to act in good faith be discharged by
the foregoing.
2. You will establish an account with respect to the Existing Notes
at The Depository Trust Company (the "Book-Entry Transfer Facility") for
purposes of the Exchange Offer within two business days after the date of
the Prospectus, and any financial institution that is a participant in the
Book-Entry Transfer Facility's systems may make book-entry delivery of the
Existing Notes by causing the Book-
<PAGE> 2
Entry Transfer Facility to transfer such Existing Notes into your account
in accordance with the Book-Entry Transfer Facility's procedure for such
transfers.
3. You are to examine each of the Letters of Transmittal and
certificates for Existing Notes (or confirmation of book-entry transfer
into your account at the Book-Entry Transfer Facility) and any other
documents delivered or mailed to you by or for holders of the Existing
Notes to ascertain whether: (i) the Letters of Transmittal and any such
other documents are duly executed and properly completed in accordance with
instructions set forth therein and (ii) the Existing Notes have otherwise
been properly tendered. In each case where the Letter of Transmittal or any
other document has been improperly completed or executed or any of the
certificates for Existing Notes are not in proper form for transfer or some
other irregularity in connection with the acceptance of the Exchange Offer
exists, you will endeavor to inform the presenters of the need for
fulfillment of all requirements and to take any other action as may be
necessary or advisable to cause such irregularity to be corrected.
4. With the approval of any Chief Executive Officer, Secretary or
Vice President (each an "Officer") of the Company (such approval, if given
orally, to be confirmed in writing) or any other party designated by such
Officer in writing, you are authorized to waive any irregularities in
connection with any tender of Existing Notes pursuant to the Exchange
Offer.
5. Tenders of Existing Notes may be made only as set forth in the
Letter of Transmittal and in the section of the Prospectus captioned "The
Exchange Offer -- Procedures for Tendering," and Existing Notes shall be
considered properly tendered to you only when tendered in accordance with
the procedures set forth therein.
Notwithstanding the provision of this paragraph 5, Existing Notes that
any Officer shall approve as having been properly tendered shall be
considered to be properly tendered (such approval, if given orally, shall
be confirmed in writing).
6. You shall advise the Company with respect to any Existing Notes
received subsequent to the Expiration Date and accept instructions of the
Company with respect to disposition of such Existing Notes.
7. You shall accept tenders:
(a) in cases where the Existing Notes are registered in two or more
names only if signed by all named holders;
(b) in cases where the signing person (as indicated on the Letter
of Transmittal) is acting in a fiduciary or a representative capacity
only when proper evidence of his or her authority so to act is
submitted; and
(c) from persons other than the registered holder of Existing Notes
provided that customary transfer requirements, including any applicable
transfer taxes, are fulfilled.
You shall accept partial tenders of Existing Notes where so indicated
and as permitted in the Letter of Transmittal and deliver certificates for
Existing Notes to the transfer agent for split-up and return any untendered
Existing Notes to the holder (or such other person as may be designated in
the Letter of Transmittal) as promptly as practicable after expiration or
termination of the Exchange Offer.
8. Upon satisfaction or waiver of all of the conditions to the
Exchange Offer, or waiver of any or all such conditions by the Company, the
Company will notify you (such notice if given orally, to be confirmed in
writing) of its acceptance, promptly after the Expiration Date, of all
Existing Notes properly tendered and you, on behalf of the Company, will
exchange such Existing Notes for New Notes and cause such Existing Notes to
be canceled. Delivery of New Notes will be made on behalf of the Company by
you at the rate of $1,000 principal amount of New Notes for each $1,000
principal amount of the corresponding series of Existing Notes tendered
promptly after notice (such notice if given orally, to be confirmed in
writing) of acceptance of said Existing Notes by the Company; provided,
however, that in all cases, Existing Notes tendered pursuant to the
Exchange Offer will be exchanged only after timely
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receipt by you of certificates for such Existing Notes (or confirmation of
book-entry transfer into your account at the Book-Entry Transfer Facility),
a properly completed and duly executed Letter of Transmittal (or facsimile
thereof) with any required signature guarantees and any other required
documents. You shall issue New Notes only in denominations of $1,000 or any
integral multiple thereof.
9. Tenders pursuant to the Exchange Offer are irrevocable, except
that, subject to the terms and upon the conditions set forth in the
Prospectus and the Letter of Transmittal, Existing Notes tendered pursuant
to the Exchange Offer may be withdrawn at any time prior to the Expiration
Date.
10. The Company shall not be required to exchange any Existing Notes
tendered if any of the conditions set forth in the Exchange Offer are not
met. Notice of any decision by the Company not to exchange any Existing
Notes tendered shall be given (and confirmed in writing) by the Company to
you.
11. If, pursuant to the Exchange Offer, the Company does not accept
for exchange all or part of the Existing Notes tendered because of an
invalid tender, the occurrence of certain other events set forth in the
Prospectus under the caption "The Exchange Offer -- Conditions" or
otherwise, you shall, as soon as practicable after the expiration or
termination of the Exchange Offer, return those certificates for unaccepted
Existing Notes (or effect appropriate book-entry transfer), together with
any related required documents and the Letters of Transmittal relating
thereto that are in your possession, to the persons who deposited them.
12. All certificates for reissued Existing Notes, unaccepted Existing
Notes or for New Notes shall be forwarded by first-class mail.
13. You are not authorized to pay or offer to pay any concessions,
commissions or solicitation fees to any broker, dealer, bank, or other
persons or to engage or utilize any person to solicit tenders.
14. As Exchange Agent hereunder you:
(a) shall have no duties or obligations other than those
specifically set forth herein or as may be subsequently agreed to in
writing by you and the Company;
(b) will be regarded as making no representations and having no
responsibilities as to the validity, sufficiency, value or genuineness
of any of the certificates or the Existing Notes represented thereby
deposited with you pursuant to the Exchange Offer, and will not be
required to and will make no representation as to the validity, value or
genuineness of the Exchange Offer;
(c) shall not be obligated to take any legal action hereunder that
will, in your reasonable judgment, involve any expense or liability,
unless you shall have been furnished with reasonable indemnity;
(d) may reasonably rely on and shall be protected in acting in
reliance upon any certificate, instrument, opinion, notice, letter,
telegram or other document or security delivered to you and reasonably
believed by you to be genuine and to have been signed by the proper
party or parties;
(e) may reasonably act upon any tender, statement, request,
comment, agreement or other instrument whatsoever not only as to its due
execution and validity and effectiveness of its provisions, but also as
to the truth and accuracy of any information contained therein, which
you shall in good faith believe to be genuine or to have been signed or
represented by a proper person or persons;
(f) may rely on and shall be protected in acting upon written or
oral instructions from any Officer of the Company;
(g) may reasonably consult with your counsel with respect to any
questions relating to your duties and responsibilities and the advice or
opinion of such counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted to be
taken by you hereunder in good faith and in accordance with the advice
or opinion of such counsel; and
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(h) shall not advise any person tendering Existing Notes pursuant
to the Exchange Offer as to the wisdom of making such tender or as to
the market value or decline or appreciation in market value of any
Existing Notes.
15. You shall take such action as may from time to time be requested
by the Company or its counsel (and such other action as you may reasonably
deem appropriate) to furnish copies of the Prospectus, Letter of
Transmittal and the Notice of Guaranteed Delivery (as defined in the
Prospectus) or such other forms as may be approved from time to time by the
Company, to all persons requesting such documents and to accept and comply
with telephone requests for information relating to the Exchange Offer,
provided that such information shall relate only to the procedures for
accepting (or withdrawing from) the Exchange Offer. The Company will
furnish you with copies of such documents at your request. All other
requests for information relating to the Exchange Offer shall be directed
to the Company, Attention: John A. Palleschi.
16. You shall advise by facsimile transmission or telephone, and
promptly thereafter confirm in writing to the Chief Executive Officer and
the Secretary of the Company and such other person or persons as so
requested, daily (and more frequently during the week immediately preceding
the Expiration Date and if otherwise requested) up to and including the
Expiration Date, as to the number of Existing Notes that have been tendered
pursuant to the Exchange Offer and the items received by you pursuant to
this Agreement, separately reporting and giving cumulative totals as to
items properly received and items improperly received. In addition, you
will also inform, and cooperate in making available to, the Company or any
such other person or persons upon oral request made from time to time prior
to the Expiration Date of such other information as so reasonably
requested. Such cooperation shall include, without limitation, the granting
by you to the Company and such person as the Company may request of access
to those persons on your staff who are responsible for receiving tenders,
in order to ensure that immediately prior to the Expiration Date the
Company shall have received information in sufficient detail to enable it
to decide whether to extend the Exchange Offer. You shall prepare a final
list of all persons whose tenders were accepted, the aggregate principal
amount of Existing Notes tendered, the aggregate principal amount of
Existing Notes accepted and deliver such list to the Company.
17. Letters of Transmittal and Notices of Guaranteed Delivery shall
be stamped by you as to the date and the time of receipt thereof and shall
be preserved by you for a period of time at least equal to the period of
time you preserve other records pertaining to the transfer of securities,
but in any event for a period of no less than 180 days. You shall dispose
of unused Letters of Transmittal and other surplus materials by returning
them to the Company.
18. You hereby expressly waive any lien, encumbrance or right of
set-off whatsoever that you may have with respect to funds deposited with
you for the payment of transfer taxes by reasons of amounts borrowed by the
Company, if any, or any of its subsidiaries or affiliates pursuant to any
loan or credit agreement with you or for compensation owed to you
hereunder.
19. For services rendered as Exchange Agent hereunder, you shall be
entitled to such compensation as set forth on Schedule I attached hereto.
20. You hereby acknowledge receipt of the Prospectus and the Letter
of Transmittal and further acknowledge that you have examined each of them.
Any inconsistency between this Agreement, on the one hand, and the
Prospectus and the Letter of Transmittal (as they may be amended from time
to time), on the other hand, shall be resolved in favor of the latter two
documents, except with respect to the duties, liabilities and
indemnification of you as Exchange Agent, which shall be controlled by this
Agreement.
21. The Company covenants and agrees to indemnify and hold you
harmless in your capacity as Exchange Agent hereunder against any loss,
liability, cost or expense, including attorneys' fees and expenses, arising
out of or in connection with any act, omission, delay or refusal made by
you in reliance upon any signature, endorsement, assignment, certificate,
order, request, notice, instruction or other instrument or document
reasonably believed by you to be valid, genuine and sufficient and in
accepting
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any tender or effecting any transfer of Existing Notes reasonably believed
by you in good faith to be authorized, and in delaying or refusing in good
faith to accept any tenders or effect any transfer of Existing Notes;
provided, however, that the Company shall not be liable for indemnification
or otherwise for any loss, liability, cost or expense to the extent arising
out of your negligence or willful misconduct. In no case shall the Company
be liable under this indemnity with respect to any claim against you unless
the Company shall be notified by you, by letter or cable or by facsimile
confirmed by letter, of the written assertion of a claim against you or of
any other action commenced against you, promptly after you shall have
received any such written assertion or notice of commencement of action.
The Company shall be entitled to participate at its own expense in the
defense of any such claim or other action, and, if the Company so elects,
the Company shall assume the defense of any suit brought to enforce any
such claim. In the event that the Company shall assume the defense of any
such suit, the Company shall not be liable for the fees and expenses of any
additional counsel thereafter retained by you so long as the Company shall
retain counsel satisfactory to you to defend such suit.
22. You shall arrange to comply with all requirements under the tax
laws of the United States, including those relating to missing Tax
Identification Numbers, and shall file any appropriate reports with the
Internal Revenue Service. The Company understands that you are required to
deduct 31% on payments to holders who have not supplied their correct
Taxpayer Identification Number or required certification. Such funds will
be turned over to the Internal Revenue Service in accordance with
applicable regulations.
23. You shall deliver or cause to be delivered, in a timely manner to
each governmental authority to which any transfer taxes are payable in
respect of the exchange of Existing Notes, your check in the amount of all
transfer taxes so payable, and the Company shall reimburse you for the
amount of any and all transfer taxes payable in respect of the exchange of
Existing Notes; provided, however, that you shall reimburse the Company for
amounts refunded to you in respect of your payment of any such transfer
taxes, at such time as such refund is received by you.
24. This Agreement and your appointment as Exchange Agent hereunder
shall be construed and enforced in accordance with the laws of the State of
New York applicable to agreements made and to be performed entirely within
such state, and without regard to conflicts of law principles, and shall
inure to the benefit of, and the obligations created hereby shall be
binding upon, the successors and assigns of each of the parties hereto;
provided, however, that you may not assign or transfer any of your rights
or obligations hereunder without the prior written consent of the Company.
25. This Agreement may be executed in two or more counterparts, each
of which shall be deemed to be an original and all of which taken together
shall constitute one and the same agreement.
26. In case any provision of this Agreement shall be invalid, illegal
or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
27. This Agreement shall not be deemed or construed to be modified,
amended, rescinded, canceled or waived, in whole or in part, except by a
written instrument signed by a duly authorized representative of the party
to be charged. This Agreement may not be modified orally.
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28. Unless otherwise provided herein, all notices, requests and other
communications to any party hereunder shall be in writing (including
facsimile or similar writing) and shall be given to such party, addressed
to it, at its address or telecopy number set forth below:
If to the Company:
Telex Communications, Inc.
9600 Aldrich Avenue South
Bloomington, Minnesota 55240
Facsimile: 612-887-9172
Attention: John A. Palleschi
Manufacturers and Traders Trust Company
One M&T Plaza, 7th Floor
Buffalo, New York 14203
Facsimile: 716 842-4474
Attention: Russell T. Whitley
29. Unless terminated earlier by the parties hereto, this Agreement
shall terminate 180 days following the Expiration Date. Notwithstanding the
foregoing, Paragraphs 19, 21 and 23 shall survive the termination of this
Agreement. Upon any termination of this Agreement, you shall promptly
deliver to the Company any certificates for Notes, funds or property then
held by you as Exchange Agent under this Agreement.
30. This Agreement shall be binding and effective as of the date
hereof.
Please acknowledge receipt of this Agreement and confirm the arrangements
herein provided by signing and returning the enclosed copy.
TELEX COMMUNICATIONS, INC.
By:
--------------------------------------
Name:
Title:
Accepted as of the date
first above written:
MANUFACTURERS AND TRADERS TRUST COMPANY,
as Exchange Agent
By:
- ----------------------------------------------------
Name:
Title:
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SCHEDULE I
FEES
The Company will pay the Exchange Agent a total of $[ ] for the
services described herein and the Exchange Agent's legal fees relating thereto.
